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Good day, everyone. Welcome to the TELUS 2022 Q4 Earnings Conference Call. I would like to introduce your speaker, Mr. Robert Mitchell. Please go ahead. Thanks, Carl. Hello, everyone. Thanks for joining us today. Our fourth quarter and year end 2022 results news release, MD&A and financial statements and detailed supplemental investor information were posted on our website this morning at telus.com/investors. On our call today, we will begin with remarks by Darren and Doug. For the Q&A portion of our call, we will be joined by Zainul Mawji, President, Consumer Solutions; Navin Arora, President, Business Solutions; Jim Senko, our Chief Product Officer; Tony Geheran, our Chief Operating Officer; Jeff Puritt, President and CEO of TELUS International; John Raines, President of TELUS Agriculture and Consumer Goods; and Michael Dingle, Chief Operating Officer at TELUS Health. Briefly, this discussion and answers to questions contain forward-looking statements. Actual results could vary materially from those statements, the assumptions in which they are based and the material risks that could cause them to defer are outlined in our public filings with Securities commissions in Canada and the U.S. including in our 2022 annual MD&A. Thanks, Diego and hello everyone. Throughout 2022, TELUS achieved strong operational and financial results across our business, leading our North American peer group with respect to 2022 operating revenue, adjusted EBITDA and free cash flow growth, along with most operating metrics. This is a trend that TELUS team has consistently demonstrated over the longer term. Our robust performance in the fourth quarter and for the full year reflects the chemistry of our globally leading broadband networks and customers first culture, driving our hallmark combination of profitable customer growth alongside strong financial results. Industry leading telecom net additions of 301,000 represented our best fourth quarter on record and concluded another year of industry leading expansion of our customer base. Indeed in 2022, we delivered all-time record customer growth, surpassing total annual net additions of more than 1 million for the first time. This included another best every year for fixed subscriber growth of 274,000 and the highest mobile phone net additions for our organization since 2010 with 401,000 net new customers. Our industry leading growth reflects the consistent potency of our operational execution unmatched by those product offerings across mobile and home and team member culture focused on delivering exceptional customer experiences over our globally leading PureFibre and 5G networks. Our team’s passion for delivering customer experience excellence, once again contributed to strong client loyalty across our key product lines, including blended mobile phone, PureFibre Internet, Optik TV, security, and voice churn, all below 1% for the year. Also for the full year, operating revenue growth of 8.6% came in above our revised guidance of approximately 8%, while EBITDA growth of 9.5% landed comfortably in the midpoint of our revised guidance range. Moreover, we achieved strong free cash flow growth of 64% for the year, exceeding our original free cash flow target. In addition, CapEx was in line with our target and reflected the final year of our accelerated broadband build program that has been considerably successful. Strength in our core telecom operations continues to be bolstered by continued strong operating momentum in our highly differentiated technology oriented businesses: TELUS International, TELUS Health and TELUS Agriculture and Consumer Goods. Let’s now turn and take a look at the fourth quarter. TELUS once again achieved industry leading operating revenues and EBITDA growth of 12.6% and 11.3% respectively. Looking at mobile, TELUS achieved strong customer growth of 218,000 net additions in the fourth quarter. This included healthy mobile phone net additions of 112,000, which was similar to last year. Notably, the strength continued to be driven primarily by loading on our premium brand, reflecting our consistent focus on profitable customer growth. It also included leading and record fourth quarter connected device net additions of 106,000, up 31% on a year over year basis. Importantly, our team delivered another quarter of industry best loyalty results, which continues to be the hallmark of the TELUS organization. Blended mobile phone churn was an industry low 1.22% in the fourth quarter, reflecting a year-over-year increase as a result of the intensely competitive Black Friday promotional environment. Looking at our industry leading postpaid mobile churn, this was once again below 1% in the quarter, indeed at 0.75% for the year and relatively flat over last year 2022 represented our ninth consecutive year of industry leading postpaid wireless churn below 1%. One key factor behind this consistent industry best performance is the superiority of our world leading networks. In this regard, in 2022, TELUS once again earned numerous accolades from independent third-party organizations. Notably, global analytics company, Opensignal out of the UK recognized TELUS with 5 industry awards in the year for both our 4G and 5G networks, making TELUS Canada’s most awarded network by Opensignal for the 11th consecutive time. Similarly, TELUS was honored with 3 awards from U.S. based Ookla in 2022, including being named North America’s fastest mobile network, according to results from their speed test. Moreover, Canada-based Tutela recognized our wireless network with 4 national awards for excellent consistent quality, core consistent quality, 5G excellent consistent quality and 5G core consistent quality. Likewise, our wireline network also received praise, ranking it the fastest nationwide internet service provider in Canada amongst major carriers by PCMag for the third consecutive year. These acknowledgments clearly illustrate TELUS’ leadership and offering our customers the fastest, most expansive and most reliable service in Canada across both our wireless and PureFibre networks. Moreover, this recognition of TELUS’ National Broadband Network leadership underscores the tremendous value of our generational investments in world leading network technologies, including our now concluded accelerated broadband expansion program undertaken over the past couple of years. Importantly, these investments will continue to drive extensive socioeconomic benefits to Canadians in communities from coast-to-coast for decades to come. To close on mobile, industry leading fourth quarter ARPU growth of 2.2% over last year was supported by roaming improvements as a result of increased international travel. It was also supported by strong performance on our premium brand also supported by strength within our MRC and supported of course by our low churn rate keeping our premium customers. Notably, mobile phone lifetime churn and the revenue that we generate continues to be up in terms of lifetime revenue by 48% higher than our national peers reflective of the critical combination of our consistent focus on high-quality economic customer growth and leading client loyalty and what a combination that is and what a huge differentiator that is versus our peers. Now, let’s take a look at our fixed operating results, where TELUS delivered another quarter of industry best wireline customer growth. Our team achieved strong fourth quarter internet net additions of 42,000, up 5% on a year-over-year basis. We continue to drive strong growth in our TV product line, with industry leading net additions of 17,000 relatively flat over the prior year despite modestly higher churn. Furthermore, residential voids was again a very positive story this quarter, with industry low line losses of only 4,000, which was down 60% on a year-over-year basis and represents our best fourth quarter results since 2002. Notably, this reflects our momentum with respect to our product intensity or product bundling, if you will and the inherent churn benefits associated with this strategy that are proving to be so successful for TELUS. Strong and leading security net additions of 28,000 further reflects our successful strategy of driving profitable customer growth and multi-product penetration. Overall, our robust industry leading external fixed net additions of 83,000 represented our best quarterly wireline customer growth on record. These performance attributes reflect the strength of our unique and highly attractive bundle offers across our unmatched portfolio of products and services, products and services that are buttressed by our ever expanding broadband networks, our leading customer-centric culture as well as our strong and highly differentiated social capitalism attributes that truly do underpin the strength of the TELUS brand and culture. Now, let’s take a look at our TELUS Health business. In 2022, health services revenue increased by 75% nearing the $1 billion revenue milestone, including 4 months of contribution from the acquisition of LifeWorks at the beginning of September. As we progress into 2023, we continue to focus intensely on integrating and scaling our global health operations to build the healthiest communities and workplaces on the planet. Notably, we recently united LifeWorks with TELUS Health together under the TELUS Health name and one brand going forward with the aim of integrating the best of the global brand and culture from across both LifeWorks and TELUS. The expanding scale of our healthcare programs within our integrated TELUS Health organization includes covering 68 million lives, an increase of more than 47 million over last year. In addition, digital health transactions were up over 5% in 2022 to more than 580 million. Furthermore, we welcomed 1.7 million new virtual care members in the last 12 months alone, increasing our membership to 4.5 million, up 61% over the prior year. For 2023, we anticipate strong growth at TELUS Health, including solid organic growth as we continue to integrate and expanded business into an asset of scale and significant global consequence. This will be supported by our intense focus on crystallizing meaningful synergies of $200 million or more that we expect to drive over the next 3 to 5 years, inclusive of revenue synergies from cross-selling and $60 million in near-term cost synergies. And of course, TELUS International has a critical role to play to help us achieve these results and beat the targets that we have set for ourselves. Before we close on health, I am pleased to share the appointment of Sid Kosaraju as our President of TELUS Health. With more than 20 years of global experience leading organizations with a focus on innovative healthcare technology and services, Sid is exceedingly well-positioned to lead the ongoing transformation and scaled growth of TELUS Health. Indeed, leveraging his tremendous expertise, Sid will drive product innovation, distribution strength and an engaged culture that puts customers first across our healthcare business. Myself and the executive leadership team look forward to supporting Sid and our TELUS Health team as we accelerate our transformational strategy of leveraging data analytics and dynamic insights to revolutionize access to advanced healthcare services, including preventative health and wellness optimization solutions, driving remarkable health experiences for the benefit of the clients and individuals that we serve in Canada and worldwide. The economic growth that stems from that will put us on the IPO trajectory that we all find so exciting. Turning to TELUS Agriculture and Consumer Goods, annual revenues of $354 million were up 24% in 2022 over the prior year. Through a combination of organic growth and the impact of business acquisitions in 2021 as our team continues to integrate and grow this compelling global business. We are creating significant value as the leading provider of agriculture and consumer goods technology solutions around the world as we advance the sector’s efficiency and effectiveness, including food quality production, waste reduction, food and retail execution, trade promotion optimization, and doing it all through advanced data analytics and dynamic insights that help our customers from agribusiness to food retailing. In 2023, we look forward to strong progress and double-digit revenue growth in this business. Now, let’s take a look at TELUS International. Despite a challenging macroeconomic environment, this morning TELUS International announced strong 2022 results, including double-digit revenue growth, leading profitability and robust cash flow for the full year. Indeed, TI’s strong results and strong outlook also reflect the important relationship with TELUS as an anchor customer, enabling TELUS with superior customer service excellence and powering our digitization strategy, a unique relationship that significantly benefits both organizations and one that is expected to continue growing and we will realize the success of that neutralism. TI’s continued focus on profitable growth powered by an attractive end-to-end set of digital capabilities position it as a trusted adviser for premier digital customer experiences and IT services for its over 650 global clients. Earlier in January, TI consummated the acquisition of full service digital provider WillowTree, significantly bolstering TI’s front-end development and design competencies, and importantly, unlocking unprecedented and deeply attractive cross-selling opportunities for both organizations. The transaction resulted in the addition of new marquee customers that further diversify TI’s enviable list of client partners. Importantly, TELUS International and WillowTree also support the acceleration of TELUS’ ongoing digital transformation and key product development across the totality of our business, but in particular in health and agriculture and consumer goods. Doug is going to have an opportunity to provide further commentary on both TTEC and TELUS International’s fourth quarter results in just a moment. In closing the TELUS team’s ability to consistently drive profitable growth over the longer term on the back of a differentiated asset base, best-in-class customer experiences, world leading networks and our unique growth businesses provide us with our confidence in the robust outlook for our business and our ability to deliver on the ambitious annual targets that we announced today. For the year, we are targeting industry leading operating revenue and adjusted EBITDA increases of up to 14% and 11% respectively. As previously announced, we expect a very meaningful drop in core capital expenditures to approximately $2.6 billion following the successful completion of our accelerated broadband investment program. This will represent a CapEx intensity ratio of circa 13%, which represents a historic low for TELUS and is amongst the lowest globally within our peer group. As a result, we expect free cash flow of approximately $2 billion up close to 60% supported by strong EBITDA growth and the material capital expenditures step down. Our targets will be supported by the healthy guidance for 2023 announced this morning by TELUS International, once again, targeting double-digit revenue and EBITDA growth alongside leading margins as they continue to drive solid and profitable operating momentum. TI’s financial objectives will be backed by their end-to-end design capabilities as they build and deliver these capabilities tapping into the accelerated need for premium digital customer experiences, digital transformation, content moderation, and AI data solutions across its strategic industry verticals on a global basis. Importantly, the unparalleled skill, innovation, grid and execution excellence of our team in progressing our consistent and winning strategy underpins our leading multiyear dividend growth program now unbelievably in its 13th year and extended that particular ambition for annual growth of 7% to 10% through to the end of the 2025 financial year. Finally, I’d like to take this opportunity to recognize our team for the way they continue to exemplify our social purpose in action. In 2022 alone, our team members and retirees, donated $125 million and volunteered close to 1.5 billion hours in support of charitable and community organizations. This is more than any other company in Canada. Indeed, since 2000, we have demonstrated our global leadership in social capitalism by gifting $1.5 billion, including 2 million days of global volunteerism. Myself and the leadership team continue to be inspired by the unparalleled compassion of our TELUS family and their dedication to making the future friendly for all of our stakeholders. They are indeed the best exemplification of our brand values in action. Before I came to TELUS, I spent 10 years in global telecom hunting for value in most places on the planet. So, it is with some degree of familiarity, that I say the growth profile that we have is truly unmatched on a global basis. I don’t know of a global peer that can match the strength and critically, the sustainability of our revenue growth, our EBITDA growth, our cash flow growth and our dividend growth. And that’s not just the story for 2023, it’s the story for 2024, 2025 and beyond. And that truly makes us unique. Thank you, Darren and hello everyone. Our fourth quarter results extend our track record of delivering leading operational and financial results supported by our high growth and diversified asset mix. In the quarter, we continue to see strong growth across all areas of our business. In mobility, we delivered network revenue growth and 6.5% driven by strong customer growth and higher ARPU. Furthermore, as compared to the pre-pandemic Q4 2019 period, mobile network revenue is 11% higher, showcasing our strong consistent growth and customer service excellence. We continue to see a steady improvement in roaming revenue with a Q4 amount of approximately 122% as compared to pre-pandemic levels. We remain focused on driving sustainable ARPU growth by maintaining our consistent focus on high-quality customer growth, executing on our 5G monetization strategy, excellent base management, diligent cash management on handsets, and leveraging our leading churn profile within a competitive and dynamic market environment. Fixed data services revenue grew 5.9% year-over-year or nearly 6.8% when considering the divestiture of the financial services business in December 2021. Within fixed data, residential internet revenue grew 8.4% year-over-year as we continue to drive market share alongside higher ARPU. Customers are continuing to move to our high speed tiers recognizing the superior customer excellence on our PureFibre network, while the compelling value of symmetrical speeds and reliability lead in this product set. Health services revenue of $411 million increased by $270 million over the prior period, reflecting the contribution from LifeWorks as well as continued organic growth. As we progress into 2023, we remain very focused on the LifeWorks integration and executing on the significant synergies and health outcomes our combined organizations can unlock together. Early in January 20, we announced the successful acquisition of WillowTree as highlighted by Darren. Together, these transactions represent important steps we are taking to scale our high growth technology-oriented business, further setting us apart from our global peer group, while adding capacity for value creation and diversification of our overall business. At the segment level, TTEC operating revenues were up 13% year-over-year. As a reminder in the fourth quarter of 2021, we recognized a $410 million gain from the sale of our financial services business to flow through other income. TTEC adjusted EBITDA grew 10% for the quarter and capital expenditures declined by 28% reflecting the conclusion of our accelerated capital program. DLCX operating revenues from external customers were higher by 9% year-over-year, primarily for growth in our tech and game clients arising from additional services providing to existing customers and the addition of new customers. DLCX adjusted EBITDA was up 23%, while margins improved 200 basis points to approximately 25%. Consolidated operating revenues increased by 13% year-over-year and adjusted EBITDA growth by over 11%. Furthermore, our annual EBITDA growth in each of 2020, 2021 and 2022, our cumulative EBITDA growth was over $1.3 billion since the pandemic started, while most of our industry peers are still cumulatively negative. We did not go negative in any year. Consolidated income was down 60% year-over-year, while EPS was down 64% due to the disposition of the financial services business I highlighted earlier. Excluding the impacts of our virtual power purchase agreements, financing costs in Q4 were primarily higher due to higher indebtedness over the past 12 months, along with higher interest rate environment. On an adjusted basis, net income was slightly higher, while EPS remained unchanged at $0.23. Free cash flow of $323 million in Q4 increased by $280 million driven by a decline in capital expenditures and higher EBITDA partially offset by higher mobile contracted volumes during a highly competitive Black Friday period and higher cash interest in the period. Looking ahead, we have set leading annual financial targets while advancing our leading growth profile and building on the momentum of strong and consistent operating momentum. In 2023, our operating revenue growth of 11% to 14% and adjusted EBITDA growth of 9.5% to 11%. Our financial outlook reflects continued healthy growth within our telecom business including profitable customer growth and continued demand for our superior bundled products over our broadband networks. In 2023, we anticipate growing contributions from our unique high end businesses, including TELUS International, which is highlighted by Darren, released their targets today as well as TELUS Health and Agriculture and Consumer Goods. Not included in our formal CapEx target of our core capital is $75 million earmarked for real estate development. As we progress through our copper decommissioning program and work to delivering on our strategy of delivering certain surplus real estate assets within the footprint, which we will monetize in the future. Our portfolio in real estate holdings will continue to increase over time with commercial, residential and industrial sites. Lastly, free cash flow for 2023 is forecasted to increase by over $700 million or 60% over 2022 to approximately $2 billion. The increase is industry leading and materially higher than our peers driven by EBITDA and lower CapEx. This is partially offset by a couple of non-operating items such as higher cash flow, cash interest as highlighted, an increase in cash restructuring to drive margin accretion, higher handset investments from the continued loading of our high value customers and higher taxes with our higher operating income. These details are detailed in our 9.3 of our MD&A. We are confident in our ability to continue generating strong free cash flow for years to come benefiting from an industry leading growth profile and consistently showcasing our superior asset mix and operational execution. Our continued strong operational financial performance supports our robust balance sheet and liquidity position. We have a strong debt maturity schedule with average debt to maturity over 12 years and only $500 million of debt maturing in 2023. The average cost of long-term debt remains at a low of 4%, while 86% of the debt is fixed. Additionally, our balance sheet strength will further be enhanced by the strong cash flow as highlighted. The strong position further supports our dividend growth will now be in place till 2025 along with the de-levering of our balance sheet and supporting strategic investments. Robert, over to you. Thank you for taking my question. Maybe I will start with the question on health, by my calculation I am getting around 5% organic growth on the business on the revenue side and 2% on LifeWorks. You discussed in your MD&A that demand for health and well-being services has never been higher than it is right now. So I am trying to figure out is this a pricing issue that you guys are having that is pressuring the top line from growing faster and when you talk about your expectation for 2023 with the integration with LifeWorks. Can you talk a little bit on what do you expect this business to look like in 2023? Thank you. As you could see in our KPIs, yes there is significant demand for our products. As you can see, our KPIs continue to grow. There was a re-rate in one of our more material customers as we renewed for a long period of time. That is generating significant long-term value. And I think the opportunity in front of us as Michael will highlight will be the integration in cross-selling that is in its infancy with LifeWorks at the moment. So Michael, maybe I can have you talk about that. Thank you, Doug and thank you for the question. That’s right. While Q4 did see a slight slowdown in respect of one segment in the health business as a result of a customer reprice on a renewal, Q4 also saw our team laser focused on two priorities, the first being servicing our global customer base and the second being increasing the pace of our post-acquisition integration activities with respect to LifeWorks. In addition to our post-acquisition integration efforts, the TELUS Health team has been hard at work partnering across TELUS to seize opportunities for collaboration as highlighted by our substantial partnership with TELUS International, which is focused on customer experience and digital transformation, including bringing AI to TELUS Health’s market leading digital health solutions. In Q4, we deepened our partnership with TI by partnering on over $100 million in business, which affords us the opportunity to deliver increased customer value through increased customer service levels across our business units. And we are ahead of our integration plans which sets us up very well for ‘23 and beyond. As Darren shared earlier, 2023 sees us going to market under one brand, TELUS Health underpinned by our strategic intent to be the most trusted wellbeing company in the world, expect strong contributions from TELUS Health in 2023 and beyond. Combining the skills and capabilities of TELUS Health and LifeWorks creates a globally leading end-to-end digital first employee wellness platform that now covers better than 68 million lives. Our teams continue to drive strong growth fueled by the LifeWorks acquisition, as evidenced by cross-selling and upselling velocities across our global customer base today. We are focused on the pursuit of our unparalleled opportunity in TELUS Health to become a global leader in EFAP alongside with data-driven preventative healthcare, wellness and mental health. Finally, I will say we work tirelessly to extend our social purpose everyday. Our recent collaboration with TELUS Agriculture and Consumer Goods is a good example of this, as we partnered to bring mental health services to Canadian farmers in a partnership with the Canadian Center for Agriculture and Wellbeing. Yes, thanks. Thanks very much for taking my question. Mine is on the strategy update you gave us a year ago. Wonder if you can update us on this. Basically, the points you were making is that we are looking to maintain tech leadership resurrecting B2B and reducing cost as well as scaling the tech ventures. I wonder if there is any tilt or shift in these strategic priorities or will sail on the same roadmap basically? Thank you. We are on the same roadmap, Jerome, explicitly in that regard. Navin, maybe given the improving EBITDA trajectory of our B2B operations given that was referenced in the question, why don’t you provide a succinct response to that component? Yes, thank you, Darren. So as you said, Darren, the B2B has had a very strong 2022. And we expect that trend to not only continue but accelerate in 2023. And what you know, what I think is notable, especially as we look across other global B2B communication service providers is that TELUS’s B2B team delivered strong growth not only on an EBITDA basis, but also revenue, margin and cash. And another key highlight is that this profitable growth came from across all B2B segments, right from small business through to enterprise and public sector. So looking ahead, we feel quite bullish on where the business is going. And we expect strong and consistent growth over the next several years. And underpinning that growth are a few important contributors. So first, digitization and automation is really helping to concurrently improve our cost structure, remove non-value at work, all while improving the customer experience. TELUS International will play a very important role in enabling this digitization capability. And we look to the recent WillowTree acquisition to help further both their capabilities and our digitization efforts in B2B. Next, leveraging our significant investments and coverage in both PureFibre and 5G, which both reduce costs and improve service quality, we feel we’ve got a lot of opportunity to continue to drive further penetration and growth in these core connectivity areas. Also tied to 5G we’re very keen to see new revenue growth through vertical and horizontal based industry solutions, as well as the data monetization opportunities. And as part of this industry solutions capabilities we see some really strong adjacencies with both health and agriculture in terms of how we go to market and those adjacencies also drive some very significant differentiation in the market. And then lastly, really strong geographic segment and product diversity which gives us several levers to drive growth with significant market share upside. So all this to say we expect strong cash contribution as well as accelerating revenue margin EBITDA growth in in 2023 and beyond. And we expect that trend to accelerate not only in ‘23, but for several years beyond that. So I will pass back you Darren. Thanks. Thanks for taking my question. I wanted to focus a little bit on TELUS Health. Thanks for the color early on, but leave aside the synergies and I recognize that’s material with LifeWorks. I wanted to get a sense of how we should think about the shape back towards perhaps stronger organic growth that TELUS Health and what the construct of that would be? And then connected to that, I know that 12 to 18 months from now you are looking at prospect of an IPO, maybe a strategic partnership on the latter option, maybe a little bit of definition around what kind of partnership you are looking for, which areas, what criteria to the extent that you can disclose right now? Thank you. Okay. So firstly, 12 months to 18 months is not the IPO time cycle, but it could be the time cycle for bringing in a strategic partner. If you are wanting color on what that model looks like, I think the example that we said in 2016 with Baring coming into TELUS International as a precursor to what we would eventually do on the IPO front, is a very good model to draw inference from. The one area of important differentiation that we would be looking for is a partner coming in not just from a cash and evaluation point of view, but what they could add to the business strategically and commercially. And in that regard, there are two key things that matter to us in terms of potentially seeking a partner. What can they do to assist us in the area of products and technology, and what can they do to assist us in the area of distribution channels, and global reach in terms of scaling, our customer penetration and our global customer growth. Those are the attributes that we would be seeking if we chose to strike the partnership. It would be fair to say that we do like the two-step model, establish a partnership first, creating a semblance of independence of the business. Whilst, of course still integrated in terms of the operations with both TELUS and TELUS International, we think it’s a good discipline in terms of getting the business to stand on its own two feet, in a run up to eventually earning the way to the IPO. And one of the things that we implemented with TELUS International that we would again emulate with TELUS Health is that we had a TI, a pre-flight IPO checklist of things that needed to be achieved by TELUS International, if they were going to earn their way to the right of IPO in the business, in servitude to the strategy. And so the other thing that we would be looking at, which gets to the first part of your question, is a business where we deliver very strong organic growth, double digit organic growth at the revenue level, and at the EBITDA level. And that of course, allows us to earn our way to the M&A opportunities, because when you have a strong organic underpinning from a growth profile, you make better acquisition decisions, because they are discretionary, rather than necessities. Also, when you have stronger organic growth, you integrate those acquisitions significantly more effectively. And if you look at some of the choices that TELUS International has made, in terms of its acquisition path, and how well those choices were and how well those acquisitions were integrated, that of course is going to be indicative of the etiology with TELUS Health. And then lastly, if we are going to do an IPO, it’s going to be for a high valuation, because clearly an organization like TELUS, we are going forward, the sources of cash are going to significantly and chronically exceed the uses of cash. It’s not for a need of money, it’s to establish a great valuation and a transaction currency that increases or amplifies the addressable market of acquisition opportunities that we can pursue. Given the multiple that we have established with our transaction currency, we are only going to realize that high level of multiple if we have great execution results with TELUS Health in 2023, 2024 and 2025. And those will be underpinned by excellence in organic growth, but also the harvesting of the synergies with LifeWorks. And those synergies are deeply significant. We have given you lots of color on those on $200 million plus holistically and $60 million in the near-term on the cost front. But the strength of what we can do on the cross-selling side of things, the strength of combining EAP with virtual care, the strength of what we can do on new product development. And of course, underscored by the significant efficiency opportunity, I think that that’s going to buttress the growth profile that we want to have in terms of the TELUS Health IPO. Yes. Thanks very much. Maybe for you, Doug. With respect to free cash flow, obviously a lot of growth year-over-year and nice to see CapEx come down. I don’t know if everyone on this call investor knows, but your free cash flow definition is probably the most conservative among your peers. And I think all the analysts understand that. So, when you think about the low EBITDA free cash flow items, my question is, when you think about the $2 billion in 2023, with respect to your earmark CapEx, your taxes, the contract assets, all kind of the moving parts. Is that $2 billion, in your view kind of more of a normalized level, or are these things still kind of swinging back and forth, a little bit more volatile, with a little bit more volatility than usual? Exactly. There is definitely a few one items in there. The restructuring cash that we anticipate for 2023, we would assume would be a decline over time. So again, that would be more accretive outside the 2023 timeframe. I think what handsets, and thank you for pointing that out on we buy. On the handsets, we have assumed that intensity levels we saw in Q4, first part of 2023. And including an investment in high quality loading is exactly what we should be doing. And we were transparent in our assumptions around that. I think because the COVID was a bit of a lull, that once we get over 2023, we should see a normal run rate or more of a normal run rate on handsets. So, I think the climb back out of COVID, again, would be limiting a little bit this year, but 2024 and beyond, again, would be a year-over-year neutral basis. And then when you look at our CapEx continuous and the growth we have talked about in EBITDA, I would say we are going to have nothing, but accelerated growth on free cash flow in the future. Oh, and interests as we de-lever, you are right. Thank you, Darren. We are at a bit of that peak after the WillowTree acquisition. You will see us de-lever over the next few quarters and as the year progresses into the next few years. And with that, the interest amount also will be more managed or more reduced. Yes. Thanks very much. Question on connected devices and the impact they are having. The first time you gave us disclosure was 2018, there was about 1.2 million devices and now it’s more than doubled to 2.47 million devices. Is that starting to have a meaningful impact on your service revenue and ARPU? And maybe you could just clarify or verify for me that you include that in service revenue, but it’s not counted as subscribers. So, it should be inflating ARPU with the extent that line gets bigger. So, that’s correct. It’s included in revenue, but it’s not included in this update. And if you look at the 2.2%, ARPU growth was absolutely and relative to our peers, I think you can see the success of connected devices, finding its way through to the economics of the business. Frankly, it’s still not yet scaled sufficiently. So, there is tremendous upside on that front still to be harvested, which I think will be aided and abetted by what we are doing on the 5G front, and product development that leverages 5G bandwidth in that regard. Navin, do you want to maybe just top up a little bit on those connected device fronts, and maybe even if you want to highlight a couple of vertical examples that are indicative of the future growth that we expect to realize and the strong economics that go with it, and maybe also highlight that this is not just an ARPU story on connected devices, it’s an Ambu 4912 story, given the attractive margins, over to you Navin. Yes. Thanks Darren. So, I agree fully. We are very bullish on IoT connected devices and actually the industry solutions, capabilities that will ride on top of that connected device and connectivity capabilities. So, as I mentioned previously, this is a meaningful nine figure business for us. It has double-digit growth on the IoT and industry solutions side. And we are getting some good traction in the market across several key verticals and horizontals. Just before I give some examples, we are really liking how 5G IoT, and PureFibre are driving some nice adjacencies across our health and agriculture business units, again, providing some important market differentiation. One example would be really how we are taking advantage of our Western incumbency and the logical linkage to key natural resource industries. So, TELUS was selected to help build one of the largest private wireless network solutions for a mining operation in Canada. Another key area where we are focused is on transportation. And so recently, TELUS was selected as the exclusive 5G connectivity partner for Project Arrow [ph], which is Canada’s electric vehicle manufacturing initiative. And maybe one other example of where we are partnering with academia and industry is we just announced a $5 million investment with the University of Windsor to accelerate the development of 5G technology applications in agriculture, advanced manufacturing, cybersecurity, and connected vehicles. And as Darren said, we were not only bullish on the revenue growth in this space, but we really liked the margin profile. And that’s mainly driven by a high volume business with a lot of automation, a lot of self-served, and end-to-end digital capabilities. So, in terms of scaling that revenue growth, huge potential, but at very little cost increases. So, we definitely like the economics of this business. So with that, I will pass it back to you Darren. Also with sticky churn in terms of client retention, another attractive feature, which helps you achieve attractive lifetime revenues out of the IoT sector. And then secondly, the biggest opportunity going forward is milking the data analytics over all those data volumes. Okay. Let’s go to the – thanks Vince for the question. Hi. Good afternoon. I was curious if you could think about this strategy around the acquisition of two small internet service providers in Ontario, just curious to be interested to know wireless plus wireline offering in Ontario. And maybe more broadly, how you think about the growth sectors in telecom post the potential Rogers-Shaw merger? Sure. So Stephanie, we have been doing small tuck-in acquisitions in specific areas where we have competed for a number of years that these are no different. We have a very significant and growing smart home security business as an example. These particular acquisitions are helping to advance our capabilities in that area. And so they are relatively consistent with these types of acquisitions we are done in the past in Ontario and nationally. Hi. It’s Matt sitting in for Dave. Thanks for taking the question. I was wondering just on two points, if I could. I know you just released 2023 guidance. But if I look ahead a little bit, can you talk about what your expectations are for maybe improving flow through of your EBITDA growth to free cash flow as you move forward with some of these acquisitions in your plan? And secondly, on the $75 million of CapEx for the kind of real estate opportunity, can you touch on whether or not this includes also a partner? I know that’s been a discussion in the past, you might bring in a partner to observe these things. And then also on the lag between when you would make these investments and when you might see a return, like how many years is the right measure should we expect to kind of allow for this type of activity? Thanks. Yes. So, we will start the second question first. So, on the real estate when the $75 million does not include a partner at the moment, we have assumed we would get potentially partners on individual real estate opportunities where appropriate, and bring in high quality partners to get things up and running. But it really is to start to build a portfolio so that over the timeframe you are thinking, we would have something of substance that could be monetized probably in the 3-year period is probably the appropriate ramp on that one. But we absolutely intend to bring in partners and that number could go down, the more we do that. On the flow through, I think it is and even Darren highlighted that it’s for the direction up on free cash flow and margins. If you look at the integration costs, we are currently doing for LifeWorks, our margins are going to continue to enhance. The double-digit growth we have in health is going to continue to contribute to that. I would say that some of the acquisitions we did for J-curves, and the double-digit growth on both revenue and EBITDA and both ag are now going to contribute, in addition to what Navin had highlighted. And so I think you are going to continue to see more and more flow through on an ongoing basis, both in 2023 and beyond on all of those fronts in addition to the strength of our core business. And if you look at that EBITDA flow through and the cash flow trajectory over ‘23, ‘24 and ‘25, also calculate what the dividend payout ratio is of free cash flow, and the headroom that we are creating as it relates to our dividend growth model. I think those figures are very interesting. Great. Thanks for the question. Can you talk a little bit about the market environment for 2023? I think looking through your discussion, you are assuming a slower macro growth rate next year. We have obviously had a lift from COVID in terms of pent-up demand. It sounds like you think that will continue. But how should we think about the overall industry KPIs across wireless and across broadband? Do you think we can sustain the pacing across the industry that we have seen in 2022 and 2023, given continued immigration, etcetera? Are you expecting some sort of moderation overall? Okay. So, first, for sure, we are seeing persistent promotional activity in the low end of the market. But that said industry best ARPU growth at 2.2% really good underlying domestic ARPU characteristics coming from the high value subscriber mix and also the base management and the step up to 5G. We are also seeing industry best churn on the back of our product intensity and our customer experience. In fact, our postpaid churn continued to be really strong, very similar to pre-pandemic levels. Our prepaid churn is elevated, but due to travelers, but over 200 basis points better than our competitors. And when you look at our nets, Q4 nets were up 80,000 versus pre-pandemic 2019. So a lot of the focus we have gone on distribution like mobile clinic, digital, direct-to-consumer are driving benefits. And so when we look into next year, we would expect that, that promotional activity is going to continue at the low end of the market, but our strength is really on the premium side of the market and bundling and we feel that’s very robust. So we expect consistent trajectory from where we are on ARPU. We see upside in business roaming. We are already seeing that in Q1. We will continue to see that high value subscriber mix washing through the base. Our base management around 5G and Koodo Pick Your Perk step-ups is working really well. The growth in our IoT subscriber base is now contributing meaningfully to our network revenue growth and we are not as reliant on the low-end flanker promotions, which is good. So, I feel really good on the wireless side that, that will continue this trajectory and we will see that kind of consistent growth. On the home solutions side and Zainul, maybe you want to top up, but we are seeing similar characteristics, especially around the bundling. And with the bringing together of mobility and home solutions in the consumer organization that presents tremendous opportunities for us to drive further efficiencies and even better bundling. But Zainul, maybe you want to say a couple of words on the home solutions side? Sure. Thanks, Jim. And I think you gave a really great summary. And one thing I would top up on as well is that we have been the lion’s share of the net porting winner. So I think we demonstrate across the board that clients are choosing TELUS. We are getting the larger premium share of the market. We have a higher level of product intensity, a lower level of churn and a higher ARPU position. So, the delta between us and our peers on customer lifetime value is significant. And there is an opportunity for growth and continued growth there on the back of our completion largely of the fiber to the prem build in the west. So if you take those characteristics and extend them out, we see a higher margin per household at over 20% increase. We see a significantly lower churn of 16 points. We see higher product intensity, 25% less cost and 70% less, fewer outside plant repairs. So we have an incredible margin accretion opportunity. And we also have a significant level of digitization and product development taking place, so that we can continue to grow our share and to develop new products under Jim’s leadership as well as leverage TI and WillowTree in terms of driving margin accretion across our segments, so that even in the lower end of the market, where we see significant immigration growth, we can come to the table with value props that are more margin accretive than our competitors. So we are quite excited about the growth potential in the market. And we think that we are positioned incredibly well across segments and across the demographics. We absolutely do see some customers characterized as looking for value in their bundle, value – higher levels of value in their purchase patterns. But because we provide solutions at every end of the market, we are really poised well for that growth. Thanks, Simon and thank you everyone for joining us today. Please feel free to reach out to the IR team with any follow-up questions you may have.

EarningCall_201

Good afternoon and welcome to the Corsair Gaming Fourth Quarter and Full Year 2022 Earnings Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recording. [Operator Instructions] With that, I will now turn the call over to Ronald Van Veen, Corsair's Vice President of Finance and Investor Relations. Thank you, sir. You may begin. Thank you. Good afternoon, everyone and thank you for joining us for Corsair's financial results conference call for the fourth quarter and full year ended December 31, 2022. On the call today, we have Corsair’s I, Andy Paul; and Michael Potter. Andy will review highlights from the full year fourth quarter 2022. Michael will then review the financials and our outlook. We will then have time for any questions. Before we begin, allow me to provide a disclaimer regarding forward-looking statements. This call, including the Q&A portion of the call, may include forward-looking statements related to the expected future results of our company and are therefore forward-looking statements. Our actual results may differ materially from our projections due to a number of risks and uncertainties. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and on our SEC filings. Note that until our 10-K has been filed, these numbers are preliminary. Today's remarks will also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to the GAAP financial information, is provided in the press release we issued after the market close today. Thank you, Ronald and welcome, everyone, to our Q4 and full year 2022 earnings call. We are pleased with our fourth quarter results following a challenging 2022 year, impacted by the Russian-Ukrainian conflict, high freight costs and a large channel inventory adjustment. Q4 2022 holiday sales were strong for most of the gaming and streaming categories that we participate in. And our overall retail sales out from the channel was substantially above pre-pandemic 2019 levels, putting us on a positive trajectory for the first half of '23. There are a number of notable financial highlights from Q4 and 2022. First, the gaming PC component market resumed growth. We benefited from an uptick in demand in the gaming PC market, fueled by new GPU and CPU launches from Nvidia, AMD and Intel at the end of 2022 with more expected rollout in Q1 2023. As we've noted before, gaming PCs built with these new platforms need faster memory such as DDR5, larger power supplies with 1,000-watt capability or higher and better cooling technology. These are all product categories that we are expert in and have attained a dominant market share. This is a big positive for our enthusiast customers who are now able to build faster, more powerful game PCs with more features at a lower cost than they could during the pandemic. There have also been several recent games launched or updated that take full use of the new technologies built into the new GPUs, making them more immersive and more exciting to play. This is another powerful growth catalyst for us and is helping to drive higher demand for gaming PCs as well as peripherals. Based on our improved results, we believe we continue to gain market share in components used to build gaming PCs. We continue to command a premium price because of our steady stream of innovative products and our proven expertise in developing the components gaming customers need for superior performance and quality. Secondly, the peripheral market held up well despite challenging macroeconomic headwinds. The gaming peripheral market for headsets, keyboards and mice showed good recovery in Q4 and in the U.S. was within 6% of Q4 '21. Compared to pre-pandemic levels in Q4 '19, the U.S. market was up by 58% according to NPD. In Europe, the market was down 10% from last year but was still 26% higher than Q4 '19 according to GfK. All this indicates that the peripheral market while getting a boost from more people at home by engaging peripherals during 2020 and 2021 is now showing that there has been fundamental growth and expansion compared to the pre-pandemic period. And thus, we are cautiously optimistic that despite macroeconomic headwinds, the market will continue to grow over the next few years and will likely be boosted by the incremental gamers that were first-time buyers during shelter at home. We observed some deep discounting in the gaming peripherals market in Q4 since the channel had large amounts of excess inventory from many suppliers. However, at Corsair, we were able to avoid much of this heavy discounting and rebates since by the holiday period, we had already largely cleared our excess inventory. We had record sales with our SCUF controllers, boosted by the launch of Call of Duty Modern Warfare 2 and we sold out our new Elgato Stream Deck Plus within days of launch. Overall, in our peripheral segment, we were down 33% in revenue from Q4 last year. However, approximately 1/3 of this drop came from channel inventory adjustments. While our channel inventory situation is close to being a target now, we see many signs that there is still excess inventory in the channel from other suppliers and we think that this will take 1 or 2 quarters to be resolved. At that point, we think we will start to gain market share again because of less discounting and also from some exciting new products that we have in the pipeline. In addition, we see a very nice list of exciting new games that will be released in 2023 which we believe will drive growth into the gaming peripherals market. We're also excited to see our Stream Deck products continue to get used in many new applications as well as pure content creation. Thirdly, margins improved. We are very pleased that margins bounced back in Q4. As expected, freight rates have continued to decline and the excess channel inventory has mostly been cleared. As we've been discussing in recent earnings calls, this was causing a headwind on both sales and margins and we're happy to see the improvement. In addition, we've made great progress in bringing down our own inventory and exit the year at our overall inventory target level. We expect these factors as well as new product introductions to continue to move up margins in 2023. In terms of geographies, the U.S. continued to be a strong market for us in Q4 and we expect Q1 to see continued growth in all categories. Europe continued to track lower than last year but it is starting to show improvement. Let me now take a minute to update you on some of our more notable Q4 product developments. First, we're excited about the Q4 launch of our Stream Deck Plus. This is a new addition to our award-winning lineup of Tactile control interfaces. As the name implies, we originally developed Stream Deck for streamers. But the market use cases have continued to expand from streamers to anyone more broadly looking for a great programmable macro device. We added new functionality, including 4 push tiles and a dynamic touch strip. The key is making content creation workflow more efficient which we excel at. The other nice feature is Stream Deck Plus integrates seamlessly with Elgato software, namely Camera Hub, Control Center and our popular Wave Link virtual mixer. Second, we saw strong interest in our new XENEON FLEX 45WQHD240 OLED Gaming Monitor and expect to start shipping volume in Q1. This 45-inch monitor designed in partnership with LG Display uses flexible OLED technology and is designed so that the monitor can be adjusted by hand from flat to a curve display. We're also excited about our expanded Webcam product line with the launch of Elgato's Facecam Pro which is a high-end camera which can output 4K at 60 frames per second. Creatives now can more easily produce ultra-high-definition video without the need for an elaborate camera setup. This groundbreaking technology combined with Elgato's powerful camera hub software makes Facecam Pro the new benchmark in the global webcam industry. Corsair remains one of the industry's most innovative gaming companies. We are excited about our product road map for the coming year and look forward to sharing more updates with you as these launches occur. In summary, the fundamentals of our business remain very strong and we are well positioned entering 2023. We are pleased with our team's continued execution and success in what was a challenging year for the gaming industry and broader market. We have an exciting product road map for the coming year with a full slate of launches planned for both our gaming and Creative Peripherals and gaming components and systems segments. We expect to benefit from multiple catalysts in our core segments with the second half of 2023 expected to be stronger than the first half of 2023. Let me now turn the call over to our CFO, Michael Potter, for details on the financials. Michael, please go ahead. Thanks, Andy and good afternoon, everyone. Q4 2022 tracked to the very high end of our expectations and ended well with momentum carrying into Q1 2023. In terms of specifics, Q4 2022 net revenue increased to $398.7 million compared to $311.8 million in Q3 2022. This compares to $510.6 million in Q4 2021. Net revenue for the year was $1.375 billion compared to $1.904 billion in 2021, a decrease of 27.8%. Our channel partners continue to reduce their inventories in Q4 2022 to current and expected consumer demand and the reduced transit and lead times. We also further reduced our own inventory by about 23% quarter-over-quarter which is back to more historic normalized levels. We are hopeful that the broader industry's inventory in the channel is also in a better position which would lead to less discounting in 2023. European markets continue to be softer than Americas and contributed about 30% of our revenue, well below the historic average in the high 30 percentile but up from the approximately 29% in Q3 2022. Turning now to our segments. The gamer and creator peripheral segment contributed $117.8 million of net revenue during the fourth quarter, up from $96.8 million in the prior quarter and a decrease of 33.4% from $176.9 million in Q4 2021. The gamer and creator peripheral segment net revenue contributed 29.6% of total net revenue, a decrease of 500 basis points from 34.6% in Q4 2021. For the year, gamer and creator peripheral segment net revenue was $437.8 million, a decrease of 32.4% year-over-year. The gaming components and systems segment contributed $280.9 million of net revenue during the quarter, up from $214.9 million in the prior quarter and a decrease of 15.8% from $333.7 million in Q4 2021. Memory Products contributed $158.1 million in Q4 2022 compared to $176.8 million in Q4 2021. For the year, gaming components and systems segment net revenue was $937.3 million, a decrease of 25.4% year-over-year. Overall gross profit in the fourth quarter decreased by 19.7% to $97.9 million from $121.8 million in Q4 2021. The decrease compared to Q4 2021 was primarily driven by reduced revenues. Gross profit margin increased 60 basis points to 24.5% compared to 23.9% in Q4 2021. This reflects the benefit of the improving supply chain environment, including a significant reduction in freight rates and supply chain lead times which are rapidly approaching the same levels as they were pre-pandemic. We expect to realize the full benefit over the coming quarter given the typical 4- to 5-month lag before these cost reductions are fully reflected in our P&L as our inventory turns. For the year, gross profit was $296.6 million Note that this was impacted by the $19.5 million charge taken previously in the second quarter to account for inventory reserves in excess of our normal run rate to address overhang in the channel. The gamer and creator peripheral segment gross profit was $39.7 million, a decrease of 24.9% from $52.8 million in Q4 2021, primarily driven by a decrease in revenue. Gross profit margin was 33.7% compared to 29.9% in Q4 2021. For the year, gross profit was $125.1 million. The gaming components and systems segment gross profit was $58.2 million, a decrease of 15.6% from $69 million in Q4 2021, primarily driven by the decrease in revenue. Gross profit margin was 20.7%, unchanged from Q4 2021. For the year, gross profit was $171.6 million. Our memory products margin in this segment was 18.1% for the fourth quarter compared to 17.5% in Q4 2021. Fourth quarter SG&A expenses were $68.5 million, a 16% decrease compared to $81.5 million in Q4 2021, driven in part by reduced freight costs out to our customers on lower revenues and lower freight rates. We did have some headcount reductions earlier in the year and we also continue to closely monitor all expenses while continuing to invest in our revenue-generating areas. Fourth quarter R&D expenses were $15.7 million, up slightly from $15.1 million in Q4 2021 as we continue to invest in our new products. GAAP operating income in the fourth quarter of 2022 was $13.6 million compared to $25.1 million in Q4 2021. For the year, we had $54.8 million operating loss. Adjusted operating income in the fourth quarter of 2022 was $29.6 million compared to $38.5 million in Q4 2021. For the year, this was income of $34.6 million. Fourth quarter net income attributable to common shareholders was $12.5 million. This represents net income of $0.12 per diluted share as compared to net income of $24.7 million or $0.25 per diluted share in Q4 2021. For the year, we had a net loss attributable to common shareholders of $60.9 million or a loss of $0.63 per diluted share. Fourth quarter adjusted net income was $20.7 million or net income of $0.20 per diluted share as compared to adjusted net income of $34.7 million or $0.35 per diluted share in Q4 2021. For the year, we had adjusted net income of $18.4 million or $0.18 per diluted share. Adjusted EBITDA for the fourth quarter of 2022 was $32 million compared to $39.5 million for Q4 2021. For the year, adjusted EBITDA was $46.5 million. Turning now to our balance sheet. We took the opportunity to fortify our balance sheet in Q4, ending the year with a cash balance of $154 million which includes the addition of approximately $81 million from our November equity offering. From a capital allocation standpoint, we continue to prioritize growth and we'll maintain a healthy balance of cash until the economic situation is clearer. We did pay down about $5 million of debt in Q4 2022 and would consider small repayments in 2023 if the year is meeting our expectations. We ended Q4 with $240 million of debt at face value and our $100 million working capital revolver remains undrawn and fully available. We spent $6.5 million on CapEx in Q4 with the elevated CapEx level related to new facilities now mostly behind us. Barring strategic investment opportunities, we will look to bring our cash balance further up over time and resume reducing debt on a more accelerated basis. Outlook; in terms of the full year 2023, we expect total revenue in the range of $1.35 billion to $1.55 billion, adjusted operating income in the range of $75 million to $95 million and adjusted EBITDA in the range of $90 million to $110 million. With the Fed rate hike cycle still in progress, forecasting interest expense remains more difficult. Assuming no further debt pay down, we expect interest expense of approximately $4 million per quarter before the impact of interest income. Assuming we maintain the same cash balance in 2023, we would expect to earn about $1.5 million of interest income per quarter, an effective tax rate of approximately 18% to 22% for 2023 and full year weighted average diluted shares outstanding of approximately 106 million to 108 million shares. We expect to see revenue distributed more as it was in the past before the pandemic, with Q2 being the lowest quarter of revenue and the second half of 2023 being stronger than the first half. We were aggressive in reducing inventory starting in mid-2022. And the ad expectation second half of last year allowed us to get our own inventory levels to our top level targets. We believe that we're starting 2023 at a healthier level of inventory, both in our own warehouses and in the hands of our channel partners. To summarize, we're seeing signs of improvement and expect a strong first half of 2023, led by the uptick in demand for self-built gaming PCs that Andy mentioned. We're also seeing the benefit of cost reduction actions we previously took and we're closely monitoring all expenditures while continuing to support our product and revenue generation. Finally, we expect to see a few additional percentage points of margin improvement in 2023 over 2022 as we benefit from normalized freight costs and reduced need for us to discount now that we're back to our target inventory. With that, we're now happy to open the call for questions. So, I think there’s a comment in the press release that revenue guidance is not expected to be affected by negative inventory trends. So if your revenue is flattish to slightly up for the year, is there a way to help us understand the tailwind you expect to get from restocking? And what does your forecast assume in terms of retail performance? Is it up? Is it down? Or is it sideways? And I have a follow-up. Yes. So the premise that we've done our forecast and guidance on is that we expect the market overall and obviously, this depends on different regions but we expect the market overall to be flat, perhaps a slightly down, perhaps a slightly up. We definitely have a tailwind in there of something like $100 million and that's assuming that this year is neutral which is a good assumption because we definitely shipped out to consumers $100 million more than we shipped into the channel. So hopefully, that gives you a sense of where we're at. Roughly the midpoint of the guidance is roughly $100 million up [ph] compared to our 2022 revenue. Got it. Okay. No, that’s helpful. And then maybe for Michael, are the shipping – the lower shipping costs, excuse me, mentioned those running through the COGS line and SG&A? Or is it one or the other? And then you mentioned a decline of over 70% in Q4 versus the beginning of last year. Is there a way in which you can put that in dollar terms? And what type of benefit is your guidance embed for '23? Yes. So for the first question, for gross margin, that's benefit in shipment in. Shipment out, we recognize the quarter we do the shipment. There's no delay in it. So it's whenever you do the ship out, that's an OpEx. But bringing inventory in gets capitalized into inventory and comes out over the terms. Just roughly in terms of some numbers, the change. As we lap 2021, it was costing close to $20,000 a container depending exactly on the routes but some of our routes as that high. By the end of 2022, it was somewhere between $3,000 to $4,000 a container again depending on specifically what route. But there was a pretty significant decrease on container costs. I wanted to touch on the promotional environment for a second. You guys gave some good color on the heavier discounting by your peers and some of the excess inventory that could take some time to resolve for the industry. Outside of that, are you starting to see any improvements in the promotional environment? Or is it too early to tell? And assuming peers continue to discount, is your strategy to maintain price just given your premium positioning? Well, firstly, let me welcome you to the analyst group, Aaron [ph]. I know you are the new analyst on Macquarie. So it's the first time we've spoken. So in terms of promotional activity, we actually think we're a little bit ahead of our -- generally of our competitors on inventory -- I mean in terms of inventory reduction in the channel. So we saw through Q4, many of our larger competitors discounting far more heavily than we were and it indicated to us that may be a little longer on inventory in the channel. Now, we think we -- well, we know we've roughly taken care of our inventory overhang by the end of the year and whatever was left, we're eating up. In fact, in many areas now we are under inventory targets in the channel. But we think that many of our competitors still have access. I believe that there will still be some discounting going on in the channel mostly in gaming peripherals for the next 1 or 2 quarters. And we will do what we can to maintain our market share but most of the discounting tends to happen in the entry level. And we're okay to lose a little bit of market share in the entry level, if it would then cause us to be in a loss position. So hopefully, that makes sense. So we think that the promotional environment will be still going on for the next 6 months -- 3 to 6 months. And I hope by the second half, it will go away as everyone's inventory clears up back to a normal level. Got it. Perfect. That's helpful. And just as a quick follow-up. I know you've recently announced several upgrades to some of your existing product lines and you've also launched, obviously, some new products as well. So as you look at 2023, how are you planning on splitting your development resources between upgrades and new product launches? Is it pretty split pretty evenly? No, it's not. I mean we've obviously got different sizes of businesses across the board. Some of the businesses we're in, like Elgato streaming for example, has got a very heavy software content and so the products are just a lot more complicated and for that reason, higher margins. We've also -- so there's a lot of resources going into that. We've got a pretty big software ecosystem which requires resources. We have a much bigger TAM that we're addressing in gaming peripherals and so there's a lot more products coming out there. In terms of the gaming components and products that we use to build gaming systems, that's the biggest part of our revenue now. And so obviously, we keep having to upgrade those. Most recently, what we've had to do is upgrade all of our power supplies to higher wattage levels because the new graphics cards from Nvidia and AMD come to that are using a lot more power or more powerful. I'm sure you've seen that in the news. So there's a general upgrade across the board. But I'd say, look, in general, the R&D budget is more geared towards products that require a lot more software and complexity. But that doesn't necessarily tie up with the revenue of each product line. I think in terms of longer-term market share expansion, we'd expect there's a lot more opportunity for us to grow in the gaming peripheral and the Elgato streaming area because those are newer. We're quite well established in memory sales and other components are going to self-build PCs and we have very high market share. If I take the midpoint of your guidance ranges, you’re sort of suggesting you’re going to earn close to 7% EBITDA margins which is basically where you were pre pandemic. If I think about what the pathway is to get to, let’s say, 10% EBITDA margins, is that just a function of creating operating leverage from top line growth? Or are there still things going on in the market or with you that are structurally impacting your margins that you think will get resolved over time? Yes, that's a good question. And both are true. The largest component is size and leverage. And so clearly, the $2-plus billion level is a lot. There's a lot more overhead -- less overhead in terms of percentage. So that drives it up. But there's still a lot of margin enhancement going on in almost every product line. We still have some remnants of freight -- high freight costs sitting in inventory. As Michael said, they go into the balance sheet. We still have some discounting going on, as I said. So we think if we got back to the normal situation that we were in -- in 2019, in terms of market, we'd actually be substantially above 41 or 2 points higher in terms of EBITDA level. Great. So the first one is just a high-level question. So now that the retail channel is normalizing, Curious if there's any other areas of focus that you'll be returning to or new initiatives this year? I know in the past, you mentioned kind of growing your DTC channels or growing your services segment, for example. Yes. Good question, Mario. Well, at the moment, the most important market we're chasing after is -- or trying to keep up with is a self-built PC component market. That has really researched with the new graphics cards coming out with from Nvidia. And in fact, it's only really the high-end cars that have come out so far. So we still have [indiscernible] which will probably end up being the most popular card that will drive most volume for us. So the first priority for us is to keep up with that demand is very strong, stronger than I think most people would expect given sort of a recessionary period, you would think it would be difficult for people to spend $2,000 or $3,000 on building the MPCs but that's what everyone is doing at a very good rate, substantially above pre-pandemic levels. So that is one area. We talked earlier about the fact that we still have a large market to go after in gaming peripherals, so that will continue to be a focus. Streaming and building out some of the streaming and content creator products such as Stream Deck. We're trying to enhance that, so it's more useful for people doing all sorts of work in business, whether it's using Teams or Zoom or Adobe. So we're going to do a lot of work there. And then yes, we are actually doing very well in our direct-to-consumer business, we had a record 15 total sales last quarter that was direct-to-consumer. So I think it's important for us to continue to build that out. Great. And just a follow-up on the comment on seasonality. You mentioned that the second half will be stronger than the first half. Is there any [indiscernible], so that we can use, like for example, should we look back in 2019, where the second half was, call it, mid-50 percentage of total? It should be much more like pre-pandemic type of patterns down from Q4 into Q1. Q2 is the lowest and then it starts going back up. Second half is higher than the first half. Partially, it will be from new product releases during the year as well. We believe that expand the addressable TAM for us and that will give us more opportunity for more revenue throughout the year and then I’ll help our second half. Just to give some color there, Mario, the uncertainties that we face are several, right? We know right now, we've got a very, very strong self-built PC market. with more to come. And so we expect that's going to go on for some time. If it does, it will be stronger in the second half, probably than the first half. We have China which is sort of going through exit of COVID, if you like. And if you remember, whenever he came out of COVID in the U.S. and Europe, the initial reaction was to do lots of vacations and restaurants and that's things that people were spending money in other places. So that's yet to come. And so there's a lot of things like that. Europe; how soon will the Ukraine Russia situation resolve itself, how well inflation work over there. So while we've got a very clear sight and feel great about the U.S. I think there's more uncertainties in Europe and Asia that could affect how the seasonality works. It's Reece [ph] on for Colin. I kind of had a 2-part question on Europe. The first part being, could you just kind of frame up where you are in that 26% gross stat versus 2019 relative to the market? And then what's kind of embedded in the guidance this year for Europe? Is it continued weakness? Or is it something else? And then I think, Andy, in your prepared remarks, if I heard you correctly, you mentioned something around mobile -- if you could just touch on that, that would be great. So just for normal percentages in the past for Europe, we’re usually in the high 30%, close to the Americas. That went down into the mid-20s at the start of the conflict between Russia and Ukraine. Got back up to about 30% by the end of last year. Assuming that there’s no further deterioration from energy costs or the conflict there, we do expect to have some gradual improvement in Europe through the year but not returning back up to the old levels by the end of next year. But certainly, some strength there. Yes. The added color there is that there was more of an inventory adjustment needed in Europe than in the U.S. So what that means is that remember the first question about how do we think about revenue sales out from the channel versus sales in there's a bigger differential in Europe than there was in the U.S. which therefore affected our revenue mix. In terms of mobile, I'm not sure what the question was. You mean what's our feeling about mobile gaming? Yes. No, that's right. We've said previously that there's a couple as that we're looking at carefully in the gaming or the interactive entertainment space. One of them is AR and VR, still a little bit early for us to jump into that. And the other one is mobile gaming which we're watching closely, it's sort of fairly small market in terms of the accessories. And by accessories, I mean, something that clips onto the phone and allows you to use buttons for a better gaming experience. So we're looking at that very carefully. Clearly, we have console controllers in our SCUF division, so we know about how that market works. But the vast majority of people playing games on phones are just using the phone screen for inputs. But as that's developed and some opportunities arise, we'll certainly jump into that. Well, thank you everybody for joining the call today and for their continued support. Obviously, we're feeling pretty bullish at the moment with our nice results in Q4. We expect that to continue for next year against, obviously, macroeconomic issues. So if you have any further questions, please contact our Investor Relations department. We look forward to updating you next quarter. Thank you very much.

EarningCall_202

Thank you so much, and good afternoon to everyone. So we can start with this meeting. And first of all, I would like to thank you for being present or connected for this meeting. It's notably a good pleasure for me to meet some of you after three years of remote organization for this kind of presentation. Well, in a few minutes, John will sum up the key or the main figures, the main metrics for Crédit Agricole, both for the fourth quarter and for the full year 2022. And actually, we shall try to answer to your questions. But at this step, let me introduce Olivier Gavalda in this room, one of the new Deputy CEO with Jérôme Grivet since he was appointed in current summer last year. Let me state a brief introduction speech to this presentation. I would like simply to come back first on the environment, the paradigm we have to face and then on the situation of Crédit Agricole very briefly. For the environment, for the paradigm we are living in, I would like to tell you that our diagnosis did not change at all since we launched our medium-term plan on June in 2022. Always, this very high level of capacity on the very short term, an opacity that is, you know that's absolutely linked and due to the accumulation of many impacts of differential waves all around the world. First of them, the necessary normalization of the monetary policy, probably quicker than we thought in terms of increase for the rates. Then, of course, the war in Ukraine, the different turmoils about energy, both in terms of prices and even in terms of availability and different geopolitical concerns you, of course, all know. But the good points, the right ones, the positive points are, first of all, that rigs are always still mastered. Difficult to explain this point, but my idea, my assumption is that for corporates, probably corporate succeed to adapt to this new paradigm more or less for most of them through pricing, probably. And for households and notably towards home loans and notably for Crédit Agricole, France, a very important error for us. The fact that households are protected by fixed income. Please do not underestimate this positive point for the economy and the impacts of banks. So risk still matter. Of course, accepting the GRP consequences of the war between Ukraine and Russia. And the second point I would like to repeat this point, and we like you to be convinced this is not a there point. The universal model of development of the group is made the make no slowdown by this opacity. And I would like to be very concrete at this point. The fact is that we have on the very long-term 3-way free axis to develop on a commercial and then financial point of view. Each of these axis are at the end of the day, organic growth. The first one is our ability to enlarge range of offers, linking or linked to the individual needs of customers and now to the collective needs of society. Our predecessors decided to launch insurance than real estate solution. Now we are launching solutions for energy transition for health care setups and so on, the ability being a bank of the global relation to enlarge on the very long-term new kind of businesses is for us a nonsaturated acts on the very long term to develop. The second one is naturally linked to the first one, our level of equipment. When you see our equipment, they are increasing, but they are absolutely not saturated. You can see our different market shares, the strongest one on savings, so lending, the smallest one of the very new businesses. So our ability to cross-sell as many times you say that. And for us, we simply enlarge the global approach of our customer is very important and never saturated. And the third access is the fact that we succeeded to create and to organize our business lines to serve these banks as legal entities. With their own autonomy and each of this legal entity today is a main consolidator of the market in this business. Of course, we can speak about asset management, asset servicing, insurance life activity, consumer finance activity and so on. This proved that we have 3 axis. The range of offers, then the equipment, then the ability of business lines to develop partnerships on different countries, different other customers. And this is why we always insist to watch you to look at our commercial pace in terms of development. Of course, we can see and you can probably imagine many headwinds usually to face and notably in 2023. These headwinds, of course, exist. But the main answer of Crédit Agricole Group to this kind of head rents to face, to cope with and probably to offset this kind of agreement as the development and look at the development of Crédit Agricole Group, commercial, the different commercial development, it is very high, and it is accelerating on the revenue term. Just look at the main figures of our development. This is simply or mainly a matter of structure, architecture of the group in terms of offers, in terms of global approach of customers in terms of ability of business lines to develop with partners. So this is for the posit on the short term on the very long term, and this is, of course, a kind of Sangalor discrepancy. I've already stated that it was very surprising to have this high level of capacity in the short term and to be so able to see the future, at least the necessary future for 2030 in terms of energy transition, in terms of setups for facing engine population in terms of agri or agro-group process that had to shift in terms of many things. Fortunately or unfortunately, the long term is very clear in terms of what we have to do today and what we have to invest, and what we have to develop on a commercial point of view today. That means as soon as 2023 for the future. And yes, clearly, the matter of decarbonized energy health setups or transition, just to take this example, are immediate huge new drivers for business and, of course, new revenues. This is for the vision we have, driving Crédit Agricole Group about our paradigm in this kind of capacity. But the way to develop on the very long term is very clear. And this feed and fuel our development as soon at the present and notably for the next 2023. Just very briefly a word about the situation of Crédit Agricole because, of course, Jean will be very concrete and very precise about this. Since I want to be very brief, let me try this exercise. If I had only one figure to give to our shareholders about our performance. necessarily, I think that altogether, we could choose simply. At the end of the day, at the summit of the group, the profitability we succeed to reach above the equity that our shareholders give us. 12.6% in terms of return on tangible equity. Only one figure, this figure because this is the sum up of all the activities, all the efficiencies, all the mastering of the risk of Crédit Agricole and you perfectly know, this is top in terms of benchmark. And I would like to highlight the fact that this is a regular performance from -- for Crédit Agricole. I stop on this point and Jerome I give you immediately the floors to be much more precise than I was. Thank you, Philippe. Good afternoon, everyone. Happy to share also this results with you. I'll try to make it brief in order to leave you time for your questions, of course. Let me start. I've forgotten to take the -- the main tool. Let me start with this page on which actually you have all the main messages that we want to insist on when presenting those results. And actually, I could stick only to this page. Messages are here. In terms of net profit, this has been an excellent Q4 for Crédit Agricole S.A. and actually the best Q4 ever with a record high level of profitability and a very sharp increase in revenues in all business lines. It's been also a very good year. And let me just come back three quarters ago when we presented Q1 results. The net profit that we posted for Q1 was down 47% as compared to Q1 '21. Because what happened during the first quarter was the start of this war in Ukraine, and we wanted to book significant prudent provisions in order to cover the risks incurred by us due to this event. So down 47%. At the end of the first half of the year, the net profit was down 16%. So the catch-up has started indeed quite rapidly. At the end of the first nine months of the year, net profit was down 12%. And now in terms of stated figures, it's down only 7%. So it means that for the rest of the year, we've been regularly catching up with this very important level of provisions that we wanted to book in the first quarter of the year. In terms now of underlying figures, which is, of course, more readable and more usable in order to understand the underlying performance that we have produced. The net profit is up, slightly up for the full year and sharply up for the quarter. In terms of financial targets for the full year, it's the final year for the previous medium-term plan. So it's the occasion for us to come back on the targets that we had set for this previous medium-term plan. And of course, we are there and above the target on all profitability items. It's the case for the net profit, EUR 5 billion as a minimum, we are at 5.5%. It's the case for the cost income ratio. We wanted to be below 60%. We are at 58.2%. And it's the case for the return on tangible equity. Philippe mentioned it, we targeted to be above 11%, and we are above 12.5% at 12.6%. So it's a very, very solid set of achievements for this previous medium-term plan. Let me finish this page with two additional elements. The first one regards the dividend. We are going to propose to the General Assembly Meeting to adopt a dividend of EUR 1.05 as was the case last year, a combination of EUR 0.85 regarding the, I would say, normal payout policy plus the last EUR 0.20 in line with what we have said regarding the 2019 skip dividend. And last point, it's very important to keep that in mind. We've continued to be agile last year in order to generate new partnerships, new activities that are going to fuel our future growth going forward. In terms of main figures on the next page, you have the main figures here, maybe one or two additional elements to complete what I have said on the previous page. On the quarter, we are posting very dynamic revenues up 4.4%, and we post also a positive jaws between the evolution of the top line and the evolution of the cost line. Second element, the cost of risk is up as compared to last year, but we will dig a little bit into the composition of the cost of risk. And you'll see that most of the increase actually more than all of the increase is due to this Russia Ukraine conflict. And then in terms of solvency for CASA, we now stand at 11.2%. So again, it's perfectly in line with our target of being at 11%. For the group globally, it's a very resilient level of profitability that we post above EUR 8 billion for the full year on a stated basis and above EUR 7.9 billion for the full year on an underlying basis. It's slightly down as compared to last year, but very modestly actually and perfectly in line with the global business model that Philippe was referring to in his introduction. Last point on this page, the solvency of the group has further increased this quarter and is now at 17.6% for the CET1, which is, of course, one of the highest levels in the space of European banks. If I go now on this page, which you know perfectly because we've had many occasions to comment this chart, but it's, again, an occasion to illustrate how we are producing this constant growth. We've been attracting new customers this year, 1.9 million new customers for the full year in our retail banks in France, Italy and Poland. So very dynamic increase of the customer base. We've been very present vis-a-vis those customers in lending to them because the production of new loans has increased by close to 6% year-on-year. We've continued to increase the equipment rate of these customers with the different products and services that we manufacture within the group. And we've enhanced permanently the scope of offers that we propose to those customers. Let me now zoom a little bit on the breakdown of the revenues in 2022. I think what is interesting on this page is, first, to see that we've been increasing the top line, both on the quarter and on the full year. Second point, this increase has been the case for all business divisions, asset gathering, large customers, specialized financial services and retail banking activities. Third point, it's been the case actually steadily since 2017 and probably a little bit before 2017. And this is this famous chart that we published on the right-hand side of the page, every quarter since 2017, we've been able to post a level of revenues that was above the level posted the previous year the same quarter. So it's a very, very proven capacity of growing the revenue base of the group that is illustrated by this chart. Coming now to the management of the cost base. Of course, the cost base has increased this year, has increased on the full year and on the quarter, but maybe 1 or 2 additional elements that you must have in mind when assessing the cost base. First point, in Q4, we've managed to post a positive jaws globally for the group. Second point, for the full year, this has been also a positive jaw for the business lines alone. When it comes to the corporate center, and we'll have probably occasions to discuss that. We have many technical elements, restatements, some of them being noncash elements. And so it's more relevant to really assess the situation on the basis of the business lines. And this jaws effect has been positive for the business lines globally for the full year. And then third point, when we analyze more precisely, what is the origin of the increase of the cost base of the business lines, plus EUR 380 million around. It's made of 3 main parts: the ForEx effect which is absolutely unavoidable, which is linked to the fact that the euro has been -- has depreciated as compared to the dollar, especially. This represents an additional cost for us above EUR 100 million. We've continued to invest in IT and the development of new setups, EUR 190 million of additional costs. And then of course, we've had to increase the salaries and exceptionally we've made an effort to increase them in the course of the year, middle of 2022. And all in all, this represents an additional EUR 130 million of cost -- additional costs, including a one-off, which is a specific premium that is into be paid to the employees beginning of '23, but has been booked end of '22 for close to EUR 30 million. So this is leading to a situation where the gross operating income is up both on the quarter and on the full year. It's even more the case for the business lines only outside the corporate center, again, for the same reasons I already mentioned. And the cost income that we published at 58.2% is far below our target, our ceiling and is also far below the average of our peers in Europe. Going now to the cost of risk. And of course, it's better to analyze the cost of risk business line by business line. But nevertheless, if we start by assessing it globally on CASA first, it's an increase as compared to 2021, plus 35%, but actually close to half of this cost of risk is linked only to the events in Ukraine. So it means that outside this event, we would have posted the cost of risk decreasing slightly compared to 2021. And it's exactly the same on the perimeter of the group globally, where we have indeed a slight increase quarter-on-quarter and a more sharper increase full year-on-full year. But definitely, the biggest part of this increase is linked to the consequences of the war in Ukraine. In addition to that, we've continued both for CASA and for the group globally to add up some provisions in the S1 and S2 buckets, i.e., provisions on sound assets. And this is what you see on the following page because actually, the proportion of nonperforming loans in our books continues to be very low, 2.7% for Crédit Agricole S.A., 1.7% for the regional banks and globally for the group, 2.1%. So this explains why with the same amount globally of provisions for CASA, EUR 9.3 billion of provisions, all in all, in our balance sheet. We've increased quite significantly since the outbreak of the COVID crisis. We've increased the proportion of S1 and S2 provisions within this amount, which remains globally more or less stable. When it comes to the coverage ratio, it apparently decreases a little bit, but it's completely explained by one specific file that I will not name that has been transferred from S2 to S3 in the fourth quarter with an average level of provision, which is below the average of the S3 provisions for reasons that are perfectly in line with this specific file. And this is leading to the situation where, again, the coverage ratios, both for the group and for CASA are amongst the highest in the European space, and they apply to a portfolio which continues to be very diversified and again, very sound. This is leading to the net income posted by CASA, both for the quarter and for the full year. On an underlying basis, it's up 6.7% on the quarter and 1.3% on the full year. Up on the basis of a reference in 2021 that was already very high and that was already a record year. So if we assess this performance on the basis of 2020, you see that the increase is, of course, much sharper, plus 57% in the quarter and plus 42% on the full year. And last point on the full year, what you can see is that all business lines have posted an increase in their bottom line. Let me go now to the solvency starting with CASA. On the quarter, actually the, I would say, normal course of business, recurring cost of activity would have led the CET1 ratio to the level of 11.4%. And so we've taken the decision on the basis of this figure to top up the normal dividend of EUR 0.85 with this additional $0.20 that we wanted to repay to our shareholders with regards to the 2019 dividend that we had to skip because of the end of the month. So how this positive evolution over the quarter took place First, the level of results and retained results generates close to 20 bps of capital. Second point, there has been a very active and very positive evolution of the RWA consumption by the business lines, especially by CACIB. So this is leading to an additional 19 bps of additional solvency. Last point, M&A, i.e., the deconsolidation of Credit mark generated an improvement of 12 bps of our solvency. The OCI evolution of the insurance activities in this quarter were quite actually stable. So this is leading to a hit of only, let's say, 2 bps. And then last point, this dividend add-on represents an additional 20 bps of solvency consumption. So this is why we went from 11% to 11.2% over the quarter. For the full year, we were at 11.9% beginning of the year. We ended the year at 11.2%. So it's a decrease of 70 bps out of which 100 bps in connection with market effects. And so it means that outside those market effects, we will have posted an improvement of the CET1 ratio. Last point, of course, we started the year with a I would say, an unrealized capital gain within our solvency that was due to amortize progressively. We end up the year with a negative element of -- in our solvency, which is going to amortize over time. So it means that going forward, all things being equal, we have some further improvement of the solvency. At the level of the group, of course, a very high level of solvency with the same elements playing over the quarter for the group, retained earnings plus RWA evolution of the business lines, plus M&A plus the dividend top-up for CASA plus also we take into account the decision of the majority shareholder to buy EUR 1 billion of CASA shares in the course of 2023 as the decision has been taken and announced, it's already impacted in our solvency. Despite all these elements, the solvency improved from 17.2% to 17.6% with the highest distance to SREP amongst the European banks. And for CASA, the 330 bps of distance to SREP. So again, a very comfortable level. Profitability, we've already mentioned the figure of 12.6% for the return on tangible equity. What is interesting to note in addition to that is the fact that this overperformance as compared to the space of European banks is a regular feature for CASA. It's been now at least 6 years in a row that we publish a return on tangible equity that is at least 2.5 or 3 percentage points above the average of European banks. And on the right-hand side of the page, you have just as a reminder, the sequence of dividends that we've been paying on the basis of CASA's results. These elements have already been mentioned. We are of course, perfectly in line with the target that we had set for 2022, but we are also on root and well on our road to 2025 targets. During this year, it's not only been a very efficient year of activity, but it's also been a year when we've been agile and we've taken a lot of initiatives in order to further enhance our revenues and our development going forward. We've taken 3 examples of those initiatives that we've taken. Of course, the restructuring of the partnership that we had with FCA Bank, which is now transformed into a very, very promising partnership with Stellantis for the development of car leasing over Europe. Second point, the negotiation and the signature of an agreement with RBC in order for CASA to purchase their European activities, which is going to be completed middle of this year. And last point, the signature end of December of an agreement with Banco BPM through which Crédit Agricole Assurance is going to purchase 65% of their non-life activities in order to develop in the long run, the distribution of non-life and protection insurance products in the network of Banco BPM. So all these initiatives are going to represent at least EUR 150 million of net profit, additional net profit in three years' time. We've continued to develop our model, and I'm not going to describe all the examples that are on this page, but we've continued to develop alongside these 3 main elements which are key to our model. utility for all customers, i.e., the development of offers that can fit the needs either of the wealthiest customers or the most fragile customers, contribution to the development of all the territories in which we are implemented and of course, enhancing our support to the energy transition sort of all our customers. I'm going to zoom now a little bit in what has been the main features of the different activities of the business lines of CASA over 2022, starting with the asset gathering and insurance activities. Globally, for the business division, it's been a very positive year with positive inflows over the year, plus a net profit of the division that is significantly up for the quarter and also up for the full year. Inside this business division, insurance activities it's been all in all, a good year commercially with net inflows in the life insurance business and again, some market share gains for the nonlife activities, both P&C and protection activities. And in terms of financials, a very, very good year with a sharp increase in the net profit on the quarter, but also on the full year. Of course, the insurance activities are going to encounter a very profound modification of the way they are going to report their financial figures starting this year with IFRS 17. And we have in this pack of document, a few slides that illustrate what we can say from now on about this, but I think this is going to be a recurring element of our discussions going forward over 2023. Asset Management, you perfectly know Amundi's results. They've been published yesterday, and I think that they've been well received by the market. The business has proven resilient over 2022. It's been a difficult year market-wise. But nevertheless, Amundi managed to continue to attract new inflows and Amundi continued to be able to adapt to this new environment, adapting its cost base and improving its net profit on Q4 as compared to Q3. All in all, for the full year, the net profit is only very slightly down, and the cost income ratio continues to stand at a very attractive level of around 55%. Large customers, it's been a very, very active quarter for CACIB with a record high level of revenues, both in capital market activities and in financing activities, especially in ITB transaction banking. And CACIB posted a very positive jaws effect, both on the quarter and on the full year and ended the year with a cost of risk, which was almost zero with a combination of loan loss reserve reversal and some additional provisions, of course, but this is the normal course of business. So at the end of the day, the cost of risk for the full year remains quite benign for CACIB despite the Russian environment, Russian Ukraine environment. Asset Servicing. This is one of the businesses in which we benefit immediately from the increase in interest rates. At CACEIS, the assets and the custody or under administration reduced a little bit in value because of market movements. But nevertheless, as the treasury is more and more remunerated. Globally, revenues are significantly up and the profit of CACEIS is very significantly up over the quarter and the full year. Specialized Financial Services, commercially a very good quarter and all in all, a very good year. The production of new loans increased over the quarter and the loan portfolio increased over the full year also. Margins are a little bit under pressure, but the volume effect is compensating the price effect. And so all in all, revenues are stable. The cost base is well managed. Cost of risk increases a little bit. But nevertheless, the net profit is up for CACF in the quarter and around flat for the full year, which is a good performance for the leasing and factoring activity, also a very high level of revenues for the quarter and the full year and net profit, which is significantly up. Going now to French retail activities with LCL. LCL has had a very buoyant activity for the full year and for the quarter with a high level of new customers capture close to 350,000 new customers for the full year with a level of activity that is characterized by the significant increase in the loans outstanding, plus also an increase in customer assets despite market effect on the off-balance sheet assets. Of course, we start to feel a little bit the pain of the shrinking of the net interest income. But despite that, we've managed to post an increase in the top line globally for the full year, a cost base which continues to be very well under control. Cost of risk, which continues to be quite benign. And all in all, for the full year, a net profit, which is up 13%. In Italy, it's a different business model. The activity has been very dynamic even in the fourth quarter of the year. But what is really important to note is that the top line increases very sharply in this fourth quarter. It's plus 14.5%. So this is leading to a very significant increase in the gross operating income. Cost of risk remained very well under control globally, plus 11% or 10% for the quarter and the full year at level, which is far below the average that we have in mind across the cycle. And all in all, a very significant improvement of the profitability, taking also advantage of course, of the completion of the integration of Creval in our setup. On this page, you have a presentation of all our activities regarding Italy. Again, this continues to present a very good 15% of the net profit of CASA so it continues to be a very active, important and developing market for CASA and all its activities. The rest of international banking activities, we have, of course, to distinguish a little bit because this quarter has been the quarter of the deconsolidation of Credit mark. So it's no longer a business issue, a business subject. When it comes to Ukraine, it's a good level of activity considering actually the situation. i.e., we post a gross operating income that is progressing significantly. But very prudently, we use all these gross operating income to complement the loan loss reserves that we book locally. So this is leading to a situation where Ukraine is producing a result around 0. And then when it comes to Poland and Egypt, two markets where the activity is good, where the rate curve is very steep. And so this is leading to a sharp increase in revenues and a low cost of risk. Corporate Center. This quarter, we have on the structural part of the Corporate Center, we have a challenging base effect because last year in the fourth quarter, the private equity investments that are booked in the Corporate Center posted a very high level of revenues. We are now posting a more normal level of revenues. But nevertheless, it's nothing worrying regarding that. And then in the volatility part -- a volatile part of the corporate center, there is this elimination of intragroup securities between CASA, Amundi and Credicard that generates this quarter a negative element of revenues, but this is going to be the last quarter when we have to report about that because thanks to IFRS 17, this element is coming to an end. So it's not going any longer to impact our P&L. Going now to the regional banks of Crédit Agricole outside the perimeter of CASA, but nevertheless, very important for the group, definitely. And again, it's very satisfying to see that the activity was good was quite buoyant, development of the customer base, development of the loan book, development of the customer assets. And so this is leading to a further improvement of the capacity of CASA's business lines to propose their services to the customers of the renew banks. The cost of risk at the level of the regional banks appears to be sharply up as compared to last year. But definitely, they've continued to book a very high level of S1 and S2 provisions. You know their very prudent approach regarding risks. So nothing worrying regarding this evolution in the cost of risk, which continues to be, all in all, low compared to any kind of standards. Let me go now very quickly on liquidity issues, simply to mention that we've been repaying a significant amount of TLTRO end of last year in December, around EUR 70 billion. Despite that, we continue to have a high LCR level above 160%. We continue to have a very important, very ample excess of stable resources as compared to stable assets. And we continue to have a very high level of liquidity reserves, which are , which are of different categories as explained on this chart. Last point, market funding. Last year's program has been increased in the course of the year due to the quite a sharp modification in the monetary policies over the world. So we've decided to be quite active in raising market funding. So we've raised last year in excess of EUR 21 billion of market funding at the level of CASA and close to EUR 50 billion at the level of the group globally. And we've started very actively this new year by issuing at the level of CASA, close to EUR 6 billion of new debt in the single month of January. So I think I will stop here. You have in the rest of the document, a very detailed presentation about IFRS 17. Maybe just I can summarize what is important to note regarding IFRS 17 with 2 or 3 IDs. The first idea is that day 1, the transition to IFRS 17 is going to create an additional 15 bps of solvency at the level of CASA. Second point, going forward, we do not foresee any significant deviation in our earnings trajectory in the insurance business as compared to what it would have been under IFRS 4. Third point, as you already know it, we are going to have a shrinkage, I would say, of both revenues and costs at the level of our insurance activities because part of the cost of the insurance activities are going to be directly impacted on the top line. So this is going to reduce significantly the cost income ratio at Crédit Agricole Assurance down to probably around 15% and it's going also to improve all things being equal, the cost income ratio at CASA by around 1 percentage point. But of course, we will have to come back on these transformation over the course of next year when we present a different quarter starting next May. This is Tarik El Mejjad from Bank of America. So I have two questions, please. The first one on cost of risk. I mean in 2022, you were below your 40 basis points through the cycle cost of it, despite, as you mentioned, the special year with the higher Stage 1 and 2 provisions and so on. So going forward, do you think you still need to guide for 40 basis points? Do you still -- I mean, your business risk of your business is definitely below 40 basis points. So is that because you want to risk more your business and guiding for 40 basis points? Or we should think that you deliver below that? So that's the question one. Secondly is on capital. I mean, clearly, you moved out from the 11% kind of tender zone, I would say. But do you feel you are constrained in your capital level to grow actually. You -- I mean, in your introductionary remark, Mr. Brassac mentioned that the group has a lot of capacity to grow because of different reasons. And do you feel like really there are some businesses that you see that you would like to capture their quality profitable, but your level of capital doesn't allow you to really grow. And then maybe a touch question to that, can you work with the group to actually help fund in a certain way that potential growth that might come? Perhaps, I'll try to answer first to the first question and second, but of course, Jerome will be much more precise than it can be. About cost of risk, I'll come back on my explanations. It's difficult to explain because cost of risk is part of our business. But first of all, this is a characteristic of the environment. What we see about our different markets is that for corporate, cost of risk are really mastered, not only for Crédit Agricole Group, but for many European and by French banks. Our conviction is that bank corporates have adapted their model to this level of opacity and most of them can adapt through their pricing towards the environment. And the second point, and I do underline this point that for the outstandings of home loans for households, our households are protected by the fixed rates. This is not exactly the case in every bank, of course, but this is very important because households for most of them can't adapt their revenues to pay 2%, 3% or 4%, if they were able to pay for 1%. I mean you can adapt your new loans with people able to pay for 2, 3 or 4, but not with people for which you were so they could pay for 1%. So I mean one of -- one part -- important part of the stabilization of risk is probably that corporates have adapted their business model with a huge financial support of states, we can say that. And then household very important, of course, for the balance sheet of banks in France, notably in France, are stabilized by fixed interest rates. Of course, this is not simply positive in terms of impact, but this point is very positive. So I think that Jerome will answer to you that will confirm. I hope that we don't change our assumptions and to our targets for 2025. But my main explanation is on the reasons of these assumptions. We'd like to add something about... Simply to correct a little bit what you said, Tarik, 40 bps is not a guidance. It's an assumption. And even with this assumption of cost of risk, we would be able to reach our financial targets for 2025. It's not a guidance. So it's not an indication of the cost of risk that we foresee for next year or the coming year. And of course, what Philippe said is very important on the household for their home loans on the one hand and the corporates for their loans on the other hand are two very important components in our loan books. And for those two categories for different reasons, we are very confident that actually the cost of risk is going to remain very benign going forward. When it comes to the capital ratio and what you call capital constraint, 11% is, again, a target and not a floor. We've said it many times. And so we don't feel that being at 11% is the death zone to use your expression. And you may have seen in the past years and you may see in the coming year actually that we are able to use our capital generating capacity to finance acquisitions. We've financed several acquisitions in the last few years. And again, for 2023, we foresee a new acquisition that is the acquisition of the European activities of RBC. This is going to represent somewhat between probably 10 and 15 bps of capital. And it's absolutely not a constraint for us and actually what we've proven in 2022, and we have a slide on that is that the organic capital generation capacity of CASA is significant. When you post a return on tangible equity of 12-and-something percent, and when you have a payout policy of 50%, it means that you have around 6% by definition, that is free that is here available to finance the growth. So we have absolutely no constraints. And last point you've mentioned it yourself. We have perfectly the capacity within the group is something bigger needs it to organize somehow inflows and outflows of capital in order to absorb it because at the level of the group, 17.5-plus is, of course, a massive capacity. Clearly that I often hear this kind of concern about the level of capital. I don't come back on the fact you perfectly know that that in terms of solvency, we are the only share within the global group at 17.6% of solvency, then it's very safe. And we are able to not to be too high in terms of solvency for our shareholders because you can't get 12.6% at 11%, of course, and the same thing for 15% or 18% or 20% of solvency. But I would like explain this point, and let me repeat that I'm really very surprised that this can be a concern for the market. Usually, more and more capital is the job of supervisor the guys. And I'm currently the Chairman of the French federation of banks. We try to explain that they must stop. They must stabilize the level of capital required because if you go higher, it is captured by supervisor. This is not for the economy nor for the investors. So it's very strange that we can look at this kind of to move -- shift from the market, looking at the level of capital, even if you know, this is very comfortable towards requirements. So let me repeat that for us, for our shareholders and certainly for the manager with the shareholders, even that percentage is very profitable. It's not so high, not so low. And so we try to drive CASA around this number, but I'm working in Crédit Agricole for a long time, but I know supervisors since 27 since the very beginning of Basel III. The level of capital was at 5%, 7%, then 8%, 9%, 10%, 11%. And now if you say, well, why not 12 because this is the average of the older venture fortune. This is against you, against the market. And we try to expand that the level of capital, whatever could be the level must be stabilized because this is at the end of the day, captured by supervisory dissenters. Well, it's very important for me to try to convince you about this point. And of course, we are very clear on our policy and we don't change this position. Please, Jean-Pierre? I think I'm going to bounce on the question of my respected colleague, and take your viewpoint for a second. First, wouldn't it be completely counterproductive to rearrange stuff within the group, considering that what you've done when you arrived is basically make sure that you didn't have all those circulars, et cetera. That's point number one. So if we're comfortable about the capital on our own, why should we even bother looking at the group. Question number two, since -- as you said in the slide, some of your, I would say, negative impact, obviously, is going to be reverted, why not saying, okay, for everything which is above 11%, I'm repaying you back in dividend, what is above that to show that your property capital? Yes, it's a good idea. I heard about banks that had set that kind of target, everything that is exceeding a certain level of capital is going to be repaid in dividend. This story doesn't inspire me a lot as you may understand. But nevertheless, what is true is that we don't want to build up capital on capital. So what we want to do is to be as agile as possible and as precise as possible in the management of our solvency in order to allocate what is available to the growth, to fuel the growth. Up to now, I think it's been quite efficient, and we've been effective in doing so. So for the time being, what we're discussing and what we're presenting is the dividend regarding 2022, and we think it's an attractive dividend for all the reasons I've mentioned. We'll see what we do going forward. So perhaps one of the reason of your question is that you help you don't appreciate at the right level, the fact that we are moving in terms of acquiring positions and the selling of the positions. But at the size of Crédit Agricole Group, we like incremental shifts in terms of acquisitions, in terms of selling position. So some questions about the capital, just like our perimeter could be stable, it is not. When you look at our different joint venture, we signed about the future development of about, for example, Credit Marfo the fact that we are going out from this bank, you can see after year that we are really moving using the level of capital we have. And another point and last point for me about the capital is the fact that I'm always surprised about giving back the capital. We need the right level of capital. We need to pay regularly our shareholders in terms of value of the share and value of dividends. But for Crédit Agricole Group, the story won't be indeed. It's a very long-term development without coming back. When you look at the trajectory of Crédit Agricole Group, including revenues quarter-by-quarter, we did give you something to see for 2025. We explain you 2030. Our successes will explain to you the future. But for corporate, giving back the capital is quite strange. I mean I don't know what to do with it. I don't know on what I can invest to get profitable, usefulness for the society and profitable revenues, it's very strange. So I think I don't want to criticize around us, but simply, we give you a very long-term trajectory on the past and in the future. And we try to be in a balanced situation in terms of means we use both for liquidity and equity. And I think that with this incremental vision to develop, we succeed to have something very, very regular, including the return on tangible equity on which investors are generally linked. Delphine? My first question is on capital, just -- sorry, just to come back on the regulatory impact, just to confirm, is it still 30 basis points for TRIM. I just wanted to understand on IFRS 17, this big change. I mean, in the quarter, because you previously guided to more like a negative impact than a positive one. What has changed in terms of your approach of methodology, which is so dramatic? Then my second question is on French retail. Just wanted to get some color from you because we've heard what Sokon has said yesterday, which was quite prudent. So just wanted to see a few, on the other hand, I believe you can grow -- invent retail this year? Thank you. Thank you, Delphine. On capital TRIM, what we expect now, it's, of course, modifying permanently because the basis on which we compound the calculation is evolving permanently. But what we foresee now for 2023 is an additional EUR 4 billion of RWAs. So it should be around 10-plus bps of capital. And actually, probably the 30 bps that you have in mind with the combination of 22 plus 23%. So we have now remaining around 10 bps plus for '23. IFRS 17, we haven't changed at all the methodology. What has changed is the sign in front of the unrealized capital positions of Crédit Agricole Assurance, because one of the effect of IFRS 17 is that actually part of the OCI reserves is going to be directly affected to the contractual service margin and no longer to the equity, to the capital position. So it means that we are going to offset part of the unrealized capital losses Initially, we thought it was against capital gains unrealized capital gains, but we are going to reduce a little bit the unrealized capital losses that, for the time being, way on our solvency. So if you reduce the negative element, this is generating an improvement of the solvency whereas when it was an unrealized capital gain, we were going to lose part of the intangible component in our solvency. So this is the only reason, actually, why the negative impact has transformed into a positive impact. I would like to try to answer to the second question about retail banking. Let me try to restate once again the view that is very different for us of what you call retail banking. Because then you consider that this is a kind of singular standalone activity with still banking, just like you have the insurance activity or sell management activity or you consider this is the organization of the group, the structural organization of the group. This is simply the basis of the global relation with our customers on which we plan all the business lines that can develop their different business. And that means that in this case, you can't ask retail banking in terms of development and then and what boating and what about consumer finance and so on. So we try to be very simple to consider that retail banking as a single activity doesn't exist. It can't exist. The only thing that can exist and develop and we succeed in it is the global relationship in a kind of proximity more and more in remote proximity, but the real fun in really geographical proximity to advise and to follow and to accompany customers, household the small business and the large corporates on the large range of their needs. That means this is a rule. And so when we -- of course, we have to give you the breakdown of revenues, net income and so on. But if you want to appreciate what you call retail banking, you must appreciate the whole direct activities of banks within their balance sheet loads and savings, then you have to add the revenues that are added to insurance activity, to asset management activity to real estate solutions activity and so on. And what you can see, I think the most important criteria is the acquisition of new customers. I'm not sure we have given you that we are increasing and increasing each year about this. More than 1.5 million new customers in bank of proximity within Crédit Agricole Group in 2022. And this is... 1.9%, and this is increasing in the last 4 years. So this is a role. Of course, we have to give the breakdown of this activity. But if you ask something about retail banking, you must appreciate the global model of the universal bank. This is very different. Of some banks that could arbitrate between a huge CIB activities or just insurance or just retail banking. In this case, this is only remote banking with a few very low level of profitability, when there is profitability. So to answer your question, we are always confident, very confident on what you call retail banking because we are confident on the development, and we do report the development of the whole group of Crédit Agricole based on the global relationship with customers and territories... And maybe one last point on this. It's very concrete, but our so-called retail banking activities in the perimeter of CASA LCL is not engaged into any kind of massive restructuration. Okay. We can take questions from the phone connected people. The first one is regarding the revenues in insurance. And obviously, I know they can be volatile from one quarter to the next. I know you usually tell us to focus on the net income. But both the revenues and net income were particularly high for that division this quarter. You mentioned in the slide pack that there were write-backs on technical provisions, which you say are linked to higher rates. So the question is to what extent this is sustainable versus a one-off stock effect that we saw in Q4. So in other words, what kind of run rate can we expect from here for insurance on revenues and/or net income? And then the second question is going back to a capital question. You had told us before that on OCI reserves, we would see a pull-to-par effect, which is fair enough, given the significant OCI losses during '22. With the new guidance on IFRS 17, does that mean we will still see the pull-to-par effect and how big could it be on top of the 15 bps positive from IFRS 17, please? Two good questions, Flora. The first one regarding the sustainability of the level of profitability of the insurance business. Clearly, going forward, if the level of commercial activity remains where it stood in not only last year, but in the last several years, what we foresee even under the new accounting standard is more or less with maybe some increased volatility, the same kind of earnings trajectory. You perfectly know that it's a little bit strange, but it's the way it works. When it comes to accounting and insurance activities we generally start with the bottom line, and then we go up within the P&L. And so it means that we have the capacity in order to achieve the type of bottom line that is in connection with the level of activity. We have the capacity of playing on different elements in the top line. It happens that this quarter due to the increase in rates, the level of provisioning of certain long-term life risks longevity risks could be less provisioned. And so we could write back provisions. But of course, we have the capacity to compensate the absence of those write-backs going forward by, for example, the capacity of extractive more financial margin from the life insurance activities, which we did in the past, which we didn't do this quarter. So all these elements are elements in which we play in order to provide a quite foreseeable and stable earnings trajectory for the insurance activities. So for me, it's quite sustainable as long, of course, as commercially, we continue to be able to increase the level of outstandings and the number of policies. When it comes to the pull to par of OCI reserves, of course, what is going to be integrated in our solvency day 1 on January 1, 2023, is not going to be available any longer for the pull to par. So I don't have the precise figure in mind, but I think we would have somewhat around 50 bps of negative solvency in our 11.2% level end of 2022 in connection with the OCI reserves of the insurance activities. So if we day 1 take 15 bps out of that, the pull to par is going to apply only on the remaining part, which is 35 bps. A question regarding consumer credit. One of your competitors and you used to mention the margin pressure. I wanted to know how do you see the cost income ratio evolving in the coming months? And if you have specific measures, to balance this margin pressure as some of your competitor tends to take. And more generally, regarding cost, I was curious to know what is your policy regarding center services abroad. Once again, some of your competitors are developing a huge center in services abroad like in India, for instance. Could you refresh me regarding your setup on these types of organization? And do you have any project regarding that? And regarding insurance, I was curious about the impact of net cat this year on your combined ratio in terms of amount, if you give it or in terms of basis point impact on basis points on your combined ratio? And do you have increased your premiums in order to balance this effect for next year? Do you see some flexibility to improve your premiums? Yes. I think the common answer I could provide to your different questions would be to say that we are much more working on the base of permanent adaptation rather than on a strong restructuration at different moments in time. So it applies to the cost base of the consumer credit business. We perfectly know since now several quarters that -- it's going to be a little bit more difficult for consumer credit activities, especially in countries like France where you have the Azure rate that is putting a constraint on the capacity to increase customer rates. So we are adapting permanently the setup, and we did it also at LCL in the past without any big restructuring plan. Actually, the number of staff at LCL reduced regularly over time smoothly without any difficulty without having to engage into hazardous operation of restructuration. So clearly, this is -- this effort of permanent adaptation that is going to help us smoothen the evolution at the consumer credit business entity. And just as an illustration of that, in 2022, the cost income ratio at CACF is around 50%, a little bit less than 50% actually, which we deem is a very, very competitive level. We have centers of services abroad. Actually, we have two main centers abroad. We have one in Singapore, which is mostly dedicated to CACIB, and it's working on IT development and IT servicing activities. And we have one which is multi-business, which is in Portugal, which is covering, I think, some back-office activities and IT operating activities, so no development, but really operating activities for different businesses of the group. It's not -- again, it's not a decision that we are going to take and one-off that is going to lead to put 1,000 people abroad, but permanently, we assess what we have -- what would be the best decision for us in terms of allocating our staff and improving progressively the efficiency of our setups. So we have absolutely no in principle I would say, position against that type of organization. simply, it's not a one-off policy that we would decide at a third moment in time. When it comes to insurance and nat cat, of course, the beginning of the year was a little bit difficult for Pacifica, which is the P&C insurance company of the group because we've had in France several significant weather events that generated a high level of claims on different policies. And so the combined ratio increased this year up to 98 something percent. It started to decrease a little bit in the fourth quarter. And of course -- and again, it's a permanent effort of adaptation. We've taken into account those weather events and the cost of those events in the evolution of the pricing grid of our policies for 2023 without any specific difficulty. So it's a smooth evolution and no strong modification in our stance. So first question on CIB risk-weighted assets. Maybe you could just explain how you managed to get them down so much in the fourth quarter? Or I guess the question is, is this just normal seasonality and customer demand that led to them to decline? Or did you have to work in order to get them to move down so much in just a quarter. Next question is on the Corporate Centre revenues. There are a couple of, I think, new items there that you highlighted that led to a negative impact this quarter. So I think some intragroup securities and then also an inflation effect on ALM. So maybe you could just help us understand whether these effects are going to recur in future quarters and also whether we should be viewing them in combination with offsetting impacts elsewhere in the group or in other line items. Okay. Let me start with the Corporate Center because to be frank, the line was not so good, and we didn't fully understand your first question. But -- okay. So the corporate center, as I already explained, I think, a few quarters ago, this is a place where we have to book some Interco restatements. And this quarter, we have had significant interco restatements regarding debt that is issued by CASA and that is subscribed either by Amundi vehicles or directly by Predica, which is the life insurance company of the group in order to put together financial products that are unit-linked products that are sold to customers. And considering the fact that the booking and the accounting of those debt is not the same within CASA as an issuer and in the different vehicles that purchased those bonds as an investor for the sake of investors. We have some differences that we have to offset at the level of the corporate center. So depending on the evolution of rates and spreads, credit spreads, we can have positive and negative elements, which are booked in the Corporate Center. This quarter, this represents quite a significant amount of negative NBI around EUR 150 million, if I remember correctly, the figure. And so this is, of course, putting some volatility, which is absolutely noncash, of course, within the Corporate Center. This is going to come to an end with the implementation of IFRS 17. So we will no longer have this volatility within the corporate center going forward. The second element -- the first question actually was regarding the RWA evolution at CACIB. And I think that the answer is that it's a combination of 3 elements. The first element -- the first element is that we permanently ask all our business divisions and CACIB as well as the others to optimize and to actively manage their RWAs in order to generate the best possible reward on capital invested in the different businesses. And of course, when CACIB undertakes actions in order to optimize the RWA consumption, sometimes it takes the form of operations that need to be prepared for a certain amount of time. And then when they are delivered, when they are triggered, this is generating one-off, a significant amount of RWA reduction. This has been prepared since Q3, and this has been launched in Q4 and helped quite significantly to reduce the level of RWAs. The second element is all the market effects, ForEx and to a certain extent, also rates that have two benefits -- had two benefits this quarter and the fact that the improvement of the euro as compared to the dollar has reduced a little bit the RWA valuation of dollar-denominated assets and also the counterparty risks on capital market activities has also significantly diminished due to market movements over the quarter. And then the last point is that we've seen some improvement in the rating of some counterparts, and you know that, to a certain extent, the rating of the different counterparts is leading to a diminution of the RWA of those counterparts. So all these elements play together in the same direction in Q4, leading to this very significant decrease in RWAs at CACIB. Maybe could I just have a follow-up in terms of the outlook for risk-weighted assets. I mean, I think you said you had 10 basis points of trim left. If there's nothing else on the horizon and I think Basel IV is going to be neutral at an inception for you. Should we really expect risk-weighted assets to just grow with business volume from here on? Yes. The baseline is going to be the organic evolution of RWAs allocated to the business lines that we do every year in the budget processing. And this year, if I want to foresee a little bit what can happen besides the RWA organic evolution of the business lines in 2023, we'll have this positive one-off coming from IFRS 17. We'll have TRIM, which will represent probably 4 billion RWAs at CACIB, and we'll have also one of the last years of the IFRS 9 phasing in mechanism that is going to represent a hit of around 15 bps -- 10 to 15 bps on our solvency. And the rest is going to be organic evolution plus, of course, acquisitions, if any. And there's one that is already decided and that is going to be completed probably beginning of Q3. That is the acquisition of RBC's European activities. I've got two questions. One, a bit more general, one a bit more specific. The first more general question is it's basically, I guess one of your competitors is looking to redeploy a lot of capital into their business in the outside, I think, of the retail piece. I'm just curious what you think about the growth opportunities in your business and what kind of competitive pressures there could be in the coming years? And then the second more specific question is on the DPS. I know given the catch-ups, it's been 105 flat for two years now. Is it possible that you could pay out more than 50% next year to maintain a progressive DPS? Let me start with the second question. DPS is, of course, a permanent question. But for the time being, we are talking about 2022, we're talking about the dividend regarding 2022, that is going to be proposed to the General Assembly that we will hold in next May. And this dividend is going to pay end of May this year. So the year has only started and we'll think about the dividend regarding 2023 a little bit later on, if you allow. Then growth opportunities, well, we permanently look at growth opportunities everywhere. So it happens that most of the time, these growth opportunities are taking place either in some, I would say, specialized business lines like asset management, like consumer credit or car leasing like wealth management. We did it in the past several times and so on and so forth. And when it comes to retail banking activities, pure retail banking activities, those opportunities to place most of the time abroad. It was the case for us in Italy. So the landscape is this one, but we are permanently looking at growth opportunities that make sense within our business model... In terms of the competitive environment, if some of your peers are looking to redeploy a lot more capital. Do you see that kind of changing... This expression of redeploying capital. It looks a little bit as if we were portfolio managers, reducing a little bit the capital allocated to business and increasing the capital allocated to another business as if we were just facing an excel spreadsheet, adding some figures in a specific cell and reducing the amount in another cell. Real life is not exactly this way. In real life, all the businesses which belong to CASA work together and also try to develop their own business opportunities. And every time they see a business opportunity, we have a discussion. We have a dedicated committee actually, which is shared by Philippe. And we are exploring any opportunity that is proposed by us. And we do not, in advance, say, this business is going to be allocated that amount of capital, and this business is supposed to give back that amount of capital. I would like to be -- to put a pressure about this question because it must be really understood by analysts and investors. It's normal to ask questions about opportunities, but I would like to share with you the fact that when you look at this on the very long term, Crédit Agricole Group is one of the 10 largest banks in the world. The topic of critical size is absolutely not relevant for us. The only relevant point is to find opportunities, but not simply opportunities, but relevant opportunities able to be integrated in our architecture in terms of development. The 3 axis I have explained at the very beginning of this meeting. And this is probably why we find year-after-year different opportunities, but they seem to be always very incremental, no rupture about this because we try to find something to go further quicker, for example, in consumer finance. Jerome didn't say that in his answer a few minutes ago, but I would like to add this point for consumer finance, the first point, the first color is that we are in a very important momentum of development I can speak to you about the agreement with Stellantis, which costs more bodies for our leasing activity with Water, with Michelin and so on. I mean, many different digital topics, but just adding incremental means to our development and absolutely consistency with the architecture and the strategy. And this is why every time I hear something about opportunity, I immediately look if this is at the size and at the nature to be correctly and previously integrated in our current development. When you look, for example, in Italy, Crédit Agricole Italia seems to be always the same, but it developed each time with incremental addition of new banks. And at the end of the year, it was a bit credit. I mean -- and this is, I think, the right way on the very long term to look at opportunities. And unfortunately, we can decide if there will be opportunities like this. But when you look business line by business line many things are possible to be looked. And I think, really, this is the right way because it's too dangerous now to bet about huge recurs in terms of business or in terms of companies. And once again, Jerome is absolutely right. We don't manage and Crédit Agricole Group didn't succeed being managed as a conglomerate of different activities. It was managed really at the deployment of the global relationship with each kind of market for household, for small businesses and for large corporates. And this increasing and regular way to develop is always very successful. Apologies for the technical issues earlier. That was entirely my fault. So two questions. My first question is on 2023 outlook. Philippe, you mentioned that RET is really the best metric to look at. And in the answer to Delfin's earlier question that it's difficult to split out retail banking from the broader group effort. So the question would be whether in the context of all the inputs this year, you would expect to see underlying RET to be up or down in 2023 relative to the 12.6% you posted in '22? And then secondly, on Slide 8, you've outlined the market shares across the universal banking model, would you expect the pace of market share gains to be fairly even across those businesses? Or alternatively, if we fast forward to 2025, would you expect the order of those bars to have changed significantly. Well, we generally do not give a precise guidance on figures for the coming years. So your questions regarding where we are going to stand in terms of return on tangible equity end of next year or this year is a question we will not answer, excuse me. But definitely, what we say is that we target to be above 12% of return on tangible equity. And so we will do everything we can in order to respect this target and this commitment. Then regarding Page 8 and the fact that we want to grow our market share in every additional business in which we've invested since the launching of the group. It's clear that philosophically, I would say, we should see every vertical bar on this bar chart to progressively reach the 30% level because this is exactly what we want to achieve. So of course, it's not going to be the case immediately in all businesses. And then if I take the example of life insurance activities, the life insurance market in France is not only in the hands of subsidiaries of banks. So it means that a certain proportion of the market will be kept probably in the long run by pure insurance players. But definitely, we have the capacity to make sure that every of our customer is potentially equipped in all of these businesses by our products and not by a product manufactured by a third party. Well, I would like to stress this point, if you look at the past of Crédit Agricole Group, for example, between 1987 when you decided to create from scratch insurance activity, nobody could probably say that towards 20 years, we could become the first insurer in France. We did. I mean -- and we -- nobody could imagine that we could become the first asset manager in Europe, the first European asset manager from scratch, we did, not only because we are so efficient in terms of development because this is the proof in the way that when you try to approach your customer in a global approach as customers of the bank and then trying to advise them with loyalty with the global sea of their needs and to accompany them in the time, you have this kind of results. Bank insurance was not created. Bankers as we are succeeded to become bank insurer and first bank and first insurance. We always say bank insurance, but we could say bank asset manager with absolutely the same rationale. There is no reason we couldn't become the first bank real estate solution to take an ode example. I mean this way to be on the global needs of each customer. And now with the collective needs of society about transition is something that is not a projection. But simply, the reminder that Crédit Agricole Group really developed by this way. And so the target for me and the concern is not to fall at a certain level because we are very big, very important, very large to the fact that to manage each business line, each silos of the group, this could be really a huge mistake for the development of the group. This is why is we explain the global figure of the group and try to manage the fact that we all develop. Let you look at the commercial performance of the group for 2022. It could be surprising to see that we are increasing everywhere, not specially asset management or especially wealth management everywhere, no miracle about this. But we try to develop as a role and we succeed since we succeed to have a global approach once again of the needs of our customers. So this is why we don't have special market shares in terms of targets for 2023, 2024 for each business site. But clearly, they must all improve. And on the last years, they always did improve in terms of market share. This is not -- and once again to it to be too long, but this is not a way to develop diversified activities as a conglomerate. This is the way to develop always the same model, the model of the global relationship and unfortunately, this model is not very known. And it is broken many times by analysis of the model inside activities. So this is why we explained this model. This is why Crédit Agricole is a group, not simply a holding of different activities. And simply we try to develop. And let me tell you that I'm very optimistic on this point because despite the very special environment with this high level of past, let's just look at our commercial momentum since three years, we grew very quickly, not because we are very proud. It can be an explanation, of course, but simply because the model works, when you take each of our customers in global approaches to make them proposition of different services and products. It's on French retail. I understand you are a diversified group and you've got asset management, et cetera, et cetera. But in 23, you have Livret A, you have the end of the TLTRO, you have the usury rate. So at least, could you give us an idea of the magnitude of those headwinds from my level, I don't have the literature, but it looks like about maybe EUR 300 million or EUR 400 million headwinds. And so do you think that in 2024, without giving a precise number, you can reach the level of revenue that you did in '22. Thank you. Well, I try to start by the answer. Unfortunately, I have the advantage to be a seasoned person. So I did personally the momentum when rates increased to 20%, 25 years ago, then decrease to the now coming back to a higher level. At the end of the day, we were always #1 in France, always. And always this kind of question, this is very negative for you to have a decreasing way for rate because reimbursement because of renegotiations. Then you have negative impact because rates are increasing. So of course, the time that the asset side can be higher to be at the level of the liability side, this will be something this will get a negative impact for you. This is right. But minded that including within the group, I think we don't really clearly explain the heart of engine. The heart of the engine, the intermediation and the transformation between liabilities and assets. And I would like simply to say that when you look at the impacts of the increase of rates and notably because we protect our sorts with fix interest, the first point is that part -- first point is that this temporary negative impact, temporary, something because, of course, at the end of the day, when rates are stabilized, this is the same level of EMEA, for banks with variable rates or fixed rates, first point. The second point is that this impact is for part partially absorbed by tools of ALM. This is why we have ALM with high level of swaps so that we don't take the global impact of the gap between assets and liabilities. This is precisely the reason for which ALM is very important within banks. And the second -- and the last point is that the residual temporary negative impacts of this phenomenon is probably largely offset by the way that this is a way to master cost of risk at the end of the day, notably for home loans. So my conviction is that facing the kind of new headwinds, the answer and the solution is an -- it in the commercial development. I mean -- and when you look, for example, for the quarter 4 Q4 for LCL, you can see, for example, a negative impact on the intermediation margin, but you can see you increase in commissions and fees. This is like nothing is stabilized, but at the end of the day, the main driver is, are you always the number one in terms of a global relationship with your customer. And once again, sorry for me to tell you that I never knew the stabilized situation of rates. And I have this experience to be ad about the fact that if rates are decreasing, this could be very bad for us and when rates are increasing, this could be very bad for us. So my only simple answer that we are always very optimistic for our targets for 2025, commercial and financial targets. And this is not really a concern for us, the increase of rates. The concern can be for customers, notably for corporates because you have many loans with variable loans for corporate. But for banks and notably for banks as Crédit Agricole Group, we just accompanied the shift. Well, this is what I can give as colors for the momentum of Crédit Agricole Group as an international bank. But perhaps Jerome can... Just two or three elements to complement a little bit the answer simply. First point, TLTRO is clearly an element which is, I would say, outside the normal ALM management of the bank because it's been so huge and so abnormal in terms of characteristics that, of course, the withdrawal of the TLTRO before the date that was initially set is going to represent an element that is going to play against us in terms of basis effect for 2023. That's for sure. But the good news is that we don't have to absorb any additional cost of unwinding hedges regarding the TLTRO in 2023. I don't know exactly what some other banks could have been doing with that, but we don't have any additional hedging costs to cover in 2020 regarding the TLTRO. Second point, Philippe is perfectly right. Our model is precisely to work alongside with ALM policies in order to be able to absorb the movement of rates and ALM is here precisely to smoothen the effect of movement of rates. Of course, the situation in 2022 was a little bit extreme. And so we've tested the limits of our models, especially because when rates increase by 300 bps, when at the same time, it's not possible to repass the customer for new loans. This such a high increase because of jarred, we are at the limit of ALM models. And the same thing applies to regulated savings accounts. Within our ALM models, there is the idea that we have to cover a little bit the inflation risk when inflation surges suddenly from almost 0 to 6%. Again, this is testing the limit of ALM models. So this is something we'll have to absorb. But definitely, going forward, in the long run, we have the capacity to leave in almost any kind of rate environment I wanted to ask the question differently, if I may. Your target for 25 in French retail was to grow about 1% to 1.5% per year. And you've nearly achieved the whole of the growth trajectory already in '22. So if you don't want to talk to us about the shape, can you maybe then rephrase your 2025 target for the revenues of LCN? I have two questions, if I may. The first one is regarding BforBank. Jerome, you said that you plan to invest in order to expand before bank. I don't know if you can give us maybe more color on your strategy for before work? And the second question is on life insurance in France. Obviously, we've seen some increase in outflows on euro products in Q4. I don't know if you can share with us what is the trend senior-to-date, for example, if you have any figures on outflows in January. Okay. So on BforBank, I think that the strategy that we've unveiled with the medium-term plan is quite clear. Actually, we are completely reshuffling the IT platform. We are going to relaunch actually before bank, I think before year-end or very beginning in June, in June Olivier in front of me is precising the date. So middle of this year, we are going to relaunch the new offer of BforBank. And so this is after a few quarters of this after this relaunch that we will be able to, I would say, assess the efficiency of this relaunch. So we'll have the opportunities to discuss about it in a few quarters. Life insurance, it's true that in Q4, actually, the outflows in euro-denominated contracts were more or less matched by inflows in UL products. And actually, what has happened end of Q4 and what is probably going to continue part of this year is the fact that some customers are going to prefer to exchange their euro products, even though we've increased quite significantly the profit-sharing rate end of 2022 against unit-linked products denominated in different categories of bonds that are going to yield probably closer to 4% or 5% rather than the 2-point something, which is the remuneration of euro products. So it's possible that we continue to see that kind of movement inside the global contract outflows from the euro part inflows into the UC part -- UL part, excuse me. Two questions left. Both are on costs. The first one is on Italy. I think this quarter, you saw some one-off integration charges. Can you confirm that these are completely done now? And if that's the case, what sort of run rate should we expect going forward? And then the second one, still on costs, more on the group level. Could you give us a sense of what your expectations of the cost trajectory in 2023. In '22, you still had some one-off items. Clearly, as we are seeing inflation at an elevated level. I'm just wondering how we should think about costs and cost growth in '22. In Italy, we are done with the integration of Creval inside Crédit Agricole Italy. And actually, the merger -- the legal merger was performed in the first of last year and the migration of the operations of Creval on the platform of Crédit Agricole Italy is completed now. So we don't have, and I don't remember having booked any kind of restructuring charges or almost nothing in the last quarter, and it's now completely done. So going forward, in Italy, we are going to continue to benefit from the improvement of the operations coming from Creval actually because we continue to enhance the equipment rate of the customers coming from Creval and we continue to, I would say, boost the distribution capacities of the branches coming from Creval network. So going forward, Italy is going to be a development story. We hope so. In terms of cost trajectory in 2023, you know that we permanently manage the cost income ratio, not the cost base per se because we think -- excuse me, that we have to adapt permanently the cost base to the capacity of generating revenues. So of course, we have, I would say, a more accommodative stance on the cost base of, for example, Crédit Agricole Assurance, where we have a permanent increase in market share, a permanent increase in the number of policies that are managed and with some other businesses in which for different reasons, the capacity of posting a significant increase in the top line is more subdued. So clearly, we try to monitor cost income ratios, and we have regular interactions with the different businesses in order to reassess their capacity to reach the level of revenues that was defined in the budget process. And if it's not possible to reach this level of revenues, then, of course, we challenge them on their capacity to adapt their cost base. But we don't want to communicate simply on the basis of cost trajectory across the board for the group, it wouldn't make sense. I think we're done. So again, thanks a lot for your participation to this meeting. Thanks, of course, to Philippe and Olivier. And we are looking forward to meeting you in three months.

EarningCall_203

Good day and thank you for standing by. Welcome to the Sonoco 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. To ask a question during the session, you will need to press star-one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one again. I would now like to hand the conference over to your speaker today, Lisa Weeks, Vice President, Investor Relations and Communications. Please go ahead. Thank you Operator, and thanks to everyone for joining us today for Sonoco’s fourth quarter 2022 and full year 2022 earnings call. Joining me this morning are Howard Coker, President and CEO, Rob Dillard, Chief Financial Officer; and Rodger Fuller, Chief Operating Officer. Last evening, we issued a news release highlighting our financial performance for the fourth quarter and we’ve prepared a presentation that we will reference during this call. The supplements and presentation are available online under the Investor Relations section of our website at www.sonoco.com. As a reminder, during today’s call we will discuss a number of forward-looking statements based on current expectations, estimates, and projections. These statements are not guarantees of future performance and are subject to certain risks and uncertainties, therefore actual results may differ materially. Please take a moment to review the forward-looking statements on Page 2 of the presentation. Additionally, today’s presentation includes the use of non-GAAP financial measures which management believes provides useful information to investors about the company’s financial condition and results of operations. Further information about the company’s use of non-GAAP financial measures, including definitions as well as reconciliations to GAAP measures, is available under the Investor Relations section of our website. For today’s call, Howard will begin by covering a summary of 2022 performance. Rob will then review our detailed financial results for the fourth quarter and the full year and, along with Rodger Fuller, will discuss our guidance update for the first quarter and full year of 2023. Howard will then provide closing comments, followed by a Q&A session. If you will please turn to Slide 4 in our presentation, I will now turn the call over to our CEO, Howard Coker. Thank you Lisa, and thanks to all of you for joining our call this morning. We really look forward to sharing our transformational results for the past year and provide our outlook for 2023. As we look at 2022, it was a pivotal year for Sonoco where we made significant progress on a strategy to continue growth as a world-class packaging company with a portfolio of highly engineered and sustainable products to support our customers. When I took this role three years ago, we started on a journey to fundamentally change the trajectory of long term profit for the company, and to do that, we had to take a pretty complex business and simplify both our portfolio and the way we run the company to drive improved growth and profitability. These changes were necessary for us to deploy capital more efficiently to our larger core business units and to better integrate acquisitions. In fact, the metal packaging acquisitions was the largest in the company’s history and performance and integration are well ahead of schedule. In parallel, we worked hard on commercial excellence to reposition pricing to less volatile indices while improving the timing of recovery for higher manufacturing costs. It’s taken several years, but the efforts of these programs are reflected in our 2022 results and we expect them to continue well into the future. In 2022, we saw strong year-over-year performance in which revenue grew 30% to $7.3 billion, base EBITDA grew 51% to $1.15 billion, and base earnings per share grew 65% to $6.48. These results obviously were a record in the 24-year history of this company. I couldn’t be more proud of the team for these results, which were achieved in another year which was nothing short of chaotic, all while staying true to the mission of Sonoco and further advancing our ESG and sustainability initiatives, which are intently aligned to the values of this company and a part of our everyday lives. With that, I’m going to turn it over to Rob to take you through the financial results and our forward guidance. Thanks Howard. I’ll begin on Slide 6 with a review of key financial results for the fourth quarter. Please note that all results discussed will be adjusted to base and all growth metrics will be on a year-over-year basis unless otherwise stated. The GAAP to non-GAAP EPS reconciliation can be found in the appendix to this presentation as well as in the press release. The fourth quarter and full year 2022 financial results again represented Sonoco’s ability to deliver strong results from our core market position despite challenging market conditions. Sales increased 16.5% to $1.7 billion in the fourth quarter. This sales growth was driven primarily by the Sonoco metal packaging acquisition and an 11.5% increase in price as strategic pricing efforts continue to both offset inflation and reflect the value we provide our customers. Volumes in the fourth quarter declined 8.5% due primarily to declining demand in the global URB and converted paper products markets and also due to soft consumer volumes, particularly in the last weeks of the quarter. Base operating profit increased 34% to $184 million and base operating profit margin increased 145 basis points to 11%. This strong performance was due to strategic pricing that offset inflation and a lack of operating leverage due to low volume. While metal packaging was important to these results, excluding metal packaging, operating profit would have grown 28% and operating profit margin would have been 12.2%. The base EBITDA increased 31% to $241 million and base EBITDA margin increased 160 basis points to 14.4%. This margin improvement has been strategic and is backed by ongoing portfolio management actions, footprint optimization activities, value enhancing capital investments, and structural transformation. These actions have enabled a reduction in SG&A as a percent of sales from 9.8% in 2020 and 8.8% in 2021, to 8% in 2022. Importantly, we have reduced this metric while also investing in our commercial, operational and supply chain capabilities. Finally, base earnings per share increased 28% to $1.27. This increase in earnings was attributable to strong operating performance offset by $0.04 of negative FX and enabled by a lower tax rate of 21.3% in the quarter. The sales bridge on Slide 7 provides the primary drivers for growth in the quarter. Volume mix was negative $123 million or 8.5%. Consumer segment volumes were down primarily due to consumer inventory management and weather in the fresh food businesses. We view these effects as transitory and not a trend. We do not anticipate they will continue in the post quarter. Industrial segment volumes were also down in the quarter on continued declines in Europe and Asia. U.S. industrial volumes also declined, particularly due to the exiting of the corrugated medium market. Price was $166 million positive, up 11.5% in the fourth quarter. Our pricing performance continued to reflect strategic pricing efforts associated with our commercial excellence strategy, mainly selling to value and managing contracts to recover inflation. Acquisitions increased $239 million driven by metal packaging and our first month of Skjern. The integration of Skjern is ahead of schedule and we’re excited about both adding new team members in Europe and our expanded capability to serve consumer end markets. The base operating profit bridge illustrates our improving profitability in greater detail. Volume mix was negative $35 million, primarily due to lower volumes in industrials. Price cost was an $87 million benefit in the quarter. Consumer had strong price cost performance, generating $16 million of favorability primarily from RPC. We achieved $66 million of positive price cost in the industrial segment in the fourth quarter. This strong price cost performance was due to contractual pricing mechanisms and historically low OCC costs. OCC averaged $38 per ton in the quarter versus $123 per ton in the third quarter and $183 per ton in the fourth quarter of 2021. In 2022, we achieved a record $340 million of positive price cost. These figures exclude metal packaging, which was accounted for in the acquisitions. Acquisitions and divestitures generated $9 million of base operating profit in the quarter. As metal packaging continues to perform as expected, margins in this business were lower than previous quarters due to normal seasonality associated with food can volume and lower volumes in aerosols associated with inventory rebalancing. Other impacts on the quarter were negative $8 million due to higher depreciation and FX headwinds, which specifically impacted operating profit $5 million in the quarter. Slide 8 has an overview of our segment performance for the quarter. Consumer sales grew 49% to $879 million due to the metal packaging acquisition and strong price performance, only partially offset by negative volumes of 2.5%. Volumes would have been generally flat excluding the impact of weather and plastic foods and mix from exiting the ice cream segment in RPC Europe. Consumer operating profit grew 37% to $85 million in the quarter. Operating profit margin declined 83 basis points to 9.7%. Again, excluding metal packaging for comparison purposes, consumer operating profit margins would have been 11.9%, a 139 basis point improvement. Industrial sales declined 8.9% to $597 million due to a 15% decline in volumes. Volumes weakened throughout the quarter due to customer inventory management and lower end market demand in more economic sensitive regions and segments. Operating profit grew 34% to $79 million as price cost offset low utilization. Industrial pricing is holding as pricing mechanisms are now oriented to overall inflation recovery and value delivered, rather than OCC prices. Operating profit margin increased 422 basis points to 13.3%. All other sales increased 2.5% to $200 million and operating profit increased 24% to $20 million. Growth was driven by strategic pricing and overall stable volumes. Moving to Slide 9, we have our record full year 2022 financial summary. Revenue grew by 30% to $7.3 billion, driven by acquisitions, volume in consumer packaging, and strategic pricing. Base operating profit increased 63% to $920 million, driven primarily by positive price cost and acquisitions. Base EBITDA rose 51% to $1.15 billion and base EBITDA margins expanded to 15.8%. Last, our base EPS for 2022 grew by 65% to $6.48. We also announced the acquisition from Westrock of the remaining equity interest in RTS Packaging and one paper mill in Chattanooga, Tennessee. In light of the current status of the regulatory review process, we now expect the closing of the acquisition to occur in the second half of 2023. Turning to Slide 10, our capital allocation framework is aligned with our business strategy to drive value creation for our shareholders. Our priority is to allocate capital to high return investments in our core businesses to drive growth and improve efficiencies. From a free cash flow perspective, we remain focused on increasing the dividend, which at present is $0.49 per share on a quarterly basis or a greater than 3% average yield over the past 12 months. We paid $187 million in dividends in 2022. After capital investments and the dividend, we prioritize investments in accretive M&A transactions aligned with our long term strategy. We prioritize our access to capital and retaining our investment grade credit rating. For the quarter, operating cash flow was $87 million and capital investments were $88 million. For the year, operating cash flow was $509 million and capital investments were $319 million. On Slide 11, we have our 2023 guidance. For the first quarter, our EPS guidance is $1.15 to $1.25. Our full year 2023 EPS guidance is $5.70 to $5.90. Our full year 2023 base EBITDA guidance is $1.1 billion to $1.15 billion. Our full year operating cash flow guidance is $925 million to $975 million. We anticipate net working capital will be a meaningful benefit to cash flow in 2023. Thanks Rob. Please turn to Slide 13 for our view on segment performance and drivers for the first quarter and the full year of 2023, which supports our guidance. Across the consumer segment for the first quarter of 2023, we expect sequential volume growth in all products, including metal cans, rigid paper packaging and flexibles. The only exception we expect is plastic packaging for fresh fruits and vegetables, which continues to be hampered by weather issues. On a year-over-year basis for Q1, we expect to see positive volume driven primarily by the one extra month of metal packaging sales as we closed the acquisition at the end of January in 2022. For first quarter earnings, we have projected headwinds in our guidance from lower steel prices and are managing through other raw material costs and availability issues with energy, adhesives and laminates. For consumer, during the first full year of 2023, we see volume increases year-over-year across the portfolio, including mid-single digit volume increases in our metal can business. We’ll continue to invest for growth and productivity led by the increasing demand for sustainable packaging in our rigid and flexible packaging businesses. In our industrial segment, we see continued softness in volumes globally in our converting and trade paper sales in the first quarter. In North America, protective packaging for appliances and household goods remains weak and we expect little near term recovery for products that support residential homebuilding and construction markets. We’re monitoring the Europe and Asia demand recovery carefully as this will be critical to the overall volume outlook in industrial for the full year, which at present we believe will be down low single digits versus 2022 levels. Like Howard mentioned, we’ve transitioned our contracts to more stable indices, putting in better cost recovery mechanisms and current lower input costs on OCC. Our pricing in industrials remains stable. Even with the most recent modest decline of $20 a ton for URB on the RISI index and some expectations of modestly higher OCC costs in 2023, we expect positive price cost benefits this year in industrial. With planned downtime in our global paper operations, we continue to maintain reasonable backlog levels and are ramping up all paper grades on our number 10 machine in Hartsville. In our all other businesses, we continue to have net stable volume demand across this collection of businesses with improved productivity and favorable pricing actions. We expect slight increases in profitability for the all other segment this year. As we look to 2023, we have a keen focus on all forms of productivity as we see the benefits of fewer supply chain and labor disruptions. Over the past several years, we’ve taken decisive actions to help offset inflation and build resiliency in our operating model. At the same time, we’ve invested capital in our core consumer and industrial businesses to position us for long term growth and profitability. If you would, turn to Slide 15. The base earnings per share view demonstrated visually here clearly shows the step change in profit improvements for Sonoco. Our full year results include the benefit of metal pricing over the life of the company, which was approximately $0.53. Without this benefit, you would still see a very strong roughly $6 per share earnings for the period. Since 2022, the high return investments we’ve made, while reshaping the portfolio and improving the operating model, have also resulted in an expected 15% CAGR in earnings per share for 2023, based on the midpoint of our 2023 annual guidance. While 2022 was a year of progress, we are only just beginning. We intend to grow profits through organic and M&A investments, as well as better efficiency in how we run the business day in and day out. In closing, if you turn to Slide 16, we carry sustained momentum from our strategy and operating model into the new year, which we believe positions us well to navigate near term volatility. We expect stable operating performance in the coming year where the midpoint of our base EBITDA guidance is essentially the same as last year; but let me be clear, the operating environment does remain very tough right now, but our expected performance reflects our better portfolio and business mix that is expected to be less volatile through business cycles. We expect the first quarter to be the low water mark for the year based on our customer forecasts, with improvements in the second and third quarter and then concluding the year with a more seasonal Q4. With improvements in working capital, we expect free cash flow for the year to be at the midpoint, around $600 million. We also remain focused on $180 million of incremental base EBITDA improvements through 2026 based on additional actions planned to further improve our core businesses and refine our operating model. As always, for Sonoco capital allocation remains a cornerstone of our strategy and we intend to continue increasing dividends while maintaining an investment grade balance sheet. In 2023 and beyond, we’re focused on improving returns on invested capital through organic investments in core accretive acquisitions and through further portfolio rationalizations. I have never been more positive about the long term outlook for Sonoco. Correct me if I’m wrong, but I think the food can business, I think you said you expect mid-single digit volume increases for this year. What gives you this confidence? I’m curious what is driving that just as we look at some of the industry data that shipments have been, frankly, a little bit weaker than that. Thanks Kyle, it’s Howard. Yes, if we’re talking from a sequential perspective, and we just have visibility of that through our conversations with our customers, their expectations. A bit of a share lift, but that’s exactly what our customers are reflecting to us and that’s what we’re building into our models. Okay. Within that business, just to follow up, can you remind us what the impact was from the sell-through of lower priced steel inventory last year, and then maybe what you’re projecting as a headwind in 1Q and possibly 2Q from that impact? Yes, for the full year last year, it was $0.54 of detriment. There’s actually--because tin plate is declining this year 10% or so, there’s actually going to be detriment as well this year from metal price overlap from the inventory we’ve carried over. I think that will be an incremental $0.20 to $0.30. Thank you. Our next question comes from the line of George Staphos from Bank of America. Your line is now open. I wanted to hit on consumer trends that you’re seeing - you know, you talked about some inventory management by your customers at the end of the quarter. Can you talk about what they’re saying and what you’re seeing as you’re entering 1Q across some of your key, either end markets and product lines, and if you would, kind of differentiate in the center of store paper versus plastic, we get that plastic for fresh is having its issues, but center store, what are you seeing in terms of your paperboard consumer packaging versus your plastic-based packaging? It wasn’t just on the consumer side, it was across the entire portfolio that we just saw tremendous brakes hit towards the latter part of last quarter, and I think that’s across all industry, actually. You know, on the consumer side, we were being told that that really is a reflection of inventory draw-downs, etc. As we’ve entered the quarter, we have not finished out and closed out our January, but looking at the top line, we’re pretty impressed with the comeback that we’re seeing across the board. The plastics side, the real issue there is the weather events both in Florida with the freeze and in California with the floods and the impact on the fresh produce. We’re seeing really solid signs and reflects, I think, this year somewhere in the neighborhood of a 4% to 5% type lift year-over-year on the consumer side. But coming out of the gate, we’re pretty impressed with what we’re seeing right now. No, you hit it, Howard. I think the modest declines in the rigid paper cans in the fourth quarter, George, as Howard said, seeing a nice recovery in January. Really another nice quarter by flexibles - 4% growth in the fourth quarter, budgeting something 5% for the year and expect more of the same as we head into next year, so the pressure really was from our plastics business. Secondly, can you talk to what benefit--realizing it’s a moving target, it’s going to be based on the evolution of the market, evolution of your inputs, but what benefit we should expect for Sonoco from commercial excellence this year and other self-help measures, and where we stand in terms of ultimately realizing the targets you would have on both of those during the transformation. Yes George, it’s Rodger again. Commercial excellence - I mean, you see the results from last year on price cost, and frankly that’s from a couple of years of really hard work around commercial excellence. We’ve talked about what we see in the guidance for the next year from a price cost standpoint, so those efforts continue and continue to pay off. You can see it in our operating margins. On the self-help side, it’s really all about productivity. As you look at 2023, we expect our productivity results to return to more historical levels and then probably plus some with the easing of supply chain and labor issues. George, you know our historical levels of productivity as well as anyone - we expect to get back to those levels and beyond, so the self-help, the structural transformation we did this year is paying off from the operating margin standpoint, so I think across the board we’re still confident in that $180 million over the next several years. George, let me just add onto that. I’d just talk year-to-year and the journey that we’ve been on. I know there’s a lot of folks on the call that are pent-up to either ask or are thinking about, okay, we’re slowing down, you are in a paper business, you guys have performed extremely well or well at all historically in recessionary type environments. I just want to touch on--you can call it self-help, whatever you want to call it, but the amount of focus and energy that we’ve put over the last four or so years in terms of improving our performance in our industrial sector, and I think you can see that sequentially in terms of the returns that we’ve demonstrated over the periods. But if you look at the profile of the company now and you take--you know, number 10 machine is one, that’s an interesting conversation, and of course we’ve spent a lot of time talking about it, but creating the lowest cost URB mill in North America, certainly within our network on a global basis, and the productivity that’s going to drive and how that is going to be attracting volume from our higher cost mills, and then we’re seeing that happening now, so the benefit from that. But the unseen benefit that we haven’t spent a lot of time talking about is controlling what we can control to reduce the amount of variability within this business. Getting out of corrugated medium, I cannot tell you how volatile being in that market with such a small machine non-vertically integrated that has been for us over the course of the last, call it eight to nine years within the company. Then you add to it the amount of effort on a global basis in terms of consolidations, again focusing only solely on industrial right now, really right-sizing our locations, the investments we’ve made in automation, and I’ve said it before and I’ll repeat it, it feels like we are in a recession from our perspective on industrial, that we are in a much better position today than we have ever been and we do not expect to see the type of variability that we saw pre-engaging in the activities this global team has put forth. So sorry for the dissertation, but I know there’s going to be questions about that. But you know, it kind of gets frustrating when you just look at quarter to quarter and what’d you do yesterday versus tomorrow, and not look at the runway of efforts that this global team has put in place to create the appropriate level of margins that we deserve for the value we generate for the market and our customers. My last quick one is a great segue to that. Within industrial, within paperboard, you talked about the change in the contracts to commercial excellence and productivity. Can you give us some guardrails, i.e. if prices drop in the published indices by X or OCC goes up by Y, what that might mean to the business on a going forward basis, so that we also are managing our forecasts with less volatility or more accuracy? Thanks, and I’ll turn it over. Yes, thanks George. What I would say is we have assumed that price is going to moderate by X and cost is going to go up by Y, and that’s built into what we feel like is going to happen this year. That’s probably the best I can do, but that’s a good question, I get it. I want folks to understand that we feel like there’s going to be some moderate pressure on price and there’s going to be--OCC cannot stay at 35, so we’ve built an upward look and plan for that in our go-forward models. I wanted to follow up on the industrial business while we’re talking about. I’m just curious how much visibility you have into the industrial backlog, and just given what you know about it right now, whether there is the potential for any volume growth in 2023 or if you have visibility on a longer term basis. Then Howard, you just sort of mentioned, what are the puts and takes--you know, I know there’s some transition going on in that business, but if you could give us some help on what you’re seeing for volume growth overall in the plan, that’d be helpful. Yes, on the backlog question - this is Rodger - industrially, if you look at the fourth quarter, our capacity utilization across our paper business was in line with the published numbers of the industry, and as I said in my opening comments, we did take some lack of business downtime in our global paper system, more in Asia and Europe than in the U.S., and some maintenance downtime to match market demand, and we’re seeing that continue at about the same levels in January. As far as we can see, we think we’ve reached the bottom there and we’re starting to see some slight change to that in the right direction, but again, in our guidance we’re projecting year-over-year down a couple percentage points for industrial, based on what we saw. If you remember, our first two quarters of 2022 were down around 2% year-over-year, so the real deceleration happened in the second half of the year. We expect it to turn the other way. Our toughest volume quarter should be the first quarter, and then we expect some recovery. Yes, I think what we’re seeing around the world, it looks like we’re bouncing around at bottom, at least first part of January, so expecting to see a bit of a turn. Cleve, can you explain deeper of what you mean by transition beyond what I shared earlier? I don’t want to repeat what I’d shared under George. I’m just wondering how much headwind you have coming out of container board and whether there’s some other businesses that are growing. I’m just wondering what that balance is, but if you can’t share anymore, that’s fine. Yes, that’s a good question, Cleve. We definitely look at all the various end markets, and we do sell into a number of end markets and a number of kind of final end markets, and we’ve done a really deep analysis on where did that URB or the product that’s made or facilitated by that URB product ends up going, and it’s a lot more--I’d say that those are much more consumer and stable end markets that you would anticipate with things like container board or tissue and towel in there in a meaningful way, and that’s been a part of our strategy, is to manage the mix, and one reason why we bought RTS, or are in the process of buying RTS, and one reason why we like Skjern, is because it gives us access to really utilizing the utility and the sustainability profile of URB in new markets that we think have some final growth and long term opportunity. Cleve, you know, that’s one of the things that the team is working on now. We keep talking industrial, and it gets the connotations it’s pure industrial. When you really get into it, there’s a huge consumer connection, and roughly 30%-- I think I’m saying this correctly, 30% of our URB ends up in the trade sale tissue and towel sector. You wouldn’t define that as industrial, so we owe it to you guys, and I know Lisa and the team are working on helping you guys better understand the true nature of cyclicality that would tie to an industrial type slowdown. That makes a lot of sense. That’s very helpful. So it sounds like maybe more stable--you’re driving towards that stable, less volatile run rate as we move through-- Okay. Then I’m sorry if I missed it earlier, but I just--you know, just sort of recapping at a higher level on the guidance, you’ve talked about, I guess, in two of the three segments, you’ve got up--flat to up volumes, it sounds like price cost is expected to be positive pretty broadly. But you know, ultimately margins and earnings are falling a little bit year-over-year, so I’m just wondering if you could lay out at a high level what the negatives or what the headwinds are. I don’t want to belabor the negative aspects of the guidance, but just so we know what the puts and takes are. Yes, I can give you that color, Cleve. Consumer volumes, really excited about the volumes this year, mid single digit positive across the board, across the various businesses. All those businesses have great consumer oriented strategies. Price cost in consumer is actually going to be meaningfully negative, and it’s because of this metal price overlap that we talked about, the $0.54 from last year and then another carryover this year from the deflation that we’re having in tin plate, so that will be actually a pretty meaningful negative price cost. Then we’re also anticipating that resin prices will turn over in the year and that will provide some price cost headwind as well, so consumer will actually see relatively meaningful negative price cost, which is a big driver for the bridge between 2022 to 2023. Industrial volumes, yes, we think they’re going to be down low single digits on price, you know, as we’ve talked about down low single digits, but not in such a meaningful way that price cost will be a meaningful headwind for the year. The other business, it’s got so much diversity in it. What we really--the way to really characterize that is normalizing end market trends and taking cost out of those businesses should result in some pretty meaningful operating profit improvement. Then there is just normal way headwind from non-operating items, like depreciation and amortization going up $32 million, interest going up and tax kind of normalizing to the statutory levels that we project at. Thank you. Our next question comes from the line of Mark Weintraub with Seaport Research Partners. Your line is now open. Thank you. Just to clarify, I think you’ve stated it, but if the metal pack overlay benefit was $0.54 last year and you’re looking at $0.20 to $0.30, are you expecting a negative $0.74 to $0.84 comparison from metal pack overlay ’23 versus ’22? Is that the way to understand it, or are we just giving up $0.20 of $0.30 of the $0.54? Yes, it’s not just metal pack because there was--you know, we did have a pretty meaningful tin plate business in RPC, and then--yes, but that is discretely the impact of the positive going away and the negative coming in. Got it, so that $6.48, we can actually back off--as we’re bridging to the guidance, we can back off $0.74 to $0.84, so that’s--as you say, that’s a very big part of the seeming bridge. Am I getting that correct? Right, and when we normalize it, I don’t think that that--I think that there’s opportunity there from normal operating conditions versus just taking it away and saying that was all one-time. Well, would we just add back the $0.20 to $0.30 to get to normal, or is there something above then or different from that? Okay, and then I guess the other elements of the--and thanks for the bridge in the last question. I guess M&A, with RTS, maybe that’s not so big, but how impactful M&A and self-help as we’re thinking about the bridge is that in the calculation of what you think ’23 will be versus ’22? RTS is not in our forward-looking numbers at this point in time. I think Rodger said, or maybe Rob earlier, that we hope to have that closed by midyear, second half of the year, but we haven’t built that in. Only Sjkern, of course, closed late last year and it’s nominal. Okay, super. That is helpful. I guess one last try, and understand that there’s sensitivity, but on the URB, can you share, are the contracts still tied directly or indirectly to indexes or is that not even how your product is getting priced anymore? It’s Rodger. Yes, if you look at in general at our total URB tons, about 60% or so is tied to the RISI [indiscernible] index, 20% or so is still tied to OCC moves, and the final 20% is open market. Thank you. Our next question comes from the line of Adam Josephson with Keybanc Capital Markets. Your line is now open. Rob, just a couple of clarification questions to start off, if you don’t mind. The mid single digit consumer volume growth that you’re expecting, is that organic? It just seems like--I don’t remember the last time consumer volumes were up mid single digits in a year. I think that would be a multi-year high growth rate amid these pretty weak conditions, so just trying to understand that volume expectation a little bit better in consumer. Hey Adam, let me handle at least the macro view of that and let Rob take over from there. We’ve talked really over the last several years, and you can see it in our capital spend pool, of how much new growth capital we’ve put towards our overall businesses, but it’s been disproportionately weighted against the consumer side, so we’ve just got known--I mean, we’ve got a launch that’s going national right now, a new line in Chicago. Actually, I was watching Squawk Box this morning and the CFO of the company was touting a new product, so we’ve got a lot of things going on within our legacy businesses that give us great confidence in terms of what we’re forecasting. Then you take the big hit we took in the end of the fourth quarter and that 4 to 4.5 tangibly in terms of new growth opportunities organic that we’ve talked about in terms of how much capital we’re deploying around the world, as well as a bit of softness towards the end of the fourth quarter, that gives us great confidence there, so. Yes Adam, it’s obviously an incredible focus of the business to develop the right strategies and really invest behind them, and you saw that with the flexible business, which had mid single digit growth throughout last year, even in December with the difficult market conditions that everybody saw. But we’ve done this--we’ve got new leadership in the global can business and a really unified strategy. I’d say most of the regions in the world are growing high single digits and Asia is growing double digits in paper cans, and we’re really excited about bringing innovation to that segment and enabling our customers to launch new products there. Plastics is another area that really we’ve invested behind and they’ve started to really grow, so each one of those businesses has mid single digit growth prospects and we’re anticipating that that will come through this year. Wow, okay. Just to be clear, for the total company, Rob, what is--roughly what is your volume expectation for the year? I assume you’re assuming up something, even with industrial being down. One to two - okay. One other clarification, Rob - on the working capital, you said that you’re expecting a meaningful benefit. Can you be any more specific than that? Howard, you expressed, I think, some frustration about some of the questions you’re getting, and I guess from our seat, most--well, really all paper-based packagers had historic price cost benefits last year, for reasons you’re well aware of, and many experienced historic margin expansion, as did you, so it’s hard for us just on the outside to parse out the rising tide lifting all boats versus these company-specific operational initiatives that you have. Is there any help, more help you can give us in terms of parsing those two out, and understanding how you’re thinking that will shake out this year and thereafter, for that matter? Yes, first Adam, I deeply apologize if you felt like I was frustrated. I look forward to these calls like you have no idea each quarter and having subsequent meetings within the quarter. But it does become frustrating when--and I’m sorry again, yes, the dissertation, as you may say, but--. You know, again, going back not too many years ago, 50% of this company was a paper industrial company. It’s now in the 30%, 35% range, and that is a tale in and of itself. I can’t answer your question specifically other to say that if there is a frustration, the peanut butter spread of your paper company is a paper company is a paper company, it’s trying to give you guys a little bit more color in terms of how we’re looking at our segment within the paper industry and how we’re doing things to take away as much of the volatility that we historically have had through those self-help actions that I described. All inclusive, as I said, we’re expecting to see price moderation, we’re expecting to see cost inflation as OCC cannot stay where it is forever, but we’ve taken actions over many years to reduce our exposure, be it from ultimate price to controlling productivity, etc. No, I just--no, it’s helpful to hear you, because again, it really is hard for us to know how much of a rising tide lifting all boats situation this is, because we just--we obviously don’t have the visibility that you do. Just a last thing, Rob, just back to the volume for one moment, if you don’t mind. Compared to the 1% to 2% up for the year, what are your expectations for the first quarter? I’m trying to understand how back half weighted that expected volume growth is. Yes, that’s a good question. Quarter to quarter, I’d say consumer volume growth is coming through now on a year-over-year basis and sequentially. For industrial, we’re kind of--we’re probably going to be flat sequentially with some back end improvement, and we’ve modeled in our core--our base scenario for that business is that we’re going to see kind of a flat recession or a soft landing and then some recovery in the second half of the year, which we think is the consensus from those sources. Then the other businesses are expected to--and we’re seeing kind of a good start to the year that will flow through both--through the full year. You know, you highlighted customer inventory destocking on the consumer side of the business late into the fourth quarter, but it doesn’t sound like there’s any expectation for lingering impact or carryover in the first quarter. Are you seeing real time improvement here already, and it seems like a quick inventory destock cycle, can you just talk through some of the dynamics that you’ve seen in that business and why the confidence on such a quick improvement in the first quarter here? This is Rob. I don’t know if I’d even describe it as a quick improvement, but I think Rodger’s already said, if you look at our rigid paper can business globally, we’re seeing strength as we head into January. A lot of it’s coming from the investments that we’ve made in capacity expansions and some new products that are being introduced, so the paper can business looks up for the first quarter, and what we see after one month is meeting expectations. Flexibles also, just like the fourth quarter, continues the strong growth. We expect another strong year from flexibles - they’re volumes’ coming in. They are putting new products into the marketplace and we’re seeing that as additive in the first quarter. Metal cans, we didn’t own the metal can business in first quarter last--in January of last year, but we have seen recovery. Our metal food can business is strong, so in that case we assume it was just inventory reductions end of last year. If you look at aerosol last year, we were somewhat heavily weighted to a couple of segments like disinfectants, spray paints that built up inventory through COVID and they worked that off last year, so we’re seeing some recovery there as well. Again, the only exception is our Primrose Store plastics business for fresh fruits and vegetables, it continues to be very soft. Other than that, we’ve seen a nice start in consumer to the year from a volume standpoint. Then switching over to the cost side of things, what do you expect from cost inflation overall for 2023? What do you expect from cost inflation for the raw material basket specifically, and then can you talk through some of the key constituents and the dynamics there for the upcoming year? Thanks. Yes, we have our base case assumptions for what we think is going to happen for cost. I can tell you kind of discretely with a couple segments, resin we’re anticipating that down with a front-end orientation really kind of driven by a broad basket that we buy. It’s a meaningfully broad basket that we buy, we anticipate that’s going to be down high single digits to double digits. OCC, obviously less important than it has historically been because it’s not really driving price, but as a cost factor, we talked about kind of a meaningful deflation that we saw at the end of last year. We think that that will somewhat recover just to a normal level because the handling cost around OCC is probably $60 to $80 a ton, and so we think that it has to go up to that kind of level in order to just have some stasis. Otherwise, things that you should know is just employee variable labor has definitely gone up and we’re anticipating it to go up, and that will be an inflation headwind through the year. Other costs like fixed and depreciation will also be going up. We don’t--I mean, we look at kind of business by business, and we also measure it against where the price and the ability to get recovery on productivity is, so we don’t have a discrete number that I have off the top of my head, but we can definitely follow up with you. Good morning. Just a couple follow-ups. I guess on the industrial segment and the volume guidance for industrial volumes down low single digits for the full year, apologies if I missed this, but is there a specific view on volumes for 1Q on a year-over-year basis? It’s going to be flat sequentially, which is kind of about the same magnitude down as it was in fourth quarter. Okay, and on RTS, there was some discussion of synergies, and I’m just wondering, you’ve been kind of minority owner of that for a number of years, if you could talk to maybe sources of synergies or maybe just more broadly how you can run that business differently, now that you’re the full owner. Well, so we’re not the full owner yet. We’re anticipating closing it in the second half of the year. We’re excited about that project as much as we ever have and anticipate the synergies will be--you know, justify the transaction. Howard, Rodger, good morning. I’ll leave the Plato references out, I guess, but just from a philosophical standpoint, you guys did a really good job in 2022, you were able to beat and raise over the course of the year. Given the economic backdrop uncertainty and some of the headwinds that you’re facing in tin plate, I guess what some of us are trying to struggle with is why be aggressive seemingly out of the gate, again when Q1 is a little bit below, and/or what gives you the confidence? I mean, you mentioned conversations with customers but just from our vantage point, there is a lot of uncertainty. And then from a geographic perspective in industrial, maybe there’s a knock-on effect from trying to reopen and that’s why you’re feeling better about the second half? Just anything from a geographic standpoint that you could talk about. Sure Gabe, this is Howard. I’m going to let Rob answer the bulk of the question, just to say. Just so you understand, as we build our bottom-up budgets, we do a very, very thorough--go through a very, very thorough process with all of our business units and understanding the puts and takes that they see in their individual businesses and their markets. We stress-test that so that when we have these conversations and these forecast, based on what we know today, these all feel like very realistic targets for the coming years. Rob maybe will be able to get a little deeper into that, but this is not lick your thumb and see which way the wind’s blowing. I mean, we put a lot of effort over the fourth quarter to--and manage it almost up until the day of announcement of what we think from our teams’ perspective, what we’re seeing from a macro perspective and what our customers are telling us. Yes, we feel really good about the budget and the guide. We think that it’s very balanced. We think that there’s obviously opportunities that we go after every day, but there are certainly risks that we’ve seen in the last two to three years like we’ve never seen before. I’d say with regards to Q1 and then thinking about the full year, a big part of that really is this metal impact, and that business has seen absolutely unusual inflation and now deflation, which has really meaningful bottom line impacts. So as I said, Q1 total impact just from metal is going to be $0.50 to $0.60, and if you took that away, we would almost be at the $1.85 that we were at last year. I think that industrial certainly has some impact there, but we’re anticipating kind of a good year from productivity and a good year from performance, so rolling those--taking that metal price impact off and then rolling forward, because we think that that metal price impact is most acute in Q1, though with some lingering impact in Q2, but then completely gone in Q3 and Q4, you can think about our year in that regard and get to the number in a pretty straight line. Yes, I think just finally, Gabe, Slide 14, I spoke to at the end of my prepared remarks. That’s the point here, is that we are on the appropriate trajectory without one-time benefits, and an unbelievable trajectory without the one-time benefits. Look, I won’t belabor the point, we’re really bullish about the long term of the company and the actions that the global teams have been taking over the years that are getting us to this point. Understood, all right. One last one, I don’t think we’ve mentioned it or it has been mentioned - capex being 325 to 375. I thought we were sort of thinking about a step down post Project Horizon, so maybe you guys found some other discrete projects in there that you’re spending on? Yes, it’s a big part of our strategy. We’ve been really focused on trying to identify as many good projects as we could, and we’ve got--you know, we are in a really good position right now where we’ve got so many good projects that we’re really managing it and we’re really identifying the best projects and the ones that fit our strategy the best. I’d say that number is a reflection of that. It’s also a reflection of us just being a bigger company than we’ve ever been before, and so as a percent of sales, it’s still kind of in line with what we’ve been targeting, and it’s also as a percent of sales a way for us to kind of continually ratchet up what we call value enhancing projects as a component of that spend, so that we’re getting better and better ROI. Howard, just one follow-up. Thanks for taking it, by the way. George asked a question about what you’re seeing in center of the store in terms of plastic versus paper board, any shifts you’re seeing from one substrate to the other. Just given that you’re uniquely positioned to answer that question, can you--forgive me if you answered it and I didn’t hear it, but can you address that question? Sure Adam. You know, it’s really where it resonates paper versus plastic and the beachhead right now is really in Europe, and we are seeing a lot of opportunities. We’re commercializing--where once a product was in a plastic container, it’s now coming to one of our all-paper containers. We’re just now rolling out the all-paper solutions that we’ve developed internally, as well as through our acquisition of Can Packaging several years ago just as COVID hit, and so we’ve got some assets coming into North America. We just don’t have the same level of pull here in the U.S. Certainly there’s focus and attention on the CPGs, but in Europe it’s almost a mandate and how quickly can you get us out of substrates such as plastic or flexibles into an all-paper or mostly paper product, so our expectation is that will continue to build on a more enhanced basis here in the United States. We’re seeing it in Asia and South America almost to the equivalent of the situation in Europe. I appreciate that. Just one--because I read, I think, that the EC was classifying any paperboard packaging with poly coating as technically a single-use plastic, and that was limiting the appeal at least to some CPGs in Europe. Any thoughts on that issue in Europe, and the States for that matter? Yes, I don’t know if I have a good answer for that because it’s a moving target and it’s by member country in the EC. But there it is required, and we’ve been really focused on paper content percentages, and so we’ve got solutions out there in the market today that are 95% paper, that are able to be recycled in the paper stream. Different countries in the EU, there will be different states that take on different positions here, but the reality is you do need some type of barrier and our focus, again, is to create solutions that have are easily managed through the recycling systems and programs, so we’re actually seeing a positive reaction in countries like the U.K., France, etc. with the products that we’re putting out in the market today. Hi guys. Just given that Adam segued that for us, just one quick one then. Why are you comfortable, or are you, that North America won’t see kind of a similar impact as you’re seeing in Europe in terms of your customers trying to get out of plastic to go to paper? Is it from their research or yours, the consumer here cares less, or is there more confidence about the sustainability merit of the plastic packages you and others are bringing to the market and maybe it’s something else? Yes George, I’d say I’m just going to wait and see here if the U.S. in totality follows the trends in Europe, but there’s just different--it’s a totally different environment right now, and I don’t know how to answer that. We are not seeing a lot of pressure right now, but these are fit for purpose solutions. We’ve got a lot more space and opportunity to either recycle and/or other options for waste streams. Thank you, and I’m showing no further questions at this time. I’d like to hand the call back over to Lisa Weeks for closing remarks. Thank you all for joining our call today, and if you have any follow-up questions regarding our results, please let us know. We look forward to giving you an update on our Q1 results in May and thank you all again, and have a wonderful day.

EarningCall_204

Good day, everyone, and welcome to the fourth quarter and full year 2022 earnings call, hosted by Gary Bisbee, Head of Investor Relations. My name is Ben, and I am your event manager. [Operator Instructions]. I'd like to advise all parties that this conference is being recorded for replay purposes. And now allow me to hand it over to your host. Gary, the word is yours. Thanks, Ben. Good morning, and thank you, everyone, for joining us today for our fourth quarter and full year 2022 earnings call. I'm joined today by our CEO, Steve Hasker; and our CFO, Mike Eastwood, who will discuss our results and take your questions following their remarks. [Operator Instructions]. Throughout today's presentation, when we compare performance period-on-period, we discuss revenue growth rates currency as well as on an organic basis. We believe this provides the best basis to measure the underlying performance of the business. Today's presentation contains forward-looking statements and non-IFRS financial measures. Actual results may differ materially due to a number of risks and uncertainties discussed in reports and filings that we provide to regulatory agencies. You may access these documents on our website or by contacting our Investor Relations Department. Thank you, Gary, and thanks to all of you for joining us today. 2022 was a year of great change and progress at Thomson Reuters, so let me start by reviewing some of our key accomplishments. First, we delivered another year of strong financial results, meeting or exceeding our key financial targets. For Q4 and the full year, organic revenue rose 6%, driven by a 7% recurring revenue. The Big 3 segments also grew 7% organically. Despite unprecedented inflationary pressure and continued investments, our full year margins rose 410 basis points to 31 -- 35.1%, and we achieved our free cash flow forecast of $1.3 billion. Due to our 2022 performance and continued solid book of business, our full year 2023 outlook for organic revenue and adjusted EBITDA margins are unchanged from our commentary last quarter. Mike will provide more details on our outlook later in the call. We successfully completed our Change Program at year-end, delivering our financial targets and making significant progress in transforming Thomson Reuters into a more streamlined and scalable business. Importantly, Change Program progress provides a strong foundation for sustainable future growth. I will discuss these benefits in more detail in a minute. 2022 was also a year of progress from an innovation and product perspective. The highlight was the September launch of Westlaw Precision. Beyond Westlaw, 2022 successes range from a continued focus on product stability, performance and user experience improvements to new offerings and capabilities added across our portfolio. We also added a number of new third-party product integrations. Our capital capacity and liquidity remain a key asset that we're focused on deploying to create shareholder value, and we made good progress on this during 2022. Through year-end, we repurchased $1.3 billion on the $2 billion share buyback program we announced in June 2022. We plan to complete the program by early Q2. As Mike will review in more detail, after completing the buyback, we intend to execute a return of capital with a concurrent share consolidation of at least $2 billion, funded by proceeds from our sales of LSEG shares. We also made progress on M&A, having closed the $500 million acquisition of SurePrep on January 3. This follows 3 smaller tuck-ins during 2022. We continue to assess inorganic opportunities, and we are optimistic that we'll be able to execute additional strategic transactions in 2023, while simultaneously completing the $2 billion share buyback program and $2 billion return of capital. Lastly, let me briefly comment on market conditions as we enter 2023. While we acknowledge a challenging and uncertain macroeconomic environment, we're blessed with a highly resilient business. 80% of our revenues are recurring, and we operate in historically stable and growing end markets. We're closely monitoring our customer sales activity and continue to see the sales cycle lengthening in corporates. But as we mentioned last quarter, though activity overall through early Q1 remains on track to deliver our 2023 targets. Regardless of how the macro unfolds, our focus will remain on leveraging our content, our technology and our service for the benefit of customers. Now for the results for the quarter. Fourth quarter reported revenues grew 3%, including a 2% drag from foreign currency and a 1% from recent divestitures. Organic revenue, which is a constant currency metric, rose 6%. Organic recurring revenue again grew 7%, with transactional revenue growing 5%, in line with our expectations. Adjusted EBITDA increased to $633 million, reflecting a 950 basis point margin improvement, to 35.9%. Excluding costs related to the Change Program, the adjusted EBITDA margin was 39.3%. Adjusted earnings per share rose 70% year-over-year to $0.73. Turning to fourth quarter results by segment. The Big 3 businesses achieved organic revenue growth of 7%. Legal organic revenue growth moderated to 5% from 6% pace in recent quarters. The slight deceleration was driven by weaker performance in our ELITE and Government businesses, which Mike will cover in more detail later. Apart from this, demand for our legal solutions remains very healthy across all key segments, and we expect to return to the 6% growth trend in the second half of 2023, driven by continued momentum in Westlaw, Practical Law, HighQ and other key offerings. Turning to Corporates. Organic revenue growth momentum continued, with revenue up 9%. Recurring revenue rose 11%, while transactional revenue softened as expected. Tax & Accounting had another solid quarter, with organic revenue growth of 8%. Our Latin American business, led by Dominio, grew over 25% in the quarter and remains a key growth driver. Reuters News organic revenues increased 10% in Q4. Growth continued across all lines of business, especially at Reuters Events. And finally, Global Print organic revenues were down 1%, again, better than expected due to improved retention, better third-party print revenue and timing benefits that we expect to normalize in the first quarter of 2023. In summary, we're pleased with our results and the solid momentum across our businesses. Full year reported revenues rose 4%, including a nearly 2% foreign exchange drag, and organic revenues grew 6%. Adjusted EBITDA increased 18% to $2.3 billion, driven by revenue growth and savings associated with the Change Program, resulting in a margin of 35.1%. Excluding Change Program costs, adjusted EBITDA margin was 37.7%, 380 basis points higher than in 2021. Adjusted earnings per share for the year was $2.56 compared to $1.95 per share in the prior year. Let me finish on the financials for the full year by noting that we met or exceeded nearly all of our 2022 guidance metrics. The only exceptions were CapEx, which was slightly higher due to inflationary pressures, and total revenue growth, which was impacted by the Q4 divestitures. Now I'll spend a few minutes discussing the completion of the Change Program and several growth updates. The end of 2022 brings to a close our Change Program, which was an extraordinary 20 months -- 24 months of effort and progress at Thomson Reuters. As a reminder, the Change Program had 2 overarching goals. First, transitioning from a holding company to an operating company; and second, from a content company to a content-driven technology company. We pursued these 2 goals through dozens of work streams. In total, we invested just shy of $600 million and have broadly delivered against our financial targets, with $540 million of run rate savings achieved as of December 31. We highlight a number of key accomplishments on Slide 11. While there remains work to do, we are very proud of what we've accomplished and how we have transformed the business. Today, we are a more focused and performance-driven company with improved organic revenue growth and profitability and a stronger portfolio. Looking forward, we believe the largest legacy of the Change Program will be the foundation that it provides for improved sustainable growth. This includes a simpler product portfolio with more focused investment on our best opportunities; improved customer-facing capabilities, including digital and self-serve; reimagined customer platforms and user experience and service enhancements; modernized technology, including expanded APIs, our conversion to the cloud, improved cyber resilience and reduced tech debt; and lastly, upgraded talent, with a more flexible footprint scale, global capability centers and a truly world-class talent across the organization. The resulting more streamlined and scalable business, along with the success from our product and engineering organizations, provides us with confidence in our ability to organically innovate, which we believe positions us well to sustain our recent healthy organic revenue growth in the future. Building on that point, I'll mention a few factors that have contributed to our revenue acceleration in recent years. During our March 2021 Investor Day, we discussed the 7 strategic growth priorities shown on Slide 13. We continue to focus our investment on these key businesses, which grew 8% on a combined basis in 2022, up from 6.5% in 2021. Product and innovation remains an important focus. The launch of Westlaw Precision was a key 2022 highlight. And the good news there continues. To date, we have recorded more than 750 Precision sales across all customer types, including to court systems in 14 states. We remain confident that this momentum will continue in 2023. Aside from Westlaw, 2022 saw a number of key offerings and key enhancements across the portfolio, including expanded HighQ Contract Lifecycle Management capabilities and a new document intelligence offering in our Legal portfolio; a new Free Trade Agreement Analyzer offering in our Global Trade management area; a new global beneficial ownership solution for CLEAR; and expanded features and capabilities across several products in our Tax portfolio. Looking to 2023, we have a strong and focused product road map that we expect to deliver continued value for our customers, and growth potential for Thomson Reuters. In addition to driving organic growth, we're focused on creating shareholder value through the deployment of what we estimate to be $11 billion of capital capacity between now and 2025. This leaves us in an enviable position to both fund strategic M&A and significant capital returns to shareholders. Mike will cover shareholder returns in his commentary, and I'll briefly discuss our approach to M&A. As we've stated in the past, we're not looking for transformational deals or to add a new operating segment. Instead, we are focused on acquiring high-quality assets that can strengthen our Big 3 customer segments. We list several areas of interest on Slide 15. We will remain disciplined in our approach, and we will be patient in searching out assets that meet our criteria, including strategic, operational and cultural fit, in addition to meeting our financial hurdles. While we continue -- while we consider a range of situations, our focus is on purchases that can replicate a tested and successful M&A playbook in which we acquire quality assets in our areas of expertise. We then integrate and invest behind the acquired assets, and leverage our extensive distribution and large customer reach to grow these businesses over a multiyear period. This playbook has been executed many times in the past, and most recently with the 2019 acquisitions of Confirmation and HighQ. In both cases, revenue has doubled during our 3-plus years of ownership, and we continue to see strong potential for both assets. There are many earlier examples of this same playbook, including the 2013 acquisition of Practical Law, among others. So moving from strategy to execution, we're excited to have closed the acquisition of SurePrep on January 3, and we welcome the SurePrep team to Thomson Reuters. We see SurePrep as a great fit with the acquisition approach and criteria I just discussed, and we're focused on executing our acquisition playbook to drive significant growth from this business over time. SurePrep is a best-in-class provider of tax workflow automation, software and services. Its offerings streamline and automate first-mile pain points for accountants, significantly reducing time and increasing efficiency of tax return workflows. We believe SurePrep's trained AI models are years ahead of the competition, and its automated coverage of tax documents is industry-leading. SurePrep is a compelling strategic fit with our Tax & Accounting business. In combination with our leading research client software, SurePrep's document collection and data extraction technology allow us to offer truly end-to-end automated workflow solutions. I'll close my comments by noting that we're in a strong position with significant dry powder in what we believe is an increasingly buyer-friendly market. We're optimistic that we can complete other SurePrep-like acquisitions in the next 12 to 18 months that strengthen the proposition of our Big 3 segments. In closing, I'll leave you with 2 key messages. First, our success in completing the Change Program positions us well to deliver improved, consistent growth in the future. And second, we are making progress in deploying our significant financial capacity and remain focused on doing so in a way that creates shareholder value. Thank you, Steve, and thanks for joining us today. As a reminder, I will talk through revenue growth before currency and on an organic basis. Let me start by discussing the fourth quarter revenue performance of our Big 3 segments. Revenues rose 7% organically and 5% at constant currency for the quarter. This marks the seventh consecutive quarter our Big 3 segments in aggregate have grown at least 6%. Legal Professionals' organic revenue growth rate moderated slightly to 5%, which I will discuss on the next slide. Organic growth was driven by Westlaw, Practical Law and HighQ. In our Corporates segment, organic revenues increased 9% for the quarter, driven by recurring revenue growth of 11%, offset by a 5% decline in transactional revenues. Practical Law, CLEAR, Direct Tax and Global Trade were key drivers of recurring revenue growth. And finally, Tax & Accounting's organic revenues grew 8%, driven by recurring revenue growth of 8% and transactional revenue growth of 10%. Recurring revenue growth was driven by UltraTax and the segment's business in Latin America. Legal Professionals' organic revenue growth moderated slightly to 5% from the recent 6% pace. Momentum across much of our Legal segment remained strong. However, weaker performance at our ELITE, Legal ERP software and Government businesses led the growth rate down to 5% in Q4. As we show on Slide 19, Government and Elite are a bit less than 25% of our Legal Professionals' revenue. The remaining majority, led by key franchises including Westlaw, Practical Law and HighQ, accelerated throughout 2022, growing by 7% year-over-year in Q4. We expect this level of growth to continue in 2023, bolstered by growing contribution from Westlaw Precision upgrades. Let me provide some color on Elite and Government. Elite is in the early stages of a transition from legacy on-premise software solutions to a cloud-based SaaS offering. We see this transition as a long-term positive as it will drive stronger recurring revenue and improved margins. However, during the transition, lower professional services revenue associated with the SaaS offerings versus the legacy offerings will be a revenue headwind. This impact is already incorporated in our 2023 outlook. However, it had a somewhat larger-than-expected impact on Q4 results. Our Government revenue decelerated in the second half and especially Q4. This resulted from 2022 slowdowns in the release of federal funding for and guidance around key benefit programs. The slower flow of funds caused a number of contract delays for our risk, fraud and compliance, or RFC offerings. We do not believe we have lost share with our Government RFC businesses, and we continue to have robust pipelines of future activity. The procurement impediments have largely been resolved, which we expect to result in a return to stronger bookings growth over the next few quarters. It is worth noting approximately 40% of our RFC revenue is in our Corporates segment, which continued to deliver double-digit growth for both Q4 and the full year. For our Legal Professionals segment in total, we believe 5% growth is likely again in Q1, with a return to the prior 6% trend likely in the second half of 2023, as Government improves and strong growth continues from our Westlaw, Practical Law and HighQ businesses. Moving to Reuters News. Organic revenues increased 10%. Growth was led by Events and the news agreement with the Data & Analytics business of LSEG. Lastly, Global Print organic revenues declined 1%. The decrease was better than expected due to improved retention, better third-party print revenue and timing benefits, which are expected to normalize in the first quarter of 2023. On a consolidated basis, fourth quarter organic revenues increased by 6%. Turning to our profitability. Adjusted EBITDA for the Big 3 segments was $618 million, up 27% from the prior year period, with a 43.9% margin rising 810 basis points. Improvement over prior year was due primarily to higher revenues, Change Program savings and lower annual bonus accruals. As a reminder, the Change Program operating costs are reported at the corporate level. Moving to Reuters News. Adjusted EBITDA was $40 million, up $25 million year-over-year, with a margin of 19.8%, up sharply from the prior year. Events revenue growth and a currency benefit drove margins. Global Print's adjusted EBITDA was $59 million with a margin of 36.1%, an increase of 20 basis points. In aggregate, total company adjusted EBITDA was $633 million, a 40% increase versus Q4 2021. Excluding costs related to the Change Program in both periods, adjusted EBITDA increased 31%. The fourth quarter's adjusted EBITDA margin was 35.9% or 39.3% on an underlying basis, excluding costs related to the Change Program. Turning to earnings per share. Fourth quarter adjusted EPS was $0.73, up from $0.43 in the prior year period. The increase was mainly driven by higher adjusted EBITDA. Currency had a $0.01 negative impact on adjusted EPS in the quarter. Let me now turn to our free cash flow performance for the full year. Reported free cash flow was $1.34 billion, up 7% from $1.26 billion in the prior year period. Consistent with previous quarters, this slide removes distorting factors impacting our free cash flow. Working from the bottom of the page upwards, the cash outflows from discontinued operations was $1 million less than the prior year period and reflects payments to the U.K. tax authority related to the operations of our former Refinitiv business. Also in the 12 months, we made $324 million of Change Program payments as compared to $166 million in the prior year period. If you adjust for these items, comparable free cash flow from continuing operations was $1.7 billion, $241 million higher than the prior year period, primarily due to higher EBITDA. I will now provide an update on our capital structure and several capital allocation items. As you can see, our capital structure and liquidity position remained strong as we exited 2022, and they have improved with the recent sell of LSEG shares. We had $1.1 billion of cash on hand at December 31 and more than $2 billion as of January 31, with the proceeds received from the sell of LSEG shares to Microsoft. We have an undrawn $2 billion revolving credit facility, and we also have approximately $1 billion of availability on our $2 billion commercial paper program. Note that half of the commercial paper borrowings at year-end were used to fund the SurePrep acquisition, which closed on January 3. Our December 31 leverage ratio was 1.7x, below our 2.5x internal target, as noted in our value-creation model. Next, I will provide several updates on our London Stock Exchange Group holding. On January 31, we sold 10.5 million shares to Microsoft for approximately $1 billion of gross proceeds, leaving us with 61.5 million shares valued at approximately $6 billion, including the value of our FX hedges. In the past, we have discussed our ability to monetize 1/3 of our LSEG shares in each of 2023, 2024 and 2025. Our vesting schedule is actually a bit more front-loaded, allowing us to monetize approximately 31 million shares this year. Combined with the 10.5 million shares sold to Microsoft, this is nearly 60% of the 72 million shares we owned as we entered 2023. In terms of our 2023 plans, we will take a disciplined approach to our monetization, which we expect to begin in March after LSEG reports their year-end results, subject to market conditions. Given that both TR and Blackstone can monetize shares this year, it would be prudent to assume the sales happen in appropriately measured tranches throughout 2023. Two other quick points. First, our cost basis on the remaining 61.5 million shares after the Microsoft sell is $2.6 billion. For your math, we would assume a 25% capital gains tax rate on gains above $2.6 billion. Lastly, the value of the foreign exchange hedges we hold against our LSEG stake were in the money as of December 31 by $310 million, down from the $650 million we mentioned last quarter due to a stronger pound sterling. We currently have nearly 90% of our remaining LSEG acquisition hedged. From a liquidity and capital structure standpoint, we remain in an enviable position with below target leverage and strong cash flow bolstered by proceeds from the monetization of our LSEG stake. We remain focused on value creation, and we expect to continue with our balanced capital allocation approach that includes annual dividend growth, strategic M&A and capital returns. We have ample capacity to pursue all 3 of these strategies in 2023 and beyond. Steve touched on our approach to M&A and recent SurePrep acquisition, so I will focus on the other 2 components of our balanced capital allocation approach. We are making strong progress on the $2 billion NCIB or share buyback we announced last June, having repurchased approximately $1.5 billion worth of our shares as of the end of January. We anticipate completing the $2 billion buyback by early April. Following the completion of the NCIB, we plan to use proceeds from our LSEG dispositions to fund a return of capital in 2023 of at least $2 billion, which will be combined with a share consolidation or reverse stock split. Assuming the current share price, this transaction would reduce our share count by at least 17 million shares or 3.5%. A key advantage of the return of capital versus a share buyback is the speed of execution, as the shares are retired immediately upon the close of the transaction. Given liquidity rules with NCIB buyback programs, it would take several quarters at a minimum to return a similar amount of capital through a share repurchase program. And finally, today we announced a 10% increase in our annual dividend to $1.96 per share, up $0.18 from $1.78 in 2022. This marks the 30th consecutive year of annual dividend increases for the company. The increase will be effective with our Q1 dividend payable next month. I will close this section with a reminder of our value-creation model, which continues to guide our long-term investment approach. As we execute to these principles, we believe Thomson Reuters is positioned to consistently and sustainably drive strong operating and financial performance that builds value for our shareholders over the long term. Let me conclude with our updated 2023 outlook. As Steve outlined, we are updating our 2023 guidance to incorporate current market conditions, the SurePrep acquisition and the Q4 2022 divestitures. I will discuss our outlook over the next 2 slides. We continue to project our 2023 organic revenue growing by 5.5% to 6%. Including the divestitures we discussed last quarter and SurePrep, we see total revenue growth rising by 4.5% to 5%. For the Big 3, we continue to expect 6.5% to 7% organic revenue growth, and we see total revenue growth of 5.5% to 6%. As a reminder, both total revenue growth and organic revenue growth are constant currency metrics. We continue to forecast our adjusted EBITDA margin at approximately 39%, which is healthy expansion from the 2022 margin before Change Program costs of 37.7%. This incorporates the realization of significant Change Program cost savings, tempered somewhat by inflationary cost pressures, investments to drive customer success and fund growth initiatives, and an estimated 50 basis points drag from SurePrep. We see our effective tax rate at approximately 18%, in line with our prior view. We forecast our accrued CapEx as a percent of revenue at approximately 7%, above our prior expectation for the high end of the 6% to 6.5% range. The slightly higher capital intensity results from inflationary pressures and product investments we discussed last quarter, in addition to the inclusion of SurePrep. We also plan to invest $30 million in 2023 on real estate optimization projects, which will be incremental to our accrued CapEx outlook. In 2023, we see M&A as a roughly $40 million free cash flow drag, resulting from SurePrep integration costs and growth investments at SurePrep and ThoughtTrace. We expect positive free cash flow contributions in 2024 from these acquisitions as integration costs subside and revenue ramps. All in, we forecast free cash flow of $1.8 billion in 2023, below our prior $1.9 billion to $2 billion outlook. This incorporates the updated capital spending outlook, along with acquisition dilution and a $40 million impact from recent divestitures. Excluding M&A, the divestiture impact and the real estate optimization spend, our free cash flow outlook would have been within the prior range, as is shown on Slide 32. While these items will weigh modestly on our 2023 free cash flow, we believe they are smart investments that will result in improved growth and profitability in 2024 and beyond. As we think about our quarterly phasing, please note the following: SurePrep's revenue is highly seasonal, with roughly half occurring in Q1, 1 quarter in Q2 and the remaining quarter split between Q3 and Q4. Costs are more consistent throughout the year, leading to strong profits in Q1, but losses in the second half. SurePrep will be integrated into our Tax & Accounting Professional segment. However, approximately 23% of revenue is with the Global 7 accounting firms and thus, will be in our Corporates segment. For the full year, we see margin dilution of approximately 250 basis points to our Tax & Accounting segment due to the inclusion of SurePrep. This includes a 300 basis point benefit to Q1, followed by 500 basis point drags in Q3 and Q4. For the first quarter of 2023, we see organic revenue growth at the low end of the full year 5.5% to 6% range. We expect Big 3 revenue to be consistent with Q4, but see growth moderating somewhat due to slower growth at Reuters News and a larger decline at Print. At Reuters, both a lower contractual price increase related to our LSEG news agreement versus 2022 and a lighter seasonal Events calendar in Q1 impact growth. We see a Q1 adjusted EBITDA margin of approximately 38%. This includes our expectation for $20 million of severance in Q1, which will be a 120 basis point drag. Congrats on the quarter and the guidance. I wanted to kind of take a bigger look at '23. Obviously, this -- you've largely maintained revenue and EBITDA guidance, and you described the small variance in free cash flow. So when you look at sort of the macro backdrop, the inflation, can you maybe just talk to how you were able to maintain that? Is it mostly that sort of the top line trends perhaps came in stronger than expected versus maybe when you sort of initiated that guide, I think, almost 2 years ago? And then maybe just expanding from that, can you just talk about how we should think about longer-term margins in that backdrop, the prospect of sort of moving towards sort of that 40% or beyond the 40% mark longer term? I just wanted to -- I'll leave it there. Yes. Thanks, Aravinda. It's Steve. I'll start, and I'm sure Michael will supplement. So look, I think the sort of where we sit today and the signals we're sending for this year speak to 2 things. One, the resilience of our business and our business model, 80% recurring revenues, serving stable and growing end markets with must-have products and solutions. I think that's the first and maybe most important part of it. I think the second part of it is in 2020, we designed the Change Program. We've executed that in '21 and '22. And the principal sort of objective of that was not only to streamline the company and get us ready for whatever comes in '23 and beyond, but also to build a sustainable platform for higher growth going forward. And so we're very focused on lifting our organic growth rate in a sustainable and meaningful way. And that started with the investment in the 7 growth initiatives that we talked about at Investor Day in 2021, in March of '21. And it's continued with the development of sort of core capabilities like migration to the cloud, APIs, digital and self-serve customer service, a data and -- a world-class data and analytics capability to support our salespeople and our products and a real focus on organic product innovation, the likes of which the company hasn't seen before. So that's where it comes from. And we'll say more about this as we move through '23, but the focus is very much on driving a higher rate of organic growth. That organic growth will lead to higher margins, just related to the business model and the fixed nature of our cost base. So we -- that's really the areas of focus. Mike, what do you want to add? Yes, I'll add a couple of additional points, Aravinda. Let me start with our outlook, which is provided on Page 32. As a reminder to everyone, the total revenue growth guidance is below the organic revenue guidance due to the divestitures that we had in Q4. As a reminder, that was about $155 million of annual revenue and about $40 million worth of EBITDA is the first point. In regards to confidence, the December and Q4 bookings, so you'll hear us refer to it sometimes as ACV, a book of business, that gave us confidence. Given that those bookings fuel our recurring revenue that Steve mentioned, 80% of our total, we achieved 7% recurring growth in that recurring revenue in 2022, gave us confidence there. To Steve's point on operating leverage, as we sustain 6% -- approximately 6% organic growth longer term and higher, the operating leverage, we have about 65% of our fixed -- of our costs are fixed in nature, which provides the operating leverage. And certainly, we'll continue to make investments to help sustain and fuel that organic growth longer term. So Aravinda, hopefully, we addressed each of your questions. Thanks, Mike. Quick follow-up. Proportion of OpEx from headcount, I was wondering -- I don't know if you can disclose that, but I was curious. Sure. About 65% of our costs are compensation-related, Aravinda. That includes base salary, annual incentive plan, long-term incentive plan commissions, commissions being the variable compensation for our sales force. So about 65% is compensation-related. I wanted to dive deeper into factors leading to your updated EBITDA margin guidance and free cash flow guidance. Can you discuss the puts and takes behind the updates there, as well as where, from a segment perspective, the changes are happening and contributing within the year? Sure. In regards to the EBITDA margin, George, let me address puts and takes. From a tailwind perspective, certainly the Change Program cost savings, we referenced the $540 million of annualized savings through December '22, is certainly a tailwind. In regards to headwinds, I would mention 3, George. Inflationary cost pressure is number one. Second, investments to drive customer success and to fund the growth initiatives. In regards to customer success, that's referring to continuing to improve our end-to-end customer experience that will drive higher Net Promoter Scores and then should drive higher retention. As a reminder, George, our retention rate is about 91% for total TR, but it varies by segment. The third headwind in regards to EBITDA margin is the 50 basis points drag that I mentioned from the SurePrep acquisition for calendar year 2023. So those are the puts and takes for the EBITDA margin. In regards to free cash flow, which are noted on Page 33, I'll just highlight again the 3 items there. The divestitures that we did in Q4, that's a reduction of absolute free cash flow of $40 million. And then we are intentionally making investments for the 2 acquisitions we recently completed with SurePrep and ThoughtTrace, which we think is the right thing to do mid to long term. And then lastly, the North America real estate optimization. We own facilities in Minneapolis-St. Paul, in Dallas. We see an opportunity, George, to rightsize those facilities that we own into smaller campuses for us going forward, which would provide a stronger employee experience, a stronger workplace of the future for us. But those are the thoughts, George, on those questions. Got it. Very helpful. You successfully completed your Change Program in the fourth quarter. Can you discuss key product investment and cost initiatives -- cost efficiency initiatives now that you're done with your Change Program as you look forward to 2023? Yes, I'll start, George. It's Steve. So a couple of things. We've -- under the leadership of Matt Keen, who was our Interim President at Reuters for a period of time, we've launched an ongoing productivity initiative. And this is very much looking for opportunities to improve our speed, our efficiency and our effectiveness across the company, all regions, all products, all segments. And we see that -- lots of opportunity there, and we'll just get better and better at doing that on an ongoing basis. From a product investment standpoint, I'm very pleased with the work that David Wong and Shawn Malhotra and Jason Escaravage have done in terms of getting us focused, not only on the 7 growth initiatives, but particularly on a series of pretty exciting product innovations and launches this year. So we'll continue to invest in Westlaw Precision. We'll migrate HighQ to the cloud. We're making some investments in our Indirect Tax and our Global Trade areas and the ongoing work that Kirsty Roth has launched in content modernization, we think will lead to a platform around some pretty interesting new launches down the track in things like CLEAR. So it's a -- there's a focused list of half a dozen or so areas that we're particularly going to call out through this year, where our customers have told us that there's demand and there's interest. And so we're excited to pursue that. Yes, George, I would just supplement our cloud migration, which we are at roughly 50% of our revenue available in the cloud at the end of December '22. Kirsty's team is driving that to nearly 90s percent by the end of 2023. Elizabeth Beastrom's Tax & Accounting Professionals business, we're continuing to invest in confirmation, virtual office, UltraTax there. And then lastly, to support our sales go-to-market teams, we're making continued sustained investments in our commercial tools and processes to help the sales team be more productive and efficient. There have been some headlines for the legal industry just regarding labor base and some layoffs and just tougher environment for the sector, especially at mid, I guess, lower deals and on the corporate side. I'm just curious kind of what you're seeing with regards to demand from your customers and legal customers' willingness to spend on a new tech going into potentially a tougher year in '23? Yes. Heather, thanks for the question. So a couple of things. As we signaled in our comments, we saw an acceleration in Q4 in our core legal products franchise. So Westlaw, Practical Law, HighQ, products of that nature. We see that continuing. We're not -- our business model is not based on heads. So to the extent that the number of lawyers goes up or down, that doesn't drive -- there's not a direct correlation. Instead, what we see is an acceptance across the legal profession. So large -- global large to mid- to small firms, that they need to significantly up their investment in information and technology in order to be more productive, more profitable. And at the global large, that's being driven by sort of demand from general counsels and all the way through, down to small where they just can't get the talent. The talent sort of shortages continues. And we don't see that changing. So we do see a real tailwind here for our legal business in terms of TR as a key driver of a transformation of the profession to a much more technology-driven independent set of activities across general counsel's offices and law firms. We're pretty excited about playing a huge role in that in the coming years. And we think with Westlaw, Practical Law, HighQ, Contract Express, the acquisition of ThoughtTrace and our Document Intelligence plans, plus our M&A pipeline that we can be a sort of a significant beneficiary of that transformation over the next few years. Yes, Heather, I would just add in addition to law firms and general counsel, we also have government, which is a big user of our legal products. Westlaw Precision has now been adopted by 14 states, led by Steve Rubley's team. We expect that to continue to expand in Q1 and Q2, and that's a big draw. Once the states adopt Westlaw Precision, that's a draw for law firms and others to get that. That's great to hear. And as a follow-up, just it's helpful to hear what's going on the legal market. Could you potentially provide some color on what you're seeing on the consulting side as well? Again, just all the sort of macro uncertainty. Yes. Just kind of where the demand is coming from on the consulting side and what you're hearing from your customers, given some of the economic uncertainty. No, that's okay. So look, on the tax and accounting front, here's what we see is happening. Firstly, the number of returns and the complexity of returns just keeps going up and up and up. And I think it's a bold pundit, as you suggest, that, that's going to reverse anytime soon, particularly in the United States. And so the demand for our software, the fundamental underlying demand for our software goes up, whether that's on the tax return side or the order confirmation side, I think the same is true, firstly. Secondly, there's a generational shift that's about to happen. A lot of certified practicing accountants are getting toward the end of their careers. And there's not the same number of new graduates coming through at the sort of bottom of that talent funnel. And as a result, the profession is becoming more and more dependent on automated technology-based solutions. And that was really the sort of thesis behind our acquisition of SurePrep. What SurePrep does is it automates the document process using AI for a tax return. So it takes a lot of the labor and the grunt work out of preparing tax returns. And so this is also -- similar to my comments on legal, tax and accounting group is going to become increasingly dependent on technology that automates that core tax return and audit process. And we think we're making the right investments to be a beneficiary of that going forward. And certainly, our results in recent years in terms of give us a cause for optimism there. And the talent that we have leading our tax and accounting franchise and the talent that we're attracting, retaining, developing within that business on both the product engineering go-to-market side reinforces that confidence. Yes, Heather, I would just add 2 points. The recent acquisition of SurePrep and Accounting really further down in regards to our confidence in that space. Just a reminder, Heather, the Dominio business in Brazil, that's led by team, that business continues to grow about 25%. It's about $100 million in revenue, now 25% annual growth. And and the team there driving new customers, new logos of about 10% annual increase there. So that's also a fuel for the Tax & Accounting overall growth. Steve, am I interpreting your opening remarks properly when you say you want growth to improve? So you're making investments this year to improve growth in future years. Does that mean your bar at least aspirationally is for the Big 3 segments to do better than 6.5% to 7% growth in 2024? Yes. Simple answer, yes. We have very lofty ambitions for our Big 3 growth and profitability, and we think we're just getting started. We see -- to my point, comments to Heather's questions, we see real potential in the legal profession. We see real potential in the tax and accounting profession. We think we can get our Government business well and truly back on track. And we think we've got an opportunity in Corporates, where, as I've talked about before, it's a relatively new area of focus for us as a company. And one of the areas in Corporates, but not the only area, will be an expansion in the risk -- our Risk, Fraud and Compliance franchise. So across the board, we're pretty excited about the growth prospects. We've got to make the right set of investments in products and in talent. And our track record, I think, is building in those areas. And to George's question around EBITDA margin and free cash flow guidance, for me that's a positive story, because we see opportunities to invest further to drive growth in the out years. And so notwithstanding the economic climate in 2023, we're pretty excited about what we see and the investment opportunities in front of us. Yes. No, for sure. Mike, one quick follow-up for you on a similar topic, different angle, is price increases. You talked previously about a bit of a lag impact where your wage costs and other input costs may have gone up, and it will take a little while to catch up with your rate increases. Is that cycle complete by the end of this year, so that margins in 2024 should not be negatively impacted by that dynamic? Vince, great question. That should largely be completed by the end of 2023. Just given the long-term nature of some of our multiyear contracts, there will be some that would over into 2024, but substantially complete by the end of '23 as those contracts materialize and mature. Just two quick ones for me. Maybe starting with you, Steve. When you laid out the Change Program and when you stepped into your role, you talked about a couple of different phases in what you wanted to do. And cross-selling was one that was more medium term once you had your organization kind of in a position to do more of it. So just what are your latest thoughts on boosting that activity looking forward? And secondly, on the outlook, I get the question, and maybe this is you're a victim of your own success, going back a couple of years when you provided 3 years of outlook. Just wondering what your latest thoughts are when you think about 2024 and 2025 and the provision of your expectations or guidance for those years? Yes. Drew, let me take the second one first. We're not today providing guidance for '24 and '25. As we get through the year and I think get more confidence and clarity around some of these investments, I think we'll be in a position to come back to you with some more clarity there. The only thing I'd sort of double down on is the comments I made in reference to Heather's question, we just -- we see lots of opportunities to invest and lots of promise within our core Big 3 franchises. We did, indeed, as you say, call out cross-selling, and it's part of the Change Program. There's a couple of areas where -- there are sort of a few areas where we really saw areas for improvement. The first was in the complexity. The number of products, the number of solutions overly complex when we started this process, and that's where the divestitures have come in. The second is we saw some really soft spots and poor performance in terms of our customer service, both in terms of the upfront sales process, but more importantly, the support and the follow-through. The Change Program has invested heavily against that, and we're starting to see the results in improved NPS, but it's early days. And the third is, as you say, cross-selling. It's not something we do particularly well across the board as a company, or not consistently so across our different segments. And this is where the shift to an operating company is really important, because it ensures that we take best practices and spread them across the entire company. We have an effort that started in Corporates around next-generation customer success that is focused squarely at improving our cross-selling. We'll extend that to our other franchises this year and next. And what I would say, though, is that we're still in the early days in terms of seeing the benefits of that. This is actually Scott Fletcher. I wanted to ask a question on M&A valuations. I'm just wondering if we should look to SurePrep at -- the price you paid for SurePrep, is it a benchmark for what you might be willing to pay for future deals? I mean, obviously, there's more to the price -- the valuation that you pay when it comes to price. But just looking to get a sense of what the amount of acquired revenue might be, given the capital plans you laid out. Yes, Scott, that's a good question. I wish I could sort of predict. I mean, we're in the marketplace in pretty active discussions on a bunch of different targets, as you'd expect us to be. We are -- and Mike and his team are particularly rigorous in terms of the financial hurdles we set. But we're equally, I hope, thoughtful as it pertains to making sure that the proposition that we might acquire is beneficial to our customers. And our segment presidents, and Brian Peccarelli play a very important role in informing that. We want to make sure that the sort of products and technologies there are pristine. We're not interested in acquiring tech debt, having to fix things. And that's where David Wong, John Malhotra and Jason Escaravage, Kirsty Roth really weigh in. So -- and then last but not least, culture. We're always looking to improve ourselves and our culture. And so we're certainly not oblivious to the idea of benefiting, having the entire TR benefit from injection of new talent coming through an acquisition, but Mary-Alice Vuicic keeps us all honest in terms of making sure we can put businesses together in thoughtful ways. And so those are the criteria. Valuations, they have definitely come down. I'm hopeful that they will stay at reasonable levels through this year and next as we deploy the -- a portion of the $11 billion in capital on M&A. But in a sense, I think the sort of the playbook that I described in my remarks of taking existing products and using our distribution does afford us the ability to pay a full price and still extract very significant value for our shareholders. And that's really where we're focused rather than sort of trying to find the best and cheapest deal and have to do a turnaround of an acquisition target. This is actually Stephanie Yee stepping in for Andrew. I'll just ask a question about client retention. I was wondering if you can just comment on what you've seen in 2022 in terms of your client retention rate versus 2021 and whether you've seen any improvement on that front? Maybe from some of the changes that you've made through your Change Program. Sure, Stephanie. In regards to retention for 2022, we saw nearly a 50 basis point improvement overall. As we've discussed before, Stephanie, that varies by segment and subsegment. And for the benefit of the full group, our highest retention is with Neil Sternthal's customers within our global large law firm at 95% plus, if not higher. Also parts of our Government business has very, very high retention. Where we have the greatest opportunity, Stephanie, is with our smaller firms. And I mentioned during the prepared remarks and in the prior question about continued investments in our customer success, we're quite optimistic as we continue those investments into end-to-end customer experience. We're going to see a direct correlation in the continued improvement. So at roughly 91% overall, we definitely see opportunities to continue to improve retention in '23, '24, '25. We have also embarked on an NRR initiative within our Corporates segment, led by Brian Peccarelli and Maria and others in which we'll be expanding our NRR initiative to Legal as we go through '23, '24. So we definitely see continued upside, Stephanie, in retention in the coming years. This is Ronan Kennedy on for Manav. May I ask, do you provide kind of insight on the organic growth components, I guess, specifically through the Big 3 in terms of pricing, the cross and upsell innovation, et cetera, what they were for the fourth quarter, expectations for first quarter in '23? Ronan, we don't go into that level of granularity. And the item that we have consistently shared is in regards to price, whereby price varies by segment and subsegment. What we had shared in the past is that our Tax & Accounting Professional business historically has been about 5% price uplift on an annual basis, with Corporates being about 3% and our Legal business being about 2.5%. Ronan, what we see as we go into 2023, if I link back to Vince Valentini's question, we do see higher price lift in 2023 versus 2022, to Vince's question with our multiyear contracts, and just that natural extension. So price increases will be a little bit higher than the reference points I just made in 2023. But we don't go into any additional granularity, Ronan, in regards to the components thereof or organic growth. Understood. And then may I just confirm with regards to '23 guidance assumptions, how you flesh out on the mix of what subs, nonsubs revenues will be, the assumptions around the Transactional, Print and Events? And then also, can I confirm quantification of margin impacts from benefits of divestitures and if there's kind of a run rate of the portfolio pruning? Sure. Let me address each of those, Ronan. In regards to 2023, Print, we are -- we had a really strong year in 2022. And based on the factors that I mentioned in the prepared remarks, we would anticipate Print reverting back to more of the historical declines of 4% to 5% in 2023. So 2022 was just an unusually strong year for us there. In regards to the Events business, we think orders overall will be approximately 5% organic growth in 2023. We had a strong year in '22 from Reuters News for the reasons that I mentioned, including Reuters Events and the News contract with the London Stock Exchange Group there. So Print, roughly minus 5. For modeling purposes, Ronan, Reuters News overall, about 5%. We did get a strong uptick in Reuters Events in '22, which will be less in 2023. Transactional revenue, I think, will be fairly comparable in '23 versus '22 there. And then, sorry, with regards to margin impacts on planned divestitures and a potential run rate, any -- on how to think about that? Yes. In 2022, those divestitures that we did in Q4 was $155 million, Ronan, in annual revenue and $40 million of annual EBITDA. So with that, you'll see a little bit of benefit from margin accretion as a result of those divestitures, which we have incorporated in our full year guidance. I wanted to ask you, now that you've delivered on and finished your Change Program, can you discuss if there are specific geographies or new areas? You talked about maybe Risk as a potential new area where you want to focus on. Can you discuss a little bit what you are looking to amplify in terms of investments, new areas for investments? And also, when you look at the $2 billion return program on capital, can you provide some guidepost as to when that program will be initiated and the needed milestones to be achieved in order to begin the process? Yes. I'll take the first part, Mike. I think in terms of the investment, certainly, we'd like to take advantage of opportunities to grow our franchises internationally. And we see opportunities to build on our recent successes in Latin America. We also see opportunities in Southeast and North Asia. And so we'll be looking to sort of develop those plans through this year. On the -- in terms of the sort of product lines and lines of business, as I said in my remarks, we don't think we need to sort of step too far out beyond our Big 3. We think we've got lots of growth potential in serving customers within and around the Big 3. But the areas like Risk, Fraud and Compliance, we have a really interesting starting position with CLEAR and Pondera and TRSS that we think sort of enables us to play in a much bigger way in that space, particularly expanding beyond our Government franchise and Corporates. Other areas like ESG, we think we've got a sort of natural right to play. And so we're looking at expansion opportunities in and around that, but it's very much serving the Head of Tax and the General Counsel and the head of Risk with -- at ways in which we can help them navigate an increasingly complex regulatory and compliance-related environment. That's what we do well. We're in a company that sort of can help our end customers and their advisers navigate those environments with content-driven technology. And so those are really the areas that we focus on. Mike? In regards to the capital returns, just a point of clarification. The $2 billion NCIB or share buyback that we began in June of '22, just to reiterate, that will be completed in early April. We're about $1.5 billion complete with that. To your direct question on the return of capital, let me share the sequencing. Step 1 in the sequencing is the monetization of our LSEG shares. As I noted in our prepared remarks today, that will be appropriately measured tranches throughout 2023, meaning we'll have a very disciplined approach there. So step 1 is the LSEG monetization. Step 2 is the return of capital. We'll use the proceeds from the LSEG monetization to fund the return of capital. And then third, we'll have the concurrent share consolidation, which will result in about $17 million reduction in share count based on today's share price there. So the timing will be driven by the timing as to when we complete the LSEG monetizations. Great. I think we'll end the call there. Thanks, everybody, for your time and attention, and feel free to reach out if you have any follow-ups. Have a good day. Thank you for joining, everyone. That concludes your conference. You may now disconnect. Please enjoy the rest of your day. Goodbye.

EarningCall_205

Greetings, and welcome to the Kimco Realty Corporation's Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Bujnicki, Senior Vice President of Investor Relations and Strategy. Good morning, and thank you for joining Kimco's quarterly earnings call. The Kimco management team participating on the call today include, Conor Flynn, Kimco's CEO; Ross Cooper, President and Chief Investment Officer; Glenn Cohen, our CFO; Dave Jamieson, Kimco's Chief Operating Officer; as well as other members of our executive team that are also available to answer questions during the call. As a reminder, statements made during the course of this call may be deemed forward-looking, and it is important to note that the company's actual results could differ materially from those projected in such forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to the company's SEC filings that address such factors. During this presentation, management may make reference to certain non-GAAP financial measures that we believe help investors better understand Kimco's operating results. Reconciliations of these non-GAAP financial measures can be found in our quarterly supplemental financial information on the Kimco Investor Relations website. Also, in the event our call was to incur technical difficulties, we'll try to resolve as quickly as possible, and if the need arises, we'll post additional information to our IR website. Thanks, Dave. Good morning, everyone, and thanks for joining us. Today, I will provide a quick recap of our major accomplishments for 2022 and share some of the progress we have made on our longer-term strategic goals. Ross will follow with an update on the transaction market and Glenn will report on our earnings results for Q4 and our guidance for 2023. At Kimco, we believe a winning strategy is one that can be successful in any economic environment. It needs to be opportunistic, have multiple growth drivers, and be resilient during downturns. A winning strategy also needs to be easy to understand and be supported by a best-in-class team to implement and execute on it. The Kimco strategic plan meets all these criteria and that is why we are so proud of our 2022 results and excited about our longer-term prospects. If the ultimate measure of evaluating a strategic plan is results then it is abundantly clear that we are on the right track. 2022 was a banner year and the fourth quarter was again outstanding from a leasing perspective as our team achieved some recent and all-time highs across many of our key metrics. This includes strong overall occupancy that finished up 40 basis points pro rata to 95.7%. This represents a recovery of nearly 90% of the COVID inventory we experienced and only 70 basis points below our all-time high. Year-over-year, overall occupancy was up 130 basis points, which is one of the highest year-over-year gains we've experienced. Contributing to our strong results was a 20 basis point sequential and a 90 basis point year-over-year rise in anchor occupancy to 98%. Small shop occupancy increased 80 basis points sequentially to 90% and was up 230 basis points year-over-year. In 2022, we leased over 11.5 million square feet, which is the highest level on record. Specifically, we ended the quarter with 152 new leases totaling 795,000 square feet, exceeding the five-year average new lease GLA for the fourth quarter. Our new lease spread was very strong, 30.4% and includes new grocery leases with Whole Foods and Albertsons. We closed the quarter with 340 renewals and options totaling 1.7 million square feet exceeding the five-year average for renewals and options GLA for fourth quarter. The spread on renewals and options was 4.6% during the quarter with options ending at 8.5% and renewals at 2.7%. Total fourth quarter 2022 leasing volume was 492 deals, totaling 2.5 million square feet at a combined spread of 8.7%. We experienced only 99 vacates, totaling just 305,000 square feet in the fourth quarter, which is 37% lower than the prior five-year historical average for the fourth quarter. Our mixed-use entitlement initiatives reached new highs in 2022 as we continue to unlock the highest and best use of our real estate. We set another Kimco record by entitling 2,805 apartment units in 2022, bringing our current total entitlements to 5,461 units. Combined with the 2,218 apartment units we have already built and 1,139 units that are under construction, this brings our overall total to 8,818 units and we are well on our way to our upsized target of 12,000 by the end of 2025. Our percent of ABR for mixed-use assets is now up to 13% and we continue to use a CapEx-light strategy to activate projects by either ground leasing or joint venturing with best-in-class apartment developers. Turning to 2023 and beyond, we believe our platform advantage is just beginning to demonstrate its potential. Efficiencies of scale often take time in multiple cycles to play out, but thus far, it is clear from our performance throughout the pandemic and during 2022 that both our strategy and efforts are being validated. Our unmatched diversification, our access to capital, our internal and external growth profile, our large-scale M&A experience, our CapEx-light mixed-use redevelopment strategy and our opportunistic investment record are just some of the differentiators that characterize Kimco. That said, we can't rest on our 2022 accomplishments. We know 2023 will require a full team effort to produce another year of sector-leading results. We are also encouraged by the fundamental strength of our operating business, limited new supply, high retention levels and robust retailer demand for quality space such as ours makes for a healthy leasing environment. While we anticipate leasing velocity and retention rates to continue at elevated levels, we can't ignore the macro environment and the potential for credit defaults to revert to the mean, that is why our 2023 priorities include additional focus on controlling expenses, upgrading the credit and merchandize mix of our tenant base, and attracting recurring customers. One of the keys for Kimco in 2023 will be to expedite tenant openings and compress the least economic occupancy spread of 260 basis points that represents approximately $43 million of annual base rent that is not yet contributing to cash flow. While our size and diversification have significantly reduced our exposure to weaker credit tenants, we still need to be vigilant and proactive. We need to closely monitor our tenant watch list, anticipate changes and turn them into opportunities. Bed Bath & Beyond is a case in point. Subsequent to year-end, we sold a shopping center with 1 Bed Bath, reducing our exposure to 25 Bed Bath, one Cost Plus sublease and four buybuy Baby locations. At this point, we know that Bed Bath is planning to close six stores. Of those locations, we already have two leases executed, two ready for execution and two with active LOI negotiations with a combined potential spread of over 12%. We are also in active negotiations with retailers on the balance of the portfolio, representing 60 basis points of Kim's share ABR, of which 10 basis points relates to buybuy Baby. This level of activity proves we continue to see strong demand from a diverse set of retailers for the vast majority of these well-located boxes, which are primarily in desirable demographic areas where there is virtually no new supply. Leasing, leasing, leasing will continue to be our mantra in 2023 and together with a solid balance sheet, strong free cash flow and ample liquidity including further potential monetization of our Albertsons stake, we are poised to take advantage of any dislocation and ready to pounce as opportunities present themselves. We have made meaningful progress towards our stated 2025 goals, both on the operating and earnings front, along with further strengthening our balance sheet. Specifically, we have improved our debt maturity profile and increased our portfolio of unencumbered assets while minimizing exposure to floating rate debt. At Kimco, we are never satisfied with the status quo and our entrepreneurial team is laser-focused on building upon our past achievements and advancing what we believe to be as our best-in-class platform and portfolio. You will see the continued evolution of our portfolio composition through a mix of our unique leasing strategies, including adding grocery anchors where feasible, entitlements, redevelopments and data analytics and tools that give our platform a unique advantage. With our focus on owning and operating the last mile open-air grocery-anchored shopping centers, along with a growing portfolio of mixed-use assets, Kimco has come a long way in a short period of time and we all collectively believe that the best is yet to come in our efforts to maximize long-term shareholder value. Good morning. I hope everyone is having a great start to their year. I will quickly touch upon a few additional details on the fourth quarter and year-end before getting into the current environment and our external growth expectations for 2023. As previously mentioned, in the fourth quarter, we closed on the $375.8 million acquisition of eight open-air retail centers from a privately-held portfolio based in the high barrier to entry Long Island, New York market. With five of the centers grocery-anchored, this acquisition is well aligned with our long-term investment approach, utilizing a combination of cash, the assumption of below-market fixed rate debt and tax deferred down REIT units, we were able to structure an accretive transaction for this generational portfolio. We are very excited about the potential to create incremental long-term value on these properties with our leasing and our operating platform. Also in the fourth quarter, we closed on another unique opportunity for our structured investment program. We had previously mentioned the $22 million participating loan on a three-property grocery-anchored portfolio in Pennsylvania. In just over four months, our borrower sold the assets for a sizable gain. As such, our loan was repaid and we received a $4 million participating interest. On an annualized basis, our investment yielded a 76% IRR. These two transactions serve to reinforce our already strong operating results. Subsequent to the fourth quarter, we kicked off the year by disposing of two slower growth commodity power centers located in Georgia, which included several watch list tenants, including Bed Bath & Beyond. We recycled the capital from the sale of these two properties into a 1031exchange on two high-quality open-air grocery-anchored shopping centers in Southern California that were previously held in one of our institutional joint ventures in which Kimco owned a 15% interest. We were successful in securing and purchasing our partners 85% stake of these two last mile centers located in Huntington Beach and Tustin anchored by Avon's Grocer and a soon-to-open 99 Ranch grocer. The demographic profile for the area includes a combined average three-mile population approaching 200,000 people, an average household income in excess of 120,000. In the coming years, we anticipate the growth profile on the two acquired assets will far outpace that of the sold properties in Georgia, a trade-off we continually seek as our portfolio enhancement efforts continue to generate outperformance. We also expect partnership buyouts to yield additional opportunities for us as we move ahead. As far as the transaction outlook for 2023, we believe Kimco has an enviable position in a market marked by uncertainty and inefficiency. For 18 months through mid- to late '22, liquidity in the sector was abundant and capital was relatively inexpensive. We saw Open Air necessity-based retail rise to the forefront of investors' minds and appetites with other sectors such as industrial, multi-family and self-storage setting all-time low cap rates, and sectors such as office and enclosed malls experiencing operational challenges. Fast forward to today, the conviction in our focused asset class, open-air grocery-anchored last-mile necessity-based retail remains strong. However, access to capital has certainly tightened with elevated borrowing costs. Institutions such as private REITs, opportunity funds and pensions have seen redemption requests and withdrawals. This has created additional uncertainty on pricing and a once extremely efficient market has become much less predictable. We view this as opportunity. Kimco has the strongest liquidity in the company's history with over $2.1 billion from cash on hand and our line of credit and our unique access to additional low yield and capital in the form of Albertsons stock, which we expect to continue to monetize in 2023. We plan to take advantage of our position with a combination of select open-air grocery-anchored acquisitions, continued partnership buyouts where appropriate and mixing in opportune structured investments that present themselves in an environment with substantial dislocation. Dispositions will be modest in 2023 as our portfolio has proven to be in very healthy shape with only a select level of pruning and sales of non-income-producing land parcels and holdings. We are excited about the new opportunities that 2023 will bring and while we anticipate that there will always be challenges, we believe we have positioned Kimco to take advantage of the uncertainty to create additional long-term value. Thanks, Ross, and good morning. We finished 2022 with solid fourth quarter results highlighted by strong leasing activity, which produced an increase in occupancy, positive leasing spreads and same-site NOI growth. Now for some details on our fourth quarter results. FFO was $234.9 million or $0.38 per diluted share. This compares to fourth quarter 2021 of $240.1 million or $0.39 per diluted share, which includes about $0.01 per diluted share related to the valuation adjustment of the Weingarten pension plan. Worth noting, this is the first quarter with the full impact of the Weingarten merger included in the year ago comparison. The key reasons for the $0.01 per share decrease are higher consolidated NOI of $6.5 million, offset by higher pro rata interest expense of $5.6 million. Other items included higher G&A expense of $2.9 million from the increased personnel levels as part of the Weingarten merger and cost associated with the UPREIT conversion and a $3.2 million change in the Weingarten pension valuation I just mentioned. The growth in consolidated NOI is comprised of higher minimum rent of $12.1 million, higher lease termination income, percentage rent income and other rental property income totaling $2.5 million offset by higher credit loss of $10 million, with $3 million of credit loss in the fourth quarter 2022, as compared to $7 million of credit loss income in the comparable quarter. Our operating portfolio continues to deliver positive results. Same-site NOI growth was 1.9% for the fourth quarter 2022, comping against 12.9% for the fourth quarter last year, bringing full year 2022 same-site NOI growth to 4.4%. During the fourth quarter, same-site NOI benefited from higher minimum rents and lower abatements of $13.7 million as well as higher percentage rent of $0.8 million compared to the same quarter last year. These increases were offset by higher credit loss of $9.5 million, primarily related to reversals of reserves in the prior year quarter and a normalized level of credit loss for the current period. The minimum rent component contributed 3.9% to the same-site NOI growth, while credit loss was negative 3%. Turning to the balance sheet. During the fourth quarter, we monetized 11.5 million shares of our Albertsons stock, receiving proceeds of $301 million. This sale generated a capital gain for tax purposes of about $250 million. In order to maximize the amount of proceeds we were able to retain from the sale for future investment and debt reduction, we elected to pay the income tax on the capital gain of approximately $57 million allowing us to retain $244 million. Further, our shareholders are eligible for a pro rata credit of the federal income tax we paid. We've added an FAQ on our Investor Relations website that provides further detail on this. We ended 2022 with a very strong liquidity position comprised of $150 million in cash and full availability from our $2 billion revolving credit facility. Additionally, after year-end, we received a $194 million special dividend from our Albertsons investment, and continue to own 28.3 million shares currently valued at over $600 million. As of year-end 2022, our look through net debt to EBITDA, which includes our pro rata share of joint venture debt and preferred stock outstanding was 6.4x and represents an improvement of 0.2x from the 6.6x level at the end of 2021. Our weighted average debt maturity profile is 9.5 years and we have only $50 million of mortgage debt maturing in 2023. Now for our 2023 outlook. We remain confident about the growth prospects of our operating portfolio. But as we mentioned on our last call, we anticipate earnings headwinds due to higher levels of credit loss more consistent with pre-pandemic levels, as well as higher interest expense compared to last year. Also, as I touched on, in 2022, we benefited from credit loss income of $7.4 million, which amounted to about $0.01 per share for the year. Our initial 2023 FFO per share guidance range is $1.53 to $1.57. The guidance range is based on the following assumptions: positive same-site NOI growth of 1% to 2%. Included in the same-property NOI guidance range is a credit loss assumption of 75 basis points to 125 basis points representing a credit loss ranging from $15 million to $22 million. No income attributable to the collection of prior period accounts receivable from cash basis tenants. Lease termination income between $14 million to $16 million with a substantial portion being received in the first quarter of 2023, an increase in pro rata interest expense of $20 million to $28 million, most of which is attributable to lower fair market value amortization to the Weingarten bonds paid off during 2022 and higher interest rates on the floating rate debt in our joint ventures. Total acquisitions, including structured investments net of dispositions of $100 million, subject to timing. Monetization of approximately $300 million of Albertsons shares subject to timing. Also, the $194 million special dividend received in January will not be included in FFO. Annual G&A expense of $123 million to $129 million, with the first quarter higher due to the timing of annual equity grants. No redemption charges or prepayment charges associated with callable preferred stock outstanding or early repayment of debt obligations and no planned issuance of common equity. Good morning. Thanks for taking my question. Last quarter, you talked about reverting to an initial credit loss expectation of 75 to 100 basis points kind of in line with the historical levels. Your guidance is 75 to 125 basis points, so a little bit higher at the top end. So, what are you seeing in the market? What is the scenario reflected by the high end of the range? And do your concerns extend beyond the usual suspects that we've been talking about? Thanks Hi, Michael, it's Glenn. Again, we took a hard look at just the overall portfolio and look at the – really the environment that we're in today. And there is a little bit more risk. We've started to see some more bankruptcies than we have in the past years and we felt it prudent to just widen the range a little bit and that's just baked into the guidance and it takes into account really the scenarios that we see both top and bottom. Good morning, everybody. I guess, Conor, can you provide a little bit color on the timing of the monetization of the $300 million of Albertsons shares, which you mentioned in the guidance. Just trying to think through the allocation of that capital proceeds and maybe along that just expand on the opportunities that you talked about, right in your opening remarks as well. Thank you. Yeah, happy to. Thanks, Samir, for the question. Look, we think that the capital coming from the Albertsons investment is a big differentiator for Kimco. We've already received a special dividend as we talked about in our opening remarks. We do have the opportunity to monetize another portion of our Albertsons shares similar to what we did last year and the same type of range of value. The expiration of the lockout is end of May. So that really sort of showcases when we have full potential to take advantage of that and then we have a – Ross can talk a little bit about the menu of options we have to reinvest those proceeds. It's a real opportunistic investment that is going to actually really reward our shareholders because when you think about it, you don't have to issue any equity this year. We have this investment that's really coming back to us now to redeploy into our core business, which should generate significant earnings growth, not necessarily in this year, but obviously, in the out years, that's where the long-term value creation is really going to shine. Yes, and in terms of the opportunity set, I mean, we've talked about our different acquisition verticals. We're having lots of conversations in all three components of that. But as I mentioned in the remarks, we do anticipate that there'll be continued partnership buyouts. We were able to execute on the acquisition of two assets from a partnership at the beginning of the year. We're focused on potential additional structured investments as we start to see some additional dislocation in the market. And then depending on where pricing is and if we see a thong of the market to a certain extent, we'll be active on acquiring open-air, grocery-anchored shopping centers. So, we like the fact that we have all three opportunity sets that we can be nimble when they present themselves. Hi, good morning. Thanks for the time. Just curious, Glenn, if you could lay out a little bit more some of the assumptions behind the guidance, mainly what's assumed, I guess, for Bed Bath and Party City in the bad debt? And is that the driver of the lease term fees that you noted something chunky in the first quarter? And if you could just provide any expectations where you think occupancy will end the year at, please? Yeah, so as far as the credit loss, again, we know that there are several bankruptcies. Party City, obviously, filed already. Bed Bath & Beyond, obviously, seems to have found the lifeline for the moment. But we have taken into account really all the scenarios around Bed Bath & Beyond in our overall guidance. And again, as I mentioned, as it relates to the credit loss, again, we did widen the range a little bit to just deal with what we're seeing in the current marketplace today. And as it relates to the LTA that you mentioned, income in the first quarter, it's associated -- the majority of it is associated with the deal structure that we did with Kohl's. As consideration to the LTA, we helped restructure a lease with them for two locations where we were able to recapture those opportunities just in – one being just in Northeast Philly and the other one just outside of Philadelphia, across the border in New Jersey. And then third to that, we're also able to recapture fee title of an operating box that's a shadow of one of our centers as well. So net-net, there is a positive on both sides there. As it relates to occupancy, it is always fluid throughout the course of the year, depending on the outcomes of Bed Bath and Party City. There could be some volatility on the anchor side of it. Small shop is extremely robust right now, a tremendous amount of activity there. As you see us now crossing over 90%, which is great. So we'll continue on our stride and hope to meet and exceed our goals. We do anticipate a little bit of Q1 normalcy of potential, what we call jingle mail, of tenants closing after the holidays and seeing a little bit of a dip in occupancy in Q1, which is traditional seasonality for us. So we think that, that's, again, reverting back to the pre-pandemic ways of the historical averages. Hey, good morning. Glenn, I just had a quick point of clarification. When looking at the corporate financing disclosure in the stock, which looks to be about $9 million to $20 million higher for 2023. What's the delta between the pro rata interest expense that's $20 million to $28 million higher? Right, so that's a great question. So the corporate financing line that you see is really the consolidated portfolio, that's our interest expense and the cost of our preferred. Included in the portfolio contribution above is the pro rata share of the joint venture interest expense and that's about $9 million to $10 million higher than it was last year and again, that's attributable to the rise in rates. There was more floating rate there, debt in the joint ventures. We have actually swapped out about $0.5 billion of debt in the mid – top of 5% range. So we fixed it, a good portion of it, but that's what's causing the $9 million to $10 million increase over last year. Morning guys. Thanks for taking my question. I had a question on your small shop. Obviously, the – very nice pickup in occupancy there. Maybe if you can talk about the spread between occupied and leased and also maybe where your peak small shop occupancy was previously and where do you think you can get it to this cycle? Sure. Floris, Happy to take that. So just to reconcile for us, on the lease economic overall, we're at 260 basis points that was compressed down from 280. So we're down 20 basis points there, which shows two things. One, we're able to get these tenants open and operating, which was a huge achievement considering some of the activity in the environment right now. So we had a lot of openings in Q4. Outside of that, too, with all the gains in occupancy that you saw as well as in Q4, gaining 40 basis points overall and bringing our small shops up to 90%. As it relates to small shops, specifically, we are at 340 basis point lease economic spread just around $23 million or so baked into that. So there is a huge opportunity there to actually bring those tenants online. Obviously, you see that growth in the coming quarters, which we're excited about. As we move forward. So, we feel pretty good about that. And then finally – yeah and then our high watermark on small shops was at 91.1%. That was in Q4, I believe it’s 2-19. So our goal is always to meet and exceed our high watermark levels and we'll continue to do our best to achieve that. Just a question on the leasing environment. I know everyone is pretty focused on the sustainability of it. As we look at the economic weakness coming relative to previous cycles, it's a little bit more telegraphed, maybe and maybe expected to be more garden variety. So I am just kind of curious, as you think about tenant behavior, maybe between anchored and small shop, right, and the timing of where we are today versus maybe the coming is at the end of the year? And how these tenants look at when they need to lease stores for store openings. I mean, is there any thoughts around whether just the timing of a potential recession, relative to when people need to open stores that the leasing demand could continue at a level maybe above expectations just because the space needs for ‘23 were already leased previously and if the recession is not so deep. Key parts you are going to look out for '24 and '25 openings. I'm just kind of curious your thoughts there and whether there's any big difference between anchor and small shop behavior? Yeah, a great set of questions. All rolled into one. So I think you first start with the fundamentals, right? And the fundamentals here on – there is no new development supply on the horizon in the coming years. The COVID inventory that we've talked about in past quarters and continue to talk about now is really the inventory that's available. Some of that inventory may increase as a result of any bankruptcies, Party City, Bed Bath being the two obvious ones right now as potential to get some space back. But that still is representing a very limited amount of inventory to actually backfill. When you look at us, we're at 98% on the anchor is 90% on the small shops. For high-quality retail, it's really, really hard to find. So the retailers, I think what they're doing is they're seeing through this and saying, hey, where do I find growth, not just next year, but years two, three, four and five. If there's no new supply, I really have to take advantage of what opportunities I see today to set myself up for growth potential going forward to hit my own targets and so I think you continue to see that. And some lessons learned from past cycles that it's really hard to ramp up a program to find new stores and to grow and to open them and then to shut it down and then try to reramp it again. You're always kind of playing a game of catch-up and you tend to miss the better opportunities early. So I think for some of those well-capitalized retailers, they've sort of seen through that and said, let's continue on our plan. Let's continue to source and find new opportunities, knowing that if we sign a lease say, midyear'23, we can be looking at a '24, maybe in some cases, a little bit further out as that opening. And as you've seen these market cycles compressed in terms of cycle through the program of dipping and then recovering. It's the time of recovery seems to be compressing much quicker. So by the time you get these stores open, the intent, hopefully, is that you're if we do go through a bit of a dip that you're on the backside of that and already you're opening during a growth cycle again. So those are a lot of the conversations that we continue to see. On the small shop side, you're seeing service-based tenants, restaurants, et cetera, continue to open and find opportunities. There's still some of that COVID inventory out there that had fully fixturize units that operators can go in and start to operate quickly. We will continue to watch that closely. Obviously, the discretionary side maybe the full-service restaurants and some entertainment see how that plays out in this coming year, if there's any disruption in terms of the broader markets, but people are really kind of looking through it right now. Sorry about that. So, just wanted to follow-up, if I could, Ross, on the transactional market comments. You made things, obviously, a bit stalled out there. Retail volumes transactions were down 60%, I think, in the fourth quarter, and we're still here with a pretty wide bid-ask spread out there. So I guess, I am curious what you're seeing in terms of maybe cap rates for the quality of open air centers you'd like to own? And given your cost of capital, what's your hurdle rate or maybe where would asset price need to be for you to get more active? Thanks. Yes, it's a good observation. And to your point, it is still somewhat wide in terms of the bid-ask spread. It's a nuanced market. So every deal is a little bit unique. I would say, historically and in most cycles, it's a pretty efficient market. But right now, it's fairly inconsistent. So you are seeing select deals getting done but it really depends on having two motivated parties to do so. I would say that we're in a position where we're not forced to do anything. So when the market comes to us, we're happy to continue to invest and to put our capital to work. On the acquisition side, and I would say the partnership buyout side that are pretty closely aligned, we're seeing pricing where deals make sense to us, somewhere in that low six cap range. Now certain sellers are, in many cases, are still looking for pricing from 12 months ago in the low 5s, and that's where you're seeing a lot of the deals going out. But to the extent that we can obtain assets that are 100 basis points higher than where they were a year ago with very strong fundamentals that really haven't changed based upon all the comments that you heard from Dave and the team here and we feel really good about putting to work in that in that range. And then when you factor in or layer in our structured investment program, which has a higher yield currently in the high-single-digits or low-double-digits, that sort of blends together to get us above our hurdle rate and make our acquisition pipeline and our program accretive from an overall standpoint. So we'll continue to look to put money to work if we find those Otherwise, we'll continue to stay patient as the year progresses. Hey Craig, great question. So we're off to a good start in 2023. The traffic that we've experienced thus far has been above 2022 levels. I think the consumer continues to gravitate towards the shopping center towards the grocery anchors that we have, towards the off-price users that are getting great value and convenience. So that continues to show well. The future is still a little unclear. That's why I think from a guidance standpoint and from what we're talking about, we're not necessarily sure what the second half of the year looks like. And so as we've all been talking about so far, so good, the retailer demand is robust. The consumer continues to gravitate towards our product, and we see virtually no new supply on the horizon. So as we continue to monitor the situation, we feel like the business is on very strong footing allows us to really see into the consumer and their habits. And so far, it looks like we're really delivering on what the consumer is looking for. Thanks. Good morning. So you guys have done a great job increasing your entitlements across all of your different sites. Can you just provide a kind of high-level path for the next couple of years of how you are thinking about monetizing it? And second, when I look at your supplemental on the development section for some of these ground leases, multi-family ground leases. Can you just help me understand that a little better because if I look at the value that is contributing at and the yield is – it doesn't seem to make sense because the land contribution value should be much higher even after taking account for the higher yield. So just if you can help me understand that a little better. Sure happy to. Good question, Ki Bin. So it's a long-term strategy for us. As I mentioned in the – in my prepared remarks, we want to activate these entitlements using a CapEx-light strategy, meaning that we really want to increase the value of the asset, unlock that highest and best use without putting a tremendous amount of capital out that doesn't necessarily return a high yield during the construction and development process. So what we've done is tried to entitle as much as we possibly can across the portfolio, layering in projects each year, so that we can activate – we've been running around 1,000 units a year of how much we have in the active pipeline. We've built over 2,000. We've got a little over 1,000 in the pipeline today. We continue to want to set this up for a long-term value creation. So it gives us optionality and flexibility to look at each asset and look at those entitlements and say, which should we monetize, which should we ground lease and which should we contribute to a joint venture? And so the way we've been doing it is we've been monetizing the office entitlements. We've been ground leasing assets where we have multi-family rights filled, but we think that, that market may need a little time to mature. So in essence, the ground lease gives us time to activate the project without having a lot of capital at risk, but then having a right of first refusal on it to bring it into the core upon the right time and place or the contribution to a joint venture where we see the project is right to participate in the economics and the cash flow growth. So that's the way we've set up the program. We continue to think that long term, it's a great way to create value on the asset, and we'll continue to monitor which of the – what's the right time to monetize those if we see fit. But that's the way the projects continue to evolve and we've seen great results in terms of being able to actually create an environment, a mixed-use environment, where the multifamily feeds the retail and the retail feeds the multifamily. And that's the flywheel you're trying to create because you're actually generating higher than market rents on the retail and even higher than market rents on the residential when the environment is complementary. Great. Thanks. Let me try to sneak in two really quickly. Really appreciate the cash flow statement you put in the supplement, I think you guys are one of the only ones that do that. So it's really helpful. So I see cash from operations here at $861 million and presumably, that's being held back by the large tax bill that you sort of incurred this year, so you can maybe get to a $900 million number. When I am thinking about sort of sources and uses, you've got a dividend that you got to pay out $550 million, maybe another $150 million to $200 million for CapEx. Is it I think about it right that presumably next year, you are in the $150 million to $200 million range of just free cash flow that you could use for whatever? Is that the right thinking? I'll take the first part, for sure. Yes, the free cash flow expectation is around $150 million for 2024. And again, kind of hit on all the – I am sorry, for 2023. You've kind of hit on all the points, right? We have really the free cash flow after dividends, FX, TIs and leasing commissions. And then that's based on the current dividend level at $0.23 a quarter or $0.92 a share for the common. You're right on track with that. And then your question about the Kroger-Albertsons merger, we're watching it just like you are. It's an interesting process that they have to go through. Clearly, there is still some hurdles to get over, but it seems to be tracking and continues to move forward. We'll watch it as closely as we possibly can. You've seen the earnings results from both. They are very strong. They both have very complementary portfolio. So it's one that if the merger were to go through, I think it's a net-net win for Kimco and our shareholders. But if it doesn't go through, obviously, they are both very well capitalized, strong performers, good grocery operators. So we are watching it closely and it's not necessarily clear yet what's going to happen there. Good morning. Good morning, out there. And if I could, just give an end of – towards the end of Q4. So two-part. One, Conor, I think you mentioned12% rent spreads on the Bed Bath. I think some of your peers have been more like 25% or 30%, so I didn't know if that's mix? Second, Glenn, what gets you to the bottom end of the range? Because it seems like you guys have baked in a ton of bad stuff into your guidance already, which I am assuming is more of the midpoint. So I'm just sort of curious, what gets to the bottom-end of the range. Alex. So on the first question on the 12%, that's on the six that we have visibility where we are lining up leases to backfill all of those individual users to take the entire box. On the entire Bed Bath portfolio, you're right, it's a bit higher. We have a 15% to 20% type of range and again, some of those might be opportunistic and we can reposition those boxes. Yes, I mean in terms of getting to the bottom end of the range, again, more credit loss above what we've baked in could potentially get you there. I mean, at the high end of that credit loss range of being in that $22 million range. You also have some timing issues, right? Timing of when we would monetize our Albertsons investment and the redeployment of that cash comes into play. The – you also have the retention of tenants versus vacates, so there's a whole assortment of potential timing issues that kind of come into play. So if everything happened later or vacate happens faster, you could wind up more towards that bottom end of the range. But that's kind of how you get there. Hey, good morning, everyone. I just have a follow-up on that Bed Bath question on the 12% spreads. Is there any box splits on that? Is that the reason why they are potentially a little bit lower spread? No, not right now. There's no box splits on those. Spreads are productive like the vintage of the box, right, maybe some of the older boxes that we have in the balance of the portfolio. Our older leases started at lower rents. Some of them are slightly newer. So it does range. So I think you have to take a broader view on spreads, in general on where you see opportunities. And I think referring back to Conor's comment about that 15% to 20% over the entire portfolio. This is just a small subset of that. Hi, good morning. Question on your 2025, I guess, goal of 2.5% same-site NOI growth, given minimum rent growth of 4% and higher given kind of the strong lease spreads and whatnot. What gets you from that 4 plus to 2.5%? It seems a bit conservative now given the strength of the business? To your point, we've actually been running ahead of that goal. Traditionally, this business has run around a 2% growth profile and clearly, obviously, with the transformed portfolio and a lot of the last mile retail reinventing itself using online as a way to connect to more customers and getting more value out of the last mile store, I think, is the game changer. So your point is well put. I mean, we've been obviously running ahead of that. It's one that we thought a 2.5% plus. That's the target, not 2.5%, 2.5% plus. And so again, exceeding that is our goal and that's what we've been doing so far. So cycles are constant in real estate. And so you've got to make sure that you recognize that over a longer term. We obviously experienced a COVID rebound at really generated outsized results. And so, as we go through another cycle, it will be – in my opinion, we should probably reset the bar a little higher, but we'll have to wait and see and see how things play out. But so far, so good on that. Yes. I am curious, are you seeing any UPREIT opportunities at this point? Or was the – I guess, the change just some longer-term planning? Yes, so in terms of the UPREIT conversion, it really is intended to be an additional tool in our toolbox. So it's a bit early in terms of finding opportunities to utilize it as we just recently converted. But as you saw with the Long Island portfolio that we acquired last year, we have utilized tax strategy and tax deferred units as a way to differentiate ourselves in a competitive marketplace. So, we do anticipate that there will be opportunity to utilize it. We'll be selective with it because it is still a form of capital that needs to be accretive when we utilize it. It is something that we've considered for quite some time now. It was previously a bit cost prohibitive, but things have changed in terms of some of the transferred taxes in certain states and so it was – we felt the appropriate time to do it now versus in years past. Good morning. Can you please remind us where the CapEx per square foot of tenant box stands today? I understand that every situation is different, but if you could provide some ranges, maybe framing it at either a single tenant replacement or a box split, it will be very helpful. Thank you. Yeah, I mean, unfortunately, it is. Every case is different and whether or not it's doing an as is in your handover issuing them a TI check or if you're actually doing a build-to-suit, it's going to range vastly between a single tenant use, a box split or an expansion to actually combine two boxes together for a larger tenant, all has implications and then related to electrical roofing, facade renovations and whatnot. So, I would – what I would say is that it's been consistent over the course of several years. Obviously, we've had inflationary pressures that we've had to navigate through as used with Switch Gear, HVAC, et cetera, that adds some pricing to your overall conversion of a box. But fundamentally, it hasn't changed all that much. Hi, yes, good morning. I just wanted to go back to a question that Haendel asked just about the transactions market. Again, the color you provided about making at deals at sub-six cap rates is helpful. But just trying to understand the $100 million of net investment that you guys do have in guidance, exactly what does that comprise of? And how do you kind of come up with that number within the context of how you are thinking about the transactions market and your current liquidity? Sure. Yes, the $100 million net acquisitions, it's a baseline number that we're starting the year with. As I mentioned in the response to Haendel's question, we feel that we're in a wonderful position where we're not forced to do anything. We are waiting for the market to really come to us and when you have a motivated seller, we can move ahead on that transaction. So we started with a modest guidance that we think that we can certainly achieve and as we see further opportunity as the year progresses, as we showcase our ability to monetize the Albertsons investment and reap the benefits of that additional cash, we're confident that we'll be able to use it. But for now, we've kept a relatively modest guidance range that we'll look to update as things progress over the course of the year. Hi, thanks for taking my question. Ross, can you give us color or anecdotal data regarding private REITs opportunity funds and pensions being redemption requests and withdrawals are opportunities coming to market and from past cycles, is there a tipping point where you start to see a wave of opportunities? That's a great question. It's well publicized as we've all been reading about. I would say that it's a bit more nuanced in the sense that each individual company has their own strategy as to how to obtain that liquidity that they're seeking. We do anticipate in having conversations with a lot of these different groups that there will be some assets that get shaken loose in the process. But you have to realize that a lot of these companies are generalist investors that own all asset classes. So I think they're going through their own internal analysis as to where they deem most appropriate to look to move certain assets whether open-air grocery sort of aligns with that strategy is yet to be seen. And as I mentioned in my prepared remarks, there are certain asset classes that have been extremely aggressive in terms of the cap rates that they have commanded. So for those companies that have recently acquired multifamily or industrial or self-storage, chances are that they are not looking to move those assets today, at a price that is lower than what they obtained those assets just in the last 12 or 24 months. On the opposite end of the spectrum, there is other asset classes that are much more challenged in terms of an investment profile and the ability to move those assets. So, we do expect that open-air grocery is an asset class that has retained its value as well as any, so that's what we are sort of waiting for, and those are the conversations that we're actively having each and every day. That is all the time we have for today's question-and-answer session. I would like to turn the floor back over to David Bujnicki for closing remarks.

EarningCall_206

Good day, and welcome to the Everest Re Group, Ltd. Fourth Quarter of 2022 Earnings Conference Call. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Matt Rohrmann, Senior Vice President and Head of Investor Relations. Please go ahead. Good morning, everyone, and welcome to the Everest Re Group, Ltd. fourth quarter of 2022 earnings conference call. The Everest executives leading today's call are Juan Andrade, President and CEO; and Mark Kociancic, Executive Vice President and CFO. We're also joined by other members of the Everest management team. Before we begin, I will preface the comments on today's call by noting that Everest SEC filings including extensive disclosures with respect to forward-looking statements, management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these filings. Management may also refer to certain non-GAAP financial measures. These items are reconciled in our earnings release and financial statements. Everest's excellent fourth quarter performance capped another strong year of consistent execution of our strategy and continued positive momentum. We advanced our objective of creating sustainable value for our shareholders with disciplined underwriting and targeted growth driving margin expansion in both businesses. We increased diversification in each of our segments both geographically and by product line. When you combine all of this with healthy and consistent rate increases and improved terms, our risk adjusted return profile improved across the Board. Both franchises delivered solid top and bottom line performance. We profitably grew our primary insurance division and executed an outstanding January 1 reinsurance renewal. This further reinforced our global market leadership and positions Everest well for the future. Our actions resulted in solid underwriting profit for the year, over $1 billion in operating income and a double-digit operating return on equity for both the quarter and the year, an excellent result. We achieved these results despite market volatility, economic and geopolitical uncertainty and industry catastrophe losses totaling over $140 billion in the fifth costliest CAT year in history. In short, we accomplished a great deal in 2022 and built a wide runway for future opportunity. We are uniquely positioned with accelerating momentum and top tier talent driving this business. Everest is more agile and well-equipped than ever and we have the ability and the drive to seize attractive opportunities and deliver on our commitments in 2023. Now, I will briefly recap our financial highlights focused on the full year beginning at the Group level. In 2022, we grew the company by 9% in constant dollars ending the year at approximately $14 billion in gross written premium. We generated $477 million in underwriting profit with a 96 combined ratio. This is a near 2 points improvement year-over-year despite an active CAT year. The attritional combined ratio of 87.4% also improved from the end of 2021 and we achieved a 70 basis point improvement year-over-year in the group loss ratio. The operating expense ratio remains best-in-class at 5.8%. Finally, our high quality investment portfolio generated $830 million in net investment income. Our actions to optimize the investment portfolio over the past three years and position it for a rising rate environment have paid significant dividends. Now turning to our underwriting segments, beginning with reinsurance. Our reinsurance division's focused execution in 2022 further enhanced our global market leadership and preferred partner position. We continue to optimize our portfolio while achieving solid top and bottom-line growth. For the full year, reinsurance growth was 5% on a constant dollar basis with $9.3 billion in total gross written premiums. This growth was driven by broadened opportunities with our core cedents and our nimble allocation of capital to achieve the highest returns. We took deliberate actions during 2022 to shed underperforming business. This also positioned us well to take advantage of the strong trading conditions at January 1. These actions resulted in over $300 million in underwriting profit for the year and a combined ratio of 96.4%, there's a 1.7 point improvement from '21. For the full year, both the attritional loss ratio at 58.7% and the attritional combined ratio at 86.2% improved down 90 basis points and 10 basis points, respectively. Our deliberate underwriting actions significantly reduced our CAT losses, demonstrated by our less than 1% market share from Hurricane Ian in the third quarter, the second largest hurricane in U.S. history. Our focused Reinsurance strategy continues to pay dividends. Throughout 2022, we leveraged our market position, deep client and broker relationships and strong balance sheet to building more profitable and higher margin book, which culminated in an outstanding January 1 renewal. I'll provide more color on 1/1 in a few minutes. Now turning to our primary insurance division. In 2022, we've made tremendous strides expanding our reach, capabilities, product set and breadth of global talent while hitting important financial milestones. We finished the year with insurance growth of 18% in constant dollars and $4.6 billion in premiums. This is supported by new quarterly gross written premium record in the fourth quarter. Growth was balanced and diversified across the business by product line and by geography. After four years of significant and cumulative rate increases, we achieved high-single digit average increases excluding workers' compensation throughout the year. In addition to rate, exposure growth driven by revenue and payroll increases created additional margin against loss trend, pricing increases in the quarter were led by commercial auto, general liability and property. Our proactive cycle management actions contributed to our continued improved underwriting profitability, our ability to pivot quickly is a key advantage. Everest continues to benefit from an influx of top talent with the market expertise, track-record, underwriting acumen and relationships to execute our strategy. We achieved the milestone full year underwriting profit of $164 million, which is a new annual record for the Insurance Division with a full year combined ratio of 94.8%, down 2.3 points year-over-year. Our attritional combined ratio also improved 80 basis points year-over-year to 90.4%. We are enhancing our operations to become even more connected and efficient on a global scale. It's an exciting time for our primary business. We continue to see significant opportunities and I look forward to even greater momentum ahead. 2022 was a year of multiple wins, we've reduced volatility, diversified the portfolio, expanded margins and enhanced our risk adjusted return. We got there with consistent and precise execution. We deployed our capital in areas where we could get the best risk-adjusted returns. We also reshaped our property portfolio through continued diversification via growth internationally. All this accomplished while increasing our top and bottom-lines and we improved net exposure to our balance sheet. As I mentioned before, we remain risk-on for property CAT as pricing, terms and conditions provide attractive returns within our defined trading range. Turning to 2023, the January 1 reinsurance renewals were executed by our global reinsurance team with equal precision, and as a result, we have a significantly stronger portfolio heading into 2023 and beyond. We approached the January 1 renewals from a position of strength. With a superior value proposition, well-prepared to support our clients and taking advantage of excellent market conditions around the world. We set clear goals for our portfolio and we achieved every one of them by leveraging Everest global market leadership and setting early expectations with clients and brokers which drove significant pricing improvements. In addition to rate, we also substantially improved terms and conditions. We targeted attractive property opportunities both domestically and internationally at materially improved risk-adjusted returns. We drove higher attachment points and reduced exposure to named and secondary payrolls. Significant property CAT rate increases were evident across all geographies. In North America, the property CAT XOL risk-adjusted rate change was up approximately 50%. The average attachment point for our global property CAT business also increased meaningfully, resulting in significantly reduced risk exposure. At the same time, the expected return for our CAT portfolio increased materially. In casualty and professional lines pricing and terms and conditions continue to improve overall. And we leveraged our property market to strengthen and further diversify the portfolio. Internationally, the 1/1 renewal exceeded our expectations throughout Europe and Asia. We grew our regional portfolios through increased participations and by expanding our base of new clients. We also saw significant rate movement in specialty lines exposed to the Russia, Ukraine war particularly in marine, aviation and political violence. I am very pleased with the performance of our outstanding reinsurance team. Everest distinguished itself in this renewal by our early and consistent communication with our brokers and clients. We set expectations heading into 1/1 and constructively work with them to find solutions. As a result, we improved our portfolio and expanded margins while deepening our relationships with brokers and clients. Looking forward to future 2023 renewals, we expect reinsurance pricing momentum to continue. We see abundant opportunity to continue growing and diversifying our portfolio in all markets, focused on further growth in Asia and Europe, while capitalizing on the continuing market dislocation in property. Given significant firming of the reinsurance market on January 1 and the heightened risk environment, primary insurers should also see firming prices in 2023, and they will need to maintain underwriting discipline. I am proud of what Everest achieved in '22. We delivered on our strategic objectives, while laying the groundwork for sustained profitable growth. I attribute Everest success to our outstanding team under consistent and relentless execution in every aspect of the business. The outlook for 2023 is bright, and I look forward to taking this company to the next level. Everest finished off 2022 with very strong results across the board in the fourth quarter. Operating income was $478 million or $12.21 per diluted share for the quarter, equating to an operating ROE of 19.4%. For the full year, operating income was approximately $1.1 billion or $27.08 per diluted share, with an operating ROE of 10.6%, while the annualized TSR or total shareholder return was 5.4%. Juan highlighted, we have a number of strengths in both our insurance and reinsurance businesses, bolstered by our team's consistent execution around the globe. We remain very well positioned to take advantage of the market opportunities ahead. Looking at the Group results for the fourth quarter, Everest reported gross written premiums of $3.7 billion, representing 9% growth in constant dollars. The combined ratio of 87.8% for the quarter represents 4.1 points of improvement over the prior year's quarter, driven by lower CAT losses as well as a continued improvement in attritional loss experience primarily in reinsurance. Group current year loss ratio was 59.6%, a 90 basis point improvement over the prior year's quarter, led primarily by the reinsurance segment, which I'll discuss in more detail in just a moment. Group's commission ratio was 21.6%, up modestly on mix changes, while the Group expense ratio was modestly higher year-over-year at 6%. Moving to the segment results, and starting with Reinsurance. In the fourth quarter, the Reinsurance gross premiums written grew 3.7% to $2.4 billion in constant dollars. The growth was driven primarily by property pro rata business. Combined ratio was strong at 86.4%, an improvement of 5.1 points year-over-year primarily on lower CAT losses. Current year loss ratio improved 1.5 points to 58.2%, as we continue to achieve favorable rate and terms, optimize mix and scale various lines as well as shifting the book towards accounts with better risk-adjusted return potential. The commission ratio was 25%, up modestly, largely driven by mix and the underwriting expense ratio was 2.8%, broadly in line with the prior year's quarter. Moving to insurance, where we continue to build solid momentum. Gross premiums written grew 20.5% in constant dollars to nearly $1.3 billion in the quarter. As Juan mentioned, a record level of production in the fourth quarter for the division. Combined ratio for the quarter was 91.4%, a 1.4 point improvement from a year ago. The current year loss ratio was 63.4% in the quarter, slightly higher year-over-year due to mix and a onetime adjustment relating to our Lloyd's Syndicate. Commission ratio improved 1 point, largely driven by business mix. The underwriting-related expense ratio was 15%, which is within our expectations as we continue to expand our franchise and invest in a number of growth initiatives across the business. And finally to cover investments, tax and the balance sheet. Net investment income for the quarter was $210 million versus $205 million a year ago, as we continue to benefit from higher new money yields, an increasing resets in our floating rate securities within the fixed income portfolio. Private equity investments yielded a negative $30 million P&L impact in Q4, and they are reported on a one quarter lag. Overall, our reinvestment rate continues to trend higher year-over-year, as new money yields remain in the 5% range, while the book yield was 3.5% at the end of the fourth quarter. We continue to have a short asset duration of approximately 3.1 years. And as a reminder, that 22% of our fixed income investments are in floating rate securities. Fourth quarter, our operating income tax rate was approximately 11%, within our assumed range of 11% to 12% over the course of the year. And regarding the balance sheet, we completed the last of our granular reserve reviews across our entire portfolio, which affirm the overall strength of our balance sheet, underpinned by our disciplined underwriting and prudent reserving philosophies. Overall, our reserve adequacy remains solid. We did strengthen our asbestos and environmental reserves, which makes up approximately 1% of total net reserves by $138 million to position that runoff book comfortably within the average range for industry survival ratios. This was offset by favorable development from a variety of areas, primarily from short-tail lines. We also had other marginal adjustments in both segments, resulting in 0 net prior year development. We continue to remain prudent given the uncertainty of inflation and the heightened risk environment the entire P&C industry currently faces. In short, we remain confident in the strength of our reserve position. Moving to shareholders' equity, ended the quarter at $8.4 billion, driven primarily by the strong earnings in the quarter as well as a modest recovery on the value of available-for-sale fixed income securities as rates moderated slightly. Net unrealized losses in the fixed income portfolio as of December 31 were approximately $1.7 billion down from a net unrealized loss of $2 billion at the end of the third quarter 2022. Operating cash flow was strong at over $1 billion during the quarter and it stands at $3.7 billion year-to-date. Book value per share ended the quarter at $215.54 per share, while the book value per share, excluding unrealized depreciation and depreciation of securities, stood at $259.18 versus $252.12 per share at the end of 2021, driven by the strong underwriting results mentioned earlier. Long-term debt to total capital at quarter end stood at 23.3%, broadly similar to the level last quarter. In conclusion, Everest ended 2022 with a very strong fourth quarter. We have the platform, balance sheet and the team to continue to take advantage of the current environment, and we have a lot of momentum as we look ahead into 2023. That summarizes our fourth quarter results. And with that, I'll turn the call back over to Matt to begin our Q&A session. Thank you. Good morning. Two questions, if I may. The first one, just listening to your commentary on 1/1 renewals and expectations that the reinsurance market remains hard, at least into midyear. I guess as I look at the PMLs that we saw in -- for 1/1, they still seem to be down quite a bit relative to mid '22 levels. Is that the right comparison or should we think about kind of what the PML will look like in midyear '23 relative to midyear '22? And could you give us some maybe thoughts on how we should see those develop? Yes, Yaron. This is Jim Williamson. Thanks for the question. Maybe to set a little bit of the stage, I'd like to add some color around 1/1 to add to the comments that you heard from Juan and Mark because I think it's an important context when we're talking about PMLs. And to reiterate what Juan said, it was simply an outstanding renewal. We executed with incredible precision and achieved a number of important objectives in the renewal that really resulted in a step change in the risk-reward equation for Everest. As you heard, we received significant rate increases in our U.S. property CAT business on the order of 50%. We essentially improved every metric that we use to measure our CAT portfolio. Our average attachment points were up. Our attachment probabilities were down. Despite all of that, rate online increased. Our expected combined ratio dropped materially. Our expected ROE increase materially. Our expected loss in dollars went up slightly, as we deployed incremental capacity to targeted clients. And our dollars of expected profit per dollar of expected loss increased very meaningfully. Similar factors played out in our international markets, where rate increases significantly overachieved expectations as we were coming into the end of the year. And on average, our international markets took 40 points of rate including over 30 points of rate in the U.K., which hasn't seen a major CAT loss in decades. So simply put, on the property CAT side, it was a fantastic 1/1. And I think we expect those conditions to play out through the remainder of this year and into next year. So just exceptional. And so when you think about the resulting PMLs of that, what I would share with you is the comparison you always want to be making is quarter-to-quarter because what you're looking at is an analysis of our in-force book. And what I would -- the way I would characterize our PML movement is the PMLs that we publish were essentially flat. And you see some ups and downs in those PMLs on a net basis, they were essentially flat. And that translates into more deployment of some gross capacity, offset by improved AUM in Mt. Logan, and that gets you to a roughly flat P&L picture. My expectation is we'll probably remain in that sort of territory. We feel really good about our ability to get those incredible economics without really having to stretch the CAT appetite. And as you'll see in the investor presentation in terms of where we are in our earnings and capital at risk measures, we continue to trade well within our defined range, which we're very comfortable with. So it's really the best of all worlds where we're able to get rate that improves economics, overcomes the inflationary factors that you see in the market and do it while maintaining our risk position in a pretty stable manner. So really could not be happier with the results we achieved. Thanks Jim, that's very helpful. And my follow-up to that then would be, if I were to try and take that commentary and color and translate that into the combined ratio, so I think you've stated that you expected 91, 93 reported combined. Would you be surprised to see that come in well below that 91 to 93 range in a "normal CAT" year in '23? And would you expect to give us an updated number at some point this year? Yaron, this is Juan Andrade. Look, what I would echo is a couple of things. I mean if you look at the 20% net income ROE that we generated in the fourth quarter, 19% operating ROE, which, again, it's an excellent result, as I mentioned in my opening remarks, particularly in the market environment that we're in right now. In addition to that, you layer the amount of rate that Jim and I just talked about, over 50% on U.S. CAT XOL, over 40% in our European businesses, et cetera. You talk about the terms and conditions that I referred to earlier in my remarks, which are also significant changes. And all of this is very much accretive to our portfolio. In addition to that, you also look at the work that has been done on the primary insurance side and just the margin improvement that we've been able to drive through 2022. So all of that leads you to a place that I say, we're in a good place. And I would not be surprised if we end up being on the better end of that range. Yes. For us, we're expecting to do another Investor Day towards the end of this year. And at that point, we will be updating our numbers and our financials. This will be the third year of our three year numbers that we put out there initially back in 2021. Yes. Look, I think by then, we're going to have a pretty good idea of how the environment is shaping. But I think, Brian, if you go back to, again, in my prepared remarks, we just renewed 53% of the reinsurance book at very attractive terms. And as I said in my comments, we also expect that 4/1, 6/1 and 7/1 will continue to be very favorable for the reinsurance industry. So I think that also gives us a pretty good idea as to where that might be shaping. In addition to that, I would also say on the primary side, we also would expect pricing to continue to improve, as I mentioned in my remarks, and frankly, we already saw some of that in the fourth quarter, right, where we saw commercial auto, property and general liability make some significant improvements quarter-over-quarter on the pricing. We're in a heightened risk environment. You've got pressure from the reinsurance hard market. And so I would expect that all of these things will lead to a very good trajectory on the growth. But yes, we will be providing additional guidance later in the year when we do our Investor Day. Great. Thanks. And then second question, Juan, I'm just curious, how do you think about allocating your PML on the property side between the insurance and the reinsurance business? I mean would you hold back some on the reinsurance because of opportunities? On primary is there one that you prefer a little bit more than the other? How do you think about that? Yes. No, that's a great question, Brian. One of the terms that we like to use inside our company is that we do quite a bit of dynamic capital allocation. So this is, frankly, a fundamental discipline that we have with our enterprise risk management framework. On a very regular basis, we're essentially looking at by line of business, where we're coming in against expected returns, et cetera. And so that's how we start deciding who gets the capital. What we do not do is peanut butter this around the company, right? So we will look at the market opportunity. We look at where we think we can get the best economics, the best risk adjust good returns, and that's essentially how we deploy the capital. And it's an important point because I think you heard both me and Jim Williamson talk about the precision with which 1/1 was executed. And I think it's important to step back to understand that in order to get to the heart of your question. And it's the fact that we have pretty good control of our business around the world. So we are able to decide whether we're going to deploy more capital in the U.S. versus in the Continental Europe versus in Asia versus Latin America, depending on the market conditions. And we apply that same rigor across the segments, whether it's in primary insurance or whether it's on the reinsurance side of things. And that's ultimately how we make those decisions. But I would invite either Jim or Mark to maybe provide some additional comments on that as well. Yes. No, Brian, it's Jim. I think that's spot on. I think clearly, what you've seen is a situation, particularly as we came into 1/1, where it took the primary market a little while to start to adjust to what was coming in terms of insurance rates. And our primary insurance business has been very disciplined on their portfolio management. And in some ways, that's freeing up capacity and thereby capital that we were able to very effectively deploy in reinsurance at 1/1. And that's, I think, really brings to life that dynamic capital allocation that Juan is mentioning. And we are very nimble that way, and it allows us to really achieve best-in-class returns. Great. Thanks, and good morning. First question is, I know this is only one piece of the changes at 1/1, but I'm trying to get a sense of the significance of higher reinsurance attachment points. Is there any way of maybe recasting 2022 losses in this new framework, just to give us a sense of how much difference that particular step make? Sure, Meyer. This is Jim Williamson. It is a very important point. And actually, I think the fourth quarter gives us a little bit of a demonstration of that because we began a lot of these strategies really long before 1/1 '23. And if you think about how we execute in 1/1 '22 and the actions that we told you we were taking, it was all about moving away from lower-performing programs, particularly pro rata deals; moving away from high volatility structures, particularly around retro, around aggregate programs; making sure that we were deploying capacity where risk-adjusted returns warranted it, which is why we withdrew some capacity at 1/1 '22 and then started deploying it back into the market as conditions improve. And what does that do? For losses like -- what happened in the fourth quarter with Elliot. In our view, losses like that should be primarily retained by seeds. That's really not a type of loss that should be a fundamental loss to the reinsurance market. And you saw our Q4 CAT loss for reinsurance was relatively small, $10 million. And that is the type of loss we want for events like that. So that gives you a sense of how we think our book will perform over time. So if in 2023, there's a number of, what we would call, frequency CATS the $1 billion, $2 billion events, our expectation is our participation in those events will be lower than they would have been prior to 1/1 '23 because the average attachment point moved up our cedings are going to be retaining more of those losses net into their portfolio, which is where those losses belong. And that allows us to really preserve our capacity for major industry events, which is one of the products designed for. So that should give you a flavor of how we expect the portfolio to perform. Okay. That is very helpful. The second question is there -- and I apologize if I missed this. I'm just looking for any thoughts on ceding commission changes, both as a reinsurer and on the insurance book? Yes, Meyer, this is Jim. I'll start and then turn it over to my colleague, Mike Karm. Yes, so we did see really excellent results in our casualty renewal as well. Obviously, a lot of attention being paid to property and rightfully so. But we enjoy a premier position with many of our seats on their casualty portfolios, and we participated in this cycle of market hardening over the last few years by taking increasing share of casualty programs for those core clients, mainly on a pro rata basis. And one of the things that's happened is all that margin is getting accreted in the primary market as you've seen ceding commissions go up, we think that made sense. It was a reasonable trade. It was still resulting in more margin for us. So we like that. What we're starting to see now is still very attractive opportunity. We did continue to participate very meaningfully at 1/1 in the programs I'm describing. In fact, in a number of cases, we increased participation and I think, grew our portfolio in a really nice fashion. But what we also saw is obviously the amount of margin expansion in the primary market is narrowing a bit. And so we started to see ceding commissions certainly leveling off. I really only have full -- a small handful of instances where they continue to increase, and that was usually when they were already below market to begin with. What we saw mostly was a modest improvement in average ceding commissions across the portfolio, and we think that's justified. And our expectation is that, that phenomenon of moderating ceding commissions will continue to play out as we go forward. Sure. Thanks, Jim. For us, it's rod striking the right balance about retaining harder and earning profit while managing our volatility and really actually, as we continue to scale up our businesses. With given the reinsurance market and what's happening, we're certainly not immune to what is going on. But I would say we're also not reliant on reinsurance like others. And given our financial strength and our capital -- strong capital base, we will continue to be -- have all the flexibility in the world here to drive what we need to do as an organization. And for us, again, it's about being thoughtful as we retain more premium for our risk. There'll be more accretive to our portfolio and whatever economics nor to our benefit will continue to drive. So I think given where we are in the position of how we scale up our businesses, we feel we're in a good position, and I don't think there'll be anything material that we're concerned about driving our overall strategy. Yes. Meyer, this is Juan. I think look, just to round out the answer, I think at the end of the day, bottom line is we saw improvement in cede commissions in this renewal. Hi, thanks. Good morning. My first question, I want to go back to the 1/1s, right? You guys spoke about the expected return increasing materially I'm not sure what color or numbers you want to give us, but like -- could you say what the expected return on your business would be in a normal CAT year? Or, for instance, if we looked at the 11% return you guys generated in '22, what would that be if last year's events recurred? Just something to give us a sense of just how much better the expected return is in '23 relative to '22 given, right, the better pricing and the improved terms and conditions? Sure. Yes. Elyse, this is Jim Williamson, and I'll provide you some of that color. And maybe at the risk of repeating some of what I said, but I do think it's really critical. If you think about our objectives coming into renewal were pretty straightforward, and they're very similar to what we focused on last year. Continue to optimize the portfolio and move away from underperforming programs; control volatility, particularly around how we structure deals and for that -- for us, that means mainly avoiding aggregate structures and minimizing the amount of capacity we have deployed at really high return probability layers like the 1 in 3 type of player, that's not really where we want to be playing. And then ensuring that we're moving capacity to the best-in-class programs. And that same phenomenon that we've consistently executed through 2022 played out in January 1. And so we were able to take capacity from, let's say, the bottom tier of our programs and reallocate it to the best opportunities in the market. We did it with significant rate increases as Juan and I have mentioned 50% in the U.S., 40% in international markets. As you mentioned, there was also significant movement in terms and conditions. In particular, in the U.S., a significant portion of our deals are on -- now on a named peril only basis. We've also eliminated write-backs of exclusions on a number of areas that will over time result in better economics. And so the heart of your question of what does that mean for the portfolio in practical terms? Obviously, every year will present us with a different set of actual catastrophes. And so as opposed to looking back, what I would tell you, how I would expect the portfolio to perform is that frequency pass, which have really been deviled the reinsurance industry, will increasingly be retained by our customers. So we're getting a lot more rate to now focus on the types of losses that reinsurance was designed to cover in the first place. We would also expect for major losses that similar to what happened with Hurricane Ian, and we're very thoughtful about how much of a share of the major losses that we want to be taking, and I would expect that to look quite good as well. And then lastly, what I would say for all of this, we have a meaningful increase in the amount of cat premium available to pay these losses and still make a strong return. So hopefully, that gives you the color that would help you to triangulate what is an excellent expected return position as we move through 2023. Elyse, and this is Juan. Let me piggyback on Jim's answer and because I think he was quite thorough. And I would point you back to that 20% ROE that we just talked about for the fourth quarter. And then we put it in perspective, right, because while we don't give specific guidance on what we think the ROE outlook is going to be for the coming year, we still generated double-digit ROEs despite the industry facing a top 5 catastrophe year. And I think you got to put those results in the context of all the activities that we have been talking about really over the past three years on how we have been managing this company, reducing the volatility, being very disciplined in portfolio management, being very disciplined with where we deploy our capital. And with the material improvements that we achieved at 1/1 that we just talked about and that we expect to expand upon in the coming renewals, we expect that steady improvement to continue. And so I would say all signs point to a significantly improved risk-adjusted return across the portfolio. So just a little bit more color on that. Thanks. And then the equity portfolio went down from $1.3 billion to like $281 million in the quarter. Why did you guys take that portfolio down in the fourth quarter? Good morning, Elyse, it's Mark. So we have a strategic asset allocation table that we're pretty disciplined with. And it allows us flexibility to move between asset classes, whether it's on the fixed income side, private equity, public equity, private credit, et cetera, et cetera. So tactically, we had a large reduction of the equity portfolio in the fourth quarter, shifted into other assets that we felt were more attractive, but still consistent with that strategic asset allocation that we've been focused on since the 2021 Investor Day. So we will probably move around a bit in 2023, but stay disciplined to that SAA. Well, good morning, everyone. I'd like to go back to, I think, in your comments, you talked about the annual ground-up reserve review that you do every year. And especially on the primary side, obviously, inflation is been a big issue in the statistics that came out in '22 couldn't have been anticipated in fiscal year '20 and '19. So can you talk to us about the process? What were the puts and takes for you to come out where you did? Some perspective there would be helpful. Yes. Good morning. It's Mark. So let me get into that just in a few ways. The process itself is year-round. And so we're looking at reserves throughout the year, performing reserve studies. It's quite comprehensive in terms of aligning, underwriting, pricing, reserving claims in the course of that process. So you've got many different stakeholders involved. And then it's quite ground up in terms of the analytics that go into it. And then I'd bring you back to principles that we set out back in 2020 about setting up prudent loss picks holding them in a disciplined fashion over time until we see a seasoning in the different lines of business. And for us, those are kind of a ground up rules and processes that we use to evaluate. Now in terms of what we did in Q4, I mentioned the asbestos and environmental reserves strengthening. So we've got roughly $20 billion of carried net reserves. We strengthened that by 138. We had some offsets, favorable offsets coming from shorter tail line and we had smaller, more marginal adjustments, pluses and minuses in both segments, but nothing approaching the 138 in the process. So overall, we feel very solid in terms of our loss position. And we obviously take into account macro factors like loss inflation by making sure that we've got prudent loss picks in our reserves. And then we do dynamic modeling. And I think one of the benefits that we have in our company is really the diversified nature of the lines of business that we have and the reserve profile that we have. There is no single emphasis on one class, and that diversification helps to absorb any potential volatility that might come from loss inflation factors, in general. So that gives us, I think, just a better mix or diversification of reserves to handle these types of issues. Got it. I guess -- so my follow-up question, well, sticking with the specialty insurance platform. We look at your primary growth 18% for the year, I think, 19% for the quarter. I think after we get through earnings season, that's going to be a pretty outstanding result relative to some of your peer groups. So could you spend a minute and talk to us about where you're seeing growth? I guess, not only looking back to '22, but when we think about '23? Sure. Thank you for the question. So a couple of things. We have a lot of moving pieces in the organization, but the reality is our underwriting profit focus is, first and foremost, the number one thing we tend to focus on. And given that with all the things we have from scaling up our existing businesses and given our market share and given the opportunity we have with our expansion, you're starting to see a lot of these things play out. So when I think about the opportunity for that growth, it's not without discipline and cycle management that comes along with that growth. But for us, we see what the market opportunity lies in front of us. So we have the expertise we can deploy anywhere in the world now with the expansion now starting to play through and some of the things we've done, you're starting to see that come into play. And in addition to that, we have the ability to have the flexibility rather to drive this in a local region. So I think growth has been great, 32 straight quarters. The specialty businesses where we see areas like we opened up and you saw adding to that, which would be aviation and energy and construction, complementing our credit political risk and surety, helping offset some of the things that are happening with like transaction liability, then you go over to some of the market and property. And when we have and see these things that are actually opening themselves up, we can do this anywhere in the world. And I think for us, our benefit has been our agility and the way we actually are able to capitalize with our speed to market. And we'll continue to do this. We're going to refine our offering, whether it's retail or wholesale. We're going to figure out where the opportunity is globally. And if we don't like what we see from a risk-adjusted return basis, we'll pull back, and we'll do the right thing. You've seen that with our cycle management and comp. You see that we're doing in D&O and if we don't see those things, we're going to sit there and we'll continue to look for opportunity where it best fits and the growth just comes with that. And so we'll continue to drive that opportunity where we see it, and it's about playing offense and not defense. Yes, Greg, this is Juan Andrade. I would add a couple of thoughts because I think that was well said by Mike. Look, I think at the end of the day, there's a couple of key factors. One, we're highly diversified within the Primary Insurance division. And so that means that we can find opportunities in the market where they exist. And as Mike pointed out, it's always about profitability. So for instance, is you're not seeing a good environment for financial lines right now, but you're seeing a very good environment for things like property, casualty still and other lines of business. So that allows us to essentially pick our spots and be able to do that. The other point that I don't think can be underestimated is really the agility of our company. And I mentioned that in our prepared remarks, our ability to be able to pivot. We're pretty lean, we're pretty entrepreneurial, we have great relationships with our distribution, and we have a lot of good talent in this company. And all of these things are basically what enable us to continue the momentum that you have seen from us really over the last number of years. Hi, good morning. Maybe first question, thinking about capital management and capital uses. Should we expect a bit more kind of operating leverage? So when we look at the premiums to equity ratio, is there room for that to inch up given kind of better economics you're attaining? And also just thinking about capital uses in '23, should we be still thinking that the growth will kind of eat up most of the capital versus buybacks? Mike, it's Mark. So a few points here. I do think we've got ample capital to take on the opportunities of 2023, and it includes more than just the traditional balance sheet. You're looking at what we call our capital shield, so Logan ILWs, CAT bonds, et cetera. Operating leverage, there's definitely more room on the balance sheet to expand that leverage. I think one of the key points to keep in mind is really the risk-adjusted return profile is improving. So you're seeing exposure being managed thoughtfully and the rate and the expected return go up significantly. And that's one of the key points that I think allows us to expand that operating leverage. We're also fairly well diversified with multiple income streams. And so I do expect the net income projections for the year to provide significant retained earnings to support growth. And we'll see how that growth comes about because there are other levers that we can pull if the opportunities in the market are even more significant than what we think they could be. But just in terms of your buyback comment, look, it's always on the table. We can pull that lever, but this is the best market we've seen in a generation. And so the value creation that comes out of the organic growth plan that we've got and the fact that we're ready for it in terms of balance sheet, teams, franchise, the whole ball of wax, you couldn't have a better alignment. So I think you'll see us really attack this opportunity in 2023 full borne. So I'll leave it there. That's helpful. My follow-up is on the alternative reinsurance, maybe ILS marketplace, given Mt. Logan is one of the leaders in that space. Is there -- are you seeing dislocation in that marketplace? And do you see that kind of persisting? I know there's some puts and takes on how that impacts someone like Everest. But what's going on in the ILS marketplace that you're seeing? And does that -- is that part of the reason you feel that the discipline within the overall reinsurance marketplace will continue? Yes, Mike, this is Jim Williamson. Thanks for the question. I mean clearly, ILS has been a dislocated market coming into 1/1. And for many of the reasons that have affected everyone participating in this market, there have been a lot of CAT losses over the last few years. And I think, particularly around the margins, you had a lot of investors participating in ILS vehicles and maybe didn't quite understand or weren't quite prepared for the prospects of having multiple years in a row of CAT activity, which is not uncommon. These clusters happen. And so that has definitely, I think, put a number of investors in a position where they're on pause. You also have, obviously, the phenomena from those CAT losses, there's a lot of trapped capital that is just sidelined no matter what rates, terms and conditions are doing, they just can't deploy that capacity because it's preserved against prior events. And so that has definitely created and helped to contribute to a capacity crunch in our industry. Now from our perspective, that affects us in two ways. On the one hand, in our primary reinsurance business, our balance sheet reinsurance business, if you will, we're seeing all the phenomenal results that we've talked about plus 50, U.S. property CAT pricing plus 40 international terms and conditions getting better attachment points rising. And that's all happening because there's more demand for reinsurance capacity than there is supply. And part of the reason that's occurred is because of the crunch in ILS. The second thing that it does is it makes it a little more challenging for us to raise funds in Mt. Logan because investors are sidelined or they have trapped capital. In terms of that trade, we'll take that trade all day long. Driving improvement in our core reinsurance business is our first priority. And it also inures to the benefit of our Mt. Logan investors who are consistently invested in the ILS space, they get better returns as well. So we like that. At the same time, what I would say is, we have been getting traction in Logan. We did raise money in 1/1. And the team is doing an excellent job of conveying our value proposition to potential investors. And in particular, unlike a lot of other vehicles in the market, our investors get the same results that Everest gets. We're not making money when they're not making money. So that's a real focus of ours. And I think that's very compelling. We have a strong pipeline of investor interest, and our expectation is that Mt. Logan will grow over the course of time, and that's a key priority for us. Good morning, guys. Just a few, hopefully, quick ones for Jim. First question, just, I guess, following up on Mayer and Elyse's line questioning on how the changes in the portfolio might map to the actual CAT numbers. So you mentioned that you're shying away from kind of like the 1-in-3 type of risk, but -- what I'm struggling with is that like in the supplement, the 1 in 20 looked like it grew about as much as the 1 in 250. So from the PML disclosures alone, it's difficult for me to really see what's going on. So I don't know the right way to ask it, maybe -- could you give us some idea over the past few years, like how much of your CAT losses have come from sort of those frequency layers that were even more frequent than 1 in 20? I'm not really sure, but just any numbers would be helpful. Yes. Sure, Ryan. Yes, it's Jim, obviously. Look, it's an important question. And so I'm going to give you a few threads that I think really help describe what's happening in the portfolio. So obviously, and I can't restate it enough, exceptional execution at 1/1 which really followed on really strong execution in 2022, as we reposition the portfolio and rightsized our CAT risk for our company and a go-forward and sustainable basis, and that's really critical work. What I would do, if you want to think about movement of P&L, first of all, I wouldn't look at it on a year-over-year basis. Too much has changed since 1/1 '22. I'd really look at our more recent PMLs, whether you want to pick 10/1 or 7/1. And I think that shows what is essentially a flat profile of PML deployment at a variety of return periods, whether it's 1 in 20 or 1 in 250, 1 in 250 is down by about $50 million from 10/1. 1 in 20 is essentially the same number, it's down by $5 million. And so that gives you some sense of what we expect. What I would say in terms of the balance of where CAT losses have been going in the industry is, it's not so much that what percent is the 1-in-3 event versus the 1-in-20 event. It's where are you getting appropriately paid? Where are you getting reasonable risk-adjusted returns? And so for us, our portfolio has shifted clearly toward the areas where risk-adjusted returns are strong and warrant the risk we're taking. And that's the 1 in 20 to 1 in 250 range. We feel really good about that. The other thing to keep in mind that's been happening against the backdrop of all this is the discipline required in the underwriting and the terms and conditions to ensure that you're inflation loading, your programs appropriately. Those are all things which will also over time and order the benefit of our portfolio. Now obviously, the actual result is going to be highly dependent on which events occur. But if we have a year where you have a couple of large events, but you also have a frequency of smaller CATS, we think our portfolio will perform better now -- meaningfully better now than it would have a year ago and that's because of all the actions we take in the rate all the improvements we've made. So hopefully, that gives you some perspective on how to interpret those PMLs. Yes, that's helpful. And then just lastly, can you give us an update on kind of how you're thinking about your original Hurricane Ian impact? Yes. Sure. Yes, Ryan, it's Jim again. Yes, we feel very good about it. I mean, obviously, it seems like it was a long time ago, but it's still relatively early. As you've seen, there have been puts and takes in the industry in terms folks adjusting their view of what their ultimate loss is going to be in terms of our clients' scenes, and so we're watching that very closely. A key thing to keep in mind, which we communicated in the last quarterly call when we talked about Ian is in terms of any upside risk to the numbers we've put up, we feel very good about that because of the protection that we received from our cap-on program. As we had indicated, in the last call, we have about $350 million of potentially exposed cap-on limit, which will engage if PCS reaches $48.1 billion in their estimate. They're currently at $47.4 million and we'll recover on a pro rata basis up to $64 billion or $63.8 billion. So we don't really have any kind of material concern about upside to that number, whether it ultimately there's a good guy in there, it's going to take quite a bit of time for that to play out, but we're watching it very closely. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to management for any final remarks. Great. Thank you all for your questions and the excellent discussion this morning. This is Juan Andrade. I am very optimistic about the opportunities ahead and our ability to continue driving a world-class platform. Our strategy is clear. Our businesses are growing with strong resilient portfolios, and we have an attractive risk-return profile. This is all underpinned by our strong culture, which is an increasingly significant competitive advantage. We will expand on this foundation to accelerate our progress and create increased value for our investors, colleagues and clients around the world. Thank you for your time with us today and for your continued support of our company. I look forward to speaking with all of you again when we discuss our first quarter 2023 results. Thank you. Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

EarningCall_207

Good morning, and welcome to the Sun Life Financial Q4 2022 Conference Call. My name is Michelle, and I’ll be your conference operator today. [Operator Instructions] The host of the call is Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets. Please go ahead, Mr. Bitton. Thank you, operator, and good morning, everyone. Welcome to Sun Life’s Earnings Call for the Fourth Quarter of 2022. Our earnings release and the slides for today’s call are available on the Investor Relations section of our website at Sun Life.com. We will begin today’s call with opening remarks from Kevin Strain, President and Chief Executive Officer. Following Kevin, Manjit Singh, Executive Vice President and Chief Financial Officer, will then present the financial results. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management are also available to answer your questions this morning. Turning to Slide 2. I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of today’s remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. Thanks, Yaniv, and good morning to everybody on the call. Turning to Slide 4. Sun Life delivered strong performance during the fourth quarter, contributing to solid 2022 full year results. Our results demonstrate the resilience of our diversified business model and the commitment of our people to deliver strong earnings and continued growth in the midst of challenging environment while meeting our commitments to clients and delivering on our purpose. We’ve made tremendous progress on our business strategy by driving positive client impact for our 85 million clients around the world. We achieve strong underlying earnings this quarter of $990 million Canadian representing 10% growth over prior year demonstrating the resilience of our business mix. Our growth was driven by strong results from our protection and help businesses. Sun Life U.S. us had a strong fourth quarter underlying earnings as a result of solid underwriting performance in health and risk solutions, significant moderation of COVID related impacts and contributions from DentaQuest. In Asia, we saw a breakthrough in earnings profitability in Vietnam driven by the addition of a scale in bank insurance and in agency and we saw higher margins in our international high net worth business. Strong results from our protection and health business were partially offset by lower income and increased outflows from our wealth and asset management businesses, largely reflecting declines in global equity markets. Underlying ROE for the quarter up 15.7% continues to trend towards our medium term objective of 16% plus, reflecting our disciplined capital management and growing emphasis on capital Life businesses, and our LICAT ratios at SLF remain solid at 130% for the quarter. Turning to slide 5, our full year 2022 results were driven by similar factors as seen during the fourth quarter. Underlying net income increased 4% to $3.7 billion supported by growth in our health and protection businesses. Underlying ROE for the year was 15.1% was also strong. Over the past year, we increased our quarterly dividend by 31%, following the lifting of restrictions in November of 2021. Turning to slide 6. This quarter, we delivered on several key business initiatives that help drive forward our client impact strategy. The strengthening of our distribution capabilities in growth markets has been a priority for Sun Life in 2022. In Sun Life Asia, we remain focused on building quality distribution channels. We realized a step change in our bank insurance distribution over the last 12 months, driven by new marquee relationships and executing on our existing partnerships. Last month we announced our first exclusive bank insurance partnership in Hong Kong with Dah Sing's bank under the 15 year agreement Sun Life will be the exclusive provider of life insurance solutions to Dah Sing's retail banking customers with distribution of Sun Life products expected to start this summer. This rounds out our distribution capabilities in Hong Kong and positions us well to compete. With the addition of this bank insurance partnership in Hong Kong, we now have more than 20 quality bank insurance partnerships in seven markets across Asia. Our history of execution in Asia has proven that strong bank insurance distribution, coupled with high quality advisor channels provides a critical platform for growth. One example of this is how we’re building our business in Vietnam, executing on transformational bank insurance partnerships, with a focus on providing high quality insurance and wealth products and services to fit our client’s needs. We are now one of the fastest growing life insurance players in Vietnam. We’ve improved our market position for insurance sales from 15 position in the full year 2020 to six position in 2022. At SLC management, we also recently closed our acquisition of a majority stake in advisor asset management. Advisor asset management or AAM adds distribution capabilities in the U.S. High Net Worth retail market, one of the fastest growing distribution channels for alternative assets. We’re excited to welcome AMM, the AAM team to our SLC team. We’re increasingly delivering positive client impact by elevating our focus on health, helping clients access health care and coverage and the coverage they need. In the U.S., DentaQuest continues to expand its dental business, advancing our goal to increase access to oral health care in underserved communities. In Q4, DentaQuest, expanded its advantage Dental Plus care practices, with four new offices in Florida. These practices went from startup to it add capacity in 90 days, which demonstrates the need for these services. DentaQuest also had a strong quarter for contracts awarded, including two new dental managed care contracts from a multi state health plan provider. The two newest contract expand DentaQuest partnership with the health plan to 10 states. That’s a question unique capabilities continue to contribute to our ability to win and retain state business while also driving higher margins. Additionally, the COVID-19 pandemic has exasperated the mental health crisis in Canada. We know many people are at a breaking point and we need to offer more resources and more access to tackle this crisis. We know the workplace is an important place to address these concerns. And we’re doing our part in Canada by providing clients with better access to mental health solutions. We’re also doing our part in our communities. And last month we announced an investment to support mental health programs for at risk marginalized youth across Canada, continuing to build capabilities that will expand access to care, will support Canadians with early prevention and with faster recovery. We continue to make great strides in our digital journey. Tied to our commitment of increasing financial security we continue to work hard to build the capabilities such that our clients can access our spectrum advisory options through a frictionless digital experience. Sun Life Canada has created more than 65,000 financial roadmaps for Canadian clients in 2022 using our Sun Life One Plan digital tool. Sun Life One Plan contributes to our goal for all Canadians to have a financial plan. Finally, we continue to be recognized for our progress in sustainability and our inclusive culture. Sun Life was recognized by Corporate Knight as being among the global 100 most sustainable corporations in the world for the 14th consecutive year. And this year, we were the top ranked insurance company globally. Additionally, Sun Life received many employee awards in 2022, including being certified as a great place to work in several of our markets. This is especially gratifying because it’s the result of direct feedback from our employees. This is recognition of our focus on ensuring we have an environment where diversity is championed in addition to offering resources and flexibility to support mental, physical and professional wellbeing. Before turning to Manjit to detail our Q4 financial results, I’d like to share a few final thoughts. First, I’m excited to welcome Tom Murphy, our new Chief Risk Officer to the Sun Life executive team. Some of you will know Tom from his time with FLC management, where he headed up our fixed income and institutional business. Tom brings a global depth of knowledge and experience particularly in asset management and the pension space which will be a tremendous benefit for all of us. I’d also like to recognize Colin Frame. Many of you on the phone will know him from his time as the Sun Life CFO and then as our chief risk officer. Colin will retire on May 1 after an illustrious 20 year career with Sun Life. He has played a significant role in our company’s growth over the past two decades. On behalf of everyone at Sun Life, I want to thank Colin for his service to Sun Life and wish him well in his retirement. And lastly, I’d like to share a few thoughts on the year ahead. While we expect the environment to remain challenging, we are optimistic about the outlook. Based on recent direction of travel for inflation in North America we’re seeing most economists forecasting a plateau of interest rates in the back half of 2023 with some soaring reductions in interest rates in 2024. We expect some volatility and rates will persist. But this will likely be within a tighter range. While inflation looks to be moderating we continue to watch the environment including geopolitical uncertainty, additional socks the energy supply, the reopening of markets in Asia, and COVID-19. We continue to feel prepared as a result of a resilient client impact strategy supported by our diversifying and capital Life business mix. Recent investments across growing spaces and health, asset management and Asia and our sustained commitment to delivering on our purpose to help clients achieve lifetime financial security and live healthier lives will all support us next year. With that I will now turn the call over to Manjit who will walk us through the fourth quarter financial results. Thank you, Kevin. And good morning, everyone. Let’s begin on slide 8, which provides an overview of our Q4 results. Sun Life had a strong finish to the year with record underlying earnings in the fourth quarter, reflecting the strength of our businesses and the benefits of our diversified mix. Underlying net income of 990 million and underlying earnings per share of $1.69 were up 10% from the prior year. Strong results and protection health businesses were underpinned by business growth, the contribution from the DentaQuest acquisition, higher margins in the U.S. and Canada and moderating COVID related impacts. This was partially offset by lower wealth and asset management results, which were impacted by global equity market declines. Reported net income for the quarter was 951 million down 12% from the prior year. The results for this quarter include market related impacts and DentaQuest integration expenses. Our balance sheet and capital position remains strong, as reflected by an underlying return on equity of 15.7% for the quarter, a 5% increase in book value per share over the prior year, a strong capital position with a lockout ratio of 130% SLF up 1% from Q3, and 130 basis points improvement in the leverage ratio of 26.4% last quarter to 25.1%. Let’s turn to our business group performance starting on slide 10, with MFS. MFS underlying net income of U.S. 202 million was down from the prior year, driven by lower average net assets largely reflecting declines in global equity markets. Reported net income of U.S. 223 million was down 5% reflecting impacts and underlying net income, partially offset by fair value changes on share based payment awards. MFS generated a strong pretax net operating margin of 40%. AUM of U.S. 548 billion was up 8% from Q3, largely reflecting higher equity markets partially offset by net outflows. Retail net outflows of U.S. 8.3 billion in the quarter are impacted by industry wide redemptions, as our investors remain cautious in an uncertain macroeconomic environment. Institutional net outflows were U.S. 3.6 billion in the quarter. Turning to slide 11. SLC Management delivered underlying net income of 38 million and reported net income of 19 million. We are pleased with the attractive business fundamentals at SLC Management. This includes good momentum and capital raising across all asset classes, including 3 billion in the current quarter, as well as 22% growth in fee related earnings, reflecting the deployment of capital into fee Y earning AUM. Total AUM of 210 billion were 14% year-over-year. This includes 21 billion that has not yet earning fees. Once invested these assets are expected to generate an annualized fee revenue of more than 180 million. Turning to slide 12. Canada’s underlying net income of 324 million was up 22% from the prior year, driven by strong insurance sales, improved disability performances on life health and higher investment gains. This was partially offset by lower fee income and wealth management businesses. Reported net income of 360 million was up slightly from the prior year. Total protection and health sales were up in the quarter reflecting an increase in large case sales in Sun Life health. On the wealth side retail sales were impacted by the market environment. Group retirement sales increased year-over-year reflecting our differentiated products and services as well as the strength of our client relationships. Turning to slide 13, U.S. underlying net income of U.S. 177 million was up 121 million from the prior year, reported an income of us 81 million was up 13 million. The results were driven by strong performance across all businesses, including the contribution of DentaQuest. Good benefit results were driven by a 16% increase in expected profit and a significant moderation of COVID related mortality and disability impacts. Business fundamentals remain strong, including good client persistency, strong premium and free growth and solid stop loss underwriting margins. The group benefits after tax profit margin increased at 8.4%. Sales in the U.S. were up 11% year-over-year. We saw good momentum and employee benefits sales reflecting our investments in technology partnerships and new digital capabilities. Stop loss sales were lower reflect In a more competitive pricing environment. Despite the changing competitive dynamic, our focus remains the same, provide value to our clients and maintain good pricing discipline. We’re very pleased with the DentaQuest results. We are on track with our integration milestones and are confident that we will achieve our synergy targets. DentaQuest delivered strong sales for the year adding approximately 3 million new members in ‘22 20 bringing the total number of members just 36 million. Slide 14 outlines Asia’s results for the quarter. Underlying net income of 152 million was up 16% year-over-year on a constant currency basis. The results are driven by insurance business growth and moderating COVID related experience. Wealth and fee related earnings were impacted by lower equity markets in Asia. Reported net income of 98 million was down from the prior year, largely driven by the gain from the IPO of our Indian Asset Management joint venture and October of last year, and market related impacts. Asia generate double digit insurance sales growth in most markets. We continue to gain momentum reflecting the benefits of our continued focus on client experience, rollout of new products and expanded digital capabilities, as well as the easing of pandemic restrictions. In corporate, underlying net loss of 39 million reflects a higher effective tax rate compared to the prior year, while reported net income was in line with the prior year. Turning to slide 15. We outlined the progress on our medium term financial objectives. Despite the challenging operating environment 2022 our resilient set of businesses delivered a 9% underlying EPS growth over the five year period. Underlying ROE over the five year period was 14.7% and 15.1% for 2022 reflecting the shift in our mix to capital light businesses, and the payout ratio within our target range of 40% to 50%. We continue to maintain a strong balance sheet and capital position which provides a port to execute on strategic priorities and as a key strength to manage through an uncertain environment. Looking ahead to 2023 we remain optimistic about the fundamentals across each of our businesses. While we expect the operating environment to remain challenging, we are confident that our leading business positions, focus on client outcomes, discipline, capital expense management, and strong talent will help to drive continued growth. And of course, this will be our final quarter under the current reporting framework as we transition to IFRS 17 in Q1, 2023. As we’ve noted before, IFRS 17 does not impact our core business drives or the fundamental economics of our businesses. It will however, impact the timing and presentation of our financial results. Based on our parallel runs for the first three quarters we have provided some updated disclosures this quarter. First, we updated the estimated earnings impact for the 2022 restated comparative year from a decrease of mid single digits to a decrease of high single digits. This is largely driven by higher investment activity gains for the year. Our investment team has a proven track record of identifying and executing on opportunities to enhance the spread for investment followed in volatile market environments like we saw for most of 2022. The present value of the higher spread is recognized immediately into earnings under IFRS 4 but we will be recognized over time as we transition to IFRS 17. While the economics and earnings benefit from the high yield is the same over time, it results in a higher IFRS 4 versus 17 difference transition. The second update is that we expect a high single digit increase in the likelihood ratio on transition to IFRS 17. This is higher than our estimates in May of last year, reflecting updates to our cash flow projections under the new life guidelines, as well as refinements or estimates as you complete our quarterly IFRS 17 parallel reporting. We’re currently in the process of finalizing our dual reporting for the 2022 comparative year and look forward to sharing additional details in May with you with the reporting of our first quarter results. Thank you Manjit. To help ensure that all our participants have an opportunity to ask questions this morning. Please limit yourself to one or two questions and then re-queue with any additional questions. I will now ask the operator to pull the participants. Hi, good morning. Manjit you concluded your remarks by talking about expecting the operating environment to remain challenging in ‘23. I was hoping you could go into more detail. When I look at it I see some improvement in equity markets that started the year, the reopening in Asia. So, when I look at it, it seems like there’s more reason to be optimistic for the outlook. And so I’m wondering if you could just go into where are the causes for concern as you see them in 2023? Thanks for your question, Meny. I think you’re right. I think we are seeing some signs of improvement. But I don’t think we’re ready to declare victory yet in terms of the overall operating environment. We do sort of see some, some some some potential for things to move back and forth over time. But more importantly, I think, for us, we are very pleased with a diversified set of our businesses and our leadership positions within those businesses. And we feel that as we’ve shown over the last couple of years that we can manage through pretty well through a different, very different types of environments. Meny it’s Kevin Strain. The equity markets year-over-year starting off still down, although they’re up a little bit at the start of the year. And that puts pressure on fee income, which impacts MFS, impacts SLGI, impacts our GRS and pension business in Asia, but also a lot of our universal life business in Asia is tied to fee income as well. So it’s a bit of a headwind. But we are seeing the start of the year look good. I sort of addressed that in my comments as well. We will see how the year performs. But it’s really a factor on the fee income from our equity businesses. Thanks for that, Kevin. And if I could just follow up. You gave an interview about a month ago, talking about M&A opportunities in Asia and the potential opportunities created by the reopening that maybe some deal competitors potentially would be distracted. So I’m wondering if you could provide a little bit more color on those views in terms of how you see opportunities for M&A in Asia in 23? And maybe more specifically, what specific areas are you looking at in Asia for deploying capital in 23? Yes, thanks, Meny. Well post the interview we did the bank insurance deal in Hong Kong, and we’re quite excited about that. That really rounds out our capabilities in Hong Kong. It gives us bank assurance alongside of our agency distribution, we have brokerage there and we have the second largest pension business by flows. So we’re quite happy with where we ended in Hong Kong with that Hong Kong bank insurance deal. As you know, we’ve done a bank insurance deal of a fairly sizable one in Vietnam that I talked about with ACB bank in my remarks and that built on our position with BP. We redid our related our agreement with Grappa which is our CBC bank in the Philippines. So we were quite active in Asia and have been quite active. I’m pretty pleased with where we are now if you look at our capabilities, cross Asia, building to do multi channel distribution. With the addition of bank insurance in Hong Kong, we now have bank insurance in every market except for Singapore. So we’re well suited in Asia. I think that that piece of the puzzle of adding bank insurance in Hong Kong was an important step for us. You’re right to note that and Ingrid may want to talk with us a little bit more that the border is opening. And we see that as a good thing for Hong Kong and the Hong Kong economy, which would be a good thing for sales in the Hong Kong business. Now that will take a little while. It just opened in January. And those bales take a little while to come through. And there’s still working through the getting the momentum and sort of that travel back and forth across the border. I don’t know Ingrid if you wanted to add anything. Again captured as well. Kevin, just Additionally, in Indonesia of the expanding our bank insurance deal with the [Indiscernible] is very important for us. Definitely optimistic about the potential as well as the underlying momentum that we’re seeing in the insurance sales, which were almost 30% in all of our other markets except Hong Kong and China. So we are well placed but clearly with some of the headwinds Kevin described. So identify a second quarter contribution. I remember when you announced the acquisition, you talked about robust growth and kind of cited a 14% revenue CAGR from 2018 to what was probably near 2021 to 2.7 billion. If I look in the supplemental on your gross premiums on dental, it seems to be tracking in line with 2021 in terms of sales growth. Am I reading that right? Or is it a more stable growth that you witnessed with that platform in 2022? Well, thanks for the question. This is Dan Fishbein. One thing to point out is that we are reporting commercial dental, which includes the legacy Sun Life, commercial business and DentaQuest in that segment. So it’s important to look at both pieces. So first of all, commenting on the commercial, we’ve actually had really great sales growth in the past year on commercial dental that was up about 50%. It’s obviously still very early. We’ve only reported on seven months of DentaQuest results but their sales results have continued to be quite strong. They added 3 million government programs members last year, for example, we mentioned, Kevin mentioned in his opening remarks, some significant sales in the fourth quarter. And that momentum has actually continued in January. But to specifically answer your question overall, both their sales and revenue growth have been roughly in line with the past trend. The sales in the government programs, business tends to be quite lumpy. You get big sales infrequently. So a seven month period is a little bit hard to establish a trend on but so far, so good. And when I look forward, Dan then I’m looking at growth outside of the revenue synergies. How do we kind of maybe track that? Is it more of like the industry trend on like government program growth? Or is it more on DentaQuest? Maybe taking market share and expanding into certain states like you did in Florida this last year. Yes. I would suggest you look at our growth specifically. But there’s lots of good tailwinds going on there. There’s a very robust pipeline that DentaQuest is working on right now. I think it’s we view it as just about the strongest that they’ve ever had. There are states continuing to move their programs from regular fee for service to manage care. And we’re certainly participating in all of those RFPs. There are health plans, as we noted in the fourth quarter, who continue to outsource their dental business in the Medicaid and Medicare programs to us. And we also have quite a bit of momentum on the commercial side. So we’re optimistic about the growth trajectory here. The pipeline is very strong. I got a couple of questions. First here. I know, the group results have been both in Canada and the U.S. really strong. And I’m wondering if that’s the claims costs have been inflated all because of interest rates. I guess my question is, despite the impact of interest rates are still generating these strong results, or has that not been a material thing? Yes. The group results are strong. I think, as you noted, improving morbidity and mortality, of course, are the primary reasons for that and kind of overwhelm all other factors. In the U.S. our mortality moderated significantly, still elevated, but moderated significantly, throughout the year, and especially in certainly in the fourth quarter. Disability morbidity has improved and stabilize. You are right there is a little bit of an impact around interest rates on long term disability liabilities, but it’s relatively small compared to the morbidity and mortality incidents. In the case of, can you hear me in the case of Canada, and then you would know that there’s essentially three things we’re looking at here. And a few years ago, we started re-pricing the business in line with the higher volume of claims that we were seeing and then Martin disability group sign. And that’s obviously now contributing nicely to our results. The other two things that we watch very closely are the volume of claims. This past quarter, I would say those were a little bit better than we are expecting but not materially. And the other area is the duration of the claims and there we have better experience than expected. On that one Gabriel I would be a little bit careful because as we’ve said in the past, one of the drivers experience in duration is access to care. And it’s not clear in my mind that this has changed materially in Canada. We still see some challenges in the healthcare system. So we had a great quarter. We’re pleased with that, of course. But you can imagine, this is an area that we’ve always continued to watch very closely. And we’ll do that. And one of the levers we look at very carefully is the pricing. We think we’re pricing in the right place. My second question is on the real estate experience losses. I get why it’s happening. Just wondering what sectors, what geographies may have yielded that results? And two, could we be in another phase, like the one we saw on most of the 2020, where real estate experience losses were, we had them for like three or four quarters in a row. Hi, Gabriel. It’s Randy Brown, thank you for the question. So let’s take a step back for a moment on commercial real estate. We’ve seen very strong growth in the sector over the last couple of years broadly. Although you did see within that weak weakness in office and retail because of the whole shift in office because it was exacerbated by the pandemic. With that said, the total return of our portfolio in Q4 was positive. So what you’re seeing come through is the deviation relative to the long term expectation of what we would earn. Right. And if so it within that, though, very, the sectors broadly performed in line. So we weren’t seeing a major deviation between the various sub sectors. So that’d be one, one point. The second point would be as you think about real estate as we go forward, yes, we do expect some cap rate decompression given the speed of risk free rates increasing. And we’re seeing that. Now in some sectors, it’s been offset by fairly robust rental inflation, think industrial multifamily, in others weakness in rent growth, think office. With that said we had talked about a pretty major repositioning of our real estate portfolio over the last number of years anticipating a downturn and so to give you an example, our office portfolio went from 39% to 24% over the last, from basically the beginning of 2019, to the end of ‘22. The majority of that coming early in that transition. At the same time, our industrial portfolio more than doubled. So we are positioned well within the real estate portfolio for what we believe may be coming. And just, you praise a quarter of the portfolio a quarter, like you don’t do it all in one shot, right. Right. It’s a rolling appraisal. So everything gets externally appraised periodically and then we will reappraise using those benchmarks we’ll use internal appraisals on everything every quarter. Good morning, maybe this is for Dan DentaQuest. I mean, if I look at the dental operation, and I know it’s got the legacy business in there, but there was a loss of 22 million if we back out the acquisition related costs in the U.S. which I assume is all related to DentaQuest. And I can triangulate back to 33 million of earnings. And I know there’s going to be a little bit in there for again, the legacy business. Just curious is the math correct. And then I’ve got a follow up on the U.S. Yes, Doug, I think that is a good way of looking at. I think you’re thinking about that the right way. The integration expense you’re seeing there is virtually all, is all related to dental class. And I can share in the quarter that the legacy commercial Sun Life business generated about $3 million in after tax underlying earnings. So the balance would be from DentaQuest. And then just looking at the U.S. group businesses as a whole. You’ve expressed a margin target of around 7% for the quarter, I know, last 12 months was 8.4%. But for the quarter, it was 10.4%. I guess my question, Dan, what causes the margin to migrate down to 7%? Or is there a need to push this 7% target higher? And you see more comfort in the outlook for that group business over the coming years? Yes, it’s a great question. Of course, we’ve just went back over the 7% threshold on the trailing 12 month basis, because of the primarily because of the very adverse COVID mortality experienced earlier in 2022. So we’ve just gotten above that metric, again, we’re obviously pleased to be there. And we don’t anticipate right now or return to the COVID mortality that we saw in the fourth quarter of 2021, or the first quarter of 2022. But having just hit the threshold, again, I’m not sure we’re ready yet to raise the threshold at this point. And then just when you when I look at that business stop loss sales were down, it seems from the prepared remarks, you’re seeing a net pick up in competition. I mean, we’ve seen this trends happen in the past and margins being negatively impacted and stop loss. And I think that’s where you’re punching above your weight in the margin side. Are you comfortable that the competition isn’t getting irrational in that stop loss business, anything to be concerned there? Yes. I think historically, and we’ve said this before, stop loss has always been a cyclical business. Margins improve competitors decide they want to take some share, they get a little less disciplined, a little more aggressive. We’ve had a history of being a very disciplined underwriter and price of the business. And you see that in our experience. We actually anticipated this. Our sales were down a bit in the fourth quarter versus the prior year quarter. But we actually plan for that. Now a little bit of that is we had a big block of business that came in the fourth quarter of 2021. And we knew that that would not recur. So we actually our sales for the year were a little bit above our expectations which is good. But we will not break our discipline around our view of trend and pricing in order to acquire market share. There are some competitors who are probably doing that right now. So the market is getting a little bit more competitive. But we think, as you’ve noted, we can continue to outperform the market on that basis. It’s Kevin Strain we’re also finding new ways to compete for business by adding things like Pinnacle care on top of the stop loss business, which helps to take the conversation away from being fully priced to being ways of adding value. And because we’re one of the larger players, we have unique capabilities to do that sort of thing. Question with respect to Asia. If I look at the impact of new business, that was positive one in the quarter now, we’ve seen that similar positive one, the fourth quarter of 2021. But historically, this has always been negative. And the sales were up nicely international, or they’re flat year-over-year in the international hubs and up getting about 10% or 11% in the local markets. So just curious as to what’s driving this in this quarter? Is it more profitable new business? Is it a better mix? How sustainable would that be? Granted, there is going to be an accounting change as to how this stuff is going to be booked. So any color there and then I have a follow up. Thanks. Thanks very much. It’s Ingrid Johnson here. Exactly right. So this quarter, we were very pleased with the new business going so particularly in Vietnam, and international, where it’s been a focus to improve product economics and margins relating to that. So that we are very pleased about and then you are seeing also just some changes if we look versus the prior on just the absence of some of the benefits that we would have had in in prior we had reversed of mortality and some investment related gains. I think new business strains specifically there’s a combination of things. Ingrid’s approach the selective underwriting for the international high net worth has made that business more profitable. And then as we’ve added scale, that also helps in terms of business strain. So adding the bank insurance agreements and focusing on building an agency helps with the new business strain item that you were talking about. And, Tom, as you note, it, of course, goes away under IFRS 17. But we’re happy to see a positive result from the selective underwriting and the addition of scale. Okay, that’s great. And then the follow up here is just curious as to what’s driving the increase in the LICAT upon transition. If I look back our head said, the movement accounting doesn’t this accounting change is not going to drive capital, I think they had said for the industry as a whole, the movement to IFRS 17 would be capital neutral. So just curious as to if you can put your now high single digit, I think it is impact upon transition to your LICAT ratio in that context. Is there what is driving your increase? And any commentary you can share with what I said about the industry would be helpful as well. Thanks. Sure, thanks for that question, Tom. It’s Kevin Morrissey. So yes, we are expecting a favorable high single digit LICAT racial increase at January 1 of 2023, as part of the transition to IFRS 17. You’re right to point out that RC did set a target for industry neutrality recognizing that there will be pluses and minuses, some companies will be more favorable, some less. So that was an overall. What’s driving our specific increase I think there’s a lot of moving pieces, Tom. As you know, LICAT ratio is quite complex and is moving pieces cross the numerator and the denominator. But I think that we can highlight probably the one driving factor that accounts for Sun Life’s increase is the change to the scalar. So as the scalar on the base solvency buffer reduces from 1.05 to 1. And this accounts for approximately 7 point increase at transition for Sun Life. Maybe the one final thought I’ll leave with your question with regard to color on the industry. I think that one of the challenges around the final calibration we had is the changing market conditions, and the volatility of LICAT under IFRS 17 as it responds to changes in market conditions, especially interest rates. And so I think with that kind of moving bald throughout the year of 2022, it’s quite difficult to set that exact point. And I think that where we landed with interest rates higher, that was probably a bit overall favorable for the industry. Okay, thanks for that color and your billion dollar I think it’s your capital generation annually after investing in the business and paying your dividend is still a billion dollars annually. Is there any color you can share with respect on that? Yes, Tom it’s Kevin again. That’s right. We’re seeing the IFRS 17 outlook largely the same in terms of capital generation. Thank you want to continue with the same topic. It’s an important one given the change in LICAT ratio. And sort of in the context of given what you were just saying regarding increased volatility under IFRS 17. Does all of the additional capital margin become the boilable capital? Or will you have a bias to maintaining more of a LICAT margin because of that increased volatility under IFRS 17? Thanks for the question, Paul. It’s Kevin Morrissey. I will answer the first part around the volatility and then I’ll pass it to Manjit around the deployability of that. So when we’re thinking about the LICAT volatility, the comments I made on volatility is largely with regard to interest rates. And I did mention the changing interest rate environment, volatility of interest rates that we saw throughout 2022. Where we are now with interest rates we see our interest sensitivity for LICAT to be largely in line with our reported sensitivities now. However, one of the things to note that as the sensitivities can change quite a bit with changing market conditions. So for example, with interest rates being lower or higher, those sensitivities will change more rapidly than they do under IFRS 4. And a lot of that is driven by the IFRS 17 market consistent cost of guarantees in the new accounting and actuarial basis. So that is something that we’re aware of that we’re going to be monitoring and we’re ready to manage, but it is something we do expect will create some inherent increase in underlying volume. And then just on the second question Paul, it’s Manjit. Overall the higher capital will lead to higher whole cash and deployable capital. But I would just sort of note two considerations. The first is that some of the LICAT increase that we’re getting is related to businesses outside of Canada. And for those businesses are continued to be subject to their local regulatory requirements. So there can be some timing differences between when that when we can bring that cash bounce back up to Sun Life. And the second factor to consider is obviously, as we’ve talked about, and Kevin’s remarks in mind, we also look at the overall operating environment and kind of base our capital levels in that environment. And so those would be two additional considerations. Got it. Thanks for that. And then second question is with respect to SLC, another year of strong sales. There has been some industry news regarding certain alternative managers closing funds for redemptions, maybe some sales headwinds, because of higher rates and concerns regarding valuation and private asset classes. So I think it’d be helpful just given an update on what you’re currently sitting and expecting for SLC flows in 2023. Thank you. Thanks, Paul. It’s Steve Peacher . I will comment on that. Just quickly looking back at 2022, obviously a volatile market environment. But we felt really good about the capital that we were able to raise in the past year. I think total capital raised was $18 billion for the year, AUM depending on whether you look at fee earning AUM or total AUM was up double digits, that flows over 20 billion for the year. So when I look back at 2022, despite a challenging environment for institutional investors it’s a good capital raising environment for us. We certainly see some pressures in the institutional market looking forward. Because if you’re making decisions that are large pension funds insurance company, the volatility of the markets makes decision making harder. The other thing is that we have something called the denominator effect. And so as public markets have traded off more dramatically than private markets, the weighting in a portfolio to private markets increases. And so when a chief investment officers think about allocating the next dollar, and they see their alternative weightings are higher, they may be a little bit less prone to allocate there. And so that created some headwinds. In the fourth quarter. You saw that our fundraising was positive in the fourth quarter, but lower than it had been earlier in the year. I think that pressure is going to kind of continue a bit, continue in the first half of this year. Having said that, it’s against the backdrop, both institutionally and now on the retail front of the trend toward alternative asset classes. So you’ll have some fluctuation in trends as the economy moves as interest rates move, but the basic trend is toward higher allocations. And we don’t see that stopping and we think it’s a multiyear trend. Thank you. Good morning, I wanted to go back to SLC Management. And when I look at the revenue line item, that’s up material a quarter-over-quarter looks like that’s related to question carried interest. And there’s a corresponding increase in expenses. Just wondering was there anything that particularly drove a bit more lumpiness this quarter for that item, because there’s a bigger divergence between total revenue and fee related revenue and how we should think about that going forward. Thanks for the question. The way I would I really think given our disclosures now, which I think we improve last year and expanded, really, if you want to look at the core trends in the business, I think you should look at management fees. I know in the supplement, it’s the revenues are on page 87 thing in the supplement and management if you just like isolate management fee revenue for the quarter, it was 234 million up from 204 million last year, and for the full year was 862 million up from 755 or about 14% increase. And those are core management fees for managing assets under management and those revenues are up because AUM is up. If you look at in core earnings measure that we look at it and also you look at across the industry as fee related earnings. And fee related earnings for the quarter were 73 million, and that was up 22% from the fourth quarter of last year. And for the full year, fee related earnings were up 20%. So that’s really I think the way to look at the core business. In terms of performance fees, we don’t have a lot of performance fees yet coming through those actually, I think are recorded below underlying income and the reported net income over the coming years, you will start to see I think more performance fees impact results. That’s helpful. There’s like IFRS 17, I believe, Manjit mentioned that the impact was on investment activity gains running lower and the benefit of the spreads being recognized over a longer period of time. Just wondering if you could expand on that. What’s the spread benefit you recognize over the duration of that underlying asset and reduce size, the expected decrease in the run rate of investment activity? Would it be 20%, 30% 40% lower IFRS 17? So Nigel, it’s Manjit. So yes, so under IFRS 4 when we trade up in our investment portfolio, that excess spread, as you know is present valued into our earnings under IFRS 4 you get the same excess spread. So economically and from an earnings standpoint, over time, the benefits will be the same, but that spread now instead of being present value into earnings in the quarter that you undertake the activity will come in over time over the duration of the assets. So that would be really a function of the duration of the assets that we traded up into. Okay, so no sizing there. But just to circle up on guidance out earlier. I think you mentioned previously, that you expect underlying net income of IFRS 17 2023 to be higher than underlying income and Iris IFRS 4 2022. Is that still the guidance that you expect for this year? Well, I think what you have to do, Nigel, is that we just updated our impact from going from IFRS 4 to IFRS 17 to be high single digits. And then if you want to take a look at what happens in 2023, then you have to factor in the current operating environment that we’re in and take account of how that would impact all of all of our businesses. And I will say as we said in May that two thirds of our businesses are not impacted by IFRS 17. So business like MFS, SLC group businesses, you could kind of just look at what you would normally expect to come out of those businesses in this kind of environment. Thank you. We have no further questions at this time. I will turn things over to Mr. Strain for closing remarks. Well, thank you, operator, and thank you everyone for the great questions. Before we close today’s call I would like to take a moment to thank our employees for their dedication, resilience and persistence over the course of the year. The strength of our people and culture combined with our focus on execution has been instrumental in achieving great progress on our strategy in 2022. A big thank you from me and the executive team to all of our people. Thanks, operator. Thank you, Kevin. This concludes today’s call. A replay of the call will be available on the investor relations section of our website. Thank you and have a good day.

EarningCall_208

Greetings and welcome to the Piedmont Office Realty Trust Incorporated Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Thank you, operator, and good morning, everyone. We appreciate you joining us today for Piedmont's fourth quarter 2022 earnings conference call. Last night we filed an 8-K that includes our earnings release and our unaudited supplemental information for the fourth quarter that's available for review on our website at piedmontreit.com under the Investor Relations section. During this call, you'll hear from senior officers at Piedmont. Their prepared remarks followed by answers to your questions will contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements address matters, which are subject to risks and uncertainties and therefore actual results may differ from those we anticipate and discuss today. The risks and uncertainties of these forward-looking statements are discussed in our press release as well as our SEC filings. We encourage everyone to review the more detailed discussion related to risks associated with forward-looking statements in our SEC filings. Examples of forward-looking statements include those related to Piedmont's future revenues and operating income, dividends and financial guidance, future leasing and investment activity and the impact of this activity on the company's financial and operational results. You should not place any undue reliance on any of these forward-looking statements and these statements are based upon the information and estimates we've reviewed as of the date the statements are made. Also on today's call representatives of the company may refer to certain non-GAAP financial measures such as FFO, core FFO, AFFO and same-store NOI. The definitions and reconciliations of these non-GAAP measures are contained in the earnings release and in the supplemental financial information, which were filed last night. At this time, our President and Chief Executive Officer, Brent Smith will provide some opening comments regarding the fourth quarter's operating results and the results for the year 2022. Brent? Good morning, and thank you again for joining us on today's call as we review our fourth quarter and annual 2022 financial results, provide details on several recent leasing and capital transactions, as well as outline our 2023 business plan. In addition to Eddie, on the line with me this morning are George Wells, our Chief Operating Officer; Chris Kollme, our EVP of Investments; and Bobby Bowers, our Chief Financial Officer; as well as other members of the senior management team. Despite the headwinds that the office sector faced during 2022, including remote work, interest rate increases and recession fears, Piemont continued to execute on its leasing and capital recycling objectives, ultimately driving our Sunbelt concentration to 67% of our annualized lease revenue at year's end with a goal to reach 70% by the end of 2023. Highlighting a few of 2022 achievements, Piedmont completed approximately 2.2 million square feet of leasing, which was similar to our achievement in 2021. This included 763,000 square feet of new tenant leasing, the largest annual amount of retenant leasing we have completed since 2018 and the second consecutive year at pre-pandemic levels. Our tenant retention ratio was over 70% and among the highest of our peers and a testament to the service and value our in-house property management, construction and asset management teams are delivering to our customers. So despite the sector's challenges, we leased almost 13% of the portfolio during the year with an average cash rental rate roll-up of approximately 10%. Atlanta was our strongest leasing market followed by Dallas. Together, the two markets represented roughly two-thirds of the year's total leasing volume. Our Atlanta Galleria project had the greatest leasing velocity within the portfolio with approximately 25 new tenant leasing transactions totaling roughly 250,000 square feet. In a moment, George will provide more additional operational details and fourth quarter performance. In spite of the challenging debt and transactions market, Piedmont completed over $310 million of dispositions, exited our last remaining Chicago asset. And in just over one year, Piedmont went from having no presence in the Midtown Atlanta submarket, to becoming its largest office landlord on Peachtree Street, with the acquisition of 1180 this past summer. Piedmont was named Energy Star Partner of the Year for the second year in a row, and all our properties received well held certified designations in the spring. We also submitted our operating data to GRESB for the initial rating achieving an overall 4-star designation and Green Star recognition, one of the highest results from GRESB for an inaugural assessment. We also substantially increased our balance sheet liquidity, raising over $575 million in incremental proceeds since our last earnings call including, $160 million through our previously announced Cambridge portfolio sale, which Chris will touch on later, as well as $450 million of unsecured debt, raised from seven of our relationship lenders at terms similar to our line of credit. Bobby will provide more color on these financing shortly. I would highlight, as of this call, Piedmont has the full availability of our $600 million unsecured line of credit and over $185 million of cash and marketable securities on hand, which in conjunction with potential asset dispositions, will address our 2023 debt maturities. As we look ahead into the new year, we believe several strategic themes will play out. Sunbelt markets will outperform with leasing and operating fundamentals continuing to lead the country as a result of, inbound population migration, a more office minded business culture and continued pro-business policies. These market characteristics will drive Piedmont leasing volumes in Atlanta, Orlando, Nova and Dallas during 2023, where approximately 70% of our vacant space reside and were 60% of the year's expirations reside. The broader economic environment will continue to pose challenges for the commercial real estate sector. Despite this, our current leasing pipeline remains healthy, with numerous leases actively in advanced negotiations. And I'm pleased to share that over 230,000 square feet of leasing has already been executed thus far in 2023, of which over 100,000 square feet is for new tenant space. The flight to quality mindset will continue to drive our customers' leasing decisions. Businesses are consistently upgrading from Class B space, as well as transitioning away from commodity Class A space, to higher-quality buildings with a compelling amenity base, place-making common areas and hospitality service-minded experience. I would note, that we are not seeing the deteriorating fundamentals currently impacting Class B product, we are on compelling Class A office buildings in our core markets, but we will continue to closely monitor this dynamic. Small businesses will continue to drive the market, as large corporations and BigTech, rationalize their real estate footprints. The majority of our absorption over the last two years, has come from small businesses seeking less than 15,000 square feet. In fact, transition volumes from this customer segment are up 60% versus pre-pandemic levels. We strategically target this key demographic, utilizing our service first model, prebuilt office suite program and well-designed collaboration spaces and amenities. Anecdotally, the small customers we're targeting appear to be more resilient to current economic conditions. The Wall Street Journal reported in January, that small businesses establishments with less than 250 employees, have been responsible for all of the net job growth in the United States since the onset of the pandemic, and that larger companies have cut a net 800,000 jobs during that time. I would also remind investors that Piedmont has limited tech tenant exposure, that the recently announced layoffs should impact office demand primarily, in select tech-heavy markets. In addition, while we have seen an uptick in blocks of sublease space in surrounding markets, they generally did not replicate the quality level of a Piedmont building, do not come with landlord capital to improve the space, do not provide the same level of service or amenities and do not offer extension rights to the subtenant. The capital markets will continue to be challenging, with limited availability of secured and unsecured debt. As a result, office transactions will be limited to high-quality buildings with limited near-term risk and/or assumable debt. The major lending banks have pulled back substantially from the office market. And along with a select group of regional banks, will only extend debt capital to their highest priority relationships. And furthermore, we anticipated assets with near-term debt maturities will face increased pressure as the year progresses to sell or recapitalize due to a suboptimal capital structure. In this environment, we will remain patient with our capital deployment and continue to focus on ensuring ample liquidity in advance of any strategic acquisitions. Corporate ESG topics including sustainability, wellness, and ethical practices will continue to influence tenant decision. Related to that, I want to take a moment to publicly welcome Mary Hager to our Board as a new member of the Nominating and Corporate Governance Committee. For those of you who don't know Mary, she's an Executive Director and Head of Greystar's commercial real estate business and a member of its global investment committee. Previously, Mary was a co-founder and CEO of Factory Partners, which was acquired by Greystar in 2021. Mary's based in Dallas is active in the Urban Land Institute, most recently as a Board member and Chairwoman of the Investment Committee for the ULI Foundation and brings to the Board a wealth of real estate investment knowledge and contacts. She's the second Director that Piedmont has recently added to the Board in preparation for the anticipated transition of two long-standing Directors reaching their term limits over the next two years. With that I'll turn this call over to George with Chris and Bobby to follow to provide further details on the quarter's operations, capital transactions, and our outlook for 2023. George? Thanks Brent. Good morning everybody. Amid the uncertainties in the macroeconomic environment, Piedmont continues to post solid operational results as it has since the post-COVID recovery began in late 2021 and we're cautiously optimistic that this will continue in 2023. This quarter we completed 42 lease transactions for approximately 433,000 square feet of total overall volume. Of this amount, 40% of these leases totaling approximately 164,000 square feet related to new tender lease activity and expansion. This new deal activity is near our pre-COVID quarterly average of about 175,000 square feet and our leasing pipeline activity is very good. For the year, we signed 2.2 million square feet of total leases and new tenant leases represented 760,000 square feet as Brent noted earlier, the most new tenant leases executed by the company in 2018. Continuing with operational metrics, our lease economics were very favorable at 6.5% and 11.5% roll-up or increasing rents for the quarter on a cash and accrual basis respectively. And our weighted average lease term achieved on new lease activity for the quarter was approximately nine years. Our lease percentage at the end of the fourth quarter was approximately 87%, up 150 basis points from the end of 2021 and largely unchanged from the close of the previous quarter despite the sales of two Cambridge assets in the fourth quarter that were 94% leased. While the majority of our new tenant lease activity emanating from the Sunbelt portfolio, where over 70% of our vacancies reside, we experienced good leasing activity at all of our core markets during the fourth quarter. And I'd like to highlight a few key announcements and accomplishments, which occurred in some of our operating cities this quarter. Beginning with Atlanta, our largest market at almost 5 million square feet and generating 20% of the company's ALR. JLL reported another quarter of positive absorption during the fourth quarter with the market ending 2022 with 1.1 million square feet of total absorption for the year, the highest annual absorption since 2015 with direct rents in the Midtown submarket increasing 10% year-over-year. For the fourth quarter, our Atlanta portfolio experienced the most volume of new tenant activity with 10 years for 95,000 square feet which were evenly split between our Midtown presence and our suburban holdings. Atlanta has been Piedmont's most consistent performance for the past four quarters, capturing 46% of all new tenant transactions and the pipeline here continues to be quite robust. Most notable this quarter was securing a full floor headquarters requirement for a private equity firm consolidating its operations from Buckhead, Atlanta and Silicon Valley to our Atlanta Galleria properties. Looking back at the full year, 2022 was a stellar time for Galleria, as they captured 38% of leases signed in the Galleria Cumberland submarket according to JLL. Post quarter end, we also signed a well-known local operator to relocate its white table class seafood and steak restaurant to the Galleria, further expanding on our food and beverage roster. Since 2021, our Galleria Holdings have captured 50 new lease deals for approximately 400,000 square feet, including four full floor headquarter requirements, validating the vibrant well-amenitized working environment, we're creating here at the Galleria. It is also noteworthy to mention Cobb County's exhibition re-development authority, now has plans to expand the Galleria Convention Center, which is adjacent to our five Galleria office buildings and to the Brave's Truist baseball park in the battery, adding additional hotel, food and beverage and entertainment facilities, which we believe will continue the momentum we see in its Northwest Atlanta micro market. We anticipate 2023 will continue to be very productive Atlanta, just as it has the past two years. Moving down to Midtown. We've completed our extensive design phase and we have begun construction at the redevelopment of 999 Peachtree. As you may recall, we acquired this prominent lead gold asset in late 2021 for approximately $360 a square foot, well below the estate replacement cost of $700 per square foot. We anticipate spending approximately $35 a square foot to completely reenvision the first two floors of the building, adding amenities and improving the building's intersection at the street level and with the fabric of the Midtown Atlantic community. Customers have responded favorably here, with rental rates up 10% and 129,000 square feet leased since acquisition. And this quarter, we signed our newest tenant, aided Spain to a full floor deal and the regional headquarters relocation from Buckhead. Redevelopment is a key component of Piedmont's value creation strategy, and we favored this approach over grounds of development, particularly in this economic environment, because of faster times to deliver the product, typically between 12 months versus 36 months and dramatically less risk associated with the cost, financing and lease up of the project. And while we have a number of sites for grounds of development, the bar for capital deployment into development is much higher and no construction starts are planned for 2023. Instead, we expect to continue to focus on a more modest scale redevelopment projects and buildings we can drive near-term occupancy and rental rates, which we believe will deliver a better risk-adjusted return in today's market. Moving on to our other markets. Boston continues to deliver solid results as well. Starting off with a headquarters relocation for robotics designing company into our 80 Central Avenue asset. This 25,000 square foot user is upgrading to the nearby Class A facility, doubling in size from organic growth and maintaining its 100% work in the office policy. As an aside, Salesforce which fully leases our 182,000 square foot lead gold five wall building until 2029, announced a reversal of its work from everywhere, workplace policy to one with more in-office mandates. We're hearing across our portfolio more of this in-office sentiment with there's more days per week or simply enforcing an existing hybrid policy, including many of our top 20 tenants, such as US Bank, New York State, New York City, Microsoft and others. Our utilization rates are increasing incrementally as well, at approximately 50% today, up 2% in January from the previous month. Circling back into Boston, our recently redeveloped 25 mall assets, which included a full lobby renovation, new coffee lounge, state-of-the-art fitness facility, and CAFE expansion with outdoor Workspace was awarded by BOMA, the Boston Regional Outstanding Building of the Year or Tobi Award for building to the highly competitive 250,000 to 500,000 square foot segment, recognizing this building's position as one of the top buildings in suburban Boston. I would note, our second largest expected tenant move out of the year is at this building, where health care and medical enterprise will vacate approximately 77,000 square feet at the end of the first quarter result of the corporate merger. At this time, we have activity that would backfill approximately a-quarter of that space. Dallas, our second largest market with approximately 19% of ALR continued to challenge Atlanta, as our most active leasing market in 2022. We recently completed three leases of our three gallery assets, which also attained lead gold status during this quarter, increasing our overall portfolio lead designation to approximately 50%, with more buildings in process and a goal of reaching 60% lead designation by the end of the year. The Dallas Galleria complex has good leasing momentum, with tours and proposals increasing as we started the New Year. I'm also pleased to share that Dallas is the first of our markets to land a large tenant in 2023. In January, we executed a new 70,000 square foot headquarters lease for 11 years at the recently redeveloped Las Colinas Corporate Center. This new tenant is an energy company experienced substantial growth and is relocating from 52,000 square feet at near by Williams Square. This lease is projected to commence in early 2024. As we carry over into 2023, customer activity continues to be resilient across most of our other operating markets, including Orlando, Alberta Minneapolis and the RB Corridor. Staying in the RB Corridor for a moment, our local team here executed a 15,000 square foot expansion from one of our largest tenants at Arlington Gateway, while also extending the existing 44,000 square foot lease for another 10 years at this Lead gold project. New York and Downtown Minneapolis continued to improve incrementally, while I would say the toughest market for us remains a district of Colombia, where demand is likely to stay sluggish as federal workers, the primary occupancy driver continue to work remotely, also affecting downstream demand from organizations that support federal agencies. The Piedmont formula continues to drive leasing success and as Brent noted, particularly the small companies the most active customer segment across all our markets. These tenants are attracted to our projects, finding with ease of accessibility vast amenity-based unique tenant engagement programming best-in-class conference facilities in conjunction with the sustainability-minded operator, building on the color that Ben provided earlier in the fourth quarter, tour activity, did soften modestly, which we attributed to an unusually severe cold weather and heightened macroeconomic uncertainties but activity has rebounded in January. Today, we have approximately two million square feet of outstanding proposals, which is roughly equivalent to what we've seen in the past four quarters. Looking into 2023, we remain positive with a cautious eye towards the markets and leasing opportunities across our portfolio. We're forecasting new leasing volumes in line with our performance last year, and we only have 7% of the rent roll expiring, 1% of which is Cargill that we now expect will vacate at the end of the year. With this modest amount of exposure, combined with our historically high retention rates and the fact that, the average size of our expiring tenants, using cargo is around 8,000 square feet, matching well with the deepest and most active demand segment of the market, we are forecasting positive net space absorption during the year resulting in anticipated year-end lease percentage in our portfolio of between 87% and 88%, up modestly from year-end 2022. Thank you, George. At the time of last quarter's earnings call, we had agreed to terms for the sale of our two assets in Cambridge Massachusetts. And as we disclosed in December, we closed both transactions during the fourth quarter, generating a total of approximately $160 million in proceeds, and combined book gains of a little over $100 million. Recall, we earmarked these proceeds as a funding source for the 1180 Peach Street acquisition in Midtown Atlanta, which Brent mentioned earlier. We had previously signaled this exit from the Cambridge submarket. And in light of the market challenges in the fourth quarter, we were very pleased with the execution on the portfolio, achieving pricing at sub 5% cash cap rates. Looking ahead to 2023, we have a list of mature and non-core assets that we would like to monetize as we do every year. Realistically, in order for us to execute against this plan, macroeconomic conditions namely the availability of debt financing need to improve. While we don't have any specific commentary to provide today, we are cautiously optimistic in being able to dispose of two or three assets during the year. As we execute dispositions, we anticipate initially paying down debt. That said, our balance sheet is in good shape with ample dry powder in the event that a rare and highly strategic opportunity becomes actionable. On the new investment front, however, we will continue to be pragmatic and disciplined as market conditions remain extremely unclear for both buyers and sellers. In this market, we believe patience is prudent and we will have a high bar to clear as we think about new capital deployment. With that, I'll turn it over to Bobby to walk you through the financial results for the quarter, balance sheet highlights, and address guidance for 2023. Bobby? Thanks, Chris. While I'll call your attention to some of our financial highlights for the year and for the quarter, I encourage you to please review the entire earnings release and supplemental financial information, which were filed last night for more complete details. We anticipate filing our annual report on Form 10-K later this month. Reviewing our quarterly results, Piedmont was able to achieve core FFO of $0.50 per diluted share for the fourth quarter of 2022 versus $0.51 per diluted share during the fourth quarter of 2021. The fourth quarter of 2022 included approximately $0.06 per diluted share increase in interest expense on a quarter-over-quarter basis. From an annual perspective, core FFO was $2 per diluted share, a $0.03 per share increase over 2021, despite an over $14 million, or $0.12 per diluted share increase in interest expense. We're able to overcome this rise in interest expense for the year due to successful leasing efforts, rising rental rates and fruitful asset recycling that have all been previously discussed this morning. AFFO generated during the fourth quarter was approximately $47 million, which continues to be well above our current $26 million quarterly dividend level. And we do not foresee any change in our current dividend level in 2023. As disclosed in our quarterly financial supplement filed last night, core earnings before interest taxes depreciation and amortization, EBITDA increased approximately $16 million for the year and property net operating income on an accrual basis increased approximately $20 million year-over-year. Similar to the last several quarters, we continue to experience improving lease economics and rental rate roll-ups. For the year, our overall rent roll-ups and leasing transactions for 2022 were up over the previous year approximately 10% and 17% on a cash and accrual basis respectively. Same-store NOI cash basis increased almost 2% for the year and same-store NOI accrual basis increased a little over 1% for the year. Turning now to the balance sheet. As Brent alluded to, we made excellent progress during the fourth quarter returning to a more normalized debt to gross asset ratio of 37.6% at year-end. Our finance team was very busy extending the final maturity to mid-2025 on a $200 million unsecured term loan priced at adjusted SOFR plus 100 basis points. Additionally during the fourth quarter, the $160 million of proceeds from the sale of our two Cambridge assets allowed us to pay off the entire balance outstanding on our $600 million line of credit, so that we had the full capacity of the line available as of year-end. And subsequent to year-end, in January, we entered into an additional $215 million unsecured term loan priced at adjusted SOFR plus 105 basis points with a final maturity of January 2025. The proceeds from this facility combined with cash on hand and potential proceeds from select non-core dispositions and/or draws on our line of credit will be used to pay off our $350 million bonds that mature later this year. In short, we fully addressed all of our 2023 debt maturities at relatively attractive rates given today's economic environment and return to debt levels equal to where we began 2022 and we believe we will further lower our leverage levels in 2023, as a likely net seller of assets as a result of a few non-core dispositions, which Chris mentioned. Finally, I'd like to turn to our 2023 annual core FFO guidance, due to the uncertain nature of the capital markets environment, this guidance will be without any disposition or acquisition activity. We will adjust guidance throughout the year at the time any such transactions occur. However, I do want to point out that we currently believe the 2023 annual results will be within the guidance range we provide today. We have taken great pride for many years in generating consecutive years of core FFO per share growth. And frankly, it pains me to introduce guidance that will break that streak. We do expect however, property net operating income on an accrual basis, on our current portfolio of properties will continue to grow during 2023. Nonetheless, with over 400 basis points of increases in Fed fund rates during 2022 and further increases projected during 2023, along with two new floating rate term loans replacing our $350 million 10-year 3.43% bonds that are maturing this year. Our projected interest expense for 2023 is estimated to increase approximately $27 million over total 2022 interest expense, negatively impacting incrementally 2023's core FFO financial results by $0.22 per share. While certainly not unique to Piedmont or our peers, we are introducing core FFO guidance for the year 2023, which includes this higher interest expense. This higher expense is offset partially by increased income from our property operations. Our core FFO guidance for 2023 is in the range of $1.80 to $1.90 per diluted share. We anticipate overall executed leasing activity for 2023 to be in the range of 1.6 million to 2 million square feet. And although our lease percentage will fluctuate between quarters given our relatively low amount of expirations for 2023, we believe our year-end lease percentage will be between 87% and 88% before the impacts of any acquisition and disposition activities. Same-store NOI cash basis and accrual basis should both be in the low single-digit range with a 1% to 3% increase and G&A expenses are anticipated to be flat for the year at approximately $29 million. We began the year with approximately 1.14 million square feet of executed leases, up from 800,000 square feet a year ago that were yet to commence for existing vacant space or that are in abatement, which should contribute additional cash revenues of $33 million and cash NOI of approximately $20 million over the next 12 to 24 months. Looking out at forward interest rate curves, interest expenses or interest rates are currently forecasted to flatten out by the end of this year and begin to decrease next year. It is our hope and our plan to return to the long-term unsecured debt markets when the credit markets have normalized. Thank you, George, Chris and Bobby. The Piedmont team made significant progress along our strategic objectives in 2022 and the real estate portfolio continues to perform well in 2023. Management expects modest space absorption and operational growth in the coming year, paired with manageable capital expenditures. We'll be selective with capital deployment for acquisitions and anticipate being a net disposer of assets to deleverage the balance sheet and enhance our already ample liquidity resources. However, as Bobby outlined, due to the continued rise in interest rates increased interest expense will continue to weigh on earnings and FFO for the year. I'll now ask our conference call operator to provide our listeners with instructions, on how they can submit their questions. We will attempt to answer all your questions now or we will make appropriate later public disclosure if necessary, Operator? Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] One moment please, while we poll for questions. Thank you. Our first question is coming from Anthony Paolone with JPMorgan. Please go ahead. Great. Thanks. Good morning. My first question just -- you gave a lot of details on the numbers but just trying to tie something together here. You're talking about the lease rate in the portfolio this year picking up I guess about 80 basis points at the midpoint, compared to where you ended the year. But just wondering, how the commenced number might change, in terms of what's baked into your FFO forecast. So you're at 84.6% I guess, at the end of the year. Like, do you think that moves in parallel with the 80bps on the lease rate, or is there something different there? Tony, yeah this is Brent. Good morning. Appreciate you taking the time to join us. Good question. I think that's pretty fair to say that it should kind of follow in line with roughly that 80bps increase in the lease percentage as we continue to have the burn off of free rent in that... Hi Tony, this is Bob. I'm going to dump -- it really depends on the leasing and what happens, this year we had almost 400,000 square foot increase in leases yet to commence and leases in abatement that certainly impact that. So it really does depend on the leasing. So I agree with you Brent, but that's not really predictable. Okay. And then, just another question more specific to Dallas, you talked about it being really one of your top two markets, I guess. And you've got about 360,000 square feet of expirations this year so it's a little bit on the heavier side with regards to your market. So just wondering, if you think there's enough demand to kind of keep all that leased and absorb space there or if there's anything that might get kicked back? Hey, Tony, good follow-up question too. Dallas continues, as you noted, to be actually a very strong market. We do continue to see larger users, particularly from the relocation groups and energy companies continuing to, kind of, feed that, maybe more so than our other markets. But we also continue to see good depth in that 8,000 square foot type tenant that we do have generally rolling. So, I think, overall in Dallas, we feel pretty good about our ability to at least maintain and kind of backfill what might expire during the year of that roughly 360,000 square feet. Of course, we'll keep some of that as well, with historical retention ratio right now around 70% and we'll continue to update you as the year goes on. But I think we feel pretty good about those prospects in Dallas. We'll have more to share in regards to that on our next call. Yes. Good morning, everybody. George, you talked about a 2 million square foot kind of activity or outstanding pipeline and proposals. Is that pretty consistent at that 10,000 square foot average size? Are you seeing some larger tenants start to move in there? And then maybe a follow-up question to throw in before I turn it back to you guys. As you talked about large corporate users in big tech, just not engaging as well and so, I wanted to make sure we could talk about US Bank as well, just given that that's coming up next year. Sure. Good morning, Dave. Thanks for joining our call this morning. When I look back over the past several quarters, we've averaged around 2 million square feet in overall proposal, which is a great sign for the overall strength of our pipeline. And I would say, looking back several quarters, I would say, about 40 -- close to 45% of that has been new activity. The store has been pretty consistent. And as Brent alluded to, we expect more out of the Sunbelt over the next couple of quarters and digging deeper into our overall market, so I'll start with Atlanta. And I would like to clarify one of my prerecorded comments about Atlanta. I mentioned that our AR number should be more than 27% range, so with that being certainly tied back into our pipeline. But Atlanta continues to be very strong, the depth of the market ranges from, I would say, 20 to 25 prospects per quarter. I would say, Dallas, as we talked about a minute ago, still seems to be trailing pretty heavily. We've seen about 20% of our new activity come out of that particular submarket. And surely, I mean, I would say, from a small tenant perspective that seems to dominate our marketplace. But it's not surprising for us to do two to three users that are between one to two, even three floors, come along each quarter. And I think we've already mentioned one of those being in Dallas and we have a couple of more of those in our pipeline. And then, Dave, this is Brent. In regards to your question on US Bank. As we've mentioned before, we have a very deep relationship with the firm and both as a tenant, but also in the lending relationship and banking relationship as a trusted adviser. That asset in Minneapolis, particularly their headquarters assets, start there maybe, lead gold building, really the best amenity package in Minneapolis in the 31st floor, but great 18-foot windows over the city. It really -- in terms of assets, it's really bar none in terms of what it can provide US Bank, which we think bodes well for the renewal there. As I noted, big tech and large corporates are pulling back, I'd say, in terms of decision-making. I think what is positive though is, we've seen financial services firms continue to lean into the office model. And US Bank themselves is continued to bring a substantial number of their employees back, now over 50% since the beginning of the year. So when you look at JPMorgan building, a massive headquarters in New York or my old prior firm, Morgan Stanley, continue to maintain their footprint. We continue to see financial services companies utilize the office, particularly for customer-facing executive roles, which is what resides in U.S. Bank. I would remind you too that lease does expire in the end of May in 2024. So we're actively in those discussions would probably have more clarity on that sometime around the early part of the summer. In the suburbs that location is also being increased in terms of its utilization. It is geared more towards a portion of that is their IT group, but I continue to increase again that incremental use. As they've completed the merger now with the West Coast bank and that integration is in process. That's also part of the delay until the early part of the summer. I think we continue to see that integration and again that decision-making process overall positive. But I think our mindset right now to guide the market would be to say, we expect a renewal somewhere between 50% to 100% in both locations. I know that's a wide breadth, but I think the firm itself is still getting its arms around its hybrid policy. But I do think the body language and what they're doing in terms of bringing their employees back is a positive. Great. Last for me going to either Chris or Brent on dispositions. What do you have in the market today? I know it's not in the guidance, but are you able to kind of transact on assets today you are obviously able to purchase last year and sell the Cambridge portfolio? Are there other assets though that you believe that you can easily transact on based on either the asset or the tenant in place and the term of the lease is that still doable in this market today? Hi, Dave. Good morning, it's Chris. On Houston this is not going to be an incredibly satisfying answer, but there's really nothing new to report there. We remain I'd say cautiously optimistic that we can move those two assets in 2023. We remain in dialogue with one or two groups there on both assets, but we really can't comment any further. We'll obviously keep you posted if and when a transaction materializes there. In terms of other assets that we might sell I don't think we want to get into any specifics and name particular assets. I do think you should expect that it will be very consistent with our history. These will be assets where we think we've either maximized value and/or have slower growth profile than we might like. But as I said in my prepared remarks conditions really need to settle and stabilize a bit before we feel extremely confident about asset sales. But recycling assets is certainly not a new initiative for us and we'll continue to try to do so in 2023 as markets allow. And that's a little bit of a gray answer, but it's an extraordinarily difficult market. Thank you. It sounds like you're expecting maybe slightly positive same-store NOI growth for 2023. Are you able to say anything about some of the components expected rent spreads or maybe expense growth? Michael, it's Brent. Appreciate you taking the time to join us today. Indeed, we do believe we'll continue to have kind of in line with what we were able to accomplish this year in terms of same-store NOI growth again guiding to -- we did this year at 2%, we're guiding to 1% to 3%. That's really a component of continuing to be able to obviously get the incremental bumps in the existing leases, but we do have a number -- a good bit of continued rent to burn off during the year and we'll continue to fuel that as well as what we anticipate additional leasing and some activity that we have in the pipeline is not signed, but would be more near-term starts that will continue -- be able to contribute to that. Anything else you might add Bobby in terms of just those specific components? No, I think in particular markets that George covered, we're seeing and meeting our pro formas on a lot of the last acquisitions by $2 or $3. So yes, we're continuing to see run-rate growth. Yeah. I would think it's a good fair characterization as well. And then I think you'll continue to see Michael us being able to drive some absorption overall in the portfolio for the year. Okay. Great. And then you talked about this a little already and I know you don't have a lot of tenant exposure in your portfolio. But do you -- are you seeing any impact on any of your markets in terms of the recent big tech layoff announcements? I think people immediately think of some of the markets where you don't have exposure like the Bay Area and Seattle, but we've heard a lot about how these jobs are actually much more spread out across the country than in past cycles. So I don't know if you're seeing anything yet or you expect to see anything in Boston or D.C. or any of your other markets? Good morning, Michael, this is George. I'll tell you that all the announcements that you've seen over the past I would say three to six months, we've kept a close eye on those users that lease space in our building. And at this point, we're just not feeling much of an impact at all at our portfolio. If I had to dig deeper into where we could have the most exposure, and I'm taking a leap here would be in our Burlington portfolio up in Boston. And when you peel beginning a little further of what we have there you've got Salesforce and Microsoft and those large leases don't even expire until sometime at the end of the decade. So I think we're pretty good from that perspective. Our only goal really to deal with in Burlington is that our Tobi award-winning building which is 25 Mall Road and we feel really good about the fact that we have one award for the renovation that was just completed there. We have a decent pipeline in tow in that place. And so we feel pretty good about our prospects for that particular submarket. George, I'd add to Michael. Overall, we only have about 1% of our ALR and expirations in 2023 and 2024 are with that tech kind of group. So we have very limited exposure more near term to that market. Okay. And you haven't seen anything more broadly in the market that maybe creates competing vacancy in any of those markets? I assume, it's probably too early to be able to... No, we haven't seen material sublease space or other kind of competitive space to this point. I think Midtown Atlanta continues to be a market that does attract the tech tenancy. And I do -- and have heard any gold lead that they have also pulled back from that market. But again, our buildings in that market are more geared towards professional services. And we've actually kind of a candid the most recent jobs report, seeing very good depth from that tenant, particularly as they continue to move from Buckhead to Midtown just like our announcement recently here at this quarter with Cadence Bank. Hey, guys. Good morning and thanks for taking the questions. Just curious, you guys touched on focusing on dispositions and should those close this year maybe doing some debt paydowns. But just curious how share repurchases might fit into that plan given where stock currently trades today? Hey, Dylan, it's Brent. Again, thanks for joining us. Yeah, great question. I think office REIT -- no office REIT I think is currently pleased with where their stock trades today and evaluating our own kind of historical program on the buyback. We continue to utilize that same framework. First and foremost, we'd need disposition proceeds. We wouldn't want to lever up particularly in a liquidity-constrained environment like we're in at the moment. And then I think we look towards again outsized underperformance, both on an absolute and a relative basis. And I think frankly, we've continued to roughly trade in line with the sector. I do think you're also seeing just very limited overall private level transactions. As I've talked about risk has been repriced in the market, stability and cash flow less so, but certainly been impacted by rates. But that risk that does exist is just uncertain pricing. And as a result, I think you're going to continue to see a dearth of transactions and frankly, a little bit of uncertainty around what NAV truly is for ourselves and for our peers. So within that context, I think we're going to continue to be very pragmatic with our available capital and look to probably not buy back shares in the more near term, continue to focus on operating the business and maintaining liquidity as it being paramount paying down debt more near term would be a better use of that capital in our mind. That's helpful. And I think that makes sense. And then, you guys commented on sort of rental rate growth across your markets. But just curious on a net effective basis, are you guys anticipating growth in net effective rents in 2022 across your geographical footprint? In this environment, it's different by market and it's always different by submarket and building. So I think we're going to continue to see -- I can take it market-by-market but Atlanta, yes, the market where we continue to see good absorption and great activity where we have assets. I think you have the ability to grow net effective rents in that market. In Dallas, I think it will not have nearly the amount of growth in Atlanta, but probably the on the positive side. I think Orlando, suburban Minneapolis, suburban Boston, probably just hold water if you will kind of flat. I do think we continue to see deteriorating fundamentals in DC, particularly in the district, that's where you're probably likely to see negative net effective rent growth. And then, we don't have much exposure in terms of the leasing market in New York given those long-term leases but that might be another market that I would say would be flat to slightly down from a net effective rent, just given some of the weight there. Hopefully, that covers the market and give you a little bit of color. I would remind you investors as well the general mark-to-market and the whole portfolio is roughly 5% to 10%. And I think that's a good indication of what we would expect in terms of the 2023 numbers as well. Thank you. As there appear to be no further questions in queue at this time, I will hand it back to Mr. Brent Smith for closing comments. First, I wanted to take the opportunity to acknowledge the incredible effort that the Piedmont team has put forth in 2022. I'm really fortunate to work alongside some very highly knowledgeable and high-caliber individuals who are experts in their field. I want to say thank you. I also want to remind investors that we're going to be attending the Wells Fargo conference in about two weeks and the Citigroup conference in early March. If you're interested in sitting down with management, please reach out to Eddie. And again, thank you everyone for joining. We appreciate the time. Look forward to talking further on our next quarter earnings call in early May, late April. Thank you. Thank you. This concludes today's call. You may disconnect your lines at this time, and we thank you for your participation.

EarningCall_209

Welcome to Warner Music Group's First Quarter Earnings Call for the Period Ended December 31, 2022. At the request of Warner Music Group, today's call is being recorded for replay purposes and if you object, you may disconnect at any time. Now I would like to turn today's call over to your host, Mr. Kareem Chin, Head of Investor Relations. You may begin. Good morning, everyone. Welcome to Warner Music Group's fiscal first quarter earnings conference call. Please note that our earnings press release, earnings snapshot and the Form 10-Q we filed this morning will be available on our website. On today's call, we have our CEO, Robert Kyncl; and our CFO, Eric Levin, who will take you through our results and then we will answer your questions. Before our prepared remarks, I'd like to refer you to the second slide of the earning snapshot to remind you that this communication includes forward-looking statements that reflect the current views of Warner Music Group about future events and financial performance. We plan to present certain non-GAAP results during this conference call and in our earning snapshot slides and have provided schedules reconciling these results to our GAAP results in our earnings press release. All of these materials are posted on our website. Also, please note that all revenue figures and comparisons discussed today will be presented in constant-currency unless otherwise noted. All forward-looking statements are made as of today and we disclaim any duty to update such statements. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. Investors should not rely on forward-looking statements, because they are subject to a variety of risks, uncertainties and other factors that can cause actual results that differ materially from our expectations. Information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in our filings with the SEC. I'm pleased to be here speaking with all of you for my first earnings call at Warner Music Group. I've been on the job for five weeks and I'm grateful to our Board of Directors, and our employees, artists and songwriters for giving me such a warm welcome. I would especially like to thank my predecessor, Steve Cooper, for everything he has done to position the company for long-term success, and for all his insights as I've been getting up to speed. Thanks also to you, our valued shareholders and everyone who follows the company for your continued support. So let's get into Q1 results. I am committed to maintaining straightforward and consistent communication with the investor community. So in that spirit, I want to immediately and clearly acknowledge that this was a tough quarter. Like most companies, WMG has been dealing with macroeconomic headwinds and the impact of currency exchange rates. It's important to note that last year's Q1 included an extra week of reporting, as a result, this quarter's comparisons need to be adjusted to provide an accurate picture and I'll be discussing our results in that context. Eric will give you more detail, but here are the headlines. Total revenue in Q1 grew 2% and adjusted OIBDA increased 13%, with 210 basis points of margin improvement. Recorded Music revenue was flat as the strength of our global performance was offset by a softer quarter in the U.S. We had a tough comparison with the prior year quarter, which included releases from some of our superstar artists. We're expecting a stronger release schedule in the back-half of the fiscal year, which will feature new music from Ed Sheeran, Cardi B, David Guetta, Aya Nakamura and BeBe Rexha. Music Publishing had another strong quarter with revenue growth of 14%. Our operating cash-flow growth was healthy, despite some of our revenue lines coming under pressure. This further underscores our disciplined fiscal management, as we navigate this challenging business environment. I'd like to spend some time on this call, proactively addressing two questions that have often been asked. Specifically, why I chose to go into the Music business and why I joined the Warner Music Group after 12 years at YouTube and seven years at Netflix. YouTube drives the intersection of creators and technology, which means that I had many options to choose from in planning my next chapter. I chose Music first and foremost, because everyone loves music including me. It's embraced by 100% of global population. In an increasingly digital world, music makes people feel and it brings them joy, hope and comfort, plus in an increasingly divided world, music brings people together. That engagement is very powerful and valuable and we expect the evolution of monetization models to reflect that. On top of that, music's global appeal is matched by its ubiquity. This industry has achieved something rare. It's build mutually beneficial, long-term partnerships with many of the world's biggest companies, Amazon, Apple, Google, Meta, Spotify and Tencent, among them. As successful as music has become, there is still meaningful upside ahead for three reasons. One, as technology opens up emerging economies, the industry's addressable market will continue to expand even further. Two, innovation is constantly creating new use cases for music, giving us the opportunity to diversify our revenue sources. Three, music is still undervalued, especially when compared to other forms of entertainment like video. I'd like to expand a bit on that last point. Since 2011, the subscription price of Netflix's standard service has roughly doubled. Data shows that almost 80% of U.S. households subscribed to at least three streaming video services. This means that the average household is spending more than four times per month on a combination of digital video services that isn't even a comprehensive offering. In contrast, the price of the music subscription has stayed the same since streaming was introduced over a decade ago. Most consumers subscribe to a single-service that carries virtually all the music ever released. Against this backdrop, it is encouraging that we're seeing first steps in the right direction by Apple, Deezer and Amazon. The other question I often get asked is why WMG? First and foremost, it's the artists and songwriters and powerful catalogs that are the lifeblood of this company and it's such a pleasure to bring this creative work depends around the world. The new generations of stars like Lizzo, Dua Lipa and Aya Nakamura; global superstars such as Ed Sheeran, Bruno Mars, Coldplay and Neil Young; songwriters and composers like Lin-Manuel Miranda, Gamble & Huff and John Williams; and legends such as John Coltrane, Led Zeppelin, Aretha Franklin and Prince. Second, it's the people at WMG. This company has a consistent decades-long history of finding and developing unique voices that change culture globally and then increasingly complex uncluttered world that originality is an essential ingredient of our success. Third is about size. WMG is big enough to drive meaningful change in the industry, but small enough to have plenty of room for growth. As just one example, the company has been taking thoughtful approach to global expansion. WMG has made world time moves that lead front the competition and dynamic fast-growing markets such as China and the Middle-East. This approach has also delivered record-breaking global first, with audits like Anita from Brazil, Paulo Londra from Argentina, King from India and CK from Nigeria. I wanted to briefly address what we're doing to architect the next phase of growth. I'm only five weeks in, but I've been very intentional about how we've gone about this. I made two significant appointments, both of which tell you something about our priorities going-forward. I hired Tim Matusch my former colleague at YouTube, as our new EVP of Strategy and Operations, which is a new role at WMG. Tim will be critical to facilitating our strategic vision and ensuring operational execution. I also hired Ariel Bardin, as our President of Technology. Ariel's career includes 16 years at Google, where he built, launched and let some of the company's most successful products, including YouTube's creator tools, memberships and content ID. He will drive the development of the systems, infrastructure and products needed to support our growth. As I've said, I'm committed to clear and straightforward communication on our progress. I also want you to know, I'm a big believer that actions speak louder than words and I'm laser-focused on execution. Right now, I'm working with leaders across the company to develop our plans for the future. We're already exploring some exciting ideas and initiatives and we will provide you with updates as soon as appropriate. That said, many of the fundamentals will remain the same. The foundations of this company are very strong and the music industry is rich with opportunities. We will continue to invest in new artists and songwriters, our catalog and our global expansion. At the same time, we plan to thoughtfully reallocate some resources to accelerate how we use technology and data to empower artists and songwriters, as well as drive greater efficiency in our business. As subscription revenue continues to grow, as supported recovers and we explore the possibilities of new technologies and business models, it's essential we structure our deals smartly and strategically. I am approaching this next phase of growth with the unique benefits of having been on both sides of the table. I am proud that over the last five years at YouTube, we developed a very collaborative mutually beneficial relationship with the music industry, after years of rocky ones. I plan on bringing in the same approach to the WMG and the industry, so that our interests are aligned with our partners and that our artists and songwriters gain maximum participation and monetization. As Robert mentioned, our year-over-year comparisons should take into account the impact of the extra week in fiscal Q1, 2022. Adjusting for the extra week, we delivered growth across key metrics, including revenue, adjusted OIBDA and adjusted OIBDA margin. Additionally, we saw strong operating cash-flow growth and strong cash conversion as a percentage of adjusted OIBDA, despite a challenging macro-environment. Total revenue declined 2.7%, but increased 2% when adjusted for the impact of the extra week. Adjusted OIBDA was flat and increased 12.8% when adjusted for the extra week. Adjusted OIBDA margin was 22.5% compared to 21.9% in the prior year quarter. Adjusting for the extra week, margin increased 210 basis-points. These increases were primarily due to disciplined operating performance and the impact of currency exchange rates. Recorded Music revenue declined 5.6%, that was roughly flat when adjusting for the impact of the extra week. Streaming revenue decreased by 2.6%, after adjusting for the extra week Streaming revenue grew by 5%, as subscription streaming revenue grew by high-single-digits and was partially offset by ad-supported revenue declining in the mid-teens. Physical revenue declined 27%, adjusting for the extra week, Physical declined 22%. Our Streaming and Physical results reflect a lighter release schedule we had this quarter compared with the prior year period, which included releases from Ed Sheeran and Coldplay. Artist services and expanded rights revenue decreased by 4%, due to macro-economic pressures affecting our E&P business and lower advertising revenue. Licensing increased 17% due to an increase in broadcast fees, synchronization and other third-party licensing. Recorded music adjusted OIBDA decreased by 6% with margin of 24.1%, which was roughly flat compared to the prior year quarter. Excluding the impact of the extra week, adjusted OIBDA grew 7% and the margin improvement was approximately 150 basis-points. This was driven by disciplined operating performance and the favorable impact of currency exchange rates. Music Publishing continues to deliver strong results, posting 14% growth, driven by strength across digital, performance and mechanical. Digital revenue grew 16%, reflecting growth in streaming, which increased 17% driven by continued growth in streaming services and timing of new digital deals. Performance revenue increased by 29%, due to continued growth from bars, restaurants, concerts and live events. Mechanical revenue increased by 17%, due to growth in France and Sync revenue decreased by 5%, due to lower commercial licensing activity in the U.S. and the timing of legal settlements. Music Publishing adjusted OIBDA increased 36% to $72 million with margin increasing 460 basis points, driven by strong operating performance and the favorable impact of currency exchange rates. Q1 CapEx decreased to $21 million as compared to $34 million in the prior year quarter, mainly due to lower facilities investments. We anticipate some acceleration in the coming quarters, driven by IT infrastructure facilities and financial transformation investments. Our financial transformation program remains on-track to meaningfully rollout in fiscal 2024 and expand globally in the following years. The program is expected to deliver annualized run rate savings of $35 million to $40 million once fully implemented. Operating and free-cash flow growth and conversion were robust in Q1. Operating cash-flow increased 62% to $209 million from $129 million in the prior year quarter. Free-cash flow increased 98% to a $188 million from $95 million in the prior year quarter. Operating cash-flow conversion was 62% in Q1, the strong performance was driven by the timing of working capital items. While working capital will fluctuate from quarter-to-quarter, our goal remains to deliver a conversion rate of 50% to 60% over a multi-year period. As of December 31, we had a cash balance of $720 million, total debt of $3.9 billion and net-debt of $3.2 billion. Our weighted-average cost of debt is 3.7% and our nearest maturity date is in 2028. As we look ahead to the rest of the year, our goal is to release amazing new music from our talented roster of artists and songwriters. While some of the macro and release schedule driven pressures we saw in Q1 will impact Q2, our slate in the back-half of fiscal 2023 is strong. Featuring releases from some of our biggest stars, as well as our next-generation of talent from across the globe. There's no question that our industry is feeling the impacts of the macro-economic environment. From currency fluctuations and a dislocated ad market to the short-term choppiness inherent in our business, there are a number of variables that can obscure our underlying health. However, our resilience through challenging times has been proven and we remain confident in our future growth. Against that backdrop, we are resolved to capitalize on the powerful tailwinds that will drive our company forward. Good morning, and thanks for taking my question. Robert, I know you've only been in the seat for about a month now. But can you touch on where you potentially see opportunity for improvement within the organization and where you see potential for faster growth? Thank you for the question, Benjamin. So yes, as you said yourself, I've been on the job for five weeks and have been digging in very quickly. Strategy at this point is, in development as I mentioned. I do have the benefit of understanding the industry from both sides, but to be honest, I'm still calibrating the site due to my short tenure on this one. So I'd like to have a little bit more time on that and in order to be thoughtful. But here's what I know, which is will very thoughtfully relocate resources to accelerate our technology investments and then to empower not only artists and songwriters, but also to drive efficiencies in the company. So that is something that I can tell you now and I think my actions speak louder than words. I've already made two appointments in that direction in the first month with the hiring of Tim and Ariel and I think we'll -- my goal is to accomplish all of that with continued focus on financial discipline and cost containment. And so, just a follow-up, if I may. Does that mean that you're planning to potentially cut costs, we've seen cost getting cut impacting music industry more broadly to our recent action from Spotify, for example, so any view on cost-containment more specific and if so, which areas would it be cutting from? So one, the company has actually then much more measured and it's headcount growth, for instance, over the last few years than others in the industry, who are now undergoing significant layoffs. Two, we are all aware that cost transformation initiatives already underway for the last two to three years before any of this macroeconomic issues have emerged. So there's been a lot of momentum on this, that is probably putting us in a slightly different position than others. And but again, I'd like to reiterate that I'll be focusing on driving, reallocating resources, our internal resources in order to invest in technology and drive not only more tools for each monetization for creators, but also greater efficiencies for us. Hi, thank you. Robert, I just wanted to ask Robert, one for Eric. Robert, are you concerned about the dilution of music from AI-generated content? Maybe given your unique perspective, given some of your prior roles, any impact. I love to hear your thoughts. And then for Eric, you touched on margin expansion was driven just by a strong operating results. Well ahead of expectations, wanted to see if maybe you could provide us a little bit of detail there, maybe unpack some of the underlying drivers in each segment that drove the robust margin expansion? Thank you. Thank you, Sebastiano. So one, I'd like to say that AI is probably one of the most transformative things that humanity as ever seen, it has so many different implications. So because of that, yes, something very close attention to it than we across the company are. Two, there are many different ways to sort for the music industry, as well as for other industries, who own copyrighted material. And it really falls into four buckets, one, which is the use of existing copyrights to train generate of AI. The second one is a sampling of existing copyrights, as the basis for new and remixed AI content, AI generating Content. The use of AI to help and support creativity. So an assisted way to do that. And then most importantly, find ways to protect the graft of artists and songwriters from being diluted or replaced by generating AI-generated content, which is what you mentioned. But it's not just that question, it's all of these together that we as an industry and I don't mean just the music industry. But overall, sort of copyright owners need to work together with the AI platforms on. And I want to make sure that everybody understands that, you don't have to be forward-looking in order to address this, which of course we are. But you can also look into today's world, one can benefit our position in the future, where there is a lot of AI-generating content. And what I mean by that is, tracking of content, identifying and tracking of content on consumption platforms that can appropriately identify copyright and remunerate copyright holders, underpins all of this. And different platforms have different capabilities in this regard. Obviously, YouTube is most advanced with Content ID, something that all the others over seen. But there are others who lacked in this department and need to work on that because in the AI future, this would be a serious deficiency. So you can -- you will see us focusing on this quite a lot. Eric? Thank you, Sebastiano. So margin expansion. So, obviously this quarter, when you look at adjusted for the extra week, 210 basis-points increase in margin is substantive and we're proud of that. We focus on disciplined management, disciplined cost oversight and management. We can look at this quarter and see, for example, Warner Chappell had a 36% OIBDA increase. Pretty extraordinary kind of growth from that line of business. We are not targeting 200 basis points of increase on a consistent basis, we are targeting margin expansion. Generally on an annual basis, not every year will be exactly the same, but 0.5 point to 1 percentage point increase in margin. It's about what we look towards, again not every year is the same. So this is an exceptional quarter from margin enhancement, but margin enhancement as part of our strategy, for sure. Good morning, Robert. Nice meeting over the phone and welcome. I wanted to ask you a bit more about your comments around music being undervalued, obviously that have been a long going debate in the industry between the labels and distributors and given your seat on the other side of the negotiating table, I'd love to hear your thoughts on how do you affect that change in the industry from the CEO position at Warner Music Groups? Obviously, you don't get to dictate per se the pricing of the DSPs and sort of what you can extract from players like TikTok, but what do you think you can do given your experience at YouTube to accelerate the value capture at music. And then I just wanted to ask Eric, if I could have follow-up. And you said high single digit subscription streaming revenue organically I believe. Can that accelerate this year, is that a new normal in your mind that's obviously quite a bit lower than what we saw from Spotify, for example on an organic basis in premium revenue and I think the market is a bit concerned that the major labels may be losing share. So I'd love to get your thoughts on that. Thank you both. Thank you. So one, I made my comments, so if I think everyone has been sort of stuck in the conversation, sort of one-on-one relationship between content providers and the DSPs. I look at it more from a more macro-level that the space is generally undervalued. And if you look at all the other indicators, how people pay for subscriptions and the price increases in various subscription, not just entertainment. It has been much more significant than it has been in music. And I think that is something that we have to all being be very mindful of. The -- I can't really get into the tactics of how we would achieve that, but what I can tell you is that, at YouTube we've had the history of executing and delivering on our plans. And that is precisely what I plan to bring here. And we've done so at least in the last five to seven years in an extremely collaborative manner. So that is also something that I plan to bring here. So I know, I'm not giving you much of the specifics other than -- other history of getting things done. And other history of being collaborative and I won the industry to go for everyone and I believe this is the right path. Thank you. Ben, good talking to you. So I would talk to our release schedule a little bit. So as we said, our fiscal Q1 release schedule in the U.S. was a little bit of a softer schedule that could have roll in and have some impact on Q2 as well this year. We have a second half fiscal '23 as second-half oriented release schedule or the strength of our release schedule tends to be more oriented this year towards the second-half and we think that will have a positive impact on streaming. If we just look back one quarter ago, our subscription streaming growth was in the teens, in the low-teens area. So release schedule does have a couple point impact. So we do think this has a fair amount to do with release schedule timing. Hi, thanks for taking the question. Robert, it's great to have you on this call, I love sort of your perspective on how important you think music is, as TikTok's core product. And then sort of a related question. When you are at YouTube, I remember had the label, including Warner, pushed very aggressively for you to launch a subscription product in addition to sort of the marketing aspect of what YouTube did for music. I'm curious, if you think the same thing in terms of the push for subscription product will happen with TikTok? Thank you, Richard. It's great to hear from you. So one, having lived through that. We made the decision to launch subscription at YouTube, because we were looking at the industry holistically and we had a fast-growing advertising business with free content to users, while at the same time subscription was somewhat nascent for the industry. And the industry really wanted us to invest into converting that large free user base into a paying user base. Obviously, you don't do it with all 2 billion users, you do at some fraction of it and great audience segmentation strategy and that's exactly what we did. So we decided that music is important to us forever, and therefore we should invest into it holistically. And obviously, that's also followed a further expansion into shortage later on. So the platform has done an incredible job, delivering multiple formats, super short format, with [indiscernible] music videos, user uploaded content, track and upload, copyrighted track, properly remunerated and subscription as well as life. So when you look at that from the point of view of content owner and content provider, it's a phenomenal partnership and phenomenal platform, that's exactly what we decided to do. I think for TikTok, to go to the beginning of your question. Well, let me also say, we've looked at this question very closely and we decided that it was important to us and that's why we did it. TikTok needs to do that, it's the right decision for them to evaluate. And you can see from YouTube's execution, what the results of the findings was for us, but again speak to what TikTok obviously finds. Sorry, I'm losing my voice. But my answer is, holistic relationship is what we're looking for. Hi, good morning. Robert, welcome on-board and Eric, hope you're well. Maybe two if I could and related. First one, Eric, any update on emerging streaming and kind of how that trended in the quarter? And then relatedly, as you think about fiscal '23, is there any way to think about or handicap, whether we could get movements on the emerging streaming side, i.e., a new deal that would actually material to kind of pushing that business up higher. And/or continued price increase momentum this year that could be material to the subscription streaming side of the business? Any way to think about that impact or potential impact in '23 would be very helpful. Thanks guys. Sure, good to hear from you and appreciate the questions. This is Eric, I will -- let me tackle these more financially oriented. So in this quarter, there were no, but say significant renewals to note, sequentially emerging streaming was roughly flat, it's up about 20%, 20 some odd percent year-on year. So up substantially year on year. But generally, we have fixed fee deals, so it moves up as we renew deals with the current deal structures in place. Any movement on renewals, so the second question. So we don't specifically talk about individual deals and deal timing. What we have said is that, we had a series of deals we did in the 2021 timeframe and most of our deals in emerging streaming tend to be two to three years in length. Meaning that within fiscal 2023, there certainly will be discussions about new deals, when exactly those close and what form, whether there continues to be fixed fee or portions of them are variable as to be seeing. So we will keep you guys apprised as deals are renewed and the impact the category, but that is something where there'll be discussions ongoing throughout the year with some of our partners. On subscription price increases. So there have been some meaningful players and partners that have announced price increases and increased prices already. Apple, Amazon, Deezer, where we use to see that. Again we don't talk about individual deals, but generally we say with our largest subscription partners are deals tend to be variable and those will have -- those will obviously price increases will have a positive impact on growth. So in future quarters, those will be rolling through the subscription revenue numbers and we expect that to be a positive to the subscription growth kind of story this year. Thank you, Matthew. I appreciate it. Thank you. Good morning, guys. I have two questions, I think for Robert. My first is your comments about technology and innovation, new use cases and these appointments that you've made. It seems that, that element of the growth has largely been dependent on innovation from outside of the company and your participation there. Do you see areas to incrementally invest on the technology side and maybe bring any of those growth drivers in-house? I'd be curious what you think on that. My second question is about streaming share. Spotify reported their annual results recently and indicated that the share of streams attributed to major labels head again declined by another couple of 100 basis-points. And I'm curious, how you view that information? Whether you see that is sort of pervasive across your DSP partner relationships? What do you think it means and how do you address that going-forward? Thank you. Sure, thank you. So there is no question that technology will underpin everything we do. Whether it's growth or whether it's efficiencies. And it's important that we invest into it and that's what we're doing. It's little too early for me to describe exactly what we'll do in that regard, but I think it gives you the option, investing into, it gives you the optionality to do that when we had the investment capital and can deployed against it. I think the only dilution question, I think it's something that you've been seeing all along, it's obviously something I keep an eye on that sort of considers a fair game. These are platforms where content providers are uploading content and we have to do a great job and having a robust catalog; b, more great artists that are gaining meaningful share and we have to do a great job with them, so the owners is on us. I would tack on to that Michael that, we obviously released music that we A&R and market ourselves. But we also have a significant business that is licensing and distributing Indie music. And we're constantly expanding our business globally to additional territories. Sometimes that involves acquiring or licensing music or partnering with local independent players. So the independent, as well as the major part of the business are both part of the business we participate in robust way. And it's part of our strategy to make sure, we're playing into the significant growth areas of the global music partner. Thank you for that, Eric. If I could just follow up, because I think that's an important point. I don't know, if you can help quantify or help us with that. But do you think that, that data is sort of from Spotify and I don't mean to just pick them, but that as an example is sort of underestimating your actual participation because of your share of the Indie side as well. Some want to kind of respond to an individual platform, because we literally have hundreds of digital platforms that were licensed to it's portfolio, some of whom are global, some of whom are local, some of who are subscription, some of whom are ad-supportive, some are socially oriented. It is our job to -- one, the first thing is that the consumption of music across platforms globally, digital consumption continues to grow. That means that there is additional opportunities for us to license and monetize music. That's our job, not just to look at one platform, but to look at different platforms and develop and different territories and develop a strategy to drive growth. And it's our job to look at the different ways music is created and released and figure out the right strategy to participate in those. So for us, it's kind of a multi-layered, multi-tiered strategy and we believe that positions us well for continued strong growth. Good morning and thanks for taking my question. I wanted to follow-up on the recorded music subscription revenue discussion from earlier, just because it has been a major area of debate. Eric, I know you talked about the impact of the release slate and content cyclicality and how that could cause a couple of 100 basis-points of volatility here and there. But the magnitude of the deceleration from Q4 to Q1 was perhaps at the upper-end of that, maybe even greater thinking through some benefits from the Apple Music price increase. So there's just a broader concern, there's something else going on beyond this market-share shifts. And so I wanted to confirm your views and maybe get a read on whether the Q1 growth rate of high single digits, it's may be an appropriate benchmark for Q2 ahead of your stronger back-half release schedule? Thank you. So thank you. So I would say, two things that affect streaming growth overall. One of which is release slate and the second one is there was we did see an additional slowdown in ad-supported streaming and we should spend a moment on that. So given the kind of dislocations are challenges in the macro-economy, we are seeing ad-supported streaming continue to slow-down and decelerate. Actually declined versus prior year and the decline is getting more pronounced. We have not seen it as a floor or start to rebound. So we're still seeing continued worsening in the ad-supported market. On the subscription side, we have looked at this and we did have a softer largely U.S. base release schedule this quarter and we do think that is what is driving the slowdown in this quarter, could roll into our fiscal Q2. But given our release schedule as second-half oriented this year, we do feel-good about our performance and -- of releases and strength in the second-half of the year. Hi, great. Good morning and thanks for taking the question. Maybe just a follow-up on that last ad supported question, Eric. Could you remind us what portion of your total streaming revenues are driven by ad supported, excluding the emerging deals and to what extend there might be any timing differences in those revenues versus what we see out of the likes of Spotify or YouTube? There shouldn't be a meaningful timing difference. I think that -- so it is in the 10s kind of streaming revenue, call it, low-teens or maybe even kind of 12, 13 -- kind of -- low-teens kind of area. And we've seen a deceleration there and there shouldn't really be a meaningful timing difference, but others are seeing in the market. Got it, thanks for that. And maybe just one on Sync. Could you maybe talk a little bit more about the types of conversations your team is having with your Sync partners, maybe how much visibility they have into that piece of content creation or ad spend this year and maybe how that's trending compared to what we've seen in years past? Thank you. Well, it is -- if what you're getting to Stephen is, is the slowdown in the ad markets affecting Sync growth trends. The answer is to a degree, yes, we have seen that there are definitely an impact in the commercial/advertising markets. That growth has slowed in that category, although our teams are still seeing a lot of opportunities and potential for growth in film, TV and other categories as well as global Sync, non- U.S. based Sync. So last year we saw Sync in both recorded and publishing growing in the kind of 20% range year-on-year. Those numbers were pretty extraordinary, partly based on our new technologies we've rolled-out, enhancing our teams and our productivity in those markets. But we do see certainly in this quarter a somewhat softer market for Sync. We are managing that revenue line in both recorded and publishing for continued growth. But it is more challenging market, and our team certainly is targeting the areas that are more active and vital for critical Syncs and the commercial ad market is one they are seeing a degree of softness. Thank you. And I am showing no further questions from our phone lines. I would now like to turn the conference back over to Robert Kyncl for any closing remarks. All right. So thank you everyone for dialing in, asking questions and continuing to be interested in our business. I look forward to speaking with you frequently. And as I get up to speed, obviously continue to share more and more information in a very straight forward and transparent manner. So thank you very much. Have a great day. Thank you. This concludes today's conference call. Thank you for your participation, you may now disconnect. Everyone, have a wonderful day.

EarningCall_210

Good morning. My name is [Latif] and I will be your conference operator. As a reminder, this call is being recorded. At this time, I'd like to welcome you to CoreCivic's Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Cameron Hopewell, CoreCivic's Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference. Thank you, Operator. Good morning, ladies and gentlemen and thank you for joining us. Participating on today's call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. On today's call, we will discuss our financial results for the fourth quarter of 2022, developments with our government partners, and provide you with other general business updates. During today's call, our remarks, including our answers to your questions will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our fourth quarter 2022 earnings release issued after market yesterday and in our Securities and Exchange Commission filings, including Forms 10-K, 10-Q and 8-K reports. You are also cautioned that any forward-looking statements reflect management's current views only and that the Company undertakes no obligation to revise or update such statements in the future. On this call, we will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data on the Investors page of our website, corecivic.com. Thank you, Cameron. Good morning everyone and thank you for joining us today for our fourth 2022 earnings call. On today's call, I will provide you with details on our fourth quarter financial performance and our newly issued 2023 full year financial guidance. I will also discuss with you our latest operational developments, update you on our capital allocation strategy, and it's got the latest developments with our government partners, including the completion of the transition of contracts at our La Palma facility from a federal mission to a new contract with the State of Arizona. Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will review our fourth quarter 2022 financial results and our newly issued full year 2023 guidance in greater detail. He will also provide a more detailed update on our ongoing capital structure initiatives. Before I get started, I would like to take a moment and highlight a significant milestone for the Company. On January 28h, we celebrated CoreCivic's 40th anniversary. It brings me deep pride to know that I got to celebrate this milestone alongside a team of some of the most dedicated people in the field of corrections and reentry services. Over the years we have expanded both in the number of government contracts and our capabilities through our partnerships with federal, state and local governments. As a result, our workforce has significantly grown and the scope of services we provide as meaningfully expanded. Most excitingly, our reentry services has evolved to reflect a more robust rehabilitative approach to programming to further support the individuals in our care as they prepare to return home to their communities. While 40 years of continuous 24/7 operations is the achievement we're celebrating is important to call attention to the original reason the Company was founded. Back in 1983, the core theme that prisons in more than 40 states were in crisis due to overcrowded conditions, challenging infrastructure, and the correctional services provided therein. The conditions in many cases were deemed by the courts to be unconstitutional. To the Company's founders, T. Don Hutto and Tom Beasley saw the need for the private sector to bring solutions to the pressing issues facing these correctional systems. From day one, the Company's purpose has been rooted in service to our nation's criminal justice system. Mr. Hutto was also to go on to help establish a standard of correctional care still upheld by the American Correctional Association and its members today. The American Correctional Association is the leading organization that champions the cause of corrections and correctional effectiveness, and has been in existence since 1870. These standards were rooted in course ethics operational approach since day one. During 2022, 15 of the facilities we manage were newly accredited or reaccredited by the ACA with an average score of 99.5%, making our portfolio average 99.5%. Our partnerships with local state and federal governments have helped to dramatically improve conditions for all incarcerated individuals, which is clearly something that we should also celebrate. The correction profession is not an easy field of work. It takes commitment, focus and a dedication to helping people even in what can be very difficult circumstances. Through our four decades of dedicated service, CoreCivic has continued to be relied upon again and again as a solution to the needs of our government partners and the individuals in our care. We have earned a reputation as a trusted partner because the entire CoreCivic team shows up every day to help improve the lives of incarcerated individuals and keep our community safe. I am deeply proud the dedication of our team over the last 40 years, and I am truly humbled for the opportunity to work alongside them. I'll now provide an overview of our fourth quarter financial results and our 2023 financial guidance. In the fourth quarter, we generated revenue of $471.4 million which was a decline of only 0.1% compared to the prior year quarter, despite the non-renewal of a contract with the United States Merchant Service at a level of detention center in 2021, and the non-renewal of the contract with Marion County, Indiana at the Marion County Jail effective January 31, 2022. Collectively, these two facilities accounted for a $13.1 million or 2.7% reduction in revenue in the fourth quarter of this year versus the prior year quarter. In the fourth quarter of this past year, we generated normalized funds from operation or FFO of $49.1 million or $0.42 per share compared to $57.8 million or $0.48 dollars per share in the fourth quarter of 2021. Now, the decline was driven by our non-renewal of the two contracts that I just mentioned, the transition of populations at our La Palma Correctional Center pursuant to a new contract with the CSO of Arizona, the expiration of our contract with the Federal Bureau of Prisons or BOP at our previously owned McRae Correctional Center in November of 2022 and a challenging labor market. Dave will provide more detail regarding the financial impact of these items. But I would add that, while we have spent considerable amounts of incentives to recruit and retain valuable frontline staff, these investments are positioning us to take advantage of increased demand from our government partners that we believe will occur once Oxy restrictions impose by our government partners during COVID pandemic are fully relaxed. We are also poised to enter into new contracts and accept additional residential populations from our government partners that are unable to manage their existing population levels, because of staffing challenges in their own facilities. We believe these needs could manifest into new contracts in the near-term. While our year-over-year financial results declined, we did experience a sequential improvement in financial results. There were three primary drivers of our improved results in the fourth quarter. Before the end of the year, we completed the transition of contracts at our La Palma Correctional Center. As a reminder, in April of this past year, we commenced transitioning populations at La Palma facility in Arizona from ICE populations to Arizona State populations, pursuant to a new contract we are awarded by the Arizona Department of Corrections, Rehabilitation and Reentry late in 2021. While we didn't achieve normalized utilization until the five days of the past year, our average utilization of facility in the fourth quarter was 66% compared to only 50% during the third quarter of 2022, while La Palma facility currently supports the mission of the State of Arizona by caring for approximately 2,500 inmates. We also experienced an increase in average utilization by our current partners, particularly from immigration and customs enforcement or ICE. Our third quarter earnings call in early November of last year we mentioned that ICE populations in our facilities increased 26% in the month of October. We attributed that increase to the start of the federal government's fiscal year, which meant the agency had more budget certainty with new appropriations to start the year and pandemic-related oxy restrictions were gradually being lifted. While the increase in utilization was noteworthy and had a modestly and positive impact on the fourth quarter, utilization levels were still below their pre-pandemic levels and a cure occurred despite a reduction in utilization in the final days of December as I prepared for the termination of Title 42, which obviously did not occur, which I'll discuss in greater detail shortly. The third driver of our improved fourth quarter performance was a continuation of modest improvements in the employment market, a trend we began to detect in the middle of 2022. That trend has allowed us to reduce reliance on registry nursing and various forms of incentive compensation. These costs still remain elevated from their pre-pandemic levels, but with salaries and benefits representing approximately two-thirds of the operating expenses even modest improvements in the employment market can result in meaningful cost savings. As for our newly issued 2023 financial guidance, we are forecasting for year FFO per share in the range of $1.35 to $1.50, and adjusted funds from operations or AFFO per share in the range of $1.29 to $1.45. Our guidance is reflective of our completed transition at La Palma facility although the cost structure has yet to normalize, as we work to fully staff the facility through local employees, and the expectation of utilization by our federal partners to remain below pre-pandemic levels due to the continued application of Title 42. Our guidance also reflects continued efforts to increase staff to position ourselves for increasing accuracy. Dave will provide greater details about our fourth quarter financial results as well as the financial impact of the more significant assumptions included in our full year 2023 financial guidance following the remainder of my comments. Since I brought the topic of Title 42, I begin our discussion of developments with our government partners with Immigration and Customs Enforcement. ICE is our largest federal partner and it is within the Department of Homeland Security. Of any of our government partners, their operations and capacity utilization needs were and continued to be the most significant impacted by COVID-19. Notably, ICE implemented Oxy restrictions at ICE facilities nationwide to improve the ability for resident populations to social distance. These Oxy restrictions remain in place during the fourth quarter of this past year. In the spring of 2020, the Trump administration enacted Title 42 to close the nation's borders and ports of entry to asylum seeking individuals. Title 42 has remained in place since that time and has also had a significant impact or reduces ICE's demand for detention capacity. As I mentioned earlier, utilization by our federal partners particularly ICE across multiple facilities were up nearly 26% in the month of October alone. Nationwide, ICE was changing more than 30,000 individuals by mid November of 2020 to a notable increase while still being meaningfully below their pre-pandemic levels, as well as the number of beds for which they are funded. We believe the increased utilization was a result of ICE slowly beginning to relax their pre-pandemic Oxy restrictions. This increase also coincided with the federal government's fiscal year began on October 1, 2022. In November, a federal court case overturned the continued use of Title 42 and a date of December 21, 2022 was set as a date Title 42 would be terminated. In anticipation of a significant increase in the need of detention capacity, ICE began releasing individuals from custody to free up additional capacity. By late December, ICE had released over 10,000 individuals from custody. Surely before December 21, there was a successful challenge to the federal courts ruling, which is now waiting to be heard by the Supreme Court in March. Title 42 is now expected to remain in place until the court proceedings are finalized, which likely will not occur until later this year. Also in December, Congress passed an omnibus spending bill that funded 34,000 detention beds for the fiscal year ending September 30, 2023. I says yet to increase this detention utilization close to its funding level and we expect their utilization to remain well below pre-pandemic levels at least until the legal challenges to Title 42 are completed. As mentioned previously, we continue to increase staffing levels in order to be well positioned to accept additional residential populations at pandemic related Oxy restrictions are removed and the legal proceedings for each conclusion. We also continue to pursue opportunities to provide ICE with non0residential alternatives to detention or ATD programs. We remain engaged with ICE as we believe that we can provide unique solutions to provide additional ATD programs. We also know we can provide case management services similar to the type of case management services we already provide in our community segment. The elevated rates of apprehensions along the southwest border continues to create challenges, which are expected to increase the governments demand for both residential detention capacity and nonresidential ATDs should these arise we believe we are well positioned to deliver solutions to ICE. Now for an update of our other two federal partners, which are within Department of Justice, which is the Federal Bureau of Prisons or BOP and the United States Marshal Service. The BOP has experienced significant declines in their populations in the last decade. In response to this long term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners. Last August, we completed a sale of our 1,978 beds McRae Correctional Facility to the State of Georgia for $130 million. Our last remaining for the contract with the BOP was at recruiting facility and represented less than 2% of our total revenue. We leased the McRae Facility from the State of Georgia from the sale day through November of 2022, so we could fulfill our contractual obligations to the BOP through the expiration of the contract. Following the expiration of the contract at McRae at the end of November 2022, we only expect to generate revenue for the BOP through the provision of reentry -- residential retreat facility contracts. The sale of our McRae Facility was a great opportunity to sell an asset at a value far exceeding the valuation of our publicly traded debt and equity securities and accelerate our capital allocation strategy of reducing debt and executing on our share repurchase authorization. While we do not expect the sale of our correctional or detention facilities to government entities to become a growing trend, we view this as an excellent opportunity to finalize our diversification away from prison contracts with the BOP, recycle capital, and create value due to the dislocation of the prices of our public securities and our assets true market values. The McRae Facility was converted to a facility owned and operated by the State of Georgia upon the termination of our lease with the State of Georgia in November of 2022. As for the U.S. Marshals, their prison populations have remained very consistent in recent years. So their need for capacity around the country remains unchanged, and significant due to their reliance on contracted detention capacity. The Marshals were impacted by the executive order signed by President Biden and issued in January of 2021 that directed the Attorney General to not renew Department of Justice contracts directly with privately-operated criminal detention facilities. In 2022, we had no direct contracts with the Marshals that were set for exploration. And now, we have only two remaining direct contracts with the Marshals. One of those contracts is that our 4,128 beds Central Arizona Florence Correctional Complex in Arizona and has contract expiration in September of 2023. Both facilities provide significant path into the Marshals that we believe would be very challenging to replace, but we likely will not have resolution on potential contract extensions until we are closer to the existing contracts expiration dates. We continue to work closely with the Marshals to ensure the capacity needs are being met in order to support their critical public safety mission. At the sea level, we continue to hear the improved market is the most substantial and ongoing challenge correctional systems are facing. We have certainly faced the same challenges, but we are able to meaningfully increase staffing across the Company during 2022, and these efforts will extend into 2023. There are multiple states that are dealing with such significant staffing challenges that they have had to reduce facility capacities and shutter housing units as a result. We are in conversations with a number of states to help to address their challenges in the near to long-term, and we look forward to providing you updates, as these discussions evolve. I will close-up my comments by highlighting the great accomplishments we had in 2022 that continued to strengthen our balance sheet. On the capital structure side, we began the year with entering into a new bank credit facility. This process involves bringing together several new banks that are supportive of our company's mission and allowed us to expand the majority of the facility through May of 2026 and we reduced our exposure to variable rate debt to just under $100 million. Throughout 2022, we've reduced our total debt by $287 million, and just last week, we repaid the remaining $154 million on our 4.625% senior unsecured notes, which were scheduled to mature in May of 2023. Since announcing our updated capital allocation strategy in the summer of 2020, we have cut our overall debt in half or by over $1 billion. We now have no debt maturities until April of 2026, which will provide us with a great deal of flexibility in how we deploy our free cash flow. We remain committed to our targeted total leverage ratio or a net debt to adjusted EBITDA range of 2.25 times to 2.75 times. We have made meaningful progress in reducing our overall leverage due to the strong cash flow the Company generates and we expect all leverage to continue to decline over time. Understanding that recently our EBITDA has been negatively impacted by the short-term transition of contracts and all the policies in Arizona and ongoing pandemic related to Oxy restrictions with our federal partners. Mathematically increase the leverage, the debt levels have declined. As these headwinds near completion, we expect our leverage to naturally decline. We continue to execute our stock repurchase program of $225 million stock repurchase authorization authorized by the Board of Directors last year. During 2022, we repurchase 6.6 million shares of our common stock at an aggregate purchase price of 74.5 million or approximately 5% of our total shares outstanding. In January of this year, we repurchased an additional $10 million of our common stock, so we have 140.5 million remaining on our share repurchase authorization. This would allow us to repurchase an additional 12% of our outstanding shares based on the recent trading price of our equity. Our capital allocation strategy has enabled us to remain flexible and in future quarters is expected to include a combination of share repurchases and debt repayments, taking into consideration factors such as the price of our securities, liquidity, progress towards achieving our targeted leverage ratio, and potential returns on other opportunities to deploy capital. We continue to believe our capital allocation strategy has been prudent for the position of the Company to generate long-term value through a stable capital structure and continue to cause effect on the meet the needs of our government customers with less reliance on outside sources of capital. I'll now turn the call over to Dave to provide a more detailed look at our financial results in the fourth quarter, discuss in detail our full year 2023 financial guidance, and provide additional financial updates. Dave? Thank you, Damon, and good morning everyone. In the fourth quarter of 2022, we reported net income of $0.21 per share, or $0.22 of adjusted earnings per share. Normalized FFO per share $0.42, and AFFO per share of $0.38. The adjusted normalized per share results are $0.09 above average analyst's estimates primarily due to lower operating expenses stemming from moderated staffing incentives AFFO credit as further described later. Adjusted and normalized per share amounts exclude a gain on sale of real estate assets, asset impairments and expenses associated with debt repayments as detailed on the reconciliations to non-GAAP metrics included in the press release. The decline in normalized FFO per share of $0.06 per share compared with the prior year quarter included an EBITDA decline of $9.1 million or $0.06 per share due to the earnings disruption in our 3,060 beds La Palma Correctional Center, the second largest facility in our portfolio, as we continue to transition to populations from the State of Arizona pursuant to the new management contract that commenced in April for up to 2,706 inmates. We previously had a contract with ICE at this facility and during the prior year quarter through the beginning of this year, we cared for an average daily population of over 1,800 ICE detainees at the La Palma facility, which were fully transitioned out by the end of September. The intake process for Arizona residents was substantially complete by the end of December, and we currently care for approximately 2,500 inmates from Arizona at this facility. Although occupancy at the La Palma facility during the fourth quarter of 2022 surpassed the occupancy level in the fourth quarter of 2021, we incurred substantial transition expenses in the fourth quarter, which we expect will normalize around the middle of 2023. Fourth quarter results were also impacted by the exploration on November 30th of the final prison contract that we had with the Federal Bureau of Prisons and our McRae Correctional Facility, which contributed to a decline of $0.02 per share from the fourth quarter of 2021. These declines were partially offset by employee retention credits were entitled to under the CARES Act for retaining employees who could not perform their job duties at 100% capacity as a result of COVID-19 restrictions during 2020 and a portion of 2021. These credits were reflected in the fourth quarter of 2022 as a reduction to operating expenses, and amounted to $0.02 per share net of related expenses resulting from the credits. We produced notable improvement in sequential financial performance. Compared with the third quarter of 2022, our adjusted EPS increased $0.14 from $0.08 per share on Q3 to $0.22 per share in Q4 and normalized FFO per share increased $0.13 from $0.29 per share in Q3 to $0.42 per share in Q4. These per share increases were attributable to a reduction in expenses associated with a very tight labor market, as we were able to reduce temporary staffing incentives and registry nursing expenses we incurred during the third quarter. Although, these expenses were still higher than the fourth quarter of 2021, we are pleased with the sequential decline. As the labor market continues to improve, which will take some additional time, we expect to further reduce reliance on these expenses. The fourth quarter comparison to the third quarter includes the same $0.02 benefit from the after mentioned employee retention credits, stronger federal populations at federal several facilities and lower interest expense, likewise, margin that our safety and community facilities increased from 19.2% in the third quarter of 2022 from 24.1% during the fourth quarter of 2022. Excluding the benefit of the employee retention credits, our operating margin was 22.6% in the fourth quarter of 2022, a notable improvement from the third quarter, primarily resulting from the favorable trend and operating expenses. Longer term, we expect operating margin percentages to trend toward those we experienced pre-pandemic of approximately 25%. As higher per diem rates we have been successful in obtaining from many of our government partners are expected to translate into increasing margins as they are applied to increasing occupancy levels and as expenses continue to normalize. Despite the improvement in sequential financial performance, our financial results continue to be impacted by occupancy restrictions implemented during the COVID-19 pandemic that largely remained in place during the fourth quarter for most federal facilities. Occupancy in our safety and community facilities was 71.1% in the fourth quarter of 2022, compared to 72.5% in the prior quarter. The slight decline from the prior year was attributable to the expiration of a contract with the U.S. Marshal Service and our 1,033 beds Leavenworth Detention Center on December 31, 2021. Our overall ICE detainee populations remain well below historical levels, as the Southwest Border has effectively remained closed, too many asylum seekers and adults attempting to cross the southern border without proper documentation or authority in an effort to contain the spread of COVID-19 under a policy known as Title 42. On November 19, 2022, a federal judge ruled that the process by which the federal government began expulsions under Title 42 was a violation of the Administrative Procedure Act, requiring the federal government to process all asylum seekers under applicable law in effect prior to the implementation of Title 42. Therefore, Title 42 was set to terminate near the end of the year. However, on December 27, 2022, the Supreme Court granted a temporary stay on the cessation of Title 42, while it considers an appeal by a group of states to continue Trial 42. Oral arguments are scheduled for next month. Whenever Title 42 is terminated, such action may result in an increase in the number of undocumented people permitted to enter the United States claiming a asylum and could result in an increase in the number of people apprehended and detained by ICE. With depressed occupancy levels, we will be positioned to significantly grow earnings whenever the impact of COVID-19 and Title 42 restrictions subside. Turning next to the balance sheet. As of December 31, we had $149 million of cash on hand and an additional $233 million of borrowing capacity on our revolving credit facility, providing us with total liquidity of $382 million. During 2022, we have reduced our debt balance by $287.4 million or $137.2 million net of the change in cash. During the fourth quarter of 2022, we purchased $12.8 million of our 4.58% senior notes in open market purchases, reducing the outstanding balance of these notes to $153.8 million. These notes were scheduled to mature May 01, 2023. In keeping with our debt reduction strategy, we repaid in full the outstanding principal balance of these notes on February 01, 2023, using cash on hand and a $35 million draw under our revolving credit facility. During the fourth quarter, we also purchased $27.4 million of our 8.25% senior notes in open market purchases, reducing the outstanding balance of these notes to $614.1 million. We now have no maturities until the 8.25% senior notes mature in 2026. Leverage measured by net debt-to-EBITDA was 3.2x using the trailing 12 months ended December 31, 2022. In order to help to ensure we progress toward our leverage target, we made no share repurchases during the fourth quarter. However, we will continue to be opportunistic in repurchasing shares without materially increasing leverage and have repurchased $10 million of shares so far in 2023. Since our Board authorized the repurchase program in May, we have repurchased over 6% of our outstanding shares or a total of 7.5 million shares at a cost of $84.5 million and have remaining authorization for over $140 million more of our shares. Going forward, we expect to continue to use our liquidity as well as cash flow from operations to repurchase a combination of our stock and bonds, taking into consideration a number of factors, including the amount authorized under our repurchase plan, liquidity, share price, progress toward achieving our targeted leverage of 2.25x to 2.75x and potential returns on other opportunities to deploy capital. Moving lastly to a discussion of our 2023 financial guidance. For the full year 2023, we expect to generate adjusted EPS of $0.50 to $0.65, normalized FFO per share of $1.35 to $1.50, and AFFO per share of $1.29 to $1.45. Our guidance contemplates the continuation of a tight albeit improving labor market, with less reliance on temporary incentives, but offset by higher staffing levels. Because of the lead time necessary to hire and train staff and because we anticipate an eventual end of occupancy restrictions, including Title 42, we continue efforts to hire staff in order to prepare for increases in occupancy, resulting in sequentially improving performance throughout the year. Although, we expect to be prepared for an increase in occupancy, our guidance does not contemplate a surge of ICE detainees in the second half of the year, but a more measured increase. Our guidance reflects an increase in EBITDA at our La Palma Correctional Center and Eloy Detention Center by a total of nearly $18 million as a result of the transition of populations during 2022 from ICE to Arizona at the La Palma facility and are expected higher average occupancy by ICE at the nearby Eloy facility in 2023. Although we are in discussions with a number of states for new opportunities, our guidance does not include any new contract awards because the timing of government actions on new contracts is always difficult to predict which would be upside to our guidance, if we are successful. Our guidance reflects the previously mentioned expiration on November 30th, of the Federal Bureau of Prisons contract that the McRae facility, which generated $6.4 million of EBITDA in 2022. Our guidance also contemplates retention of the lease with California at our California city facility through March 2024, the date indicated in a previously disposed termination notice we received in December 2022. There are a few things to remember when crosswalk in the fourth quarter of 2022 to the first quarter of 2023. Compared to the fourth quarter, Q1 is seasonally weaker because of two fewer days in the quarter and because we incur approximately 75% of our unemployment taxes during the first quarter, resulting in a collective $0.03 per share decline from Q4 to Q1. The benefit of the employee retention credits in Q4 results in an additional $0.02 decline to Q1. As Damon discussed in the final days of December, ICE reduced its utilization to create capacity in anticipation of the termination of Title 42. The decline extended through January, and although those populations have been steadily recovering, is expected to contribute to a reduction of approximately $0.02 to $0.03 per share when compared with Q4. We expect our normalized effective tax rate to be 26% to 28% and the 2023 full year EBITDA guidance in our press release provides you with our estimate of total depreciation and interest expense. We expect G&A expenses in 2023 to be comparable to 2022. During 2023, we expect to incur $61 million to $63 million of maintenance capital expenditures, roughly in line with 2022 and $3 million to $4 million of other capital investments, which is substantially lower than 2022, when we were completing several renovation projects. We remain focused on managing to our leverage target, and will sculpt stock repurchase levels to EBITDA performance. However, for reiterate, we will remain flexible and will continue to be opportunistic in repurchasing shares without materially increasing leverage. Good morning, Damon and David, congrats on the quarter. I wanted to start out may be diving a little bit more into the so called guaranteed minimum contracts with ICE. I know you had mentioned previously you've been in discussions with them on some of the facilities that you have that do not have those types of contracts, just maybe get an idea of the progress on those. Is there a kind of a timeframe in your mind, if you don't receive, let's call it relief? What do you do with those facilities? And I don't know, if you can you kind of give us a ballpark figure, if you were to receive some relief, what could that mean on the financials end? Yes, thank you for that question. We really didn't talk about it in our script, but I guess I will say here in the near-term and keep me [indiscernible] day for last probably 90 to 120 days, we've had some pretty meaningful discussions with ICE about how they see the world after Title 42, and obviously, the need from public perspective. You know that part of the story, but also we have a couple of facilities that to your point, maybe doesn't have a fixed monthly payment or other provisions in the contract. And interestingly, they've been pretty receptive on these conversations. So, we've had some pretty good renegotiation of contracts either with that provision changed or tweaked or maybe some improvement on the pricing or maybe a combination of both. So, don't necessarily want to parse it out and go kind of facility by facility, but I will say that we've been pretty encouraged by the conversation. And we can we think that behavior is pretty indicative of, as they look out in the next 6, 12 months, and the likely pulling back of those Title 42 that they're going to need those beds and need that capacity. But anything you'd add to that, Dave? Yes, I add couple of things. Our guidance does reflect some of those negotiations coming to fruition, but I'd also say, as we mentioned previously, our ICE populations in particular are much lower than historically, historic levels. And so, we have a lot of conversations with ICE about individual facilities when those occupancy levels are so low about the other mission, what do they want to do, they want to consolidate populations into fewer facilities. And so far, they have been reluctant to do that they want to maintain that capacity, which I think is an indication of future need. So based on that there are a good partner, we tried to work with them. And just expect that there, they'll eventually have those needs or will continue his conversations about consolidations in the fewer facilities. Whenever they got add Joe, we've been saying this for a couple quarters that, we've been leaning forward on staffing facilities, in anticipation for increased competency and then also the, again, going back to the full Title 42. And so, we've estimated that if we were kind of staffing to what Oxy was today versus kind of lean forward, we probably would be pretty close from a guy's perspective to what the street estimates are for 2023. So, I think that's pretty notable, again, that gives us hopefully, it gives a little indication, again, from the kind of feedback that we're getting for ICEs on kind of what their needs are today's point about, the conversation of consolidating within facilities or within a facility closing the various units. We're keeping those facilities open and again leaning forward a little bit on a staffing perspective. So again, we know that obviously impacts a little bit guidance this year and then come close to what the analyst estimates are. But again, if we would kind of calibrate staffing appropriately with the current populations that we actually probably be pretty darn close to the guidance or to analyst estimates. Thanks for that insight. Much appreciated. On the ICE occupancy restrictions, how much flexibility have you seen lately? And would those at the latest be part of the administration's May 11th and all COVID health restrictions are to be removed, would that be part -- those occupancy restriction will be part of that? We think that's the case. Again, in this environment, we can never make any definitive statements because again there is a lot of moving parts here with the pandemic emergency being terminated on May 11th and also the ongoing kind of court activity with Title 42. So, we think that's the case. But let me, I guess, maybe back up just a tag because I know it's been a little confusing for all of us on Title 42, the court case and then also the proclamation that the pandemic emergency will be terminated on May 11th. So, let me give at least maybe a little more color on that. Again in this environment can never make any in the statements, but let me go ahead and take a shot at it. So as you just noted, administration plans allow the pandemic emergency to expire on May 11th. So again, that's been while they reported in the press. The administration has suggested that, there would also be the end of Title 42 border restrictions. It's correct that the Title 42 order said, on its faith that it will end when a pandemic emergency is. Whether that happens automatically or with another termination order from CDC isn't clear at the moment. But the administration is also in federal court litigation about its prior efforts to terminate Title 42, and it's in litigation in the Supreme Court about Title 42 as well. No way to know, obviously, but I'd be afraid to rule out efforts by the court or various border states to keep Title 42 restrictions in place longer. So I think you know, Joe, that I mean, in the spring quarter, we will hear arguments on March first, but probably won't issue decision until probably June or July. So again, plenty of uncertainty, but our goal is that, our goal is to be ready, whether Title 42 goes away in May or in June or July or possibly some later date. And again, based on the conversations we have had with ICE and some activity, we have had some contracts backs with amendments on pricing and fixed monthly payment. Again, it appears that they are continuing to kind of March forward on getting themselves prepared for the likely outcome of Title 42 being rescinded. Okay. Thanks. Switching gears, the California facility where you have got the lease termination notice, which I think is in 2024 although currently, it's only funded I think through what the first half of this year. It sounds, when you read in your press release of all the improvements that you made, the aging of other California facilities that you might have some hope that, that decision is reversed. I mean, could you comment on that? And then also you mentioned that facility generates about $134 million in revenue annually. What kind of EBITDA does that facility produce? Well, I'll tag team with Dave on this one, Joe. This is Damon again. I mean, first to say, when we got the communication from the state late in 2022, they indicated, again they want to give plenty of runway for not just us in this facility, but also for the operations with CDCR and also the community. And I've had some actually direct conversations with leadership within the state where that was reaffirmed here in the last 30 days. So that gives us confidence in that facility. Even though we're not in the next fiscal year, as you know, July 1st, coming around that with that, it'll be in place through the rest of this year through March next year. So I can't say this indefinitely, but based on communications I've had directly with state officials, we feel like that's the likely case. So on a parallel path, we're working obviously with the state, but also assessing kind of a long-term opportunities and needs that could be fulfilled with that facility. So nothing to disclose today, but those conversations are ongoing on several different fronts. And it's not just with one agency, so that I'll just kind of leave it there. Second part of your question, I'll let Dave tackle that one. It's on our supplemental disclosure report, we do disclose the margins of each of our segments and Cal City is you could sell just the amount of revenue. It's a significant component of the property segment. So its margin is very comparable to the margins that we disclose in the property segment, which is around 70%, 75%. So, I have a couple of questions. Just to dig a little deeper on what you were just saying during your prepared remarks. And again, after two recent questions on Title 42. As you noted, we've expected Title 42 to be terminated in the past. There's been litigation that has impacted that the timeline there. So how should we view Title 42 in 2023 of May 11th really is going to see the end of a lot of these COVID regulations? Is this really do you saying from what we're hearing? This is Damon. A lot of really smart legal minds that are on cable to talk shows every night are trying to answer this question. I don't know, if I've got anything more interesting than they've been able to provide. What I just said, again, very definitive action by the administration on terminating a pandemic emergency on May 11th. So that's, again, very, very definitive at least on that piece. And I know the administration is trying to make the argument that same should obviously, impact Title 42 since they're linked. Title 42 is linked to the pandemic emergency, but it's hard to say with these kind of court actions at the lower courts and the one it's also proceeding through the Supreme Court how that impacts timing. So, what I shared earlier is our best estimate, but also to truck riders elect clarity on that front. I don't think any add to that Dave. In terms of timing, as Damon answered the timing question in terms of the actual impact, I think if you go back to the end of December, it could be an indication when ICE took down detention capacity by about 30% in the last couple of weeks in December, that was nationwide, our populations correlated with that reduction. So while that obviously didn't happen at the end of the year, I think it does give us a playbook for what could happen when the termination of Title 42 is imminent, which I would think it would be imminent. Whether it's May, whether it's June, July or some other date, that's really, a lot of crystal ball, difficult to predict, but I will tell you, as I mentioned in my prepared remarks, our guidance does not anticipate a surge that could happen, but more of a measured increase in the second half of the year. So we wouldn't expect anything to happen early in the year, certainly nothing before May 11th. I think that would be the earliest day, something could happen. But given how many lawsuits have arisen around the timing that would just be very difficult for us to kind of pinpoint. These points are really important when because, our guidance is conservative from the perspective of Dave just noted relative to increasing occupancy. So we've looked at what the portfolio is today. And, as always, we always set by customer by customer and build that into guidance. But we're not anticipating leases, from a guidance perspective, again, a huge surge. But on the other side, we are being served on the staffer, as I said earlier. So if we were not staffing up, as I said earlier, like we are today, in anticipation for increased needs, again, our guidance would probably be pretty close to consensus. So that at least gives you a little sense of how to look at the rest of the year that we've got the expenses built in, and not necessarily the increase in accuracy. So hopefully, we'll get more on that as we get closer to the spring and summer months. Okay. And again for sure, I think we all understand that nobody really knows, but you do have a sense that maybe this time, this time is the real time. So then I have one other question. And it's about a model that you had introduced in one of your facilities, about a year and a half ago, the Northeast Ohio Correctional Facility, where you were operating that under two different contracts, I think, one with the state and one with the county. As you continue to have discussions, with different entities now, and near-term discussions, are there any other facilities where you might think that it would be beneficial to introduce that same kind of dual contract model? Yes, great question. And short answer is absolutely. I mean, we're always looking at if we've got a facility that's either underutilized or fill the vacant where are the prospects either with existing or new partners where we could either activate solely or higher or increase occupancy. So, absolutely, and, I think we've shown over the last couple of decades that not only can we manage the complexity when you have multiple customers, but also especially if they're different levels. So we've got facilities that have a federal contract, as you noted, with Northeast Ohio and also as a state partner. So, in a very different mission, one's a very short-term population, another one's a longer term population that has unique medical and mental health and program needs. So short answer is absolutely, we're always looking at those opportunities. If we think about facilities that might not be affected by Title 42, what type of trends and occupancy are you embedding in the in the guidance for fiscal '23? Yes, great question. And I'll tag team with Dave on this a little bit, but -- so outside the immigration custom enforcement, the only other federal partner is Marshals service and we I think feel like we are pretty stable through the course of the year. We may see some increases from various contracts around the country. But there is nothing too notable to draw attention to. So really then the other opportunities on the state side and actually we are seeing pretty robust engagement from state partners either existing state partners or new state partners. As you know, with the election this past November, there is a fair amount of new governors in office around the country, and I've been encouraged to see that, Criminal Justice reform and also improving the conditions of people with the correctional systems, not only just from a housing perspective and residential perspective, but also from a programming perspective, it's a high priority for them come into office. And so we have had a few states already reached out to us that would be new states for us, answering questions relative to how we can maybe meet their needs short-term and long-term. Another thing I'll just say is that, kind of a growing trend that's been very coupling, but also a solution that we think we are uniquely positioned to provide for, and that is dealing with especially with opioids and the fentanyl crisis. I was encouraged by the President earlier this week in the State of Union talking about this being a big issue and a big priority for his administration going forward and I'm hearing the same thing from governors around the country. So we are looking actually this year to do a program in prison and also do a program that's community base that would help with addiction and these are called MAP programs or medically assisted treatment programs. And so that could be an interesting solution to help these individuals that are dealing with addiction, both the imprisonment and community based. And again, what we are hearing from governors, especially new governors that just gone forward and this is something of a real interest to them as we deal with the challenges of the addiction not only just in core system, but also in the general community. But I don't think you add to that Dave. Yes. Just with respect to the guidance, which we don't have any of that in our guidance. So if we were to implement some MAP programs, which we are looking at a couple of pilot programs, there could be some start-up expenses and I'm not talking Nichols, it's pennies of that in startup expenses to activate a program like that. And the revenue for that would probably be back end loaded in the year. Likewise, as I mentioned in my prepared remarks, we are not contemplating any new state contracts in our guidance, though we continue to have the conversations that Damon just described. So that could be upside to the guidance if we are able to get one or more of those contracts across the finish line. But generally speaking, I would say that, Marshall's populations are relatively stable in our guidance throughout the rest of the year, and same populations have been fairly stable even towards the tail end of the pandemic here second half of 2022. So we are forecasting those to be pretty stable in the 2023 guidance as well. Okay, great. And then my -- thank you for all that. So my second question, I think you may have addressed it earlier. But there has been some uptick in per diem rates but how should we think about additional increases for '23 at both the state and federal level? Yes. Good question. As I alluded to earlier, the question around making capacity at facilities where we have got high contracts again we have had some pretty good engagement with our partner on that front again with maybe changes to the fixed multi-payment, but also the per diem rate. So, that I think potentially -- we've -- as Dave alluded to earlier, we have built some of that into the guidance for this year. The state side, as you know, is always, there is a flurry of activity in the spring. So most, if not all, state legislators, let's say, are back in session, we're actively engaging with all the appropriate stakeholders and states where we currently operate and looking at not only the needs that we've got for my staff and perspective and to get some salary increases, but also maybe per diem adjustment. So too early to tell, but I will tell you, we are encouraged by the amount of engagement support that we're feeling from our state partners. We had a record year last year on a per diem increases with our state partners. So I feel like I don't know if I can say this year is going to be the same, but it does feel very encouraging. Other thing I'd just say, just generally, a lot of economic information out there relative to recession and labor markets and how it's impacting employers and various industries. We are somewhat encouraged that state budgets may not be impacted dramatically, like they were a decade ago with the great recession. So, state budgets, if they get dramatically impacted then that potentially puts some pressure on pricing. At the moment, we're not feeling that or seeing that, again with states I think relatively speaking, I know, it's not exactly the same case in every 50 state, every state in the country. But I'd say relatively speaking, I think most things feel pretty good about their economic environment, their revenues, and have built up some pretty nice rainy day funds in the last couple of years. And that actually dovetails into my last question. How should we think about net operating margins turning through 2023 given the strength that you guys put up in the fiscal fourth quarter '22? This is Dave. I'd say, we did have the employee retention credits in the fourth quarter that inflated the fourth quarter margins a bit. I gave the margins excluding those credits would be 22.6%. That's probably the number to compare going forward from Q4 '22. I'd say fairly stable as it's a leveraged model, though, as occupancy goes up, margins go up, we are optimistic, we'll get back to our pre-pandemic margins of around 25%. And don't expect that to be in '23 though, as we don't forecast or occupancies get into pre-pandemic levels in '23. But I would say stable, right around the number in Q4, certainly during the first two quarters of 2023, with a possibility of them increasing higher in Q3 and Q4, as we would expect occupancy levels to sequential increase. You've answered most of mine on the scripted portion or in the previous Q&A, but I do have a couple left. So, as it relates to the La Palma Facility, I know that still kind of ramping and costs haven't really normalized there. When do you guys anticipate that facility being fully staffed and having its cost structure reach a normalized level? To your question about staffing probably normalizes here first maybe second quarter. I mean keeping on with your day, but probably midyear. Again, we've been encouraged by the labor market, globally kind of turned into our favorite in the last six to eight months and Arizona is no exception to that. But I guess maybe to the second part of your question. And I'd say, the ramp, we're in really good shape, so it's substantially completed as of now. So, I think as we mentioned in our prepared remarks, we have about 2,500 people there today. The staffing is really been supplemented with staff from other parts of our systems. So, that's really what's driving the incremental expenses at the La Palma Facility. We've got travel expenses. We've got shift premiums for people to work away from their home facilities and work in Arizona. Registry nursing continues to be a challenge and in Arizona. So those are the types of expenses that we continue to incur. And don't expect those to really go away until the middle part of the year. But as far as the ramp goes, we're in really good shape and staffing, we're in good shape. It's just we're incurring outside expenses because we don't have the permanent local staff there. And then the next one was, I just want to make sure that I've got my math right here. So, I know you guys paid down and you and you discussed in the scripting portion. You paid down four and five eights notes due in 2023. We're about $154 million of those outstanding when you paid them down. And you said that you did that your cash and revolver draw? That was a $35 million revolver draw and $119 million of cash. Do I have that right? Okay, great. Just wanted to want to make sure that I was getting math there right, that's going to be it for me. Congratulations on the quarter. And thank you for taking the question. Good morning. Congratulations on the quarter. I just had a couple of follow ups here. I think the fourth quarter if you annualized adjusted EBITDA, you get to mid 300 million like 250 million of EBITDA. So the guidance is below what the annual number would apply. What are the -- and almost everything we've talked about directionally year-over-year is a tailwind, right, La Palma population pricing, what are the -- other than McRae, what are the headwinds in the guidance? Yes, this is Dave and approaching to that question. I guess the only thing I would say and I'll tag team again with day but you know, just talking about staffing. So again, as we kind of continue on ramping up staff in anticipation of increased needs, throughout the portfolio note to be with ICE that is going to be going to be significant as I try to provide a little bit of clarity on that. If we were not ramping up staffing so late last year and going into this year, I mean, I think we would easily be within range of the consensus for this year without that increased labor costs. Do you have anything to add to that Dave? Yes, I mean, it's definitely labor that's thriving, and again, we're not where we want to be yet. So we are increasing staffing levels throughout 2023. That's included in our guidance, and that's a bit of a drag even though we continue to incur the shift incentives and retention, referral relocation bonuses and registered nursing. We hope those normalized, so there we did see the decline from Q3 to Q4. In Q4, I'd say, we did have the employee retention credits. So that's you got to take that out of and a run rate basis for 2023. Since that's not going to be recording in '23. And it might be good to know I don't know if we've talked about this in a while, but for us to hire an employee from the time they are hired to the time they actually don't work on a post in a facility. I mean, it could almost be probably two to three months. And so part of the -- again, anticipation is we want to make sure we get them through the training academies as appropriate. All of our contracts have very comprehensive background screening process and those could take weeks, not days. So, that's part of it just we want to make sure that, if there is demand manifesting during the spring, summer, fall that we have got to staff and I have to wait three months to meet that demand. Got it. That's helpful. Is the pricing mechanism such that you only get one shot? It's in the spring when the budget set and then you have to wait a whole year to get another? Typically, typically, I mean, most of our state contracts are tied to the fiscal year, which majority states are in July 1st to June 30th. And so, yes, are making of the case within the legislature and then ultimately what we negotiated with the Department of Corrections, it's usually in the spring. But we do have had, I mean, in the last couple of years, we have had some, what I call, all cycle adjustments. Notably, conditions have changed within the facilities where they have a unique need of services and programs, and we can go shoot that in real time. And then also the labor market, which has been fluid. The good news about our state business is that many of our states, if not all of them operate their own facilities. So they know if there can build some challenges, in their facilities we are likely going to feel the same changes and so that we could do maybe some adjustments can off cycle. But anything you would add to that? I wouldn't mind you asking, Kirk, because I was going to say that from a prior question. Last year, there were a couple of off cycle per diem rates they were received because we were providing off cycle wage increases. Here we are getting towards the middle of February. I don't see that happening in the first half of this year. So, we haven't baked that into higher per diem into the first half of the year. We would time them with the middle part of the year, as the state budgets get through their budgets and implement their new budgets effective July 1st. And I guess I'd say one other thing, Kirk, on the annualization in Q4 going back to employee retention credits, if we net costs associated with those credits that's probably a $10.4 million annual amount that you had to back out of '23 if you're just taking Q4 and multiplying it by 4. Interesting. Okay. That's a pretty big number then. Got it, I appreciate it. And then just to clarify, so I'm guessing that, the guidance assumes the renewal of Central Arizona? Got it. And then lastly, I don't everyone want to ask you to comment on rumors. But there has been some press coverage of a potential deal between the Biden Administration and Mexico, which I'm not sure how to interpret. But is that something that you can elaborate on or comment on?

EarningCall_211

Good day, and welcome everyone to the KBC Group Earnings Release 4Q 2022 Conference Call hosted by Kurt De Baenst, General Manager, Investor Relations. My name is Judith, and I’m your event manager today. [Operator Instructions] I would also like to advise all parties this conference is being recorded. Thank you. A very good morning to you from the headquarters of KBC in a sunny Brussels and welcome to the KBC conference call. Today is Thursday the 9th of February 2023, and we are hosting the conference call on the fourth quarter and full year ‘22 results of KBC. As usual, we have Johan Thijs, our Group CEO, with us; as well as our Group CFO, Roger Popelier, and they will both elaborate on the results and add some additional insights. As such, it’s my pleasure to give the floor to our CEO, Johan Thijs, who will quickly run you through the presentation. Thank you very much, Kurt. And also from my side, a warm welcome to the announcement of the quarter 4 results of 2022, which is, as a consequence, also the announcement of the full year results of the very same year. Let me start with, as always, the overall view of the quarter 4 and we are posting today an excellent result of €818 million on the quarter, which is indeed, given circumstances, a very strong performance. Return on equity stands at 14%, and that also clearly indicates that once again, the machine has been firing on all its cylinders, and this time, it is really true. We have been performing extremely well in all our franchises, bank and insurance, across the group. What does it mean? It means, for instance, that we have been growing significantly our lending book, more than 8.5%. Over the year, we have been growing our deposit book more than 9.5% over the year. We have been performing our insurance sale on the non-life side more than 8% a year. The life insurance business was significantly up in the fourth quarter. It was more than doubled on the unit-linked side. We have been growing our investment products book significantly, 21% more net inflows compared to last year, which was a record year. So it was really excellent. The quality of our books remain super solid with a combined ratio on the insurance side of 89%, but also with a credit cost ratio of 0% in essence. But if you take into account the prudency, which we put into our buffer for emerging and geographical risk, it stands now at €429 million, which is a credit cost ratio of 0.8%. So in that perspective, it is really solid. We have been, as a consequence, also posting a very strong solvency ratio of 15.4% and more than 200% on the insurance side. And that goes hand in hand with very strong liquidity numbers, as usual. We also have, as a consequence, an update of our outlook for the future [that we] will come back into the detail later on. Let me first switch to the consequence of all of this that is on Page 3, the capital deployment. We will propose a total gross dividend of €4 per share to our AGM for the accounting year 2022. That is then a sum of an interim dividend of €1 per share, which we already paid out in November of last year, complemented by a final dividend of €3 per share. That brings the payout ratio of the total dividend, including the AT1 coupon to 60% roughly. But in consequence and in execution of our announced capital deployment plan for the year 2022, we also envisage to distribute the surplus capital above the fully-loaded capital target of 15%. That means that is roughly €0.4 billion. We will also distribute that to our shareholders. So in that perspective, that decision is final. How we are going to distribute that is subject to an ECB approval for a share buyback. So we are proposing today that €0.4 billion is going to be distributed anyway, but it can be distributed in the form of a share buyback and/or an extraordinary interim dividend. The share buyback, as I said, is subject to approval of the ECB. And then when we have that approval, the Board will take a final decision in the course of the next coming months. For the accounting year 2022, if you add the surplus capital, the €0.4 billion to that, we will end up with a payout ratio of 75%. As we have communicated last week, we also concluded in this first quarter of ‘23, the closing of the sale of our activities in KBC Bank Ireland. You know that we are having an agreement with Bank of Ireland Group for practically all the assets and liabilities on our books. And that means that we will generate accordingly a capital relief of approximately €1 billion. Also, for that €1 billion, we do envisage to distribute this €1 billion, so that decision is also final. And the question is, in which form and because we are proposing a share buyback as well, which is subject to approval, we are waiting for the final decision to be taken accordingly in the course of the next coming months. So in that perspective, the €1 billion will be distributed either in the form of a share buyback, either in the form of an extraordinary interim dividend, either in the combination of both. Let me then go a little bit further into the business of 2022. So first of all, as I said, the bank-insurance model has been contributing [at its max], so we have a traditional split up between the bank and the insurance company where the bank now stands for 83%, 17% for the insurance company. We also have a very strong performance of all the innovation which we have put forward in the last years, and that is now really paying off in several ways. The first and most obvious way, and that’s something which our customers see on a daily basis, that is the usage of KATE. To be very open and transparent, the usage of KATE by our customers, we have in the meanwhile, roughly 3 million customers. At the end of last year, it stood at 2.9 million. We have much more customers using KATE than we originally planned. And also, the number of transactions which we have with our customers, more than 11 million transactions with our customers in Belgium. That is much more than what we originally anticipated for. The great news in that perspective is that the implementation of KATE goes with 2 other triggers, and one of those triggers is the KATE autonomy, which means that KATE can take the decision to answer the question of the customer to provide a solution without any human being interfering and that is now at 56% of all the questions which we received from our customers in Belgium and 51% in Czech Republic, which has a significant impact on our efficiency. The second thing is the implementation of KATE goes hand-in-hand with the implementation of straight-through processing. Because as I said, KATE takes a decision, provides the solution to our customer, and that is without the interference of human being, so it means also that in terms of straight-through processing, any question is answered in a straight-through processed way and that is boosting our efficiency and our productivity. Last but not least, KBC has been always very active on the front of sustainability, and that also clearly plays off in several things. We were already ranked high by agencies in terms of our sustainability score, but also in 2022, we now put it to the next level, so for the first time ever, we have what we call a green budgeting for the year 2023, but also the full implementation of the green strategy is now governance-wise fully implemented in the group in an operational manner. Consequently, we were one of the 19 companies worldwide who received the Terra Carta Seal, and we’re very proud on this one. But also, we published a report on the climate targets, which we foresee for the nearby future to reduce the CO2 emissions of our book -- of our lending book and our insurance book, and we are now shifting that capital target book and the capital report into the Scientific-Based Target initiative approach, which is another step up. Last but not least, also, the Carbon Disclosure Project gave us the topnotch score of A, which is also an assessment of our sustainability activities. On the next page, you get an overview. I’ll skip that and I’ll go to the exceptional items. As a matter of fact, this quarter is pretty unexceptional in that perspective. We had a couple of exceptionals, mainly driven by, for instance, the modification losses because of the cap, which we have to face on the interest rate in Hungary. That is €25 million negative, but that is offset by a couple of positive one-offs, which are related to, for instance, our transactions in Ireland, but also to the fact that in the U.K., the corporate tax has risen [6 points percent] from 19% to 25%, and that increases our DTA to the tune of €15 million. So offsetting all of this brings us to an exceptional of zero after tax or plus €4 million, so it’s completely negligible. Let me now go into the more important stuff, which is driving our P&L. And let’s start with the obvious one that is net interest income. So the net interest income is up significantly, 20% on a year basis, 9% on a quarter basis. We already indicated on the announcement of the quarter 3 results that the impact on what we call the transformation result is very significant, and that is indeed now starting to have further impact, as we promised in the third quarter, is now taking place in the fourth quarter, and that will continue to do in the quarters to come. Why? Because our replicating book has shifted gradually into the higher rate environment. Be aware that a vast majority of our replicating book is still subject to the low interest rates, given the maturity profile of that book is nicely spread over time. As a matter of fact, we generated €140 million more transformation results on the quarter. On the year, it’s a whopping €280 million. As a matter of fact, if I look into the pure lending activity, then the lending activity was pretty stable. There’s one fundamental remark here. The lending activity was down because of the decline of the Irish book, where we have, of course, given the process, which is ongoing -- which was ongoing and which has now concluded, we built down the book significantly in the meanwhile. In Ireland, we did not pursue any commercial activity anymore in that book for obvious reasons. And therefore, the lending income has dropped in Ireland. [It’s now at] roughly €25 million. The other lending activity kept up quite well. We have seen, indeed, volume-wise, a slowdown in the fourth quarter, given the consequences of the war and the energy crisis, but we still had quarter-on-quarter stable growth of the lending book, both on the side of mortgages. As a matter of fact, mortgage was up 1% on the quarter as on the fact of -- and on the side of SMEs and corporates, where it was indeed stable. If I look at the total growth of the year, then it’s 7% including Ireland, 8.65% excluding Ireland. If you look at the deposit side, we had a very strong quarter again with a positive inflow of 2%, and we had a year-on-year result of 8%. If I exclude Ireland because there as well, we started to shift the portfolios to other banks. In the fourth quarter, we have a growth of 9.6% on the non-Irish book, which is very significant and also shows that KBC is considered to be a safe haven, which means that in difficult circumstances, i.e., a war environment, a lot of customers trust KBC or entrust KBC with their deposits, which in the current rate environment, clearly is paying off on the P&L side. In terms of the net interest margin, no big surprise to say that the net interest margin was up 20 basis points on the quarter, 25 basis points on the year, and that is fully translated by the interest rates because there is still commercial pressure on the rates, most of the time on the mortgage books in all the countries. Fee and commission business, first glance it’s down 3%, 6% on the year, but it is definitely triggered by the -- of course, the year-on-year comparison definitely triggered by the impact of the war on the assets under management. They declined significantly compared with 1 year ago. If you look on quarter-on-quarter, they went up with €1 billion. And here we have the first indication that in terms of the fee and commission business, which is linked to the sale of investment products that that is triggered by actually a good performance on the investment products side. Entry fees were up. Asset management fees were slightly down, so the sum of 2 parts was roughly stable. The reason why the fee and commission income total of €451 million was €12 million lower has to do with one single element and that has to do with distribution fees, which are paid, mainly in this perspective to: first, the insurance business. Insurance business was doing extremely well and commissions which are paid out in that perspective are deducted here. And then the second thing, also in the fourth quarter, you have the seasonal impact of commissions, which are paid out in Czech Republic amongst others to Czech Post, and that is deducted also from the fee and commissions business there. So business-wise, investment products doing fine despite the difficult circumstances, despite the big volatility on the financial market. The second thing on the banking services, the interest -- sorry, the fee business was up mainly because of payment business; and secondly, on the security side, KBC Securities side had extremely strong quarter given their ECM activities. Assets under management already mentioned, €1 billion up. This is due to a pricing effect of the markets, but also because of net inflows. I was not expecting, to be very open, a positive inflow in the fourth quarter given the volatility. But in reality, we saw a further inflow of asset management sales to the tune of €0.3 billion, totaling for the full year 2022 an inflow -- net inflow of €2.9 billion, which is 21% more than 2021, which was in itself a record year. So over the full year, KBC was able group-wide to boost its investment sales and its life insurance sales and generate, as a consequence then, the higher return on the fee business. For a good understanding, out of the €2.9 billion net inflows, we had a very strong performance of the regular investment plans, which -- this is a gross number -- we’re inflowing €2.3 billion over the year. And that is indeed the main reason why the numbers are so good because regular investment plans are smaller amounts. They are absolutely not impacted by a lot of volatility in the market, and therefore, remain stable also going forward. And that’s a very important one, given the uncertainty which is still part of our daily life, I refer especially to the war in Ukraine. Let me go to the insurance sales. Non-life is keeping up the pace of the previous 3 quarters with a growth of 7% on the written premium, 8% on the earned premium. I think the latter number is more important than the former. And it is also once again posting a very, very good quality and underwriting, 89% combined ratio despite the impact of the natural catastrophes, which we had in the course of the year. That 89% is due to all business units, so Belgium, Czech Republic, Slovakia, K&H, and DZI are hovering around at 89% and is actually a translation that the entire book of KBC, which is, by the way, underwritten in the same way, according to the same underwriting schemes that it is indeed performing in all countries extremely well. In terms of the life sales, I said in the previous call that I was disappointed on the results of our performance on the unit-linked side. Well, my colleagues in the group picked that message up and performed extremely well. To give you an idea, we more than doubled the unit-linked business over the quarter, but also over the year, we actually doubled it, as you can see on the graph. In terms of the interest-guaranteed products, also there we had a very strong increase on the quarter and it is slightly below what it was in [position] last year. To sum it up, we have a growth on the quarter of 85%, and we have a growth of 35% roughly on the year. So it’s an excellent result also on the life insurance side. Going to financial instruments at fair value, let’s keep this short. We had a strong increase of roughly €60 million on that P&L line, which is mainly driven by the higher dealing room income, €95 million extra, which is, of course, driven by the higher rates and the volatility in the market. We had a €26 million increase on the equity instruments because we actually had a very low result in the third quarter. And we have the usual volatility on the ALM derivatives and on the XVAs, which are mainly triggered by the increasing interest rates and therefore, the performance -- the better performance of KBC on the funding side, which has a negative impact on those ratios. On net other income side, it’s actually perfectly in line with the normal run rate, which is in principle between €45 million and €50 million. The difference between €50 million and €44 million is €6 million. Well, that is the explanation can be given because we had one provision of €7 million for an old legacy file, which is the legal file in Slovakia which is coming to materialization and that deducted from the €50 million brings you to €43 million, which is perfectly in line with the result, which we are posting here. Far more important is the operating side, the operating cost side. That is on Page 11. We have posted today a cost of €1.16 billion. If you deduct the taxes from that, it’s roughly €1.145 billion. That’s 10% up on the quarter. And if you exclude, of course, Raiffeisenbank Bulgaria to make a comparison with the same quarter last year, if you exclude Bulgaria, you exclude the one-off, then we do see a growth of 7%. As a matter of fact, if you exclude those elements, we have a cost/income ratio of 54%, which is better than the cost/income ratio of last year. If you exclude the bank taxes, because they went up significantly, we have a cost/income ratio of 48%, which is substantially better than the 51% of last year. [How come] cost increase? There will be no big surprise when I say inflation pressure is there. We had a much higher inflation than we originally anticipated at the beginning of the year in all countries. But also, let’s say it as follows: we anticipated cost evolutions of the year 2023 and 2022. And for that reason, we just exceeded the guidance which we gave to the market. And as a matter of fact, if we would not have done so, we would have been perfectly within the guidance of the market. Let me say [indiscernible] what is the impact on this matter going forward. Traditionally, on the quarter, you have seasonal effects, IT, marketing expenses, [indiscernible], we continue to invest on the IT side for innovation purposes because of several reasons. We have continued to build a tech company within the bank and as a consequence, a bank and technology. We are clearly building also marketing platforms for brands and for consumers to close the gap between demand and offer. And that will give all of them, including customers, including companies, the reduction possibilities on cost and on time spent. And the trigger of all of that is KATE and the further implementation of the KATE Coin. And in that way also, we want to be entrusted with customer data, so to give them the power of their own privacy within all legal boundaries. And this is the core of our investments on the IT side. And as I said, because of this, we will trigger productivity gains, and that will benefit to KBC Group in the nearby future, as it did in the last 2 years. In terms of the bank taxes, while there are [certainties of life], bank taxes have gone up to a whopping €646 million which is 13.4% of our total OpEx. And you can see the split up over the countries. But in essence, this is driven by 2 things. First of all, interventions by government. Hungary in that perspective was an outlier again. And then the other thing is, of course, the impact of the growth of our deposit book because, for instance, in Belgium, the taxes are calculated on amongst others, the deposits, and that growth triggers automatically higher bank taxes. So going to the assets impairment side, another set of good news. First of all, the impact of the war, we don’t see it yet reflected into our book. And that means that over the quarter, we actually only had to book €40 million of impairments. As a matter of fact, if I look into the detail of those -- of that lending book, then the €40 million is actually translated into 1 single file, which costed us 300 -- sorry, not 300, costed us €35 million, and that explains almost in full the €40 million. Otherwise, we see no deterioration of the quality of our book nor in the PD shifts, nor in the staging processes. But to be also on the more cautious side, we further increased the buffer for geographical and emerging risk with another €42 million, which brings us now up to €429 million. When we take into account the guidance which we give for next year on the credit cost side, then this buffer, €429 million, actually is the same as a full-year provisioning for 2023. Last but not least, we also had an impairment of €51 million on what we call other. That is the earlier mentioned modification losses in Hungary related to the cap on the interest rate side, and then a €21 million impairment on intangibles that is traditionally on projects but also on buildings which we have, for instance, in Slovakia and then a goodwill impairment on -- a small goodwill impairment in Czech Republic of €5 million on a fintech activity. Credit costs, I already mentioned, and in impaired loans, not surprised, that is very low, 2.1%. This is [according to] KBC definition. If we would use the EBA definition, which is not as stringent as ours, then we would have a credit -- nonperforming loan ratio of 1.5%, which is clearly below the European average of 1.8%. On Pages 14 and following, you have the detail of the geographical buffer, but I suggest that I’ll skip the essence of that. The only thing I want to say on Page 14 is the buffer which is put in there, we have to adjust that each and every time according to the evolution of the portfolio. And therefore, you can see that on certain of those buffers, which we put forward because there was no negative evolution, we are releasing already certain of those buffer parts because indeed the evolution is much better than what we have put forward at the beginning. On the business profile, Page 16, you see the overview of our book. Clients continue to grow in numbers and then also the loans and the provisions -- the loans and the deposit, as already mentioned, we are growing the book, respectively, 8.6% and 9.6% when we do not include Ireland. What does it then translate into capital? Well, on Page 17, you see the evolution of capital. The capital position CET1 fully loaded now stands at 15.4%, clearly above the surplus target, which we have set at 15%. It is due to the fact that in essence volumes went up. We had a couple of positives as well, for instance, on our market’s risk-weighted activities. And all in all, the risk-weighted assets remained pretty stable at €110 billion. Now if you translate that into buffers, then we have a -- you can see that on Page 18, we do have a buffer of roughly €4 billion compared to our MDA restriction for a good understanding because of the changes in the -- in certain of those underlying elements. Our OCR buffer now stands at 11.31, and our MDA level stands at 11.83%. To be very complete, as you know, we did an issue of a Tier 2 instrument in the course of this first quarter in ‘23. If I would take that into account, the MDA buffer goes up from 3.6% to 4%, bringing it in total to €4.4 billion. In terms of the leverage ratio, increased as well to 5.3%, clearly above the regulatory target. 203 basis -- 203 basis points would be extreme low, 203% on the Solvency ratio II of the insurance company, the drop is mainly driven by the impact of the interest rates. It’s a bit counterintuitive, but because of the interest rate curve, the impact is negative on the Solvency II ratio for the most significant part, equity markets have performed extremely well, and that is then mitigated by the volatility adjustment, which brings it down as well. So it is rock solid and because of a couple of intrinsic model-driven moves, it is now at 203%. LCR stands at 152%, whereas the NSFR at midterm stands at 136%, which is also clearly above the targets, which we have imposed upon us and which are also triggered by the supervisor. Let me go to the forward look at guidance. We give guidance today on 2 elements: first, the year which we are dealing with, 2023. We have brought our guidance to €9.4 billion ballpark figure, which is including the positive one-off of €0.4 billion for the conclusion on the deal in Ireland. For a good understanding, this is better than what we originally posted for in the guidance -- in your guidance, mostly at the time, it was included €0.2 billion. It now comes to €0.4 billion, and that brings the total ballpark figure to €9.4 billion. In that €9.4 billion, we give an update of the net interest income, which stands at €5.7 billion, and that is a significant increase compared to the numbers of ‘22. Consequently, also of inflation, the OpEx is now guided at €4.4 billion ballpark number, which brings indeed the Jaw of KBC for this year. And in principle, we don’t speak about Jaws, but the Jaw for this year is substantially higher than what was originally assumed in the market. The credit cost ratio is currently estimated for the year ‘23 at the level of -- at the range of 20-25 bps, which is slightly below the through-the-cycle target. And the reason why it is [adapted] is because we do see clearly also in the first part of this year, let’s say, the first month of this year, no further deterioration of our portfolio and also given the further improved economic circumstances, we do put the guidance at what it is 2025. We also update the Basel IV guidance. There is a lot of uncertainty on Basel IV and the decision process is currently ongoing at the level of the European authorities. And taking into account what we know and what is still under debate, on our balance sheet end of year last year, we will have an impact of approximately €3 billion. So the previous approach, which was on the static balance sheet, is now updated to the balance sheet of today, and be aware, what you see here is the impact of the dropout of Ireland. The further guidance which we give is on the NII sensitivity. That is on Page 21. First of all, we gave you a full insight where we are with our net interest income in ‘22. How that goes down to the net interest income like-for-like and what the impact is of the positioning of -- the increasing interest rates. We give you an insight taking into account a pass-through of 40% on the saving accounts and a pass-through of 80% on the term deposits at KBC Group level. In order to give you an idea what it means in terms of sensitivity, if the pass-through would change, so if we would go up or down, the interest sensitivity brought a 30% pass-through on the euro-denominated saving accounts, brings us a €0.15 billion positive impact. If you would increase it with 10%, then of course, you have to reverse the same. This is for the year 2023. Consequently, with all the evolutions, we give a guidance on the longer term. As always, we do this on the basis of 3 years. And therefore, the guidance on total income stands at 6%. The guidance on OpEx comes to 1.8%, which creates a Jaw of 4.2%, which is an increase of our previous guided Jaw, which was 4% at least. The cost/income ratio goes to 43%, which is also an improvement. And then we keep the ratios or combined ratio below 92% or max 92%, and the surplus capital definition remains the same. The long-term financial guidance through the cycle remains for the credit cost ratio of 25 to 30 bps. And then all the others I’m not going to repeat them. And you can read them in this update because they did not change, just the regulatory requirements. Let me come back to the long-term guidance. We have used for the long-term guidance the forward rates to make that calculation. The reason why we did so is because there is a lot of uncertainty in the market in this respect. And when we saw the decision of the ECB last week, Thursday, since then also the forward rates have been moving up and down both directions coming to an end, which is higher than what it was on the -- what is it -- the 3rd of February last week. We have taken into account that guidance of the forwards of the 3rd of February of last week. In the meanwhile, indeed, the forwards have come up with 25 bps. So this guidance, which we just have given, is in that perspective on the more conservative side. All the rest of the package give you 2 details. First of all, it gives you the detail on the countries or the business unit, as you wish, for quarter 4 and gives you an overview of the full-year result. Let me skip both, but let me say that the full year result stands at roughly rounded number €2.9 billion, which is roughly 10% more than what it was. The driver is the sum of what I said on the quarter 4, kind of. So I prefer not to repeat it again, but I will make the floor available for you for asking questions. Thank you, Johan. The floor is now open for questions. Please restrict the number of questions to 2 to allow for a maximum number of people to raise questions. Thank you. Benoit Petrarque from Kepler Cheuvreux. Well, thank you for this very good presentation. I just wanted to try [to get] on the [indiscernible] guidance. So, first of all, on the NII 2023, you seem to assume a pass-through rate of 40%, which sounds like very conservative. So I just wanted to check if this is a 40% average over 2023, or is that a gradual increase to 40% during the year. So just wanted to check that because it sounds like the €5.7 billion is, again, well, very conservative. And then on the guidance on total income. So ex-one-off, you go for €9 billion in 2023. I think your 6% CAGR assumes €10.2 billion in 2025. So could you maybe talk about the gap, I think it’s €1.2 billion extra income in 2 years, so that’s quite significant. Could you talk about, yes, the exact interest rate assumed in 2025? Also, the customer behavior embedded in that guidance? And then just the final question is on the cost side. Where is your regulatory costs, say, trending in 2023 and 2025. I think some banks are removing the contribution to ESRF. So I just wanted to check where you are on this. I’ll take the first question everyone and then Johan will follow up. So on the pass-through rates, indeed, we think we’ve been conservative because we’ve applied the 40% pass-through immediately. Currently, we are not at that stage at the group level. It depends, of course, country by country, but if you look at group level, we’re not at that level at the moment, but we’ve applied it immediately in this analysis. Do you take the other one on the €9 billion? Yes. So on the non-NII increase between ‘23 and ‘25, you’ve got, yes, of course, the insurance, which is particularly on non-life, continue to grow at a good rate, and you see what’s happened in the last 2 years, growing at 7% to 8% premiums. We see that continuing in the next few years. And obviously, with a combined ratio, which is well below 100%. You know our target is maximum by ‘25 of 92%. That contributes quite a lot at that growth. So that’s quite an important driver. The second one is fee and commission income. That will also grow, particularly in the later years ‘24-’25. ‘23 we’ll be growing, but not as strong as the later years, and that is because, obviously, we start with a much lower assets under management with a low base. So we have to increase quite a lot this year compared to last year to have the same average assets under management and then do better. But we think we are going to increase our fee and commission income there, both asset management and other services as well. And these are the 2 biggest drivers that explain the further delta between ‘23 and ‘25. Do you want to take the... Benoit, if I add to that, because I was not sure if you were asking about [non-II] side. Like I explained it also, the total income side. Of course, on the evolution between now and 2025, the NII side will have a very positive impact. And that very positive impact, I mean there’s no big surprise here. It’s going to be driven by the evolution of the interest rates. And as I said, the guidance which we have given is the forward rates. In the meanwhile, the forward rates have increased, so on that side, it’s even a little bit conservative. By the way, we in KBC think that the evolution of interest rate will be a little bit different than what is put -- what you can read today in the forward rates. We fully agree with what is, for instance, on the short term. the next, let’s say, 9 to 12 months. But if you think on the longer end, there we believe that there will be more upside pressure on inflation, amongst others, triggered by the economy, which is not going to go down that deep as we originally -- as the market originally anticipated. I’m referring to a recession period, which is not, knock on wood, going to materialize. That’s one element. Second element, China is clearly into the market again, and therefore, will be also present on the energy market again more than it was in the recent past. Thirdly, obviously, you have the Inflation Reduction Act in the United States, which is clearly driven as a subsidy towards more economic development. Europe is currently debating the alternative or the answer to that. And let’s -- I think the common understanding is that Europe has to act to protect also its economic output. And as a consequence, if this economic output will be delivered, you will have on both sides of the ocean, also upward pressure on commodities and/or on energy prices. So there will be an upward pressure. And because of that upward pressure, inflation will be higher than we think what is assumed. Consequently, given the context, which is given by the central banks also recently, we think also that even in the longer term, there is more upwards pressure on the interest rates going forward. And for that reason, we think that the forward rates are on the conservative side. Coming back to your second question, you referred to the cost and what about the regulatory costs going forward. Well, in total cost for 2022, we had a purely regulatory cost, which is what we have to pay to our regulators to make them function. That is €40 million. We put forward in our budgets a constant evolution in that perspective upward. The regulatory cost, on the other hand, can be translated as an indirect cost, which is, for instance, the cost on the AML side. And that went up significantly in 2022. Like in every other financial institution, we see cost increasing there. There is a [bot] at the KBC side because KBC has, as you probably will know, developed an AI application 3, 4 years ago, and that is run across the group. And also in the meanwhile has been externalized into a separate company, which is dealing with other peers of ours to see if they are interested. Currently, we are running 2 pilot process -- pilot tracks with other banks where they’re using our software for AML. The impact in KBC going forward is that that software, which is far more efficient than the existing software, depends a bit on the country, we were talking about 3% to 15% more efficient. That will bring down the indirect regulatory cost, for instance, on the AML side. So we have taken that into account into our cost calculations. And if I would extend my story, everything what we do in terms of investments in innovation will have a positive impact, not only on the regulatory costs or the indirect regulatory costs, but also on the direct nonregulatory costs, will have a positive impact on the productivity in that domain. On the bank tax, you expect a relatively flat level in the coming 2 years, or are you assuming a drop at some point? This is a very difficult question. There are a couple of elements, which -- the first one is, of course, we don’t have under control what the governments are going to decide. It was -- at the beginning of the year, it was not foreseen that, for instance, the Hungarian government stepped in and increased the costs. All the other elements, which are on the table and which are known, for instance, Czech Republic, where the decision has been taken, has been put forward, that has been taken into the books. You know that for Czech Republic that the impact on KBC will be very limited. As a matter of fact, for 2023 it will be hardly -- it will be be nonexisting. What is going to be the decision going forward, we really don’t know because what we cannot exclude is that governments step in and because of their budgetary constraints, they are pushing up the bank taxes on the financial industry. For that reason, we also obviously guide our OpEx without bank taxes because we have no grip on bank taxes. And I already said a couple of years ago that it would be unfair to [save] the increase of bank taxes by cutting FTE and cutting into the muscle of your organization. So the answer straightforward is we don’t know. There is a kind of an inflationary aspect, for instance, on the bank taxes in Belgium because they are calculated on the number of deposits which we hold and the number of deposits KBC, as you know, is very attractive for customers. So we will have there anyway an upward pressure. All the rest depends on the change of opinion of supervisors -- not supervisors, sorry, politicians in essence. 2 questions, please. I’ll just come back first on the bank taxes. You sound cautious about your ability to actually have this bank taxes stop or precisely the ESRF contributions. Is that because you are a Belgian bank and historically in Belgium, the things tend to be a bit harsher than the other European country? Why you think that will not stop? And do you think that’s [indiscernible] this could be renamed or recycled in Belgium specifically to another tax? And if you go into Slide 12, within the €646 million, how much is the ESRF actually, namely? Is it €154 million or there is other parts that falls into that? And then the second question is on the capital return. Can you explain why you didn’t distribute the €400 million excess above €15 million with full year results as you did last year? This is part of the ordinary policy. And I presume you could have done it. And why pursuing the share buyback route while you trade at a hefty premium to book and incentive for that is lower and you can just do with cash given your excess capital? Let me answer the first one. So on bank taxes, you’re right, we have a split of the bank taxes between straightforward bank tax -- and I’m talking about what is on the Slide 12 -- the straightforward bank tax which, as I said, is calculated amongst others in Belgium on what they call eligible deposits. That’s one thing. And then you have 2 other contributions, which are part of that. That is the contribution for the European Resolution Fund, and then the second one is the Deposit Guarantee Fund contribution. So if I look, and you specifically refer to Belgium, let me give the answer for Belgium. You look at the numbers on Page 12, then we have, in total, €349 million of contributions for Belgium. That is split up €177 million of taxes, €74 million of Deposit Guarantee Fund, and €98 million of contribution to the Resolution Fund. What I was referring to the previous question, then we are not indexing the €349 million because of the evolution of the bank tax and then we are talking about the €177 million. In Belgium, there was a rumor last year that the government was reconsidering the distribution -- the DGF and so the contributions for the digital -- not Deposit Guarantee Fund. That conversation is not decided yet, and we’ll see how that evolves going forward. Everything else, I cannot answer because I have no clue what the government is going to do. In terms of the second question you asked, so the capital distribution. The capital distribution, which is now put forward is indeed split up in 2 parts. You have one part which is linked to the surplus capital, the 15%, and that’s indeed €0.4 billion. And the second part is, of course, the [free flow] of capital, which is linked to the sale of the assets in Ireland. We took both together indeed because, indeed, we are considering a share buyback, and we are discussing that -- we have discussed that with the European Central Bank, but we keep the optionality open. That means that, first of all, we awaite the decision of the European Central Bank, which will happen in the next coming period. The authorities have in principle 3 months to decide that. Given the constructive dialog which we have had with the authorities, we have good hopes that it needs not to take the full 3 months, but we’ll see. And then on the basis of that, we will take -- that is the new information we will get, we take immediately a decision when the decision of the ECB comes in on what we’re going to do and how we’re going to distribute the capital. And then you have all the optionalities on the table. The final decision is taken to distribute the capital. The Board [indiscernible] forms of cash, and they will see on the optionality, if it is approved by the ECB, of that optionality of a share buyback is taken yes or no. But a decision is going to be taken, both combination of the [free fall], and we did not wait for the full year -- for the first quarter results on the €0.4 billion of surplus capital of the year 2022. Okay. But just to understand, so you will have -- you asked for the share buyback approval. And then if you get the -- you’re confident to get it, then you’ll decide, if you will do a buyback or cash or combination? Is that right? Correct. And that’s what is mentioned on the slide, that is the final decision by the Board. It’s precisely that what you just described. Yes. Flora Bocahut from Jefferies. I’d like to come back, please, first of all, on the distribution, just to make sure you know we understand your point correctly there. So basically the distribution delay regarding the €1.4 billion here is entirely due to you waiting for the ECB approval but nothing else. So when you say in the slide pack that you envisage this distribution, we should actually understand that you intend to do that distribution barring only the ECB approval that you expect in the coming months. So if you could just clarify that this is how we should understand this. And then a question on capital, just to check 2 elements. The first is the IFRS 17 impact because you mentioned in the slide pack that you will provide us with more explanation in mid-April, but at least the capital ratio impact, can you maybe give us a number already? And then just to check that you still intend to update the capital target in Q1 like you do every year? Flora, just to answer your first question, Luke will take the second one. The answer is, yes, indeed, you’re right. Your analysis is correct. So on the surplus capital and on the €1 billion, the decision to distribute it to shareholders is positive. Only the format we have a little bit of a different process because we need to get the optionality of the share buyback approval by the ECB. But the decision on the distribution is taken. There is no doubt about that. And then on the IFRS 17 capital impact, there will be no impact as we work with the Danish Compromise, and we use the historical book value of the insurance company. That means that for capital calculations, KBC Insurance is deconsolidated and then taken as a financial participation as book value. So any IFRS 17 changes in the net asset value of the company do not affect as a result the core Tier 1 of the group. Sorry, Flora. Yes, indeed, we are going to update, because we’re in a bit of confusion. Capital target, you mean the definition of the surplus capital? Just the first one following up on capital threshold, the 15% for distributions. Obviously, you’ve historically said that this is linked to the average capitalization of your peer group. But when we look at your own capital stack and perhaps look at the Basel IV impact within that, it looks obviously to be quite small. It was already small, but obviously, now it’s even more smaller. So is there scope for -- should we be anticipating that there is now more scope for a reduction in the 15% threshold going forward? That’s the first question. And then the second question I have is just a clarification point around the pass-through. When you say 40% is your assumption, can I ask what has been experience so far, for example, in Q4 of last year, what was the actual pass-through at the group level and perhaps in Czech Republic, which seems to be at the higher end within your geographies? Coming back to the definition of the surplus capital, the 15%. As I said on the answer to the Flora on the previous question, we will give you an update on that matter on the back of the first quarter results. And for good understanding, we take into account several measures. You referred to the average of peers. It’s not the average. It’s the median. So in that perspective, we will give you the full update. It’s very early days to do it today, and we’re not going to do so. And then just to clarify on the Basel IV impact, which we mentioned in our document. So the Basel IV impact is the first-time application impact. It’s €3 billion. And the impact of that is, of course, to be balanced given the fact that we take into account our peers because we want to be amongst the better capitalized financial institution in Europe. So all [is relative] given the impact of our peers going forward. But as I said, we will give you an update on the surplus capital definition of 15% in the months to come. On your second question on the pass-through rates, we do not give any specific percentages. But as I’ve mentioned before, at the moment, and that also accounts for the fourth quarter, obviously, the group-wide pass-through on the savings accounts and 80% on term deposit, taken together, we are well below that at the group level. Of course, the difference -- there’s a difference country-by-country. You can imagine that where interest rates are very high, the pass-through rates are higher; where interest rates are lower, pass-through rates are lower. But overall, we’re below the level that we here show in the sensitivity analysis in the pack. Two questions, please. So firstly, on costs. If you apply the 1.8% CAGR out to FY ‘25, you come to around €4.4 billion, which is dead in line with your FY ‘23 guidance for €4.4 billion as well. So could you perhaps talk us through how you plan on keeping costs flat from 2023 to ‘25, especially given earlier in the call, you stated the inflation could be more persistent and certain elements of your cost base are immediately linked to that? And then secondly, on NII in Belgium. So is the Q4 amount reasonable run rate for FY ‘23 in the context of you flagged higher reinvestment yields, which contextually should grow, but also the current pass-throughs below your full year expectations for next year? So just some clarity on those dynamics would be helpful. We had a bit of difficulty to understand because the line quality was very poor, but we think we understood it. Anyway so, first of all, the first question on cost. So if you apply the CAGR, you end up indeed at €4.4 billion. And we understood that the question was how will you manage to keep it flat given the guidance of €4.4 billion in 2023. Well, indeed, there are several reasons why we are achieving that €4.4 billion flattish level. First of all, be aware that the composition of the book has changed -- will change, sorry, between 2022 and 2025. First of all, we have the exclusion of Ireland, which is still part of 2022, and that makes, of course, a significant difference. The second one is that we will, regardless of Ireland, further reduce -- or further increase, better, the productivity of our book. So we will have on the back of the innovation, which we have been investing in over the last years. We will have a fundamental improvement of our productivity per FTE. In the recent past, it was roughly 1% a year. So we can use that as a guidance. We don’t disclose the detail for the period to come. That’s one thing. And then second thing is we do have a second effect, and that second effect is the integration of OTP in Slovakia, which still has to materialize, so that will materialize in ‘23, mostly in ‘23 and ‘24. And then we have, of course, the integration of Raiffeisenbank Bulgaria in -- UBB Bulgaria, sorry, and that will materialize in ‘23 and ‘24. So those 2 evolutions are also to be taken into account as well. And then last, but not least, we have also -- and there was an earlier question, and I don’t remember precisely who asked it, but it’s an important one. It was Mr. Petrarque who asked it, that is the effects of the implementation of AI solutions amongst others on the regulatory side, and that is AML, which was a fundamental cost driver in 2022. So regulatory cost on the AML side, which were significantly up in 2022. If you do just extrapolate that going forward, you overestimate that because the impact of the AI solutions, which we have and which we, by the way, commercially used in our subsidiary [DZI], that is going to have a positive impact as well. Small detail, but it’s a significant number. Be aware that we had a one-off bonus of €41 million in the year 2022 because of the payout of COVID-related bonuses to our staff in ‘22, which we do not foresee in the years ‘23, ‘24, ‘25. On your second question, we were debating, I don’t think we understand fully because there’s discrepancy in our interpretation here what your question was. Did you ask whether we could extrapolate the fourth quarter growth? Was that the question? I can reclassify. Hopefully, the line’s a bit better. So it’s just about NII in Belgium and whether the Q4 amount could be extrapolated into FY ‘23? Okay. I’ll give the complete picture. So first of all, you cannot extrapolate the quarter-on-quarter growth in -- obviously, in the fourth quarter. Because in the fourth quarter, we already -- we still had the benefit of €27 million of TLTRO in that number. So if you would [indiscernible] again in the next few quarters, that would be overestimating the NII. So that’s one element that we need to take out. On the other hand, we still see ECB rates that have increased further compared to what we have on average in the fourth quarter. ECB rates, you have to look at what the average ECB rate was in the fourth quarter and then look at what the average ECB rates will be in the next quarters. Now there will still be quite an increase in the average ECB rate between the fourth quarter of last year and the first quarter of this year. And that has, of course, quite an immediate effect on our NII since a portion of our corporates and -- our current account and saving accounts are reinvested in cash at the ECB. So that will have an immediate effect, but not everything. And afterwards, we have, of course, the reinvestment of our replication book. But that will mean that the growth we will see in the first quarter will still be very strong, but then reducing a little bit quarter-by-quarter because then the other effects of reinvestments of your portfolio of your replication book will take over. But please do not just say you have 16% growth each quarter. That’s impossible. The first one relates to your comments you made about using forward rates on the 3rd of February. What would be the impact if you take the forward rate now because you said it’s a little bit more favorable? The second 1 is a clarification on the dividend ‘23 paid in ‘24. Is it fair to assume that because you take into account that €400 million gain on Ireland in the €1 billion distribution, when you consider the ‘23 earnings to pay the dividend ‘23 in ‘24, you will remove this €400 million? And then a clarification on Basel IV, you said €3 billion saved in ‘25. Do you still stick to the €8 billion fully loaded? I’m not sure if I’ve seen anything on that. So on the forwards, yes, indeed, there is a difference. I said it’s roughly, I think, 23 basis points average, so roughly 25 basis points. But unfortunately, we do not give that sensitivity. That work we leave up to you. Okay? And then your question on the capital gain, the €400 million. Technically, you’re right that this is profit for 2023 and 50% of that is our policy will be paid out next year. So there’s a bit of double counting, but we’ll take that into account when we decide on the capital distribution next year. Having said that, and that is always our basis given the good profitability, we always want to have an ordinary dividend, which is stable, which is doesn’t -- is not very volatile. But we have the sufficient profitability to ensure that there’s stability there, even if we have to make a technical correction of the €200 million, so the half of the €400 million capital gain, even if we have to take that into account as a correction, we will have more to be distributed normally next year, if you see what the guidance is than just 50% of our dividend -- of our profits. Then the question about Basel IV, yes, you’re right. We have not given any updates on the long-term effect of Basel IV. So the fully loaded effect, the €8 billion is now outdated and can no longer be used. Why? Well, we thought about doing the same again on the balance sheet for this year, a static balance sheet. But the problem is that there are so many effects that are currently under discussion and smaller -- what may seem small decisions by the European Parliament and the Council and the Commission can have quite big effects on the results on Basel IV. So we now abstain from this because it can be volatile both plus and in minus, both ways. So you’re saying it could be better than 8% but could be worse than 8%, so you don’t know, so you stick to... There are so many amendments. I think 1,900 amendments that have been submitted. It is really difficult now to see what the endgame will be. And if we now give a number, then it could be really outdated by a big margin in 6 months’ time. I’ve got a follow-up on costs. Could you please share what is the weighted average inflation per year that you’ve got in your targets? Because the 1.8%, again, it is low versus [indiscernible] particularly when we compare what you were saying on inflation going forward? The second question is regarding the debate between buybacks and special dividends, could you please remind us what is the preference of your core shareholders? And just a third one very quick on the Czech Republic. Are you saying that NII will grow in 2023? Okay. We don’t give a weighted average inflation. But to give you an idea what our estimates were for the guidance is that in 2023, the average inflation for Belgium will be around slightly more than 5 percent points -- sorry, 5% compared to now in ‘22, 10%. This is the harmonized inflation. We should be careful about that because local inflation sometimes is different from this because it’s harmonized and that is the average between 2022 and 2023. So it is not the inflation between the beginning of ‘23 until the end of ‘23, but the average compared to last year, 5.2%. Czech Republic for ‘23 -- sorry, maybe I should say, 5% for Belgium going down to 3% in ‘24 and then 2% in ‘25. Czech Republic,7.5%, slightly more than 7.5% for ‘23, coming down to 3% and then 2%. Slovakia, 10%, then coming down less fast, 9% afterwards and then lower. Hungary we keep at 8%. We think it’s going to go up at 18%, and then fast coming down to about 5% and then 3%, 3.5% by ‘25. And Bulgaria is 10% and going down also to 3% and 2%. So that gives you an idea of what our estimates were for the basis of our guidance. On the question is what is the preference of our core shareholders. Well, we still have to discuss with them. I don’t know what their preference is. Clearly, the optionality is created. It was already decided by our AGM last year that we could do potentially a share buyback and also the reason why we reached out to our -- sorry, supervisor, ECB, is clearly to have that optionality on the plate. What the preference is we will let you know as soon as decision of the ECB is in because we will take immediately a decision in that perspective. Sorry, there was one last question that was posed on the NII evolution in Czech Republic. And I think it’s a very interesting one and a very difficult one to answer as well because there are different opposing effects. First of all, of course, on transformation results that game is over. We will now probably have reducing interest rates rather than increasing interest rates. And there we’ll have to see how the pass-through rates can be reduced as a function of reduced reduction in interest rates. That’s very difficult to model. And secondly, on the other hand, that is a positive effect, we still see some decent growth in the loan portfolio, as I mentioned before, and probably also improving margins. If rates come down, then margins go up again. What will be the end effect? There will be certainly not a huge increase, but we don’t see any huge decrease either. And it’s very difficult to predict at the moment. So we don’t give any precise numbers. But that’s indeed something where you should not expect a huge growth from. But again, we don’t think there’s going to be a huge downside either. All right. So this sums it up for this call then. Thank you very much for your attendance and hope you remain healthy. Take care and enjoy the rest of the day. Cheers. Thank you. Everyone, that concludes your call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.

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Greetings and welcome to RCI Hospitality Holdings First Quarter Fiscal 2023 Earnings Call. You can find RCI's presentation on the company's website. Click Company and Investor Information under the RCI logo. That will take you to the company and investor information page. Scroll down and you'll find all the necessary links. Please turn with me to slide two of our presentation. I'm Mark Moran, CEO of Equity Animal. I will be the host of our call today. I'm here in New York City with Eric Langan, President and CEO of RCI Hospitality; and Bradley Chhay, CFO, who is in Houston, home of one of my favorite clubs Club Onyx managed by Josh Brooks. Please turn with me to slide three. If you aren't doing so already, it's easy to participate in the call on Twitter Spaces. On Twitter go to @RicksCEO and select the space titled Rick RCI Hospitality Holdings Inc. 1Q '23 Earnings Call. To ask a question, you'll need to join the Twitter Space with a mobile device. To listen-only, you can join the Twitter Space on a personal computer. RCI is also making this call available for listen-only through traditional landline and webcasting. With Twitter having glitches today, in the event of a crash we’ll restart the Space, and if that fails, more to the tiling. A question-and-answer session will follow. And this conference is being recorded. Please turn with me to slide four. I want to remind everyone of our safe harbor statement. You may hear or see forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those currently anticipated. We disclaim any obligation to update information disclosed in this call, as a result of developments that occur afterwards. Please turn with me to Slide 5. I also direct you, to the explanation of Rick's non-GAAP measurements. I would like to encourage everyone, to retweet and share this date. Finally, I'd like to invite everyone listening in the New York City area to join me and Eric tonight at 7:00 to meet management at Rick's Cabaret, New York, one of RCI's top revenue-generating clubs. Rick's is located at 50, West 33rd Street between Fifth Avenue and Broadway, a little in from Herald Square. If you have an RSVPed, ask for Eric or me at the door where I will be deploying my own capital allocation strategy after 9:00 p.m. Thank you, Mark. Thanks everyone, for joining us today. Total revenue came in generally as expected with Nightclub segment having another great performance. This offset difficult Bombshells comparisons. GAAP EPS and net cash from operating activities and non-GAAP EPS and free cash flow were affected by repairs and maintenance CapEx that occurred in the first quarter. GAAP EPS also included $0.16 in non-cash, intangible amortization and stock-based compensation compared to a year ago quarter. Nonetheless, adjusted EBITDA was up 13.9% year-over-year and we ended the quarter with $34.1 million in cash. That was after making a number of club and restaurant and real estate acquisitions. Probably, the most important thing that happened in the quarter, is that we got off to a terrific start with our big three year initiative. The goal is to continue our mission of growing free cash flow and EBITDA of a higher revenue base. Now, we have -- we now have numerous acquisitions and projects and development. Highlights include our pending acquisition of a group of five Baby Dolls and Chicas Locas clubs in Texas. The Rick's Cabaret Steakhouse Casino in Central City, Colorado. In addition, we have an even stronger lineup of new Bombshells locations in three states in Alabama, Colorado and Texas. Thanks, Eric and good afternoon, everybody. Looking at the sum of the major numbers for the quarter, total revenues were $70 million, up 13.2%. GAAP EPS was $1.11, up less than 1%. Non-GAAP EPS was $1.19, up 8.2%. Net cash from operating activities was $14.9 million. That's off 8.4% from last year, mainly because we paid down more liabilities on our books in the first quarter compared to a year ago. Free cash flow was $13 million, that's off 14.6% because of the change in net cash from operating activities and about $1 million more maintenance CapEx that fell in the first quarter. Adjusted EBITDA was $20.5 million, up 13.9%. And weighted average shares outstanding declined 1.9% year-over-year, due to repurchase over the last year. Please turn to Page 7, to review Nightclub segment. Revenues totaled $56.3 million, up 20.4%. GAAP and non-GAAP operating margin was 40.4%. That reflected increased operating leverage from higher sales in particular higher-margin service revenues, which increased 23.4%. This was partially offset by increased amortization of club licenses at lease locations. As a result operating income increased 21.4%. Now fiscal year 2022 and first quarter acquisitions added $15.3 million in sales. Same-store sales were up 1.2%. This reflected strong contribution and growth from our white collar clubs mainly New York, Illinois and Florida, partially offset by some softness in our blue collar clubs. In the second quarter, the 11 clubs we acquired in October 2021 will fall into same-store sales. Based on current trends this should result in growth in same-store sales. Please turn to page 8 to review the Bombshells segment with me. Revenues totaled $13.4 million compared to $14.8 million last year. Operating margin was 13.8%, primarily reflecting reduced operating leverage. Operating income was $1.8 million. Bombshells Arlington, which opened in December 2021 added $1.3 million in sales. Same-store sales were down compared to last year when the chain was experiencing very favorable local economic environment and the combination of government stimulus people returning to work and a little competition. However, compared to pre-COVID, first quarter of fiscal 2020, our December quarter same-store sales were up 3.6%. Please turn to page 9 to review our consolidated statement of operations with me. All comps as a percentage of revenue and compared to a year ago quarter unless otherwise noted. Cost of goods sold continued at 12.9%. This reflected the increased higher margin service revenues in the sales mix. Salaries and wages were approximately low at 26.7%. Now SG&A was 32.5%. This reflected $900,000 of non-cash stock-based compensation and $400,000 of repairs. Now if we exclude these two items, SG&A would have been 29.5% compared to a year ago quarter, which was 29.9%. Expenses associated with these newly acquired and reopened locations will subside as a percentage of revenues as their sales build. The non-cash stock-based compensation is an ongoing item. While we have repair expenses every quarter, they are not typically as large as they were in this quarter. Depreciation and amortizations were 4.7%. This reflected an increase in depreciable assets from newly acquired and constructed units. It also included increased non-cash amortization of licenses from the clubs at lease locations. Operating margin was 24.2% and 25.6% non-GAAP the same as last year. Interest expense was 5.3% versus 4.2%. This reflected higher debt from our club and Bombshells site acquisitions over the course of the year. Now please turn to page 10. We ended the quarter with cash and cash equivalents of $34.1 million. Free cash flow was 19% of revenues and adjusted EBITDA was 29%. That's a little below our targets of 20% and 30%, respectively. Please turn to page 11 to review our debt metrics. Net of loan costs, debt was $211.2 million at December 31st. That's an increase of $8.7 million from September 30th. This increase primarily reflected financing used in the acquisition of Heartbreakers deal, down in Dickinson, Texas, the Denver Food Hall and Atlanta, Lubbock, Texas for a Bombshells location. Our weighted average interest rate continued at 6.35% this compares to 6.26% a year ago and 6.73% five years ago. Our amortization continues to be within the $9 million to $10 million annual range which is very manageable with our cash flow. Now please turn to Page 12 to review some of our other debt-related metrics. The ratio of debt to adjusted EBITDA was 2.4x as of December 31, well below our MAX comfort level of around three. Our occupancy costs were 7.8% of revenues. This continues to be well within the 6% to 9% range which average when sales weren't dramatically affected by COVID. Please turn to Page 13 to look at our December 31 debt pie chart. Our debt now consists of 61.9% secured by real estate, 25.2% secured by seller finance debt -- secured by respective clubs to which the real estate at applies to, 4.9% of the debt is secured by other assets and 8% is secured by its unsecured debt. Please turn to Page 14. Now we continue to talk to new investors, so I'd like to take a moment to review our capital allocation strategy. Our goal is to drive shareholder value by increasing free cash flow per share 10% to 15% on a compound annual basis. Our strategy is similar to those outlined in the book, The Outsiders by William Thorndike. We have been applying these strategies since fiscal 2016 with three different actions subject to whether there is strategic rationale to do otherwise. The first one is M&A, specifically buying the right clubs in the right markets. We like to buy solid cash flowing clubs at 3x to 5x adjusted EBITDA and will use seller financing and acquire real estate at market value. Another strategy is grown organically, specifically expanding Bombshells to develop critical mass, market awareness and sell franchises. Our goal in both M&A and organic growth is to generate annual cash on cash returns of at least 25% to 33%. The third action is buying back shares when the yield on free cash flow per share is more than 10%. Thank you, Bradley. Please turn to Slide 15. We currently have acquisitions and projects in development involving nine clubs. In October, we acquired Heartbreakers in the Galveston area. At the end of January, we reopened the day shift. We plan to finish the clubs remodel in February and that should help increase its contribution forward. In late December, we reopened and reformatted a location in San Antonio as the Jaguars Club. The first quarter provided a little contribution, but we expect it will be bigger contributor going forward. In mid-December, we announced definitive agreements to acquire a group of five Baby Dolls and Chicas Locas clubs in Texas. We are awaiting transfer of liquor licenses. The club should contribute $11 million in EBITDA in year one. And once we complete our expansion plans, they should contribute $14 million to $16 million in EBITDA. In December, we announced acquiring club assets in Fort Worth to create another PT show club. The remodeling is underway and the reopening should occur in the second half of fiscal 2023. Last year, we had to close our Jaguars Club in Lubbock, Texas because of an intimate domain issue we acquired another location with the money the state paid us. It is currently under construction and opening is expected in the second half of fiscal 2023. Fiscal 2023 will also benefit from a full year of the 15 club acquisitions and three club and club-related restaurant openings we made last year. I'd like to highlight the value we added in our big October 2021 acquisition of the 11 clubs. Based on our management and optimization, we increased adjusted EBITDA 24%. That means we paid 4x for the operating assets compared to our original estimate of 5x their pre-COVID-adjusted EBITDA. Please turn to slide 16. We have nine locations in the process of acquisition or development. In late December, we acquired the Denver area food hall. We are currently remodeling it and installing the Bombshells kitchen. That is expected to be completed by the end of February, and an increased contribution in March. Earlier this week, we bought out our San Antonio franchisee for $12 million cash, and $2 million in debt. This is one of the best-performing Bombshells. Construction is continuing at our Stafford location in the Greater Houston area. Building permits have been approved for our Roulette location in the Greater Dallas market. We are currently reviewing construction bids. In Lubbock, we are awaiting a building permit for our location. Our second location in Austin Texas is now pending site review. We have an LOI for a location in Downtown Denver with an existing building that will work very well for Bombshells, and we estimate it will take about $1 million or less in work to get it open. Our Huntsville, Alabama franchisee is awaiting his building permits and indexation of his land into the city of Huntsville. Regarding our other Denver location in Aurora, our plans are in process with the city. If you'll turn to slide 17. In December, we announced acquiring a 30,000 square foot building in downtown Central City for only $2.4 million for our Rick's Cabaret Steakhouse & Casino. We have applied for our master casino license, and are moving full steam ahead on this. Turning to slide 18. This slide compiles all of our capital allocation to date for this fiscal year, including some shares we repurchased in the first quarter and the major acquisition we have pending. Altogether, we are looking at allocating about $93.2 million so far this fiscal year, and I estimate approximately $20 million in additional capital expenditures will be used to build the improvements for these properties that are still in development for last – and the properties still in development for last year. As I've said, our goal is to allocate about $200 million on average per year over the next three years. Please turn to slide 19 for an updated on our geographic focus. In the first quarter of 2023, our regional revenue breakdown was Texas 38%, including Bombshells. Florida 25%. New York 9%, a little higher than fourth quarter 2022. Illinois and Colorado each at 7% and the other eight states combined for 14% of revenue. This demonstrates our geographic diversity. Our exposure to growth states like Texas, Florida and Colorado, and how we develop business clusters in key areas. I want to say thank you to all of our loyal and dedicated teams for all their hard work and effort. We can't do it without you. Thank you very much, Eric and Bradley. I want to encourage everyone to retweet and share this Space. And I'd like to give a special shout out to Cynthia Daniels. I was very much enjoying your profile, while Eric was speaking. If you would like to ask a question, please raise your hand in the Twitter Space, when you are done asking your question please mute your microphone to eliminate any background noise. We have a limited number of speakers Space's. After your question, we may move you back to the audience to free up Space. To start things off, we'd like to take questions, from RICK's analysts and then some of its largest shareholders. Our five analysts are Scott Buck of H.C. Wainwright, Anthony of Sidoti, Lynn Cole of Water Tower Research, Rob McGuire of Grant Research and Joe Gomes of Noble Capital Markets. First up, we have Scott Buck. Scott, take it away. Hi, guys. Thank you for taking my questions. First one, Eric, could you talk a little bit about the trends you're seeing in the clubs in January and the first part of February? Still seeing some of the soft pockets in the blue collar clubs, or is that kind of worked itself out? Yes. I mean I still think there's a little weakness. I was going over everything looking at a four-month trending deal with October, November, December, January. This January total sales were a little over October -- I mean I'm sorry a little over November and December's total revenues. So, I think that's a promising deal. Typically when we see these slowdowns, they affect us for about six months. I think the slowdown started in November based on what I'm seeing. So I'm hoping that it will be a little shorter and that March I think is going to be the big turnaround for us. Of course we have Super Bowl this week. So this week we'll be abnormally affected by a one-time event for this weekend, especially out in the Phoenix market and -- as well as the two great teams with the Eagles and Kansas City in the Super Bowl, I think that's going to be a help a lot with viewership. It's to help the Bombshells in Texas as well I think. Great. That's helpful. And my second question, Bradley, should we think about these higher than anticipated repair and maintenance costs as a pull forward from future quarters or is this in addition to? Now, last year was the same thing. We had $4.5 million in maintenance CapEx. I wanted to clarify something. So last year we had that. And this year we had $6 million as our target. So 1.5 per quarter what our maintenance CapEx should be. Now that's an impact to free cash flow. However what we're talking about is repairs and maintenance costs. Those repairs were done in part of the winter storm and all that stuff and some plumbing. We don't anticipate higher than expected repairs and maintenance expense going forward. Good afternoon and thank you for taking the questions. So as far as Bombshells, the operating margins there were lower than where we had projected. Can you just talk about kind of what happened there? And then how should we think about segment margins there going forward? Yes. I think we got a little surprised at some of the weakness in late October -- I mean late November and December. The margins I think will return to a more normal mean of 18% to 22% as we move forward. The Houston market was extremely weak. The Houston, Texas did not contribute anything at all this year, which hurts a little bit in that marketplace. Overall I think that Bombshells has gone through a little bit of some growing pains in that -- in the previous years we've had less competition in the marketplace, because so many places were closed. We were some of the only places open after COVID. We were first to open after COVID, and there was a lot of vacant buildings. And I think over the last year and especially in the Houston and Dallas market, those vacant buildings have been reopened new businesses, new restaurants have moved in and come into the marketplace. And they're going through their honeymoon periods, because they're new. And so everybody rushes to the new place for a while. But I think over the next few months we're going to start seeing some of that return back to normal where the customers kind of float around a little more than they were as those places are no longer than their honeymoon periods. I would also like to remind everybody that same-store sales were still up 3.6% from our pre-COVID 2019 numbers. So overall Bombshells is still on course. We do have some cost -- the Grange Food Hall is in the Bombshells segment because it's a restaurants, we put that in the restaurant segment. So, were some cost there in the first -- last 10 days of December that didn’t really contribute revenue. And I think as the Grange, we're doing the remodel the new TVs are in, the games are in, the actual Bombshells kitchen construction starts next Tuesday, should be finished by Friday or Saturday and we hope to have that open by the first of March. And so we'll have a lot more contribution from the Grange this year -- in this quarter as well as for March and then of course going forward. But we also have the -- on February 1st we took over operations from our franchisee as they lost their operating partner and the investment partners decided they wanted to sell the location and rather than trying to go through the whole franchising process and finding somebody we just discussed them selling us the location. We financed that location with $1.2 million cash down and a $2 million a five-year seller note. So, a very manageable note for us with that location averaging sales of about $120,000 a week. That's about a $6 million year a unit. So, I don't think we could have even built the unit for that cost. So, it's an upgrade for us. It's sad that we lose a franchisee. We're really hopeful on the franchising model at some point in the future. Maybe Huntsville will be the guy who's successful. But at the same time we pick up a fantastic location for ourselves. Okay. That's good to hear. And then given the choppiness in traffic in both of the blue collar locations and Bombshells, are you guys maybe perhaps rethinking your promotional strategy to do maybe more specials as far as for food or drinks, or like how are you thinking about that? Yes absolutely. I mean we have been -- we kind of switched modes in early December. We don't want to get too crazy about it in December because we did have a lot of preplanned parties and Christmas party and stuff. We did get affected a little bit -- pre-Christmas was pretty decent and it slowed down the week between Christmas and New Year's was a little off but then New Year's was -- New Year's weekend was fantastic for us. So, it's been a strange -- I would say it's been a little strange adjusting to it right? Because this -- I call this a psychological recession in that there's plenty of jobs. People can go out and earn money and make money very easily right now. It's just -- it's psychological. Everybody keeps saying things are going to get bad, things are going to go bad. And people are seeing prices a little higher. And so I think there's still a little sticker shock on certain items and certain prices out there. But overall I think that by March -- I'm thinking by March out we've adjusted our plans. We're seeing like I said January was better than December and November in total revenues. February the short month we only have 28 days, so we don't get those extra three days. So, we'll see how February comes in. But I think on a per week basis or if you do an average daily sales, I think February is going to be up from January. And I expect March will put us back on the path and we'll have to see how we run through this summer. Thank you very much. Eric, I wanted to ask you do you have any other color that you can provide on the casino in terms of the progress you're making? Well, yes and no. We're in some negotiations right now. We would try to complete with a national partner that's not quite done yet, but we're working on that process hopefully by the next -- by next week we'll get some color on that which I think will be exciting for us. Overall, we are -- we've done our 3D scans. We're starting all of our layouts. We're going -- we'll be up there Monday after Super Bowl to -- with some of our operational team we're going to actually do floor layouts and flow patterns for the location to get to the architect. I suspect and hope that we'll have the roofing and HVAC systems repairs and replacements started in April and hopefully completed by the end of April. My personal goal is to have the casino turnkey ready to open by November 1. A lot of that will depend on whether we can get our preliminary approval by June 1 which we should be able to do because that's about six months. And typically it only takes three or four so we may have it much sooner. We've been in licensing I guess going on about December January about 2.5 months. So hopefully based on what we've heard from historic from other operators in the Colorado market is that between four and six months you typically will get your preliminary approval so you can start your casino setup. So if everything goes right we'll be turnkey ready by November 1. And our total cost on that is we're buying most of our machines. We're not going to do a lot of leases or what we call they call participation machines will -- should come in just under $10 million between the remodel the machines, the table games everything else the security systems that type of stuff is what you think including the land and building cost of $2.4 million. So basically I figure we're going to spend about another $6.5 million on build-out and gaming devices and leave us about $1 million bank for start-up. That sounds great. Thank you so much. I just have another question. It would being in Dallas and the weather has been pretty unfavorable. I know we're only a few days end of February, but can you comment at all on how the weather has impacted the last couple of weeks or so in Texas? Yes. We had 10 locations that were closed for two days. Six of those locations were closed for a third day. We also had a tornado that hit our Fuqua location in South Houston. It was closed for a couple of days. While we got the -- some of the repairs done and there was no electricity on that part of town down your part Texas. You've seen it on the news that's where the tornado actually hit. We just got the tail of it I think or the beginning of it I'm not sure which. But it was pretty bad tornado. It actually ripped a metal the metal top off of our garbage dumpster and it blew out the fence on the roof like the AC units, HVAC or the [indiscernible] system was damaged. We had to get that repaired. We have insurance so we'll worry about the insurance part of it later. Right now we're just getting everything fixed. Back the store closed for about two days. So there were some minor stuff but most of that I think there was two days in January and then February 1. I think I remember. It might have been all three days at the end of January. So our January numbers which I said were better than November and December were affected by those 10 stores closings as well. So I think we've been a little better off with those 10 stores and we've gotten those three days from those 10 stores. So.. That's great color. Thank you so much. I just have one final question and that's about Bombshells in Colorado. How many units or restaurants do you anticipate being able to build in the Denver area over the next couple of years? We have about six site locations -- or area locations that we're looking into. Right now we have the one in Aurora. We have a downtown Denver location very close to the convention center that I think will be just an unbelievable location. And it's a -- I won't call it a turnkey location, but it's pretty close. Everything we're going to do is cosmetic. The current -- the previous operator left everything in the building, so all the kitchen equipment is there. It was a large operation, great location. And hopefully, we'll -- we're in the contract negotiation to get that under contract and close. And I think that if we can get this done in the next week that we could actually have that location open in time for the football season when the Denver Broncos have their first home game. That's going to be our goal is to get that one. So that one could be opened very quickly and very inexpensive. Total cost of probably less than $1 million on the build-out and we have bank financing on the purchase. We're buying the property so we'll have bank financing on the purchase. So it will be a super fast cash-on-cash return as well for us. So I'm excited about that location. That's great. Thanks so much. I think I’m good for now. Congratulations on another great quarter and thanks again for taking my question. Thank you so much, Lynne. And Eric I just wanted to give you a second to clarify something, because I believe that you might have said the San Antonio Bombshells franchise was acquired for $12 million versus the $1.2 million? Well, $1.2 million in cash and a $2 million note is what I thought I said. So if I misspoke that I'm sorry that is the -- the total purchase price was $3.2 million, which like I said is less than we could probably build that location for. And it's $1.2 million in cash $2 million on a five-year promissory note. Phenomenal. Thank you so much, Eric and then thank you again, Lynne. Next up we have Rob McGuire of Granite Research in a hold position. Rob, take it away. Nice quarter guys. Can you give us an update on perhaps when baby dolls could close? And anything unusual going on with those alcohol licenses, or any color around that? Yes. I really thought we'd closed by February 1. That was my plan. We were prepared and ready to close by February 1. We have a line of credit set up through our bank ready to draw down on as soon as we need it to close the transaction. What's going on right now is they had a couple of outstanding issues. And so the Texas Beverage Commission has put an administrative hold on the transfers. So they can't turn their licenses in so ours can be issued. And ours aren't ready yet due to a couple of other issues with the cities, but all of our stuff is now in. It's in processing with the Beverage Commission. We're -- as they say waiting on the government. So hopefully I know the attorneys are working. Probably you'll have more color based on our discussions by February 20. I would love to see us close by March 1, but it could be March 15, it could be March 31. But I do think we will get it closed in this quarter. That's seven weeks. Surely they can resolve issues even dealing with state agencies. The problem is, we have a sense of urgency but they just don't have a sense of urgency. They want to get through the process at their speed and their time. And we'll just be sitting here waiting to go. But everything on our end is ready to go. We're ready to close the transaction. We have -- like I said, they have the money in the bank the line of credit setup. And we're good to go. So our teams are ready. We've already preordered all the POS equipment, so we can -- excuse me -- so we'll have the POS in immediately everything on our side that go we're just waiting for those final approvals. So it could be -- I guess, it could be March 1st, it could be March 15th, or it could be March 31st. So I think sometime in that time, they gave me a couple of time deadlines on typical time it takes to do these things. And I think one was March 20 -- or I mean April 20 something March third date and I remember seeing like a March 30th date or something. So sometime in the -- sometime in that plan will get it done. But basically as soon as the licenses are approved, I think we'll probably try to close the next day or the day after. Thank you. And then, just turning to Denver, can you talk about, -- you're looking at six potential Bombshell area locations. You've got two under your belt. And you've been able to acquire that land for less than what we've seen in Texas. Do you expect that trend to continue with the other four locations, if you expand or continue to expand there? I think so. I mean, we look at some properties that are more expensive than Texas, in that market. But there's still a lot of vacant restaurant space out there. Unlike, Texas which opened pretty quickly, they were closed for a much pro-longer period of time. So a lot of what I would call better operators still walked their locations out there. So there's still a lot of land, I think tied up in courts and leases and stuff issues. So we're sorting through all that trying to find the right locations. Obviously, I have seven on my plate right now, so I'm not in a hurry. We are lined up for 2024. I think one of the problems -- I think what people don't realize for like 2023 is, the only growth -- we have to grow through acquisitions in this year, because we weren't doing any -- we weren't lining up these things in 2021 and 2022 like -- I'm sorry, 2020 and 2021, like we normally would have because of COVID. And so, the Bombshells, has taken a pause here. But now that we're coming back online and I think some of that has -- not having new growth kind of dulls the excitement for the brand a little bit as well. So that could have some effect on us, as we move forward. But I think as we start -- as we get to the end of this year. And we start opening up new locations again. And we energize our management teams with upward mobility I think we're going to see some great things out of the Bombshells brand again. And for brand, we don't have another kind of COVID shutdown or anything like that ever again, I think that brand will be very, very well over the next three years as part of our plan to get us to that 30-plus units and get us to $50 million-plus EBITDA out of our restaurant division. So I don't think we'll have any problem getting there. I appreciate that. And then shifting -- staying in Denver but shifting to the Nightclubs. You talked about the substantial improvement in operations from the, 11 Nightclub Acquisition you made, but can you talk about potential for lock them to continue to improve here? And just give us the backdrop on that? Sure. So the plan is to convert that location into Rick's Cabaret Denver. I know the name has been there for a long time. But with the convention business there and the people that travel from out of the country Chicago, New York and other and Miami other major markets where RCI operates, we think that the Rick's brand will do very, very well there. We've been waiting for approvals for permits in the outside remodel and signed permits on that, which are all starting to come in and we hopefully will have that location converted by April. Hey. Brad just one clarifying point. The Bombshells San Antonio franchise location. I know Eric said $1.2 million down, $2 million note, five-year and but two-year balloon 7%? Just wanted to put that all out there. Thanks. Thanks, so much, Bradley and good thing you’re not referring to these five balloon that was recently hovering over. Rob, thank you so much for the question. And I want to encourage everyone to also check out Rob's recent video on misconceptions of the adult entertainment industry. Now before we move into our open Q&A session. I would like to encourage people to raise their hand to be called out, to be able to ask questions. We're going to bring in Joe Gomes as our final equity research analyst up to ask questions. Joe, take it away. Thanks. Congrats on the quarter. Just wanted to go back to Bombshells for a second. I know we're kind of beating the dead horse here. But maybe Eric can you give us a little more color and detail as to how the San Antonio operator kind of left so to speak? And even though Bombshells is performing better than pre-COVID, it has been somewhat negative on a same-store sales basis here, I don't know the last four quarters or so. How is that impacting your efforts to attract additional franchisees? Yes sure. I mean right now with the current economy we're not getting a lot of franchise calls because it's a $6 million-plus investment. And people are – I guess at the psychological – I call it a psychological recession, where people – nothing's really changed for them other than maybe the gas and foods up for especially for maybe your top 50% of the population your bottom 20 probably getting very squeezed by those things. But there's plenty of jobs for – especially in the even – with the tech layoffs, if you read the reports, most people are laid off in the tech reports were back to work within one week. Unemployment claims did go up. On as last time hundreds of thousands of people were laid off in a recession and unemployment payments went down. So there's plenty of jobs. And so when I say psychological, I mean people are expecting things to get worse and so therefore they are changing habits. And those changing of habits are what we have to adjust our business model too. I think we're doing a fantastic job of that. As far as being the Bombshells look, we've expected – we knew we were going to get very hard comps. We knew that as all these new restaurants and all these spaces were being leased and we saw the construction going up that we were going to be effective for a period of time at those locations. We're adjusting our model. We're doing the things we need to do to get Bombshells back to their 18% to 22% margins – excuse me. And I think it's just going to take time. We have to work through it just like – when everything – back in 2008, 2009, when we saw the – our earnings dropped $0.08 per share from the 20s. And that was the first time we had experienced anything like that. And so, we had to adjust our models that took us a little longer. And I think this time, we've adjusted our models very quickly. Instead of globally, because of the information systems Bradley has put in place for us, we're able to do this on a regional and club-by-club basis and that's why we know that the recession -- or I say recession -- the slowdown, whatever this period of end, the consumer trying to decide whether you want to keep spend their money as they have in the past or save in case it slows down has been to the point where it's affected certain clubs and not other clubs. And so instead of switching the model at all of our clubs across the country, like we did in 2008, 2009, we were able to target specific locations and make those adjustments. And you'll see the clubs are still positive. Our clubs are still comping positive. The Bombshells is a little different market and it's not as geographically diversified as the clubs are. It's all Texas-based, mainly Houston, where the majority of our locations are in Houston Texas. And so, like I said, we were affected. We're affected by sports because we're a sports bar. So when the Texans are winning three games in a year and one of them shouldn't have been won, because they lost first-round after, those are the kind of things that are effected the Bombshells market a little bit. As we move into March, we're going to have Mark Madness, the Suite 16 in Houston Texas this year at NRG Stadium. That's going to be a huge event for us 1st of April. So I think going forward, we're looking at easier comps because now we're comping against a period where we had a bunch of new locations for other businesses opening in honeymooning, going against very strong comps. And like I said, I just like to remind everybody that the Bombshells segment, while our margins are a little off right now, we're making some adjustments to get those back in line. But our overall revenues are still up 3.6% on a same-store sales basis from 2019 pre-COVID. So overall, the brand is still as solid today as it was in 2019, maybe not as strong as it is when you're the only one selling liquor in town, but still very strong overall. We've just got to get like I said some of the costs in line. It's very difficult. Your beef prices change daily, your chicken price has change daily, your labor costs have had creep, that is loosening. I think our -- like chicken has come way down in cost, but it may go back up with all these egg shortages and whatnot they can end up having chicken shortages at some point. So, we've got to watch those things. We got to adjust to them and keep our prices in line and keep things working in the right direction. Thanks, Eric. One more for me here. You didn't talk anything at all today about admire me. I was just wondering, maybe give us an update on where that program stands today? Thanks. Sure. So as of January 1, we have replace our developers. It was a very tough decision. And our developer was a Ukraine-based company. Ukraine is in a war as everyone knows. We tried to stick with that group and they've just been unable to perform and meet the standards and the time lines that we wanted. The new company came in on January 1. They took about six weeks to basically learn all the code, get the code together. They're now making a lot of the -- what we call bug fixes, they're getting the bug fixes fix everything works correctly again. I would suspect that in about three months time, they will get us a viable product. That's our hope. I think, the problem with all the bugs and things that just weren't working properly, we were just spending money trying to get – we pay them to fix something and while they fix that they break something else, because they weren't a coherent team. The new group we have is a very coherent team. They're working very well together. We've seen some major improvements in the site as far as the things that didn't work are all fixed. I would – I guess, I suspect about three more months, we'll have – maybe next quarterly call we'll have some much better news on that front. But that's a problem with technology but at least we're not billions of dollars in like Meta. We're keeping our cost relatively inexpensive relatively low number for the company on that transaction.. Thank you so much for the questions Joe. We actually just got interrupted by a few individuals who walked into the office. We have large Tyler Moore and Dave Portnoy of Barstool Sports. Thanks for coming guys. Tyler, do you – you look like you got a question do you want to ask anything? Yeah, I do. Congratulations on the quarter Eric. Great quarter, I want to talk a little bit about what you guys are doing out in Colorado. It seems like you're spending quite a bit to get into the gaming space. I just want to know a little bit more about that about what the expansion plans are there. Sure. Thanks for the question. The main thing we're doing out there right now is creating an entertainment zone. If you're familiar I know Barstool Sports and Penn Gaming have the Ameristar out there great property one of my favorites, but there's no entertainment. There's no night clubs. There's no fun places, I would say other than casinos. You all a gamble if you want to hit the tables you want to hit the spot. That's great out there. If you want to go the outdoors it's great. But as far as nightlife and for younger people, one of the big things when we first started looking up there and almost passed, because I was like well, I mean, this Colorado casinos for since 1990s come on. This is nothing new. Why would I go to this market and try to do something that nobody has been able to work for 30 years? And so I started a study and I said, well, wait a minute. They had $5 bet. Then they had $100 bet. Now there's no limit. In the trailing 12 months through June 30, 2022 $9 billion went into slot machine in Black Hawk Central City area. The average keep was 8%. It's huge. The amount of money was huge. And so we said well, okay how are we going to differentiate ourselves? I don't get to come just be the same thing. And so we saw let's build a club. Let's build a Rick's Cabaret up here, and let you have nightlife entertainment. Let's turn the music up, and let's draw the 30-year-olds up here, because right now they rarely come up here. As we were going to the clubs, I was talking to all the people in our clubs, especially all the entertainers the wait staff or bar tenders, all this age group that's that 20 to 35-year-old crowd I said "Hey, you all want to go to Central City, I want to go to Black Hawk with me tonight, why? There's no reason to go because there's nothing to do. And so what we want to do is create – take Main Street in the City of Central, and say let's do some music festivals, let's do street festivals, they already have some, but what do we do all the stuff. And in the meantime, if we can control the nightlife, so on the street got closed 11:00, it's a residential area. So, all the stuff goes down 11:00. We call everybody into the buildings. We built a couple of nightclubs or turn the music up and I think we can do some unbelievable business up there. Phenomenal. Thank you so much for that question. Now next up let's bring Adam Wyden up. Adam? And Adam before you go ahead. [Operator Instructions] Adam, I think you are on mute. Perfect. All right. You guys -- this presentation had a lot of good disclosure that you didn't have in the past. So I just want to go through some sort of logistical questions and then talk bigger picture. So on Slide 15, you have a whole thing about club acquisition and development and on Slide 16 Bombshells acquisition development. And as you know in restaurants and sort of club business, when you're doing a lot of remodels and your -- Bradley talked about maintenance CapEx and repair and maintenance, but I suspect a lot of the clubs that you had to shut down, clubs that you had to reformat, the grading or the beer haul, I mean you're running a lot -- you were running a lot of stuff through the P&L that is going to be a cost center that will be a profit center as you roll in 2023. I mean do you -- and then on top of that, you have all the legal and transaction work associated with Baby Dolls and whatever you're doing on the casino front. And can you try and sort of give us a sense of sort of how much sort of -- I don't call it onetime, but sort of how much sort of preopening or growth CapEx or sort of onetime stuff that sort of will be reversed in the coming periods? Is that -- we sort of have our arms around sort of $2 million or $3 million EBITDA, is that sort of a good place to start in terms of sort of not recurring sort of inflation hit, but more just sort of onetime cost investment that will manifest itself in revenue in future periods. Yeah. So make it real simple, okay? Other than the San Antonio franchisee location, every one of these properties involve real estate that we now own. And so we purchased that real estate ahead of time. So there's carrying costs. Like you said there's legal costs, survey costs those types of things. Those are not capitalized. Those are expensed for the most part. And so yes, there's cost. You also have interest carrying expense, right? So now these things are carrying interest. And so we're having -- it's not a lot of expense. But when you look at this many properties, it starts to add up and it becomes a larger number. And what you're going to see, as we move into the end of 2023 or second half of 2023, definitely I think in the fourth quarter of 2023, you're going to see these -- the early units of Heartbreakers, Jaguar, San Antonio the acquisition or maybe I certainly hopefully closed by March 31. I mean I will be all over if we're not open -- we're not done with this by then, but they should be able to get this work done. Our side is done. We -- like I said we're just waiting on the state of Texas and the seller to work out a couple of issues they have with each other. The Jaguars club in Lubbock which is under construction in the PT sub. All those are taking cash out right now, but that's going to reverse as soon as they open -- as soon as those locations are open and it’s a double source. So let's say we are spending $0.50 million or $1 million a year, and now of sudden you got units to start making between $0.50 million and $2 million each unit here, all the sudden you're going to see those big swings, right. So if you're losing $0.50 million you make $1 million or $1.50 million swing in the EBITDA. And so we are going to see those things, come to solution. I think in march you're going to see the a couple of the locations really pick up, the Denver food hall definitely will have an unbelievable mark. I know Heartbreakers is set up with the grand opening in the end of February to really lead us into March as well with the new day shift to open and the construction. The VIP room construction upstairs is about 85% complete. I know they were doing sound and lights last week when I was down there. So that's all being done. That site should be done pretty quick. I was just at the Denver food hall on Monday. All the new TVs are in. We have a 220-inch screen up. A bunch of 90-inch televisions are all around the place, it looks unbelievable compared to what it was before. Everyone there is very excited. Business is up. January -- I think January this year over January last year; sales were up about 42%. But that's still not where it needs to be yet. And it's because we lost the largest sales -- over 30% of their sales were the single booth that moved out, where Bombshells is moving into. And so, when that location reopens in March, that's going to be big for that. So you have a lot of income coming in. Stafford location right now is targeted for 2024. They're a little ahead on construction. So hopefully maybe we get that one a little early, which will be nicely changed and small cell construction usually runs a month or two over. So I'll be excited if they get done early. We're very close on roulette. We finally worked everything out with the developer, because our bids were extremely high, because they had us doing a bunch of work that the developer had to put in, the roads and stuff like that. They were not our -- the city made us put them on the plans. And so, everybody thought we had to build those, but that's the developer’s part of that. So we finally got that worked out. So that construction should start soon. The club in Lubbock, the construction has started. The club in Fort Worth, construction has started. We're waiting permits. So the Lubbock is probably a few months from starting construction and Huntsville is only a few months from starting construction. So there's going to be a lot of stuff that's going out but we -- the main thing is, we've spent on all these things, right? We paid the architects. We paid for the building permits. We paid for a lot of this -- a lot of this stuff is in our cost. So that will get much better as we move forward. Okay. Perfect. Moving to -- I got two more and then I've got kind of a more qualitative one. On slide 18 you added this fiscal year 2023 capital allocation of $93 million and that includes Baby Dolls and Buyback and Heartbreaker and this and that. And I know you're going to put more money in the casino. But you sort of committed to doing $200 million a year. Now, obviously, if you invest another -- I think, yes, you said another $20 million on top of what you've already invested so far. I mean, do you still think you can fill out that $90 million? I mean that could be sort of two -- that could be sort of a few Cheetahs or another big, Baby Dolls or Lowrie. I mean, do you still think that you can get another sort of large size acquisition, at least announced this year or even closed, another big deal or another couple of mediums to get you to 200? Or several smaller units could still happen. We've got about $90 million, right? We're at about $110 million, right? We put the $90 million and $20 million, get you about $110 million. Thinking about $90 million, so we want to get invested this year. We're talking with several operators. And, yes, I definitely think, last year we closed the Cheetah Club in May. We closed another club in August with Playmates. So, I mean, yes, it's -- we've got plenty of time. We're literally four months and nine days into the year, right? So barely over a-third of the year is over and we lined up $110 million investment so far. So to think that we can't line up another $90 million in the next eight months, I guess, I could take a long vacation and miss, but I don't plan on doing that so -- Yes. Eric, this is helpful. And then, I'm going to have to turn my question sort of out of order, but like I was talking about it with someone that works internally at the firm and isn't an analyst, isn't a stock person, but sometimes it's helpful having sort of non-stock people and they said well -- and in the old days, you got all these guys that are getting older, and they weren't earning any money in the bank and they just went through a global pandemic. Now you're giving them 6% seller finance, and there's actually a cost to their capital is sort of the point that we're making. I mean, you see this in the '80s. You see this in the periods when interest rates go up, smaller guys sort of get squeezed out, there's a cost to their money and you sort of seen consolidation. I mean, do you think the higher interest rates and sort of just going through COVID could actually bring some of these guys and say look, I don't want to go through another downturn. Eric, is going to give me money from my club. He's going to pay me cash, stock, 6% 7% on a mortgage. I mean, don't you think that like this environment where capital has a cost might actually bring some sort of older guys in saying look, I'm going to use this as an opportunity to sell, because interest rates could go back down in theory. I mean, do you think that this environment sort of lends itself to consolidation and people coming to you and say, I'm finally ready to sell? I mean, I think we're getting those calls, we've been getting those calls. COVID kind of got some pretty major players, interested in selling as you know from the Denver acquisition, which was -- has been fantastic for us. I think there's still room. We're still going to have growth. I mean trailing 12 months, 24% increase over their 2019 numbers. And I think that we'll see more increases in trailing 12 months, from today, I think that number is going to be even better. So as we move forward, I certainly think there's plenty of opportunity out there for us. I am being a little pickier, because I've got so much on our plate right now, and that's one of the things I wanted to lay out, in this slide, is just how much we've actually been working, right? Because you guys don't see this. Until you announce it and we open. When I buy, a $1 million piece of land or maybe $0.5 piece of land it's not material. I don't put out press releases over these small things, but we have a lot on our plate right now. We're ready for more on the right -- of the right kind of deals. I mean, I've been talking with a couple of owners and like look they're like I want 4 times or I want 4.5 times and I'm like well you've got a 3 times unit. I'm sorry. I can't pay you 4.5 times for a 3 times unit. If you want to give me some better terms, you want to carry more paper. You want 65% cash down. That raises my cost. I'm going to pay you less. One way or the other, it balances out. Now if you want to take, if you want to take the finance portion of what I'm willing to pay for your free cash flow, and carry the paper, sure I'll be happy to give you that. You carry more paper. I'll give you another point of interest, but you don't take any of my cash from me. I go in there and generate the income from their particular location to pay for it, then yes, I'm willing to give them a little better multiple. But when they increase my risk factor, I'm in a market that I'm -- it's not a major market or I'm not extremely comfortable with the market, I'm going to pay less for it. And we've targeted guys said, well, I don't want to sell my club to anybody else. I said what you're really saying is, nobody else wants to buy your club for this price. And I can't buy for that price, either. This is the price I will pay, call me when you're ready. And I guarantee you, one day we'll get that call. We're probably paying with -- it's not that we're paying the top price, because people offer them more money. What we are paying with is reputation. We're paying with -- we've never missed a payment. In 30 years, we made every payment to a seller we've ever promised to make. We made every payment through COVID, to 90% of our seller finance notes and the only ones we didn't pay were because they said, hey, don't pay me. I know you guys are settling right now, don't pay me. If you guys have been good to me, take three months of payments and just to firm. We'll work it out later. And so we were able to do those types of things. But -- and so that's what we are the preferred buyer, because they know they're going to get paid. People offer them more money but they want less cash down. They want -- they offer them higher interest rates but they're never going to get their money. Plus they also know that when we take over their club, we're not going to run their club into the ground. We're going to remodel. We're going to build. If they ever did get it back from us, it would be in better shape than it was the day they gave it to us, whereas, they sell to these other -- if they sell somebody else who's carrying so much paper in their cabinet, they may be struggling and they -- as they go and they may not -- not only they not pay the payment but they're going to run their clubs into the ground as well. And so that's what we're using as our past reputation in how we do business and they can call any owner if there's none out there listening looking to sell their club, I mean, you can call anybody we bought clubs from, no one that I know of we'll say a bad thing or has ever said a bad thing about us on how we do business and how we treat you and how we work with you through anything that comes up. Yeah. No, I definitely -- and the other thing that we've gotten in our research is like there's basically one large strategic who is not really active in consolidation anymore déjà vu hairy, and so like there really isn't anyone who has the balance sheet to facilitate transactions like Baby Dolls or VCGH or what have you. I mean, you're really the only guy out there that can do it. That has the ability to close and get property level mortgages and fund the cash down payment. And I mean I don't think a lot of people have $30 million of cash or $25 million in cash to buy a $10 million, $15 million EBITDA asset. So I worry less about competing for the asset and more about sellers wanting to sell to you and having a cost of their capital. But, yeah, look I think we've still got a long way to go on the M&A. And then the other part is back to the casino. I think you've been a little bit cagey about this. And so again and true to Adam Wyden form, we've done our own diligence. And I know a guy that operates slot machines down here, operates casino, and I do the math on 30,000 square feet and the number of slots and I can back into it, if you guys are going to spend $10 million and most of that is slot and gaming you're not participating. I mean, again, I don't know what you're doing with your online gaming and your sports betting, but I suspect that's part of the equation as well. I mean, there are scenarios where a 30,000 square foot casino could generate in the tens of millions of EBITDA. I mean, I know it's early in the evolution, but I think it would be helpful, because I think -- again I -- look I know that we spoke this much about Bombshells. I mean, Baby Dolls is double the EBIT that all Bombshells is doing. I mean one freaking transaction is $15 million of EBIT pro forma versus $8 million of EBIT out of Bombshells. I mean, the fact that we spent the first hour on the call is just absolutely abhorrent. But separately if I say separately, I sort of look at a lot of guys are like wow he’s doing this casino it's -- Adam, it’s barely weekend [ph], and we don't think about it at all. We've seen the renderings and we say look this is a Cabaret, you've got -- it's sort of like the old Western Cabaret Casino, I think it's just so on brand. But I think even more importantly I think it's important for you to come out there. And I know it's early, you are an entrepreneur and so am I. But I think when you're making an investment in a casino for $10 million of cash and again in the grand scheme of your market cap and your balance with $35 million cash I mean it could go to zero. But when we do the math we've sort of seen the range of outcomes of like low end of the range you're making like $10 million of EBITDA like high end of the range you could be making as much as $25 million or $30 million. And I think it's super important that like you sort of and I'm not trying to put words in your mouth, but I think it's important for us and the investor community to understand that like you're not you're in the no-brainer business. When you buy strip clubs with real estate at four times EBITDA that's a no-brainer. And that you're getting into this because A, it's sort of like -- it is a strip club itself. It's a strip club steakhouse casino; and B the returns are so good you can't not do it. So I just wanted to sort of lay that out and give you an opportunity to respond. Well, I'll respond to the way without saying anything. I don't invest my money unless I think I can get a minimum of 25% to 33% return on an average risk investment. I would consider this a high-risk investment, right? I'm going into a new market. I'm building something from scratch. And if I didn't think that I could get the returns in the 50% to 100% range, I wouldn't even be looking at this. Our preliminary numbers are very similar to the model you laid out. I don't know what I don't know. I know how many people are out there. I know there's 5000-plus hotel rooms. I know on the weekends those rooms run out for $300 a night. I know that based on my observations 60% plus of the people out there are men mostly 30 years to 55 years of age in Black Hawk. Now in Central City it's a much older crowd but I'm going to draw those younger guys to Central City which is -- it's basically everybody says Central City Blackhawk, but it's really one area. It could be one town. It's so close together. And so you don't even know if, they didn't put a sign up you wouldn't know you're leaving one town and entering the other. You would think you're in the downtown district which is the old town and you drive out in your -- in the new part of town is basically how I see it when I'm out there. I don't think the road is 1.5 miles long that connects the downtown -- the old town to the new town. It's a very, very short very close knit little area there. People that work in Blackhawk live in Central City people that live in Central Live and Blackhawk may work in Central City. It's really just one area out there of Blackhawk Central City. And the difference I think is the betting laws changed in September of 2021. One of the things people say well Colorada casinos for 30 years. So you're not going to go out there and make any big changes or do anything that's going to -- how are you going to do any different than all these other operators. And like I said the difference is that the rules changed. And people have been slow to realize these rule changes. And also I think, I've been going to council meetings and Central City since July. And I think we've got a very progressive mayor and very progressive city council now that's becoming more business friendly. I think in the past they've had a much more protectionist City Council that was more concerned with keeping Central City the way it is even to the detriment of economic growth. And I think that the there's a balance. And I think this new City Council and the Mayor have a great plan for balance to bring new business in at the same time preserve what Central City is. And it's a great town. I posted some videos on my Twitter. You can or you can go to the City of Central's website and look at the videos of the town and it's a great old town. It's got the oldest opera in the country, been there since the 1800. It's just -- it's an amazing little area but one of the things is they're just no nightlife and no entertainment. So, we're going to be the only thing to do after 11 o'clock at night. And I'm very excited about it. You've run casino numbers. If I put 300 people in the building every day 500,000 to 700,000 people on the weekend, you know what the numbers are going to be. Yes. I mean look again I don't know what you're doing as it relates to your online gaming or sports betting, but I suspect if you're working with a national partner you're getting a deal that's sort of minimum guarantee and some capacity. And again I don't know but if you're getting a minimum guarantee on your sort of sports betting or online gambling, I suspect that that in some ways is probably covering a lot of your sort of upfront investment for the thing altogether. So, again I sort of like don't know the exact numbers, but I suspect that between your online gaming and sports betting, if you're working with a national partner you'll have some sort of minimum guarantee and that will cover some part of your investment hopefully all of it. So, again, I sort of look back and I say to myself I don't know why we spent two hours or now we're talking about Bombshells when this casino nightclub strip club thing could be 25%, 30% of EBITDA, it could be doing four times the amount of EBIT that all of Bombshells is doing. So -- and not to mention Baby Dolls alone at maturity is $15 million of EBITDA. That's double. That one acquisition is double the amount of Bombshells. So, look I obviously hope that Bombshells margins go up, but I think the major takeaway for us and all of this is that if you do the casino and it does well, it's triple the amount of EBIT as Bombshells. If you do one more Baby Dolls, it's double the amount of EBIT as Bombshells yet somehow the entire sell-side analyst community spent the first hour talking about Bombshells. So, look it's exciting this casino and obviously, we'd love to see more Baby Dolls and that's it for me. Thank you. Thank you so much for that question Adam. Phenomenal actually more than one question, plural. Next up we're going to bring Ticker History -- actually let's bring up StockMKTNewz Evan. Evan, please the floor is yours. Yes, I appreciate you let me get a question here. Fantastic quarter. I'm also a really big fan of the Rick's CEO account, the person hosting the space. So, first of all everyone down below make sure you're following the account. And that's kind of where I want to dig into my question. We're doing this on Twitter Spaces. You're very active on social media. I would love to hear a little bit more about how your use of social media has helped the company, helped the stock? Anything in general, but really how you've seen your use of social media Twitter Space is kind of helping Rick's? Sure. I'll tell you what it's done. It's been amazing. We've been able to communicate directly with not only end users of our product, investors in our company, potential investors, critics it's -- to me it's so engaging. I just love the immediate feedback. I can post something. I can ask questions. I can do hypotheticals. I can just be goofy if I want to. It's just -- it's a great -- it's just it's a great tool, I would say with Twitter. One of the main things I would say that what has Twitter done for our shareholder base. We started out -- I have to go back and pull the exact numbers, I don't know but it's 6,000 -- between 6,000 and 7,000 shareholders on our name list finish the owners list. And I think now we're getting close to 9,000. I'll get the new list on the 15th of February. We'll kind of see if that trend has continued. I saw institutional ownership dropped from 54% to 42%, and yet our stock was hitting all-time highs. This never happened before, right? When you lose your institutional ownership, your stock crashes. But that didn't happen with RCI. And I can say -- the only thing I can contribute, the only thing we changed was we went on Twitter. We hired Equity Animal to get our story out to the people directly, right? And that's what's changed. And like I said, I can't be more excited about how it's going, how it's been going. I throw two parties at the clubs and it's money because 20 30 people show up sometimes. Sometimes four people show up. Sometimes one guy shows up. And me and that guy get to sit down and have a drink together, and talk and I get to hear one-on-one, why did you come here? Why did you do -- what do you like about us versus somebody or other clubs you've been to? I get to get just direct feedback, and to me that's incredible. My direct messages. I follow people. I don't care if your account has a small amount of followers or a large amount of followers. You tell me you're a shareholder and you engage with me, I'm going to follow you, so you can direct message me. I get a lot of direct message. We can talk. And like I said, it's just direct feedback. You can't get that any place else. Thanks so much for that question Evan. Eric, we appreciate the kind words. [indiscernible] we're going to get to you next. Great profile picture by the way. But first, let's bring up Orchid Wealth [ph], you're up. The floor is yours. Hey, guys. Great quarter. I just was going to second Adam's comments. Obviously, with the vast majority of the money constantly coming from the strip clubs, adult clubs a lot of Bombshells talk and focus, I feel like people whoever is listening and wants to focus in on that does not understand the entire story. I'm completely behind this idea about this casino expansion. And like anything else, I have faith in what you're doing, Eric. I really don't have anything to add other than just to congratulate you. I'm happy that you're moving into the space. And from the looks of things and the way you've done things in the past you have my confidence with my shares. So I'm going to just leave it at that. Thanks. Thank you. I really appreciate that. It means a lot. I mean that's what I said. This is -- that's -- that there is why I'm on Twitter. It's why -- it's been so important. It's why I spend so much time. And I know I've been in Colorado over three days. I don't think I've made two posts in three days. I was looking at my engagement. I said, oh man, I'm way down. But we've been out there. We've had non-stop meetings to give credit to our Vice President Travis Reese. Man, he is engaged in this casino stuff in the laws in every aspect of creating this new concept. So one of the things, he's good at helped the Bombshells and help create that concept and really got it started before we brought a restaurant expert in who basically fixed the concept turned it into what it is today. And Travis has been great at that. Very happy we've been -- I don't think in the last three years we've spent as much time together on a day-to-day basis that we have in the last six months. So it's nice to be able to spend time with him again. But his engagement in this deal in Colorado has been fantastic. So, I want to throw that out there say thanks to Travis for that too. Fantastic. Thank you so much for the question. Now in that same vein, Eric, I'm going to ask you a question that was submitted to me anonymously. This individual was curious about the plans of the brewery. And is it similar to Robust in terms of vision, Robust for those who don't know is the energy drink. Also actually let's answer that one first and then we'll move into the second question. Yes. No the brewery is nothing like Robust. Robust is basically a generic product that has a flavor profile very similar to the leading brand, which Mark is drinking right now. That's a no, no in RCI world, now just joking. But seriously it saved us about $20 a case off of the major brand product. We were using about 25,000 cases a year at the time. I think now. I don't even know what the numbers are. It's much higher than that today, because we've grown so much. And so it was more of a cost saving deal. We just bought the product at first, but then they were trying to expand the brand. And so we bought into it. Probably shouldn't have done that. I probably wouldn't do it under our capital allocation strategy today the numbers wouldn't make sense, and we probably wouldn't have moved in that direction. But we did. And then we ended up loaning them money that they couldn't pay back and so that we ended up basically buying them out and taken over the brand. Since then we've done very well with it. We've expanded some of our distributors, but the main thing is slice our own clubs. And we're working with others to say, look, you're paying all this money you could be saving, especially big operators in this energy market that sell by thousands of cases could save so much money with this product. And from a chemical standpoint, it's one molecule different. It's not -- it's very, very, very -- when it's mixed with any type of alcohol whatsoever you can't really tell the tale. I call it the Pepsi Coke challenge. If you remember the old days of the Pepsi and Coke challenges of exactly the same thing. I can pour on two different glasses. You can drink them, tell me which ones which is very difficult to do. I will say that the hardcore drinkers can tell the difference. But the casual drinkers, especially if you put vodka you can't tell the difference. So that's kind of that. But with the breweries more this was kind of a one-off thing where we were buying this building and it was a great property. We're going to close it down turn it into a Bombshells. And as we did more site inspection, we started looking at how it operated and we thought -- and when we look at they're actually making money and not much, but they're profitable. When we started going through the financials -- we asked for the financials, right? Well wait a we just keep this business open give us the financials. And we start to look at their financial, and we said, well, we can cut this, we can change that. And again, we can make this thing. This thing could actually have better margins than a Bombshells, because we get all the alcohol, but we don't have to have the food. We don't have to have the labor cost, because all that rented out. So we get basically paid for the space and they provide all the food product, which is our lowest margin in the Bombshells, but we get all of the alcohol. We get all of the sports stuff and we can make our own beer, which cost us even less. So the keg instead of paying $120 a keg, we can get kegs for $30 or something making them ourselves. And that's kind of how we got started in that and it's evolving. It remains to be seen. We may build this into a concept that we may decide to build more of if the returns are right on it. Like I said, it's early. And it's a good way for us to get a Bombshells into the Denver market right away. So we can start training staff. We'll have our cooks ready we do all our training at the food hall when we get ready to open up the Bombshells we're building out there. Fantastic, phenomenal answer. As a very hard consumer of energy drinks I cannot tell a difference. Next up we have Hot Girl Capital [ph] and I would just take a moment to encourage everyone to raise your hand if you have a question, because we’re starting to get towards the end of our Q&A segment. Hot Girl Capital. Take it away. Thanks, Mark and congrats on a great quarter. I'm super curious if you guys are going to do any like celebrity or brand collaborations? Well, we're talking about that with the casino right now for sure. Definitely what admire me once we get a viable product we will definitely be doing some stuff with some influencers in that regard for sure. Mark and I have been brainstorming a few ideas around our new merchandise store that we're getting ready to launch. So yes, there's definitely going to be opportunities for that. And as we're getting – I'm still relatively a baby on Twitter. I was – my one-year anniversary was the other day and I said, well that was just the day I signed up. That wasn't really my one year in or – my real one year anniversary of sometime in May after I met Mark. And he said, why don't you try doing this and do some of this stuff. And then of course they wrote me a little bread and got me some stuff going. And the more I started this. So I think May is probably really my first one year anniversary. So hopefully, we'll – we can – they keep telling me 10,000 is the magic number I got to get. You have to get to 10,000 cards. You have to get 10000 followers. So hopefully, by May we will be there. I think definitely by November, when we opened the casino up we'll get there. But yes definitely looking at some different ideas with influencers and doing some collabs on certain things to bring people not only into our clubs or restaurants but also into the casinos as we move forward. Fantastic. Great question and great answer, Eric. Now I'm going to ask the last question of today. Eric, the last earnings call it ended with you talking about your vision for Empire Building. And I wanted to ask what your update is on that? And what the vision is now moving forward? I think we laid that out pretty well on Slide 15 and 16 on what we've been doing and how we're doing it. So have you looked at that. I think we have to continue to basically do what we do. And that is used fifth grade math to make sure that as we make these investments that we have an expected cash on cash return. I know the construction stuff. I'll be honest, I hate construction. I hate those new things. I'd rather just go out and buy Nightclub-after-Nightclub-after-Nightclub. Unfortunately, it's just not that easy. Someone's saying to me, well, you should just have a whole stream a whole line of clubs line up. I said, well, we kind of do, but you don't have sellers. So they start doing comparisons to Carnation and Waste Management and AutoZone and all these roll-ups. And then, I said, yeah, I have 500. And I already own 50 of them, so there's, about 450 targets. You're talking about acquisitions where they had 45,000 targets. Yes, it's easy to line up two or three acquisitions a month or a quarter when you have 45,000 targets. When you have 450 targets and of those 450 targets there's multiple players, multiple of multi-club operators so you're really probably talking about less than 100 individuals that I have to do deals with, so it does take a considerable amount of time. And you've got to have people that are ready to sell. I know a lot of these guys are older and they are thinking about it. The multiples as we started paying four times to five times multiples instead of just three, because we used to -- we were just stuck at just three for a while. So certain locations have probably worked more, until we started off of that and we started getting better acquisitions. I think we're going to continue to see that. It's just -- it takes time. We're going to buy -- an every year. Some will be single-clubs some multi-clubs. But I'm very confident in our three-year plan here to really roll this up to the next level and grow from $100 million in EBITDA to $250 million in EBITDA at four times -- $600 million at a four times would be $150 million additional EBITDA. So I think -- so on a shooting for the moon. Okay, well, I'm shooting for the moon. And I only get into the stratosphere. So I only get to $175 million or $200 million. That's still significantly over a three-year period, exceeding our 10% to 15% growth target. And so as long as I can do that, I'm going to be very excited, very happy. And hopefully our shareholders will be. And I'll say it again, I say it every call, I say it on Twitter all the time. We're not for everyone. We're not looking for momentum investors. We're not looking for guys that care what we do, next quarter or the quarter after. We're looking for long-term guys. They're going to be with us for three years. Let us execute our plan. And let's all get wealthy together. Amazing. And with that, let's all get wealthy together. Thank you, Eric and Bradley. For those who joined us late, you can meet management tonight at 7:00 at Rick's Cabaret, New York one of RCI's top revenue-generating clubs. Rick's is located at 50 West 33rd Street, between Fifth at and Broadway, a little in from Harold Square. If you have an RSVPed ask for Eric Langan or me at the door, after 9:00 p.m. however I will be busy implementing my own capital allocation strategy. On behalf of Eric, Bradley, the company, our subsidiaries and my favorite dancer [indiscernible] on Instagram thank you and good night. As always, please visit one of our clubs or restaurants and have fun.

EarningCall_213

Legal counsel requires us to advise that the discussion scheduled to take place today may contain forward-looking statements that involve known and unknown risk and uncertainties. Actual results may be materially different from any future results, performance or achievements contemplated in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in forward-looking statements is contained in the company's annual information form as filed with the Canadian Securities Administrators and in the company's Annual Report on Form 40-F as filed with the U.S. Securities and Exchange Commission. As a reminder, today's call is being recorded. Today is February 9, 2023. And at this time, for opening remarks and introductions, I would like to turn the call over to Global Chairman and Chief Executive Officer, Mr. Jay Hennick. Please go ahead, sir. Thank you, Operator. Good morning, and thanks for joining us for this fourth quarter and year-end conference call. I'm Jay Hennick, the Chairman and Chief Executive Officer. And with me today is Christian Mayer, Chief Financial Officer. As always, this call is being webcast and is available in the Investor Relations section of our website. A presentation slide deck is also available there to accompany today's call. During the fourth quarter, investment management and outsourcing and advisory delivered strong revenue growth, while leasing matched the record results from the prior year period. As expected interest rate volatility and challenging debt markets impacted capital markets in our seasonally strongest quarter. We expect this to continue through the first half of 2023. However, transactions are still being completed and there's significant pent-up demand for real estate assets, which should translate into additional volumes in future quarters, especially as conditions stabilize. Strong full-year performance was driven by high value recurring service lines, which continues to validate our strategy of transforming Colliers into a different kind of diversified services company. With our globally balanced and highly diversified business, significant recurring revenues and proven track record of capitalizing on opportunities, Colliers is stronger and more resilient than ever. Earnings from high value recurring revenues now make up about 58% of our pro forma EBITDA and this is growing. Last year, we completed a record $1 billion in acquisitions across our global enterprise. These acquisitions not only strengthen our core, but they also create additional opportunities to drive shareholder value. In investment management, a segment established only six years ago, we finished the year with total assets under management of $98 billion, placing Colliers amongst the top global players in the alternative private capital industry. One of the most important attributes of this business is that 85% of our assets are in perpetual or long dated funds 10 years or more. These revenues are very stable and have grown historically year-over-year, and we expect this to continue in the future. As you might remember, in 2020, we announced our Enterprise '25 growth strategy. The goal was to double our profitability and generate more than 65% of our earnings from high value recurring revenues over the following five years. Last year, was the second year of our plan, and so far, we're well ahead of our targets. If we're able to achieve this as we've done in the past, it will be excellent news for shareholders. Colliers has a highly respected global brand and growth platform. We have a well-balanced and highly diversified business with a unique enterprising culture and leadership team who have a significant equity stake in our company. The combination of these characteristics truly sets Colliers apart from the rest. But perhaps most importantly, we have a 28-year track record of delivering 20% annual growth and share value to shareholders, a track record we are very proud of. My comments will follow the flow of the slides posted on the Investor Relations section of colliers.com accompanying this call. Please note that the non-GAAP measures referenced on the call are defined in today's press release. All references to revenue growth are expressed in local currency. Our fourth quarter revenues were $1.2 billion relative to $1.3 billion in the prior year period. Revenues were up strongly and are recurring Outsourcing & Advisory and Investment Management service lines. Our leasing operations were up 3% benefiting from continuing activity in office and industrial leasing. Capital markets, as Jay mentioned, declined across all regions reflecting the impact of higher interest rates, reduced availability of capital, and geopolitical uncertainty. Adjusted EBITDA for Q4 was $203 million, up 6% from one year ago, with margins at 16.6%, up 230 basis points relative to the prior year quarter. The margin improvement primarily reflect service mix shift toward our high margin Investment Management operations. Americas fourth quarter revenues were $679 million, down 16% relative to the prior period. Outsourcing & Advisory was up 9% driven by engineering and design, including recent acquisitions. Leasing activity matched the record results from the prior year quarter. Capital markets, including debt origination was down 51% relative to record volumes in the prior year's seasonally strongest fourth quarter. Adjusted EBITDA was $83 million down 12% from last year. The margin in the Americas was 12.2%, up 60 basis points reflecting lower average commission levels; lower performance-based incentive compensation, as well as careful control of discretionary costs during the quarter. Q4 EMEA revenues were $228 million, up 8% from one year ago. Project management activity is up across the region as releasing transactions. Adjusted EBITDA was $36 million versus $42 million last year, with the margin primarily impacted by service mix with a higher proportion of project management revenues at modest margins. Asia-Pacific revenues were $194 million down 3%. Capital markets revenues were impacted by interest rate volatility and continued COVID restrictions in Asia, while leasing improved in both industrial and office asset classes. Adjusted EBITDA was $34 million relative to $38 million in the prior year quarter. Fourth quarter Investment Management revenues were $121 million, up 53%, excluding pass-through carried interest, revenues were up 87% driven by acquisitions and management fee growth from increased assets under management. Adjusted EBITDA for the quarter was $53 million, up 88% relative to the comparative quarter. For reference, our reported adjusted EBITDA is equivalent to fee-related earnings or FRE that many pure-play IM firms report since our IM earnings are generated from recurring management fees. Fundraising across our platform for the full-year 2022 totaled $8 billion. This was a relatively strong result when compared to the general slowdown in capital allocation by investors across most real estate asset classes. We have a strong fundraising pipeline, which we hope will drive internal AUM growth of 10% to 15% in 2023. As of December 31, we had $98 billion of AUM. Our fee paying AUM is now $53 billion. As I noted last quarter, the private and defensive nature of the real estate and real assets in our portfolio brings stability to our AUM. Our financial leverage ratio as of December 31 defined as net debt to pro forma adjusted EBITDA was 1.8x. We expect our leverage to be 1.8x to 2x for the first half of 2023 declining to the 1.5x range in the second half. As previously noted, the target leverage range is between 1.2x, and we are comfortable exceeding this range temporarily if a compelling acquisition opportunity becomes available. We have provided an initial outlook regarding our financial performance expectations for 2023. Our outlook includes all acquisitions completed to-date, and incorporates our best information for each service line and geography. There are three broad themes to our outlook. One, recurring Investment Management revenues are expected to grow significantly from continued capital raising for several products we have in the market right now, as well as the annualization of recent acquisitions. Two, recurring Outsourcing & Advisory operations are expected to continue to grow organically as well as from the annualization of recent acquisitions. And three, we expect capital markets activity to be down 20% to 40% during the first half of 2023 relative to strong prior year comparatives with a return to year-over-year growth in the second half. We expect to maintain disciplined cost control through this period with tight management of discretionary expenses and by gearing our support in administrative staffing levels to match expected revenues. This outlook is subject to risk and uncertainties outlined on the accompanying slides. Hey, good morning, Jay and Christian. My first question, I wanted to dig into the 2023 EBITDA guidance just a little bit. My math tells me, assuming $100 million of incremental EBITDA from the deals that you have closed at the mid-point of the 2023 EBITDA guidance essentially implies flat organic EBITDA. So first, is that thinking correct? And then, second, just broadly is the idea that leasing O&A and IM effectively offset capital markets. Great question, Michael. First off, the EBITDA from the annualization of acquisitions is more like $75 million, not a $100 million. So you need to dial that into your organic growth assumptions, which will I think take those assumptions a bit higher. That's my key observation to your comment. As it relates to capital markets, I mean, of course, I outlined that we expect to be down significantly in the first half, which will translate to being down in that particular service line by 10% to 20% on a full-year basis. The other parts of the business Outsourcing & Advisory and Investment Management have significant organic growth baked in to each of those areas as we continue to grow organically and generate new business in those segments. Thanks, Christian. That's a great outlook. And then, maybe just flipping to the Americas here, so we saw margin expansion there despite the contraction in revenue. You highlighted lower commissions, incentive comp and discretionary spend. Just wondering, how we should think about the sustainability of the margin expansion there through the first half of 2023 given the anticipated declines in capital market. Well, look, when you have significant declines in revenues, you're going to have some margin compression. We're doing our best to manage costs. We have highly skilled operators in the field that have done this before. Three years ago, we lived through the pandemic and we took a very disciplined approach to cost management. And we're doing the same in this situation. So we're going to do the best we can to maintain those margins, but there will be some margin compression of course as revenues declined at those levels we talked about it in the first half. Hey, thanks. And just to start off with just want to commend you on continuing to give guidance for the year, which is pretty rare in this industry. But first question on capital markets, you kind of mentioned this in your commentary, but just want to dig in, I guess, are you seeing any signs of deals getting pulled or canceled altogether? Or does this truly seems like a timing delay where transactions are taking longer and where there could be a wall of pent-up activity they could unlock in the second half of this year and potentially into 2024? Well, I think it's a definitely transactions have been canceled. And for all the reasons you'd expect interest rates, availability of capital, near-term expectation that a building was worth X dollars six months ago and its worth substantially less today. But there is huge pent-up demand at least we see it. We see it in Europe, actually the smaller transactions, the smaller buildings are moving, are trading. But we think there's a big pent-up demand of real estate assets that want to trade, but they still need a period of time to stabilize and stabilize both on the -- on both sides. I think higher quality assets will trade sooner than lesser quality assets. But there is a lot of discovery happening. It's not just price discovery, its -- its clients looking at portfolios or ways to acquire two or three assets from a seller who might be under a little bit of financial pressure. So I would say our capital markets people are busier today than they've ever been before. And it's in an environment where they know the likelihood of near-term completing transactions is not as rapid as it was let's say a year ago. Got it. That's helpful. And then just as a follow-up for Investment Management, great trends in fundraising, AUM. So I guess just as a high level, what do you attribute that success to? And is that AUM growth -- you have a lot of different assets and businesses there now, I guess, is that AUM growth pretty broad-based across the different businesses you have in there or just any more detail on that? Yes. I mean, it is broad across all of the asset classes. We're in very attractive spaces, alternative assets, infrastructure, traditional, real estate, multi-family, et cetera. And we do a little bit of credit as well. But the thing that, that, that, that really surprises a lot of people is that there is in addition to the fact that, and I commented about this in my comments, that we have a lot of perpetual and long dated funds. You have to remember that the LPs and for us, most of the LPs are big institutions. We have just under a 1,000 LPs, very little direct to retail at this point, although something we're working on. But these LPs have known us and our platforms for a long period of time. So they move from one fund to another as the closed-ended funds mature, and a new fund is initiated, they move from fund to fund. So in addition to the fact that they're long dated strategies closed-ended funds it's the same investors that are going from fund to fund to fund. So there's a wonderful cadence of recur ability to this business, and we're enjoying it. Now, it's -- it's -- it's cadence that only continues if we continue to deliver top tier performance to our clients. And that is -- that has continued through all of the platforms that we have. And I think there's a lot of reasons why that happens. Part of it is of course, that we have selected carefully, but part of it also is that we are partners with the people that make it happen every day. And they have a significant invested interest in continuing to deliver top tier performance to their clients. Probably more than you wanted to hear, but at least it gives you a little bit more color. Hi, good morning. Just wanted to turn a little bit to leasing, which you've highlighted in your 2023 outlook expected to be sort of stable and was stable in Q4. And I'm just curious if you can talk a little bit about some of the factors that give you strong visibility into leasing trends in Q -- in 2023. We've said this for a long time. And I think if you go back really to the fundamentals of leasing, a lease is five years, 10 years, seven years, whatever the lease term is. And during COVID, there was a period of time when landlords, because of the uncertainty would extend lease terms for a year or two. Well, people -- well, their tenants got comfortable with what's the new paradigm, which by the way, I'm not sure they're comfortable still yet on what the new paradigm is. But ultimately, leases have to be renewed, extended, a move, a move has to take place. And so there is a repeatability to leasing that you don't necessarily have, for example, in capital markets. So we were not surprised to see leasing give or take the prior year. I think we were -- when that we were happy to see it. But leasing has got some interesting repeat qualities that are not really seen by most people. Great. Thank you. That's helpful. And then just on turning to capital markets, just wondering if you can talk a little bit, I know you gave some color Jay which I appreciate, but just wondering if you can talk a little bit about sort of how you've seen capital markets evolving in Q1, if at all different in a material way from Q4. Just it feels like there's a little bit more rate stability now than there was in Q4. So I'm just curious if you had seen some sequential improvements in the capital markets business? Well, Stephen, it's pretty early to comment on Q1, but certainly the trend from Q4 was down meaningfully year-over-year relative to in particular in the Americas record volumes in Q4 of 2021. Q1 of 2022 was a pretty strong quarter too. So the comparative is tough. And as I mentioned, we do expect capital markets to be down in the 20% to 40% range in aggregate in the first half. So I think what we're saying is that capital markets activity continues to be challenged and we expect it's going to be challenged in the first quarter. And in particular, larger assets are not really trading right now. That doesn't -- that means that part of the market is not very active. Other parts of the market we are seeing some activity but overall it's going to be down like we said. Yes. Okay. That makes sense. Thank you. And then maybe just finally, when you highlighted the strength of the balance sheet, which I think is a huge asset in a market like this and long-term as well. As well as the capital deployment that you've put towards acquisitions over the last 12 months, can you talk a little bit about what you're seeing in with potential acquisition opportunities? And then, Christian, just to follow-up you mentioned the leverage target. I was wondering if you could repeat that because I didn't quite pick it up in your prepared remarks. Yes, I'll start with the leverage target and then Jay will turn to acquisitions. The long-term leverage range for us is 1x to 2x, but we are comfortable exceeding 2x temporarily if an acquisition opportunity comes available. It -- in terms of acquisitions, we've got a with $1 billion of acquisitions done last year, we could actually rest and collect the cash flow that we generate from our business, which is extensive. Our CapEx as a percentage of our EBITDA is relatively small. So we generate a lot of free cash flow in this capital-like business. But as we have done historically, we've set a target of another $65 million-ish in incremental EBITDA and acquisitions for 2023. And the beauty is they're all over the Board for us. I mean lots of opportunity in services really around the world. And there's even opportunity in Investment Management in a couple of areas as well. But I would say the services portion of our business has got tons and tons and tons of room. And as I've been saying, Stephen, for so long, having a global platform with exceptional management teams around the world who've been with us for a long time and are heavily incentivized through share ownership and other things, gives us the ability to execute on acquisitions virtually anywhere in the world and properly integrate them. And we've been doing this for a long time. So we're going to, see for us, it's going to continue to be business as usual and acquisitions will continue to be part of our overall growth plan. Hey, good morning, everyone, and congrats on a good result. First question around the margins in Investment Management, they took a bit of a step higher this quarter. And I think you've alluded to the potential for those to be sort of 50% or higher in the future. Is that going to come mostly from the organic fundraising and operating leverage? Or should we see some integration synergies upside? Yes. I think it's going to be mostly from organic growth and the operating leverage that comes from that. And I think as we look ahead to 2023, we're taking a, on an incremental approach, I think the 50% margin target is a few years away for us. But certainly, 45% is well in reach for 2023. Okay. Great. And then in terms of engineering and property management both going very well, have you seen any indications that financing costs or just construction costs in general are slowing the outlook for engineering? Or is there anything to see there? It seems like it's just continuing -- construction activity just continues to be exceedingly robust. Very robust. And in particular, the infrastructure spending everywhere is really driving engineering. I don't have the percentages of our business handy. But I would say that the majority of our revenues are things like infrastructure rebuilds everywhere in new development everywhere and that's really driving the growth of our engineering platform. Got it. And then just one point of clarification to Stephen's question. I think you mentioned $63 million of targeted EBITDA. That would be above and beyond the guidance that was just put out. Yes. Daryl, I think Jay mentioned $65 million of incremental EBITDA that could be targeted as our acquisition goal for the year. That will be -- that will happen when the acquisitions happen and we'll update you at that point. But certainly, the outlook range we have in front of you today does not include any acquisitions. Hi, good morning. Thank you for taking my questions. So this is sort of trying to dig deeper into one of the questions that was already asked on guidance. How much of your 2023 revenue and earnings guidance is driven by acquired businesses rolling up where obviously there is less risk versus other segments like capital markets or leasing, where there could be more externalities. Just asked another way, how much of your 2023 revenue role is already known? Chandni, that's a very interesting question and a very astute one. As I mentioned earlier on the call, about $75 million of EBITDA comes from the annualization of acquisitions completed in 2022. And out of that $50 million -- sorry, out of that $75 million, $50 million is Investment Management, which we have extremely high visibility on and the remainder is a combination of the other services, which includes a little bit of capital markets, but also a significant amount of property management and engineering business. Fair point. And then you guys talked about strong fundraising pipeline, which you expect to drive AUM growth of 10% to 15% in 2023. What's the composition of this incremental AUM? Will this be all? Will this be traditional? Or will this be infra? And what sort of conversations are you having in this environment that's driving such strong fundraising? Well, it's all over the map based on the strategies that were in the market raising capital on. So I don't have the exact breakdown in front of me. But across the Board, whether it's Harrison Street, Rockwood Basalt versus Colliers Global Investors all are in the market raising their next vintage of funds. There's one or two new products. New products generally raise less incremental dollars but vintage products generally do much better than that. So the expectation that Christian talked about in his prepared remarks are, I would say, significantly existing products, re-ups. I can confirm that the demand for engineering services is unlike anything I've seen in my 20 years covering the space. So I'm pretty bullish on that particular end market. Now given this, are you not tempted to dial-up sort of the M&A on that particular sector? And just I mean, I know you've been quite active there, but I think I am took a focus, took a large part of your efforts and attention in 2022. So how do we think about that particular sector and the growth prospects in the next couple of years? Well, you've known us a long time, and we try not to sleep too much. But engineering and project management has gone from virtually nothing in 2018-ish to something that's approaching almost $1 billion in revenue for us. We are actively looking to augment those operations virtually around the globe. You saw the first significant acquisition in Australia during this past year. There was also an acquisition in the UK during this past year. So we are very active and if you have any opportunities that you think we should take a look at, we're always open to speak to anyone you want. Noted. Thank you, Jay. The other -- more like a -- the other question is more along the -- more clarity around that, Christian; you noted you guided towards a 20% to 40% decline in capital markets. Do you expect that to be evenly weighted between Q1 and Q2? And then, secondly, are there regions where is it evenly spread among your three regions? Or will one region feel it more in particular? Well, Frederic, I'm not sure I want to get into the particulars around Q1 and Q2. Let's just say that we think it's going to be down 20% to 40% in the first half. But as we've said, those were strong quarters last year and tough comparatives. And as it relates to the regional question, I think you'll see the Americas be down significantly year-on-year because they had very strong performance in the first half of 2022. And when you look at EMEA already had challenges last year with the situation in Ukraine. So we don't expect the year-over-year grants in EMEA to be that significant. And as you look at Asia-Pac, we had the COVID issue in Asia in the first half of last year that was impacting our activity levels. So I don't think the variances there are going to be as significant either. I think it's really going to be focused in the Americas. Okay. Thanks. That’s helpful. Pretty consistent with what I was expecting. Thanks. I'll leave it, great results, great guidance, very happy. Thank you. This concludes the Q&A session. I'd now like to turn the call back over to Jay Hennick for any closing remarks. Thank you, operator, and thanks, everyone, for participating in our fourth quarter and year-end conference call. We look forward to speaking to you again at the end of the first quarter and we'll see how we do in Capital Markets. Have a great day.

EarningCall_214

Greetings, and welcome to the Q4 and year-end 2022 results and 2023 Outlook Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Friday, February 10, 2023. Thanks, Chris. Hello, everyone, and welcome to our conference call covering our '22 results and our 2023 outlook. Joining me today are Swamy Kotagiri, Vince Galifi and Pat McCann. Yesterday, our Board of Directors met and approved our financial results for 2022 as well as our financial outlook. We issued a press release this morning outlining both of these. You'll find the press release, today's conference call webcast, the slide presentation to go along with the call and our updated quarterly financial review all in the Investor Relations section of our website at magna.com. Before we get started, just as a reminder, the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. Such statements involve certain risks, assumptions and uncertainties, which may cause the company's actual or future results and performance to be materially different from those expressed or implied in these statements. Please refer to today's press release for a complete description of our safe harbor claimer. Please also refer to the reminder slide today included in our presentation that relates to our commentary. This morning, we'll cover our 2022 highlights as well as our Q4 results. We'll then provide our 2023 outlook and lastly, run through our financial strategy. Thank you, Louis. Good morning, everyone. Today, I'll recap 2022, comment on our results and address our outlook. 2022 was another difficult year for the automotive industry and for Magna. The year started with continued supply chain disruptions, most notably the lack of semiconductor chips, which was expected to improve considerably during '22, but instead remain an issue throughout the year. Although vehicle built recovered from the 2021 levels, OEM production schedules remained volatile throughout 2022, which drove significant inefficiencies in our operations, including tapped labor, overtime and staffing availability issues to name a few. It also had an adverse impact on our ability to achieve our continuous improvement plans and optimize our cost structure across the company. We also started 2022 expecting net input cost inflation of about $275 million year-over-year. The conflict in the Ukraine created additional input cost pressure, particularly in energy, and China's zero COVID policy resulted in lockdowns and further supply chain pressures. These factors drove an additional $290 million of net cost headwinds, primarily energy-related. Despite significant cost volatility through 2022, we were able to slightly improve from our revised $565 million in net input cost from our April Q1 call. We ended at $530 million for the year. In the context of this industry environment, a tremendous amount of effort was expanded by our team to manage through the challenges, launch business, negotiate customer recoveries and resolve commercial items. We were also successful in booking a record amount of business for Magna. So, while we are not happy with our 2022 results as a whole, and especially with underperformance in some of our facilities, I am appreciative of the tremendous efforts made across the company. Unfortunately, we ended a difficult year with disappointing Q4 results relative to our expectations entering the quarter. Although our sales of $9.6 billion in the fourth quarter of 2022 were up 5% year-over-year compared to our outlook, Q4 sales were lower and mix was negative with our operating segments down almost $400 million, excluding complete vehicles and the impact of foreign exchange. Turning back to year-over-year. EBIT margin for Q4 declined to 3.7%. This was due to both internal and external factors. Internal factors included higher warranty expense, which cost us about 35 basis points, provisions against certain balance sheet amounts about 30 basis points and operating underperformance at a facility in Europe by approximately 25 basis points. External factors included continued inefficiencies caused by ongoing last-minute reductions in OEM production schedules and a customer footprint decision that resulted in our having to take asset impairment charges, which was about 5 basis points. These were partially offset by higher commercial resolutions, which positively impacted us by about 25 basis points. Our adjusted EPS was $0.91 for the quarter, ending the year at $4.10, and mainly as a result of lower EBIT, free cash flow in Q4 was $340 million, which was below our 2022 outlook. I recognize that we have operations that have underperformed our expectations this past year. However, operational excellence remains core to Magna, a key differentiator and a fundamental element of our strategy going forward. Although we incurred additional cost to do so, we once again managed to minimize disruption to OEM production despite continued supply chain challenges and volatile schedules. Our customers continue to recognize our efforts in operational excellence and innovation. Last year, we received 107 customer awards, and our progress continues towards net carbon neutrality in our operations. Part of how we address operational excellence is through a focus on people. We developed the operational management accelerator program to enhance the technical breadth of our future general managers and leaders. This will ensure we can fill the pipeline of future leadership across Magna. And I'm proud that Magna received 14 leading employer recognitions this past year, including from Forbes for the sixth consecutive year as world's best employer. Turning to sales growth. We outgrew our markets in 2022 by 7%. And once again, we achieved this outgrowth in each of our major regions, North America, Europe and Asia. We were awarded a record amount of business, about $11 billion annually for 2022. This represents more than 30% above the average of our last five years of awards. We expect this to drive strong sales growth over market and improved returns as these programs launch. And we signed an agreement to acquire Veoneer Active Safety. This will further accelerate our growth and position us as a leader in the fast-growing ADAS market. We have begun planning to ensure a smooth integration of the business once the transaction closes this year. Finally, we remain committed to innovation. We were awarded substantial new business in a number of core innovation areas. This includes battery enclosures, eDrives, Driver Monitoring Systems and SmartAccess power doors. We won another automotive news PACE award, our sixth such award in the past eight years. Our commitment to innovation continues. As we communicated last year, we increased our R&D investments in mobility megatrend areas in 2022 to support awarded programs and opportunities. Thanks, Swamy, and good morning, everyone. I'll start with a detailed review of our financial results. As Swamy indicated, our 2022 results were impacted by continued significant disruptions in OEM production schedules, mainly due to supply chip shortages and input cost inflation in our primary markets to levels we have not experienced for decades. Overall, global light vehicle production increased 6% in 2022 or 5% weighted for our geographic sales. Our consolidated sales rose 4% year-over-year. On an organic basis, our sales increased 12%, driving a 7% weighted growth over market for the year and partially customer recoveries. However, our adjusted EBIT margin and EPS declined during 2022. The single most significant factor being input cost headwinds, net of customer recoveries, which reduced our consolidated EBIT margin by about 150 basis points. The start-stop production impacts, while difficult to quantify, were also a meaningful headwind, negating some of the positive impact of higher sales. In addition, operating inefficiencies at a BES facility in Europe cost us about 35 basis points. Entire engineering to support our activities in electrification and ADAS negatively impacted margin by 25 basis points. Partially offsetting these favorable was favorable commercial resolutions that benefited margin by about 45 basis points. For the fourth quarter, global light vehicle production increased 5% as North America increased 7%, China increased 3%, while Europe declined 1%. On a Magna-weighted basis, production increased 5% in the fourth quarter. Our consolidated sales were $9.6 billion compared to $9.1 billion in Q4 2021. We had strong relative sales performance in the quarter with organic sales outperforming weighted production by 8%, again, in part due to customer recoveries However, continued OEM production schedule volatility negatively impacted our pull-through on the higher sales. We had disappointing EBIT margin performance in the quarter, which resulted in Q4 EPS that was also lower than we expected and lower than 2021. Let me take you through the specifics on our margin. Adjusted EBIT was $356 million, and adjusted EBIT margin decreased 190 basis points to 3.7%, which compares to 5.6% in Q4 2021. The lower EBIT percentage in the quarter reflects higher engineering spend for electrification autonomy, increased net warranty expense, higher launch costs, operational inefficiencies at a facility in Europe and provisions recorded against accounts receivable and other balances. These are partially offset by the impact of foreign currency translation, commercial resolutions and higher contribution on sales, although significantly hampered by OEM production volatility. As we indicated in our early warning press release last month, some of these items were not anticipated when we provided our outlook in early November 2022. In particular, the net warranty costs, the provision against AR and other balances and the timing of net engineering expense. Turning to a review of our cash flows and investment activities. In the fourth quarter of 2022, we generated $501 million in cash from operations before changes in working capital and a further $755 million from working capital. Investment activities in the quarter included $750 million for fixed assets and $186 million for increase in investments, other assets and intangibles. Overall, we generated $340 million of free cash flow in Q4. We also paid $126 million in dividends in the quarter. Growing our dividend remains an element of our stated financial strategy. And yesterday, our Board approved an increase in our quarterly dividend to $0.46 per share, reflecting the Board and management's collective confidence in the outlook for our business. We have increased our dividend per share at an average growth rate of 11% going back to 2010. And now I will pass it back to Swamy for comments before I get into the specifics of our outlook. Please note that our outlook excludes the pending acquisition of Veoneer Active Safety. Thanks, Pat. Over the past couple of years, we've been highlighting our go-forward strategy to propel our business into the future. While it is still early days and despite the difficult industry environment, we are making progress in our strategy. You're going to see that this progress is reflected in our three-year outlook, mainly through investments in megatrend areas. We start to see some results of our strategy over the next three years, but most of the benefits are expected to be realized beyond our outlook period. As always, our outlook reflects both tailwinds and headwinds. Now in terms of tailwinds, we're launching content on a number of new programs, which is contributing to sales growth. Compared to 2022, we anticipate higher global auto production growth during our outlook period, although the growth rate is well below what we expected a year ago. As I said earlier, we continue to increase our business in megatrend areas, particularly electrification and autonomy. This additional business is leading to increased investment. In terms of headwinds in our outlook, while we experienced some improvement in 2022, we expect continued OEM production schedule volatility, primarily due to semiconductor supply constraints. Our business is facing further inflationary input cost impacts compared to 2022, especially in labor and energy as well as lower scrap revenue. We expect incremental input cost headwinds, net of recoveries of approximately $150 million for 2023. However, I'll tell you that we continue to pursue additional recoveries associated with ongoing input cost inflation. Our prices need to more closely reflect the cost environment we're currently operating in. So how does all this translate in our key financial metrics? We expect continued strong organic sales growth in the range of 6% to 8% on average per year over our outlook period. We anticipate margin expansion of 230 basis points or more from 2022 to 2025. Our engineering investments in megatrend areas should continue to average about $900 million annually before customer recoveries. And capital spending is expected to increase mainly to support our significant business growth, particularly in megatrend areas. Lastly, we expect our free cash flow generation, which has been impacted by the industry environment over the past couple of years to significantly improve over our outlook period, as margins expand and get through our heavy period of investment for growth. As a result of the increased investment spending and the pending acquisition of Veoneer Active Safety, we plan to increase our debt during 2023. As we continue to execute against our long-term strategy, our number one priority in 2023 is operational excellence to improve margins and returns as well as the seamless integration of the Veoneer Active Safety business once the transaction closes. Thanks, Swamy. I'll start with the key assumptions in our outlook. Our outlook reflects relatively modest increases in vehicle production in each of our key regions relative to 2022. For '23, our global light vehicle assumption is up about 2%. In North America and Europe, our two largest markets, volumes in 2023 remain well below levels experienced in 2019. However, we expect the increased production in both markets through 2025. In China, we expect a modest decline in '23 and growth from 2023 to 2025. We assume exchange rates and our outlook will approximate recent rates. This reflects a slightly weaker Canadian dollar and Chinese RMB and slightly stronger euro in each case relative to 2022. Net-net, the impact of currency to our outlook is expected to be negligible. I will start with our consolidated outlook. We expect consolidated sales to grow by 6% to 8% on average per year out to 2025 reaching almost $45 billion and potentially as high as $47 billion. The growth is largely driven by the higher vehicle production and content growth, including as a result of the launch of new technologies across our portfolio. These are partially offset by the end of production on certain programs and the disposition of a manual transmission facility. On an organic basis, we expect consolidated sales growth to also be between 6% and 8% on average per year out to 2025. Excluding complete vehicles, we expect our organic sales to grow between 8% and 10% on average. For 2023, we expect organic sales growth of between 5% and 9% compared to global production of 2% or weighted growth of about 3.5%. You'll see that this growth requires additional capital. In addition, we are expecting significant sales growth from unconsolidated joint ventures over the next few years, including our LG JV for electrification components and systems, our integrated eDrive JV in China and a new seating JV in North America. We expect our consolidated margin to be in the 4.1% to 5.1% range in 2023. As Swamy noted, we expect continued input cost pressures in 2023 but we are focused on mitigating higher manufacturing costs, via operational improvements and additional inflation recoveries. Relative to 2022, our '23 margin is expected to benefit from contribution on higher sales, operational improvement initiatives, lower warranty costs and the impact of certain AR and other provisions incurred in the fourth quarter of '22. Offsetting these are lower expected commercial resolutions compared to 2022, higher net input costs of about $150 million, including $50 million related to lower scrap sales, lower license and royalty income and higher launch and new facility costs. While we do not provide a quarterly outlook, we do expect '23 earnings to be lowest in the first quarter of '23, in fact, below the Q4 level and improve sequentially as we move throughout the year. We expect a step-up in margins from '23 to 2025. This is largely driven by a contribution on higher anticipated sales, continued execution of operational improvement initiatives, higher equity income and lower launch and new facility costs. Many of the same factors that are impacting consolidated sales and margins out to 2025 are also impacting our segments. In the interest of time, we will not run through the segment detail. However, we are happy to discuss any questions. Next, I would like to cover some of the highlights of our financial strategy. We have been consistent in communicating our capital allocation principles over the years, and I'd like to reiterate these. We want to maintain a strong balance sheet, ample liquidity with high investment-grade ratings, invest for growth through organic and inorganic opportunities along with innovation spending and finally, return capital to shareholders. As we begin 2023, our leverage ratio is just above the high end of our target range, substantially due to the recent impacts of the auto environment -- EBITDA. As Swamy noted earlier, given our investment needs and capital spending, working capital and to fund the acquisition of Veoneer Safety, we plan to increase debt in 2023. We expect to maintain high investment-grade ratings with credit rating agencies. And based on our current plans, we anticipate bringing our leverage ratio back into our target range by the end of 2024. We are entering a period of somewhat cyclical capital investment to support growth, similar to what we experienced in 2016 to 2018. We expect capital spending to be approximately $2.4 billion for 2023 and to modestly decline from these levels out to 2025. Compared to our 2022 level, about $1 billion of our incremental capital spending in the '23 to '25 period relates to our upcoming sales growth in megatrend areas during and beyond our outlook period. This includes almost $500 million in capital in 2023 alone. Based on our current plans, CapEx to sales will reach a peak this year before beginning to decline again. The global and industry challenges have hampered our free cash flow over the past few years. And based on our increased capital spending in the near term, will impact free cash flow. However, based on our current plans, we expect significantly improving free cash flow throughout our outlook period. In summary, we expect continued organic sales above market, increased investments to support further growth and opportunities in megatrend areas, margin expansion over outlook period, including through ongoing operational improvement activities, and increasing free cash flow as sales and margins expand in our gross spending subside. As Swamy said, we are highly focused on the integration of Veoneer Active Safety and getting back into our targeted leverage range over the next couple of years. Good morning guys. Just a couple of questions on the sort of the near-term and midterm outlook. I mean, if we look at the '22 to '23 numbers, I mean, you can certainly argue that the small decremental margin, right, as earnings could go down, even the sales go up on the low end, but then you could get something to sort of 13% or sort of mid-teens, depending if you want to include the unconsolidated sales in there. It's kind of a wide range. And I know you kind of highlighted some of the factors here. But I mean, if you were to think about sort of the extreme to the downside, what do you think would really drive that? I mean the upside seems, like it's kind of more normal in the process, but the downside seems like it's pretty extreme. What would take you to that low end of the range? Good morning John. I think some of the things that I mentioned, right, have been difficult to quantify. And the one significant that shows up in my mind is the production volatility. Just to give a context and put some amount of magnitude around it without naming customers or platforms, if I just look across the major customers that they have, there are some programs where the volumes are in the 50% to 60% of the contracted plan. On top of that, at these low volume numbers, the variability of the production schedule is hovering anywhere between 35% to 50%. And that is a significant inefficiency hit in terms of managing labor, looking at cap labor or just looking at the overall cost structure. I would say that is one significant impact. The other one is energy in Europe, how it ends up and how it progresses. And obviously, the third one is a significant headwind in terms of inflation and input costs. And it's a complex equation that we're trying to solve here. And that's kind of the reason why -- and looking at the geopolitical and macroeconomic issues, I think are the reason for the broader range that we're looking at. And I think we'll be able to get a little bit more granularity as the year goes by. And Swamy, the one plant -- or it seems like there's one plant in Europe that's causing you problems. I mean this kind of happens from time to time, there's one underperformer in the large portfolio. Can you kind of highlight or give us some details around what's going on with that? Because it sounds like it's called out as one specific plant and what the turnaround process is there? Yes, John. It's a BES facility, and I think I talked about it in the last two quarters. And it's basically the planning and efficiency, and I talked about a little bit in looking at the specifications and how it was underestimated, which led to a lot of constraints on production capacity and strike. But the good news is that over the last two quarters, it has been stabilized and the expected impact that we have planned in Q4 came as we expected. So, I think the facility is stable, and we are continuing to improve in 2023. But I think I've mentioned in the past, it takes a little bit of time to balance the capacity back to normal. Some of the outsourcing that we bring back in get the stability that is needed, put the capacity that was needed. I'm confident that we are on the right path in that one. But you're right, that is the one facility that has had a significant impact in the numbers on the underperformance bucket. Okay. And then just second on the midterm, the '23 to '25 in your guidance, I mean, you once again, kind of 27% incremental. So, after what we're seeing from '22 to '23, I think there's a little bit of consternation that those might be a little bit on the optimistic side. I mean it is really a question of the markets normalizing on volume and volatility and cost inflation normalizing? Or is there something else that you can really control that will drive that kind of upside? There's a couple -- yes, a few factors, John. I think one definitely is we can just hope, right? We are hoping that the market stabilizes, but we can just bank on that. Some of it is accelerated continuous improvement, how we're looking at it. We have had discussions in '22 on recoveries with customers and they continue to happen, and we have started those discussions for '23 already back in the Q4 of '22. So, they really know where we stand. And it's not just limited to 2023. There is pre-2023 discussions that continue to be had. So, it's a mix of all of those. But I think we're also looking at the operational efficiency and excellence that I talked about is going to be a key priority, right, get back to the cash flow generation, looking at not even having the surprises that we've had, looking at true causes and how do we make it better. So, it's a combination of those. Seems like you're being awful polite given the volatility in the schedules that you're being given. Just lastly, real quick on Veoneer, what will be the financial impact? If you can just remind us on cash out the door accretive when it becomes accretive? And if we think about that in the context of the balance sheet. Does that put us in a position where there's likely to be no buybacks in '23 and '24 as capital is allocated in that direction that balance sheet normalizes? Hi. John, it's Pat. Let me -- maybe I'll answer those in reverse order, if that's okay? So, if you think about the share buybacks, our financial strategy has been pretty clear, which is number one priority is investment grade ratings. Number two is to grow the business. And then if there's cash left over after those activities, we'd be returning it through share buyback. Given the capital levels and the acquisition of Veoneer, our intention would be that we're not going to have any share buybacks in 2023, and we will normalize come back within our targeted leverage ratios and that we would obviously revisit that in 2024. Veoneer itself, on the acquisition, we're still targeting a midyear close on that transaction. On a stand-alone basis, they're expected to be post breakeven in 2023, on a full year basis, where it's going to be marginally decremental in 2023, given the PPA that we have in there. As we move into '24, the first full year of ownership, we expect it to be breakeven at the Magna level excluding PPA. Thanks. Pat and swami. So, a question on your actions. What are you doing specifically, what's the plan to improve these very disappointing results, Swamy? I mean I see you call out cutting discretionary costs and securing more inflation recoveries, which may or may not be in your control, but let's assume -- I think the market's going to assume not fully in your control. You addressed a plant in Europe. But is it time -- from my history covering Magna, there's never really been -- it's been a long time since you've done like a more sweeping restructuring because you always have the Magna way and is continuously happening. But is there -- is this a chance when your margins are falling and your CapEx is rising into this environment where you need to do something a little more significant on the restructuring side. If you could be specific with how we should think of that, that would be great. Thanks. Good morning, Adam. Fair point. Very good question. I think if you think back from 2018-time frame, we did actually restructure and talked about the cost base. And unfortunately, with the COVID and everything, we didn't see the impact that we thought we would but we did see it and we got to offset by a lot of stuff. So that's one. Discretionary spending and past recoveries are just a couple of elements that we're talking about. But I think like I said, one of the key factors is looking at production volatility is given. Hopefully, it gets better, but it's been that long enough. We are looking at how the discussions we had and how do we address it. So, we can have a little bit of a more stable run rate and look at cost optimization across, whether it is to offset the labor inflation side of things, or some of the other cost inputs that are coming. That's going to be important for us. So that, I would say, is the more broad sweeping initiative across the company. In terms of restructuring, I think that is an annual process that we go through to see reconsolidation divestitures. If you look back in the last three years, we've done that and we continue to do so. But I think the key is going to be looking at how do we get the cost base and new cost base, given the volumes that we're seeing over the near term and the midterm, which is not really recovering to the 2019 levels. I would say that is going to be the fundamental focus and priority for us, to get the class basis to where we need to given the volumes. And I think the volatility is something we have to take into account will be there, and we have to address it. And if I can just add, Swamy. Sorry, Adam, when you think about that infrastructure, we -- Swamy mentioned, we have done significant restructuring. We've looked at the product portfolio and taken out -- whether it's significant groups. But the outlook we do provide on a, I would say on adjusted basis. So we do have significant restructuring even in our 2020 to 2022 period, we recorded significant charges in Q4, and we're going to continue to restructure our footprint for a couple of reasons one is a vice transition to BB we're going to have transition has to happen there. But we're also transitioning our footprint from higher-cost regions into best-cost countries, and that's going to continue. So when you look historically, where we have those cost, those are going to continue in the future as we move forward. And some of the margin improvement we're anticipating on the earlier question is driven by these restructuring actions. Thanks, Pat. Just one follow-up on the capital intensity. You look back 10 years, 20 years on Magna and your CapEx has been around 4% of sales. And I've never seen it at 6%. You're going to be near there this year. You called out that, that's kind of temporary and it will decline thereafter. But beyond that, as we think of the shape of decline from 6%, are we -- is 4% the wrong number? Is a new normal, maybe closer to 5%? It seems like the capital intensity in the business might be structurally rising for the next few years. Am I wrong there? Should we kind of throw that 4% out the window? I think in the near term, Adam, the 4% would be below. I was at a very -- actually Swamy, myself, we were at a very capital-intensive group in our career. And really what you see when you look at a cycle where you have awards, the growth is just not lumpy. And right now, with the growth that's ahead of us, you're putting heavy investment in and this is beyond a Magna issue as well where you're growing with a new industry when you're looking at EV penetration is going up, and we're transitioning our portfolios from one to the other. But more importantly, we're growing with new products that requires significant capital. So we are above 5%. We expect to be above 5% through our outlook period but it's going to normalize. Where is it going to normalize down to? I see no reason it wouldn't normalize back down to where we've operated historically. And a little bit more color, Adam. I think we operated generally around $1.8 billion or so, even for 2022, and we ended up at $1.7 billion. Some of it was deferrals into '23. And as I mentioned, we had a record level of awards in 2022. That means requires capital prior to program launches. And as I said, this is a 30% higher than 5-year average bookings. So I would say about $500 million of that is in 2023 alone is in the megatrend areas. This includes battery enclosures, which is the lion's share, and along with power and electrification and new mobility. But I think as Pat mentioned, we expect this to be back to the normal levels. We are confident that how we see it unless there is a new business, which would be good news at that point. But the ratio should be back to where we historically have been. But Adam, if I could just add, just to be clear, these investment decisions are return-based transactions, and we haven't compromised our return expectations. This is capital that we're growing. If you come back to our capital allocation strategy, its number 1 priority is to grow the business, grow it internally, externally, whether it's greenfield, brownfield. But if we're generating returns at our appropriate expectations, that's our priority, and we continue down that path. We haven't made a decision to decrease returns with the objective of growing sales. This is -- the objective is to grow returns in the future and drive value for shareholders. Good morning. You've talked this morning about the elevated level of engineering costs that you're incurring. It sounds, like they're mostly related to vehicle electrification and ADAS. So can you talk about, like how do you get a return on that investment? Is there a customer reimbursement and this is a timing issue? Or do you recover it through the programs? And I assume you recover these costs through the programs. And when is the crossover point when these programs are the sufficient? They ramp -- they've begun, they've ramped, they're of sufficient scale that you start to recover some of these costs? Peter, I'll start and Swamy, jump in. So when you think about the engineering spend, we say they're elevated. I would say they're fairly consistent with our previous outlook where we would have been guiding. When you think about some of these new types of products we're getting into, they're higher engineering and we just spoke about capital intensity, and that applies in our industrial group where you buy assembly lines, brick, mortar that type. When you move into electrification and ADAS type programs, your capital spend tends to be lower, but it's replaced with an engineering analysis. But our program analysis, our quoting models don't change. It's still viewed as a -- if we treat it effectively as a capital spend. So that's kind of the return profile. When you think about the engineering spend that goes through our books, it is -- as you said, it's two pieces. There's a piece that's up some upfront payments prior to program prior to SOP. The second portion is you might have it recovered. So you'll see this other asset spend we referred to and this is guaranteed spending that we recover over the program life. And then the third obviously just comes through piece price recoveries. All that means a long answer, our expectations are we we're going to win, we're going to recover all that engineering spend and the returns on those programs are equal to the returns we achieved in the rest of our portfolio. And I think that's one of the things we said that we are expecting the net engineering to be relatively neutral to earnings through our after period and it's going to be $900 million annually as we have talked in the past. So just talking about the Q4, it's just a matter of timing. Okay. And I believe I heard you say, Pat, that you expect that earnings are going through -- 2023 quarterly earnings are going to improve sequentially about the earnings level on an adjusted basis in Q1 would be less than the Q4 that you just reported today. And when I look at -- just looking at the industry vehicle production volumes, like North America and Europe are going to be up quarter-over-quarter. So why -- what are the dynamics that's causing Q1 to look a little bit weaker than Q4? So if you think about Q4, you normalize it for some of the unusuals, and we take that. I would say that's factors going one way. When we move into Q1, we did have some positive commercial settlements in Q4 that just the nature of how these discussions proceed, Peter, and a split of what's continuing versus what's new. Those discussions will intend to result, so we're conservative in our accounting procedure. So we're going to only record those recoveries as incurred or received. So I think it's slightly below Q4 levels, Peter, and then we're going to see growth as we come through. And the other factor you have to consider is as we go through the year, we're expecting volatility in the industry to improve just as we move throughout the year. So I would say it's a combination of unusual items in Q4, it's the inflation recovery is being pushed into Q2, Q3, Q4 similar to what we experienced this year, and then normalization of the OEM production schedules. Okay. And then just lastly, like one of the issues that you've raised for -- on the Q4 earnings has been higher warranty accruals. So what's going on? Is there any one program that caused this? Or is it just kind of random from quarter to quarter? No, Peter, I think this was specific, one product line or one program product in electronics that cost the warranty issue in the PNB segment. Can't get into the specifics, obviously, with the customer in all of that. But it was one specific program, contained and understood. It is done. It's behind us, and it's related to electronics. Yes, hi, good morning. And thank you for taking the question. The company's 2025 EBIT margin outlook is about 100 bps lower than what the company thought it was going for 2024 when you gave that 3-year plan a year ago. The revenue views are pretty similar to what you think you'll do in '25 versus what you thought in '24. So it doesn't seem like there's any change to the revenue view that 3 years 4, but margins are now 100 bps or so lower. So could you bridge us what's changed on the EBIT margin potential of the business in three years? Yes, I would say the most meaningful change from what we said last February to what we're talking about is lower volumes, right? We talked about the higher level of net input costs and lost sales and contribution from our business in Russia. I would say those are the significant points that account for the change. And you've got to look at margin loss. Our percentage has been negatively impacted by increased revenues and costs from inflation. And I keep repeating this, but if the -- if you take into account the loss due to the volatility in production schedules, the inefficiencies, we're not discounting that. It will be fully done. Hopefully, it does, but that's been a negating factor, too. Got it. Thanks, and that’s for me. And my second question was on the pricing environment and the ability for Magna to get recoveries from customers. Maybe you can elaborate a little bit more specifically on what happened in the fourth quarter? Because I know it was a positive in the quarter, but I don't think it was as much of a positive as the company had originally been guiding for. So what happened in the fourth quarter on recoveries? And can you talk a little bit more on what's assumed in recoveries for 2023 in terms of what would get the company to the lower end of the guidance? And what would have to happen with recovery to get to the higher end of the guidance? I think, Mark, maybe I just want to clarify. We have guided to, from a net cost inflation-wise, was about $565 million in our Q1 April, and we ended up at $530 million. So that was one. I mean when we talk about settlements, I think we've got to take all of this into account as we've had discussions. Some of it is are coming in terms of more process-oriented long-term adjustments in terms of our recovery. Some of it is coming in lump sums. And some of it is offset to give back and so on. So were the customers have, for example, a change in ratios footprint or volume agreements that contracts, that ends up in commercial settlements. So our guide to what we said the net inflation cost was going to be, I think we held and did better. Commercial settlements are really a little bit in terms of negotiations overall, which ended up in the fourth quarter. And I think Swamy, just to add to that. So Swamy, you're exactly right. So relative to expectations, we underperformed and that's what drove the decrease from the $550 million down to the $530 million. Mark, on a year-over-year basis, you're correct, where we do have pediments on a year-over-year basis. So relative to expectations we outperformed on a year-over-year basis all for the quarter. Okay. And just one last one for me, if I could, please. The warranty expense, I believe I heard it's contained to '22. So you're not expecting that to be an issue in the '23 guide. This underperforming facility, maybe you can elaborate how much of a headwind do you expect that to be this year? Thanks. Relative to '22, Mark, the operating facility in Europe is expected to be a positive. So as we said earlier, we have the headwinds of 2022, relative to expectations. We move into '23, we're seeing improvements. We have this is full focus. We have a team dedicated to it. and we're driving to execute everything Swamy is talking about as far as increasing capacity, reducing the outsource, and we're seeing the benefits of those actions take place already, and they're going to continue to improve both throughout the year. Great, thank you. Good morning, everyone. Just two questions for me. I was hoping we could go through some of the segment margin walk on Slide 30 and particularly on a complete vehicle assembly for '23 and 2025. And then just secondly, hoping you could also comment on kind of what you're seeing the latest on overall production volatility by region and whether you're starting to see any signs of stabilization that kind of supports the outlook for improvement in Q2 and beyond. Good morning, Itay, it's Pat. I'll start with the first one as far as the margins in complete vehicles, and Swamy can jump in on these schedules. So looking at the complete vehicles, the margin from 2022 into 2023, there's a few factors that are driving that. In '22, we did have -- we did benefit from some customer settlements and licensing income, so we have licensed out at EE architecture. Both of those are expected to recur in 2023. Those two factors are a negative drag of about 70 basis points. The second bucket I would refer to is we do have higher input costs. This is an operation in Europe where we do have significant labor and energy headwinds. And at the same time, we do have engineering program specific costs that are accelerating in 2023 versus '22. Those two factors combined for about a 90 basis point impact. And then obviously, as we've discussed previously, we're transitioning that facility as we move certain programs out and launch new ones. And those costs are a drag on earnings just by the nature of incurring costs and lower revenues. Yes. I think the production volatility in terms of a couple of programs, right, significantly lower than what the expected volumes there. And we always plan to some degree, launch-related costs where there's more than estimated, sometimes I’ll just go through. And I think there is a little bit in terms of that level of cost associated with this transition that's been a drag. Yes, thanks for taking my questions. Just wanted to follow-up on input costs. You noted it was $150 million for this year. Any color on what percent recoveries you're kind of assuming in that, so we can kind of gauge the sort of expectations there? And you said you ended at $530 million for '22. Is the long-term plan to get 100% of that? Any color on that? And of that, when you negotiated last year, is all of that locked in? Or do you have to renegotiate if costs don't come down versus [indiscernible]? Good morning. As I said in my previous comments and to a previous question, some of this settlement, right, are long term that went to changes in Page 5 going forward programs being indexed, which takes a bit of volatility and so on. And some of it is just addressing the amount specific to the year of '22. But it does give us a framework and a precedent. So it's a combination of addressing both together. We won't get into the specifics of customers and how and what. I can definitely say that we have started the discussions in Q4. The customers know where we stand. Obviously, we want the economics to reflect the currency in terms of where the market is. So it's a combination of those. Like Pat mentioned, there's a lot of these discussions ongoing. And then we're going to use what we had in '22, but the discussions on '22, even or pre-'23, I would say it's not even though, right? So we continue to pursue recoveries on all aspects, not just for '23, but some elements of '22. I guess just put it another way, I mean, are you thinking of this as this is your portion of the costs that you're going to have to find ways of coming out over time? Or you're thinking customers, eventually, you'll be able to get this through customers in some period? As I think other slides have talked about a number of this is just a responsibility at this point. Some of it is -- it's both, right? There are some which are index fund, which are I talked about the production volatility and scheduling. We definitely want we partners in helping. And as we said, we did not cause any disruptions, but I can't say the cost. So we have to work together to figure out how to reduce that volatility, so we can address the cost base and health efficiency overall. But on the other hand, we are not saying it's just everything outside. In my prepared comments, I did talk about continuous improvements in setting -- resetting, I would say, the cost base, but that can be done only to work together. So it's kind of a bilateral but there are some issues which we continue to push in terms of recoveries is wafer energy or commodity costs. Got it. And just if I go to the slides last year, you targeted a pretty impressive $6 billion in free cash flow from '22 to '24. If I look at the slides this year, the same period looks like it's adding up to something less than $2 billion. I mean what are the main drivers here? Is it just -- obviously, CapEx has stepped up. And kind of why is that, it's only been a year? And then I assume a lot of it's the margin weakness. Anything else from a working capital perspective that's sort of impacting that number that we should be considering? Hi, Colin it's Pat. When I think of where we were last where we stand today, I think the biggest variances are a few. We talked -- Swamy touched earlier on the margin question, if we just focus out to 2025. So we're impacted by we've seen significant volume, geopolitical issues in Europe that are driving volumes down for those effectively throughout our whole period, which drive the inflation significantly. If you think about our outlook, we tried last year, we updated in the appropriate quote we reflect an additional $290 million primarily of energy cost. So we have -- and then the third thing, as Swamy said earlier, we were forced our flushing operations. So you have on the P&L side, you have those factors driving our earnings. And then we have significant growth above where we expected last year. And when you think about that growth that fits into what we see in our cash flow statement, which is driving higher capital, whether it's accelerated, but it's significant capital to our growth. So long answer, but I think it's a combination of volumes, input costs offset and typically just the growth that's driving the cash. Hi, everybody. As we look out to 2025, you do have the succeeding get back to over $3 billion of EBIT is similar for you back in 2018, but on much higher revenue and more capital than we saw back then. And I was just hoping you can address whether the business is structurally less profitable going forward. And I'm not -- I'm still not sure I understand what you're assuming with regard to the, I guess, it $680 million of higher input costs, the $150 million this year and the $530 million last year. Are you assuming that, that essentially gets recovered by mid-decade? So Rod, maybe I'll answer the second part of that question. Swamy can jump in on the first. On the -- so for 2022 versus 2021, we had net input cost headwinds of $530 million. And that's what was reflected as an EBIT hit, I would say. As we move into 2023, the additional $150 million is a combination of headwinds. We have inflationary costs primarily in Europe for -- well, labor is actually global, but we're seeing labor headwinds where we're operating the increases are in the mid-digits or above standard across the globe. And we also have continued energy headwinds in Europe. So those are the first two buckets driving headwinds into '23. And the other part of it -- that's $100 million on a net basis, net of recoveries. The second part is scrap, and these are contractual scrap balances month to month per contract. So to answer your question, we have a $150 million incremental EBIT charge in '23 versus '22. Sorry, I was asking about whether you have that reversing by 2025. The combination of these headwinds. Are you anticipating that in this $3 billion north of EBIT that you're projecting by then that, that has been fully recovered or resolved now? No. So it's -- a portion would roll off, Rod, as contracts launch. So you have a combination of old economics, new economics. And as we continue our business and you think about our launch period, these inflationary headwinds started hitting roughly this time last year. So as we move forward and launch new business, that will reflect new economics. So -- 2025 portion would reflect a combination of old and new. So the answer is somewhere in between. And some of this rollover changes, like labor inflation is going to be sticky and we have to offset that in terms of continuous improvements and other, call it, structural improvements going forward and accelerate the continuous improvement as we talked about. And to address the first part of your question, Rod, I'm confident that it is not a fundamental shift in the profile of the business. I think some of the things that we talked about is actually the transition of all these input cost effects and the higher investment that we're making for the businesses that we've won. I think as we transition through in the long term, I believe there is no foundational or fundamental change in the profile of the business. So the 2018, in terms of percentages of ratios, we can get back to. But I think the more important part is that's weighing on us is the uncertainty of what's going on in the industry right now. Thanks for that. And just Swamy, just in light of what's happening in the market and strategies of some of your peers, are you still of the view that diversification is a net positive for Magna? Or just given the complexity of issues in different parts of the company that we've seen over years, is there more benefit from focus on and having some of the businesses you're kind of independent response? Yes, Rod, I think if I understood your question, you're talking about the portfolio of products and the focus related question. I tend to kind of look at what's happening in the industry and how the kind of the future is going to be designed or how is it going to be sourced is changing. And our customers that are shifting their organization even, whether it is the sourcing side of things or engineering side of things to be looking at more highly integrated systems. Some of the OEMs have already changed their organizations to address their aspect of it. So I think we are -- at Magna not looking at body and chassis and seats and electronics and powertrain as independent. But more or less, what are the systems that are going to evolve going forward and how do we build the synergies to get a system approach solution to it. With that said, we continuously look at each of these products how they evolve and how relevant are they going forward and what synergy values that we can bring. And if they are not, as we have done in the past, we'll do what is necessary. Hey, thanks. Just wanted to zone in a bit on the body and exteriors margins. Can you just highlight how the mega spend trend or incremental spending with megatrend is impacting that specific business? Is battery trade part of that segment? I guess I always thought it was somewhat agnostic to megatrends. But I am just trying -- wondering if there's something there I should be thinking about? Yes. I would say when we say it's agnostic, I think also the content that we have had and continue to have remains, although it evolves a little bit in material process irrespective of the propulsion system. But an added addition to the product in that segment would be battery includes, right? As the electrification continues and we have the material mileage joining technologies as well as the asset base that has become a significant growth area. And we have seen that both in terms of wins of programs, but also you see the amount of investment we are making business that's already been awarded. In some cases, it's expanding the volumes of the business that has been awarded. Okay. And for that $900 million number, are you able to break that down across -- how that splits across the various segments? I would say that $900 million is predominantly on the AV segment. As Pat talked about this area, whether it's electrification or electronics and so on are more, call it, engineering intensive. When we talk about BES, it's more capital intensive. But we also have to keep in mind that the asset base that we have, which is not program specific is an advantage for us, right? The new investments are related to the program specific once they come. And again, we follow the same philosophy of getting the right returns and looking at each of the programs. Yes. Okay. And the $11 billion of new business wins that you spoke about. So a, can you give some idea of how those spread across the various segments? And then as well, can you describe how the margin profile embedded in that $11 billion is different from what we've seen historically? Is it much lower on the front end of that versus what we've seen historically? Yes. I think as I said in my comments, I won't get into breaking up $11 billion by product line, but I definitely have mentioned and will repeat, it's across Magna. There is definitely an incremental business for the megatrend areas, and I talked about whether it's eDrive, whether it's battery inclusions, whether it's driver monitoring systems and so on. And I just want to reiterate the business growth is always on the financial hurdles that we have followed before, which is return space, and the profile remains the same, right? So it is not a lower margins or lower hurdles financially. So I believe as we launch this business going forward, our returns profile and cash flow generation gets better. And there are no further questions on the line at this time. I'll turn the presentation back to Swamy for any closing remarks. Thank you, Chris, and thanks, everyone, for listening into our call today. Industry conditions continue to be tough. We remain focused on controlling costs across the organization, improving underperforming operations and pursuing inflation recoveries from customers, all while executing our go-forward strategy. Enjoy, the rest of your day, and thanks for listening again. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

EarningCall_215

Good day and welcome to the Q4 2022, Apollo Commercial Real Estate Finance, Inc.'s 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]. I would like to remind everyone that today's call and webcast are being recorded. Please note that they are the property of Apollo Commercial Real Estate Finance, Inc. and that any unauthorized broadcast in any form is strictly prohibited. Information about the audio replay of this call is available in our earnings press release. I'd also like to call your attention to the customary Safe Harbor disclosure in our press release regarding forward-looking statements. Today's conference call and webcast may 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 statements and projections. In addition, we will be discussing certain non-GAAP measures on this call, which management believes are relevant to assessing the Company's financial performance. These measures are reconciled to GAAP figures in our earnings presentation, which is available in the stockholders section of our website. We do not undertake any obligation to update our forward-looking statements or projections, unless required by law. To obtain copies of our latest SEC filings, please visit our website at www.apollocref.com or call us at 212-515-3200. At this time, I'd like to turn the call over to the Company's Chief Executive Officer, Stuart Rothstein. Please go ahead. Thank you, operator and good morning, and thank you to those of us joining us on the Apollo Commercial Real Estate Finance fourth quarter 2022 earnings call. I’m joined today by Scott Weiner, our Chief Investment Officer and Anastasia Mironova, our Chief Financial Officer. The consistent credit performance of ARI's floating rate portfolio of loans produced strong operating results in 2022 as evidenced by substantial earnings growth and a well-covered common stock dividend. Our team originated over $3.7 billion of loans and grew the portfolio to $8.7 billion at year-end. Notably, despite some lingering misperception, 93% of ARI's portfolio now consist of first mortgage position. Beyond originations ARI achieved significant milestones with respect to several focused assets freeing our underperforming capital and redeploying it into newly originated loans underwritten to generate attractive risk adjusted returns. Proactive steps also were taken to strengthen ARI's balance sheet, expanding and diversifying financing sources and extending the term on several facilities. As a result of these effort, ARI continue to demonstrate the resilience in earnings power of the company's business model. 2023 begins with a real estate markets continuing to face headwinds from elevated interest rates and concern over both additional Fed rate increases and the potential for an economic recession. While historically, inflation has been a positive for in-place real estate, in the short-term, the rising rates is leading to a repricing of assets. Sellers and buyers as well as lenders continue to reconcile their views on value and as a result, transaction volume has slowed. Importantly for ARI, given the robust level of loans originated over the past two years, ARI's portfolio remains well-positioned to continue generating distributable earnings in excess of the common stock dividend, while taking a measured and opportunistic approach with respect to new capital deployment. As always, ARI is fortunate to benefit from Apollo's broader commercial real estate debt platform which originated over $13 billion of loan transactions last year. Apollo remains active, originating and closing transactions in the marketplace which enables ARI to access real-time market data and information as we assess the use of the company's investable capital. While transaction velocity has slowed, the market remains open for assets to be refinanced and as evidenced by the $2.2 billion of repayments received in ARI's loan portfolio over the past year. ARI's repayments were across varying property types and geographies. In most instances, properties were refinanced as they achieved business plans. However, there were also situations in which other capital sources were willing to provide financing in order to put capital to work and attractive attachment points and yields and ARI was the beneficiary of a full or partial pay down. Notably, ARI had several office loans either fully or partially repay totaling approximately $650 million during 2022. And as of year-end, office exposure had decreased from a high of nearly 30% at the end of 2020 to just 19% of the current portfolio. That exposure was further reduced after quarter end, as ARI received full repayment of an off of a loan on a London Office building and partial repayment on loan secured by office buildings in Chicago. What we have seen with respect to repayments is the importance of working with both well capitalized high-quality institutional sponsors and subordinate lenders. In many instances, borrowers recognize the long-term value inherent in their underlying properties and have the patience and capital to support properties until business plans are achieved and markets normalized. Shifting to the portfolio at year-end ARI had 61 loans totaling $8.7 billion, near quarter end, we sold the properties underlying ARI's Miami Design District loan to a sponsorship group, with significant experience in the neighborhood, which freed up approximately $180 million of capital. As part of the transaction ARI provided 60% loan to cost seller financing. There has also been positive operating performance at ARI's Hotel in Washington DC. While we are still considering selling the asset, the hotel produced positive cash flow in 2022 and is rapidly approaching pre-pandemic performance levels. Work remains on the other focused assets, however, we are extremely pleased with the positive outcomes achieved this past year, which we believe highlights the strength of Apollo's asset management capabilities, in addition to the ongoing focus and commitment to the preservation of capital. Turning to the right-side of the balance sheet as we look ahead to 2023 ARI's only corporate maturity is the $230 million of convertible notes coming due during the fourth quarter of the year. Similar to the convertible notes that matured in 2022, ARI will closely monitor the credit capital markets as the year progresses and consider a capital market transaction to repay the notes, while also at all times being prepared to repay the notes using its existing liquidity if needed. Before I turn the call over to Anastasia, it is worth highlighting that ARI is current quarterly dividend run rate of $0.35 per share, the company is paying common stockholders roughly a 12% annualized yield, coming off a quarter in which ARI earned $0.48 per share while trading at approximately 75% of book value, with earnings supported by a portfolio consisting of 98% floating rate predominantly senior loans. ARI produced strong financial results in Q4. With distributable earnings prices realized losses in impairment and investment of 69.3 million or $0.48 per share. GAAP net loss available to common stockholders was 7 million was $0.06 per diluted share of common stock. ARI's portfolio remains well-positioned for rising interest rates, as 98% of our loans are floating rate. And as of quarter end, all our U.S. and European floating rate loans were in excess of their respective [floors] [ph]. An additional increase of 50 basis points and the global floating rate interest benchmark would lead to approximately $0.09 per share increase in net interest income. Portfolio credit also remains strong, with no additions to the list of focused assets during the quarter and the resolution of one of the largest focus assets, the Miami Design District loan as mentioned by Stuart. The resolution of this asset freed up non-performing capital, a portion of which was immediately redeployed into seller financing. As of December 31, the weighted average risk rated of ARI's loan portfolio was 3 was less than 3% of the loans in the portfolio based in principle outstanding, risk rated four to five. During the quarter, there was an increase in the general CECL allowance were 5.7 million, bringing it to 36 basis points of the loan portfolio is amortized cost basis as of December 31. The increase is attributable to a more conservative macro outlook with respect to the economy, partially offset by the impact of portfolios strengthening. Also, during the quarter, ARI recorded 36.5 million increase in the specific CECL allowance for the mezzanine loan secured by the for sale residential project located at 111 West 57th Street. In accordance with ARI methodology, the loans that are individually assessed with specific CECL allowance would compare the fair value of the underlying collateral to the current value of the loan. The value of the underlying collateral is typically determined using the cash flow forecast model. In the instance of 111 West 57th Street, cash outflows into model comprise the expected to remain in cost to complete the project including carry costs and borrowings. Capital inflows are based upon net sales proceeds driven by assumptions around the timing and pricing of future unit sales, which they can take out a number of factors, including price sales activities, recent and expected closings, overall market activity, and current value interest, as indicated by foot traffic and broker inquiry. For accounting purposes, we then calculate the net present value or NPV of expected cash flow and compare the NPV to the current carrying value of ARI's outstanding loans. In our most recent analysis, the forecast model still shows that the nominal projected cash flow [freeing] [ph] NPV discounting exceeds ARI's fully funded basis net of the price 30 million reserves. However, given the more conservative view on timing and net sales proceeds, on an NPV basis with the additional 36.5 million reserves. It is worth noting that to the extent our forecast is realized and ARI's current basis prove to be covered by nominal proceeds. In the incremental reserves taken based upon the discounted cash flow analysis will be reversed over time. We will continue to provide updates on the project as there may be future differences in the nominal and discounted NPV view of the asset value, which may potentially result in further adjustments to the specific CECL reserve in the future. It is worth noting that since the refinancing of the Steinway Capital structure in August of 2022, net proceeds from the sale of 70 units have reduced the balance of ARI's senior loan by 111 million. And the principal balance of the senior loan as of year-end was 277 million. From this point, proceeds from the future unit sales will be used to pay down the senior loan and the mezz-B loan on a pro rata basis until both are fully repaid. Currently, there are two penthouse units in the tower and one-unit in the historical Steinway building expected to close within the next few months. Proceeds from the sale of this three units will further decrease the outstanding principal balance of ARI's senior loan and mezzanine B loan by approximately 75 million. With respect to realized events, during the fourth quarter ARI recorded a 24.9 million realized loss in connection with the Miami Design District loan and the loan secured by a hotel property in Atlanta, Georgia. There was no impact to the book value for the year as the realized loss represented the write-off of previous allowances. With respect to the Atlanta loan, we opted to realize the loss in the current quarter due to certain tax structure in consideration. Despite the additional reserves and realized losses taken during the quarter ARI's book value per share, excluding general CECL reserves and depreciation was $15.78 at year end, an increase of 2% over last year. Book value in 2022 benefited from the company's earnings in excess of the common stock dividend. And the gain realized on the acquisition of the multifamily development in Brooklyn known as the Brook. With respect to ARI's borrowings, ARI is in compliance with all covenants and continue to maintain strong liquidity. ARI ended the quarter with $232 million of total liquidity, which was a combination of cash and undrawn credit capacity on existing facilities, and 1 billion of unencumbered loan assets. ARI's debt-to-equity ratio at year-end remained constant compared to the previous quarter end at 2.8. We're currently in discussions with several financial institutions to further expand and diversify our borrowing relationship. Thank you. [Operator Instructions]. Today's first question will come from the line of Steven DeLaney with JMP Securities. Your line is open. Thanks. Good morning, everyone. And congratulations on the nice close to 2022 terms of resolutions and strong distributable EPS. Starting with the EPS, $0.48 before realized losses, it's a nice increase over $0.37 in the prior quarter. Can you comment if there were any one-time items or possibly significant prepayment fees that were included in the $0.48 and possibly quantify that for us as far as anything that we shouldn't expect to see again in the first quarter of this year? Thank you. Yes, the simple answer is no, Steve, it's really the benefit of obviously rising interest rates, but then also putting to work capital that [indiscernible] has not been earning a return. Yes. So more capital invested, and you've got a lot more tailwind. So okay. Well, we were $0.40 and perhaps looks down two kind of step added up. But that's for another time. Stuart, the loan portfolio, you grew, I guess about 10% in 2022 to 8.7. Do you expect net growth in 2023 given your liquidity position? Or how should we think about it, just reinvest and a flat portfolio? Or could it possibly grow? Thanks. I think about it a couple of ways. And I don't want to miss the point that there's not a lot we have to do in order to keep paying the dividend. And I think that allows us to be somewhat more selective and thoughtful as we think about deploying capital. I think the increase in the portfolio overall was obviously very healthy originations during the first half of last year. But also, as I alluded to, in my opening remarks, I think it's sort of somewhat misappreciated that we've transferred. Not all but just about all of the portfolio from mezz to first mortgage and obviously, first mortgages levered versus mezz loans unlevered just naturally leads to a larger portfolio size. It's an inexact science. We certainly are open for business and expect keeping our capital working. But I think from a portfolio sizing perspective, modestly up just as we continue to get paid back on some things and redeploy capital, we've got some excess liquidity going into the year, but probably inside of what took place last year vis-à-vis portfolio growth. Thank you. One moment for our next question. And that will come from the line of Stephen Laws with Raymond James. Your line is open. I'd love to get some comments, you guys focus more on Europe than most of your peers as kind of looking at your breakout and your [deck] [ph]. U.K. and Europe is about half of your office exposure, it's about 70% of your retail exposure is U.K. Can you maybe talk about, pros and cons or what you're seeing over there that maybe we don't hear as much being talked about as far as those exposures? Yes. Look at a high level, let me start by saying right as you think about what we've done over the last 12 to 18 months vis-à-vis moving ratings around or taking assets, specific allowances, et cetera notable that none of that activity has been in Europe, which should be certainly an indication from our perspective, we believe the portfolio is performing well. I think at a high level, on the asset side, our strategy in Europe and it's really been two-fold. We found some situations where we've provided loans against things that are longer term lease and envisioned for redevelopment and renovation at some point in the future but feel perfectly comfortable with existing credit today. And then, we've obviously done the traditional call it, office renovation, bridge type of lending. We've had assets that are performed quite well. And we've been paid off because of that. And we've had other situations where there was sub-debt or other capital subordinate to us that as business plan was being achieved, sought a guess out. I guess the high level of commentary on office in Europe in general, is that office usage in Europe hasn't gone through the fits and starts that we've seen in the U.S. with respect to getting people back to the office. People are back to the office in Europe. People are using office space. You have similar concerns in Europe to the U.S. vis-à-vis concerns over recession, not recession, though, I would say the concerns in Europe are a little bit more concentrated, i.e., it's tied to for the most part, energy prices. So I would say on the office side in Europe, we've stuck to major cities and have generally been quite pleased with the performance of the portfolio. On the retail side of things, the strategy in Europe has been more I'd say non-traditional retail and that we've done outlet center in Europe. And then, we've also done call it a bigger box concept. Both concepts which historically have proven to be much more recession resilient in terms of their performance given the price point at which the tenants are selling goods. I would say performance has been good, on a debt yield basis, I think given that it's retail, we were able to strike some pretty attractive terms from our perspective. So as we look at rent levels versus our loan basis, we feel very comfortable from a debt yield or cap rate perspective, if you think about it, at that level. But generally speaking, happy with the portfolio in Europe, as you've heard me say on prior calls, a little bit more selective with Europe today. A, because of where Europe's gotten in terms of sizing of our overall portfolio, and I'm not sure we envision it being any bigger in terms of percentage, and then also given shifts in currency rates and the impacts of interest rate differentials. It is no longer as economically advantageous to do your deals in Europe and then pick up economics when hedging back to the U.S. but at a high level. We feel good about the portfolio. And I'd also say from a liquidity perspective, similar to the U.S. slowdown in the market overall. But still plenty of capital available for deals that are ready to be sold or deals that are right for refinancing. Great, thanks for those comments, Stuart, those are helpful. My follow-up question, I want to follow up on Steve's initial question. You guys have transitioned the portfolio to almost entirely senior loans. And when I look at a leverage table versus peers, 2.8 is a little below most seem to be in the mid or high threes on a total leverage basis. Maybe it's not near-term, but kind of as you think medium term on an all senior loan portfolio, kind of where do you envision, leverage moving? Do you think it gets to the mid threes? Or kind of how does that look on a medium term basis? And how much does it depend on kind of your financing mix as you move forward? Yes. I think it gets roughly speaking to three, maybe a tick ahead of three on sort of an asset specific basis. If you think about an all first loan portfolio, right. We eliminated $350 million of corporate leverage with respect to the convertible notes last year. I think it's certainly reasonable to expect. We'll eliminate $230 million of corporate leverage with the convertible notes maturing in the fourth quarter of this year and unless there was a way to attractively replace that corporate leverage, at some point. I think you run the bucket, call it 3 to 3.1 times of leverage. And maybe at some point, if there was attractive corporate level financing, you might move, towards the mid threes, but I think for now, as we project out, it's sort of 3, 3.1 times, which makes sense if you think about most of our repo borrowings or call it 70% to 75% advance rate. Thank you. One moment for our next question. Will come from the line of Jade Rahmani with KBW. Your line is open. Okay. Thank you. Regarding the broader credit outlook, can you just make any comments on what you're expecting? And related to that, away from the focus list assets, which you've spent some time talking about, the ones would speak specific CECL reserves, and also on which there's been some disclosure. Maybe talk about if you're expecting any further deterioration in performance elsewhere, I noticed two loans moved to risk rated four. Maybe if you could just comment on the credit outlook. Yes. Look at a high level. I guess I'd say from an accounting perspective, if I was truly worried about something today, accounting doesn't let me decide when I want to reflect my concern, I would need to reflect it now. So I would -- I think you should interpret our disclosure and what we've done from a rating perspective as indicative of what we're truly losing sleep over today. I think at a high level, we've managed through a lot of, what we would describe as the focus assets still work to be done on some of them? I think we, like everybody else are trying to figure out where the economy is ultimately headed. I would say, the market, generally speaking, is functioning to the extent that, if people need more time to execute their business plans, I think they recognize that they don't get more time for free. And there are very productive discussions around extensions in exchange for partial pay downs, et cetera. But I would say, I don't think our credit view has changed a lot over the last quarter or two other than I think we've gotten paid off on some things that we're happy to have gotten paid off. You heard me reference an office building in London. Obviously, resolving Miami Design District made sense. But there's no obvious warning lights other than beyond what we've addressed previously at this point. Okay. Thanks. Technical question. The non-accrual loans, they are 581 million, there's Atlanta 111, West 57, Cincinnati, are there any other loans because when I add up this specific CECL reserves it is around 345 million. And then there's 234 million to get to that 580 million of total non-accrual loans. I think it's probably pieces of 111, West 57. But are there any other loans that should be included in there in the non-accrual bucket? Thanks for that. So we're looking at upcoming maturities. How are you feeling about those? Just going through the disclosure you provide some of the deals would include the Cincinnati retail loan has a September maturity. I suspect performance there has been improving given the uptick in bricks and mortar retail Chicago office. Not sure about that one and a few others. Yes. I think look, I think Liberty Center is definitely performing better. Occupancy levels are up. There's a few things on the edges vis-à-vis adding some greater density vis-à-vis potentially hotel or multifamily that will help as well. But Liberty Center, while it's a maturity, right, the end game on Liberty Center at some point as we sell the asset, right, because we are effectively the beneficiary of what economics remain. I would say, asset is performing better getting close to the point where perhaps later this year, early next year, a sale could make sense. But I think it's also somewhat dependent on interest rate environment, and what financing would be available for a purchaser of the asset but definitely moving in the right direction. I think on some of the other repayment activity that you mentioned, I would say, generally speaking, sitting here today, based on our dialogue with the relevant borrowers/sponsors, I would say there seems to be a reasonable path towards full or partial repayment in those situations, and obviously, a partial repayment will be some sort of conceptual discussion around incremental time for something that allows us to get to a basis level where we're comfortable remaining in the transaction that included the Chicago office assets that you referenced. Hey, thanks. Good morning. Maybe just following up a little bit more on the reserving and credit. How strong of a connection would you say there is between conditions in the CMBS? Market? Financing markets more generally? And the amount of reserving that you're doing? Like, are there scenarios where the macro could maybe hold up, okay, with the capital markets are more dislocated? And how that maybe impacts the amount of reserving it in? I guess, I'd say at a high level and without making it specific about the CMBS market, I think there's plenty of liquidity in the real estate credit environment in general. Yes. Okay. I mean, then a separate question here. I mean, it's been typical, historically, for the company to split loans with other lender counterparties, which I think can be a nice way to offer opportunities that you might not otherwise have. The two questions there. I mean, how does the splitting of loans impact any negotiating power in the case of a loan, extension or a recapitalization or modification? Is there more friction in a tougher environment as a result of splitting those loans? And then, second, how available will that opportunity be going forward? Like, is there going to be as much appetite from others have that to take on that opportunity to split loans? Thank you. Yes. I guess I'd say at a high level. At a high level, generally, our splitting of loans has actually migrated away from splitting with other parties and more the para pursue splitting of ARI and other Apollo affiliated capital. And to the extent we're talking about para pursue interests. It's generally not a lot of pressure or divergence of opinion, vis-à-vis dialogue. Historically, we have done some senior Junior sharing of loans. And obviously, in any instance, where you're sharing a senior, junior piece or creating senior, junior structures, the internal creditor agreement is pretty clear in terms of who's right or what, as you work through a situation. So I would say today, not overly concerned. And there's one particular situation that comes to mind, which was a sharing of a large loan amongst us and several non-affiliated financial institutions. And again, pretty consensual and constructive and getting to a point that worked for all three parties, given that everybody held para pursue interests. And as a result, you need to get to a point where something works for everybody. So again, I appreciate the question. And, you know, nothing has come up on our radar screen and doing this for 14 years now that that leaves us overly concerned about the ability to resolve things. Thank you. One moment for our next question. And that will come from the line of Rick Shane with JPMorgan. Your line is open. Hey, everybody, thanks for taking my question. Steve Delaney made an important observation in terms of spread income. And frankly, in some ways, the wider spreads are offsetting some of the impact of credit. But when we think about that, to some extent, that's been for borrowers, so far relatively free, because they've enjoyed rate caps on their loans. I'm wondering as we move into an environment where loans are extending, and some of those caps are expiring, how you think about that, and how you work with your borrowers to mitigate the risk from higher rates that will start to impact them now. Good question, Rick. Look, the short answer is, there are no extensions without the purchase of a rate cap to cover the remaining term of a loan. I think you highlight an important issue, which is beyond potentially rebalancing the loan balance of a loan. The increased cost of caps is certainly another challenge for owners/borrowers these days, I would say in certain instances where you've heard me refer to pay downs in exchange for extensions in a consensual fashion. You should assume that when I say pay downs, I am referring to both principle pay down and the purchase of additional caps as necessary. And you can also infer from my comments that, at times, the capital necessary to do that might not come from the original borrower, but it might actually come from capital that's willing to take a mezzanine piece or a preferred piece in between our original borrower and our senior position. Got it. Okay. That's helpful. And again, remember, we're not in the market shopping for caps, can you give us some context on, take $100 million notional, what a transaction would have caught what a cap might have cost three years ago, and what it would look like versus what it might cost to that. Thank you. One moment for our next question. And we do have a follow up question from Jade Rahmani with KBW. Your line is open. Thank you very much. With the stock down around 5% today, and the strong distributable earnings ex-credit items? No, it seems the markets not overly concerned or shouldn't be overly concerned about dividend coverage. That's not really the issue. However, book value did decline by around two and a half percent. And there was a further reserve on 111, West 57. That loan still seems to be I would assume the major issue that the market is concerned about. So can you just remind us I know that you made some initial comments in the opening about the methodology there. But what's the last dollar basis? The junior mezzanine, a, position and the senior mezzanine position, they're very large, both north of 190 million. So ignoring the junior mezzanine b position, which now has been written down to 15.5 million, the what's the last dollar basis or what's a way to think about and get confidence with the approach to you know, coverage on that position? On the junior mezz position is 255 million. So that's also quite large, the three of those some 720.8 million. I mean, it would seem that the junior mezzanine B position of 15.5 million, there's a good chance that faces for the reserves, but could there also be reserves on the junior mezzanine A position what would be the last dollar basis or price per square foot or some metric that you think about. I mean the way we think about it Jade, if you look at the senior loan and the senior mezz position, net of sort of what's taken place to date already, you're talking about from a our eyes perspective, you're talking about $430 million of basis, if you think about the fact that we actually have a partner in the senior loan with another financial institution, you're talking about $570 million of value in the remaining units to get those two pieces fully paid off. I mean, you can have units of 10 million, you can have units of 50 million, just tell me what you and your family might of move into, and we'll find the right unit for you. Let's put it this way, I would say at $575 million of value, you are inside 60% on a loan to net sellout basis, including selling costs, et cetera. Okay. So how much risk is there to the junior mezzanine? So it seems like you're suggesting that there's the 575 million, that's your senior position plus the other senior loans, right? Like the whole senior mortgage. It's our mortgage, right? It's the full mortgage, which is shared plus our senior mezz position. So then the risk that you are suggesting is in the junior mezzanine A and B positions, those collectively total 270.6 million. I mean, would it be fair to haircut those two positions. I think what Anastasia was trying to explain and I don't want to be cavalier about this. The way we see the world now, even if you assume certain haircuts to get assets sold, or units sold on a nominal basis, we still think everything is covered. From an accounting perspective, which requires a DCF analysis, not just a nominal basis, you could have a situation where there is some incremental allowance in the future, based on pacing, not based on any changed view of what units will sell for, but then you'll actually recover that allowance when units are sold and you actually receive the nominal pricing. Yes. I mean, we can expect there to be, 20-year life to recovering, but I mean, that doesn't make sense to take a haircut. Speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back to Mr. Rothstein for any closing remarks.

EarningCall_216

Good day, everyone, and welcome to the Lumentum Holdings' Second Quarter Fiscal Year 2023 Earnings Call. All participants will be in listen-only mode. Please also note, today's event is being recorded for replay purposes. [Operator Instructions] At this time, I'd like to turn the conference call over to Kathy Ta, Vice President of Investor Relations. Ms. Ta, please go ahead. Welcome to Lumentum's fiscal second quarter 2023 earnings call. This is Kathy Ta, Lumentum's Vice President of Investor Relations. Joining me today are Alan Lowe, President and Chief Executive Officer; Wajid Ali, Chief Financial Officer; and Chris Coldren, Senior Vice President and Chief Strategy and Corporate Development Officer. Today's call will include forward-looking statements, including statements regarding our expectations, regarding our recent acquisitions, including NeoPhotonics, such as expected synergies, and financial and operating results, macroeconomic trends, trends and expectations for our products and technology, our markets, market opportunity and customers, and our expected financial performance, including our guidance, as well as statements regarding our future revenues, our financial model, and our margin targets. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations, particularly the risk factors described in our SEC filings. We encourage you to review our most recent filings with the SEC, including the risk factors described in the quarterly report on Form 10-Q to be filed for the quarter ended December 31, 2022, and those in the 10-K for the fiscal year ended July 2, 2022. The forward-looking statements provided during this call are based on Lumentum's reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update these statements, except as required by applicable law. Please also note, unless otherwise stated, all financial results and projections discussed in this call are non-GAAP. Non-GAAP financials are not to be considered as a substitute for or superior to financials prepared in accordance with GAAP. Lumentum's press release with the fiscal second quarter 2023 results and accompanying supplemental slides, are available on our Web site at www.lumentum.com under the Investors section. This includes additional details about our non-GAAP financial measures and a reconciliation between our historical GAAP and non-GAAP results. Thank you, Kathy, and good morning, everyone. Our second quarter financial and operational performance was very strong led by robust demand from our Telecom and Commercial Lasers customers. Operating margin and earnings per share were both above the high end of our guidance range, with revenue above the midpoint. Wajid will cover this more in detail in the next section. As expected, sequentially higher revenue from Telecom and Commercial Lasers customers in the quarter offset the anticipated reduction in revenue from certain cloud customers due to inventory digestion and at a major consumer customer due to reduced smartphone unit production. As discussed over the past several years, share normalization has occurred in our consumer business, lessening our exposure to this cyclical market. Nearly 90% of our total revenue is now derived from infrastructure markets which are driven by durable, long-term secular trends in which we serve with highly differentiated products and technologies. Lumentum lights up the optical fiber of the most advanced cloud, carrier, submarine, and 5G mobile networks across the globe. The technology we provide enables compute, data, and communications infrastructure to scale from a performance, cost, and power consumption standpoint. We enable higher-precision new materials and cleaner and more energy-efficient processes to be used in the microelectronics industry. The type of lasers we supply are key to manufacturing of electric vehicles, energy storage solutions, and solar cells. Our technology leadership position is stronger than ever due to successful investments in developing new products and technologies, as well as the two acquisitions we closed this past August. We are now six months into integrating these acquisitions and tracking ahead of plan in realizing overall cost synergies, which contributed to our profitability and earnings per share results being above our guidance ranges. Our technology capabilities and manufacturing scale makes Lumentum the innovation partner of choice for our customers. We have the communication industry's broadest photonic capabilities, including high-bandwidth coherent and direct-to-tech optical components and modules, ultra-narrow-linewidth tunable lasers, advanced optical amplification and ROADM solutions, coherent DSPs and RF-integrated circuits, as well as silicon and indium phosphide photonic integrated circuits. In close partnerships with our customers, we enabled the deployment of the industry's latest high-capacity 400, 600, and 800G cloud and cord network solutions. In addition, due to the escalated data traffic at the edge of the network, customers are deploying our products originally developed for core network applications at the edge or access part of the network. Revenue from edge networking products was up 40% year-on-year in the second quarter, and is now a major component of our Telecom business. We are confident that our technology leadership position and solutions for advanced compute, data, and communication infrastructure will continue to provide a tailwind for Lumentum's long-term growth. Now, let me provide some detail on our second quarter results. Telecom and datacom revenue was up 44% year-on-year driven by organic and inorganic growth in Telecom. Within this, growth from Telecom customers was substantially higher but partially offset by inventory digestion at certain cloud customers. Revenue growth continues to be limited by supply shortages of ICs from third parties. We have made significant progress over the last year on closing supply gaps, which has enabled our growth to date. At the end of the second quarter, remaining IC supply shortages resulted in approximately $60 million of unsatisfied customer demand. This is a modest improvement from the $80 million gap articulated in our last call. Revenue was especially strong in products which play into the industry's transition to 400G-and-above speeds in next-generation networks, including narrow-linewidth tunable lasers, tunable transceivers for network edge applications, high-speed coherent components and modules, as well as our latest ROADMs. We achieved a new quarterly revenue record in narrow-linewidth tunable lasers which are key enablers of all coherent transmission solutions, including 400 gig ZR and ZR+ modules, and our customers' latest 600 gig and 800 gig transmission systems. We also set a quarterly revenue record with our tunable transceivers for network edge applications where a growing set of cable, MSO, and wireless network operator customers use our modules to expand data bandwidth in metro access, fiber deep, and wireless 5G fronthaul applications. Coherent components serving 400G-and-above applications also achieved record revenue with approximately half of the quarterly revenue in coherent components coming from the highest data rate applications at 600 and 800 gig. Second quarter ROADM revenue grew 45% in the same quarter last year due to continued strong demand and improved access to critical ICs. Shipments of MxN ROADMs grew 78%, and high port count ROADMs grew over 70% from the same quarter last year, representing a broader adoption of these next-generation ROADMs with market-leading customers. As anticipated, inventory digestion at certain cloud customers and their module manufacturers resulted in a sequential decline in Datacom's laser chip revenue. As highlighted on our last call, we expected the hyperscale customers to reduce their inventories of our laser chips during the second quarter. And now, we expect that this will continue throughout most of calendar '23. Looking ahead on the technology roadmap, cloud datacenters will be designed for artificial intelligence and machine learning applications which bodes very well for us as we extend our technology leadership to even higher speed laser chips. We are on track with our 200 gig per lane EMLs for 1.6 terabit per second applications, and expect to enter production as we exit fiscal '23. We are also broadening and diversifying our product portfolio for intra-data center applications with differentiated high-speed VCSELs, DMLs, and high-power CW lasers and receiver photodiodes for silicon photonic solutions. For example, we expect to ramp production of our new 100 gig per lane VCSELs during fiscal '24. This is a major new opportunity for us, and addresses the accelerating transition from copper to optical fiber in shorter-reach datacenter applications, especially those for machine learning and artificial intelligence. Turning to industrial and consumer, Q2 was down from Q1 as expected. During the quarter, we saw incrementally weaker overall demand for consumer VCSELs. We continue to focus on ramping new automotive and industrial sensing applications for our technology. In the second quarter, we recognized approximately $3 million in revenue from automotive and IoT applications, and we expect this revenue to grow significantly in the coming years as these opportunities ramp. At this year's CES Show, we had strong customer engagement across all applications of 3D sensing and LiDAR including from numerous automotive customers. We have a broad multi-prong approach to solicit LiDAR in automotive with a wide range of design wins with market-leading customers who are pursuing a variety of in-cabin and LiDAR approaches. In the second quarter, commercial lasers revenue was up 7% sequentially and 16% from the same quarter last year. While fiber lasers for metal cutting and welding continue to be our largest commercial lasers product line, products for emerging high growth application in solar, display, and electric vehicle manufacturing are becoming more meaningful. And we now expect them to increase in our mix in the coming quarters. Underscoring this, ultrafast laser revenue in the quarter more than doubled from the same period last year due to expanded use cases. Our FemtoBlade laser was recognized with the 2022 Innovator's Award at Laser Focus World due to our innovated design which enables faster processing time in micro machine applications for all LED displays, semiconductor ICs, printed circuit boards, and solar cells. We are very excited about lasers product roadmap which will expand addressable market further in the coming years. I am very confident about Lumentum's future given our differentiated portfolio of innovative product and technologies, our strong foundation of intellectual property, and our significant opportunities for long-term growth in the cloud, networking, and advanced manufacturing markets. I am also very confident in our ability to grow into adjacent market, extend product leadership, and expand profitability over the long term. In addition, we have made tremendous progress towards achieving our corporate responsibility goals including our drive to a net zero carbon footprints by 2030. Lumentum has also been named by Newsweek as one of America's most responsible companies for a second consecutive year, in recognition of our achievements in ESG. Finally, I would like to thank all of our employees around the world for all their hard work and resilience as they continue to execute upon our strategy. Thank you, Alan. Net revenue for the second quarter was $506 million which was above the midpoint of our guidance range. Net revenue was flat sequentially and up 13.3% year-on-year. GAAP gross margin for the second quarter was 32.8%. GAAP operating margin was negative 4.3% and GAAP diluted net income per share was a net loss of $0.46 primarily driven by onetime charges related to acquisitions and restructuring activities. Second quarter non-GAAP gross margin was 44.9%, which was down sequentially and year-on-year as expected primarily driven by product mix including NeoPhotonics revenue. During the quarter, we incurred $11.7 million in extraordinary charges to acquire IC components from various brokers to satisfy customer demand. These incremental charges were excluded from non-GAAP gross margin as disclosed in our filings. Second quarter non-GAAP operating margin was 23.1% which decreased sequentially and year-on-year due to product mix including from our recent acquisitions, but was above the high end of our second quarter guidance range. Second quarter non-GAAP operating income was $116.7 million. And adjusted EBITDA was $133.4 million. Second quarter non-GAAP operating expenses totaled $110.3 million or 21.8% of revenue. SG&A expense was $45.9 million. R&D expense was $64.4 million. Interest and other income was $5.1 million on a non-GAAP basis due to higher interest rates on our cash and investments. Second quarter non-GAAP net income was $104.1 million. And non-GAAP diluted net income per share was $1.52. Both of which were above the high end of our guidance range provided on our last call. Net income for share performance was in part driven by accelerated acquisition synergy attainment, a cost savings action taken late in Q2 and higher interest income on our cash and investments. I will provide more color on our structural cost improvements in the guidance section of my prepared remarks. Our fully diluted share count for the second quarter was 68.6 million on a non-GAAP basis. Our non-GAAP tax rate remains at 14.5%. Moving to the balance sheet, we ended the quarter with $1.68 billion in cash and short-term investments, which was up $55.5 million from Q1. During the quarter, we had some one-time restructuring costs as we accelerated the attainment of acquisition synergies and drove some structural cost reductions. Turning to segment details, second quarter Optical Communication segment revenue at $448.8 million decreased 1% sequentially, primarily driven by a decline in industrial and consumer which is mostly offset by growth in Telecom and Datacom. Optical Communication segment non-GAAP gross margin at 43.9% decreased sequentially and year-on-year, primarily due to product mix and the impact of the NeoPhotonics acquisition. Our second quarter Laser segment revenue at $57.2 million was up 7.1% sequentially, and up 16% year-on-year. Second quarter Lasers gross margin of 52.4% was approximately flat sequentially. Now, let me move to our guidance for the third quarter of fiscal '23, which is on a non-GAAP basis and is based on our assumptions as of today. When we acquired NeoPhotonics, we highlighted $50 million in synergy opportunities with $20 million in annual operating expense opportunities within the first fiscal year and then another $30 million cost of sales synergies as we exit the second fiscal year, we have already exceeded our $20 million cost savings target in annual operating expense synergies over the last six months of integration activity, we have executed well on our operating expense reduction plans, and are confident we will exceed our initial synergy targets. In December, we took additional actions that will structurally improve the long-term operating costs of the company. The benefits of these actions are reflected in our diluted net income per share guidance for Q3. As we execute on our integration and synergy plans, I will provide more details in future quarters. Our Q3 guidance reflects our expectation, our reduce cloud and consumer end market revenue. Supply constraints on Telecom products and a few million dollar sequential decline in lasers revenue. We expect net revenue for the third quarter of fiscal '23 to be in the range of $430 million to $460 million. Our Q3 guidance incorporates approximately $60 million of impact revenue driven by continued shortages of third-party components. Based on this, we project third quarter operating margin to be in the range of 17% to 19% and diluted net income per share to be in the range of $1 to $1.15. Our non-GAAP EPS guidance for the third quarter is based on a non-GAAP annual effective tax rate of 14.5%. These projections also assume an approximate share count of 69.4 million shares. Turning to our annual outlook, due to substantial structural improvements in our operating expenses and tight cost controls, we anticipate fiscal '23 EPS will be above the midpoint of our previous fiscal '23 outlook of $4.65 to $5.65 per share to a new range of $5.15 to $5.45 per share. We expect that our fiscal '23 revenue will be at the low end of our previously articulated annual outlook of $1.9 billion to $2.05 billion. This implies Q4 revenue will be approximately flat from Q3, given our assumption of growth in our Telecom and Datacom business offset by seasonally lower consumer revenue. We expect that Q4 will still be constrained by IC supply. I'm extremely pleased with the progress our team has made in synergy attainment and we are now in an excellent position to exceed our $50 million synergy savings target. Thank you, Wajid. Before we start the Q&A session, I'd like to ask everyone to keep to one question and one follow-up. This should help us get to as many participants as possible before the end of our allotted time. Now, let's begin the Q&A session. Thank you. [Operator Instructions] Our first question comes from Simon Leopold of Raymond James. Simon, your line is open. Please go ahead. Thanks for taking the question. I wanted to see if maybe you could build a bridge or unpack a little bit more the outlook for the Telecom and Datacom segment being down in the March quarter, because I guess there are a handful of things I'm contemplating as factors, but just want to understand better in that I know you've got some seasonal slowing from the Chinese New Year, simply the factory workers going home. I'm wondering if maybe there's incremental supply chain issues baked in or whether we can attribute the decline more to the weakness you're seeing from hyperscale, just looking to unpack the drivers. Thank you. Yes, thanks for the question, Simon. Yes, our guidance for Q3 has Telecom and Datacom coming down really mostly because of the slowing end cloud customer and the supply chain that goes into the cloud. And we are still continuing to have challenges with semiconductors as we indicated in the script, that we still anticipate $60 million of unsatisfied demand primarily in Telecom as we exit the third quarter. Yes, and it's pretty simple. You did mention earlier cross-synergies coming out from the acquisition. And you exceeded your own guidance on earnings. I'm just wondering what you had baked in when you provided the original forecast for the synergies and how much you exceeded them by, and, roughly, you were about $11 million-$12 million below our OpEx assumptions, and I'm trying to just make sure I understand where it's coming from? Yes, hi there, Simon. So, probably for the fiscal quarter Q2, we were able to impact operating expenses by about $5 million to $7 million incrementally better in the quarter than we had thought coming in to the quarter. From a total synergy standpoint, basically what's happening is that the first year synergy targets that we had set for ourselves have gotten pulled into the first six months. And so, we're being able to see the benefit of that in -- and not only in our fiscal Q2, but in the fiscal Q3 and fiscal Q4 outlook we've provided, given that we've got a lower revenue level or we're at the low end of our previously announced outlook on revenue. So, that's really what's happening from a synergy standpoint. Good morning, guys. Thanks for letting me ask a question here. I just wanted to ask on the industrial consumer, and particularly the 3D sensing side, in December. When you look at that market, you have talked about a normalization of share for a while now. But I just wanted to get an update there, in terms of normalization or -- do you view that market as split equally or do you see yourselves losing additional share there just because, if you look at the numbers between the two of you, it looks like share has moved away; just any comments on what is a normalization of share and where that stands today? Thank you. Yes, I'll give you my thoughts on it, and Chris can chime in as well. We've been talking about share normalization for years now, and it is finally coming. If you look at our reduction in 3D sensing revenue year-on-year, we're cut in about half. And so, that's what we would have expected. I can't comment on what our competitor is saying or doing, but everything is coming in as we expected. Yes, I would just echo it's difficult to compare to competitors, but certainly they sell more than VCSELs and sell into more than just 3D sensing in the sensing application universe. And as Alan highlighted, we expect it 50% down in the first-half of this year, and that's what's happened. And that baked in our expectations around share, as well as other normal year-over-year price-downs, and things like that. Got it. And then just as a follow-up, through the December quarter, you saw some of your end customers actually beat estimates quite robustly. And they called out supply chain work throughs. Could you just talk about -- you're guiding that Telecom business down into the March quarter. Can you talk about what the supply chain looks like with your end customers? Do you see inventory on their balance sheets? Obviously, they're beating on the revenue side, but they're talking about backlog coming down. Just any update on the health there of that ecosystem just given the fact that you're seeing March down, and then you're indicating June flattish from a total company perspective. So, any comments there would be helpful. Thank you. Yes, sure, Tom. I'd say our network equipment -- that network equipment manufacturing customers' backlog are continuing to be very robust. Of course their inventory is growing, as you say, and we can see it on their balance sheet, but their demand on us is extremely strong. I'd say the soft part of the market that we see is where the end customer is the cloud service provider. But given the backlog at our customers, I don't see that as a huge concern over the long-term as the carriers are continuing to have to invest to meet the ongoing continued growth in bandwidth demands. Yes, and I would add only that to, Tom, your suggestion that, well, revenue going into the fourth quarter may be, at the company level, flat, as we said in the prepared remarks. Obviously, there's additional seasonality in 3D sensing. And so, we expect Telecom to go up into the fourth quarter or Telecom and Datacom in the aggregate impact. Thanks for the question, guys. I guess my first question is around gross margin. So, if I look at Optical Comms in particular, you guys were kind of mid-50s a little over a year ago, mid-40s now. Can you talk about the trajectory as we look forward? Is this now the trough, and what is that kind of recovering gross margin look like, and when might we be able to get north of 50 again for that business? Yes, hi there, it's Wajid. I'll start off on that. Yes, so you're absolutely right. Our gross margins have come down year-over-year primarily because our chip businesses, both our Datacom and our 3D sensing businesses have historically had higher gross margins than the rest of our telecom and transmission product lines. And so, as we've seen a mix shift, we had highlighted very early on with the NeoPhotonics acquisition that we would see a shift from a gross margin standpoint. Now, we've been able to offset some of that as we've started going through our synergy actions. And as we go through the $30 million of synergy actions that we had highlighted at the onset of the acquisition, and we've highlighted on that, recall, after that, we expect that most, if not all, of that benefit will actually come through in our OpComm gross margins with the factory consolidations and the backend consolidations that we see happening and executing on throughout -- we've actually already begun most of the planning on it. But as we execute on it, in fiscal '24, we'll see the benefit of that come through. As well, you've noted that we've talked about the inventory digestion happening over the next couple of quarters within our Datacom product lines. And as that recovers, we should see a favorable impact as well as revenue levels increase as well. So, that's really our path to increasing our gross margins in our OpComm business. That's fantastic. And then just following up on OpComms as well, two other lines of questioning, first of all, I wanted to follow up on your Datacom. So, I believe you pushed out that weakness from the first-half to the full-year. Was wondering did you just get a fresh view on the amount of inventory at cloud customers; I'd like to know why that was pushed out? And then also, if you could perhaps talk about this migration from 400 to 800, does that play into this as well? And then finally in OpComms, ROADM, anything on that market, and would you believe your supply normalized with demand at this point? Yes, that's quite a follow-on. So, I'd say the change in Datacom outlook in duration of the digestion was twofold. One is inventory; we knew the inventory was there. Secondly, is the cloud growth and the CapEx spending of cloud providers, as their growth slows their need to deploy more datacenters and the interconnections of those datacenters lessens. And so, that's why we wanted to set expectations that it's going to take a few quarters to get through that inventory. I'd say that the migration to 800 gig is just economically the right thing to do for those cloud providers. And so, they're very excited to make that transition. And as we've said, that transition will happen late this fiscal year, and ramp through fiscal '24. And then on ROADM supply, I'd say that's the primary area, ROADMs and ROADM line cards, where we're being impacted the most with respect to the supply chain challenges in ICs that we have. So, I'd say 70% year-over-year growth on high-end and contention with MxN is a pretty good indicator that those are the products that are leading the market. And we expect continued growth in that market as new networks get deployed. So, we're really excited about the progress on ROADMs and in next-generation ROADMs that we expect to come out in fiscal '24. Yes, I mean I would say that the transition or -- I wouldn't call it transition, the add of 800 gig, because I think 400 gig is still going to grow over the next N number of years, and as 800 gig is added, that only adds to the opportunity. And as we've highlighted in the script, that's an exciting opportunity for us we're participating today. In some -- certain 800 gig architectures that are just beginning to hit the market, but as we introduce the 200 gig EML, that enabled an even more cost-effective 800 gig architecture. And so, a great opportunity for us, and there's not a lot of inventory of that given that's brand new, right? So, that should be something that's incremental growth. Yes, hi. Thanks for taking my questions, I have a couple. Maybe if you can start on supply. And I'm curious; you indicated the supply backlog improving modestly as you look at the March quarter. The feedback that we've seen from the industry is that even though the broader sort of supply environment is improving, the problems, particularly around ICs, might be broadening to more suppliers than before. Just wondering what are you seeing? Are you generally seeing this sort of consistent improvement across your supply base or is it similar to what the others -- other feedback that we've received, that the problems might be broadening across more suppliers? And I have a follow-up. Thank you. Yes, I'd say, in general, things are better. But as we've said all along, we need all of the parts to be able to ship a product. And so, as we see analogue ICs and even passives become a problem of -- or a decommitment, we've seen just surprisingly more decommitments at last minute due to factory issues or COVID issues, or what have you. So, it's not behind us by any means. And so, I'd say we're seeing exactly what you said, Samik, which is generally improvement but still have problems that we're working through, and surprises that we've incorporated into our guidance. Got it. Okay, helpful. And just to follow-up on Datacom, I think some of the other module makers that have reported have indicated that the 200 gig plus modules are doing well with cloud customers still. And there seems to be a ramp on that front. Just wondering sort of if we should be thinking about your Datacom business being positioned differently with the module makers or module maker customers that you work with. And could you sort of also sort of give us some guidance in terms of is there sort of another leg down when we think about Datacom revenues from these levels that you are seeing as you indicated sort of draws out through the end of the year? Are there -- do you see more risk in terms of additional step-downs given sort of what you are seeing with inventory with the customer? Thank you. Yes, I think, Samik, this is Chris. To clarify that the module makers are our customers, and so, I think as we alluded to in the prepared remarks that our view is that there is inventory digestion both at the cloud operator buying transceiver but as well the transceiver manufacturers that are our direct customers also have high levels of inventory. So, you can imagine a scenario where they are continuing to ship at using or leveraging chips that we have already provided. In terms of a leg down, I think, and we've highlighted this previously that the March quarter timeframe is where we see the low point for us in the Datacom chip business. I think the new development is just that the ramp back up from that point is probably going to be a little more gradual based on the latest discussions with industry participants. Great, thanks. I was hoping you could talk through the dynamics around pricing. Typically, the March quarter has 10% or 15% type price declines in it. Are we seeing any of that? I have heard that the pricing is much flatter this year than traditional. And similarly, on the flipside of that what are you seeing on the supply chain side? Pricing to you is -- obviously you have talked about $60 million in constraints, but what about on the pricing side and the margin impact of the supply chain piece of the equation? Can you give us some guidance on that? And as you are looking out into the June quarter, do you expect this inventory correction, the resultant some non-seasonal pricing changes? Thanks. Yes, Alex, I would say that you are right. The pricing environment with -- between us and our customers is very different than the 10% to 15%. In some cases, prices are actually going up. But overall, we are in this for long term with our customers. And so, we try not to take advantage of the short-term with really focusing on helping them win in the market and helping us have long-term supply agreements with our customers. So, the price dynamics are very, very different, and you are right, it's much flatter than traditionally. I would say pricing too as from our suppliers has moderated with respect to the price increases we saw a year or so ago. That said, we are still going out to the broker market when we need to satisfy for customer demand. And we are having to pay spot buy premiums that impact our cash significantly. We are seeing less of that frankly more recently. But we are still in that game for some period of time. And then, in the June quarter, your inventory digestion question is that around Datacom or is that something else? Well, the question is ultimately as things start to normalize given flatness of pricing over the last two years, does that pricing start to creep back into the equation as a downward pressure maybe on a non-seasonal basis but rather on a cyclical basis? I see, okay. Yes, like I said earlier we are working with our customers to try to satisfy their short-term needs for price reductions but also our longer-term needs to have agreements in place that extend a year or two. And that's what we're working on a win-win solution with our customers that would then ensure that we have set prices with them. And we have set share agreements with them that extend beyond the short-term. So I'd say that as inventory or as supply becomes available, that $60 million or $70 million of unsatisfied backlog will be satisfied. But we don't see that happening in the June quarter, we see continued challenges, as we need to get the semiconductors in house by April in order to make the shipments for June. And so we're still seeing challenges and think it's going to go into the -- early into the second half of the calendar year. Second follow-up question is on the technology front, there are a couple of moving pieces that I was hoping you could address. So, the first one is that we've heard that there's a new module going into the primary 3D sensing customer that in the new additions that is pretty meaningfully changed from the prior-module. And I'm wondering if that is a function of your design or somebody else's? And then second, you talked about delays in the timing and the ramp on the Datacom. I'm assuming that that is not a real relation to any missed windows on getting the new products up. And then third off of this a broader question. AI is taking off in most of the Cloud customers, is there an impact from changing the architecture of the Datacom, Telecom network for AI impacting your business? So, can you address the technology side of those, those key pieces? Thanks. Yes, so thanks, Alex, great question. Maybe kind of start with the Datacom and then circle back around to the 3D sensing. So in the Datacom side of things, the period of extended digestion is not driven by any missing any product window, I think it just is generally driven by cloud CapEx trends and perceived probably, economic outlook by customers or end customers. In terms of the AI architecture, yes, I think it's a tremendous opportunity for Lumentum and folks like Lumentum, because not only talking about transitioning to higher speeds, but you're looking at copper move to optical, and it's very interconnect dense or rich architecture. And therefore, we expect an acceleration in volumes. And as we highlighted in the prepared remarks, we're broadening our technology, or product offering, within the Datacom portion of our Telecom and Datacom business, we've been really focused on EMLs and DMLs that's what we had, when we got out of the module business, but over the past couple of years, expanding the axial photo diode, high power lasers for silicon photonics and CPO architectures to live a broader product offering as that plays into this very rapidly expanding interconnect dense or rich AI architecture. Circling around the 3D sensing, not sure what is being referenced. But I don't think it's appropriate to comment or speculate on a specific customer program or what's going to happen next year, we remain focused on being the innovation partner and a best proven supply partner for our customers. And we remain very competitive in that space. Great, thanks. I know we've kind of circled around it. But I guess I was just surprised to see the broker fees increase kind of pretty meaningfully this quarter from the past couple of quarters. And so just wanted to get a sense of, was that some acute increase in fees towards the end of the quarter, just as some of the China reopening pieces made the environment a little bit more acute, or just kind of what led to kind of that pretty dramatic step up and then just, it seems as if you're saying they'll step down, but just we expect to kind of go back to some of the more normalized like, when is your view that we get back to less dramatic broker fees being paid. And then maybe this follow-up question for me just any update on kind of the DSP development efforts? Thanks. Meta, I will start off with the broker fees. And then Alan can talk about the DSP side of it. Basically, what you saw happening is, as inventory was being flushed out with the increased supply, the broker charges were a little bit higher. And so the reason they were lower last quarter is not because our purchases were lower, but it was really just the time that it took for it to go through the lead time offsets in our manufacturing process, pick up the rest of the components that were needed in order to ship the final product. And so, with the improvements we saw in fiscal Q2 in our ability to actually deliver to our customers, you would see a corresponding increase in that charge simply because of a swing from inventory into cost of sales. So it's more of an accounting matter rather than a business issue. We have actually seen our purchases for broker bought inventory decreased and we expect it to decrease in the coming quarters as well as it's just a couple of components suppliers that we are now struggling with to fulfill our demand, Alan on DSP. Yes, thanks for the question. Very excited about the team that we brought on from the IPG acquisition, not only on DSPs, but also RFIC's from NeoPhotonics and what both companies, both acquisitions bring to us on silicon photonics. But on the DSP front, we're focused primarily on getting the tape out done for our first DSP, and continuing to drive our roadmap, but primary focus is get the tape out done, get the product into our ZR and ZR+ module. And then we'll see what happens from there. Our primary focus for the DSP is internal consumption, to really drive the cost of the ZR type module down to the lowest possible cost point. And the DSP was the last piece that we needed. So we have all of the other components. If you look at ZR, the tunable laser, the modulator, the receiver, the RFICs and the DSP, we've got it all. So we are the broadest range, or broadest provider vertically integrated on those modules. And so as we finish up that DSP, I think we'll have a very, very competitive offering at 400G. And then we're going to, we're going to continue to work with the merchant market on next generation DSPs. But we are filling out our roadmap and building up a team to be able to do more than one DSP at a time, so very, very exciting time. Hi, guys, thanks very much. You mentioned you made some organic cost reductions in the business. I guess I'm just curious about what segments of the business you're taking cost out? What types of costs, anything you can tell us that would be great. George, it's mostly on the G&A side, a little bit on SG&A. But primarily, the reductions that we saw during the quarter were on the G&A side, where we see a little bit of opportunities from a product rationalization standpoint, we're doing that as well. But any savings that we're getting from that, we're reinvesting into R&D. So that's really the way to think about it. Got it. Okay, thank you very much. And then any sense for what the NeoPhotonics contribution was in the quarter in terms of revenue impact? I know you guys gave us a number for last quarter. I think it was $73 million over two months, but just curious what that looks like now? Hey, George, this is Chris. Well along in many of our integration plans, we're not going to be breaking out any separate NeoPhotonics contribution. The teams or one team working together, products are beginning to be rationalized. So it's a little difficult to say what is NeoPhotonics, what is Lumentum at this point for all Lumentum. Thank you. Thanks for letting me ask a couple of questions here. I had a follow-up for Chris, on the commentary around 3D sensing. I just wanted to make sure I understood this correctly, Chris, when you think about the drivers of the downtick in the business, you've got overall demand, you've got share which you talked about in pricing, I believe you said pricing and pricing environment is normal. And you did talk about the share kind of being kind of where you thought it was going to be. So the way to think about I guess, for this fiscal year is demand, obviously lower. But as you look ahead with consumer now down around 10% or so of revenue, do you think the pricing environment is going to be similar for next year? Do you think we're going to grow off of that level? Any detail there would be helpful. Thank you. Yes, I would say, as you highlighted the year-over-year performance is primarily driven by the share normalizations, we've talked about, we've had an outsized share position for many years, and so it was really just a question of when and how steep that reduction would come now that we're more normalized, I think that that is largely behind us. Pricing, as you indicated is normal, there's nothing unusual going on there over the past five years of this prices have come down in general, unless there's a change in architecture, if you will, where a chip gets bigger or smaller, that causes an adjustment in price. And then from that point forward, there tends to be more year-over-year price downs, like we get from our IC suppliers, and very normal as volumes go up. This year obviously, in the past near-term, the last quarter, and looking ahead, there's obviously more going on there with regards to supply chain disruptions that are customer and perhaps lower consumer demand. But I think as we look ahead, our focus is on one, continuing to do well and the customers innovation partner of choice in the consumer space, but as well broadening out into other new applications, we've got extended reality, we've got automotive, and then what's perhaps even more exciting over a longer timeframe is in the industrial markets, where sensing technologies will impact manufacturing factories, warehouses, and that's an area where not only can we supply lasers, but we can supply modules and subsystems, leveraging a much broader base of technologies that Lumentum offers. So, I think there's a lot of tailwinds more broadly, when we start talking about these expanded use cases, in new applications, these new applications, perhaps of higher dollar content, and things like automobiles as an example, or even extended reality headsets tend to add more sensors per a given device. So that amplifies the dollar opportunity per unit. Does that answer your question? It really does. Thanks for all that detail, Chris. If I could just ask a very, I hope a quick follow-up in terms of the initial revenues being recognized out of auto, IoT, et cetera. How would you characterize those revenues, are those sort of still proof-of-concept revenues, I guess what I'm trying to get at is, is their line of sight to an inflection in some of those non-consumer markets for 3D? I'd say it's more than proof-of-concept as, especially in China, the adoption of LiDAR is becoming a reality. And so I'd say that that inflection point isn't in the very short-term with respect to ramping, but I'd say that these are going into vehicles that are going out on the road. And so I'd say that fiscal, by the end of fiscal '24, we should see a meaningful pickup in that business. And we're excited about the broad range of customer engagements that we have and the design wins that we've been awarded. So, it's more of a long-term investment that we've continued to make and in the coming years, it should be more meaningful. Hey thanks guys. Good morning and thanks for taking the question. I guess two quick ones, if I could. Chris, you had mentioned with three, it was mentioned in the slide deck with regards to 3D sensing that the demand was softer than anticipated. So was there a production component to that as well and a demand and market component to that as well, and then just a quick follow-up, thanks. Yes, on our end, I don't think there was any production component limiting us, it was generally focused on customer demand. And I think the factors that we've highlighted around customer supply chain disruptions, that really impacted the second quarter being a little bit below where we had originally thought, if you recall, these disruptions maybe began slightly before our last earnings call, but they continued, if you will, through the remainder of the year. Got it, helpful. And how would you guys characterize the transceiver business right now? And sort of demand is transceivers into end customers and I guess the impact from transceiver inventory that you're seeing at end customers, and that's it for me, thanks. Yes, so I would say that, you're probably referencing. Yes, ZR transceivers coming out of and DC modules and things are going well on that front. We participate in the transceiver market both by supplying to other transceiver vendors. And that's the bulk of the revenue participating that market today. But as Alan highlighted, we have our own ZR, ZR+ business with the NeoPhotonics acquisition, good design wins. And our big focus today is leveraging the combined company's capabilities to bring costs down and drive more design wins. And we anticipate that will be a tremendous growth opportunity for us over the next couple of years given that that ZR, ZR+ markets, going to be a multibillion dollar market, and especially as a transition to 800 Gig long-term tailwinds. Thank you. Our next question comes from Vivek Arya of Bank of America Merrill Lynch. Vivek, your line is open. Please go ahead. Thanks for taking my question. I'm trying to understand whether your commentary about Datacom demand being soft, is that Lumentum specific single customer or single product, I think, or is it a broad commentary on Datacom demand being softer as an industry across the board for most of the year? I would say that it's more end market softness in the cloud providers. And so for Lumentum, we sell Datacom chips to both the cloud providers as well as the module manufacturers. And as the cloud, as the cloud providers slow the deployment to data centers, they slow the deployment of consumption of Datacom modules. And so, what we're seeing is, is that inventory being depleted, but the slower growth of cloud that has been very public from those end customers basically slows the consumption of what was originally thought to be much stronger. And so our view on this is it's a temporary issue that that we'll get through and very excited about the broadening of products, as we address AI and machine learning. So, I wouldn't say it's Lumentum specific, it's more of end market change that we've seen that's temporary. Understood and for my follow-up, realistically, does your 3D sensing business start to grow with a normal seasonal pattern from September onwards? Or we should still be looking out for any sequential share shift that could prevent that from happening? I just want to make sure that at this point, from what you see, has shares normalize or is there any more to go on a sequential basis as they get to the better second half calendar half of the year? Thank you. Yes, I mean I think that that business will continue to be seasonal, if you will. So we expect going from third quarter into the fourth quarter would decline, and then fourth quarter going into the first quarter would grow. So yes, we would expect that seasonal factors will become more significant than they have in the last couple of quarters where the normalization process has unfolded. Okay, fantastic. Best for last, I want to ask somebody else has asked about the commercial lasers business. It was up to $57 million all-time record, guiding it sequentially down. Can it get bigger than this, can eventually get into the 60s, what's the medium term outlook for commercial lasers? Yes, we're very excited about lasers. And the growth year-on-year, our laser business grew 30% in the trailing 12 months. And so we're gaining share in lasers. And that's really given the innovation and new product introduction, as we talked about the new markets that we're getting. And so I would fully expect this to continue to be able to grow over the long-term as we introduce new products, especially in our ultra-fast lasers, which is getting great adoption by these new markets. So yes, we're excited about the long-term outlook of organic growth in our lasers business. Okay, great. And another question is just on Telecom. As you think about again, the medium term or couple of year, two, three year outlook for Telecom, is there still a confidence that this is a sustainable double-digit growth market for multiple years? Well, I think certainly macro headwinds and uncertainty have us not thinking that every year, we're going to be 10%, every year, I'd say long-term growth of bandwidth requirements. And if you look over time, it grows at 10%. And so I think over the midterm to your point, setting aside what happens in the economy, the trend rate, or the growth rate should be 10% in Telecom. Chris, you have anything to add? Yes, and I think the only thing I'd add is that, on a pro forma base, the Lumentum plus Neo had we been together a year earlier, the Telecom and Datacom business is certainly up in the teens percent, if you will, in the first half of our fiscal '23 compared to the first half of fiscal '22. So, the growth has been there, despite the supply chain challenges and softening or the digestion of inventory coming from the cloud end market. So I think that's demonstrated and our customers having tremendous backlog is also very encouraging. So, I think that opportunity is there. But obviously, as you pointed out, there's macro factors, that loom out there that yes, I don't think anybody has seen impact at our customer level at this point, but very difficult to handicap as we look out the next year or next two years. Thanks, Michael. Unfortunately, this is all the time we have for the Q&A session today. So I'll hand that over to Alan Lowe for any closing remarks. Great, thank you, Charlie. I would like to leave you with a few thoughts as we wrap up the call. I'm very excited about the tremendous opportunities ahead of us as we scale our business to serve the exponential growth in network bandwidth in the artificial intelligence, machine learning, mobile, carrier and cloud computing markets. We have a proven playbook to win with our best-in-class products and technologies and to leverage these technologies in other markets. We're committed to investing deeply in innovation and our manufacturing capabilities to deliver on customer needs today and into the future. With that, I would like to thank everyone for attending, and we look forward to talking with you again at LITE 2023 Lumentum's Investor Technology event on March 7 at the OFC Tradeshow. You will find registration information about this event and other upcoming investor events on our Web site. Thank you very much for attending.

EarningCall_217

At this time, I would like to hand the call over to CEO, Benoit Coquart; and CFO, Franck Lemery. go ahead, sir. Thank you. Good morning, everybody. Franck Lemery, Ronan Marc and myself are happy to welcome you to the Legrand 2022 results conference call and webcast. As said, please note that this call is recorded. We have published today our press release, financial statements and a slide show to which we will refer. Those documents are available on the Legrand website. After a few opening remarks, we will comment the details into more details. I begin on Page 4 of the deck with the 3 key takeaways. First, Legrand reports a very solid integrated performance in 2022, i.e., both financial and extra financial. Second, the group is actively implementing its strategic road map. Third takeaway, in 2023, Legrand is aiming to grow between plus 2% and plus 6% at constant exchange rate, with an adjusted operating margin of about 20% before acquisition. We are also taking the opportunity of this call to review our last 5 years' performance, which is an industry benchmark in terms of value creation. So moving now to Page 6 and 7. I will start with an overview of sales. In 2022, we turned in another outstanding global performance, very much in line with our midterm targets despite all the challenges linked to a continued very unsettled environment. Sales rose a steep, plus 19.2% to over EUR 8.3 billion, reflecting a strengthened competitive positions. Organic growth in sales was plus 9.7%, by our business momentum, pricing power and very active supply chain management. On top of organic growth, the scope effect was plus 3%. Based on acquisitions announced and their likely date of consolidation, the full year impact should be around plus 1.5% in 2023. Now last component regarding sales, the FX effect. It added plus 5.5% to sales for the year based on average exchange rates in the month of June 2023, the full year impact on 2023 sales should be around minus 2%. But of course, things can change. We'll see in the months to come. You will find on Page 7, the key takeaways per area. Each of the 3 regions achieved a solid level of growth. Globally, we had many commercial successes, especially in faster expanding segments, data centers, energy efficiency with some negative impact coming from China and Russia, notably in Q4. These were the main comments on sales. Let me now pass the mic to Franck for more color on our robust financial performance. Thank you, Benoît and good morning to all of you. I will start on Page 8 with operating margin. Adjusted operating margin before acquisitions and excluding asset impairment in Russia, stood at 20.7% for the year, meaning an increase of plus 20 bps from 2021. This rise in profitability came despite an inflation of around plus 12% on the raw material and components during the year. TI and front-running profitability reflects once again the group's fair management of both expenses and sales prices. After acquisitions, the adjusted operating margin for the year was 20.4%. Going now to Page 9, regarding the net profit attributable to the group. Excluding the effect of Russia impairments, it grew plus 26.8% over the year. The main driver was the strong rise recording in the operating profit. Trend in the financial results was also favorable. Group's corporate income tax is therefore increasing logically despite the tax rate being down. Moving now to Page 10 with a few comments on cash and balance sheet. Against the backdrop of strengthened coverage of inventory linked to supply chain pressures and also the priority we gave to customer service, the free cash flow stood above EUR 1 billion i.e., a solid 12.4% of sales in 2022. Free cash flow was particularly high in the fourth quarter. Thank you, Franck. Let me present our 2022 ESG achievements on Page 12 to 14. As you know, Legrand launched its 2022 -- in 2022, sorry, its CSR roadmap structured around 4 pillars and 15 priorities. So as shown on Page 12, Legrand reached 123% overall achievement rate with strong achievements in 3 pillars: diversity and inclusion, carbon footprint and responsible business. And as expected, some challenges regarding circular economy despite some first good showings. As you can see on Page 13, we are particularly proud to have reduced Scope 1 and 2 CO2 emissions by 15% at current perimeter and to have raised the share of women amongst managers to 28.5% in 2022. On Page 14, Legrand ESG policy that is already well recognized in various indexes and rankings was once again recognized by outside parties in 2022. So let's move now to the fourth part of the presentation regarding dividend and capital allocation. So on Page 16, Legrand will propose the payment of 1 point dividend, up 15.2%. This will place the payout ratio of nearly 50% in line with the group's midterm targets. On Page 17, the very good showings over 5 years and our confidence in our value creation model enable us both to pursue an ambitious strategy of acquisitions with at least 50% of free cash flow dedicated to bolt-on acquisitions and to announce a share buyback program up to EUR 500 million over 18 months. On Page 20 to 22, driven by strong R&D, Legrand is very active in terms of launches of new products with a particular focus on faster expanding segments that represent 1/3 of our sales. On Page 23 and 24, a key area of growth, M&A, Legrand is announcing 2 new acquisitions Encelium in the U.S. with sales of over USD 20 million and CLAMPER in Brazil with sales of nearly EUR 40 million. Together with the 5 acquisitions announced over 1 year, so the 7 companies represent annual sales of about EUR 200 million. On Page 26, some examples of our CSR progress. I would insist on the fact that we start actively embarking our suppliers to get their commitments to reduce their own CO2 emissions and hence, a large part of our Scope 3. I'm now moving to Page 28 and 29. As I told at the beginning of the call, the relevance of Legrand's strategic choices and successful execution have made it an industry benchmark for financial and extra financial value creation over the past 5 years. Since 2017, our sales grew up by a total of over 50%. The adjusted net profit grew plus 83% and the free cash flow by plus 49%. On the same period, on average, our adjusted operating margin stood at around 20% of sales despite division coming from acquisitions and despite inflation that clearly outpaced sales price increase. In other words, our productivity gains have helped Legrand improve its market positions while securing its long-term pricing power. At the same time, we reduced our CO2 emissions by minus 34% at current scope and so a very significant rise in gender diversity with a percentage of women amongst managers standing at 28.5% and for key executive positions at 24.4%, up from 14.8% in 2017. The group plans to continue rolling out its strategic roadmap; and thus, remain on track to generate integrated value in line with the midterm targets we announced in 2021. And now the last topic of this earnings release on Page 31 with our targets for 2023. Our targets for 2023 exclude impacts linked to the group's disengagement from Russia and are the following: Sales growth at constant exchange rates of between plus 2% and plus 6%, including a scope of consolidation effect of around plus 3% and an adjusted operating margin before acquisitions of around 20% of sales, at least 100% CSR achievement rate. This is what we wanted to highlight today. May I also underline that we have included into the deck, a detailed schedule of the meetings we plan to have with investors. It's on Page 34 and 35. So of course, we will be pleased and delighted to meet again most of the time face-to-face with our investors. I'll just go one at a time. Firstly, can I clarify on the Russia impact vis-a-vis the guidance that you gave. Should we think about the 2% to 6% ex-FX growth as you guided and then take 1.5% out for Russia disposal from that? Or is that already in the 3%? And related to that, is there a margin mix effect should we think about related to that exit? Was that business dramatically different versus the average group margin, please? Yes. Andre, this is indeed a good question. Well, as you know, Russia represented last year 1.5% of our sales. Of course, the situation is a bit uncertain because we don't know yet how long it would take for us to dispose from this activity. And we don't know either what the sales evolution is going to be in the coming months until the sales activity. So the assumptions you can take. So number one, we will treat Russia into scope. So it will be a negative scope for Legrand in 2023. And indeed, our guidance is excluding an impact from Russia. Number two, as far as the Russian top line is concerned, difficult to estimate, but you can estimate that we may lose up to -- or we may have in our accounts in 2023, let's say, from 1/3 to half of the 2022 Russian sales, depending how long it takes to sale the activity and depending on the drop in sales we're going to experience in the next months. As far as the margin impact is concerned, it can range from 0 bps if we are able to sell quickly the activity. And if meanwhile, we are able to retain an acceptable level of profitability up to minus 20 bps. So in other words, you can take the guidance as it is, plus 2% to plus 6%, which is including acquisitions, but excluding Russia, then you can have a negative perimeter impact which depends on your assumption, but which is going to be at worth 2/3 of the Russian sales recorded in 2022. And as far as the margin guidance is concerned, again, a negative impact ranging from 0 to minus 20 bps. Clear? Crystal clear. Yes, absolutely. And can I ask a question on Europe. Just looking at the run rate there on kind of 2019 basis, trying to no doubt the comp effect. It seems to slow down quite meaningfully from the Q2, Q3 kind of run rate by about 8 points even though optically organic growth only went from 8% to 9.8%, it was quite an easy comp. Could you just talk about if there's anything specific happening there? Or is this the kind of ready slowdown has been well anticipated. And was there any particular kind of stocking moves in the quarter that we should be aware of as kind of a one-off nature? Well, it's always difficult to analyze over a period of 3 years, 4 years, 5 years. What I can tell you is that, indeed, Europe is up 8% year-on-year on Q4, whereas it was up -- it is up close to 10% on the full year. So it's indeed deceleration. Well, by the way, you have to include the fact that it includes also a negative performance from Russia. And Russia performance wasn't so negative in Q1 because the work started late in February, but it was pretty negative in Q4. If you take Europe without Russia, the Q4 performance instead of being plus 8%, it's plus 11%. But this being said, it is true that the situation in Europe is a bit more demanding in H2 than in H1. By the way, European volumes are flat in 2022. And going into 2023, it is indeed a question mark. And even though some macroeconomists are a bit more pessimistic in Europe than in the U.S. on our side, we are not overly pessimistic. And we believe that even though the economy might be demanding, there are a number of interesting trends that should support our business going forward in Europe and elsewhere, such as, for example, the green products, data center connected products and a number of other things. So yes, so the volume and the sales are lighter in H2 compared to H1. I wouldn't talk of a strong deceleration and we are cautious, but not overly pessimistic going into 2023. Really helpful. And just the last one, if I may. On pricing, could you help us with how much pricing you're carrying over into 2023 from the actions already taken and whether you intend to raise further during 2023 or have done so far already? I have to tell you that I don't like that much the concept of pricing carryover because the truth is that it doesn't mean anything. We can have a carryover, but because the environment of raw mats and components -- the prices of raw mats and components is going down, then we can give additional discounts to our customers, so we can give additional and other rebates to distributor. So your total performance in terms of pricing could be even -- either lower or stronger than the carry over. What I can tell you, maybe it will answer your question. So as you saw, we are -- so 2 things. Starting with the Q4 numbers. In Q4, we had a pricing of about 10% and we had inflation of raw mats and components of about plus 4%. And for the total of the year, we have a pricing of, again, close to plus 10% and inflation of raw mats and components of about plus 12%. So of course, you have better and more positive relationship between selling price and price of raw mats and components in Q4 than for the first 9 months of the year. This was expected, and this could potentially help a bit of margin in 2023, first topic. Second topic, let me maybe clarify the guidance we are shooting today. So as indicated, we are aiming to record a gross in sales excluding FX between plus 2% and plus 6%, including a plus 3% perimeter effect, which means you can do very easy math that organically, we are shooting for something between minus 1 and plus 3. And the way it was built is that it integrates a modest price increase and volumes should be -- should range from slightly down to slightly up. This is the way we have built our guidance. Now the usual caveat, you know that Legrand has no order book. You know that we are absolutely no visibility in when we will have to deliver in the coming weeks. So of course, this guidance was as usual based on the series of macro assumptions that can prove to be wrong. I wanted to ask one more medium term and 1 more I'll start by the shorter term. On inventories, and can you tell us if you're sort of now comfortable with the level? Do you plan to destock a bit more next year? How should we think about that equation? And then more on the medium term, I think now we've been talking about sort of green plans and stimulus for a number of years, and I know there have been sort of some lack of maybe data or values for you to be able to quantify it, but now looking at the U.S. IRA, there is a quite clear timeline and several amounts tag that specific building energy efficiency initiatives. Can you talk us through how you think that's going to feed through what's the cadence you expect that to see through in your business? And where -- which parts of your business you see the biggest impact? So the 2 questions at the same time. Well, as far as our inventory is concerned, you know the Legrand historical numbers. We had a level of inventory to sales historically, which was at 13%, 14%. We reached a peak of more than 19% of ratio of inventory to sales in Q3 2022, and as we told you at that time, it was made on purpose because we really wanted in the context of shortage of components, raw mat and so on. We wanted to maintain a good level of service to our customers, which was completely made on purpose. And we are now back to 16.3%, and to be more precise, it is 16.9% if we exclude the impairments we made on the Russian inventory. So the right number to have in mind is that 16.3%, is really 16.9%. So you can see it was slightly down compared to the level we recorded in Q3 2022, but not yet at a historical level. Well, our intention is to -- remains to progressively come back to our historical levels. It won't take 1 or 2 quarters. It will be longer than that. It could be 1.5 years or 2 years, we'll see. We will do it in a very cautious manner because we don't want that move to damage our customer service and customer service will remain our first priority. But I can confirm that in the quarters to come in the next 1 or 2 years, you should expect our level of inventory to sales to continue to decrease. As far as inventory in our channel, well, we haven't seen on globally, anything one way or the other in 2022. So we have not seen significant destocking nor significant restocking from our distributors. Some countries destocked a bit. Some of it restocked a bit, but if we do the total of all that, there's nothing worth mentioning that would have had an impact on our 2022 accounts. And as far as the global level of inventory at our distributors place, my feeling, even if it's difficult to have a precise color on that -- my feeling is that our distributors are not carrying too much inventory. So we'll see what happens in 2023, but it probably depends on their own perception of what the year 2023 is going to be, but so far, we are not expecting a massive or a very significant destocking or restocking in the quarters to come. As far as the green plant is concerned, well, it's indeed something everybody is tracking very carefully. We have to split between, let's say, the U.S. and Europe. As far as the U.S. is concerned, there's nothing that should have a very strong impact on Legrand in the so-called IA plan, which is dedicated to other sectors than Legrand, but still this being said, you have a number of positive moves at the state level, which could have a positive impact on our business. You have to understand that as usual in the U.S., you have different policies between the federal state and the local states. And you have now more than, I think, 30 local states, which have committed to targets in terms of CO2 emissions reduction, which are actually close to European targets. And in order to reach those targets, there's no choice but for those states, not only to work on transportation, not only to work on the industry, but also to work on buildings, which I remind represent 40% -- close to 40% of CO2 emissions. So even if there's not a big federal plan supporting the green business, a number of states have taken some initiatives. For example, you may know that you cannot build a house anymore in California without being net zero. And this regulation will soon be applied to commercial buildings. Well, as far as Europe is concerned, surprisingly because, of course, the organization in Europe is quite different from the one in the U.S. It's quite similar. So you have all those big for 55 grid plants and so on which we sometimes have difficulties to see how it really impacts our business. But at the same time, you have a number of local initiatives that are indeed pushing ourselves up, take in Italy, the so-called super bonus, which had significant impact on the top line in Italy. We grew very nicely in Italy. You have what we call Máquinas E Condutores in France. And every time -- even if some of those plants are not targeted directly at our sales, it has an indirect impact on our business. When you are installing, for example, a heat pump, we're not active in the heat pump business, but it's highly likely that you will also add some circuit breakers in panel board. So it's the same story for Europe as for the U.S., no impact of a big European plan, but a number of interesting impacts locally. And looking at the numbers, I can tell you -- I can confirm that in Europe, our green products did very well, grew a lot faster than the rest of our products, both in value and in volume, and it includes the sales of EV charging stations, climate control products such as thermostat, for example, time switches, power busbars, data center called corridors, all those products grow very nicely. And part of this growth was supported by local plans. Benoît, Franck, Ronan, can I talk and ask to pricing, please. First of all, what was pricing in the fourth quarter, that would be helpful if you can give it. And I appreciate you don't want to give us carryover, I'm going to assume it's a couple of percent or so. But if I understood your views on 2023 correctly on the guidance, it implied volumes down low single digit to up single digit. That would imply pricing at flat to maybe small up. I'm assuming you're starting the year at high single digits. So I'm trying to understand the pricing cadence as we go through the year. And whether there's a risk to negative pricing as we get into the back half, we've seen some of your particularly U.S. distributors come under a bit of pricing and gross margin pressure. So keen to try and understand how to think about pricing as we go through the course of this year, to the extent you can give some color on that. Yes. Well, again, pricing is a very dynamic topic. So that's why I don't want to give you a carryover, which will be read as a forecast -- as a target, but you can compute it yourself. I can remind you the number quarter-by-quarter of pricing. Q1, 8%; Q2, 10%; Q3, 11%; Q4, 10%. So you can do your own math and compute carryover itself. I can confirm that we are shooting for a modest price increase. I can also confirm that there's no way prices will go down. It is clearly a very important part of the Legrand equity story and business model to be able to increase prices year-on-year, and I confirm that prices will go up in 2023. Now, we assume that even though the energy price will remain high, the price of raw mats and components will be more under control than it was in 2022. And as a result, our pricing instead of being plus 10% in 2022 will be modestly up in 2023, indeed. And your assumption that our guidance includes volumes slightly down on the low end and volumes slightly up in the high end is indeed the right one. Two more comments on pricing. Well, number one, pricing should be higher in H1 2023 and in H2 2023. The mechanical impact, if I may say, of a carryover. So you shouldn't bet that into your model. Second comment, the U.S. situation is somehow a bit specific, reading at the releases from a number of U.S -- listed companies Prices have gone up 13%, 15%, sometimes 17%. I can confirm that our level of price increase in the U.S. was not at this level. And we've been very cautious in not increasing prices too much, neither actually in the U.S. nor elsewhere. And even though we are not communicating on a precise pricing by region, our price increase in the U.S. was closer to the group's average than to the 15% price increase that I can hear here and there. So we don't believe that we have made too much pricing, and I'm not aware of any margin squeeze at our distributors level. And I still believe that we have retained some pricing capability should we need it. Now it may be the opportunity also to give you a bit of color on what happened over the last 5 years. Over the last 5 years, prices increased by 19% over a period of 5 years, which is less than the price increase we recorded in raw mats and components, which is 10 points higher, and which is also less than -- slightly less than the wage increase. So what does it mean Is number one, that we've been able to hold this 20% margin, plus or minus with other means, productivity, footprint, innovation and so on and so forth. Number one. And number two, it means that we haven't made too much pricing once again and that we have retained our ability to do pricing year-on-year, should we need it. That's helpful. It's just that I'm struggling there with pricing for the full year if you're starting at 7%, 8% year-over-year in the first quarter and the guide implies say 1% to 2% pricing for the full year, how you see the pricing positively as we get into the back half, but maybe we can get -- take that offline. I mean I can answer this question because the way so-called carryover is understood, it's usually okay. There's a carryover of 1%, 2%, 3%, 4%. And then if you are doing further price increase, the total price effect on 2023 become 2%, 3%, 4%, 5%. But it can go one way or the other. You have a carryover of plus -- of, let's say, 100, but if you feel that because the price of raw mat and components is going down because you want to be a bit price aggressive, even though in our trade, it doesn't have such a good payback in this product family, you can decide to decrease or to have less price increase than your carryover. And it can be done almost overnight. You are giving more discount on a certain number of projects. You are increasing a little bit at the end of the year rebate you're granting to your customers. So that's why a carryover is very political. I can tell you a carryover of 1%, 2%, 3%. But at the end, it doesn't meet much about the price impact it will have, the price effect it will record in 2023. What I can tell you is that -- is to tell you, number one, prices will go up. Number two, we will do what it takes to, at the same time, preserve our competitiveness and meet our profitability targets, i.e., 20%. Clear, Very briefly, if I can, just on the volume outlook for '23. Any color around resi, non-resi and data centers will be helpful. I think you've been calling out data center still as an area of volume growth, at least that appears to be the expectation. I wonder where we are on the channel destocking in resi, particularly in Europe? And how do you see the sort of volume cadence? I appreciate that's difficult to call at this stage, but I wonder what thinking is around the key segments for the year. That's it. What I can tell you what it was in 2022, it's always a bit more difficult to give you a forecast. So in 2022, clearly, the residential piece was less supportive, both in the U.S. and in Europe than commercial. This being said, if we look at the level of our sales compared to the pre-crisis level compared to 2019, actually, we had significant growth starting from mid-2020 and throughout 2021 and a more difficult situation in 2022, but it's not a very tough situation. This is more the result of sort of one-off booming sales starting mid of the year '22. But as a result, residential was not as supportive as commercial. Commercial was better oriented, both in the U.S. and Europe and data center continued to experience very, very strong growth. And take, for example, the U.S., we grew double digit in data centers this year. We grew double digit last year. We grew double-digit a year before. So we grew double digit, 5 years in a row organically in the U.S. on data centers. So if I had to put, let's say, ranking, the slowest vertical was residential then commercial was pretty good and sometimes supported by green products and data center was booming. Well, going into 2023, it's a big question mark. It's a bit difficult to answer. There are pros and cons. If you look at residential, some of the local statistics of housing starts, permits and so on are not very positively oriented. Now we are not entirely dependent upon housing starts. We have a large part of our sales, which are renovation-driven. There's clearly a need for refurbishing residential buildings and the various green plants will help. I remind you that 70% of buildings in Europe are not energy efficient. And if we want to meet our 2050 targets, we should triple the pace of renovation in Europe, moving from 1% per year to 2%, 3%. So 2022 residential was not very supportive. And I believe that even though some of the statistics, especially in Europe, are not very impressive for 2023. We could have a number of opportunities, and I'm not, again, overly pessimistic on residential Europe. The first one is kind of touching on some of our points on data centers. And I think you've been flagging or I think you were flagging throughout this year that you have been impacted by supply chain constraints and not being able to ship as much as you would have liked to. I wonder if that supply chain situation has improved or has remained stable? How do you see that developing into 2023? And kind of touch that question. Do you feel like you have had any market share shift? That will be the first one. Well, it's not specific to data centers, but indeed, we had faced 2 supply chain issues. One was on electronic components and it has impacted all products incorporating electronic components. So by definition, connected products, data center and some of the green products. This constraint should continue a couple of quarters that the feedback we are getting from our suppliers. It does not prevent us from growing, and that's what we showed in 2022. But clearly, we could have done more growth, especially in data centers and new connected products if we had more electronic components. How long will it take to -- for the situation to smoothen if I may say, probably a couple of quarters, and we expect to have no longer any issues, but at the end of 2023, but depending on how fast the problem is solved, it could have, of course, a positive impact on our top line in 2023. The second constraint we faced were supply chain issues coming from China. We have quite a significant flow of products between China and the U.S. And the zero-COVID policy in Q2 was an issue and the change in policy end of the year was also a short-term issue because all of a sudden, we had 60%, 70%, 80% of our people being contaminated, and I guess it was also the same in a number of suppliers. So all these changes in policies created some issues, and we couldn't serve our customers as well as we wanted to in the U.S., not only in data centers, but on also simpler products, such as, for example, presence detectors or light switches. Well, we expect this issue to be solved within a few weeks. Once people will come back and they're actually coming back from the Chinese New Year. From what we understand, a lot of the Chinese people have been infected. We don't expect a significant disruption at the factory level coming from this COVID policy. So the electronic component issue would remain for a couple of quarters. The Chinese supply chain issues are currently being clear. As far as market shares are concerned. Well, it's -- I can answer broadly your question. I think that we have done well in Europe in most geographies. And I'm not commenting specifically on data centers, but as a whole, we have done very well in Italy. We have done very well in Spain, in Eastern Europe, in Germany, even though we are a small German player. We have been able to hold market share without significant gains or losses in France, which is, as you know, an important country for us. And we have a couple of countries where it has been more difficult. Of course, Russia since we complied with the sanctions, we couldn't sell any electronic components or products containing electronic components in Russia in 2022. So we lost share clearly on some product families that we couldn't sell anymore. And our market shares were also under pressure in the Netherlands. But if we make the total of all that, I think our market share did increase in Europe in 2022. As far as the U.S. is concerned, clear gains in market share in data centers, when we look at -- so you remember in the U.S., we are mostly active on white room data center. We're not active at all in great space. So we're not selling any circuit breaker, power busbar, UPS in data centers, but we are selling busbar for the white room, PDUs, cabinets, jacks, fiber optics solutions and so on. And on all those product families, we have significantly gained market share. We have clear evidence of that compared to our competitors. As for the rest of our products are concerned, the situation is more balanced. You have some gains and you have some losses. And as for the rest of the world is concerned, where the situation has been difficult in Brazil, we are still convinced that Brazil is a very interesting geography to operate and that you can find niches which are high growth, high profitability issues. It's the reason why we bought CLAMPER specialists in search protection devices, especially for photovoltaic installations. But on the traditional product of reinstitution has been a bit more difficult, and we have sometimes accepted deliberately not to be active on some product families as a result to lose market share in order to hold or to increase our profitability. The other way, the situation has been very, very positive in terms of market shares in India, where we are growing very, very fast and in Africa, where we are also gaining shares. So as a whole, and even though it's always difficult because the analysis has to be done on a product by product family, and we have 100 different product families. On a country-by-country basis, we feel that 2022 was a pretty solid year as far as market shares are concerned. That's incredibly helpful. And if I can squeeze one last question. I was just wondering why you've announced now the buyback. Why do you think now is the right time to announce this? And why is it in this format or not something like a special dividend? Is it to give you more flexibility in terms of potential M&A? Or what's the rationale behind that. That was exactly the -- you have already the answer. So why now? Well, it's a very simple math. If you look at the past 5 years, we have generated EUR 4.8 billion of cash. We have done what we committed to do as far as M&A is concerned, i.e., over the past 5 years, we have spent more or less half of this free cash flow in acquisitions. We have done more or less what we had to do in terms of dividend. We increased the dividend per share by 50%. We have done -- what we wanted to do as far as employees are concerned, we have increased above inflation in most geographies, the wages of our people. We've done what we wanted to do as far as customers are concerned by doing not too much pricing and by delivering good customer experience, new products and so on. And at the end of the year, we have a leverage, which is 1.2, i.e., a leverage which is not low, but reasonable. So we thought it was a good idea to give part of this cash back to our shareholders. Why share buyback rather than extra dividend because indeed it's more flexible to make things clear, our first priorities as far as -- as far as cash allocation is concerned, it's #1 acquisition, #2 dividend. So we intend to keep spending half of free cash flow into acquisitions, and we intend to have a payout ratio for evidence, which should be at about 50% for net earnings. Those are the 2 clear priorities, and we'll continue along those lines. But since we have a bit of extra cash, we are giving the cash back to our shareholders. And the share buyback structure was meant to give us enough flexibility so that it can be stopped or postponed if we had for example, a big acquisition opportunity or a series of many different acquisitions. So we plan to do this share buyback program. But as clearly stated in the press release, should we have a big acquisition, we will, of course, freeze it and give a priority to acquisitions. Can I ask about margins Q4 is usually a seasonally weak quarter for you from a margin perspective. And you just printed a very strong margin of a bit above 21%. So the momentum here looks pretty positive. And I guess Q1 '23 margin will probably now be around 22%. The guidance being only 20% or around 20%, can you just elaborate on the driving forces that could actually lead the margins to gradually decline to around 20% for the full year. Is it a question of mix? Is it a question of more investments coming in or wage inflation? Gael, thanks for the question. Well, you noticed that, of course, Q4 was quite positive in terms of profitability. You have in mind what Benoît reminded about the dynamic of pricing, sales prices and raw mat and component pricing, which were very unfavorable at the beginning of the year and more favorable at the end of the year. Having saying that, of course, this dynamic could be the same last year, meaning better start on the front of pricing versus purchase prices. and which will progressively or mechanically fade a little bit out. Then what matters, of course, is the full year target. We will manage our 20% with all the traditional levers of the group, which is adjusting pricing, of course, to cost inflation, but also productivity, accelerating on some dedicated commercial or digital initiatives as we do usually. But the dynamic of pricing could be the one you have mentioned. Now again to elaborate on what Franck said, we're not guiding on a quarter. We are guiding on a full year, and so be careful of not extrapolating your assumptions on a given quarter throughout the year. Understood. Okay. And then a question on growth. within the organic growth guidance of between minus 1% and plus 3% I'm sure you have some assumptions regarding resi, non-resi and data centers. So can we just get a bit of color on this? Well, actually, Gael, the question was asked, we have assumptions when it comes to countries and geographies, but the way we manage the business is not -- we are not managing worldwide residential or worldwide commercial business units. It's really country-based. So the assumptions on which -- this guidance was based is what the macroeconomics are telling us, i.e., that the situation should be a bit more difficult in Europe than in the U.S. and the rest of the world. The IMF, GDP forecast, if I'm correct, is plus 2.9% for 2023 with a tougher Europe as far as Europe is concerned or euro area, if I may say, the GDP was -- I mean, grew 3.5% in 2022 and it's supposed to grow only 0.7% in 2023. So our guidance is based on the fact that the European situation should be a bit tougher than in the U.S. -- as for in Europe and in the U.S. As far as the rest of the world is concerned, we are super optimistic for India, super optimistic for Africa. A question mark for Latin America and a big question mark for China because it depends a lot on any measure of stimulus plan that could be implemented in order to boost the building industry and you know that we are highly dependent upon building in China. So that's it. A bit more optimistic in the U.S. than in Europe for 2023. But again, with the usual caveat, if for whatever reason, the Europe economy is a lot more supportive in Europe than expected. Then of course, it would have a direct impact on the top line and the other way. But this is the way we look at our business. It's where our budgets are built, country by country and regions by regions. We are not building a budget for resi, non-resi and so on. Last comment, of course, our sales throughout our geographies, U.S., Europe, rest of the world should be pulled by the fast expanding segment. So we expect data center to continue to grow everywhere. We expect green products to continue to grow, especially in Europe, and we expect connected products also to continue to grow because this is our strategy and those products should record higher than average growth. I have got two questions, if I may. The first one regarding the U.S. I was wondering if you would consider adapting your offer there in order to maybe better catch some current positive trends like, for instance, infrastructures in the U.S. Could you make maybe some acquisition, for instance, to expand your offer beyond your current exposure to building and data centers there in the U.S. is my first question. And I have got the second question on this antitrust investigation in France. Did you try to measure or to calculate the financial risk linked with this investigation? And what could be, for instance, the maximum cost for you? And do you see any changes on that front recently on the front on this antitrust investigation. So as far as the first question is concerned, we are always looking at adjacencies in the U.S. and elsewhere, and we have identified a number of adjacencies in which we'd be happy to enter. And without even talking about adjacencies are a number of product families in which we are not in the U.S., but in which we are elsewhere and where we could decide to enter. Take, for example, EV charging station. We are solid and well-known player in Europe for EV charging stations. We're not active yet in the U.S. for those products, but this is typically something we could consider. Now you are not doing a move into new field of activity in order to have an answer to plan such as IRA if this was your question. So infrastructure, no; industrial automation, no; industrial software, no; medium voltage, no. We will remain within our playground, but within this playground, which is a market of about EUR 120 billion worldwide and a couple of tens of billion euros of adjacencies. Yes, of course, we will keep looking at potential adjacencies. As far as the French investigation is concerned, Well, we've made 2 press releases on that this year. We could mention -- I mean, the theoretical fine from the competition authorities is well known. It's up to 10% of the sales. Nobody expect the amount to be paid and has never been paid by anybody. If you want to have my feedback, I myself am pretty confident on the fact that we will demonstrate that our practices in France as elsewhere are perfectly compliant with the law that all this derogated price concept and mechanism is by nature and by definition, bringing prices down, not price is up, and that is made in perfect compliance with applicable laws. So that's it. We will continue to do what it takes to demonstrate that in front of the authorities, and we'll see. A follow-up on component availability subjects in relation to the faster expanding segments, that was flat as a share of sales, 33% of the group compared with last year. obviously impacted by component availability. I was just wondering, can you say what the organic growth was in 2022 in that area overall? Was it lower than the group average? And as it stands running now, do you expect that to kind of play a strong catch-up in 2023? And then you've sort of implied the faster expanding segments have grown around 6% organic historically certainly in the kind of 5 years to 2020, 2021, but that was off a lower base. Given the strengthening set tailwinds, are you now more confident that that's really the kind of growth rate that this area can deliver over the next 5 years as well? So indeed, the fast expanding segment represented 33% in 2023 and they grew organically only marginally more than the traditional core infrastructure products like-for-like by a few percentage points and not the 5, 6, 7 or 8 percentage points, you could think of, only a few percentage points. And you have 2 main reasons: number one, the big reason, the main reason is a shortage of electronic components and those products include electronic components. And number two, and this is a comment especially on connected products, connected products at Legrand are slightly more geared at residential than nonresidential. But again, the lack and the shortage of electronic components was responsible for the slight or small other performance of those products in terms of like-for-like sales compared to the more traditional one. Am I happy with this result? No. I'm a bit disappointed by the fact that we had to stop selling some of those products sometimes for weeks, sometimes even for a month or 2 because we didn't have the components. We have lead times that have gone up very significantly. Again, would it be completely solved in 2023. I'm not sure it will be solved from Q1 or Q2, but it should hopefully be solved by the end of the year. I'm very optimistic on our ability to significantly overperform or average like-for-like growth with those fast expanding segments. We have -- and on top of that to keep delivering acquisitions and M&A on fast expense roads. We have given the market guidance that we -- our long-term objective that we wanted those fast expanding segments to represent 50% of our sales. It will not take a year or 2. It will take more than that. But this is still the target that we have. Now as far as the past is concerned, we have grown the percentage of our sales of those fast expanding segments from 18% in 2015 to 33% in 2022, which is a CAGR of 17.5%. So gross per year of 17.5%. Half of that was scope. Half of that was like-for-like. Will we be able to register the same cash in the years to come? I don't know. But I confirm that we still have the ambition for the products to represent half of our sales over the midterm. I wonder if you could just clarify your comments on data centers there in terms of growth you're expecting in 2022. Second question would be, if I understand correctly, you'd still expect to see 20 to 40 basis points of margin dilution from M&A as you've typically guided for in 2023? Is that fair? And then last thing, last point, if I may. I just want to come back to this point on Russia. So if you're guiding slightly down to slightly up, volume-wise. That includes Russia declining 30% to 50%, I think you mentioned. When you talk about the guidance, excluding any impact of Russia, what you mean is we shouldn't be adjusting for 1.5% anywhere. We basically take everything as it stands until such time as you tell us that we should be taking Russia after that. Is that the right way to understand it? Just a clarification on data center growth, sorry, in 2022, I just -- and then I think you said you expect it to grow everywhere in I wasn't sure whether that meant now in 2023 or whether it's -- that was sort of a more of a mid-term comment. Well, starting with the first question, I told you that the fast expanding segment grew marginally faster than the rest of the product offering. But if we look at the various segments, the highest growth was on data center and green products and the lower growth on connected products. So data center like-for-like sales overperformed significantly the rest of our product offering. The issue, if I may say, the fast-expanding segment, which I can hardly qualify as an issue, but as a sort of a short-term difficulty we had to face what was clearly coming from connected products. So very nice growth in 2022 in data centers. And we expect this growth to continue in 2023. I'm sure that you have read a number of analysis, but the fact that the GAFAM were laying off people, sometimes improving their margin or cutting some investments. We don't believe that this will be -- will have a meaningful impact on the data center business in 2023 or 2024. There are still huge investments which are planned. If you take something like a ChatGPT, for example, it cannot work and being operated without a huge data center capabilities. So every time there is an innovation, call it Metaverse, call it ChatGPT, it requires additional capacity and international bandwidth. So we remain very optimistic on data center. Number two, as far as margin dilution, it really depends on how much acquisitions, we do. If we are doing the plus 3% perimeter impact, which we are guiding for, yes, indeed, the dilution could be minus 20 bps, minus 30 bps, while minus 40 bps would be quite a high dilution. But I think it should be probably closer to 20 to 30. And with the current scope we have, the dilution will be minus 10 bps with a 1.5% scope impact, which is already secured, if I may say. So assuming that the go get of 1.5% could add an additional 10 bps or 20 bps of that usual I think is the right assumption. As far as Russia is concerned, to make things clear. We are guiding for like-for-like sales between minus 1 and plus 3. To that, you should have -- so excluding Russia, excluding all numbers from Russia, to that, you should add plus 3% of perimeter impact, of which already secured; 1.5% as a go get. To that, you should deduct the activity we will have in Russia in 2023. It won't be minus 1.5% because we will still have some activity until we sell this business. And it could take as long as 6 months to be sold. What I don't know is how long it will take to be sold and how will the business be meanwhile. So it will not be minus 1.5% of negative scope. It could be minus 1%, it could be minus 0.5%. Those are the orders of magnitude. So minus 1% to plus 3% an additional plus of scope and a negative minus 0.5% to minus 1% coming from the exit from Russia. To be complete in terms of margin, we are shooting for the 20% EBIT margin. Then you can have, of course, minus 10%, minus 20% -- minus 20 bps, sorry coming from -- or even minus 30 bps coming from acquisitions. And then you have minus -- from 0 to minus 20 bps coming from Russia. I wonder if I could follow up on the growth segments. You mentioned 14% data center, but we're still 33 for the faster expanding segments. Can I assume that Elliott was the one that dropped from 15% to 14%, and green stayed at 21%? And also on the growth segments, you mentioned a bit better. Could we think about 12% or more 11% for the organic growth in '22 from the growth segments? And then the third question is regarding the sequential Q-on-Q volume, excluding working day and price developments in Europe and the U.S. on my math, both Europe and the U.S. last quarter in the third quarter fell 7% Q-on-Q on pure volumes adjusted for working days and stripping out price versus the second was quite a big drop, and I think Europe bounced back up 3% this quarter and the Americas up 6%. And I just noticed that, that's much more than the normal seasonality over the last 10 years. And I wondered whether you noticed what was really driving that cadence in volumes? Well, as far as -- maybe Franck -- we'll let Franck to answer the question 2. As far as the first question is concerned, don't forget that there is an overlap between the 3 subproduct categories within the fast expanding segment. A product can, at the same time, be connected green and be sold into data center. So let me maybe give you the breakdown of the 33%. Green products represent 22% of our sales; connected products represent 14% of our sales; and data centers represent 14% of our sales. And then you have an overlap. If my computation is correct, you have overlap of minus 17%. So this is the breakdown. If you look back in 2015 compared to 2015, green products have doubled in our sales; connected products have slightly more than doubled in our sales; and data centers have almost been multiplied by 4 as a percentage [indiscernible]. And then, of course, you have the overlap. So this is a way that the breakdown is made. Well, as far as the organic growth of fast expanding segments are concerned, it's actually between the 2 numbers you shown. So between plus 11% and plus 12% as compared to an average group of plus 9.7%, i.e., less than 9% for traditional products. This is the order of magnitude indeed. I'll let maybe Franck to answer the seasonality question. Yes, if I understood properly your question, James, it's about softer Q4 for Europe and a stronger Q4 for the U.S. As far as Europe is concerned, as we said at the... If I could just clarify, and maybe my math is wrong, but the way I work is to remove price at the group level in all geographies. And then I take away a working day effect, which I calculate. And I come back to a year-on-year pure volumes, excluding working day. And then I index that and look at what's the sequential Q-on-Q. So I'm really talking about Q-on-Q pure volumes on a daily basis. And I just noticed both Europe and the U.S. were down 7% in the third versus the second. And now they bounce back up. Both of them have come back up. It's just Europe has come up 3%, which is good and the Americas has come up 6%, which is even better, and that's certainly better than we would have thought looking at all the construction data and confidence indicators. And I just wondered what was behind that positive rebound transatlantically. Okay. Okay. So I understand. I'm afraid that your math doesn't work globally, but the main message is the same is why Q4 stronger Q4 in U.S. versus Q3 and while softer for Europe. First, starting with your methodology, a number of days on a quarter for us doesn't work very much. Applying the average pricing of the group is also a shortcut. And third, if I understand properly, you are trying to combine year-on-year computation with a sequential view. So for me, it's a lot of caveat in your computation. Having saying that, looking at Q4 versus Q3 in Europe, if you exclude Russia, the behavior of Europe is slightly the same, you're right, slightly better than Q3, but no meaningful changes. Second, as far as NCA is concerned, so Legrand for Central America is concerned, Q4, you're right, slightly stronger than Q3. Remember that we said when we disclosed our Q3 numbers, that we had some supply chain challenges in the U.S. It was on behalf of components availability. It was also about the dependency to China. As Benoît said earlier in the call, we have quite a meaningful flow of product between China and the U.S. And Q3 was particularly a challenge in terms of zero-COVID policy in China, impairing slightly our sales with a slight recovery. So that's the 2 main messages that would explain on what you have seen. But in other words, we're not seeing a stronger sequential growth in the U.S. nor a strong sequential drop in Europe. Volumes are indeed a bit under pressure, which was expected. And again, for 2023, assuming that we will record from a slight -- volume slightly down to slightly up, I think is reasonable assumptions, both based on what we can see from the macro specialist and from what we recorded in our accounts in Q3 and Q4. That's very helpful. And if you ever want to help with the caveat and give regional working day effects and pricing, please feel free. Working days has an impact on our trade over 1 month. So when you have 20 or 21 or 22 days on a given month, of course, one well, you can do the math better than I do. One day, more or less, can have an impact of 4% to 5% on your top line. But out of a total number of days, of working days of 240 or 245 in a year, it has almost an impact. So we can, from time to time, mention it on a given quarter. But frankly speaking, it is not a meaningful input to analyze yearly sales. I am turning to the operator. Well, thanks, everybody, for taking the time to look at our numbers and for the discussion. I'm very happy to tell you the truth to meet some of you doing the roadshows to come. And should you have any more questions, you have Ronan, Samy, Antoine and Franck and myself, of course, at your disposal. Thanks a lot.

EarningCall_218

Good day and thank you for standing by. Welcome to the Fluence Energy Incorporated First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Lexington May, Vice President, Investor Relations. Please go ahead. Thank you. Good morning. And welcome to Fluence Energy’s first quarter 2023 earnings conference call. A copy of our earnings presentation, press release and supplementary metric sheet covering financial results along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on the Investor Relations section of our website at fluenceenergy.com. Joining me on this morning’s call are Julian Nebreda, our President and Chief Executive Officer; Manu Sial, our Chief Financial Officer; and Rebecca Boll, our Chief Product Officer. During the course of this call, Fluence management may make certain forward-looking statements regarding various matters relating to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding the risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward-looking statements, which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in our earnings materials on the company’s Investor Relations website. Following our prepared comments, we will conduct a question-and-answer session with our team. During this time to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you, Lex. I would like to send a warm welcome to our investors, analysts and employees who are participating on today’s call. This morning, I will provide a brief update on our business and then review our progress on our strategic objectives. Following my remarks, Manu will discuss our financial performance, as well as our outlook for the rest of the fiscal year. Starting on slide four with the key highlights. I am pleased to report that we recognized $310 million of revenue during the quarter. More importantly, we improved gross margin for the quarter both on an adjusted and GAAP basis. Our demand was strong across all three of our business lines and new orders were approximately $856 million, highlighted by the 1200-megawatt hour contract with Orsted we announced on our December call. Furthermore, our signed contract value as of December 31st was $2.7 billion, a quarter-over-quarter increase of more than 20%. Importantly, over 70% of our backlog is with non-related parts. Lastly, our recurring revenue businesses, which consists of our Services and Digital business continued to grow during the quarter. Our service attachment rate was 11% for the fourth quarter. However, our deployed service attachment rate is rated at 90%, which is based on our community service contracts relative to our deployed storage. Most of our customers wait to sign service agreements closer to the point with the storage solutions coming online. Thus, there is usually a lag between storage contracts and service costs. We believe the deployed attachment rate is more reflective of our true service attachment rate due to a contracted lag that I just mentioned. Moving forward, we will be providing you with both our contracted and our deployed attachment. Additionally, our Digital signed more than 800 megawatts of contracts since the fourth quarter, providing us visibility to future revenue. Turning to slide five. I would like to discuss the five strategic objectives that we headlined in our last earnings call and provide you with an update on our progress. First, on delivering profitable growth. I am pleased to report that we are raising our fiscal year 2023 guidance for both revenue and adjusted gross profit. As Manu will discuss in more detail, we are able to raise our guidance due to incremental demand and better supply chain shares. Second, we will continue to develop products and solutions that our customers need. As such, we are now ready to begin offering Northvolt ACT batteries in our Gen 6 Cubes. This provides our customers with more optionality when looking at solar solutions and helps to diversify our battery supply by adding a European battery vendor. Third, we will convert our supply chain into a competitive advantage. I am pleased to say we have all our fiscal year 2023 battery requirements either in-country or in-transit, both providing us high confidence for execution and achievement guidance. As you may recall from last year, one of the challenges we faced was getting our batteries on time from our battery vendors. They were often delayed, and as a result, we incurred liquidated tariffs. Our team has done a tremendous job in mitigating this risk for 2023 by ensuring that all our battery needs are within our control. Where we stand today, we don’t foresee supply chain issues that could derail our fiscal year 2023 expectations. We continue to implement our risk management processes and proceed and those providers would have confidence. Additionally, if we identify any issues that could cause us to deviate from our plans, we will act swiftly to mitigate the risk to have loss [ph]. Fourth, we will use Fluence Digital as a competitive differentiator and margin driver. I am pleased to announce two significant milestones in our Digital business. First, we entered the ERCOT market with our Mosaic Bidding application and having awarded an initial contract with a non-related global FPP Energy. ERCOT is a rapidly expanding market and provides a significant number of opportunities for our Mosaic application. Mosaic now is in three markets, Australia NEM, CAISO and ERCOT. As we discussed last time, we are looking to expand to four additional markets in the next three years. Additionally, we have now successfully launched Nispera on its capability on to battery services. This offering now provides those customers with renewable asset portfolio. The opportunity to utilize one asset performance management platform for all their assets rather than multiple platforms. And finally, our fifth objective is to work better. We are continuing to see successful execution on our transformation, including enhancing our risk management capabilities, improving our project execution and optimizing our cost structure, which I will touch on a little later. Turning to slide six. Demand for any historical continues to accelerate. In fact, our pipeline now sits at more than $10.3 billion, nearly 4 times our current backlog of $2.7 billion. As you can see from the chart, our funnel reflects some early projects that are attributable to the Inflation Reduction Act. We expect we will see some of these projects turn into signed contracts beginning in the second half of this year. Additionally, our project leads are at an all-time high, which is a good indicator of potential opportunities. As such, we expect the IRA to drive our U.S. revenue growth in 2024 to 40% to 50%, thus implying consolidated revenue growth of 35 to 40 predicated on a timely issuance of the IRA guidance. While the exact timing of the IRA guidance is unclear, we are hopeful that some initial commentary will be released this year. Continuing with demand, we are becoming increasingly important by the actions that coming out [ph] of Europe. Earlier this month, the European Commission built its Green Deal Industrial Plan, which aims to increase spending and reduce regulations and rent pay in order to accelerate the expansion of renewal energy and sustainable technology. While still early days, the details of the plan has not been shared, we applaud the efforts of the European Commission as they take serious steps towards securing their energy independence by increasing their share of renewal energy, including battery energy storage. On slide seven, we have highlighted some of the reasons why our customers choose us to provide their energy storage solution. For instance they are looking for someone who can provide them with a safe product. We are proud to be one of the market leaders in safety and have surpassed the industry standards. Time after time, our customers tell us that safety is their top priority when selecting an energy storage. We will continue to make safety our highest priority when developing additional solutions. Second, performance. Our customers demand not only a safe product, but one that performs at high level. To that point, we are pleased to have deployed the world’s fastest responding battery and storage facility. Our team has achieved the demand response times below 150 milliseconds on assets deployment [inaudible]. Third, bankability. This is critical to our customers as they look for further finance, especially for the larger projects, which are becoming more and more common. Banks and financial institutions have told our customers, they feel confident in underwriting projects with Fluence Battery Energy Storage Solutions. In fact, in December year-on-year, Fluence is Battery Energy Storage System Cost Survey. These are a report in which BNEF will rate 185 industry participants. One of the survey questions asked participants to rank the bankability of 15 integrators and providers. We are proud to be ranked at the top for bankability, reflecting our successful track. And fourth, supply chain assurance. Our customers want someone who will be able to deliver their projects on time. This comes only with efficient supply chain. We are proud to say that we have all our battery needs for the remainder of the fiscal year either in-country or in-transit. This significantly reduces the risk of Project Litgrid. Our track record of safety and performance, our understanding with bank and other lenders and the steps we have taken to significantly reduce supply chain risk allows us to continue attracting some of the world’s largest infrastructure players as our customers. These customers are seeking a long-term relationship that begins with our storage solutions and opens up the opportunity for long-term Services and Digital contracts that provide recurring revenue. This evident as greater than 90% of our community storage deployed has a long-term service contract. Turning to slide eight. We continue to expand our Digital offering in order to help our customers maximize their profit. First, we have officially entered the ERCOT market with our Mosaic Bidding application. This is now the third market for Mosaic with the orders to be in Australia NEM and CAISO. More importantly, we have been awarded our first contract in ERCOT. We signed a framework agreement with an unrelated global IPP & Utility to optimize any ERCOT BESS brought online in the next three years. The first allotment totaled 289 megawatts. This is a significant award as it establishes our product in a new market with a blue-chip customer. Second, as I briefly mentioned, we have officially launched [inaudible] storage on Nispera asset performance management platform. This is a major milestone. As a Nispera platform, it’s one of the first APMs in the world to be deployed into all four major renewable asset classes, wind, solar, on hydro and now battery energy storage. Nispera additional battery capabilities include providing real-time monitoring of the battery subcomponent, data performance analysis of the system and ticketing for acetate. The advantage Nispera brings that many of our customers bought more than one renewable asset class. Nispera can now provide with one APM for all renewable assets in the portfolio. So instead of having different APM for each asset class, they can now have just one for the entire portfolio. Similar to our Mosaic offering, the overall objective of Nispera product is to maximize our customer process by having an asset performance management platform where it also helped lower the total cost of ownership of our customers and increase our customer business. Turning to slide nine. As we have seen from our financial results, we are making a tremendous progress on our operation. As we briefly discussed on our last call, our transformation is focused on three main areas. The first is enhancing our risk management. We have put in place a set of managerial and commercial initiatives to ensure we identify all materials, at least one we have managed more efficiently and effectively and ensure all rates are quantified and mitigated to then with the product complete. The more robust risk management allows us to be more confident on our prospective financial results. As all these processes as measured continue to mature, we will continue to provide further clarity on the prospects of our report. There is still some way to go in our endeavors. But I am confident in our ability to continue moving this path forward. Second, improving our execution. A major driver of our execution is our product availability and capability. We recently revised our product roadmap initiative. We are breaking down our product development projects into smaller units, moving away from the concept of generation output and concentrated on improvements projects we know. The smaller projects are easier to manage, more efficient and faster to market. In addition, our recently established best-in-class facility allows us to test each new improvement at a system level and we are able to drive solutions and identify a problem before going to the customers. Third, optimizing our cost structure. As we mentioned on our last call, we have been increasing our resources on India Technology Center. We have been often taking a competitive workforce strategy that reduce resources in higher cost countries and increase resources in lower cost countries. As part of this, we are utilizing our India Technology Center to provide necessary support function and to retool our Digital class. I am pleased to report that we made significant progress in this endeavor and plan to double the number of employees in India by the end of our fiscal year. As a result, we expect India to represent 10% to 15% of our talent, which provides us with the necessary resources for our significant growth. By focusing on our resources in lower cost countries like India, we are able to reduce our operating leverage as a [inaudible] offering that Manu will later touch on. Overall, I am pleased with the achievement of the first quarter. Although we are mindful there’s still a lot of work to be done. We will look to continue this momentum as we progress for the remainder of the year. Thank you, Julian, and good morning, everyone. I will begin by reviewing our financial performance for the first quarter and then discuss our outlook and guidance for fiscal year 2023. Please turn to slide 11. In the first quarter, in addition to having the highest order quarter in our history, we delivered $310 million in revenue, representing an increase of 78% year-over-year. We continue to effectively manage our global supply chain and execute on our backlog, including working through our legacy backlog. Greater than 95% of our first quarter sales was made up of legacy backlog and we expect to be materially complete by the end of fiscal year 2023. Moving to gross profit. I am pleased to report that we generated positive gross profit in the first quarter. We continue to strengthen our contract compliance controls and risk management practices and our gross margin number in the first quarter includes the recovery of net claims worth $18 million we had made against one of our battery suppliers that we previously disclosed and was accounted for as a reduction of two cost of goods sold. The important takeaway is that, we are still in stronger contract compliance procedures to enable us to recover damages per our contractual results if necessary. With regard to operating expense and adjusted EBITDA, first quarter operating expense, excluding stock compensation was approximately $54 million, which is in line with the fourth quarter of 2022. As Julian mentioned, we are executing on our plan to optimize our global workforce, including through leveraging our India Technology Center. Our previously communicated model are holding operating expense growth to less than 50% of revenue growth is intact and we expect full year 2022 operating expense spend as a percentage of sales to represent the high watermark. This model helps create operating leverage and will drive the improvement in adjusted EBITDA that we expect in 2023 and beyond. Turning to our cash balance. We ended the quarter with approximately $460 million of total cash, including short-term investments and restricted cash. This figure is in line with our comments on our Q4 earnings call. Rounding out the balance sheet discussion, inventory increased by approximately $400 million versus the prior quarter, as a risk mitigation strategy to provide us with supply chain assurance for our 2023 revenue guidance. As Julian mentioned, all of our battery needs for 2023 are now either in-country or in-transit from China. The inventory increase in the first quarter significantly derisked our 2023 revenue guidance and a significant portion were funded by customer advances and milestone payments. Given our planned first quarter inventory build, we expect our cash usage in the second quarter to be slightly higher than in the first quarter. Furthermore, we do expect inventory turns to improve as we exit 2023 and end 2023 with liquidity greater than $500 million between cash balance and undrawn revolver, in line with previously communicated cash framework. We do not believe we need to raise any additional capital to meet our needs. Please turn to slide 12. As we briefly mentioned, we are increasing our fiscal year 2023 guidance for both revenue and adjusted gross profit. We now expect our total revenue to be between $1.6 billion and $1.8 billion, which is up from our previous revenue guidance of $1.4 billion to $1.7 billion. Additionally, we now expect our adjusted gross profit to be between $85 million and $115 million. This is up from our previous adjusted gross profit guidance of $60 million to $100 million. The guidance increase is due to the incremental demand and better supply chain visibility. We provided more detail in our appendix similar to last quarter. We are coming into the second quarter with 99% of our 2023 expected revenue in our backlog, providing us high visibility to achieving our guidance. In terms of revenue seasonality, we still expect to see a split of approximately 40% in the first half and 60% in the second half of our fiscal year. As Julian briefly touched on, we expect the IRA tailwinds to benefit order growth in the second half of 2023 with a benefit to topline revenue and gross profit mostly occurring in 2024 and beyond. Thus, we have not included any IRA impact in our 2023 revenue and gross profit guidance. Before I turn the call back to Julian for final remarks, I would like to reiterate that we are committed to and on track to be adjusted EBITDA positive in 2024. Thank you, Manu. In closing, I want to reiterate what I consider the main take away from this quarter results. First, we had a strong quarter in terms of our financial performance, with our highest order intake through in history, providing us with a solid base from which we can launch the strong growth we foresee for our company. We continue to make significant progress on our risk management, most notably for this quarter, reducing our supply chain risk through several actions as reflected in our order 2023 battery needs in-country or in-transit. We continue to expand our offerings, concentrate our efforts in developing new products and solutions that create value for our customers, especially relevant this quarter, the new Nispera battery management software. All the effort covered in today’s call provide us with high confidence to increase our total revenue and adjusted gross profit guidance for fiscal year 2022 [ph] and achieve the positive EBITDA in 2024. Thank you. [Operator Instructions] And our first question comes from the line of James West with Evercore ISI. Your line is now open. Julian, obviously, really strong order intake this quarter and it raised guidance a very positive moves there. I am curious what you are seeing in terms of pricing because demand is running well ahead of supply in the market. And thinking about your drive here, you and Manu’s drive to profitable growth, but significant growth of profitable growth, are you at the point where you can exact some pricing power onto the market? We see pricing -- as you said, demand is strong and we see prices supporting our 10% to 15% margin of what we have said to the market. So same within that range, some segments are better, so some segment are going to develop out of the branch, some segments are in the lower side. But generally, we are kind of in that range, that’s our alternative view, so. Yeah. The only thing I will add is, you can start to see that in the new deals we are signing. Those are double-digit margins as well. Okay. Okay. Makes sense. And then maybe a follow-up for me, a little bit related but on the software side of the business. There was a good uptake on Mosaic and Nispera is seeing some progress here as well. What’s the go-to-market strategy with those software packages? Do you sell them as a package, do they go individually? What’s the -- I guess, how is that process run and… As we communicated in the last earnings call, remember, one of the things that we are integrating our sales channels better. The reality is that the Nispera is product -- is a global product. So we can sell it all around the world in all the geographies, wherever they are located. Mosaic is a market product that works in Australia, in California and in -- and now in ERCOT. So they are not -- you cannot integrate the two together, because they are different and it depends on the business case that each of our customers. But we are integrating with our offering to make it to be a lot more efficient in the way we sell it. So that’s the way we think on it. You will see, I think, a closer integration of our APM or Nispera offering into our product sales as we continue moving forward, it is a global product, the same as our products. Thank you. One moment for our next question. Our next question comes from the line of George Gianarikas with Canaccord Genuity. Your line is now open. I’d like to ask about gross margins and I don’t want to put the cart before the horse, but you have done a really good job getting them back into the mid single digits, and previously, you had guided for your hardware business to be somewhere in the mid-teens, I believe. Is that given that there have been multiple structural changes to the way you contract, is there a potential upside to that mid-teens gross margin target long-term? No. I think, as I said, we are still seeing this 10% and 15%, lower-teens, some markets doing better, some markets doing a lot tighter. But our view hasn’t changed, not today, same view. It’s not that. Clearly we are on top of and I am clearly always talking to our sales team to ensure we look at the segments where we can capture better margins, but today what we told. What -- just to kind of explain why we are not seeing that in our results today. As you know, we are getting out of our legacy customers and we probably will be out completely our legacy contracts by the -- with the time we close this fiscal year and you should see a lot of improvement on margin during the year and we will see the new contract coming full in 2024 going forward. Thank you. And maybe as a follow-up, we continue to read about auto companies not only obviously building cells, battery cells, but investing in lithium mines. And I am curious as to, when you think strategically over the next couple of few years, I know you have enough supply currently, but is that -- is getting deeper into the supply chain something that’s of interest and… Last quarter, we announced that we were going into module production, which is a little bit of a further vertical integration with a way of trying or with the objective of commoditizing the cells modernization, opening of the people we can buy from, accelerating the time at which we can integrate sales and for -- getting a stronger position in the cell supply chain is strong. Also we don’t have plans to go further down, but so that is essentially where we are going. Our current views that we are expectable to it, but going further down, it’s not -- it will not be efficient or effective for us well. All right. Our next question will come from the line of Maheep Mandloi with Credit Suisse. Your line is now open. Yeah. Absolutely. And maybe just to start with, could you just talk more about the supply chain improvements you are seeing here? Is this something you are seeing throughout the year here, is it from a timing perspective? And how should we think about that like kind of going into next year and could you expect -- just going back to the gross margin question, but like do you expect an earlier faster ramp to your gross margin target here? Yeah. One of the reasons why we are able to raise our guidance for the year is that we feel more confident on our supply chain. When we -- last year -- at the end of last year, when the zero COVID policy in China and there was this view that we might enter into a similar situation of what we had when COVID started, remember. That didn’t materialize. But that made us make the decision to kind of accelerate that, because it was not costly, it wasn’t required a lot of working capital, we could do it, accelerate our battery and get as much of them out order in process, we are able to get involved into that. But the reality is that we have seen no disruption. That’s the reality. Great action, we feel makes us feel confident, further assurance to meet our guidance. But we have seen no -- not the -- our supply chain seems to be normalized, and in fact logistics, as a main issue a year ago, no longer an issue. The prices of transferring of -- moving things around are not back to pre-pandemic prices, but are in line with what I consider normal. So we are happy. I will tell you this is my view on this, where we are today. Our view of the world connects with our financial guidance to the market. As the world improves and it improves to a point that we believe that we will do better, we will communicate it to you that what we are doing today and that’s obviously. But we are very, very confident that the world as it is today and where with -- where our risk management tools will lead us to the range in terms of gross profit and revenue we set for ourselves for this year. But I have said that and maybe a little optimistic, different words and maybe come back to hug me, I think the market demand is growing. There’s a lot more supplies, getting things, moving things are cheaper. So growth pathways at that time improve our world -- our view later on, but I think that where we are today in the world as we see it today leads us to the guidance we provided. Yeah, Manu, please. I think the only thing you would appreciate, we have both narrowed the range and up the range in terms of our revenue guidance that’s on the last, both from a backlog confidence perspective and supply chain. And then we provide more firmness on our 2024 of how to think about from a revenue percentage. That is also driven by the fact that we feel confident about our supply chain assurance going into 2024 model. Got it. No. That’s really helpful. And then maybe just on manufacturing. I mean, I know you guys talked about all the benefits from IRA, but could you like remind on the module manufacturing you guys were talking about on the last call and… So thank you for the question. As we said last time, we are in the process of developing the technology and putting in place the manufacturer. Our view that will be ready in summer of 2024. So and we are -- it’s going well. Milestones that we met. We -- I met the team yesterday and the update looks very good. So very, very happy with the process. So we should be able to start manufacturing out of our facility -- our manufacturing facility here in the U.S. in the summer of 2024. Very happy. Hey, Manu. A couple of questions for me. I guess I really appreciate all the additional disclosure and color around the guidance here and even kind of the first look at 2024. I know most of it is focused around kind of volume demand, revenue upside as you factor in the impact of IRA. I think you alluded to also embedding some impact on profit margins. Can you maybe elaborate a little bit on what you are assuming in 2024 in terms of impact of IRA, whether it’s pricing, it’s something on the COGS side? It sounds like there’s some margin uplift you are assuming and just trying to get a sense of what you are embedding in there and also where the puts and takes are if you could see even more versus what you are base casing right now? Thank you, Brian. Our core view on the IRA is that is same today. What we are embedded in our view of the market, we are communicating to you, it’s not volume. So we are feel more confident so we can give you the guidance of 35% to 40% increase in revenue for next year and that will be profit or EBITDA profit -- adjusted EBITDA profit for today in line with what kind of communicated, an improvement, but it’s volumes. Today, I don’t think we are at a stage where we are today that we can give you -- that we can commit or embed in our guidance increases in margin. So we continue, as I said, 10% to 15%, some segments higher, some segments on the lower side, but in line with what we have been telling the market what we are going to do. So we are not at a point that we have defined our margin objective. Okay. Fair enough. We will look out for more color. I guess second question for me and I will pass it on is, on the contracted backlog, a healthy number here, $2.7 billion. You clearly have the revenue guidance in your crosshairs for 2023. Can you remind us sort of how you define backlog, what we know the $2.7 billion, why wouldn’t it translate to potentially a higher revenue opportunity in 2023 versus the $1.6 million to $1.8 million you are guiding to today? And then also the mix of the backlog, if you could kind of articulate what the $2.7 billion is comprised of? Thanks, guys. Yeah. Sure. So just from a layering in, if you take the remaining three quarters of the year and take our midpoint to our first quarter actuals, that’s roughly $1.4 billion, sort of the $2.7 billion, $1.4 billion translates into the year. Typically from a cycle time perspective, our backlogs translate into revenue between, call it, 12 months to 18 months and some may be a little longer, some may be towards the lower end of the month. So I think that’s been a normal kind of translation of backlog from a revenue perspective going into 2023 and 2024. Look as we tighten up from an execution perspective and a supply chain assurance perspective, is it possible that some of that backlog that we have articulated for 2024 dates back into 2023 and gets us closer to the top end of our guidance? Yeah, that’s certainly something that we internally strive for. But from a guidance perspective and from a color perspective, we are comfortable with what we told you, which is we narrowed the range, increased the midpoint of $1.7 billion and we have kind of provided a form of 14 to our 2024 number of revenue guidance between 35% to 40% investment spent. What we are seeing in the backlog, and more importantly, what we expect to see come down the pipe in the second half of the year from the IRA. So on slide six, just you are pointing to the IRA driving revenue growth of 40% to 50% in the U.S. and just on the consolidated topline growth that you are pointing to, I think, that implies international growth just above 20%. So just on the international piece, curious if you could speak to the visibility there at this point and is most of that coming from Europe or Asia? Yeah. I think it’s a combination. Both markets are similar size from our point of view. Some of the markets are move at some point faster or smaller as we move forward. So that’s kind of the way I think on. So there are -- where are the markets where we see the most growth? The U.K., Australia, are probably the ones where growth seems to be. Taiwan and the Philippines have been attractive markets for us. We will work on them. Germany with a transmission project has proven to be a good market too also. I think that long-term these two markets should to represent roughly the same size. Today, APAC in our numbers are a little bit smaller, but we see significant growth coming forward. Okay. Great. And then just specifically with what unique clarification on from the IRS by April or the spring can, I guess, just to ensure that 2024 growth expectation in the U.S. materializes. Just what specifically do you need clarification on? This is more. I don’t think that it won’t affect in any way 2023 revenue. It could affect some time in 2024, but fairly confident that -- I think the clarifications for what we are waiting for is some of this to ensure that we can have U.S. manufacturing content and that they are developing as we continue to look at capturing some of our -- some of the value that compared to the pressure of that that we can capture more than anything. I will say that it’s very unlikely that the guidance will affect what we are telling you for 2024. Just coming to your go-to-market share -- good morning. Regarding the Mosaic entrance into the ERCOT market, can you speak to how the product is differentiated for ERCOT versus CAISO and should we be looking for additional markets that you would be entering in the near-term on that product? These -- our Mosaic product -- its main goal today. It’s very good foresight. The ability to predict will affect it to what’s going to happen in the market in the high 90s. So and that happens that for every market you need to really work to get to high numbers. You need to ensure your database and your artificial intelligence tools are working effectively. So that’s why essentially happening. The tools provide the same. The high on where the market is going to play in terms of volumes and price going forward. So in terms of growth, what we had -- as we discussed in our last call, we are re-platforming the Mosaic tool. Why? We have proven that it was taken -- it was too costly and too cumbersome the processor, the architecture needed some improvement to ensure that we can move standard into new markets at more reasonable cost. Clearly, that is really matter in California and ERCOT, because these are very, very attractive market, very liquid, a lot of players. But as we go into market that are not as big, not as liquid, we really needed to ensure that we manage the cost of the adaptation to new markets going forward. We are in that process as we announced in the last call of re-platforming the tool and our plan is to -- while this re-platform is done, which will be around this year or early next year, we will -- our objective will be in the next three years to enter into four new markets. So that’s how we are seeing on it. We have not set the specific date of when each market will come, but you should expect that coming in 2024. Excellent. And as the product continues to evolve, are you seeing certain types of customers being more appropriate for this type of software package in terms of type of resource generation versus some of the initial asset classes that you identified through the IPO? I think we are working with the same global IPPs who are training their staff. So it hasn’t changed their -- who we are working with and it might change as we move into new markets for ERCOT and CAISO and NEM. We work with the same type of customers. Hey. Just on the supply chain, could you talk to us and remind us about your cell supply and how you are with your current relationships and the intent on if there is one on expanding those relationships and how you think about geographic risk on the supply chain from that front and mitigating that? And I have a follow-up. Thank you. As you know, we are currently buying modules. We are not buying cell yet. We will start buying cells once we have our own module for the summer of 2024. So we are buying modules. We are a -- so in terms of -- today we are actively looking to diversify the players we work with. We have the Europe players with -- there’s a significant or a great majority of supply chain comes from China. We are working hard to diversify it to Europe with the Northvolt process we are doing and we are working with some other markets where we are from Korean production. But generally, when you look at it today, it is mostly China. As we move forward, I think, we will continue, and I guess that’s your question, we will continue to work with some of the people that we are working today. But as we start buying cells, we will expand significantly we can buy cells from and we can -- I think they will expand not only from the companies but also geographic. So that’s kind of where we are. We are actively looking. Diversification is a rule of the game and we have set as to our view of our companies that scales fundamental for this company, because scale is the only way to diversify at an optimal level. So that’s kind of where we see ourselves and I will tell that, that’s where we are. Okay. Thank you. Just on slide seven, you talk about bankability. I am just wondering if that -- if the leadership you show here, if that makes a bigger difference now with IRA, the ITC from a tax equity perspective? Thank you. Yeah. That’s a great question. Thank you. Bankability is very, very important, especially for the bigger -- in the U.S. market, where projects are bigger and they are required some cases more complex tax function or structure to make it work. So we see sometimes that we are one of the few that are called to cost of spread [ph] there. There are not that many players with whom you can build this project currently [ph]. And that I think is reflected in the fact that we are already seeing the IRA reflected in our pipeline. As we said, we should see that higher volumes in 2024 coming out of that. So it’s clearly a competitive advantage, something that we take care of, ensure that we are always -- the way we structure our deals and the way we think our product to ensure that we keep that leadership position in bankability. Thank you. Our follow-up -- final question comes from the line of Julien Dumoulin-Smith with Bank of America. Your line is now open. Hey, guys. Good morning. It’s Alex Guevara actually on for Julien. But thanks for taking our question here. Appreciate it. So apologies, this one’s probably for Manu. It’s a little bit in the weeds, but just trying to make sure we understand. When we look at the deployed, I guess, gigawatts looks up pretty modestly versus the rev recognition coming up quite a bit, and I saw, I guess, unbilled receivables kind of shot up as well? So just trying to understand maybe the nuances there between rev rec and kind of the deployed number, as well as what’s reflected in the contracted backlog versus rev rec if that makes sense, just try to square all those pieces? Sure. So let me give you a couple of comments and then we have more detailed definitions on slide 15 of our deck and then there’s a little bit more on our metric sheets. But just the way to think about it, right? So deployed as we talk about that is projects or solutions that have achieved substantial completion. That’s one. From a rev rec basis, as you know, we do a percentage of completion revenue recognition perspective, and therefore, there is some portion of megawatt hours that we recognize as we go. The reason we gave you megawatt hours tied to revenue recognition, because it’s a good volume metric tied to our revenue dollars. I think that’s one way to think about it. That way you can think about how we are doing in terms of our volume, pricing, just makes modeling easy and it’s also a key metric that shows operational progress on a particular project. So for a variety of reasons, that’s a great metric for us to have a conversation on. But we do give you the deployed megawatts or megawatt hours to show what projects have achieved substantial completion, right? So that’s one. Our contracted backlog is a dollar number that is tied to the value of the project and the layering in of that contracted backlog revenue dollars between the fiscal years 2023, 2024 is influenced in part by the percentage of completion methodology on how we book our revenue. So said differently, we may recognize revenue on a project in 2023 that may achieve substantial completion in 2024. So, hopefully, that was hopeful. We can clear up any of the follow-ups in our call next. Yeah. No. I appreciate it. I know it’s kind of an in the weeds question. Maybe one that’s less in the weeds and let’s just talk about you guys obviously sourcing more and more from Northvolt. I think it’s really impressive actually that you say everything in-country or in-transit, a lot of line of sight there on that backlog. I mean, when you think about more, let’s say, non-China sourcing and sort of this higher rate demand wedge on the other end, I mean, when we think about backlog, do you have, I guess, a broad heuristic as far as line of sight that you anticipate, whether it’s one year, two-year or a lot longer in this business, clearly, it’s evolving. But I think the key lever point towards you guys could have a lot more line of sight than you have had historically on that piece of the business. So just curious how you think about that. I am not sure I had followed completely the question. I mean, I do -- I will tell you kind of how I think of it, I said, how we are looking forward. Supply chain diversifying, reducing the [inaudible] we can create. Clearly, our strategic plan is to capture the IRA, so modules and then buy U.S. manufactured cells and manufacturing products there. In terms of what we are seeing today is, I would say, what we have seen -- what we can see line of sight today with our backlog is essentially products that are in line what we were doing. These are not -- were not reflected in a U.S. manufacturer product were not reflected. So those will come up as we move forward and we can secure the batteries, we can secure the supply chain and we can get this forward. So that one, that was clearly another point of side and another -- maybe another point of volumes that we have potentially a better view or a different view on markets. But I don’t know if I am answering your question completely. Maybe Manu -- that’s how we think about it. So today we are very confident in 2023, very confident on the topline in 2024, on the EBITDA line on 2024. So that’s what we can convene and what we are seeing now. Let me just bring this to a close as to how I sort of the question, similar to what Julian said. We have got 2023 supply chain on lockup, like we said. We have got backlog locked up as well. For 2024, we have great line of sight, both from a topline perspective. We provided a fair bit of comments in this call. And then from a supply chain perspective, we have a great line of sight going forward, which gives us the confidence to get to the range we provided of 35% to 40% largely on the back of the growth in management. And then from a diversification perspective, the way to think about diversification is we are going up the chain and making our own product or our modules. And then the Northvolt also provides us a source of diversification. It’s certainly on top of our mind and there are multiple angles to it like we articulated both in terms of making our own systems, as well as identifying sources that are not channels. Thank you. Thank you very much. Thank you everybody for participating. We are very, very happy with the quarter. I mean, I think, that we have seen the initial effects of our turnaround. There’s a long way to go. There’s a lot of work we need to do. We need to continue maturing, capturing our -- what we said our objective, continue growing this company so we can capture the value through the scale, supply chains, derisking, diversifying, capture the IRA and continue development products and going with the market and sell -- offering our customers the products that makes their lives easy, that makes the world different. So there’s a lot of work, but we are happy. We probably will celebrate today, but celebration will be more of an impulse to continue working as we are working. So, great, thank you all for participating and hope to talk to you all during the next few weeks. Bye-bye.

EarningCall_219

Good afternoon, and welcome to Adyen’s 2022 H2 Earnings Call. We are delighted to be joined by Pieter van der Does, our Co-Founder and CEO; and Ingo Uytdehaage, our CFO today, to talk you through the financial results for the second half of the year. We are going to structure the call as follows. We will start with a short fireside chat hosted by myself with Pieter and Ingo; after which, we will open it up for Q&A hosted by Sanne. If you have any questions, please feel free to submit them already using the Q&A functionality of Zoom. And when submitting the questions, please make sure to use your full name and the firm you represent. Please do not use the raise hand function since we won’t be using this today. I hope that household memo got in loud and clear, but before we dive into the fireside chat and Q&A, we once more, and as you're used to from us, would like to share a short video that the team prepared highlighting the key developments of the second half of the year for you. Enjoy. Welcome to Adyen's H2 2022 earnings call. We look forward to discussing our commercial, product and team updates from the last period. There is no doubt that the past six months presented a range of global challenges for society and commerce alike. Despite the economy's volatility, Adyen's disciplined history placed us at a fortunate position at the start of H2 and enabled this half to serve as a key investment period. As planned, we were able to continue laying the groundwork for our next growth phase. Following this approach, we closed 2022 with a strong set of results. Looking at it by the numbers. In H2, we processed €421.7 billion on our single platform, which is an increase of 41% year-on-year. In line with previous cycles, more than 80% of these volumes came from customers who were already on our platform when the period began, and we again achieved less than 1% of volume churn. Net revenue amounted to €721.7 million, up 30% year-on-year. Adyen is moving with momentum. Each period, we report even broader global reach, and H2 proved to be no exception. Our point-of-sale volumes were €67.6 billion, up 62% year-on-year and comprising 16% of total processed volume. This figure underlines the continued appetite for advanced multi-channel experiences and to the unique ability of our single platform to meet this need. In order to remain at the cutting edge of consumer journeys, in H2, we relentlessly sought new avenues for innovation. This resulted in the launch of several product iterations, with an online checkout, the rolling out of our new terminals and piloting our embedded financial services suite. While we are proud of these achievements, our sights remain on our long-term horizon. From this vantage, we see our significant runway ahead and the journey we are only at the outset of. The key to reaching our technical and commercial ambitions is maintaining our speed. To keep moving at this pace, H2 required accelerated headcount growth. By the end of 2022, our motivated team totaled 3,332 FTE, with 58% of our new hires sitting in tech roles, spanning both established and young initiatives. Being diligent about both the quantity and quality of these hires further situated us to capitalize on the sizable opportunity at hand. Investments in the team were the primary driver of half year EBITDA margin evolution, which landed at 52%. We remain confident in the long-term return on this investment period. Together, we are laying the bricks needed to reach Adyen's next level. Well, I think that video does a great job in capturing the highlights for the past 6 months. Pieter, Ingo, it's great to have you both here. Pieter, perhaps to start with you. I think the video highlighted the growth that we saw on the platform, but even more so, we've been investing in the team. Would you care to elaborate a bit on why it's so important for us to use this period as an investment period? Yes. I think for Adyen to reach its full potential, we need to grow a little bit larger in number of people. And during COVID, we were hiring, but we always kept the bar high. It's a very competitive market. So we knew something was going to give, and that was the number of people that we attracted because we would have liked to hire a little bit more. And now we move into a market where things are still competitive but a little bit easier, and we now see the opportunity to get those very talented people on board. And so we're benefiting from that to grow towards the plan of working at a larger scale and to onboard those people. And what's, I think, interesting is it's often assumed that we use them just for one initiative, maybe embedded financial services or just for platform. But actually, we use them to invest in all our products. So both online where we started, Unified Commerce, having a store and online working seamlessly together. In platforms, helping the industry, which is platform and then over and above that, the embedded financial services. But also we have new development hubs in Madrid, in Chicago. We're adding to the commercial organization, account management and sales. So you see that globally, we invest in the company. So it's not very skewed towards one element. So that's how we bring the company to the next stage. That's all very clear. And at this accelerated pace, how do we ensure that we successfully onboard all of these new joiners? We benefit from being back in the office. Adyen is back in the office. Globally, we have a policy where we ask people to come in, and it's really working. So the offices are a very vibrant place, and that makes it easier to train people. So that's a very simple part. We have always been very good in training, I think. But even there, we stepped up. We have specific, what we call academies. And we now broaden those academies for the different specialisms within the company. So that's easier to train people. We are hiring people with a little bit more experience, and sometimes, even we fly in – we have leaders, which we call in flying leaders. So people have been leading in another organization. And why is now the time good to do that? In the past, we felt it could be dilutive to our culture. We have now such a size that we feel that actually those leaders can add something and can be good for the company. So we targeted to have more senior people. We also developed a special training for them called the flying leader training, so to land them successfully. But also, of course, it takes less work to train those advanced people. So that's why we feel comfortable that we can absorb that. That's all very clear. And Ingo, on to you, if you look back at the past 6 months, perhaps through the financial lens, what are the highlights that you'd like to emphasize? Yes. We look back on a strong half year of results. If you look at our process volumes, they grew over 40%. Net revenues were up 30%, and also what was already highlighted in the video, we became more and more global, so further diversified both in geography as verticals. So that's a development that we're very happy with. EBITDA margin came in at 52%, lower than previous periods, but that's the outcome of our willful decision to invest in the business, like Pieter just said, hiring more people, starting to travel again, bringing people back. So this is the outcome of our decision. And if we had to, we could get back to higher EBITDA levels very quickly, but this is a moment of investment. Yes. I think the investment for me really is the keyword. It's fair to say that investment goes beyond only investing in the team. Can you highlight any other investment areas that we've seen? Yes, absolutely. Of course, we continue to invest in our product but also in the underlying infrastructure. That's also why you see why CapEx is higher than usual. The second half of this year, we ended up at 8% of our net revenues and a total year, 7%. We made these additional investments to make sure that we would have all the capacity available. Also, with the stricter situation in many supply chains, we want to make sure that we have this capacity available. Longer term, we believe that we will come back to the 5% guidance on CapEx. So 2023 onwards, we will – below that level again. Our customer base is very stable. You see, churn in large merchants less than 1%, and our growth comes from more than 80% out of existing merchants. So merchants that give us more business but also merchants which we onboarded last year or the years before, which are still rolling out with us. So the underlying economics are strong. If you look historically, we invested, for example, Unified Commerce in the U.S. It takes years for that to really scale. Currently, we're making the investment in other markets. I think Japan, I think Mexico, where we have both online and store working together. We know those are powerful products, but we also know the results of that will come quite a bit later. So it's the fact that we are very long term. And you see that there's appreciation by our merchant base that we feel it would be risky not to use the opportunity that we currently have in the market. Yes. At the same time, we're not blind to what's happening around us, macroeconomically. Yet if I hear the both of you, for Adyen, it really seems like it's business as usual. We've got our eyes on the long term. Ingo, back to you, what do you attribute that to? Yes. Indeed, what you say, like, we take this long-term view, so make the investments that are necessary to get to the next levels of growth because that's very important to us, make sure that we do the right things for our customers in the different commercial pillars. Of course, that comes at a cost. That's why you see why EBITDA levels are lower right now. But these are real investments. You could also argue that if we would stop doing this, we would get back at 65% margins very, very quickly. So these are not additional cost because we need to run our business today. So these are investments in the future. If we would stop investing in the future, we would quickly get to these higher profitability levels. So that's why we are very convinced that this is a good and valid strategy for us. It's indeed a bit opposite to what's happening in the market around us. But we've always built the company in a very disciplined way, and that's what we will continue to do so. So we're not hiring as fast as we can. We hire in a way that we get the right quality in with a bar high and keep the discipline. That's clear. And Pieter, I already see you nodding. Are there any closing remarks that you'd like to add, what Ingo just mentioned? The investments which we make today are deliberate, and they're built – and they are for the long term so that we can on a – over a prolonged period, keep to our growth guidance, and that's what we're doing. Perfect. Well, thank you both for your insights. We’re now going to open it up for Q&A. If you haven’t done so already, please use the Q&A functionality in Zoom to submit any questions that you have. Please again mention your full name and the firm you represent. Hi, all, and welcome back after a quick break. With the already great fireside chat behind us, we’re now moving into Q&A, and we’ve had our first questions come in. The first one that we’ll be answering live is from Mohammed Moawalla from Goldman Sachs. Mo, please go ahead and mute yourself to ask your questions. Great. Thank you, Sanne. Hi, Pieter. Hi, Ingo. My question was really on the investments you're making. You're obviously in quite a unique position. As you said, despite what's going on around you to be able to really step up the pace of investments. Can you help us understand how you think of sort of the payback and how this sort of impacts the existing business as well as perhaps the realization of the benefits from the new product areas? And should we think of this as simply sustaining Adyen's kind of already high growth rates or potentially being additive and accelerating that? Thank you, Sanne. Thanks for your questions, Mo. Pieter, if we look at why we're investing and the time lines of when we're expecting payback on this – on our investments, how do we think it will impact our business and our products? If you could take that one, and then Ingo, if you can take the second one on sustaining our growth rates or whether we'll be accelerating them. So if you see how we are investing, we are investing in things which will have a return fairly quickly because, for example, in digital, we are constantly investing and making checkouts easier, are able to retract store payment details. So that has an immediate benefit if you invest in the sales organization. If you sign up more merchants, you need more account managers. So those things lead to a high quality of service but also executing it well. There are other parts, which I mentioned for example, Unified Commerce. If you launch that in Japan, that's not going to make a material difference on the very short term. But we know those are the type of products that take more years to come to maturity. If you look at our investments in embedded financial services, it's great that it's live because now we get direct merchant feedback and you can improve, but that's how you build something. That's not how you get the benefits yet. So that's an example of something which will ramp up slower. Yes, absolutely. I think if you look at how we see these investments, it will extend our runway. So of course, we have this guidance on how we want to grow our revenues longer term. That's what we want to continue. And these investments make this possible. Of course, longer term, we also want to go beyond payments. So we're still heavily investing in payments but also developing our first products that go beyond this. And this is because merchants ask for it. So we want to make sure that we do this to make sure that we are in line with our merchants' demand. And yes, with a single platform, that's relatively easy to do. So not in itself as an acceleration. It is a sustaining growth path that we're on. Great. Thank you. Mo, I think that should answer your question. So we’re going to open the line for the next questions, which are from Adam Wood at Morgan Stanley. Adam, please go ahead and unmute yourself to ask your questions. Hi, perfect. Thanks for taking the question. Piet, good to see you back, and Ingo, congratulations on the added role. I've got 2, please. The first one is just, could you help us understand the order of magnitude impact on the 2023 numbers on EBITDA? I mean the model that we were working on suggests that EBITDA margins fall back below 50% this year. But obviously, that depends a lot on the wages per employee that we assume. Could we even be looking at a situation where margins return back to the 2015, 2017 level? Well, again, I think it was a period you're investing quite heavily when margins went as low as the low mid-40s EBITDA. That's the first one. And then secondly, lot of people have been asking about the interest on the cash on the balance sheet. There's obviously a pretty big cash balance in the business now. Could you talk a little bit about your ability to earn interest on that balance? And is that different between the cash that is your cash and the cash that is part of the merchant float, please? Thank you. Thanks for your questions, Adam. Ingo, I hear EBITDA margins, I hear balance sheet. I think this one is for you. Thanks, Adam. Yes. So for – if you look at our investments, we want to continue our investments in 2023. So in 2022, we hired around 1,200 people. That's also the number of people that we want to add to the team this year. That's sort of the maximum that we want to hire. We, of course, keep the bar high. Also with the full impact of the people that we have hired in the second half of this year or in 2022, that could lead to some further margin pressure. So 2023 is certainly not a year where margins will expand again. That's more something that we will expect to see longer term in the course of '24 when we think we are at this next level, and we will hire less people. Indeed, I think your reference to early years, I think it's very similar and not so much maybe on the margin levels but the perspective that we take. So the perspective that we take right now is fairly similar to the 2015 and 2016, 2017 years when we invested heavily in acquiring licenses, point-of-sale development, and that really started to pay back in the years 2018, 2019, 2020. And we want to take that same approach indeed, so have lower margins on the short term to be in a way better position on the long run. Then on our balance sheet and interest rates, yes, we are, I think, in a lucky situation that we're now in a positive interest environment with no debt that leads to income instead of the fact that we need to pay for the balances that we hold. But we don't want to make this like a separate business model, like our business model is really focused on the fees that we earn with our merchants, so not so much on the interest rates that we make with the central banks. But of course, it's a good side effect, and it will certainly partly pay back our investments that we're currently making. Great. Thank you. So, Adam, as you hear, we are – we remain in the investment mode. We’re building for the long-term. We’re building what our customers need. I think we’ve answered your questions. That means that we’re ready for the next in line, which is James Goodman from Barclays. James, please go ahead and unmute yourself to ask your questions. Great. Much appreciated. Thank you for taking mine. Just firstly, coming back to the commentary around the macro backdrop and the growth outlook. I think you've been pretty clear that these investments are helping to sustain your medium-term growth. If we look at the second half this year, which was already a challenging e-commerce environment, I think on a constant FX basis, your net revenue was within but at the lower end of your medium-term guidance. So I just wonder if you could comment in terms of what you're seeing right now and the outlook for 2023, whether that's a sort of prudent level of growth to think about given some of the discretionary spend pressures and higher energy bills and things that we're seeing in the market. That's the first question. The second is just actually to directly follow up on the interest income element and just really to gauge a little bit the materiality of this. I mean it was €25 million, I think, already in the second half. Presumably, that was mainly Q4, I think you're earning it both with central banks and commercial banks in both Europe and the U.S. Is there any reason this couldn't be €200 million plus of interest income on an annualized basis? And really a full offset to some of the incremental investments that you've been discussing in the opening remarks. Thank you. Thanks for those, James. Ingo, if you could take the first question on how the overall macro backdrop impacts our growth outlook. I think James specifically asked for what we also see happening in the e-commerce environment versus on our platform. And then the second question, I think, is another good one for you to take on is how material we think interest income can become for us. Yes, sure. So I think if you look at our expectations for 2023, our main focus will be land and expand. So the fact that there is a macroeconomic backdrop is not necessarily an issue for us because we are so much focused on the land and expand. So working with our existing merchants and getting a bigger share of wallet. Of course, if the organic growth of merchant is lower, that also has always a bit of impact on us. So we were not completely immune for this type of development. But we strongly believe also in the guidance that we have given. So if we would have different growth expectations also for 2023, we would have signaled this. So we are firm believers in our growth strategy. But in the end, it's very difficult to exactly measure which part is linked to the macroeconomic circumstances. And then on interest rates, like indeed, of course, the interest that we earn is really dependent on how the interest rates will develop this year. There is, of course, still a bit of uncertainty around. But with the rising interest rates, that income will certainly further increase. I think it is, of course, relatively easy to model how much we potentially could make. We have not – we decided to not disclose or guide separately on interest income. But I think it's good to assume that for most of the balances that we hold, we will get interest on it. And it will, indeed, one of our sources for funding the investments that we currently make. Great. Thank you. That’s another complete set of answers. Now next up is Justin at Credit Suisse. Justin, please go ahead and unmute yourself to ask your question. Awesome. Thank you so much. Congrats Ingo and good to speak to you guys. So just a couple for me here. One, I noted an Oracle partnership in the platform side. I think you may have had a relationship there in the past. Obviously, this is a massive provider of POS, point-of-sale software across North America and Europe. Maybe you could talk a little bit more about that relationship and that win if it was incremental. And the other question is kind of ancillary relating to embedded financial services. So now that that’s live, have you seen a change in the way conversations are going with the platforms, meaning, are you seeing kind of more productive conversations? Are there a lot of platforms that are saying, "Hey, now that you guys have this more complete suite of offerings, we’re more likely to work with you." And any examples of that, that you can provide outside of the Moneybird one you gave in the shareholder letter. Thanks for your questions, Justin. Indeed, a lot happening in the platform space. So Justin’s questions, the first one on our Oracle partnership, whether that’s a win or an expansion of the relationship, and the second one on how our conversation around EFP are evolving, I think, two great questions. Thank you for those. Ingo, if you can take them. Sure. Yes, I think if you look at the Oracle partnership, that’s a partnership that we’re very pleased with. Indeed, they have a huge reach, and they also bring us to customers that would be more difficult for us to sign up directly. I think it is also a way to further grow our embedded payment solution. And of course, longer term, that’s also very much – very important for building out EFP, so embedded financial products. So the embedded payment is an entry point for longer term, the other financial products. Oracle is an important partnerships. Of course, we look at other partnerships. It’s a very clear trend in this industry that software service providers look for different ways to embed payments into their offering. And that’s why the platform vertical for us is so important. Then switching to embedded financial products now it’s live, what we’re going to do. The initial feedback is very positive, but it’s also still in pilot phase. So yes, there are more platforms coming to us that already were considering us for embedded payments to say like, "Okay, if you can do more, you’re even more interesting or logical choice for us." So it absolutely fits very well with also our strategy to be their long-term partner, but like we also indicated earlier, like it’s going to take a bit of time to really roll out embedded financial products and get revenues from it. First focus is getting the embedded payments right, and that’s like the majority of the conversations that we have now with platforms. Great. Thank you. So Justin, as you hear, there is much more in store in the years to come. I hope we’ve answered your questions because it’s time for the next question is already from Frederic Boulan at Bank of America. Fred, please go ahead and unmute yourself to ask your questions. Hi, thank you, Sanne. Thank you, everybody. If I can follow-up on the previous question from James on your revenue growth outlook. So if you look at the 2022 second half, and we had FX supporting, we have eBay still contributing. If you can discuss the building blocks that give you confidence about delivering within the guidance range for 2023. In the back, would that get a bit tougher, in particular, any development on POS or other areas where we could get a bit more comfort on growth picking up? And then secondly, on the management side, if you can maybe spend a moment on the changes happening, in particular, departure of Kamran Zaki and the outlook for the rest of the management team. Thank you. Thanks for your questions, Fred. Ingo, if you can take Fred’s first question on our growth outlook for the upcoming year against the macro backdrop but also what gives us confidence for the year to come. And then Pieter, if you can take a Fred’s second question. Yes, sure. I think if you look at the building blocks for our growth this year, it’s, at the one hand, regional. So if you look at our traction in North America right now, that’s very significant, and we want to further grow this. And the same for what we see in Unified Commerce space. So a lot of retailers also after pandemic are reconsidering their payment strategy. They see that payments is very strategic to them. They – also with our data perspective, we can help them to get better insights in their consumers. And so that’s an area where we expect a lot of growth from. And of course, these are deals that we potentially already have signed in 2022, and in line with our land-and-expand strategy, we expect to see more revenues from this in 2023. So that’s also why we are so convinced that we will make this outlook. It’s also based on the account management plans that we have in place. So for each account that we manage, we have detailed visibility on the growth that we want to make, and that also supports our growth for this year. Yes, there’s some changes in the management board. I’m very positive about it. I, of course, don’t like to see come Kamran go, our COO. But I think from a West Coast U.S. perspective to spend almost a decade with a company show strong commitment. And when we asked him for the Board, my assumption was that it would probably be for a term. So there’s not a big surprise in there. It gave us the opportunity for Ethan to become CFO, and we – often, you see that people already have the role which they are being granted. And so we were happy to give Ethan that opportunity. Ingo takes over a large part of Kamran’s role, which is products and... Yes, sorry, product and operations. What we do with account management that goes to Roelant Prins, who has been with us very much from the beginning and so bring that commercial together is an elegant way to solve it. And because now we make those changes, there’s also an opportunity to adjust the Board to how Ingo and I have been working together, and we have been very much operating together and to now formalize that, I think that that’s the right thing to do to ensure that we are all working in a way which we can work together going forward. Of course, with coming back to the office, a little bit more difficult than I expected. It would have been nice to have had it in place already. And – but I have no – there’s nothing which I know is coming up that I would be out of the office. Great. Thanks for that update. I think Fred, we’ve also answered your questions here. So that means we’re going to move on to the next question, which is from Sandeep Deshpande at JPMorgan. Sandeep, if you could please unmute yourself and ask your question. Hi. Thank you for letting me on and congratulations on a good report. Two questions for me, if I may. Just back again to the question on margin. Would you then say, Ingo, that 2023 would be the bottom of your margin? And then in 2024, your margin will improve from here as your hiring slows into 2024? The second question I have is for Pieter, which is to do with the growth trajectory of the business. I mean, clearly, I mean, you’ve seen very strong growth in POS in the United States. What is the next leg of this growth? I mean, clearly, for instance, in the U.S., getting your license and et cetera helped you grow very fast in the U.S. over the last few years. Is it about continuing to expand within the existing acquired customer base? Or is it now the push together with these new employees to get new customers is going to increase? Thanks for your question, Sandeep. I think they were already directed by Sandeep in the right direction. So I guess I’ll say thank you for that. Ingo, if you can take the first question on how our margins will develop in an upcoming year and years after. And then Pieter, the second question for you on how we’re expecting to further grow in the U.S. and beyond. Yes. So if you look at our margin expectations for 2023, we expect that margins will be impacted by the people that we hired this year. So we have, as an internal goal, 1,200 people that we want to add to the team. And then in 2024, number of people that we hire will slow down. So in absolute terms, lower than the 1,200. That’s our current expectation. That should lead – and if you think about the number of people that we hire in 2023, that also, of course, had some impact on the cost in 2024. But in the course of 2024, we expect that margins will start to expand again. And then we think that we are at a level where our ultimate scalable business model will be visible again where we grow on the longer-term to the 65% EBITDA margin. And I think that’s a very important point to highlight. We strongly believe that our revenue can grow way faster than our cost. Most of our cost is cost of the team. These – the people that we hire currently are additional investments to have a longer growth path. But if we wouldn’t hire them right now, we would get to higher margins instantly. And I think that’s the investment that we’re making, and that’s why we expect from 2024 onwards or in the course of 2024 onwards, margins will expand again. Great. Thank you. And I think from our current investments to – over to North America, a place or a region where we continue to invest but also have been investing for a very long time already. Pieter, what’s our growth trajectory and aim growth trajectory there moving forward? First, how does that commercial engine for us work? And that is we have growth from existing merchants, which is like the majority more than 80%. But we’re constantly adding new merchants to that, so that, that doesn’t stall but that keeps going. So that’s what we’re doing. And if you look at the addressable market, we are not limited by addressable market. So yes, that’s what we’ll keep on doing in the U.S. with more people with more track record being recognized as an important domestic player as well. So at a further point, it becomes easier than your first sale where you’re just a little bit – being seen as a – that’s an unusual choice. It’s not much more an accepted choice. But in the meantime, we’re doing – we’re planting the same seeds in other markets. So I mentioned Japan, I mentioned Mexico. So they’re also that engine starts to work. Safe to say, what’s then more important, it’s important to keep it flowing. We constantly grow with existing, and we constantly add. And that’s what we have been doing now for more than a decade, and that’s what we continue to do. And then it’s about outperformance of the products, investing in engineers and almost 60% of what we hired are engineers that built a product, constantly improving. And that’s why merchants choose first. It’s not from a deviation in the past that they tied their hands. Now it’s like this is the product I like and I put more volume to. And that’s what we’ll do for the years to come. I think a very clear strategy that’s brought us where we are today, and we’ll continue to drive our growth in the future. Thank you, Sandeep, for your questions. Next up is Michael Briest from UBS. Michael, please go ahead and unmute yourself to ask your questions. Yes, thank you. I think most of them have been asked, but I guess just coming back on the interest income. Could you give any sensitivity perhaps around a 1 percentage point move on U.S. or eurozone rates, how that would affect that income stream? And in terms of the hiring in the second half, it looked like the average employee cost went up quite a lot sequentially and year-on-year. And I guess, is there anything odd about seasonality? Or does that speak to something around the sort of salary inflation you saw or the caliber and seniority of talent that you brought on board? And perhaps has attrition come down notably? If you could address that. Thank you. Yes. Thanks for your questions. I think it’s becoming a theme of the call, but Ingo, could you address Michael’s first question on interest income and then also pick up employee cost? And maybe together, you can speak to attrition and seniority of our team. Yes. If you think about the sensitivity to interest, the balances that we hold on a daily basis, of course, the velocity of those balances is super high. So what we see from all the different payment methods around the world is paying out basically the next day. That velocity is high. But for most of the balances that we hold, we are in a position to get interest on it. So I think that gives a sense for if you want to model it, like if you look at our balance sheet, how much is eligible for getting interest? And then I think – thinking about how volumes will grow over time and also how balances then will grow over time, I think it’s the best way to model the sensitivity to interest rates. We’re not going to specifically guide on it, also because we’re not actively going to steer on it. We’re focused on making sure that we continue to build our fee business with our merchants. And this is a very nice side effect of it that helps us to fund our growth. Great. Thank you. And then there is a question that I think you can best address together, which I think will kick off with the cost of employee expense and then also some parts on how the team has developed also from a seniority perspective and what attrition looks like. Yes. This year is the year that we deliberately chose to bring in leaders because we felt that we are now such as a size that we benefit from it. On the balance of do you risk culture, we feel we are now that so well embedded. That’s actually an opportunity to get other leaders in. So that indeed changes the package. What we also see is that we’re hiring outside of Europe. If you hire outside of Europe, then usually the packages are different. So that raises salaries. We are hiring engineers, and they are usually also the different package. So those are, I think, the underlying trends. Great. Thank you. And I think we’ve already answered the full question. So then it’s time to move on to the next. Hannes Leitner from Jefferies. Please go ahead and unmute yourself to ask your question. Yes. Thanks for letting me on. I have also a couple of questions, but they’re rather more driven around license landscape. Could you remind us a little bit around your current license landscape, where do you see the key focus areas and then also talk about the acquiring license in the U.S.? I think after the branch license, you are potentially eligible to apply for one. And then also, what would be the incremental benefits from that? And then maybe on the second question around Unified Commerce. One key discussion here is around profitability between the channels. Could you remind us there? Especially also around the implementation, is there extra costs incurred by you to, for example, implement the terminals in store? Or do you have third parties you work with? Or is it the merchants directly? Thanks for your questions, Hannes. Ingo, if you could take the first – Hannes’ first question on our licensing landscape, what our key focus areas are, how we’re progressing when it comes to our U.S. acquiring license, what it means for our business? And then also the second one on profitability between our Unified Commerce channels. Sure. If you look at our license landscape, let’s first take it from a regulatory perspective. So we always try to optimize our regulatory approach in each region. That’s why we have a banking license in Europe, where we have a branch license in the U.S. And in each market, we always ask ourselves like what’s the best next step to provide our services on the long-term. If there are any updates to be given, we, of course, will, but it’s, of course, also the question like what is right timing for it. Then the second way to look at licenses, of course, are acquiring licenses globally. We used to have a couple of rent-a-BIN licenses in the past. For the U.S., that’s mostly now transitioned out. Given the fact that we have significant acquiring volume, this is not necessarily a real cost benefit because having those licenses ourselves also incurs certain costs. Of course, in combination with the regulatory license, it improves the quality of service because we have direct control over all the flows. They are no longer dependent upon third parties. And that’s, I think, very important improvements in how we can help our biggest merchants globally. If you’re live in U.S., we are a real domestic player now, and that’s, of course, if you’re a big merchant, the quality that you’re looking for. Great. Thank you. And then Hannes also asked a second question on Unified Commerce. And if I recall correctly, he was asking whether there is a difference between online and offline channel when it comes to profitability and whether there are any extra additional costs that incur when we implement terminals for our customers. Yes. I think typically, the way how we price for Unified Commerce-type of deals is more volume-based. Also because longer-term, we strongly have the vision that the difference between online and in-store will disappear. So you don’t want to have strained situations that based on the choice of a consumer, you get two different costs for the retailer. So we try to make it as easy as it is to price that. If you think about rolling out the cost of terminals, of course, this is an additional component. We’re not subsidizing these terminals for our retailers. So we charge for it. And for the whole supply chain or logistics behind it, we work with third parties to make sure that those terminals are shipped to the stores. The installation of those terminals is relatively straightforward. So some companies, do it themselves, some have the help of third parties to do this. But our aim, of course, is to make it as easy as possible. And for instance, one of the things that we have changed compared to the traditional industry where if you had updates on terminals, you had to send a service engineer. We have all made that completely remotely, so we can remotely update terminals, and it’s basically Internet plug and play. Great. Thank you. I think that makes that we’ve answered both of Hannes’ questions. Next up on the line is Josh Levin. Josh, please go ahead and mute yourself to ask your questions. Hi, good afternoon. Two questions. It seems like the increase in headcount is more than what you had discussed earlier in 2022. Are you hiring more people than you had originally planned? Or are you hiring faster than you had originally planned to hire? And if yes, why? And then just again, on the interest income. It looks to us the implied rate you earned on the cash in 2H 2022 is a lot lower than the prevailing short rates in Europe and the U.S. and we’re trying to understand why. Can you park your deposits at central banks and earn the rates paid by central banks? Or do you largely park the deposits to commercial banks and earn the rates paid by commercial banks? Or is it some other mechanism altogether? Thank you. Thanks for your questions, Josh. Pieter, if you could take the first question on our pace of hiring and why we are maintaining that pace. And then Ingo, I think once more the interest rate question will come your way. Yes. I think we run the risk of – actually, we run the risk of underinvesting. And now that we can find those talented people, those are the people that we need, but we’re not managing the company towards let’s hire those people, which in these discussions almost sounds like, oh, it would be great to have 1,200 people. Now we have work for 1,200 fantastic people. Can we find them? Then we will. And that’s about a number where we think we should get to. But it’s not – we are not – we are hiring to build products and not the other way around. Yes. I think adding fantastic to it is a great nuance. I think it’s a good one to – for everyone to take into account that, that’s in the end for the 1,200 people from this year were. I think for the second question on the interest income Ingo, I’m going to defer to you again. Yes, sure. So if you look at the interest rates, they only start to move in the period. So it’s only part of the period that we have seen those increases. Most of our balances is at the ECB. And I think the ECB has been slightly slower, for instance, in raising the rates than the U.S. Also part of our funds are held by commercial banks. And they typically have a bit of a lag between if the central bank raises interest before they have implemented it. So these are effects where there’s a bit of a lagging situation in those interest income. Thank you. Josh, thanks for sending in your questions. We’re going to move on to the next on the line, which is Jeff Cantwell. Jeff, please go ahead and mute yourself to ask your questions. Okay, great. Thanks for taking my question. Thanks for squeezing me in. I just want to follow-up a little bit on what you’re talking about with your new hires. And so when you say that your new hires have a longer growth path, can you explain what you mean by that? Why is that the case? Just trying to think about whether this is product development, for example, land and expand, maybe movement into new geographies and so forth. And then when we think about how to model that, what does that mean for the volumes and take rate, for example? Because given the magnitude of the hires, the size you’re talking about on these expense lines, it would seem like your thinking implies to sort of add more than a couple of PPG to your revenue growth. So was hoping you could help us understand more about this. Yes. Thanks, Jeff. Pieter, could you speak to how our new hires will expand their growth path and what it will mean sort of business moving forward? Yes, feel free to chip in where you think necessary. The – as Ingo mentioned, it’s very easy to limit on investments, and it will bring the operational leverage very high in this company. But the question which we try to solve here is what investment level is right to have those products, which we know will later on deliver. And we are building things which we know already for a few years are needed by merchants. And those – how that works is not always so straightforward. It – when we were just launching with terminals, in-store payments, we thought, oh, wow, this is really going to help for companies, which have in-store payments. And then it turns out that you sign up merchants for pure online who say, "We might want to do it in the future. So we’d rather work with you." Then we can know we can extend it. Why do I mention this as an example? If you now look at platforms and you don’t use embedded services, if you can choose between providers, which provider would you take, the one where, if you want in the future, do card issuing embedded service or the one who doesn’t do that? And then if you also look in our case, all in one platform, so no new contracts. It’s just flipping of switches to get things up and running. That’s very attractive. So the hard relationship that you’re asking for is sometimes a little bit less strict. But on the other hand, we have been in this market for a long time. We’ve been speaking to merchants for a long time. So this is not just a guess as in, let’s make up a feature. Now we are building to what we know, if needed and will be used and if you then ask me so why do you say that then lengthened your growth, your runway because we know these are the products. You never know 100% for sure, but we think these are the products that will be used. So quite confident in that. I think the comparison to be made is, for instance, like if you look at the U.S., it has taken years to get real traction in domestic U.S. market. Of course, we’re ready. We’re quite successful early days with U.S. merchants going international. But now to have domestic traction, that took years to get there. If you translate that to other markets that are very significant, Japan, it will really take time to get – or to be in that similar situation. You need to build a team. We built a team from the ground up, so we don’t do any type of acquisitions. So time is the thing that we need to overcome. It just is having that patience building it right. It’s also on the product side, of course, building everything ourselves. It just takes more time. And that’s why we strongly believe that the investments now will put us on a longer growth path and why we think this is the right thing to do. Great. Thank you. I think, Jeff, we have answered your questions there. So we’re going to move on to the next on the line, which is Alexandre Faure. Alexandre, please go ahead and unmute yourself to ask your questions. Good afternoon. Thank you very much for squeezing me in. I got a couple of questions, if I may. The first one is again on this big investment phase of yours in 2022 and 2023. Could you please give us a broad sense of how much of this effort goes into embedded finance products as opposed to all your other initiatives? And my second question relates very much to inventories that I think went up quite dramatically in H2. I think it relates mostly to a point-of-sales terminals. So I’m curious if – as in anticipation of growth in Unified Commerce, if it’s trying to get ahead of potential supply chain disruptions. Just wondering what’s going on there. Thank you very much. Thanks for your questions. Pieter, could you speak to Alexandre’s first question on where all of our new colleagues are, what initiatives they’re working across. I’m not sure what it [was for] me, but I’ve had some difficulty understanding or hearing your second question, but I am looking at Ingo whether he heard and else, we might ask you to unmute again if he didn’t hear, but I thought it was either Unified Commerce or CapEx, but that’s a broad range. So let’s start with Pieter. Yes. So the question, is it embedded financial services where you need to – why you feel the need to hire people? And the answer is no. It’s we’re investing in all initiatives. So that means that we build the teams out globally. We invest in all the different initiatives that we have, which means making sure that our online merchants get new functionality. And we retrieve payment data. We make it more smooth. We look at risk and make sure that we have less false positives. So there’s constant investment. We invest indeed in Unified Commerce. We invest in platforms and off-platforms. Embedded finance services is a part. But we are also discussing now taking Unified Commerce live in other regions. We have – we set the development hubs, and to develop that muscle that we can also have engineers in other regions is important. So it’s not so biased. And especially if you look at 2013 when we had a lot of engineers from getting a point-of-sale live, this is different. This is scaling the company to bring it to its potential. Yes. Let me start with the second question. And if I’m not completely answering it, we will give you a second try. I think the way we look at Unified Commerce and the way how we build our terminal business, of course, we had some limitations in the supply chain earlier. And we were also dependent upon a single provider or a single vendor. And that’s why we already, some years ago, decided, okay, we need to go for a multi-vendor strategy and preferably also develop or design terminals ourselves to make sure that we cater for the needs of our merchants. So we build terminals that are in line with those needs. We have them available. So that’s not a restriction any longer to grow Unified Commerce. So from that perspective, the situation where there were some limitations, that’s over. It is really about making sure that we have the right rollout plans with our customers and making sure that terminals then get to stores. So, so far, we feel in a very good position to further roll out with our customers. Great. Thank you. I think we can move on to the next questions. Next up on the line is Antonin Baudry from HSBC. Antonin, please go ahead and unmute yourself to ask your questions. Yes. Thank you very much, Sanne; and hi, Pieter; hi, Ingo. My question is about evolution of the competitive landscape. We saw that Stripe, one of your competitors, signed partnership with Amazon in Europe and the U.S. So this is a contract that you could have typically won, especially as you already partner with Amazon in some geographies. So do you see a change in the competitive landscape? Do you see more pressure from some of your competitors to penetrate this enterprise segment, especially with some pressure on prices? Thank you. Thanks for that question. Ingo, if you could speak to the overall competitive landscape, and Antonin also asked about our relationship with Amazon. Yes. I think in general, the competitive landscape is not really changing. Of course, there is – if you look at, in general, large players, they typically work with multiple providers. There’s always deals that we would like to have. At the same time, we focus on the deals that we have won and deliver the best quality on it. So in that sense, there is – not a lot has changed. Also going forward, I think if you look at new players like most of the industry is still with the traditional banks. If you look at the opportunity that we have in Unified Commerce, most of that is to win from traditional banks. If you look at online players, a lot is to win from the incumbent players that still have significant volumes, and that’s what we focus on. Clear. Thank you. I think we have answered your questions there. Next up on the line is Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien, please go ahead and unmute yourself to ask your questions. Yes. Hey, everyone, and thank you for taking the question. On Unified Commerce again. The volumes are ramping up quite rapidly, and you are now moving to new markets, Japan and Mexico. Could you please help understand what is the competitive landscape in this new geography? Do you see new competitors in Mexico and Japan? And on the capital allocation strategy, you have now a bit more than €2 billion in and in terms of net cash position at the end of 2022. Could you remind us a little bit the capital allocation strategy? What do you plan to do with your cash going forward? Thank you. Thanks for your questions. Pieter, if you could take the first one on the competitive landscape at global scale on Unified Commerce. And then Ingo, the second question on capital allocation will come your way. Yes. If you see how much experience we build up in Unified Commerce over the last years, if we bring it to new markets, we are very far ahead. The challenge in the new markets is that you don’t – are established as a brand yet, and banks and merchants have relationships, which you don’t switch overnight. We know that, so that takes time. But it’s not that we are – that there are other companies providing that. It is – it also works as they do it. It’s just way more operationally efficient to work with us, and their sales that’s lost by not doing it. And at a certain point, there’s a tipping point that merchants say, "Yes, I’m going to switch now." But that doesn’t happen the day it becomes available at the market, at least for some, but not for the – not as quickly as you would dream. Yes, sure. So we indeed have a significant cash position that helps us to grow the business. We’re still in investment mode. It helps to have a significant cash balance. In discussions with regulators, it helps us with discussions with merchants. We have an A- rating with S&P. So it also says a lot about our financial stability. In the end, that’s ultimately what we’re selling. We’re selling trust to our customers. And having this financial stability helps us a lot. That’s why we continue with this strategy for now, and we will revisit at a later stage. Great. Thank you. I think it’s time for us to move on to the next question, which is Lisa Ellis from MoffettNathanson. Lisa, please go ahead and unmute yourself to ask your questions. Good morning. Thanks for having me on. I’m delighted to be joining. I had one related to the deceleration in processed volume growth that we see from 1H to 2H, excluding the impact of eBay and their – was most of this deceleration driven by a slowdown or moderation in e-comm spending? Or are you seeing some other dynamics out there in the market such as the slowdown in customer decision-making or the slowdown in customer rollouts of your implementations or an increase in competitive environment? Just can you unpack a little bit that deceleration in volume? Thank you. Thank you, Lisa. And so this is our final question. So on the final question of the day, I think I’m going to send it over to Ingo. And then afterwards, we’re going to wrap it up. Yes. So if you think about the volume growth on our platform, for an important part of – there is the volume growth dependent on rollout of new merchants. So, for instance, for point-of-sale, there’s not a lot of rollout in the second half of the year, specifically not in Q4. So that’s a trend that we see. I think other trends are not really visible. So we are still very much convinced that we can continue the growth on our platform. The – that’s also why we keep reiterating our guidance on revenues. So there are no big underlying trends that I can highlight. Thank you. And with that, it was our final question. It was a pleasure having you. It was a pleasure being here with Pieter and Ingo today. It was – also, on behalf of Steven, the rest of the team, we’d like to thank you for dialing in today, sending in your questions. Thank you.

EarningCall_220

Greetings and welcome to the PROS Holdings Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. Thank you, operator. Good afternoon, everyone, and thank you for joining us. Our earnings press release, SEC filings, and a replay of today’s call can be found on the Investor Relations section of our website at pros.com. Our prepared remarks will also be available on our website immediately following the call and will be replaced by the official transcript, which includes participant questions, once available. With me on today's call is Andres Reiner, President and Chief Executive Officer; and Stefan Schulz, Chief Financial Officer. Please note that some of the commentary today will include forward-looking statements including, without limitation, those about our strategy, future business prospects and market opportunities, and our financial projections and guidance. Actual results could differ materially from such statements and our forecast. For more information, please refer to the risk factors described in our SEC filings. PROS assumes no obligation to update any forward-looking statements to reflect future events or circumstances. As a reminder, during the call we will discuss non-GAAP metrics. Reconciliations between each non-GAAP measure and the most directly comparable GAAP measure, to the extent to which available without unreasonable effort, are available in our earnings press release. Before I hand the call over, I'd like to notify our investors and analysts about our upcoming Analyst Day which will take place the afternoon of Tuesday, May 23rd during the 2023 PROS Outperform user conference at the Hyatt Regency in Denver, Colorado. The event will be webcasted live for those unable to attend in person. Investors and analysts who wish to attend the full conference will receive a discount on the conference registration. For more details on Outperform 2023 or to register, visit pros.com/outperform. Thank you, Belinda. Good afternoon, everyone, and thank you for joining us on today's call. As I reflect on 2022, I'm proud of how our team executed to deliver a strong year. We grew subscription revenue by 15% and total revenue by 10% year-over-year. The increased momentum we saw in 2022 is supported by the fact that we more than doubled our deal count for the full year compared to 2021. Our value proposition has never been more relevant, which is fueling demand for our platform. Businesses today are leaning into automation and AI to drive greater efficiency and fuel profitable revenue growth. In times of economic uncertainty, the question management teams are trying to answer is simple: how can we drive organic growth, efficiently? The PROS Platform helps answer that question. In today's rapidly evolving markets, speed is a competitive advantage. Businesses that get quotes out faster win. However, operating at speed is becoming increasingly challenging because of the number of product configurations, distinct sales channels, and negotiated customer prices. For businesses today, the only solution is to digitize sales and support an omnichannel sales model. Industry analysts predict that by 2026, 85% of B2B sales interactions between suppliers and buyers will occur in digital channels, up from 55% in 2021. The PROS Platform is uniquely able to automate and digitally connect omnichannel sales experiences, driving higher productivity in sales and a better customer experience. We continue to be recognized for innovation leadership with 15 awards and accolades received in 2022. In Q4, PROS was recognized again as a leader in Gartner's 2022 Magic Quadrant for CPQ solutions, with Gartner citing that PROS Smart CPQ is ranked number one overall for our ability to support channel sales. Additionally, it was noted that PROS delivers more AI-driven guided selling capabilities than any other product evaluated. Together with our leadership position in the IDC MarketScape, PROS continues to be the only platform with a leadership position in both Price Optimization and Management and CPQ. Our leadership in the market continues to drive new customers to PROS. In Q4, we welcomed Unlimited Technology and Vector Security, both leading providers of security solutions. With PROS, Unlimited Technology and Vector Security can accelerate sales productivity with guided selling workflows and reduce quote turn-around time, fueling profitable growth. Industry analysts predict that by 2028, 85% of all companies with B2B go-to-market will employ AI to augment at least one of their primary sales processes, up from nearly 40% in 2021. AI is going to be core to the way companies execute, and they will be looking for technology that drives the best outcomes. In Q4, we announced the availability of our next generation of Price Optimization powered by PROS Gen IV AI, the first pricing solution in the market to use neural network technology. Neural network algorithms adapt in real-time to ever-changing market factors and drive robust results even with imperfect data, which drives higher ROI results for our customers. Signature Aviation, a B2B aviation services company, selected PROS in Q4 to take advantage of our latest Gen IV AI advancements to fuel their profitable growth strategy. In travel, the disruption airlines have experienced over the last couple of years has increased their focus on extreme automation and full digitization of the customer experience. Our digital offer marketing and dynamic offers solutions are helping airlines entice customers with relevant offers and pull them into direct and digital channels, driving higher conversion rates through channels with lower cost of sales. Aegean Airlines, Greece's largest carrier, selected PROS in Q4 and will use our dynamic offers solution to distribute offers to online channels. Philippine Airlines and Oman Air, among others, expanded their partnerships with PROS with the adoption of our digital offer marketing solutions. We are focused, as always, on value creation for our customers and you, our shareholders. We made organizational changes in early 2023 and are now projecting to generate free cash flow and positive adjusted EBITDA this year. We're also accelerating our timeline for our long-term growth and profitability targets. Further fueling our profitable growth will be our focus on three key pillars of our strategy. The first is driving market adoption of the PROS Platform with our land and expand sales motion. We are laser focused on landing customers with solutions that drive immediate value, and then expanding quickly to drive more value over time. A great example of this is our expansion within the General Electric family in Q4. In Q3, we announced our win with GE Healthcare and in Q4 we expanded into GE Power. The second pillar of our strategy is to establish a new software category of profit and revenue optimization software. Our innovation leadership is recognized by industry analysts across the software categories that we exist in today, whether it be revenue management, price optimization and management, or configure-price-quote. However, we bring so much more value to the market with the extensive capabilities in our platform and our AI. We believe the value we deliver is reflected in a new category of software, profit and revenue optimization. This year, we’re focused on elevating our messaging and leading the market in innovation that drives profitable growth for businesses. The third pillar of our strategy is to focus on customer experience and rapid time-to-value. I'm confident that no one else in our market can deliver the measurable ROI we deliver to our customers, as fast as we deliver it. We'll continue to build implementation assets and drive platform innovation that allows our customers to activate even more use cases with rapid time-to-value. We enter this year well positioned to fuel our profitable growth. We have the right people, strategy, and platform to capture the market opportunity in front of us. Before I close, I'd like to talk a little bit about our incredible team and culture. Our people-first culture is what makes PROS such a special place, and I’m so proud of the environment we’ve built that prioritizes personal growth and ensures every employee can reach their full potential. We continue to receive recognition of our culture, including recently by PEOPLE magazine in the 2022 Companies that Care, a list of the top 100 U.S. companies that demonstrate outstanding care, respect, and concern for their employees. While we've had to make difficult decisions over the past several months, we know that the culture that we built is one that encourages current and past employees to care for and lean on each other. I am thankful to all our team members over the years for their contributions to PROS, and we're committed to supporting both current and former employees of PROS throughout their careers. I’d also like to thank our shareholders, partners, and customers for their ongoing support of PROS. Thank you, Andres and good afternoon, everyone. Our team delivered a strong fourth quarter and full year. Despite a challenging economic environment, our solutions have proven to be mission critical to businesses as they look to drive profitable revenue growth. Our platform and our package offerings launched in the second half of 2021, really set us up to drive a strong 2022, where we consistently outperformed our revenue guidance. With our platform launch, we were also able to drive our revenue performance with greater efficiency. This resulted in improved subscription gross margins. We even generated positive services gross margins as well as positive adjusted EBITDA in the second half of 2022. Now, I’ll cover our results in a little more detail. Subscription revenue in the fourth quarter was $53.1 million, increasing 13% year-over-year and exceeding guidance. For the full year, subscription revenue was $204 million, increasing 15% year-over-year. Our strong subscription revenue performance along with a stronger-than-expected services revenue result led to total revenue in the fourth quarter of $70.9 million, increasing 9% year-over-year, and $276.1 million for the full year, increasing 10% year-over-year. Recurring revenue for the fourth quarter and the full year was 84% of total revenue, and our trailing twelve-month gross revenue retention rate continued to be better than 93%. Our Subscription ARR was $229 million, increasing 17% year-over-year on a constant currency basis, and exceeding guidance. Total ARR was $247.5 million, increasing 9% year-over-year on a constant currency basis and was within our guidance range. Going forward, we will focus on subscription ARR because ARR from maintenance customers now represents well under 10% of our total ARR, and will continue to decline during 2023 as we approach the end of life of our perpetual license agreements. This is a significant milestone for us as it marks the end of our transition to SaaS. Our fourth quarter recurring calculated billings increased 6% year-over-year and 13% for the trailing twelve months. Our non-GAAP subscription gross margins were 77% for the fourth quarter and the full year, which increased over 500 basis points from 71% in 2021. Additionally, we delivered another quarter of a positive 4% services gross margin, getting us to a year-end services gross margin that was just short of breakeven. Our professional services team drove significant improvement from a loss of 6% in 2021. As I mentioned in last quarter, we expect services margins to be slightly positive on an annual basis in 2023 and beyond, with some quarterly fluctuations due to seasonality. Total gross margins were 65% in the fourth quarter and 64% for the year, which is more than a 350 basis point improvement over 2021. The path to profitability starts with improving gross margins and our team delivered in 2022 reflecting continued focus on driving efficiencies in how we provide and deliver our solutions. We generated an adjusted EBITDA profit of $2.4 million in the fourth quarter, significantly outperforming our guidance. Our adjusted EBITDA loss for the full year was $14.9 million, a 40% improvement year-over-year. Our adjusted EBITDA outperformance was driven by the better than expected revenue and cost savings in the fourth quarter. Our fourth quarter earnings per share was $0.02 per share beating guidance and we generated just over $1 million in free cash flow in the fourth quarter. And our free cash flow burn for the year was $21.7 million and in line with our expectations. We ended the year with 71 quota-carrying personnel, which was slightly better than our expectations. Starting in 2023 we are adding quota-carrying personnel to drive expansions. The quota for these reps will be lower than the quotas for our new business reps and will create a larger pool of quota-carrying personnel with varying levels of quota. Because of this change, we will not be providing quarterly updates on quarterly carrying personnel as the comparisons to past quarters will be inconsistent. Now we are comfortable with our sales coverage at this time and we’ll continue to manage this coverage to achieve our growth goals going forward. We will also continue to focus on driving higher sales rep productivity, building on the success we had in 2022, where we doubled our deal count every quarter of 2022 with only a few more sales reps than we had in 2021. And, before I cover guidance, I want to mention a couple of things. First, we are confident in our ability to capture the incredible market opportunity in front of us, but we are considering the current economic environment as we set expectations for the year. Second, and to echo Andres’ comments, we continue to scale our business and have recently made changes to our cost structure, allowing us to accelerate our near-term and long-term profitability goals. We expect to report positive adjusted EBITDA and generate free cash flow in 2023. I'll provide more insights into our long-term model at our upcoming Analyst Day during the Outperform Conference in May. With that, here is our guidance for the full year of 2023 with the stated growth rates reflecting the midpoint of the ranges. We expect subscription ARR of $250 million to $253 million, representing 11% growth year-over-year. We expect full year subscription revenue to be in the range of $230.7 million to $232.7 million, representing 14% growth year-over-year and total revenue to be in the range of $293 million to $296 million, representing 7% growth year-over-year. We are expecting full year adjusted EBITDA profit of between $3 million and $6 million, representing an improvement of over $19 million year-over-year. We expect to generate free cash flow in the range of $2 million to $6 million an improvement of over $25 million year-over-year. Turning now to guidance for the first quarter of 2023, we expect subscription revenue to be in the range of $54 million to $54.5 million, representing an 11% increase year-over-year. And total revenue to be in the range of $70.4 million to $71.4 million, representing a 7% increase year-over-year. We expect first quarter adjusted EBITDA loss of between $3 million and $4 million, which is a $5.6 million improvement over the first quarter last year. And as a reminder, it is typical for our business to have higher expenses in the first quarter. Using an estimated non-GAAP tax rate of 22%, we anticipate Q1 non-GAAP loss per share of between $0.09 and $0.12 per share based on an estimated 46 million shares outstanding. Now related to the cost structure changes, I mentioned earlier, we expect to incur severance charges in the first quarter of approximately $2.8 million to $3.2 million, which we will exclude from our non-GAAP results. In closing, I would like to thank all of our employees around the world for their continued hard work and dedication to PROS. I would also like to thank you, our shareholders, for your continued support of PROS and we look forward to speaking with you at our upcoming events. Thank you. Ladies and gentlemen at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Scott Berg with Needham. Please proceed with your question. Hi everyone. Congrats on the nice bookings this quarter and thanks for taking my questions here. I've got a couple Andres. So I wanted to start off with the reopening of China and the impact of your business. I know on the travel side it's heavily dependent on international travel and when we think of Asia PAC, China is a large chunk of that. One of the data points we recently heard is air travel, or at least bookings for Asia PAC-based air travel in January, it was looking very close to 2019 levels. I guess two questions in there. One, have you seen that as well? And then two, if that area or region is trending towards kind of more normal levels all of a sudden, how does that impact your business or potentially impact your business this year? Thanks. Yes, Scott, great question. Yes, we are seeing that region continue to improve and are really pleased that it's opening up because that impacts frankly not just that region but all regions. We think that this year definitely that will help us and it’s something that, I think, is still early, but throughout the year, I think, that's going to be an area where we'll continue to see investment. So, overall, we're pleased with that recovery. Got it helpful. And if we look at the B2B side of the business, which I believe in yours and I's, prior conversations was trending towards pre-pandemic levels. Should we think of the bookings in 2022 as it's kind of maybe in line with what you saw in 2019, or is that business dropped a little bit to go before it's deemed to be completely healthy again? Yes, I would say look, B2B has continued to improve and performed very well last year and we continue to see that business continue to improve as we get into 2023. Overall, I would say last year we set pretty aggressive goals from a sales perspective to get back to 2019 and I'm very pleased of how we executed throughout the year. And overall, I would say look, travel performed well last year as well. It's still not back, but definitely travel contributed as well in 2022. You are carrying a bunch of additional reps for expand motions this year and I get why you are not going to give that metric going forward because it's a different metric at least. But how do we think about your expand cadence in 2022 with regards to your bookings and expectations there? Are you seeing customers expand like they did also pre-pandemic or is this really just a chance to maybe fuel those plans going forward? No. So, that's a great question. So overall, we saw about a fifty-fifty split between new and existing, which is a very healthy level. In last year we really focused on deal velocity and continuing to start small and drive expansions. We see a lot more opportunities with our platform to drive even more expansions within our customer base of more capability that we can sell to our customer base. And we're setting up a sales organization that can help drive faster expansions within the customer base. And we see that as an opportunity long-term, smaller quotas a different approach. We're trying in some segments of our business first, but it's a model that we see a lot of opportunity in the future. But overall, very pleased with both the new and the existing and the approximate fifty-fifty split between both. Great. Thanks for taking my questions. Further kudos on not only the strong finish of the year, but achieving EBITDA positive and non-GAAP profitability. It's been a long time coming. So it's good to see that in the pivot towards a pretty significant free cash flow and adjusted EBITDA growth this year. So nice job. Yes. I guess just in terms of the guide and Stefan, I know you cited, you are obviously factoring in kind of what everybody is talking about macro wise. But just if I look at subscription growth, and I understand we're starting the year here and obviously we hope to do better. But the growth rate of 14%, at the midpoint relative to your kind of 14% or maybe even a little bit higher closer to 15 this year in subscription growth, just considering the momentum throughout the year and obviously travel, you at least sound like you are more confident that it's going to be better this year. I guess maybe, I don't know how you quantify the macro kind of impact on the guide, but just how do you think about B2B versus travel growth in that subscription growth rate? Yes, so Chad, that’s to your point, when we set the guidance and we do this every year when we first set it for the first part of the year, it's always – it's a long period of time to set the guidance and so we typically look early on and we don't factor in as much for the latter part of the year. So, that does leave us an opportunity to reassess as we get to the mid-year point to see if things have – as we built better visibility into the second half of the year if that's something we can adjust for. So, that's very similar to what we do every year and that's no different this year. The other thing that we have to factor in is we are going to have a little bit of a currency headwind. We talked last quarter about that being about a two percentage point delta on total, and it also is applicable to subscription. Actually I don't think it's going to be that much. I think it's going to be somewhere between 1% and 2%, so hopefully it's around 1%. We've seen the euro strengthen that's helped things as well. In terms of looking at our B2B and our travel businesses, would say that because we have – we're coming from such a recovery stage on the travel side, you're actually going to see a really nice growth rate on travel. Andres commented that our travel business did very well in 2022 versus where we were in 2021, but we still see more of an opportunity to recover from what was lost in the 2020 and 2021 timeframes. So I would tell you the travel is going to have an outsized growth rate primarily because of the recovery, because of Asia opening, et cetera. But that doesn't take anything away from our B2B business. Our B2B business is going to continue to do well. It's just not having the same level of recovery that travel did. So I would say just between the two travel is going to be a bit higher of a growth rate because of that phenomenon. Got it. And then just, is there anything that you saw in the fourth quarter, whether it's towards the end of the quarter, from a billings booking standpoint, that really kind of impacted your thought process or is it just conservatism just because of everything you are hearing out there? I mean, I don't know if billings growth rate kind of came in where you thought it was, or how you think about that. Thanks. I would say no, Chad. I would say, look, we have to be cognizant. The way we approach guidance is the same way every year. If you look at last year, we took the same approach. We want to be very confident with the guidance that we provide and we go about it the exact same way. I will say we hear every day companies talking about the macro and the effect and we have to take that into account. We can't assume it is a difficult selling environment and we have to assume it's going to be a difficult selling environment. We are actually pretty pleased with our guidance where it is starting the year and we're very focused on executing. And I would say we have pretty aggressive goals to do, but overall our approach hasn't changed. Yes. And I think on the calculated billings, sorry, to your point on calculated billings to add to that. Our calculated billings in the fourth quarter were pretty much in line with what we were thinking in terms of where it landed. Because in the short-term, calculated billings is really a function of what was already lined up and a little lesser to do with what you earn in new in the quarter. So we have a pretty good idea of what that's going to be where it gets more difficult is when you're forecasting it over a longer period of time. But our calculated billings were pretty much in line with what we were thinking. And keep in mind, too, that there is – there are some timing effects that occur there that kind of drive that up or down. And we certainly benefited from a timing benefit in Q4 of 2021, and that did have a reflection on how we showed calculated billings in Q4 of 2022. Got it. And maybe one last housekeeping one, if I could. Stefan, how should we think about the maintenance kind of decline this year? And then I'll hop off. Thanks. Yes. No, maintenance will decline at an accelerated rate from what it has in the past. We had a good migrations year in 2022. Real happy to say that. I mean it really has changed the dynamic of what our ARR looks like. And maintenance is a very small component, as I commented in my prepared remarks. So Chad, we've always talked about, think about maintenance declining in the, call it the 20% to 30% range. I think as we go into 2023, I think 30% to 40% decline is probably more in line with how to think about maintenance. Yes. Hi. Thanks for taking my question. Stefan, I was wondering if you look at gross revenue retention, I think it was above 93% again, really solid number. But if I go back to pre-COVID, I believe you talked about 95% in the past. As we look to 2023 and beyond, do you anticipate getting back to those levels? And how much does that factor into the growth outlook this year? Thanks. Yes. So Parker, I would say looking back, you're right. I mean, but the year right before COVID, so 2019, our retention rate was around 93%. But you're right, prior to 2019, we did have higher retention rates. And as we've gotten bigger and as we've gotten and done more or executed more transactions that are more of the land and expand variety, we knew that was going to have some pressure on our retention rates, and that has been the case. And so we're very happy with doing 93% or better, and that is certainly something we factor in. And is there an opportunity to do better? Absolutely. There's an opportunity to do better. And I think the work that we're going to be doing around these expansion reps and spending more time to sell the value of what we currently have in those accounts and what we can do to add more value, I think we'll go a long way towards helping that gross retention. I will say this, it's a little short of me to call out improving it off the 93% because we feel like 93% is actually a pretty strong number. But yes, we've done it before to your point. So I feel like it's something we can do again. Understood. And then shifting gears over to the cost structure changes and the opportunity for leverage here on the path of profitability in 2030. How should we think about the impact across different areas of the business? Is there any one segment sales and marketing, R&D that maybe had an outsized impact from the cost structure changes? I wouldn't say there was an outsized impact. You'll see as the expense numbers come in 2023, I think you'll see an impact in the sales and marketing area, you'll see some impact in R&D and G&A as well. I think from a cost of sales perspective; you're going to continue to see the scale that we've been talking about over the last couple of years come into play. But no, I wouldn't say there's an outsized change one way or the other. Now within each one of those line items, we have changed our priorities. So for example, we are going to be investing in more of the expansion reps that we talked about. We're also going to be investing in new business logo reps as well. We're going to spend more money investing in our demand gen and our marketing brand awareness initiatives. So there's going to be areas where we do make some investments, and that's going to be factored in. And then similarly, on the product side, we have looked at some of our lesser priorities, deprioritize those so we can put more kind of wood behind the arrow on some of our bigger priorities, especially around what we want to do with our platform that Andres mentioned earlier. So that's really what's happening. Think of it as yes, there were some reductions made and they were made in many different areas, but it was really emphasizing how do we make sure that we stay and continue to invest in those bigger priority items? Yes. Thanks. And congratulations on the good results and the adjusted possibility in fiscal year 2023 is a big positive surprise. So that's great to see as well. Starting with the revenue guidance, can you just – why only 7% year-over-year growth in fiscal year 2023, given that or fiscal year 2022, you had 13% billings growth. I mean, does this imply that you're expecting flash films [ph] growth in fiscal 2023? No, it doesn't mean that. What we've done, Nehal is in order for us to drive growth rate for the full-year, we've got not only leverage the billings that you talked about that we ended 2022 with, but we've got to also see that executed all the way through 2023. And as we typically do when we set guidance at the beginning of the year, we're really only factoring in what we have near-term visibility to think next six months, and we don't factor in as much around what we see around the second half. So as is typically the case, I would tell you that we've factored that in so that we have more of a chance to have upside than say, downside, but we are being cautious because of what we see in the marketplace. We do also have a little bit of a currency impact. I mentioned earlier about a 1 to 2 percentage point – somewhere between 1 and 2 percentage points of an impact on currency, which is impacting us a little bit. And so those are some of the things that are driving that. But let me put it this way, we're executing to a plan and an idea that could do better than that. Okay. And then you have the Q1 guide for subscription revenue growth of 11%, but full-year, 14%. So doesn't that imply accelerating subscription revenue growth as we go through calendar 2023? It does. Yes, it does. But that's a different factor because what we're really talking about there is timing of when those bookings come online. So from a revenue recognition standpoint. So as you probably know, there is a good portion of our business that – where we get the bookings, but we don't immediately get the revenue recognition. That revenue recognition has delayed starts. So we have lined up revenue that's already been booked to your point, that's coming online from a growth rate perspective, and that's why you're seeing that factor in. Got it. Okay. And then I always, I mean, it's always great to see the significantly improved profitability that you're projecting, but I always get concerned that, that is going to come at the expense of future revenue growth, yet you're talking about accelerating your growth targets. So can you help me reconcile what you presented here? Well, from a growth rate perspective, we feel like we are continuing to invest in the areas that are going to help us drive growth. Now, when we looked at some cost-cutting areas and where we cut some costs, we did cut areas in what I would call lower priority areas. And so yes, that can have an impact on the overall growth rate. I don't want to mislead you that area, but it's not going to have a huge impact because the areas that we are really locked in on what we want to accomplish, both in the travel and B2B areas are areas that we're still continuing to invest in. As a matter of fact, I would tell you that we've actually allocated a few more dollars in some of those areas as we went through these exercises to ensure that the things that we really want to focus on are those areas that are going to drive the revenue growth. So yes, there is a phenomenal effect because of some of the things that we've stopped doing but our plan is to more than offset that or at least offset a good chunk of that with the focus and execution in those higher priority areas. Okay. And then as far as the OpEx invoice [ph] we should be thinking about, the $45 million for the December quarter, is that the go-forward rate that we should be expecting in the March quarter and going forward from there? I calculate that you had a $45 million OpEx for the December quarter. So is that the baseline level that we should be looking for going forward? Yes. That's in the zip code of what we should be thinking about somewhere in that neighborhood. Now keep in mind, we do have seasonality. So while it will average out that way, it may be a little – it will be a little higher than that in Q1, then it will dip down as we go into later quarters. But yes, that's a pretty good estimate of what OpEx would look like. Yes. Great. Thanks for taking our questions. Yes, nice to hear the win with GE or expansion from GE Health to Power in just one quarter. I – just curious to hear what GE Power and PROS particularly useful initially? And maybe a bit more detail you could share on just around the expansion process to GE Power just within one quarter? Yes. No, great question. Real focus area is on or price optimization and management solutions and how we're driving price guidance to drive more profitability for their business. And I think there's been a very focused area on how we prove leveraging our next-generation AI to drive better win rates as well as better margin uplift for their business. We've experienced in many of these like industry, IT, many customers that seen a pretty significant both revenue and margin uplift, and we were able to prove in a very short amount of time, significant impact and we were working across our focus in many of these global accounts is to work across the business units to prove out the value. I would say big kudos to our team and to our product organization. I think our platform launch and our ability to get started small, prove out the value helps to drive this time and expand motion. So I think a lot of what we saw last year in our success is really about our platform launch at the end of 2021, and this is just one of the examples of that. Got it. Got it. No, that's great to hear. Maybe just one more question, if I may. Nice to see that APAC is on its way to a more meaningful recovery. But I want to kind of dive into maybe Europe a little bit. It seems like performance there kind of slowed a little bit in the quarter. Any meaningful changes around like sales cycle or close rates in that region during the quarter? Yes. I would say no meaningful change. We actually had – we talked about in travel, Iberia with the migration in the region. We saw good business momentum, I would say, look, in general across, it is a harder selling environment. I've talked about it the last quarter, but in this type of market, where we're trying to be very intentional with is making sure we can land with small investment, rapid time to value and very measurable results. And I think that's the strategy across. But I would say Europe, not a big difference to any other market. Actually, we had across good business in Europe. No big difference from any other market. There are no further questions in the call. I'd like to hand the call back over to Belinda Overdeput for closing remarks. Thank you for listening to today's call. We look forward to speaking with you at conferences and events this quarter. We will be attending the Wolfe Research Software Conference on February 28th in New York City. If you have any questions following today's call, please contact us at ir@pros.com. Thank you and goodbye. 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_221

Good morning. My name is Michele and I will be your conference operator today. I would like to welcome you to the Canopy Growth Third Quarter Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Thank you, operator. Good morning. Thank you all for joining us. On our call today, we have Canopy’s Chief Executive Officer, David Klein; and Chief Financial Officer, Judy Hong. Before financial markets opened today, Canopy issued a news release announcing our financial results for our third quarter ended December 31st, 2022. This news release is available on our website under the Investors tab and will be filed on EDGAR and SEDAR. Before we begin, I would like to remind you that our discussion during this call will include forward-looking statements that are based on management’s current views and assumptions and that this discussion is qualified in its entirety by the cautionary note regarding forward-looking statements included at the end of this morning’s news release. Please review today’s earnings release and Canopy’s reports filed with the SEC and SEDAR for various factors that could cause actual results to differ materially from projections. In addition, reconciliations between any non-GAAP measures to their closest reported GAAP measures are included in our earnings release. Please note that all financial information is provided in Canadian dollars, unless otherwise noted. Following remarks by David and Judy, we will conduct a question-and-answer session, we will first address questions uploaded by verified shareholders using the Say Technologies platform. Following that, we will take questions from analysts and to ensure that we get to as many questions as possible, we ask analysts to limit themselves to one question. Thank you, Tyler. And good morning everyone. During our Q2 earnings call, I clearly outlined Canopy's top priorities in becoming a North American Cannabis leader, which included actions to drive Canadian profitability, and empowering Canopy USA to progress the US THC strategy. On today's call, I'll provide comprehensive updates on both priorities, which are imperative to achieving our ambition of long-term North American cannabis market leadership. Following my remarks, Judy will review our Q3 results, provide an update on our path to profitability, and outline the cost savings anticipated from the business changes announced today, as well as discuss our balance sheet. The transformative plan introduced today addresses the actions needed to drive profitability, but also to secure the future of our business. The intent of establishing a legal cannabis industry in Canada was to combat the illicit market. At the outset, the legal sector was poised to be a source of immediate economic development, with significant job creation and tax revenue. As a global first mover, the legal Canadian cannabis industry was originally projected to grow into a CAD7 billion market over time, however, that market aspiration has not come to fruition. Today, there are two very different cannabis markets in Canada; one that's legal, highly taxed and regulated, and one that's thriving in illicit. The unregulated illicit market is generating billions of dollars of revenue with a 40% market share, and faces virtually no risk of enforcement. The legal sector out of necessity, is forced to be price-competitive with an illicit market that does not pay excise taxes, does not pay provincial board markups, and is not restricted in the products and pricing that they offer. The competition with the illicit market, compounded by an overbuilt legal cannabis industry, has caused price compression across the board. We expect the sector challenges to remain for years to come and as a result, the sustainability of this legal sector is in question. Make no mistake building an industry from the ground up is not linear and the knowledge gained has been significant. We stand ready to work with regulators, politicians, and provincial boards to improve the punitive regulatory environment based on experiences from the front lines. However, despite these market realities, Canada remains a large market in which Canopy is well-positioned with strong brand recognition, a diversified portfolio of products in the adult use segment, and a growing share of the medical market. The backdrop I just outlined formed the catalyst for the actions announced today, which are intended to position our Canadian business to be profitable and self-sustaining. The Canadian Business Transformation Plan includes consolidating our production and operational footprint, shifting to a brand-led asset-light model and completing an organizational restructuring that better aligns our resources with market realities. Specifically, we intend to exit our 1 Hershey Drive Smiths Falls, Ontario facility as we consolidate cultivation at existing facilities in Kincardine, Ontario, and Kelowna, British Columbia and where necessary, enhance our offering with a flexible flower sourcing strategy. Similarly, we will be outsourcing non-flower formats such as beverages, edibles, vapes, and extracts as we implement a nimble asset-light model that allows us to be dynamic and actively respond to market demands. In Quebec, we will cease sourcing of flower from the Mirabel facility. As the Mirabel facility is operated through a joint venture structure, we're engaging with our JV partners on the long-term future of that site. We recognize our core competency is brand development with strong routes to market. The Canadian transformation is intended to closely mirror the plan structure of Canopy USA, which we believe to be a winning model. The changes announced today are in addition to the following cost savings initiatives that were completed in Q3, including the divestiture of national retail operations, closure of our Scarborough, Ontario research facility, and outsourcing of our genetics program to Quebec-based EXKA; the restructuring of our Canadian cannabis business into a standalone business unit and the reduction of our SKU count by approximately 50% as we focus on the highest performing segments within the Canadian adult use cannabis market. The changes announced today will result in approximately 800 employees exiting the business over the coming months, with 40% of that reduction occurring immediately. We expect these further adjustments to reduce annual SG&A and COGS by an additional combined CAD140 million to CAD160 million over the next 12 months. Judy will speak to the financial aspects of our restructuring in greater detail during her prepared remarks. Now, let me spend a few minutes discussing business outside of Canadian cannabis, starting with our international markets. Where Australia is worth highlighting as our sales in this market have increased nearly 200% year-over-year and demonstrated steady growth. Storz & Bickel or S&B continues to demonstrate its capabilities and appeal with core and limited time premium vape offerings like the Peace Volcano. In the third quarter S&B delivered its best quarterly revenue since Q4 FY 2022. This growth was driven by traditionally strong seasonal demand for premium cannabis vaporizers. Overall, S&B continues to be a key profit contributor in the Canopy brand portfolio, and is poised for innovation and growth. Turning to BioSteel, we're very pleased with the strong momentum at retail despite quarter over quarter volatility in reported revenue due to the timing of distributor loadings. According to Nielsen data, BioSteel share of isotonic beverage sales in the Canadian National convenience and gas channel reached 10.4% in the third quarter and 13.8% in Ontario. In the US, the brand has also made impressive distribution gains over the past year with IRI data showing BioSteel's ACV at 34% for the quarter. This was matched by notable sales gains, with scan sales in the US region increasing 157% from the prior year. With expected distribution gains and velocity growth driven by our investment and brand activation, we expect to see revenues increase significantly over coming quarters. Finally, I'd like to speak to Canopy USA, which continues to progress the US THC strategy. With a lack of developments in Washington, I strongly believe that through Canopy USA, we've taken control of our destiny to capitalize on the once in a generation opportunity in the largest cannabis market in the world. Our primary objective for Canopy USA is to optimize the value of our entire US cannabis ecosystem, Acreage, Wana, Jetty and TerrAscend. By leveraging their brands portfolios, routes to market, and operations. We're pleased to see the ecosystem exploring opportunities to collaborate and grow with examples including Wana and TerrAscend bringing Wana Edibles to New Jersey, and the expanded availability of Wana in the State of Maryland. Wana launching in New Mexico and Missouri in addition to releasing a suite of new sleep product offerings. And Jetty Extracts announcing upcoming product availability in the state of New York. After closing, Canopy USA expects to reduce its annual operating expenditures, including eliminating redundancies and the public company reporting cost of Acreage, all of which are expected to be realized shortly after closing these transaction. This is a novel and groundbreaking strategy. We're resolute in remaining dual listed as the Canopy USA strategy progresses and as we continue to finalize our proxy, we anticipate holding our shareholder vote as early as April 2023. Thank you very much, David and good morning, everyone. I'll focus my remarks on one a brief summary of our third quarter results; two, an overview of the financial details of our transformation plan for Canadian cannabis business; and three, discussion of our cash flow and balance sheet. Beginning with a review of our third quarter fiscal 2023 financial results. In Q3, we generated net revenue of CAD101 million, representing a 28% decline over the prior year period. When adjusting for the impact of divestitures of C3 and the Canadian retail business, revenues decreased 23%. Revenue highlights include Canadian medical cannabis increasing 9% versus the prior year period; Storz & Bickel increasing 50% sequentially compared to Q2; and our Australian cannabis business having its seventh quarter in a row of record revenue. Gross margin declined year-over-year, with the decline due to a shift in the business mix from the divestiture of C3, the impact of last year's COVID-19 Relief Program, and a decline in BioSteel's gross margins. Adjusted EBITDA loss increased by CAD21 million to CAD88 million compared to a year ago. Approximately CAD8 million of the adjusted EBITDA loss during Q3 resulted from a few discrete items including costs associated with returns in our US CBD business following our strategic change; the write-down of aging inventory of BioSteel; and a credit to a distributor which is related to the previous sales made to Israel. Free cash flow improved 13% year-over-year due in part to lower capital expenditures. Now, let's take a look at the results from each area of our business. Canada cannabis revenue declined 23% compared to the prior year period, and declined 11% sequentially compared to Q2, with the decrease due to lower adult use B2B revenues, partially offset by a 9% growth in our medical cannabis revenue. The impact of the retail divestiture during Q3 was approximately CAD1 million. Canada cannabis adjusted gross margin was negative 8%, but cash gross margins improve to 29% when normalizing for the impact of depreciation and certain non-cash inventory charges. The year-over-year improvement in cash gross margin is driven by mix improvement and the cost reduction actions announced in April of 2022. And today's announcement is expected to further improve cash gross margins and address the gross profit dollar headwinds that have stemmed from lower revenue. In the rest of the world cannabis segment, revenues excluding C3 experienced the 54% decline year-over-year due to a decline in the US CBD business and the impact of shipments to Israel. The current quarter did not have any shipments to Israel, which negatively impacted by sales by CAD4.7 million compared to the prior year period. This was offset by strong performance in Australia, nearly tripling revenue compared to Q3 of last year. Year-to-date, our international cannabis sales, excluding US CBD business are up 43%, despite the decline in sales to Israel. Adjusted gross margins for this segment with negative 33% in the current period compared to positive 32% a year ago, which reflects the discrete factors that impacted sales that I discussed earlier in the call. We expect gross margins in this business to revert back to the historical level going forward. BioSteel revenues were relatively flat to the prior year period and lower than Q2 mostly due to the impact of timing of distribution loadings. The timing boosted Q2 sales, while Q3 revenues were also impacted by shipment timing shift into Q4. Year-to-date, BioSteel revenues have more than doubled, and we expect to see strong growth resuming in Q4. Adjusted gross margins for BioSteel were negative 37% in the period, which was impacted by inventory write-downs and higher third-party shipping, distribution, and warehousing costs across North America. The inventory write-downs relate to an aging inventory of ready-to-drink product, which is primarily due to the previous inventory build ahead of distribution gains that progress slower than anticipated in the U.S. The acquisition of a manufacturing facility in Verona, Virginia during Q3 is expected to improve BioSteel's gross margins by reducing contract manufacturing costs and the BioSteel team has several initiatives in place to further reduce its cost of goods sold in the coming quarters. We expect BioSteel's gross margins to approach industry standards as sales scale over time. Storz & Bickel revenues decreased 20% as compared to the prior year period, yet increased 50% sequentially compared to Q2. While cautious consumer spending in an uncertain inflationary environment is impacting demand and higher priced items, we did begin to see resumption of sales to key distributors in the US market. Note that this also represents Storz & Bickel best revenue quarters since Q4 of FY 2022. Gross margin for Storz & Bickel remained healthy at 45% in the current period. This first revenue decreased 22% of the current period compared to the prior year due to challenging UK retail dynamics. Gross margins declined slightly to 49% from 51% in the prior period. I'd like to now provide an update on our actions to achieve profitability. Our previously announced cost reduction initiatives are already driving improvement in cash gross margins in the Canadian cannabis segment. However, our adjusted EBITDA losses have not improved meaningfully due to the decline in our Canadian cannabis revenue, as well as investments behind BioSteel. As David mentioned, this morning, we announced a plan to transform our Canadian business to an asset-light brand-driven model, significantly reducing our operational footprint as well as headcount across our organization. As a result of these actions, we expect to reduce our overall costs by an additional CAD140 million to CAD160 million comprised of a CAD90 million to CAD100 million reduction in cost of goods sold, and CAD50 million to CAD60 million reductions in SG&A expenses. The reduction is incremental to the CAD100 million to CAD150 million of cost reduction plan that we announced in April of 2022. The additional cost reductions are expected to come from several areas. One, reduction of our Canadian cannabis operational footprint. Our plan to exit cannabis flower cultivation in our Smiths Falls, Ontario facility and seizing the sourcing of cannabis flower from the Mirabel, Quebec facility is expected to result in a much smaller cultivation footprint. In addition, we plan to close the 1 Hershey Drive facility in Smiths Falls and move manufacturing for smaller footprint, while moving production of all Cannabis 2.0 formats to third-party partners. And we've already closed the Scarborough, Ontario research facility. These operational footprint adjustments are estimated to deliver CAD35 million to CAD40 million in annualized cost savings and reduce their distribution costs as well as other supply chain related costs by an additional CAD100 million -- CAD10 million in annualized cost of goods sold. We anticipate these operational changes will be completed in Q2 of FY 2024. Two, reduction in headcount across our operations. Headcount reductions across cultivation, manufacturing, and other areas of operations are expected to generate CAD45 million to CAD50 million in annualized cost of goods sold savings. Three, reorganization of our sales and marketing organizations. We have streamlined the sales and marketing functions under the creation of a standalone Canadian business unit with focus on key accounts, high margin customers, and our medical sales. This is expected to result in a leaner selling organization and reduction in certain marketing expenses, with an estimated cost reduction of CAD10 million to CAD15 million in annualized sales and marketing costs. And four, reduction in R&D and G&A spending. We've eliminated our central R&D resources, outsource our genetics program, and embedded innovation functions within the Canadian business unit. This is expected to deliver CAD10 million to CAD15 million in annualized cost savings. And right-sizing of our essential support teams from both a headcount and operational spend perspective to the size of the current business and market realities, is expected to generate an additional CAD30 million in annualized G&A expense savings. Overall, we expect to reduce our total costs by CAD240 million to CAD310 million upon completion of the April 2022 cost reduction initiatives, as well as the actions that we've outlined this morning. We expect the combined cost savings program will position Canopy to be profitable in our Canadian operation, even with no improvement in revenue from the current run rate. And as such, we reaffirm our previous expectation of achieving positive adjusted EBITDA in FY 2024 with the exception of investments in BioSteel. Let me now spend a few minutes on our cash flow and balance sheet. Our cash balance declined by CAD354 million during Q3 compared to Q2, which is higher than the recent quarterly cash outflow. So, let me walk through the various drivers. First, we paid off CAD117.5 million of our term loan, which was the first of the two payments as part of our agreement to tender $187.5 million of the outstanding term loan. Second, cash used for acquisitions and investments during Q3 included CAD24 million in acquisition of a manufacturing facility for BioSteel, which should provide an attractive return on investment, and a CAD38 million related to an option premium payment to purchase Acreage's debt. Third, our free cash flow in Q3 with an outflow of CAD146 million. This included cash interest payments of CAD28 million in Q3. Cash outlays also included approximately CAD20 million that are not part of our adjusted EBITDA, which includes acquisition-related costs, primarily related to the reorganization of Canopy USA and divestiture of our retail business, as well as certain cash restructuring costs. Q3 CapEx came in at CAD2 million, significantly lower compared to the prior year period and for the full year 2023, we continue to estimate CapEx to be in the range of CAD10 million to CAD20 million. Our cash and cash equivalents remained strong at CAD789 million and our overall debt position has been reduced to CAD1.2 billion as of Q3 quarter end, down from CAD1.5 billion at the end of Q4 of fiscal 2022. We also have many liquidity options available to us and are laser-focused on improving our cash position and further reducing our debt over the next few months. First, of the remaining senior notes due in July 2023, Constellation has already indicated its intention to purchase for cancellation up to CAD100 million principal amount. Second, we have a very constructive relationship with all our debt holders and we continue to consider ways to reduce debt in a accretive manner, balancing our focus on remaining -- maintaining our financial flexibility and cost of capital. Third, we are in active discussions around monetizing numerous non-core assets that we have, which includes facilities that we've already closed. Fourth, $2 billion base shelf remains fully available to us. And importantly, we expect the cost reduction initiatives to reduce our operating cash outflow by more than half with significant quarter-over-quarter improvement starting in Q1 of our fiscal 2024. Let me now provide some perspective on the balance of fiscal 2023 revenue outlook. First, we expect strong growth from BioSteel in Q4 with increased marketing investments, driving gains and sales velocity as well as new distribution. Our Canadian cannabis business is expected to show stabilization in net revenue as we undergo our Business Transformation Plan. Note that with the disposition of our Canada retail being completed at the end of Q3, the Canadian adult use business to consumer revenues will now be eliminated from our go-forward results, which will negatively impact both year-over-year and quarter-over-quarter comparison. Our Europe and west of the world's business is expected to show year-over-year decline in Q4 as we no longer expect to see sales to Israel going forward. For Storz & Bickel, we're encouraged by improved us distribution in the third quarter. But note that Q3 results benefited from Black Friday and the holiday season, so we expect seasonality to contribute to a modest decline in Q4 versus Q3. In conclusion, achieving profitability is critical for us and with the decisive actions we announced today, we're focused on executing this transformation in Canada and significantly reducing our cash burn over the coming quarters. This concludes my prepared comments. We will now move into the question-and-answer session. To begin with our Q&A session, we'll first address an investor question that was uploaded through the question-and-answer platform developed by Say Technologies. Tyler, can you please state the first question. What do you feel the effects of legalization in the United States will have on the company and the industry as a whole? So, -- thanks, Tyler. Look with the lack of developments in Washington on federal legalization, we've decided not to wait for regulatory reform to happen in order to reap some benefits through our ecosystem in Canopy USA. And you know that just to reiterate what that is that's really putting together our Wana brand, our Jetty brand, Acreage, together so that they can operate in a collaborative fashion, grow their business faster than they might do if they were to continue to operate as separate companies, and realize cost synergies. And so we continue to work on our Canopy USA strategy, which we commented on, both in the earnings release as well as in our prepared remarks. So, yes, I think that we're all hopeful that at some point, we have full federal legalization in the US, but we see that happening -- continuing to happen very slowly. So, we've taken matters into our own hands. Thank you. Good morning. Judy, I just wanted to ask in terms of the EBITDA, could you comment a bit on what the EBITDA loss looks like between the particularly the Canadian cannabis segment and then your consumer segment? I'm just looking at based on your total cost announcements to-date and you're reaffirming EBITDA guidance, that it seems the majority if not possibly all of the currently reported consolidated EBITDA loss is due to the Canadian cannabis segment and that possibly the consumer segment EBITDA, maybe already in the positive. Are able to comment on that? And can you just give a little bit more detail on the cadence of all these cost savings as we progress through the quarters and fiscal 2024? Thank you. Sure Tamy. So, I would say when you look at our total adjusted EBITDA losses, the way I would think about it is sort of break into a few different segments, right? So, number one, to your point, right now, the two main drags in terms of our adjusted EBITDA losses are one, Canada, and second, the investments that we're making in BioSteel. So, with all the actions that we've announced in terms of our Canadian Business Transformation Plan, our expectation is that once we're complete with the plan, that all of our operations across our businesses will be profitable, with the exception of the investments that we're making in BioSteel. So that's the outline of my comment around FY2024. So when you look at the businesses that we have Storz & Bickel is a profitable business, you can see that in the gross margins. And obviously the high price points that that brand Garner's it is a profitable business. The International Cannabis, there's some noise in that business, just given some of the actions that we've taken with US CBD business and the opportunistic sales that we had previously benefited from Israel, but all in all International Cannabis is achieving gross margin profitability, and if you look at, if you get This Works and others, we think we're pretty close to profitability in all those segments. So it's really about making sure that all the cost savings are driving Canada to be self-sustaining and profitable. And for BioSteel, we do think the investments will eventually pay off for Canopy shareholders one way or the other in terms of really the sales growth that we're benefiting from that business. And I think that that does create value for Canopy Growth shareholders. In terms of the cadence of the savings that are expected to flow through, I would say, we obviously did announce the changes this morning and there is a big portion of the savings that will begin to flow through starting in Q1. But as we complete those actions in Q2, we think the bigger chunk of those savings and the progression from a quarter-over-quarter basis we really begin to start to see in Q1 and Q2 of fiscal 2024. Hi, good morning. This is actually Victor Ma on for Vivien Azer. And thank you for taking the question. So broad based inflation headwinds are persisting in North America, while flower downtrading has been evident in Canada, have you seen that accelerate at all, as consumers absorb higher energy prices this winter? I think we've seen across Canada, and I would argue in the US, we've just seen growth in the value segment, which we don't play heavily in. But that's really - that's, I think where we're seeing, I think it's less about overall price compression and more about this growth of the - of the low end of the market. And just in terms of our business in Canada, we are looking at now the impacts from some of that price compression moderating in our business, if you look at our product mix, as we're premiumizing our portfolio, the decline in terms of our average pricing is beginning to moderate. So you see that in terms of the product mix shift. David, you - I think you noted that the shareholder vote on Canopy USA was still planned for April of 2023 or is planned for April of 2023? Please correct me, if I heard that wrong. You know that there's a lot of details in the press release this morning about potential remedies that would make the NASDAQ and I presume the SEC more comfortable with this transaction. I'm still struggling a little bit just to understand the practical considerations here. You talk about, a smaller percentage ownership, among other things. So, just in plain terms, what would need to change to get this deal through? And then, perhaps comment on how this changes the -- I suppose the reporting relationship with Constellation, my read here is, you know, probably under the changes that they'd still be reporting to Canopy and equity income but I'm not sure. So, anyway, so you could tell just trying to maybe, just dumb this down a bit and understand kind of practical considerations of what's actually being contemplated here. Thanks so much. Yeah, Chris. So look it’s a complicated transaction and that’s partly why it’s taken, yeah, we're still we're still targeting in April 2023 shareholder meeting. I don't think it changes, any changes that we might make in the structure of our Canopy USA business won't affect how Constellation ultimately treats their investment in Canopy. And so to simplify, where we are really, again, the value of Canopy USA is in putting these businesses together, letting them generate revenue synergies, because they can effectively open markets maybe faster, generate cost synergies by working together to drive routes to market and route to market activation within individual marketplaces, and then look at other more G&A sorts of synergies across their businesses. So we think putting the businesses together is the value unlock. How we go about doing it is the complicated set of activities that we're working through with SEC, as well as our -- the exchanges that we trade on. And so, simplistically put, we would have to ensure that our economic ownership isn’t more than 90% which was a likely or potential outcome anyway, as we put this business together. We need to make sure that we would only have three members on the Board so we would have one fewer seat on the Board and that seat would come from a Canopy nomination to the Board we don't think that affects the performance of the business whatsoever, and then we'd have to – it says in our earnings release, eliminate certain negative covenants such as adjusting some things that Canopy would have ordinarily or originally hadn't had say over. So what we're really doing is we're just positioning the company to function like every other company would, gather synergies across their portfolio, drive their business in the marketplace. And these kinds of technical things are just required for us to have an appropriate level of distance from specific control of that enterprise as we go forward. Thank you. Good morning. My question is on the profitability goals, and even at the high end of the combined savings plan that doesn't get you particularly close to break even on EBITDA at least compared to the current quarter. So how do you square that with the outlook for F2024 being positive? And presumably you're spending on BioSteel? Isn't that material? So is it that you're including results from your US businesses, even though those won't be consolidated? There's also the comment about revenue not needing revenue growth. So just trying to better understand the profitability you’ve got? Thank you. Sure, I'll start and, David, you can add, as well. So just in terms of the overall profitability goal and how that ties to the cost reduction? Look, again, I do think when you combine the announcement we made in April, and will were announced today, it is a pretty sizable cost reduction that we currently are underway. So there are some remaining cost savings as part of the April program. And then we obviously have additional cost savings that we announced. I would say the investments we're making in BioSteel are not insignificant. And I think that's a decision that we made, particularly in the current fiscal year as we really were standing up the investments behind the NHL sponsorship, really with the anticipation that that will drive strong velocity and strong distribution across both the Canadian market and the US market. And as you see in the retail data, we're very pleased with the performance of BioSteel, you see that at least in the retail data, despite some of the lumpiness that you see on a quarter-over-quarter basis. So we do think that that investments that we're making, will pay off in the coming quarters? So again, I think as I said to Tamy, if you think about the cost actions that we announced in Canada, and the other businesses that are you know, approved already profitable that we think we can get to a profitable business for Total Canopy with the exception of the investments and BioSteel. And I think the adjusted EBITDA losses as it relates to BioSteel really depends on how quickly the sales scale up in the coming quarters. [Technical Difficulty] taking for question for me. So the first, many of your initiatives focus on improving profitability that you announced today, which is really great to hear. However, the weaker top line growth for Canopy and to be honest, more broadly for Canadian cannabis industry remains a fundamental challenge. So, could you just walk us through what you're planning as part of your initiatives that in particular address improving top line given the challenges you've got highlighted at the start of the call? And then my second part of the question is, many investors have expressed concern that Canopy USA is adding to your costs or taking management's attention away from the core business without contributing positive cash flows until federal legalization occurs, which appears increasingly unlikely for the moment. So what would you say to those investors who are concerned about that? Thank you. So, I'll take a shot at these, Judy and then you can fill in the blanks. But in terms of top line as Judy pointed out. We aren't anticipating or we don't require a top line to meet the profitability objectives that Judy outlined, as a result of these changes that we've announced today. What gives us confidence in being able to sustain the current level of performance in Canada is really the continuous improvement we've made over the last several quarters in terms of the offerings that we have in the marketplace, the general consumer acceptance and appreciation of those offerings and the strength of our commercial team on the ground in Canada, which we believe is second to none. And so we think that those have us in a good position to at least retain the current level of revenue that we're generating in the business. And so we've sized our business accordingly, which yields the profit objectives we talked about. As it relates to Canopy USA, look, the purpose of Canopy USA is to create value by putting Jetty, Wana and Acreage together in a way that they can work together in a collaborative fashion to extract value. And that is something that those businesses need to do by working together. And it's really less about resources being assigned from Canopy Growth. And so we don't see it as a major distraction from running the rest of our business, which includes Canada, includes Storz & Bickel, and includes BioSteel as well as of our international businesses. And I would just add, from a revenue standpoint, Nadine, so when you look at our Canadian total cannabis revenue over the last few quarters, it's been stabilizing in the range of CAD35 million to CAD40 million. And that is, there is some declines in the adult-use cannabis side, but we've actually seen medical revenue growth, as we pointed out on the call. So importantly, when you think about our profitability target for Canada, we're not expecting any changes to our current run rate. So we think that we've got an opportunity to continue to grow our medical business, and we've got increased product offerings, and that's driving some of that improvement, we expect that to continue. And really, from an adult-use cannabis business standpoint, we're not expecting an improvement to the current run rate. And I think that is still enough for us to get to profitability in Canada. And then from a Canopy USA standpoint, look, I think once we get Canada to be profitable, we think the cash flow generation or the contribution from Canopy USA is really not something that's required to support the Canopy Growth, cash needs. And so from that perspective, it's really about optimizing the value of Canopy USA through advancing the USP fee strategy. And then for Canada to be profitable and for the rest of the business to continue to be profitable. I want to actually come back to a point as it relates to the top line as well. So we made a decision a year and a half ago or so to not chase the value segment. And it doesn't mean we won't participate in parts of the value segment when we have products that we can waterfall down into that segment. But we deliberately chose not to chase the value segment, which has had a dampening effect on our top line, because of the growth of that segment, which we've not participated in. We did that because we didn't believe that we could build a profitable sustainable business at the value level in the Canadian market. And so we focused on mainstream and premium offerings in the marketplace. However, our footprint was too large to support that segment of the market that we really want to go after and so the actions today are all about getting our footprint right to address the market that we want to address within Canada. And as Judy said, that's been running in that CAD35 million to CAD40 million range quarter. We think that we can stabilize at that and then begin to build from that as a base. Morning. Thank you. So within results there's a big revenue miss mostly on BioSteel and your commentary in November was a modest sequential climb. I'm not sure if you had visibility into that the distribution issues. Today's commentary outlines steps you can take if NASDAQ objects to the consolidation, which I don't know correct me if I'm wrong, you could I could have been hit head on in the release last call back in October. My biggest question is like what's going to change from here? Given the cash needs, I think viability requires successfully navigating the capital markets, which requires properly setting expectations and credibility. And back to the cash needs, I guess in this business with the assets in hand, including Canopy USA and the changes you've made today. achieve positive free cash flow with the full run rate of interest expense on the remaining term debt? Thanks. I'll start from a from a cash needs standpoint, Andrew, and then David can add additional comments. So from a cash needs standpoint, as I outlined on my prepared comments, we think we already have a strong balance sheet with just under CAD800 million that we have on our cash, as well as several options that we have available to us to increase liquidity and reduce debt. You've already seen our actions that we've taken to reduce our debt, including equitizing the portion of the converts last year, we've obviously also paid off some of the term loans, and that is going to drive the interest savings and reduce our cash burn going forward. We've also talked about the remaining convert notes with Constellation interchange the 100 million into exchangeable shares, we also have very constructive relationship with the debt holders, and we're in communications to address our desire to pay off some of the debt in a very accreted manner. So we are looking at all those options. We have availability of $2 billion of cash available to us through the base shelf that we file. So we actually think we've got several options. We've already also are in active discussions with monetizing several assets that we have, and you'll hear more about those as we go forward. But from a liquidity needs standpoint, I think we've got a really a several options that's available to us. But to answer your point, the entire point of what we're doing today, and what we've announced this morning needs to generate a sustainable business that will have positive cash flow over time, we get that. And so all the actions that we're taking to significantly reduce our operating free cash flow in our Canadian business, as well as interest savings that we would get from our debt reduction plan, and all the things that we're doing to monetize the assets, we think we've got a very laser-focused and strong plan in place to get to that place as quickly as possible. And I would just say, look, protecting revenue in nascent industry and nascent businesses is difficult at best, that's which is why we don't provide guidance. I would point out that BioSteel has seen volatility, but BioSteel on a year-to-date basis is up 100% year-over-year. And so we think that that kind of performance over time will continue with that brand. But as we said, we're going to see volatility from quarter-over-quarter, and you could make the same case with other components of our business as well. And so, I think that what we've laid out here today represents a strong path to getting profitable to achieving cash flow favorability at a point in the future, and some very strong businesses that have a lot of economic value potential for our shareholders. This is Matthew Baker on for Pablo. Thank you for taking our questions. Firstly, I just wanted to congratulate the company on ringing the opening bell at NASDAQ on December 12. Can you update us on how those conversations with NASDAQ are going? Yes, you are committed to the dual listing but NASDAQ has made it clear that they'll delist you have to consolidate US assets. So what has changed? And then secondly, when do you expect that regulatory approval for the consolidation of acreage? Thank you. Yeah. So the first of all, let me start with the regulatory approval that that starts as soon as Canopy USA triggers the ownership interest in acreage, which hasn't happened yet. And then, that takes as long as 9 months to 12 months afterward, in order to complete that regulatory approval. As it relates to NASDAQ, you've outlined the issues appropriately. We've already been really clear that we do not control Canopy USA and that's important here. We had an accounting pronouncement that suggested that we would have to consolidate which was in which created an issue for NASDAQ, and we're now working on alternatives which would solve the concerns meaning we wouldn't have to consolidate Canopy USA into our results. And we need to -- we need to continue to do that work. But there's a lot of activity going on around that. And, we expect that, that we'll be able to get through all of the open matters and ultimately proceed to a vote, as we said, our targeted date for that shareholder vote, which means we will have cleared all of these hurdles is in April of 2023. Good morning. Two part question. Number one, David, you did really call out today, what you see as the sector challenges in Canada, and it appears the inability to make any significant changes with respect to those unless the government makes some changes. So my first -- the first part of my question is, are there ongoing discussions that you think will be fruitful? And I'm even saying in the near term, but let's say in the midterm, that's the first part. And then the second one was, can you comment on the medical growth, which was positive this quarter? And if this is a function of taking share from other groups, or this is a function of the medical business overall, growing perhaps a little bit faster than everyone believes? Yeah. So starting with the Canadian regulatory situation looked at the legal industry was built on the back of a call for harm reduction. That's kind of different from maybe building the industry around economic development and generating tax from this industry, which has an underlying rate of consumer participation, right. And so I do are there are there any things that would or there anything's going, anything going on that would affect that the industry in the near term? I don't think so. Which is why we made the changes we made today so that we would have a business that's right size for the industry as it sits today. I do believe however, over time, the Canadian government will continue to try to understand how they need to adapt the regulatory regime. So that cannabis can be the economic development engine that we all started to experience, immediately post legalization in Canada. So I think it'll take a long time, as I said, in my script, which is why we made the changes to adapt our business for the realities of the market that we sit in today versus where the market could go in the future. Hi, good morning, and thank you for the question. So for me, it's wanted to talk a little bit about BioSteel. So you talked about expected growth to come back next quarter, but look for grow quarter-over-quarter wanted some more color their 34% ACV. I believe that matches last quarter. So if you could provide some line of sight into the magnitude of timing, timing of additional distribution and maybe some ACB targets over the next 12 months to 18 months? That'd be helpful. Thank you. Yeah, I think the thing that's exciting about BioSteel is you see it, particularly anybody that lives in Ontario, you can really see the gains that are taking place at retail, and just the general availability of the brand in the marketplace. And so when we work with retailers, but in particular, when we work with distributors between us and retailers, there can be lumpiness in terms of reported revenue. But what I think is interesting is are the stats that I called out on my prepared remarks where we're just under 14% market share and convenience and gas channel in Ontario, where scan sales in the US up by 157%. I think it's that kind of consumer takeaway activity that ultimately drives revenue growth. And in overtime that cuts through the lumpiness that you get in forecasting reported revenue based upon shipments to distributor. So I think -- I think you have to, so instead of putting targets out there, I think you have to just keep looking at the consumer takeaway data because that's going to determine, obviously, where the brand ends up in the medium term. Yeah. Good morning, just a follow-up for me, with respect to the BioSteel commentary you just made, with the margin profile of the overall company on an unadjusted basis dipping back into negative territory, there's a few things called out in the press release. And one of them was some write downs with respect to age, inventory and BioSteel. So I don't expect that's a material element of it. But if you could just maybe give us some idea of the magnitude? And then just the dynamic given that, you know, outside of the timing of shipments, when you look at this business on a six months smooth basis, or just sort of year-over-year, growth is certainly continuing to -- to be a theme for that brand. So just the sort of rationale behind why there's aged inventory requiring right down at this point. Yeah, I'll have Judy handle that. But I first want to actually build a little bit of a bridge where Judy called out in her script that we expect that this brand achieves industry, kind of standard margins for the brand, which would, which would really put that into the high 30s, low 40s kind of percent over time. And that was the driver behind our purchase of the Verona facility, which allows us to control more of the supply chain for BioSteel, I think there are some cost savings to be had as we get scale from distribution costs, which on a per unit basis are quite high in a nascent brand, but shrink very quickly as you start to get scale. We think that we can do some more work. This is a good price point -- high price point really in the category. So there's a lot of margin available to us, we have to make sure we continue to do a good job of managing that kind of gross to net margin erosion that happens when we go into retail. And in there's the team at BioSteel, especially post-closing on the Verona facility are laser focused on showing consistent improvements in that margin on its way to those industry standard margins. And yeah, there's some noise in the near term that Judy can comment too, but we think we have a very well defined path to industry margins that go along with the top line growth we've seen in the brand. Yeah. So just in terms of the gross margin suppliers steel Matt, so in Q3, we think roughly about a 5 million impact as relates to some of the inventory situation and that has impacted the negative gross margins of BioSteel. And to be clear, this is really related to the inventory bill that we had previously built. And, I think in when you go back a year ago, we talked a lot about the lumpiness, again, in terms of the sales and distribution loading is happening slower than we had anticipated, particularly in the US market. So this is really a result of that historical inventory build that we had in the BioSteel. And if you kind of look at Q2 BioSteel margins or year-to-date, gross margins for BioSteel, that's probably more reflective of the margin profile on today's faces. And to David's point, as we bring production and house with the Verona facility acquisition and all the other initiatives to drive gross margin improvement and as sales scale up we expect BioSteel gross margins to mirror sort of that industry standard margins for a beverage company. Ladies and gentlemen, unfortunately, that is all the time we have today for questions. So I will turn the conference back to David Klein, for any closing remarks. Yeah, thanks again for joining us today. The changes we announced today well difficult they're necessary not only for us to reach profitability, but to sustain our business over the long term. We continue to believe Canopy has significant opportunity ahead both in Canada and the United States. And today's actions coupled with our strategy for US entry will ensure we're able to realize this. Investor Relations we'll be available to answer any questions that you have over the rest of the day. And again, thanks for joining us and have a good day everyone. Ladies and gentlemen, this concludes Canopy Growth third quarter fiscal 2023 financial results conference call. A replay of this conference call will be available until May, 8th 2023, and can be accessed following the instructions provided in the company's press release is issued earlier today. Thank you all for attending today's call and enjoy the rest of your day. You may now disconnect your lines.

EarningCall_222

Good afternoon, ladies and gentlemen, and welcome to the Deutsche Borse AG Analyst and Investor Conference Call regarding the Q4 and Full-Year 2022 Results. At this time, all participants have been placed on a listen-only mode. And the floor will be open for your questions following the presentation. Welcome, ladies and gentlemen, and thank you for joining us today to go through our preliminary 2022 results, as well as the outlook for 2023. With me are Theodor Weimer, Chief Executive Officer; and Gregor Pottmeyer, Chief Financial Officer. Theodor and Gregor will take you through the presentation. And afterwards, we will be happy to take your questions. The link to the presentation material for this call has been sent out via e-mail and they can also be downloaded from the Investor Relations section of our website. As usual, this conference call is recorded and will be available for replay afterwards. Thank you, Jan. Also welcome from my side, ladies and gentlemen. Let me start the call today with a review of the exceptional development of the year 2022. We did not only significantly overachieve our original guidance for the year, but reached already the targets we have set ourselves for this year and our Compass 2023 strategic plan. The year turned out to be quite different from what we had initially expected. Our expectation was for continued growth out of own efforts by addressing the secular trends in our industry. So steady steps towards our mid-term goals. At least it was the plan. But reality was different. Initially, it was to market volatility in the context of the terrible war in Ukraine. Throughout the year, we then saw the corresponding implications on European energy markets. And finally, spiking inflation rates have resulted in swift actions by central banks around the globe and significantly increasing interest rates. In this environment, characterized by uncertainty, we are a trusted and reliable party for our clients to manage and hedge their exposures. This has resulted in, by far, the highest level of cyclical growth we have seen in a long time. Cyclical net revenue growth contributed 14 percentage points out of the overall net revenue growth of 24%. But it was also very encouraging to see the continued secular net revenue growth, which amounted to 7%. This is really the result of the many initiatives to win new clients and market share, as well as introducing new products and services over the last couple of years. The development in 2022 also underscores the quality of our business portfolio. The strong results are not just driven by single businesses, but by double-digit net revenue growth in almost all business lines. Since the development in 2022 by far exceeded our initial expectations, we revised our initial guidance of around EUR3.8 billion upwards throughout the year and have now also exceeded the last guidance of more than EUR4.1 billion by a clear margin. The implementation of our Compass 2023 strategic plan has further improved our position and potential for ongoing sustainable growth as you can see on page two of our presentation. Consistent secular net revenue growth with a 6% CAGR, since 2019 has become the key pillar of our growth strategy. And most importantly, we have achieved this in all different kinds of market environments. We have successfully executed and integrated our M&A initiatives since 2019, and we see further opportunities in the pipeline. This has made M&A a reliable addition to our organic growth aspirations. M&A has helped to strengthen our proposition in Data & Analytics and position us as one of the top three global ESG data providers. This has also led to an increase of the share of recurring revenues to around 60%. Tokenization and digitization are very important trends for us. And we started to lay the foundation to expand into new asset classes and service offerings with a number of different initiatives. This will be accelerated by the strategic partnership with Google Cloud that we announced today. In terms of the financial progress of Compass 2023 on page three, it is fair to say that we achieved our financial targets already one year earlier than planned. As you will recall, our target was to grow net revenues and EBITDA at 10% CAGR between 2019 and 2023. But so far, the actual net revenue growth amounted to 14% CAGR and the EBITDA growth to 15% CAGR even. In terms of the different growth components, stronger-than-expected secular growth compensated to slightly lower contribution from M&A, and cyclicality became a significant tailwind we previously did not expect. As a result, we already achieved the EUR4.3 billion net revenue last year, which we had originally targeted for 2023. Thank you, Theodor. On page four, we show the details of the preliminary results for the full-year. The financial performance throughout the year was very positive with the fourth quarter even being the strongest one from a net revenue perspective. The main drivers for the strong performance shifted somewhat during the year. In the first half, the development was driven more by market volatility, whereas in the second half, we saw increasing benefits from higher interest rates. The operating cost development during the full-year, you see on page five, has been stronger compared to our initial expectation. But we think this was due to a combination of factors that was very specific to 2022. Firstly, M&A effects contributed 4% to cost growth. They were still mainly driven by the ISS acquisition in 2021. Secondly, the FX effect from the stronger U.S. dollar resulted in a 3% operating cost increase. But at the same time, this FX effect was also beneficial to the net revenue development, particularly in Data & Analytics. This brings us to the more meaningful constant currency organic operating cost growth of 10%. On the one hand, it was driven by inflationary effects from building operations, general purchasing and higher staff costs. On the other hand, we had to continue to increase the provisions for variable and share-based compensation in light of the favorable financial development and relative share price performance. In addition, we saw higher IT and growth investments, as well as higher travel and marketing costs, compared to the depressed situation in 2021 resulting from the pandemic. This brings me to the details of the fourth quarter results on page six of the presentation. While the secular growth developed broadly in line with our expectations, cyclical tailwinds remained very strong. The cyclical growth was driven, in particular, by further increasing interest rates and the continued high levels of collaterals in our clearing houses. The M&A effects, again, had minor impact in the fourth quarter, since they were only driven by some of the smaller, more recent acquisitions. The explanation I just provided on the operating cost development for the full-year, you can generally also be applied to the fourth quarter. While the M&A impact on the operating cost has become smaller, compared to the previous quarters, the impact from the stronger U.S. dollar continued to be quite meaningful. The constant currency organic operating cost growth again, was mainly driven by inflation. This item also includes the inflation compensation bonus we paid across the group in December, amounting to around EUR20 million. The aim was to bring some of the inflationary pressure forward into 2022. The EBITDA in the fourth quarter included a negative result from financial investments, which is mainly an FX effect on the valuation of Clarity AI, compared to the third quarter and lower valuation of some of the fintech funds. Depreciation and amortization included one-off effect from smaller software impairments. And the financial result included a positive FX effect. I'm now turning to the quarterly results of the segments, starting with Data & Analytics on page seven. We continue to see very good organic net revenue growth in the segment. This was mainly driven by the continuing trend towards ESG, which resulted in higher demand for our products and services. Analytics net revenue was stronger, compared to the preceding quarters. But in Q4 ’21, we had much higher point-in-time revenues from new client contracts. The other line, which is mainly the ISS Market Intelligence business, still included some inorganic growth from the acquisition of Discovery Data. Index includes around EUR20 million relating to a volume-based license fee reimbursement from Eurex. This is a large number because it was applied retrospectively for ‘21 and ‘22. You can see the corresponding volume-related costs in index derivatives net revenue in the Trading & Clearing segment. So it's almost neutral from the group's perspective. Most of our direct U.S. dollar exposure is in the Data & Analytics segment, from the ISS and Axioma subsidiaries. But the constant currency net revenue growth in the fourth quarter was still very strong with around 16%. Let me turn to slide eight, the Trading & Clearing segment. We saw some normalization of market volatility in the fourth quarter. However, hedging needs in asset classes, like fixed income, gas and foreign exchange continue to be high. In financial derivatives at Eurex, the improving equity market condition resulted in some decline of demand for index derivatives. But interest rate derivatives and the OTC clearing continued to perform well. In addition, collateral levels in the clearinghouse continue to be on an elevated level, broadly in line with the third quarter. In commodities, we achieved another record quarter, because of the increased trading and hedging needs of our clients in gas products and due to the higher margin fees. While the power trading activity has somewhat recovered, compared to the second and third quarter, the high margin requirements are still a burn for our clients. In January this year, we have seen collateral levels coming down quite meaningfully. This should generally be good for volumes, in particular, in power derivatives. In the cash equity business, we continue to see headwinds from elevated levels of retail participation in 2021 and lower equity market volatility towards the end of last year, but market share levels have started to recover since December. As a result of higher currency volatility, the demand for our FX products continue to be elevated, and we again, achieved a very strong quarter. In the Fund Services segment on page nine, the continued onboarding of new clients and funds more or less offset the cyclical headwinds from the market performance compared to the very strong equity market at the end of 2021. In addition, we saw the inorganic contribution of the Kneip acquisition, which was closed at the end of March. In the operating expense base of the segment, we saw a few bigger effects in the quarter. They related to the integration of Kneip and the carve-out of the Fund Services business from Clearstream, which will be completed in 2023. Our Securities Services segment on slide 10, saw a significant acceleration of growth in the fourth quarter. Headwinds from equity market performance and lower retail participation were overcompensated by solid levels of fixed income issuance activity, some effects on assets under custody denominated in U.S. dollar and the collateral management business with a growth of more than 30%. In addition, the net interest income has increased almost ten-fold compared to last year. This was driven by much higher U.S. interest rates and increasing European interest rates. Furthermore, the cash balances have continue to increase compared to the preceding quarters. This brings me to our dividend proposal for 2022 on page 11. Our proposal combines an increase of the dividend by 13% to EUR3.60, with a further reduction of the payout ratio. We are planning to reinvest the remaining recurring free cash into the business to support our M&A strategy and thus, further improve our secular and recurring growth components. Thank you, Gregor. Despite an extremely strong year 2022, we expect to achieve further growth in 2023 as well. We expect the secular trends, like the move from OTC to on-exchange trend towards passive investing, or higher demand for it’s cheaper [Indiscernible] outsourcing the funds industry to continue to support our organic growth. Our diversified business model and a track record over the years gives us a lot of confidence that we will continue to deliver on the secular side of the equation. With regard to the potential cyclical development, the net interest income in Security Services is clearly expected to continue to grow quite substantially, but the comparables in Trading & Clearing are generally high, and volume and volatility patterns might be somewhat different this year. Who knows? We continue to expect to complement organic growth with M&A, and the environment has also improved slightly over the last couple of quarters. But at the same time, we are patient when it comes to finding the best solutions with regards to strategic fit and financial terms. We will manage operating costs effectively, depending on the net revenue development and thus, have some flexibility to offset potential cyclical headwinds. We will continue to invest in new technologies to improve our operating efficiency and tap into new revenue opportunities in the longer-term. We have already set new standards with our multi-cloud strategy that we started a couple of years ago. Already around 35% of our IT operations today are running in the public cloud. As we announced this morning, we have entered into a 10-year strategic partnership with Google Cloud. Google Cloud will be our preferred partner to enhance and economize our cloud adoption. We are targeting a public cloud exposure of around 70%, 7-0 percent, over time. In addition, we will be launching joint projects to accelerate the development of new and innovative platforms. Examples are the acceleration of the development of our digital securities platform D7, for post-trading and the joint buildup of a completely new digital-as-a-platform for new asset classes. So we'll cover both the securities part as well as the new asset class part. Information Technology is at the core of our DNA, and to not only meet, but anticipate customer demand is key for us. But to be very clear, our core infrastructure is state-of-the-art and not affected by the partnership. And our cooperations, especially low latency trading and clearing systems will remain on-premise. In terms of effective steering, we will maintain an active portfolio management, a great further strategic optionality. One example is the new organizational setup of securities and Fund Services that will be completed this year. Overall, we are targeting net revenue of between EUR4.5 billion and EUR4.7 billion and EBITDA of between EUR2.6 billion and EUR2.8 billion for 2023. Our guidance is mainly based on continued secular growth. The range reflects different potential cyclical scenarios, including market volatility and interest rates against high comparables. Since we achieved our Compass 2023 goals already last year, we have already kicked off and started working on a new strategic plan. We plan to present our thoughts on the evaluation of our strategy at the Investor Day this year, which is scheduled for June 28. We are looking forward to welcome many of you here in Frankfurt. Hello. Thank you very much for taking my question and congratulations on a strong set of results. Can I ask a question about the 2023 revenue and EBITDA guidance you've given us? It is very clear that you've tried to think about the cyclical scenarios, as well as the secular growth? But could you help us understand the parameters of that guidance. So for example, what assumptions you might have made regarding Clearstream collateral balances for the Fed fund ECB rate pathways and the likelihood of any sharing of net interest income uplift with your users? Thank you very much. Yes. Thanks, Haley. Obviously, for this question, everybody's interested in what are the parameters for our guidance, right? So to say it's quite simple, right? So the midpoint is roughly a 6% increase, so the EUR4.6 billion, compared to 2022. And that's basically exactly the secular growth component we expect, so that is the very easy answer. To go into the next level, there will be most probably pluses and minus from a cyclical aspect. So a big plus, obviously, we will see on our NII specifically or Clearstream, obviously. But there are some questions or the potential minus on the Trading & Clearing as we had highest volatility levels in 2022. So with volatility levels of 25 to 30, and so the current level is roughly 20. So obviously, that's less compared to last year. So most probably that will balance out from our perspective and what we basically include in our guidance. With regard to the customer cash balances, as you explicitly mentioned that for the NII calculation at Clearstream. So the good thing is that the cash balances did not reduce so far. It's still in the EUR18 billion level, and that's obviously good to see. And indeed, in our forecasting, we had assumed that the cash balances would go down a little bit, right? So this did not happen so far. That's obviously good. But doing now this forecasting, we still assume with this increased rates, and rates will continue to increase following the Fed announcement and the ECB announcement, right? There will be pressure from a customer perspective to, on the one hand side, potentially reduce the customer cash balances. On the other hand side, to -- that we share some of the revenues. Therefore, we did roughly a 20% discount in our calculation. Good morning. Thank you for that. If I turn to Eurex, interested in your thoughts on the benefits from the recent repricing initiatives you've done from the 1st of January. I can see some of the pricing on the stock that's being on the future contracts. And in CME, in their recent results, they're talking about a 4% to 5% increase in aggregate. So anything you can say on pricing and what the implications are for Eurex revenues this year? Thank you. Yes. Thanks, Andrew. Obviously, you are perfectly right. And it's public knowledge, obviously, that we increased pricing at our Eurex product, beginning from January 1. So the impact on the Eurex revenue is roughly 3%, right? So that's obviously much more what we usually do. So our guidance overall is roughly some 1% price increase in average for Deutsche Borse group level, right? So -- and now this Eurex increase is quite close to the 1% on group level. But we use, obviously, the timing and the high inflation from 2022. And obviously, it does not disappear in 2023. So it was reasonable for us to do a little bit more, compared to things we did in the past but we do it always with market consultation. And so far, this price increase was accepted by market participants. Thank you very much for the opportunity to ask question. Just talking about the potential for M&A. Theodor, I think you mentioned in a couple, three or four months ago that from an M&A perspective, you were telling your team that you're going to hold off on doing new M&A. You thought prices, I think, were set to fall further. The bid ask spread, probably too narrow. I'm just wondering how you're thinking about M&A at the time right now? How does that bid-ask spread come in? And do you see a lot of opportunities? Are you getting a lot of incomings from potential targets? Thank you. Thank you, Mike, for the question. Substantially, our stance hasn't changed dramatically to the last time we saw and the public multiples were coming down on the private side -- private capital side. We see lots of interest to talk, because people still believe they can sell off their assets at a very high multiple. And of course, people need to understand that the weighted average cost of capital has significantly increase. And therefore, we all play this in the discussions. But to be very clear, we see continued inbound calls. We have certain criteria, which we need to fulfill, right? And we are also very, very careful, right, to look into the potential acquisition targets from a very balanced point of view, strategically and financially balanced. What do I mean by this? It's very clear, our margin perfectly, EBITDA margin, which is fortunately extremely high, and we will continue to keep high margins, right? That is actually a promise on our side. On the other side, we want to grow. If you want to grow, you can grow organically or you can inorganically, leaving aside a cyclical part, right? And therefore, if you want to grow, and organically, if you want to go into deals, what we are potentially ready to do, then you have to take into consideration that whenever you do a deal, it will be per se and [Indiscernible] margin dilutive, right, margin dilutive, which is a big hurdle we have to overcome. So that is more expensive. Equity is anyway is expensive, right? And then you've got the margin dilution. Therefore, we are very careful, right, how to deal with such situations. And as I said this morning during the press conference of the presentation of the full-year numbers, for me, as soon as we are getting into larger deals or potentially larger deals, right, since the effect is so big on the financials, I need to get into -- we need to get into situations where the synergy potential is pretty high, right? That is how we approach the situation. And last but not least, right? We are completely agnostic, right? Don't get us wrong, right? We think we can go for M&A, but we are not desperate, right? And if we compare at the end of the day, right, M&A deals towards other alternatives, right, and there's a full spectrum, M&A on the one hand side, the other hand side is, I would say, share buybacks, right? So we take it completely agnostic. We want to do the best for the investors. That's our determination. And just a quick follow-up, if you don't mind. Your weighted average cost of capital internally, what is it for you guys now? And how does that compare to, let's say, back in 2021? Yes, Mike, obviously, our WACC increased as it increased for the whole industry due to the increase. And it depends, obviously, the WACC we take, when we do for M&A, depends in which business we invest in which region, in which maturity level, right? So it's different overall. On group level, our WACC is roughly 7%. Yes, hi. Good afternoon. One question on ISS, please. I was wondering on the number of covered corporates, what are the plans for '23 and how this could impact the client acquisition going forward? Thank you. I understand. Okay. Now, I got it. Sorry, Benjamin. Yes, we make good progress, right? So the number increased from roughly 7,000 to 7,800, right, as we hired 100 analyst research guys in Manila. And so far, we made good progress, but we are still not there where we want to be, right? So we still need, let's say, another 800 to cover the full spectrum, what is needed, right? And therefore, we are still working on this topic in ‘23 as a high priority for us. The latest, end of 2023, we have all the capabilities at our hands so that we cover our customer needs. And then we have much better opportunities to increase our market share here. With regard to the quality, customers are very satisfied, are happy with our ratings. They are even better, the quality, compared to our competitors. And so, if you have catched-up here on the number of corporate rating, I think we are very well positioned to gain additional market share. Hi, good afternoon. I had a quick question on your Fund Services business. Obviously, you alluded to the sort of step down in profitability that you saw in 4Q. Could you say perhaps how you might expect that profitability to be impacted throughout ‘23 as you go through the remainder of the carve-out of that business? And will it take the whole sort of 12 months, do you think, to be done? And if you wanted to do M&A in this space, would it sort of require completion of that carve-out before you kind of consider doing it? Yes, Tom. Good question with regard to our Fund Services business. And it's obviously that the profitability decreased in 2022, but there are good reason for that. So first, you are aware that we carve out basically the business out of the Clearstream overall organization, due to the fact that clients are different, processes are different, systems are different. So it makes us more focused and more agile. Secondly, we've got now a new banking license, right, for that kind of business to increase our product and offer spectrum. So that is obviously an important thing. Then thirdly, we are in the process to build up a new banking account system here. So having this banking license, also having a proper contract management system here in place. So that's the reason why 2022 and 2023 is elevated from a cost perspective. In addition, we acquired the Funds Data business or the Kneip business, what was not really profitable so far. So we do also here some restructuring and reorganization. And this will take also a little bit time. So overall, I expect 2023 also due to our project work that the cost will be on an increased level. But from a top line perspective, we are quite confident that we will come back to double-digit growth or even mid-teens growth in 2023 due to our strong pipeline, what we acquired and with all the signed contracts. So we really expect coming back in 2023 with double-digit growth here in our Fund Services business. And overall, the targeted EBITDA margin, including all costs will be in the range of 55%. And just on the M&A point there, does the sort of restructuring work over the course of ‘23 prevent you from doing additional M&A? Thank you, Tom, for the question, right? And it's good that you're insisting here. So from a CEO point of view, the following, right? Generally speaking, the carve-out process will not limit our ability, right? We are so far progressed that we could move ahead, right, with partnering. The idea of carving out the ISS business and the Clearstream business was, at the end of the day, to enhance our ability for strategic partnerships, right? And it is, at the end of the day, an optionality for us to do something. An optionality does not necessarily mean that we take -- that we go for the option, to be very clear. This has -- we have many others -- many other dimensions, which we needed to balance. It's a strategic balance. It's a financial capability. It's the other side as always. It's a strategic fit. It's the financial fit. And so for that, I don't want to go too much in detail. But I think at the end of the day, a key driver for this year or in this company is great optionality, don't let yourself -- don't get into a situation that you feel pushed to do an M&A deal. That's always the worst thing, what can happen. And therefore, we take this very calm. And we have -- and that's a good position. We have many optionalities on the table, right, be it strategically, be it financially, right? And at the end of the day, that is what we are doing here, and that is what we can share with you. Hi, thank you for taking my questions. And just would like to ask about the margin fees of Eurex and EEX, which has seen a lot of growth in 2022 due to cash flow levels. Can you help frame where collateral levels are right now versus peak? What could be sustainable levels? And linked to that, is there any feedback you're hearing from participants in the EEX now energy prices have fallen? Do you think volumes can kind of grow from here as people going to come back? Any color would be great. Yes. Thanks, Gregory. So starting with EEX. So obviously, in 2022, we have seen highest volatility, so price increases of 10 times and even more. And as a result, we asked for high margins, right? So before the crisis, we had some EUR5 billion margins in our clearinghouse. And in peak times, we had even above EUR100 billion. So on average, it was roughly EUR50 billion in 2022. And now in January, it comes back to a level of a little bit above EUR20 billion. So that's the EUR20 billion we also assume as our base case assumption for us for the full year 2023. With regard to Eurex here, we have also seen increased volatility and increased margins, but there are different reasons for this increased margins. It's not just pure volatility. It's also due to our secular growth, specifically in our interest rate for business. So therefore, we do not expect that the margins will materially go down. I would assume a little bit go down, but not as significantly as -- at EEX. Thank you. Maybe just a quick follow-up, if that's okay. What's the amount of assets under administration on the fund distribution business? I think it was less about EUR400 billion. What are we today? And also the timing of the large client win, HSBC? Thank you. Hi, good afternoon and thank you for taking my questions, answer the presentation. Just going back to M&A. I mean, obviously, you're in quite a good position. Just to check, I think your net debt to EBITDA now is in the low 1s, around 1.2 or 1.3, if you could just confirm. And if you could remind us, I think when you consider deals and what the credit rating will sort of give flexibility for that would allow you to go to say sort of 2.5 times. I'm just trying to understand what the existing sort of flexibility is to do deals because it seems like there's quite a lot? And then in terms of the, I guess, within your strategic growth priorities and given what's happened to pricing, is there any particular area that's kind of looking more interesting as you sit here today, be it data, Fund Services, post trade or trading? Anything in terms of perhaps the skew of what's coming across in terms of incoming that might be interesting? Thanks. So Bruce, thanks for your question. Starting with the first one. So indeed, our rating relevant KPIs net debt to EBITDA, decreased to 1.2. And I think you are aware that the threshold for AA rating is 1.75. So if you do the math, it's more than EUR1 billion, obviously, flexibility here. But I would like to comment a little bit more general on our financial flexibility. So for an M&A transaction, so the funding, the refinancing is not a limitation for Deutsche Borse. The reason for that is, okay, of course, today, we have some even more flexibility. Then our cash generation is very, very big and very quickly. Obviously, in 2022, we have some cash flow of more than EUR2 billion, right? So that's obviously big number. And here, you can see the financial power we can create out of our increased cash flow over time. Then from an M&A perspective, we are also very open, how does the performance look like. So if we bring in an asset, so we don't have to pay additional money or to increase our debt or equity level. So we are very flexible with regard to that format, and we have already done such deals. And obviously, we have also some equity authorization from our AGM. And in my discussion with investors, they tell us if there's a good asset with good quality and if it's financially attractive and then we are also flexible to support you with additional equity. And therefore, that's in basically our summary that funding is not a limited factor in -- for an M&A deal. Secondly, or the other way around from going from the liability side to the asset side. So where do we want to invest? So our priorities are basically unchanged. So priority number one is our Data & Analytics business, where we have seen big investments over the last three to five years. This Axioma, this ISS and so on just to tell the most prominent one. And so, we are still missing some capabilities here, and we are very open to do deals in that area, again, when it makes financial leasing, when it makes from a strategic perspective and sense. The second area where you have seen M&A transaction from us, and we potentially will continue to see is in the investment Fund Services business where the customer is always the choice to connect to our platform, to outsource or even to sell the business, right? And we are very flexible with all of these three formats. And this customer decides to sell the business for us, and then we show this as an M&A transaction. And so, Fund Services is really continue to be of high interest for Deutsche Borse. Hey, good afternoon and thank you for that call. You've talked a little bit about inflation in respect to Eurex. But I wondered, could you talk us through how you see pricing moving in the rest of your portfolio, including obviously the data businesses and beyond. What -- how much inflation can you pass through apart from the Eurex segment, please? Yes. Thanks, Philip. Obviously, we do that in all of our business segments, right? If you see that high inflation of 8% to 10%, basically now not just for 12-months, most probably even for a longer time horizon then is natural as all the pricing increases around us that we also increase our pricing here. And basically, we did some price increases in all our business segments across the board here. And it's not always a direct price increase, so increasing some fees. It's also some volume rebates where you do some optimization and so on. So overall, it's again, it's more than 1% and price increase in closer to 2%. But looking forward, right, normalization, our general target is not to focus on price increase. Obviously, our focus is to get additional liquidity and to increase our market share. So that's by far our most important intention. And these are just temporary effects what we use as we see high inflation last year and most probably also this year. Good afternoon, everybody. [Indiscernible] First of all, a follow-up question on the NII sharing with customers. We are now at a level which you previously did not ever expect to see and then probably where you would also think that customers would be unhappy about it. How much revenue sharing do we -- or should we put into our models from the next rate hikes? Should we expect that the customer gets all of the rate increases? 50%? What's your gut feeling? And then my question is mainly on the OTC clearing now. Could you -- because this is getting hidden in the fixed income derivatives business. Can you elaborate a bit more on progress on market share and especially the revenue generation in that business? And then what's your view on June 2025 when -- how do you expect the commission to decide. To prolong or to cut the clearing agreement? Yes. Thanks, Johannes. With regard to the NII topic, I think, I covered that already, but we'll repeat it. So there's open -- so you can do some technical calculation, right? So starting with the EUR18 billion customer cash balances, 50% is U.S. dollar, 35% is euro, 15% other currencies. So far, we did not lose any of these customer cash balances that even slightly increased. But nevertheless, as the rate starts to continue to increase, so it's a question whether these customer cash balances go down? And secondly, whether there is additional pressure with regard to revenue sharing? So far, we do not share revenues, right? And so far, the balances did not decrease. So far, so good. But you have to consider this increased pressure. And therefore, we calculated in our base case scenario, some 20% discount to the technical numbers you could calculate. And how it develops and how it contributes with regard to reduced cash balances or revenue share, we do not know. It's just a 20% discount roughly. So that would be our best guess today. So that's the first question. The second question around the euro clearing. So far, we made the progress as expected. So we have EUR31 trillion notional outstanding volume that translates in a market share of roughly 20%. The net revenue, we got from the OTC clearing space was in 2022 more than EUR90 million. So we guided some five years ago, EUR50 million to EUR70 million, and we achieved the EUR60 million, the midpoint in ‘21. But in 2022, increased more than 50%, more than EUR90 million. And we are quite confident that we will continue to significantly grow that kind of business. Yes, there was a delay of the regulation by three years, unfortunately, from June 2022 to June 2025. But on the other hand side, we see clear direction from EU commission and also from ECB, so that they really expect that the euro clearing will be increasingly managed within the Eurozone office in the EU. And therefore, currently in this draft legislation, we talk about an active account, right? That it's not accepted anymore, but they just build the connectivity to the platform so that they really use it. And currently, out of our 600 customers that are onboarded at Eurex clearing, roughly 300 or 50% is inactive. And if you see here now some movements also pushed by some expectations from EU commission and ECB, that would obviously significantly help us. On top, we did this kind of activation program for some incentivation, we decided to introduce that. So there's an additional incentive for market participants to join our platform. So overall, we are quite confident that you will see continued growth already this year but also in ‘24 and ‘25. Hi, thank you for taking my question. With respect to the cloud partnership you announced today, can you just talk about the key revenue opportunities that you see coming from this partnership? You noted that, at a minimum, this could significantly help your data distribution? And then how quickly do you think we -- that you would be in a position to launch new products as a result of the cloud migration? Should we be thinking about that as an opportunity in year one or year two of that cloud partnership? Or even further out than that? I'll take this one, Kyle. Firstly, we have entered into this partnership with a clear path to develop the digital asset platform, right? And therefore, the new asset losses need to emerge. And as a CEO and as ExCo, we have the obligation, right, to stay ahead of the curve because we are the leading European capital market infrastructure provider, right? And I think it's our obligation to be ahead of the curve. Something is cooking out there. You see in the United States, lots of new asset classes are coming. You see, especially on the real estate side, trading and so forth, right? So it's pretty clear this is more than just noise at the far horizon. When this will emerge and how it will emerge, nobody knows. The old rule is you overestimated the effect for the first 12-months, right? You underestimate the effect for the first five years, right? That's where we stand. So we go into this partnership with Google Cloud, we will develop this IT digitized based as a platform, right? And then, right, it is -- yes, if you have the opportunity, if there is the supply there, if the product -- if the IT capability is there, then this will create demand, right? That it will create demand, right? So we are working on the product offering, and this will ultimately translate in business, right? We have not yet factored in anything for the year 2023. You will hear a little bit more about this and our plans during the Capital Market Day and the strategy, but we affected in nothing, simply nothing, right? Of course, right, taking at the end of the day, we get software development capacities, we get all the access to the Google Cloud people, right? So we are here. We will set up a new asset platform, both for the new asset classes, and we'll accelerate our already existing D7 platform, right? And what we are currently making out of D7 is a negligible number in the overall context of what we are doing. This is an investment. And we didn't go out to the investors to ask for a 3 digit million of investment, right? We went out and asked, right, how -- what can we do? How can we partner with somebody? That's how you have to perceive this situation. Hi, thank you. Just a follow-up on M&A. I just wanted to know if you would consider, if an opportunity arises, also more transformational deals rather than just maybe bolt-on deals? I'm thinking, especially in the Fund Services business or general in the non, let's say, traditional exchange part of the business. Thank you. Thank you, Enrico, for this question, right? And my apologies for not laying out our full M&A strategy here. I think that is not appropriate. But one thing is for sure, right? We do not start, we do not exclude any kind of deals per se, right? Given the situation we are in, right, given the financial constraints we are having in terms of dilution of EPS, right? There's only very few transformation leads out there, which are striking to us, right? And if you simply look into what we've done, this string of pearls, how we are doing our strategy piece by piece, right? We can do larger deals, but it also depends on what is the definition of a transformational deal, right? One thing is for sure, I'm not out there and talking about, can I do a type of a merger of equals, whatever, yes, you have in your mind stuff. That is not what we are doing. Hi, thanks for taking the presentation. Just a few short follow-ups for me, please, if that's okay? First up, can you just share any CapEx expectations for us for 2023, please? And secondly, maybe just if I could ask a bit more detail around the thinking in relation to the Google agreement. It sounds, like you're not considering, at this stage, migrating your sort of core trading technology to the cloud. And I think some of your global peers are sort of going down that route. Could you just explain your thinking around that? Is that something that you might consider in the future? Or is it completely off the table, please? And just finally, on Axioma. Can you just explain, kind of, the outlook for that business place? I think growth has been a bit weaker in that side of the Data & Analytics business this year. Is there kind of some change you can make on the sales side or a more attractive pipeline for 2023, please? Thank you. Yes. So I'll start with the CapEx question, 2023. So it's roughly EUR300 million. With regard to the Axioma outlook, we think in 2023, we have a reasonable chance to come back to higher growth rates. Whether it's double digit, we will see, but the pipeline so far looks quite promising. On the Google agreement, Ian, the following. Firstly, we have coinvented with some others if I may say so, the electronification of the trading systems, right? And we have been a protagonist there. Later on, we have been a protagonist with the futurization, which is the derivative part and where we are now having a top three position at least, right, at least. And now we see, right, the next S-curve, right, if I may use this term, the next S-curve is the new asset class digitization, right? And therefore, it's very clear that is what we are going for. We will not touch the low latency situation on trading guide, why should we? We are good. We are -- quite frankly, we are top, whatever we are. At least we are ahead of the bunch, right, should I include this into this context. Others have different strategies. Others have different starting positions. Others have different business models, right? I do not care too much about others. I care about what is best fit for us, right, on this side. And we are completely convinced that this innovation part of it together with the data strategy that is the best fit for us. Yes, good afternoon. Thanks for taking my question. Finally, coming to cost. I was wondering, if I take your cost base this year, and you said you were quite successful actually preempting some of the costs in ‘23 already in ‘22 also inflation-linked, you potentially have -- will not have such a high compensation effect maybe in 2023. I was wondering if we go with the secular growth and apply kind of 6% cost growth, if you agree to come out in, let's say, 1.85 space? And then in the second step, I was wondering how much of OpEx? You mentioned additional spending in the fund service space, like this year -- well ‘22. How much this would potentially add? And potentially also some further investments in the technology you mentioned. So is this something which is potentially significantly above spending we have seen in earlier years? Or would you think this is more or less in line? Thank you. Yes, Tobias. As you can derive from our guidance, right? So our guidance on the cost base is roughly EUR1.9 billion, right? So just subtracting net revenues and EBITDA, okay? There are some financial results in between but, let's say, the EUR1.9 billion, and that's a 4% cost increase, or 4% to 5%. And so, our message is that in 2023, we will come back to the guidance we always gave. So for roughly 5% plus secular growth, we need roughly some up to 5% cost increase, and that's exactly what is included in our guidance. And so far, we are quite confident that we are able to achieve this target. And the 17% cost increase you have seen for 2022, there were really some specific effects related to year 2022. I don't want to repeat all of the reasons. And the majority or a bulk of that will disappear in 2023. So that gives us also the chance, and I gave already the number of CapEx, roughly EUR300 million that we can do reasonable investments to continue to grow with our business. Yes. Thanks, Gregor. However, if I calculate basically on, let's say, a bit of a clean cost base that you see get to 8%. And I was just wondering if you this time, like potentially are a bit more vigilant on the cost side. But I understand you that a kind of EUR1.9 billion figure is something you have in focus, and it will be kind of -- sure on that. Thank you. Yes, thank you for taking my question. I just have one last one. Could you elaborate a little bit on your cash equities business and the market share development here, what you see will change? Thank you. Yes. Obviously, we were not really happy about the development in 2022 as we lost some market share here. I think, I shared that it's below the 60%. And obviously, we have already reacted with the liquidity program. There's not big expenses, and market share already increased back to more than 60%. I think we are able to manage that situation and we will see better market share development in 2023. All right. Thanks a lot for your participation today. There are no further questions, and we would like to close the call today. Thank you.

EarningCall_223

Good day and welcome to this Tapestry Conference Call. Later, you will have the opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Global Head of Investor Relations, Christina Colone. Good morning. Thank you for joining us. With me today to discuss our second quarter results as well as our strategies and outlook are Joanne Crevoiserat, Tapestry’s Chief Executive Officer; and Scott Rowe, Tapestry’s Chief Financial Officer and Chief Operating Officer. Before we begin, we must point out that this conference call will involve certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. This includes projections for our business in the current or future quarters or fiscal years. Forward-looking statements are not guarantees and our actual results may differ materially from those expressed or implied in the forward-looking statements. Please refer to our annual report on Form 10-K, the press release we issued this morning and our other filings with the Securities and Exchange Commission for a complete list of risks and other important factors that could impact our future results and performance. Non-GAAP financial measures are included in our comments today and in our presentation slides. For a full reconciliation to corresponding GAAP financial information, please visit our website, www.tapestry.com/investors and then view the earnings release and the presentation posted today. Now, let me outline the speakers and topics for this conference call. Joanne will begin with highlights for Tapestry and our brands; Scott will continue with our financial results, capital allocation priorities and our outlook going forward. Following that, we will hold a question-and-answer session where we will be joined by Todd Kahn, CEO and Brand President of Coach. After Q&A, Joanne will conclude with brief closing remarks. Good morning. Thank you, Christina and welcome everyone. As noted in our press release, we delivered record second quarter earnings despite the challenging backdrop. During the key holiday season, where brand magic, compelling product and operational excellence are required to win with consumers, we outperformed expectations. This is a direct reflection of our talented teams and the benefits of our globally diversified business model, which continue to fuel innovation and customer engagement across our portfolio. Importantly, we remained disciplined stewards of our brands, which is underscored by gross margin expansion, as well as the ongoing investments we are making to support our long-term growth agenda. Now touching on the strategic and financial highlights of the quarter. First, we powered global growth, delivering low single-digit constant currency revenue gains excluding greater China, which experienced incremental pressure associated with COVID. These results were led by double-digit sales increases in Europe, Japan and other Asia, which together outpaced our expectations. In North America, as expected, we realized the slight decline in revenue, amid a difficult consumer backdrop. We did this while driving higher gross margin, operating margin and profit dollars compared to both prior year and pre-pandemic levels, underscoring our commitment to brand building and operating discipline. In Greater China, sales declined 20% on a constant currency basis. This was below our expectations as we like many others experienced greater than anticipated COVID-related disruption. That said, following the change in the COVID containment policy in China, we experienced a meaningful improvement in traffic trends, driving a positive Lunar New Year performance and a solid start to the third quarter. Second, we continued to build lasting customer relationships. During the quarter, we acquired nearly 2.6 million new customers in North America alone. Importantly, these customers transacted at higher AUR than the balance of our customer base. At the same time, nearly half of these customers were millennial and Gen Z consistent with our strategy to attract younger consumers. We also drove higher average spend across our customer base, which included an increase in units per transaction, reflecting the rising traction of our lifestyle offering and focus on solidifying our brands as gifting destinations during the holiday season. Third, we delivered seamless omni-channel experiences harnessing the power of our direct-to-consumer business model and highlighting our ability to meet consumers where they are shopping. Excluding Greater China, we drove a low single-digit increase in direct-to-consumer sales at constant currency. This was fueled by a mid single-digit growth in brick-and-mortar sales as consumers embraced a return to in-person experiences. We lean into this shift welcoming more customers to our stores around the globe, where we leveraged our expertise and world class field teams to deliver exceptional customer experiences. Given this dynamic, our digital business declined low single digits as anticipated. With that said, digital sales were 3x ahead of fiscal '19 levels, and represented one-third of total revenue, underscoring the continued importance of this channel. Next, we've continued to invest in our platform capabilities. In fact, this marks the first holiday season that all our brands were on our digital enterprise platform, which was designed to enhance engagement and simplify the customer journey. In addition, we leverage new data analytics capabilities to optimize our product allocation processes, such as utilizing artificial intelligence to forecast customer demand, and better position inventory and stores. This led to an increase of inventory availability and help to ensure our product was in the right place at the right time, as we match supply with demand to help deliver superior customer experiences. Before moving on, I want to recognize the incredible work of our teams across the organization. Their ingenuity and partnership drove our results and importantly fueled omni-channel engagement across our brands. Fourth, on a constant currency basis, we drove handbag AUR gains globally and in North America. This reflects a blend of magic and logic, our commitment to driving fashion, innovation and product excellence informed by analytics and consumer research. Together this supported our ability to drive gross margin expansion in the quarter, allowing us to capitalize on lower freight costs and drive the savings to the bottom line. Overall, we generated second quarter earnings well above expectations supported by stronger-than-anticipated margins. On a currency neutral basis, EPS rose 10%, which we accomplished despite headwinds in China, and continued investment in our platform capabilities and our brands. Building on this performance, we are raising our earnings outlook for the fiscal year, demonstrating the power of brand building and customer centricity augmented by an agile operating model and financial discipline. In addition to our financial progress, I'm proud of the work we've done to continue to advance our corporate responsibility strategy, which we're calling the fabric of change. Last month, we published our 10th annual corporate responsibility report, highlighting our progress and launching new and bolder ambitions to support an increasingly equitable and sustainable future for our business and our planet. Now turning to the highlights across each of our brands, starting with Coach. In the second quarter, our revenue outperformed expectations while driving an increase in operating margin to over 31%, despite facing incremental headwinds from Greater China. We advanced our strategic initiatives which fueled our results. First, we remain focused on our core leather goods as we continue to build equity in our most important families, while simultaneously introducing emotional newness into the offering. Our iconic platforms Willow, Tabby and Rogue drove our handbag performance in the quarter. Willow remain the number one handbag family with a timeless aesthetic and compelling functional silhouettes. Rogue was again a top seller with notable strength in North America at premium AUR. The Tabby collection continued to resonate with consumers led by outperformance in the core shoulder bag. We continue to animate this family introducing new colorways and fabrics including Shearling to add depth and excitement. And following its strong launch in the first quarter, Bandit, outperformed expectations and was the key recruitment vehicle with approximately 40% of shoulder bag sales coming from new customers at strong AURs. Based on the consumer demand we've seen, we are further investing behind this collection which is emerging as an iconic family. At the same time, we fueled innovation through trend right launches with a focus on appealing to younger consumers. We relaunched the Demi bag, an icon from our archives, and a blend of organic cotton and recycled polyester. We also continue to lean into the micro and mini handbag trend including our studio baguette and mini Tabby, which resonated with Gen Z consumers. These examples showcase the innovation we're delivering to translate fashion trends into our brand language. Overall, our product assortment fueled a mid-single-digit constant currency gain in handbag AUR, both globally and in North America. Importantly, our brand strength and pricing discipline helped to drive gross margin expansion in the quarter. Second, we focused our marketing investments on brand building activities to create emotional connections with consumers harnessing the brand's unique purpose. Our first Courage to be Real campaign featuring Global Ambassador, Lil Nas X, cut through with consumers with its message of confidence and authenticity. Following the launch last September, the campaign video has approximately 350 million views, and we’ve seen improvements in purchase consideration for Gen Z consumers per YouGov. In addition, we continue to test and learn new ways to engage consumers on digital channels in keeping with our multifaceted marketing strategy designed to increase customer lifetime value. For example, we utilized an array of YouTube shorts to deliver high-impact brand and product stories. As a result of these efforts and our innovative product offering, we acquired nearly 1.5 million new Coach customers in North America alone. Importantly, these customers entered the brand at a higher AUR than the balance. Third, we drove double-digit top line gains in our lifestyle offering at constant currency, an area of long-term opportunity for the brand. In footwear, outsized growth was led by trend-right styles, including the Leah Loafer and the Men's Low Line sneaker as well as boots and booties across genders. In men's, revenue growth was fueled by our core leather goods families, notably the Gotham, League, Charter and Hitch. And in ready-to-wear, we continue to see success in both men's and women's styles featuring iconic branding across outerwear, including puffers with Signature C as well as our cut and so gifting items adorned with Rexy, our brand's favorite mascot. Fourth, we focused on creating omni-channel experiences that resonate with consumers by communicating our brand's purpose of self-expression. We launched an array of in-person experiences, including a one-of-a-kind Coach Mart in Japan inspired by the region's iconic local convenience stores. At the end of December, our collaboration was a beloved White Rabbit candy brand debut in China in anticipation of the Lunar New Year holiday, celebrating the year of the rabbit. We amplified this multi-category collaboration through exciting activations and including an experiential event at the Bund in Shanghai. We are also connecting with new customer segments through immersive online environments and high-impact content to allow Coach's physical world to have greater reach. This included partnerships with digital artists, 3D installations and high-profile physical retail locations and hyper-local mobile games. In closing, we delivered a solid holiday quarter, highlighted by margin expansion despite the challenging backdrop. Our success is rooted in our strategy of bringing expressive luxury to life through a clear understanding of our target consumer and an unwavering commitment to our brand purpose. Coach is truly unique. It's a brand that enables confidence, self-expression and authenticity with products crafted to last. Building on the strong foundation, we are confident in our ability to write the next great chapter of profitable growth for this iconic brand. Now moving to Kate Spade. We delivered second quarter revenue ahead of our expectations. These results were driven by outperformance during peak selling periods, including a record Thanksgiving week and CyberMonday event in North America. Importantly, we continue to invest in and advance the brand strategic priorities, becoming more emotional, more lifestyle and more global to drive lasting customer relationships and deliver balanced and sustainable growth. Touching on the details of the quarter. First, we created emotional connections with consumers through a focus on delivering an innovative and distinct offering. To this point, we reinforce the pillars of our handbag collection, highlighted by the Knott and Katy families, which continue to fuel our performance. And in December, we introduced the Gramercy, which has delivered strong performance and has over-indexed with new customers, underscoring the opportunity to expand the silhouette going forward. In addition, we launched new branding through a chenille monogramming platform on our Manhattan [indiscernible]. Given the success of this style, we're expanding our logo offering with further iterations of the Spade flower across the assortment, which we believe represents an important platform for future growth and innovation. We also amplified our novelty offering, a differentiating element of our assortment and an important vehicle for brand storytelling. Our Zebra collection was particularly successful, while the candy-themed offering was a hit with consumers. At the same time, the [indiscernible] slingback pump, which featured a champagne corkill [ph] was a top-performing style within footwear. Overall, our product initiatives, coupled with our use of data to deepen our understanding of consumer preferences, supported mid-single-digit handbag AUR growth at constant currency both globally and in North America despite more normalized promotional levels. This season, the North America consumer was more value-driven, over-indexing during holiday sale periods, which resulted in promotions that were above the prior year, though below 2 years ago. Importantly, we delivered overall gross margin improvement as we continue to manage the business for the long-term, balancing brand health and inventory management. Second, we remain focused on our strategy of becoming more lifestyle, delivering mid-teens revenue growth in the assortment. Importantly, we continue to see the customers who enter the brand through these categories are our highest value customers demonstrating the importance of lifestyle as a long-term driver of sustainable growth. In ready-to-wear, our collection of festive sweaters and skirts for the holiday season as well as trend-right outerwear pieces helped fuel mid-single-digit sales growth. And in footwear, our evergreen styles, notably boots and booties, led our performance, while jewelry delivered growth with strength across core and fashion pieces. Third, touching on marketing. We expressed the unique world of Kate Spade leaning into the power of brand storytelling and community. Our Have A Ball campaign reinforced Kate Spade's Joy Colors life purpose in a celebratory spirit, highlighting the brand as a gifting destination for the holiday. We synchronized activations to amplify our message across touch points, including global pop-up center around our candy collection, which were successful in attracting new customers. From a digital perspective, we continue to diversify across social platforms, notably TikTok and YouTube where we focused on engaging with a younger consumer. Taken together, our impactful marketing helped to fuel the recruitment of approximately 1 million new customers in North America with these customers continuing to enter the brand at a higher AUR than the balance. Additionally, we saw an overall increase in spend per customer. Importantly, we are engaging with consumers through our social impact effort, which connects our customers to our brand beyond product. Our purpose focuses on women's empowerment and mental health. As such, we have broadened our brand work to reach younger and more diverse audiences, notably through our social impact council. Finally, in keeping with our priority of becoming more global, we remain focused on meeting our target consumer where they shop around the world. To this end, we continue to roll out our new store concept, which began with our Marina Bay Sands Store in Singapore in October. Since then, we have expanded the concept further to Taipei and Chicago where we have seen strong initial reads. In closing, we continue to make important progress in advancing Kate Spade's strategic growth agenda. It is a global lifestyle brand synonymous with optimism and joy, a differentiated positioning with global relevance. As we enter the brand's 30th anniversary year, we have an appreciation for its past and confidence in the future. With an unwavering eye on our consumers and our unique DNA, we will continue to drive innovation while investing in capabilities to support sustainable, profitable growth. Turning to Stuart Weitzman. Revenue declined in the quarter, impacted by the brand's significant exposure to China as well as a decrease in wholesale, reflecting in part a reduction in off-price shipments as we remain focused on tight inventory management and brand elevation. Importantly, in our North America direct business, sales rose mid-single digits. Turning to the details. We made further progress on our strategy to win with heat and improve brand awareness. First, we curated an assortment of high motion product across occasion wear and casual styles. We continue to lead with our iconic styles as we build out the offering to engage with a wider set of consumers. Soho remained atop collection with notable success among younger customers given the family's on-trend lug sole. The Stuart, a new staple in our offering, resonated across age groups, while the iconic land styles acted as a strong recruitment tool. Additionally, we were pleased with the consumer response to our handbag launch. While a small assortment, the top handle style sold at an AUR of over $700 with engagement from both new and existing clients. Second, we focused on brand building in the wholesale channel, notably in international markets. We created high-impact activations across key accounts globally from London to Dubai. And after a successful pop-up at La Rinascente [ph] in Milan, we are now moving into a permanent space on the designer floor there in mid-February. Third, we fueled bread heat by delivering impactful marketing campaigns, amplifying our brand purpose to celebrate women who stand strong. The debut of Kim Kardashian as our global ambassador helped to drive an improvement in customer trends driving growth in new customers, including outsized gains with millennials. Looking to the balance of the year, we are innovating on our approach to connect with consumers and increase awareness. In February, we're set to launch our Kids Super collaboration, followed by a styling series utilizing influencer marketing to highlight our spring collection. Overall, we are progressing against our strategies to build brand awareness and offer products that spark desire. We are continuing to navigate the significant profit headwinds the brand is facing from pressures in the highly penetrated Greater China region, though remain focused on delivering a profitable fiscal year. In closing, our foundation is strong and our runway is significant. We are staying agile and disciplined in a volatile environment to successfully navigate current headwinds and at the same time, drive forward our long-term growth agenda. Importantly, we are well-positioned in attractive, durable categories, amplified by our digitally enabled direct-to-consumer platform, which powers our iconic brands to move at the speed of the consumer. We are confident that our competitive advantages and strategy will continue to drive sustainable growth and value for all our stakeholders. With that, I will turn it over to Scott, who will discuss our financial results, capital priorities and fiscal '23 outlook. Scott? Thanks, Joanne, and good morning, everyone. As Joanne mentioned, we delivered solid results in the face of a volatile backdrop as we focused on the factors within our control. We achieved revenue of over $2 billion, while realizing the operating margin ahead of expectations and grew earnings per share 10% against last year, excluding $0.11 of currency pressure. At the same time, we returned $272 million to shareholders, demonstrating our commitment to enhancing long-term value. Turning to the details of the quarter, I'll start with revenue, which will be shared on a constant currency basis, unless otherwise noted. Sales declined 2%, which included pressure in Greater China as a result of the COVID-19 pandemic. Excluding Greater China, revenue increased 1%, led by outperformance in the balance of our international regions. In Japan, revenue increased 10%, while Other Asia grew 29%, driven by strength across Singapore, Malaysia, Australia, New Zealand and Korea. These trends were again led by traction with local customers. At the same time, sales to tourists improved versus the prior year that remained well below pre-pandemic levels, highlighting future opportunity. In Europe, sales were 20% above last year, fueled by higher international tourist traffic, notably from the Middle East and within Europe as well as continued growth with local customers. For Greater China, sales declined 20%, which was below our forecast due to incremental pressure associated with COVID impacting both stores and online. As Joanne mentioned, following the lifting of certain government restrictions in December, we've seen a meaningful improvement in traffic Q3 to date, notably during the Lunar New Year holiday. Therefore, as we approach guidance, we maintained the expectation for a strong sequential improvement in the second half of the year, albeit from a lower second quarter base. Overall, we still expect strong double-digit growth in the second half to fuel an increase for the fiscal year at constant currency. Turning to North America. Sales declined by 2% for both the total region and our direct business, in line with our guidance for a low single-digit decline. Importantly, we delivered North America operating income ahead of forecast and realized handbag AUR growth at both Coach and Kate Spade, underscoring our focus on brand health. By channel, our direct business declined 2%. That said, excluding Greater China, direct revenue grew low single digits, which included a mid-single-digit increase in stores fueled by continued traffic improvements and a low-single-digit decline in digital. And in wholesale revenue was 3% below the prior year. Moving down the P&L, we delivered gross margin ahead of our projection and 50 basis points ahead of prior year. This year-over-year expansion included approximately 130 basis points of favorable freight offset by 100basis points of FX headwinds and the negative impact from lower penetration of high-margin China business. Therefore, excluding these impacts, gross margin was still ahead of prior year, driven by operational outperformance. SG&A declined 1% and was slightly favorable to our prior outlook. In the quarter, we continued to prioritize high return initiatives, including platform investments and brand building activities underscored by mid-single-digit growth in our marketing spend. So taken together, operating margin and operating income were ahead of forecast. EPS grew 2% compared to the prior year or 10% on a currency-neutral basis and was favorable to forecast due to operational outperformance as well as a $0.03 tailwind from a more moderate year-over-year FX impact. Now turning to the balance sheet and cash flows. We ended the quarter with $846 million in cash and investments and total borrowings of $1.67 billion. There were no borrowings outstanding under our $1.25 billion revolver. Free cash flow for the quarter was an inflow of $552 million, including CapEx and implementation costs related to cloud computing of $102 million. As anticipated, inventory at quarter end was 30% above prior year. We are pleased with our sequential progression in the quarter and the quantity and quality of our current inventory. We continue to expect to end fiscal year '23 with inventory up single digits compared to the prior year. Moving now to our capital allocation priorities. We continue to plan for approximately $1 billion in shareholder returns in fiscal 2023, which includes share repurchases of $700 million including $300 million bought back in the first half, including $200 million in the second quarter as planned and dividend payments totaling approximately $300 million. This is based on an annual dividend rate of $1.20 per share, which represents a 20% increase over the prior year. Our priorities remain unchanged. First, we are investing in the business to drive long-term profitable growth; and second, we are returning capital to shareholders through dividends and share repurchases. In the future, we believe our platform is scalable and would evaluate M&A that is accretive to our organic TSR plan. Now moving to our guidance for fiscal 2023. We've raised our earnings expectation, incorporating three key changes versus the prior outlook. First, our outlook now reflects the second quarter's operational outperformance of approximately $0.08. Second, we are including a more moderate headwind from currency, which provides a $0.10 benefit versus our previous guidance. And third, as previously noted, we've incorporated the expectation of more modest growth in Greater China for the fiscal year based on the incremental pressure we experienced in the second quarter. We've rebased our second half outlook given the lower Q2 results, which equates to roughly $0.10 of negative impact versus our prior guidance. Overall, our ability to increase our earnings outlook despite a volatile external environment, highlights the resilience and agility of Tapestry's operating model. So let's run through the details of our outlook, which replaces all previous guidance. For the fiscal year, we expect constant currency revenue growth of 2% to 3%. On a reported basis, we anticipate sales to be approximately $6.6 billion, which represents a slight decline compared to the prior year, including roughly 300 basis points of FX headwinds. Touching on sales details by region at constant currency. In North America, our guidance continues to contemplate a low single-digit decline in the second half of the year, consistent with year-to-date trends. In Greater China, as previously mentioned, we expect a slight increase in the fiscal year. In Japan, we now expect mid-teens growth, while Other Asia is forecasted to grow approximately 35% reflecting strength in the second quarter and the continuation of these trends into the second half. In Europe, we continue to anticipate low double-digit gains. In addition, our outlook includes a year-over-year operating margin decline of over 70 basis points, which contemplates FX pressure of approximately 115 basis points. We expect the majority of this FX headwind to flow through the gross margin line. We anticipate gross margin slightly ahead of the prior year, largely reflecting favorable freight costs relative to prior expectations. Compared to fiscal '22, gross margin incorporates the benefit of moderating freight costs of 130 basis points as well as AUR growth, which is being partially offset by the previously anticipated rising input costs for materials as well as the negative impact of FX, as mentioned. On SG&A, we continue to anticipate deleverage for the year, reflecting growth-driving initiatives, including increased marketing expenses to fuel long-term customer value, investments in digital and the planned 2023opening of our new fulfillment center in Las Vegas partially offset by proactive actions we've taken to reduce our expense base. Moving to below the line items, which are consistent with our prior guidance, net interest expense for the year is anticipated to be approximately $30 million to $35 million a significant decline versus fiscal '22, reflecting the benefit of our cross-currency swap agreements. Tax rate is expected to be approximately 20%. This represents an increase against last year, primarily due to the anticipated geographic mix of earnings. Weighted average diluted share count is expected to be in the area of 242 million shares. This reflects approximately $700 million in share repurchases expected in the fiscal year as noted. Taken together, we project EPS of $3.70 to $3.75 representing high single-digit growth compared to the prior year, which includes a year-over-year currency headwind of approximately $0.40. Finally, we now expect CapEx and cloud computing costs to be in the area of $300 million. This decrease from the prior outlook is due to the timing of store openings and renovations in Asia, mainly in China, some of which have been deferred to fiscal year '24. Given the shift, we now expect approximately one-third of this spend to be related to openings and renovations with the balance dedicated to our ongoing digital and IT initiatives, including investment related to our new fulfillment center in Las Vegas. As previously outlined, given the volatile environment and last year's atypical comparisons, we continue to expect significant variability by quarter. Specifically, we project revenue and earnings growth to be back half weighted, helped by the planned return to growth in Greater China and lower freight costs on a year-over-year basis, providing a tailwind to margin. Drilling down in the third quarter, we expect revenue to increase 3% to 5% in constant currency, which includes gains in Greater China. On a reported basis, we anticipate sales to be up slightly, including a negative impact of approximately 350 basis points from FX. We expect EPS to approach $0.60, representing a strong year-over-year increase despite a currency headwind of approximately $0.10 versus the prior year. So in closing, we delivered record second quarter earnings, outperforming expectations and are raising our earnings outlook for the year despite a volatile backdrop. In addition, we remain on track to return $1 billion to shareholders in fiscal '23, underscoring the strength of our balance sheet and significant cash flow generation. Importantly, our performance reinforces our competitive advantages and validates our strategy. As we look forward, we remain focused on delivering against our long-term priorities to drive sustainable growth and shareholder returns. Hi. Good morning and congratulations on a solid quarter and a really tough environment. Joanne, what trends are you seeing in China, if you could maybe just talk about more recent trends and how things have developed? And Scott, can you unpack exactly how you're approaching this with some more numbers in your guidance around China? Thanks. Well, thank you, and good morning, Bob. We certainly have seen a meaningful trend change in Greater China from the second quarter to the third quarter. We had an encouraging start with a solid Lunar New Year driven by sequential improvement in traffic trends in the market. And quarter-to-date, our business is trending roughly in line with last year, and our guidance, which Scott will cover in more detail in a minute at a high-level, assumes light growth in the market for the quarter and a recovery in China through the balance of the year. And we are seeing some green shoots with respect to domestic travel, including in Macau and in Hainan, which are important destinations. However, international travel is still down, and we see that as further opportunity going forward. Overall, seeing very encouraging signs of recovery in the short-term. And we are confident in the long-term opportunities for China as a growth vehicle for our brands and the category at large as we move forward. But Scott, turn it to you for unpacking our guidance assumptions. Yes. Sure, Joanne, and good morning, Bob. If you look at the impact that China had on our outlook for the year, our projections, it's about $65 million. And just unpacking that in the second quarter, we had an expectation of being down about 10%. In reality, we were down about 20% based on the more extensive COVID-related impacts that we mentioned in the prepared remarks, that's worth about $20 million. And as you look at then taking the recovery curve that we had previously projected and rebase lining it off of that lower Q2 starting point, we then expect to continue to see meaningful improvement throughout the balance of the year, returning to growth in Q3 and up about 20% or more than 20% actually in the fourth quarter is where the comps get a little easier versus COVID a year ago. And that's where it's a little more than $40 million in the second half or about $0.10 in terms of earnings. And we are really encouraged just to build on what Joanne said and the start that we've had. Lunar New Year started off strong for us, and we are tracking well against that progression. And I would also just say, let's not lose the bigger picture here because while we have reflected what we see in China, and that has had a slight kind of negative impact. The business remains strong throughout all geographies, and I think this is a real testament to the resiliency and diversity of our model as even with these dynamic demand and revenue impacts that we continue to see, we are managing the business for the long-term, you see our gross margins being strong, inventory is in great position, and we were able to raise our earnings even with these dynamic impacts that we've seen in China. So I feel really good about the future there. Hey, good morning. Scott or Joanne, not sure who this is for, but two things quickly. First, on pricing, so AUR is up mid-single-digits again this quarter. Just -- anything you're seeing on pricing, any resistance that you've seen at all in the back half, are you assuming AUR continues to increase? And then just real quick, I know it's a smaller part of your business, about 10% on the wholesale channel. Can you just kind of comment POS trends you saw heading into holiday, what you're seeing quarter date. Any big changes there? I know there's been some stuff going on with some of your competitors. Just curious, again, knowing it's smaller. Just curious what you guys have been seeing with your brands. Thanks. Yes. I will pick that up, Ike. As it relates to AUR, we did drive mid-single-digit AUR increases in the handbag category this quarter, both globally and in North America. And I think that's a testament to our focus on brand building and staying close to our consumer and the balance we have of delivering magic and logic. We've gotten behind our most important product categories, our icons -- our iconic product. We are delivering compelling creative innovation into the marketplace. And we see the customer responding. And we will continue to manage stay close to the customer and manage the business in a healthy way as we move forward. As it relates to overall handbag pricing, we do see opportunity to continue to grow AUR into the future across our brands. I will let Todd comment on that in a minute. Actually, maybe, Todd, you can touch on both subjects, … … but as it relates to your question on wholesale, Ike, to your point, we are 90% direct-to-consumer. And we control our destiny with our direct -- we love this relationship that we have with our customer. It allows us to stay close to move very fast with the customer as we see the customer moving. And it gives us a lot of data that we can then leverage to improve our execution and what we -- and how we go to market. Overall, our wholesale business was down low single digits for the quarter. So while there was some pressure, it was manageable and again, a very small part of our business overall, but Todd, I will pass it to you. Great. Thank you, Joanne. Just let me do the wholesale first. Just to reground us for Coach, obviously, our largest brand, North America wholesale represents less than 4% of our business. So it's an important business. We value our relationships with our wholesale partners, but it doesn't drive our business. And as Joanne said, we've migrated to really of being a direct-to-consumer business, understanding our customers in a much more profound and deeper way and love that relationship and the long-term value we can create. Regarding handbags, we were very happy with the mid-single-digit constant currency handbag growth we saw globally and in North America, which is an important point. And one of the things we always focus on is emotion trumps price. And we have offered incredibly emotional product for our consumers. One of the great examples I can give you is, right now, we’ve a heart-shaped leather bag in outlet. It can I think hold a big iPhone, but I'm not 100% certain of that. We sell that for around $199 and I think I'm on fumes right now in terms of inventory. Compare that to our City Tote, which is a phenomenal high-functioning tote, which average AUR of 150. So this idea that we can, as long as we create emotional product that resonates with the consumer, the example I gave you in particularly over indexes with the younger consumer. So we are really excited by that. We will continue to allow us to grow our AURs and not just in handbag and not just in small leather goods, but we see lots of opportunity in men, lifestyle and footwear. Thanks. Good morning. I wanted to get your insight on the promotional environment. You called out a more promotional -- some more promotional selling at Kate. What are you seeing at the Coach brand? And what is your outlook for both brands in the second half and beyond? Well, maybe I will kick it off and then again, have Todd weigh in on the Coach brand. What I will say is, as we think about the environment that we saw in Q2, particularly this is really a North America focused comment, definitely seeing a more cautious consumer through Q2. We delivered a slight revenue decline which was a continuation of our first quarter trends and the macro environment is challenging. And this holiday, we saw what I would call a more normalized promotional environment versus a year ago when we were -- and many were supply constrained. This holiday, we delivered record Thanksgiving week and Cyber Monday sales results, which I think shows that consumers were value-driven and they were more selective in their spending outside of those peak periods. So it was a reversion to what I would call more normalized traffic patterns in the environment in North America. But even in that context, we just talked about it, we drove higher handbag AUR in North America, which is a testament to the product innovation and the data driven business model that we are applying and we've been disciplined in our approach to managing our brands and our business for the long-term that allowed us to deliver higher gross margin, operating margin and profit dollars versus last year in North America despite the softer demand environment and the external pressures we are seeing. So we are continuing to take a prudent approach to running and forecasting the business with an eye on continuing to build our brands for the long-term. And I will pass it to Todd on Coach. Thanks, Joanne. It is a promotional environment. We know that particularly in the holiday quarter, it always has been. What separated us, I think, is the journey we've been under for the last couple of years in focusing on our icons, reducing the tail of our products that drive markdown expectations and liability and leaning in on expressive luxury and leaning in on purpose and leaning in on values. And that is evidenced by our gross margin. So we didn't have the pressure that we had to deal with, and I feel very good that that's going to continue. Again, it goes back to this idea that we can separate ourselves when we focus on our customer, focus on our product, create a storytelling around the product that really is compelling. And ultimately, being 90% direct-to-consumer, we have a greater opportunity to control our own destiny. Great. Thanks and congrats on another nice quarter. So maybe a two-part question. So, Joanne, could you speak to maybe the cadence of top line as the second quarter progressed. How best to think about trends you're seeing notably in North America at the Coach brand maybe post holiday? And then, Scott, as we think about gross margin, is there a way to break down the driver of the 50 basis points gross margin upside in the second quarter? And then if you could just quantify or maybe even directionally help walk through some of the key puts and takes for gross margin in the second half outlook, I think that would be really helpful. Yes. Well, I will take the first part of the question, and it's an interesting question. The cadence of the quarter, I would say, if we're talking about North America specifically, and we could talk about globally, but North America specifically, the cadence of the quarter was more normalized. I think a year ago, we all saw a pull forward in demand as many, and we were supply constrained. And as I just mentioned, this year, this holiday, we saw a more normalized cadence where customers were shopping during the peak periods. Importantly, we were welcoming so many more customers back into our stores, which was fabulous. And obviously, we are well-positioned with a great team to take advantage of those changes and trends. Obviously, the conditions in China played out much differently than we expected and impacted the cadence of the business on a more global scale with softness in December when they were reopening and the changes in the COVID containment policy and COVID infections impacted that market. So a lot of different changes, some we anticipated, some we didn't. But our teams really moved with agility to deliver for our customers and manage the business in a really healthy way. Even in the face of the shifts, we were delivering higher AUR in our handbag category, we saw the resilience continue to see the durability of that category with our consumers and we delivered higher gross margin and exceeded our expectations for profitability as well. Scott? Yes. Just taking it from there, Matt, the second quarter being really was what we would call operationally related. So it was the combination of price increases versus a discount. So as we said, discounts may be a little elevated versus the strange year last year when we were under unit constraints and supply issues. This is, as Todd and Joanne said, more normalized, and we are operating with discipline, and we said we would even -- we are not going to chase the last revenue dollar just to drive top line. We are really focused on the long-term health of the business, and Todd said, focus on a motion versus just price. And you see that reflected in the second quarter. And as we turn to the full year, I think we outlined it in the prepared remarks, but freight has gotten a bit better for us, FX as well and some of the operational impacts. So we took our gross margin guidance up slightly in the second half. And as you see that, it's about 130 basis points benefit now for the full year. And remember, that's for freight. And remember, in the first quarter, that freight was negative. So the 130 reflects the negative in the first half and some of the benefits we are seeing in the second half. So that benefit continues to grow as we move through the second half and what should be a tailwind as we go into next year. Hey, guys. Congrats on a great quarter. I want to just ask you -- when you think about -- what do you think are the most important things for your teams to focus on to get North America back to positive growth here? I'm sure that's the discussion you're having. On AUR, you mentioned smaller handbags. You've heard a little bit about that. I wonder if that trend continues, that become a pressure on continuing to report the nice positive AURs we had. But more importantly, last quarter you lowered revenues a bit and you held the EBIT margin nicely. Now you're raising, but there's a lot of moving parts. As you look at the second half plan, Scott, I guess, two things. Where do you see opportunities for upside? And if you're able to tap those numbers, do you think you need to bring some of those costs back that you may have removed earlier to stabilize EBIT for us? Or maybe just help us think about flow-through. Yes. Let me kick us off with how we're thinking about driving growth into the future, particularly in North America, but also globally. I think as we leverage our direct-to-consumer model and our platform, one of the things that we're really focused on is making sure that we drive growth with our customer file, both an acquisition as well as average spend per customer, which you saw in the second quarter, a continuation of that trend. So leveraging that direct relationship that we have with our customer and staying close to that customer and driving more. So that means that we have to show up where they are. We have to be investing in marketing, taking advantage. So that's first, deepening our relationships with our customers. Second is delivering compelling product and innovation. And we're focused on that and doing that every day. And maybe Todd can talk about some of the great innovation that's happening at Coach, and delivering compelling omni-channel experiences. So this was a quarter where we saw customers come back into our stores. And we have the advantage of having two very profitable channels to meet our customers where they are. And that customer is increasingly omni-channel, shopping across both channels. So those are the real keys to -- and I should say that omni-channel customer is spending more with us. They're our highest lifetime value customers. So leaning into our customer relationships, our product and product innovation, including our lifestyle categories for growth and meeting them where they are in an omni-channel basis. And all of those things you can see came to bear in the second quarter. And as we continue to further our strategic agenda going forward, we think that will drive our growth. But maybe toss it to Todd to talk about Coach. Thanks, Joanne. A couple of things to reinforce. First, we did add 1.5 million new customers that Coach this last quarter in North America at average higher AURs. So we are -- the expectation of the AUR and where they enter the brand is different than in years past. Second, as I said before, emotion always comes price. So when we think about bag size, the correlation between -- yes, if you have a very large bag, typically you have a higher AUR. But some of our highest AUR bags, as I indicated, with the heart bag in outlet. But if you take Bandit, if you take Tabby, if you take some of these beautiful bags these families that are iconic that we add texture and different materials, we command higher AURs, whether it's Shearling or Pillow tabu [ph] or other opportunities to take a family, create an icon and expand on it and grow our AUR. So again, I am not as concerned by whether we sell large bags or small bags, I'm concerned about bringing in a customer, creating a connectivity and making sure we have them and that they believe that the Coach brand represents their values, and that will create a sustainable, profitable growth for us in the future. Yes. And, Michael, I guess, adding on to what may be our longest question of the morning, you asked me what inflection points you catalyst could be for upside in the second half. And I'd just point you back to -- or remind you how we've approached from initial guidance all the way through now halfway through the year, is we are taking the trends that we see, and we are projecting them forward, right? So whether it's North America down low-single-digits, it's -- I think, now have spend a lot of time on what our assumptions are in China. From a top line standpoint, obviously, that could be better. Could China get open up and come back faster, it could. Could it be slower? It could. I think we've got reasonable estimates, same with North America, right? Our business has been very consistent. We haven't predicted a big up or down. And so as that dynamic continues to evolve, we know our brands are strong. We are running for the long-term, and we are going to adapt to whatever demand environment we see. We are not trying to force it or push it, and we are maintaining those strong gross margins. So any upside we do see, will come through on the bottom line. On the other side, investments are largely in our control. And I hope you've seen that we've been disciplined at trying to both be prudent in light of a very dynamic environment, while at the same time, maintaining investments on what we think are going to drive us in the long-term, whether it's a little more than 8% from a marketing standpoint, even a little higher than that in the second quarter. And continuing to invest in our capabilities around digital, data analytics, et cetera. Those are obviously within our control, but we think this quarter is a great testament to the fact that those are paying off. So we will continue to be prudent, managing our expenses as carefully as we can while not sacrificing the long-term. And as Todd and Joanne said, one of the biggest things that gives me confidence in the future is that gross margin as we continue to manage the price increases and being diligent on the discounting. We see those gross margins coming in and we see that for the quarter, and we see that for the full year. Good morning and thank you so much for taking our question. A lot of ground covered, but my question today is for Scott. Can you comment on your inventory position by brand and geography given the slower rate of recovery in China? As you think about the cadencing of inventory rebalancing, where do you expect that to trend for the remainder of the calendar year? Thank you. Yes, Brooke, I would love to answer that question. I would say the big picture here is no new news, right? We've talked about the quality and the quantity of inventory being well-positioned and coming into our peak holiday season, we felt good about it. And the answer is, we still do. We are up about 30%. We said by the end of the year, we'd be up single digits. If you can expect sequential improvement as you move through the third, and I told you where we expect to end for the fourth quarter. And it's funny, on China, a quarter ago, we were talking about do we have too much inventory in China and now is at reopen do we have enough inventory in China. Again, I would say this points to the diversity of our -- and flexibility of our model. We've got bonded ware houses. We're able to, within some degree, reposition inventory. We've got inventory in China. We feel good about the quality of that inventory. And as that starts to reopen, we think we are really well-positioned there as return to growth in the second half in China. Hi, thank you. Great quarter. With CDP, the customer data platform has been pretty impressive. How does that intersect with pricing? And also it's been very positive that the new customer that you're seeing are coming in higher AURs? What are some of the factors underpinning that? And then on the future of the platform, less is more and thinking about Bandit versus Willow, Tabby and Rogue. What's the head for platform development and SKUs as you continue to rationalize and do more with less than decomplicate the product matrix. Thanks. Thanks, Oliver. The consumer and the consumer data that we have are -- have been a real meaningful driver. In terms of our understanding of our consumer and where they are and their expectations for our brands, we're leveraging that data in a number of different ways. We are leveraging it through the full value chain from product creation as we understand and do market mapping and understand what our consumers are looking for from our brand as well as from our product, including the younger consumer and we are leveraging it as we think about how we market and which products resonate with which consumer bases. We have, importantly, a technology infrastructure that allows us to harness this data and really embed it into the decision making that's happening day-to-day. And as we see those, it does show us opportunities to drive higher lifetime value. We understand how customers are coming into our brands, what they're likely to purchase next in terms of driving frequency and how we engage them more fully in our brand and not just in one product at one price. And I think you've seen that through the second quarter. That is, again, a huge advantage of our direct-to-consumer platform. We are continuing to build on the platform, and we are applying new technology every day. And having a modern technology infrastructure allows us to move very quickly to apply new technology, to allow us to utilize that data even better. And I think our results show it. It's new customer acquisition, but you also see it in increased spend per customer as we lean into the learnings from that and our teams leverage it throughout the business. And Todd, I don't know if you want to take the SKU -- SKU question on Coach. Yes. Overall, again, it's so amazing what we are able to see and do with the platform we have with Tapestry and how rich the data is. And we are really understanding how best to animate the individual icon. So we are testing ideas earlier. Our merchants, our creative teams, we're bringing in our timeless Gen Z customer to influence some of that very early. So a great example is Tabby and Shearling in the quarter did exceptionally well. And when I walked through the showroom looking at fall next year, we took some of that learning and how to amplify it. We also recognize that this idea of time placed and occasion matters. So how we focus on each time place and occasion, one of the opportunities we identified in outlet was to have a compelling backpack. And again, that you'll see the icon being launched in the fall, which will be incredible. I'm actually been wear-testing it. I love it. So, we see these opportunities. I know Joanne is going to say I'm not the timeless Gen Z customer, but internally, I am. But we really look at that, and the data is informing and it doesn't just inform on the hind-sighting, it informs upfront. So as we get better, as we understand it, it informs our pricing. It informs our promotions. It informs our placement. It really informs everything we do. So I'm very excited by the platform. I'm very excited by the opportunity to continue to animate existing icons without constantly trying to create new icons every year, which would have been the historic norm. Good morning. Thanks for squeezing me in. So I guess along the same line as is what you were just discussing there, Coach North America, in line with your expectations, driving new customers, higher AUR. Kate, you did mention that, that customer appeared to be a bit more price sensitive. Why do you think Kate is showing more -- the Kate customer is showing more price sensitivity versus Coach? Is this a function of a younger consumer on average? Are there data and analytics capabilities that you're leveraging at Coach today that you're not at Kate, so you can potentially close that gap over time? Just curious of any insights there and how it might impact durability of growth in Coach versus Kate? Should the macro backdrop moderate as the year unfolds? And then just a real quick one for Scott, inventory tracking in line with your plans. With the bigger picture, can the business achieve inventory turns at levels that you saw pre-COVID? And how would we think about the time line and opportunity there? Thank you. Thanks, Mark. We feel great about Kate and the progress that we are making. And I think some of the points that you made in terms of who the customer is. We acquired 1 million new customers at Kate over the quarter. We drove handbag AUR growth in the quarter. The environment was, I would say, more normalized from a promotional standpoint. And while the promotions were higher than last year. Last year, the Kate business was extremely supply constrained. So I would say that would be an anomalous year. The promotional levels were still lower than 2 years ago at Kate Spade. And we are applying the same tools across our platform between Coach and Kate. But one of the key differences is Coaches icon strategy has deep history and heritage. And at Kate, we've been building out our core handbag platform with success, but we are still in building mode at Kate. Again, we called out really encouraging signs. We talk about the core platform, the Knott and the Katy as we've been developing a more solid core foundation there. Those continue to perform. We introduced a new leather program, Gramercy that's off to a great start. Additionally, Kate has, in its history, never really had a signature platform, and we've really been leaning into the spade flower. We talked about Monogram platform that we had. And again, that's another platform that we can continue to leverage at Kate to continue to build resilience into the model and durability into the model at Kate in addition to the novelty, et cetera, that is such an important part of the Kate DNA. So the teams are making progress at Kate Spade and building on the foundation. We have a very passionate customer base at Kate Spade. And we are expanding that customer base. We are seeing higher spend per customer. We're leveraging the full complement of lifestyle categories. We saw mid-teens growth in lifestyle categories at Kate, which we think is an important driver of long-term customer value as we go forward. So we feel good about the progress at Kate and we are investing in the future because we are confident in the future runway ahead. Yes, Mark, just to address your question on churn. The short answer is, yes, we think as we work through the very unusual dynamics that we've seen at play this year with elongated lead times by an early disruptions in supply demand stuff, all the things that we've been talking about now over the last number of quarters, We are targeting, and we would expect a return to pre-COVID churn levels as we move into the next year. I don't know exactly when we hit those levels, but that's certainly in our line of sight, and that's certainly our intent. And I can tell you internally, we are focusing on that just about every time we get together from Todd from Joanne from myself. So that's our expectation, and that's what we're driving to. Thank you. This does conclude our question-and-answer session. I'd be happy to return it -- the call over to Joanne for some concluding remarks. Thank you, and thank you for joining us and for your interest in our story. Today, we delivered record holiday earnings, outperforming our expectations and positioning us to raise our outlook for the fiscal year. A huge thank you to our talented team around the world who continue to drive our results. Importantly, our performance highlights Tapestry's competitive advantages, the power of our iconic brands and strong consumer engagement platform as well as our globally diversified direct-to-consumer business model. We have a clear strategy to drive significant long-term sustainable growth across our portfolio, and we're confident in the runway ahead. Thanks again, and have a great day.

EarningCall_224

Good morning. Welcome to the WTW Fourth Quarter 2022 Earnings Conference Call. Please refer to wtwco.com for the press release and supplemental information that was issued earlier today. Today’s call is being recorded and will be available for the next three months on WTW’s website. Some of the comments in today’s call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed today in the company and the company undertakes no obligation to update these statements. One moment. Thank you. Some of the comments in today’s call may constitute forward-looking statements within the meaning of the Private Securities Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed in today’s company and undertakes no obligation to update these statements unless required by law. For more details discussed of these and other risk factors investors should review the forward-looking statements section in the earnings press release issued this morning as well as other disclosures in most recent Form 10-K and in other Willis Towers Watson SEC filings. During the call, certain non-GAAP financial measures may be discussed. For reconciliations of the non-GAAP measures as well as other information regarding these measures, please refer to the most recent earnings release and other materials in the Investor Relations section of the company’s website. Good morning, everyone. Thank you for joining us for WTW’s fourth quarter 2022 earnings call. Joining me today is Andrew Krasner, our Chief Financial Officer. In 2022, we focused on executing against our growth, simplify and transform strategic priorities, continuing to bring the best of WTW to our clients and generating value for our shareholders. I’m proud to say that we delivered on all of these commitments. Today, we are stronger, more resilient and better positioned than we were a year ago, and I’m excited about what we will achieve going forward. Our fourth quarter performance reflects the momentum we’ve been building and is a solid finish to a great year. In Q4, we delivered 5% organic growth, which brought our full year organic growth to 4%, in line with the mid-single digit forecast for 2022. We also saw a modest margin expansion despite significant headwinds from prior year book of business settlement activity, which is expected to normalize going forward. We generated adjusted diluted earnings per share of $6.33, up 12% over the prior year fourth quarter. We also continued to execute against our capital allocation strategy completing another $440 million in share repurchases in the fourth quarter, bringing our full year total to $3.5 billion. Our transformation efforts continue to have a significant impact. During the fourth quarter, we realized $49 million of incremental annualized savings. This brings the total to $149 million in cumulative annualized savings since the program’s inception and positions us well to achieve our 2024 target of $360 million. In advancing our simplified goals, we further refined our organizational structure by consolidating our Asia and Australasia operations into one Asia-Pacific region. This streamlined unit will be better able to leverage shared resources and to seamlessly serve clients in the region. Simon Weaver, who is previously the Head of Australasia will lead the new integrated region and be responsible for driving growth through closer collaboration across the business. For our grow initiatives, we remain focused on driving better outcomes for our clients through our innovative and differentiated offerings. Most recently, we launched a customized online platform for the aviation sector, which gives our clients access to WTW’s expertise across the globe 24/7. Tailored to the unique challenges and needs of the sector, this platform allows airline and aviation-related clients to share technical expertise, news and insights, strengthening the breadth and depth of our client and industry relationships. We also advanced our grow initiatives with the recent introduction of WTW’s collaboration with Liberty Specialty Markets and Markel. Together, we launched the pilot phase of an innovative digital commercial insurance platform. This is a significant step forward in our broader strategy to transform our digital capabilities across the entire value chain. The venture will improve connectivity, giving brokers efficient, flexible trading options. Elsewhere within Risk and Broking, the ongoing rollout of our industry specialization strategy in CRB is producing great results with our global lines of business driving high-single digit organic growth. We’re also excited by the traction our grow initiatives have gained within Health, Wealth & Career. Our focus on making connections across our businesses produced meaningful benefits in the fourth quarter with a noteworthy portion of our discretionary project sales referred by other businesses. In 2022, we made significant investments in rebuilding our talent base. WTW hired over 9,700 colleagues last year, demonstrating the appeal of WTW as a destination for talent. Our investment has translated into revenue growth in 2022, and we expect this to continue throughout 2023. We also saw the benefit of our retention efforts with voluntary attrition remaining in line with macro trends. As a result, WTW finished the year with 46,600 colleagues around the globe, an increase that has restored our headcount to 2019 levels despite the divestitures made since that time. Overall, I’m pleased with our fourth quarter performance. The progress we have made to date, executing our strategic priorities to grow, simplify and transform gives us confidence that WTW is on the right path to drive sustainable growth and value creation. In the year ahead, we’re focused on further accelerating our growth, driving greater operating leverage and prioritizing cash generation. The current complex economic environment supports our ambitions. Our clients are facing many uncertainties, including inflation, rising interest rates, softer GDP growth, a tight labor market, ESG risk and potential recession. The regulatory focus on pensions in an uncertain economic environment is also heightened. As we’ve seen historically, such volatility can create strong demand for specialist work and products that our unique combination of businesses provide. I’m pleased with our ability to help clients evaluate their risks and opportunities in these complex environments. For example, recent market dynamics have provided defined benefit plan sponsors for the increased funding levels, which in turn has created flexibility to explore a range of potential alternatives including modifications to investment strategies as well as pension risk transfer options. We’ve seen a significant increase in pension risk transfer projects, many of which evolved over multiple years and require a high degree of specialization. In addition, we’re seeing increased interest in clients reviewing their non-qualified benefits as well as investigating programs to manage their workforces, additional areas in which we are ideally placed to help. Many of our clients also continue to navigate sustained rising commercial insurance rates across various lines, insurers are pushing for premium increases. This causes even greater challenges for our clients as they try to manage complex risks. We’re well-positioned to help clients through this difficult rate environment. Our customized tools ensure that clients get the best return for their premium dollar across their entire portfolio of risks. We call this Connected Risk Intelligence and believe it represents the future of financially efficient insurance buying. At the same time, we continue to build momentum. Our recent hires are becoming more productive. We’re getting faster, more agile and better connected and our transformation program is delivering. We see continued demand from clients seeking our solutions to manage their unique challenges, which strengthens our conviction in achieving mid-single digit organic revenue growth in 2023. We expect to deliver another year of operating margin expansion led by an incremental $100 million in annualized transformation program cost savings and improved free cash flow. Andrew will share more details on our outlook for the year, but in short, we’re driving hard to achieve our long-term targets. In closing, our performance in 2022 demonstrated our focus on delivering on our commitments and our pursuit of profitable, sustainable growth. We believe that robust client demand in the face of a complex risk environment and the successful execution of our strategy will continue to drive momentum and we remain focused on achieving our goals and creating shareholder value. Last, but certainly not least, I want to thank our colleagues for their performance this year. I sincerely appreciate their dedication, service and continued commitment to our clients. Thanks, Carl. Good morning, everyone. Thanks to all of you for joining us today. As Carl mentioned, we finished the year on a high note and our outlook for 2023 is positive. Now I’d like to share some further details on our financial results. The fourth quarter was in line with our expectations, with revenue up 5% on an organic basis. For the year, organic revenue growth was 4%, and we had solid growth across our portfolio of businesses. For the quarter, adjusted diluted earnings per share were $6.33, an increase of 12% over the prior year. For the year, adjusted diluted earnings per share were $13.41, representing 16% growth over the prior year. Now on to our detailed segment results. Note that to provide comparability with prior periods, all commentary regarding the results of our segments will be on an organic basis, unless specifically stated otherwise. The health, wealth and career or HWC segment generated revenue growth of 5% on an organic and constant currency basis compared to the fourth quarter of last year. Excluding the year-over-year headwind from book of business settlement activity, HWC’s organic revenue grew 6%. Revenue for health was flat for the fourth quarter primarily due to a strong comparative arising from book gains in the prior year. Excluding this activity, health revenue grew 6%, primarily driven by portfolio growth and new client appointments in Europe and international as well as increased project work in North America related to helping clients manage increasing costs and implementing legislative changes. Wealth grew 5% in the fourth quarter. The growth was primarily attributable to higher levels of project work, actuarial valuation activity and new administration clients in North America and a combination of regulatory and settlement work in Great Britain. This growth was partially offset by a nominal decrease in our Investments business, which was pressured by declines in capital markets, an expected headwind we mentioned during our third quarter earnings call. The Wealth business finished the year with a strong fourth quarter, offsetting declines experienced earlier in 2022. Career experienced 9% growth in the fourth quarter. This growth was largely driven by strong client demand for talent and compensation products, including compensation benchmarking surveys and advisory work, as well as employee engagement offerings, which we expect to continue this year. Benefits Delivery and Outsourcing generated 6% revenue growth in the fourth quarter. The increase was largely driven by individual marketplace, with strong growth from higher volumes and placements in Medicare Advantage policies. As expected, TRANZACT delivered double-digit growth in its seasonally strongest quarter and for the full year, driven by a supportive macro environment and our focus on profitably growing the business. Technology and Administrative Solutions revenue also increased primarily due to new client appointments and increased project activity. We continue to see growth opportunities for these businesses and expect that they will continue their growth trajectory into 2023. HWC’s operating margin was 39% for this quarter compared to 38.2% in the prior year fourth quarter. Excluding the impact of book of business activity, HWC’s operating margin was 39% compared to 37.6% in the prior year fourth quarter. For the full year, HWC’s operating margin was 26.1% compared to 25.6% in the prior year. The 50 basis point improvement was due to improved operating leverage and transformation-related savings. Risk and Broking revenue was up 5% on an organic basis and 3% on a constant currency basis compared to the prior year fourth quarter. Excluding the headwind from book of business settlement activity, R&B’s organic revenue increased 6%. Corporate Risk & Broking or CRB, organic revenue increased 3%. Excluding book of business settlement activity, CRB’s organic revenue growth was 5%. The business generated growth across all regions, driven by new business wins in construction, natural resources and aerospace. Excluding headwinds from prior year book of business settlements, North America revenue increased with notable growth in construction. Europe and international also made strong contributions to CRB’s growth with new business in construction and aerospace. In the Insurance Consulting and Technology business, revenue was up 17% over the prior year fourth quarter, benefiting from the timing of software sales, which had originally been expected earlier in the year as well as increased advisory work. For the year, ICT delivered strong growth of 9%, in line with our long-term expectations for this business. R&B’s operating margin was 28.3% for the quarter compared to 30.1% in the prior year fourth quarter. Excluding the impact of book of business activity, R&B’s operating margin was 27.6% for the quarter compared to 28.3% in the prior year fourth quarter. For the full year, R&B’s operating margin was 21.2% compared to 23.4% in the prior year. The decline in margin was due to our significant investments in talent. We expect these investments to continue to gain momentum in 2023 as the contributions of these hires become more meaningful. Now let’s turn to the enterprise level results. Adjusted operating income was $882 million for the quarter with 32% of revenue, a 20 basis point improvement over the prior year. For the year, adjusted operating margin was 20.9%, a 100 basis point improvement over the prior year. Our improved adjusted operating margins primarily reflect the benefits of strategic portfolio management which were realized at the corporate level, alongside transformation program savings, which were realized at the segment level, but in some of our businesses were more than offset by our increased investments in talent during the period. As Carl mentioned, during the fourth quarter, we realized $49 million of incremental annualized savings. Transformation savings will continue to be a key aspect of our ongoing margin expansion efforts as we’re encouraged by the results this year, which exceeded both our original $30 million target for 2022 and our most recent forecast of $110 million for the year. To date, our transformation savings have outpaced our original expectations from a timing perspective, driven primarily by accelerated workforce savings, technology savings from migrating operations to the cloud and reductions in our overall real estate footprint. For 2023, we expect our transformation program to deliver approximately $100 million in incremental run rate savings by the end of the year with continued contributions from real estate, technology and process optimization. Foreign currency was a headwind on adjusted EPS of $0.25 for the year, largely due to the strength of the U.S. dollar. Assuming exchange rates remain at current levels, we expect foreign currency to be a $0.06 headwind in Q1 of 2023, but only a $0.01 headwind for the full year. We generated free cash flow of $674 million for 2022 compared to free cash flow of $1.9 billion in 2021. This decrease was primarily due to the receipt of the $1 billion termination fee in the comparable period and the absence of cash generation from the divested treaty-reinsurance business. Looking ahead, growing earnings and generating healthy free cash flow remain our priorities. Our U.S. GAAP tax rate for the fourth quarter was 17.7% versus 20.8% in the prior year. Our adjusted tax rate for the quarter was 22.2% versus 21.1% in the prior year, with the difference primarily due to the geographic distribution of profits. For the year, our U.S. GAAP tax rate was 15.4% versus 19.9% in the prior year. Our adjusted tax rate for the full year was 20.9%, more in line with the 20.7% rate in the prior year. In 2022, we returned a significant amount of capital to our shareholders, paying $369 million in dividends and repurchasing 15.7 million shares for $3.5 billion. We will continue to pursue a disciplined capital allocation strategy that balances capital return with internal investments and strategic M&A to deploy our capital in the highest return opportunities. While we expect share repurchases to remain the primary avenue for capital deployment, we continue to evaluate all our options to create value for shareholders. Turning to our 2023 guidance. Based on current market conditions, we expect to deliver mid-single-digit organic revenue growth alongside adjusted operating margin expansion despite continued investments in long-term growth. We also expect an improvement in free cash flow now that onetime cash outflows primarily related to our divested treaty-reinsurance business are behind us. As I mentioned earlier, we expect to see $100 million in incremental annualized transformation program savings. With respect to non-cash pension income, we expect to see a decline due to market volatility and interest rate movements. For 2023, we expect about $112 million in pension income as compared to $271 million in 2022. I’d like to note that despite this dynamic, the funded position of our plans has improved. We remain focused on our long-term targets and recognize that to achieve them, we will need to build on prior momentum and continue to accelerate revenue, margin and cash flow growth. Each of these areas remains the subject of significant management attention. Overall, it was a strong quarter and year for WTW with performance that aligned with our expectations. Our results reflect a lot of hard work, which included vigorous hiring efforts, investments in technology, successful transformation initiatives and the unwavering dedication of our colleagues. We ended the year in a solid position, and I’m confident that we will continue to build momentum in 2023 as we work to achieve our long-term targets. Thank you. [Operator Instructions] Our first question comes from the line of Elyse Greenspan with Wells Fargo. Your line is open. Hi, Thanks. Good morning. My first question. Can you guys just give us the impact of the book gains and the fiduciary investment income on both your revenue and margins for the fourth quarter as well as for the full year? Yes, sure. Thanks, Elyse. It’s Andrew. I think, as you point out, it’s meaningful to talk about those two components that underlie the revenue growth figures for the quarter. As you know, we had headwinds from gain on sale activities, and these were partially offset by sort of investment income. The tailwind from investment income was $24 million for the quarter and $43 million for the full year. And that was partially offset by the headwinds which we had from the gain on sale activity which was $65 million for the quarter and $63 million for the full year. I think it’s also important to note that we still would have had mid-single-digit organic growth and margin expansion absent those items. Okay. Thank you. And then my second question is on free cash flow, right? Given where you guys were for 2022, I mean you’re still – you’re running short of that three-year target that you guys have laid out. And so – could you just get – is there a line of sight to getting into that free cash flow target? And can you just talk through some of the ways you’re looking to improve your free cash flow in 2023 and 2024? Yes, sure. As we discussed on the last call, we faced more headwinds on free cash flow than we originally anticipated, including our exit from Russia and timing differences from cash payments made in 2022 on both the termination fee and the Willis regain. Non-recurring working capital items, including these tax payments and other economic factors had a meaningful impact on free cash flow in 2022. Looking ahead, we’ve not provided any annual free cash flow guidance, but we do remain committed to achieving our cumulative three-year free cash flow target of $4.3 billion to $5.3 billion. We’re focused on free cash flow generation, we understand what is required to reach that target from where we are today, and we are lining things up to get there. We expect the one-off items and the related headwinds to abate we’re optimizing the cash generation profile of our business portfolio, and we’re focusing on tactical working capital improvements as well. And then just one more quick one. So you did revise your 2024 EPS target last quarter. But then this quarter, right, you gave us the pension income guide, which is lower pension income for 2023. Is that embedded within the guide, the $17.50 to $20.50, right? That pension income will be lower, you would have a lower base in 2023 and still be able to get to that 24% EPS target? So Elyse, we’ve not adjusted our 2024 pension income assumption for the current headwind we’ve got in 2023. As we’ve seen during the last 12 months, a lot can happen when it comes to external factors, so a lot can change over the next two years as well. We do remain focused on driving organic growth, operating leverage and cost savings to achieve our long-term EPS target. Thank you. [Operator Instructions] Our next question comes from the line of Gregory Peters with Raymond James. Your line is open. Good morning everyone. For my first question, I’m going to focus in on both the adjusted operating margin. If I look at the full year and your results, it’s up 100 basis points from prior year. And in your prepared remarks, you talked about all the new hires that you successfully executed on last year. Can you talk about how those hires affected the margin results, the margin expansion results in 2022? And I guess when I’m thinking about 2023 and 2024 as those employees get the new hires get more – get onboarded and they become more productive in year two and year three, maybe there’s some tailwind on margin from that. So some perspective there would be helpful. Yes, Greg. So with regard to talent, I mean, we’re really pleased with the progress we’ve made on our higher efforts during the year. Net hiring for the year is positive. Our headcount is up by almost 2,500 to 46,600 employees, which is kind of back to 2019 levels, and that’s despite the divestitures we’ve made since then. We do expect the contribution to the improvement in our talent base fee become more meaningful into 2023, and we’ve already seen positive trends as we progress through 2022. I think that’s reflected in the revenue growth numbers from quarter-to-quarter. We’re continuing to hire opportunistically in the number of open positions and base position, of course, are going to vary at any given time based on our needs. But we’re really encouraged by the progress we’ve made, and we’re going to continue to focus on expanding our talent base as necessary to achieve our growth targets. You’ll probably see some further detail on our higher efforts in goals in our 10-K, which will be filed later in the month. And just a point of clarification on that. I sort of viewed 2022 as like a hiring super cycle for you guys – is it – when I think about 2023, is it more – are we back to more normalized run rate type of additions? Or are you still – would you still think of 2023 is still looking out to make a substantial addition to your workforce? Well, we are continuing to hire opportunistically, as I said, Greg. And yes, there’s always going to be some areas in a firm that is the span of services we do where you look and say, okay, we need to kind of advance what we’re doing more substantially than others. But I think we’re opportunistically is key, right? Whereas coming into 2022. As we talked about in earlier calls, we had more pronounced needs across the organization. Yes, that makes sense. Okay. My second question, I guess, is my third technically, but my last question will be on organic revenue guidance. You provided the mid-single-digit guidance and I know you don’t want to get mired down in the detail, but I’m wondering if you could give us some idea of how you think the pieces inside Health, Wealth and Career and Risk and Broking might perform in 2023 in the context of the 2023 guidance. And I guess the reason why I’m asking about this, as I look at the ICT results that were really strong, and I’m just wondering if that’s something like that can sustain itself? Thank you. Yes. Thanks for that. We remain confident in our ability to get to the mid-single-digit growth in 2023 and beyond. That’s demonstrated by the organic revenue growth that we achieved this year, reflecting all of the momentum in our businesses. The continued growth from clients seeking our solutions coupled with our robust pipeline and investments that we’re making in our talent strengthens our conviction in our ability to achieve that mid-single-digit organic revenue growth in the future. Our focus remains on enterprise level, long-time organic – long-term organic revenue growth target in the mid-single digits and specifically regarding thoughts around the growth profiles of each of our businesses. Probably best to refer you back to our Investor Day materials from September of 21, where we did set some of that out business by business of what we expect long-term for each one of those components. Hi, thanks. Good morning. I was just wondering if you could size the benefit that the favorable ICT timing had an organic revenue growth in R&B in the quarter? And maybe just talk about how much of a headwind that would be in the first quarter of 2023? Yes, it’s Andrew. I assume you’re referring to the comment about the timing of the ICT software sales? Is that right, David? So that was stuff that actually we had expected earlier in the year that ended up occurring in the fourth quarter just to when sales cycles close, et cetera. So I think it’s best to look at that business on a full year basis, and that’s in line with our expectations of how that business has performed over the longer term. Okay. Got it. That’s helpful. And then just looking at the R&B organic growth, I think it was 6% excluding the book of business drag and I’m calculating around a 2-point also a 2-point benefit from fiduciary income. So I’m getting to around 4% organic if I take out book of business impacts and fiduciary impacts, which is about the same as it was last quarter. So I guess I’m wondering why we didn’t see that – or I guess, first, is that right? And if so, why we really didn’t see that growth accelerate versus the third quarter? Yes. So I think the first point of clarification there is around the Risk and Broking growth rates. So 5% organic – 6% organic, excluding the gain on sale and 6% excluding gain on sale and investment income. So it would have been 6% with or without the tailwind from investment income within that line of business. And I guess maybe just one more I’ll sneak one in. Could you just size the adverse impact that the divested reinsurance business in Russia had on free cash flow this year? Because it does feel like a pretty big ramp to get to the low end of the free cash flow target over the next couple of years. So maybe just help us get a sense for what a more normalized free cash flow number would look like if we didn’t have those items would be helpful? Yes. We did talk a bit about this on the call, the last quarter. So I think we disclosed that the Russia business had about 1% of our total revenue base and a margin of more than double the enterprise margin. So there is some pretty healthy EBITDA cash flow associated with that. Additionally, we did write off a large amount of receivables that were associated with that business, which we were unable to collect. So there’s a fairly sizable headwind, which presented itself from the divestiture and write-off of that business. Yes, just for clarity, that was our insurance broking business, not reinsurance broking which we – any of that would have already been divested with the Willis Re divestiture. Hey, good morning. I promise to just hold it to one question and a follow-up. First question, I just wanted to – I heard the answer to Elyse’s question about the pension income being factored into your long-term guide and it can be volatile. But I just want to be clear, it’s a meaningful headwind in 2023. And so are there other levers that you’re pulling more so than you had kind of previously expected in 2023 to be able to show margin improvement? So just to clarify on the size of the headwind, as you’ll see in our 10-K, pension income for 2022 was $272 million and we’re guiding for $412 million in 2023. So that, I think, shows you the product quantitative basis what we’re facing. We do look at all levers available to us as we run this company. And to the extent we’ve got a headwind in the other direction, we search for what we can do elsewhere. That feels like how you manage the company every day. And just as we’ve seen during 2022, we can get all sorts of headwinds and directions, expected or not. We think the benefit of running the diversified portfolio we have, gives us the opportunity to adapt. Okay. And my follow-up, just curious, some of your peers have publicly talked about looking for ways to bring employees more back to the office and to better collaborate. I believe Willis has always kind of been collaborative and a more virtual environment. And you’ve been clear that a lot of the cost – some of the cost saves will come from less real estate. But any changes in kind of in your view on the meaningfully lower real estate footprint and kind of just the overall firm’s view of remote work? Thanks. So we absolutely have adapted really well to remote work, but we recognize the benefit of in-office collaboration as well. None of that is incompatible with a reduced real estate footprint and we are, I think, extremely successfully navigating back to work, back to collaboration and the flexibility that the workplace of tomorrow really wants from their employment. So I’m really happy with how our colleagues have adapted and kept up to great work as they do, both in office and remote. I’ve seen no lag in how we’re able to perform for our clients, and I think that’s demonstrated by our results. Thank you. [Operator Instructions] Our next question comes from the line of Paul Newsome with Piper Sandler. Your line is open. Good morning. Thanks for the call. I wanted to revisit the gain of the book sales impact. And if you could just give us a little bit more, maybe just walk us through, again, what the comparisons will likely be prospectively if we continue to have negative comparisons. And one thing I’m not sure if I have it in my mind and maybe some others are not quite getting is I think there’s two impacts. One is the actual comparison of having a gain a year ago versus not having today. But is that there also an impact of not having that book any more prospectively over the next year versus a year ago. And so how should we think about sort of those two pieces? And how long we will be talking about book gain comparisons. Yes. So you’re absolutely right. There is a second component, right, of the revenue that does bleed off, and that is sort of excluded from what we’ve been talking about in terms of the gain on sale headwinds that we’ve experienced in some of our businesses. We do expect that level of book sales to normalize going forward. And if you look back pre-2020, you can start to get a sense of what that normalized level looks like, and we do expect to be getting there in relatively short order as the events from 2021 get further and further away. So does that mean that we’re essentially normalized into 2023 or we still going to be talking about this in the next couple of quarters? I think we put a book gains began to normalize as we progress through 2022, and we expect them to be in line with historical levels in 2023 as 2021 receives. So there may be some quarterly headwinds as that normalization continues throughout 2023. And we’ll – as we have been provide detail on what that looks like. Thank you. [Operator Instructions] Our next question comes from the line of Andrew Kligerman with Credit Suisse. Your line is open. Andrew just to see if you’re on mute. Sorry about that. Good morning. I have been reading a lot about these net hires, particularly in the summer, you mentioned that construction and aerospace was quite strong. Could you give a sense of the kind of impact on volumes, sales, commissions that these hires might have in 2023 and 2024 as non-competes roll off? Because it looks like you had a very good result this quarter, but the real impact of these hires is something we should be thinking more about as 2023, 2024 numbers. Am I thinking about that right? Yes. I think that is right, Andrew. I mean we bring people on. We don’t expect them to be fully productive from day one. It’s typically about 12, 18 months before they’re fully productive. And so someone we brought on during the summer kind of – we expect to be hitting their stride in Q3, Q4, the following year in full, right? Do take those – because of the timing of renewals, right, they – and bunching around the end of the year, right? So that’s where you might get some variation in that – how many months as opposed to the efficacy of the particular individual, right? But you’re absolutely right that someone we brought on who’s a great front office talent in 2022, we’ll be hitting their stride in 2023 and beyond. So it just sort of seems like the focus on the call of these book of business gains, it seems like we’re getting closer to normalized. It’s just not something to focus on. This is where the focus should be. So my next question is on the Medicare Advantage sales. It was kind of interesting to read about some of the smaller public players that are very focused on it. They all seem to be seeing improvements in volumes and margins. And a lot of folks just kind of write this business off is a very low-margin business. But could you talk a little bit about the margins of Med Advantage as compared to the overall HWC segment? And could you talk a little bit about the prospects that you were seeing in the quarter and opportunity for continued growth. Yes. Sure. It’s Andrew. So we’re not going to get into the specific margins of specific products, but we are pleased with the level of profitability that we are seeing in that product and that business overall as it is a portfolio of different products, of course, primarily MA, but there is a nice balanced portfolio there as well. Yes. And I guess as far as the prospects, I mean, first of all, we have continuously run this business for sustainable growth, and that means looking for growth opportunities that are profitable rather than growth for growth’s sake. That philosophy has served us, I think, very well and it’s one we will be continuing. But the overall backdrop for that business remains very strong and our relationship with a variety of partners does position us well. From a macro perspective, I’ve cited this before, but when you have 10,000 people becoming newly eligible for Medicare every day, it is quite a tailwind for the industry. Medicare enrollment is projected to grow 7.6% per year over the decade. And the percentage of Medicare eligible people who buy an MA plan rather than just use traditional Medicare is rising, it’s expected to grow from just over 40% to more than 50% by 2030. So those are all, I think good conditions for our business. Thank you. [Operator Instructions] Our next question comes from the line of Rob Cox with Goldman Sachs. Your line is open. Hey, thanks. Just on the wealth segment, you talked about a number of tailwinds and noted that some of these projects could last years. So I’m curious if you could talk about how long you expect to benefit from sort of the stronger PRT levels and then really the regulatory-driven work? Yes. So whenever we have a change in regulation, there’s typically a multi-quarter bump as clients trying to analyze and determine actions to take with respect to the change in the environment. The improved funded status of pension plans that we’ve seen during 2022 gives them additional flexibility to consider risk transfer options. And while as I noted, there’s always chance for the economic climate and the funded status for those plans to change over time. That’s typically something we see a multi-quarter benefit from as well, right? And again, even if the fund as does change to economic conditions, that creates fresh volatility that clients need help – analyzing. So we think our strong position in all elements of servicing pension funds in the industry, we see some resilience to the results going forward. Got it. Thank you. And maybe just switching over to the transformation program. Any chance you could give us an update on kind of more finally, where these transformation savings are benefiting the margin between corporate and the two segments so far in the program? Yes. We’ve seen in your benefit from our strong transformation performance across the portfolio of businesses and in the corporate segment, what you’re seeing play out primarily in the corporate segment is the fact that would be a reinvestment need and then talent, things of that nature is not as pronounced as it was, for example, in Risk and Broking. Hence, the transformation savings there more than offset by the investment hiring and to a lesser extent, in HWC where there was margin expansion and the transformation savings were a driver of that. But again, there was some level of reinvestment there, just not to the same extent that you would have seen in Risk and Broking. Thank you. [Operator Instructions] Our next question comes from the line of Joshua Shanker with Bank of America. Your line is open. Yes. Thank you for taking my question. I don’t know what I’m going to find out asking this question, but learn something. When you look at the organic growth you’re experiencing right now, can you talk a little bit about customer growth versus inflation versus product sales. And the mix of growth, what is actually growing when we try and break out the successes of the year? So there’s – there are all of the above, right, does play into how we grow, right? We’ve talked on prior calls about how various parts of how we price are in place in sensitive, whether it’s rates in our consulting business or asset values that underlie insurance and thus, the commissions we receive. We have also talked about how the fact that we’re back in the marketplace, right? During the period where we were involved with Aon, we stopped receiving RFPs, and that came back to us beginning with the fourth quarter of 2022, we’ve enjoyed the success winning new clients. And over the course of emerging from that experience, our retention rates of existing clients have also improved. And that’s a credit to the hard work of all our colleagues, making sure that our well-earned reputations are superior client services maintained. When you’re talking about client wins here, to what extent are they new clients to work in? Are they clients who might have been lost during the Willis and uncertainty period that you won back? And can you sort of give examples on what areas of the market you’re seeing that market share gain within the space? Yes. So I mean, it’s a mix of all of the above I think. We have a lot of clients, and so you’re going to have a lot of examples on the direction. If you look at various parts of our business, some of it just much more naturally sticky than others, right? We’ve got a client of BDO, who’s in an outsourced benefits relationship with us, typically with a three, five, seven-year contract. That business was extremely resilient during all of this and has looked resilient going forward, but we continue to add new clients in the mix as well. Our CRB business is where we saw the most volatility in the client mix, and that’s one where I think our colleagues did a great job retaining clients, but it was under pressure. Now that we have a clear course and destiny. We’ve seen client retention and client attraction both up as well as new expansion of existing client relationships. So there’s a lot in the hood. We have a lot of variation in the businesses, but the direction, I think is encouraging across the… Yes. Thank you. Andrew, just a quick question here on fiduciary income. You probably some nice disclosure in your Q last quarter on the tailwind from every 25 basis points. If I take a look at that, it would look like it’s probably a 50, call it, basis point tailwind to organic growth in 2023, just given where short-term rates are and maybe a little more meaningful for margins. Do I have that right? I think directionally, you’re getting there. Remember, it does take time for investments to turn over. So the portfolio has to work through in that as well. But I think directionally, that’s consistent with how we’re thinking about things. Yes. No, I was just going to say the other thing, don’t forget, we’ll have some gain on sale headwinds that continue through next year, right, that will temper that from a margin perspective. Right, right, right. I got that. I got that. The second question would be a number of your, call it, peer companies or competitor companies highlighted the headwind from transactional business this quarter and maybe in the first quarter. Do you have a big transactional business? Was that a headwind at all this quarter to organic revenue growth and potentially first quarter? So we do have a transactional business of a successful one. I’m glad to say. And we faced the same headwinds as others. We’re – we didn’t think about that as we’ve talked about our expectations. Yes. Thank you. Good morning. Just a small question, in the transact business, anything that you saw around expected lifetime value seems like the enrollment season, people were more productive about new business. Did that have an impact on the persistency of the – of your customers there? Yes. We have taken actions, Mark, and good morning, to try and do our part to help with persistency, including working with carriers on sort of their customer treatment to make sure that customer satisfaction is as high as possible. And we’re happy that those actions seem to be fruitful, and we’ll look to maintain that sort of thing going forward, including post-placement customer support on our end. We continue to examine our lifetime values, which, of course, are subject to outside actuarial estimate. And I think that we remain happy with how we’re going. I mean persistency has improved. And so no signs that we have anything but to continue our actions and continue to improve, how we go about that business to keep the numbers going forward. Good morning. Thanks. How do you think about buybacks to current valuations and just the way you think about buying back stock versus reinvestments for this year? Yes. Sure. As we’ve got a fairly disciplined approach to capital management that does begin with looking at share repurchases as the primary use of cash. And given current valuations, we do continue to think that is a very attractive return although we do need to look at our portfolio of potential investments through a strategic lens and you need to continue to reinvest in the business organically or inorganically as appropriate to ensure that we’re investing for growth in the future. Got it. That’s helpful. And then my second question is more on a high level. At your last Investor Day, you talked about kind of moving upstream to larger accounts. Can you just give us an update on how that’s progressing? And how that’s contemplated in your mid-single digit organic growth guidance for this year? We’re happy with how we continue to be a large account reference there was principally across the R&D portfolio, right? Our existing HWC business skews large accounts to begin with. With respect to how we’re progressing in large market, I think I’d just point to the fact that we’re growing and large market is very much a part of that. Some of the talent we brought on focus is there. But we think we play well across all market segments, and that’s a strength we have for us. Good morning, and thanks for taking my question. I’ve got two. One, when we take a look at Health, Wealth and Careers, most of the business is cyclically insensitive and across the Board. But you do have some cyclically sensitive elements within that business. I’m wondering what you’re seeing just in terms of client behavior buyer intentions in that area? And then I have a follow-up with regards to cost synergies. Yes. So typically, our career business is the one that’s seen the most volatility to it through the economic cycle. We not see all that much of it this time as employers are trying to adjust to the “new normal of work”. And you even see that despite threat of recession in the job numbers that we posted here in the U.S. We’ve also taken measures over the years to make that business some of us economically sensitive, switching to software and technology as part of the offering and to focus on some of the parts of the business that are also less economically sensitive like executive compensation as part of the mix. So not declaring victory, but I think we’ve made strides in removing some of the sensitivity there. The higher demand has been holding up well we think. That’s terrific. And then with regards to the incremental cost synergies that you ended up achieving. Did that come primarily from real estate or personnel or a combination thereof? And what’s going to drive the $100 million of additional cost reductions next year and any change to the 2024 run rate savings targets. So no change to the 2024 targets. The amount that sort of got pulled forward in Q4 is really just a matter of certain components moving faster than we’ve anticipated. And that’s come across the portfolio of actions that we’ve taken, whether it was real estate or technology and optimization or right shoring, things of that nature. So we’re pretty pleased that it did come from all components of the program. Thank you. I’m showing no further questions in the queue. Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

EarningCall_225

Good morning. This is the conference operator. Welcome, and thank you for joining Credit Suisse Group's Fourth Quarter and Full Year 2022 Results Conference Call for Analysts and Investors. As a reminder, all participants are in a listen-only mode, and the conference is recorded. You will have the opportunity to ask questions after the presentation. [Operator Instructions] I will now turn the conference over to Kinner Lakhani, Head of Investor Relations and Group Strategy and Development. Please go ahead, Kinner. Before we begin, let me remind you of the important cautionary statements on Slides 2 and 3, including in relation to forward-looking statements, non-GAAP financial measures and Basel III disclosures. For a detailed discussion of our results, we refer you to the Credit Suisse fourth quarter and full year 2022 earnings release that was published this morning. Let me remind you that our 2022 annual report and audited financial statements for the year will be published on or around March 9, 2023. So, I will now hand over to our Group CEO, Ulrich Koerner; followed by our Group CFO, Dixit Joshi, who will run through the numbers. Let me begin with some opening remarks. 2022 was an extremely challenging year for Credit Suisse with the group posting a net loss of CHF7.3 billion. Nonetheless, it was also a year which marked the beginning of the important and necessary transformation for our organization. On October 27th, we presented a targeted plan to create the new Credit Suisse, a simpler, more focused bank built around client needs. And, today, we reaffirm all of the targets we announced in October. We are building the new Credit Suisse around our Wealth Management and Swiss Bank franchises complemented by our leading and differentiated capabilities and Asset Management and Markets. We continue to execute our transformation at an accelerated pace and in a determined manner. I will share some details of our progress over the course of the presentation. In line with the update provided on November 23rd, we reported a pre-tax loss of CHF1.3 billion and an adjusted pre-tax loss of CHF1 billion for the fourth quarter. We have a robust balance sheet, and we are executing on our transformation from a position of strengths. We reported a year-end CET1 ratio of 14.1% and a Tier 1 leverage ratio of 7.7%. Our liquidity position also improved following the impact of the events of October. The average liquidity coverage ratio was at 144% at the end of the fourth quarter, with further improvements this year. At these levels, our capital and liquidity ratios compare favorably to our peers. The Board will propose a cash dividend of CHF0.05 per share for the financial year 2022, subject to AGM approval. This is consistent with our intention to pay a nominal dividend throughout the transformation period. We remain focused on the disciplined execution of our strategy and have made progress in restructuring our Investment Bank, the creation of CS First Boston, and the acceleration of our cost transformation program. We are confident that our fundamental reshaping of the bank will create value for all our stakeholders. Over the next three years, we will continue to execute at pace, building on our respective global franchise and delivering exceptional service to our clients. Let me turn to the fourth quarter results. The group reported an adjusted pre-tax loss of CHF1 billion for the fourth quarter, primarily reflecting an adjusted pre-tax loss of $1.3 billion in the Investment Bank. Challenging market conditions and lower client activity had a significant impact on our Capital Markets and Advisory businesses, while the strategic actions to de-risk and exit certain business lines resulted in lower sales and trading revenues. Now, turning to Wealth Management. The division reported an adjusted pre-tax loss of CHF155 million. During the quarter, we put in place an extensive client outreach program and are already seeing the benefits of our initiatives. We are also taking proactive steps to reduce the cost base as part of the group-wide cost transformation program. The Swiss Bank division reported an adjusted pre-tax profit of CHF259 million for the quarter. This demonstrates our resilience and leadership position in our home market. Overall, the group reported a pre-tax loss of CHF1.3 billion. This result includes several adjusting items, the largest of which were restructuring expenses related to our cost transformation program as well as real estate gains. Our new executive board remains fully focused on the successful execution of our strategic transformation and the actions we have taken so far strengthen our business momentum in 2023 and beyond. Now, let me be clear, our teams continue to work relentlessly on serving our clients. Since October, we have proactively engaged with more than 10,000 Wealth Management clients and over 50,000 clients in the Swiss Bank. As previously mentioned, we are seeing the first positive signs from our comprehensive global initiatives to regain deposits as well as assets under management. In January, we saw deposit inflows at group level in Wealth Management and in APAC, as well as net new asset in APAC and in Swiss Bank. Importantly, clients remain overwhelmingly supportive and we remain very thankful for that. To remind you of the strengths of our Wealth Management business, we are the number two wealth manager outside the U.S. with a deep client franchise balanced between ultra and high net worth clients. We have a very clear plan to restore the Wealth Management division to profitability. We are focused on growing a more stable high net worth business. We increased our focus on recurring revenues and regaining client wallet share among ultra-high net worth clients. And we are undertaking steps to reduce costs and improve efficiency. Let me now update you on what we have achieved since October 27th. We have made significant progress in the transformation and restructuring of the Investment Bank. Since the end of the third quarter, we have achieved about two-thirds of our Securitized Products Group asset reduction target. In the fourth quarter, we've reduced risk-weighted assets and leveraged exposure by about $5 billion and around $15 billion, respectively, reflecting proactive deleveraging and derisking measures in the non-core unit, that's ahead of the target run rate we set in October. As announced, our goal is to carve out CS First Boston as a distinct leading independent Capital Markets and Advisory net business, and we are pleased with the acquisition of the Investment Banking business of M. Klein & Company. This is a significant step forward in realizing CS First Boston's growth potential and creating value for our shareholders. Since our strategy announcement in October, we have strengthened our capital position by raising around CHF4 billion of equity and we have completed around CHF10 billion of debt issuances, while it's making tangible progress in deleveraging and derisking the group further. This should reduce our funding needs in the future. Our cost transformation is well underway. As previously disclosed, action initiated in the fourth quarter represent approximately 80% of our 2023 cost base reduction target of about CHF1.2 billion. I want to make it absolutely clear that me and my management team are relentless in driving our cost base lower. We have made significant progress on our exit from the Securitized Products. We completed the first closing of our transaction with Apollo. That, along with other actions taken, contributed to an overall reduction in Securitized Products' assets by around $35 billion, since the end of the third quarter. This is approximately two-thirds of our targeted reduction of $55 billion. So, we are on track to close the full transaction in the first half of 2023, subject to regulatory approvals. This transaction, together with the potential sale of other portfolio assets, is expected to reduce risk-weighted assets, leverage exposure and other risk metrics over time. These actions are consistent with our strategy to significantly reduce the size of the Investment Bank and release liquidity and capital to support the bank's core businesses. Turning to the non-core unit. As you can see on the slide, we are running ahead of schedule on both risk-weighted assets reductions and leverage exposure. Dixit will cover the important progress we have made in more detail. CS First Boston is an attractive value proposition for Credit Suisse shareholders and its carve out is an important step in our strategic transformation. We are creating a global independent capital markets and advisory led bank with distinctive capabilities and a unique market position. It will be headquartered in the US with leadership positions in Europe, Asia and selected emerging markets. We are confident that our history of innovation, market leadership and the years of experience of our core teams, together with a simpler operating and regulatory model, will provide a clear competitive advantage. Our execution plan is already underway. We have announced the acquisition of M. Klein & Company, which will further strengthen CS First Boston's advisory capabilities and we are right-sizing the business to reduce capital needs and release low-returning capital. In short, CS First Boston will be efficient, agile and have a comprehensive product offering designed around client needs. Importantly, the new Credit Suisse will maintain a long-term strategic partnership with CS First Boston, leveraging our leading market platform, whilst ensuring the close connectivity to our Wealth Management and Swiss Bank businesses. And we have a strong management team under the leadership of Michael Klein. Michael has an established track record in building leading capital markets and advisory led businesses as well as four decades of investment banking experience. The acquisition of M. Klein & Company adds to Credit Suisse's advisory capabilities and accelerates the creation of an advisory-led CS First Boston. At the same time, it creates significant revenue opportunities for Credit Suisse. The transaction is that a single digit price-to-earnings multiple and is expected to be earnings accretive with an anticipated impact on the CET1 ratio of less than 10 basis points. In October, we made a very clear commitment to simplify the group and to reduce our cost base. We intend to cut the total headcount from around 52,000 in 2022 to 43,000 over the next three years. We have already achieved a 4% reduction in the fourth quarter 2022 and we intend to continue to reduce third-party costs, including spending on contractors and consultants in a targeted and decisive manner. We are determined to deliver on our cost reduction target of CHF1.2 billion in 2023 and CHF2.5 billion by 2025. These targets on a like-for-like basis and exclude the impact of business exits. We are making progress on our cost transformation, and we will be relentless in identifying opportunities to move further and faster. Rest assured, our cost initiatives will not impact the investments in risk management and technology, including digitalization as well as our targeted business growth. To sum up, we are well advanced on our journey to deliver a new simpler, more focused Credit Suisse built around client needs. We have a new executive board with relevant experience and a strong track record of execution in similar situations. We are building a unified culture from the top of the organization with a strong focus on risk management, collaboration and accountability. We remain disciplined on strategic execution, strengthening and reallocating capital, delivery on our cost ambitions, and, most importantly, supporting our clients globally. As I mentioned, we have acted decisively to address the impact of the outflows experienced in the fourth quarter and we have seen deposits inflows at the group level in Wealth Management and APAC, as well as net new assets in APAC and the Swiss Bank. We are also making progress with the carve out of CS First Boston and are creating a more focused markets business that will deliver innovative solutions and products for our Wealth Management and our institutional clients. In short, we are determined to make this transformation a success, restore trust with all stakeholders, and ultimately create sustainable value for our shareholders. I'm going to start today with the financial overview for the fourth quarter and the full year, and then provide some details on assets under management given the outflows that we saw in the quarter. After that, I'll go through the divisional performances before setting out some of the key themes for the group. Before I begin, I'd point out that this is the last time we will be discussing our results under our current financial reporting structure. As of the first quarter of 2023, we will be publishing our earnings under the new structure that we outlined in October comprising the four key business divisions and the Corporate Center, plus the Capital Release Unit. We will provide a restated time series at the beginning of April, along with other relevant information and, of course, we plan to provide regular updates detailing our progress as we execute on our strategy. Please note that unless I state otherwise, for example with the Investment Bank, you can assume that whenever I give a currency figure it's in Swiss francs. So, let's start with the group overview. The group took clear strides forward, despite the challenging fourth quarter. We delivered the strategy update alongside our third quarter earnings and started immediately on implementation. We made good progress reducing non-core related exposures, on cost reduction measures and on balance sheet reductions relating to the Capital Release Unit. We proactively managed our liquidity position following the outflows in the fourth quarter. We executed a successful series of capital and funding measures, including raising around CHF4 billion in equity and completing around CHF6 billion of debt issuance in the fourth quarter. We strengthened our CET1 ratio to 14.1%, and we remained resolutely focused on execution and on supporting our clients. As you can see from this morning's announcements regarding the acquisition of the Investment Banking business of M. Klein & Company and the completion of the first closing of our Securitized Products transaction with Apollo, we are executing rapidly on the strategy and we're ahead of plan. In terms of our financial performance, the net asset and deposit outflows in the fourth quarter reduced our net interest income and recurring revenues, notably in Wealth Management. The Investment Bank experienced another tough quarter with lower client activity, the impact of our strategic actions, as well as the events of the fourth quarter, all contributing to the reduced revenues in sales and trading. Revenues in our Capital Markets and Advisory businesses were also lower and more in line with the industry-wide slowdown. Overall, fourth quarter reported net revenues for the group were 33% lower year-on-year at CHF3.1 billion and reported operating expenses were 31% lower at CHF4.3 billion. Provisions for credit losses amounted to 6 basis points of net loans at the year-end, mainly relating to specific provisions taken in the Swiss Bank and the Investment Bank. This resulted in a reported pre-tax loss for the quarter for the group of CHF1.3 billion, in line with the guidance that we gave at the end of November of a loss of up to CHF1.5 billion. Our reported results include a number of adjusting items with a cumulative net impact on our fourth quarter results of CHF300 million. A detailed breakdown can be found in the earnings release. However, notable adjusting revenue items included CHF191 million of real estate gains and a CHF75 million loss relating to the disposal of our remaining stake in Allfunds. In total, adjusted net revenues for the fourth quarter were 32% lower year-on-year at CHF3 billion. Reported operating expenses for the quarter included CHF352 million of restructuring expenses, broadly in line with our guidance of CHF300 million and CHF34 million of major litigation provisions. We continue to make good progress in resolving our outstanding legacy issues. Adjusting for these items, operating expenses were 3% lower year-on-year at CHF3.9 billion, resulting in an adjusted pre-tax loss for the quarter of CHF1 billion. The income tax expense for the fourth quarter was CHF82 million, resulting in a net loss attributable to shareholders of CHF1.4 billion. The reason we have a tax charge for the quarter, despite the overall reported pre-tax loss, is driven by the fact that we earn taxable income in legal entities, which cannot be offset by tax losses elsewhere in the group. We expect this to continue to be the case in 2023 as we execute on our transformation program. I'd like briefly to mention the Corporate Center, which booked an adjusted pre-tax income of CHF104 million in the fourth quarter compared to a loss of CHF172 million in the same period last year. This was largely driven by treasury results. Turning back to the group, for the full year, reported revenues were 34% lower compared to 2021 at CHF14.9 billion, reported operating expenses were 5% lower at CHF18.2 billion, leading to a reported pre-tax loss for the year of CHF3.3 billion. The third quarter deferred tax impairment of CHF3.7 billion resulted in a reported net loss of CHF7.3 billion for 2022. Let me make a brief comment on compensation, which for the full year was down 2%. The fourth quarter total for the group decreased by 4% year-on-year, however it was 8% higher compared to the third quarter. This was a function of structural changes we've made to compensation over the course of the last year. As a result, some of the division show increases in the compensation line for the fourth quarter. Compensation is one of our key levers for controlling costs and I'd note that the total variable compensation pool for 2022 was 50% lower than in 2021, as we took actions commensurate with the decline in the group performance. Now, before we turn to the performance of our business divisions, which I will discuss as usual on an adjusted basis, I'll touch on the impact of the client asset outflows during the fourth quarter on Slide 15. Our assets under management were impacted by significant net asset outflows early in the quarter, which affected both our revenues and our liquidity position for the fourth quarter. Approximately, two-thirds of the net asset outflows in the fourth quarter occurred in October and they've reduced considerably in November and December. Group assets under management were around 8% lower quarter-on-quarter at CHF1.3 trillion, largely reflecting net asset outflows of CHF111 billion. Deposit outflows made up around 60% of Wealth Management and Swiss Bank net asset outflows in the quarter. In total, net asset outflows represented 8% of assets under management at the end of September. Since the start of the fourth quarter, we strengthened our balance sheet, including through the capital raises to set the group on a stronger trajectory. We're now three months into our transformation journey and we saw the first signs of the benefits of these and other proactive initiatives in January with positive deposit inflows at the group level and specifically in Wealth Management. Net asset flows in the Swiss Bank were positive and the net asset outflows in Wealth Management in January where at a reduced level compared to December with net asset inflows in Asia Pacific. Moving on to the divisional overviews, we'll start with Wealth Management. Lower assets under management and deposits as well as subdued client activity resulted in lower revenues. This led to a loss in Wealth Management as we had indicated in our outlook statement in November. Net interest income declined 17% year-on-year with lower loan income and higher funding costs offsetting the benefit of rising interest rates on deposit income, albeit on lower deposit volumes. Similarly, lower average assets under management resulted in a 17% year-on-year fall in recurring commissions and fees. Transaction based revenues were 20% lower, reflecting reduced levels of client activity and mark-to-market losses of CHF31 million on financing exposures. Total net revenues were down 18% year-on-year. Operating expenses were 5% higher, mainly due to higher general and administrative expenses, reflecting higher allocated corporate function costs. I would note that a number of the measures that we took in the fourth quarter should reduce costs for the division in 2023. Overall, the division delivered an adjusted pre-tax loss for the quarter of CHF155 million. While we expect the division to report a loss for the first quarter, we are determined to return Wealth Management to profitability and Ulrich has highlighted some of the specific actions that we're taking to achieve this. Let's turn to the Swiss Bank on Slide 17. Swiss Bank had a resilient fourth quarter. Net revenues were 10% lower year-on-year, but quarter-on-quarter revenues held up well, 3% lower. The reduction in the threshold benefit from the Swiss National Bank, given rising interest rates in Switzerland, negatively impacted net interest income, so this was partially offset by higher deposit income. NII was 11% lower year-on-year and flat compared to the third quarter. As a reminder, the loss of the SNB threshold benefits is now in the quarterly run rate and we expect the year-on-year impact, which was CHF78 million in the fourth quarter, to bottom out by the middle of this year. Recurring commissions and fees were 10% lower year-on-year, mainly due to lower average assets under management. These were flat compared to the end of the third quarter and 12% lower year-on-year, primarily the result of declining markets. Transaction-based revenues were 18% lower year-on-year, mainly driven by the impact of equity investments. Excluding these, lower client activity accounted for an 8% reduction. Provisions for credit losses were CHF28 million compared to a release of CHF4 million in the fourth quarter last year, equivalent to 7 basis points of net loans. Turning to Asset Management. Market conditions in the fourth quarter were challenging for the Asset Management division. Net revenues were down 28% year-on-year, driven primarily by lower performance, transaction and placement fees, as well as reduced management fees. Management fees were 19% lower, reflecting a decline in assets under management of CHF74 billion, CHF50 billion of which was due to FX and market effects. Net asset outflows in the quarter were CHF11.7 billion, across both traditional and alternative investments as well as outflows from investments and partnerships. Operating expenses were 3% lower year-on-year, primarily due to lower costs relating to the supply chain finance funds matter and reduced commission expenses, partly offset by higher compensation and benefits expenses. Let's now turn to the Investment Bank on Slide 19. Clearly, this was not a normal quarter for the group and in particular for the Investment Bank, where revenues were down 74% year-on-year. Revenues were directly impacted by: first, our restructuring actions, including the steps taken to de-risk and exit certain business lines; second, actions we took in response to the group's deposit outflows in the fourth quarter; and third, reduced client activity as capital market conditions remained challenging. Operating expenses were 15% lower year-on-year, mainly reflecting lower compensation and benefits, resulting in an adjusted pre-tax loss for the quarter of $1.3 billion. Our sales and trading businesses were impacted both by our restructuring and lower client activity, resulting in an 89% year-on-year decline in revenues. We estimate that the impact of the accelerated deleveraging, including that linked to our strategic actions, accounted for around 40% of the year-on-year decline. Our continued strength in macro was offset by a substantial decline in Securitized Products and Global Credit Products, largely due to our strategic actions and, consequently, fixed income revenues were 84% lower year-on-year. Equity sales and trading revenues were affected by the impact of our strategic actions, reduced client activity and less favorable market conditions on the equity derivatives business. The exit of Prime Services also had a year-on-year effect on cash equities. Overall, equities revenues were 96% lower year-on-year. For those business lines less directly impacted by our restructuring, the performance was more resilient with Capital Markets and Advisory revenues 59% lower year-on-year, in line with the reduced industry fee pools. The reported pre-tax loss of $1.5 billion included restructuring expenses of $214 million for the fourth quarter, part of which was related to the headcount reduction program. We also booked major litigation expenses of $43 million. Looking forward, our strategic actions and the ongoing challenging market backdrop mean we would also expect the Investment Bank to report a loss in the first quarter of 2023. However, we have taken decisive action on the structure of the division and these measures are important steps in the creation of the new Credit Suisse. I'll now take you through our progress on some of our key financial metrics starting with capital on Slide 20. We ended the fourth quarter with a CET1 ratio of 14.1%, up around 150 basis points quarter-on-quarter. Our successful capital increases added 147 basis points, underpinning our capital strength as we continue to execute on our strategic transformation. Business RWA reductions benefited the CET1 ratio by 80 basis points, partially offset by 53 basis points attributable to the net loss for the quarter and by 24 basis points due to other CET1 movements, including FX and model and parameter updates. Overall, RWAs declined by CHF23 billion quarter-on-quarter, mainly due to the reductions in the Investment Bank of around CHF5 billion and around CHF9 billion in Wealth Management and Swiss Bank, with a further CHF10 billion due to FX. Our parent capital ratio was around 250 basis points higher compared to the end of September at 12.2%. I should also note that as we reduce RMBS exposures and activity as part of our announced strategy towards a managed exit from the Securitized Products business and to de-risk the bank, we anticipate, based on ongoing regulatory discussions, that operational risk RWAs associated with historical RMBS activity will decrease. Turning to leverage. For the fourth quarter, we reported a Tier 1 leverage ratio of 7.7% compared to 6% in the prior quarter. Clearly, this ratio was higher than the level we'd normally expect to maintain, primarily because of the reduced size of the balance sheet which resulted from the events early in the fourth quarter. Reductions in high-quality liquid assets, mainly from the deposit outflows, and business deleveraging contributed 102 basis points and 59 basis points, respectively, with the capital raises contributing 47 basis points. This was partly offset by 17 basis point impact resulting from the reported net loss for the fourth quarter. Leverage exposure was CHF186 billion lower quarter-on-quarter at CHF651 billion, primarily driven by CHF118 billion drop in HQLA as well as deleveraging, notably in the Investment Bank. Let's now look at these deleveraging and derisking measures in more detail on Slide 22. As part of our strategic transformation announced in October, on the 1st of January, we established the Capital Release Unit, which includes the non-core for non-strategic assets. The CRU will be a separate reporting division and we will provide a more detailed breakdown when we publish our restated financials in early April. We've made a strong start in the fourth quarter in advance of the formal establishment of the CRU. Proactive deleveraging, derisking, and market moves reduced RWAs by around $5 billion and leverage exposure by around $15 billion, excluding the impact from reductions in HQLA allocations. We're running ahead of schedule, and I'd add that de-risking also generated an estimated $10 billion of liquidity in the fourth quarter. We intend to continue to execute on the run down of assets to release capital and liquidity, as well as targeting cost reductions. As you can see, we're well on track to reach our RWA and leverage exposure targets of around $25 billion and around $92 billion, respectively, by the end of this year. Moving on to our liquidity coverage ratio. Although, the group's liquidity position was impacted by deposit outflows in the fourth quarter, our average liquidity coverage ratio at the end of December stood at 144%, well above the group's minimum regulatory requirements and comparing favorably with our peer group. This represents an improvement from the lower levels in the quarter. It was a result of a series of proactive measures, including the capital raises, debt issuances and deleveraging. We have continued to see the improvement in the ratio, since the start of the year and we remain focused on maintaining our LCR at a prudent level. The disciplined execution of our strategy, including our simplification program, should lead to further liquidity improvements and more efficient liquidity management across the group. Moving now to funding on Slide 24. A major consequence of our strategic transformation is that the group's future funding needs and related costs should reduce considerably over time due to the simplification of our business model. This should result in a more efficient group balance sheet. You can see that in 2023, as a result of the balance sheet deleveraging driven by our strategic actions, redemptions should exceed our estimated debt issuance plan for the year. This reverses the situation of recent years, and I would expect this trend to continue over the next three years. Our issuance plan for the current financial year is around CHF17 billion, less than the expected redemptions of CHF22 billion. Reduced HoldCo funding needs means we expect issuance of around CHF2 billion and AT1 issuance of around CHF4 billion. In January, we completed nearly half of our planned CHF9 billion OpCo issuance for the year and around a quarter of the overall full year funding plan. Let's move on to net interest income sensitivity and guidance for funding costs. I would expect the cumulative revenue benefit based on current forward curves to be around CHF900 million for the next three years versus year-end 2022 with the largest benefit coming from higher US dollar rates. To be clear, our forward net interest income assumptions are based on the static balance sheet at the end of the year. The benefit going forward will be a function of actual loan and deposit balances. Now, turning to funding costs. The widening of our credit spreads over the course of 2022 has resulted in an increase in the cost of our funding and I would expect this to continue to be the case, partially offsetting the benefit of higher interest rates over the next three years. For 2023, I expect that increase to be in the region of CHF500 million compared to 2022. However, as I mentioned earlier, we expect our funding needs and costs to reduce as we progress our transformation. Turning now to costs. Adjusted operating expenses for the year was CHF16.2 billion, broadly flat compared to 2021 and below our previous guidance of around CHF16.5 billion to CHF17 billion, reflecting our disciplined approach to costs, including compensation, which I touched on earlier. Looking forward, our ambition to reduce the cost base to no more than CHF15.8 billion in 2023 and to around CHF14.5 billion by 2025 on a constant perimeter basis remains unchanged. What I mean by this is that as we complete the Securitized Products transaction and execute on other disposals, we'll adjust our cost and headcount targets downwards accordingly. We are on track to deliver on our cost ambitions and, as we've previously disclosed, the actions that we have already initiated in the fourth quarter are expected to represent 80% of the savings required to achieve our 2023 cost target. We will, of course, be looking for additional opportunities to eliminate duplication and drive operating efficiencies across the group. In terms of restructuring costs, for the fourth quarter, we booked CHF352 million, and I would reiterate our previous guidance for restructuring costs of CHF1.6 billion and CHF1 billion for 2023 and 2024, respectively. Touching briefly on headcount, our overall target is to reduce this by 9,000 to around 43,000 by the end of 2025 on a constant perimeter basis. And actions that we've taken in the last three months have enabled us to achieve around a 4% headcount reduction since the end of September. To summarize, our financial performance for the fourth quarter reflects the decisive actions we have taken against a difficult market backdrop. Looking forward, we expect that the strategic actions taken to reduce the group's risk profile and the challenging market conditions will continue to be reflected in our financial results. I would expect the group to report a loss before taxes in 2023 given the adverse revenue impact of the exit from non-core businesses and exposures and, of course, the restructuring charges related to our transformation. We are now well into the execution phase of our strategic transformation and have clear priorities for the weeks and months ahead as we work towards achieving the financial targets that we set out on October 27th. Let me remind you what they are. On group-wide costs, we expect to reduce our cost base on a constant perimeter basis to no more than CHF15.8 billion in 2023 and to around CHF14.5 billion by the end of 2025. With regard to the group CET1 ratio, we expect this to be at least 13% throughout the transformation period and above 13.5% at the end of 2025 pre-Basel III reforms. And by 2025, we are targeting a core return on tangible equity that is excluding the Capital Release Unit of greater than 8% and around 6% for the group, as a whole. Thank you, Dixit. We will now begin the Q&A part of the conference. May I ask everybody to stick to two questions, please. Alice, let's open the line, please. Good morning. I guess my first question, I'd just like to come back to your commentary around being proactive on flows and winning back some of the client money. Thank you for the comments on January about Asia Pacific and Swiss Bank. I guess my question would be more broadly, as part of your proactive approach, could you provide any kind of color on what you're doing in terms of pricing? Are you putting through cuts to fees? Are you offering higher rates on the deposits? How are you going about winning back that business? So that would be my first question. My second question is on what's left of your fixed income and equities business post the SPG divestment? What is the plan for that business overall? How much is expected to be moved in with CSFB versus how much of that Markets business is to be retained by the broader CS Group? And I'd just like an idea of any thoughts on what the revenue contribution of that Markets franchise could be. You've obviously given the CHF2.5 billion number for CSFB, but presumably, that's mainly around origination and advisory retail. Any thoughts on the Markets franchise going forward? Thank you. Thank you, Andrew. Let me start with the first question. So, as we were alluding to, and I'd like to reiterate that because it's really, I think, important for where we are now, where we are going throughout the year, so this client outreach program, which I was talking about, is really unprecedented. That is at least what the colleagues here in the firm tell me being here longer than 30 years. So -- and I think it has shown and has developed very good momentum and, hence, the figures I gave for January. You asked concretely about pricing. So, we try to be competitive, call it, like many of our competitors as well, so to be in the game, but we are not buying assets, just to be clear, because that would not be very smart going forward as well. So, what is also the fact, and I think that is something which all my colleagues in the bank and myself felt and the many, many clients interactions which we had nearly on a daily basis, I would say is that the client support which we get from them is really overwhelming. And I mean this something which is absolutely, for me and my colleagues, is absolutely fantastic. So, the clients, in other words, the clients want us to be successful, and that is something which we can feel and, therefore, we are so focused on delivery. Andrew, I'll take the second, and thank you for joining the call. The SPG transaction, as you know from our previous announcements, part of our strategy to reshape and rightsize the Investment Bank. That portfolio had in the region of around CHF75 billion approximately of assets at the end of September. We've derisked two-thirds of that portfolio overall through a combination of transactions with Apollo and the first close yesterday and other third parties in the market. And so, we're making rapid progress in reshaping the Investment Bank starting with the SPG portfolio. And we'll continue to enforce capital efficiency and balance sheet efficiency in the Investment Bank. The other leg of that stool is, of course, the Capital Release Unit, which, as I mentioned in my remarks, came into being on the 1st of January. We've moved with pace in advance of that in the fourth quarter to derisk as well. Regarding your question on First Boston -- CS First Boston, CS First Boston, we are reshaping that business as we speak to be capital-light, balance sheet efficient, as well as rightsizing headcount, as Ulrich had mentioned as well. And so, to the extent that we have synergistic businesses, they, of course, will fit well in Credit Suisse First Boston, but I would use those criteria at the outset, which is looking at cost efficiency and balance sheet efficiency as two main criteria for which businesses would fall into SPG -- into Credit Suisse First Boston. The second point I'd make is that with our macro and our markets businesses, we have rightsized those businesses. We've refocused them and, of course, aligned them towards our Wealth Management and our Swiss Bank franchise, which is a key pillar of our strategy at the outset. We will, of course, reflect our restated financials once we set up the CRU, so you'll have a better idea at that stage of the relative splits and what our new segmentation looks like. That should be in April. I hope that's helpful. Thank you very much, and good morning. I'm going to go back to the Wealth Management and to the flow situation. And I have to say, you're commenting on a clear plan to restore Wealth through profitability. So, could we just hear what's in your business plan flow-wise for 2023? But like broader, from a customer business perspective, when we look at kind of flows, deposits, custody assets, loans, how do you see those developing, let's just say, over the next 12 months on top of what you told us on APAC and kind of year-to-date numbers? So that's question number one. And question number two really is about the mix of your cost savings in 2023 as well. You've given us kind of very -- you've given us points on a slide, I think, 11 -- let me just go back there, on Slide 11 from the perspective what your priorities are. But could you give us a sense which of those points that you have detailed there actually have the biggest impact on that cost base reduction so that at least we get a sense kind of where to look at? Because, for example, on the professional services side, you've already did a lot. On the contractor side kind of workforce mix, you've already done a lot in the fourth quarter. Thanks very much. Magdalena, thanks for the question. So, I would say, with respect to your Wealth Management question, what is important, that's why we gave these indications from January, the group overall, as I said, is positive on deposits; Wealth Management, globally, positive on deposits; Asia Pac, positive on deposits. And I'm reiterating that because, as you are fully aware of, the deposits are these kind of assets, so to say, which leave first and have the fungibility to reenter first. So -- and I think that is important to bear in mind. As you immediately understand, Magdalena, we do not give you business plan figures. But you can assume that in the Wealth Management plan is a fair chunk of rewinning lost volumes, lost business with our clients. And important to note here is as well that we hardly lost any client. I think that is also important. That shows you something about what I said before in terms of the relationship which we may have with our clients. Seems to be, for me, very important. In terms of the cost and, Dixit, you might add, a couple of points from my side. With respect to the CHF1.2 billion target, which we stick to, as you are aware of, for 2023, 80% of this cost reduction has been initiated and this in execution already in the fourth quarter. So, I think that is something very positive, which you need to bear in mind. So, you will see the effects coming in, obviously, quarter-by-quarter as we speak in 2023. To better understand, I would say, the overall program, I mean we are doing in forcefully, as I said, everything which we would do in that situation to reduce the cost with the more, call it, classical measures like as we were alluding to getting more efficient, therefore, leading in less headcount, reducing contractors, consultant spend, and there is room to go. This is absolutely no question, we are looking at the usual things which you apply, like how many levels in the organization, how many direct reports, all these kind of things we are working on. Having said that, and I'm saying that because this is what I would think is, call it, the first phase to get into new Credit Suisse. And then, obviously, and we are working in parallel on that one, is that we are asking ourselves and developing our new operating model for new Credit Suisse, and that needs some more work over the next few months. But I think that is important for the second phase of cost reduction, because the new operating model in itself must be designed in a way that is much more agile and much more simpler. That's why we talked about that in connection with new Credit Suisse several times. Ulrich, just to add, I mean, on those -- and Magdalena, good questions. I think as we reduce complexity and as we simplify the company as part of the move towards the new Credit Suisse, I think that creates larger efficiencies for us, of course, that we need to crystallize. The second point I'd make is we will keep focusing on optimizing our legal entity structure, which also has upside for our cost base. And the third point I'd make is that I mentioned in my remarks that our cost targets are very much on a constant perimeter basis. And so, for example, as we progress towards the final close of the Securitized Products transaction, we will, of course, once that's closed, also then adjust our targets accordingly. So, I think what you're going to see from us as a management team is that we will leave no stone unturned. We have levers at our disposal to drive cost, and we're, hence, confident, as you can hear from myself and Ulrich's remarks, that we're confident on delivering on the cost target. Thank you very much. Good morning. Can I just kind of clarify further the outflow and the flow situation? And sort of two questions very specifically on that. You said that the 4Q outflows were two-thirds in October. Could you give us an idea of the remaining one-third, how was that split between November and December? Was it sort of even across both of those months? That's my first question. And then, the second question, you said -- again, it's on a similar topic. You said that you'd had further outflows in Wealth Management in January, but at a reduced level. I just wondered how we should interpret what you mean by reduced level. Is that relative to 15% in 4Q or relative to where you were in December? That would be very helpful just to understand what you mean by a reduced level of outflows. Thank you very much for the questions, both very good questions. First one, we said like two-third in October. If you look into October and November together, it's more than 85% of the outflows stemming from these two months, and that was exactly the reason. And you are aware of, before our strategy update end of October, we are not in a situation to communicate. That made it so hard in October. And that's why we started immediately at October 27, literally, our client outreach program, which travels with us -- traveled with us throughout the whole year and travels with us right now and as we speak. So, it has not stopped. So, more than 85% from October and November, which tells you now how the development was also in the last quarter. With respect to your second question, net new assets, in particular, we said we are positive, which is very good, because that's a very proactive region, growth region. We are positive in APAC with a good number for January also in comparison to other years. We are positive in Switzerland, also with a good number overall here. We are positive in a couple of smaller other geographies, but we are also still having some outflows in other regions. And that's why we gave this guidance to say, look, it's not at the moment the case yet that we can say we are all over and in every market and in every region already positive on net new assets. That's how you should read it. But again, as I said, in my eyes, the situation has completely changed from last year. Yes. Thank you and good morning. So, Slides 24 and 31, if I could, please. So, Slide 31, you've now this very, very large surplus to your going and gone concern capital requirements. And as you said, Dixit, there's 30 basis points uplift in CET1 from Securitized Products and then there's this operational risk RWA reduction. So, it seems that you'll have really quite striking surpluses and, in particular, in the debt and the subordinated debt stack. So, going back to Slide 24, I can very much see why you might under-issue. Is there a possibility you might under-issue by more if you're able to execute on the deleveraging plan that you've laid out? Thank you. Alastair, thank you for the question. And I'm glad you've noted that because it is a change from, as you can see on the chart from the previous years, certainly the last two years where we've had a greater issuance requirement than we've had redemptions. As we simplify the balance sheet and as we execute on our strategy, and I hope you're seeing that now in the fourth quarter, certainly, as we've taken the size of the balance sheet down, the intentional pieces where we've delevered the SPG transaction, the early start of the noncore unit, you're starting to now see some of those funding efficiencies come through, and that's now reflected in this issuance plan. We set out, we said, up to CHF17 billion. Of course, the funding plan is dependent on the evolution of the balance sheet through the year, and one has to be somewhat responsive and nimble as you get through the year. But at CHF17 billion of indicated issuance versus a CHF22 billion redemption, we're starting to now really turn the corner and start setting ourselves up on a trajectory to eventually reduce our funding costs through time. A couple of things I'd highlight. In response to what you've just said around Slide 31, it does lead to the reduced HoldCo issuance, which is, at CHF2 billion, much less than our expectations would have been, let's say, at some point during last year for this year. And again, that's a reflection of the strategic actions that we're taking. On OpCo, we'll be opportunistic, as you'd expect, through the course of this year, but we've already issued CHF4 billion of an indicated CHF9 billion. And then, of the overall issuance plan, we've come out of the gates quite fast with an issuance of around 25% of the entire full year plan in January. So, we'll be responsive, but what you're going to see is a much more efficient balance sheet over time as a result of the strategic intended actions that we're taking. I hope that's helpful. Yes. Thank you. Can I just -- as a sort of supplemental, so I appreciate you'd expect to grow the balance sheet somewhat as you get deposits and inflows back. But those very large buffers that you've ended up with perhaps through shrinking faster than you'd expected, is it fair to assume that if you can execute, you wouldn't need buffers that big so that the sort of capital requirement goes down, but also some of those buffers that you've ended up with, in particular, that sort of 900 basis point buffer in HoldCo debt might be able to come down? An important observation. I mean what I'd say is if you look at the comments that I made on operational risk, as a result of setting out the strategy and then beginning to execute on it and then demonstrating that we're able to derisk, especially in the mortgage-related portfolios, as you can see, I'm giving fairly clear guidance there that in dialogue with our regulators, we would expect a lower OR requirement. Now, when it comes to really AT1 and HoldCo, of course, this is in the list of our regulators. That said, we will continue transforming the balance sheet in a manner that I think would be conducive towards lower issuance needs. But of course, that's in the hands of our regulators as well. It will be an active dialogue that we will continue having. But I think what's in our hands right now is to continue to drive the balance sheet efficiency that puts us in a position to be able to have that dialogue. Yes, thanks for taking my questions. The first one is on Wealth Management again, but maybe slightly differently, could you talk about the RM decline of 5% quarter-on-quarter, year-on-year by region and also how you see RM development through 2023? And in that context, could you talk about the cost as well, which clearly has continuously increased in WM? And how you see cost development on an absolute level within the Wealth Management business? And then, the second question is on SPG is, can you give us a little bit of an idea of our modeling, how we should think about the revenues and the costs that are coming out of the disposal of SPG? Okay. Let me start with the first question. You mentioned the RM decline. We had certainly -- if you look into last year's somewhat heightened attrition, that's right, as you say. Nevertheless, part of that is also to be seen in the light of increasing productivity, goes without saying. So, looking ahead, I would say, very much depending on how we develop step by step to coming back into Wealth Management profitability and, most importantly, into growth, which we will, I think that might then turn around and we might add again on the RM side to the equation into Wealth Management. Let me also clearly say, we have -- I must say, we have no issues to hire, be it on the AM side, be it on other very significant and important positions. If we feel we need to hire, we have no issues to hire. A lot of people also outside from Credit Suisse are strongly buying into that story of new Credit Suisse and where we are going. And I think that is important and helpful. In terms of cost, the overall development, which you are alluding to in 2022, certainly not where it should go. I was also saying before, we have reduced headcount by like 4% already in the fourth quarter. And the cost program, which we are running within Wealth Management, is obviously an important part of the overall cost transformation program. So, if you look into 2023 and beyond, certainly 2023, you can expect lower costs in Wealth Management, both if it comes to direct costs, but also when it comes to allocated costs from Corporate Center functions. Kian, if I may address the second question on SPG and specifically your question on cost and modeling, I think it's part of a whole host of associated benefits for the firm. And it should be put in light of the wider derisking as well as the repositioning of the Investment Bank and resizing of the Investment Bank. So SPG, of course, is one part of, call it, capital release and business repositioning. The other is the non-core unit as well. And on both those counts, we will be giving you clearly more visibility as we do the restatements and, in the case of SPG, once we get to the final close of the transaction, which we're anticipating in the second quarter of this year. We've given some highlights on the elements that we're able to. The first one being the capital benefit yesterday as a result of the gain on sale, which approximately is in the region of 30 basis points. The second is the OR reductions with, as I mentioned, some clear guidance on the forward trajectory without being able to give you the magnitude as at the state, given that would be an active regulatory dialogue. But we have, as I mentioned, strong expectation on the direction there. The third benefit would be liquidity and funding efficiencies. And you've already seen that come through over the last quarter as we've been de-risking in the SPG portfolio, and there'll be some further efficiencies through the course of the next quarter. And then lastly, I'd mention that the, really, the reduction or the impact on our financial plan from the exit of the SPG business was built into the RoTE target that we had set out on October 27 last year. And so -- and I would also mention that our cost targets will get amended accordingly as we progress towards the final close on the transaction. So, a number of moving pieces that we will give you more clarity on as we get to the close and as we complete the transaction. Thanks, Dixit. Just one more quick one. You mentioned the losses from the non-core in the IB. I missed that. Could you just repeat how it breaks down within the IB? Sure, Kian. We -- as we haven't re-segmented, of course, it's been IB reporting for Q4 under the old segment. The non-core, of course, will be split out when you see the results in April in that time series, but also, we'll be reporting Q1 in our new market structure. We, of course, did in advance of the non-core unit taking shape on the 1st of January. We have been disciplined on executing on our exits of products or exposures to free up capital in a manner that will benefit the shareholder, and you're seeing that come through in the fourth quarter. As I mentioned, that's about... Sorry, I'm referring to the P&L. Can you -- just a simple question, can you give me the breakdown of the losses in the P&L within the IB? No, not yet, Kian. As I said, once you get the restatement, once we restate in the new segment, then we'll be able to provide more visibility around that. Of course, in the Q4, as you point out, of course, in the Q4 in the IB segment, we have losses related to intentional de-risking and especially accelerated de-risking that we've absorbed in the fourth quarter, which is what you're seeing coming through in the results as well. Yes, good morning, and thank you. I wanted to ask about the liquidity coverage ratio of 144%, which is a three-month average. Can you tell us where spot levels were year-end or probably now? And historically, that was closer to 200%. There was probably some reasons behind that. How should we think about it? Whether you can also structurally change some of the funding, bearing in mind legal entity constraints? So, that's one. And then, secondly, also on the capital situation, I mean I guess the U.S. business was running at 24% CET1, Q3. I don't know where it was in Q4, but how do you think about the capital distribution within the group and things you can optimize in that regard? How are you going to do that in the context of the carve-out of CSFB? Are you going to use that legal entity? And what's the possibility to repatriate some of that capital to then really have a benefit at the parent or the group level? That would be interesting. Thank you. Thanks, Daniele. With respect to LCR, 144% at the end of last year, as you said. So, what we do not do is giving spot rates here. But that's why we said, and that's how you should think about it, that's why we said it has improved since then. And if you put that all together, what I said about the overall flow situation and so on should be pretty clear, and what we are, and hence, a good question. So, assume throughout this year, we are rebuilding further the LCR ratio to an extent different levels, which is obviously, as it's immediately clear to you, driven by the whole derisking, deleveraging, which we are doing and Dixit was talking about. What we have not yet fully defined, so to say, what should be with respect to new Credit Suisse an adequate and sensible target ratio for the long term, this is certainly something which we will do once, but not yet, too early in this year because as you also immediately understand, it has a lot of questions tied into legal entity structure and so on where we are also working on. And once we are more progressed on this kind of topics, then we will be certainly in a position to say, look, and very sensible, very comfortable target for LCR should be X or should be Y. I think that's the current situation. So, we are rebuilding further. And Daniele, on capital, I'm glad you brought that up because if you look at the U.S. entities, in particular that you mentioned, with the exit of the SPG business and the work that we're doing towards a carve-out of Credit Suisse First Boston, our legal entity structure, our legal entity balance sheet will look quite different in places like the United States. And it's not just the U.S., but it's elsewhere as well. As we look at simplifying the organization, the derisking and simplification will lead to further opportunities for capital repatriation and efficiency. You've seen that, for example, in the U.K. entities over the last few years where we've created much capital efficiency as we execute on our legal entity simplification program. The other is I'd point you to the parent capital ratio, which as you saw was at 12.2%, partly as a function of some of the simplification benefits we've seen over the years. Hi, thank you. I've got two main questions. One, I think, obviously you mentioned in 2023, you anticipate a fairly substantial loss. Just I appreciate there's a lot of moving parts, and obviously, there's a lot of things to be seen for the year. But I mean, is there any chance you can give us a bit more of a sense of how substantial? Is that largely centered in the IB, but just some sort of order of magnitude there? And then, secondly, there have been a number of articles about various changes to compensation plans, different incentives being put in place. I just wanted to get a sense of how all these things add up. And also, how do they get expensed? So, are they generally being expensed in 2023 or in future years and basically have some of these things work? Thank you. Amit, hi. Yes, on 2023, I mean I'll try to give you some of the building blocks, again, not in a position to give you full guidance for '23 in detail, but I'll point you to a couple of important data points. One is that the Capital Release Unit has targets for this year to deliver on our RWA and leverage efficiency and free up capital. And as you know, we built de-risking costs in respect of that into our plan. So, I would say that's the first item. The second is for businesses that we buy, the discontinued exit, as you know, as is the nature of Capital Release Units that we've seen before at our firm and elsewhere is what you have is revenues dissipate quite quickly and then you attack the cost base and that takes more time, but it's effectively a drag on PTI, which is also what we indicated to you in October with some estimates of PTI out to 2025. And so that would be the second drag we expect. And then, the third is just broader restructuring. We'd indicated that we would try and front load to an extent the restructuring expenses. You saw CHF300 million, just north of CHF300 million in the fourth quarter. This year, we've estimated around CHF1.6 billion. That was the guidance we gave in October for this year. And for next year, it's about CHF1 billion. So, you'll see the P&L absorbing those restructuring expenses as well through the course of this year. Again, we'll give a further update as we begin -- as we get through the rest of the year, but we're really three months into the execution of our strategy. And really, so when we say we'll be loss-making for this year, it's to absorb all of those costs. You asked specifically, is it the IB? It's a combination, actually, for example, our cost reduction program, it really goes horizontally across the organization. So, it really affects all of our business units and all our infrastructure areas. Amit, with respect to compensation question, as you have seen, variable compensation 2022 was reduced by 50% compared to the last year, but even more significantly to previous year, so to say. And you are alluding to, I guess, to what we call the transformation award. That is an award which goes to, call it, a pretty selected, relatively small group of people in the firm. These are colleagues which, independently of hierarchy, and this is also important, independently of hierarchy, who have -- if you want additional important tasks to support our transformation and to help us with the transformation. And overall, this is not an -- in my eyes, very material amount. And the award has on top of it -- and this is also to bear in mind for you, has on top of it a strong cliff vesting element in it, which kicks in if everything gets done as we laid out. And we are convinced of that, this kicks in after 2025. So, overall, if you look through '23, '24, '25, that will not disturb your model in any meaningful way. Yes, good morning. I wanted to follow up on liquidity, please. In one of your recent disclosures, you did point to some liquidity breaches in some of your subsidiaries. And I was wondering if those breaches have been resolved since then. And the second question relates to your funding cost guidance, the CHF0.5 billion increase that you mentioned for 2023. Is that relating, in a relatively narrow sense, to wholesale funding only? Or are you also allowing for some adverse pricing effects on deposits, either by trying to get them back or by having to offer more to your existing depositors? Thank you. Stefan, yes, happy to take both of those. On liquidity, as we said in October, pretty exceptional month for the company at that point, and glad that it's now behind us. As Ulrich mentioned, more than two-thirds of the flows occurred in October and more than 85% in October and November. And in our disclosures, we were pretty fulsome in October around some temporary breaches that we had. So, I'd highlight the word temporary because, as you say, were they resolved? Yes, absolutely. As you know, when we're operating multi-legal entity construct, we would try and retain the appropriate level of liquidity in each of the entities, but not necessarily excesses at the entity level. We would retain those excesses in the group. And then, our group treasury would rebalance in the normal course of business on a daily basis depending on flows. And so, you make an instances where you have a momentary need in an entity and then that gets cured within a day or two or three. And so, pretty comfortable with how that was dealt with, and we're in a pretty good position right now, as you're seeing from the turnaround through the quarter as well as in January. On the second point, on funding costs, and perhaps I'll address it through your deposit point first, which is that we have seen the central banks have pulled back on liquidity through the last year. We have seen a more competitive environment for deposits more generally across the industry. And so, we're also competitive in that respect on pricing. We've also wanted to rebuild our deposit base. And so, we will flex our pricing accordingly, very comfortable with the pricing levels that our RMs and our teams are going out with. And the other is, look, just once again, a recognition that deposit funding is still, on a relative basis, our cheapest source of funding and will remain so. We're pleased that we've been able to reduce, as a result of the actions that we're taking on the balance sheet, as a result of our strategy, we've been pleased that we've been able to reduce the quantum of capital market funding that we have. But as you can see, it's CHF17 billion out of a much larger balance sheet. And so, we're pretty comfortable that we're setting ourselves on a path to reduce our funding costs through time as our balance sheet evolves. Yes. Good morning, everybody, and thank you for taking my questions. The first is essentially a bit of a follow-up to Magdalena and Kian's question earlier. One of the key pillars on the strategic update at Q3 was the pivoting of the business back to profitable core. And at the time, you mentioned the Wealth Management franchise is sort of an 18% to 20% RoTE business within those 2025 targets. But given the reduction in AUMs, and you've highlighted the business is expected to be loss-making in the first quarter, is there now a sort of a strategic decision to be made as to whether to either sort of, a, run the business as a profitable franchise at current AUM levels; or b, to try and regain assets and deliver the level of absolute profit contribution, which was embedded in that strategic plan? I appreciate the comments you made earlier on this topic, but I just wondered whether those two options are essentially mutually exclusive from a cost perspective. So that's my first question. And then, the second one is just on the strategic update, you had the objective of around $3 billion of revenues in the Markets business. And I just wonder whether that's still an objective now. Okay. Chris, let me start with the first one. Thanks for the questions. So, we laid out very clearly, as part of the transformation, three main blocks of actions by the end of October, as you might remember. The first one, as you put it, the radical restructuring of the Investment Bank, and we talked about some various important elements over the last few minutes here. The second one is the cost transformation program with very, very clear guidance on the cost reduction targets, again, as Dixit was saying, excluding exits and all these kind of things that comes on top of it. And that's important to bear in mind. And the last one, which we very clearly said is we want to do that transformation out of a position of capital strength, hence, the capital raise, which was successfully -- and other measures, which was successfully concluded in November, as you are fully aware. So -- and we are executing currently against all of these main blocks of measures and, as we said, very focused, very decisively. And you see that we are in many, many aspects, if you go through the presentation, we are ahead of our plan. Second point to make here is, and that is something, as I was alluding to at least, something we are also in parallel working on is to really fill these new Credit Suisse, how we put it, bank, which will evolve here over the next couple of years with content and then, obviously, doing the same with CS First Boston on the other side. And this is something which we owe you, so to say, but it needs a bit more time as we are traveling through 2023. And once we are there, we will update you in terms of what it means then really going forward. Having said that, and that's intuitively clear to you, if new Credit Suisse is based on our Wealth Management business, our very strong businesses in Switzerland, complemented by Asset Management and by the Markets business in a resized form, I think it's intuitively clear where this business, if it runs, so to say, in the way we want to run it going forward, will end up in terms of shareholder returns. So, there must be a very, very attractive proposition for our shareholders. Wealth Management, I think it's -- if I understood the question correctly, it's not -- it's a tricky question, I would say, if you allow me. So, it's not the idea to say, okay, we lost these assets and then we take what we have and, therefore, resized the Wealth Management firm to make it reasonably profitable again. I think we do two things. We do all what is necessary on the cost side, and there is room, as I said before. On the other hand, Wealth Management is the growth engine or one of the growth engines of today's Credit Suisse, but also of the new Credit Suisse. And that is why I said we have a relatively clear plan, the client outreach initiative which we started is part of that certainly in the short term, i.e., last year and 2023. And I said it has started to create good momentum. So we want to win back all the assets, and if not more, which we lost, that goes without saying. Secondly, the growth focus in Wealth Management, strategically spoken, is very clearly on the stable high net worth business; secondly, recurring revenues, and there is enough room for us to improve, goes without saying; and then last but not least, and you know that we have super strong positions in different geographies of the world here, also regaining the ultra-high net worth wallet share. So, I think that's the overall package we are working on. And that's the way how we push back Wealth Management into profitability and into growth mode. Chris, if I could just answer the second question that you mentioned around the Markets business, I would say, look, not to look really at the fourth quarter, given that was an exceptional quarter for the company with all of the challenges that were there, together with the intentional repositioning and restructuring-related actions that we undertook in the fourth quarter. The Markets business is an important alignment to our Wealth Management franchise. As a management team, we're moving pretty quickly to take the actions that were necessary to restore that, the bottom-line in that business. And we're confident in the actions that we've begun taking in that franchise. Yes. Good morning, and thank you for taking my question. I just wanted to follow up on your -- on the benefit of higher interest rates. If I remember correctly, at the strategic update, you said around half of the 5 percentage point uplift in the RoTE is coming from higher interest rates. And I think that would imply a higher number than you show us today on the CHF900 million prefunding costs. So, I just wondered how this squares. And then on -- following up on Amit's question on the substantial loss in '23. Is it fair to assume that you also think there's a loss at the underlying level? And I think you made some comments on the news wires about 2024, if you can please clarify? Anke, sure. I'll -- let me run through the first. On higher NII, on October 27, when we indicated, I think we said in the region of around CHF900 million to CHF1 billion for 2025 as a result of the current term structure and market implies at the time. I think interest rates right now are slightly higher than where we were on October 27. But of course, we have a lower deposit base as a result of the events in October. On balance, it comes out roughly to a wash with around -- still around CHF900 million for the three-year period. And that's very much what was embedded into our RoTE walk as well. On the second point, on the loss for '23, as I said, look, we're focused on really restructuring our businesses. We want to take as many of the actions that we need to create the new Credit Suisse early on in our transition path. We're three months into the restructuring. We've already started, as you can see, in the fourth quarter results as well, largely premeditated intentional actions to execute on our strategy, and you're seeing that come through in the results. We'll, of course, be doing that during the course of the year in a way that is sensitive and capital accretive as possible or economically responsible for our shareholders. But we do want to move as quickly as we can on repositioning and restructuring the firm. On 2024, I think you said you expect to be profitable, is that correct? And is that at the reported level? Thank you. Hi. Good morning. Thanks for taking my questions. Firstly, on the core Markets business that you're mapping out there, you've talked about a net revenue expectation of CHF3 billion. But how do you expect the costs to develop for this division? You've talked about cost reductions across the whole group, but I'm just trying to zero in on the Markets division here and seeing what the core profitability might be if you take into account the cost expectations? And then CSFB, obviously, a lot of work to be done here to carve it out. Is your expectation as you carve it out to -- what's your anticipation of the net CET1 ratio impact as you complete that carve-out? Andrew, hi. Look, on the first on really Markets and your question on the cost base, as I mentioned before, the initiatives that we're undertaking as part of our cost transformation program are really across the horizontals. And so, of course, at the one level, we have the strategic repositioning that we've done with the exit of the SPG business. We'll have the carve-out of the Credit Suisse First Boston business. So, we have a simpler mix, and we'll exit cost along that journey. But then, we have really all of the horizontal initiatives that we've been driving for cost reduction, which will also impact the Investment Bank. So, I think what you'll see, as you're starting to see through from last year, is you're starting to see the efficiencies slowly come through, because the headcount reductions that we've undertaken in the fourth quarter will feed through into the bottom-line and going to the cost base as the quarters go along, but won't be visible in the immediate quarter necessarily. What I would say is that, look, we're committed to taking the actions that we needed to, as you're seeing, and to move with speed on those to rightsize the businesses as well in response to the revenue environment that we've seen as well. On the second point, on CS First Boston, we can't give you a specific capital impact today. Suffice to say, one of the pillars of the strategic reasoning here is very much capital efficiency as well as to generate and free up capital for the organization and for the shareholder. And that's certainly the path we're on as we work towards the carve-out and an eventual IPO for that business. Step one for us was to ensure that we commence on the initial planning for the carve-out, which we're now doing and is underway. Step two, as we've announced, was the acquisition of M. Klein & Company, which we announced this morning as well, which was an important pillar on this part of the carve-out, and we'd love to give you more details as we progress on this journey. Good morning, guys. So, I was just wondering if you could kind of bucket the discussions around flows of client. You have over CHF90 billion of outflows in Wealth Management. What do you see as a realistic number to come back? And what is unlikely to and what is somewhere in the middle? And I guess what I'm trying to get to is, what clients are open to returning based upon what they see in terms of progression around your restructuring plan? Or others are interested in things like fee reductions, an increase in deposit rates or something like that and others that are probably unlikely to return? That's it for me. Thanks. Okay. Tom, let me take that. So, as we said -- or as I said earlier, we feel that the declines are overwhelmingly supportive. What we have observed, I would say, since October, in particular, and then early November on all these client meetings, at least where I was participating and doing, as I said, typically several a day, I would say there are three groups of clients. The one group which we started to come back very quickly already last year, so after a successful capital raise, they came back, they brought money back and so on. A second group, which I tend to believe is a very large group, at the end of the day, which was a bit more careful, so I look -- let's look at that, let's look at how you are doing, how you are executing and so on, which will come back over time, I'm not saying in a run, but over time. And there's a third group, I would think relatively smaller group, which says, look, we stick with you with what we have now. After reductions, we like you, but we want to observe you a little bit longer than just, let's say, the next, whatever, a few months. So, I think that's what I felt at least from client meetings. So, to your concrete question, how much is coming back, I would like to know that as well, as you can imagine. As I said, the Wealth Management colleagues are pretty hopeful that we bring a fair part of the outflows back already in 2023, and the rest will come later. And as I said also earlier, obviously, our target is to bring all and everything back and then go beyond that. Good morning. Thank you for the questions. Lots of questions on flows. I want to see more detail on deposits. Clearly, they're down more than a third Q-on-Q. Can you give us any sort of color around that by division, that by term versus site deposits; and then, the assumption around deposit costs in the NII guide through 2025 and what that might mean particularly for Wealth Management, NII quarter-on-quarter into the beginning of this year, given the repricing outreach program that is ongoing? And then, secondly, back to credit. The language around the AT1 seems to indicate that the preference will be to kind of call and reissue this year's first call date. Is that the right way of reading it? Thank you. Adam, hi, sure. We wouldn't traditionally break down deposits necessarily within term, site, et cetera. I mean what I'd say is, look, we're looking at deposit efficiency, of course, on our balance sheet. So, step one for us was really ensuring that we'll restore confidence with our clients and customers, and you're starting to see, per Ulrich's remarks, you're starting to see that come through. A core part of that was to ensure that we tapped the capital markets, undertook private transactions, restored CET1 to a higher level, all of the actions that I mentioned that we did in the fourth quarter, and that's now starting to come back. I would point you to the LCR ratio. Look, that's ultimately a combination of both deposits and other measures lead to us managing the LCR ratio. And the LCR ratio, as you see, is up from the lows in the quarter to an average of 144% for the quarter and, as we've indicated, has improved in January as well. So, we're three months into the restructuring. We're taking all the necessary steps. And we're starting to see, as you can see, positive momentum on deposits in January. The second question was really on really deposit costs. And I would say in the NII guide in the first quarter, it's partly why we've guided to a loss in the first quarter for Wealth Management as well is we have a reduced deposit base compared to what we had in September. You see that impacting the NII, of course, in Q4 as well, and that will also have a knock-on impact into Q1 as well. That said, the evolution from here will depend, of course, on both factors, both volume of deposits, but the other is also the evolution of interest rates through the course of this year. The corollary to this is also funding cost where, as I've indicated, we're working hard on optimizing the balance sheet and ensuring that we can squeeze as much as we can out of it and reduce our funding cost. And step one on that path was to derisk in order to reduce our funding needs and then to be able to issue less in the capital markets, which you're now seeing through our issuance plan as well. So, a combination of all of those would lead to NII efficiency. Just a quick follow-up. The guide for NII is on a static balance sheet. The deposits you're bringing on board January to date, does that increase or decrease the NII guidance? We would -- look, depending on the NII evolution, we'd always amend our modeling and our calculations. That's normally what we do. In fact, in October, we've made assumptions, forward assumptions on the reduced balance sheet given the events in the first three weeks in October, which effectively reduced even from the static balance sheet that we had at the end of September, obviously, reduced the NII, which in the numbers that I've given you in October really factored in a reduced balance sheet as well. Today, when we remodel our balance sheet, we have lower balances, actual balances at the end of the year, but rates are slightly higher and the net outcome is roughly the same at around CHF900 million for NII uplift. But look, as we evolve our balance sheet, we'll give you further updates and guidance on that. No, on deposits, as Ulrich mentioned, we're -- it's still our cheaper source of funding. We're competitive. As we've said, there's been more competition from deposits from the rest of the industry as well through the course of last year. And as always, it's an important part of our funding mix. We'll continue to remain as competitive as we need to be there. Good morning. My question is actually on short-term wholesale funding. We've talked a lot on the call about the long-term debt issuance plan and also the positive developments in terms of deposit flows. But if I look at the quarterly report, you've got some quite negative wording around the impact of the November credit rating downgrades on your access to short-term funding. And I wonder if you could just address that in terms of what you're seeing more recently on access and cost of short-term funding and the impact on the IB financing derivatives businesses. Thanks. Sure, Piers, and I'm glad you brought that up. Look, we've been reducing our reliance on short-term funding through the course of the last year. And most importantly, the few initiatives that we've launched around restructuring the Investment Bank, derisking in the Capital Release Unit, getting the SPG transaction done, which, as you can see, we've moved really, really quickly on and with -- we're around two-thirds of the target reductions already having happened, all of those reduce our reliance on short-term wholesale funding and create more funding efficiencies as well. There's no question, of course, as we're transparent about that with the credit rating downgrade, certain facilities would have been affected. But that said, we have other tools at our disposal. We're able to do private placements and other bilateral financing as well. And ultimately, what you should look to is the LCR ratio which we're managing to, which is effectively an amalgam on a stress basis of short-term and other medium-term measures in the calculation. Hope that's helpful. Great. Well, thank you, everybody, for joining us this morning. Thank you, Ulrich and Dixit. Of course, if you have any more questions, feel free to reach out to IR. And have a great day. Thank you.

EarningCall_226

Good day, ladies and gentlemen. Welcome to the 2022 Fourth Quarter Genpact Limited Earnings Conference Call. My name is Justin, and I will be your conference moderator for today. At this time, all participants are in a listen only mode. We will conduct a question-and-answer session towards the end of this conference call. As a reminder, this call is being recorded for replay purposes. A replay of the call will be archived and made available on the IR section of Genpact's Web site. Thank you, Justin. Good afternoon, and welcome to Genpact's earnings call to discuss results for the fourth quarter and full year ended December 31, 2022. We hope you had a chance to review our earnings release, which was posted to the IR section of our Web site, genpact.com. Speakers on today's call are Tiger Tyagarajan, our President and CEO; and Mike Weiner, our Chief Financial Officer. Today's agenda will be as follows. Tiger will provide an overview of our results and an update on our strategic initiatives. Mike will then walk you through our financial performance in greater detail and provide an outlook for the full year 2023. Tiger will then come back with some closing remarks, and then we will take your questions. We expect our call to last about an hour. Some of the matters we will discuss in today's call are forward looking and above a number of risks, uncertainties and other factors that could cause actual results to differ materially from those in such forward-looking statements. Such risks and uncertainties are set forth in our press release. During today's call, we will reference certain non-GAAP financial measures that we believe provide useful information to enhance the understanding of the way management views the operating performance of our business. We include reconciliations of these measures to GAAP in today's earnings release posted to the IR section of our Web site. And with that, let me turn the call over to Tiger. Thank you, Roger. Good afternoon, everyone, and thank you for joining us today for our fourth quarter and year end 2022 earnings call. We are pleased with our full year 2022 financial results with revenue growth, adjusted operating income margin and adjusted diluted earnings per share, all coming in at the high end of our expectations, highlighting the relevance of our data tech AI services and digital operation services for our clients. Transformation is a pervasive theme across most enterprises with many of them calling out 2023 as a year of efficiency. We're therefore seeing a robust pipeline of continuous flow of data tech AI and large transformational deals. In the fourth quarter of 2022, we delivered on a constant currency basis; total revenue of $1.103 billion, up 6% year-over-year; data tech AI services revenue of $495 million, up 5% year-over-year; and digital operation services revenue of $608 million, up 7% year-over-year. Adjusted operating income margin of 17%, expanding 260 basis points year-over-year and adjusted diluted earnings per share of $0.70, up 30% year-over-year. For the full year 2022, on a constant currency basis, we delivered total revenue of $4.37 billion, up 11%; data tech AI services revenue of $1.96 billion, up 18%; digital operation services revenue of $2.41 billion, up 6%; adjusted operating income margin of 16.5%, flat year-over-year; and adjusted diluted earnings per share of $2.74, up 12% year-over-year. This performance during 2022 reflects the nondiscretionary nature of a majority of our services and the full suite of services we provide our clients to drive cost, growth, mitigate risk and improve a variety of such outcomes. Our revenue growth was broad based across all our industry segments, in particular, financial services and high tech manufacturing services delivered strong double digit growth. Data tech AI services when we design and build solutions to transform our clients' businesses grew 18% on a constant currency basis. This was driven by the ongoing momentum in our emerging services, including supply chain services, sales and commercial services and risk services that collectively grew 20% plus during the year. Digital operation services where we digitally transform and run our clients' operations globally delivered steady results throughout the year, growing 6% on a constant currency basis. Full year 2022 bookings were $3.9 billion, up 6% year-over-year. We had a record level of deal inflows up almost 25% from the prior year, including a wave of large deal inflows in the last few months of the year. Win rate held steady at 51% and sole sourced deals continue to represent approximately half our bookings. We also won 126 new logos during the year, up 30% year-over-year. These new logos include a number of companies that we believe will become priority accounts for us in the long term. Our average initial contract value with these new logos was up 10% to over $3 million. Entering 2023, we are excited by the recent momentum around large deals. Our late stage pipeline has expanded nicely with a strong line of sight to closures over the next few months across all three industry segments. We are in a unique time in the market and are seeing a set of core themes across our clients in all industries and geographies. First, every enterprise is on a journey to transform their business, revisit their portfolio choices and set their business up for strategic long-term success. The transformation drivers vary from company to company and include factors such as the desire to modernize their technology stack, supply chain volatility and risk management, the need to leverage real time data and predictions, China concentration risk and energy transition. Second, at the same time, inflation is hurting and that has led to a dramatic increase in cost being a huge agenda item for everyone. We have seen costs become a prime motivation for our clients in more than 60% of situations versus 45% just six months back. However, an increasing number of clients are using this moment to not only reduce costs through consolidation, standardization, digitization and global delivery, but also to build out new operating models and deliver efficiency to redeploy towards long term investments. Even the largest tech companies have declared that 2023 is a year of efficiency. To quote a client, I want to batten down for a recession and tool up for a transformation and do both at the same time. There is a clear desire to work with a fewer strategic partners in technology services. They are revisiting their choices of priority check partners and we are being told that we are differentiated in technology because of our domain process and data analytics depth. There is a heightened desire to have us bring our unique approach to building solutions and leveraging cloud based technologies and approach rich in industry domain, process and data. There has been a significant increase in spin-offs of businesses getting ready for separation as companies redefine their portfolios. We have seen such opportunities double in the last 12 months. There is an insatiable and rising appetite to leverage data and ensure real time access, and the arrival of ChatGPT and other technologies in generative AI will only further spur that. With structurally shrinking workforces in many countries, companies are unable to meet their demand for talent, particularly in data, digital and technology skills. As always, we respond to these changing client behaviors in an agile way. We are continuing to invest in our priority accounts, which represent a portfolio of select clients that are on a significant transformation journey that we believe have great potential to generate above average company growth. The trust and client intimacy we are building with them across multiple buying centers allows us to drive value for them and growth for us. During 2022, revenue from our priority accounts grew 15% and represents approximately 60% of total revenue. Next, we are expanding our large deal team to take advantage of the increasing opportunities we see in the market to drive more sole source multi stage engagement given our positioning as a partner with the essential domain depth and suite of capabilities to be able to transform clients' operations end-to-end. We continue to deepen our relationships with our partners where we design, implement and support technology and data solutions on AWS, Azure and Google Cloud platforms, specialized data platforms like Snowflake, enterprise applications like SAP and Oracle, cloud workflow technologies like ServiceNow and specific micro platforms like Kinaxis, BlackLine, o9 and HighRadius in specific domain areas. Let me bring these to life with some examples. For a large tech platform provider in the automotive industry, we have been chosen to drive the complete modernization of their tech stack to AWS cloud, while at the same time consolidating all of their operations globally. Our domain depth in the automotive industry where we understand not just the vehicle but it's repair, maintenance, financing and insurance, one of the relationship, for a large global medical technology company, we have been chosen to consolidate all functions, leveraging new technology on the cloud and deliver meaningful cost savings in the first two years that allows them to reinvest into strategic growth initiatives. For one of the largest tech enterprises in the world, we will be implementing Kinaxis on their cloud platform to deliver better planning for the supply chain for their data centers. The exciting opportunity here is to then take this jointly as a solution along with a tech partner to a range of other clients. For another large tech enterprise, we won a small engagement in sourcing and procurement operations for their cloud business. Another clear example of how efficiency is the mantra for 2023, even for growth oriented big techs. For a global life sciences company, bringing our industry domain and functional depth to set them up for a spin off of one of their divisions. This is initially a consulting and advisory relationship that we expect will lead to digital operations. And finally, for a leading provider of healthcare liability insurance, we are modernizing their data management practices, migrating their data infrastructure to the cloud and ensuring broad availability of their data for business decisioning by their finance, underwriting and claims teams. Our attrition rate significantly improved in the fourth quarter, declining to 31%, which is our lowest level since the second quarter of 2021. Adjusting for involuntary attrition and employees with less than three months of service, our attrition was even lower at 27%. The first five weeks of 2023 continues to show declining trends. We have seen this across the board across all levels, all skills, including data analytics, digital and technology skills and in every part of the globe. This [hovered] well -- really well for delivering sustained value to our clients. During the quarter, we welcomed more than 9,000 new team members across the globe and almost 50,000 for the full year 2022, reflecting Genpact's powerful brand and reputation as an employer of choice, providing many opportunities to learn and advance ones careers across the globe. For the third consecutive year, our global workforce completed more than 10 million trading hours, leveraging our Genome online on-demand platform. Despite the ongoing macro uncertainty, we have a healthy pipeline, which includes several large deals. We believe many of these will close over the next few months. This gives us confidence in our ability to deliver total revenue growth for the full year of 2023 of 6.5% to 8% on a constant currency basis. We also plan to expand our adjusted operating income margin to 16.8%. With that, let me turn the call over to Mike for a detailed review of our results and our outlook for the year. Thank you, Tiger, and good afternoon, everyone. Today I'll review the fourth quarter results and then discuss highlights of our full year 2022 performance and provide you with our current outlook for 2023. Beginning with our fourth quarter results. Total revenue was $1.103 billion, up 3% year-over-year or 6% on a constant currency basis. Data and tech AI services revenue, which represents 45% of total revenue, increased 2% year-over-year or 5% on a constant currency basis, largely driven by continued growth in our cloud based data and analytics solutions across our focus areas, including supply chain, sales and commercial and risk services. As a reminder, data tech and AI services revenue grew in the mid-30% rates during the fourth quarter of 2021, reflecting a higher level of short cycle revenue. Digital operations services revenue, which represents 55% of our total revenue, increased 3% year-over-year or 7% on a constant currency basis, primarily due to deal ramps from existing and recent wins. From a vertical perspective, Financial Services increased 17% year-over-year, largely due to continued strong demand for our risk management services, leveraging data and analytics. Consumer and healthcare declined 1% year-over-year, largely driven by the impact from lengthening large deal cycles and lower data tech and AI services revenue. High tech and manufacturing increased 7%, primarily driven by sale and commercial, sourcing and procurement and supply chain engagements with both new and existing clients. We successfully divested the business that we previously classified as held for sale. Given a lower than anticipated net realized value, we recorded an $11 million charge during the fourth quarter that is included in the other operating expense line in our P&L. Our adjusted operating income margin expanded 260 basis points year-over-year to 17%, largely due to operating leverage, the positive impact of off cycle coal adjustments and cost containment initiatives. As a reminder, our lower than normal adjusted operating income margin level in the fourth quarter of 2021 largely resulted from higher investment activity deferred from the first half of the year and notably, increases in transaction costs related to deal wins and the impact of wage inflation. Our performance in the quarter excludes the negative impact of the business that was held for sale and the related charge referred to a moment ago. Gross margin in the quarter was 34.9%, an increase of 40 basis points year-over-year. The expansion was largely due to higher utilization and the benefit of off cycle pricing adjustments. Investments we made during the fourth quarter and supporting new deal activity led to the 50 basis point sequential decline in gross margin from the third quarter. SG&A as a percentage of revenue was 21.5%, down 140 basis points year-over-year, largely due to cost containment initiatives and overall G&A leverage. Adjusted EPS was $0.70, up 30% year-over-year from $0.54 in the fourth quarter last year. This $0.16 increase was primarily driven by higher adjusted operating income of $0.13, the impact of lower outstanding share of $0.02 and higher FX remeasurement gains of $0.02, partially offset by higher net interest expense of $0.01. Our effective tax rate was 27.1%, down from 29.6% last year, primarily due to higher level of discrete benefits in the quarter compared to the same period a year ago. Now let me provide you with some color around full year 2022 performance. Total revenue was $4.37 billion, up 9% year-over-year or 11% on a constant currency basis, coming in at the high end of our full year 2022 outlook and above our 10% long term revenue target. Data tech and AI services revenue, which represents 45% of total revenue, increased 16% year-over-year or 18% on a constant currency basis, largely driven by continued growth in our cloud based data and analytics solutions across our focused areas, including supply chain, sales and commercial and risk services. Digital operation services revenue, which represents 55% of total revenue, increased 3% year-over-year or 6% on a constant currency basis. During the year, we grew the number of client relationships with annual revenues greater than $5 million from $145 million to $158 million. Clients with more than $15 million in revenue increased from 59% to 63% and clients of more than $50 million in revenue increased from 12% to 15%. Outcome and consumption based commercial models now represents 14% of full year revenue on our path towards 20% by 2026. Adjusted operating income margin came in at the high end of our outlook at 16.5% despite absorbing the impact of wage inflation and higher attrition. Gross margins were 35.1% compared to 35.6%. The 50 basis point decline was largely due to elevated attrition during the year, wage inflation and higher year-over-year travel costs, partially offset by off cycle coal adjustments and better utilization. Our full year gross margin includes a negative 20 basis point impact related to the restructuring charge for strategic actions we took in the second quarter of 2022. As a percentage of revenue, SG&A remained flat year-over-year at 21.5%, largely due to the absorption of higher investment activity that incurred in the latter part of 2021, offset by overall G&A leverage. Adjusted EPS was $2.74, up 12% year-over-year from $2.45 in 2021. This $0.29 increase was primarily driven by higher adjusted operating income of $0.22, the impact of lower share count of $0.07, reflecting our capital allocation strategy and foreign exchange remeasurement gains of $0.01, partially offset by higher taxes of $0.01. Our full year effective tax rate was 24%, up from 23% last year, primarily due to lower level of discrete tax benefits taken during 2022 compared to the prior year. Turning to cash flow and balance sheet. For 2022, we generated cash flow from operations of $444 million, reflecting clients reverting to historical patterns instead of paying us in advance to take advantage of elevated interest rates, resulting in DSOs expanding to 81 days from 74 days last year. For example, we received payments from a few accounts of approximately $100 million in the early part of January that negatively impacted our year end DSOs by two days. The aging of accounts receivable has remained in line with prior periods, and we have seen no deterioration in credit. At year end, our cash and cash equivalents totaled $647 million compared to $899 million at the end of the fourth quarter 2021. As we reduced our total debt by almost $230 million and returned capital of more than $300 million to shareholders during the year. During the fourth quarter, we refinanced our bank debt that was set to mature in the second half of 2023. Given the uncertain market environment, we are pleased that our facility carries a similar interest rate spread as our prior borrowings. We ended the year with net debt-to-EBITDA ratio of 1.2 times, in line with our preferred 1 times to 2 times range. With the undrawn debt capacity, existing cash balances, we continue to have ample flexibility to pursue growth opportunities and execute on our capital allocation strategy of reinvesting back in our business, pursuing capability based acquisitions and returning capital to shareholders. Capital expenditures as a percentage of revenue equated to 1.2% for full year 2022 compared to 1.3% in 2021. During the fourth quarter and full year, we returned $55 million and $306 million of capital to shareholders respectively. This includes dividend repayment of $23 million in fourth quarter and $92 million for the full year. We also repurchased 700,000 shares with a total cost of $32 million at a weighted average price of $45.03 during the quarter and 4.8 million shares at a total cost of $214 million at a weighted price of $44.79 for the full year. Our buybacks during 2022 reduced our net share count outstanding by 2.5%. We remain committed to returning capital to shareholders through our quarterly dividend as well as our regular cadence of share buybacks. We currently anticipate a minimum of 30% of our cash flow from operations to be allocated to share repurchases during 2023. Our Board of Directors approved a approved an increase of $500 million to the company's existing share repurchase authorization, providing us with a total of $625 million of availability for future stock buybacks. Additionally, our board approved a 10% increase to our dividend to $0.1375 per quarter or $0.55 on an annual basis. Our dividend has increased at a compounded growth rate of 15% since we began paying dividends in the first quarter of 2017. Finally, I want to provide you with our full year 2023 outlook. We expect total revenue to be between $4.64 billion and $4.71 billion, representing a year-over-year growth of 6% to 7.5% and 6.5% to 8% on a constant currency basis. This outlook reflects our expectations of existing client revenue and the risk weighting of bookings we expect to win during the year. This all is against the backdrop of the current macroeconomic environment. We currently expect our full year 2023 adjusted operating income margin to be approximately 16.8% in lined with our strategy to drive margin expansion at a faster pace than we've done historically. This 30 basis point improvement is primarily driven by the continued scaling of data tech and AI services and operating leverage. Our 2023 effective tax rate is expected to be approximately 24% and 25% compared to 24% we reported in full year 2022. Given the [indiscernible] just provided, we are estimating adjusted earnings per share for the full year 2023 to be between $2.92 and $2.99. This represents year-over-year growth of 7% to 9% and includes the positive impact related to lower share count of $0.02, offset by the impact of higher expected taxes of $0.02 and the negative year-over-year FX impact of $0.06 per share due to the $15 million of remeasurement gains recorded last year. We are forecasting cash flow from operations of approximately $500 million, primarily driven by the expected growth in our adjusted operating income during 2023. Capital expenditures as a percentage of total revenue is expected to be approximately 1.5% to 2% in 2023, as we expect to invest in new operating expenses related to our hybrid delivery model and continued investment in digital solutions. Lastly, let me provide you with some perspective on how we see revenue growth progressing through the year. With the expected ramp in recent new deal wins, we currently expect the seasonal first quarter sequential revenue decline to be less than typical. Therefore, we expect to see low single digit quarter-over-quarter growth throughout the remainder of the year. From a year-over-year perspective, we expect growth during the second half of the year to be at the higher end of first half of the year related to ramp of new deal wins and easier comparisons year-over-year. We currently expect our adjusted operating income margin to follow our typical pattern of being lower in the first quarter and expanding through the year. With that, let me turn the call back over to Tiger. Thank you, Mike. We are pleased with our 2022 results. As enterprises respond strategically to this macro environment, we are seeing the benefit of that with increased conversations, inflows and pipeline. There is no debate that data has become the most valuable asset for all businesses. We are seeing this with the increased demand in our focused service areas of supply chain, sales and commercial and risk, all deeply connected to data and analytics. Our intelligent platform, Genpact Enterprise 360 enables clients to harness the power of data driven insights derived from running clients’ operations and using our proprietary metrics and benchmarks. This powerful tool empowers clients to take actions themselves or through our work with them to deliver outcomes today and discover transformation opportunities for the future. We continue to be recognized for our ESG initiatives with Genpact being included in the 2023 Bloomberg Gender Equality Index for the second year in a row. We were also named as one of the best performing companies in ESG by Sustainalytics. In summary, we have a growing top line primarily made up of sticky long term global relationships with inherent operating leverage to help drive long term margin expansion. We also have the ability to take advantage of opportunities in our large and growing underpenetrated market that is getting unlocked by our data tech AI and digital operation services. In fact, 70% of accounts that start out as data tech AI engagements end up expanding into larger data tech AI or digital operations relationships. The 126 new logos we signed in 2022 are the seeds in which future priority accounts will be borne. Our 2023 outlook is very much aligned with our long term growth and profitability goals. Before I close my prepared remarks, our thoughts are with those that are affected by the devastating earthquake in Turkey, including the approximately 50 Genpact employees who are there and their families. With that, let me turn the call back to Roger. Thank you, Tiger. We'd now like to open up our call to your questions. Justin, can you please provide the instructions? It's great to see like that you're seeing like strong momentum for large deals. Could you also talk about demand environment you're seeing for short term project based work, and what does the guidance -- annual guidance assume for that? Puneet, overall, we are seeing good demand for both short term specific engagements because everyone, as I said, is on a journey to reevaluate the portfolio and protect their strategic journey around digital transformation and changing their business. And then, of course, you already and I already referred to the large deal environment being good. The one thing I would call out is towards the third -- end of the third quarter of last year and the fourth quarter, and continuing into 2023, we saw and we expect front end digital marketing and experience driven short term consulting and advisory kind of engagement slow down. We saw that in the fourth quarter. We expect that to continue to be slower through the year. And are you also seeing higher mix of employee rebadging deals as your clients look to cut cost, and what's the typical profile of such deals that you would pursue? So Puneet, I don't know whether I would say from a longer term -- if you take a bigger time scale of three years, I wouldn't necessarily say that there is material difference in more rebadge deals. Having said that, we are going to see probably a little bit more of that in our profile for 2023 because as we said, we didn't close too many large deals in the fourth quarter, and we have a strong pipeline that we are working on now. As we close those, some of them will have a rebadge component. So if you take a longer term trajectory, not that different, if you just shorten that to a couple of quarters, you will see a bump in that. There is no question that as companies reevaluate their own long term trajectory as they reevaluate how do they get cost efficiency in order to reinvest back in those strategic initiatives, captive centers, existing global business service operations absolutely come into play as part of the overall transaction. And we've become pretty much one of the leading global experts at doing that. So we feel very good every time that happens. Tiger, my first one for you is similar to the previous question. But how do you think about the growth algorithm for CY '23? And really looking at new logos versus existing customers, and I know you said you signed up to 126 new logos this year, how do you think about that in CY '23? And in particular on the existing customers, are you seeing more pressure on the existing business and really wondering on the difference between, say, growth retention and net retention. In other words, are you finding the renewals more challenging in the economic cycle, are you seeing lower mix or less volumes? But just any -- I'd love to hear you comment a little bit more on the growth algorithm. So growth algorithm is a great phrase. I'll start by -- let's talk about renewals. Renewals are always contingent completely on what's the value we have been driving for our clients over, let's say, the five year relationship we've had. We start those conversations with our clients well before any renewal comes up, let's say, 18 months. And our objective and our clients’ objective in all those conversations when we talk about renewals is incremental the next slug of value creation. And often, that leads to expansion of scope, it leads to more digital intervention, it leads to technology stack getting added, more movement to the cloud, more data analytics and prediction engines being built. So we see the renewal process and our focus on renewals over the last 18 months to be really strong and having paid off. And in this economic environment, we see that actually as a big benefit because clients are looking for fast paybacks. So that's on renewal. On new deals, you talked about -- your other question was, just remind me, Keith… So Keith, if you look at our new logo history, I talked about 126 for 2022. I said 30% higher than the prior year. So if you look at, again, a three, four year trajectory, it's been in the ballpark of 80, 85 newer to this 126, which is clearly a high. We don't see that changing in 2023, because everything that I described about the environment, I would say applies to every enterprise and every part of the globe in every industry vertical. It's a question of which of those are they picking up, are they picking up a journey on technology stack, are they picking up a journey on consolidating tech partners, are they picking up a journey on moving apps to the cloud, are they picking up a journey on extracting cost by consolidating functions in order to reinvest back in growth initiatives, which we know is very important these days given the environment around where growth is not easy. So we see that growth algorithm being not that different between existing clients and new clients. We have -- our focus on priority clients continues and our focus on those 126 new logos just to pick them would be to sow the seeds of future priority clients, let's say, a couple of years from now and that's the business model longer term, if you play this out over the five, 10 year horizon. My follow-up question then is similar. Tiger, are you seeing more risk of competition from technology? And what I mean by that, as you focus on, say, AR collection, there's actually more software companies bringing up and try to enhance doing AR collections in an automated fashion, and/or if you want to just go to a lot of the AI announcements that occurred in the last couple of weeks. How do you think about the maturation or advent of new technologies potentially offering new opportunities or placing incremental risk on some of your practices? It's a very simple answer, Keith, because we've been on this journey now for about seven to eight years of leveraging new technologies. And we've always said that our role in that is to find the right technology, incorporate it into the end-to-end service that we offer our clients or bring it to our clients so that they can incorporate it into their operations, because they don't give us the digital operations to run. In both cases, our deep belief has always been that technology adds value only if you know how to use it, if you know how to implement it, if you understand the industry, if you understand the domain and if you understand the data. What's happening around us in our clients is that there is a real belief in our client base, but that's exactly what needs to be done, which is why we are beginning to see real traction in technology, real traction in incorporating technology with us as the partner. Our relationship with some of the AR examples you gave is, HighRadius is a great example of that. And it's not new, it's more than four years old that we've been working with HighRadius and incorporating it into our solution, if that's what is the right thing for the client. So we see these technologies coming in as a real opportunity, because the client has to find a way to leverage them, they need us, people like us to help them leverage them. It's not a threat it's actually an opportunity. Maybe to piggyback a little on Keith’s question about new technologies. I know you've been in the press, you've been talking about ChatGPT and stuff. And as you said, you've done a nice job integrating technology into your processes, and that's actually an accelerator of growth. Do you have any examples you have of clients coming to you saying, hey, on this process, could we try to integrate ChatGPT? And have you seen either examples of it being a benefit, or do you see any examples where it could be a headwind? I just think it's too early to expect a full integration. So the answer is no. I don't think a client would expect a full integration now, and we wouldn't expect that to happen. Having said that, it's very clear that there's real opportunity to actually bring technologies like that, not just ChatGPT but other generative AI technologies into a number of our operations and services. But to do that, the first step that has to happen is that particular generative AI must get seat in the data and the domain that it needs to address. It's not generic, it's specific. So there's a whole backend training that, that ChatGPT needs to undergo. And actually, it's going to create a whole slew of data operations jobs to train the ChatGPT on specific domains. And who best positioned to do that, people like us because you need the specificity of what does an insurance claim for an automotive in the state of Michigan look like. And that needs to be part of ChatGPT's data infrastructure for it to be able to answer the question that is needed to be answered in order to incorporate ChatGPT into a claims process. So we see a real opportunity. We just kicked off a major hackathon across the company of 90,000 people participating to figure out use cases and pilots and ideas of where it can get incorporated. And the maybe a second question and my follow up. I would imagine the data tech AI business, you expect that to grow faster than the digital operations business this year, and probably have more of a hockey stick acceleration through the year, whereas the digital apps business will be more stable. Is that a fair way to think about it through the year? Absolutely. And so when you think about the business and the cadence of the earnings or revenue pattern associated with it, that low single digit growth rate that we have in the digital operations will be much more consistent than data tech and AI business. This is Jesse on for Maggie. I wanted to follow up on Puneet's question earlier. So what is Genpact's exposure to those types of digital marketing experience, short term consulting engagements you mentioned earlier? So our exposure is that we have a growing and emerging business there. We don't really talk about it in the notional size of it. It's not a tremendous percentage of our total revenue in the business. But kind of building on one of the comments Tiger said earlier, we've seen the revenue performance of that almost indexed with incredibly large marketers in this general macroeconomic environment as you've seen. So as general demand has pulled back from that, our revenues goes accordingly to it. It's very well indexed to it. But again, not a huge piece of the business. But I don't think it's going anywhere. I think it's going to come back particularly in relatively strong in the second half of the year. And then, Mike, a follow-up question for you on margins. Obviously, guidance is for expansion this year. So how are you thinking about the medium term, should we be thinking about kind of steady state or the potential for a normal cadence going forward? No, I mean if you think about how we talked about our margin at our June Investor Day, right, when we looked at it and looked at the drivers of margin, particularly that the increased scalability of our data tech and AI business becoming more and more meaningful to the company, right, as well as a number of other factors, our goal has been to grow that margin at a greater clip than they've done historically. So I think we're showing that within our guidance. We think that's going to continue to drive us through our 2026 strategy to think about it from that perspective. Is it going to be 30 basis points per annum? Still no. We'll see how it goes on an annual basis. I wanted to ask demand based on client location. Are you seeing any different activity in the US versus Europe? Is there really any different behavior you're seeing based on client location right now? Actually, no, Brian, we are not. It is actually interesting. Even in my prepared remarks, I talked about the fact that a number of the themes that I called out seem to be pretty global themes cutting across the US, Canada, Europe as well as global companies headquartered in Asia. So there doesn't seem to be that distinctive of strand that I can pull out and say this is different in this geography versus another. And then a follow-up on margin. So I just wanted to dig into the 30 basis points of expansion for this year. How do you anticipate the attribution between potential gross margin improvement in 2023 versus SG&A leverage? And I asked because I'm hearing the optimism about large deal pipeline. So I'm not sure if investments there could potentially work against you in gross margin initially as things like that ramp. Yes. You got it exactly right. So disproportionately as large deal ramp ups happen, we'll have investments on them early part of the cycle. Remember, our revenue and expense cadence is in line perfectly, right? So have those greater investments early on, which will dilute our gross margins as we grow. We will get the SG&A leverage and that's much more linear. But that's 100% correct the way to think about it. Tiger, I just wanted to get some thoughts on the sales force. Where are you today in terms of the headcount? And just given your optimism on demand, what are your expectations in terms of ramping up the sales force to hit your revenue growth targets? Mike, it's a great question. And actually, it's very timely because we just finished a good assessment of our entire sales force. As you would expect, any good enterprise to do towards the end of the year and beginning of the year. We think we have really good coverage, size and scale of the sales force across our various industry verticals. We also are very nimble at moving that sales force from where we see demand to where we see less demand. A great example of that was about 18, 24 months back where we reallocated sales force literally in two weeks into the semiconductor space and got the big benefit of that as the world in the semiconductor space went through supply chain challenges. So in terms of total numbers, I think we are well positioned. What I would say is, given the nature of the type of services, including technology intensity of those services, the technology partnerships that we talked about and incorporate growth into our services, some of the people in those client situations, we are changing around and we continue to do that. And I expect that to continue to happen as we go through the year. And of course, we have a number of training programs and immersion programs that get a number of the people ready on the new technologies, on the different partnerships, on the different solutions, which has always been one of our strengths. And then just as a quick follow-up, I wanted to ask you about your exposure to the large tech companies that are announcing layoffs. Does that have any implications for your data tech AI revenue? And just in general, do you see this as a positive where they might rely more on you for digital investments, or do you think it might actually be working against you in the short term, any exposure there and implications of that? It's a tale of two cities. It has always been, no surprise, a fast growing sector and industry, and therefore, a fast growing segment for us for many years. Having said that, there are still many, many enterprises there that are just about waking up, I guess, waking up is the right word to use, to 2023 being a year of efficiency and productivity. That language is new for probably the entire sector. That language is throwing up a bunch of opportunities for us. Having said that, the reason I called it a tale of two cities is that there are a few situations where we would have a very high intensity in terms of our relationship where we do a lot of digital marketing support sales support. And obviously, those undergo changes as that pie may shrink with one or two of the players. In the net, it's actually a benefit for us. And actually, one of the things we have done over the last six months is, again, back to the sales force conversation, realign some resources into that space and we are getting the benefit of that. I guess for my first question, maybe if you can provide some color on what the time line for winning new deals look like in light of the comment around 2023 being a year of urgency around cost initiatives. I mean how much are you mining conversations at this point that you started three months ago, sis months ago, nine months ago? And I guess if you were to start new conversations, what is the urgency for those conversations or those deals to be transacted, especially the larger deals? A number of the conversations that are in late stages now started six, nine, in some cases, 12 months back and have progressed to the point where we believe they're getting closer and closer. The issue is less about urgency from the client, it's more about the complexity of some of these larger deals. I talked about multifunction, I talked about technology stack, I talked about in answer to some other questions, I talked about, in some cases, not all of them, rebadging. That makes a deal large, it makes the deal complex, it makes many more people from the client side having to be involved in the decision. And of course, in the meanwhile, they have had to deal with, depending on the industry, regulations, to supply chain, to China, to Ukraine, to energy and inflation. So I would say the good news is every one of those conversations have continued to make progress as we get later and later into the stage of the pipeline, you get more and more confident of finally signing it. The more complex it is, the longer it takes, and that's what we have always planned for in this kind of an environment. And it's actually good because we are circling the wagons and then landing the plane in what is obviously a very complex journey. The other side of the house, which is data tech AI, tends to have faster decision cycles. Those decision cycles haven't expanded, they have continued to be at the same speed they were because payback is important. And as long as we go in with the right solution that is relevant for the client at that point in time, in a variety of buying centers and in a variety of services, we hit bulls eye. So again, it's a question of balancing both. And the last thing I'll say is I talked about this at the end of my prepared remarks, every data tech AI engagement, when we look back over three to four years ends up being subsequent more data tech AI engagements and digital operations agreements to the tune of 70-odd percent. So which means when you sign a 100 plus new logos and let's see all of them are data tech AI engagements and rest assured that 70 of them will have follow-on data tech AI and digital operations over the next four years, which is the beauty of our business. And then as a follow-up, in terms of the complexity of the projects that you're taking on at this stage, any color on how maybe the projects are being oriented. And what I mean by that is there's a narrative out there that clients are looking for higher or quicker ROI on their investments. So does that change the strategy or the roadmap for implementation for you guys, but whether projects get chopped up a bit more or whether you do certain, I'll call, delivery projects out of order just to get the benefit to the client. And if that impacts, I guess, what I would call revenue timelines versus what a normal roadmap might look like? So actually, again, a great question. And we talked about this, I think, probably in both the prior earnings calls, I think both quarter three and -- quarter two and quarter three earnings calls. Larger deals and complex deals, in some cases, not in all cases, do get broken up into a couple or three phases. And the idea there is exactly what you said, which is, can we get to first class, the low hanging fruit, get the payback and it generates the investment dollars for the second and the third. Having said that, there are some clients who prefer not to break them up and take bigger swings. They are okay spending a little longer time in order to actually get everyone aligned and then go for the whole at one shot, often including rebadging, because in a rebadging exercise, you cannot break that up in a particular operations into pieces because that doesn't work. So there are different colors in the way I would answer the question. There's no one standard size that fits everyone. I think we've seen all of the above. And our ability to adjust and flex and be agile to create the right solution is what has always won us the day. And I guess just a clarification on that, Tiger. Does that change the revenue ramps or is it just different ways to get to the same end point? I don't think it changes the revenue ramp. Obviously, development details. I think Mike said that on when we do digital operations and it's got rebadge then it will require investments upfront, and larger complex deals require a little bit more investment. So that changes the margin profile on the gross margin side. And as it relates to rebadge deal versus a slow ramp, a slow ramp is a slow revenue ramp where the rebadge deal, you get a pop in the revenue ramp in the beginning. So we have a good mix of all of the above. And as I said, it's not that different from the past. So therefore, I wouldn't necessarily call out any difference in revenue ramp on account of that. And thank you. And I am showing no further questions. I would now like to turn the call back over to Roger Sachs for closing remarks.

EarningCall_227

I would now like to turn -- introduce the call to Ms. Liz Shea, Senior Vice President of Investor Relations. You may proceed. Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Carrie Strom, Senior Vice President and President, Allergan Aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call are Scott Reents, Senior Vice President and Chief Financial Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website. Following our prepared remarks, we'll take your questions. Thank you, Liz. Good morning, everyone and thank you for joining us today. I'll provide perspective on our overall performance and outlook and then Jeff, Carrie, Tom and Rob, who will review our business highlights pipeline progress financial results and 2023 guidance in more detail. Today, we reported another strong quarter and a highly productive year for AbbVie. We delivered full year 2022 adjusted earnings per share of $13.77 reflecting double-digit growth. Total net revenues of more than $58 billion were up by 5.1% on an operational basis, driven by impressive growth from SKYRIZI and RINVOQ which generated nearly $7.7 billion of combined sales in 2022. As I reflect on our 10 years as an independent company, we have made excellent progress evolving AbbVie into a leading biopharmaceutical company. We have successfully created a well-diversified portfolio with multiple growth platforms in attractive and sustainable markets. This includes the rapid development and launch of SKYRIZI and RINVOQ across all of HUMIRA's major indications, plus a distinct new indication, atopic dermatitis. We anticipate these 2 products will collectively exceed the peak revenues achieved by HUMIRA by 2027 with significant growth expected through the end of the decade. We are also building a substantial portfolio of novel, heme and solid tumor assays for oncology. The anticipated launches and indication ramp of several new products like venetoclax in multiple myeloma and MDS, epacritumab across B-cell malignancies and Teliso-V, a new treatment option in non-small cell lung cancer will collectively support growth in the middle of the decade. We expect continued robust performance in neuroscience with our leading on-market portfolio to address migraine and psychiatric conditions as well as a promising pipeline for neurodegenerative diseases. And we see significant long-term growth potential for aesthetics, an extremely attractive market which is underpenetrated, where we have the leading position in toxins with BOTOX cosmetic and Fillers Rejuvido [ph]. Second, we've established a productive innovation-driven R&D organization with a robust pipeline. Our R&D engine has discovered and developed Five major billion-plus medicines over the past decade. We are committed to pursuing new ways to address patients' most serious health issues and have more than doubled our annual R&D investment since our inception. The breadth and the depth of our pipeline which now includes more than 80 programs across all development stages, further supports our long-term growth outlook. Lastly, we have maintained a strong financial position. to fully invest in innovative science and commercial initiatives across our therapeutic categories to drive long-term growth. We've also used that financial position to support a robust and growing dividend which we have increased by 270% since our inception. And we have also used it as capacity to pursue value-enhancing business development to augment our existing portfolio and pipeline. With these strong operating characteristics, we remain well positioned to absorb the impact of the HUMIRA LLE and quickly return to robust sales growth in 2025. As it pertains to AbbVie's near-term outlook, we anticipate 2023 adjusted earnings per share of $10.70 to $11.10. This guidance range contemplates, we expected headwind from direct biosimilar competition with U.S. HUMIRA sales down approximately 37% which is at the lower end of our previous erosion projection of 35% to 55%. Robust performance from SKYRIZI and RINVOQ which we expect will collectively generate $11.1 billion of revenue, reflecting year-over-year growth of nearly 45%. Revenue pressure in [indiscernible] with recent challenging market and share dynamics impacting IMBLUVICA, partially offset by strong sales growth of venetoclax. Double-digit revenue growth of neuroscience including accelerating sales of Vraylar with our recent MDD approval. Our guidance also contemplates the transient economic impact primarily in the U.S. on aesthetic procedure growth, affecting near-term performance for toxins, fillers and body contouring. Given that it's difficult to predict the duration of economic and inflationary pressures, we have not assumed the recovery in 2023. And finally, this guidance reflects increasing investments in both R&D and SG&A to support our long-term growth opportunities. It's also important to note that while it is possible 2023 could outperform our guidance, depending upon the shape of the HUMIRA erosion curve. We don't anticipate that 2024 earnings will be lower than the $10.70 for of the 2023 adjusted earnings per share guidance which we are issuing today. In summary, we are executing well across our business and see numerous opportunities for our diverse portfolio to drive long-term growth. Thank you, Rick. I'll start with the quarterly results for immunology which delivered total revenues of more than $7.9 billion, up 19.5% on an operational basis. SKYRIZI and RINVOQ are performing exceptionally well, contributing more than $2.3 billion in combined sales this quarter, reflecting operational growth of 70%. SKYRIZI continues to exceed our expectations, outperforming our initial full year guidance by more than $750 million. Global revenues this quarter were nearly $1.6 billion, up 12.8% on a sequential basis. SKYRIZI is achieving strong market share momentum globally with in-play psoriatic disease leadership in 24 countries and total market share leadership in more than a dozen key markets. In psoriasis, SKYRIZI's total prescription share of the U.S. biologic psoriasis market has increased to more than 28%. And there is substantial room for continued growth in psoriasis based on SKYRIZI's leading in-play share of new and switching patients which remains at nearly 50%. Psoriatic arthritis is also providing a nice inflection to SKYRIZI sales, especially in the U.S. Dermatology segment, where we have achieved approximately 10% share of the total biologic market. And we are also seeing encouraging SKYRIZI new patient starts in the U.S. room segment as well which accounts for more than 80% of all PSA treatments. SKYRIZI is being co-positioned with RINVO to rheumatologists where these 2 products combined have already achieved a leading in-play PSA room share of approximately 16%. In Crohn's disease, we are making excellent progress with the U.S. launch. Feedback from gastroenterologists has been very positive, especially as it relates to SKYRIZI's novel dosing and overall clinical profile. We recently started DTC promotion for this indication and are already achieving a total in-play patient share of more than 15%. Turning now to invoke which delivered global sales of $770 million, representing double-digit sequential growth. In rheumatology, global prescriptions are ramping nicely across RINVOQ's 4 approved indications, RA, PSA, ankylosing spondylitis and non-radiographic axial SpA. We continue to see positive market share momentum in both the U.S. and across key international geographies. In atopic dermatitis, RINVOQ is demonstrating strong uptake in both treatment naive and second-line patients globally. Feedback from the global derm community supports the importance of RINVOQ as a long-term chronic therapy to control atopic dermatitis, especially as it relates to skin clearance and rapid itch relief. RINVOQ AD prescriptions are trending up globally with 20% to 35% in-place shares across our major international markets and a mid-teens in-place share in the U.S. which are both tracking in line with our expectations. In gastroenterology, the launch trends for RINVOQ in ulcerative colitis are very strong. Physicians have been pleased with RINVOQ's high rates of endoscopic healing as well as the speed of onset which has quickly resulted in RINVOQ achieving approximately 20% in-play share in the U.S. second line plus setting. Internationally, RINVOQ UC is now approved in 50 countries with reimbursement discussions progressing in line with our expectations. This strong adoption in UC amongst gastroenterologists is very encouraging for RINVOQ's potential in Crohn's disease as well. We are on track for U.S. and EMA regulatory decisions in the second quarter and are preparing for the commercial launch. Global HUMIRA sales were approximately $5.6 billion, up 6% on an operational basis with 9.9% growth in the U.S. partially offset by international, where revenues were down 16.9% operationally due to biosimilar competition. In the U.S., we have secured broad formulary access for HUMIRA encompassing more than 90% of all covered lives which enables us to compete for patient volume at parity to biosimilars. Turning now to hematologic oncology, where total revenues were $1.6 billion, down 11.2% on an operational basis. Imbruvica [ph] global revenues were approximately $1.1 billion, down 19.5%. The U.S. performance continues to be impacted by challenging market and share dynamics attributed to the pace of COVID recovery as well as increasing competition. Venclexta global sales were $56 million, up 12.2% on an operational basis, with continued strong demand in both AML and CLL. We are particularly pleased with the international performance driven by robust share gains in the EU and across Asia. In neuroscience, revenues were $1.7 billion, up 5.1% on an operational basis. Vraylar continues to demonstrate robust growth. Sales of $565 million were up 15.5% on an operational basis, reflecting increasing market share, primarily in bipolar 1 disorder. Vraylar was also recently approved as an adjunctive treatment for major depressive disorder, marking its fourth approved indication and adding a new substantial opportunity for long-term growth. We are very pleased with the AMDD label which confirms Vraylar's strong benefit risk profile, dosing flexibility with positive efficacy results for both the 1.5 and 3-milligram dose and the ability to reduce depressive symptoms as an add-on for the partial responders who present and this is important, with or without symptoms of anxiety. The AMDD launch is off to a strong start and we are already seeing a nice inflection in total new prescriptions in the marketplace. Within migraine, our leading oral CGRP portfolio contributed $249 million in combined sales this quarter, reflecting growth of nearly 30% as we continue to see strong prescription demand for both Ubrelvy and QULIPTA. We are also pursuing in the U.S. commercial approval for QULIPTA as a preventative treatment for patients with chronic migraine which would further strengthen our competitive profile and uniquely position QULIPTA as the only oral CGRP available as a preventative treatment for patients with both chronic and episodic migraine. Rounding out the migraine portfolio is BOTOX Therapeutic, a unique treatment with a dozen approved therapeutic indications and the clear branded leader in chronic migraine prevention. Total BOTOX Therapeutic sales were $728 million, up 10.7% on an operational basis. And last, we continue to prepare for the launch of ABBV-951 in both the U.S., Europe and Japan later this year. 951 represents a potentially transformative next-generation therapy for advanced Parkinson's disease and a $1 billion-plus peak sales opportunity. So overall, I'm pleased with the performance and the momentum across the therapeutic portfolio. Thank you, Jeff. Full year 2022, global aesthetic sales were approximately $5.3 billion, reflecting growth of 5% on an operational basis. Global Botox cosmetic sales were approximately $2.6 billion, up nearly 21% operationally and global Juvederm sales were approximately $1.4 billion, down roughly 2% operationally. Our global aesthetics portfolio grew in 2022 despite several headwinds, most notably inflationary dynamics in the U.S., COVID-related lockdowns in China and suspension of our operations in Russia. In the U.S. we began to see a slowdown in aesthetic procedures in the second quarter of last year which coincided with the softening in economic metrics. These trends continued through the end of the year with the most significant impact on higher priced more deferrable procedures, including fillers and body contouring. Despite these economic pressures, U.S. Botox cosmetic sales grew approximately 16% in 2022, driven by strong first half sales with growth moderating over the remainder of the year. Similarly, U.S. Juvederm saw strong growth in the first quarter of the year but filler market declines throughout the second half of the year resulted in full year sales being down approximately 17% versus a robust 2021. We continue to track a number of key external economic metrics, including real personal consumption and the U.S. Consumer Confidence Index. While we have not seen major improvements in these metrics, data over the course of the last several months has shown stabilization. It remains difficult to predict the duration of these economic headwinds. But as Rick noted, we have modeled them to persist through the end of 2023. Our international aesthetics portfolio continued to demonstrate robust growth with the strong performance in most major markets, offsetting impacts from China and Russia. International Botox cosmetic sales of nearly $1 billion were up approximately 29% operationally and international Juvederm sales grew approximately 9% on an operational basis. We delivered this performance despite the significant headwinds we faced last year in our 2 largest international filler market, China and Russia. While our aesthetics portfolio in China continues to be impacted by COVID-related headwinds -- the current wave appears to have peaked. We expect the situation to improve through the first half of 2023 with full recovery in China beginning in the third quarter. Despite the transitory challenges we're facing, we remain confident in the long-term outlook for our aesthetics portfolio. Consumers continue to be very interested in the aesthetics category and in our brands. We see substantial room for further market penetration across each of our aesthetics categories and are continuing to invest to support long-term growth. Our promotional efforts are focused on driving more consumers into our customers' offices while increasing retention and productivity of existing patients. We have built a best-in-class commercial technology team known for developing our consumer loyalty program, Eli. We have over 5 million consumers who use Eli and more than 20,000 of our customers' offices. We have a series of new technology products launching this year to drive growth in the aesthetics market and support our customers and consumers. Internationally, we are focused on markets with significant growth potential. We have increased investments in injector training and expanded our field force in China which is our second largest market. Latin America which is very aesthetically oriented and Japan which is growing rapidly and is expected to be one of our fastest-growing markets in 2023. Additionally, we are focused on delivering new product innovation. This year, we're launching 2 new fillers in the U.S., VOLUX for improvement of jawline which was approved late last year and Skin Vive for enhanced skin quality attributes, including hydration which is expected to be approved in the first half of 2023. We're also continuing to launch Harmonica, our hybrid bio-stimulatory HA filler in several international markets. The investments we're making to support long-term growth for our aesthetics portfolio, along with the stabilizing economic outlook and improving tobidynamics in China, leave us well positioned for future growth. Thank you, Carrie. We expect significant program advancement across all stages of our pipeline this year. In immunology, we continue to make very good progress with programs in our core diseases as well as in adjacent areas of rheumatology and dermatology, where we are expanding our portfolio. We're nearing completion of SKYRIZI's registrational program in ulcerative colitis which is the last major indication expansion program for SKYRIZI. In the first half of this year, we'll see data from the Phase III induction and maintenance studies for SKYRIZI in ulcerative colitis with our regulatory submissions anticipated later this year. We'll also see data this year from our head-to-head comparison studies evaluating SKYRIZI versus other commonly used agents which we expect will further distinguish its profile from competitive offerings. These studies include our Phase III trial in Crohn's disease versus STELARA and our Phase III trial in psoriasis versus Otezla. Results from these studies will add to the body of evidence supporting SKARIZI as a best-in-category agent in these indications. We're also nearing completion of the core indication expansion programs for RINVOQ. Our regulatory applications for RINVOQ and Crohn's disease are under review and we anticipate approval decisions in the second quarter. RINVOQ demonstrated very strong rates of remission and endoscopic improvement in our Phase III induction and maintenance studies and we believe RINVOQ will be an important new treatment option once approved in Crohn's disease. This is a market where approximately 80% of bioexperience patients have used the TNF inhibitor and there remains considerable unmet need for therapies that can deliver high rates of response and long-term remission. Beyond our core immunology indications, we're developing RINVOQ in several diseases where we've seen strong evidence that our JAK inhibitor has the potential to become a highly effective therapy. Our Phase III program is already underway in 1 of these indications, giant cell arteritis. And later this year, we plan to begin Phase III studies for 4 additional diseases, systemic lupus, hidradenitis suppurativa, vitiligo and alopecia areata. Moving now to our oncology portfolio, where we expect several important regulatory and clinical milestones this year. In the area of hematology oncology, we'll see data from several Phase III studies, including results from Venclexta's event-driven de novo trial in relapsed/refractory multiple myeloma patients with a T114 mutation and Navitoclax' TRANSFORM-1 trial in frontline myelofibrosis. Results from these studies are expected to support regulatory submissions in the second half of the year for Venclexta and navitoclax in their respective indications. We also anticipate regulatory approval this year for epcoritamab in relapsed/refractory large B-cell lymphoma in several major geographies, including the U.S. in the second quarter and in Europe and Japan in the second half of the year. Based on the very deep and drillable responses demonstrated thus far in our clinical program, we believe that epcoritamab has the potential to significantly improve upon treatment options for these patients. We believe that epcoritamab has the potential to become a core therapy for B-cell malignancies. And we continue to make very good progress, expanding our development programs for epcoritamab across several indications. Over the course of 2023, we expect to begin several new studies, including a Phase III study in frontline DLBCL in combination with R-CHOP and multiple Phase II studies in CLL and MCL. We remain very excited about epcroritumab's potential to become a best-in-class therapy across multiple B-cell malignancies and look forward to providing updates on these programs as the data mature. Now moving our solid tumor pipeline. We remain on track to see data later this year from our Phase II study evaluating Teliso-V in second-line plus advanced non-squamous non-small cell lung cancer. As a reminder, we received a breakthrough therapy designation for Teliso-V, our c-Met ADC, based on the encouraging results from Stage 1 of this Phase II study and the data we'll see later this year has the potential to support an accelerated approval. Our Phase III confirmatory study in patients with overexpressed c-MET is also ongoing. Treatment options for these cancer patients who have exhausted platinum-based chemotherapy, immunotherapy and targeted therapy are very limited and prognosis for these patients is extremely poor. As a targeted therapy for patients with overexpressed cement which represents approximately 25% of the non-squamous non-small cell lung cancer population, we believe Teliso-V has the potential to become an important new treatment option for these patients. We're also making good progress with our next-generation c-MET ADC, ABBV-400 which utilizes a more potent topoisomerase inhibitor payload, to potentially drive deeper tumor responses as well as broaden the range of solid tumors where c-MET therapies can be used such as gastroesophageal and colorectal tumors. We expect to see early data from our Phase I program in 2024. Elsewhere in the solid tumor pipeline, we have begun to see encouraging data from several programs which we plan to advance into Phase II studies this year. Our anti-GARP antibody, ABBV-151 is showing strong signals of activity, including deep responses with prolonged durability. Based on this preliminary efficacy, we plan to initiate Phase II studies in several tumor types. We also plan to advance ABBV-647 into Phase II dose optimizing studies this year based on the promising results from our early stage program. This ADC targets PTK7 which is a subset of non-squamous non-small cell lung cancer and represents approximately 25% of patients and has little overlap with c-MetSo our c-Met ADCs and PTK7 ADC combined will target approximately 45% of non-squamous non-small cell lung cancer patients. Now moving to neuroscience, where we recently received FDA approval for Vraylar as an adjunctive treatment for major depressive disorder which marks its fourth indication approval. We're very excited by this approval and pleased with the label which highlights Real or strong benefit risk profile in this indication. Vraylar is an important new treatment option for patients who are currently taking an antidepressant but continue to have unresolved depression symptoms. We also recently received approval in Japan for ABBV-951, our novel subcutaneous levodopa carbidopa delivery system for treatment of advanced Parkinson's disease. This innovative approach to delivering DUOPA-LIKE efficacy through a subcutaneous delivery system represents a potentially transformative improvement to current treatment options. With a less invasive, nonsurgical delivery system, it also has the potential to significantly expand the patient population currently addressed by DUOPA or other more invasive therapies for advanced PD patients such as deep brain stimulation. We remain on track for approval decisions this year in both the U.S. and Europe. In the U.S., we anticipate approval in the first half of the year, with product launch expected in the second half after we secured reimbursement. And in Europe, we anticipate approval in the fourth quarter of this year. And in the area of migraine, we remain on track for an FDA approval decision in the second quarter of this year for QULIPTA as a preventive treatment for patients with chronic migraine. In Europe, we anticipate an approval decision in the third quarter for atogepant as a preventive treatment for patients with both chronic and episodic migraine. If approved, this would be another differentiating feature for Lipa as it would be the only oral CGRP approved for prevention in patients with chronic migraine. This is a common and debilitating disease that significantly impacts quality of life and we look forward to make this new oral treatment option available to patients once approved. And in our aesthetics pipeline, we expect to see results this year from several toxin programs including data from our Phase III study for Botox in platysma prominence with regulatory submission in the U.S. expected near the end of 2023 as well as data from our Phase III study for BOTOX in masseter muscle prominence, where we expect to submit regulatory applications in certain international markets in the second half of the year, including China and Canada. These 2 novel indications for prominent neck and jaw muscles will help to further build our portfolio in the lower phase segment. We'll also see data from our Phase III trial for Bot-AE or short-acting toxin in glabellar lines near the end of this year with regulatory applications plan for 2024. So in summary, we continue to demonstrate significant progress across all stages of our pipeline and anticipate numerous important regulatory and clinical milestones again in 2023. With that, I'll turn the call over to Rob for additional comments on our fourth quarter performance and our 2023 financial outlook. Rob? Thank you, Tom. AbbVie's performance and financial foundation remains strong with our leadership positions across a diverse portfolio, we are well positioned to return to robust growth by 2025. Starting with fourth quarter results, we reported adjusted earnings per share of $3.60 which is $0.07 above our guidance midpoint. These results include a $0.13 unfavorable impact from acquired IPR&D expense. Total net revenues were $15.1 billion, up 3.8% on an operational basis, excluding a 2.2% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 52.1% of sales. This includes adjusted gross margin of 86% of sales, adjusted R&D investment of 11.5% of sales, acquired IPR&D expense of 1.6% of sales and adjusted SG&A expense of 20.8% of sales. Net interest expense was $476 million and the adjusted tax rate was 13.4%. Turning to our financial outlook for 2023. Our full year adjusted earnings per share guidance is between $10.70 and $11.10. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred throughout the year. We expect net revenues of approximately $52 billion. At current rates, we expect foreign exchange to have a neutral impact on full year sales growth. This revenue forecast comprehends the following approximate assumptions for our key products and therapeutic areas. We expect immunology sales of $24.8 billion, including SKYRIZI sales of $7.4 billion, reflecting growth of more than $2.2 billion due to strong market share performance across all approved indications. RINVOQ revenue of $3.7 billion, reflecting growth of more than 45% with continued indication expansion and HUMIRA sales of $13.7 billion, including U.S. erosion of 37% and following a loss of exclusivity in late January. With 1 biosimilar currently in the market and potentially 9 more biosimilars available in the middle of the year, we anticipate that sales erosion will be more heavily weighted towards the second half of 2023. In hematologic oncology, we expect VENCLEXTA sales of $2.2 billion and [indiscernible] revenue of $3.5 billion. For aesthetics, we expect sales of $5.2 billion, including $2.5 billion from Botox Cosmetic and $1.4 billion from Juvederm, with growth rates expected to improve when we lap the market slowdown in the middle of the year. For neuroscience, we expect revenue of $7.2 billion representing growth of more than 10%, including Botox Therapeutic sales of $2.8 billion, Vraylar sales of $2.5 billion and total oral CGRP revenue of $1.1 billion, including Ubrelvy growth of approximately 17.5%. For eye care, we expect sales of $2.2 billion and we expect Mavyret revenue of $1.4 billion. Moving to the P&L for 2023. We are forecasting full year adjusted gross margin of 84% of sales, adjusted R&D investment of $6.8 billion and adjusted SG&A expense of $12.4 billion. We forecast an adjusted operating margin ratio of 47% of sales. This profile includes a 70 basis point benefit that is fully offset in tax expense given the transition of Puerto Rico's excise tax to an income tax effective at the beginning of this year. We expect adjusted net interest expense of $1.8 billion and we forecast our non-GAAP tax rate to be 15.3%, including an impact of 1.3 points from the Puerto Rico tax transition. Finally, we expect our share count to be roughly flat to 2022. Turning to the first quarter. We anticipate net revenues of $11.8 billion. At current rates, we expect foreign exchange to have a 1% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas. Immunology sales of $5.5 billion which includes U.S. HUMIRA erosion of 27%, Oncology revenue of $1.4 billion. Aesthetic sales approaching $1.2 billion; Neuroscience revenue of $1.5 billion; and eye care sales approaching $600 million. We are forecasting an adjusted operating margin ratio of 46% of sales and we model a non-GAAP tax rate of 13.3%. We expect adjusted earnings per share between $2.39 and $2.49. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie's strong business performance and outlook continues to support our capital allocation priorities. We expect to generate adjusted free cash flow of nearly $19 billion in 2023 which is net of $1.4 billion in SKYRIZI royalty payments. This cash flow will fully support a strong and growing dividend which we have increased by 270% since inception, continued debt repayment, where we expect to pay down $4 billion in maturities this year bringing our cumulative debt reduction to $34 billion. Our strong cash flow also provides capacity for continued business development to further augment our portfolio. In closing, we are very pleased with AbbVie's strong results in 2022. And with our diverse portfolio, we continue to be well positioned to deliver long-term growth. And so maybe a question -- a bigger question for Rick. So AbbVie -- when we talk to investors, AbbVie has always been 1 of those. The R&D as a percent of sales has always been low. And right now, even it is still less than 15% and that's the pushback we get that the company cannot grow organically. And in some ways, you have always been playing defensive given that since inception, HUMIRA has always been an issue. Now that you're beginning to get past that, do you think something you'll change -- you want to change fundamentally with the company and the way you allocate internal versus external R&D spend? That would be very helpful. Okay. This is Rick. So it's a good question. We've obviously heard that question. I think there's a number of dynamics that play into it. when you look at our R&D expense as a profile. One is, obviously, we have a large volume of HUMIRA revenue that requires relatively little R&D support. And so that obviously dilutes out the profile of the business. As we see biosimilar impact, obviously, there will be some impact on that as you know, our revenues were to go down. The second thing is the aesthetics business, we're funding it aggressively to grow it. But by definition, it's not that expensive to be able to fund many of those programs. So it has a much lower profile. So some of it is mix when you think about it. The second thing I'd say is we obviously fund R&D at a level that we believe we can drive productivity. And I think if you look at our productivity over the last 10 years, the data I've seen suggests we are 1 of the most productive R&D engines in the industry. Certainly, when you look at products like SKYRIZI and RINVOQ, the return on those assets is tremendous. The third thing I'd say is, look, what drives R&D expense to the greatest extent is when you have large volumes of Phase III programs. And we're coming into a phase as we move forward over the next 3 or 4 years, where we have a number of programs that if they are successful, they will create a scenario where we will increase R&D. So an example of that would be our GARP program. We've seen some incredibly encouraging data out of that program thus far to next-generation immuno-oncology program. That combines with checkpoint inhibitors. And if that program continues to advance the way we see it now, we would want to expand our as our Phase II and then Phase III trials in that program significantly across the relatively broad range of solid tumors. That will require a significant increase in investment to be able to do that. So we tend to drive R&D based on programs that we have a high level of confidence can be productive and can be successful. And we don't constrain R&D in any way from that perspective. Another program will be our AbbVie program. If that program proves to deliver high rates of amyloid reduction and low REA. That will be another program that we want to rapidly move into Phase III. And so I can tell you, I'm very comfortable with the productivity we're getting out of R&D. Certainly, we will want to continue to increase that and that's 1 of our objectives. We always look at programs on the outside to bring them in. And in fact, I'd say over the last couple of years, we brought in a number of programs that are earlier stage programs. And we're fortunate from the standpoint that we have the ability to drive very strong growth, as we've indicated to investors between now and the end of this decade. We can drive high single-digit growth. We're going to return to robust growth in '25. So we're looking mostly for assets that will allow us to drive growth in that late 20s and early 30s time frame. So again, as those mature and they're successful and they go into later-stage development programs, they will drive further need for investment. Mohit, this is Rob. I'll just add that. If you look at this year's guide, it's a great example of our willingness to increase R&D investment where it's needed. So if you look at we're increasing it from $6.4 billion to $6.8 billion. Those increases are focused on epcoritamab as well as midstage assets such as GARP and PTK7. We also have several new Phase III studies for additional RINVOQ indications which could contribute several billion dollars of revenue in the latter half of the decade. So even in the year where we're seeing a decline in the top line, we're increasing R&D investments. We're very committed to increasing innovation investment, whether it's internal or external. I guess, I just wondered, high level, if there was anything different, Rick, or Rob, about your approach to guidance on the revenue side this year versus last year. I think last year, performance was choppy across a number of different franchises. So as you thought about the guidance this year, anything different as you approached it? And then my second question is any other details you can provide on how you're thinking about HUMIRA in 2024. Obviously, I appreciate the color this year but how should we think about 2024 dynamics in the U.S. Okay. So maybe I'll start and then Rob can fill in anything that I might miss. I think whenever we look at guidance, we look at it and I think this has been our historical practice. We obviously look at guidance as something that we have a very high level that we can execute against that guidance. I would say this year, you've seen that the range is a little bit wider than what we normally project. And we did that based on the fact that as HUMIRA goes biosimilar, obviously, very small changes in the assumptions we're making on erosion for HUMIRA can have a fairly significant impact. So we're right in the range by about $0.10. and that's reflected in this guidance. And so I would say that as we have in historically, we have a high level of confidence we're going to deliver on this guidance. As it relates to 2024, we have provided as part of this guidance, what we are projecting to be a floor because we've gotten a lot of requests from investors about when will we hit the trough and will it be '23 or will it be '24? So maybe to give you a little color around how we think about that. One, the $10.70 is a floor. That doesn't mean that we will go down to $10.70 but it means that we would say to investors that, that's what you should assume is the absolute floor. Now when will that or if it were to occur, when we occur? Will we see the drop in 2023? Or will we see the trough in 2024. And I would tell you that our expectations would be based on this plan, the trough should occur in 2023. But what I would tell you is if we significantly overachieved this plan into 2023 and there's obviously somewhat greater risk it could move into '24. The reason why it is in '23 versus '24 based on our current planning assumptions, is because the strength of the growth platform has the ability between where it will grow in '23 and where we're growing 24% to offset what will obviously be further erosion of HUMIRA in 2024. 2024, you will basically have to impacts on HUMIRA. You will have the annualization of this year. And as Rob said in his remarks, we expect more of an impact in the second half of '23. So when you annualize that, you're going to have an impact that flows through to '24. And then we would expect further erosion of HUMIRA, both price and probably to a greater extent, volume in 2024. But the growth platform has the ability to grow through that based on those assumptions. And so that's the philosophy that we operate with on the guidance. I think if you reflect back on the history of AbbVie, we've had a long track record at delivering exceeding our guidance. I think 2022 is an exception. And if you look at on the top line now, we didn't make earnings. So that's important to highlight. If you look at the top line, the 2 biggest factors that drove the miss versus original guidance in 2022 were with Imbruvica and Venclexta, the CLO market, we did not anticipate that, that market would actually not recover. I mean that's -- it's down 20% versus pre-pandemic levels. And then we did see some additional share impact on IMBRUVICA. And then aesthetics, we saw, obviously, in the month of May, we started to see a slowdown in the economy. We had a very strong first quarter. So both of those things really are what drove the top line miss, we made earnings. Now we have factored both those things in the 2023 guidance to give investors confidence that we said it appropriately. But we always look to set the most responsible guidance we can and we feel good about where we set 2023. Just 2 for me. Maybe just following up on the 2023 guidance being a trough number. It seems like you're still going to have about a $12 billion U.S. HUMIRA franchise here. So can you just provide maybe a little bit more color of what you're envisioning 2024 to look like for HUMIRA? Like is it reasonable to think about the down 35% to 40% year as we look out to '24. I think we just turn your hands around just the how much growth in that core platform and how much of a headwind, I guess, HUMIRA is going to be facing at the same time. My second question was just on aesthetics trends as we move through this year. You've talked about some signs of at least sequential stability the last few quarters. You're talking about stepping up investments. You've got a couple of new products launching. I guess why shouldn't we think about some recovery in this business as we look out to the second half of the year? Chris, this is Rick. Let me talk a little bit about HUMIRA and the trough. We're 2 weeks into the biosimilar activity. So it's a little difficult to give you precise predictions or 2024. I think the way to think about HUMIRA going forward is what we would expect is the most significant impact on HUMIRA is going to be price. And obviously, we're trying to predict going forward what that price will look like. Certainly, as we look at this year, the most significant impact is clearly price. So that's more predictable because we obviously know what the pricing is in the contracts that we've put together. And so I think that's something that we have a high level of confidence. There will be further pressure on price as we move into '24 and there'll probably be further pressure on volume in '24d. But I would say, at the end of '24, I would expect HUMIRA to start to develop a more stable tail of revenue. It will still have some pressure as we move in '25 but '25 and '26 is where we should see that more stable tail for HUMIRA emerge. And that's 1 of the things that allows us to be able to see the underlying growth from the growth platform. So a number of things happen between '23 and '24 and then '25 as we move forward. As you mentioned in your second comment, we would certainly expect that the U.S. economy will start to recover in '24. It may recover earlier than that. And if it does, that would be great. We don't want to put a plan together to assume that because obviously, that's difficult for us to predict. But I think we would all expect that 24 will see a recovery in the U.S. economy. And we would fully expect for the aesthetics business to return back to historical growth rates very quickly when that happens. And so that will be another opportunity for that business to be able to grow. And then I would say Imbruvica is the other key issue for us. as we move forward. We would expect the majority of the erosion that we see on Imbruvica will occur this year and there will be less downward pressure as we move to '24. So that's what allows the growth to be able to come up. What I would tell you even though I don't want to make a; prediction in '24 of what HUMIRA will look like. I think we have a high level of confidence that we have the ability if the erosion curve looks like how we've modeled it now between '23 and '24 that we have the ability to be able to have the growth platform and go through that. So we can absorb that impact. And so far, like I said, it's early on but I'd say so far, we're comfortable with how things are playing out. I think you characterized it well, Rick. I mean the thing to highlight for this year for '23, the way you think about HUMIRA really in the first half of the year, the vast majority of that erosion will be priced. In the second half, you'll see because we've contracted rebates, you'll see a step-up in the price erosion, although you also will see more volume with biosimilars coming in the market in the middle of the year, we would expect more volume erosion. I think as we think about '24, we would expect, based on the contract to see a step up in price but albeit not at the same level as we see in '23 but '24 would be more volume. It's probably the best way to think about it right now. We're not going to give you guidance but if you think about how to model HUMIRA '23, '24, that's the way to think through it. Yes. This is Carrie. The -- in terms of the aesthetics market and how we're thinking about it for 2023, I mean, first, I'd say, yes, this is still a very strong fundamental market with consumers who are very interested in entering the category. And so that remains a strong opportunity the now and in the future. But what we saw as we exited 2022 is as these economic metrics were softening, we also saw that reflected in demand for aesthetic procedures. And in our conversations with customers, we saw that reflected in their practices, market research with consumers, where they said, yes, we're interested in the category but we want to see what's going on with the economy, perhaps before a new patient might want to enter the category. And based on that, we are modeling for those trends to continue in 2023. And what that means for U.S. toxin market is the market growth would be around a mid-single-digit decline for U.S. filler market around a 10% decline. And like we said, those growth rates would be different by quarter as we lap a strong first part of the year. Now of course, if there is a scenario like a deep recession, where unemployment skyrockets, that is not something that we've contemplated. Or on the other hand, if the macroeconomic environment stabilizes or improve that would represent favorability to our plan. First question is on neuro in the quarter. It's actually weaker than we thought. So was there any additional pressure on gross to net, maybe for the oral CGRPs? And what sort of inflection are you expecting for Vraylar and MDD, how rapid do you think that adoption might be this year? And then, Rick, you recently said that you would be in an article that you would be lifting the self-imposed $2 billion annual cap on business development that you have more capacity to do deals. So how much capacity do you guys have what areas are you looking to be most aggressive? And how important is it to add sizable marketed products into the mix? Or would it be mostly focused on pipeline? Yes. I'll take the first one, it's Jeff. Thanks for the question. No, we did not see material incremental pressure on the gross to net -- we did see a little softening versus our expectation on the overall preventative marketplace but it was quite modest. So no, fairly consistent trending. I mean if you look at our new prescription capture and the oral market, it's basically a 50-50 shared capture rate between ourselves and the major competitor. In terms of the Vraylar adoption trend, we had discussed previously because we really have very, very strong access for Vraylar that we would anticipate a pretty rapid inflection in adoption for the depression indication, the adjunctive depression indication. As I mentioned in my remarks, that's what we've seen. So we're quite encouraged. I mean we can see a significant trend break on the new prescription adoption versus what was already a very nice growth rate for the bipolar 1 indication. So I think the early dynamics and again, it's only really been a month here in January where our sales force has been out promoting the new indication. We're quite encouraged in terms of the market response, both from the metrics in terms of IQVIA, the scripts we see but also the qualitative feedback from the customers. And on deal capacity, we obviously look at business development based on what we believe are -- we're trying to accomplish strategically in each of the therapeutic areas that we're operating in. we identify areas that we think would be good opportunities for us and then we look to see if we can find those kinds of assets. As I mentioned before, I think we're in the fortune of a position that we can drive very strong growth. with the assets that we have on the market today as well as what's coming out of our pipeline over the next 3 or 4 years. That gives us the ability to be able to return to growth and then drive that high single-digit growth through the end of the decade. And we're also fortunate that after HUMIRA, we have a -- relative to our peers, we have a very low LOE [ph] exposure. So we don't have a lot of downward pressure on the business. Now having said that, we've done an excellent job of paying down the incremental debt from the Allergan transaction, we put that $2 billion cap in place when we did the Allergan acquisition that allowed us to focus again on some earlier-stage assets. And I'd remind everyone that was about 4x what our historical practice has been for those kinds of assets. So there was plenty of capacity to do that. But we're certainly in a position now that if the right thing were to come along, we could do a transaction that would be much larger. We certainly have the financial wherewithal to be able to do that. And we've certainly shown that we were able to do that and create value in the assets that we bring in. The areas that we typically look at are aligned with our therapeutic growth areas. So immunology, oncology, certain areas of neuroscience and eye care, I would say, are the predominant areas as well as aesthetics. We obviously continue to look for opportunities in the states. They tend to be smaller acquisitions, though. And so at the end of the day, I feel good about where we are and we've been quite active. We have a very active business development group. And we'll continue to look at those. And like I said, we find something that's of interest and it could really help us round out a category that we're in, then you should expect us to act on that. Maybe to come back to aesthetics. It does sound like you built in conservatism on a number of fronts. I wanted to also -- you didn't touch much around sort of China reopening and how you expect that sort of business to -- as it comes back, if you expect it to sort of return to how it was? Or if that will evolve differently. And then in the -- I guess as we think then around the guidance for '23 and the link you've drawn to as you sort of maybe if the guidance potentially evolves over '23, should we think about that link remaining intact? Or is that sort of a near-term phenomenon and that will sort of, I guess, disappear going forward. Yes. So your question around China and I'd say China is our second largest global business. It has demonstrated significant growth in the past few years and proven to be very responsive to the increased promotion that we're putting into that market. Of course, in 2022, China COVID-related issues did impact the aesthetics market, especially in the second and fourth quarters. Now, as we look at the year beginning in China and as everyone is returning from the Chinese New Year, it does look like the current wave has peaked. And that the situation is beginning to improve and will continue to improve through the first half of 2023 and we're expecting a full recovery in the market in Q3 and for the second half the year. So despite the challenges in 2022, China still posted positive growth and we will definitely be continuing our investments in China in 2023 and beyond. And Carter, this is Rob. I'll try to answer your second question. I think the way to think about '24 -- clearly, as we go through the year, we always look at the trends and contemplate what that could mean for flow through in '24. But the reason we gave you that guidance range, we mentioned the $10.70 [ph] being the way to think about it as a floor for '24 is because of the dynamics around the HUMIRA erosion. So if we do better in '23 and more of it happens in '24, then you can at least anchor back to we're not going to fall below that $10.70 EPS floor in our guidance range. So we always would factor in trends but that's the way to think about it. If it's just the erosion on HUMIRA is better this year than we have in this guidance. We want to make sure you understood that what it means potentially for '24. So that's again, always factor in trends. But as we sit here today, that's the best way to think about it. Maybe just let me add 1 thing that might help clarify it. I think you should think about HUMIRA in '24. We believe we're going to get to a certain level of price and volume in '24, almost regardless of what happens in 2013 because of the competitive dynamic. And so when we talk about the shift, what we're really talking about is inflating '23. If you anchor '24 is a solid point that we have a high level of confidence of where HUMIRA's tail will be in '24. And the only thing that happens to shift it between '23 and '24 is that we do much better in '23 than we expected, right? So that inflates but it still anchors against the '24 point [ph]. That's the way to think about this. The low end of 2023 guidance implies 22% EPS erosion, the high end of Q1 guidance assumes 21% EPS erosion. How is it possible that Q1 could be in line with the full year and not appreciably better? It seems as though the Q1 guide is low? Or is that because AbbVie believes the floor on HUMIRA price is already reached? Maybe another way to restate the question. What should be our anticipation for the quarterly cadence of EPS as we go through the year? So Steve, so I think the best way is 1 anchor on the guidance we gave you on U.S. HUMIRA today. So we said for the first quarter, we said it would be 27% erosion. And so -- and that's going to -- the vast majority of that will be priced. And we said because there'll be 9 biosimilars coming to market in the middle of the year, we would expect more of the erosion to come in the second half of the year. So you have to factor that dynamic into the way you look at the quarters that there'll be more erosion in the second half of the year for HUMIRA versus the first half of the year. Then you also have to factor in that you've got things like aesthetics, we haven't quite lapped the economic impact yet, right? So in the first quarter, you have a dynamic where you will see aesthetics still down, right? But when we get into the middle of the year, when we lap it, that also affects your year-over-year growth rates. And then, the underlying performance of the growth platform as we continue to drive those brands, you'll see those growth rates accelerate. So those are all the things that would factor as you look at the quarterly -- really, we've given you Q1 and then full year. We haven't given you Q2, 3 and 4. But that -- those are the variables I would look at. There's not really a whole lot in terms of if you look at investment, for example, that you have to flex. We do tend to see some higher levels typically in the fourth quarter. So, you could -- you could look at historically our investment patterns and use that as a proxy. But those are the variables to consider as you think about the first quarter versus the rest of the year. I'm going to torch you with a couple more questions on the same subject as others. The U.S. HUMIRA erosion guidance of minus 37% in '23. How much of that is price versus volume? If I look at what your Q1 U.S. HUMIRA erosion is, so the guidance is minus 27%. Given that volumes for HUMIRA are, call it, 5% positive, that would suggest the price cuts may be in the 30% to 35% range. So can we triangulate off of the Q1 guidance to understand what percent of that minus 37% comes from price? And then the second question, again, goes back to 2024. I know there's lots of uncertainty on the exact rate of erosion for HUMIRA '23. But if you hit that minus 37% right on the nose, would 2024 erosion likely be slower or faster than net minus 37%. So Tim, on your question related to price and volume. The way to think about it is in the first half of the year, the 27% in the first quarter, is the vast majority of that is price, right? So there is some volume impact but not very much. it's in the second half, what you'll see is in the second half, the overall erosion will step up and think of it as equivalent between price and volume because you're going to have -- we know we'll have rebate rates in some cases, increasing as well as the biosimilars coming to market, we expect to see more volume erosion. So as you think about -- as you're trying to triangulate the price volume with the guidance you've given, 27% vast majority's price, second half of the year, you'll have some more volume kicking in. That's I think the best way to think about the price volume split. And then your question on '24, is your question in terms of the percentage or the absolute percentage [ph]? So, if you hit the minus 37% this year which is your guidance for U.S. HUMIRA, the rate of erosion in '24 would be greater or less than that 37%? So we're not going to give you a 2024 guidance, Tim. I think the way to think about '24 is we would expect to see additional price but albeit not at the same level as '23 and more volume coming through because you're going to have up to 10 biosimilars in the market for the full year. So we would expect to see more of a volume impact in '24 that we would expect to see in '23. You previously commented about the operating margin trajectory of '23 into '24. I believe characterizing them is basically flattish. Is that still the case? And then across the immunology category broadly, we're seeing some -- a lot of cross-currency [ph] mix dynamics, clearly, with your portfolio being part of that. What is your expectation about the potential for some of the newer mechanisms that are emerging with clinical data. Are you keen to figure out whether you want to invoke those as part of your portfolio? What do you see the outlook for novel mechanisms, given that we're going to have some biosimilars to some of the most standard of care approaches PNSIL-23. Chris, this is Rob. I'll take your first question. I think for modeling purposes, I would expect operating margins stay roughly at this level in '24 and then begin expanding again in with our return to robust sales growth. I think the pace of that expansion will depend on investment needs as we will always prioritize R&D and SG&A investment to drive long-term growth but that's the best way to think through '24 and then what the operating margin will look like in '25 and beyond. And Chris, it's Jeff. I'll maybe kick off on your immunology question and then ask Tom to comment on some dynamics as well. So it is very, very clear that certainly in the midterm, the most excitement across these immunology categories are for SKYRIZI and RINVOQ. It's quite striking. And I think Tom mentioned there's still incredible interest in a next wave of dermatologic indications that follow on for atopic dermatitis that he highlighted. And really, as I noted in my remarks, I mean, the amount of excitement around the IL-23 and particularly our IL-23 across these indications is really profound. Now having said that, we are watching the competitive landscape for some maybe potentially some novel orals. We don't see them as major players. As we look deeper in the pipeline, we can see that there is the possibility for combination use of novel biologics or biomarker-driven approaches, particularly in IBD. And we monitor those very carefully as we look at our long-range plan. And Tom, I don't know if you want to address some of the things that are back in our pipeline in terms of immunology. Sure. I mean I think the -- I just want to start saying that with SKYRIZI and RINVOQ really raised the bar in terms of efficacy and you see it in mucosal healing, for example. So the bar is getting higher and we will continue to do that. But even to show that we're raising the bar, we're also going to do -- we're going to read out head-to-head studies this year with STELARA and Otezla. So another way to kind of show that what we have is really very profound in terms of responses we're seeing with patients. And we continue -- I mean, honestly, we look at the field. We look at competitors. We're hearing data of S1P1 inhibitors but the data appears to be less effective based on a number of patients which are discontinuing treatment and the signals that we see cardiovascular and others that are similar to what we've seen with previous ones. So I mean, again, without having seen the data, it's all difficult to kind of predict how they'll be able to do accept that our data with RINVOQ and SKYRIZI are very strong, durable and again, very strong at the level of endoscopy also. So we think we have already a competitive edge. We continue we'll see PMR data later this year. We have talked about our RIPK1 inhibitor, again, from the coal healing that's in the clinic right now. We're looking at additional indications. So over time, obviously, we're going to look at additional mechanisms. But not necessarily just pushing down on the same cytokines as JAKs but looking at other target pathways of things that happen in the scan or in GI, again, mucosal healing being an tool pathway. And this is where we think a combination of our immunomodulators like RINVOQ and SKYRIZI with other mechanisms will combine well to give even more profound responses. For all the helpful color so far. So maybe a broader question just with regards to HUMIRA biosimilars. I just I'm curious like, what is the broader impact you anticipate on the I&I market just in terms of net price has been sort of a question we've been getting a lot of people are trying to wrap their heads around -- and then maybe just one on your CF triple. I know that the trial is ongoing. Can you give us an update here? How is the progress? Should we still expect data later this year? Yes, I'll take the one on the immunology marketplace. I think that the impact overall in the category for net price would be modest. And I think a lot of it has to do what Tom and I've discussed before which is the -- just the pure profile of some of these agents particularly SKYRIZI and RINVOQ and either others in the pipeline that are coming. I mean they really are setting different standards of care versus what they've seen in the past. And certainly, the physicians and the payers are recognizing this. I'll give a really quick example on 1 of our major products which is RINVOQ. I mean RINVOQ, based on the label changes that have taken place is already a post-TNF type of dynamic. And so the pricing is going to be the pricing there's no incremental ability to step it, for example. The other thing I would note is on SKYRIZI, we have 4 head-to-head trials against all the major competitors and another one coming with Otezla, as Tom noted. So you start to see that level of performance, whether it's against STELARA, multiple TNFs. Otezla, as I said, that's pending here. And it just becomes very clear that you're just going to achieve much higher levels of clearance and relief. So we feel pretty confident that the pricing impact over time, particularly in the U.S. market will be very modest. And certainly, we can navigate that based on the power of the performance of the portfolio. This is Tom. I'll just answer about the cystic fibrosis program. Again, this program continues. And just to remind you, we're working on a triplet and where we believe that 2 of the 3 components of -- for this drug, this triplet, we have best-in-class assets. But we were looking for another part of the triple called the C2 corrector, where last year, the previous ones basically didn't give the meaningful improvement we were expecting in FEV1 sweat chloride. So we've actually, in our discovery groups, continue to develop new ones. In the last year, we've moved our ABBV-576 forward. in SAD in Phase I studies. We continue to see these, again, safety, high exposures, good PK, things that with -- if you combine with our preclinical data, makes us think it will, it has a potential to be best-in-class -- and that's triplet again with -- is -- first of all, to being tested, we'll have data this year to actually show how they behave together. And later at this part of this year, I'll be able to give an update. Trung [ph] from Credit Suisse. Two, if I may. So I was just wondering on your thoughts more broadly on the pricing dynamics in the EU and U.S. So in the EU, you recently exited the U.K. pricing agreement. In Europe, it does feel like there's -- it's just becoming an increasingly complicated pricing environment. There are a number of reforms being proposed in Europe. So I guess my first question is, is do you see these changes being material or any headwinds to you in your growth ex U.S.? And then secondly, can you just perhaps talk about your reasons you decided not to renew your membership for pharma and bio. How are you going to remain engaged in D.C. and have a voice when it comes to things like IRA and pricing controls. Yes. Thanks for the question. I'll take the first one there in terms of the EU. We do see some movement there, particularly in the, let's say, industry tax and I'll comment on the so-called VPaaS [ph] in the U.K. In some ways, whether or not we were in that voluntary program or outside of the voluntary program, the impact is about the same. And frankly, it was a policy decision because we really think that the U.K. government needs to reform that VPaaS. They didn't plan properly for how things might dynamically evolve in the U.K. and it's a very substantial part of the revenue now that is causing problems, I think, across all of the company. So it was a position of policy position, net neutral. It didn't matter, frankly, whether we were in or not and the U.K. is a relatively modest business for us. We are seeing perhaps more importantly, some changes in the German law, as you're probably aware of. And that is, I think, a modest net pressure that will come in Europe in Germany, in particular, because there's the move, as you may know, from 1 year of free pricing to 6 months. There's a modest increase in rebates, for example. So we do see some austerity impact. But on the bigger scheme, it's -- I wouldn't say it's material to our growth platform that we've been discussing. And Trung [ph], this is Rob. In terms of international prices, I mean, typically, we see year-over-year decline of low to mid-single digits and that's the way we're modeling it for '23 as well. And then on pharma, this is Rick. Obviously, every year, we evaluate any kind of significant investment that we're going to make. And we make a decision as to whether or not we believe that investment is appropriate and is going to have the right level of return at that point in time. And ultimately, we made the decision around pharma based on that. We have a very significant government affairs group that's been active and been in place ever since we came into existence. Back in 2013, we've grown that organization. We did grow it somewhat this year as well in anticipation of not being part of pharma. We plan on being active as we have been in the past to try to appropriately advocate for things that we think are appropriate for patients. And I think that group is quite capable of being able to do that. And I would tell you that at a point in the future, we might decide to go back into pharma. But at this point, we've made the decision that we think that investment could be used elsewhere to be more effective. It's as simple as that. I appreciate all the perspective on guidance. I just had a follow-up on it. Rick, on your comments on the HUMIRA scale for starting next year in the U.S. I think when you look at other geographies, international revenues, you're still seeing double-digit declines after 4 years or so. Maybe just give us some context for what you're seeing there broadly versus what we could expect for the U.S. And just to be clear, when you see next year the impact from all the HUMIRA biosimilars, how much do you think that biosimilar STELARA may play a role here when you look at your assumptions for HUMIRA erosion? And then second question, just on the BD front, you guys talked about some of the therapeutic categories that you're interested in. But with the appetite to expand to expand the menu here and to say more orphan indications, I think across the landscape, some companies in the I&I space are getting into more niche indication. I wasn't sure if that was something that you guys would consider? So I think on the HUMIRA tail, just to maybe clarify what I said is I would expect that as we move through 2024 then in 2025 and 2026, we would start to see a more stable tail for HUMIRA. In other words, we're going to see erosion in 2024. I want to make sure I didn't somehow communicate that, that wasn't the case. So if you look at OUS, I think what's probably deceiving to you is you had different countries going biosimilar at different periods in time. So you can't necessarily look at that as an analog because it's so heterogeneous in the year that those countries went biosimilars. So you are correct. Yes, it is still experiencing double-digit decline but it's been driven by the fact that those countries have not -- some of those countries haven't reached stability yet. But typically -- and the U.S. market is a little different because you have all a large number -- you have a small number of large payers who drive the bulk of the activity in this market. So, it's more like some of the countries that did other kinds of government-wide activity, like in Germany as an example. And there, we do see after a couple of years, we've seen stability. So I think what's misleading you is you're looking at the overall number but you're not factoring into that, the fact that these countries went biosimilar across a number of years. Jeff, this is Rob. Just to add to that. So if you just look at this year, so about half of the erosion is going to come from newer markets like Puerto Rico, Canada and Mexico. So that, as Rick mentioned, we have different waves. And so you're still seeing some of those waves come through. You also have some volume going to new agents like SKYRIZI and RINVOQ, right? So that's something to keep in mind that that's a dynamic that's also playing out for HUMIRA in those markets. And then you typically see negative price trends in international markets, again, low to mid-single digits. So you're going to see some level of pressure there. So those are all factoring into the year-over-year on international HUMIRA something to make sure you're keeping in mind. And if you look at the STELARA dynamic with the biosimilar, I think there's a couple of dynamics that we're watching. And it does go back to my prior comments over the clinical differentiation. The first is that there will be less biosimilar competitive intensity against STELARA. Certainly, we've not seen anything like the 9 that we were -- 9 or 10 [ph] that we're going to see on HUMIRA. And so -- and that price point is quite high actually. If you look at where Stellar is now with the branded program. Now I think maybe more importantly, as we've highlighted before, we've anticipated that entry. And certainly, in Crohn's, we have an ongoing head-to-head trial against STELARA that will read out towards the end of the year. We plan on putting that into promotion if and we believe it will be positive, particularly what we're studying which is that endoscopic endpoint which is really becoming the standard in the gastroenterology space. So we think we can carry quite well with the ultimate arrival of that IL -- the 12/23 [ph] versus our Pure '23. So I hope that helps. I think on your third question, again, what tends to drive our BD strategy is the long-term strategic road map that we put in place across the branch. So if you think about it, you mentioned immunology as an example. I would say in immunology, we have 2 fundamental objectives that we're trying to drive. There are still areas within immunology, where we believe we can significantly raise the effectiveness of the therapies that are used on patients to drive higher levels of remission or higher levels of endoscopic healing. In other words, better clinical outcomes within the areas that we're in. And so we have a tremendous amount of effort in those areas to bring next-generation assets or as Tom mentioned in his comments, there are opportunities to potentially combine 2 mechanisms together to achieve that level of therapeutic benefit. But then we look outside those areas at the adjacencies. And we look for where are the opportunities for us to be able to bring in either an existing mechanism or something we can either develop within our own discovery group or something that we can acquire on the outside as a mechanism that we don't currently have. But we tend to look for where there are areas of large unmet needs and relatively significant patient populations. So, I use 2 examples to illustrate. Vitiligo. Vitiligo is a disease that's very prevalent. There aren't good therapeutic options in it today at all. We do believe there are mechanisms that will allow you to effectively treat vitiligo. If those are effective, that could be a very significant opportunity overtime. Alopecia is another good example of that. So that's how we focus BD in these areas. That's not to say we would never look at a more much opportunity or an orphan opportunity but I wouldn't say orphan is something that is core to our strategy. It was great with all the color you've given. I just had some -- I want to follow up on, you mentioned Vitiligo. With the competition with topical rux [ph] which might have a first mover advantage and then they have an oral as well in Pfizer. How do you see the opportunity for you in vitiligo for RINVOQ? Can it compete? And then my second question last earnings call, you highlighted your GARP TGF beta. So that's 151. And I know there's been a lot of cardio-tox [ph] in the space. So what gives you some confidence what features and what indications, like how do you focus on this? And how do you view the competition profile? On vitiligo, maybe Jeff and I will tag team on it. I would certainly say a topical has a place but it is difficult for people that have large areas of their bodies that are impacted by something like vitiligo for a topical to be a manageable therapy for those patients. So an oral for those patients that have more severe disease typically has greater benefit and frankly, better compliance among those patients which ultimately gives you better clinical outcomes. So I think the RINVOQ will stack up against whoever the competitive alternatives are based on the data. Based on how we've seen RINVOQ perform in other areas, I think we feel pretty good about what the potential is. But the data will speak for itself, see what the data looks like Just to build on that. When we look at the valuation of, for example, that indication or HS or alopecia which again are those derm oriented indications that will follow on pretty quickly in the middle of the decade on top of atopic dermatitis. We do exactly what Rick highlighted. We will segment the patients based on the body surface area. We know that the topicals will be important for a certain percentage of population. For example, if it's maybe highly located to the face, that might be more appropriate, at least as the first course of action. But we do believe that in almost all indications that we've looked at for RINVOQ, it just performs exceptionally well in the clinic. And we would anticipate that as well above a base case scenario. Perfect example is Crohn's disease. There will not be another JAK inhibitor in Crohn's disease for the United States just because they just don't work. And you have spectacular results with the selective JAK with RINVOQ. So We take that all into that competitive context all into our calculations as we look forward to return for those future derm indications. If I can just continue with. I mean, we will have readouts for our Phase II study this year and we've mostly been looking at those cases where there's more extensive body coverage disease -- or the face. So I think it would be a different -- it's a much better to take an oral than a cream when you actually have significant body coverage. Again, we'll see the data, we will report on another quarter call. Thank you, Robin, for the second question. Yes, TGF-beta is a known tumor suppressive pathway and people have tried to drug it to increase the response to immunotherapies. The first-generation TGF-beta because the target is so many parts of the body, you actually have effects, the cardiovascular effects having related to the TGF-beta activity in some of the endothelial cells in the valves and so on of the heart. Here, we're using GARP as our target. GARP is actually a receptor for TGF-beta that's called latent inactive that GARP sound only on Treg cells, a little bit on some fiber some store sales but it's not some in the heart or other tissues. That's what gives us our safety profile and the ability to causing a suppression on Treg cells found in tumor cells as opposed to other places in the body. So that we felt from the beginning was the attribute we needed to go to target this pathway would be something that will be tumor selective and that's what we've been able to see so far. Tumors. So in our -- initially, we focused on tumors. So this pathway is found on almost every solid tumor has some subset tumors which express TGF-beta and GARP. We started off thinking that we'd do a Phase I SAC [ph] study which we did well that we will expand. And we had picked liver and bladder because we saw a lot of TGF-beta pathway in those indications. And we also -- although we knew there was 7 CRC, we saw in patients in our Phase I study which were unselected in terms of tumor type. We saw responses. So we've actually continued expanding studying CRC but we did see responses in liver cancer where we expected to see it based on expression of TGF-beta. We did see it in bladder cancer and we're expanding in those indications at this point. Given the fact that I said earlier that we TGF-beta in all types of tumors, both tumors called hot or cold, we're actually expanding in other tumors to get signals right now. And again, we have we'll have baskets to actually continue to explore its indication space. But right now, we're expanding when we're going to Phase II dose rating studies that's indications where we've actually seen data in our Phase I study. Two, if I may, please. Just going back to U.S. HUMIRA. Giving us the expected erosion is extremely helpful. It's also extremely impressive that you confident enough to give a point estimate for the percentage erosion in '23. So notwithstanding that, I wonder if you could give us what the likely pushes and pulls are. Is this something where we should be thinking more about the being upside risk due to inability of those additional generics biosimilars to supply the market. So any color pushes and pulls there and also into 2024 and your confidence around the erosion curve in '24? And then a question on tax. One question topic that's been raised by some of your peers has been an impact from the OECD minimum global tax rate initiatives in '23. Your guidance would suggest that isn't a factor for you. I just wonder if you could give us any color on when and if you expect those initiatives to impact your tax rate? Simon, this is Rob. I'll take your first question. So when we give guidance, we typically give approximate assumptions and we do use point estimates. We don't typically give product level range. So it has been our practice. So we said approximately 37% erosion for U.S. HUMIRA. We have confidence in that number, obviously. But I think in terms of the pushes and pulls, it's really going to be about volume erosion, right? I think that's -- if you think over the course of the year, we made assumptions around volume erosion. We have good visibility of the price. Now it's a question of what will the volume erosion look like? And obviously, as we go through the year, we'll update you on that. This is Scott. I'll give you some thoughts on the OECD question that you asked regarding tax. So you're right. For 2023, we do not see any impact from this. In our view, there's a lot of things to be worked out with respect to the global minimum tax you mentioned. We have, in the U.S., as you know, a minimum tax we see ultimately this OECD tax being a top-up on that if that does occur but there's a lot of details to be worked out and we wouldn't anticipate any impact there until 2025, if there is an impact. I have 3 quick follow-ups, please. The first 1 on aesthetics, in addition to the macro impact. Are you seeing or do you expect increasing competition from your smaller competitors, DTC campaigns and new products? The second question is on HUMIRA. Was AMGEVITA in line with your expectation. And the third follow-up is on capital allocation. So can we think of 2x as a soft net leverage target which is relevant for AbbVie to consider material business development. I'll take that first question on aesthetic competition. So in terms of U.S. BOTOX [ph] Cosmetics, this is a product that's around for 20 years and has based increased competition and still commands market-leading market share in the high 60s. And we know though that the competitive market will expand as new entrants are coming and have entered and in terms of a revamped toxin at the end of last year. What we've seen in the aesthetics market is that, of course, customers are going to try these new products. It's highly kind of newness driven and there's a novelty factor and trial and competitive trial is to be expected. And what we see is that these products and past aesthetic launches that we've watched, the share ramps for the first 12 to 18 months and then tends to stabilize. And so, of course, we don't underestimate any of our competitors. And so in 2023, we are modeling what we think is a competitive amount of share erosion in terms of our Botox business. And we'd expect that in '23 and beyond that U.S. BOTOX [ph] cosmetic will continue to be the clear number 1 market leader. And the new toxins that enter the market will be competing for their position number 2, 3 or 4 in our customers' offices. And it's Jeff. On your comment on AMGEVITA, the range of pricings that were released were not really a surprise. There's been some external thoughts that this is of interest where there were 2 different AMGEVITAs, 1 high WACC and on low WACC. But again, we've seen this across very different categories and studied it very carefully, as you would expect. So we've seen variably priced WACC products in our own HCV market with authorized generics from competitors. We've seen it in the diabetes space across multiple competitors, including biosimilar competitors. And certainly, with the -- with Amgen and the other segments of their own business. They were often moving around the list prices as well. So all in all, within the range that we would expect from Amgen. Yes. This is Rob. I'll take the question on net leverage. So the 2x is -- think about it as our sustainable target. So as long as there's a path back to net leverage of 2x, could take us in some cases, it could take 2 to 3 years to get back to that. But as long as there's a path, a very clear path to get back to net leverage of 2x, that's the best way to think about how we would evaluate it. Wanted to confirm if you were planning to submit the Imbruvica plus Venclexta frontline CLL combination to the FDA following the ASH this year? And then on 951 in Parkinson's, we saw top line data from competitors from last month. I don't have the full data yet. One thing that sticks out is that they have lower discontinuation rates. So just wondering if there's any insight on devices or trial design that may explain this. It's Roopal. I'll take those. So for the ISV that you referenced, we have that in Europe and I think you're talking about the ASH data, overall survival. There as it clears couple of years is 0.5% or less and the PFS still stays low. At this time, we're not submitting here at the FDA. They would like to see a little more prospective data in another trial setting. So that's the hype. On 951, this is interesting on the competitors you bring up. So the when you run these patients in, you could have discontinuation rates. And if you include them or not include them, it's going to impact what happens post run in. So for example, when you see our data set, we count the run-in discontinuation and post run-in as you get into the main part of the trial. So you see that in the 20 percentile range or so. And that's fairly consistent with what you would see with a subcutaneous infusion. And it's not clear to us how that data, as you're speaking about is reported. Also, we don't know if that's more than 1 injection is that 2 injections and is it rotated daily. I can tell you about 951. We have dosing exposure that gets up to DUOPA unique from DUOPA to 24 hours. It's a single injection and you can leave it in for 72 hours. Thanks, Gavin. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. This does conclude today's conference call. We thank you all for participating. You may now disconnect and have a great rest of your day.

EarningCall_228

I would like to welcome everyone to the IFF Fourth Quarter and Full Year 2022 Earnings Conference Call. All participants will be in a listen-only mode into the formal Q&A portion of the call. [Operator Instructions] Good morning to everybody. I want to start today's call by recognizing our teams in the incredible work they've done throughout 2022 to bolster IFF's industry leadership and also to continue delivering innovative solutions for our customers amid the challenging operating environment. As part of our Investor Day in December, we unveiled the next phase of our strategic transformation including our strategic priorities and a refreshed operating model that will better position IFF to drive long-term profitable growth and capitalize on the market opportunities ahead of us. The plan seeks to maximize our competitive advantage and ensure that we are operating as an even more innovative, efficient and disciplined company. As we delivered solid 2022 result and 2023 is in full swing, I’m pleased to share that we are advancing key elements of this plan and excited to update you on today's call. It is a true privilege to work along such talented and dedicated colleagues. Across our global platform, it is clear that our teams are committed to IFF's continued transformation as we delivered unmatched innovation, service and quality in the solutions that meet the needs of our customers, both today and tomorrow. Now on Slide 6, I'd like to reiterate the financial and strategic initiatives central to the strategic refresh that we were discussing during our Investor Day last December. Following an extensive assessment with our key stakeholders, including our customers, shareholders and key partners, we've identified several top priorities that will guide IFF's next chapter. First, we're focused on jump-starting even stronger growth across the business. There's no question that our robust portfolio provides a clear strategic advantage by doubling down on customer excellence and making strategic investments in the opportunities that will reap the greatest returns for our business will be better positioned to drive sustained profitable growth. We have many of the pieces in place to support future growth, a highly diversified offering, serving attractive end markets, global talent and a world-class R&D organization. Our long-term success requires a more disciplined approach to ensure that growth does not come at the cost of profitability. We must deliver on this objective, and we are laser-focused on doing so, particularly amid the macroeconomic pressures we are facing today, it is essential that we target enhanced cost and productivity initiatives. In 2022, we implemented several productivity and cost reduction efforts that have proven effective towards offsetting market challenges. Ultimately, our goal is to realize net annual savings of approximately $350 million to $400 million between 2023 and 2025, including the additional $100 million in run rate savings we announced at our Investor Day to support this reinvestment and increased profitability. Moving forward, we will be disciplined to focus on the areas of our business that will best support our profitable growth, investing in R&D to get projects to market more efficiently, enhancing end-to-end productivity to drive improved costs and processes and further improving our supply chain to be more efficient. An essential component of our value creation plan is our work to simplify our operating model to closely align with our three core end markets: food and beverage, home and personal care and health and become One IFF. This new model will be critical to achieve the goals I just outlined as we enhance our ability to grow profitably through a more customer-centric and market-backed approach. As a result of these efforts, we are building a stronger financial profile for IFF and are targeting sales growth of 4% to 6% and adjusted operating EBITDA growth of 8% to 10% on a comparable currency-neutral basis over 2024, 2025 and 2026. We also remain committed to deleveraging our balance sheet below the 3x net debt-to-credit adjusted EBITDA objective for 2024. Underpinning these efforts will be an intense focus on enhancing our ESG leadership and accelerating our efforts to contribute to a more sustainable world through our operations and initiatives. We will also continue efforts to optimize our portfolio, ensuring we have the offering needed to support future growth while pursuing noncore divestitures like our recent announced sale of our Savory Solutions business to improve our capital structure. Doing so, will allow IFF to reinvest in the high growth areas of our business while ensuring we are operating most efficiently as an organization. Lastly, we continue to take steps to evolve our Board in line with best-in-class governance standards, with plans to reduce the size of our board from 14 to a target of no more than 10 IFF directors and one icon capital designee director by the 2023 Annual Shareholder Meeting. With this initiative, we are also focused on the composition of the Board and prioritizing the inclusion of senior executives with the most relevant skills, leadership experience and business expertise needed to support IFF's long-term vision. As you may have seen, we have some additional board changes since our Investor Day where we announced Mark Costa is joining us. I would like to welcome Dawn Willoughby and Gary Hu to our Board as well. I also want to take the opportunity to thank several Board members that have recently come off the board or has been announced and will do so at the annual meeting. We are grateful for the years of tremendous contribution and for all of their hard work and service to IFF. Thank you to Dale Morrison, Michael Ducker, Ilene Gordon and Kare Schultz. In addition, I would like to congratulate Roger Ferguson on his upcoming appointment to the Chair of the Board and look forward to continuing to work together. Moving to Slide 7. I would like to spend a moment highlighting our new strategic framework. This recently introduced framework will be guided by three key pillars: be the premier partner, build our future and become one IFF. Our recently introduced strategic framework is designed to support our mission to do what matters most and drive sustained profitable growth. With our refreshed approach, we have zeroed in on customer excellence, incremental cost reductions, consistent execution and disciplined investments to advance the opportunities with greatest potential returns. This strategy deeply embeds ESG+ priorities across our entire enterprise, strengthening IFF's commitment to positively impact our environmental footprint in the communities in which we operate. With this refreshed strategic framework, we are better positioned to meet evolving customer expectations. We're aligning even more powerfully with our customers while fulfilling our purpose of applying science and creativity for a better world. Now on Slide 8, there are eight key areas that underpin our strategy to advance our growth agenda and pursue cost reduction and enhance our operating plan. Our growth strategy will rely on improvements to our supply chain, enhanced commercial execution, geographic expansion and advantages from harnessing our innovation advantage. As I mentioned, our focus on driving greater productivity and efficiency are equally important to our sustained success. And finally, introducing our end market-driven operating model, strengthening our talent pipeline and culture and improving our digital capabilities will complement our ongoing growth and productivity initiatives to support our long-term strategy. Together, these focus areas will enable us to unlock incremental value for our stakeholders and pursue profitable growth in 2023 and beyond while staying nimble through macroeconomic conditions. Moving to Slide 9. I'd like to review IFF's performance for the full year in which we delivered solid top and bottom line performance despite a very volatile market environment. These results and the progress we've made toward our key operational priorities demonstrate the strength of our global teams, the demand for our offerings and the effectiveness of our productivity initiatives. In 2022, we delivered $12.4 billion in sales, a 9% growth over the previous year on a comparable currency-neutral basis. Adjusted operating EBITDA was approximately $2.5 billion, which equated to comparable currency-neutral adjusted EBITDA growth of 4% versus the prior year. While we were challenged by inflationary pressures over the year, our pricing actions and productivity initiatives helped us to offset and address these challenges over the course of the year. All-in, IFF recovered more than $1 billion in revenue through strategic price increases in 2022. This allowed us to fully offset our raw material, energy and logistics inflation seen throughout the year. We also continue to execute on our productivity agenda where our focus on greater efficiency and the optimization of our supply chain to reduce cost delivering nearly $150 million in productivity benefits in 2022. Aligned with our portfolio optimization initiative, we also successfully completed the sale of our Microbial Control business and announced the sale of our Savory Solutions business. Together, these transactions will contribute more than $2 billion in gross proceeds to strengthen our capital structure. We will continue to examine our business and explore additional noncore divestitures and other timely optimization opportunities to further reduce our debt and direct focus to our core parts of the business. At year-end, our net debt-to-adjusted EBITDA ratio was 4.1x. While we made progress against our deleveraging target, this will be a priority for us moving forward as we prioritize cash flow generation in 2023. Now on Slide 10, I’m pleased to share that IFF delivered $12.4 billion in revenue for the full year, representing 9% growth in year-over-year currency-neutral sales. Our Nourish business was a major growth driver, though we saw growth across our four divisions in nearly all of our submarkets. I will cover this in a bit more detail in a minute. As expected, foreign currency impacted our results through the year given the significant volatility across the global markets in which we operate. Looking at our overall profitability in 2022 on Slide 11, despite the combination of inflation and global supply challenges, pressuring our profitability margin, IFF delivered 4% growth in comparable currency-neutral adjusted operating EBITDA. As I mentioned earlier, the strategic pricing actions taken throughout the year were essential in managing the significant inflation we face. The productivity initiatives we undertaken in 2022 more than offset volume weakness as we deliver nearly $150 million in operational efficiencies, which drove our full year profitability in the challenging operating environment. Moving forward, we'll continue to closely monitor the macroeconomic environment and take the steps in the areas which we can control to ensure we deliver for our customers, our shareholders and our stakeholders. On Slide 12, now our strong performance across business segments showcased the resilience of our portfolio and the underlying dynamics contributing to our overall top line growth. For the full year, Nourish achieved currency-neutral sales growth of 11% compared to the previous year, with $6.8 billion in overall net sales. This was led by double-digit growth in food designs and ingredients as pricing actions and productivity initiatives led to a 5% increase in adjusted operating EBITDA. Although, impacted by lower volumes, price increases in Health and Bioscience enabled the business to deliver 4% currency-neutral sales growth in 2022, primarily driven by strong performance across all segments, particularly in culture and food enzymes and animal nutrition. Scent also delivered strong 8% currency neutral growth with total net sales totaling $2.3 billion, led by double-digit growth in Fine Fragrance and strong single-digit increase in Ingredients and Consumer segments. Pharma Solutions achieved 15% currency-neutral growth driven by demand in our pharma business and mid-single-digit growth in industrial. Due to volume growth and successful results from our pricing and productivity initiatives, Pharma Solutions enhanced profitability and achieved an impressive 25% increase in adjusted operating EBITDA. Before turning it over to Glenn, I want to provide a comment around fourth quarter performance. While we anticipated a challenging quarter, the combination of volume deterioration throughout the quarter accelerated in December, as well as its impact on our P&L and negative manufacturing absorption and higher inventories led to a shortfall relative to our expectations. Much of this can be attributed to customer destocking and also softening consumer demand, consistent with what many of our customers have already reported. Nevertheless, as an organization, we need to be better at driving volume growth with our customers, an imperative part of our go-forward strategy. In addition, we will enhance our demand management efforts, process and tools as it relates to inventory management to ensure we are maximizing cash flow generation. I am confident that the addition of new leadership, particularly in Nourish division when our new leaders named and in operations with the recent addition of Ralf Finzel. I have no doubt that through greater commercial execution and more defined processes, we have a lot of opportunity ahead to maximize value creation for our shareholders. I'll now turn the call over to Glenn to provide you an update on fourth quarter results and an overview of business level performance. Thank you, Frank. Greetings, everyone. Let me add my apologies for the technical issue. You should have seen we're both sweating. So I'll start off by just reiterating, as Frank mentioned, the financial and operational initiatives we implemented during the year, they have proven valuable in helping buffer the broader economic headwinds. But at the same time, we recognize, while we've taken some important steps, we have not fully delivered against our financial objectives. We recognize we have more room for improvement to realize our goals and create a more profitable organization, and I assure you we continue to be intently focused on this going forward. Looking at fourth quarter results, IFF generated $2.8 billion in sales revenue. On a comparable currency-neutral basis, sales were up 4% for the quarter with growth achieved across nearly all divisions. Our adjusted operating EBITDA in the fourth quarter was $441 million, and our comparable currency-neutral adjusted operating EBITDA declined 5%. As it was significantly impacted by lower volumes more than anticipated, which led to meaningful impact from negative manufacturing fixed cost absorption despite continued strong pricing and productivity gains. Because of this, we saw a year-over-year decline of approximately 200 basis points to our adjusted operating EBITDA margin. Despite being partially offset by lower effective tax rate, our Q4 EPS ex amortization was 12% lower due to lower adjusted operating profit. Currency headwinds also present a significant challenge in the quarter with a 7 point adverse impact on sales and an 11 point adverse impact on adjusted operating EBITDA versus the prior year. Encouraging recent trends within the currencies have been promising. Clearly, a difficult market environment has weighed on our performance in the fourth quarter. However, I am confident in the steps that IFF is taking as part of our strategic refresh to create a stronger, more resilient business moving forward. Urgency is key and controlling what we can control is our focus: enhancing sales execution disciplines, continuing to price surgically to offset ongoing inflationary pressures, accelerating and importantly, expanding our productivity efforts and more aggressively managing cash flow. On Slide 14, I want to provide more color on our sales performance in the quarter. In a very difficult operating environment, including strong currency headwinds, we realized 4% comparable currency-neutral sales growth. For the quarter, we saw growth in Nourish, Scent and Pharma Solutions. Health and Bioscience, which overlaps strong double-digit growth from prior year, experienced a revenue decline. Factoring the strong year ago comparison, H&B is up 5% on a two-year average in the fourth quarter. I’ll go into more detail on the following slides. In the fourth quarter, we also saw a more pronounced slowdown in terms of volumes than we initially expected, down high-single-digits for the quarter, due mainly to consumer demand slowdowns and significant customer destocking actions. We estimate that about 75% of the drop in volume in Q4 is related to destocking, with the balance coming from softer consumer demand. Turning to Slide 15. The fourth quarter market challenges also significantly affected our margins. Comparable currency-neutral adjusted operating EBITDA decreased by 5%, impacted by volume declines, including negative manufacturing fixed cost absorption and currency pressures. However, pricing actions allowed us to recover the total cost of inflation. Additionally, we delivered notable productivity gains and operational efficiencies, which helped offset some of the volume pressures we faced in the market. Now let’s take a look at segment performance on Slide 16. Overall, we saw top line growth across most of our segments in the quarter. Nourish’s solid comparable currency-neutral sales growth of roughly 4% year-over-year was driven by continued growth in Food Design & Ingredients. Health & Bioscience, which saw a 3% decrease in comparable currency-neutral sales delivered solid performance in Animal Nutrition and Cultures and Food Enzymes despite declines in health and grain processing. Both Nourish and Health & Bioscience saves profitability pressures with 11% decline in comparable currency-neutral adjusted operating EBITDA across both due to lower volumes. Our Scent division performed particularly well in the quarter, delivering 6% year-over-year sales growth on a comparable currency-neutral basis that was supported by double-digit growth in Fine Fragrance and mid-single-digit growth in Consumer Fragrance. We were also encouraged by since 25% growth in comparable currency-neutral adjusted operating EBITDA due to a combination of favorable product mix, to catch up in pricing to raw material costs and productivity gains. Our Pharma Solutions segment again delivered excellent performance in the quarter, totaling $221 million in sales, a 15% increase on a comparable currency-neutral basis, driven by another quarter of double-digit growth in our core pharma business. However, like Nourish and H&B, price increases and productivity were more than offset by lower volumes and higher energy costs. Moving to Slide 17. I would like to provide some additional commentary on our free cash flow dynamics in the year and the progress towards our deleveraging targets. For the full year 2022, cash flow from operations totaled $345 million, while 2022 CapEx was $504 million or roughly 4.1% of sales. Our free cash flow for the full year was candidly disappointing at a negative $159 million. Our free cash flow included about $300 million of costs related to integration and transaction-related items. As we discussed in last quarter’s call, our free cash flow for the year has been significantly impacted by growth in working capital, predominantly by higher inventories caused by inflation, demand slowdown and destocking by our customers. Our priority, as Frank mentioned in 2023 is to take significant actions to improve net working capital with a major focus on inventories to drive cash flow. Accordingly, we have initiated a number of actions across our business and supply chain teams, including systems and process enhancements to rapidly reduce our inventories over the course of the year. And while we understand that this will result in negative manufacturing absorption, adversely impacting the P&L in the short-term, we are prioritizing improved working capital to maximize cash flow results. To keep you with our commitment to return value to our shareholders, we also paid out $810 million in dividends in 2022. As I mentioned during our Investor Day, we are committed to continuing to grow the dividend and will balance dividend growth as we consider reinstituting our share repurchase program once we get debt below 3x net debt-to-credit adjusted EBITDA. In terms of leverage, we remain focused on efforts to reduce our debt and finish 2022 at 4.1x net debt-to-credit adjusted EBITDA ratio. Our cash and cash equivalents totaled $535 million, including $52 million of assets currently in assets held for sale, while gross debt for the year totaled $11 billion. As part of our strategic priorities, we remain committed to achieving our deleveraging target of 3x net debt-to-credit adjusted EBITDA by 2024, including through deploying proceeds from completed divestitures. Importantly, as Frank mentioned, we will be exploring further opportunities to streamline our portfolio while dedicating resources to our highest growth businesses. Turning to our consolidated outlook on Slide 18. For the fiscal year 2023, we expect revenue to be approximately $12.5 billion and adjusted operating EBITDA to be approximately $2.34 billion, representing comparable currency-neutral sales growth of approximately 6% and comparable currency-neutral adjusted operating EBITDA flat versus prior year. We expect year-over-year foreign exchange to have no impact to sales growth and have a modest or approximately 1% negative impact to operating EBITDA growth. Let’s move to Slide 19. Given the number of moving parts affecting our 2023 outlook, we thought it would be helpful to unpack each of the components impacting year-over-year adjusted EBITDA. Adjusted portfolio, which includes the Health Wright Products acquisition, the 2022 sale of the Microbial Control business and the anticipated close of our Savory Solutions divestiture in May of this year, comparable 2022 EBITDA starts at $2.37 billion. As previously mentioned, we expect full year pricing to fully offset inflation with a net zero EBITDA impact in the year. In our plan, we’ve assumed volume will be flat with high-single-digit negative volumes in Q1, modestly down in Q2 and volume growth in the second half. In addition, we are anticipating mix to be slightly unfavorable for the year as we expect some of our higher margin categories will experience volume pressure, particularly in the first half of 2023. In order to rebalance our inventories and with driving cash flow generation as an imperative for us this year, we anticipate negative manufacturing absorption will impact us significantly. Specifically, we expect that our actions to reduce inventory will adversely impact our adjusted EBITDA growth by several percentage points expressed in year-over-year growth terms. We anticipate that this will yield a strong improvement in inventories and be a core driver to our targeted 2023 adjusted free cash flow of more than $1 billion, excluding costs related to restructuring and deal-related items. In terms of cost savings, we plan to drive significant productivity by accelerating our previous launch programs, which focus on end-to-end operations improvements, supply chain efficiencies, procurement and demand management, we are also undertaking additional actions to cut costs across the organization and reduce our overall spend where possible, including in our D&A line. We anticipate that these additional actions to deliver an annualized run rate savings of $100 million. We will also be reinvesting some of our productivity to drive our top line through strategic growth initiatives, specifically in R&D, our commercial teams and technology as we begin executing our long-term strategy. Finally, we expect currency to have a modest year-over-year negative impact on EBITDA growth of approximately 1%. As mentioned in terms of the cadence throughout the year, we are anticipating the first half to be more challenging, particularly the first quarter, with a back half improvement. In particular, we expect first quarter comparable performance to be impacted by more challenging volume conditions offset by pricing benefits. For the quarter, we expect sales to be approximately $2.9 billion to $3 billion with adjusted EBITDA of approximately $470 million to $490 million. As I conclude on the next slide, I want to highlight our four key areas of focus for 2023 and provide further perspectives relative to our detailed execution plans for each. First, we are committed to accelerating sales growth as we move through 2023. While we do expect volumes to be under pressure from the items I discussed earlier, we are sharpening our sales execution discipline and continue to be more surgical with our pricing actions with the goal of progressively improving throughout the year. The build-out of the commercial excellence team, targeted growth investments and increasing our focus on revenue synergies will allow us to capture new wins. Second, as previously outlined, we are focused on enhancing our customer service levels and supply chain efficiencies. With this in mind, we will be setting more granular customer service and related inventory goals by business utilizing our ROIC framework to guide those goals. Supporting these efforts, we will be rolling out our redesigned sales, inventory and operations planning process. Third, as mentioned, we are determined to accelerate our synergy and productivity efforts this year as well. For your reference, included in our 2023 guidance, we are targeting more than $200 million of gross cost reductions from productivity and restructuring benefits. Fourth, and very importantly, we’re intently focused on maximizing our cash flow and accelerating deleverage of our balance sheet. We are being extremely aggressive in managing our working capital through a heightened focus and improved processes and systems, and we are also actively working to complete our additional non-core divestitures and evaluating additional portfolio opportunities. Thank you, Glenn. Before I open the call for questions, I want to take a moment to reflect on what has continued to make IFF a strong, resilient organization and a category defined leader in our industry. I joined IFF almost a year ago and in an important moment in the company’s transformation and while our global business sought to navigate an incredibly complex operating environment. As I’ve mentioned before, what attracted me to IFF was its enterprise-wide purpose to apply science and creativity for a better world. Since then, I have seen this purpose serve as a guiding light as we have continued to build out our teams, expanded in new markets and strengthen our innovation portfolio and pipeline together. In 2022, we have executed tough pricing actions, rolled out new productivity initiatives and found successful ways to optimize and streamline our portfolio. So we’re investing in areas that will generate growth, enhance our profits and reduce our debt. Most significantly, we have unveiled our refreshed growth strategy and our focus on carrying out those initiatives to ensure we are delivering for our customers while also creating strong returns and sustained profitable growth into the future. Our teams here at IFF have rallied to meet the challenges in front of us, and I’m confident in our future heading into 2023 and beyond, especially based on the excellent reception from all of our stakeholders following the announcement of our strategic refresh in December. Although, we entered 2023 with a cautiously optimistic outlook, I am confident that we have the strategy and the people to address any challenge and deliver long-term value for shareholders and other stakeholders. IFF continues to play an essential role in the daily lives of so many people around the world, and I’m energized by the unique opportunity in front of us. IFF has built an incredible foundation as a trusted partner with world-class talent, a robust R&D pipeline, broad portfolio, and I’m confident that our refreshed strategic framework and new operating model will allow IFF to increase our customer centricity, more closely align with today’s marketplace and deliver most efficiently for our customers around the world. Good morning, everyone. So the first question, why should we believe your full year guidance if you’re having to downgrade guidance by such a magnitude in a space of two months? And then I have a separate question on portfolio moves, if I can squeeze another. Are there now more options for you now that it’s been two years since the DuPont merger? Thank you. Heidi, it’s Frank, and thanks for the question, and it’s really an important one. One, we did provide in our Capital Markets Day a preliminary view into 2023. With that said, I think we all feel that we own some of which you’ve mentioned maybe the change. And let me unpack what has happened and especially in Q4. As we went through Q4, Heidi, we had assumed that we would have mid-single-digit volume decline. And as you saw now our full quarter four results, we ended up having growth of 4% overall, but we saw high-single-digit volume decline. We saw that change really accelerate the decline in the month of December, in particular, Heidi. I had spoken about what we were seeing in the Health North America Probiotic business, also parts of our Nourish business, Ingredients and Protein Solutions. And in fact, in the month of December, we did see many of those businesses have double-digit volume decline primarily due to destocking. There is some end market demand impact as well. So when we saw the volume changes in particular that came through in December as well as the impact that it had on our manufacturing cost and absorption, we felt as though we had to really take a look into 2023, obviously, as we’re coming out now to guide. As I look at the trends in January, they are continuing to be very similar, Heidi, to what we saw in December. So when we think of the first quarter, especially against our first quarter comparison where we grew last year 5%, we have made the assumption that this is going to be a challenging first quarter, similar trends as what we have seen in Q4. And then as we get into the first half of the year, we also continue to see challenges from inflation and other pressures. We do see growth in the back half of the year. But when we look at it overall, we see the year having pretty much flattish volume year-over-year, Heidi, but we also feel good about our 6% overall sales growth. When we look at the entirety of the P&L, we also feel it’s really important as you heard from Glenn to focus on cash flow. So one of the things that we’re going to be doing is focusing on reducing our inventory to improve cash flow that is going to have a several percentage point impact on our EBITDA profit growth. We think that’s the right thing to do. And then also as we continue to look at the volume dynamics, we clearly are going to continue to focus on everything we can to control our cost. We have announced accelerating our productivity program, and you heard that from Glenn, and we talked about that at Capital Markets Day. In addition to that, we are instituting a much stronger S&OP process that’s going to be co-led with Ralf Finzel, our new Head of Operations. We have a new Head of Procurement that’s come in, and Glenn’s going to help to co-lead that team, and that team is going to meet on a weekly basis. Also, we’re going to continue to focus on our customers by improving our key account management activity and also continuing to invest in R&D to make sure that we have the innovation needed as things improve as we get in particular towards the back half of the year and as we head into 2024. So we feel confident in the guidance, Heidi, we think it’s prudent and we felt as though it was the right thing to do based on what we saw the trends in the fourth quarter, in particular in the month of December. Your second question, I’m sorry, real quick. Yes, Heidi. The Reverse Morris Trust now in February is – allows us to look at the entire portfolio that work is underway, Heidi, and we will, as we discussed on Capital Markets Day, continue to look at the entire portfolio to make sure that we’re maximizing for our shareholders as well as making strategic decisions to benefit our customers and to drive profitable growth. Hi. Good morning. I’ve got one for Glenn please, if I can. Glenn, could you help us reconcile what the difference is between the $600 million of the adjusted free cash that you disclosed? And we actually ended up, which is essentially flat. And then going on from that, can you talk us through the drivers for improvement in 2023? How confident are you? And I’m thinking about the $1.5 billion free cash that you outlined at the CMD in December last year, please? Yes. Thanks, Gunther. So first of all, to reconcile for 2022, our GAAP free cash flow was negative $160 million. We had approximately $300 million of deal-related integration restructure. So on a like-for-like adjusted basis, that’s roughly $150 million positive versus the $600 million. So the $450 million difference we had communicated last year – the largest by far is working capital. We were $300 million higher on working capital for the year. The inventory of that driven by higher inventories, the total increase in working capital was nearly $1.1 billion for the full year. So it was a significant drain on our cash flow. We also – the earnings were shorter than we had anticipated, and there were some miscellaneous items, but the largest by far is working capital, which then goes to your question regarding 2023. The big swing for 2023 is largely going to be driven by the working capital area of focus where it was a use of $1 billion plus last year. We expect it to be neutral to slightly positive. The biggest focus there is obviously within the inventories, which is the biggest component of our working capital, and that decision to focus on generating $1 billion plus of adjusted free cash flow will put some pressure on the P&L. So we’re taking a hit for some negative absorption and fixed costs because volumes actually will be lower than sales. So we actually can have a decline of year-over-year production volumes, negative absorption. But basically, that is the big driver. Cash interest, cash taxes, CapEx largely will be flattish year-over-year, but the biggest difference by far is the focus on our working capital and namely inventories. Got it. If I could just follow up a quick one. How much of the inventory reduction would be driven by lower pricing from raw materials? And how much room left to participate? Yes. Good question. We’re anticipating $350 million to $400 million of reduction from volume and about $150 million increase in price. So think about that as basically, I’ll call it roughly $200 million-ish of reduction of absolute inventory, which is $150 million increase in price and about a $300 million increase – or decrease or so driven by volumes. The next question comes from the line of Mike Sison with Wells Fargo. You may proceed. Mike, your line is now open. Yes. Sorry about that. Given recent commentary from consumer products companies, your peers, any insight into your performance in North America and China, both look notably weak relative to some of these comments. Thank you. Yes, Mike, I’ll take this one. It’s Frank. For China, for the quarter, we did see sales down approximately 4%, Mike. So you’re absolutely right. It was another tough quarter in China as we continue to manage overall the lockdowns and then the reopenings and then some of the COVID impacts that we’re seeing throughout China. So China is still, for us, is a cautious, I would say, market. And as you are well aware, that is our second largest market. So that’s something that we are really continuing to work with our teams there. If you look at North America, you see a little bit of a tail of a couple of different stories. Mike, for the full year, we did grow 5% in North America, but we did see an impact in Q4 of 4% decline versus prior year. And that really speaks to what we saw overall of the impact it’s had in particular in Nourish, which was down approximately 4%. And then also, we saw the significant reduction in North America in the Health Probiotic business that I’ve mentioned, and that actually had H&B down in North America as well. So those are the two, I would say, dynamics in both China and in North America and in particular, North America, I would say more to destocking as we saw a big hit as we’ve been discussing here in Q4. Yes. Hi. Thanks for taking my question. So just thinking about raw material inflation specifically, I guess, first, what’s your assumption on the percent increase for this year? And I guess if I look at fourth quarter and how you’re talking about first quarter, your top line is kind of the same. So your pricing is better. Fourth quarter, you saw some positive price cost dynamics. I guess why aren’t we seeing that in 2023? And what are the things we need to watch for in terms of better or worse inflation? Thanks. Yes. Josh, good question. So let me unpack the roughly 6% inflation expectation for this year. That’s about 70% raws and zero logistics and the residual 30% energy. Energy, by the way, is highly volatile. So that generally is moving more favorable than when we put the plan together, although an awful lot of our energy pricing is now through surcharges. So we’re sort of hedged one way or the other relative to that. So I’ll focus on the 70%. The other thing I would note that remember the first quarter will be impacted by the inventories from last year. So sort of what hits relative to our cost structure is really already baked into sort of what’s sitting in the plants to some extent. We are expecting actually fairly ratable i.e. price equals costs pretty much quarter-to-quarter relatively neutral. So we’re not expecting any sort of big upside or downside. And part of that’s the pacing of the inventories as well. I would say that we are seeing some early signs of deflation on the raw side. However, there are certain commodities that actually have seen more increases, but I would say that you could maybe be a little cautiously optimistic that we probably have seen the peak of inflation in raws and the back half of the year may be experiencing maybe some deflation, which will be favorable for the business. In general, our pricing is pretty much locked in for the year. Most of our pricing is beginning of the year or contractually based on indices that are tracked. So I think the pricing dynamic, the pricing risk is not as significant relative to what’s locked in. Of course, if there’s a rapid level of deflation in the second half of the year, we would adopt relative to our customer dialogues and pricing actions against that. But I would say I’d have a slight lean towards a little more optimism in terms of the price/cost dynamic this year versus last year. Thank you. Good morning, everyone. Given that it’s clear that consumer is exhibiting greater elasticity, just given the extent of price increases, a lot of your CPG customers have been instituting. Frank, just based on your direct conversations with customers, do you sense that there will be a change in their price or volume strategy as we push further into 2023? And just your sense as to how the elasticity dynamic varies globally? Yes. Ghansham, thanks for the question. We do anticipate just as you think about what we saw in Q4 to continue as I mentioned, in Q1. The elasticity question is a really important one. I would say that most of what we are seeing and in discussions with customers, you’re seeing some trade down with regards to quantities. You are seeing some trade down to private label, but it’s not significant. I mean it’s in different parts of the world. I think you’re seeing more price elasticity honestly, in some of the Asian markets, where clearly, you’re seeing some trade-offs there. But overall, we’re not seeing significant trade-offs at this time. With that said, many of our customers are expecting, and I think you’ve seen some of them announce that it’s going to be likely a continued challenging first half of the year from a volume perspective. They are continuing to increase prices and I think that’s going to continue as well for the foreseeable future. So that’s at least at this point in time, how I kind of see the elasticity question. We’re seeing some in Europe, one last geography I would mention, but nothing significant to really point to in other geographies. This is probably for Glenn, so I’ll just ask them together. Frank, I assume you’re still interim head of Nourish. Can we get an update on that process? And did less new wins or a slowdown in new products contribute to the lower volume in Nourish? And then, Glenn, I have in my notes that there were two other small divestments expected to be announced by the end of this quarter, I think, totaling about $300 million in gross proceeds. Is that still the case? And you didn’t provide EPS guidance. So could you talk about how EPS dilution or accretion could play out as the deals close through the year? John, it’s Frank. I’ll get started. So one, no, we do not think that the volume declines are specific to any transition in Nourish. I think they’re much more market-driven as we’ve been discussing around destocking. And in fact, in our Flavors business, which is one of our most important businesses. I think we’ve honing very well versus competition. As far as the process, I am working very urgently, John, to get that position filled and my hope is to be able to announce something very shortly on who will be leading theirs going forward. Glenn? Thanks. Good morning, John. So just a reminder, a year ago, we had talked about four transactions in total with a probability of $1.5 billion to $1.7 billion in gross proceeds. We announced the largest of those transactions in Savory Solutions, which will be over $900 million of gross proceeds in the fourth quarter. And we’ve mentioned we have two other sort of in the near window. We do believe one of them circa $200 million more likely than that. It’s not final will be announced within the quarter. The other two deals, which are relatively small, we are putting on hold. The reason is we are, at this point, actually taking a more comprehensive review of our portfolio and want to focus on sort of what makes sense sort of longer term relative to the overall portfolio. So our efforts are really against the larger portfolio opportunities at this point versus the residual. But I do anticipate between the Savory Solutions and the latest probably $1.1 billion-ish or more of gross proceeds. Relative to full year EPS ex amor, it’s likely to be down circa 15% that’s really driven by the dynamics of the first quarter versus prior year. For the balance of the year, it will be flat to modestly up for the last three quarters of the year. Thanks, John. Frank, with the change in the 2023 guidance relative to the IR Day, does this change your expectations the 2024 to 2026 period in terms of 4% to 6% sales growth and 8% to 10% EBITDA growth. And just on the productivity program, I know you’re looking to accelerate it. Any plans potentially to expand it as well? Thank you. Yes, David, thanks for the question. So the answer is we’re still sticking with what we talked about at Capital Markets Day, the 4% to 6% top line growth, 8% to 10% EBITDA growth over the 2024 to 2026 time frame. If you take actually a two-year look back, David, which I did – our business grew approximately volume about 3%. So if you recall, we're in a market that is 2% to 3% in more normal conditions, which obviously, we're all looking forward to those coming back. But we still believe that profile that we put forward at this point in time is achievable for Capital Markets Day. And we are accelerating productivity, as we've mentioned, we are bringing forward cost reductions this year. Nothing else additional to announce at this point in time. But obviously, myself, the management team, especially during some of the challenging macro environment we talked about, we're going to continue to look for ways to drive additional productivity as we go forward, but nothing additional than what we've already shared. Thanks and good morning, everyone. So I wanted to follow up on an earlier question and ask a related question. So it just seems from the outside perhaps that this business could be too big an unwieldly to run effectively and efficiently. What would you have to see and by when would you consider a more larger scale divestiture – divestitures to essentially shrink and deemphasize some of the acquisitions, which have been made. And related to that, recent volume trends have been pretty consistently below peers last year, year before, et cetera. So what is that attributable, and when should investors expect IFF to at least grow in line with the peer group? And how do we measure that? Yes, I'll get started, Mark. I think the volume question is a fair one, but let me look at the portfolio from a couple of different lenses. In our Scent business, we feel as though our volumes are very comparable to peers and the competitors. In fact, there are some instances, I think where we're even gaining share in parts of the Scent business, and we saw very strong volume growth in Fine Fragrance as an example. In Health and Biosciences, Mark, we clearly see good performance in food and culture enzymes. We feel as though we're very competitive in home and personal care. What you're really seeing is the dynamic and the impact on that business is really within health. And we've talked a lot about the shift and change in market demand as well as destocking, but we think overall, our H&B business is very important for the future, but there are some clear volume challenges in that one segment with good growth in other parts of that business. If you come to Nourish, in Nourish we are very competitive. If you look on a two-year basis, Mark, because you have to take into account, we had a very strong volume growth in 2021. But two-year basis, Flavors is growing approximately 5%. So we feel as though we're in very good position within that business. I think the question really volume-wise is within the ingredients business, and we've spoken about. We were capacity constrained in some of those businesses, which impacted some of our volume opportunities. And then we were very aggressive on pricing and made some trade-offs to preserve margin in that business, and we did probably see some share loss within the Ingredient segment, in particular Protein Solutions. So I think overall, Mark, to your broader question, we feel as though the portfolio is the right one. We hear from our customers and in fact, many of our team was down at ACI, just this – or last week a lot of excitement about the innovation, a lot of excitement about our portfolio. But the proof will be we've got to execute against it, like I mentioned at Capital Markets Day, and that is our focus. We are going to continue to obviously, as Glenn mentioned, we'll get the entirety of the portfolio to make sure that it works strategically and also achieves our other objectives of driving profitable growth. But we feel as though the portfolio overall is the right one. And now we're focused on executing as we've been discussing. And Mark, I'd add a couple of other items to the Frank's point is, lots of benefits across the portfolio. A lot of our work is on aligning and integrating and maximizing the portfolio. So aligning against three divisions, customer-backed, making sure that we have all the sales and operating teams focusing on the revenue synergies across the how systems work relative to advancing that is important. And then on the simplification of the portfolio, Microbial Controls exit, Savory Solutions. These are businesses that add a lot of complexity. Savory as an example, is a business that has 16,000 customers, 8 different businesses for the ERPs. And to Frank's point, we're going to continue to look at our portfolio and what they may be less core to the overall portfolio as we go forward to continue to simplify as well. Hi, thank you. Good morning, everyone. I want to – Frank, you referenced in an earlier response kind of 2024 kind of still thinking growth could get back in that high single-digit range. I just want to maybe unpack that a little bit in the context of 2023, where it would seem like one of the bigger deltas obviously, volume is not growing, but there's a pretty significant cost under absorption issue as you worked on inventories and presumably, that's weighted in the P&L in the first half of the year. If you're going to 2024, and we presume that there's some growth in the underlying market and your working capital inventories are in a better position, why would we not have faster growth in 2024 on an earnings basis if we're lapping pretty significant under-absorption charges this year. Yes. And I'll just start. I think I will hold any additional comments on 2024. I think you're right. It's a short-term impact that will be on the P&L, as you've mentioned, as we work down our inventories and have additional absorption, I think we need to really focus right now on 2023. Like I said, we have a guidance that's out there for 2024 to 2026 and in that 8% to 10% range. I think at this point in time, I'd like to hold it there for now and let us work through 2023 and come back to you, okay? Good morning and thank you. So it seems like over the past decade, IFF enjoyed this ability to price and have good visibility regardless of the cost cycle. And it just seems lately – and when there were problems that was internal, it was getting the disciplines in place and awareness in place. You look at some of these more recently acquired businesses, it just feels like maybe they were always less sustainable margins and more volatility in terms of just they're more opaque, particularly some of the businesses that saw the volume variances this quarter. So how would you comment on that? And is this kind of volatility in both margins and volume maybe more of a new normal? Thanks. Yes, this is Glenn, Jonathan. Relative to the first part of your question, clearly, in the last now 18 months, we have significantly improved the discipline, awareness and processes relative to pricing from tools and cross-training to best practices, to much, much surgical application by customer geography, et cetera. And I think that is here to stay in terms of optimizing the business going forward. Not all segments and regions are created equal. Some have greater ability to price than others and some geographies such as Greater Asia, in general, are more competitive, particularly in this environment. So we're being very, very thoughtful. In general, I would say that the N&B portfolio is about equivalency to the F&F portfolio relative to pricing capabilities or ability to pass through pricing, some of the ingredients portfolio are a little more difficult just given slightly more commoditized nature of this businesses. But I do not think there's really a significant difference in what we've seen from an execution standpoint between the legacy IFF and the legacy DuPont businesses and would again iterate that we've done a lot to actually tremendously sort of advance our capabilities to basically be much, much smarter and surgical in our pricing capabilities. Great. Thank you so much. Just going back to the portfolio optimization comment a couple of questions ago, you had a very helpful slide in your Analyst Day, I think Slide 12 of Frank's presentation about optimizing some of the underperformers. You mentioned Protein Solutions. I would love to get a little bit more color there on how you see that progressing throughout the year and what's embedded in your assumptions and then perhaps multipliers as well. And then on the positives, any update on Food Design ex Savory? Thank you so much. Yes. Thanks for the question. And as we go in – as we were communicating on that framework, and remember, it is a framework. What sits in that 20% is really we're going to look at it from two different lenses. One, and you mentioned Protein Solutions and you have some of your specialty proteins, your value proteins that are going into meat alternative products. We're going to continue to look at that business right now. We see it as an important part of our overall offering that we bring to customers because that's oftentimes an entry point in the customers for driving some of our flavor opportunity and other opportunities in the portfolio. With that said, from an ROIC lens, we'll continue to look at it and look at ways to improve the profile of that business. Food designs ex Savory, we see also as an important part of the portfolio going forward. This is all like I said, aligned around our whole Nourish offerings. And if you think about where we're going to really shift to more of an end market focus, in particular around food and beverage, we think that business can really help us to bring a lot of integrated solutions and opportunities to customers going forward. So that's how I would answer it. And we are, though, continuing to stare our portfolio in its entirety through that ROIC lens to make sure we're making the right portfolio choices and putting our resources against the winners that you see on that slide as well. Thanks very much. I think during 2022, when you thought about raw materials and price, what you thought is that raw materials were worse than price in 2021 by $200 million, you'd be roughly even in 2023 – in 2022. And then in 2023, you would be $200 million to the good in the price raw material balance. And now you think that you'll be about flat with inflation. So what happened? That is why did you think you'd make $200 million, but you didn't – what happened to, I assume, price conditions? And second, what are the cash restructuring outlays – outflows that you expect in 2023? Yes. Hey, thanks, Jeff. Good morning. Good question. So you already harken back a year ago, which seems like a decade ago, we originally had $600 million of inflation, pricing/inflation embedded. What happened is two additional rounds of inflation. So we had another $400 million last year, and we have circa $600 million-ish plus in this year. So there's a lag effect. So we're sort of kind of just running through the cycle from a kind of a timing standpoint and standpoint. We haven't sort of talked about sort of how this flows through the 2024, but I think it's reasonable to assume either a combination of stabilization and some deflation in the environment. On the back end, we will pick it up. So I think that's still a very reasonable assumption over the time horizon. The horizons just extended because there's been more sort of systemic inflation over the last few years than we anticipated at that point in time. Relative, we have – as Frank had mentioned, we have an incremental cost productivity program of $100 million targeted. We expect to get probably circa $70 million of that to hit the P&L this year. We're estimating around $70 million-ish to $75 million of onetime expenses associated with that restructuring. Great. Thanks so much. We covered a lot. So I guess I have a couple of questions still. But I guess, primarily, when we think about 2023, I think, Frank, Glenn, the three of us have discussed it being a transition year, and there's a lot of things that you laid out on kind of what you want the business to look like as you hit 2024. But now you're talking about not just the curtailing production, but also accelerating cost savings going after G&A and so on. So to what degree do you think – should we worry about you being able to manage through the cash flow situation kind of shoring up working capital and making these short-term changes you need to make, but still being able to fully execute and get to where you need to be so that this can be the transition year that you discussed it being? Yes, Lauren, I'll – good start. Thanks for that question. I think – it's a really great question, an important one. What we've done on is we're really focused on really prioritizing our activities across the company and the management team. First priority, Lauren, is clearly doing everything we can to make sure that we do have the right investments in the innovation that we deliver, in R&D and also making sure we can accelerate our sales performance, and we are spending a lot of time with our commercial teams, working on ensuring good capability build and making sure that we are ready to enhance our pipeline as well as our win rate going forward. So that's priority one, Lauren, and that's a big focus for us. On the cash flow and inventory work, I think we're in a good position. We brought in a new team. Glenn is going to be very intimately involved with our new Head of Operations and our business leaders. We are going to build that into our incentive system, cash conversion this year, Lauren, and we feel as though there is a very good path forward to deliver the short-term because we have to improve our cash flow, and we have to reduce our inventory, and we have a laser focus on making that happen. And I feel like we've got the right team and we're putting in place the right processes to execute against that. That's pretty much number two. And then number three, we are working towards, as you mentioned, getting the organization aligned to more of an end market back view. We are starting that work. We'll have more to communicate here as we go throughout the year. But I feel good by the end of this year, that alignment will be in place and we have the right people, right teams align with our customers. Just one anecdote. Many of our customers that I've spoken to as well as that we've engaged with really like the way we're thinking about operating and aligning IFF to how they're organized. So we think that is something we will focus on. So while there are a lot of activities, think of it three laser-focused priorities the team are aligning behind, Lauren, to execute to your point, to make sure that we can deliver on the future profitable growth agenda that we have, okay. So thank you. With that, I want first – I want to – yes. Just a couple of last comments, I want to first, thank everyone for joining. Our apologies again on our start. We appreciate everyone hanging in with us. We know this went a little bit longer because of that and we look forward to seeing you here and speaking to you very soon. Thank you, everybody. Have a good rest of the day.

EarningCall_229

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA 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] As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Nick Childs, Senior Vice President, Investor Relations and Treasury. Mr. Childs, please begin your conference. Thank you. Good morning, everyone. Thank you for joining our fourth quarter 2022 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; Ron Bruehlman, Executive Vice President and Chief Financial Officer; Eric Sherbet, Executive Vice President and General Counsel; Mike Fedock, Senior Vice President, Financial Planning and Analysis; and Gustavo Perrone, Senior Director, Investor Relations. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call in the Events and Presentations section of our IQVIA Investor Relations Web site at ir.iqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. The actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. Thank you, Nick, and good morning, everyone. Thanks for joining us today to discuss our fourth quarter and full-year results. As we close 2022, we are very proud of what we've achieved at IQVIA. It was a record year for our R&DS business, we achieved bookings of $10.8 billion, which was the highest ever, our backlog stands now at a record $27.2 billion, and the business added over 275 new customers in the year. We improved access to critical research; we've expanded our decentralized clinical trial capabilities by launching the first self-collection safety lab panel for U.S. clinical trial participants in collaboration with Tasso. Our DCT program achieved GDPR validation in Europe, marking the first time a DCT offering received this data privacy validation. And our connected devices business added 50 new customers, including wins with two top-10 pharma companies. We made significant advancements as well in our real world business. We increased the number of active data sources by more than 30% across more than 50 countries, and we enhanced access to real world data for European and U.S. regulators through our partnerships with European Medicines Agency and the Real-World Alliance. We expanded our digital marketing capabilities with the acquisition of Lasso Marketing, which offers a technology purpose-built for healthcare marketers to execute digital campaigns. We deployed capital of $3.7 billion during the year. This included $1.3 billion in acquisitions, $1.2 billion in share repurchase, $700 million in CapEx, and repayment of $510 million of debt. At the same time, we were able to reduce our net leverage ratio to 3.45 times adjusted EBITDA. 2022 also marked the end of our Vision 22 three-year strategic plan. No one could have predicted the volatile macro environment we would have to operate in during this period. Despite the many headwinds we have faced, since 2019, when we set these goals, we in fact exceeded our Vision 2022 goals. I am proud of the resilience, resourcefulness, and creativity that our employees around the world demonstrate every day in support of IQVIA's mission. It is these attributes that allowed our company to deliver on the commitments we made to you in 2019. And as you know, since the beginning of '22, the industry has been reporting a slowdown in demand for clinical and commercial services caused by reductions in biotech funding, as well as the higher interest rate environment and macro economic uncertainty. As we've discussed before, while we've of course seen anecdotal evidence of these concerns we, at IQVIA, remain confident that the fundamentals of our industry and the demand from our clients remain healthy. And, in fact, we remain confident in our ability to deliver on our 2025 goals. As we begin 2023, there are more molecules in development than at any other time in history. Our RFP flow was up 13% for the full-year. We, in fact, saw acceleration in Q4 to 22%, with double-digit growth in all three segments; large, midsize, and EBP segments. Our net new business reached a record $3.1 billion in Q4, which is up 29% versus prior year. For the full-year, we achieved bookings of $10.8 billion despite the large COVID bookings we had in 2021 that didn't repeat in 2022. And yes, in our commercial business, while we are seeing some short-term fluctuations in discretionary spend categories such as, for example, consulting, demand for our commercial services nonetheless remains on a favorable growth trend. Finally, let me just acknowledge and congratulate our employees around the world for the nice recognition the company received last week. IQVIA was named to Fortune's list of the World's Most Admired Companies for the sixth consecutive year. Importantly, once again, we earned the first place ranking within our industry group. We also rank number one in seven out of nine categories, including innovation, people management, use of corporate assets, social responsibility, quality of products and services, global competitiveness, and long-term investment value. Turning now to the results for the quarter, revenue for the fourth quarter grew 2.8% on a reported basis, 7% at constant currency compared to last year. And excluding COVID-related work from both periods, we grew the top line 10% at constant currency on an organic basis. Fourth quarter adjusted EBITDA increased 11.1%, reflecting our strong revenue growth and ongoing cost management discipline. Fourth quarter adjusted diluted EPS, of $2.78, grew 9% driven by our adjusted EBITDA growth. Few highlights of business activity this quarter; in our technology business, IQVIA recently entered into a milestone agreement with Alibaba Cloud to collaborate in China. Through this collaboration, IQVIA will be the first company to make its Salesforce-based products available on Alibaba Cloud and the only life sciences provider to have a full Salesforce-based ecosystem of products hosted locally and designed to be compliant with China's data residency and privacy regulations. Through our partnership with Alibaba Cloud and Salesforce, IQVIA will continue to extend the OCE suite, delivering innovative capabilities tailored to meet China's specific market needs. As you know, IQVIA's Human Data Science Cloud offers clients a combination of extensive data networks, data integration, and embedded intelligence, all of which help our clients deal with the challenge of increased data complexity and volume. A top-10 pharma awarded IQVIA our largest ever commercial managed services deal where we will take responsibility for managing the end-to-end commercial analytics for all their commercial brands globally. Personalization of care is becoming a focus of our customers' commercial strategy. This quarter, IQVIA was awarded a major patient support program by a top-10 pharma for their [indiscernible] cardiology product displacing the incumbent vendor. And once again validating IQVIA's uniquely differentiated integrated domain expertise, services, and technology platform. As I previously highlighted, demand from our EBP customers has remained high despite the funding levels returning essentially to pre-pandemic levels. As an example, a U.S. based emerging biopharma company recently selected IQVIA to be their end-to-end clinical to commercial partner. IQVIA was selected due to the breath of capabilities, our domain expertise, strong resources and technology such as OCE. IQVIA will support all aspects of their first commercial launch as well as provide clinical trial services for their future indications. In another example, Biostage which is a biotech company developing regenerative medicine treatment selected IQVIA to manage its first clinical trial of their esophageal implant product. Current treatment options for patients diagnosed with esophageal cancer result in only 20% survival at 5 years. In the first use of the implant, the trial demonstrated that the product was able to successfully regenerate tissue to restore the functionality of the esophagus. IQVIA was selected due to our dedicated gastrointestinal team, and our ability and expertise running the most complex cutting-edge cell and gene therapy trials. Within our RNVS, we also signed a long-term collaboration with Clalit, the largest health services provider in Israel to launch the first Prime Site in the region. The collaboration combines IQVIA and Clalit's capabilities in clinical trial delivery, real world research data, and genomics. Clalit operates a network of 14 hospitals and more than 1600 primary care clinics with special expertise in oncology, pediatric rare disease, and genomics. In Oncology, which remains the largest therapeutic area for R&D outsourcing, we continue to experience strong double digit year-over-year growth in bookings. As an example, we expanded one of our preferred partnerships with a top global pharma which awarded IQVIA a large early and late stage trial in multiple oncology indications. We were selected because of our analytics to optimize protocol development, site selection, and operational planning including our ability to recruit patients meeting their diversity targets. So, overall, the R&DS business continues the strong momentum. You saw we achieved new bookings of $3.1 billion in the quarter, the highest in our history. This translated into a quarterly book-to-bill of 1.51 including pass throughs. And excluding pass throughs, the business delivered almost $2 billion of total net new business in the quarter with a book-to-bill ratio of 1.30. For the full-year, our contracted book-to-bill ratio was 1.36 including pass throughs and 1.33 excluding pass throughs. Thanks, Ari, and good morning, everyone. Let's start by reviewing revenue. Fourth quarter revenue of $739 million grew 2.8% on a reported basis and 7% at constant currency. In the quarter, COVID-related revenues were approximately $190 million which was down about $150 million versus the fourth quarter of 2021. In our base business, that is excluding all COVID-related work from both this year and last, organic growth at constant currency was 10%. Technology & Analytics Solutions revenue for the fourth quarter was $1,499 million, up 0.2% reported and 4.7% at constant currency. Excluding all COVID-related work, organic growth at constant currency in TAS was 7%. R&D Solutions fourth quarter revenue of $2,058 million was up 5.9% reported and 9.3% at constant currency. Excluding all COVID-related work, organic growth at constant currency in R&DS was 14%. Finally, Contract Sales & Medical Solutions or CSMS fourth quarter revenue of $182 million declined 7.1% reported, but grew 2% at constant currency. Excluding all COVID-related work, organic growth at constant currency in CSMS was also 2%. For the full-year, revenue was $14,410 million growing at 3.9% on a reported basis and 7.8% at constant currency. COVID-related revenues totaled approximately $1 billion for the year. In our base business, again that's excluding all COVID-related work, organic growth at constant currency was 13%. For the full-year, Technology & Analytics Solutions revenue $5,746 million, up 3.8% reported and 8.7% at constant currency. Excluding all COVID-related work, organic growth at constant currency in TAS was 10% for the year. Full-year revenue in R&D Solutions was $7,921 million growing 4.8% reported and 7.7% at constant currency. Excluding all COVID-related work, organic growth at constant currency in R&DS was 17%. Full-year CSMS revenue was $743 million which was down 5.2% reported, but grew 2.7% at constant currency. Excluding all COVID-related work, organic growth at constant currency in CSMS was 4% for the year. Now let's move down the P&L. Adjusted EBITDA was $920 million for the fourth quarter, representing growth of 11.1% while full-year adjusted EBITDA was $3,346 million which was up 10.7% year-over-year. Fourth quarter GAAP net income was $227 million. And GAAP diluted earnings per share was $1.20. Full-year GAAP net income was $1,091 million or $5.72 of earnings per diluted share. Adjusted net income was $524 million in the fourth quarter. And adjusted diluted earnings per share grew 9% to $2.78. For the full-year, adjusted net income was $1,937 million. Adjusted diluted earnings per share was $10.16. Up 12.5% year-over-year. Now as Ari reviewed, R&D Solutions delivered another outstanding quarterly booking. Our backlog at December 31 stood at a record $27.2 billion which was up 9.6% year-over-year on a reported basis and 11.6% adjusting for the impact of foreign exchange. Without that impact of foreign exchange, year-over-year backlog would have been about $500 million higher. Full-year net new business increased $10.8 billion, growing 6.2% year-over-year on a reported basis. It increased to $10.8 billion I should say, growing 6.2% year-over-year on a reported despite a significant amount of COVID bookings we had in 2021 that didn't repeat in 2022. Now reviewing the balance sheet, as of December 31, cash and cash equivalence totaled $1,216 million, and gross debt was $12,747 million. And that resulted in net debt of $11,531 million. Our net leverage ratio ended the year at 3.45 times trailing 12-month adjusted EBITDA. Fourth quarter cash flow from operations was $560 million. And CapEx was $171 million which resulted in a free cash flow of $389 million for the quarter. Now as we shared on our last earnings call, early in the fourth quarter we retired $510 million of variable rate U.S. dollar term loan that was scheduled to mature in early 2024. At the end of the year, we entered into a $1 billion of floating to fixed interest rates swap to further limit our exposure to changes in interest rates. And with these changes, our debt structure at yearend was 66% fixed. And we expect this to drop to about 58% fixed at the end of Q1 when as you know we have $1 billion swap expiring. December 31 marked the end of our Vision 2022 three-year plan and as already mentioned, we exceeded our commitments and here are a few highlights. We achieved a compound average growth rate for revenue of 9.1% reported in 10.2% adjusted for the impact of foreign exchange. This achievement exceeded the high-end of our goal range of 7% to 10%. Our three-year CAGR for adjusted EBITDA was 11.7%, exceeding our goal of 8% to 11%. And for adjusted diluted earnings per share, the average growth rate was 16.7% consistent with our goal of double-digit growth. Finally, our net leverage ratio exiting 2022 of 3.4 times trailing 12 month adjusted EBITDA compared favorably to our goal of 3.5x to 4x. Okay, let's turn now to 2023 guidance. For the full-year 2023, we expect total revenue to be between $15.150 billion and $15.400 billion representing year-over-year growth of 5.1% to 6.9%. This revenue growth includes about 100 basis points of contribution from M&A activity and a very slight FX tailwind of approximately 10 basis points versus the prior-year. Adjusting for the COVID-related work step-down which we anticipate to be approximately $600 million, the contribution of acquisitions and the FX tailwind, our guidance implies 9% to 11% underlying organic revenue growth at constant currency. Our adjusted EBITDA guidance is $3.625 billion to $3.695 billion, our growth of 8.3% to 10.4%. Our adjusted diluted EPS guidance is $10.26 to $10.56 representing year-over-year growth of 1% to 3.9%. Our EPS guidance includes about $615 million of interest expense, just under $550 million of operational D&A and effective income tax rate of approximately 21%, which is about a point higher than it otherwise would have been because of the increase in the U.K. corporate tax rate from 19% to 25%. And finally, our EPS guidance assumes an average diluted share count slightly above 190 million shares. Adjusting for the year-over-year impact of the one-time step-up in interest rates and the higher U.K. tax rate, our guidance implies adjusted EPS growth of 11% to 14%. This guidance assumes about $2 billion of cash deployment split evenly between acquisitions and debt retirement and regarding the latter, we expect to retire remaining term debt maturing in March 2024, towards the end of the year; that is the end of '23. Based on these assumptions and our guidance, our net leverage ratio should drop to below three times adjusted EBITDA by the end of 2023. Finally, our guidance assumes that foreign currency rates as of February 8th continue for the balance of the year. Now, I know there are a lot of moving pieces in our guidance. So, let me share some additional color on the revenue and adjusted EPS dynamics in 2023. As I mentioned earlier, we anticipate that COVID-related revenue will step down by approximately $600 million versus 2022. And I should highlight that about 40% of this step-down will occur in the first quarter. Now, it will more than compensate for this headwind during the course of the year as we project revenue to grow between 9% and 11% organically at constant currency excluding COVID-related work. As I also mentioned previously, our full-year guidance includes about 100 basis points of M&A contribution and a very slight tailwind from foreign exchange of 10 basis points. That said, it's important to point out that we will actually experience a headwind from FX in the first-half. Now at the segment level, we expect revenue growth to be 6% to 8% reported, this includes a year-over-year step-down in COVID-related work underlying organic growth for TAS that is adjusting for the step-down and COVID work, FX and acquisition impacts will be 7% to 9%. R&DS revenue will grow 5% to 7% reported. This reflects an even more significant year-over-year step-down in COVID-related work, underlying organic growth for R&DS, again adjusting for COVID-related work, FX, and acquisition impact will be 10% to 12%. And finally, in CSMS, revenue growth is expected to be flat reported, and approximately two percentage points organic excluding COVID-related work and FX impacts. On adjusted EPS, we will experience the year-over-year impact of the step up in the interest rates and an increase in the U.K. corporate tax rate that I mentioned. Together, these non-operational items are expected to impact growth by approximately 10 percentage points year-over-year. Excluding these items, we expect to deliver strong results with 11% to 14% adjusted EPS growth. It's important to note that the year-over-year increase in interest expense step up will be most pronounced in the first-half, while the operational tailwind from our cost cutting and productivity initiatives will be skewed towards the second-half of the year. And as these timing issues are relevant to our first quarter guidance, the first quarter will be the toughest comparison versus the prior year primarily due to four factors. Number one, the largest headwind from FX, despite FX being a tailwind for the year; number two, the largest year-over-year COVID-related step-down; third, the toughest interest expense comparison; and finally fourth, the phasing during the year of the benefits of our productivity initiatives which will increase as we progress through the year. So, as a result, in Q1, we expect revenues to be between $3.570 billion and $3.640 billion or growth at 2.4% to 4.3% on a constant currency basis, and 0.1% to 2% on a reported basis. Excluding COVID-related work, we expect organic revenue growth at constant currency to be between 9% and 11%. Adjusted EBITDA is expected to be between $835 million and $860 million, which is up 2.8% to 5.9%. And finally, adjusted diluted EPS is expected to be between $2.35 and $2.46, declining 4.9% to 0.4%. Excluding the step up of the interest expense and the tax rate in the U.K., we expect adjusted diluted EPS to grow between 6% and 10% in the first quarter. Again, our guidance assumes that foreign currency rates, as of February 8, continue for the balance of the year. So, to summarize, Q4 was another strong quarter capping a successful year. For the full-year, revenue grew 13% organic at constant currency excluding COVID-related work, and adjusted EPS was up 13%. Underlying demand in the industry and our business remain healthy, with RFP growth accelerating in Q4 and recording bookings in R&DS. During 2022, we repurchased almost $1.2 billion of our shares, and retired $500 million of our variable rate term debt, while reducing our net debt leverage ratio to 3.4 times. We exceeded our Vision 2022 commitments despite the volatile macro environment. And lastly, we're projecting strong operating performance again in 2023, with 9% to 11% organic revenue growth at constant currency excluding COVID-related work, and 11% to 14% adjusted EPS growth excluding non-operational headwinds. Thank you. So, I'll just start off, Ari, you mentioned continued confidence in the 2025 goals. You're guiding 5% to 7% of revenue growth in '23. I think the CAGR through '25 was a double-digit number. So, could you bridge from the 2023 result to the acceleration anticipated thereafter? Thank you. Yes, thank you very much, Dan. Look, when we say we are on the same trajectory we were on when we set our '25 goals, we -- it continues to be true operationally. Obviously, we assumed foreign currency rates that were different. I think we lost -- I don't know the exact number any longer, but we probably lost $500 million in revenue just in 2022, so -- to FX. So, look, I don't know about revenue; it'll be close. Maybe not 20, but it'll be close. On EBITDA and on earnings per share, we're very confident that we will achieve those goals. Again, the -- what we are facing, first of all, you're seeing the EBTIDA is certainly, clearly on that trajectory unchanged despite everything else. And EPS is just as we said in our introductory remarks, a one-time step up that hopefully won't replicate. If anything, I think the world expects rates to either stabilize or start declining afterwards, in '24 and '25, so that would be even a tailwind. But certainly the step-up is one-time. And after that, we fully expect the resume very strong double-digit as we experienced. I remind you we delivered over 16% compound earnings per share rate of growth rate over the year 2022 period -- three-year period. Thank you. Thank you. Good morning. So, I wanted to hit on R&DS bookings first. Difficult to ask the question in a way that's easy to answer, but I'd like you to step back and think about your fourth quarter strong bookings, your '22 bookings. Do you have a sense how much was, if you will, normal opportunities versus, say, competitive takeaways, rescue wins, or incremental share capture that you might have gained through higher hit rates through the year? Just trying to get a sense of where the market was versus what IQV did additionally on top of that, if that makes sense. Yes. Yes, well, it's really hard because we don't have the perspective of time and clear data from competitors yet. And we will know a little bit more after we read your report on how CROs did when everyone has reported. So, I'm looking forward to that read. But look, we've been on a momentum certainly since the merger to gain market share. And I think it's clear that we have been gaining market share. We know we are gaining market share because we are displacing competitors. I don't think rescue studies played a role. Of course, we have the anecdotal here and there, but not more or less than in history. And things happen, and the study doesn't go well with a certain approach. And at some point in time, the sponsor decides that they want to switch CROs, it's a very difficult and cumbersome exercise, and no one wants to do that, but it does happen. I don't think it's happened more than in the past, unless you're including rescue studies that were at the beginning and that for a reason or another the sponsor decided to switch CROs. And that I would include in the category of market share gains. The market continues to be strong. The underlying demand, all the indicators that we see, and we kept repeating it ad nauseam during 2022 despite everyone else being on the other side and suggesting that the world was falling apart because of biotech funding levels returning to what I considered to be very strong levels, but nevertheless, lower levels than they were during the pandemic. We haven't seen any delays in decision-making, we haven't seen any signs that demand was slowing down. Quite the opposite, I mentioned that our RFP flow is very strong. I can give you even more -- I've got some more data here on the, if you'd like, the -- our -- So, I kind of -- I get that. Yes, the -- again, overall RFP flow was very strong. We said 13% for the full-year, and over 20% in the fourth quarter, so, if anything, accelerating. Our qualified pipeline at the end of the year was up over 20%, and that is really the pipeline that we consider real. The awards, by the way, which is kind of an early indicator of what will happen in the future; awards, I remind you, we stopped at -- we have essentially one, but we have not yet contracted for and not booked for. The awards were up -- actually, the absolute number in Q4 was the highest ever, and it was up 9% year-over-year. So, we mentioned the book-to-bill ratio, the backlog, which itself is up just under 10% year-over-year, and 11.6% excluding FX. So, I don't know what else to share. We've got our solid numbers here that support healthy demand for clinical trial services. And then, on top of that you can add our market share gains, and I think that explains it. Thank you, Eric. And Ron, if I could just have one quick technical item here, can you confirm that there are no share repurchases built into the guidance? And I know you talked about the $2 billion capital deployment and the split between debt and M&A. But is there any current thinking on taking some advantage of that authorization that you have on the repurchase side? I can confirm that there is no share repurchase baked into our guidance. We're right now assuming $2 billion of capital deployment split evenly between M&A and debt reduction. Well, might we repurchase some shares during the year? Sure, that that's our assumption going in, and the guidance that we gave is that we're not. And we'll devote the capital to debt reduction instead. But that could always change with circumstances. Your next question is from the line of Anne Samuel with JPMorgan. Your line is open. Anne Samuel with JPMorgan, your line is open. Hi, good morning, everyone. Just pivoting from RDS, Ari, you talked a lot about some strong momentum in commercial managed services. Just want to -- wondering if you could expand about some of the strength there, and also is that isolated just in TAS or is that also in the CTMS business? No, I mean, CSMS is a relatively slow grower, so I mean I would put that aside. The TAS growth has been consistent. We're pleased, obviously, to see that it continued to grow. You saw that excluding the COVID step down, and we had a fair -- I would say a large share of COVID work during the pandemic, so that's stepping down. And excluding that, we had growth of 7% in Q4, and 10% for the full-year. Quarter-to-quarter it could vary. I think the first-half was more or less around 10% growth, third quarter was 12%, we had the -- activity that was -- that came in earlier than we thought. And the fourth quarter was 7%, so, overall, very good growth in Q4. We guided 7% to 9% for next year. Again, this is consistent -- again excluding COVID acquisitions and FX, this is consistent with the underlying operating momentum that we've had in TAS, and that we've guided to, which is a high single-digit. So, the real -- the fast growers in this business are technology and real-world, and that's where I mentioned a few very significant achievements and a few significant awards with clients. Both considered to be strong drivers of growth as we continue to find innovative ways to utilize real-world evidence for clients and deploy more of our technology solutions. The piece of the business that it perhaps more exposed to the economic whims and budget expansions or restrictions by clients is the more discretionary spend, like the analytics and the consulting work. We saw, usually at the end, almost -- just to share a little bit more color, we usually have at the end of the year an acceleration in this business, and we didn't see that in December. And the reason for that is, historically, clients like to spend more towards the end of the year, and they do kind of last-minute purchases, and they kind of utilize their budgets, if you will. And we didn't see that so much this year. And I -- again, I don't know whether people are kind of being more cautious or anything, but -- and mostly, again, it was in the consulting area and analytics, which tends to be short cycle, short-term, and more discretionary. But the underlying growth is driven by real-world and technology, both of which are longer-term decisions and are not so subject to cyclical economic changes. And then, of course, the last piece is the data business, which is flat and continues flat to low single digits, one-ish percent, and that continues where it is. And when you do the math, basically that's what yields your high single-digit growth for the segment. Thank you for your question. Thank you. Good morning. Ari, so, I know you sound bullish around the funding trend that you've seen over the last year. Wanted to ask about funding in a different way, just what were you seeing in terms of cancellations around your end? Was there anything notable about that relative to the last couple of years? Short and sweet. Yes, has there been any rumbling around restructuring at any of your important clients? I guess just like how are you building just sort of a macro into your outlook for the R&D segment this year? Okay, and once again in terms of demand, no signs that we can see that our clients are somehow delaying, canceling, postponing clinical trial development work that was planned before. So, we don't see anything, no unusual cancellation activity, no unusual postponements, nothing. We've been saying this essentially for 12 months exactly. In terms of factoring the macro environment, if you want to expand your question, then that's a different discussion. We've got -- we are a large, powerful ship navigating extremely stormy waters. The engine continues to be very strong, that's the demand, and certainly our operating momentum in our organization. But the winds in the form of interest expense, in the form of wage inflation, in the form of wars in foreign theaters that affect our ability to do work in certain sides, in the form of continued COVID issues in China which are expected to delay our return to normal operating mode in clinical sites; all of those and more are these winds that I'm -- winds and stormy waters that I'm referring to that are macro factors. Some of which we can do something about. For example, wage inflation we are addressing by trying to manage our workforce more tightly, by increasing and accelerating our productivity initiatives, by looking at maintaining and accelerating our cost cutting discipline. And we've launched that effect that towards the end of last year, a new program to again bring forward many field overhead rationalizations and economies of scope and outsourcing and offshoring decisions that were scheduled to occur over the '22 to '25 planning period and we are accelerating all of that into 2023. So, as Ron mentioned, the benefits of those will begin showing towards the latter part of the year, but the work is ongoing. So, that's how we are trying to address those macro factors that are not -- that are somehow that we can offset with action on our side. With respect to interest, shortest one-time step-up in the interest expense, we're kind of limited in what we can do. But we certainly, as you saw started reducing our debt levels, and we entered into swaps. We're trying to address that in capital markets, we will probably towards the end of the year retire another $1 billion of debt, the tranche that would normally turnout in 2024. We'll do that in the latter part of the year. And for now, as Eric remind us we do not have any share repurchase plan this year, because we're diverting our cash flow now, if our cash flow is very strong and circumstances were to change, obviously, we will adjust those decisions. But that's what we're doing to address the macro factor. Thank you very much. Hey guys, thanks. Can you one clean-up here on the COVID, can you give us a sense of the how you're expecting that the roll-off in 1Q between the two segment between TAS and RDS, just from a modeling perspective? Yes, Jack, it's I think I'd said overall of the $600 million COVID step-down year-over-year, about 40% of it would be in Q1, though, will be fairly substantial impacts in both of the segments there. And I would say about a third of the impact would be in TAS, [Jack] [Ph], and about two-thirds in R&D, that's kind of how you should think about it by quarter and for the full-year, it's above that roughly. All right, great. Thanks. It's really helpful. And lastly, here on front on the free cash flow. So, I mean, I understand a ton of moving parts here on for the year. But can you give us a sense of what you're targeting for '23 and as a percentage of EBITDA conversion? We always talked about it as a percentage of adjusted net income. And we target typically between 80% and 90% free cash flow adjusted net income, that's where we were for the full-year 2022. And look the only thing I would caution on that is in any given year, it could vary from that because cash flow is based on point-to-point of the balance sheet. It's not like, an accrual concept or anything like that. So, of course, you could be higher or lower, we were substantially higher than that in 2021. And we're right in the range in 2022. And I would say just as a kind of a target you should think of as being in the 80% to 90% of adjusted net income range, but recognizing that we could deviate from that in any given year. Thanks very much. Question for you, Ari to sort of engage in your crystal ball a little bit longer-term because I know you're talking certainly a lot more of the biopharma CEOs and than I am, when I look back at sort of what I heard at JPMorgan, Davos, just other things around, how pharma is looking at the next three to five even 10 years, especially with the Inflation Reduction Act, I hear sort of conflicting messages from about are people going to invest more, hey, we want to get away from or be more diversified and not so concentrated in one or two blockbuster drugs and so we want to get more drugs out there. We are going to and so there is more trials we're going to pull back, I just love to hear what you're hearing or what you're thinking about what your customers are looking at not really, from the economic perspective about the current macro environment, but with how their portfolios are, how concentrated they are and few really big drugs, and what the Inflation Reduction Act means. Would love to hear your thoughts on that? Thanks. Yes, thank you. Yes, I mean look, the Inflation Reduction Act of just similar to, what they decided to name it. It's very is influx right now, there's a lot of work to be done in finalizing the details of the legislation; we actually spend a lot of time with our clients trying to explain to them what's in it. Not that we understand it entirely, because many of the provisions, first of all, haven't been detailed enough or specific enough. And we don't know how it's going to work. And a lot of it is still subject to negotiations. Many of the provisions anyway, won't kick in until later in the decade, and again, some parts of the inflations are undefined, many of the rules and regulations are still under discussion. So, generally, the statements from pharma CEOs, when I speak to them about this is that, it's harmful to innovation and to patients because anytime you start curbing the economics or you try to start a curbing the economics for drug development, even if it's long-term and even if it's the effect, if any, before any other administration changes these things, it'll be seen 15 years from now, it could at least conceptually, the pharma companies to decide, well, it's not as attractive, so I'm going to drop this program or that program, when I factor in different types of pricing and so on, so forth, or reimbursements. But again this is not how pharma works. Despite the [indiscernible] pharma is motivated by healing people. And the R&D, all of the R&D Heads at Pharma companies that I know and my colleagues speak to day in and day out, their motivation, what makes them come to work every day is they are going to come up with a drug to cure pancreatic cancer and to cure breast cancer and to cure diabetes, et cetera, et cetera. So, this is the underlying motivation. And the model is predicated on pharmaceuticals doing good for society. So, the notion that people are going to cancel the program, because the economic zone gets attractive, yes at the margins. That's a general observation. Second observation in my conversations with clients is that a lot of and that's a trend that that's independent of the Inflation Reduction Act, a lot of the focus is on trying to address more specific diseases, rare diseases, subcategories within subcategories in oncology, I mentioned before oncology is probably and it continues to be the largest and strongest grower in our business in terms of the demand for clinical trials, and drug development work. So, that's just not going away until the diseases go away, which we all hope for, drug development is here to stay. And pretty much in the same model. Again, the focus on addressing previously untouched obviously is much smaller markets. That continues, and that as you know plays to our strength and capability. So, I mean, that's the bit of color on my conversation. So, yes, I mean it's a general cloud and at a conference like Davos, you could expect to hear such things. But in practice that is not changing very much day-to-day how our plants operate and make decisions with respect to their investment programs. Thank you. Hi, guys. Thanks so much for the question. I was wondering if you could comment on sort of the degree of pricing that you're sort of getting on new contracts and that are going into bookings and also sort of the degree of wage inflation you're currently experiencing as your labor force. Thank you. Okay, I will take the second part of the question first, yes, we are experiencing significant wage inflation, the skill sets that we are looking for are scarce and in high demand, we're looking for people who have healthcare expertise, who have data science expertise, who have software development expertise, or a combination of all three, and that these skills are in very high demand. Secondly, frankly, we are a hunting ground for competitors of all kinds in the healthcare sector, in the tech sector, and in the data science sector. And as a result, we are compelled to raise our compensation programs, and that causes inflation. So, you have the general inflation out there, plus reasons there are specific idiosyncratic to our business and to our company. Now, I mentioned before that, despite that, you can see that we are growing our margins. So, we are addressing it, and that's true, essentially cost management programs meaning, we do more work in lower cost areas, et cetera. Now, I get into the first part of your question, which is pricing, are we able to offset those costs increases with pricing generally, in the commercial sector for shorter cycle businesses? Theoretically, yes, and we are when we can, but it's always a negotiation with clients. And it's a competitive market out there, you got a lot of smaller competitors who are fighting for the slice of the pie. And often, we got to defend against that. And so, our pricing flexibility is limited, it does exist in theory on the commercial side. In R&D, as in for clinical trials, yes, of course, rates have to reflect what the labor cost is. And again, that's also subject to negotiation. But we do transfer at least a portion of those wage raises to our clients in the form of rates that are applied to determine pricing for a clinical trial. But I remind you that the clinical trial business is a long-term, long cycle business, meaning that what we booked today, which may reflect some level of price increase, won't be realized into revenues until the next, the one to four or five years. So, what we are delivering in revenue today, and tomorrow was sold several years ago at different, under different labor cost assumptions. So, there is a delay, if you will, in the clinical trial business, because of the long cycle nature of the business. There are contracts where we have escalation clauses for inflation, but they never envisioned the type of inflation that we are facing in some of the markets. So, that's the picture on pricing. Thank you very much, Elizabeth. Great, thanks for taking the question. Maybe Ron, just I might have missed it, but when you talk about the impact EPS from these buckets, can you kind of break down for us the relative contribution between the higher tax rate, interest expense, et cetera, that makes up sort of that delta on EPS growth and then if you think about for this year, yes, for the EPS? Yes, well look the U.K. corporate tax rate increase, added about a percentage point to our overall effective tax rate. So, you start with that, but most of the impact year-over-year is coming from interest expense. So, we were, I think slightly over $400 million in interest expense in 2022. We told you about $615 million in 2023. So, you can do the math on that, then with 190 -- roughly 190 million shares and figure out what the impact is, it's principally coming out of that and that's why we excluded those two items and showed you that absent those are EPS growth rate underlying operational was still very strong double-digit. And that assumes the debt pay down assumptions and going into swap agreements or is that, if you do those things through the course of the year, okay? Okay. Thank you everyone for joining us today. We look forward to speaking to you again on our next earnings call. Myself and the team will be available the rest of the day for any follow-up questions you might have.

EarningCall_230

Good morning. My name is Audra and I will be your conference Operator today. At this time, I would like to welcome everyone to the Mettler-Toledo fourth quarter 2022 earnings call. Today’s conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star, one again. At this time, I would like to turn the conference over to Adam Uhlman, Head of Investor Relations. Please go ahead. Thanks Audra, and good morning everyone. I’m happy to welcome you all to this call. I’m joined with Patrick Kaltenbach, our Chief Executive Officer, and Shawn Vadala, our Chief Financial Officer. Let me cover some administrative matters first. This call is being webcast and is available for replay on our website at mt.com. A copy of the press release and the presentation that we will refer to on today’s call is also available on our website. This call will include forward-looking statements within the meaning of the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934. These statements involve risks, uncertainties and other factors that may cause our actual results, financial condition, performance and achievements to be materially different than those expressed or implied by any forward-looking statements. For a discussion of these risks and uncertainties, please see our recent annual report on Form 10-K and quarterly and current reports filed with the SEC. The company disclaims any obligation or undertaking to provide any updates or revisions to any forward-looking statement except as required by law. On today’s call, we may use non-GAAP financial measures. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measure is provided in the 8-K and is available on our website. 2022 was another year where our company’s unique strength and culture of execution led to strong performance and success in overcoming significant external challenges. Our teams’ resilience and agility to quickly react and adapt to the changing environment allowed us to meet customer demand, gain market share, and deliver robust financial results. We also finished the year with excellent sales growth in the fourth quarter and benefited from very good broad-based growth across geographic regions and product categories. The highlights of the fourth quarter performance are detailed on Page 3 of the presentation. Local currency sales in the quarter increased 9% as compared to the prior year with broad-based growth across all regions and most of our product portfolio. Strong sales growth combined with benefits from our margin initiatives and good cost control contributed to excellent growth in adjusted operating profit and adjusted EPS, offsetting very significant currency headwinds. As we look ahead to this year, we expect continued uncertainty regarding the global economy and face challenging multi-year sales growth comparisons. I’m confident that the diligent execution of our growth and productivity initiatives will again position us very well to gain market share and deliver solid financial results. Later, I will have some additional comments on our business, but let me now turn it to Shawn to cover financials and the guidance. Sales in the quarter were $1.058 billion, which represented a local currency increase of 9%. On a U.S. dollar basis, sales increased 2% as currency reduced sales growth by 7%. We estimate that the impact of not shipping to Russia was a headwind of about 1% to sales growth. On Slide No. 4, we show sales growth by region. We had broad-based sales growth in Q4 as local currency sales increased 8% in the Americas, 9% in Europe, and 9% in Asia-rest of the world. Local currency sales increased 11% in China in the quarter. Excluding Russia, our sales in Europe grew 13%. On Slide No. 5, we show sales growth by region for the full year 2022. Local currency sales grew 11% for the year with 12% growth in the Americas, 6% in Europe, and 13% in Asia-rest of the world. Local currency sales increased 14% in China in 2022. Excluding Russia, our sales in Europe grew 9% for the full year. On Slide No. 6, we summarize local currency sales growth by product area. For the quarter, laboratory sales increased 10%, industrial increased 6%, with core industrial up 5% and product inspection up 9%. Food retail grew 12% in the quarter. The next slide shows local currency sales growth by product area for the full year. Laboratory sales increased 12%, industrial increased 9% including 10% growth in core industrial and 7% growth in product inspection. Food retail grew 1% in 2022. Let me now move to the rest of the P&L, which is summarized on Slide No. 8. For the fourth quarter, gross margin was 59.8%, an increase of 130 basis points. We benefited from favorable pricing and volume growth, which was offset in part by higher costs. R&D amounted to $45.9 million in the quarter, which is a 7% increase in local currency over the prior period, reflecting increased project activity. SG&A amounted to $227.6 million, a 1% decrease in local currency over the prior year and included lower variable compensation related to our strong prior year results. Adjusted operating profit amounted to $358.6 million in the quarter, a 12% increase. Currency reduced operating profit growth by approximately 9%. Adjusted operating margin was 33.9%, which represents an increase of 310 basis points over the prior year. A couple final comments on the P&L. Amortization amounted to $16.5 million in the quarter. Interest expense was $16.8 million in the quarter. Other income in the quarter amounted to $1.5 million, primarily reflecting non-service related pension income. We reduced our effective tax rate from 19% to 18.5% in the quarter. This rate is before discrete items and adjusting for the timing of stock option exercises in the quarter. We are pleased with this reduction and expect to maintain an 18.5% rate in 2023. Fully diluted shares amounted to 22.4 million in the quarter, which is a 3.5% decline from the prior year. Adjusted EPS for the quarter was $12.10, a 15% increase over the prior year or a 24% increase excluding unfavorable foreign currency. On a reported basis in the quarter, EPS was $11.86 as compared to $9.94 in the prior year. Reported EPS in the quarter includes $0.21 of purchased intangible amortization and $0.07 of restructuring and other costs. We also had two items impacting reported income taxes this quarter. We had a $0.20 headwind due to the difference between our quarterly and annual tax rate due to the timing of stock option exercises, and we also had a $0.16 benefit from adjusting our tax rate to 18.5% for the first three quarters of the year. The next slide summarizes our full year 2022 financial results, which we are very proud of considering the unexpected challenges our team faced over the last year. Local currency sales grew 11% for the year, adjusted operating income increased 13% or 18% excluding unfavorable foreign currency, and our operating margin expanded 190 basis points. Adjusted EPS grew 17% for the full year or 23% excluding unfavorable currency. That covers the P&L, and let me now comment on cash flow. In the quarter, adjusted free cash flow amounted to $272.9 million and DSO was 37 days, while ITO was 3.6 times. To start off, forecasting remains challenging and market conditions remain dynamic. We are basing our guidance for the first quarter and full year assuming market conditions remain as they are today. While some factors impacting our outlook have improved, like foreign exchange rates, we still face uncertainty, including the risk of recession in certain countries. We also face difficult multi-year sales growth comparisons. Regardless, we remain focused on the factors we can control and believe our unique sales and marketing strategies and innovative product portfolio will support market share gains and profitable growth this year. For the full year 2023, we have left our local currency sales growth guidance of approximately 5% unchanged. We expect full year adjusted EPS to be in the range of $43.55 to $43.95, representing a growth rate of about 10% to 11% or approximately 11% to 12% excluding unfavorable foreign currency. This compares to our previous guidance of adjusted EPS in the range of $42 to $42.40 and reflects the impact of three items. First, foreign exchange based on today’s rates is expected to be a 1% headwind to profit growth, down from our previous guidance of a 4.5% headwind due to the strengthening of the renminbi, among other currencies. Secondly, we now expect our effective tax rate for 2023 to be approximately 18.5%, down slightly from our prior estimate and a modest benefit to EPS. Lastly, somewhat offsetting these benefits to adjusted EPS is an increase in interest rates and related interest expense, as well as a decrease in forecast pension income. Specifically, we now expect interest expense to be approximately $78 million. Other income, which is below operating profit and largely reflects non-service pension income is forecast to be approximately $1 million. Total amortization including purchased intangible amortization is forecast to be $73 million. Purchased intangible amortization is excluded from adjusted EPS and is estimated at $27 million on a pre-tax basis or $0.97 per share. Now let’s turn to cash flow. For 2023, we continue to expect free cash flow in the range of $900 million and we still expect to repurchase approximately $1 billion of our shares this year. This would allow us to maintain a net debt to EBITDA ratio of approximately 1.5 times. Thanks Shawn. Let me start with some comments on our operating businesses, starting with lab, which had strong sales growth in the quarter with strong growth across most of our product portfolio, especially in analytical instruments and process analytics, while our pipette business was down due to a decline in pipette tips. Overall, we continue to see growth with pharma and biopharma customers as well as the faster growing segments, such as lithium batteries and others, and expect favorable results in 2023. Turning now to our industrial business, where core industrial had solid growth in each region and continues to benefit from market trends towards automation and digitalization. Our outlook for this year is positive, although I’d note this business is not immune to potential changes in the economy and will require us to remain agile to identify and target growth opportunities. Product inspection sales were stronger than expected this quarter with very strong sales in the Americas. Europe had modest growth as we saw better customer activity compared to the last quarter. Overall, we expect to have a positive start in 2023 in product inspection with good growth in the Americas, however we remain cautious in Europe with softer conditions in packaged foods. Finally, food retail delivered very strong with project activities in the Americas and Europe offset in part by a significant sales decline in China due to disruptions from the pandemic. Now let me make some additional comments by geography. Sales in Europe increased 9% in the quarter, better than we had expected and inclusive of a 4% headwind from stopping our shipments to Russia. We saw good growth across most product categories in Europe, particularly in process analytics and retail. The potential energy crisis and related impact on customer demand has also been better than expected, but we of course still need to get through the rest of the winter. Sales in the Americas was again strong with especially good growth across product inspection and food retail. Finally, Asia and the rest of the world had another quarter of good growth, led by our lab business. China grew 11% with particularly strong growth in lab. Switching now to our service business, we continue to see excellent momentum, and service sales grew 11% in the quarter and 12% for the year. Service remains an important contributor to our profits and a key advantage versus our competition. Also, customers that use our service are more likely to buy instruments from us again in the future. Given the importance of our service business, I’d like to share with you more details on our strategy and initiatives. To start off, as a reminder, service represents 20% of our revenues and is a key part of our solution offering. Our service offering is comprehensive and includes installation, qualification, calibration, preventative maintenance, spare parts and repair services. Over 50% of our service represent service contracts that support our customers’ ability to maintain uptime, improve productivity, and comply with regulatory requirements. An important piece of our business is calibration services, and our comprehensive and audit-proof electronic calibration certificates are fully traceable and available on demand from a secure database. This makes it very easy for our customers to comply with regulatory requirements. We have very strong competitive advantages with our service business and excellent opportunities to accelerate our growth. We believe we have the largest installed base of weighing instruments in the world and the largest service network across our direct competitors with over 3,000 service technicians around the world. We have a stand-up global service offering with dedicated service sales experts. This global coverage is increasingly important as customers look for consistent service around the world. Our ability to serve customers during the pandemic has proven to be a strong competitive advantage and our service offering was especially important to customers in regulated environments. The introduction of new service levels, 24/7 support, and remote diagnostics have been helpful in supporting customers. We have seen continued improvement in our net promoter scores in recent years and throughout 2022, which measure customer satisfaction after a service event. We are focused on accelerating our service growth given these competitive advantages and strong customer satisfaction, and over the medium term would expect our service sales to outpace our product sales. To achieve this, there are two important elements of our growth strategy besides continuously upgrading our offering: penetrating our large installed base of instruments, and selling service contracts at the point of product sale. Starting first with penetration our installed base, we have a large installed base of instruments we have sold over many years, the majority of which is not serviced by us today. To further penetrate this installed base, we use the same concepts and similar approaches with advanced big data analytics that we use when selling products but with more specific data about history, needs, current penetration, and potential of the customer. Our service telesales teams can leverage this data to run marketing campaigns based on the age, warranty, service history and projected service intervals of our instruments to generate a service lead when an instrument is most likely to require service. Additionally, we use sophisticated data analytics for sales force guidance to identify carefully selected high potential accounts for our field service sales team. Selling services contracts at the point of sales is another high priority focus for us. Over the past year, we re-vamped our sales trainings and product quoting process to automatically provide a quote for service contract at the point of sale. Productizing service has also been beneficial in providing and communicating the value of a service contract to a customer in an easy way. Providing service under a service contract is a win-win for us and the customer. It ensures high reliability and accuracy of measurement for our customers and also helps prevent costly failed experiments, poor production quality or unplanned downtime from devices that are not properly maintained or calibrated. Our technicians are able to build deeper relationships with customers and become trusted advisors. Service contracts are also a benefit for our service team as they are able to more efficiently schedule service calls weeks in advance, leveraging our territory and route planning analytics to optimize the productivity of the team. Additionally, customer satisfaction is higher for customers with service contracts, and as I said, those customers are more likely to purchase our instruments again. Overall, I feel very good with our service growth strategies that they will position us well to grow this very important and very profitable portion of our business over the coming years. As we look ahead through 2023, we expect to face continued uncertainty in the global economy and challenging multi-year sales growth comparisons. Our ability to demonstrate resilience and agility during difficult times is an important signature of our culture. I am confident we will be able to react quickly to the new challenges and opportunities that arise so we can continue to gain share and deliver solid results. Patrick, Europe came in solidly above the low to mid single target for the fourth quarter. Just curious, any other color you can provide on what drove the upside and how durable do you think this is? Do you think it was something Mettler is doing different, or just a stronger market outlook? Yes, look - we are very proud of our fourth quarter results, of course. The team performed extremely well across the regions and across the product portfolio. I would say what you have seen is again Mettler in action. We have demonstrated that we can go after the market opportunities as they arise. There has been, I would say, not much better market momentum than we predicted, but we have been really capable to act on the opportunities that are out there. Europe has performed stronger, as Shawn already indicated in his remarks. We have seen good opportunities despite the headwinds we have seen from not shipping products to Russia. Europe grew excluding Russia 13% on a best compare against the prior quarter, and again that is also driven by the fact that we really were capable to capture opportunities out there. There is not--I would say market conditions have not changed compared to what we had seen last year. We have seen some reluctance in Europe, for example, in the PI business - customers are more cautious spending dollars right now, they extend time of some of the projects, but we were able really to get everything that was out there and turning all the orders in sales. Our supply chain team executed very well getting over some of the remaining issues we had seen in the supply chain. We had really short shipment times and it all helped us to really perform extremely well in Q4. Got it, good to hear. Then Shawn, was wondering if you could walk us through the though process on the 6% local currency guide for the quarter, but reiterating the 5% for the full year. This set-up obviously implies a bit of a decel in the latter three quarters despite an easing comp. Just curious if it’s something in the order book. Was there push-outs from the fourth quarter that hit in the first, or is it just Mettler being prudent? No, I think if you look at it, of course there’s an element of caution, just given that we have these difficult multi-year comparisons that we referred to, and there is uncertainty. But I think there’s a couple dynamics that are important to reflect on, too. The first is that when we look at pricing in terms of the cadence of pricing, we’re going to have better higher pricing in the first half of the year than the second half, but we’ll probably have better volume growth in the second half of the year versus the first half, so that’s one topic. Then another is we’ll probably do a little bit better on the retail business in the first quarter. Maybe this is a good time, I’ll just kind of walk through the different pieces of the business and you’d kind of see that retail will have a little bit of a benefit here in Q1. As we’re thinking about the first quarter, we’re thinking about mid-single digit growth in lab and we’re thinking mid to high single digit growth for the full year. For core industrial, we’re thinking mid single digit growth for Q1 and we’re also thinking low to mid single digit growth for the full year. We’re thinking product inspection mid single digit growth for Q1 and low to mid single digit growth for the full year, and then here we get to retail, we’re looking at high teens, so we’re going to benefit from strong project activity in Q1. Now keep in mind, retail is still only about 5% of our business, but you get a sense for it. But then for the full year, we’re still thinking in the mid to high single digit range for retail. Then from a geographic perspective, we’re looking at mid single digit for Q1 and for the full year for Americas. For Europe, we’re looking at mid single digit for Q1 and low single digit for the full year, so that’s us being maybe a little bit cautious on Europe and also acknowledging multi-year comparisons, especially if you exclude Russia - I think we grew 13% in the fourth quarter of this past year. Then for China, we’re looking at mid single digit growth for Q1 and high single digit growth for the full year. Shawn, maybe just on your last point there on China, can you just talk a little bit about the transition from first half of the year headwinds from COVID to something that looks like presumably a step-up in the back half of the year? I’d be particularly interested in your thoughts around stimulus dollars in China. Some of our companies have just been more emphatic about the impact there that you might see than others, so would just love to get your two cents. Yes, thanks Dan. Maybe a few comments. One, we’re very pleased with the quarter we’re coming off - you know, 11% growth in China, and then when we look at China for 2023, we feel very good but we’re coming off two very strong years. We grew 14% in 2022 but we grew 25% in 2021, so that’s always on our mind and I’d like to remind everybody of that. But as we look at the cadence for this year, very pleased with how the team was able to manage through different dynamics with COVID. We’ve always said that things can change quickly in China, and this is another example with the reopening. We had quite a bit of the organization infected with COVID around the holidays, but we’ve been back up in terms of full capacity now for a few weeks, I’d say, and things are back to normal. Of course, they just also came off the Chinese New Year as well, so we’re actually looking at it quite favorably in terms of the reopening. There could be some short term uncertainty in terms of what it could mean to certain customer segments, but as we kind of look to the second half of the year, certainly there could be--you know, we’re looking at higher growth in the second half of the year than we’re looking at for the first half. Then in terms of stimulus, I think we’re all looking forward to what comes out here over the next month in terms of the magnitude of stimulus, but our expectations certainly are that stimulus dollars will be most likely directed towards a lot of the programs under the five-year plan, and then I’m sure some of these strategic industries within the country will also benefit as well too. We continue to see really good momentum in a lot of these hot segments, like lithium batteries, like semiconductors, and then just these overall arching trends towards automation and digitalization continue to play out well. We continue to feel like we’re very well positioned for China for the medium to long term. Of course, in the short term, always a little bit more difficult to call, but I’d say that’s it. No, I think you covered it really well. Again, we have a strong team in China, a long history in China. The team has executed very well using the same go-to-market strategies and tools that we used in the rest of the world very efficiently. As you said, I’m very confident about the mid to long term performance in China, and who knows what’s coming out of any stimulus. It might be a bit more biased towards the real estate market - we don’t know yet, but I think it will also cover a good part of the five-year plan, which means investing into health, investing into important technologies where we all play well. Then just maybe on pricing, Shawn, I don’t know if I missed it, but did you give the refreshed price realization assumption that you’re making for the year, and then as you’re dialing in your pricing expectations for ’23, I’m just curious if there are business segments or geographies that maybe we should think of as being more or less than the company average when it comes to realization, or do you think that everyone kind of just moves up in sort of the same range? Yes, I mean, our guidance for the full year is unchanged at 4%. I would say we actually finished the year a little bit better than what we were expecting. We had a very strong finish in Q4 with something in more the 7% kind of range, and so we’ll probably get off to--I expect to get off to a good start here in Q1 with something more in maybe the 6% kind of range, but then we’ll kind of moderate into the second half of the year as we start lapping a lot of these pricing actions that we did to combat inflation during the course of 2022. In terms of differentiation, I’d say lab always does--nothing significant to point out, but I’d say lab tends to do a little bit better than the rest of the portfolio, and then we tend to do maybe a little bit better in the developed countries than we do in the emerging countries. I wanted to ask about the product inspection business, so 9% core, nice beat versus the guide, and I think the CAGR accelerated in the year end too. The service piece is usually pretty steady. I was just curious if you could talk about the trends there, what you’re seeing on service versus the product side - was there any acceleration? Look, as you said, we are really, really happy with the performance of product inspection in the fourth quarter. We gained momentum. I think we were a bit more cautious getting into the quarter but we saw especially good momentum in the U.S. and a bit better performance than expected in Europe, but we are still cautious, as I said before, about Europe. Of course, increasing our installed based on products will continue to drive also more service business. Service is a really important part of that, and our service coverage, especially in the U.S., is exceptional compared to many of our competitors and gives us a clear advantage in product inspection. We continue to build out our service offering in terms of the level of services we can provide also for this product portfolio, and again as we also launch new products, including now also more mid-range products addressing more of the mid-market needs of products, we are also going after more market share with instrumentation which will afterwards continue to drive more services. The area, the region where we had probably still more happen was also in China. Given COVID-19, there was not a lot of momentum in PI in the fourth quarter. While we saw some good adoption of the new product that we launched for mid-range, overall the market there was still suffering from the pandemic. But also there, I would say moving forward, we see opportunity of course of building more market momentum in that domain as well, but the U.S. is by far the biggest and most important market and very well covered by our service business there, of course. Europe is the second biggest part and continuing to build out also China and Asia-Pacific. In terms of trends, we saw improvement both in service and the product business, Jack, kind of going from Q3 to Q4, but service has been growing faster than product this year. Got it. Then just one probably minor point on the 2023 outlook by segment, in lab, I think previously you were talking about mid to high single digit growth, now mid single digit. Was there anything that softened a little bit, or just anything you would call out there? For lab, we’re talking--if I said it incorrectly, I apologize. We expect to grow mid to high single digits for the full year, which is consistent with what we said before. For Q1, we’re at mid single digit, and Q1 is going to be a little bit impacted by some of the topics like pipette tips and customer stocking, so. I guess my first question is on the Q1 guidance. Did I hear you correctly, Shawn, that pricing has six points in Q1 and the guidance is 6%? That implies zero volume. It seems a little conservative. Maybe talk about the Q1 assumptions. Yes, I think we--if you look at it, we’ve always been concerned a bit by multi-year comparisons and uncertainty in the macro, and I don’t think it’s really that different than what we’ve been saying about the full year results. I think right now, it’s a new year, we’re very early in the year. I think we need to see how the next couple months play out and then we’ll be able to have a lot more insight in terms of how not only the first quarter went but how the year starts to have--what kind of momentum we have going into Q2 and the rest of the year. Understood. Then one on cash flows here, it looks like free cash flows came in below your guidance for fiscal ’22. I’m curious, was that just a timing element, and I’m looking at your guidance here for fiscal ’23 - $900 million, is that benefiting from some timing elements here, or any cadence on free cash flows? Yes, good question. Our free cash flow, you might not remember but we updated our guidance for that last quarter, so we actually came in line with our revised guidance from last quarter and we revised down 2022 primarily because we were carrying more inventory in--or we carried more inventory in 2022, giving more safety stocks just to kind of mitigate some of the challenges in the global supply chain. As we look towards 2023, we expect to benefit and reduce a lot of those inventory levels, and so you’ll see from a one-year growth perspective, you’ll see pretty significant growth but a lot of it has to do with timing of working capital. Great, thanks. Appreciate the detail on the service side, but just want to dig a bit into consumables. What was the consumable growth in the quarter and the year, and then can you help quantify the size and the timing of the two major one-off headwinds Mettler is facing in ’23 around the pipette tip business, particularly the roll-off of the DoD contract and then that inventory stock dynamic? Yes, so our consumables business, in terms of total mix on the business, is about 10% in the quarter. For the full year, it was about 12% of our business. Consumables, as a reminder for everybody, about half of that is probably pipette tips and then the other half is a combination of process analytic sensors, as well as other consumables for other categories. As a total group, consumables were down about 5% in the quarter, and for the full year they were up 5%. But if you kind of dug into the details, of course, the one area where we saw a decline was pipette tips, which would have been down over 20% in the quarter, and that’s topic related to customer stocking that you’ve heard about from other companies. Fortunately for us, it’s not a significant impact to our overall results, and we’ll probably continue to see that trend play out here in the first quarter and maybe even in the Q2. Then my second one on margins, I think the guidance implies about 120-ish basis points from operating margin expansion. Can you help us understand how we should think about the pieces of growth versus SG&A, R&D? Just additional help here would be great. Yes, sure. If we look at our--you know, rather than going through each line, maybe I’ll give you a little bit of flavor in terms of gross profit and then, of course, there’s a lot of other ingredients in terms of R&D and SG&A. But in terms of the first quarter, we’re looking at gross margin expansion of about 140 basis points, and for the full year we’re looking at about 100 basis points, so that number is a little bit lower than the last time we spoke and the reason is it purely--you know, almost entirely related to just currency translation. On a currency neutral basis, it’s pretty consistent with our previous guidance. Then for the full year, our operating margin’s up 190 basis points, and then for the full year we’re estimating about 130 basis points. Patrick, maybe just on the services business that you talked about on the call, just reflecting back from the investor day, you talked about that services mix being about 50/50, contract versus value-added services. Could you just maybe talk about the importance of that mix shift as you move forward and where you see that mix over the medium term developing into? Yes, thanks Matt. Really good question. Yes, as I pointed out at the investor day, it is important for us to continue to drive that mix more towards services on a contract, and the team is working hard on that, the telesales team and the sales team of course, working on continuously also bringing new--our new service story to our customers, including the new service offerings that we have, ensuring that our sales team and our customers understand the benefits of being under contract, what it means to them in terms of preventative maintenance, of uptime, response demand for service, 24/7 availability, etc. I see actually good momentum. I think we have made good progress over the last two years or three years in moving more of our services under contract, and it starts always at the point of sale, making sure that when we sell a product, we can have--our sales person can have an educated discussion with the customer of the benefits of being under contract. At the same time, we have increased the portfolio of services that we offer, as I mentioned before, from basic to comprehensive services, and that makes it also easier and more attractive to our customers to select a service contract. I see the shift ongoing and we are working on that, because in the end, it’s again a big win-win for both the customers and ourselves. As I said, we have the data analytics behind it, we know that customers under service contract are more likely to buy from us again because they have seen the full benefit of our offering, and for us it also helps us, of course, to drive more efficiency in services. It helps us to be more effective in scheduling services, making sure we optimize the coverage of our service and the timing when we can do services, and make sure the service technicians that we have are working most efficiently. Expect a continued increase there in terms of service coverage. It’s again beneficial both for us as a company but also a strong win for the customer. Got it, and then just maybe a follow-up, just staying on services, Patrick, you mentioned that the majority of instruments are not serviced by Mettler. Maybe if you could give us a little bit more color on what that percentage is and where you think that could go to. Then Shawn, just given that services--and you commented that it’s going to be growing faster than group, and I’m assuming it’s higher margin. Could you talk about the medium term impact on margins from a larger services business over the next few years? I’d say I don’t have it quantified in terms of precision, but you’re right - we expect our service business to grow faster than our product business over the medium to long term, and our service business has operating margins that are higher than our corporate average. Yes, and back to your question regarding the service opportunity overall, of course we have millions of instruments in our database and that is a very competitive advantage for us to have that visibility. Our served market for services is over $3 billion, so we have significant opportunity to expand our market share in there as well. If you look at the total share of instruments of the installed base, of course you never know--we know to a good extent about which instruments are still under operation and then, based on the lifetime inspections and the database we have for instruments, we make some assumptions in terms of how many instruments otherwise would be still operational, but we think it’s probably more than 60% of the instruments out there are not yet under full service coverage from us. Could you just split out lab versus industrial in China in the quarter, and then those two sub-segments, what you’re anticipating for the year? Any bifurcation between those two markets? Yes, sure Brandon. For Q4, lab was up over--I’m sorry, I’m looking at the wrong year here, but still good results. Lab was up about 20% in the fourth quarter and industrial was up low single digits. As we look towards 2023, we’re expecting double digit growth in lab for the first quarter and the full year, and we’re expecting industrial to be more flattish, you can imagine more impacted by some of the disruptions over the last few months. Then for the full year, we’re a little bit more conservative there with low to mid single digit growth, so obviously expecting more growth in the second half of the year. Got it, and then on the lab business globally, are you able to quantify the impact of the pipette declines on that segment in the quarter? I imagine it must have been maybe at least a point. Then Patrick, you mentioned lithium batteries, just help us understand what areas of the portfolio are serving that market. Yes, so for the quarter, Brandon, if you play out the math, the data points that I kind of mentioned earlier, that’s probably in the 1% or so to the group, so it probably would have been in the 2% or more to the lab division and probably looking at similar type trends here in the first quarter. Then at some point, we expect it to stabilize during the second quarter. Yes, let me add there, Shawn. On the pipette business itself, we have seen good growth on pipette instruments also in Q3 and throughout 2022, and also we see continued good growth in service pipette business, so it’s really the pipette tip business that has been suffering, and that’s of course also due to the ramp down of testing, etc. out there. With the increased number of instruments that we sell, single use pipettes, etc., and the increased service business, I think we are quite confident that as we see the demand for pipettes, that also the demand for pipette tips will continue to go up. Hey guys, thanks for the question. I guess first, I wanted to go back to the services business. You talked on the penetration side in Matt’s question, but on the other area of opportunity you mentioned of selling contracts at the point of sale, can you just elaborate on what your attach rate is today and where you’d like to see that go over the next few years and longer term? What we are working on, Catherine, what we are working on is, again, continued increase of the attach rate. What we changed last year is the entire quoting process. Before, our sales people had to actively quote services and had to look up in a catalog what services we could offer, what dedicated products. Now, it’s an automatic part of the quoting process, and if a sales person wouldn’t be able to sell services, they also have to give us some justification why they couldn’t, and that also helps us then to improve again the marketing collateral behind services and making sure that we make a better job of selling the value of services. We continue to really make sure that we pull all levers to make sure our customers understand the benefit of service contracts. The overall attach rate, I think is in the range of--it’s actually hard to say, I’ll have to look up that number and get back to you, probably on one of the next calls. But for me, the most important message, really, is that we continue to see an increase. All right, great. Then on Europe, you mentioned there’s maybe some conservatism in your low single digit guide for the year. What do you view as the swing factor there - is it mostly on the packaged food side, or are there other areas where you’re trying to be a bit more prudent as you start that initial guide? Yes, I think it’s multiple factors. Packaged food is definitely one of them, clearly, again because this is high capex investment and it’s one of the few product categories where it’s really more in the high capex side. But we also have seen some of our customers being more reluctant, and we have seen this in Q4 and we see this continuing into Q1. They are all looking at the market situation right now and they all want to see how it plays out. Fortunately, as I said, the impact of a potential energy shortage in Europe has not yet played out, and hopefully we will get through the winter without some major issues and that will then hopefully also increase overall market confidence. Otherwise in the European market, for us it’s also--look, we have been very successful over the last couple of years. We also have been quite successful in Q4, so in the second half will also be a tougher compare for us. That’s why we are thinking currently about for Europe more in the low single digits for 2023. Sorry if I missed this earlier, but I want to drill a little bit into core industrial. I know you kind of anticipated a little bit of a step-down in the fourth quarter, but it still seems like a sequential decline from the first three quarters of the year where you had really strong 10% growth, and then looking at your guide for low to mid single for 2023, anything in particular you’d want to call out, how that’s trending? Is that mostly a reflection of macro or how much conservatism is built into that? Are you seeing any change in order patterns with those customers or is there anything by geo you could call out there? Thanks. Yes, I’d say we’re coming off a period of a lot of growth in that business, Mike. We still feel really good, though - the business is well positioned, it’s a better mix of business than it used to be. Like we’ve talked a lot about over the past year, a lot more in what we would call the more attractive segments of the market, like more anchored towards pharma, food manufacturing and chemical, which is primarily speciality chemical for us. This business also benefits from some of these hot segments that we talk about, like lithium battery, and then just these trends in automation and digitalization, which we continue to see really holding up during a deteriorating macro environment over the last few months. Historically, it is the business that’s most susceptible to the macro, so we still keep an eye on it. We were really pleased in the fourth quarter that we saw good growth in each region, which I think is good. It’s important to see each region of the world growing, but we’re certainly a little bit more cautious as we kind of look to 2023 - it’s early in the year. China is a big part of this business, so I think it will be important for us to get through the first quarter, see how things look, and then we’ll have maybe some better visibility into the rest of the year. Okay, that’s fair. Maybe just a follow-up, tying up a loose end on modeling - the 18.5 tax rate, is that a one-year dynamic for 2023 or is it safe for us to assume that going forward beyond? Yes, so it’s at least a two-year dynamic. We took it down for 2022. We feel comfortable we can hold it for 2023. As we look to 2024, I think there could be some upward pressure on the rate. It’s still a little early for us to kind of communicate anything, but it could be something in the 1% to 2% kind of range. But we’ll obviously know a lot more towards the end of this year and when we provide guidance for next year. Kind of an opex question on kind of how to think about [indiscernible], maybe diving in there a little bit. So R&D up 7% in local currency in the quarter, obviously you offset that with SG&A declines. As we think about broader--your investment strategy, how should we think about the R&D line and kind of modeling that out? I’ll get started on this. Look, actually I’m very proud that we really have a lot of opportunities in our business to drive more products to the market, and the success of our business really also relies on driving innovation to market. This year we brought a lot of great products to the market, helping our customers in the domain of automation, digitalization, compliance, etc., both on the hardware and software portfolio that we launched. We actually launched internally a program that we call our accelerator program, where we look at our pipeline of R&D projects that we have across the company and selected a number of really high potential projects that we are accelerated with additional funding, and that’s part of the increase that you also see there on the R&D line. Again for us, on the leadership team, we’ve made a very conscious decision, saying using the success that we have as a company to accelerate products and bringing even more horsepower to the street and making sure that we get stuff to our customers which we know will help them to drive more productivity, help them to drive better insights into the research they are doing, and I’m actually really excited and really proud that we could do that. Great. I know obviously the Mettler story has been predominantly organic, but you’ve definitely made some notable tuck-ins, like PendoTECH, Biotix. Can you just provide me the update on the M&A environment and what you’re seeing in the market, maybe in terms of incremental opportunities to enhance the portfolio? Yes, very good question, Liza. On M&A, we didn’t change our strategy at all. We are still looking at tuck-in acquisitions, bolt-on acquisitions that complement us both--either on the technology side, technology that we do not own today but think is important for us to complement our portfolio, or giving us market access in areas where we don’t play PendoTECH was an example of that, where we said we wanted to go more into downstream bioprocessing and have the right solutions for our customers. We also made last year a strategic acquisition in the area of software, complementing our autochem business with Scale-up Systems, which is a very important software capability for us to help customers scaling up from R&D to manufacturing. It gives us really also a unique value proposition there. Then end of the year, we acquired also a smaller lab business called [indiscernible] in Germany, $10 million revenues, but also with products that we think really we should have in the portfolio, and that’s the way I envision to continue this. We really look for the right opportunities. Given the strength we have as a business, we can be very selective in what companies we want to acquire. I think Mettler is a leader with an outstanding platform for these companies who look for either global access to market, which we have, or for the strength that we have in terms of supply chain to help them to really accelerate their go-to-market, but it needs to be really something that is missing in our portfolio. We don’t have to make M&A to grow. We have a strong organic engine, but I’m very interested of course in opportunities to get us into the fast growing market segments, like we have in biopharma for example. It was one of the reasons why we acquired PendoTECH. I wanted to follow up about some of the earlier questions around the consumables dynamic and some of the pipette inventory stocking as well. You flagged that consumables were down 5% during 4Q due to that pipette dynamic, so can you just walk us through your expectations for consumables growth in the first quarter and then for the full year? Yes, hey Rachel. I don’t have the specific breakout for the full year. I would say I’d probably expect to see a similar result in Q1 as we saw here in Q4 overall for consumables, then I would certainly expect to see some growth in the second half of the year. But I don’t have anything specific in mind in terms of exactly what that would be, but definitely would expect us to return to growth in the second half of the year. Yes, absolutely Shawn, and think again, as I said before, some good indicators for us is the demand for our pipette itself, for the instruments. It should give us continued growth. We are playing very well in the biopharma research space with our product portfolio, so the COVID tailwinds, I think will hopefully not be any topic for us as we go into the second half of the year. The rest of the portfolio that we have in consumables, the sensors that go into biopharma, some of their probe sensors or even some of the lab products, have consumables. They are still doing quite well. Great, and then maybe a quick one here, just on on-shoring. You guys have talked about the on-shoring and near-shoring dynamic being a tailwind for Mettler. Can you just talk about your latest expectations on where you could see that impact the portfolio? Obviously there’s some debate going on around the U.S. budget here locally, so how are you kind of embedding that into expectations in the near and medium term as well? Thank you. We still see that as a really good opportunity for the company in the medium to long term, but in terms of 2023, we didn’t really build anything specific into our guidance. Shawn, maybe on the supply chain in general, you talked about inventory, obviously you ran a little high in ’22 because of some of the stocking impacts. Can you just talk about expectations to kind of wind that down? Are you seeing normalization in the supply chain? Some thoughts on how you’re thinking about that piece. Yes, thanks Patrick. I’ll start and then I’ll let Patrick maybe a few comments as well too here. But yes, we definitely have seen a lot of improvement in the supply chain, in particular on the transportation side, like just the time to go from one country to another is--the lead times are, I think, pretty close to back to normal at this point in time, so that’s been great. Then in terms of availability of components, there’s still a topic here or there, but I’d say the noise level is significantly lower than what we were seeing six months ago. Yes, absolutely. I only can confirm that semiconductor issues that we talked about last year are mostly behind us with very few exceptions. The team has been also very agile to change some of the designs of the instruments so we are not so dependent on some of the exotic components there. But clearly, our supply chain is--I would say it’s almost back to normal in terms of transportation times, availability of materials, and that should not get in our way to make a successful business in 2023. Maybe just one final comment on that one is we’re really proud of our team. The supply chain, I think really has been a competitive advantage for us over the last few years, and just the collaboration around the global organization and the culture has just been really amazing to observe from the inside. I think it, frankly, helped us gain some share along the way and enhance our brand. That does conclude the question and answer session and today’s conference call. Thank you for your participation. You may now disconnect.

EarningCall_231

Ladies and gentlemen, welcome to the Enbridge Incorporated Fourth Quarter 2022 Financial Results Conference Call. My name is Abby and I will be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. Thank you. Good morning and welcome to the Enbridge Inc. fourth quarter and year end 2022 earnings call. My name is Rebecca Morley and I am the Director on the Investor Relations team. Joining me this morning are Greg Ebel, President and CEO; Vern Yu, Chief Financial Officer and President of New Energy Technologies and the heads of each of our business units: Colin Gruending, Liquid Pipelines; Cynthia Hansen, Gas Transmission and Midstream; Michele Harradence, Gas Distribution and Storage; and Matthew Akman, Renewable Power. As per usual, this call is being webcast and I encourage those listening on the phone to follow along the supporting slides. We will try to keep the call roughly to 1 hour. And in order to answer as many questions as possible, we would appreciate you limiting your questions to one plus a single follow-up as necessary. We will be prioritizing questions from the investment community. So if you are a member of the media, please direct your inquiries to our communications team who will be happy to respond. As always, our Investor Relations team will be available following the call for any additional questions. On to Slide 2, where I will remind you that we will be referring to forward-looking information on today’s presentation and in the Q&A. By its nature, this information contains forecasts, assumptions and expectations about future outcomes, which are subject to the risks and uncertainties outlined here and discussed fully in our public disclosure filings. We will also be referring to non-GAAP measures as summarized below. Well, thank you very much, Rebecca and good morning everyone. I am excited to be here today to review our fourth quarter and our record full year 2022 financial results. It was another solid quarter and year. So let me start off by doing a recap of our accomplishments in 2022, including, as you will see on this slide, our Saint Nazaire project. This is France’s first operational offshore wind farm and it came into service in November on time and on budget at approximately €2.4 billion. It’s providing 480 megawatts of electricity, enough to provide 700,000 people with electricity every year. I will also spend a few minutes discussing some of the key strategic advancements from our four core franchises. And then Vern will walk you through the financial performance and outlook. And then I will come back and close it a little bit on what you can expect to hear at our upcoming Investor Day. And of course, the Enbridge team is here to address any questions at the end. Before we get into the highlights, let me spend a minute or two sharing why I am excited to be leading this great company moving forward. For me, it starts with the people. As Chairman, I had a great opportunity to get to know many of the Enbridge team that I have not previously known. And in the last few months, I have met with employees at all levels across the business. Their passion is evident in their delivery of life giving energy that people depend on and they do it everyday, safely and reliably. I have no doubt we will build on this legacy, deliver top-tier performance and continue to grow this great company. And like many of you, I am passionate about the energy industry. We all know it is the backbone of our society. Access to safe, secure, affordable energy supports economic development and well-being. Today, the sector is at an inflection point. We must support the transition to lower carbon future, while at the same time, ensuring we are delivering safe, secure and affordable energy. Enbridge is right at the center of it. We are uniquely positioned to lead in the energy transition and continue to deliver reliable energy to our customers. As this slide demonstrates, we have an extensive asset footprint that allows us to realize synergies across our four core franchise. Our business is highly diversified and is underpinned by low-risk commercial frameworks. Our franchises are largely demand pulled and we serve the best markets across North America and increasingly in Europe. And we have demonstrated over our history, an ability to adapt, wisely allocate capital and capitalize on evolving market fundamentals, growing our natural gas franchise, investing more than two decades ago in what were then the emerging renewable energy technologies of wind and solar. Our balance sheet is in great shape and we have good visibility to cash flow growth. Combined, this will allow us to continue to deliver strong risk-adjusted returns to our shareholders through all market cycles and allow us to build on our tremendous track record of steadily growing our dividend. I am excited by the passion of our people, the strength of our company and by the investment opportunities that we have in front of us, both on the conventional and lower carbon fronts. So, let’s move to our 2022 highlights. The year was indeed another solid one for Enbridge. We continued to lead on safety and reliability. In total, we invested over $1 billion on the integrity of our systems. Our balance sheet is in great shape, BBB+ rated and comfortably within our debt-to-EBITDA range of 4.7x. We have placed $4 billion of growth capital into service and secured an additional $8 billion of new capital projects, including investing in liquefaction through our investment in the Woodfibre LNG project and we continue to be good stewards of capital, releasing close to $2 billion of asset value from our regional oil sands assets and DCP Midstream. That brings us to $11 billion in capital recycling to help fund high-grade opportunities since 2018. We made great progress on our ESG goals, increasing diversity, establishing new indigenous partnerships and advanced emission reductions across the business. Now, let’s spend a few minutes on key accomplishments of each of our businesses, starting with liquids. Our liquids business delivered record utilization in 2022 with the Line 3 replacement project being put into service in late 2021. Our Mainline is running full. Average daily throughput was 2.96 million barrels a day for 2022. And February and January of 2023 will exceed that as we hustle to move every barrel we can for our customers. We continue to have constructive dialogue with our customers on its successor Mainline incentive tolling agreement. As you know, these discussions take time and we are working with a subgroup of shippers to land on a new framework. Once agreed upon, we would then take it to the broader shipper group for a vote on the proposed agreement before filing it with the CER. Now should we be unable to come to an agreement then we are fully ready to file the cost of service with the CER, which would actually reduce our risk and make us even more utility like. It’s important to note that we have been factoring the impact of TMX into our financial and operational outlook for a long time. We expect the Mainline will remain well utilized once TMX is in service, and we are talking to our shippers about the impact of TMX and it will be accounted for in either commercial tolling outcome. In addition, we expect to see growth in the basin between now and 2030. As the basin grows, our system will fill back up. In 2022, we extended our light oil strategy by increasing ownership to 68.5% in the Gray Oak pipeline through multiple transactions and increased Cactus II pipeline ownership to 30%, both of which help connect the Permian Basin to our Ingleside terminal. We sanctioned another 2 million barrels of storage at Ingleside, which will unlock already built docks loading capacity for further export. I think we are starting to see and to create a real value-added super system out of the Permian region for our customers. Beyond having the ability to move product for our customers on two pipelines, we have the number one export terminal and the capacity to let them access premium markets for their oil. We also advanced several exciting low-carbon opportunities, including the development of a hydrogen ammonia plant at the Ingleside terminal and the JV with OxiClean Carbon Ventures to develop a carbon capture hub in Corpus Christi. I think there are some really exciting times coming for our Gulf Coast connected liquid assets. These low carbon opportunities on the Gulf complement our CCS plans in Alberta, where we are leading the development of the Wabamun Carbon Hub with close to 4 million tons of CO2 already secured for sequestration. And we are advancing our self-power power strategy with 7 projects in construction at our pump stations with more on the way. Lastly, we executed a landmark transaction with 23 indigenous communities in Northern Alberta, selling roughly 11% stake in the regional pipeline and storage assets. With this transaction, we have strengthened our relationship with neighboring indigenous communities and serves a strong value for reinvestment. We see this as an ideal framework for future partnerships and as a tool to recycle capital, more on that and our Gulf Coast [retail plans] (ph) at Enbridge Day in March. Moving to gas transmission, we had another excellent year. Our systems were highly utilized, in particular during the winter storm Elliott. We continue to demonstrate our reliability by reversing the flow of our Texas Eastern system to supply much-needed gas to the U.S. Northeast. The net swing of close to 3 Bcf was instrumental to avoiding potentially devastating impacts to our customers and underlines our competitive advantage in serving customers in changing environments. During the year, we also achieved positive rate settlements on the TETCO and BC Pipeline systems. And further underpinning the value of our pipeline system, all contracts up for renewal in 2022 were successfully recontracted. We placed $900 million into service, including modernization projects and our Vito offshore pipeline system. Our natural gas export strategy continued to play out as we began construction on our Venice extension projects serving Plaquemines LNG. In addition, our investment in Woodfibre LNG has helped spur new investment along our BC Pipeline system, where we secured another $4.8 billion of expansions on T-North and T-South. As you will recall, these projects earn under a cost of service framework. And given that they consist of Brownfield construction on existing right of ways, they have considerably lower capital cost risk. Overall, we see tremendous potential for North American LNG to meet global demand for secure lower carbon energy and we are engaging with governments in the United States and Canada to advocate for permitting reforms to support development. We also further reduced our exposure to commodity prices by decreasing our economic interest in DCP and in favor of a higher interest in the Gray Oak pipeline that is highly contracted. This was another good example of recycling capital to lower volatility and better risk/reward investments. Turning to our gas utility, they had another strong year with approximately 46,000 new customers added. We put $1.2 billion of expansion capital into service in 2022, which supports the continued growth of our rate base there. And we filed a new incentive rate application for the period 2024 to 2028. We have a long track record of working under incentive rate mechanisms that provide quality, safe service and predictable rates for our customers while also allowing us to achieve our premium return within the return parameters set annually by the OEB. Michele will have more to say on this important initiative at our Enbridge Day in March. Our Dawn Hub and transmission systems continued to perform well, particularly in December, as winter storm Elliott wreaked havoc on North American markets. Our integrated Dawn storage hub was able to reliably provide gas to the market, which helped to stabilize prices. In fact, just before Christmas, it was able to deliver a record 6.1 Bcf of gas to the market in a single day. The distribution team continues to progress our RNG strategy with two new projects sanctioned, bringing the total to 8 in service or under construction in Ontario. We are also seeing encouraging performance from the 2% injection of hydrogen into the gas stream in Markham, which serves 3,600 customers with low carbon or lower carbon natural gas. While we are still studying the impacts, we are also exploring the merits of extending this strategy to more customers. Looking at our Renewables business, 2022 was a pivotal year for that segment. We placed the first of 4 offshore wind projects into service in France on time and hit the €2.4 billion budget, quite an accomplishment in this market. We have 3 self-powered solar projects in service and another 10 under construction, which will produce 113 megawatts of power for our liquids and gas transmission businesses. Lowering Scope 2 emissions and we acquired a top renewable developer in North America, Tri Global Energy. The acquisition brings near-term cash flow from the sale of 3.9 gigawatts of advanced projects over the next couple of years. And the Power team has over 3 gigawatts of new development in progress that we expect to enter service between 2025 and 2028 with more beyond that timeframe. The 3 gigawatts represents $3 billion to $5 billion of potential growth capital investment for Enbridge. Our combined expertise will help us accelerate our North American onshore renewables strategy, taking advantage of the incentives announced in the Inflation Reduction Act. So really fine 2022 for all the business units, which translated into record financials and sets us up for future growth. Thanks, Greg and good morning everyone. A strong fourth quarter capped off a record year for us. We exceeded the midpoint of our DCF guidance range and we finished at the top end of our EBITDA guidance range. Strong operational performance resulted in a 6% increase in EBITDA and a 7% increase in DCF per share quarter-over-quarter. Our full year EBITDA increased by 11% over 2021 and our DCF per share was up 9%. During the quarter, we saw record Mainline volumes of 3.1 million barrels per day. Export volumes at Ingleside continue to grow throughout the year and we continue to enhance our U.S. Gulf Coast footprint with increased ownership in Gray Oak and Cactus II. Gas transmission utilization remained high and we have increased our revenues with the recent rate case settlements at Texas Eastern and at the BC Pipeline. Q4 also benefited with a full quarter of operations from our T-South and Spruce Ridge expansions. The utility was up with strong customer growth rate escalations and some slightly colder weather. The renewables business was down slightly in the quarter due to lower U.S. wind resources, the timing of annual operating expenses, which was partially offset by strong European power prices. Energy Services remained challenged in the quarter due to tight basis differentials and backwardation. But as a reminder, we expect Energy Services to return to profitability this year. The quarter also benefited from a stronger U.S. dollar. DCF in the quarter reflected higher distributions from our Alliance and Gray Oak joint ventures offset by higher interest expense, cash taxes and the annual timing of maintenance capital. Let’s take a moment now to remind ourselves on how we have built a business that’s resilient in all market cycles. The financial markets continue to be extremely volatile. Inflation is driving central banks to raise rates stoking the potential of a recession. Enbridge continues to be well-positioned to navigate through these risks. Our low-risk business model is built on minimizing our exposure to market price volatility and provides us contractual protection against any of these movements. We have a proven track record of meeting our guidance despite volatile market conditions. This resiliency is once again demonstrated in our 2023 outlook. Let’s move to that now. We are reaffirming our 2023 guidance that we provided last November. We expect the business to perform strongly in 2023 with high utilization across all of our systems. And we will benefit from the capital we placed into service in 2022 and the additional capital that we placed into service this year. Rising interest rates are a modest headwind in 2023, but this has already been reflected in our guidance. We entered the year with approximately 10% of our debt in floating rates. We are also substantially hedged on foreign exchange. So we are well protected here as well. Our 2023 dividend increase of 3.2% marks our 28th consecutive annual dividend increase. And our dividend payout remains in the middle of our target range. We continue to prioritize the balance sheet and are targeting to exit 2023 in the lower half of our 4.5x to 5x debt-to-EBITDA range. At Enbridge Day, we will provide more detail on our medium-term growth outlook, so please join us for that. I am now going to move on to our secured growth program. Today, our secured capital program sits at $18 billion. We had $4 billion capital enter into service in 2022, which will drive cash flow growth in 2023 and beyond. We also added $8 billion to our growth capital program last year, where the majority of this capital comes into service between 2026 and 2028. Our $5 billion to $6 billion of annual investment capacity allows us to fund these projects under an equity self-financing model. Going forward, we have ample investment capacity for more organic growth, tuck-in M&A, debt repayment and share buybacks. So with that, let’s move to capital allocation. It all starts with the balance sheet strength and financial flexibility. Recycling capital into new opportunity is just one part of our strategy to keep our leverage in check. Our balance sheet doesn’t require us to do so, but we will continue to opportunistically evaluate future asset sales at attractive valuations. We continue to return capital to shareholders sustainably. We pay out about 65% of our distributable cash flow as a dividend. And as you know, we have a long record of growing that dividend. We renewed our $1.5 billion normal course issuer bid, which allows us to opportunistically repurchase shares. Buybacks will, of course, compete with any other capital allocation opportunities, but they will also act as a benchmark for our business developers. We will prioritize low capital intensity and utility-like investments and then deploy any remaining investment capacity to the next available option. All of these opportunities fit our low-risk business model, exceed our risk-adjusted hurdle rates, have a strong strategic fit and align with our ESG goals. The bottom line is we continue to be focused on maximizing shareholder value. Let me finish off with an ESG update. I am truly proud of our ESG accomplishments in 2022. Most of all, by the work we have done on the indigenous reconciliation. We released our indigenous reconciliation action plan in September, which articulates and tracks our commitments and progress with their indigenous stakeholders. Through the East-West Tie Line, the Wabamun Carbon Hub and the AII Regional Oil Sands equity partnership, we are setting the standard for economic participation with our indigenous partners. We see further opportunities to continue to develop more of indigenous partnerships on both sides of the border. We are finding innovative ways to reduce our GHG emissions in order to executing on our solar cell power strategy that supports both of our liquids and gas businesses. On governance, we are honored that Pamela Carter has been elected our first female Chairperson. Finally, we issued another sustainably-linked bond in the fourth quarter, bringing our total sustainably-linked financings to over $4 billion. Well, thanks very much, Vern. And as we mentioned earlier, we’re really looking forward to spending time with you at our Investor Days coming up in Toronto and New York in March. You will hear that those days from our business unit leaders on the prospects for each of their businesses. They’ll be providing you with views on the following questions. What are the near and long-term fundamentals of the business, how will we continue to drive efficiencies, how we grow our core businesses and invest in new energy technologies while leveraging our existing business positions horizontally across the enterprise? How are we progressing on our ESG goals? In addition, you’ll hear from myself and the team about the positive positioning of our business, our strategic priorities, our capital allocation discipline and our medium-term financial outlook. We hope to see you there and look forward to a great discussion. Before we take questions, let me wrap up by saying that over the last decade, Al Monaco and the senior leadership team have transformed Enbridge to be the leading energy delivery company. Building off that strength, we’ve entered 2023 with a solid plan and a committed team to continually continue safely and reliably delivering energy across North America and beyond for our customers and our investors. 2022 was an inflection point for our industry. and policymakers as energy security and high commodity prices from underinvestment in energy was put under the spotlight. The need for both conventional and lower carbon solutions to meet the growing demand for global energy will be critical as will our ability to deliver both in an economic and environmentally sustainable way for our customers, our investors and stakeholders at large. Our business model is resilient, and our low-risk value proposition should make us your first-choice energy investment opportunity. We will demonstrate that as Enbridge day and show you how we will bridge to the energy future by meeting the needs of today, tomorrow and beyond. Thank you for joining us today. And now let’s open up the lines for your questions. Thank you. [Operator Instructions] And we will take our first question from Robert Kwan with RBC Capital Markets. Your line is open. Hey, good morning. Greg, I guess, first question here for you, just around the Mainlines here. Have you changed the company’s priorities, even if it’s nuanced, with just part of a potential deal? And specifically, as you think about transitioning the business over time, is there a desire to push for higher depreciation to both manage the residual value of the Mainline as well as releasing additional capital to rotating to lower-carbon infrastructure? Well, Robert, first of all thank you and Colin is on the line here too. But maybe I’ll start. Yes, I would not see the Mainline negotiations as anything about changing the priorities of the company. As I have tried to speak to the investment community today and we will talk about this in March I wouldn’t read that into it. I mean, look, my strong belief continues to be that from a North American perspective, it’s about going through and out and the liquids business is part of that obviously and a critical component. That will remain from a Western Canadian perspective as we serve those customers, not only in Canada but also their desires to go south. And as we talked about a little bit in the opening comments from the perspective of the Gulf Coast, we’re building what I think is a really great super system there. So I don’t think it’s a - it’s an either/or, it’s an and. So I definitely don’t see the Mainline negotiations has changed in any way in the priorities. This is a great business that earns about $9 billion in EBITDA and will continue to be the backbone of the corporation, which does not take away from the other business units. But specifically, Colin, do you want to speak to some of the comments and questions from Robert? Sure, Greg. Thanks for the question, Robert. Maybe just to build on Greg’s comments, and I’ll give you as much color as I can on the negotiations. It’s obviously premature to dig into it too much and it would be disrespectful to our counterparties. But here’s what I can tell you – and Robert, you’ve been around [Indiscernible] industry for a while and you’ll recognize that we’ve evolved through incentive tolling for 27 years now, seven vintages starting back, right, in the ‘90s. And each one of those arrangements matured build on the previous one added new features, typically added not too many subtractions, but added new features around risk and reward, around speaking to ways we can maximize value for industry, right? These – just to recap a little bit, these have included initially cost envelopes, then it evolved to batch quality. It evolved to connectivity. And increasingly now, it’s including ESG stewardship and defense of the system and advocacy. Will we add new features to this one? Likely could include items like you’re talking about. We’re very mindful of the dynamic you surface there and in light of increasing industry risk. So I’d say an incentive arrangement here remains the shippers preference. That’s why we’re negotiating it. I’ll add our bid-ask on the toll component of the arrangement has narrowed meaningfully. But I want to caution that we’re not there yet. We’ve made progress, but we’re not there yet, and we may not get there. And obviously, we’ve advanced and fully prepared the alternative cost link – cost of service pass-through model, which should be equally acceptable to us. We don’t have comments on timeline. I don’t think that’s helpful, but we are making progress. And either outcome here will be competitive for our customers and investors. So I don’t know, I probably over answered that, Robert, but it is a good question. Great. I appreciate the color. If I could just finish on capital allocation or capital recycling, you had a good amount of activity in 2022. I’m just wondering how active do you intend to be both on monetization front as well? Just on acquisitions, it’s not new that you’re focusing on tuck-ins, but the annual disclosures very specifically no tuck-ins. Just some thoughts as well as to how you might be approaching larger deals? Or is it really the focus on tuck-ins when it comes to M&A. Yes. Well, first and foremost, I think the reason why we can even consider those types of things, Robert, is that strong focus on the capital allocation starts with the maintenance of our balance sheet and the equity sales financing model. And all that, of course, ultimately ends up in being able to increase that dividend on a steady basis. But you’ve seen us recycle capital over the last 4, 5 years, $10 billion plus. That allows us as well as some of the capacity on the balance sheet to go out and do tuck-ins. We will continue to look at those. And the next thing is for a company the size of Enbridge, with the self-equity financing model and the balance sheet capacity, we – tuck-ins for us are pretty substantial deals. I mean we would refer to Ingleside as a tuck-in – from that perspective. And as you know, it’s in the $3 billion range and look at the opportunities that then it created, frankly, the management team, great job in getting a solution over the many years to DCP, and it leads to Gray Oak and then leads to Cactus and some of the opportunities. And I would even argue to the work we’re now doing in the early stages with Oxy and pieces like that. So I think you can continue to watch for that, continue to see us look at tuck-ins. I don’t think we explicitly said in our 2023 guidance, we wouldn’t do that. That is part of the core of what we are able to do now. And you should expect to continue to see that in a smart stuff that we can fit in and they can add incremental value, not just to the business that maybe it’s coming to, but also that horizontal perspective of some of those tuck-ins. And that includes on the new energy technology side. Look, Matthew and the team bringing in Tri Global Energy, that’s a great example and a whole variety of opportunities. And I know all the business units are looking at those types of things, again, driven by the strong balance sheet and the ability to equity self-finance. Hi. Good morning, and all the best in retirement, Greg, looking forward to working with you going forward here. Just wanted to pivot towards, I guess, WCSB and expansion, really specifically construction risk going forward. We see a lot of projects out there. We see issues that cost overrun and we see pressure on the contractors, the strength of those companies. And so just wondering, as you look at expansions with T-South, how do you think about addressing project cost risk, given the dynamics and what we’ve seen in the basin so far? Yes. Look, it’s a great question. And we’re obviously very much focused on it. As you know, we’re not new to building projects, but this is an interesting environment. Several things that I think probably put us in a bit of a unique situation particularly in Western Canada. So the projects that were just secured last year. First of all, they are on existing right of way. That is an important issue that cannot be underestimated in terms of us understanding what we’re doing. And remember, we’ve been through one company or another have been running that system since 1950ish type timeframe with lots of expansions. Secondly, they are split up over a long period of time, right? So you’re talking about brownfield projects, of which the capital is spent over multiple years, and much of it not for several years ahead. So unless you believe there is going to be a very long time period of inflationary pressure on us. I think really, we should be in a good spot from a – from an inflationary perspective. And then, of course, these are brownfield projects. I think it’s very different when you’re building brand-new projects. And this will go – this was very similar to the whole system. Where there is a greenfield project, it’s not a linear project. So Cynthia and the team from a Woodfibre perspective, obviously, that’s a big project, but not a massive project and it’s not a linear project and one that’s been worked for the better part of 20 years, and now coming to a good fruition. So I’d say not just in Western Canada, this is something we’re focused on, on all fronts. I know the power team is focused on that, obviously, right across North America, this is something that we’re hypersensitive to. But I like our positioning from the perspective, as I said, existing right of ways, largely brownfield. Our timing and capital spend should put us in a better spot than maybe some others are dealing with right today. Got it. Got it. That’s helpful. Thanks. And just want to pivot towards, I guess, floating interest rate exposure. It seems like there is some locking in for this year. But just thinking on a longer-term basis, is there any thoughts to kind of terming out more of that and reducing the amount of exposure to floating rates at a given point in time? Yes. Good question, Jeremy. I’ll turn to Vern for that. The other thing I probably should have mentioned, as you know, it’s not the case in every location, but definitely in Western Canada, we are under a cost of service structure, too, which is definitely different than a lot of other people in terms of their contract structures and infrastructure. But Vern, do you want to speak to the floating rate debt issue. Okay. Thanks, Greg. Jeremy, as you know, we run our debt book with percentage of floating rate debt in each and every year. And over the long run, we create shareholder value by having some floating rate debt out there. Our target is to run between 10% to 20% of the book and floating rates. And as you’ve seen, obviously, interest rates go up, we’ve gone to the shorter or the smaller end of the target range. We’re highly hedged on new issuances as well. So there is obviously some interest rate exposure, but we will carefully manage that. And I think you’re right, there is some value in the shape of the curve right now, and that will be part of how we manage our debt portfolio as we go forward because, obviously, in today’s market, a 5 or 10-year bond is actually cheaper than floating rate debt. So you raised a good point. Hi, good morning, everyone. Maybe keeping with the DCP, can you comment on the deferral of the T open season just given the commentary on producers are reevaluating their long-term plans, is this commodity price driven or is this Blueberry driven? Can you maybe add a little bit of color there? Yes. Thanks, Rob. I would say that it would be an opportunity for our customers to step back and confirm how they want to approach this. So it is both the Blueberry and they may be looking at the inflationary pressures, but our West Coast customers, when they asked us to postpone us to the second half of the year. It’s basically just to allow them to assess what their development plans are and their gas transportation requirements. So with that Blueberry decision, I think it’s great that we’re able to continue to progress we’re going to see more certainty. Certainty is always something that we’d like to see in that space. We’ve always had some, as Greg had mentioned, long relationships with the indigenous people in that area, but our customers now will have this opportunity to really look at how the Blueberry decision is going to allow them to continue to develop. So it’s a combination of both. Great. Thank you for that. And then, Greg, you’ve been in the Chair, I guess, just over 40 days now. Can you give us an update on where you are on your 90-day plan, what you’ve been focusing on so far and what changes you’ve made? Sure. So several things, obviously, getting the books closed for the year-end. I just finished the Board meeting, all good on that front. But I’ve really been spending time a, seeing investors, a lot of investors, getting out and seeing our employees, I’ve sat down with every Vice President of the company, I think, for at least an hour to get their views on where things are and also huge employee groups as well. I spent a lot of time, and this is going to be a big focus of mine with policymakers, too. Look, permitting is a huge issue. We set this up front. But both Canada and the United States, this is an issue, and we’re not really answering the call from sustainability of fuel perspective globally, and we can do that in North America and look after ourselves well helping the rest of the world. So I’m going to spend a lot of time on that front. I think you’ll hear in March, and I’ll ask you to wait until then, kind of some of the priorities going forward. But again, I would not expect to see a significant change on the key areas, right? So the Liquids business, we chatted about that as well. The Gas business, look, the LNG side of things is absolutely a focus of mine, both here in Canada, but also in the Gulf Coast in the United States. Those opportunities are big, and we’ve got to continue to do that. And then as well on the renewable side of things, how are we going to continue to grow out that business. We bought Tri Global. We’ve got to focus on that and make sure that the results we expect to that come in, in the next few years as well as advancing our RNG, or CCUS, and in the longer term, some of the hydrogen opportunities that are out there. And I will not forget the Gas Distribution business. I love the Gas Distribution business. I’ve been there to see employees there as well. That is a growing business. And it is – frankly, there is no future without natural gas. I don’t care what anybody says. That’s the reality of the situation. And obviously, having a Gas Distribution business is an important element of that. So that’s been my focus. We will come out in March. I have – I’ll say, I pushed some authorities down to people to make decisions so that we can move a little quicker. I think that’s going to be critical, making sure that we can react to our customers, but also the needs of investors going forward and really starting to look at – look, I think we’re in a good position for ‘23 where we’re going to go in ‘24, ‘25 and ‘26, and look forward to chatting with you about that in March. Good morning. I’m curious as to your longer-term strategy on the liquid side for the U.S. Gulf Coast, given the series of acquisitions over time. Do you see more to do to short your portfolio there? What is your general outlook? Yes. Well, Colin and I will speak about this in March, but the short answer is absolutely. Again, I think you can just see, since the acquisition of Ingleside, just a little bit over a year or so ago. We’ve continued to kind of move the ball forward on that front. As I said, I think the future both on the Canadian side and the U.S. side is through and out of the continent. We have got to be a bigger player on the Gulf Coast. And I think we are setup to do that. So if you will give us a few weeks, we will see you and we will talk through this. So I think it’s pretty exciting. Actually, what’s going down there, which does not, and I want to be clear just not take away from anything that what’s going on in Western Canada as well. Particularly on the oil side, look, there is a lot of discussion about gas. But I think as China reopens, and we have – and not enough money has been spent on restocking, if you will, the reserves on the oil front and many commodity fronts. I think that’s going to lead to some real opportunities and people being real careful with capital, which is the right thing to do. But as we go through the year, I think you’ll start to see more upward pressure on the price of oil, particularly in the international markets. And let’s see, 3 to 6 months from now, where China is on the reopening, economy is a little softer here, but outside of North America, I think you’re starting to see a little bit of green shoots going on and that’s going to lead longer term to the need for more infrastructure on the Gulf Coast from my perspective. So we will chat more about that, but that’s my general comments. Hi, good morning. You partially answered this with respect to your answer to Robert Kwan, but I’m wondering if in the current cost environment, including inflation and higher interest rates, is that causing you to change your approach for rate request specifically risk sharing? Or is it more a matter of just ensuring proper tools are reflected so that you’re covering your proper cost and maybe more frequent rate cases. So maybe you can answer it more on the gas side given your prior comments on liquids. Sure. I’ll let Cynthia chime in here, too. But I think the answer to that is also yes. I mean we – it was 20 years plus from the time we had a Texas Eastern rate case. And now we – those muscles have been toned again. So I think we’re getting good at that. I think our customers recognize some of those costs. And the same thing on the distribution side of things, too. So maybe Cynthia and then maybe, Michelle, you can both speak to that issue. Sure – for our gas systems, we have done a number of rate cases recently, two very successful settlements just last year, both with Tax Eastern system and the BC pipes. And we continually look at when is the right time to go in to a rate case settlement. And we look at all those things, Robert. So it is our cost our capital costs, the interest rates, all of those costs come into that. We do have that opportunity as Greg was mentioning to go back on a regular basis. So this is just part of our standard approach to making sure that we’re getting the right return for the investments that we’re making in the assets that we have. So you will continue to see us go back when the time is right based on what the experience is. So, with just having settled though both Texas Eastern and the BC system, it will be a couple of years before we go back on those. But that’s just a continual part of our approach now as we go forward. Right. So, when we go into those settlements, Robert, we do have those conversations about what the experiences have been. And we also look at what the right approach is for us to have in that risk environment. So, the framework is flexible, and we continue to create that balance both for us and for our customers. And there is some of that risk and Michelle, maybe just some commentary on your filing of the – at the OEB and how you are looking at that? Sure. You got Greg. And Robert, at the OEB, it’s a little more formulaic and structured. We go typically every 5 years. Now, what’s unique here is it’s the first rebasing application for both of the legacy utilities in about 10 years, because we have been operating under the mergers framework for the last 5 years. But – so a very heavy lift to get that in and it was in by the end of last year, which has us well on track to have new rates that will be effective for the first of January. And we are quite confident that we will move forward with our performance-based regulatory model in a manner that is as effective as what we have seen in the past, and that really does allow us to continue to earn while we are driving our efficiencies, we pass those savings on to the customers. And then post 2024, after we rebase, we would expect some very attractive returns using that formulaic incentive setting mechanism. Yes. Most of our programs or most of our assets have some element of inflation tracking. And I think that’s important. It’s not instantaneous, Robert, but we shouldn’t forget that because in this environment, I think that’s unique. And we are looking at things on that both on the gas side and definitely on the gas utility side, like depreciation. So, if people have a view on risk, so do we. And so we will continue to push those forward. In some cases, that even means looking at bigger equity components as well. So, all of those are on the table. And I think we have got constructive mechanisms both you get your components, but from the customers, but even regulators. Again, back to gas infrastructure is absolutely critical despite what you see sometimes in the papers. Okay. That’s very helpful. And then just a follow-up question on your Mainline discussion. As I am inferring from your comments that obviously, every negotiation takes on a life of its own and has its own character. But Greg, I am wondering if you can comment, when do you – when will you know when it makes sense to file a cost of service application. What has to happen for you to make that decision? Well, first of all, as Colin said, look, I don’t think creating artificial timeframes on these things is a wise idea. It’s not because it is an artificial timeframe, we obviously continue to serve our customers. We want to get the solution as soon as possible. But I would say, if we came to a point where, as Colin pointed out, we just weren’t making progress, then we already prepared and willing to go down that cost of service route. But as long as there is some progress, and as long as there is goodwill between the parties, that doesn’t seem like the way to go, and that’s where we are right now. So, I understand the frustration sometimes on this. But I can assure you, Colin and the team. And our customers are very focused on this issue, and there is, again, good report between the players and trying to reach a solution. We may not get there, but we shouldn’t create a false deadline to be able to pull that off. And Colin, if you want to chime in, please do so. Good morning. I wanted to touch on the gas storage business. It seems like the value of storage is going up with the winter storms and some of the supply low gas prices that we are seeing. I guess are you seeing any positive traction in storage rates? And then maybe can you remind us how much of your gas storage is third-parties versus used by your utility? Sure. I think both Michele and Cynthia can speak a little bit. But I – first of all, we have huge storage position, both on the Gulf Coast. Let’s not forget, and in obviously, central part of the continent, so several hundred Bcf. I think it’s – there is a variety of reasons why you are seeing an increase in the value. I don’t know if I want to give you the specific rates, and I will let Cynthia decide where I do it. But we are seeing markedly higher rates for re-contracting. And LNG is playing a critical component of this. I have been waiting for this for a long time, but big ambient temperature swings are relevant issues for storage. And then also just things like, obviously, your standard winter and regional differentials are important, too. But Michele, I don’t know if – well, maybe I will turn to you, Cynthia, because I definitely see storage as one of those growth areas for us as well. Yes. Greg, I don’t think I will get specific as to what our renewal rates are, but we have seen a lot of opportunities to continue to look whether it’s re-contracting with the existing customers, and we have had a lot of inbound interest and others. And as you said, Greg, a lot of that ties into both the incremental draw now for exports and creating some stability for that as well as just the volatility that you are starting to see. So, it has been good. Our teams are continuing to have lots of conversations and we are seeing strong re-contracting rates. Yes. And so on the U.S. side, on the Gulf Coast that would be third-party. Michelle on the utility side, how much of the storage would be for you guys announced to be third-party. Yes. Greg, it roughly breaks down to about two-third sets that’s reserved for our rate base and then about one-third that is unregulated. And I do have to say and give that to say our Dawn storage hubs across states perform incredibly well through some of these really challenging winter conditions we have seen. And in fact, what we are seeing is a trend towards some really propping things up in the Mid-Continent over the holidays when we saw extreme weather across North America, they were flowing into the Ontario market for certain. They were backstopping things into the Mid-Continent get out towards the Northeast. I mean we have added a lot of flexibility into that storage system. We have invested over $100 million in the last 10 years to increase the ratability and performance out of it. And it’s absolutely stepping up to do that. We are also seeing longer term contracts being signed up for that in regulated storage and certainly our unregulated storage this year is sold out for 2023. Yes, that’s great. And more, when you get these big swings in weather as well, let’s not forget you got – if you move Texas Easter in both directions, now there is a different need where that storage is and how customers drop on that. So, just to be clear, storage contracts are still short, alright. So, storage contracts would be typically 2 years to 5 years. So, when we say they are getting longer, that means they are no longer spot. But still, that’s a great spot for us to be in. So, a good question. Thanks. Very helpful. And then just switching gears with your leverage now down to 4.5, 4.7. I think it’s the lowest it’s been in a very, very long time. I guess what is the right leverage for your business as you look out over the next few years? And are you going to keep driving that lower, or are you hitting a point where you could potentially pivot more of that free cash flow back to – either back into the business or to equity holders? And then just tied to that, how do you think about leverage in the context of ESG recognizing the more oil-weighted asset base? Well, you have asked a great question. I think we are quite comfortable where we are in the debt-to-EBITDA range. You have to remember that lots of our assets are highly regulated with highly regulated capital structures. So, there is a limit on how far we can push the debt-to-EBITDA down. But being in the lower half of the range provides us tons of flexibility to allocate capital to all kinds of great stuff, more organic growth, tuck-in M&A, share buybacks and potentially a slightly lower leverage. But I think we are happy where we are at, and we will continue to try to be around this point in the debt-to-EBITDA range. Yes. I think the nice thing, and it’s really important that I think our U.S. investors sometimes miss, and we maybe need to do a better job with the U.S. rating agencies. Again, to Vern’s point, when you got 65% debt required by regulation in the utility and not too dissimilar number on all the gas pipes in Canada, that’s going to, by definition, give us a little larger number. But as Vern says, the way it’s structured now and the way our DCF kind of comes through, you have got $5 billion to $6 billion of investment capacity annually that we can handle with the self-equity financing model and the balance sheet without making any negative change to our balance sheet. That’s a really strong position and goes back to some of the comments about things like tuck-ins as well. So, we are in a good spot right now. Thank you. Just a follow-up question on the Mainline to give us some more context around how this is progressing. In terms of the sticking points potentially, is everything still at play and being traded off, or are there a number of items largely settled such as potentially like duration and off ramps with just a few sticking points. Can you comment on what might be more versus less contentious and would one of the sticking points still potentially be trading off competing customer priorities? Linda, it’s a good question. I will let Colin jump in here. But until the negotiation is done, I don’t think it’s fair for us to kind of throw [ph] one-offs and assume we know exactly where the other side is to it’s done. But Colin, with that, maybe you would like to chime in? Yes, I agree. I can appreciate your curiosity here, Linda. But yes, I don’t think it’s appropriate to kind of tick or pull those apart. More to come and we will advance this as expeditiously as appropriate. And I know I should mention too, that we have got, right, our Enbridge Day approaching in three weeks. I would like probably to manage your expectations that we may not have finality or much more color on this by then. Negotiations will continue actively likely through that period. And remember too, there is a vote that’s required by industry. Yes, I appreciate the question. Sorry, I can’t help you too much more at this time. No, I understand. And given the importance to the basin, it’s good that everyone is taking a thoughtful process. Just as a quick follow-up more from a financial lens. Right now, you have got a bit less than 2% of cash flow at risk. Can you – you commented on interest rate exposure, you got some foreign exchange exposure. Can you talk about maybe where you are on commodity prices? And your services business continues to lose money. Like what is – is there a strategic value there? What’s the outlook for that? And how might that business evolve over time? Yes. Linda, as you saw last year, we traded our DCP position for different larger position than Creo [ph] and that materially reduces the amount of commodity price risk we have in our business. We still have some residual commodity price risk within the gas transmission business, primarily associated with lion’s mark stable. We have some cost associated risk with power prices in liquids and the gas transmission business. But really, that’s pretty much all the commodity, out right commodity price risk we have in a very, very large organization. So, there is a pretty de minimis amount of commodity price risk across all of our businesses. With respect to Energy Services, I think we have talked about in the past that it gives us a good lens on basis differentials, which generally drive pipeline development. So, it’s good to continue to have a foot in that door to understand what our customers are seeing, both in natural gas and crude oil. I think we talked about previously that, yes, 2022 was a very tough year for that business. Effectively, there was no basis differential across many pipeline systems. And in the crude oil markets, prices were backward pretty much for the entire year. So, going forward, we are going to see some contracts roll off at Energy Services. Some commitments will go away, and we expect the business to return to profitability this year. So, it’s a long-winded answer, but hopefully I think gets you a little hint. No, I think well said, Vern. And obviously, staying completely within all the regulatory confines I think it’s a fair focus we are taking a look at and how Energy Services entitled help to create more value for the customers and making sure that they understand all the capabilities back and forth. So, definitely something to look at. I appreciate that. Hey everyone. Good morning. Thanks for the time at risk of again the answer that just wait for Toronto. I just wanted to follow-up on Theresa’s question on the Permian strategy. I mean is there any interest at this point of reaching further back and owning, let’s say, something on the gathering side? And then similarly, kind of just staying in the Permian, now that you have bigger stakes in both the big Corpus pipes, just any interest in potentially expanding those sooner rather than later? Thank you. Sure. Look, never say never, but having just got out of a major gathering system on the other side on the NGL side. I think our focus and what we are really getting is big pipes and tied to the export side of things. So, Colin, you may want to add to this, I guess if it was really going to – we saw incremental value on the export side of doing that, that something be open to. But at this point, I think the way we are building this out is bigger pipes and figuring out ways to really serve customers on that front. But Colin, you may want to add to that. Yes, I agree on the gathering point, less interested there for sure. And – but exclamation marks, behind the export strategy. And I think it’s becoming quite clear that the Corpus egress point out of the Permian is quite attractive. And we are building out and up from there, but only so far. We are – it’s initially an acquisition, a tuck-in acquisition strategy here, where we are deploying risk-adjusted returns versus build there, relatively attractive given build risks. And then synergies along the integration value chain, and potential expansions here. So, that’s the strategy in a nutshell, building out a light oil strategy to complement the top-notch heavy one that we have got further north. Alright. That’s helpful. Thank you. I know we are top of the hour. I will just ask one more quickly, and it’s probably an easy answer. Any change in LNG export appetite that you are seeing either from your partners or kind of potential customers, given the pullback in global prices recently? No, I think people are looking at this from a long-term perspective. Again, I will go back to – there is no future without natural gas. And I think parties – one thing I would say only come back 5 years or 6 years because there was a more practical approach to energy transition 5 years ago, we seem to get batten happy on the fact of plentiful fuel and stuff like that. And I think people are realizing, unfortunately, due to the situation in Europe and elsewhere that North America’s energy is needed abroad. And the only way to do that is through exports. So, definitely don’t see any pullback on the LNG side. And these players on that side have a much – they have got a very long-term focus on the price of the commodity and who they are serving. So, I see – I think their use of the quantity prices has moved up and down. And – but they have got that long-term focus as do we. And so I don’t think you will see any pullback on that side. The biggest challenge in LNG continues to be permitting issues, right. And so some of our customers in the Gulf Coast, they need some real help out of the FERC. And of course, appear that’s always an issue as well, so permitting, permitting, permitting, not commodity, commodity, commodity. Hi. Good morning. Thanks. Going back to the Mainline, I was wondering if you do you go to cost of service or your following cost of service, how long does it take to head that through the regulatory process? Colin, I will leave that to you. I know we – it’s less short than the negotiations. I can tell you that. Yes. That’s right, Ben. And I think we have got some gas charts on some standing IR presentations where we have compared to contrast process and timeline. I would refer you to those. But yes, generally, we would file a cost of service – and by the way, the application is ready to go here. So, if we need to pivot, we can quickly. But it is a longer process. It would take into probably late 2024, I think probably to get clarity on that. So, yes, it’s another thing to consider in the mix of our alternative. Okay. And then maybe a follow-up on that say, in your prepared remarks, you mentioned hypothetically cost of service, move more towards utilities, de-risk cash flows. Is there maybe – if that does happen, do you think it’s warranted to move to an earnings per share guidance metric? And do you think that you can actually potentially take on a bit more leverage from a credit rating standpoint? Well, I think look, I don’t see the leverage piece being in that calculation. Yes, maybe on the EPS, something we will give some thought to look, I am very focused on – the team is focused on delivering our cash earnings, right. It’s all about cash all the time, and it should be. And so we really haven’t crossed that route upon. Let’s continue to see the negotiations move forward. As Colin said, we are ready to go on cost of service and you are exactly right. That makes it even more utility like. So, either is possible, but we are not going to cross the EPS comment today. Okay. Got it. And then maybe one last one. Offshore wind markets have seen significant dislocation. Do you think it’s better to buy offshore wind assets now than build just with the CapEx risk that you are – that the industry is seeing? Thanks Ben for the question. We are really happy with our offshore wind position right now. There is a lot of moving parts over there right now in terms of – I think some of the players are – there is a little bit of a dose [ph] of reality coming in with some of the inflation impacts and timelines. We are in a great position because we have got the project we just brought into service. We have got two others in service. And then we have got a couple under construction that it’s never easy, but are going quite well now also. And then some in development that are advancing nicely and also have contracts attached to them. So, we are not rushing into acquisitions in the offshore space, but it’s something been that we always watch and certainly, opportunistically, we would look at that. But right now, we are really happy with the position we have there. And ladies and gentlemen, this concludes the question-and-answer session. I will now turn the call over to Rebecca Morley for final remarks. Great. Thank you and we appreciate your ongoing interest in Enbridge. As always, our Investor Relations team is available following the call for any additional questions that you may have. Once again, thank you and have a great day.

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Good afternoon. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to Oscar Health’s 2022 Fourth Quarter and Full Year Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn it over to Cornelia Miller, Vice President of Corporate Development and Investor Relations, to begin the conference. Thank you, Regina, and good evening, everyone. Thank you for joining us for our fourth quarter and year-end 2022 earnings call, where we’ll discuss our execution against our annual plan, our expectations around InsuranceCo profitability, and our path to total co-profitability. Mario Schlosser, Oscar’s Co-Founder and Chief Executive Officer; and Sid Sankaran, Oscar’s Chief Financial Officer will host this afternoon’s call, which can also be accessed through our Investor Relations website at ir.hioscar.com. Full details of our results and additional management commentary are available in our earnings release, which can be found on our Investor Relations website. Any remarks that Oscar makes about the future constitute forward-looking statements within the meaning of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in our quarterly report on Form 10-Q for the quarterly period ended September 30, 2022 filed with the SEC and our other filings with the SEC, including our Annual Report on Form 10-K to be filed with the SEC. Such forward-looking statements are based on current expectations as of today. Oscar anticipates that subsequent events and developments may cause estimates to change. While the company may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. The call will also refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in the fourth quarter 2022 press release, which is available on the company’s IR website. Thank you, Cornelia. Good evening, everyone, and thank you for joining the call today. Before we get to fourth quarter and full year 2022 results, I would like to provide some context on our story to dates. For the past five years, we have seen a 75% compound annual growth rate for Direct and Assumed Policy Premiums. We have improved the medical loss ratio by approximately 12 points since 2017. Our Net Promoter Score has increased more than 20 points with the same time periods. Our members were the first to get access to free virtual urgent care. Our $3 drug list has made medications more affordable for them and our $0 virtual primary care medical group has been helping more of our members get importance preventative care. Fast forwards to today, the fourth quarter capped off a transformative year for the company. We have talked about how – we have talked a lot about how 2022 was a year of monumental growth for the business. We nearly doubled membership and crossed the 1 million member milestone and while that is impressive, what’s more impressive for us is how we managed that growth. We knew that heading into 2022, the step change in membership required us to put all of our focus on operating at scale and that our technology, our operations, our people, would be under pressure to deliver our target at MLR and expense ratios. To meet these challenges, we organize the company around three key objectives, medical cost management, sculpting the portfolio and admin cost management. As our year end results show, we were able to execute against the plan, we set out for the business in these areas and we applied our learnings gathered throughout the year to position the company for profitability. Let’s first take a look at medical cost management, despite doubling in size and welcoming a large number of new members that we knew little about, reduced the medical loss ratio by 360 basis points hitting 85% for 2022. We applied the best of our technology to our efforts and we also spent the year implementing and scaling the traditional managed care processes in medical or social managements. We realigned operations against a more localized operating model to respond to regional trends more quickly and we developed targeted medical cost mitigation strategies. We were able to drive higher utilization of less invasive, more cost effective procedures and reduce hospital readmission rates supported by changes to medical policies and by thoughtful case managements. We also applied our member engagements to medical cost managements utilizing our campaign builder’s capabilities, the team develops campaigns and strategies to ensure our members seek the highest quality, lowest cost options for site of care and for drugs. We believe that our member engagement model allowed us to make further progress in bringing down medical costs in 2022 and we’re very excited here for what else we will deploy in the course of 2023. With regards to the seconds of our levers portfolio sculpting, heading into 2023, we prioritized margin overgrowth in our IFP strategy and we took high-single digit rates increases on average across the book. Our localized operating model has also enabled us to restructure our networks in certain markets, reduce unit costs, and drive improved quality with our provider partners. We continue to scalps our portfolio both in terms of plan designs and markets to ensure we allocate our capital in places we view as most attractive and most sustainable. As the third lever, we tackled the challenges of bringing down our administrative costs. Throughout 2022, we took a disciplined approach to expense managements, which improved our insurance company admin ratio by 125 basis points year-over-year. This work, which included leveraging our technology defines fixed admin cost efficiencies across our customer service operations as well as increasing automation throughout our clinical operations has set us up very well for 2023. As part of this app and efficiency work, we also moderated the acquisition costs of our 2023 IFP book and we took other decisive cost actions that positioned us to enter the year with a lower cost base. Overall coming into 2023, on the cost and margin side, we have already completed much of the work needed to achieve our 2023 targets and with a greater portion of our book consisting of returning members than ever before in our history, we have better line of sights into our member population and the related cost structure. In summary, we proved our technology can scale and they continue to be opportunities for efficiency going forwards. We also did all of this while delivering an all-time high Net Promoter Score of now 47. In 2023, we expect the majority of our tech resources will be focused on impacting insurance company operating results near-term that means less focus on growing +Oscar platform revenue, that being said, we have continued to develop our first +Oscar standalone module campaign builder, and during this quarter we signed our first campaign builder deal with a South Florida based MSO, which is leveraging the tool to power their value-based care operations, drive primary care utilization and manage medical expense. We intend to grow campaign builder at a thoughtful pace with a modest rollout pace in 2023 as we build our execution muscles here and insurer is successful deployments with our initial clients. As we think about +Oscar longer-term, we believe that focusing our tech on increasing efficiency and profitability in our insurance business will translates to even better capabilities we can bring to the markets. And before I hand it over to Sid, I want to talk about we like to call internally the Oscar magic, our member engagements. This part of our company continued to be a differentiator for us in 2022, we maintained high levels of digital engagements and as our membership has grown and changed from a demographics perspective, we have added channels to increase engagement with members who have historically been harder to reach. If one example here, in SMS campaign we launched to drive active renewals and autopay enablements, that campaign saw about a 33% response rates compared to about a 2% rate you would get for a similar email campaign targeting similarly non-digitally engaged members and then 78% of those members that responded yes to keeping their plan ultimately renewed into their same plan and nearly 10% activated autopay. We made some exciting strides towards leveraging this member engagements engine with our provider partners as well. We told you that here we are investing to bring our tools to be our providers and we’ve begun to use our real-time data more and more to deepen our provider relationships on the grounds with the most closely aligned provider partners we have, we are co-creating campaigns to improve outcomes and to lower total cost of care. For example, we spend 2022 piloting campaigns focused on annual wellness visits, closing these gaps and other care quality campaigns. In fact, you can see a demo of this technology on our IR site, ir.hioscar.com I think clearly, right? Yes. Go there and click. And we are excited to scale these campaigns and with nuance to our 2023 as well. There’s a lot successes we think in 2022 once that gives us a strong momentum into 2023 across the business. And here we believe we are better positioned than ever before to hit profitability based on discipline execution in 2022. We’ve got a very clear roadmap for the organization achieve our goals for the year, which is profitability in insurance business in 2023 and total company profitability in 2024. And we believe we have enough cash to get us there and Sid will walk you through the plan for this in his part of the prepared remarks. Fundamentally, Oscar is a growth company and we are positioned well in any environments where the consumer has increasingly greater choice in buying power. The ACA continues to be the fastest growing health insurance segments projected to hit 20 million enrollees in the near-term, and we see shifts to what programs like individual coverage hedge ratesas another signal that the marketplace offers unique value for individuals and increasingly also employers. With these market tailwinds, we are excited to return the top line growth in 2024. Thanks, Mario, and good evening, everyone. It’s great to be back and I’ve enjoyed reconnecting with all of you again. Our full year 2022 results were largely consistent with our expectations and guidance range. We believe last year’s performance offers a solid baseline for our 2023 targets, which I’ll discuss in greater detail in a few moments. Turning to the results, we ended the year with nearly 1.2 million members, reflecting growth of 93% year-on-year. A robust membership growth also drove a direct and assumed policy premium significantly higher. Full year direct and assumed policy premiums increased 99% to $6.8 billion driven by membership, mix shifts to higher premium plans, rate increases as well as improved lapse rates and higher SEP growth rates in the second half of 2022. Even with our sizable membership growth, our 2022 medical loss ratio improved 360 basis points year-on-year to 85.3%, primarily driven by lower COVID costs, mix and pricing, as well as execution on our total cost of care program. Excluding negative prior year development of $28 million in the calendar year, the MLR would’ve been 84.8%. Our fourth quarter MLR of 91.6% improved 630 basis points year-on-year, largely driven by the same factors as the annual MLR. However, the quarter includes $13 million of favorable intra-year development driven by favorable reserving trends relative to our pricing assumptions, partially offset by more cautious view on 2022 risk adjustment given our growth. Overall, claims trends have been favorable in total with inpatient and professional utilization coming in better than expected offset in part by higher RX spend than projected. Switching to our admin costs, our InsureCo administrative expense ratio improved 125 basis points year-on-year to 20.6%, driven by operating leverage benefits and admin efficiencies from our enhanced scale, partially offset by higher distribution expenses. As we’ll discuss in guidance, we see 2022 as the high water mark of distribution expenses. Our fourth quarter InsureCo admin ratio of 22.3% improved 220 basis points year-on-year due to the items I just mentioned. Our overall combined ratio, the sum of our MLR and admin ratio was 105.8% for the full year 2022, an improvement of 490 basis points year-on-year driven by the aforementioned improvements in each of the individual metrics. We believe our nearly five points of margin improvement coupled with a top line growth, demonstrates the power and sustainability of Oscar’s model through disciplined execution of our business plan. Our adjusted admin expense ratio, which includes expenses in our holding company, was 24.6% in 2022, an improvement of 440 basis points year-on-year, primarily due to operating leverage and scale efficiencies. For the fourth quarter, our adjusted admin expense ratio was 26% an improvement of 840 basis points year-on-year. Moving to our overall company profitability, our adjusted EBITDA loss was $462 million for the full year 2022, which was in line with our initial guidance range for the full year. This was better than our most recent expectation due to higher than expected net investment income in the fourth quarter, as well as admin savings to right size our cost as we tightly manage headcount ahead of 2023. The full year adjusted EBITDA loss reflects a 7 point year-over-year improvement as a percentage of premiums before quota share reinsurance. Our fourth quarter adjusted EBITDA loss was $190 million, an increase of $26 million year-on-year, which was largely driven by higher premiums. The fourth quarter adjusted EBITDA reflects a 9 point year-on-year improvement as a percentage of premiums before ceded reinsurance. Turning to the balance sheet, we ended the year with $3.2 billion of total cash and investments including $340 million of cash and investments at the parent company. Our subsidiaries end of the year with approximately $700 million of capital and surplus, which exceeded our internal targets by $170 million. Note, we also set our internal capital targets is that at a higher threshold than regulatory minimums in order to ensure we maintain a strong balance sheet. As we look to 2023, we intend to continue to be disciplined and are already executing on our plan to improve core margins and profitability. This is reflected in our 2023 guidance, which we’ll discuss today. Our outlook for the year reflects largely stable premiums year-on-year with continued meaningful combined ratio and adjusted EBITDA improvements, driven by targeted actions the company has taken and will continue to implement to reach profitability. Specifically, we expect our direct and assumed policy premiums will be the range of $6.4 billion to $6.6 billion. This is consistent with our prior commentary, but our membership will be largely flat between 2022 and 2023. As a reminder, we proactively work with regulators to pause accepting new members in Florida. And therefore we do not expect new enrollments in that state in the first half of the year. We expect to begin receiving Medicaid redetermination members in the rest of our states beginning early in the second quarter. Overall, we’re projecting lower SEP members as a portion of the overall book this year. This should be favorable to our MLR, however, it’ll be a net headwind to premiums. Our expected medical loss ratio range of 82% to 84% reflects over 200 basis points of improvement at the midpoint versus last year, driven by rate increases, mix shifts and total cost of care management programs. We are renegotiating our PBM contract, which will result in meaningful savings beginning in 2023, and as an example of one of our cost of care initiatives. We do expect our MLR seasonality will look similar to last year, albeit with a more modest slope. Switching to admin, we expect our InsureCo admin ratio will be 17% to 18%, reflecting an improvement of 300 basis points year-on-year at the midpoint, primarily due to the identified cost savings that we have discussed previously. These savings largely consist of lower distribution expenses and vendor savings achieved by our increased scale. Importantly, the majority of these savings have already been achieved. And as a result, we are turning our attention to generating further efficiencies for 2023 and beyond. We expect our admin seasonality will be different from last year with the first quarter highest and declined gradually throughout the year with 3Q and 4Q ratios fairly similar. We would call out that for 2023 we are targeting a combined ratio at or less than a 100%. We are entirely focused on execution here as this remains the primary metric we use to assess core business margins and profitability. In order to better allow investors to understand the profitability dynamics of our statutory insurance subsidiaries and their underlying capital profile, we’re introducing a new metric, our InsureCo adjusted EBITDA, which includes the combined ratio, investment income and the cost of our quota share reinsurance. We believe this metric will allow investors to better understand the capital and cash flow relationship between our insurance subsidiaries and our parent company. Unlike our competitors, given our startup nature, Oscar has historically not had meaningful investment yield on our portfolio relative to market competitors who’ve had longer duration portfolios yielding 3% or more. With the return to a more normal interest rate environment, investment income is expected to have a significantly positive impact on the InsureCo profitability in 2023. We ended 2022 with $2.9 billion of cash in investments at our subsidiaries. For 2023, we are estimating our cash and investment portfolio will yield 3.5% with the range of 3% to 4% for the year depending on Fed actions in the shape of the yield curve. With respect to our quota share reinsurance agreements, we have restructured our quota share contracts to maintain a similar ceding percentage year-on-year while lowering the cost. I’d also note that our new quota share contracts required deposit accounting upon their one-one effective date. So you’ll see a diminimus amount reflected in reinsurance premium ceded going forward. Incorporating all these items, we’re projecting solid earnings and capital positions for our insurance company. For 2023, we project our insurance company adjusted EBITDA will be $20 million to $120 million resulting in profitability across the entities. Switching to our total co, we projected an adjusted admin expense ratio range of 20.5% to 21.5%, an improvement of 360 basis points year-on-year at the midpoint, largely due to cost savings previously outlined. In 2022, admin services revenue was $61 million and we generated a modest bottom-line margin. For 2023, we agreed to terminate the Health First arrangement and will receive no further fee income, while occurring a modest amount of transition related costs. For our ongoing +Oscar arrangements, we expect fees of approximately $20 million to $25 million generating a positive contribution to our results in 2023. Our projected adjusted EBITDA loss range of $175 million to $75 million reflects an improvement of $335 million year-on-year at the midpoint, largely driven by improvement in our core underwriting margins as well as meaningfully higher investment income with rising interest rates. The midpoint of guidance reflects approximately five points improvement in the adjusted EBITDA loss as percentage of premiums before ceded reinsurance year-on-year. We enter the year with a very strong balance sheet including $340 million of parent cash and investments. In our base case, we believe we have sufficient cash and liquidity to fund the company to total company profitability, which is expected next year. Specifically, we expect limited capital contributions to the insurance subsidiaries in 2023 with potential upside in our free cash flow driven by our insurance company adjusted EBITDA profitability. This is a substantial improvement from 2022 where we infused $420 million into our subsidiaries due to growth and net losses. As a reminder, as our insurance subsidiaries become profitable, there upstream tax earned payments from the subsidiaries to our holding company. We do not expect to be a cash taxpayer at the holding company for the foreseeable future given our sizable deferred tax asset. Given our substantial progress on insurance company profitability, our holding company costs net of revenue are now the primary use of funds for the company. As we’ve said previously, we are targeting total co profitability in 2024. [Indiscernible] data so I will close out with some very simple thoughts. The risk equation for a company has changed dramatically towards the positive. We are projecting full company profitability next year and we expect we will have enough cash to get us there. We’ve done the work to bring down our medical loss ratio in line with other industry incumbents. Our admin costs are coming down in line with our plan. We took on membership this year at a sustainable margins that set us up for the future. We have a differentiated products in the fastest growing insurance markets in the country and remains attractive to brokers and members alike. Having our own infrastructure that has proven scalable and being clearly advantaged in our ability to engage with members, those are massive differentiators. We are builders and I find it personally very exciting to continue to build on top of this infrastructure. There is ample runway to get even more automated and efficient and that is where we will continue to focus in the coming year. So the 2023 plan is straightforward. We know what needs to be done, we simply need to continue on the path that we are on. Before I close, I’d like to thank the Oscar employees who’ve been so committed to building on the momentum of the past few years. We have great ambition and an even greater team. Hi, thank you. So I understand this year you’re targeting lower distribution expenses and vendor savings from increased scale. And I think you have mentioned majority of these savings were already achieved and now you’re focused on further efficiencies. I was wondering if you could talk about what these efficiencies are? How that could yield additional savings and whether that presents opportunity for upside to earnings? And also on Health First, I think you mentioned incurring a modest amount of transition related costs. How should we think about the magnitude of those stranded costs? Yes, Michael. Let me take the first question and then Sid you can talk about the second part of the question. I will point you back to the three levers we tackled in 2022 across admin, medical cost managements and portfolio sculpting in all three of these, we have more, I think, way more room to go. Start with the admin side, we renegotiated things like chart collection vendor contracts pretty much every medical management vendor we have contracts there, PBM vendor, things like that. Where the additional savings lie in the future is in my view a lot in further automation really across our claims operation, across eligibility and billing operation, across the killing [ph] operation. These are now nicely scaled and I think we know what we’re doing in these now, both from point of view of whether any errors occur or any other issues happen there. But also from the point of view of how sort of front footed we can be on these and across the Board there, we can still do more scale – as we scale the future and high membership growth, this is automating more of these types of conversations. An example last year on the customer service sites and we’re sending a lot more conversations through this automated systems that can ping directly into our real-time systems, whether it’s about eligibility, claims status, things like that, supporting the provider service and customer service sites. Sid, maybe on the second question transition costs. Yes. Sure. Thanks, Michael. Appreciate the question. Really with respect to the runoff expenses, there is some modest expenses performing runoff services in 2023. We wouldn’t expect them to occur in 2024 and we really wouldn’t comment beyond that. Got it. Thank you. And if I could squeeze one more in, if I’m not mistaken, I think Florida’s one of the most capital in central states. I think the statutory cap requirements are something like 25% for the first five years, but I believe Oscar first enter Florida back in 2019. So presumably you’d be nearing the end of that, so you might get a decent chunk with cash back. I was wondering is that true? And if so, what would the timeline be on receiving that cash and would your statutory capital requirements drop to 10% or 15% thereafter? Thank you. Well, Michael, again, thank you for that. It’s a great question. Yes. Your read of the statutory regulations is consistent with ours and those startup seasoning requirements would effectively run through the end of this year. Beyond that, I mean we think as Mario said, we have a lot of potential for the company growing organically becoming more capital efficient in some of our structures. And so we’d of course evaluate that, but I think you’re absolutely right to call out that, that we would see that as an upside potentially. Hey, thanks for taking my question. I just want to hit on redeterminations and how you’re thinking about the risk pool of the members that you may end up recaption. Do you have an assumption of how many members you think that you will actually gain from redeterminations and kind of how are you thinking about their MLR coming on to your books later in the year? Thanks. Yes, Jonathan, maybe I’ll take the first part, Sid, if you want to add anything feel free. So two levers there of course. One is premium growth, the other one is medical costs. Overall on both of these, we have made assumptions around redeterminations in the estimates in pricing and also in the guidance for 2023. I would not call the material to either premiums – neither premiums nor medical loss ratio. Generally, I would say in anything that increases the ACA market size is a great thing. We’ll have side effects in making the market even more stable and attractive and so on. So I think long-term this is clearly a great thing. When it comes to growth, we expect like everybody else obviously needs to start in April. It is still not quite clear over what timeframe they will come in. The states have not given clear guidance. Some states will go population based, others time based. When we look at when those members rolled into the Medicaid roles, actually quite linear, I would say over each month of the year. So we won’t see potentially any kind of bulk coming in any particular month there, but Texas has said they think it’s going to happen in six months to nine months and Florida said it’s going to happen in 12 months. So quite differently in terms of what we could expect in different states there. In Florida as Sid said, we don’t expect to participate in this in the first six months of the year because the membership and limitation for brains in place until then. And so when we then have participates on the medical loss ratio sides, we share what others have seemed to pick up on the market, which is that the acuity these numbers will likely be higher than the risks that’s already in the ACA. And clearly, members who come in special enrollments as we know have the headwind of partially risk adjustments. But they come with as well. As we talk about in the past, and we’ve reaffirmed this again throughout the 2022 results, members who get in special enrollments, you’ll come with that sort of MLR penalty then do look like pretty much everybody else in the year after that. So again, long-term great for the markets, short-term with MLR headwinds, but I’ll close out by saying both on the growth sides and on the MLR sides quite likely – quite immaterial to the projections for 2023 for us. Okay. Great. And then just on some of the automation that you were talking about in order to improve your operating efficiency, would that require any further investments on that would be needed for 2023 or does your current capital planning account for all that and there’s no need for extra investments? Thanks. No extra investments, really our current capital planning is based on us essentially following the plan we laid out and everything Sid talked about in terms of base case cash plan InsureCo profitability 23, total profitability 24 is all very consistent with us. And so we really expect in fact to be at the tail end of a whole bunch of multi-year investments. For example, the claim system we’ve been building internally it’s really kind of the last sort of component still being fine tunes essentially at the end of the investment cycle there. And that to us is very exciting because that system is the one that’s already answering. We have some questions on eligibility and claims and stuff like that and various provider facing and member facing service lines and look more automation. I think we can get in all of these aspects. Hi, good evening. Couple questions. First one I just wanted to start with if you could tell us, I mean, where do you see enrollment landing at 1Q and year-end? I didn’t see any enrollment guidance in the release. Yes, I think we obviously haven’t explicitly called that out in the guidance. I think with respect to membership, I think we have highlighted that we expect membership to be roughly stable year-on-year. We are importantly to point you to this, we are projecting lower overall SEP members, as a portion of the overall book. And as a reminder, that will result in lower member months year-on-year, but as a positive tailwind to the MLR, I think Mario commented nicely on Medicaid redeterminations. So the net-net of all of that as it flows through to premiums is, we’ll have slightly different member month dynamics than we’ve seen and that’s what’s really driving the Direct and Assumed Premiums down modestly year-over-year. But should we think – should we be thinking that the business has some normal attrition from the first quarter through the year, would redetermination sort of backfill that and enrollments more stable? Does that make sense? Yes. I mean if you think of the business there, there is some normal course churn in the book, which is effectively lapses offset by initiations. One of the key points we’re just calling out here is we’d expect new initiations in year to be lower than they would’ve been historically because SCP will be a smaller proportion of the book this year. Yes, we generally see that whatever market share trends, we have an open enrollments flow through the special enrollment as well, and that’s how we set up the guides. And then my second one was just go into risk adjustment. I agree. I think to be honest, doubling your enrollment premium year-over-year and bringing MLR down here on a basis point is actually really great performance to be proud of for sure. If when we do that, final settlement of the risk adjustment next June, what you’ve accrued there proves to be sound. And I know you’d suggested just a little more conservatism and the figure you’ve booked in the 4Qs. I just wanted to give you a chance just to address where you think you’re at for year-end and how that will settle up in June. Yes. Well, I mean I think Gary, your highlighting key point obviously the final date will be out in June and we’ll be able to make final judgments at that point. I think given the dynamics in the marketplace, we just thought it would be prudent to be cautious. I think in particular in the second half of the year, you saw certain carrier exits in certain markets, including in Florida. And so given that we thought it would be prudent to overlay some judgment to be a little more cautious on risk adjustment than we might have been in years prior. But we always are open and flagging that that’s a risk. And so we think we’ve been thoughtful about it. Yes. I think at this point, just for accounting purposes, we haven’t disclosed that, but as we think about financial disclosures going forward, I think we’ll think about what could be helpful to analysts and investors there and come back to you. I think you had a good line of sight into the holding company, so what I would tell you is if you’re trying to come up with that estimation, think about the holding company costs are and you’re effectively reverse engineering that out. Great. Thanks. I just wanted to make sure I understood what you were trying to say about investment income. It sounds like that’s a bigger tailwind than you thought it was going to be. Is that – are you saying that that’s part of how you’re getting to breakeven this year? Or like even excluding that you would’ve been comfortable with the breakeven dynamic or is that always part of the calculus, it’s just something you think the Street didn’t catch onto? Well, I think I’d reiterate a couple of points. As we think about our core underwriting profit, we’re targeting combined ratio less than a 100. So at the core, that’s what we really want to use as the metric to measure the business. We were making a second subtle point is obviously externally analyst investors try and do pure comparisons of ultimately gross margins, net margins and how that compares to peers. Our investment income over the years, given are being a startup has been effectively been de minimis while our competitors have effectively had 3% investment yields. So now the interest rates have in some ways normalized, you’re now going to be able to include investment income in your model for Oscar, similar to what you would use at other competitors. And we’ve given you a little bit of an indication. We think that’ll be about 3.5% this year in our base case, anywhere from 3% to 4%. And so that’s obviously structurally with the ability to extend duration and look more like other – what I would call normal insurance companies, I think that is a great kind of normalizer for us now when we look at our results versus other people in this guidance. All right. Great. And then I guess you guys mentioned a $20 million size for the exchanges over time. That’s a still a pretty big growth rate from where we are this year. But this year membership is flat when the industry grew quite well because of all the actions you mentioned earlier. Are we done with those actions? Should we start to think about you guys growing in line or faster than the industry or to make that transition to the final profitability? Are there still things we should think about that say, yes, you won’t grow quite as fast as the industry for another year or two? Hey Kevin, so you thought say once we have a long-term goal for growth and we’re not moving away from that. So I mean I think that there is a lot of growth power stored up in the company. That would’ve even come through more in last of enrollment, have you not taken some of the actions we talked about. I think the overall market will have the savings we talked about as well, and I really do think that that’s our long-term growth target would mean – we would outgrow the markets and that’s – that’ll continue to be our goal. And we are already in the process of thinking through and actually working through and things like service area expansions for next year. So we’ll – we’re back in the playbook essentially of figuring out where we can best grow with the best unit costs with the best responsible sustainable margin profile because we’re not going to go back to prior years of margin profiles we can sustain in. That’s for sure. And as Sid talked about, we also still have a good amount of regulatory reserve capital against, which we can grow in the various places we’re in. And so that certainly feels like something we’re going to tackle for next year. On top of that, in terms of the other thing I’ve mentioned is that’s in I would not excludes continue to work on portfolios sculpting. If they are areas we are in where it’s not working, where we don’t see ourselves filling sustainable business, then we’ll continue to look at those, give those a hard look and see if we want to continue to be in those. But of course, that’s a high bar because generally I think we’ve now really builts and very good local model of growth, happy members, happy brokers and providers who work with us closely. Hi, thanks. Good evening. Appreciate taking the question. Midpoint of MLR guidance of 83, call it down 230-ish basis points year-over-year. How much of that is reflective of pricing actions that you took and how much of that is medical management techniques to improve relative to overall trend? And I kind of asked that question in light of needing to sort of turn off or cap the membership in Florida, just to make sure there’s no sort of mismatch there. Yes. I think, Josh, nice to hear from you. I’ll take that one. I don’t think there’s any mismatch there to use your words. I mean, obviously, I think Mario highlighted, rate increases in the high single digits, which we view in excess of trend very disciplined, I would say, pricing across our markets is – was certainly a key element of the business plan. We were trading off frankly, profitability for growth this year, which was the biggest consideration. And I think secondly, I think there’s real dollars embedded in the MLR savings such as the PBM contract I mentioned. We’re renegotiating along with that rate increase above trend. That is really pushing us to where we want to be on the MLR side. Got you. Got you. And then it looks like guidance implies about $195 million of corporate costs or sort of parent level overhead. What was that number in 2022 and how should we be thinking about that sort of after 2023? Yes. I think the first point, this answer won’t surprise to you is down. Surely, as we look at that I think that we’re very focused on expense management when you begin to start decomposing us versus peers. I think if you look at Oscar now relative to competitors, I think folks have to acknowledge the really meaningful progress we’ve made on MLR, and that’s why I appreciate some of the comments and questions today. Clearly, what you’ve heard from Mario and myself and certainly the rest of the management team with Scott and Alessa, and we are absolutely focused on that cost line, and I think you should expect us to continue to get better operating leverage out of our cost base as you model the company forward. And I can’t believe we made it to this, probably towards the end of the call without utilization question on the existing quarter. MLR came in a little bit better than we were looking for. I don’t know if there were any, I heard the development prior period reserve development relating to the current year. But anything other – anything else you would point out in terms of MLR trend for the quarter? Nothing in particular for the quarter. I think as we look at the year that the inpatient professional utilization, as I mentioned, came in better than expected. RX savings was came in for the year higher than we had anticipated in price for. So there’s been a lot of focus on our total cost of care around PBM and drug spend, which is why we’ve highlighted this other element of our renegotiating PBM contract, which we think is a nice tailwind for our results as we go forward. Great, thanks for the questions. Maybe first just building on the MLR comments from the last question. I’d just be curious to get your view longer term where you think MLR needs to be to kind of reach the profitability path that you laid out for the business. And I guess as you look to potentially return to growth, would you kind of expect to keep MLR either in the range of the 10 or continue to improve it while also growing membership? Yes, I think as we sit here today, first off, I think we’re proud of all the progress that we’ve made with respect to MLR really as we look forward we would want to be targeting in below 80s. What are the implications for the business? Certainly that means as we look at 2024, there’s still more work to do on pricing for some margin expansion. And then again, our total cost of care savings program, I think has generated real benefits as we work with our actuaries. And so a big chunk of the resources and kind of human capital company is really focused there on all the components of better medical cost management. Now, sometimes that bit may sound unsexy to you, but it’s the meat and potatoes blocking and tackling of running a managed care company. And I think the team is entirely focused on that and that’s why we’re confident we think we can get there. Yes, I think that – it’s just – we’ve been this market now for the longest really of almost anybody else in this market, and it’s quite clear that’s purely leading with price. When you don’t have the unit cost, you don’t have the management and so on does not work. We’re not going to go back to those days, certainly from a pricing perspective, and don’t think the market will either, by the way. So for us, this is a matter of in which markets can we build networks and providers who will over time share risk with us. We can build the modes around longer retention, longer 10-year members who will want to be with those providers. And in those markets, I think we have a huge amount of growth potential still. And so therefore, MLR wise low-80s and not going back to the previous days of trying to somehow win on the price side there. Great. And I just wanted to ask a quick follow-up if I could, I think following up on Gary’s questions on the risk adjustment payable. I guess, with the slower growth that you – within the business this year, I guess, would you expect to be in a receivable position for the current year? And I guess, when do you kind of feel like you’d get better visibility on that? Well, we wouldn’t anticipate being in a receivable position, but we would assume that the payable would be coming down modestly as we look forward. And risk adjustment is a pretty big focus area for us, given the nature of our membership and demographics are pretty similar, I mean, to point you to an important comment that may have been lost in our prepare remarks, which is this is really the first time that Oscar has had this level of stability in its membership. And so we know the membership population, we have strong data on that population. And so we actually think that’s beneficial from the perspective reducing volatility. Yes. And maybe as another piece of data there. Our silver mix is larger, this in the– as Sid mentioned, it’s sort of in the 60s, right? And that’s by itself likely means that we’re just not going to be a receiver from the pool, but a payer into the pool, because it’s still a little bit different than other market participants there. And we’ve been moving it to the right direction. We’ve priced some great – I think plans and other metal tiers as well that work well. But that means we likely have lower claims for than others, but higher RA payouts and are comfortable with that as long as you manage the RA well in which I think we at this point do. Hey, thanks. Had a couple of questions about the broader exchange market I was hoping to get some insight into. So obviously you guys are not growing your membership this year or very intentional decision. The market as a whole, especially, key states like Florida are seeing really significant strong growth again in 2023. I guess, first we’d like to get a sense of how you guys think about potential changes or maybe improvement to the risk pool and whether anything like that has been considered in the MLR outlook you provided today. And secondly let’s just get your perspective on maybe Florida as a whole, like, it looks like the growth there has gotten to the point that I think around 13% or 14% of the state population has signed up for the exchanges. And at the national level, I think that’s more like a 4% or 5% number. So just love to get a sense of what you think is happening in Florida and whether that potentially could be more like what other states look like over time. Thanks. Yes, Steve, great question. So the – on the growth side generally, I think, we – Florida, let me start with actually the Florida side of things. So Florida is a very simple answer. It is the population in the state I think is conducive to being in the ACA, right? We have, at this point, I think about 40% of our welcome kits that go out, go out in Spanish, so a fair bit of immigration population and so on that that’s, we want to go into the ACA, but even the bigger driver is a very, very active broker base. And so Florida is almost unique in that regard. I mean, some of the same brokers and general agents we work with – have been working with very closely for the past couple of years have now made their way to Georgia and other states as well. But those brokers have been incredibly effective at finding folks who should get coverage. And I think the latest statistics are that’s something like, actually, I’m going to put through this now. But some large percentage of uninsured people in the U.S. could get effectively still free healthcare in the ACA. And so that I think is a population that you have not seen sign up in other states where people – where they haven’t been told that by a broker that they could get that. And those folks are in the markets in Florida. I think that’s happening in the states there. Going forward, in all of the ways you point out still plenty of growth. I mentioned this briefly before, we continue to see interesting dynamics in the individual coverage HRA space. It’s again, kind of some of the Florida brokers and general agents who are saying, hey, I’m able to turn companies over into defined contribution type health plans, which is individualizing in the ACA. And to us, that could be a whole another growth wave that we’re very excited about going forward. Thanks. I think could you just touch on maybe how you guys are thinking about the risk pool dynamics as the market continues to grow in 2023 kind of put in the redetermination piece aside. Yes, sorry, I forgot about that one. So generally what you see in the ACA is that if you’ve had more growth, it tended to bring down the average risk score. Now there is clearly risk score trends in the market, meaning every year all insurance companies tend to get better at collecting risk scores and recapture rates and things like that, right? So you sort of always have written that in that race of making sure you don’t fall behind the year. And we’re very aware of that. But generally, the risk pool has comes down if – when the pool expands. And I would think that that’s would again, have happened coming into this year. We did not make big assumptions around this. And so partly because we didn’t want to be too, again, exposed in terms of whatever happens in SEP. And I could see a situation where SEP members coming in drive the pool up, but then the more recent growth has driven it down. So that’s kind of our overall about the same. But as I mentioned before, and I’ll just briefly say it again, from a metal mix perspective and also from an average age perspective actually, we have about the same population as before. And so to us that generally means there isn’t anything there that we will be somehow too concerned with getting the risk pool will run us versus the overall markets. But obviously these are all the things we’re watching and there’s the same weekly report coming out. We’re always sitting there and cheering when it comes in the way we expect. And I’m looking forward to the next time that will happen. Okay, thanks. And then just one super quick follow-up, hopefully. Just on the PBM contract, like, it sounded like you are renegotiating or it already has been done, I just am trying to clarify whether we should think about there’s an impact beyond 2023 that we should be considering or is the impact fully captured in the 2023 guide that you provided? Thanks. Yes, thank you, Steve, it’s great question. And it’s – I think we’ve always talked about this about the benefits of the increased scale. And so, yes, we are in the final, final steps of renegotiating that PBM contract and it’s structured in a fashion that will provide us benefits in 2023 and beyond. So think of it as multiyear. Yes. I think for us this was a good example of – we’ve reached a certain level of scale now that enables us to take these kind of steps that maybe at lower scale wouldn’t have been the case. And that’s something we intend to also press on going forward. We have no further questions at this time. Ladies and gentlemen, that will conclude today’s meeting. Thank you all for joining. You may now disconnect.

EarningCall_233

Good afternoon, and welcome to the Knowles Corporation Fourth Quarter and Full Year 2022 Financial Results Conference Call. My name is Tamiya and I'll be your Operator for today. Thank you, Tamiya, and welcome to our Q4 2022 earnings call. I'm Patton Hofer, Vice President of Investor Relations. And presenting with me on the call today are Jeffrey Niew, our President and CEO, and John Anderson, our Senior Vice President and CFO. Our call today will include remarks about future expectations, plans and prospects for Knowles, which constitute forward-looking statements for purposes of the Safe Harbor provisions under applicable federal securities laws. Forward-looking statements in this call will include comments about demand for company products, anticipated trends and company sales, expenses and profits, and involve a number of risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties in the company's SEC filings, including but not limited to, the annual report on Form 10-K for the fiscal year ended December 31, 2021, periodic reports filed from time-to-time with the SEC and the risks and uncertainties identified in today's earnings. All forward-looking statements are made as of the date of this call and Knowles disclaims any duty to update such statements, except as required by law. In addition to pursuant Reg G, any non GAAP financial measures referenced during today's conference call can be found in our press release posted on our website at knowles.com and in our current report on Form 8-K filed today with the SEC, including a reconciliation to the most directly comparable GAAP measure. All financial references on this call will be on a non GAAP continuing operation basis, unless otherwise indicated. Also, we've made selective financial information available in webcast slides, which can be found in the Investor Relations section of our website. Thanks, Patton. And thanks to all of you for joining us today. Before we dive into the Q4 results, I wanted to refresh everyone on the new segmentation that we introduced during our investor update call in November, as this is how we will be discussing the company in the prepared remarks. We separate our audio into two -- in segments in two. The first segment is called MedTech & Specialty Audio, or MSA, which primarily includes acoustic solutions sold into the Hearing Health market. The second is our consumer MEMS Microphones segment, or CMM, which is focused on microphones sold into the ear, IoT, compute and smartphone markets. Knowles now operates and reports under their three segments, Precision Devices, MedTech & Specialty Audio and consumer MEMS Microphones. With that, let me begin with a summary of our Q4 results. We were pleased to report; we delivered results at or above the high end of our guided ranges for gross margins, adjusted EBIT margins and free cash flow, despite a challenging backdrop in consumer electronics market and the COVID related issues in China. In the quarter Knowles generated $197 million of revenue, which was down 16% versus the prior year, driven primarily by weak consumer electronics and market demand and customers inventory adjustments in consumer MEMS and MedTech & Specialty Audio. Consumer MEMS mics was down 31% versus prior year levels, and MedTech & Specialty Audio was down 13%. In contrast, Precision Devices delivered revenue growth of 9% versus prior year levels, as we continue to see robust demand in defense, medtech, EV and industrial end markets. We deliver gross margins of 40.4%, above the high end of our guided range; earnings per share of $0.33, in line with the guidance -- with our guidance; and we generate just shy of $40 million in free cash flow, which was at the high end of our expectation. I believe these results demonstrate that our focus on the markets and price where we have significant competitive advantages is paying dividends, particularly our profit margins and cash flow. For full year 2022, I would like to take a minute to highlight each segments performance individually and their current market dynamics. First in Precision Devices, we delivered record revenue, gross margins and adjusted EBIT margins. Revenue grew 21%, gross margins finished at 47%, an increased to 140 basis points versus prior year levels. Adjusted EBIT finished at $68 million and grew 29% versus the prior year. We continue to see strong organic growth in the mid to high-single-digits going forward driven by defense, medtech, and EV market. Both of our product categories, high performance capacitors, and our filters continue to demonstrate our superior technical capabilities, providing a competitive advantage for Knowles in markets we serve. Second, our MedTech & Specialty Audio delivered record gross margins and adjusted EBIT in the year. Revenue was flat with prior year levels and strong growth in Hearing Health market in the first half was offset by customer inventory adjustments and a softer end market demand in the second half. Gross margins finished at 50%, 270 basis points increase over prior levels. Adjusted EBIT finished at $88 million, a 10% increase versus 2021. Although market condition deteriorated slightly for the segment, we’re able to deliver double-digit earnings growth and flat revenues. In the near term, we continue to see customer inventory adjustments and software end market demand. We have confidence in the resilience of this market and day time bookings trends, we expect to see strong sequential growth for revenue and profitability in Q2 2023 as customers inventories normalized. Now onto our consumer MEMS microphone business. Revenue in this segment was down $144 million versus prior levels. 2022 was a difficult year for consumer electronics around the globe as end market demand, customer inventory adjustments, and the impact of COVID lockdowns in China severely impacted the segment top line. In August, we announced our restructuring actions to address current market conditions and dynamics to accelerate our strategy to diversify away from commodity microphones. Today, I'm pleased to confirm all the actions have been put in place delivering greater than $28 million of annualized savings. In Q1, we continue to see weak end market demand in inventory adjustments by our customers. These headwinds are across most end markets and geographies, including PCs and smartphones. Because of the weak demand, we will continue to operate in less than 50% capacity utilization in Q1, negatively impacting gross margins. Despite these near term headwinds, we expect sequential improvement in Q2 for revenues and profitability, and on the beginning of China market recovery and our customers' new products. In summary, for the company, Q1 is normally sequentially lowered due to seasonality, but it's been further impacted by weak consumer demand, inventory in the channel and COVID-related challenges in China as they reopen their economy. I'm proud of the execution by our employees, which has allowed us to continue to generate cash in the face of substantial headwinds. As we look beyond Q1 and Q2, we are anticipating 15% to 20% sequential revenue growth with all three segments contributing. Lastly, I would like to highlight we have secured an extension of our $4 million revolving credit facility until 2028. This reflects the strength of our balance sheet and the expectations to generate significant free cash flow. It also provides a substantial liquidity to supplement internal growth with acquisitions. Thanks, Jeff. We reported fourth quarter revenues of $197 million, down 16% From the year ago period, driven by lower shipment volumes and consumer MEMS mics and medtech and specialty audio, partially offset by higher revenues and precision devices. The precision device segment delivered revenues of $63 million, up 9% from the prior year, driven by growth in medtech, EV, defence and industrial end markets. For the full year, PD revenues increased 21% including 18% organic growth and 3%. from an acquisition which was completed in 2021. Full year 2022 revenues were at record levels and driven by strong demand across all of our end markets. In medtech and specialty audio, fourth quarter segment revenue was $2 million, down 13% versus the prior year as our customers reduced inventory levels and we faced difficult year-over-year comparables as the second half of 2021 benefited from strong COVID recovery. For the full year, MSA revenue was flat with prior year levels. Consumer MEMS mic revenues of $72 million was down 31% versus the prior year, driven by weak global demand for consumer electronics, channel inventory adjustments and COVID related issues in China. For the full year, revenue was down 33%, driven by weak consumer demand and inventory adjustments in most end markets and geographies. Fourth quarter gross profit margins were 40.4%, a 190 basis points above the high end of our guidance range and down 290 basis points from the same period a year ago. Precision devices segment gross margins were 48.6%, down slightly from the prior year due to favorable inventory adjustments in Q4 2021 that did not repeat. For the full year, gross margins finished at a record high of 47.2% and up 250 basis points over prior year levels, driven by favorable product and customer mix, factory productivity improvements and the acquisition we completed in the first half of 2021. Medtech and specialty audio segment gross margins were 51.6%, up 120 basis points versus the prior year, driven by favorable product mix and foreign currency benefits. For the full year, MSA delivered record gross margins of 49.9%, up 270 basis points over prior year levels, driven by favorable product mix, productivity improvements and benefits related to foreign exchange. Consumer MEMS microphone gross margins for the fourth quarter were 23.9%, down more than 11 percentage points versus the prior year, driven by significantly lower factory capacity utilization, pricing and unfavorable mix, partially offset by benefits to the restructuring actions implemented in the second half of the year. For the full year, gross margins were 28.2%, down 960 basis points from the prior year, driven by unfavorable capacity utilization and product mix, partially offset by benefits of the restructuring actions announced in August. For full year 2022, total company gross margins were 40.6%, down 110 basis points from 2021 with record annual gross margins in both the PD and MSA segments, more than offset by significant year-over-year margin declines in the consumer MEMS mic segment. R&D expense in the quarter was $15 million, down more than $4 million from the prior year, with the reduction driven entirely by lower incentive compensation costs and the benefits of the restructuring actions taken in the consumer MEMS microphones. SG&A expenses were $27 million, $3 million lower than prior year levels, driven by lower incentive compensation cost. For the quarter, adjusted EBIT margin was 18.9%, 190 basis points above our expectations. For the full year, EBIT margins were 18.6%. EPS was $0.33 in the quarter at the midpoint of our guidance range. Now, I'll turn to our balance sheet and cash flow. Cash and cash equivalents totaled $48 million at the end of the quarter. We generated cash from operations of $47 million, slightly above the midpoint of our guidance range. Capital spending was $7 million in the quarter. For full year 2022, free cash flow was $54 million, representing just over 7% of revenue. We repurchase 2.3 million shares at a total cost of 44 million and exited the year with cash net of debt of $3 million. This marks the first time since the spin off, we've ended the year in a net cash position. Moving to guidance for the first quarter of 2023. We expect total company revenue to be between $140 million and $155 million, down 27% versus the same period a year ago. With the decline in revenues driven by weak demand in consumer MEMS mic, inventory corrections and medtech and specialty audio, partially offset by year-over-year growth in precision devices. We estimate gross margins for the first quarter to be approximately 32% to 35%, down eight percentage points from the year ago period, driven by low factory capacity utilization and unfavourable mix in our consumer MEMS mic medtech and specialty audio segments. R&D expense is expected to be between $16 million and $18 million, down $3 million from prior year levels, driven primarily by prior year restructuring actions in the consumer MEMS mic segment. We're projecting selling and administrative expense to be between $25 million and $27 million, up $2 million from the year ago period, driven primarily by higher incentive compensation cost, partially offset by restructuring actions we've taken in the consumer MEMS microphone segment. We're projecting adjusted EBIT margin for the quarter to be in the range of 2% to 6% and expect EPS to be within a range of $0.01 to $0.07 per share. This assumes weighted average shares outstanding during the quarter of $94.8 million on a fully diluted basis. We're forecasting an effective tax rate of 16% to 18% for the quarter and full year '23 which reflects an expected change in jurisdictional income and the impact of the unmet conditions or tax holiday in Malaysia. For the quarter, we expect cash generated from operations to range between $15 milloin and $25 million, capital spending is expected to be approximately $5 million. Given the current macro headwinds and uncertainty in the market, we'd like to provide some select commentary as it relates to our expectations for the second quarter of '23. As Jeff mentioned, we're expecting sequential revenue growth of 15% to 20% with all three segments expected to drive the increase. We also expect gross margins in the second quarter will return to 40% or more, driven by improved capacity utilization and favorable mix. Thanks, John. But there's no doubt, we are dealing with some significant challenges in the global markets. Our Q4 and 2022 results continue to demonstrate our strategy to focus on high value markets and products is allowing us to achieve strong EBIT margins and continuing to generate cash. Looking at 2023, we are expecting significant sequential improvement from Q1 to Q2 in both revenue and profitability and remain confident in our ability to achieve our midterm targets of 22% to 24% EBIT margins, and 15% to 17% free cash flow. Absolutely. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Bob Labick with CJS securities. Please proceed. So, I just wanted to kind of dig in a little more on what you just gave us in terms of guidance and a look at two into the first half in general, if I do the quick math on the sequential growth in Q2, it looks like you're still looking for about 10% revenue declines there. So, 25 and plus or minus in Q1, 10 in Q2. The question is, can you talk more about the first half end market demand versus inventory corrections, and really talking about the end market demand for that first buy segment if you because in a new segment, orientation that you've laid out for us? Yes, Bob, happy to do that, provide some additional color on Q2, and also just like maybe first start with Q2, but then maybe delve in a little bit about what we see right now for full year. But let me start with the Q2, let me break this up by the business units. As I said in the prepared remarks, we expect about 15% to 20%, sequential revenue growth in Q2 over Q1. So, first in the MedTech, and Specialty Audio, what I'd say here is we're fully booked for Q1 already. And I think we're probably a little ahead of normal where we'd be at this time. So, we're feeling pretty good that -- what's included in our guidance for Q1 is very, very achievable. And the trend generally, is that as we move through the quarter, the bookings are getting better. Even in Q2, we're already seeing strong bookings in Q2. So, I think -- when we think about the sequential growth improvement in Q2, I think, we're pretty happy about where we are with that. In the PD space, I would say, it's kind of a similar story. The current bookings, which are even longer than out then where we would be in the MedTech and Specialty Audio are pretty good. And the expectations of pros and defense, EV, MedTech are quite good. So, I think we feel pretty good about that as well. And lastly, in the consumer MEMS market, I would say, I'm cautiously optimistic for modest improvements in Q2, and I think the majority of that will be in China improvements. Right now, if I were to sit there look at my forecasts or how I look at China, China's at a really low point in Q1 still. And we do see some pretty nice growth sequentially, not year-over-year yet, but sequentially. But there's still inventory clearly in some of these places. And I would point out specifically compute, we're not seeing a real recovery or move out of the inventory till probably the back half a year. So, overall, again, 15% to 20% sequential growth. Now, I'd like to just take make a comment -- few comments about 2023. I'll preface this, this is a very fluid situation. It's not guidance, it's more just kind of when I'm thinking about, and I'll go through it by segment again. So, first for Precision Devices, very strong defense markets we're expecting in 2023. I'd say steady growth in the MedTech portion of Precision Devices. And then the last piece in terms of growth is EV. And I would say since the last earnings call, our visibility into growth, to nice growth in this space for 2023 looks pretty good, the bookings have been strong, and we expect them to continue to be strong. And that's being driven by the kind of the abatement of the global shortage of chips. First, for automotive, but also more of our designs are now entering production and we have more confidence that rendering production that's going to drive growth. We are experiencing some softening in the industrial markets, with inventory starting to come a little bit more elevated than normal in a distribution channel. But overall, I would sit there and say, we still expect your mid single-digit growth for PD in 2023. In the medtech space for a full year, I would say, based on what's going to happen in the first quarter, which is there is this inventory correction. I would say we're expecting the full year to be flattish for the segments. All of our data points and discussions with our customers lead us to believe that we will return to growth in this business in the second half of the year. But with the top first quarter already being down versus prior year, it's probably going to get the top to get more than a flattish business for the full year. Now, lastly, probably you're still the one that I probably have the most, I would say wide variety of outcomes would be the consumer microphone business. I mean, there's a lot of people who are predicting, I would sit there and say, a big upswing in the back half. I mean, it could happen. But I'm not calling the bottom here. But right now it's good. Again, the first apps continue to be impacted by demand in China, inventory clearing, I would say we'll definitely see sequential improvement from the first half based on normal seasonality in the back half of 2023. And there's cautious optimism on return the growth in the second half for the segment driven by normal seasonality, inventory being out of China and a recovery in China. So I know it's a long answer. But all in all, I guess what I would say given the PDF mid single-digit, MSA relatively flat and given us first half challenges with CMM and I would say upside downside right here, kind of middle of the road, we see revenue being flat full year in 2023. I mean, I hope that kind of gives you some color on all the markets with a lot of markets. But I want to make sure we cover that. Yeah. That's super helpful. And then it doesn't sound like this is the case at all. But I just want to clarify. In terms of some of the changes, is there any market share shifts of any node, doesn't sound like there's any major certainly like any major losses, despite, everything that's going on. But any market shifts potential wins or how are you viewing the competitive landscape in this difficult macro environment? I would say, Precision Devices are getting really hard identify the real competition here. I don't think there's any shifts, I would sit there and say we're taking share in the defense portion of that market. And it's easy with the market. So I don't know how you sit there and start taking share. We're just capitalizing on a new market in terms of PD. In medtech and specialty audio, I would sit there and say, we kind of took some share last year, I think those share gains are sustained. I don't think we'd see a lot of changes in that either up or down in terms of share, we have relatively high share in that business. And then the consumer nodes business, I really can't point to and sit there and say we've lost this or we won this and changing shared significantly. I would say the consumer space we're probably taking more lower margin business in the short term. And we would want because we're trying to use it -- optimize our capacity utilization. But really to get the improvements that we're hoping for in the back half from this business, we're going to have to get the full capacity utilization or near it in the back half of 2023. Got it. Okay, great color. And then last question for me, I promise I'll jump back in queue. But it just relates to what you just said in terms of -- you gave us the update on the restructuring, you said it's complete. I think you've planned the capacity drawdown so to speak back in August, or so before that probably the first half, middle of last year. Are you done with restructuring? Is there more given that the outlook now that you need to do to take out, or how are you going to -- how do you feel about the level of capacity that you have after this restructuring? Yeah, yeah. I’ll answer it. So as far as the capacity utilization, our capacity we have, I think we feel pretty good about where we're at, we took out again, a fair amount of capacity last year. And I think when the market recovers, we feel comfortable that we can fill that capacity with reasonably good gross margin business. As far as restructuring, I think if there's one thing about it, you can say we're not shy about taking action when necessary. And, you know, we’ll forward with the restructuring if it becomes necessary in any of our business if it makes sense. So that's how I would answer that question. Hey, guys, thanks for the question, and thanks for all that info. I don't know, if I followed all of it, but there was a lot there. I guess, maybe asking a different way for March. Can you talk about, I think I have you guys down roughly 25% sequential? Can you talk about the three segments and either force rank them, or how they kind of apply to that 25%? My next question will be about inventories. But I'm not quite sure how sell-in is affected here for each of these segments into March? Yeah. So for the March quarter, I would sit there and say, in terms of Q4 to Q1, yeah, so I would just sit and say, in precision devices, we -- typically seasonally Q1 is down, we were expecting growth in this business, again, in Q1 year-over-year, but it is down sequentially. And just as fiber goes on here, we typically give our price increases at the end of the year, that does sometimes drive people to want to order more in the previous quarter, especially in our distribution channel, where they can get a lower price before the before the end of the year. Now, it's very difficult to control that. But that's driving some sequential decline in Q1, in the Hearing Health business, MSA, I would sit there and say, we had a very strong first half of 2022, it's definitely slowed down. If you look at some of our hearing aid customers, they're starting to report, they're basically pointing to 1% to 3%, 1% to 4% full year growth in Hearing Health market, weighted heavily towards the back half. So they're expecting the first half to be down. So we're dealing with the first half being down in that business, the end market, but also inventory in the channel. And so, but I would, as I said, what I kind of see in this business is we are already fully booked for Q1. So the numbers that we're thinking in our guidance, we're already fully booked, which is probably a little earlier we expect. If we go in Q2, we're already starting to see bookings that are stronger than kind of margins 15% to 20% sequential growth. So I think I feel pretty good about that business, going into Q2 and in the back half the year. I think the biggest wildcard is the microphone business. We're not seeing anything is recovering in Q1. Q1 is a very challenging quarter. We're running, sub-50% capacity utilization. We are expecting some sequential improvement in Q2. But I would say it's not a reduction or inventory coming down. It's just some recovery in China from what I would say, Q4 and Q1 being extremely low. And so, as I said, I'm cautiously optimistic, that this business can return to growth year-over-year in the back half of 2023. Okay. I guess, first following up on that, I guess, maybe I don't totally understand if you're fully booked. I believe you're still implying a sequential drop into Q1 for MEDTECH. Why would that be the case, if you were fully booked out? Well, it's fully booked out to that lower expectation. But I would say it's skewed toward the end of the quarter that the shipments are going to happen. Okay, Okay. And then my second question is around inventories. I mean, if we have this very large increase in June, I guess there's two things there. First of all, I'd love to understand the full industry dynamic perhaps you can quantify even, how this inventory dynamic looks? Maybe revenue out there in terms of inventory that needs to be burned threw in March in order to get that strong seasonal June. I assume, that that's why June is so strong here because of this, this inventory dynamic overall. And then, just to add one more things to that, I apologize. But for your largest customers, I think they're still your largest customer. A lot of people are guiding for a weaker June than we would have expected. And do you anticipate that in your guidance, or is it now at the point where it's not meaningful? So, I mean, there's so meaningful customer, but we're not going to make any comments about our shipment specifically to them. But here's what I'd say is, if you look at the sequential growth that we expect from Q1 to Q2, it is the vast majority is with between PD and MSA. So PD and the MEDTECH and specialty audio, I would say on an absolute basis, it's incremental that we're expecting sequential growth in Q2. So it's not a huge amount of sequential growth. Secondly, as far as inventory goes, I mean, we're following a lot of same things you're following in terms of mobile phone shipments, in terms of PCs. So let's give you one example. We just got the data for January sales on handsets in China, it was not good. I mean, it was not good. And so we're still not seeing the inventory come out of the channel that is there in terms of finished product. And I would sit there and say for PCs, we've talked to the customers. But we're also looking at what industry saying is, and most people are saying that the inventory won't be cleared out till the end of the second quarter. Hi, guys. Jeff, let me start with you. I wanted to really focus in more of the PD side, which is still doing quite well, do you have view on the inventory in the channel, particularly just for the PD side? Where do you think it is? I would sit there and say that, the majority of stuff we do is with the custom stuff, which is defense, medtech and EV. I would say that, there isn't a lot of inventory in the channel at all. I think they order for specific bills, we deliver their custom products, we're not seeing people say, oh, I got too much inventory in that portion of the market. So if you look at the PD business, I would say, the industrial/distribution business was somewhere in the neighborhood of $50 million, $60 million on an annualized basis. We are definitely we watched that inventory, it definitely, especially in the distribution, where we can see it, it has been starting to creep up some. So, we are expecting, a little bit of weakness here, in the short term. But, overall, we still expect mid single digit growth for this business in 2023. I mean – and driven by very strong defense growth, very strong EV growth and steady medtech growth. Got it. And then it's just the nature of your competitors. And I know you guys have shied away from really the mobile market. But I'm curious, generally, what you're seeing on ASPs? And maybe I guess, I'm more interested on the PD side are your competitors acting fairly rational at this point? I would say, in the PD space, again, most of our stuff is custom long-term contracts. And I would sit there and say, I haven't seen much of pricing on pressure at all in that portion. There’s been a little bit more discussion in that distribution/industrial side, on pricing. But it's not, big now I'll make a comment on the CMM business. I'll be honest, I mean, the pricing has been challenged, as we in Q4 and Q1. If you look at 2022 and 2021, 2020, we really limited price erosion in that microphone business for the last three, four years. We've done a pretty good job of keeping that sub for even sub 3%. But as you look at the end of this year as we started saying, okay, we got to fill some of this capacity, the price erosion has become more, and we're expecting that's the kind of persist in the first half of 2023. Because there's a lot of excess capacity, chasing less business and so we’re hopeful of new products, and things will happen towards the back half of next year and into 2024 that will reverse that trend again. But in the short term, it's kind of tough on pricing and that business. But I'm Hearing Health, I think, business or MSA business. I think we're the dynamics really haven't changed dramatically. I think we're seeing essentially flattish pricing. Yeah, Anthony, just kind of just say add on – on PD, one of the big drivers of one of the drivers of gross margin expansion in 2022 was pricing, we increase gross margins, over 250 basis points. There's some mix. There's some productivity improvements. But we've also been really good at passing on our inflationary input cost to the customers through price increase. That makes sense. And John, since I have you, I wondering kind of your view on the full year CapEx, I know you gave us for Q1. And on top of that, you guys have done a good job of free cash flow over the last 12 months, what are your thoughts now, given on the reduced expectations are 2023? Where your cash flow goes? And on the past year, we're hoping that nearly it doubled them? And I'm curious what your updated view is for free cash flow? I thought you'd – you mean CapEx or through cash flow. From CapEx, and I think we're going to – yeah, we're going to be kind of in the 4% to 5% of revenue from a CapEx standpoint, with more of it skewed to the PD, and MSA segments, we clearly aren't going to put in more CapEx for capacity and CMM. So I would say two thirds of our CapEx in 2023, will go to PD, and MSA. And I think it's worth just mentioning on the CapEx side, Tony, one point, like 65% 70% of our CapEx used to go when we were at 7% 8%, towards the microphone business. Now, it's like 33%, of 4% to 5%. And so you can see how we're shifting where we spend our dollars. In terms of cash flow. I mean, despite some pretty tough macro conditions, we still delivered 7%, free cash flow, the percent of revenues in 2022. And we had a big headwind, Tony, with networking capital. Inventory increased our payables because we really started turning off the spigot, our payables were at a historic low as we exited 2023 -- 2022. So it's a $40 million to $50 million working capital, headwind in 2022. We don't expect that to recur in 2023. You know, that's one of the metrics that I feel pretty good about is, we have a very reasonable shot at getting back to that 15%. So kind of doubling the 2022 rate as a percent of revenue in 2023 and, again, not having the headwind being a little more disciplined on our CapEx, and then some operating expenses. So that kind of points to – you’re know, getting back to the free cash flow percent of sales back to where we were in 2021. One last question if I can sneak it in and maybe I misheard. We talked about kind of second half growth. For Q3, the September quarter, are you calling for September 2023 to be larger than September 2022 same thing with December? Yes, I would say, – yes, I would say the answer does yes. You know, I think, you know, we just didn't break it down by segment. We're expecting growth, you know on precision devices in the back half over the back half of 2022 that we did all the dynamics we've talked about. In medtech, I think we started seeing as inventory correction in the back half of 2022. I think we have a lot easier paths. And again, the market is expecting, the end market, our customers, and there's a lot of data out there are expected to return back to growth in the back half of the year. So we're expecting some nice growth year-over-year. The wildcard is really around the microphone business. You know, I think, you know, right now, if I were to sit here and say, yes, I would expect year-over-year growth in the back half, but I'm being very cautious and calling that out. And I would sit there and say, if we really start seeing really nice growth in that business, and there's a recovery. You know, I kind of said in my – to Bob's question, we will end up flattish when we start seeing some strong growth in the microphone did to the back half, we’ll do better than flattish for the full year. Hi, Jeff. Hi, John. Maybe hitting a sub-segment, you haven't talked about much yet. The EV auto market, can you talk about what the potential for that to ramp up is in terms of program visibility. I know it's longer visibility, and whether that can grow to be a material part of the revenues two or three years out? Yeah, I think we're kind of mentioned that, you know, so I think last year, we had some reasonable growth last year. And I think we set the expectation was going tot be around $15 million in sales at the EV business. It actually was slightly over that. So we exceeded that. I think we could have probably shipped more into that segment, if it wasn't for the chip shortages that a lot of our customers were experiencing. Right now, I would sit there and say for this year for 2023, we would expect another 30% to 40% growth in terms of revenue, so that it will be over -- probably over $20 million in revenue. But I think the other part about this, Suji, I just kind of would make a comment is, the bookings are becoming very strong. And so, I mean, I don't want to get into how the bookings exactly translate into when the revenue come. But I'm hearing from the team that we could have, like, in excess of, obviously, with more bookings in the back half, more than $30 million in bookings in this business. And that kind of starts to give you an indication of where that business could probably go in 2024. So, all that said, design wins are strong. It depends on who are the winners three, four years from now. But I think we had said, we hope this business can be like $50 million, $60 million in three to four years. I think that's achievable. If we win with the winners, we'll see who those are in terms of how much content we have, it could be even more than that. So it started to become material later this year in 2024. Okay. And then other questions for John, perhaps, he talked about a lot of the elements looking ahead to in revenue and gross margin and free cash flow, intermediate term. But in terms of the costs, and you already did the restructuring, and had that question before in terms of more restructuring, is the revenue -- is the -- I’m sorry, is the costs OpEx in 1Q, way to think about a run rate going forward from here, John, is there more flow through with the restructuring benefit? And is that the right baseline to start with as we move forward? Yes. If you look at Q4 and actually the numbers I gave in Q1, the benefits are fully of the restructuring, we announced last August are entirely baked into that, I've talked before about a $45 million run rate, which is about 180 million annualized, that's kind of what I would expect sitting here today that is up over 2022 levels, and it's really driven primarily by incentive comp. Bonuses were a very low in the consumer MEMS segment, as well as the corporate in 2022. So we're going to have a pretty decent uptick, because we're planning to get back to normalized levels in terms of incentive comp. We also are adding some headcount in the PD to support the growth there. And then we also have conversely benefits from the restructuring we took. So again, I think, kind of a $45 million run rate is appropriate. Sorry about that. Mute button. This one is for John. And I might have heard this incorrectly. So I apologize. But did you guide Q2 to an EBIT margin of 22 to 24? I have gross margins -- well. Yeah, Chris, I said gross margin, we have sequential – Jeff mentioned sequential growth of 15% to 20%. And I said with that gross margins we'll be back at 40% or above in the – in Q2. Yes. Okay, I thought I heard improved cap utilization and favorable mix 22 to 24 EBIT or -- I made that up. Yeah, I didn't say that. But that gross margin, getting back to 40% is dependent on increased capacity utilization, but we do… If gross margin in Q1 – Q2 look at the revenue, that's the most -- that's going go right to the bottom line.. It kind of gave you a pretty good trail. If you think of sequential growth, gross margins at 40 above and I just said the run rate on OpEx. So you can… Thank you. There are no other questions waiting at this time. [Operator Instructions] There appear to be no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect your line.

EarningCall_234

Good morning and thank you for attending today's PHX Minerals December 31st 2022 Quarter End Earnings Conference Call. At this time, all lines will be muted during the presentation of the call with an opportunity for a Q&A session at the end. As a reminder, this call is being recorded. Thank you, operator, and thank you everyone for joining us today to discuss PHX Minerals' December 31st 2022 quarter end results. Joining us on the call today are Chad Stephens, President and Chief Executive Officer; Ralph D’Amico, Senior Vice President and Chief Financial Officer; and Danielle Mezo, Vice President of Engineering. The earnings press release that was issued today after the close is also posted on PHX’s Investor Relations website. Before I turn the call over to Chad, I'd like to remind everyone that during today's call, including the Q&A session, management may make forward-looking statements regarding expected revenue, earnings, future plans, opportunities, and other expectation of the company. These estimates and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to be materially different from those expressed or implied on the call. These risks are detailed in PHX Minerals most recent annual report on Form 10-K as such may be amended or supplemented by subsequent quarterly reports on Form 10-Q or other reports filed with the SEC. The statements made during this call are based upon information known to company as of today, February 9th, 2023, and the company does not intend to update these forward-looking statements whether as a result of new information, future events, or otherwise, unless required by law. Thanks Rob, and thanks to all of you on this call for participating in PHX's December 31st, 2022 quarter end conference call. We appreciate your interest in the company. The decline in natural gas prices that impacted the December quarter continued into the new year. PHX's quarterly financial results reflect a 26% sequential drop in realized natural gas prices. Since then, and in the month of January alone, natural gas front month prices have dropped a further 40%. This being the largest one month drop since 2001, 22 years ago. This precipitous drop was driven by reduced demand due to warmer weather and less power burn, along with the Freeport LNG export terminals continued in service delay. This terminal represents 2.2 BCF a day of natural gas demand. This important LNG export terminal has been out of service due to an explosion since last summer, and represents over 500 BCF of total gas demand being removed from the market. We estimate this event alone represents somewhere between $1 and $2 of negative impact to the current natural gas market. This drop in prices will reduce industry cash flow, which will additionally reduce industry capital expenditures. Though the total US rig count has remained relatively flat over the last months, recent indications are that operators, especially in gas basins, will begin reducing their building budgets, and thus laying down rigs and frac crews, which should reduce domestic US natural gas supply by roughly 1 Bcf per day during the year of 2023. Under a conservative assumption of weather, and Freeport back in service, officially announced February 1st of this year, it appears that during the second half of 2023 into the 2024 timeframe, natural gas supply/demand macro should reach equilibrium, and set the stage for a price rebound. THX has purposely built a strong balance sheet and maintained ample liquidity supported by our hedge book to be able to withstand the current headwinds we face. You can access our heads schedule, that is in our latest Investor Relations slide deck on our corporate website. Over the last three years, we have enhanced our asset base by selling mature legacy assets. Specifically, we exited our relatively higher cost, lower margin non-op working interest business. We use the proceeds from these divestitures to build a high quality core mineral position in two of the most active areas under reputable credit-worthy operators who are actively drilling. These minerals we have acquired are in the core of these basins and can be economically developed by the operators and almost any commodity price environment. We believe this will allow us to continue to report year-over-year steady royalty volume growth. Our most recent quarter underscores this as our current quarter reflects a 33% royalty volume growth over the same quarter in 2021. During the quarter, we closed on $14.7 million of mineral acquisitions and since the quarter end, we have closed owned or signed binding agreements for an additional approximately $7 million. Our deal flow remains robust and our disciplined approach evaluating each opportunity remains in place and I am confident we can continue to build shareholder value. At this point, I would like to turn the call over to Danielle to provide a quick operational overview and then to Ralph to discuss the financials. Thanks Chad and good morning to everyone participating on the call. For our December 31st, 2022 ended quarter, total production decreased 15% from the prior sequential quarter to 2,215 Mmcfe. However, year-over-year, our royalty volumes increased by 33%. This volume growth is a result of our successful mineral acquisition program on which we have been executing for the last three years. Quarterly royalty production decreased 12% sequentially. This decrease was primarily a result of two factors, the first being four wells in the Haynesville where we have a high royalty interest that were temporarily shut in to frac offsetting wells. Note that all four wells are back online and then we also own mineral interests in the offsetting pad that was being fracked. These volumes will be reflected in the next few quarters. Secondly, the timing of new wells turned to sales. Let me give some additional color to what I mean by timing of new wells turn to sales. When comparing sequential quarters, volumes can be lumpy due to timing within the quarter of when each new wells production is introduced. Thus, new wells with partial quarters are the culprit. As I will discuss in a moment, our active wells in progress or WIP are the source of new well volumes and some quarters we'll have more WIP completed and turned to sales than other quarters. As a result, the lumpiness is smoothed out when you compare annual volumes. As a mineral owner, we do not control timing of well development, which rests with each operator. As such, there can be some reported volume volatility on a quarter-to-quarter basis. On the working interest side, production volumes declined to 22% sequentially to 587,330 Mmcfe in the December 31st, 2022 quarter as a result of the sale of our legacy Fayetteville working interest wells in late September 2022 and the natural decline of reserves. Note that the working interest volumes will also decrease in the next quarter as we closed on the sale of our legacy Eagle Ford and Arkoma working interest assets on January 31st, 2023. This is consistent with our stated strategy to exit this part of our business. Royalty volumes represented 73% of total production during our December 31st, 2022 quarter and should exceed 80% in the current quarter post the Eagle Ford and Arkoma divestitures. As recently as calendar year 2021, royalty volumes were only 45% of our total volume. As we have grown our royalty volumes and divested of our non-op working interests, the quality of our asset base is enhanced with improving margins. Additionally, 75% of our quarterly production volumes were natural gas, which aligns with our long-term position that natural gas is the key transition fuel for a sustainable energy future. During the quarter ended December 31st, 2022, third-party operators active on our minerals acreage converted 60 gross or 0.27 net wells in progress or WIP to producing wells compared to 49 gross or 0.22 net WIP converted to PDP in the quarter ended September 30th, 2022. The majority of the new wells brought online are located in the SCOOP and the Haynesville. At the same time, our inventory of wells in progress remained consistent at 203 gross or 0.83 net wells compared to the 172 gross or 0.85 net wells reported as of September 30th, 2022. The continued track record of well conversions and replenishment of the inventory of wells in progress or WIP shows the repeatability of our business strategy. Additionally, we have mineral interests under a deep inventory of approximately 2000 gross undrilled locations that will continue to feed this WIP activity. In addition to our WIP, we regularly monitor third-party operator rig activities in our focus areas and observe 22 rigs present on PHX Minerals acreage as of January 17th. Additionally, we had 91 rigs active within 2.5 miles of PHX ownership. The number of active rigs on our mineral a acreage has stayed consistent quarter-over-quarter despite the recent decrease in natural gas prices. In summary, we continue to see steady development on both our legacy and recently acquired mineral assets which should lead to annually increasing royalty volume. Thanks Danielle and thank you to everyone for being on the call today. As we shared in our last quarterly call, we are transitioning to a calendar year reporting schedule this year to bring us in line with the rest of our public peers and to make it easier for our business and reporting results to be evaluated. With that, on today's call, I'll be generous generically referring to 12/31 period as the quarter or the quarter ended 12/31. Natural gas, oil, and NGL sales revenues decreased 32% on a sequential quarter basis to a total of $14.9 million. This decrease is attributable to the 15% lower production volumes as discussed by Danielle and 20% lower realized prices during the December 31st, 2022 quarter. Realized natural gas prices averaged $5.66 per Mcf, 26% lower than the prior sequential quarter. Realized oil prices averaged $82.52 per barrel, 12% lower and NGLs average $28.77 per barrel, 24% lower. Realized hedge losses, losses for the quarter were $3.8 million. For the quarter, approximately 65% of our natural gas, 57% of our oil, and none of our NGL production volumes, or hedge that average price as of $3.43 and $49.27 respectively. At the end of January 2023, the lower priced hedge contracts put in play -- put in place during the height of COVID have officially expired. Approximately 40% of our anticipated 2023 natural gas production has downside protection at between $3.15 and $3.45 per Mcf. On the oil side, approximately 68% of our anticipated production has downside protection between approximately $71 and $75 per barrel. Our current hedge book is available in both the 10-Q and our corporate presentation. Total transportation gathering and marketing decrease expenses, decreased 17% on a sequential quarter basis to $1.460 million. These expenses are primarily tied to movements and production volumes. Production taxes decreased 34% on a sequential quarter-over-quarter basis to approximately $618,000. These expenses are primarily tied to movements in both production volumes and commodity prices. LOE associated with our legacy non-operated working interest wells increased 6% on a sequential quarter basis to $1 million. While the LOE from the sale of our legacy Fayetteville assets sold in September 2022 came off the books, we experienced an increase in LOE associated with our working interest oil production in the Eagle Ford. Note that the Eagle Ford asset sale closed on January 31st, 2023, and we expect a significant decrease in LOE for the coming quarters. We only have 563 legacy non-operated working interest wellbores remaining in our portfolio, and those on average, have lower fixed LOE than the wellbores that we have sold over the prior 12 plus months. Cash G&A was flat at $2.6 million compared to the prior sequential quarter and would have been slightly lower had we not incurred the costs associated with terminating our ATM program. Adjusted EBITDA was $5.3 million in our quarter ended December 31st, 2022 as compared to $8.4 million in the September 30th, 2022 quarter. EBITDA was positively impacted by an 11% decrease in total cash expenses. The revenues were negative negatively impacted by 25%, mainly pulled down by the drop in natural gas prices as we pointed out. The non-cash impairment of $6.1 million was associated with held for sale accounting associated with our Arkoma properties. The sales price is lower than our book value for the assets which will lead to the impairment. Note that given the impairment, there will not be a loss on sales associated with the asset and the upcoming quarter. The Eagle Ford on the other hand had a sales price higher than its book value, which will lead to a non-cash gain in the upcoming quarter. Net income for the quarter was $3.34 million compared to $9.2 million for the prior sequential quarter. Note that this includes a non-cash impairment I just spoke about, which means that backing that out, net income would effectively be flat on a sequential quarter-over-quarter basis. We had total debt of $33.3 million as of December 31st, 2022 and our debt to trailing 12-month EBITDA was 1.25. As of February 2023, pro forma for closing of the working interest sales, our total debt was $23 million, and we had cash on hand of approximately $2.5 million. Lastly, our asset portfolio has been high-graded with improved development visibility and in an effort to improve transparency and better communication with investors, we have made the strategic decision to provide an operational outlook for calendar year 2023. This is the first time in the history of PHX in which an annual outlook has been issued. We estimate 2023 royalty production to grow approximately 20% at the midpoint of the range compared to calendar 2022. Key expense metrics are expected to remain flat on a per unit basis and LOE is expected to significantly decline pro forma the sales of the working interest assets we closed on January 31st. A detailed summary can be found in both our press release and our corporate presentation. Thank you, Ralph. As I have repeatedly highlighted over the past two years, we continue to enhance our asset base by the vesting of mature non-core non-op working interest wellbores and reinvesting the proceeds into high quality minerals in our areas of focus. This provides us with a clear path to annual volume growth. However, as Danielle reported, royalty production in the quarter was impacted by a short-term disruption in the Haynesville due to temporary shutdowns of a few high interest wells to accommodate frac completions on a set of offsetting wells, a common industry practice and fewer new wells coming online due to typical seasonal volatility or lumpiness as also explained by Danielle a moment ago. However, our inventory of WIPs continues to increase -- near-term rebound in reported volumes and our long-term prospects. Results were also impacted by lower commodity prices, but our strong balance sheet and success in divestiture of working interest continues to help us navigate near-term headwinds. We are bullish on a recovery in natural gas prices in the second half of 2023 going into 2024 as short-term impacts dissipate. Additionally, I'm also pleased to announce that given the confidence in our strategy, and the steady conversion of our inventory, or the WIPs, we have the visibility began providing an annual outlook which you can access on our Investor Relations presentation from our corporate website. As you can see, despite the current natural gas price headwinds, our strategy is sound and we expect increasing royalty volumes in 2023. Our pipeline for acquisitions continues to be robust, but to be sure, we will maintain during the downturn in natural gas prices, the same level of technical and economic discipline we have used over the last three years. I believe 2023 will be a tremendous year for PHX, its employees, and its shareholders. I would like to thank our dedicated employees for their hard work and congratulate them on our achievements to-date. Additionally, I would like to thank our Board of Directors for their support and insightful wisdom they provide an executing our corporate strategy. Hey, guys, thanks for taking the questions. So, I'll admit my own my own errors here, in that I personally was forecasting a 3% quarter-over-quarter increase for this quarter. And then you guys had the 15% quarter-over-quarter decline. And I'll just say the logic of the 3% increase was this thesis of, okay, we're hitting this inflection point with companies zeroing in on kind of key locations and the acreage clusters that you guys have. And so we should start to see a sort of pickup from this. We've talked about before this embedded growth, where you've laid the chips on the table and then as you know, activity picks up. And then, sort of the Haynesville wells, that's a good explanation in the lumpiness and the timing of WIPs being turned in line. But I want to check myself on just the broader thesis here of this sort of embedded growth, should we still expect this idea of there being embedded growth where the chips are on the table, and you can continue to even grow production without necessarily spending additional money as property is getting developed. And how do I kind of reconcile that with the outlook? Because the outlook, you guys shared shows basically flat production being at the high end, so I was curious if you can talk through that? So, Donovan, I think you're confusing -- it's Ralph, I think you're confusing a couple of things, right. So, total corporate production, which we stayed at for the last three years, right, is going to consist of growing royalty volumes, and decreasing working interest volumes, because we're monetizing, or just allowing the working interest to deplete, right. So, royalty volumes are actually -- if you look at the midpoint of the guidance, are actually expected to grow 20% on a year-over-year basis, right. The majority of those volumes are going to be accounted from wells that we already own the minerals underneath and they're currently being worked on, or PDP, right already. So, theoretically, if we spent no money this year, right, those -- there's a high degree of certainty that we're going to hit those numbers on the royalty side, right. The other thing to keep in mind, and this is very important, right. A molecule of working interest is generally worth half of a molecule of royalty volumes, right? Because on average, that royalty volume has twice the cash flow margin as the working interest molecule. So, if you hold prices constant, right, even if total corporate vol -- if you held prices cost -- if even total corporate volumes do not increase. If you see the increase in in royalty volumes, right, you're still generating additional cash flow at the corporate level, because of that difference in margin. Just real quick to kind of rephrase what Ralph saying and make sure I'm getting, just looking at the outlook table, this idea of like an embedded growth where the chips have been set on the table and the rigs move on, you're seeing that embedded growth on the royalty side for the outlook. And on the working interest side, it makes sense that you have a large decline there, because there's some sales of working interest assets, but then also even the working interests that you still have. It's the similar phenomena we're playing out where rig comes on and whatever, you guys are also actually electing to go non-consent on those. So, then you're not actually even participating in those anyway, either, right. So, that's kind of what's being reflected there. Well, so it's the natural decline in the sale and the working interest aside. And just to be clear, also on going down consent, generally speaking, whenever somebody proposes an AFE, we try to monetize that AFE and create value for the company. So, I don't think that you can make the blanket statement that we just go non-consent. We try to monetize that -- allow somebody else to put their money up and we get compensated for giving them that opportunity. Sure. But this sort of phenomenon of owning something, acreage in the sense somewhere, and then the rig comes on to it from the working interest -- when it's a working interest situation, that's not going to translate into additional volumes for you guys the way that -- royalty generally speaking, okay. That makes sense. And let me be clear to characterize. When we say working interest, those -- when we say mature assets, they mature in the sense that they've been fully developed. There's really no consistent high quality drilling locations -- drilling opportunities on those assets on that leasehold. Most of the AFEs we do get our workovers. All wells do need to be worked over, clean out the wellbores, refrac or whatever on those existing wellbores. But to be clear, what we're selling has no real true upside growth from a working interest perspective from operators coming in to drill well. We -- that's one of the reasons we were selling these assets, they have no real growth, story of growth upside, and we want to be able to demonstrate to the market that year-over-year we can grow volumes by way of a royalty. And so speaking of growing royalty volumes, this quarter-over-quarter drop, to be clear and to highlight it, we're a victim of our own success because we -- this particular four set of wells that was shut-in, we had a very high net revenue, interest, royalty interest in those four wells. And again, we can't control it. It's an industry practice to shut wells into frac offset wells. We have an interest in the offset wells as well. So, the four wells are back on, the new wells are producing, we have an interest in those wells. So, our volumes will be back up, but we again, we're kind of a victim of our own success buying in high quality areas where developments going on. Yes, and Donovan, one thing just to just to kind of finish off the point. Most of the working interests aside from the Eagle Ford, right, the prior management teams participated as a working interest owner through their mineral ownership. So, what you actually have the ability to do, in the rare case that somebody comes to drill a well, adjacent to it, where you still own minerals, even if we choose not to participate on that well, we actually -- and that well gets drilled, we actually still maintain them, the mineral and thus a royalty ownership in that new well, that generates additional cash flow from us. So, what we're selling is literally a wellbore and leasehold interest, right, and we're retaining the minerals and the royalties associated with all that acreage, right. So, I want to be crystal clear about this, we are very cognizant about creating value and not giving away any value. So, when we're selling this, it is a effectively a wellbore working interest assignment. And if there's any new developing those sections, we will benefit from that development through that the legacy ownership of the minerals. Okay. And then as a follow-up, the Haynesville shut-ins, there's really interesting I -- from when I was a petroleum engineer, I know the importance of shutting another wells to pressurize and so they don't basically become like a magnet for adjacent tracks to get drawn into them and cause interference and all that stuff. But I'm sure your business model, having such small sort of fractional interests, I think, mentally creates just a little bit of a disconnect, even for myself, that the idea of four wells in the Haynesville having such a large impact, when you own, your royalty interests tend to be somewhere between, a fraction of a single percentage point to maybe up to two percentage points. And I realize that can be a factor of 10 difference, 0.2% is one-tenth of 2%. But can you give us a sense of how -- because I'm assuming you're talking about four gross wells, just roughly how for gross wells can move the needle, is it impacting eight adjacencies? And then you've got 2% relative interest there. There's something that kind of helped us wrap our minds around this is -- sort of feels like a disconnect the idea that you have so many growth wells, the tiny fractional interests and how do four wells being shut in, really move the needle? And then another question there is just do the adjacent wells that you also have an interest in, are those also high royalty interest? Is it higher as a smaller? So, on these -- it's a good question. So, on average, if you look at the corporate presentation and you look at our average NRI per well, I think it's in the 0.6% to 0.7%. Right? And if we're, that's about the number these wells, we actually had a 4.6%, 4.7% interest in these four wells, right? Yes. Big interest wells. But also right and I think what Danielle try to get to on the call is that there are two factors, right? That's one of the factors. The second factor is. So for example, right, there is a set of wells, we cannot book revenue, right, until the production volume associated with a well is publicly made available, right. And operators and this is a state regulation have x amount of time, some of them have six months to report production data. So there are instances where we know the wells online, but we cannot book that revenue, because there's no production data available. Okay. So on a quarter-to-quarter basis, here's what happens, right? And some of it happened in this quarter, which is, there are wells that were online, right, but there's no production data. And fast forward to today, right, some of those wells, literally started reporting production data were last or this week, right? Within the last couple of days so what ends up happening is you have that lumpiness that we talked about. So the volumes that should have been reported last quarter will be reported in this 331 quarter. And so on a quarter-to-quarter basis, some quarters are going to be high, some quarters are going to be low. And that's why we've have consistently said over the last three years they use, you kind of have to use a 12 month period, whether it's a rolling four quarters or year-over-year to really compared the performance because in this situation, right, there were wells that were on production, but we just couldn't book them, right. And now there are and now there's that production data, and they will be booked. So that that's what creates that sequential quarter volatility, and some are going to be in our favor. So I'm we're going to be against this right, but they will be trued up over a 12 month period. And I would add to that. Donovan, this Chad. The four wells that were shut in, where we have the 4% plus net revenue interest, we're relatively new wells completed last fall. So they're still high up on their decline curve, and their volumes are very high. So it was a perfect storm of events that caused this quarter-over-quarter reduction. Those wells are back online, will flow those volumes through the next quarter, as well as the lumpiness on these whips that we're outputting. And by the way, these, these four wells with the high interest have been some of the best wells or best assets that we have purchased in the last three years. And you said that, yes, and this is you, you had an interest in the ones that these were wells are shut into allow adjacent wells to be completed and that you had interest in those. The adjacent wells, if this is a pad, I can see it being a case where, maybe it was just, maybe there's only one new well, that was drilled and all three had to be shut in. But so was it -- was it one well, two wells, three wells, how many wells were being completed? That led to the four shut ins? And are these also like 4.7%? Generally speaking, so there are four wells that there were four new wells coming in, and honestly, we don't have what our interest in those four new wells is it's, it's less than 4.6%. But I don't remember off the top of my head what it is. Good morning, all. With regard to your 2023 outlook could you speak to the expected trajectory for production for the year and your activity assumptions for the Haynesville more broadly? We can so for the Haynesville more broadly. Again, as I alluded to in my comments, rig count is not dropped in the Haynesville. We've been kind of steady at around 75 rigs and today we haven't seen any reduction. We try to buy out in front of the drill bit in these areas, the core areas where the rock is the best. Some of the operators were under eighth on Chesapeake they have. They're the ones with the highest rig counts. And they're those rigs that they're running. They haven't reduced the rig counts yet. We're anticipating some sort of reduction. We don't know what that is, but we don't think it'll impact the guidance, the outlook that we've provided in the queue and in our in our Investor Relations slide deck. So we're, we're confident, we're confident because of the quality of the minerals we've acquired out in front of the drill bit, so to speak. Yes, I mean, I think I think Derrick, broadly speaking, right, I mean, we're, while the numbers haven't seen, haven't shown it, right. I mean, we're sort of anticipating, maybe a 10%. Drop in the Haynesville rig count. Obviously, because we're reporting this as a regular quarter and not a fiscal year end, we're, we're the lucky recipients of having to go first, right. So a lot of the public guys haven't yet come out with their 2023 plans. But as we've modeled all of our, activity, right, we're being conservative in terms of the slowdown and pace, but Chad's point that we believe is coming. But to Chad's point, right, the 2023 volumes are the majority of which are spoken for by wells in progress, right. So that's already been started. So even if you lay down a rig today, you assume they're not going to stop drilling the well in the middle of drilling it to lay it down, right. So we're pretty confident about those numbers And going into 2024, assuming the 75 -- current 75 rig count remains constant, almost half those rigs are within a two and a half mile, proximity to PHX Minerals. So again, we feel the outlook for 2024 volumes look pretty good in terms of our market share of the overall rig count in the Haynesville. Terrific. And maybe for the follow-up shifting over to the M&A environment, I wanted to ask if you guys could speak to the broader environment for minerals. In light of the selloff in natural gas, particularly the next call it 18 months of the curve. And if you since the bid ask spread is narrowing post the sell off? Well, we were seeing as we moved through kind of Thanksgiving and going into December, a lot of money moving in, especially private equity, money moving into the Haynesville both on the Louisiana and Texas side. And our partners who are out on the ground helping us acquire these minerals we're seeing some increase in competition, a little rise in prices. And now with this, as I characterized in my comments, this precipitous drop in natural gas prices, over the last few days, our discussions with our boots on the ground, so to speak. Obviously, our valuations have come down a little bit. And the mineral owners who are selling are still expecting the same prices that were being paid a couple of months ago. And so there's going to be a probably a time period here where there's a little market therapy, so to speak. But we're still able to some of the stuff we're acquiring right now at, again, our overall economic analysis. We're able to transact on, but we are seeing some disruption in deal with deal closings so to speak. Yes. I think what you see any, it's interesting, it's a good question, because what you saw in the last quarter, right? If you look at the know, when we even reported into September 30 quarter, we were we were doing a large volume by number of deals, right? And the deal size actually got smaller, right. And that was a phenomenon, as Chad said, have that increased competition. And, to maintain the rates of return, we kind of started doing a lot more of the smaller deals to deploy the same amount of capital, right to meet to stay true to our return requirements. And I think I think what we're seeing here, January and February is the same thing, right? You kind of have to, you're sticking to the smaller stuff, because, again, it takes time for that market therapy, as Chad said, to work its way through. And so the, the smaller guys are sort of the -- are sort of the mom and pops who, who are less, how do I put it? They, they require shorter periods of market therapy to be able to transact. So, I think you're going to see a smaller average deal size in the 331 quarter, right, and then we sort of get back to normal as we move forward as that bid asks spread on, the average package size in that $2 million to $3 million range that, we saw at the beginning of last year, right kind of becomes more reasonably priced and we can achieve our return targets. And to follow on to that, Derrick, the smaller deals are really our bread and butter, our kind of sweet spot, we're a little bit below the radar. The larger private equity firms and a lot of money are looking for much bigger deals, the $20 million to $25 million to $50 million deals. And the $1 million, $2 million and $3 million deals were a tiny little company. And those deals are material to our results and success. So that's where and why we are having that same success we've been having. And maybe Chad just the good question to build on that response, which would you further suggest that the environment for the smaller deals is better now than it was maybe a quarter ago, two quarters ago? Or do you have the expectation that it could be? Yes. Again, market therapy to Ralph’s point it may, may or may not take a little time, but we are optimistic that it will probably open up some more opportunities, because of value expectation. Hi, guys, okay. So glad I'm able to get another couple ones in here. So one question, I have on natural gas prices and kind of your outlook for expecting equilibrium, as you get near the end of 2023. I'm curious if you have a take or views factored in, there's this idea that as air conditioning has become more and more -- a more important part of people's lives and air conditioning adoption becomes more widespread in the US. And then if you take climate change and hotter temperatures, you can actually have an increase in natural gas demand in the middle of summer. I'm wondering, is that something you like when you -- I'm wondering have you considered or why are you not, or if not -- why not considering potential for some natural gas price recovery, more towards the middle of the year? And we saw a bit of that in 2021. I think we saw some of that in 2022. But of course, it's complicated by the invasion in Russia and so forth. But do you see the potential for increased power burn through the summer, if we were to say get a very hot summer? Yes. So current prices have been impacted by hedge funds, shorting short contracts increased by 60% year-over-year, to-date. So that the Hedges -- that the hedge gas shorting from a financial perspective have had a huge negative impact on prices, as well as on top of that kind of a self-fulfilling prophecy larger E&Ps, as prices started dropping, they started hedging more to protect their cash flows in their CapEx budgets. And so when those companies start hedging, the back end of the curve is suppressed as well. So those two events, again just kind of, as I said, a self-fulfilling prophecy. That being said, we're still dependent upon weather, but not as much as we were once Freeport is back in service. And once that 2.2 Bcf a day comes back online, we're probably currently with that online, maybe 1 Bcf to 1.5 Bcf a day oversupplied. But once if we have a warmer than normal summer, and if prices stay where they are two more dynamics, coal to gas switching for power burn, as you just alluded to, natural gas is much cheaper than coal right now. So coal to gas switching will increase natural gas power burn. So that will be a big impact. And then CapEx budgets will drop, cash flows going to be dropped or reduced. So rigs lay down, so less supply, more demand. So my guess is it will flow through, the hedge funds will get squeezed. It will flow through going into the third and fourth quarter this year, prices will start being uplifted coming into the winter, worried about a cold winter. So we'll see the price dynamic improve 2023 going first quarter 2024 is my guess. Okay, okay. So yes, hot summer maybe does more to sort of impact storage levels or something, starting conditions up as you head into winter and not as much driving an outcome for pricing in the summertime itself. Okay. One thing, let me add one thing here, right, because I think you've touched on something that's important, right? I mean, we can generate pretty good free cash flow, even in the $3 to $4 range, right? I think the beauty of in part of the strategy of switching from having this working interest component to being a pure-play minerals company is that, when you have these drop in prices, I mean, think about on the working interest side, right. I mean, even on our non-op that we reported, right, our margins get squeezed even more, because you have the impact of inflationary pressures coming from the service side, that affects LOE, it affects rate costs, et cetera, et cetera, right. That affect the working interest side of things, way more than the mineral side of things. And there's a mineral only company, right. We can generate pretty good returns that even $3 to $4, which is effectively what the strip shows today. So $8 gas was nice, right? But maybe $8, $10 gas wasn't realistic, igniters $2, right. But if you look at the strip at $3 to $4, we still make a pretty good rate of return. So I want to make sure that you understand that. I mean, we're not sitting here hoping for higher prices to bail us out. Businesses is -- is the balance sheet super clean, and the returns are there at even $3 to $4, which is what the strip shows today. Okay. And then for the 2023 outlook with transportation, gathering and marketing, you have that coming down on a per Mcfe basis. So just curious, what is driving that, is or what assumptions are built in there? Is it just lower gas prices? Is that's getting used as a fuel for compressors or what -- what's the degree of confidence and what's driving that expectation for transportation costs? It's also a geographic location of where the production is coming from, right. There's a lot more production closer to -- it's going to cost more to move gas in the Arkoma as an example, right, then in the Haynesville. So, it's really associated with the working interest volumes going away that from the divestitures that we've made right, and continued growth into Haynesville. Thank you. And we have reached the end of the question and answer session, and I will now turn the call over to Chad Stevens for closing remarks. Again, I'd like to thank our employees and shareholders for the continued support and hard work. I'd also like to note that Ralph and I will continue to expand our investor marketing activities over the coming weeks and months through a series of non-deal road shows and conference presentations aimed at expanding investor awareness. If you would be interested in meeting, please don't hesitate to reach out to myself or Ralph or the folks who think IR. We look forward to hosting our next quarterly call in mid-May. Thank you.

EarningCall_235

Good day to everyone. Welcome to the Rockwool AS Conference Call regarding the results for the full year 2022. My name is Thomas Harder. I am the director of Group Treasury and Investors Relations of Rockwool AS. Today I’m pleased to present CEO, Jens Birgersson and CFO Kim Junge Andersen. For the first part of this call all participants will be in a listen-only mode, As a reminder, this conference call is being recorded. First Jens Birgersson will go through our presentation and give you an update on the results for the full year and fourth quarter of 2022. Afterwards we will be ready to answer all your good questions. Before I hand over the words to Jens Birgersson I must ask you to notice slide number two, which is the forward looking statement. Please be aware that this presentation contains uncertainties. Now we can go to the next slide, which is slide number three. Thank you, Thomas. Good morning, everyone. If you look at the full year, it was the third unusual year in a row. We have had, but when we look at the outcome we are quite satisfied result from the Rockwool. 3.9 billion top line up 23%, 400 million EBIT and if we set aside to Ukraine provision 10.6% EBIT margin. So considering where we were on slide four please. And we look into Q4, the background to that was a Q3 where we only had 6.2% EBIT margin and surging energy prices when we looked at our forecast in Q3, our challenge was to get the balance between the price and the surge in energy prices. Energy price did come down a little bit in Q4. We got successfully pricing up. And that gave us an a top line of about a billion or 955 million Euro and an EBIT of 101 and more normalized EBIT margin around 10.5. Obviously not up on the 12%. But considering the very extreme, very extreme energy cost increases, and that we reached 12%. If we set aside Ukraine provision, are happy with that. I suspect we haven’t, I haven’t checked the numbers, but we probably haven’t delivered more EBIT in Q4, actually, I’m definitely not for the full year. What also happened in that quarter was that we saw how the construction market started to get impacted by the very high material prices and enterprise interest rate and the general macro economy climate. So while we had very good growth, starting 2022, a little bit less in Q2, and Q3 and Q4 we went into negative territory. So while we were delivering that fourth quarter under profitability, we pulled down our factory capacity and actually in Q4, we reduced about 500 jobs in manufacturing and we pulled the capacity down to more normal levels. Remember in Q2 and beginning of Q3, we were on extremely high capacity utilization. Should be said also that that reduction of 500 factory jobs we have that kind of as part of our system, where we mix permanent employees with temporary employees. So it’s something we can do. It’s not easy but relatively easy and we have done it many times over the last years. So outcome was good. But again, we saw a slight slowdown and when we spoke last end of February, we were quite open with that. We see that why the construction industry especially new bid started to decline in not every market obviously at the same time we saw Asia. Waking up saw Canada and US in a pattern where during the autumn us was done quite a lot and Canada stayed growing and not switching in between them different months. If we go to slide five, full year sales not much to say about that, but that full year, the growth was driven by insulation up 29% more than 3 billion sides. And the majority of that growth comes out of improved price. Slide six looking into the quarter most of the insulation or the insulation growth in that quarter is solely referring to price because we had volumes down under slow down. December was okay, not a disaster. Not special in any way. But also okay December but as always a low month. If we look into the system division, where the growth stepped up a little bit, we saw basically a rock panel Europe, North America doing quite well, especially North America. Rock Panel generally had a good year straight through with good top line grow down from net negative growth earlier in the year, mainly driven by the situation in the US. Came back to slight positive growth in Q3 and then in Q4 it was up in double digit. I still would say that’s too early to say whether we have turned a corner but at least we had not two quarters for quite a long time where we had growth and growth on. Slide seven. If we look into the regional development in Western Europe, it was quite a uniform pattern with declining volumes but good, healthy price realization. So we basically had the growth across Western Europe, but obviously less Q3. Eastern Europe did quite well in Q4, but Russia was down double digit, not triple digit, but double digit, and that to Eastern Europe and Russia down to 2%. North America up single digit around the 5% mark. There during the autumn, we saw US quite stagnant or flattish and Canada still moving forward quite well. Asia, very good development outside China, but China down some 20%-30% and that we expect that to continue a bit more but the Chinese economy and the construction market has not recovered. Again, the size of China in Rockwool should be prospectively. We are small in China. So it doesn’t really make it have a big impact. Slide eight energy pricing. Q4 energy prices, if you take gas with electricity, we take coke higher than last year, but we experienced an easing compared to Q3. So that was very welcome. In Q-et depending if you look on the on the forward price, or the spot price, we would expect it to continue down for now slightly. But let’s see what really happens as the quarter plays out. Slide nine. Profitability. Nothing much to say about that. Basically the margins came back in Q4 due to price compared to Q3 and we are back on the same level that we were a year back. So that was good progress. Price increases from the beginning of the year in most businesses has been around 25% to 30% year-on-year. It’s a little bit more because Q4 one year back we had slightly lower prices and we brought to end of the year. Q4 profitability same effect in the two businesses recovery back to a more normal level and it’s basically due to price. Investments; we invested 93, million, 22 million into the sustainability investments. I come back soon to some of the results out of that. The big ones we are doing here is flume rock in Switzerland. We’ll be putting in a green melter and electrical melter. We also added some growth and capacity Canada and Rockwool capacity in Poland. We plan to continue investing not only in the green transition, but also in capacity and sustainability. Whatever happens this year in the market in terms of in terms of turbulence and challenges, we will remain positive about outlook for Rockwool. So we are not easing off, does not apply. We will continue to invest in new capacity. Q3 cash flow, no comments slide 12, no comments to that really other than saying that there is not an increase in overdue payments or anything like that. The slight differences here working capital that’s basically inflationary, driven. It’s the value of the stock and not the amount of the stock. So we have actually kept quite tight control of not building up too much stock when the volume drops. So that was worked well. Slide 13, sustainability goal achievement, back in 2016, before we had define the science based target, we set some sustainability goals up to 2030 and then we put in a halfway house goal. In most of the cases, we divided the goal 2030 by two and put that as a midterm goal. This slide represents what we achieved on that. So if you look at for example, the Co2. This is not Co2 equivalent, this is just Co2 emitted per ton or per unit stonewall produce. We have managed to reduce that by 17% already since 2016. That’s very good progress on it’s quite far beyond the target we had and I will say as we have moved along, we have learned quite a lot. And we have developed quite a few technology, done quite a few technology developments that are helping us here. And for example, if you look at 2022 we took our Marshall plant from US from coal to gas, that also reduced the cost. And we did the same in Poland where we transition one big line from coal to gas. That was at a higher cost because gas and of course went very expensive after we have done that, but for the sake of Co2, we still did it. And I remind you for example of what we did in Denmark, where we went to biogas where we dropped Co2 emissions with almost 90%. So good progress on the Co2 intensity. Reclaimed material Rock cycle is to concept. We call it Rock Cycle we have now launched out in 19 countries. And we had the goal to launch it in 15 by 2022. Generally, I would say that program has gone from strength to strength. There is quite a lot of enthusiasm about that, for obvious reasons. Energy efficiency in our own offices. Since we don’t have so many white collar stuff, it’s not a massive impact on the environment but we have traditionally not been great at insulating our own buildings. We have done about 17 offices now. Typically the reduction is about 80% when we do it and we are on 39% reduction. So well on track to achieve that goal. We got a little bit delayed due to Corona because it was very hard to renovate offices. We do this office renovation with quite a deep engagement of our own staff. So we lost almost a year during Corona. And in spite of that, we are ahead of the plan. And part of the reason is that the energy savings are a bit better than we expected. So quite happy about that development. Water, this is not or is almost a free good. Water doesn’t cost very much anywhere. But we have said, we will reduce our water intensity. We are putting in closed loop system, rainwater collection and all the rest. Most of these projects are in a way, I wouldn’t say that they’re near to loss making because water is so cheap still. On the other hand, some of these projects have already helped us keep production running, where notices come out that there’s water shortage and all the rest. We become less and less dependent on the municipal water line into our plants. And obviously, when a big consumer like we don’t need to consume as much it helps the community around us. So the 14% I’m very happy with that number. Landfill waste and that is what we don’t manage to get through production re-circulate in the systems and the landfill from our factory sides. We have cut that by 50% so far, and I think we should continue to get to 85% reduction. Obviously, we don’t mind getting there before 2030. And then on the say health and safety, we put that red. Yes, the lost time incident ratio is down. Also are the type of incidents are down. But we had we had a fatality so we still mark that red. We had a fatality in Poland last year. So although the overall statistics has improved, it’s overshadowed by that person lost, lost his life on one of our lines. We have analyzed that very carefully. And we are taking learnings from that. But we also have very big machines. And in this case, we have an employee that climbed into machines that wasn’t stopped. It shouldn’t happen. But we are taking a long and hard think about how can we ensure that no one climbs into one of these machines because it’s obviously super dangerous. Then a little bit after 2016, we did recover committed to the science based target and the science based target just to remind you of the differences. That’s an absolute dimension gold. It doesn’t matter how much we grow. And it’s also Co2 equivalents. So if it’s another gas, for example, pure Co2, you have a multiplier on it, all about that. But we have set the goal to reduce scope one and two. So that’s everything inside the factory fans plus the electricity with 38%. And then by while we do this, we believe automatically a lot of the scope three everything outside the fans will follow. But basically, it doesn’t look like much progress now. But if you go down and see what we are doing there, and the fact that we have been growing quite a lot, I’m quite happy with those 4%. And we have also had the chance now to test some of the technologies in terms of achieving this goal. Basically every green field that we do now needs to come with more or less a zero Co2 emission footprint. So we need to put absolutely emission free technology or close to it in all the new build. And we need to convert the plants we have. So the most recent one is flume rock where we have started a project to replace at melter is quite a substantial project that’s happening as we speak. And that will drop the footprint because we feed the electrical melter with green electricity. Another example that we take in action we did relocation of the factory in China that wasn’t really a relocation but we got a big grant from the Chinese government to move almost 40 million Euro and while we move we then of course replaced all the equipment and put in electrical melters. So that has been done. And when we look at the next Greenfield where we wait instead for the building permit in France, obviously, we are putting in an electrical melter that is running off green electricity. So that will reduce the footprint compared to if you do a traditional plan. So this work will have to continue. And obviously, we will just stay on course for this and you’ll see the green part of the CAPEX that we’ll have to continue. And we’ll probably talk, I haven’t announced specific figures, but it’s not cheap. You need to be planned for spending those 100 million a year roughly and keep doing that for 10 years at least. And it will take even longer than that before we are done. But we are aiming for our sustainability goals. And I’m very happy with the technology we have in place now. And the fact that we can make large scale conversions. So all good about that. Then we get to the outlook, I guess the main focus of today among some of you, we have said, we have flagged that we see the construction market go down that is it is impacted by interest, inflation and war in Ukraine and what have you. So we have seen a softening. So therefore we have put the range up to about up to 10% drop from a very high level of the top line. Obviously, it’s very hard to forecast. And they have also allowed ourselves to play a bit with price. So volume is down. Price to work this so that we roughly maintain market share and this downturn that we see now. It hasn’t at all changed our optimistic outlook. We see Germany putting money to renovation now as a plan of 30 billion in this year, not all insulation, obviously. We see France doing it, Italy doing it and there is list of countries, but it’s not happening very quickly. But the cooling off of the new bid market might help us. It frees up labor. So mix of ability to respond on price and balance and capacity, price and margin. That will impact that 10%. And just because we say down to 10%, it’s not that minus 10% is the more likely, I’m just saying it’s a very, very hard to predict here. And we have seen already during the autumn slowdown. And we had a record first half year last year. So I think those are the main reasons for that up to 10%. Then on the EBIT we sit now with the situation that energy prices are down. They are lower in Q1. That’s our prediction than in Q4. And they’re also lower potentially they could be lower than Q1 2022. So that’s all good news. But we see a risk in that that when China wakes up again, that energy prices will increase. If China’s economic activity stays as low as it is now, then the risk of that is smaller. But fundamentally how long can China be on the extremely low economic activity level that we see now. Other impact on the margin would be that we are, we have reduced capacity 500 jobs, we have reset the business on the current run rate. That’s done. That was very quickly done, swiftly done. But on the white collar side we see a more moderate adaption to the downturn we see now. And the reason for that is that fundamentally we want to be ready for increased renovation rate and a market that gets into growth mode again, and we can’t exactly say where it is but our position now is to be a little bit careful with overreacting to the downturn in our muscle, our engineering muscle we will keep building and all the rest and then maybe have a volume drop, not fully adapted at an average cost, but get ready for the upturn and keep investing. And then on the investment side, as I said 400 million Euro. Keep it on that level. The first greenfield that does see construction work start on is most likely the one in France in the coming two, three months or something like that. Thank you. So probably not so surprising. My first question is on your margin guidance. Can you maybe just clarify exactly these 8% to 10 what’s the assumption on prices and energy costs? So, have you assumed your prices up or down year-on-year the same on entity classes that assumed to be up or down in your guidance range. So, at the moment, obviously there are three impacts on the modernist absorption, so to say the amount of absorption in the factories depending on the volume, and then as the price and versus the energy prices. So what we have assumed now is kind of a picture of what we said that we match roughly the price effect and the energy effect and that we see an absorption impact and then we don’t have an accurate approach to when the price increase if we will be, the energy price if it increase that will be late again. So we are kind of not, it’s not our intention to dilute if energy prices go down our product pricing will go down but we see also that we have a certain homework to just give ourselves a little bit of room to protect market share if it’s needed. At the moment, we sit with high or slightly increasing prices in January. But we need to balance this with the volumes and absorption. So it’s between there, but I would say energy price and price, they should go a little bit hand in hand with obviously, in some segment. We do less some regions, it’s less, but there is some price element there adjusting with energy price. I mean, gross margin is assumed to go up a little bit. The thing is that, as Jens said, we were holding back a little on the white collared staff. So we will have a, you could say, more fixed cost balanced than the volume would allow for. That’s the idea and that could be a competitive effect if we get with this volume declines in selected market that we need to defend market share. And then I want to have some strength for that in case that’s needed. And that was actually just my other question here. Because I mean, what have you seen specifically, which make you mentioned, the need to defend market share so specifically? Have you already seen competitors be aggressive on price? I mean, there are so many competitive dimensions here. You have pricing now into plastic foams, certain segments, some of their raw material prices going down, that has been very high. So that might increase the competitive environment there. Then if you have a volume drop in some markets, you have some more suppliers that then want to keep capacity. I mean, we cut capacity immediately when we saw this and adapted it to what we feel is a good level. But I mean, basically, in every year, we see a little bit of that all over the place. But if the volumes go down, we certainly see it and it can vary by segment, for example, in the new build segment, at the moment, single family houses new built, where it’s not our main-main segment, but obviously the competition in there is tougher now, because that is one of the main segments for glass wall, and they lose a lot of volume in some countries, and then it also wraps over on us. So we see a mixed bag of that. And I guess my approach would be to say, we will, as always, we believe we should keep pricing sound in relation to the costs position, and for the product we sell, but that will also be react when needed. And that’s the approach. And yes, we see in some segments that it’s happening, but it’s hard to also saw early in the game to see exactly what the reason is, because for example, we have had years or in Poland, where without the market changing that much destocking can impact two quarters. So it takes a while to understand what actually happened on the end customer side and we are in that process now. I give an example in the U.S. there we had a couple of months last autumn but we had very low business volumes. We just talked to price because we were convinced the business volume was down but that it was a destocking with their stock and now the business is back up again and we are doing further price increases because it was just a massive destocking that looked like a massive market decline but it wasn’t as dramatic as one would judge by the production volume. So we have this we just need to navigate through and it’s not one recipe everywhere but one thing is for sure. I will not sit with a high price and have a competitor that keep capacity up and just going to take my volume then I will respond. Okay. Hello, good morning, everyone. I will go back to that 8% to 10% margin guidance again. If you could explain to us what is changing between q4 ‘22, to 2023, to suggest that 11.9% margin comes down to 8% to 9%? Because I’m coming from a point that the residential end market was remarkably weak in q4 and that possibly improving as we speak, not that it’s coming back to the original level, but it’s still down. But nevertheless, the sequence of improvement, and if you could just give, what’s your volume assumptions within that by end market there? So Brijesh, I don’t give specific volumes, as you know, but I can give a flavor. I agree with you that the residential market came down in many markets, I mean, Denmark, and Sweden being prime examples, which really stopped. So that we saw, but what I’ve seen now is the project pipeline where we look into safe flat roofs, you have the example of some of the data centers, projects canceled, you have a famous example, in Denmark. You have Amazon, where they had the expansion plans, and they were not public in that respect, but we knew about them. And when you talk about 4.5 million square meter of projects, flat roofs, that kind of our postponed or not happening or cancel. And then you look into say we take a country like Poland, has been in extreme-extreme high activity level. And what we look into now in Q2 is just fewer projects. So, I would say you will see a bit of decline also in other segments happening, because the economic outlook is uncertain commercial business, non residential business. And then some of it if you look into Eastern Europe and Russia, you see, maybe Russia not improving either is not a huge effect, but it is a negative effect. So I would say you can add few more segments on top of the residential. And then on the product side. Products needs to be completed, but then you need new products to come. So I look at the pipeline and the start of new products and it looks to be lower. So what you are suggesting is that the 15% to 20% volume decline you had in Q4 that is a residential is majorly in Q4. But when we look into ‘23, would you say that the residential will be down double digit and non-residential also? I’m not sure I said 15% to 20% Brijesh but I think we will have a mixed bag going forward of that you have a bit tougher competition on flat roof. You have a bit more capacity, and you have new projects not coming to the same extent because the economic outlook, it does not fit into the pipeline. And there’s just less in the pipeline. I should say at the moment, it’s not still on a level where we have sound production, but we definitely see that it has come down. But that’s I think, a short term effect that we see now. We then want to bridge this into the next stage, which is where this labor capacity used for renovation and that some countries will use renovation and the green agenda to provide a bit of stimuli or reach the goals that the EU now has mandated for the countries. And so I think we are talking about, I don’t know if this is a gap year or gap half year or gap one and a half year but this some sort of gap we are looking at but overall little bit long term you just take the next box in your spreadsheet or two boxes down your spreadsheet I’m very confident about the growth. Sorry to press on this. Would you say that your guidance for up to 10% is the most berries you could have and if anything you could beat that. We always have the spirit to beating. We looked at each other in this team. And you looked at what we did between Q3 and Q4 in all the countries and price realization that was well done. We know we add the aisle, and we know we can manage here we are creating room to what’s driven by the construction decline, whatever that number is, I’m fine with it. I’m fine with that you have a decline. But I need to balance our muscle for the future here if this is relatively short lived with capacity reductions. Sure, we will reduce also fixed cost overheads on that. But we will not go extreme on it because we are so optimistic about the future when this starts to grow again. So I think that’s the main item that the market size will define how much it is. And then there are some short effect that an extreme peak in energy pricing again can lead to a challenging quarter for us. So we need to keep in mind that if we have one of these 6% margin quarters, again, because the energy market explodes, that can also be a case that we know, because we have decided, again, we are hedging on the fraction, because we haven’t found one year hedges. There are some countries where we have really good schemes in place, and we are much better position than last year. But on aggregate, we see that it hasn’t made sense, again, for us to hedge very much. And that means that we have that risk also. So we have been making a wide window so that we have covered most of them. And then as we move through the years, of course, we hope to improve the situation. Fine, then I guess you answered my first question about 8% to 10% margin versus 11.9. Because you are alluding to the fact that you will, you are allowing a margin for a 6% EBIT margin quarter as well. And then also to sum up I mean, we go into Q1 is one thing, what happens in Q1, we are in a way in a good place in a market that is declining. But then the rest of the year is just incredibly hard to predict. It’s not like a 2% to 3% year that we had before 2018 and ‘17. It’s another one of these turbulent years we have ahead and we have reflected that in the outlook. Thank you. And also a few questions from my side. As you said several times that you want to protect your market shares. If you look at the low end of your revenue growth guidance, does that imply a loss of market share or is stable market share? That will be the first question. As you said form products are enjoying, cost deflation. So what would happen if they started to lower their prices? As you said in previous calls, there’s a certain no difference between Stone world and [Indiscernible] one technology over the other. We have analyzed that. And actually the vast majority of for example, flat roof that we get, that has a fire component to it, non-combustibility components. So it’s not the direct competition. There are buildings where both can work. But the segment we play most of that the majority of that is with the fire components. So and it can vary between countries. In Netherlands, no one cares about fire properties, Germany, they do. Denmark, they do, etc. So it is a very-very scattered picture. But the just because raw material prices go down on [Indiscernible] it doesn’t mean that big become crazy competition everywhere where it’s just price and what because we are positioned differently and we still adhere to that when we have the right product in the right segment it should have a sound profit margin. And that’s how we drive the business. I just created room in case we need it. And this stable market share it’s incredibly different, difficult to measure precise market share and all the segments we are in. But roughly-roughly speaking, that’s the approach. And then you said you expect or fear that energy costs could go up again, when China picks up. So what about your hedging strategy? Have you started to hedge energy or you’re still running on the spot mark? We have run, obviously, we are working on a strategy with PPAs power purchase agreement, we have made some, for example, in France, the government came with a great approach. And we tried that up for two years. Then on gas, we don’t like hedging with the way the market done. But we have done a fair amount to just make sure that if it goes crazy on gas that we numb the feeling. But our analysis at the moment is that when we may simulate different for example, last autumn, we didn’t hedge because our conclusion was, it would have cost us maybe 40 million in the quarter. It turned out that we were right on that. So it’s still the cost of a hedge with this one year perspective, as we see, it now still comes with a very high risk premium. When we run hedging policies the last 10 years, and you go a little bit longer hedging policy or rolling longer hedging policy, it seems that the market works, it’s no difference in the cost, actually. You just have more stability. But we haven’t found that sweet spot yet. And therefore we have largely left it except for some gas to just numb. Because we see that if the gas goes crazy with China LNG in the autumn, we at least have numbed the effect of a portion of it. Listen going back to your revenue guidance, people are questioning you about your price assumptions and from your answers. My feeling is that it’s not really clear what prices will be for next year. So I presume that’s… I was saying that there was questioning about the prices and also you’ve given just to me that you’re not quite clear what is going to happen to the price. So let’s assume that at zero. So that suggests to me that minus 10% revenue guidance, the majority of that you think is going to come from volume. Is that correct? Yes. I think it’s fair assessment. I believe that there is a good chance that energy prices are lower this year than last year. But you have to, there might be other factors too. But you have the main one is the China effect, that they open up and you have Asia pull on energy. So that’s the main one that we have allowed us a bit of room for but fundamentally, I believe that if that doesn’t happen energy prices should be lower. And then we said we hope our goal is that we match pricing with energy cost somehow. And the rest is the absorption effect and maybe some competitive elements down there. But the absorption effect is the main one. Yes. Thanks. And then going back to what you said that you agree that the majority of minus 10 is from volume to me that there’s quite extreme because in previous conversations, you said that during the global financial crisis, your total drop in volumes was minus 10%. And we are talking about a significantly milder recession now and most people are actually not used to seeing recession charts even in Europe. I’m just surprised that this is what you’re assuming. I think that different mild recession, the house builders, we might have, we don’t even have a recession in Denmark. But you have a super drastic negative impact on construction in Denmark, you talking about some house suppliers, I have a friend holds a house supplier, thousands houses a year it’s not Denmark. It’s in Sweden. He has sold one house in six months. So the recession and GDP are linked to the construction market and certain segment. It’s not the same levers. So I agree with you. Let’s hope for a mild recession, if any recession the German numbers now came up a little bit. So I may have even said Russia would be on flat this year. That might be the case. It that could be worse. But in the construction market, I see something slightly different. And how long that will be it’s hard to judge. Well, that’s still surprising because the global financial crisis was a construction led recession. And we saw how huge the impact was. And you’re effectively describing something similar now. But I hear you. Listen, the other thing about prices and competition. You have hinted a few times that competition is acute, especially in some segments, but overall, it feels like [Indiscernible]. Again, I remember previously, when you were telling us about price evolution in 2022, you were expecting that from the beginning until the end of the year, the prices would go up by 35%. But today, you just said that they actually went up by 25% to 30%. That means that in Q4, you couldn’t really raise the prices. So can you just talk to us about that? And why insulation is a good industry. The capacity utilization is quite good. I mean, it’s fallen, but it’s high. And the competition seems to be quite acute. Yes. I mean, Q4, we delivered all the price we wanted. And here, it’s more a matter of comparison, Q4 ‘21 average versus the end year. So the price. So the end of the year last year, we had increased prices compared to the first of January with more than 30%. But compared to the average of the end of the year before it was 23%. So this is semantics on how you do it. Because the quarter when you ramp, the average will be different to the endpoint. So price realization was not a problem in Q4, not at all. What I see now is that we have a situation where you have in some segment a volume drop of now, we’re talking more than 10%. Seeing it family houses in Denmark, I’m still curious to see what happens in Q4, but I predicted to be something like -70% or something like that, maybe even worse. And when you have that, plus you have distribution, destocking that’s something different as opposed to steady, slightly growing market. So I think you’re mixing two modes, a transitionary mode with a more stable growing market. And we expect this more transient market condition to happen this year. And we saw it starting in Q4, but we realized prices we did it but looking forward now last year, once we got into midyear, we knew energy prices would be crazy. So it was relatively easy to take a decision three months forward. But now real prices now go down and then up on energy or what will it be. It is a less clear picture. So it’s a different dynamics. No, I didn’t say. This is today, when you put it because I said the price compared to first of January to 30th of December. You draw a curve between them. But I don’t explain how that curve goes. I didn’t speak about averages. Can I just ask one last question about your margin? Previously you’re saying that’s your aspiration for the long term margin is 13%. Is that still your aspiration? Thank you very much. I would like to ask another question. You announced or said yesterday that you sort of still intend to build the factory in France. So, first of all, hoping you could just give an update on the timeline there? And secondly, should we also expect additional factories on top of that? I mean, you didn’t really get about building what you wanted to build last year. That’s my third question. Thank you. So on France, where it stands now is the legal case where the central government and the local municipality was involved. That’s settled. And the verdict is very clear. So now it’s a time of issuing the building permit and uncertainty of issuing that building permit is that the French legal system doesn’t have defined response times. You should do it in a reasonable time. And we don’t know exactly what that reasonable time is. But we be predict that it’s going to be towards the end of Q1 or first half of Q3, and then we start building. So that’s France. And that’s where it stands. And then the timeline for that will be, we will, of course, see if we can shorten the delivery of that. But if you start in ‘23, ‘24. ‘25, you hope to be ready. But we’d come back with a timeline. Obviously, we have worked, we continue to work on the engineering on the plant and all the rest, but we need to reassess the timeline when we have the building permit in hand. The environmental permit we have already. So that’s clear there. Permit, all of that is in place. And then in terms of other factories, I haven’t announced any other factory products, but there will be other factory products because I’m confident in the demand for [Indiscernible] be talking about the transient kind of intermediate, low or slightly lower downturn of construction. And maybe that’s not a bad thing to get renovation started. But we will come with more factory product, and we are not going to, obviously now we have a little bit more time due to the market contraction, but we still want to do it, is still going to be needed. And we will not miss, we will not miss this slowdown to push forward. And when you look at some of the absorption issues we have, we want to keep our engineering capacity and keep working through this. And some of that is reflected in our margin numbers. The other thing we do, for example, we used to time now is that be putting solar panels in quite a few places. And we have engineering for that. We keep investing in that. So yes, we’re going to come with greenification. And we’re going to come up with more new bids. And just to make sure I understand correctly, let’s say that you announced another factory here during 2023. That would not be included in the 400 million CapEx guidance. Is that correct? Yes. It’s included, we have included it. And the reason is, when you start the project, you have a, you need to buy a piece of land. You need to do a whole lot of engineering to get an app permit or environmental permit. You need to do in most places, a lot of engineering to get the building permit. It varies a little bit and you do a whole lot of other things. But of course it’s not the main equipment spent that comes in the first year. So it’s more engineering hours is expensive, but just not near placing equipment orders for 80 million Euro. So therefore it doesn’t really impact the forecast. We have allowed for those projects in our forecast 400 million. And then just as a follow up to all of the many questions regarding prices. I mean, you’ve heard it talked about the competitive dynamics here; the glasswool, and home producers. But what is happening on the customer side right now? Are you getting calls from customers that stop complaining about their volumes and say, listen, I can see the energy prices down, you need to lower the price or roll back the price increases that you did last year, is that starting to happen already? I mean, it happened a whole last year, our focus last year was that we tried to have a very open dialogue about the cost with our customer. I mean, it’s not an open book. But we tried to say we believe this happening, our energy prices, and I guess are resolved in Q3 underline that we were not doing this just for the fun of it. It was a need. And when we look at our net promoter score from our customer, in installation, for example, actually increase last year. So we did it in with a really-really open intent on the sell, and it was reality, and they suffered on the way out the materials that went up much more than we did. So we do that. And now you have the other situation that energy prices come down and then people ask for lower prices. And they’re again, we’re going to have a dialogue with them. And we need to understand the situation and then we need to weed out also market declines that are distribution destocking from and set it on that level. But you have that discussion. But that discussion is there all the time every year. You always going to talk about that with your customer. So it’s nothing unusual in it. Thanks very much. Good morning, gentlemen. I have a couple of follow up questions. The first one is quite simple. Could you just confirm what your rollover pricing is at the start of ‘23 and if the price increases that you spoke about at the Q3 results of the 17% incremental price increase from Jan, has been successful. And the reason I’m asking this is this obviously gives us the starting point to then think about where prices might go as we move through ‘23 and the discussions on market share. That’s the first question. I don’t know if I should give you the rest or if you just want to answer that one as a starting point. So the price increases we talked about in Q4, when we discussed Q3 that happened, okay. And then the roll over price is what 10%, 15%, but it varies by region and etc. Prices going forward, I think is very much dependent, we be launched price increases for Q1, but if the energy prices go down, we will not be needing that in every market. And again, it varies by market. So I think the energy in generally general inflation will rule how much we do. And to some extent, also competitive environment. So that’s where we stand. And it’s very hard to give any numbers to that. These are linked together. And we need to navigate it. But without sitting and said, all these assumptions for every month on this, this is the pricing strategy. Our approach to it is your not to look at it now quite frequently and manage it by market and really be, tried to understand what’s going on. So it’s hard to put it in. And we never do it anyhow in just a percentage point and up a nominee to buy the whole picture. And then the second question is a very simple one. You talk about the risk of prices falling in the market and your incentive to gain market share, which makes a lot of things. Are you actually seeing any prices going down today? I mean, it doesn’t sound like you’re cutting your prices right now. I know you flag risk in the future, which makes a lot of sense, but you’re not cutting prices is my take, and I don’t hear from any competitors that they’re actually cutting prices yet. So I just wanted to get a sense for the feeling on the ground today taking into account obviously the risks on the more medium term. I give an example we bought an order for 300,000 square meter a big factory, that price we went down on price to get that, due to energy cost and all the rest, and we still got the price that was 20% above the second highest bidder, and they bid credibly low price, but we got to order. So you have those effects in markets where for something [Indiscernible] pipeline, you need to choose what project you take. And then we typically have a premium. And we adapt a bit and it’s a different energy situation now than it was in the previous quarter. So we do that altogether. But overall, you see, of course, much higher price level than we had this quarter last year. And it’s not like we sit and just lower prices all over. This is done bid thinking of cost and what orders we bought. And then it’s very different also in distribution. The diffuse sites and projects and we just need to weigh this and it’s too early in the year to say exactly when that will land. But it’s not that we have gone out and say we lower oil prices 10% Definitely not. Energy prices are still very, very high. We should separate try to make sure we have underlying gross margin in the business. And that’s our goal. So I’ll take that as in some markets, and in some products prices in say January and February are lower than they were in November, December. That’s on balance, the backside. And in some markets is higher. And we all always have that. I mean, it’s a fluid thing, but the price quality is high. But there is going to be segments obviously if we have a product in the residential market now general building insulation. There we have to lower price to keep our share and then a different situation and another segment. Yes. And then just on gross margins in the last two years ‘21, ‘22 it’s been more than 1000 basis points of gross margin compression. And I understand the points that you’re making on being focused on market share and wanting to match price and cost development. But why are we not actually thinking about trying to recapture gross margins, right, because effectively if you’re saying we want to match price and cost, you’re basically saying we’re not going to try and increase the gross margin, which I find surprising, considering the level of gross margin compression in the last years. And the windfall that we’re now seeing, I would assume that the whole industry has seen a lot of gross margin compression in the last years and the whole industry is hoping to see gross margins improve. So I’m just trying to square your comments with the broader industry backdrop, which has been tricky, why not find the gross margin improvement? Yes. I think we absolutely want to keep the gross margin percentage and improve it. Okay. What you had, what you have now, was that you had this extreme-extreme inflation where it turned if you had your energy costs increase with 60% in a quarter you need to increase the top line with 60 and if you want to increase the gross margin, you need to do increase the price with maybe 70%. With that extreme dynamics we had in 2024 I mean we lost masses of gross margin because we could not react quick enough and then towards the end of the year we had gotten it back up to at least a reasonable level. So the gross margin issue we need to sort out but then we have an idea that we need to improve it because we are investing in engineering, digital and green technologies. So our goal is to get the gross margin back and get that back what you mentioned and also improve it so that we can finance and get back to 30% EBIT margin and have a business where we can find our source investments, we’re doing green technologies, etc. So you and I have no different view on that. I don’t have a different view to what you want me to have. I’m pretty sure. Just to push you on that why are you saying you want to match cost and price? I mean, that’s effectively -- About match no, no, no, no, that’s obviously not if the cost goes out 20 and that the price needs to go up 20. No. It’s still in the spirit of the gross margin, of course, to maintain the gross margin or improve it, Yes, always. And then sorry, just one last one, should you have higher EBIT margins in Q1 because you’ve got the benefits of all that road, I mean, sequentially, versus Q4, you’ve got the benefits of all that rollover pricing. And I know you flagged the risk of pricing as we move into the rest of the year. But ultimately, Q1 should still have pretty good pricing. I know volumes will be really weak, but you’ve also got quite a bit tailwind on energy costs. But how do we think about it the Q1 margin sequentially? We typically I’m not going to guide. We are still fresh in the quarter. But it’s not uncommon that we have good margins in Q1. Just I would have a question again, on your midterm target. So your gross margin was closer to 50% in the past five years, would you is it fair to assume that you want to go back to this event? And would you try to achieve a margin of like, 30% or more than 30% medium term? That would be my first question. We don’t guide for that. But if you look at it, if you start to really, you’re talking EBIT margin, and when we start to put if we need to grow more, EBIT we will be impacted on the depreciation and we are being quite firm. And so let’s say one year, we build three new plants and we add all that depreciation, maybe then we need to start to talk EBITDA margins and see what’s happening there because EBIT margin can be impacted by some of these non-cash effects. Now we haven’t done anything really drastic there. So 13%, but I will say the spirit is we are absolutely fine at 13% and growing, and we want to grow. We have had 5%, 6% CAGR for eight years. And then now that we have this dip with pure organic growth it’s pretty hard on average, to get above that, that really requires bid a lot of factories. But I don’t mind a higher EBIT margin at all. It’s just that when you start to grow more, and you build more factories, and when you build them, you don’t fill them up experiences that it’s hard to keep. You could have a really good year with a really good EBIT margin. But if you keep building all the time, I think that 13% is a pretty, 12%, 13% is pretty okay level to be at provided you grow. Then the EBITDA discussion we can do some other time, because they are you might want to step up a little bit over time, but we do a lot of investment at the moment in marketing, digital development, we are not holding back on any of that and that needs to be financed and it needs to come from the gross margin. And then on the competitive landscape. For example, we understand that will face they will probably face a higher energy price in 2024, in 2023 because they were higher last year. When we look at [Indiscernible] they just make a big, big acquisition in Glasgow, and they probably have to repay the debt so they probably need to generate cash. Do you see those big player which I understand probably like, open once more than 60%, 70% of the capacity. Do you see the big player being disciplined in price and trying to hold prices? Or do you see also like the large player being a little bit more nervous and trying to undervalue on project? I don’t want to comment that now. I think the bigger you are the more important that you have a steady cash flow to finance a big operation. You can’t swing it around up and down but commenting individual players I don’t want to do that. But if you want to run on a sound big business, of course you cannot drive as a market leader, I can speak for ourselves. I mean, it’s obviously we need to have an acceptable price level and generate cash all the time to feed our growth. So that’s our view on it. Then last question on the energy price. Just can you energy price are all actively low today? You mentioned that you had a little bit. Could you mention like, what percentage of your gas is hedged in 2023. Or just give her give us a rough order of magnitude? Let’s say like this of our total energy, we do very little is hedged. But then the specific hedge with Europe is one thing, U.S. one thing, Asia one thing. So I don’t want to venture into that, because I probably gave you the wrong number when you put it as a global number. But they have hedged a bit in Europe to make sure that we, we make ourselves a little bit more resilient. But we came to the conclusion that and I want to emphasize that for our energy types, we came to the conclusion that we couldn’t find a good hedge to hedge 80% or 50%. of all our energy in Europe. We couldn’t find a good point so far that has proven wrong. But then, of course, if China steps in at the end of the year, we might sit and say we wish we had that hedge. But up to now, I just feel every time we look at it, it seems expensive to hedge. So that’s as much as I would like to share about that. So it is pretty insignificant what we have hedged. I will express it that way. So my first question is just the clarification. You mentioned the majority of the guidance is on volumes of 10%, which kind of implies flat pricing. And that was compared to kind of the previous commentary on pricing being around 15% on the carryover. So that implies some quite strong cuts. But I’m getting a sense that’s not exactly what you’re saying. So what am I missing there? And the second question is Rockwool seems to always have a pricing premium compared to the competitors, would you think that the volume decline that you face be more pronounced as spending comes under pressure? Thank you. So first of all, we have allowed for a bit of price reduction in the outlook and then I say it’s up to 10% decline. So let’s assume we work and so we have a, we do it’s not like it’s one calculation, and we get to the guidance, we play around with the numbers and we said okay, within this we can navigate. So it means that the then numbers are not always matched. It’s like different streams. So what I said on price is that depending on the energy price and inflation, it may well be absolutely that the prices are lower during this year than at the beginning of the year. And that’s fine as long as we can protect fundamental gross margin. So energy prices keep going down and we don’t get the spike at the end of the year. We are fine with lower prices because our goal is not to just sits stuck on that and then see energy prices go down to 200 million odd share and have that you know bear and the market won’t allow it because other will go down but of course we don’t. So we have allowed in the calculation price, but we haven’t allowed a massive dilution of profitability with price. So that’s that part. And then if we then have 10% to 20% volume drop in the market in that descended more bigger effect on the bottom line. And that’s the link and the fact that if we don’t hire any people in the office as to on the white collar side, on the blue collar side, we adapt to the capacity that we deliver that they have to and that’s the vast majority or two thirds or something more of our employees are obviously in the factories. We have deep-deep manufacturing. And then on the office side, the white collar side, seen as we’re going to do engineering of new plants, this green investments, all the rest we have said that we don’t want to make a cut exactly with the volume decline temporarily in the construction market and you pay a little price for that. And that’s reflected in the outlook. And then you could argue, okay, that’s bad management. But if you like I and our team believed that the green agenda will come up. It will work. It will kick in, then it’s better to bridge because we have a really good crew in this company that knows a lot about. So we don’t want to damage that muscle. But of course, if we sit in one year’s time, and the business is down 20% in volume, and it’s looking to be stuck there. We haven’t seen that in the history of construction. But let’s assume that’s the case. Then of course, we will have to look into the fixed cost and do something deeper. But we have never seen that in the history of the company. And one of the lessons was maybe that sometimes it’s better to be more measured in those situations. We saw during Corona. I will say that second quarter we had be probably took a bit too much cost out in that one what we did. And here we see so many macro speaking for us that we need to be a little bit cool in this one. Does that make sense? Ladies and gentlemen we will now close the Q&A session. I will now turn the call over to your host for final remarks. Please begin. Thank you. Jens, Kim and I, Thomas Harder thank you for joining today’s earnings call. We would like to thank you for your good questions and the audience for listening in on today’s call. We appreciate your interest in Rockwool AS. Please be informed that on the second March, the Rockwool group will hold the next investor conference call dedicated to ESG topics. If you have further questions, please feel free to reach out to me. My contact details or you may find them on the investor section on our corporate website. Have a great day.

EarningCall_236

Hello, ladies and gentlemen, welcome to the Himax Technologies, Incorporated Fourth Quarter and Full Year 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Mark Schwalenberg from MZ Group. Please go ahead. Thank you. Welcome everyone to the Himax fourth Quarter and full year 2022 earnings call. Joining us from the Company are Mr. Jordan Wu, President and Chief Executive Officer, Ms. Jessica Pan, Chief Financial Officer and Mr. Eric Li, Chief IR/PR Officer. After the Company’s prepared comments, we have allocated time for questions in a Q&A session. If you have not yet received a copy of today’s results release, please email HIMX@mzgroup.us, access the press release on financial portals or download a copy from Himax’s website at www.himax.com.tw. Before we begin the formal remarks, I'd like to remind everyone that some of the statements in this conference call, including statements regarding expected future financial results and industry growth, are forward-looking statements that involve a number of risks and uncertainties that could cause actual events or results to differ materially from those described in this conference call. A list of risk factors can be found in the Company's SEC filings, form 20-F for the year ended December 31, 2021 in the section entitled "Risk Factors", as may be amended. Except for the Company’s full year of 2021 financials, which were provided in the Company’s 20-F and filed with the SEC on March 23, 2022, the financial information included in this conference call is unaudited and consolidated and prepared in accordance with IFRS accounting. Such financial information is generated internally and has not been subjected to the same review and scrutiny, including internal auditing procedures and external audits by an independent auditor, to which we subject our annual consolidated financial statements, and may vary materially from the audited consolidated financial information for the same period. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Thank you Mark and thank you everyone for joining us. My name is Eric Li, Chief IR/PR Officer at Himax. On today’s call, I'll first review the Himax consolidated financial performance for the fourth quarter and full year 2022, followed by our first quarter 2023 outlook. Jordan will then give an update on the status of our business, after which we will take questions. We will review our financials on both, IFRS and the non-IFRS basis. The non-IFRS financials exclude share based compensation, acquisitions related charges and the cash awards. We preannounced the preliminary key financial results on the fourth quarter 2022 on January 12, 2023 where revenues and EPS both exceeded guidance while gross margin came in moderately below the guidance range issued on November 10, 2022. Today, our reported results for revenue, gross margin and the EPS are all in line with the pre-announced results. Fourth quarter net revenues of $262.3 million increased 22.8% sequentially, substantially exceeding our guidance of an increase of around 4.0% to 8.0% sequentially despite the macro headwinds continuing to challenge our business. The increased sales momentum was attributed to our continuous efforts to deplete inventory, particularly in the small and medium-sized TDDI segments. IFRS and non-IFRS gross margins both came in at 30.5%, a decrease from 36% and 36.3% respectively last quarter, and the lower than the guidance range of 31.5% to 33.5%. Price erosion from offloading excess inventory was the predominant factor that adversely impacted our margin profile. Also contributing to margin contraction was higher cost of the inventory sourced primarily during 2021 and early 2022 when foundry and the backend pricings were higher due to capacity constraints. Yet, IFRS profit per diluted ADS was 24.1 cents, exceeding our guidance of 17.8 cents to 20.8 cents. Non-IFRS profit per diluted ADS was 27.3 cents, beating our guidance of 21.0 cents to 24.0 cents. Revenue from large display drivers was $43.5 million in Q4, an increase of 5.3% [ph] sequentially, exceeding our prior guidance of flat from last quarter. TV sales grew nicely as expected, increasing single digit quarter-over-quarter and appear to have bottomed following several quarters of sharp correction, while both monitor and notebook sales were better than guided. Large panel driver IC sales accounted for 16.6% of total revenues for the quarter, compared to 19.3% last quarter and 27.7% a year ago. Moving on to our small and medium-sized display driver segment, revenue was $177.4 million, an increase of 25.5% sequentially, and ahead of our guidance of a single digit increase, primarily a result of increasing shipment of TDDI in all three sectors, namely smartphone, tablet and automotive. Despite the challenging macro environment, our fourth quarter revenue for the tablet was up more than 100% sequentially, thanks to the strong shipment in higher-end TDDI products, an illustration of our leading solutions being adopted by more customers for their next generation products, supporting larger sized, high frame rate displays and high precision active stylus features. Meanwhile the AMOLED total solution sales, including TCON and DDIC, increased mid-teens quarter-over-quarter and accounted for more than 8% of total sales, mainly attributable to our tablet AMOLED total solution supporting the mass production of premium tablet models for a global leading customer. Q4 automotive driver sales increased single digit quarter-over-quarter better than guided as customers restocked, especially for TDDI. Automotive driver business once again represented the largest revenue contributor with over 30% of total sales in the fourth quarter, a result of our comprehensive product coverage and increasing automotive TDDI design-wins across panel houses, Tier 1s and auto brands. It’s worth noting that our automotive TDDI sales surged by more than 170% on a year-over-year basis, boosted by the robust adoption of the technology for customers’ new generation car models. Small and medium-sized driver IC segment accounted for 67.6% of total sales for the quarter, compared to 66.2% in the previous quarter and 61.2% a year ago. Fourth quarter non-driver sales also beat guidance with revenues of $41.4 million, up 33.8% from a quarter ago. Our TCON business was up a solid double digit sequentially, bolstered by higher shipment of large sized display drivers, automotive drivers as well as tablet drivers for AMOLED. For automotive TCON, we anticipate business momentum to accelerate in coming quarters, backed by a strong order pipeline and the rapid expanding design-wins across different continents. TCON business represented over 8% of total sales in the fourth quarter. Non-driver products in Q4 accounted for 15.8% of total revenues, as compared to 14.5% in the previous quarter and 11.1% a year ago. Our IFRS operating expenses for the fourth quarter were $52.5 million, a decline of 27.9% from the previous quarter and down 6.2% from a year ago. The sequential decrease was caused mainly by decreased annual bonus and salary expenses, partially offset by an increase in R&D expenses. As previously mentioned, we typically grant annual bonuses, including cash and RSUs, to our staff at the end of September each year, which can lead to higher IFRS operating expenses in the third quarter compared to the other quarters of the year. The year-over-year expense decrease was primarily related to the special bonus we awarded our employees at the end of Q4 2021. Excluding the special bonus paid in Q4 last year, the IFRS operating expenses would have increased 2% year-over-year during the fourth quarter. Non-IFRS operating expenses were $45.6 million for the fourth quarter, down 2.2% from the preceding quarter and down 6.0% from a year ago. Fourth quarter IFRS operating income was $27.5 million, or 10.5% of sales, versus 1.8% of sales in the last quarter and 39.4% of sales from a year ago. Non-IFRS operating income was $34.5 million, or 13.1% of sales, compared to 14.5% last quarter and 41.1% same quarter last year. IFRS after-tax profit was $42.2 million, or 24.1 cents per diluted ADS, compared to $8.3 million, or 4.8 cents per diluted ADS last quarter. We made a divestiture of long-term assets during Q4 2022, which resulted in a non-operating income of around $11 million on an after tax basis. Fourth quarter non-IFRS after-tax profit was $47.7 million, or 27.3 cents per diluted ADS, compared to $29.8 million, or 17.0 cents in the previous quarter. Now let's have a quick review on the 2022 full year financial performance. Revenues totaled $1.2 billion in 2022, representing a 22.3% decline compared to 2021. Unexpected lockdowns in China, geopolitical tensions and macroeconomic related factors created a challenging operating environment and impaired our business performance for the year. The halt in consumer demand and significantly reduced visibility at panel houses and OEMs towards the end of first quarter adversely impacted IC demand and consequently our sales. Given the nature of wafer production, which usually starts months in advance, the abrupt drop in demand resulted in a rapid increase in our inventory. Revenue from large panel display drivers totaled $264 million in 2022, a decline of 33.7% [ph] year-over-year, representing 22% of total sales, as compared to 25.7% in 2021. Small and medium-sized driver sales totaled $778.9 million, a decrease of 19.2% year-over-year, representing 64.8% of our total revenues, as compared to 62.3% in 2021. Non-driver products sales totaled $158.4 million, a decrease of 14.7% year-over-year, representing 13.2% of our total sales, as compared to 12.0% a year ago. Our automotive segment continued to see extraordinary business momentum in 2022. Automotive sales enjoyed the highest growth among all product lines, up more than 50% on top of the remarkable strength in 2021 when sales grew more than 110%. For the year, sales of traditional DDIC for automotive were up over 30%, while auto TDDI sales surged by more than 300%. As we mentioned repeatedly, automotive displays continue to be adopted at a rapid rate in number, size and technological sophistication, implying higher content value of display ICs per vehicle. As the market share leader in automotive display ICs, we continued to gain ground not only in DDIC but also in TDDI, supported by over 200 design-wins with the number still increasing as we speak. While our overall annual sales declined due to the unusual and abrupt demand halt, several new sales streams have started to contribute during 2022, including ICs for AMOLED and the ultralow power WiseEye smart sensing. Both product lines enjoyed higher than corporate average gross margin in 2022. Our AMOLED, we provided AMOLED DDIC and TCON for automotive and tablet displays. In addition, we are making good progress with leading panel houses for the development of AMOLED display drivers for smartphone, TV and notebook applications. We anticipate the shipment of smartphone AMOLED driver to start in the second half of 2023 for key customers in China and Korea. On the WiseEye product line, we continue to support Dell for its production ramp up in a range of newest models using our first generation WE1 solution. In addition, a host of leading laptop vendors and the CPU platform players, have shown strong interest in broadening AI use cases of future generation smart notebooks by adopting our next generation WE2 AI processor. Jordan will extrapolate on this in a few minutes. Backed by a strong business pipeline and the robust design-in activities in numerous AIoT applications with customers from all over the world, we expect strong sales momentum for WiseEye in 2023. IFRS gross margin in 2022 was 40.5%, decreased from 48.4% in 2021. The decline was largely attributable to pricing pressure resulting from excess inventory levels following the sudden halt in demand beginning in the second quarter. In addition, charges related to unmet minimum purchase orders from contracts with foundries and backend suppliers entered during the unprecedented shortage in 2021 also led to the eroding margin. Non-IFRS gross margin was 40.6% in 2022, decreased from 48.5% in 2021. IFRS operating expenses in 2022 were $229.5 million, up 12.8% from 2021. The increase was primarily a result of the vested portion of the annual bonus compensation awarded to employees in 2022 as well as previous years, along with increased salaries and R&D expenses. Non-IFRS operating expenses were $181.3 million, up 5.7% compared to 2021. 2022 IFRS operating income was $257.6 million, or 21.4% of sales, a decrease from $545 million, or 35.2% of sales, in 2021. Non-IFRS operating income was $306.8 million, in contrast to $578.3 million in 2021. IFRS net profit for 2022 was $237 million or $1.36 per diluted ADS, as compared to $436.9 million, or $2.50 per diluted ADS in 2021. Non-IFRS net profit for 2022 was $276.1 million, or $1.58 per diluted ADS, as compared to $463.6 million, or $2.65 per diluted ADS in 2021. Turning to the balance sheet, we had $229.9 million of cash, cash equivalents and other financial assets as of December 31, 2022, compared to $364.4 million at the same time last year and $227.9 million a quarter ago. The substantial decrease in cash was a result of annual cash dividend payout of $217.9 million, partially offset by $82.9 million of operating cash inflow in 2022. We had $46.5 million of long-term unsecured loans as of the end of fourth quarter, of which $6 million was current portion. Our year end inventories were $370.9 million, down from $410.1 million last quarter and up from $198.6 million a year ago. Accounts receivable at the end of December 2022 was $261.1 million, up from $253.3 million last quarter and from $410.2 million a year ago. DSO was 79 days at the quarter end, as compared to 97 days a year ago and 74 days last quarter. Fourth quarter capital expenditures were $2.3 million, versus $3.4 million last quarter and $2 million a year ago. The fourth quarter CapEx was mainly for R&D related equipment and in-house tester of our IC design business. Total capital expenditures for 2022 were $11.8 million, mainly for design tools, R&D related equipment as well as in-house tester of its IC design business as compared to $7.6 million in 2021. As of December 31, 2022, Himax had 174.4 million ADS outstanding, unchanged from last quarter. On a fully diluted basis, total number of ADS outstanding for the fourth quarter was 175 million. Now turning to our first quarter 2023 guidance. We expect first quarter revenue to decrease 12% to 17% sequentially. IFRS gross margin is expected to be around 28% to 30%, depending on the final product mix. The first quarter IFRS profit attributable to shareholders is estimated to be in the range of 3.5 cents to 7.0 cents per fully diluted ADS. Non-IFRS profit attributable to shareholders is expected to be in the range of 6.5 to 10 cents per fully diluted ADS. To note, the EPS guidance already accounts for certain foreign exchange loss attributable to NT Dollar appreciation against the U.S. Dollar based on the prevailing exchange rate. As a reminder, much of our locally incurred expenses, including the bulk of employee salaries, as well as the outstanding income tax payables are NT Dollar based. Thank you, Eric. Historically the first quarter has seasonally been the slowest of the year due to the Lunar New Year holidays. On the backdrop of sluggish global demand and a surge of Covid-19 cases in China despite their government lifting COVID restrictions, many Chinese factories extended their shutdown period through the Lunar New Year. This added uncertainty to an already stagnant business environment causing our customers to hesitate to place new orders, while cautiously managing their inventory levels and further clouding our business visibility. As uncertainty persists, our objective first and foremost is to strictly manage our inventory level, as we have been aggressive in doing so by sacrificing short-term gross margin to offload excess stock. We also continue to curtail our wafer starts while striving to win more projects from customers specifically for the purpose of digesting our excess inventory. Our inventory position has much improved since its peak during the third quarter last year and we anticipate it will continue to decrease to near our historical average no later than the third quarter of 2023. With that said, our Q1 gross margin remains under pressure. As Eric mentioned earlier, the cost of our excess inventory is high from being sourced during tight capacity constraint in 2021 when foundry and backend prices were at peak levels. Another contributing factor to Q1 margin contraction stems from market price decline of certain unsold inventories which will necessitate write-downs. However, we believe this effect will gradually diminish throughout the year as the market has shown signs of recovery across many business areas. Notwithstanding the pressure from the destocking process, we continue to work diligently towards improving our gross margin as a primary objective. Despite the expected short-term margin compression, we remain confident in our gross margin prospects, backed particularly by several high visibility product areas, most notably the higher margin automotive and WiseEye smart image sensing businesses which look set to outgrow other businesses. Looking ahead, the semiconductor industry appears to be trending toward a post-pandemic era. While the supply chain gradually stabilizes and channel inventory reverts to healthier levels, we believe a decent recovery is forthcoming. On the revenue front, we expect the first quarter to be the trough of the year with sales rebounding in the second quarter and business momentum continuing to improve into the second half of 2023. With that, I will begin with an update of our large panel driver IC business. Our first quarter 2023 large display driver IC revenue is projected to be up high single digit sequentially. We expect monitor IC business to be on a recovery trajectory as customers have started to replenish chips due to reduced channel inventory after multiple quarters of destocking. Monitor IC sales in the first quarter are set to grow by a decent double digit. TV panel prices also show signs of stabilization from restocking demand, particularly for mainstream models, and will likely strengthen in Q1, bucking the seasonal factor. We anticipate our sales for TV segment to increase single digit sequentially in Q1. Conversely on notebook segment, the highly publicized downward trend lingers on with further declines from enterprise IT budget cuts in tandem with customers’ continuous stringent inventory control measures. Turning to the small and medium sized display driver IC business. We expect Q1 revenue for this segment to decrease by double digits sequentially. Q1 automotive IC sales are anticipated to be down mid-teens as our customers continue to reduce inventory for traditional DDICs. However, we see strong momentum for our automotive TDDI sales which are poised to grow by single digit, backed by our solid new design-in pipeline which has been rapidly expanding for many quarters. Additionally, we anticipate customers’ inventory adjustment in DDIC will find equilibrium, leading to a strong recovery in the second quarter. Both smartphone and tablet IC sales are set to decline double digits quarter-over-quarter due to seasonality and customers’ continuous destocking measures. Now for automotive update on the automotive segment. The trend for the automobile interior continues to be in favor of more stylish and diverse designs, made possible with increasing quantity and size of panels inside the vehicles equipped with advanced interactive display technologies as we have previously discussed. As the leader in the automotive display IC market, we provide a one-stop-shop offering of the most comprehensive product portfolio for automotive display in the industry, ranging from traditional DDIC to new technologies such as TDDI, local dimming TCON, LTDI and AMOLED. Our business visibility for automotive segment for 2023 remains much better than those of consumer electronic products. In addition, we see a favorable trajectory in our automotive TDDI business, backed by our prompt expansion of TDDI adoption and our fast-growing new project-wins as TDDI technology is essential for large sized, interactive, stylish, curved and free-formed automotive displays required of future generation vehicles. We believe our automotive TDDI sales will be one of the primary driving forces for our long-term business growth. Moreover, we anticipate the market share of our automotive TDDI will surpass that of DDIC which has already reached 40% globally. Furthermore Himax is also the first in the industry to launch the LTDI (Large Touch and Display Driver Integration) automotive display solution, catering to the need for ever larger screens inside vehicles. LTDI solution requires even higher levels of integration of display and touch technologies for the next generation, typically larger than 30-inch automotive displays, where the solution can cascade up to 30 chips in support of ultrahigh-resolution displays, usually more than 7Kx1K, and high-precision touch sensitivity. United with a top-Tier automotive digital platform provider, our cutting edge LTDI technology was showcased at CES 2023 by one of our leading panel customers for a 55-inch pillar-to-pillar, in-cell touch display that provides seamless, intuitive and advanced tactile experience for future generation smart cabins. Our LTDI is scheduled to start mass production in the second quarter this year, substantially ahead of competition. More design collaborations in some of the most modish automotive vehicles are underway. Next for an updated on AMOLED. We continue to gear up for AMOLED driver IC development jointly with major Korean and Chinese panel makers in various applications. For tablet, we are seeing shipments on the rise for premium models that adopt advanced AMOLED displays, of which Himax offers both DDIC and TCON and has commenced production to certain leading brands. For automotive AMOLED display, we continue to win project awards for our flexible AMOLED driver and TCON with both conventional car makers and NEV vendors. Finally, we are making good progress with leading panel houses for the development of AMOLED display drivers for smartphone, TV and notebook applications. We expect to commence smartphone AMOLED driver production from the second half of 2023. Our AMOLED business, including display driver and TCON, is slated for strong growth in the next few years. As a reminder, for smartphone AMOLED display driver, we already has secured meaningful capacity. Now let me share some of the progress we have made on the non-driver IC businesses starting with an update on timing controller. We anticipate Q1 TCON sales to decrease by mid-teens sequentially, hampered by decreased shipment of tablet product for AMOLED displays. On a positive note, our position remains unchallenged in automotive TCON for local dimming technology, which not only improves display contrast ratio, but also drastically reduces display power consumption, which is critical for larger displays and EV models. With years of strenuous work on this high entry barrier technology, we have developed comprehensive local dimming TCON product offerings that can support a wide range of design covering super high frame rate of 240 Hz and resolutions of up to 8K. We have won numerous project awards from various named panel makers, Tier 1s and car makers for premium new car models with a small number of which already commenced mass production recently. Local dimming TCON is set for robust growth starting 2023. We anticipate Q1 automotive TCON sales to increase more than 150% year-over-year and represent over 2% of our total sales. Switching gears to the WiseEye AI total solution, which incorporates Himax's s proprietary ultralow power AI processor, always-on CMOS image sensor, and CNN-based AI algorithm. We continue to support the mass production of Dell’s notebook and other end-point AI applications, such as automatic meter reading, shared bike parking, video conference device, door lock and medical capsule endoscope. We are more committed than ever to strengthening our WiseEye product roadmap and retain our leadership position in ultralow power AI processor and image sensor for end-point AI applications. At this year’s CES, we teamed up with several industry-leading ecosystem partners and customers to jointly introduce our neomodern ultralow power tinyML solutions in various real end-point AI applications, including surveillance camera with Novatek, a leader in surveillance system SOC, and smart home with Useful Sensors, a start-up founded by Pete Warden, the former Google TensorFlow tech leader. We also joined forces with Seeed Studio in smart agriculture and Wentai Technology in smart office, both leading players in their respective areas. These are just a few examples of real adoption of our ultralow power WiseEye solution in the emerging end-point ultralow power image AI era. We continue to see increasing deployment of our WiseEye solution in diverse applications, driven by the mega trend of AIoT and growing demand to add image AI capability to everyday objects. To highlight our surveillance camera demonstration, Himax and Novatek jointly showcased a leading ultralow power pre-roll AI solution, enabling battery-operated surveillance camera with comprehensive event recording capability through what is called “negative time” recording. The pre-roll function, powered by our WE1 processor, features an always-on video recording operation at a slow frame rate, using only single digit milliwatts power consumption. Meanwhile, the WE1 AI processor intelligently senses specific motion events, such as certain human behavior or suspicious activities. All these are taking place while the core vision processor remains powered off. Once a classified event is identified, the WE1 processor activates the core processor which then initiates a high-resolution recording of the event while stitching the pre-roll video clips of the WE1 processor thereto. This is a substantial improvement compared to what existing surveillance solutions offer in terms of security as users receive a thorough video stream complete with pre-roll video clips of what preceded the motion events. It also significantly reduces the overall power consumption, made possible for battery-powered surveillance system. With these significant features in pre-roll and ultralow power, WiseEye is gaining traction in various surveillance fields, covering doorbell, door lock and dashcam. Numerous engagements and design projects have been in progress with surveillance customers across different domains after CES. Also during this year’s CES, we debuted our next generation WE2 AI processor that offers 40% peak power saving and 30-fold inference speed, implying over 50 times power efficiency on a per inference basis, compared to the first generation WE1 processor which is already leading the industry among AI processors aiming for similar target markets. With the exceptional local inferencing capability, the new WE2 AI processor performs face landmark detection to identify facial regions, including eyes, mouth, nose, and jaw to enable advanced, accurate and precise facial expression recognition, such as head pose estimation, gaze direction, fatigue detection, et cetera. These new features provide additional vital intelligence to a broad array of applications on top of the success of Himax’s leading WE1 AI processor that provides contextual awareness with the ability to visually detect user engagement levels based on presence, movements, and facial direction. Several leading laptop names have shown strong interest in our WE2 processor after witnessing our live demonstration at CES, leading to many follow-up engineering activities. Additionally, we continue to partner with leading notebook CPU and AP SOC players, with the aim of expanding our engagements with leading global laptop names and IoT players working on the enrichment of various new AI features and use cases for next generation smart notebook and IoT applications. Given a consistent product roadmap, improving product performance and broader customer traction from various domains, we believe that WiseEye will emerge as a multiyear structural growth driver for Himax. Lastly, for an update on our Optical Related Product Lines including WLO, LCoS and 3D Sensing. Himax is one of the few companies in the technology industry with a wide array of optical related product lines that are critical for the realization of metaverse. Our technology leadership and manufacturing expertise are evidenced by the growing list of AR/VR goggle device customers and ongoing engineering projects. We continue to work on strengthening our optical related technology suite, while collaborating with some of the world’s largest technology companies that remain deeply committed to investing in its development. Now to look quickly review some of our recent progress. First on 3D sensing, we see increasing adoption of our optical components and/or 3D sensing technologies that enable new ways people interact with AR and VR applications. At CES 2023, we introduced a series of next generation 3D vision processors to support a variety of state-of-the-art 3D sensing technologies in Time of Flight and structured light. Our structured light AI processor can provide 3D eye tracking functionality to report the exact eye positions with the industry’s highest response rate and low-friction to enable high precision and dizzy-free spatial reality applications. We featured a live demonstration of our 3D naked-eye display at CES with our eye tracking technologies becoming a hot focus point. Viewers experienced a 3D holographic view from all angles without needing additional wearables to enjoy immersive and advanced visual experience without the side effect of feeling nausea or dizziness. Moving on to WLO on 3D gesture control. Our WLO technology is deployed to empower 3D perception sensing for precise controller-free gesture recognition in VR devices. Our collaboration with a leading VR player is going smoothly and we expect volume production starting middle of this year. On 3D scanning for object reconstruction, our 3D sensing technology, which incorporates both our 3D projector and 3D decoder, is being deployed by a leading customer’s 3D scanning device for the purpose of generating real time digital twins, avatars and 3D environment surroundings that ultimately help users transit and connect seamlessly between physical and digital worlds. The collaboration is ongoing with promising progress, and we expect it to hit the market next year. As I mentioned before, metaverse related developments are early in the lifecycle but overall remains an attractive opportunity for us potentially. Himax is well positioned with years of research and development, a unique product portfolio, production history and key partnerships to capitalize on its growth as the industry continues to emerge and mature. For non-driver IC business, we expect revenue to decrease mid-teens sequentially in the first quarter. That concludes my report for this quarter. Thank you for your interest in Himax. We appreciate your joining today's call and we are now ready to take questions. Thanks for taking my question. Hi Jordan and also Eric. My first question is that in your prepared remarks, you mentioned that the fourth quarter gross margin was impacted by some charges related to future foundry and also the backend for some minimum loading. I want to know if there's still -- is this still impacting your first quarter and also the second quarter margin? Okay. To give you a sort of more comprehensive story, such charges i.e. the charges related to our not fulfilling the LTA application, volume application vis-à-vis our future foundry or backend partners and the resulting penalty incurred, such charges in 2022, meaning last year total about 1% of total sales of last year. Okay? And the uncertainty is very much backend loaded as you can imagine, because in the first half, in the first quarter of last year, there was actually still a shortage of supply, so there was no such issue, and it was starting mostly in the second half that we started to have to face such issues. The penalty, such penalty will still exist in Q1 this year, which will be a bit larger than that for Q4 last year. But we are not disclosing the detailed number here because they are not really a predominant factor of leading to the slight construction of our gross margin Q1 versus Q4. However, if you look ahead into the rest of the year, we believe when we, our inventory level becoming more normal and will starts gradually normalize, then there will be certainly be less charges of this nature going forward for this year. Bear in mind we, I mean, certainly all these countries are entered into when the industry was suffering from serious capacity shortage. And we believe quite a number of such contracts, while they may appear to be a bit problematic in some cases in the short-term they remain important countries for us going forward, or in the long-term. I would point out to our 28 nanometer LTA for smartphone OLED, and certainly equally important for our DDIC and for automotive sector, which is a very strong supporting factor for success in the automotive market. So, and there are other LTAs primarily in the areas of smartphone and tablet TDDI, we are indeed facing demand issues. And with this project, again, when the industry recovers over time and also when our inventory level comes down to a more normal position, then there will be a lot less problem and not problematic. And in the meantime, we are certainly in discussion with our foundry partners, trying to achieve some flexibility in terms of execution of such contracts. For example, we may agree to extend the duration in change for a smaller penalty in the short-term, or we may exchange product line, by loading certain other products to them more of certain other products then in change for, our shortage to meet our commitment for the LTA areas. So there are such negotiations and discussions going on, and we are in the good progress so far. So I think while such penalty may incur throughout the year, will depend largely on the market situation. But as we mentioned earlier, we believe the market will be recovered throughout the year, so we are not pessimistic about this going forward this year. Okay, thank you. Second question is regarding the guidance outlook. For the first quarter revenue, I think you have guided large sized driver IC and also timing controller to decline potentially. This seems to be a little bit different from your peers. I think they, I think they're guiding for up Q-o-Q. Can you give us some color on what you are seeing on the industry trend and why there is such a difference? And then on the automotive side, I think last year had a very strong growth 50% year-over-year. How should we think about the growth for 2023? And then I also want to know what's your opportunity in mini OLED also the micro OLED display for automotive, and how should we think about the midterm gross rate for this automotive business? Thank you. Okay. There are a lot of questions. Let me see. To recap, your first question is about the large panel display and TCON okay being different from peers. The second question is about automotive prospect for this year, basically, right? And third question is micro OLED and mini OLED? Okay. Can I address the second question first, automotive? I think it's probably the most important, the one of three questions, given our exposures to automotive market. We did suffer from a few quarters of sequential decline. Bear in mind in Q1 last year we were sure suffering from shortage with our supply being short of the demand. And, but there's a certain stop of demand, major disruption in China particularly, because there was a sudden lockdown across a big geographical area, especially for example, in [indiscernible], which is a local, a major center for automotive manufacturing. So a lot of our customers are stuck. They didn't know how to react to the overall lockdown. So while we shipped a lot of ICs to them with they had solid demand in hand at that time, they were not able to produce them or ship their products because of lockdowns. So, inevitably the second quarter ICs we shipped to our customers became their inventory. And such inventory will then be digested throughout Q3, Q4 and even up to Q1 this year. Okay? So that explains big picture wise why the automotive DDIC will suffer some decline sequentially over the last few quarters. However, our TDDI automotive, even during such period has demonstrated a very strong momentum, growing sequentially, certainly year-over-year strongly because it is a relatively new, and also it's in hot demand relatively speaking, because they are newer products, and which are typically designed for newer models, which are, many of which are EV models. And EV models in difficult times are encouraged by the government, incentivized by the government. So they are in better demand compared to traditional models. So, and therefore, our TDDI or few factors I mentioned still enjoyed very good momentum and growth even during this period, this time of period or this period of difficulty. We believe DDIC where we've done strongly from Q2 because after about three quarters of inventory digestion, I think our, throughout the ecosystem, the inventory level has been back to normal. However, whether we were -- enjoyed the similar strong growth as we enjoyed over the last two years, bear in mind, in the year before we had 110% growth year-over-year, and last year, even the economy we are facing headwinds, we still enjoyed 50% automotive growth. So in DDIC this year, such similar growth will be unlikely, I think for a few reasons. One, our market share is already close to 40%, is arguably as high as one can get. So we are -- our DDIC demand is now growing pretty much in line with the market and the automotive market for a few factors, I think you know this better, are unlikely to see a major growth this year. So therefore, we don't think our DDIC will enjoy the similar growth rates compared to last year. However our TDDI automotive will definitely continue to enjoy very strong growth with high double digits, very decent double digits year-over-year with quarter-by-quarter sequential growth and half over half sequential growth, I think very well expected. And that is because we simply enjoy very good design win pipelines. We -- in my prepared remarks I talked about more than 200 [ph] projects of design wins. Actually out of which only about 20% are currently mass production. So there is still a lot of upside, not just this year, in the next few years. And so, for last year, our automotive TDDI already accounted for about between, for about 17% of our automotive sales, pretty much industry average is single digit. So we are already 17%, and we expect by year 2025 or 2026, this number will be more than 40%. So that explains our confidence, that demonstrates our confidence that automotive TDDI will continue to enjoy very good growth going forward, not just this year, but also next few years. And on top of that, there are a few things that are very exciting, equally exciting. In our prepared remarks we talked about the timing controller, which is a [indiscernible] feature. We are the clear industry leader or arguably the only company providing the solution right now in the marketplace. We are -- we need very good, we are getting very good project wins across the board with customers starting from premium models and now certain customers even thinking about making it more into a mainstream model. So this, I think this year it will be again, very high double-digit growth and strong growth for the next few years as well. And LTDI large display touch and driver IC integration, likewise we talked about our early mobile advantage and CES demo and the second quarter this year commencement of production ahead of the industry again. And this will be a long-term growth engine as well. And finally, OLED work in our view will continue to be a premium niche market for automotive. But we are -- we already have a few customers putting our product into mass production. We are designing a fixed, collaborating with certain leading customers for all the players. And so, I think this is long-term looking good as well. So I think with automotive business, I think our overall market share is set to further grow from the existing already very high level plus of 40% and visibility is among the strongest of all sectors. So this, I think will continue to represent our single biggest revenue contributor over the years. And for large display, I think our view for the whole year is going to enjoy the growth and Q1 versus Q4 to us is seasonality. And we have seen TV market stabilizing, price rebounding and all indications are basically saying, telling us that TV market, especially high end point of view point interface for 4K TVs, I think where we have a good presence directly in partnership with leading branded customers. I think starting from second quarter, and so in second half this is set to enjoy growth. Monitor and notebook prospect are more questionable. I'm saying they do, we do have limited visibility, although we are starting to hear from end customers, leading end customers that there's a good likelihood their destocking process will be coming to a conclusion probably towards the end of second quarter with hopefully the third quarter across board slowly and gradually picking up their restocking process. But again, I think we are watching the market growth especially for monitor and high monitor, where we enjoy a very good market position. But I have to say the business prospect is not very good for the time being the visibility. And micro OLED, we believe we haven't talked about this in public and in our prepared remarks a lot, but we are actually doing a lot of work for micro OLED, but in short we are a lot more focused on offshore large display micro OLED where we are developing a total very comprehensive solutions covering display drivers, timing controller, PMIC, and others for certain strategic partners and also with various leading panel makers we are working on. For example, ASIC timing controller designs, et cetera. But in the next year or two, this remains niche, very, very small niche market, is an emerging market only and that is why in the interest of time, we have decided not to talk about it too much. Our view on very small displays, for example, AR, VR related micro OLED application, our view is a lot more negatives for a lot of technical reasons. That is our view. So we are putting a lot less resources into them, although they are inquiries from our customers for development. But we are a lot more hesitant and conservative in that regard. So for micro OLED, our focus will be in at large displays and surely in the next few quarters, we will give people a lot more updates as our developments unfold into a more mature stage. But our -- we are not very much into small size AR, VR kind of micro OLED because we are not talking about such technologies prospect. Hello. Yes, thank you for taking my questions. My first question is, can you give us some details on your pricing trend in coming quarters? Do we plan to lower the maybe wafer price or packaging price in coming quarters or in Q1? I mean, maybe for your non-LTA shipment? Thank you. Whether is LTA or non-LTA, I think our foundry partners have made it rather public that they are not about to, in any meaningful way lower this price in this year. And I think the reasoning is quite simple. They are seeing high inventory levels across the port, which their customer need design houses. So by lowering the price, they are unlikely to stimulate the demand. So why bother? So whether it is LTA regulated price or non-LTA finding price, we are not anticipating the display price from foundry to go down in any meaningful way this year. However, when it comes to good new orders I think their doors are always open for specific deal by deal, case by case negotiations. Right? So that is first point about the -- on the supply side. On the demand side, there are, I would say three points I want to mention. One, there are indeed overall price pressure upon us, because the economy, the overall economy, the macro factor is just very bearish and we have all seen our panel customers are losing money. Right? In a rather meaningful way. So I think they are under a lot of cost pressure as well. So such pressure will to some extent be transferred to us. And certainly, I mean, we were not agreed to all their price demands, and there will be a lot of negotiations, but there are some, indeed some price pressure. That is my first point. And my second point is, the products with excess inventory. I'm talking about mainly smartphone TDDI followed by [indiscernible] TDDI, primarily in these two areas where across the board we are seeing our peers are having certainly pretty meaningful excess inventory. So, and the demand is, the demand is ability is not positive either, right? So there will be price competition in order to offload everybody's inventory level. So that is certainly a price pressure. And we are taking a similar position, right? And not to mention, the inventory will prepare when our cost were as we peak. So the gross margin over here, certainly another pretty in the foreseeable future. So that -- all these have been factored in to our guidance or our prospect for the whole year now. So that is the second question. And however, there are other areas where the pricing environment is a lot more healthy. For example, our automotive sector, I talked about the demand and our revenue decline over the last few quarters, but even during those quarters, the price erosion, the extent of price erosion was nothing to compare with. The same for smartphone and tablet. Smartphone automotive was -- has been a lot more stable. And I think we are seeing the same throughout this year, the rest of this year, as we anticipate, as I said earlier, good rebound starting from the second quarter and certainly second half versus the first half. And TDDI certainly we are seeing very strong demand. So there are in this field certain sectors where the price environment is relatively healthy. Our unique timing controller, our WiseEye certainly is unique product areas and some other things, AMOLED as well, more stable comparative. So I would say, last year we suffered quite a bit for large display driver because the market was just not very good. And ditto for smartphone and tablet, TDDI and the bearish environment has still lingers on for smartphone and tablet TDDI, while large panel has been stabilizing, I would say. Does that address your question, Jason? Okay, thank you. And my second question is, during this down cycle, especially demand weakness, do we also see market competitions? I mean, maybe market share pressures for our large display or small display side? I think the pressure comes primarily on large display first. Our strategy has been, I cannot say there's no such pressure coming from competition, but our strategy for TV has been to form a strong partnership directly with the leading end customer, with the leading end brand customer for their relatively higher models. And certainly even with that we are still subject to certain fluctuations, but I think the competition is a lot less compared to the mainstream TV models vis-à-vis general panel maker customers or mainstream monitor or notebook models. For monitor and notebook, what's interesting to note is that leading, certain leading end customers, especially the Americans are facing the struggle in between the U.S. and China are hedging the effects by asking their supply chain to be away from China and that certainly benefits us somewhat. But certainly, we are also working very hard with our Chinese ecosystem and suppliers. But there seems be although panel makers are still predominantly Chinese, but when it comes to the components, especially IC components, there is still such discussion. So I think our -- certainly we will shift our focus from more towards leading non-China end customers. Although we are all dealing with mainly Chinese panel makers, but leading non-China end customers and less on Chinese end customers. I'm talking about large panel, whether it's TV, notebook or monitor, I'm talking about large panel. So I think there appears to be this trend and actually, it's not coincidence, but we, you know before the two governments struggle becomes apparent, before this we have actually strategized ourselves as much by focusing, you know facing shortage, so we do make a choice, we need to bet on certain customers and in a way bet against certain other customers. And we have been strategizing our sales by forming partnerships within international end customers. So, such strategy kind of plays well when it comes to this new development in between China and the U.S. Got it. And my last question is, I know that LTPS, LCD now it's migrate -- is improving on the automotive applications. So do we, can we expect that this kind of migration can boost the adoption rate on the automotive TDDI? Yes, indeed, as the resolution becomes higher and refresh rates becomes higher, touch panel, you know basically if you take our panels, I think the higher end fancy panels is a trend towards [indiscernible] poly panels as opposed to, I mean the traditional [indiscernible] silicon panels does enjoy cost advantage, but when it comes to higher end, higher resolution, higher refresher panels, now then poly does enjoy advantage and we are seeing many first projects together with our TDDI solutions going hand in hand, yes. And so I have one followup question, do we have penetration rate of automotive TDDI? Is that some kind of, is kind of number? For the automotive industry, I don't have the number in hand, but I did mention earlier that for Himax alone last year automotive TDDI accounted for about 17% of our total automotive sales. And so for the automotive TDDI in terms of ASPs are a bit higher than traditional DDIC, but in terms of revenue percentage like TDDI. However, bear in mind our number is substantially higher than the industry average which we believe is below 10%. Below 10%, yes so I would say our, such number is probably kind of double the industry average and certainly we expect this number to stage the increase. It's not going to be as dramatic as how we saw in smartphone and tablet you know in the last few years. But I mentioned for Himax our sales, we expect the number to be up from around 17% last year to about 40% or above by 2025 or 2026. So that is certainly a major business for us, yes. I show no further questions at this time. I would now like to turn the conference back to Jordan for closing remarks. As a final note, Eric Li, our Chief IR and PR Officer will maintain investor marketing activities and continue to attend investment conferences. We will announce the details as they come about. Thank you and have a nice day.

EarningCall_237

Welcome to the O’Reilly Automotive, Inc. Fourth Quarter and Full Year 2022 Earnings Call. My name is Paul and I will be your operator for today’s call. [Operator Instructions] I will now turn the call over to Jeremy Fletcher. Mr. Fletcher, you may begin. Thank you, Paul. Good morning, everyone and thank you for joining us. During today’s conference call, we will discuss our fourth quarter and full year 2022 results and our outlook for 2023. After our prepared comments, we will host a question-and-answer period. Before we begin this morning, I would like to remind everyone that our comments today contain forward-looking statements and we intend to be covered by and we claim the protection under, the Safe Harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. You can identify these statements by forward-looking words such as estimate, may, could, will, believe, expect, would, consider, should, anticipate, project, plan, intend or similar words. The company’s actual results could differ materially from any forward-looking statements due to several important factors described in the company’s latest annual report on Form 10-K for the year ended December 31, 2021 and other recent SEC filings. The company assumes no obligation to update any forward-looking statements made during this call. Thanks, Jeremy. Good morning, everyone and welcome to the O’Reilly Auto Parts fourth quarter conference call. Before we begin our discussion on our results and our plans for 2023, I’d like to take a few moments to discuss the announcement we made in January regarding the promotion of Brad Beckham and Brent Kirby to Co-Presidents. Our company is extremely focused on identifying and developing leaders who in turn are relentless in building the very best team in our industry. Our long-term commitment to succession planning is a critical component of our human capital strategy. In line with that strategy, we are extremely pleased to have Brent and Brad assume the elevated positions of Co-Presidents. Brad and Brent are exceptional leaders and are both driven by their passion for perpetuating our O’Reilly culture and providing excellent service to our customers. Brad and Brent bring diverse and broad experience to their roles of Co-President. Brad’s career with O’Reilly began 26 years ago when he joined the company as a parts specialist in Wagoner, Oklahoma. He has progressed through every leadership role in our store operations group, from Store Manager through Executive Vice President of Store Operations and Sales, before assuming the role of EVP and Chief Operating Officer and now Co-President. Brad’s leadership has been instrumental in the growth and expansion of our company and his impact is evident throughout the leadership ranks of our operational teams, many of whom have been mentored and promoted directly by Brad. As Co-President, Brad is responsible for the company’s domestic and international store operations and sales, real estate and expansion, human resources, training, legal, risk management, loss prevention and finance. Like Brad, Brent brings decades of retail leadership experience to his role as Co-President. Brent began his 35-year retail career with Lowe’s Companies and progressed through their ranks, ultimately serving in the roles of Senior Vice President of Store Operations, Chief Omnichannel Officer, and Chief Supply Chain Officer. Brent joined Team O’Reilly in 2018 as our Senior Vice President of omnichannel and made an immediate impact in that role before assuming leadership of our supply chain and distribution efforts. His extensive experience and significant DIY and professional retail industry knowledge is critical to our efforts to enhance our industry-leading inventory position, leverage technology investments to deliver powerful tools for our team, and drive deep connections with our DIY and professional customers. As Co-President, Brent is responsible for the company’s distribution operations, logistics, merchandising, inventory management, pricing, advertising, omnichannel, customer satisfaction, program management, electronic catalog, and information technology. Again, I am very pleased to have Brad and Brent step into these new roles and I am excited about the leadership they will provide to Team O’Reilly as Co-Presidents. Brad and Brent are participating on the call with me this morning, along with Jeremy Fletcher, our Chief Financial Officer. Greg Henslee, our Executive Chairman; and David O’Reilly, our Executive Vice Chairman, are also present on the call. I am once again pleased to begin our call today by congratulating Team O’Reilly on another record-breaking year in 2022. We finished the year with incredible momentum, posting a comparable store sales increase of 9% in the fourth quarter, representing an increase of almost 35% on a 3-year stack basis. For the full year of 2022, our team generated a robust 6.4% comparable store sales growth, which came in above the revised guidance range of 4.5% to 5.5% we provided last quarter and above the midpoint of our original comp range of 5% to 7% we said at the beginning of 2022. Even more impressive, our 6.4% comparable store sales growth in 2022 followed record-setting sales growth in 2021 and 2020 when we delivered comps of 13.3% and 10.9% respectively, resulting in 3-year stacked comps exceeding 30%. These strong top line results drove another year of record earnings per share as diluted EPS increased 8% to $33.44, representing a 3-year compounded annual growth rate of 23%. Our ability to continue to grow our business and capture market share year-in and year-out is a testament to our team’s commitment to providing excellent customer service and we couldn’t be more pleased with how our team finished 2022. Entering 2023, we remain bullish on the opportunities we see ahead of us and are anticipating another strong year of sales and earnings growth. For earnings per share, we have established the guidance for 2023 at $35.75 to $36.25, representing an increase of 8% versus 2022 at the midpoint. Achievement of our 2023 guidance would result in us doubling our EPS over the last 4 years, representing a compounded annual growth rate over 19%. This impressive performance and challenging target is a testament to the quality of our team and their commitment to our customers. Brad, Brent and Jeremy will walk through the rest of our detailed outlook in their prepared comments. But for now, I will just say that we are excited about the aggressive plans we have to invest in our business and continue to take market share and drive industry-leading results. Before I turn the call over to Brad, I want to share a little bit about the incredible culture building experience our team just had in January at our Annual Leadership Conference in Dallas. Each year, we bring all of our store managers, field leadership as well as our sales and DC management team members together in one place at one time to build leadership skills, enhance product knowledge, share best practices across our company, and celebrate our award-winning performance. The theme of this year’s conference was: One Team, Reunited. And it was definitely an appropriate rallying cry for our first in-person leadership conference in 3 years. The passion and energy displayed by our company leaders was infectious and it gives us even more confidence in the Team O’Reilly’s ability to drive future success through their unwavering commitment to our customers and fellow team members. To wrap up my prepared comments, I want to thank each of our team members for their dedication to our company’s long-term success and their outstanding performance in 2022. I am extremely proud of all of you and I am confident 2023 will be another record-setting year for Team O’Reilly. Thanks, Greg and good morning everyone. I would also like to begin my comments this morning by congratulating Team O’Reilly on another great year in 2022. Our team’s focus on providing consistent, excellent customer service allowed us to generate the outstanding results we reported yesterday and we were excited about the opportunities we see to continue to grow our business. Now I’d like to provide some additional color on our fourth quarter comparable store sales results and outline our guidance for 2023. As we discussed on our third quarter conference call, we started the fourth quarter with strong sales volumes in line with trends we saw as we exited the third quarter. Those robust sales volumes continued through the end of the year, delivering results solidly above our expectations on both the professional and DIY sides of our business each month of the quarter. From a cadence perspective, the monthly comp was steady throughout the quarter with December being the strongest month of the quarter on a 2 and 3-year stack basis. As we finished the year, we saw broad-based strength across all of our markets in weather-related categories, such as batteries, cooling and antifreeze as well as our other core non-weather-related categories. We saw strength in both our DIY and professional businesses, with professional again leading the way with double-digit comparable store sales growth on robust increases in both ticket counts and average ticket size. As we finished 2022, we were very pleased with our professional performance and we believe the momentum we have created is the direct result of our team executing our proven business model at a high level and providing industry-leading customer service. We were also pleased to see the improved performance in our DIY business, which accelerated on a 1, 2 and 3-year comparable store sales growth basis, driven by our strong average ticket growth. As anticipated, DIY ticket counts were a partial offset to our comp growth due to difficult comparisons from strong traffic growth in the previous 2 years, but improved sequentially in quarter, continuing the trend we saw in the third quarter and exceeding our expectations. As we saw throughout 2022, growth in average ticket values drove our total comparable store sales growth in the fourth quarter. Average ticket size grew in the high single-digits on both sides of our business, supported primarily by the mid single-digit growth in same SKU inflation and augmented by a benefit from increasing clean improved quality and design of new parts. On a year-over-year basis, we saw a moderation in the same SKU benefit after peaking in the second and third quarters as we lap the acceleration of higher inflation in 2021 and saw modest increases in selling prices as we finished out 2022. The moderation in selling price increases correlate with what we are seeing in product acquisition costs as industry pricing has remained rational on both sides of the business and we have been successful in passing through cost increases. Now, I want to transition to a discussion of our 2023 sales guidance and our outlook for this year. As we disclosed in our earnings release yesterday, we are establishing our annual comparable store sales guidance for 2023 at a range of 4% to 6%. And we want to provide some color on the factors that are driving our expectations as it relates to both our outlook for our industry as well as the specific opportunities we see for our company. I will begin with our view of the prospects for our industry, which we believe are still very favorable. The health of the automotive aftermarket continues to be supported by strength in the core fundamental drivers of demand and the last few years have further reinforced the compelling value proposition that motivates consumers to invest in their vehicles. Since the onset of the pandemic, the scarcity of vehicles has forced many consumers to keep their vehicles longer. These investments consumers have made to keep their vehicles well maintained have paid off and we expect to see a continued willingness by consumers to invest in their high-quality vehicles at higher and higher mileages. We also have a positive outlook on the strength of the consumer in our industry and their ongoing willingness to prioritize their transportation needs. We continue to view the health of our customers as strong, supported by extremely low unemployment and robust growth in wages over the past 2 years. We think these factors provide a solid backdrop for growth in miles driven in our industry and solid demand over the next year. While miles driven still remain below pre-pandemic levels, we have seen growth in this key fundamental for our industry over the past 18 months. We believe we will see a continuation of the long-term industry trend of steady growth in miles driven resulting from population growth and an increase in the size of the U.S. car park. As we think about the broader macro factors that could impact the U.S. economy in the coming year, we remain cautious in our outlook for – outlook concerning ongoing headwinds from inflation and the potential for deterioration in economic conditions. Negative trends in the broader economy can – it can influence demand in our industry in the short-term, but we have consistently seen over time that consumers adjust quickly in challenging environments. In fact, in 2022, it was a good illustration of how this can play out. The pressure we saw from elevated gas prices, broad-based inflation and global economic shocks weighed on our results versus our expectations in the first half of the year. However, our customers adjusted as conditions stabilized and our business rebounded to meet our full year sales growth expectations. Our experience through multiple economic cycles in our company’s history is that consumers will prioritize the maintenance and the repair of their existing vehicles as a means to avoid a car payment and save money in the face of economic pressures. Ultimately, due to the non-discretionary and value-driven nature of our business, we have confidence our industry will perform well in 2023, even if we end up facing challenges in the broader economy. As confident as we are in the strength of our industry, the most important driver for our outlook for 2023 is the opportunity we see to outperform our competition and gain market share by out-executing – or excuse me, by executing our business model and providing the best customer service in the industry. To this end, I would like to spend a few minutes discussing our outlook on both sides of our business. We expect both our DIY and professional businesses to be positive contributors to our comparable store sales growth in 2023, with professional again expected to outperform. We are excited about the strength we built in 2022 in our professional business and we believe this will continue to accelerate our growth on this side of the business. We remain highly committed to being the industry leader in the quality of service and inventory availability we provide to the professional customer and our focus moving into 2023 is to aggressively lever these strengths to further consolidate this side of the market. We also see significant opportunity to grow our DIY business, but are more cautious in how we view our ability to increase ticket counts on a year-over-year basis. Our DIY ticket counts in 2022 were pressured in comparison to 2021 as we were still calendaring the impact of government stimulus and faced headwinds from gas price shocks and inflation. We feel like we have now completely lapped the artificial spikes in demand and are pleased with the steady DIY traffic we saw in the back half of the year. While there has been a lot of volatility in our comparisons over the past 3 years, our overall growth in DIY ticket counts has been solidly positive in total during that timeframe. We have clearly taken market share since the onset of the pandemic through consistent execution and excellent service even as we face the long-term industry trend of pressure to DIY ticket counts. For 2023, we will continue to face this industry dynamic where increased complexity and quality of parts extend service and repair intervals. As a result, we anticipate DIY traffic down will be down slightly in 2023 with an expectation that we will continue to gain market share to partially offset the normal industry drag on ticket counts. We expect the pressure to DIY traffic to be more than offset by increased average ticket. We anticipate average ticket on both sides of our business to benefit from low single-digit inflation arising from the carryover benefit on a year-over-year basis as we compare against price levels that ramp throughout 2022. Consistent with our historical practice, we are including only modest increases in price levels from this point forward in 2023. We do not expect to see growth in average ticket values above and beyond same-SKU inflation, resulting from increased product complexity and our ability to trade customers up to a higher quality product on the good-better-best spectrum. As we move through 2023, we anticipate comps in the first half of the year to be stronger than the back half as a result of the year-over-year same-SKU inflation benefit as well as easier comparisons in professional ticket counts, which ramped throughout 2022, and to a lesser degree, DIY ticket counts which faced more pronounced pressure in the first half of last year. We are off to a strong start thus far in 2023 and we are pleased to see continued momentum on both sides of our business. Now I want to spend some time covering our SG&A and operating profit performance in 2022 and our outlook for 2023 before turning the call over to Brent who will provide color on our gross margin. Fourth quarter SG&A expense as a percentage of sales was 32.2%, in line with the fourth quarter of 2021. As we noted in our press release yesterday, this number includes a $28 million charge associated with our transition to an enhanced paid time-off program for our team members. Average per store SG&A for 2022 was just – was up just over 4.8%, driven by incremental variable operating expenses on better-than-expected sales volumes and cost inflation in fuel, wage rates and team member benefits. Over the last several years, our teams have demonstrated an ability to drive an enhanced level of profitability and productivity on our SG&A spend as we are pleased with the finish to 2022. As we look forward to 2023, we are planning to grow average SG&A per store by approximately 4.5%. This level of spend is a step change higher than we would normally forecast in our initial SG&A guidance. While we anticipate facing some pressures to costs from ongoing inflation, the majority of our incremental spend anticipated in 2023 reflects deliberate decisions we are making to invest in our business. We are targeting initiatives we believe will enhance the value proposition we offer to both our team members and customers by investing in our professional parts people and our customer service levels, in turn, driving both long-term sales and operating profit dollar growth. We plan to deploy these resources to enhance our long-term operational strength with specific emphasis on strengthening our team member experience and benefits, upgrading our store vehicle fleet, refreshing and improving our store image and appearance, and deploying incremental technology projects as well as investments in infrastructure. We believe we have an opportunity to capitalize on our strong competitive position in our industry and further separate ourselves as we consolidate the market. We are highly confident our investment in these initiatives will provide strong long-term returns, but anticipate we will face initial pressure to our SG&A as a percentage of sales in 2023. Based on these expectations, coupled with the normal drag from new store expansion and our anticipated gross margin rate, which Brent will discuss in a minute, we are setting our operating profit guidance range at 19.8% to 20.3% of sales. At the midpoint of our guidance, we are expecting operating profit to increase over 4%. Ultimately, our leadership team is focused on enhancing the excellent customer service and overall value that creates strong relationships with our customers on both sides of the business that, in turn, drive long-term growth in operating profits. To finish up my prepared comments, I want to add to what Greg has already said about the incredible experience we had as a leadership team in Dallas and the enthusiasm our team showed for our business and the O’Reilly culture. This was my 26th Leadership Conference, my first being in 1998 when I first became a Store Manager and there is no doubt in my mind, it was our best one yet. Since there was – since this was our first in-person conference since 2020, the last two being virtual, there was certainly a lot for us to celebrate, but I was blown away by the commitment I saw from our team to not rest on our laurels or be satisfied with our past success. Instead, our team was passionate about the opportunities we have in front of us. As we look forward to 2023 and set an ambitious plan to outperform the competition and gain market share, we will be aggressive in supporting our teams and equipping them with the tools and resources to drive our company to an even higher level of performance. I want to once again thank Team O’Reilly for their continued dedication to our company. Thanks, Brad, and good morning, everyone. I would like to begin my remarks today by congratulating Team O’Reilly on yet another strong year. Once again, your commitment to consistent, excellent customer service drove outstanding results in 2022. As Greg and Brad have already shared, it was a privilege to be able to get together with our industry-leading team professional parts people at our leadership conference in January, and we are all incredibly excited about the strength of our business moving forward in 2023. Today, I’m going to discuss our fourth quarter and full year gross margin and supply chain results and our outlook for 2023 and provide color on our capital investments. Starting with gross margin. Our fourth quarter gross margin of 50.9% was 183 basis point decrease from the fourth quarter of 2021, but in line with our guidance expectations. For the full year, gross margin came in at 51.2%, which was 145 basis point decrease from last year. Our year-over-year margin results were primarily impacted by the rollout of our professional pricing initiative, combined with anticipated comparison headwinds to the LIFO benefits that we realized in 2021. We are pleased to generate a full year gross margin rate in the upper end of our guidance range. However, we’re even more excited to drive strong gross profit dollar growth. Our price investments and superior execution of our business model paid off in a solid 5% increase in gross profit dollars in 2022, which represents a 3-year compounded annual growth rate of 11%. I want to thank our supply chain store operations and sales teams for their hard work in driving these results in a dynamic and very challenging market environment. For 2023, we expect gross margin to be in the range of 50.8% to 51.3%, which is consistent with how we viewed our margin guide throughout 2022. Even though we aren’t anticipating a significant year-over-year change, there are a few puts and takes that I want to call out that we expect to impact our gross margin in 2023. To begin, we will face some remaining incremental pressure in the first quarter from our professional pricing initiative as we lap a higher gross margin run rate at the beginning of 2022 before we fully rolled out the initiative in the middle of the first quarter. We also will face headwinds from a number of other factors, including comparisons to temporary benefits in the first half of 2022 from the timing of selling price increases, a higher planned mix of professional business in 2023 as that side of the business continues to grow faster, the calendaring of the remaining LIFO benefit that we realized in 2022, and pressure on distribution costs as we continue to stabilize our network after the disruptive periods we have seen during the pandemic, and face headwinds in the fixed cost we capitalized in inventory driven by a significantly smaller planned inventory build in 2023. Offsetting these headwinds, our gross margin outlook also includes an anticipated benefit from modest acquisition cost improvements. On balance, we still expect to see inflationary pressure in acquisition cost in 2023, driven by rising labor and raw material costs in the supply chain. These are specific areas that we have seen some relief in from cost pressure that were passed along to us over the course of the last 2 years, specifically in freight and transportation costs. Beyond what we have built into our outlook for next year, we remain very cautious regarding the prospect for incremental reductions in acquisition costs as most of our supply chain partners continue to face broad inflationary pressures. On an individual basis, none of the discrete factors I just outlined represent a significant impact to our gross margin. And candidly, we normally don’t dig in at this level of detail in discussing the puts and takes that impact our margin. However, we think it’s important to provide additional color since there are so many moving pieces. Over the last several years, we have seen variability in our quarterly margin results that are not typical of the normal cadence for our business, driven by significant cost inflation, the reversal of our LIFO debit balance and the implementation of our professional pricing initiative. In 2023, we anticipate quarter-to-quarter gross margins to be more consistent, with only first quarter being slightly below our full year guidance, driven by product mix. However, since some of our comparisons are more challenging, in the first half of the year, we do expect to see some pressure on gross margin rate on a year-over-year basis in the first two quarters. Inventory per store at the end of 2022 was $730,000, which was up 15% from the end of last year, which is significantly above the target that we set for inventory growth at the beginning of 2022. Over the course of much of the last 3 years, it has been our intent to aggressively add incremental inventory dollars, and we have been constrained by supply chain challenges and the necessity to keep up with the strong sales volumes and replenishment needs of our stores. As we move through the back half of 2022, our supply chain distribution and store operations teams made tremendous progress in deploying additional inventory. We also proactively took advantage of opportunities to incrementally add inventory to our network as we saw upside in capitalizing on strong sales demand as supply constraints begin to ease. For 2023, we are planning per store inventory to increase approximately 2%, which is below our historical run rates. This is primarily because of the inventory additions that we accelerated at the end of 2022. Our ongoing inventory management is geared to deploy the right inventory at the optimal position within our tiered distribution network. While our expected incremental additions in 2023 are modest, our plans include continued adjustments to push out and pull back inventory to ensure that we’re offering the best possible local inventory assortments. A key part of our inventory deployment strategy is our ongoing evaluation and modification of all aspects of our hub store network, including the number of hub stores, sizing of inventory assortments and market positioning. A substantial amount of increased inventory that we deployed in 2022 and the dollars we plan to roll out in 2023 are targeted in our hub stores to further enhance our industry-leading inventory position. Our AP to inventory ratio at the end of the fourth quarter was 135%, which sets an all-time high for our company, and was heavily influenced by extremely strong sales volumes and inventory turns along with the impact from increased inflation and product acquisition costs. While we deployed significant incremental inventory into our distribution centers and stores in 2022, we actually saw a decrease in net inventory investment of $513 million. We anticipate our AP to inventory ratio to moderate slightly as we move through 2023 and currently expect to finish the year with a ratio of approximately 133%. Our capital expenditures in 2022 were $563 million, which fell short of our original plan by approximately $140 million. The lower CapEx was driven by a few different factors, including a heavier weighing of leased versus owned stores, the delay of certain store DC and headquarter projects and planned maintenance, and the timing of expenditures related to distribution expansion projects. Included in our expectations for 2023, our plan to deploy capital for the initiatives that were delayed in 2022 as well as support new store and DC development to support our long-term growth strategies in the U.S. and Mexico. For 2023, we are setting our capital expenditure guidance at $750 million to $800 million. We have also established a target of 180 to 190 net new store openings with a planned heavier mix of owned versus leased locations. Our CapEx outlook also includes significant investments in our distribution network as we will complete and open our newest distribute center in Guadalajara, Mexico and expect initial expenditures for future projects. We have identified several exciting projects and initiatives in 2023 to enhance our service levels and provide customers an improved efficiency and product availability. Our CapEx guidance includes planned investments in significant DC and store fleet upgrades, store projects to enhance the image, appearance and convenience of our stores, and strategic investments in information technology projects. Before I turn the call over to Jeremy, I want to again thank Team O’Reilly for their unwavering commitment to our customers and dedication to going the extra mile to deliver outstanding business results in 2022. Thanks, Brent. I would also like to congratulate Team O’Reilly on another outstanding year. Now we will fill in some additional details on our fourth quarter results and guidance for 2023. For the fourth quarter, sales increased $353 million, comprised of a $288 million increase in comp store sales, a $65 million increase in non-comp store sales, a $2 million increase in non-comp non-store sales, and a $2 million decrease from closed stores. For 2023, we expect our total revenues to be between $15.2 billion and $15.5 billion. Brent covered our gross margin performance and guidance earlier, but I want to provide a quick reminder on how we view the application of LIFO in our gross margin results. We view our reported gross margin as the best measurement of our performance. Since the GAAP cost of goods sold under the LIFO method most closely matches our current acquisition costs, as a result, we don’t view the normal application of LIFO as a discrete charge in our evaluation of gross margin. In the first quarter of 2022, we did receive a limited benefit of just under $10 million, resulting from the reversal of our historic LIFO debit balance and the final sell-through of inventory purchased prior to acquisition cost increases. This comparison headwind is a component of our gross margin expectations that Brent outlined earlier. Our fourth quarter effective tax rate was 18.2% of pretax income, comprised of a base rate of 19.9%, reduced by a 1.7% benefit for share-based compensation. This compares to the fourth quarter of 2021 rate of 19.4% of pretax income which was comprised of a base tax rate of 20.4% reduced by a 1% benefit for share-based compensation. The fourth quarter of 2022 base rate as compared to 2021 was lower as a result of an increase in certain state tax credits. For the full year, our effective tax rate was 22.4% of pretax income, comprised of a base rate of 23.3%, reduced by a 0.9% benefit for share-based compensation. For the full year of 2023, we expect an effective tax rate of 22.9%, comprised of a base rate of 23.4%, reduced by a benefit of 0.5% for share-based compensation. We expect the fourth quarter rate to be lower than the other three quarters due to the tolling of certain tax periods. Also, variations in the tax benefit from share-based compensation can create fluctuations in our quarterly tax rate. Now we will move on to free cash flow and the components that drove our results and our expectations for 2023. Free cash flow for 2022 was $2.4 billion versus $2.5 billion in 2021. The decrease of $178 million was driven by higher capital expenditures in 2022 versus 2021, and differences in accrued compensation. For 2023, we expect free cash flow to be in the range of $1.8 billion to $2.1 billion. As Brent discussed earlier, the expected year-over-year decrease is due to a planned increase in net inventory in 2023 versus the benefit we realized in 2022 as well as the planned increase in CapEx. These headwinds are expected to be partially offset by a benefit of $300 million in 2023, resulting from favorable timing of tax payments and disbursements for renewable energy tax credits. Moving on to debt, we finished the fourth quarter with an adjusted debt to EBITDA ratio of 1.84x as compared to our end of 2021 ratio of 1.69x, with the increase driven by our successful issuance of $850 million of 10-year senior notes in June, offset by the September retirement of $300 million of maturing notes. We continue to be below our leverage target of 2.5x, and plan to prudently approach that number over time. We continue to execute our share repurchase program. And for 2022, based on the strength of our business, we were able to purchase 5 million shares at an average share price of $661.66 for total investment of $3.3 billion. Since the inception of our share repurchase program in 2011, we have repurchased 91 million shares at an average share price of $224.8 for a total investment of $20.4 billion. We remain very confident that the average repurchase price is supported by the expected future discounted cash flows of our and we continue to view our buyback program as an effective means of returning excess capital to our shareholders. As a reminder, our EPS guidance includes the impact of shares repurchased through this call, but does not include additional share repurchases. Before I open up our call to your questions, I would like to thank our team for your hard work and dedication to our company and our customers. This concludes our prepared comments. At this time, I would like to ask Paul, the operator, to return to the line, and we will be happy to answer your questions. Thank you. [Operator Instructions] And the first question today is coming from Michael Lasser from UBS. Michael, your line is live. Good morning. Thanks a lot for taking my question. So prior to the pandemic [indiscernible], O’Reilly would consistently guide its comp in the 3% to 5% range. This year, that outlook calls for 4% to 6% increase. Are you backing into that based on the investments that you’re making in SG&A such that you need this sales level in order to drive leverage to cover the buildup of cost? And if so, does that create some downside comp risk kind of similar to how last year played out? Yes, Michael, this is Greg. I mean, the answer to your question is absolutely not. Brad and – talked a lot about our bullish thesis on both the industry and what we expected from our company in 2023. And the fact that miles driven has improved, not to the point of pre-pandemic levels, fuel prices have stabilized, new car sales and used car sale prices have been elevated, and overall sales have been softer over the past few years, I think there’ll be some recovery there in 2023, but we still see a tremendous opportunity just because new car sales may improve, that doesn’t mean that the millions of cars that are on the road today will just simply vanish. Cars are built better, they are lasting longer. And for all those reasons that Brad laid out. We’re very, very optimistic about the future. But as always, we’re cautious. First and fourth quarters are more volatile. And I don’t know what’s going to happen with the economy. The onset of spring impacts our volumes. But overall, on an annual basis, we remain very bullish for our future. Michael, maybe the only thing I would add there is we continue to expect to an average ticket benefit that’s greater than normal years as we roll over some of the pricing changes that happened within our business and our industry last year. But even as we step behind or beyond some of those macro factors, we feel very positive about how we think about the opportunities we have from a share perspective as we move through next year. And those are things that we have confidence in because of the trends that we’ve seen for the last couple of quarters as we’ve seen the – I think our customer base be really resilient and respond, and we’ve seen traction and momentum on both sides of our business. That makes sense. My follow-up question, and you’ve gotten this a lot recently, is that costs have come down quite a bit, whether it’s supply chain costs in the form of lower containers, petroleum prices. Can you quantify the savings that O’Reilly is experiencing from these lower input costs? And are you passing along the savings in the form of lower prices or is that helping the profitability in offsetting some of the other pressures that you had identified? Yes, Michael, maybe let me answer your question backwards and the second part first. Yes, we’re absolutely – whenever we see any potential benefits, we’re – we’ve been able to take that to the bottom line. We have not seen to date any market movements to roll back some of the increases that we’ve seen and if there is been any relief on pressures. And Brent talked about that as a positive within his prepared comments. We do expect some benefits there this year. I think to the first part of your question, we haven’t quantified – we won’t. And I would maybe caution a little bit to treat that as a big factor moving in one direction. There continues cost pressure on balance. We think that we will see more cost increases this year than decreases as our suppliers continue to stay under pressure. And while we’ve seen some reductions, and those are good, and we’re positive about that. We’re very cautious in how we think about that moving forward and the benefits that we would bake in. And I think you see that reflected and really how – I think we’ve talked about this for the last couple of quarters, but then also as we’ve laid out our outlook. Hey, guys. I’m going to ask the one and a follow-up now. The first question on SG&A growth. Is this a 2023 event or – are the spending on the stores and people? Or do you foresee some of this spilling into next year? And then to clarify, if product the second is to follow up, if product acquisition costs start coming down, because you didn’t record a charge, does that create – does that – do we start creating a new debit balance? Just I think that, that won’t help the gross margin then since you didn’t create a charge you just build up another reserve. I just want to make sure that’s right. Yes. Simeon, I will take – I will start the SG&A response here, and then maybe Jeremy or Brent will want to chime in. We haven’t changed our focus. Our focus continues to be growing operating margin dollars. Our focus continues to be to grow top line faster than we grow SG&A. None of that’s changed. We still talk about our core culture value of expense control day-in and day-out. This change this year was a deliberate and a prudent effort to try to position us for future growth. There is a lot that’s changed over the past 2 years in the retail market and industries as a whole across all industries, actually. And we faced wage pressures, there is no secret there. We faced turnover. And we really looked ourselves in the mirror this year and had conversations with our team members about what is important. We want to stop the turnover, get back to normalized rates, make sure we have the ability to recruit, promote and retain the best talent, which is what we have been successful with for also – so part of that initiative, and I am not going to go into all of it, perhaps Brent or Brad would want to go into more detail. We called out the initiative on the PTO. That’s one example of us listening to our team members as to what’s important to them and an effort for us to position ourselves for future growth. I don’t know, Jeremy, if you had anything to add? Yes. Maybe the only thing I would say is we establish our SG&A guidance 1 year at a time, and I don’t want to guide from a pure dollar perspective, what we look like beyond that. I think what Greg points to, though, is that we remain highly committed to making sure that we are driving the right results out of every part of what we invest in our business from an expense control standpoint. And so as we move beyond this year, we intend that these investments pay off, that we lever SG&A as a result of them. And I think what you would expect to see from that perspective hasn’t changed from a long-term standpoint. Does that mean we won’t find other things as we continue to move forward and invest in, we will continue to evaluate that. It is our intent to do what we can do to build the long-term strength of our business. And I think what you see in our guidance and what we talked about matches up with that. Maybe just briefly to address your second question around the LIFO perspective, to the extent we see cost decreases in the coming year, we again, don’t expect that on balance substantially. They are going to offset cost increases. It would require a magnitude of change there that’s far in excess of what we would expect for our LIFO accounting to push back into a debit balance. So, we will be on a credit LIFO for the foreseeable future and the impact of that is as we see cost increases that will get reflected pretty rapidly within our reported results. Great. Thanks. I guess my first question was on wages. What was the inflation in average hourly wage that you saw last year? And what are you expecting this year in the guidance? Yes. It was significant in 2022. It was in the mid to high-single digit range for inflation. It depends on market and type of position for us. We expect that to moderate off of those levels. We will have some carryover impact there from a comparative situation evolves. But we are still building in an expectation of somewhere in mid-single digit range from a wage perspective because of those factors. What I would tell you is that we see that is the ongoing regular management of our business. And we expect that, as we saw in 2022, that we will have the ability to pass along the cost increases to the extent that we have planned. And if that number ends up being different than what we foresee at this point in time, we will have the ability to pass it along as well. Got it. And then my second question is on mix shift. You mentioned that as being a slight headwind to gross margin, I would love to have a little more detail on that and color within DIY and pro. Is there any trade-down occurring? What sort of behaviors are you seeing from your customers on both sides of the house? Yes. Greg, this is Brent. I can start on that and then others can chime in. We really – net overall, we haven’t seen a lot of trade-down. In some categories, we have actually seen trade up as cars become more sophisticated and OE requirements on batteries as an example, with AGM, and some of the higher price points that are required on a lot of replacement batteries today. So, we have seen a lot of that actually move the consumer from the best to the better in a lot of cases – or better to best, rather. We have seen a little bit a category where we still had some – a lot of inflation in the oil category, and we have had majors that have still struggled with their supply chain. In some cases, we have seen customers trade-down to some of our proprietary brands on oil. And quite frankly, they are happy with what they are getting and we are seeing some stickiness there with those customers with some of our proprietary brands, which long-term is a good thing for us. But net-net, we haven’t seen any violent move, one way or the other, in terms of trade-up or trade-down. And Greg, maybe specifically to your question, in Brett’s prepared comments, when you talked about some modest headwinds there, that’s really on the professional versus DIY mix, because we anticipate professional and our top line grows faster in that that creates just the mathematical pressure on… Thanks a lot and good morning. And my question is around the DIY side of the business. You mentioned that you see some opportunities for ticket growth, but you are more cautious. Now, even with the easier comparisons there in the first half of the year, would you expect ticket growth – ticket account growth, I should say, in the first half of 2023? Yes. Just to clarify, Seth, in Brad’s comments, we said we expect DIY tickets to be slightly down. Now, we see some benefit as we continue to perform well against the marketplace, we are gaining share on the DIY side of our business. And we will have some easier comparisons in the first part of the year because of the pressures we saw last year that you mentioned. That’s really all partial offsets against the longer term industry trend that we and others have talked about that pressures ticket count comps because of the increasing costs and complexity of vehicle parts that supports the average ticket price, but possibly lead to service intervals and repair cycles that extend out. So, we anticipate that, that is a bigger impact for us as we move through the year. But – and that is kind of consistent with how we would normally think about DIY tickets. Got it. Okay. So, a little bit less pressure in the first half of the year and then more normal thereafter? So, the first question, I guess it’s pretty simple, but the business did accelerate just from the comp perspective, even stacked up nicely here in Q4. And then the commentary you made suggests that strength has continued here to Q1. You mentioned weather is a driver. Is there – I guess, can we maybe quantify the benefits of weather within that acceleration? And are there other factors that could help to explain why the business has strengthened further off of already strong levels? Yes. Brian, thanks for the question. The weather is a part of the acceleration, I would tell you, it’s not all of the acceleration. So, we continue to see traction. And maybe I will start here and the other guys can jump in. We continue to see strong traction within our professional business and the trends there we have seen, we are very encouraged by. From a DIY perspective as we move further out in the middle part of the year when we saw pressure that, that customer has proven to be resilient and stabilized quite a bit. And we have seen some incremental improvements there that are positive. Obviously, as we think about those things, we look at them on a stack basis because of the comparison questions. But those types of things were positive. As we got to the last couple of weeks of the year, we had a cold snap that stretched across a lot of the country and we can see that pretty clearly. But even in that period of time, what we saw was broad-based across a lot of our regions and markets and customers. And we have been pleased with how we continue to see strength in the first quarter. Brian, I think one of the things we called out that I think you are referencing is the strength in winter categories. And we did see – actually it was the expected strength where we saw cold weather, snowy weather. Obviously, up in North, snow is probably better for us than it is in the South, but the recovery component after the snow gets cleared in the South helps us out as well. Got it. And then helpful. Then my second question, look, I know it’s early. We have been talking about it as an investment community inflation and within your business for a while. But maybe as you are starting to see those inflationary pressures begin to abate and recognizing you are not lowering prices, but prices may not be going up as much as they once were, are you seeing consumers react favorably to that? In other words, I am asking, are you starting to see the early indications of what may be sort of say, an elasticity of demand here? Yes. It’s kind of tough to see that, Brian. I think it lays into a lot of other factors with the consumer. We don’t see the same types of pressure on our customers when we have those things pass through. The shocks are a big deal. We saw shocks in 2022. But pretty quickly, our consumer adjusted to that. They have a real non-discretionary need for what they buy from us. They got to keep their car on the road to be able to get to work, to take their kids to activities, to do so many things that are part of American life. So, as we move past that, we have, I think some benefits. Before we were a little bit more constrained, maybe we have more of an opportunity to add items to a job or to sell them up on the value perspective, and we feel positive. But I think our positivity is just around the overall strength of how we view that consumer. Brian, and to Brent’s earlier comments about a trading up, trading down, we just really haven’t seen evidence of a significant trade-down to drive us to think that there was tremendous cost pressure on the consumer. Some of the trade-up, trade-down, trade-across, as I have said in previous quarters, was about inventory availability. Perhaps we didn’t have the particular brand they wanted. But a lot of that subsided with the improvement in our supply chain. So, really haven’t seen any evidence of elasticity or trade-down. Okay. Thanks guys. We sort of danced around this, I think a little bit, but I wanted to ask you about any concern about a price war or aggressive pricing? We talked about it a year ago, there was a big concern. It never really materialized. But now as auto is talking about getting more investment in pricing, your gross margin, the midpoint is down, can you just address how you talk about or think about pricing amongst your close-end competitors? Thanks. Yes, Mike. We – as we said last year when we introduced this concept of adjusting our prices, it was a very scientific process we went about. It was thought out, it was tested, it was evaluated. And it wasn’t across the board. It was directed to individual SKUs across individual categories. And we did not see any movement from our competitors at that time. Since then, we have clearly taken some market share. So, what our competitors do going forward, we don’t know. We have no control over it. But we have seen no evidence of that today. Brad, you live this day-in and day-out. What are your thoughts? Yes. Hi, good morning Mike. Yes. As you know, as we talked for a long time, all of us here have been in this industry a long time. We have been with the company a long time. That’s the first time in my 26-year career that we have really moved our framework down the way we did. And we have no plans to do that again. We felt like, as you know, there was a huge opportunity. We work in a $130 billion industry, and we do – we have 10% share. And as you know, on the professional side, it’s so much more fragmented. And with the disruption we saw the last couple of years in supply chain and some other things that hit the independents and some of the smaller players harder, especially some of the weaker ones, it was very strategic for us to make the decision we made. And we feel not only as good as we did a year ago, but we feel better in the decision we made. But it’s made, we did it, we rolled it out. And there is no plans to do that again. And just to remind you, Mike, our team’s pro-price initiative is probably fifth or sixth down the list when our operational and sales teams go to market. They are focused on having relationships with the installers. They are focused on having relationships with the decision makers, given the best delivery service in town, helping them turn their base. And I don’t necessarily contribute a large portion success last year to just pricing, it’s backing up the pricing with the top two, three, four things that make the pricing pay-off. And we feel really good about how that’s going to continue to build in 2023. Yes. This is Brent. I was just – the only thing I would add to the comments Greg and Brad have already made on professional pricing is the framework remains intact and we monitor it on an ongoing basis. We monitor all our pricing on an ongoing basis. But we have stayed very rigorous around being competitive, but winning on service and parts availability. That’s how we win. Thanks for squeezing me in. Dovetail on a couple of earlier questions. I guess on that DIY acceleration, you got past – gas prices came down, you had some favorable weather in December. But I guess as you would look at DIY, do you think your share gains accelerated sequentially? Like, to what degree was the acceleration some more of like non-specific to O’Reilly factors versus share gains that you have been driving? Yes. Really hard to say, Chris. And I think, especially on the DIY side of the business, the pace of what we see from a ticket perspective, more modest than on the professional side. I think we talked about where it’s very clear that we know we are outperforming the market. We think that likely throughout the course of all of ‘22 and, frankly, 2021 and 2020, we have been outperforming the market and taking in share gain. So, I don’t know that we have seen a net incremental acceleration there. I think it would be hard to see. And maybe you would have to watch it for a few more quarters. I do think that a lot of what we have seen is our customers just continued to be strong and healthy. And the industry continues to prove out that there is a lot of value in investing in your vehicle at higher mileages that it’s – there is a good payback on that for customers. And I think that’s been a positive as well for us. And so I have sort of a two-part follow-up. So, one is, I guess on the PTO program, to what extent is this sort of a competitive need where direct competitors, companies like Walmart are – had a higher PTO option that you are reacting to in the environment? And then just second, as you think about the first half, obviously, weather always has an impact. It hasn’t been that great of a winter so far. Is the expectation as you lap that gas shock that is essentially muting what’s been a relatively warm winter? Hi Chris, this is Brad. I will touch on the PTO and then kick it over for the other. But as you know, Chris, we work in a people business. You have heard us talk for a long time about the importance of having tenure and knowledge and professional parts people. And quite frankly, we are very proud. When Brent and I talk, whether it’s the store teams or DC teams, we are very proud of our ability to retain and cut down on turnover amongst everything that’s happened in the last couple of years. But frankly, Chris, we are getting ahead. We are going to invest in our people. We are looking at human capital. We are looking at things that we are less looking at what maybe competitors do or other parts of retail is we feel like this is very strategic. We feel like our people value their time off. We feel like we need to be more flexible in the way we give them that time off. And so really, this for us is getting ahead, not following anybody. We are being proactive and we are going to invest in our people. And then maybe on the weather part of your question Chris. I would say, obviously, we have had some positives there at the end of our fourth quarter just maybe more on balance, we would view weather as neutral. I think depending upon market, we see things, plus or minus, there is nothing from a significant change perspective that at least at this point, we would call out as having an overhang effect as we move through to the next couple of quarters as we think about cadence during the year, and I know Brad mentioned it in his comments. We do expect more strength in the first half of the year because of some of the opportunities on average ticket in the comparisons from a DIY and professional ticket count perspective is as we run up against some more opportunities there. But on balance, I think weather, we would say it’s favorable constructive for the type of demand we would like to see in 2023. Hi guys. Scot Ciccarelli. Thanks for squeezing me in as well. Just – I guess one more question regarding kind of the same SKU inflation comments you guys have already made. Are some vendors actually reducing product costs, or are we just talking about reducing the magnitude of increases, because obviously, that’s two different things. Yes. Chris, this is Brent – Scot, rather, this is Brent. I would tell you it’s a little bit of a mixed bag out there. There are some suppliers that have been more impacted by wage rates and raw material costs than others, obviously. We are always going to negotiate hard. We are always going to negotiate for best first cost. None of that stopped. We are relentless with that. We are going to continue to be. I hit on in the prepared comments, we have seen transportation costs abate from what they were from the peak. We have seen some benefit from that. So, we have also still seen some continued inflation even later in the cycle on petroleum products. So, it’s a mixed bag out there, but our guide anticipates that we are not going to see any tailwinds from acquisition costs. We are going to negotiate hard, and we are going to do everything we can to control cost. And then where we do have to absorb any increases, we will be able to pass those along to our customers. And just to be completely clear on that one, Scot, when we say our guide, it does include some benefit from cost reductions. I think what Brent is saying there is that we are not anticipating a lot of incremental things versus what we haven’t seen already. Got it. Okay. That’s very helpful. And then just clarity on the $28 million PTO charge in SG&A. Was that treated as a charge because that was like an accrual catch-up of some sort and then we are basically on a run rate basis for ‘23? Yes. Scott, we did have an accrual catch-up. As we converted to the plan, we had some existing balances and some other types of sick and personal time items that as we enhanced, we had a one-time catch-up for team members. And then our run rate will be higher as a result of what we have seen. On a comparative basis, it will have normal comparisons there with the difference, obviously, that it will be a run rate throughout ‘23 as opposed to a fourth quarter charge in ‘22. Thank you. We have reached our allotted time for questions. I will now turn the call back over to Mr. Greg Johnson for closing remarks. Thank you, Paul. We would like to conclude our call today by thanking the entire O’Reilly team once again for their unwavering commitment to our customers and for our strong results we have posted in 2022. We look forward to another strong year in 2023. I would like to thank everyone for joining our call today, and we look forward to reporting 2023 first quarter results in April. Thank you. Thank you. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

EarningCall_238

Good day, and welcome to the Philip Morris International Fourth Quarter 2022 and Full Year Earnings Conference Call. Today's call is scheduled to last about one hour, including remarks by Philip Morris International Management and the question-and-answer session. [Operator Instructions] I will now turn the call over to Mr. James Bushnell, Vice President of Investor Relations and Financial Communications. Please go ahead, sir. Welcome. Thank you for joining us. Earlier today, we issued a press release containing detailed information on our 2022 fourth quarter and full year results. You may access the release on pmi.com. A glossary of terms including the definition for the smoke-free products as well as adjustments, other calculations and reconciliations to the most directly-comparable U.S. GAAP measures and additional smoke-free volume and net revenue data are at the end of today's webcast slides, which are posted on our website. Growth rates presented on an organic basis reflect currency-neutral adjusted results excluding acquisitions and disposals. As such figures and comparisons presented on an organic basis exclude Swedish Match up until November 11, 2023. As mentioned previously, starting in the second quarter of 2022 and on a comparative basis, PMI excludes amortization and impairment of acquired intangibles from its adjusted results. Today's remarks contain forward-looking statements and projections of future results. I direct your attention to the Forward-Looking and Cautionary Statements disclosure in today's presentation and press release for a review of the various factors that could cause actual results to differ materially from projections or forward-looking statements. We had a remarkable year for our smoke-free transformation in 2022. Despite the exceptional challenges of the war in Ukraine, severe supply-chain disruptions and global inflation, we delivered very strong financial performance and took two major strategic strides towards a smoke-free future. I would like to express my deepest thanks to all my colleagues who spared no effort to drive excellent business results during these unprecedented times. Our thoughts also continue to be with those affected by the war in Ukraine and the recent tragedy in Turkey and Syria. In 2022, PMI delivered its second consecutive year of total volume growth, reflecting continued IQOS progress and broadly stable cigarette volumes. Full-year smoke-free net revenues reached almost one third of total PMI and over 50% in 17 markets. This is impressive progress towards our ambition of becoming a predominantly smoke-free company by net revenues in 2025. IQOS outstanding results continued with over 21% full-year growth in both shipment volumes and in market sales excluding Russia and Ukraine. This reflects broad-based momentum in the European Union Region, Japan and emerging markets. IQOS ILUMA continues to generate excellent growth in its launch markets with upgrades from existing users and new user acquisition outperforming our initial expectations. The success is supported by the increasing deployment of a two-tier heated tobacco units portfolio providing adult smokers with an expanding range of innovative and high quality alternatives to cigarettes. In combustibles, we delivered a robust performance with a 3.7% growth in organic net revenues and 0.3 percentage points higher share of segment excluding Russia and Ukraine despite the impact of adult smokers moving to smoke-free products. We also achieved two critical strategic milestones this year, reaching an agreement to take full control of IQOS in the U.S. in 2024 and successfully completing the acquisition of Swedish Match. These achievements will accelerate our smoke-free journey and further position us to lead the transformation of the wider industry. Clearly currency headwinds were extremely strong and weighed on our U.S.s dollar performance but although volatility remains, I am pleased that they seem to significantly abate in 2023. Overall, 2022 was a pivotal year and we look forward with confidence to 2023 and beyond. Let me now take a moment to cover our key strategic priorities for the coming year. With the acquisition of Swedish Match and securing the rights to IQOS in the U.S., we are now a global smoke-free champion. The addition of the world's biggest market and the leading nicotine pouch brand ZYN alongside IQOS provides us with significant untapped opportunities to further accelerate the growth of smoke-free products. As the strength of our IQOS business continues to grow rapidly, the full global rollout of IQOS ILUMA is a major priority and we expect to make substantial progress on this in 2023. The success of ILUMA in launch market so far demonstrates the importance of groundbreaking consumer-centric innovation and we continue to broaden our portfolio with new science backed offerings. This includes BONDS by IQOS, our latest heat-not-burn device aimed at low and middle-income adult smokers. Pilot city launches in Colombia and the Philippines in the last quarter of last year show encouraging early results and we intend to take the learnings from these markets before deploying on a wider scale. Following a successful first three years of partnership with KT&G, we also recently extended our long-term s their innovative smoke-free portfolio outside South Korea. I am very pleased to welcome Swedish Match to the PMI family. In particular, the fast-growing potential of ZYN is an incredibly exciting addition to our company. We are focused on supporting the Swedish Match team to continue and accelerate ZYN's outstanding success in the U.S. while also leveraging PMI commercial capabilities to prepare for the international expansion of nicotine pouches. IQOS and ZYN are premium brands, leading the global categories. In the U.S., ZYN is helping the American smokers leave cigarettes behind and offers great growth prospects. For IQOS, the world's biggest smoke-free market is a fully untapped opportunity and our plans are well underway in anticipation of our commercialization in the second-quarter of 2024. We will be leveraging the sales and distribution capabilities of Swedish Match and deploying our commercial model digital engine organization and infrastructure for a successful rollout. We continue to expect to file an FDA application for ILUMA in the second half of 2023. Logically, the international expansion of pouches, U.S. IQOS preparation and the replacement of IQOS 3 with ILUMA entail additional investments this year, which combined with inflationary pressures will weigh temporarily on our margins. Indeed, many of the ILUMA related costs are one-off in nature as Emmanuel will explain shortly. In combustibles, we continue to target a stable category share over time, despite the impact of IQOS cannibalization, while taking judicious pricing actions. As we have explained previously, maintaining our leadership in combustibles helps us maximize switching to smoke-free products through the connection to adult smokers and the retail trade. In terms of our financials, the strength of our business provides a robust operating cash flow, which we intend to maximize to provide reinvestment in our smoke-free business, deleveraging and growing the dividend. Finally and importantly, shaping tobacco harm reduction by providing better alternative to smokers and advocating for science-based regulation is critical to accelerate the end of smoking. Harm reduction is also at the core of our transformation, as we lead on sustainability to achieve a positive impact. We will be expanding on some of these topics at the CAGNY conference on February 22nd and we also plan to host an Investor Day in September this year, where we will go into greater detail on our strategies and future vision particularly with regard to --with regards to the U.S. Our business driven by the strength of our innovative and expanding smoke-free portfolio generated excellent top and bottom-line 2022 growth despite a very difficult operating environment, and currency headwinds. Our full-year net revenues grew organically by plus 7.7% excluding Russia and Ukraine and by plus 7.1% for total PMI, despite the impact of hyper-inflationary accounting in Turkey. This reflect the continued strength of IQOS, accelerating pricing and the recovery of combustibles in many markets against a pandemic affected comparison, notably in H1. IQOS devices accounted for approximately 5% of our full-year smoke-free net revenue, both including and excluding Russia and Ukraine. Our net revenue per unit grew plus 4.4% organically, excluding Russia and Ukraine and by plus 5.5% in total. This was driven by combustible pricing of plus 4%, excluding Russia and Ukraine and plus 5% overall and the positive mix impact of an increasing proportion of HTUs heated tobacco unit in our overall volumes at higher net revenue per unit. Our 2022 operating income margin contracted organically by 60 basis-points, excluding Russia and Ukraine, and by 70 basis-points in total due to a number of headwinds, which I will come back to. These headwinds were partially mitigated by the growth of IQOS, pricing and ongoing cost-saving. In 2022, we delivered gross saving of $800 million, with over $1.6 billion in the first two years of our cost-efficiency program. This puts us well on track to exceed our target of $2 billion over 2021, 2023 and mitigate recent inflationary pressures. Despite margin pressures, our excellent top-line growth and diligent cost management enabled us to deliver currency-neutral adjusted diluted EPS growth of plus 11.9% to $5.34, excluding Russia and Ukraine. This includes unfavorable currency of $0.85 and a small contribution from Swedish Match net of financing cost for the 50 days of consolidated results. For total PMI, we delivered adjusted diluted EPS of $5.98. We also had a strong finish to the year. We delivered excellent Q4 organic net revenue growth of plus 7.9%, excluding Russia and Ukraine. Again, reflecting continued strong IQOS performance and robust combustible pricing. Our Q4 operating income margin expanded organically by 80 basis-points, excluding Russia and Ukraine mainly due to a favorable comparison. On the total PMI basis, organic margin were flat including the impact of a challenging comparison in Ukraine and shipment timing in Russia. Fourth quarter currency-neutral adjusted diluted EPS grew by plus 20.8% to $1.23, excluding Russia and Ukraine and plus 15.3% in total to $1.39, an excellent performance. Before discussing our 2023 guidance, I would like to provide an update on our Ukraine and Russia businesses. We continue to support our employees in Ukraine. I would like to personally thank them for their tremendous efforts to secure our business continuity during these extremely difficult times. In Russia, the environment for divestment has become increasingly challenging and complex, especially given recent December 2022 regulatory developments. To provide more clarity to investors on the full extent of our business, we will now include both Ukraine and Russia in our 2023 outlook and reporting. Now turning to the 2023 outlook, we expect to deliver very strong organic net revenue growth of plus 7% to plus 8.5%, supported by a step-up in combustible pricing and another year of rapid progress from IQOS. This would represent the third consecutive year of organic top-line growth above plus 7% and excludes the impact of Swedish Match for the large majority of the year. Including Swedish Match, we expect our reported currency-neutral net revenues to grow into the teens as its business continue to deliver strong performance. We expect excellent IQOS momentum to increase our HTU volume growth on the total PMI basis supported by the growing presence of ILUMA across our key markets. We forecast between 125 billion and 130 billion HTU shipment volumes, representing plus 15% to plus 19% growth. This reflects an acceleration compared to the total PMI growth rate in 2022 despite an expectation of no significant progress in Russia given our decision to restrict investment and innovation. As mentioned previously, the pace of ILUMA launches has also been constrained by supply-chain disruption and the outstanding take up in initial launch markets. We expect these constraint to gradually improve through the first half as we progressively roll-out to more geographies. We expect organic smoke-free net revenue growth to have an aligned progression with the rate of HTU volume growth this year with less distortion from device revenues. Including Swedish Match and at constant-currency, we expect to deliver around $13.5 billion in smoke-free net revenue compared to $10 billion in 2022 and to approach 40% of total PMI net revenues this year. While our topline outlook is very strong, like many other global companies, we are facing significant margin pressure from the intensifying inflationary environment in addition to a number of specific transitory factors and investment, which I will come back to shortly. As a result, we expect our adjusted operating income margin to contract between 50 to 150 basis-points organically. Accordingly, we forecast currency-neutral adjusted diluted EPS growth of plus 7% to plus 9%. This includes a full year's positive contribution from Swedish Match net of the related interest expense. However, this benefit is offset by the increased interest cost on our non-Swedish Match debt and planned investments. This translate into an adjusted diluted EPS range of $6.25 to $6.37, including $0.15 of unfavorable currency at prevailing rates. This forecast notably, does not factor any potential favorable court ruling in Germany regarding the legality of the surcharge on the existing excise tax on heated tobacco product effective in Germany. as of 2022. We continue to account for the excise surcharge in our results and outlook. However, the obligation to pay the surcharge is currently suspended. If favorable the difference to our forecasted 2023 excise payment would increase our net revenue by around 1% and adjusted diluted EPS growth by around three point, thereby increasing our forecast currency-neutral growth range to plus 10% to plus 12%. In this scenario, we would expect our operating cash flow would move towards the upper half of our forecast range. We expect a judgment towards the end of the year. There are a number of other assumptions underpinning our outlook, we expect total international industry volumes of cigarettes and heated tobacco units excluding China and the U.S. to decline by minus 1% to minus 2%. Given our leadership in smoke-free product and the growth of the category, we expect to gain share and target total PMI shipment volume to be flat to plus 1%, which would represent the third consecutive year of growth. While we seek to maintain our share of the combustible category, given the current inflationary environment, we assume combustible pricing will accelerate to around plus 6% on an organic basis compared to the plus 5% realized in 2022. We also expect full-year capital expenditure of around $1.3 billion as compared to $1.1 billion in 2022, reflecting increased investment behind our smoke-free platform including ILUMA and Swedish Match portfolio. Let me now come back to the various factors impacting our margins. In 2022, total PMI gross margin contracted by 220 basis points organically. While growing inflationary pressures were a drag, the largest impact came from the combination of the rapid growth of ILUMA and transitory factors such as supply-chain disruption and the need to use air-freight. ILUMA drove accelerated device replacement from existing user in Japan and other launch market. Such devices sales are positive for acquisition, retention and full conversion. However, devices are margin-dilutive and this dynamic is likely to continue on a temporary basis, as we roll out to more markets this year and consumers upgrade from IQOS blade. The initially higher weight and cost of ILUMA consumable also played a role and this meant that the overall impact of our heat-not-burn business including devices was margin-dilutive in 2022. Importantly, average gross margin on HTUs remain around 10 percentage points higher than for cigarettes on the higher net revenue per unit. This is a fundamental long-term positive margin driver through the growing HTU volume mix in our business and this had a plus 110 basis-point favorable impact in 2022. Our two other key long-term margin drivers of pricing and productivities also continued to contribute favorably. Gross margin headwinds were mitigated at the operating income margin level by SG&A cost which declined by 150 basis-points of net revenues, due primarily to cost-efficiency, operating leverage and comparison effect. The picture for 2023 is quite different while our gross margin will face increased inflationary pressure, this is now primarily due to COGS for the cigarette business as leaf, acetate tow, salaries and energy cost increase. An acceleration in combustible pricing and lower air freight cost will serve to mitigate this exceptional inflation. However, a time lag is built into our projections. Importantly, while cost inflation is also headwind for IQOS, the 2023 margin impact of our heat-not-burn business is expected to be favorable due to the positive impact of increased HTU volume at higher net revenue per unit, planned ILUMA efficiencies and a more measured increase in device volumes. Overall, this underlying strength from IQOS combined with pricing will not be sufficient to offset combustible cost inflation in 2023, however, we expect a lower organic gross margin decline compared to last year and for our heat-not-burn business, to have an increasingly visible positive impact as we approach 2024. 2023 SG&A cost would include incremental investments to drive future growth, including in the commercialization of ILUMA. Also included is around $150 million with a broadly even split between the U.S., where we are preparing our organization capability for the launch of IQOS and wellness and healthcare investment in product development and clinical trials. In addition to inflation, this mean an SG&A cost increase more in line with net revenue growth is likely with limited margin impacts. A few words now on 2023 phasing. We expect margin pressures to be weighted to the first half, particularly given the challenging Q1 2022 comparison and a progressive decrease in airfreight cost throughout the year. In addition, investment are expected to be front loaded and we know that the rollout to ILUMA can lead to a short period of slower user acquisition as consumer wait for the launch. Combined with the timing of shipment and cost saving, we expect our 2023 top and bottom line delivery to be heavily H2 weighted. Indeed, we expect the first quarter to be the most challenging with low-single digit organic topline growth and soft margin. Shipment timing and ILUMA launch impact are expected to be pronounced and we accordingly expect HTU shipment volume of around 26 billion to 28 billion HTUs. We also face a comparison with a significantly lower impact from war related disruption. We forecast adjusted diluted EPS of $1.28 to $1.33, including $0.10 of unfavorable currency at prevailing rates. Importantly, we expect margin to improve as we approach 2024 as headwinds relent and the fundamental margin-accretive driver of our smoke-free transformation continue in the form of heated tobacco unit growth, pricing and cost optimization on ILUMA. Our cash flow generation remains strong. We delivered $10.8 billion in 2022 operating cash flows representing plus 3% growth on a currency-neutral basis. This include a favorable timing of certain financing item of around $0.3 billion. Given nonrecurring item and working capital movement benefited 2021 by around $1 billion, this was an excellent result. In 2023, we forecast $10 billion to $11 billion in operating cash-flow despite the notable expected impact from higher working capital requirements due to growth, global inflation and the reversal of one-off timing benefits. This put us on track to deliver our '21, '23 target of around $35 billion given in February 2021 at then prevailing rates. While our net debt is 2.9 times adjusted EBITDA on a 12 months trailing basis, this reflects only 50 days of Swedish Match results, including a full-year contribution for Swedish Match would clearly result in a lower ratio. We target robust EBITDA growth, which combined with strong cash flow allows us to focus on deleveraging, while continuing to invest in innovation and the growth of our business. In addition, our commitment to our progressive dividend policy is unwavering and in line with our long term commitment to return cash to shareholders. Turning back to our 2022 results, both our HTU and in-market sales volume increased by around 21.5% supporting total volume growth of plus 3.2%, excluding Russia and Ukraine. Q4 HTU shipment volume grew by plus 37.5%, partly reflecting the replenishment of inventory for ILUMA in Japan, following lower shipment earlier in the year and favorable shipment timing in the EU, notably in advance of new ILUMA launches. Supported by very solid cigarette performance, we delivered total volume growth for the second consecutive year, both including and excluding Russia and Ukraine. Focusing now on combustibles. Our portfolio delivered robust organic net revenue growth of plus 3.7% for the full-year excluding Russia and Ukraine. Combustible pricing increased in H2 as we continue to adjust to the inflationary environment. This resulted in Q4 organic pricing of plus 4.8%, excluding Russia and Ukraine and yielded full-year pricing in line with our expectation with notable contribution from Germany, the Philippines and Turkey, despite the impact of hyperinflationary accounting. In 2022, our share of the cigarette category increased by plus 0.3 percentage points excluding Russia and Ukraine following category share declines in 2020 and 2021, exacerbated by the pandemic. This includes sequential growth in every quarter of 2022. Marlboro remains extremely resilient despite pressure on disposable income and the impact of IQOS cannibalization with plus 0.2 percentage point share of segment growth. In addition, while we have not yet seen any meaningful acceleration in down trading, our share in the low price segment increased by plus 0.6 percentage points excluding Russia and Ukraine. As Jacek mentioned earlier, maintaining our leadership in the cigarette category is a key enabler in accelerating smokers switching to better alternative. Our robust cigarette share combined with the growth of IQOS delivered an overall market-share gain of plus 0.6 point in 2022, excluding Russia and Ukraine, with notable contribution from Egypt, Italy, Japan and Poland. PMI heated tobacco unit continue to strengthen the position towards becoming the largest nicotine brand in markets where IQOS is present and reached the number two position in 2022 with a record-high share of 8.5% in Q4. Now focusing on IQOS user growth, there were an estimated 20.3 million IQOS user as of December 31st, excluding Russia and Ukraine. This reflect growth of around plus 3.5 million for the full year. For total PMI, we estimate there were almost 25 million IQOS users as of year-end. Consistent with comments in our recent disclosures, user growth in October and November was slower due to higher-than-expected impact from commercial activity and lower acquisition for IQOS brand product in anticipation of the launch of ILUMA in certain key markets. However, we saw a strong rebound in December as ILUMA launches continued delivering robust user growth of plus $0.8 million for the quarter. This actually was close to our initial expectation and we look forward with confidence to 2023 as ILUMA continues to be deployed. ILUMA is driving volume and share growth across its market supporting our strong position in heat-not-burn category. We launched in eight new markets in Q4, including the Czech Republic, Italy, Portugal, and South Korea, bringing the total to 16 markets with ILUMA launched now represent more than half of our total HTU volume. ILUMA delivers a superior consumer experience as evidenced by net promoter scores which on average increased by more than 10 points across its different market archetypes and higher conversion rate compared to IQOS. While the rate of acceleration differ by market in both Switzerland and the more recently launched United Arab Emirates offtake share has almost doubled since launch. Importantly, as I mentioned earlier, the benefit of scale and optimization should allow us to bring down the cost of ILUMA overtime starting in the second half of 2023. Focusing now on the European Union where smoke-free net revenue exceeded 40% of the region for the full year. Our fourth quarter HTU share increased by plus 2.4 points to reach 8.8% of total cigarette and HTU industry volume with a modest flattering effect from timing factor. IMS volumes continue to grow sequentially and reached a record high of 9.3 billion units on the four-quarter moving average. This reflects success across many markets and key cities including Vilnius with over 43% share, as well as Athens and Rome with over 25%. In Japan the heat-not-burn category now represents close to 35% of total tobacco with IQOS increasingly driving its growth In Q4, the adjusted total tobacco share for our HTU brands increased by plus 2.6 points to 24.5% with offtake share in Tokyo surpassing 30%. Our two-tier consumable portfolio continued to deliver strong results. IMS again grew sequentially to reach a record-high of 8.8 billion units on a four-quarter moving average as the number of Japanese IQOS users crossed a remarkable 7.5 million adult consumers. In addition to strong IQOS gain in developed countries, we continue to see very promising growth in low and middle-income market. In 2022, our HTU shipments grew by almost 50% excluding Russia and Ukraine. This robust performance reflects success across many markets, including Egypt where Urban Cairo exit offtake share surpassed 7% Bulgaria and Malaysia where Q4 offtake share reached 14% in both capital cities. Let's now move on to Swedish Match which finished the year strongly further confirming our belief that this combination will be accretive to our growth and margin profile over the coming years. Please note for housekeeping purposes, that my comments on Swedish Match Financial Results are based on publicly available information through September 30th and from November 11th when it was consolidated in PMI's financial statements. Swedish Match delivered excellent performance following the acquisition, with strong net revenue and adjusted operating income. Most impressive was the phenomenal U.S. growth of ZYN which I will come back to on the next slide. In other U.S. smoke-free products, moist snuff also performed well gaining almost one percentage point share of segment and growing 2022 volumes within a declining category. In Scandinavia, the overall smoke-free market and Swedish Match continued to grow, albeit helped by year end trade inventory movements ahead of a January excise tax increase in Sweden. The cigar business delivered robust performance to end a challenging year with growth in volume and category share. We are very pleased with the strong 2022 results from Swedish Match, which also included positive pricing across all smoke-free category. We look forward to reporting our combined results going forward. Now let's discuss ZYN's recent U.S. performance in more detail. Excellent progress continues with shipment volume growth of plus 37% in 2022 and plus 35% in Q4, reaching a record quarterly high. ZYN category volume share grew sequentially by one percentage point compared to the third quarter and by 2.2 percentage points compared to the prior year, further strengthening its position as the clear number one nicotine pouch brand despite continued heavy competitive discounting from less premium offerings. Importantly retail value share for ZYN remains strong at 75.7%, highlighting its premium positioning and high brand equity. 2023 promises to be a very exciting year. We are thrilled to have welcomed Swedish Match employee and leading oral nicotine portfolio into the PMI, family to create a global smoke-free champion. And we will look we will work together to create value as we accelerate towards our shared vision of the smoke-free future. In particular, bringing in ZYN and IQOS together in both the U.S. and international markets present a significant opportunity to drive accelerated growth and switching of adult smoker to better alternative. As a well-run and successful business we expect continued strong performance from Swedish Match existing operation. A key focus this year will be supporting and further driving strong in growth in the U.S. In addition, we are now preparing for the international expansion of nicotine pouches leveraging Swedish Match rich product portfolio and PMI's extensive smoke-free commercial infrastructure. In parallel, we will be actively Swedish Match U.S. distribution and commercial capabilities for the launch of IQOS in 2024. Moving to sustainability. As we transform our company our business and sustainability strategies are advancing hand-to-hand with increasing momentum. PMI and Swedish Match have a shared vision and values. The combination helps us further accelerate towards achieving our purpose, transforming for good to make cigarettes obsolete and maximize the benefit of smoke-free products. Our goal for best in class ESG performance is aligned as we seek to address the environmental impact of our product, eradicate child labor, reduce our carbon footprint and provide a more inclusive and empowered working environment for all our employees. In December, we published a standalone report detailing our new biodiversity and water ambitions. For biodiversity we aim to achieve no low net loss on ecosystem connected to our value chain by 2033 and contribute towards to a net positive impact on nature by 2050. For Water Stewardship we aim to scale solutions towards a positive impact on water resources by 2033 and contribute towards a positive impact on water resources by 2050. I am also proud to share that for the third consecutive year we have been awarded CDP's Triple A. CDP scored nearly 15,000 companies on their climate change forest and water security disclosures, of which only 12 received this strategic prestigious score. In addition I am excited to share that we are included in the 2023 Bloomberg GenderEquality Index for the third year running. Overall, our business delivered both a strong fourth quarter and full-year performance despite many challenging headwinds. We achieved excellent top and bottomline growth with double-digit currency-neutral adjusted diluted EPS growth and almost $6 of adjusted EPS for total PMI. The consistent quality and sustainability of our organic top and bottomline delivery has been clearly demonstrated over the last three years. Most impressive was the continued outstanding performance of IQOS, which is now complemented by the remarkable growth of ZYN. Combined with Swedish Match we will have a comprehensive global smoke-free portfolio with leadership positions in heat-not-burn and the fastest-growing category of oral nicotine. We expect 2023 to be a landmark year for our smoke-free transformation with smoke-free net revenues of around $13.5 billion at constant currency, approaching 40% of our company. We have exciting opportunities for growing nicotine pouches in the U.S. and internationally, along with the U.S. commercialization of IQOS next year. We expect margin headwinds will persist in 2023 before improving in 2024. However, our underlying growth fundamentals remain strong and we look forward with - and we look forward with confidence. With an excellent performance over the past two years and our strong 2023 outlook, we expect to comfortably exceed our three year minimum CAGR targets of more than 5% organic net revenue growth, more than 9% in currency-neutral adjusted diluted EPS growth and broadly stable shipment volumes. Finally, our strong growth outlook and highly cash-generative business enables us to deleverage while maintaining our steadfast commitment to our progressive dividend policy. Good morning. I want to ask you first of all, you gave some great color there and detail in your remarks. As I look at the EPS growth in 2023, just understand some of the burdens on that growth and we know about $150 million of investment you've outlined for the U.S. in your health and wellness division. What are the costs do you foresee in some of the supply-chain costs and use of air-freight available, how much are those burdening your cost for the year, if you can give some color on that? So maybe I start and Emmanuel will chip in, I guess. Yes, it's a 115 between the U.S., $115 million between the U.S. and the wellness healthcare, almost evenly spread between the two. Now, you have the air freight and this is more of the thing, which I think, we should start seeing some improvement in 2023 and especially as we go towards the second half of the year. I think, we should start normalize the use of the air freight, which will then obviously continue with the 2024. Now you have the inflationary pressure on the COGS, I think Emmanuel mentioned in his remarks, the leaf. Leaf, obviously is - due to our duration of inventories of the leaf and the way the leaf prices are rolling through the P&L is something which last usually longer right you have a three years above the duration of inventory. So, on a moving average, valuations I mean the spreads over the period of time you have energy, which is obviously the big hit across the number of directly or indirectly through the materials. Now we start seeing energy prices easing at least at this stage, but also you bind it by some contractual arrangements, et cetera. So I don't think that's helping '23, but I remain cautiously optimistic that as of '24, we should start seeing reversal of those. Obviously, you have a cost of the IQOS ILUMA roll out because we are at the year end, we've been at the 16 markets out of 73 markets total IQOS. So there is a bulk of a market in front of us in '23 and we don't want to stop or slow down the rollout of ILUMA. So obviously, you have a pressure on the margin coming from the extra sales of the devices, right, which obviously had a drag on the margins, and which essentially accelerating replacement of the devices at the existing consumers level, but with the very clear view now, that we have a very nice paper going forward with the accelerated acquisition, better consumption, better conversion rates. And that's the key items. So Emmanuel, did I miss something important. No, I think you were very exhaustive clearly, Jacek. Just sort of couple of further detail and clearly, in '23, we've been flagging it. We expect our heat-not-burn business to contribute positively at the level of the gross margin rate evolution. So in '23 it's really inflation impacting us very negatively at the level of all cost of goods, but on combustible, we are going to increase price that is not going to be sufficient to offset this impact. And just to give you a color, Jacek was alluding to energy price. We're not talking about even the double-digit inflation, I mean energy price between '23 and '21 we are talking about close to a 3x factor. So it's a big increase with the big impact on the P&L. Over time with price increase, we're going to overcome that, but there is just a lag as we said on matching that. Then there is a big difference also on our SG&A cost evolution. In 2022, we were flat, because we've been generating a lot of efficiencies, inflation was not as others is going to be in '23 with a lot of salary increase and probably on the basis of comparison were more favorable. In '23, we expect to grow our SG&A in line with top-line, more or less which one would expect. We continue to invest a lot in order to support the growth of the business to acquire new user, digital investment. We talk about the U.S. and wellness and healthcare and there would still be efficiency, but not at the same level. Last element that I have to add, the cost of the debt, I'm not talking about the debt of acquisition of Swedish Match because for Swedish Match, we are in line with expectation i.e. low single-digit accretion on the EPS. But clearly for the existing debt, there is also an increase in the cost and that is having an impact on the evolution of the adjusted EPS. I think with that, Chris, we are giving all the information we can on what we are facing in term of evolution on our cost. That was sure exhaustive. Thank you for that. It was very, very helpful. I had just one quick follow-up, which will be that, you have heated tobacco unit growth expectation of that 15% to 19%. I just want to get an understanding on two specs of that, is Russia, Ukraine down likely in 2023, given you're not investing there. And then, just to what degree, its capacity limited today? If you had more ILUMA capacity, could that grow even faster? Thank you for your time. Okay, so actually the Russia and Ukraine and obviously, Russia due to its weight even more, there were drag on our performance both in '22 and will be - and it's fair to assume will be a drag in 2023. As you know is, our decision, strong decisions today investor and essentially ILUMA is for example, is the key technology advancements, which will have, which we decided not to rollout in Russia, because it has an impact right. So that, the numbers which we now just for the visibility to the investors of the business, as is today, we're including Russia and Ukraine but above five very much Russia not contributing to the growth. So one good thing opposite excluding Russia and Ukraine, our growth rates would be at a higher level, on a comparable level, capacity, we will. I think we have - we are guiding the market that we expect the better result in the second half of the year. And that's partially reflects the moment when we think, we will be beyond the bottleneck with regards to the capacity around ILUMA. So we really managing the business on a very tight supply chain for still this year, sorry 2022 and for first half of '23 and the second half of '23, we should be okay. I could actually - again - I can bridge back to the famous air freight, et cetera, because all of these things are consequences of us riding on a very, very tight supply chain. Good morning, I guess my question is on your op margin guidance and the implied deleverage. Maybe you could breakdown the headwinds you highlighted just a bit further and thinking about in the context of what you can control like the investments, you're making to drive future growth. Could you help frame that for us? Just trying to think through, how big of a step-up the investments will be this year versus last year? And then, how do we think about the investments required next year and beyond? I guess, I'm trying to get a sense of how much of the investments required to essentially roll-out IQOS in the U.S., it will take place this year versus next year. And I'm well aware of the investments you need to roll out ILUMA, but anything there would be helpful? I'm please to take that one, Bonnie. So I think, on the U.S., we've been clear on the fact that we expect something like half of around $150 million, of course it's a rounding of extra investment in the U.S. as we prepare the launch of IQOS in the U.S. that is for 2023. When we have a plan for the coming years and of course, with more detail, we will of course come to you and elaborate and detail that. Now for the rest of the business, I think we are and that was the sense of my comment on SG&A evolution. On a relatively regular basis, we are investing an extra few $100 million in ILUMA to be more specific, because, of course, very sensitive information behind the acceleration of IQOS and it's going to come, of course, behind IQOS ILUMA in 2023. So the growth, when we say, we expect SG&A to grow broadly in line with topline, there is a huge impact of inflation. I mean, I don't need to explain that inflation is in most country around high single digit and we need to reflect that on salary increase. We have efficiency on cost in front of that and that is enabling us to on top of the inflation impact to keep investing on the growth of the business and we do that in a rather consistent manner, of course, very much focus behind ILUMA in 2023. Okay, that's helpful. And then just a second question if I may, it's just related to the user growth in Q4 and IQOS, could you maybe talk through some of the puts and takes that you saw in the quarter. I mean, it seem to accelerate relative to Q3, despite some of the headwinds you had recently highlighted and then you did mention that ILUMA drives higher conversion rates than IQOS 3 DUO so, could you possibly quantify that for us? I guess, I'm trying to think through when that platform scales, do you expect your overall conversion to grow meaningfully possibly above your current 70% rate? Yes, so I maybe take the ILUMA conversion rates in the markets at this stage, [technical difficulty] run-rate conversion rates before an IQOS blade will be somewhere up in the range of a 10 percentage points. Okay, so obviously, different markets, there is some difference between the markets, but as a rule of thumb is about the 10 percentage point, which essentially means, the way we measure conversion at 10% of the devices sold through acquisition of new users, AG Snus and they should, and they are generating the recurring demand for the consumables. So this also has the - there's a better productivity on the user acquisitions and devices sold. I want to just bridge back to the - your previous question, Bonnie, if you allow me. When we look at the U.S. investment, we've highlighted, including the wellness and healthcare, about $150 million. But we shouldn't just look at the investment from the lenses of IQOS, because part of the investments, which we already started, once we committed to make this year, I believe will also benefit further growth opportunity for ZYN, okay, for Swedish Match. So it's not that we're really running business - two separate type of a businesses. We try to look at this from the leveraging and further enhancing the capabilities of Swedish Match and I believe the opportunities for ZYN in the U.S., they had a spectacular or phenomenal growth, depends which adjective you like better. But I think, there is more to come on this one. So the way we're looking at allocating the results is that, it is not just going to prepare us for the IQOS stake back in '24, but also in the meantime, can further - can be a further boost to the ZYN. Now, to your question also about the future rollout of the IQOS alone in the U.S., I think September when we meet, I hope during the Investors Day, we will be in a positions to give a more precise plan. So we obviously taking considerations the expected timelines vis a vis from FDA. We said that we're going to file IQOS ILUMA which is our - the best flagship and the best propositions we have today. And obviously, our objective - prime objective would be to enter markets, U.S. markets with a very big momentum coming from international on the best what we have, but I think, by September, this year, we should have more details and more visibility about this. Hi, good morning. So the first is on the step up in cigarette pricing, so it was 5% last years, you are saying it will be 6% in FY '23. Now Japan had 5% pricing last year, this year it will be 0, so clearly ex-Japan cigarette pricing is accelerating from four to seven approximately. So, where exactly is this biggest step-up happening in cigarette pricing? Japan, you pretty good single out Japan in this case, right, this is the biggest pricing from the unknow, right and it's difficult to make any assumptions in Japan, but we have already this year working pretty well with the good results on the - reversing the pricing trend in Indonesia. As you may recall, and I believe we're really turning the corner in Indonesia which always due to volume underlying size of the and the weight of the business to us is very important. I think, we have a stronger Philippines, plus the European markets also come with a strong pricing. So that 6%, which we assume in the - for this year is just the reflection of this. Now depends what's happened in Japan. I mean, all of these things will be coming on the top, but actually Japan from the large geographies is the under market when visibility for obvious reason is very limited to. Sure, thank you. And then on this EU heated tobacco flavor ban, which is expected to come later this year, how should we think about it? And how is it factored in your guidance? I mean, it's one of the events which nobody ever experienced. We have a - some sort of similarities with the flavor bans including menthol on the combustible cigarettes you may recall few years ago. And frankly speaking, that has not had any material sort of a impact on the cigarette volume, so I think here - okay we will see, what's going to happen. Can you discuss your strategy for the U.S. market this year for Swedish Match and what you - what your key priorities are? And then what are your plans for the international rollout of ZYN and the timeline? So obviously, you know the focus is to continue and enhance the spectacular momentum of pouches, ZYN growth in the U.S. I mentioned this before answering another question that part of the investments we are allocating to U.S., I believe also will benefit the current business of Swedish Match. I think, there should be a bigger, better pricing, especially on the cigar business, although it is not really our strategic focus, but still obviously helps the overall business performance. And the strategy in terms of long-term, the big question obviously is how we will approach IQOS commercialization, the moment when we fully take it back in that in 2024. And we know what sort of actually capabilities are missing at the Swedish Match level. So we adding them. But the real big commercial spend, I mean, it will depend on the timing and the dense and the intensity of our rollout plans, which we will share, I guess, around September, during the Investors - September this year, around the Investors Day. When it comes to the pouches, on international, I think Swedish Match and us now together have a plans, how to start addressing some share pressure especially in the Nordics, okay but on the bigger international scale, we have quite a few markets, which we will start rolling out the pouches this year but for obvious reasons, I will not mention which markets. But that was the whole purpose of acquisition of Swedish Match, as you recall, leveraged the base and our growth opportunity in the U.S., is the - is a huge relief in a sense of preparedness for IQOS but also I believe the category has the - quite a potential in there or in the regions of this product space on international basis. We will have infrastructure in most of the markets, it's - I'm not releasing really - disclosing any strategic confidential matters, obviously IQOS is present in 70 plus markets. This is where the developed infrastructure is most developed and very likely, the markets for ZYN products will be - which in the list of this markets. Thanks. And then can you just talk about your strategy with the bonds product that you launched in test markets and what your early observations are and then how are you thinking about a broader rollout over time? Yes. I mean it's a broader rollout of the bonds is more the - we've more strategically planned for the 2024, so the next year. We will have some volume, but nothing compared to be very frank to what we have about the IQOS and ILUMA product. This is by far the prime focus. But I think, the early results, which we get from the Philippines and Colombia, I mean, they are very strong, actually they are very strong, obviously our expectations after a seven or so years of experience with IQOS products are much higher than we ever had. So BONDS have to come and meet that expectations as well. The proposition essentially, we knew that the moment when we will be going more into the emerging markets, lower-income, when the afford - consumer affordability might be at a bottleneck in achieving our smoke-free ambitions. We had to also come up with a technology both on a consumables and on the device which somehow adjust the cost of the propositions to the potential pricing we can offer to the market. So obviously, the focus will be on the emerging markets, but I do believe that that proposition also nicely will help in some developed economies because across the spectrum of the smoker's audience, obviously, they also group of people who, for whom the affordability might create some constraint. So that will be a very nice complement - complementary propositions in our portfolio. And essentially it also help IQOS to continue on its extremely successful history of occupying this premium or medium plus space. This is - this mega brand, which we're trying to build, while preparing our self that one billion plus smokers in the world, I mean they are going across the different various price segments from the premium, mid, low, super-low et cetera and we need to provide the relevant propositions there. So I think, bonds is on the track and this is how we are going to play strategically in the portfolio. Hi. I was hoping to talk about the IQOS outlook, please, in terms of the stakes and in particular, what impact is the removal of characterizing flavors on HTUs in the EU, impacting your outlook. How are you accounting for that? And what's the expected timing of that, please. Thank you. Yes, so I partially answered that question before, Vivien. But the characterizing flavor, we had that - we had an experience with the cigarettes - combustible cigarettes in the past and it's the only reference point we might - we have today. And as you recall, the menthol and others ban in Europe, didn't really impact in any material way the volumes of the cigarette, so I think here, one can expect a similar sort of a manageable impact if you like of that ban. The second thing, it's very - but also reminding everyone that IQOS by far today is the best tobacco flavor proposition. Yes, there are some flavors, which we have in our portfolio, in the market , that propulsions might be different, but by far, IQOS on the pure tobacco flavor and this is by the way, were the bulk of the cigarette market, the rest in essentially all geographies. I mean this is an IQOS strength, so there was a portion of a portfolio, which will be impacted. But and I think for the vast majority of the smokers existing of sorry existing comparative to IQOS users and the smokers, which are still on a combustible, I mean IQOS still offers to date best in class taste and a flavor experience which is in the core of the tobacco flavor. Thank you for that. And I apologize if I missed this, but is there any way that you can provide an update on kind of the infrastructure build-out for IQOS in the U.S. ahead of your reacquiring the commercial rights to that proposition, both in terms of the consumables as well as the devices? Thank you. Yes. I think there was look - there was a - we're looking also both as a - we are also looking at this, not only on IQOS on a standard basis but IQOS and the ZYN and other parts of the Swedish Match business. And I believe, the obvious, the questions of the optimal distribution and I believe this can pair very well and enhancements already to the distribution which serves not only in a future IQOS but can and will serve actually in growth opportunities today, there is the whole digital aspect, there is a better management of the pricing promotions. The whole consumer piece, right, which is so strong behind an IQOS success. I mean, that's something which we are preparing the infrastructure for. Yes my question is more a bigger picture, longer term, one around the U.S. and the overall RRP space, now you've got control of your own destiny. I was hoping to get your thoughts on how you see RRP overall develop longer-term across the different categories? Whether you see some more attractive than all these. And do you still think you could envisage or when we introduce into the U.S., obviously bearing in mind, the limited traction it got with Altria, and then just linked to these U.S. RRP plans, any update on timing for a PMTA submission with your VEEV product. Thank you. Yes, so I start with the last one. We plan to submit the IQOS ILUMA to PMTA to FDA in the second half of this year. Now with regards to the - to potential, look, we think that an IQOS strength, which is really if you go to the core of the smokers today, when they really enjoy this pure unaffected by any flavors et cetera, tobacco flavor and so on is undisputed. Every market you go, IQOS exactly delivers on the flavor, taste expectations to this audience. And that's also I believe a critical factor in IQOS high conversion rate. And how many people fully adopt the IQOS and not only that they are leaving cigarettes fully behind them, they don't even attempt it on occasional basis to go back to cigarettes, okay, so that's the core and I believe for the audience which with the smoking audience, which you have in the U.S., IQOS perfectly fitting into this whole thing obviously the other platforms, which offer you the different ritual, different experience, the e-cigarettes and the pouches. The e-cigarettes usually more driven by the flavors, and obviously absence the pure tobacco natural type of a flavor, it's - that's the challenge, which partially in our opinion is behind more of the dual consumption that the full conversion, but also the products are under development and they're getting better. And pouch is actually on the risk continuum of the product. I mean, it's an average important offering for the consumers, who really want to reduce significantly exposure and potentially the harm by - while enjoying the product. So I think, there is this complementary, there is this complementary role of each of these platforms with, you know, also that we're working on our platform forward because technically which is Leaf and the Viva products, the electronic cigarette segments going through this own dynamics, is this mix of the flavors, disposable et cetera, it's not necessarily great for the economics, but partially also because of the slower conversion rate compared to the other platforms. So we have said it from the very beginning of our transformation, if you follow us seven, eight years ago, I recall that the - one of the first investors conferences, when we announced the purpose of that we want to go smoke free, we have said that there is the room for every platform at the different moments for different consumers and our job is at the right time to deploy this platforms and the leverage, the opportunities and the benefit to the smokers. Great, fantastic. And just - sorry, a follow-up, the question on the PMTA was not for ILUMA, I think previously for VEEV you said, you targeted first half of '23, just any update on VEEV, PMTA submission?. Yes as I think, we're also thinking about the 2023, but now having also the ZYN and knowing what ILUMA can do and knowing that before we also need to make sure that we have a right PMTA submission strategy, right, it was an effort behind each of them and we need to prioritize, but the - I mean the way we are thinking, we are - sorry thinking, is more than a thinking, we are working on bringing our P4 to the U.S. as well. Sticking to – hi, sticking to U.S. IQOS. We know that the U.S. menthol ban from the FDA proposed standards allows - potentially will allow for some exceptions to it. And thinking that your IQOS has the MRTP designation, which is rather unique versus all its peers, would -- were you factoring this in when you set out your ambition of I believe 10% market share by 2030 if I'm not mistaken? Yes, you were - I think you're quoting my words, this is Jacek here. Yes, I still do believe that IQOS by 2030 knowing how it performs on the many other international markets. The 10% is not out of - it can be a realistic ambitious - ambition or realistic dream. Now to be very frank, when we look into this, we have not been trying to factor being that there might be some flavors or menthol bans on other products. But you rightly noticed that IQOS today is two variants of IQOS outdoor iced with the menthol flavor, will this be an accelerating factor or not? Look I mean the future will tell, but I still believe that IQOS as is in the current environment due to its strength and the satisfaction it gives to smokers, et cetera has the - that big potential in from the person. A couple from me please, first, given the CapEx, step-up in CapEx that you expect for this year, I just wanted to ask, how should we be thinking about CapEx levels beyond '23? Is next year kind of a one off given the ZYN international expansion plans? Look I think, you should expect us of course to accompany the growth we are growing volume within more capacities, so the CapEx will reflect that. There is certainly, when it comes to ILUMA, a moment where we build the capacity for ILUMA and that is translating into a significant investment. So you see that in the 1.3. I would say, we are going to certainly regularly invest on the capacity for the Swedish Match overall business, so I'm not able to get at that stage. I'm not giving guidance on '24. I certainly believe that there is this transition moment where we are building the capacity on ILUMA then of course that will be accompanying the growth of ILUMA and - and we are very ambitious, as you know, on growing overall product. So that will come with investment, but, of course, they are not of the same magnitude as the one that we've been making in order to be the capacity on IQOS, smaller volume, smaller base. So notwithstanding back on the long-term anyway. Okay, that's clear. And for the second one and maybe just on the Healthcare and Wellness segment, I mean, 2023 will be another investment year. I know you guys have talked about that that probably being a multiyear investment cycle. But I don't know if you can give any indication on when you think that business could potentially start to contribute to growth and maybe also, could you guys talk about your learnings so far in those businesses that you have acquired? Yes I mean, look, they obviously, been very clear about this from the very beginning, I mean, in order to develop and bring to the market of a couple of the programs and products, which we have it in mind, I mean we have to go for the investments, we talked about us prefer also have a very promising investment in the medical of - in the medical space be cannabinoids et cetera. So all of this programs that they agree to establish milestones in terms of the - the development of these products including the series of clinicals and meeting of different regulatory expectation, so that's about what's going to be. We have said historically our ambitious target of achieving this $1 billion revenue by 2025, there is a pipeline of the product but the more interesting actually, what's going to happen with that business beyond '25, because it's the longer-term, longer-term investment. Obviously, when we allocate the capital, we look first with - we allocate the capital behind the -- those things, which are in the near and mid-term for us and it's obviously heat-not-burn and IQOS, ILUMA expansions to the US, and I can go through the long list of an opportunities but they're keeping also denied. This businesses have a quite - wellness and healthcare offers us a very interesting opportunities in the longer run, when we very well leverage both our scientific life science expertise capabilities combined with the commercial et cetera. So, this is how I would look on this thing. I think when we meet on the - in September of this year for the Investors Day, we will start, obviously opening a much more longer-term horizon, how the management, how we see the future of PMI not just in the next year or two, but with the longer time of a perspective. And this is the moment when, I guess, we will share more details, by the way, also I think we'll be able to answer more precisely your first questions to Emmanuel, about the CapEx, because obviously, we open a 10 years horizon for Philip Morris, we will have to touch upon that capital allocation component as well. It appears, we have no further questions at this time. I will now turn the program back over to management for any additional or closing remarks. Thank you. Before closing our call, I would like to remind you that we will be presenting at the CAGNY conference on February 22. And as we mentioned earlier, we plan to host the September Investor Day, in Switzerland. We hope, you will be able to join these events, either in person or virtually. That concludes our call today. Thank you again for joining us. If you have any follow-up questions, please contact the Investor Relations team. Thank you.

EarningCall_239

Good morning, and welcome to Molina Healthcare’s Fourth Quarter 2022 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Good morning, and welcome to Molina Healthcare's fourth quarter 2022 earnings call. Joining me today are Molina's President and CEO, Joe Zubretsky; and our CFO, Mark Keim. A press release announcing our fourth quarter earnings was distributed after the market closed yesterday and is available on our Investor Relations website. Shortly after the conclusion of this call, a replay will be available for 30 days. The numbers to access the replay are in the earnings release. For those of you who listen to the rebroadcast of this presentation, we remind you that the remarks made are as of today, Thursday, February 9, 2023. It has not been updated subsequent to the initial earnings call. On this call, we will refer to certain non-GAAP measures. A reconciliation of these measures with the most directly comparable GAAP measures for 2022 and 2023 can be found in our fourth quarter 2022 press release. During our call, we will be making certain forward-looking statements, including, but not limited to, statements regarding our 2023 guidance, our projected 2024 outlook and revenue, our recent RFP awards, recent and future RFP submissions, including those in Indiana, New Mexico and Florida, our acquisitions and M&A activity, Medicaid lease terminations, our long term growth strategy and our embedded earnings power and margins. Listeners are cautioned that all of our forward-looking statements are subject to certain risks and uncertainties that could cause our actual results to differ materially from our current expectations. We advise listeners to review the risk factors discussed in our Form 10-K annual report filed with the SEC, as well as the risk factors listed in our Form 10-Q and Form 8-K filings with the SEC. After the completion of our prepared remarks, we will open the call to take your questions. Thank you, Joe, and good morning. Today, we will provide updates on several topics. Our financial results for the fourth quarter and full year 2022, our initial 2023 revenue and earnings guidance, our growth initiatives and our strategy for sustaining profitable growth, and our outlook on premium revenue for 2024, given our new business successes in 2022. Let me start with the fourth quarter highlights. Last night, we reported fourth quarter adjusted earnings per diluted share of $4.10, representing 42% growth year-over-year. Our fourth quarter 88.3% consolidated medical care ratio, 7.5% adjusted G&A ratio, and 3.9% adjusted pretax margin demonstrate continued strong operating performance. The fourth quarter completes another strong year of operating and financial performance. For the full year, we grew premium revenue by 15% to approximately $31 billion and grew adjusted earnings per share by 32% to $17.92. Our full year adjusted pretax margin of 4.4% was squarely in line with our long-term targets. Medicaid, our flagship business representing approximately 80% of enterprise revenue continues to produce very strong and predictable operating results and cash flows. For the year, we grew membership by approximately 10% and premium revenue by 21%, driven by the inception of our Nevada Medicaid contract, recently closed acquisitions and organic growth. The rate environment is stable and we are executing on the fundamentals of medical cost management. The full year reported MCR of 88% is at the low end of our long term target range and consistent with pre-pandemic levels, reflecting the underlying strength of our diversified portfolio and our focused execution. Our high acuity Medicare niche serving low income members representing 12% of enterprise revenue, continues to grow organically and demonstrate strong operating performance. For the year, we grew membership by 10% and premium revenue by 13%. Membership growth was driven primarily by our low income MAPD product, which more than doubled in 2022. The full year reported MCR of 88.5% was modestly above our long term target range, but includes approximately 300 basis points of pressure from COVID-related care. In Marketplace, the smallest of our three lines of business, we repositioned the business both in terms of its size in the portfolio and metallic mix. On a pure period basis, the business performed at roughly breakeven. While the financial performance did not meet our initial expectations for the year, we believe we have positioned our marketplace business to achieve target margins in 2023. Turning now to the execution of our growth strategy for the year. The successes in 2022 were many. On the M&A front, we closed on the acquisition of Cigna's Texas Medicaid business at the beginning of the year. And the AgeWell acquisition, at the beginning of the fourth quarter. In July, we announced the My Choice Wisconsin acquisition further adding to our market leading LTSS franchise. Our performance on Medicaid RFPs in the year was exceptional. We renewed our contract in Mississippi, doubled the size of our California contract for 2024 and won two new contracts: first in Iowa and then Nebraska for a 100% win rate on RFP responses submitted. In total, we project that these RFP wins for the year will add $4.4 billion in run rate premium revenue. In summary, our full year 2022 enterprise results continue to demonstrate our ability to produce excellent margins, while expanding our franchise by growing premium revenues. Turning now to our 2023 guidance. You can easily see the results of the repeatable earnings pattern we have created. We built new store contract backlog and harvest the earnings as the contracts and acquisitions mature. Meanwhile, we continue to focus on the operating fundamentals and drive operational improvements, which allows us to grow the core business at attractive margins. With regard to our 2023 guidance, we project 2023 premium revenue of $32 billion, representing a 19% compound annual growth rate since our pivot to growth in 2019. The 2022 earnings per share of $17.92 serves as a solid high margin earnings jump-off point. We expect that $1 per share of prior embedded earnings will emerge into 2023 earnings. We expect to produce $1.50 per share of core growth and operational improvements. We expect all of these elements will combine to produce 2023 core earnings per share of at least $20.40, offset by $0.65 per share of one-time contract implementation costs, which results in our 2023 adjusted earnings per share guidance of at least $19.75. The operating improvements supporting the margins in our guidance are durable. The various elements which could impact earnings, COVID, flu, RSV, any margin impacts from redeterminations have been considered informing our guidance. The metrics implied by guidance are squarely in line with our long-term target ranges. As our guidance produces a 4.7% pretax margin, with a growth rate of 14% in core earnings and 10% on a reported adjusted basis. This is an attractive growth profile in a model that is repeatable. In addition to the growth within our guidance, we continue to build an earnings base for the future in the form of our embedded earnings profile, which provides a forward view of our earnings potential beyond 2023. The new store component of our embedded earnings defined as earnings from achieving target margins on acquisitions and new Medicaid contract wins is now at least $4 per share. The ongoing net effect of COVID, which at this point is the continuing earnings impact from the three remaining risk corridors, adds $2 per share of additional upside to this figure. This latent earnings growth estimate does not take into consideration any future organic growth or future strategic initiatives. Turning now to our growth strategy. We have taken major strides toward our $42 billion 2025 premium goal. At this early stage, we already have a clear line of sight to $35.5 billion in 2024. The key to our strategy is balanced, a stellar record of new contract wins, Kentucky, Nevada and now filling in the middle part of the country. The doubling of the size of our California business, including significant expansion in Los Angeles County, preserving and securing all of our incumbent state contracts and no large reprocurements in the near-term, continuing to build the M&A pipeline as this aspect of our strategy has already produced seven transactions for $10 billion. in revenue. Not to mention, organic growth, one member at a time by focusing on greater member attraction and retention and overcoming the regulatory headwinds of redeterminations and pharmacy carve outs. With that as the backdrop, I will now provide an update on some specific in flight opportunities related to our long term growth strategy. At the end of January, the Texas Health and Human Services Commission posted a notice on its website indicating that it was issuing a notice of intent to award our Texas Health Plan, a contract for all of our existing eight service areas in the state. We expect to be able to provide more of an update once these contracts have been finalized and signed. Our RFP response for the Indiana LTSS program has been submitted, it is pending evaluation and subsequent award announcement. In New Mexico, the state announced it has terminated the RFP that was in process and according to their press release, intends to issue an expedited reprocurement as soon as possible. We have many other new state business development initiatives well underway, including the potential for expanding to our former nearly statewide footprint in Florida. Our growing Medicaid footprint still only represents half of the 41 states with managed Medicaid. With multiple new state RFP opportunities over the coming years, and our demonstrated capabilities, referenceability and track record, we remain confident in our ability to win additional new state contracts. Our acquisition pipeline remains replete with actionable opportunities. While the timing of transactions remains difficult to predict, the strength of our pipeline and our track record of success gives us confidence in our ability to drive further growth from this important element of our growth strategy. In summary, we are very pleased with our business performance and the progress made in 2022 on our growth strategy, which has created a solid and growing financial profile. At least $20.40 of core earnings per share and $19.75 per share of adjusted earnings in 2023. Current new store embedded earnings power of at least $4 per share with an additional $2 of upside, if and when the few remaining COVID era corridors are eliminated. And $35.5 billion of identified premium revenue in 2024. All of this is before any impact from the continued execution of our growth initiatives. Of course, we could not accomplish all of this without our excellent management team and dedicated associates now approaching 15,000 strong, who in concert with our hallmark, proprietary operating model and management process have produced these results. To the entire team, I once again extend my deepest thanks in heartfelt appreciation. Thanks, Joe, and good morning, everyone. Today, I will discuss some additional details on our fourth quarter and full year performance, our strong balance sheet and our 2023 guidance. Beginning with our fourth quarter and full year results, our consolidated MCR for the fourth quarter was 88.3%, reflecting continued strong medical cost management. For the quarter, flu, RSV and COVID-related medical costs in total were largely in line with our expectations, but the impact varied by line of business, with Medicare being disproportionately impacted. Our full year consolidated MCR was 88%. This result was consistent with our expectations and was driven by the continued strong performance of our flagship Medicaid business. In Medicaid, our fourth quarter reported MCR was 87.3%. This strong performance was driven by effective medical cost management, and favorable retroactive premiums. The net effect of COVID in the quarter was a modest 30 basis points within our reported MCR. Our full year Medicaid MCR of 88% was at the low end of our long term target range and consistent with pre-pandemic levels. In Medicare, our fourth quarter reported MCR of 91.8% was driven by higher COVID, flu and the mix effect of our significant growth in MAPD. During the quarter, the net effect of COVID was 300 basis points within our reported MCR. Our full year Medicare MCR was 88.5% modestly above our long term target range and was similarly burdened by 300 basis points of net effect of COVID. In marketplace, our reported fourth quarter MCR was 93.8%. The MCR was impacted by normal seasonality and increased utilization in a handful of markets. The net effect of COVID was approximately 50 basis points within our reported MCR. In the quarter, we also settled some provider balances dating to prior years, which disproportionately impacted our Marketplace MCR by approximately 300 basis points. Our full year Marketplace MCR of 87.2% exceeded our long-term target range and includes approximately 120 basis points of net effective COVID, as well as approximately 130 basis points from the impact of a 2021 risk adjustment true-up recorded in the second quarter. Additional drivers of our strong fourth quarter and full year results include a 7.5% fourth quarter adjusted G&A ratio, which was in line with expected seasonal expenditures related to open enrollment and spending on community and charitable activities. Our full year adjusted G&A ratio improved year-over-year to 7.1% as we remain focused on delivering fixed cost leverage as we grow, even while making the appropriate investments to sustain our growth. Fourth quarter and full year results also feature higher net investment income as expected from recent increases in interest rates. Turning now to our balance sheet. Our reserve approach remains consistent with prior quarters, and we continue to be confident in our reserve position. Days in claims payable at the end of the quarter was 47%, about three days lower sequentially. The decline was driven by the increased mix of LTSS claims, which settled more quickly, resulting from the closing of the AgeWell acquisition as well as an additional payment cycle in the quarter. Our capital foundation remains strong. Debt at the end of the quarter was 1.8 times trailing 12-month EBITDA, and our debt-to-total cap ratio was 44.9. On a net debt basis, net of parent company cash, these ratios fall to 1.5 times and 40.7%, respectively. Our leverage remains low. All bond maturities are long dated on average eight years and our weighted average cost of debt fixed at just 4%. In the quarter, we harvested $268 million of subsidiary dividends and repurchased approximately 590,000 of our shares. Parent company cash at the end of the quarter was $375 million. With substantial incremental debt capacity, cash on hand and strong cash flow to the parent, we have ample dry powder to drive our organic and inorganic growth strategies. 2022 full year operating cash flow was lower compared to the prior year, primarily due to the cash settlement in 2022 of large prior year marketplace risk adjustment and Medicaid risk corridor payments. Normalizing for the timing of these payments, 2022 operating cash flow was $1.6 billion. Turning now to our 2023 guidance, beginning with membership. In Medicaid, we expect organic growth, the midyear inception of the Iowa contract and membership from our My Choice Wisconsin acquisition to be largely offset by the second quarter resumption of redeterminations. We expect this to result in 2023 year-end membership of approximately 4.7 million members. In Medicare, based on our performance in the annual enrollment period, we expect to begin the year with 160,000 members and continue to grow during the year, ending 2023 with total membership of approximately 175,000 members. Our Medicare membership growth for 2023 is expected to be evenly split between our D-SNP and MAPD products. In Marketplace, based on open enrollment, we expect to begin 2023 with approximately 290,000 members, reflecting our pricing strategy to achieve target margins in this business for 2023. Accounting for a limited SEP and normal levels of attrition through the year. We expect to end 2023 with approximately 230,000 members. We continue to treat any marketplace membership from Medicaid redeterminations as upside to these projections. Moving on to premium revenue. Our 2023 premium revenue guidance is $32 billion, representing 4% growth from 2022 Our revenue guidance is comprised of several items, $1.2 billion for the full year impact of AgeWell and expected revenue from the My Choice Wisconsin acquisition when closed. $1 billion of organic growth in Medicaid and Medicare and $900 million for the midyear inception of our new Iowa contract. Several offsetting items include: $600 million for the known pharmacy carve-outs, $500 million for the impact of the resumption of redeterminations beginning in April, $600 million for the lower Marketplace membership, and $300 million in 2022 pass-through revenue that we don't expect to recur in 2023. Turning to earnings guidance. We expect full year adjusted earnings to be at least $19.75 per share. Our EPS guidance reflects the realization of approximately $1 per share of 2022 embedded earnings, consisting of the contribution from acquisitions and a portion of the net effect of COVID partially offset by the impact of redeterminations. To this, we add $1.50 for the underlying organic growth plus several operating levers, including our real estate reduction strategy, the full year effect of our PBM contract and net investment income, partially offset by the negative impact of known pharmacy carve-outs. These drivers combined to deliver core earnings per share of at least $20.40. Recognizing the one-time non-recurring implementation costs in 2023 for our new contract wins that we now project to be $0.65 per share, yields our 2023 earnings per share guidance of at least $19.75. Moving on to select P&L guidance metrics. We expect our consolidated medical care ratio to be approximately 88%, consistent with our 2022 results. We expect our adjusted G&A ratio to fall slightly to 7%, even while absorbing the impact of the one-time non-recurring implementation costs for our new contract wins. This reflects disciplined cost management and fixed cost leverage from our revenue growth. Excluding the new contract implementation costs, our adjusted G&A ratio would have improved year-over-year to 6.8%. The effective tax rate is expected to be 25.3%, adjusted after-tax margin is expected to be 3.5%, well within our long-term target range. Weighted average share count is expected to be 58.1 million shares. And we expect our quarterly adjusted earnings per share profile to be fairly flat over the year, with the first two quarters of the year at roughly $5 each. As Joe mentioned, our 2023 new store embedded earnings power is at least $4 per share and is comprised of at least $3.50 from our three recent new contract wins, and $0.50 per share for AgeWell and My Choice Wisconsin acquisitions, achieving full accretion. We continue to carry approximately $2 for COVID era risk corridors providing additional potential upside to be at least $4 of new store growth embedded earnings. Thanks, Mark. In looking back over the past five years, we pause briefly to reflect on our company's accomplishments. We won $5 billion in new Medicaid awards over the period and defended all of our existing contracts. We acquired $10 billion in profitable revenue. In short, we doubled the revenue base. We have produced industry-leading margins in our core products, averaging 4% to 5% on a pretax basis. The top line growth and margin expansion allowed us to grow earnings per share from a loss in 2017 to nearly $20 per share in 2023 guidance. We've ascended to Fortune 125 status and were promoted into the S&P 500. We have a pure-play government managed care franchise to grow and build on. We only take this retrospective journey to express our excitement, enthusiasm and energy for the next five years. There are so many more opportunities to continue to grow and expand our franchise. As we say here at the company, reaching milestones is not a cost for celebration, but a cause for consternation as reaching one merely marks the point in time to set new aspirational goals. We plan to share our view over the next five years with you at an Investor Day later this year. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Josh Raskin with Nephron Research. Please go ahead. Hi. Thanks. Good morning. So the guidance for the 2023 MLR is overall flat. I assume it would be fair to expect the Marketplace MLR to be down meaningfully. But even just based on size, probably not a meaning contributor. Would it be fair to assume that the Medicaid MLR embedded in there is actually up? And maybe you could help quantify some of those absolute changes by segment and maybe specifically how reterminations are impacting your view of the Medicaid MLR? Sure, Josh. That is correct. We are going to produce a consolidated medical care ratio of 88% in each of 2022 and our guidance through 2023. We get there in a slightly different way year-over-year. Obviously, with our repositioning of the Marketplace business, we're projecting that with pricing actions, with the small silver and stable strategy, we will bring that MCR down within the long-term range at the high end of the long-term range of 78% to 80%. Medicare slightly underperformed our long-term target for the year because of 300 basis points of pressure. We now project that Medicare will come into its long-term target range, perhaps in the middle of that range. And yes, because we have been outperforming our long-term guidance range in Medicaid, 80% of our revenue, we are forecasting a reversion to the mean, considering all the impacts of flu, RSV, COVID, any potential nuanced reaction to retermination process puts us in the middle of the range at 88.5%, our long-term range being 88% to 89%. So that's the line of business tail of the tape for MCR projection into 2023. That's right, Joe. Josh, it's Mark. Total guidance at 88% MLR. As Joe mentioned, each of the segments I've got pretty much right in the middle of long-term guidance. So think of Marketplace, 79% to 80%; Medicare Advantage 87.5% and Medicaid, call it, 88 5%. For weightings, pretty similar to what we had this year, probably about 5% marketplace, which is a little bit smaller as the portfolio about 13% Medicare Advantage, about 82% in Medicaid. So you round all that out. The only other thing I'd say is, we finished full year Medicaid in 2022 at an 88%. We're obviously in our guidance saying an 88.5% roughly for Medicaid. So that's an additional 50 basis points for new stores, who knows redetermination or just general conservatism, but that's how I'm thinking about the MLRs there. Thanks. Hi, everybody. Maybe I'll just -- I know it's a smaller portion, but on the public exchanges or marketplace, your decline in enrollment. I know you've been talking about for a while that for '23, you would price for margin. Are you surprised -- was that decline in enrollment consistent with what you thought. It seems like, as we hear from your peers and everyone, there's quite a divergence in and what people are seeing. Any comment you can make on what you saw in benefits as this market become very sensitive to slight changes because some people are showing huge growth, others are not. And I'm just trying to put that in perspective. And then you're saying you do not have any assumption that you'll pick up lives on the public exchanges as redeterminations play out. Can you give us a sense of what that might look like possibly if you're not baking in the guidance? And do you have any view? I know there's been a lot of discussion about how those redetermined lives when they come on the public exchanges might affect the risk pool, I'm assuming that net-net, because you don't have anything in there, you think it would be a positive for you, even if maybe they're a little sicker than your average person on the exchanges today. But anyway, just fleshing out some of the public exchange commentary. Sure, A.J. The membership results starting the year with 290,000 members, finishing the year with 230,000 members. We'll aggregate to about $1.6 billion in premium for the year. And that was fully in line with our expectations with respect to our pricing strategy. Look, we're allocators of capital and this business has shown that due to the instability of the risk pool by the introduction of the special enrollment period and other factors that it does have some inherent volatility. There also has been some irrational pricing over the past couple of years. So pushing the pause button and going silver stable, in small was exactly the right approach and the business for 2023 has landed in a good place for us to achieve our mid-single digit margin target, if we conclude that the risk pool has stabilized due to the lack of government movement of the risk pool rules, pricing is rational, we likely would conclude to allocate more capital to this line of business and grow it again. Yeah, A.J., good morning. As Joe mentioned, starting off with 290,000 members going down, I think, to 230,000 by the end of the year, really exactly what we expected. We put 9% rate into the market this year. If you look at the mix of what we got and the pricing we put into the market, so with 9% not surprised with that result at all. Now you asked about the MLRs. To the extent we pick up folks from redetermination, I'm expecting the MLRs coming over to be quite consistent with our underwriting range. Those folks will not be new to health insurance. They will not be coming in with pent-up demand. So I'm expecting a pretty stable pool as they come over. Thanks. Good morning. A couple of questions on the numbers side. First, on Medicaid membership, can you give us the membership? I know it's going to be flat. You talked about some new growth of acquisitions offsetting redeterminations. Can you give us those numbers in terms of what you're expecting there for each of those buckets? And then, how should we think about redeterminations from '23 into 2024 in your mind? And then on the reserves, I've heard you talk about DCP and I saw in the release that you mentioned a bunch of payments in the quarter. I did go back and take a look at fourth quarter paid versus fourth quarter kind of reserved or medical costs, last year to this year, it didn't look like there was a significant change in paid claims as a percentage of total in the fourth quarter of this year versus last year. So hoping you could just flesh that out a little bit in terms of what you were seeing there? Thanks. Great. So a bunch there, Justin. Let me start with Medicaid. We ended 2022 with about 4.7 million members. As Joe mentioned earlier, I expect to conclude 2023 with about the same. We'll go in there. The moving pieces is redetermination probably around 300,000 or more coming off, but replaced by a number of good guys. For example, the Iowa acquisition about 200,000 members, the My Choice acquisition about 40,000 members; California fee-for-service coming in a bunch of offsets there. So pretty much flat over the year from a membership perspective. On the DCP, you're talking about and the payments related to medical expenses. In general, when I look at DCP and I look at our reserving, our purchase is the same. It's the same actuarial on leadership, same approach to development and our triangles, the same external audit review. So I feel very confident about our process. What has changed is, in the fourth quarter, we added AgeWell, which brought in the LTSS membership, that membership adjudicates a whole lot faster and pays a whole lot faster. We also had the extra payment cycle. So when I look at the fourth quarter, we actually paid more than what I recorded in medical expense. So that's driving a bunch of that DCP decline from 50 to 47. Hope that helps. Hey. Good morning. Just a quick follow-up. It sounded like you said if the marketplace was stable, you could look to grow it again next year. And that just sounds a little different than some of your previous comments where you kind of let the membership float up and down year-to-year. I just want to understand that in the context of your overall strategy. Is the growth outlook for Marketplace just based on your evaluation in the market this year, and that's something that you look to reevaluate next year or are you saying that you kind of want to grow Marketplace going forward. Now in that line of business, we are going to look at the stability of the risk pool, chasing and moving target with respect to the government rules around who's eligible, how many people are eligible when they become eligible has thrown in the past couple of years, that risk pool into what we consider to be a period of instability. If that should stabilize and now we're convinced that the pricing that's put into the market by us and the competitors is rational. I've always said, we could put this business back into the growth category, allocate more capital to it and grow it, but grow it in a very responsible and measured way. So I'm not sure, we're seeing anything new, but right now, keep it small silver and stable until we conclude that we should allocate more capital to it and grow it in a very measured and responsible way. And that's been our strategy all along. Got it. And I know you're not forecasting growth from Marketplace from redeterminations. But just curious if you have a sense for what the recapture rate was pre-COVID. So when someone got redetermined in Medicaid, how long did they typically go uninsured before they got coverage elsewhere? And I guess how often are you able to recapture some of those members in a Molina Marketplace product? The way I would answer that is one of the reasons we haven't forecasted to capture is because the data around how it's worked in the past is pretty imprecise. I mean we could create all the models with various scenarios. We decided not to forecast it. We have operational protocols in place with member outreach in the states that allow that through text, phone and mail to help members reestablish eligibility and if determined that they are ineligible for Medicaid but eligible for a highly subsidized Marketplace product, we will then warm transfer them over to our distribution channels for Marketplace and capture them in that manner. But because this is uncharted waters, it's just -- it's never been done before, we chose not to create a model and forecast it, but consider it as upside to our membership growth. Hi. Thanks. Good morning. I guess, I'll use my question just to try to fill out a couple of the other modeling elements for 2023. Just interested if you could give us your thoughts on operating cash flow, and then also investment income and interest expense for 2023? Sure. Scott, it's Mark. So when I think about operating cash flow, I focus on cash flow at the parent because that's what restocks my firepower. I expect to take pretty meaningful dividends. I've got a few acquisitions to pay for this year and I've got some growth organically that I need to fund. So all told, at the parent, I expect to have more than $0.5 billion by the end of the year. Interest expense, you can model going forward, you know my bonds, you know my rates. On interest income, that's a wildcard, right? We're all guessing on that. finishing 2022 with about $7.5 billion of cash and investments. I expect across 2023 to end the year with about $7 billion of cash and investments, including everything at the subs. Now the wildcard here is, what kind of an interest rate to put on that, right? We've had one Fed raise already this year. If you look at the Fed Funds future rates. We've got maybe one more raise coming and maybe one or two declines back half of the year. So how do I think about that across the year? Not quite sure. I think you could model any place between mid and high 2s on a yield basis and come out with a pretty credible interest forecast there. Okay. Thanks. And just one quick follow-up question. Just on the M&A side, how you're thinking about the pipeline and sort of the pacing of engagement in 2023. Obviously, you've got some significant installations of new business in flight. So interested in how you're thinking about layering in M&A as well. Thanks. Yeah, Scott. Even with the significant backlog of both integrations on in-flight acquisitions and new contract implementations and our new wins, we have continued to aggressively pursue the M&A pipeline. And nothing has really changed with respect to the appetite of single state operators not for profit plans to listen to the Molina story and want to be part of this larger enterprise, where they continue -- they can continue to fulfill their local mission and have access to the broad and deep capabilities and financial resources that we bring. So it's a great story and nothing has really changed there. I would say, given the size of the pipeline and the level of activity and the maturity of some of the opportunities, we feel very confident in some announcements here in 2023. Hi. Thank you. Just wanted to touch on the marketplace, again and just ask about like what happened in '22. So at the beginning of the year, you're expecting 79% MLR, but Q2 I think there was a large miss really full year expectation to 84%. And then this past quarter, even excluding the 300 bps of scheduling past provided balances still ended up higher than expected. Now you're at 87% to end the year. So I thought pricing was more disciplined than you went through this major recalibration of your metal peers to cover. So I would have expected more MLR stability than what we saw. Could you walk us through about like what happened with Marketplace and why the large divergent from initial expectations? Sure. And as we said in our prepared remarks, even with the exclusion of the one-time items, the COVID-related items the risk adjustment true-up in the middle of the year. And in the fourth quarter, the significant settlement of some prior year provider balances, we did not meet our expectations in marketplace. The continuing MLR drag from that significant SEP membership that renewed into the current year, continued to drag on the MLR. We now believe that the special enrollment period might produce this year 3,000 to 4,000 a month, where it was producing 20,000 to 25,000 a month and the height of the SEP gives the risk full more stability, and we're priced for it. So we did not meet our expectations even while ignoring the one-time items. But this year, we feel that with the high-single digit price increase, low-single digit trend, good visibility on our renewal membership to make sure we get appropriate risk scores that we're in good shape to hit mid-single digit margins in 2023. Yeah. Hi. Thanks. I wanted to follow up on the Medicaid MLR question. I appreciate the color on your expectations. How should we think about Medicaid MLR? I know you probably want to guide it too close quarterly, but do you expect to generally operate around that 88.5 level kind of consistently throughout the year or is there any slope to that line that we should maybe be thinking about? And then just to kind of put a bow on the question on the DCP for the AgeWell business, could you just give us a sense of what the DCPs would look like on a stand-alone basis, we can try to put that into context? Thanks. So I'll turn it to Mark. But yes, given the mix of the business has changed and many of the dynamics of the businesses have changed, the seasonal patterns of how MCRs emerge, has changed slightly over time. So I'll turn it to Mark to give you a view of how Medicaid might perform over the quarters. Yeah. I'm expecting pretty flat. And if you look historically, we've run pretty consistently on Medicaid, certainly more so than Medicare in the marketplace. So I think you can model that one pretty straight line. On the AgeWell, we'll follow up with you offline. I don't have a discrete number on that. I know what it does to my weighted average, but we can follow-up with that. Thank you. Great. Thanks for the questions. You mentioned the $2 per share of earnings power from the three remaining COVID risk corridors. What's the time line to potentially realize these earnings? And then just more generally on state rates, how do you think the process plays out for states potentially revisiting rates as redeterminations occur and potential changes to the underlying risk pools take place. How do you think the states are going to approach that? Thank you. Sure, Nathan. We actually consciously separated the two major components of our embedded earnings because one of them is, in our view, entirely controllable, harvesting the $4 of earning our target margins on latent contracts and M&A is something we have a proven track record of doing. We separated that from the $2 of lingering COVID era corridors because eliminating them is outside our control. They were put in place during COVID. They're articulated as being related to COVID. There are three remaining two that matter. Washington, State of Washington and Mississippi, and we believe over time that they will either be compressed or eliminated, but we don't control that. With respect to rates, I would say that states, our customers and their actuaries are vary at least aware of the potential for an acuity shift somewhere due to the redetermination process. And the fact that they're aware of it. And we would -- and if or not, we will certainly make them aware if we experience it, leads us to believe that if there is a significant shift in acuity somewhere in the book of business that the actuarial soundest principle will prevail, and we'll be able to have a productive conversation about that. Nathan, just to build on that, a number of our states were in 19 on Medicaid now. A number of our states have told us, if and when there's any impact from that redetermination, they are quite willing to reopen that to revisit it. So we feel good between that commitment and our advocacy efforts that the rates will move as they need to. Hey. Good morning, guys. Most of my questions are answered, just two quick ones. One on the exchange membership loss driven by repricing. Is there any particular state you'd point out in your footprint or is that pretty evenly distributed that rate increase in the enrollment decline? And then just secondly, because 99% of all the incoming investor angst about Molina is around redetermination risk and potential impact on margins, et cetera. Just wondered if you could share with us any additional work you've done on low utilizers, zero utilizers, people, populations most likely to be redetermined, et cetera? I know you've shared some of that before and just anything else you might add to provide some comfort around your Medicaid, MLR guide would be helpful, I think. Thanks. Gary, I'll answer your second question first and then kick it to Mark for more detail. But the analysis that we've shared with you and investors is the same one, because we're looking at all the data. And there's so many theoretical arguments of why an acuity shift could happen. We focus on the numbers and the data. We look at members greater than one year duration, less than one year duration. We look at the MLR for members with less than one year duration, greater than one year duration. We look at members with zero to 25% MLRs. We look at the lapse rate of membership, which hasn't gone to zero. There still is a disenrollment rate that occurs in the Medicaid book. So we look at all that data, and it leads us to believe that while maybe somewhere there could be a slight acuity shift probably in the expansion book, not in the tenant book or the ABD book, but manageable and will be easy to deal with, particularly because the states are aware of it and we believe we'll have a productive rate discussion if and when there is a shift in acuity that makes the rates actually unsound. Mark? Yes. So we update this analysis every quarter and the conclusion is really not changing. Joe mentioned a couple of the data points, the folks with us more than one year versus less the folks in the zero to 25% MCR bucket. Expansion, we're seeing a little bit of an increase, but across the board is not much. Remember, expansion is just 30% of our total revenue. The other data point that some folks have been talking about is coordination of benefits or duplication of benefits, do we see any increase in that population. Once again, not really, a little bit of an expansion. So across the board, is there something here? Maybe, but it's really minimal. So again, not expecting much of an impact here to the extent it plays out. Now I refer back to the previous question, where I think the states are quite amenable to revisiting it. On your first question, are we fairly even distributed on our Marketplace? Yeah. I don't see any real estate density in any outliers of one state being disproportionately dense. We've got pretty good distribution across our 14 states here. Great. Thanks. Good morning. So just a follow-up question on the exchange business. Here you mentioned the shift from bronze to silver has been the right move the better margin profile demonstrates that. So I know you talked about this more a year ago, but just remind us again why bronze has proven to be more tricky from your point of view. Has that gotten better or worse currently versus a year ago? What would have to change within that just to give you comfort to reexplore bronze on a greater level? Thanks. Steven, it's really an anomaly of the product design, not anything that we design, but the way the product is priced from an industry perspective, where one thing I can point to that is absolute fact is for the same member in bronze and silver with the same acuity level, the same services and therefore, the same HCCs, the risk score produces less revenue in bronze than it does in silver. And there are other aspects of it that make it just slightly less attractive. Mark? Yeah. I'd say a couple of things just building on Joe's thoughts. It's a lower actuarial value product. Sometimes that attracts folks that don't think they're going to use a product but do, the way the rules are set up, the balance on risk adjustment is a whole lot better on gold and silver than it is on bronze. And finally, just at a lower revenue load, it becomes slightly less attractive from a G&A perspective and some of our other operating ratios. You take those things all together, it's more volatile, and we just don't see the margins there. The next question comes from George Hill with Deutsche Bank. Please go ahead. Mr. Hill, I'm not sure, some trouble hearing you. All right, your connection may have gone down. We'll go to the next questioner, who's Kevin Fischbeck with Bank of America. Please go ahead. Great. Thanks. One quick clarification question before I jump into the real question. The $6 of embedded earnings, it wasn't 100% clear to me. Is that in addition to the $0.65 coming back or is that $0.55 in the 3.50? So the total of $6 is $4 of new store EPS; $2 of net effective COVID; and there are two other items in there that cancel each other out. There's the implementation costs, which are a bad guy in the current year of $0.65, but go away next year, right? And then, there's also the remaining hit on redetermination of expecting in 2024, which is also $0.65. So those two cancel each other out, you're looking at $4 and $2. All right. And then I just want to go back one more time to the redeterminations because it's interesting because on the one hand, it sounds like you thought about redeterminations as a potential MLR pressure in your Medicaid MLR guidance, which is different, I think, than how you've talked about it in the past, but then throughout the call, you've kind of dismissed it as a potential pressure to MLR. So just trying to understand a little bit finer like are you saying you've put it in, but you think it's set most 10 basis points or something like that, something kind of immaterial or how exactly are you thinking about and what exactly are you including in this year's guidance? And then I guess to build on that, if it is a pressure this year, would you expect that pressure to be higher or lower next year? Higher because more members are being determined or lower because states have more time to adjust rates? Thanks. Kevin, I'll give it to Mark. We are not and haven't parsed all the specific trend factors that go into an MCR forecast for the Medicaid business, but we have been outperforming even the low end of our range, a range which produces best-in-class industry margins and we just think it's not prudent to continue to forecast that we'll continue to outperform the outperforming that range. So we call it a reversion to the mean. We're forecasting an 88.5% for the Medicaid business, which is right in the middle of the range, citing medical cost pressures due to any of the items like flu, COVID, RSV and then, of course, any pressure that might be experienced with an acuity shift knowing that a significant acuity shift will probably be absorbed by retroactive rate increases. So I'm not going to parse it, but that's why we were somewhat conservative in forecasting the middle of our long-term Medicaid range rather than continuing to forecast that we outperform it. That's exactly right. So we finished last year at an 88% for the year. Our guidance anticipates an 88.5%, and we don't attribute any specific basis points to a driver. But in general, reversion to the mean flu, RSV, number of different things we could think about in there. Don't forget, we also have some new stores coming along, Iowa, the acquisition of My Choice Wisconsin. In general, just a little bit of conservatism, reversion to the mean, not attributing any basis points specifically to redetermination. But look, we've all had the conversation enough. We're acknowledging that, that's something that's potentially in there. in our reversion to the mean. Now you also mentioned maybe what happens next year. So to the extent any of this starts to manifest it will largely be back-end loaded in the year, just given the way redetermination is going to play out. I think that gives all of us a lot of time to anticipate it but just as much work with our state partners to make sure that rates in the concept of actuarial soundness anticipate the same thing. Okay. Thank you, guys. Joe, and I think you kind of just touched on this in the last answer, but my question was around the $0.65 in implementation costs in 2023. I guess could you kind of break out the buckets that they're typically going to fall into. And again, this was just commented on, but I assume no part of that repeats in '24 that all goes away and there's no part of that cost structure that's durable. I'll answer the last part of your question first. On the cost for -- obviously for Iowa, California and Nebraska, yes, those once spent should not repeat themselves. But as I said many times, and not tongue in cheek, I hope in the future, we continue to have one-time implementation costs on new contract wins can have a better spend than that. There are technology implementations, which are fixed in nature. And then, of course, you need to hire the people that are going to service these businesses in advance of the revenue stream, which is a major part of the $0.65 implementation cost. Mark? Right. I'll just build on that. So if you think about the $0.65, the way I think about it, about a third of it is IT, sort of a fixed component and about two-thirds of it is staffing, mostly highly variable, right? We have to staff up ahead of day one membership. So that's the way to think about it. It obviously, it comes to us ahead of when we start booking revenue. So I wouldn't say that it goes away specifically. What it does is it goes into the anticipated margin once we run these businesses. We've talked about $3.50 of same-store -- of new store embedded earnings here. That $3.50 is, of course, after operating costs. The reason we have $0.65 is we're not booking revenue yet. So $0.65, one-third, fixed; two-thirds variable, that's the right way to think about it. Yeah. It goes away as a one-time item, but it becomes consumed into the run rate of the new contracts is the way to think about it. Good morning. Thanks for taking my question. I hope you can hear me. I have a few small ones. In your discussion around, the state's willingness to revisit these rates, as redetermination progresses. Do you have a sense of the urgency around that? Meaning, will they do that on a relatively short notice or will they want to have that discussion in the next rate cycle or after the majority of the redetermination in their state has played out. We don't know that specifically. All we know is that they're aware of the theoretical possibility that there's an acuity shift in the book, likely, could result in prospective rate changes, but also retrospective rate changes. And it all has to be data driven. So to the point on timing, the data has to mature. The claims have to complete, the data has to be analyzed and then reasonable people will get in a room and figure out whether a rate change is necessary. So I would look at it, I don't know whether they're going to wait until the entire redetermination process is complete. But it's got to be data driven. So the data has to complete, and it has to be verifiable and actionable. And David, it's Mark. The fact that a number of these states have also led with this thought, unprompted to me is encouraging that will be somewhat proactive here. Okay. That's interesting. Second question is any thoughts on trends post-COVID in medical costs that are more durable and maybe distinction as to whether you're betting on that or not. So thinking about things like lower ER utilization and that type of things. No, I think the medical trends we've experienced late in the year seem to have fallen into a nice pattern of, lack of volatility and understanding what COVID is actually costing sort of like on a run rate basis. It almost evolved into a $40 million to $50 million monthly run rate. And as long as it stays stable, as long as we know where the COVID infection rate is spiking, it certainly is -- the inpatient cost is certainly the more costly component, and that certainly hits the Medicare more than the Medicaid book. We have pretty good line of sight into what those services will cost us. But late in the year, it sort of settled into a nice pattern of $40 million to $50 million a month. And then lastly, Joe, I appreciate your comments on your -- it sounds like your M&A pipeline is still very robust. Does the cost of capital change in the environment impact cadence or appetite? Has it impacted expected valuation on the seller side? No, not at all. We obviously measure the returns against our weighted average cost of capital. Obviously, we're earning more on the free cash now than we were before. So there's less of a drag. But no, it hasn't caused any change in momentum in terms of the appetite for counterparties in the market to want to speak to us and think about becoming part of the Molina enterprise. This concludes our question-and-answer session and Molina Healthcare's fourth quarter 2022 earnings call. Thank you for attending today's presentation. You may now disconnect.

EarningCall_240

Welcome to the Geospace Technologies’ first quarter 2023 earnings conference call. Hosting the call today from Geospace is Mr. Rick Wheeler, President and Chief Executive Officer. He is joined by Robert Curda, the Company’s Chief Financial Officer. Today’s call is being recorded and will be available on the Geospace Technologies Investor Relations website following the call. At this time all participants have been placed on a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] It is now my pleasure to turn the floor over to Rick Wheeler. Sir, you may begin. Thank you, Brittney. Good morning, and welcome to Geospace Technologies conference call for the first quarter of fiscal year 2023. I’m Rick Wheeler, the Company’s President and Chief Executive Officer, and I’m joined by Robert Curda, the Chief Financial Officer of the Company. In these prepared remarks, I will first provide an overview of the first quarter and Robert will then provide an in-depth commentary on our financial performance. After some final comments, we will open the line for questions. Some of today’s comments about markets, revenue recognition, planned operations and capital expenditures may be considered forward-looking as defined in the Private Securities Litigation Reform Act of 1995. Statements we make are based on our present awareness, while actual outcomes are affected by uncertainties we cannot predict or control. Both known and unknown risks can lead to results that differ from what we say or implied today. These risks and uncertainties include those discussed in our SEC, Form 10-K and 10-Q filings. For convenience, we will link a recording of this call on the Investor Relations page of our geospace.com website. And I recommend that you browse our website to learn more about Geospace and our products. Note that, the information recorded this morning is time sensitive and may not be accurate at the time when listens to the replay. Yesterday, after the market closed, we released our financial results for the first quarter of fiscal year 2023. Spanning October 1st through December 31, 2022. We were pleased to see that, revenue for the quarter reached $31.1 million, reflecting an increase of 73% over last year’s same period. Moreover, the amount represents the company’s highest quarterly revenue in the last 8.5-years, going back to June of 2014. Gross profits for the quarter were also strong and reached a three year high of $10.5 million. Factoring in all other expenses, the first quarter posted a narrow net loss of $0.01 per share. However, it must be noted that, the slight loss comes after including $1.4 million in one-time charges. These charges were a combination of restructuring costs, write-offs of Russian inventory and non-recurring repair costs. Those actions stem from our commitment to achieve future profitability through streamlining our operations, reducing operating costs and increasing revenue in each of our business segments. The majority of first quarter revenue came from our Oil and Gas segment led by wireless seismic products. While the sale of GSX land equipment from our rental fleet was a contributing factor. The largest portion of wireless seismic revenue came from our OBX ocean bottom nodes. Rental revenue from performing OBX rental contracts was certainly the largest component. However, a significant amount of OBX related revenue was the result of compensation for OBX equipment that was lost by a rental customer during a survey. We intend to build out additional OBX nodes to replenish this lost equipment in the rental fleet, as demand for both the deepwater and shallow water OBX models continues to strengthen. Many of our existing customers have stated an intention to move their crews and to follow-on client contracts after their existing surveys are complete. Combining this demand with an increasing number of shallow water surveys being put out for bid, interest in using our New Mariner nodal technology is also growing significantly. Our strategic diversification efforts continue to bear fruit, as evidenced by the performance of our adjacent market segment. First quarter revenue from these products within 1% of its all time records set in last year’s third quarter, adding traction to our move toward profitability. As a premier manufacturer and supplier of ruggedized water meter connector cabling, our market position in these products continues to climb. To maintain this position, we work closely with trusted water meter companies to meet the design and specifications of their domestic municipality customers. The breadth of discussions taking place with these partners for specialty cables as well as the Aquana smart valve products gives us confidence, that future growth in this market will continue. Thanks, Rick and good morning. Before I begin, I would like to remind everyone that, we will not provide any specific revenue or earnings guidance during our call this morning. In yesterday’s press release for our first quarter ended December 31, 2022, we reported revenue of 31.1 million compared to last year’s revenue of 18 million. Net loss for the quarter was a 100,000 or $0.01 per diluted share compared to the first quarter of last year’s net loss of 6.8 million or $0.52 per diluted share. Our oil and gas product revenue is as follows, traditional product revenue for the three month period ending December 31, 2022 was 2.8 million compared to revenue of 600,000 for the last year. The increase in revenue is due to higher demand for seismic sensors and marine products. Seismic sensor sales are up due to the long-term order with an international company and a modest increase in domestic sales and our Russian entity. Our wireless product revenue for the quarter was 17.2 million, an increase of 98% compared to revenue of 8.7 million last year. The increase in revenue is due to higher rental revenue from higher utilization of our OBX rental fleet and higher marine wireless product revenue from a rental customer’s compensation for lost OBX nodes. Moving to our adjacent markets product segment, our industrial product revenue for the first quarter was 7.9 million, an increase of 58% compared to last year’s revenue of five million. The increase in revenue is due to a higher demand for our smart water meter connectors and cables. Imaging product revenue for three-months ending December 31, 2022 was 2.9 million, a decrease of 8% when compared to 3.2 million from the same period last year. Lower demand for thermal film products during the holiday season explains the slight reduction in revenue for the first quarter as compared to the same prior year period. Revenue from our emerging market segments for the first quarter of fiscal year of 2023 is 93,000 compared to 137,000 for the first quarter of fiscal year 2022. The revenue for both periods is related to the ongoing contract with the U.S. Customs and Border Protection Agency. Our consolidated gross profit for the first quarter of fiscal year 2023 was 10.5 million compared to 1.7 million last year. The increase in gross profit was due to higher utilization of our OBX rental fleet, higher marine wireless exploration product sales, and increase demand for our water meter cables and connector products. The first quarter of fiscal year 2023 operating expenses are 10.8 million. This is an increase of 26% when compared to 8.6 million for the first three-months of fiscal year 2022. The increase is due to a favorable non-cash adjustment reported in the prior year for a change in the estimated fair value of contingent consideration related to our quantum and at the sites acquisitions. Severance costs we announced in our prior teleconference and higher selling general and administrative expenses resulting from our increase in revenue. These increases are partially offset by a decrease in R&D project costs. Q1 2023 cash investments into our property plant and equipment were 265,000 and cash investments into our rental fleet is 162,000. Our 2023 capital investments into the rental fleet could be as much as six million provided new rental contracts warrant the additions to our fleet. Investments in property plant and equipment could be as much as one million for the fiscal year. Our balance sheet at the end of the first quarter of fiscal year 2023 reflected 12.3 million of short term investments, and we made cash - and short-terms investments and we maintained additional borrowing ability of 8.5 million under our bank credit agreement. Thus, the Company’s total liquidity was 20.8 million. We currently have no debt and own numerous real estate holdings in Houston and around the world that are owned free and clear without any leverage. Thanks, Robert. After the first quarter closed, our Quantum Technology Sciences Subsidiary secured a new contract with an undisclosed federal government contractor. While the initial dollar amount of the contract is modest, it holds strategic significance in future potential for serving an application unrelated to our previous border security work. In conjunction with multiple active discussions surrounding other unique applications of Quantum’s Analytics Technology, we believe the outlook for projects in our emerging market segment is expanding. As part of our plans for streamlining operations and reducing costs, we anticipate completing the sale of our satellite use facility within the second fiscal quarter. This facility currently houses our OBX rental operations, which we are in the process of consolidating into our main campus location. In accommodating this consolidation, we sold some obsolete equipment after the first quarter closed. We believe the continuation of our planned efforts and vigilance in maintaining a strong balance sheet will successfully lead us to profitable returns for our shareholders. With that, this concludes our prepared commentary and I will now turn the call back over to Brittany, our moderator, for questions from our listeners. Thank you. [Operator Instructions] Now we will take our first question from [Martin Laurinson] (Ph), who is a Private Investor. Your line is now open. Hi, to Texas from Germany, and thank you for taking my questions. I have a few as I may. The first one, can you shed some additional light on the property sale, you indicated last quarter on this call as well? Are we talking about the Langfield Road facility? Well, we are certainly going to be examining our assets with our property, plant and equipment as far as that goes. I don’t think there is any anticipation of our properties at this point in putting those up for sale, but we are open to doing that. If in fact our examination shows that would be beneficial for us in our overall approach in our plan towards profitability. Got it. And on the higher level, can you address market share and how that potentially shifted since the onset of the pandemic, especially given the consolidation that seems to be happening and picking up in Europe as well? Well, I mean, the market is certainly picking up. The pandemic for the most part had a massive effect on the overall demand for oil and gas and subsequent to that. Seismic exploration for several years now has been at the lowest it is ever been in history. But that being the case, we see with what is happening in Ukraine as well as the fact that, China is coming out of its isolation more so from the pandemic, the demand for oil and gas and energy in general is improving. I think that is what is driving most of what we see today. It is true that, we don’t see as much improvement in the land side of things, although there are signs of that also improving. Most of what we see is occurring in the offshore space. And certainly that is why you see that our OBX, our rental fleet and ocean bottom nodes are driving our revenue at this point in time. Got it. Okay. And then lastly, do you see room for further freeing up of working capital that we have seen over the last few quarters and what do you - what can we expect the cash balance to look like? I think we are looking good for cash. Again, we don’t give any guidance to how those things are manifesting in the future as it were, but we do conservatively manage our cash as is exemplified for the - many years gone by. So we expect ourselves to be in good shape with respect to our cash. Thank you. Rick, I would like to start with the comment you just made about the land market and that there are some small signs that it is improving. Would you walk through those for us? Well, many of these improvements are coming about in foreign locations. Certainly in the Canada and North America, things are still depressed, but even there we are seeing improvements. To the extent that seismic exploration has just been at such low levels, there is a little bit of pent-up demand that I think that we believe is what might be driving some of that. But overall, it is still too early to tell, what sort of recovery we might see in the land side of the business. Thank you. So then relative to the new Mariner product, you’d mentioned that, there was increasing interest. Would you help us understand whether that is predominantly an interest in rental or if that product is gaining purchase interest? It is actually both, but certainly, the Mariner represents a very cost effective solution compared to what has historically been available for ocean bottom nodes. That was one of the primary design targets of our engineers was to ensure that we could maintain the quality while lowering costs in that manufacturer. I think we have been successful with that, and it has features that you are not going to find in the general equipment that is out there. That being said, I think that is driving an interest, both on the sales side and on the rental side, but I’m sure that the rental of those units will certainly be a driving force, and will have to see to what extent the sales also manifest. And Rick, how are you thinking that you may look back, say a couple of years from now on this and see Mariner versus OBX in terms of what is a bigger driver of the business? That is really too hard to predict. So long as the prevalence of ocean bottom surveys persists. I think the Mariner has a good future for it, as it were. The OBX technology is serving that industry very well, and the Mariner is going to serve it equally well, if not better. And do you see cases where customers will be making a choice between OBX and Mariner, or where Mariner will be taking share from OBX or are they really serving different applications? No, I think, you are not going to see one overtake the other particularly from a use case point of view. The Mariner is a shallow water designed node just like the OBX 750. So to that extent, it is been carefully designed such that you can mix these units. The data from each of them is completely cross compatible, as well as the systems that operate that equipment can operate both simultaneously and any cross combination of the two. Now, the deepwater OBX is one that has seen some of the very same improvements embedded in its design so to speak. So, it serves a different market, but you are not going to see the Mariner represent a different use case than what the current shallow water version of the OBX uses. So, and they are both going to be able to be mixed together. Great, thank you. And then shifting to Aquana are the discussions that you are talking about there with Aquana. Are those with the same buyers of the water meter connectors or is this a different buyer set that you are that you are interacting with? It is somewhat a combination of both, but it definitely intersects with a completely different market and group of customers than the water meter cables just themselves do. The fact is that the water meter cables are used in the same environment that those valves are going to be used. So there is some crossover. We also tar are targeting Aquana valves for property management purposes also. So that is an entirely different set of customers. Yes, that is a good point. So it is not really addressing the aspects of the needs of the municipalities. It is a different market altogether. Okay and so in that case, you would be interacting with a real estate owner or property managers that would be making the decision to implement these either with new construction or with existing or with existing apartments, And then shifting to Quantum, if we may would you please discuss the new contract that happened here after quarter end? Can’t really get into too much of it. As far as the details of that contract, it is with a very well known federal contractor for very specific and targeted purposes that really aren’t available to be discussed at this point. But we will - it is easy enough to say that the available commerce with this particular use case is going to be significant. Thank you. And then, in the release, you mentioned that, Quantum has an expectation for additional orders. And I did take note that, that orders was plural as it was written in the release here in the remainder of this fiscal year, so the next nine-months. Talk more to that if you would please. Well, one of the things that we are doing and quite in the middle of is, expanding the utilization of the Quantum analytics into other spaces. That includes our oil and gas and other components of the energy business. So, much of what we are examining is going to fall into that category, as well there are some additional government agencies that we are in discussions with for things and we do have those expected contracts to be issued sometime this year. Thank you. Thank you for the updates, on the company. I have been a shareholders a long time, and I think you guys just keep fighting, which is tremendous. And it sounds like things are just starting to turn, which is great. And then my question really goes back to liquidity and cash availability to see the outcome you are all hoping to achieve. The cash balance against the CapEx that you had reported. You are going to need working capital in so forth. I understand the bank line is there and I understand it is a forward-looking comment. But it is kind of simple math. When I look at it, I’m sort of feeling this year and a half two years to make this work or there is something existential on the horizon. Am I seeing that right or do you guys see it differently? We don’t - looking at our forecast, we think we are in pretty good shape in this next 12-months in a cash positive position. So I’m not really concerned from a liquidity point of view at this point. Good morning, guys. So Rick, can you just give us a rough idea of what the building - the value of the building will be what sold in the quarter? I don’t think we have revealed that. I mean, I’m sure it will become very, very evident, as we close that this quarter. We definitely anticipate closing that sale in the second quarter here. It is not earth shattering, but it is also a substantial benefit to us and we do anticipate a gain on that property on our books. And how much, if any of the six million that you have earmarked for rental equipment, are you guessing would come from Mariner? Well, the Mariner is not going to begin contributing until later on this fiscal year, I can tell you that. And certainly, the construction of the Mariner is going to be a big part of what that is. I think the revenue from the Mariner is going to be something that, you see more or so in the tail end of the fiscal year and then going forward. And Rick, no discussion regarding PRM, can you give us some idea, if those multiple customers are still interested. We keep hearing an awful lot about the deepwater market opening up quite dramatically from other players in your field? That is a very good question. And yes, there is not really much discussion because there is not much really new. But the interest is absolutely ongoing and active. We have had active discussions with those representatives here at our facilities, as well as being at their facilities. So the interest is still there. And I think that, to your point, the examination of getting the most out of these deepwater assets is largely what keeps those discussions floating, and in the top of mind. Rick, can you just give us a rough idea of the potential addressable market that we are talking about for Quantum, I mean, are we talking PRM type contracts or can you give us any idea of what that addressable market looks like if you are successful? Again, I don’t think we have actually revealed what we think some of those numbers are, but we wouldn’t be bothering with it if we didn’t think it was significant. And those opportunities certainly are going to be ones that the government itself is going to be involved in both for the military as well as some of the law enforcement agencies. Last question, for the land wireless customers, has most of that existing inventory by your customers been absorbed, or is that still an issue? No, we still have inventory as it relates to the wireless land product. Certainly, some of it has made its way to the hands of customers, and in fact, that is what we were referring to in this release. There was a component of revenue in that space in the wireless product space that was land equipment sold out of our rental fleet. I’m sorry, one more question. So this environment to me reminds me a lot of 2005. Would you agree in terms of what you are seeing? In my mind, every one of these cycles has its own character in its own personality. While I do see some similarities to what has happened in the past in that regard, there are a lot of things that are very unique to this situation. So, I don’t know that I would have that one-to-one correspondence, but I do understand the analogy you are drawing. Thank you. Continuing down the question relative to PRM, how are the discussions different today versus back in, well, a decade ago, 2012 when those conversations were taking place? Well, I think at the time, earlier on, they were anticipating that they would be putting out a tender sooner than that actually was going to occur. So the discussions I think have got a little bit more realistic. That is why we would say that even amidst these discussions, we don’t expect anything to land in such a way that it would offer the opportunity to generate any revenue in this fiscal year. So all that that we see in these discussions are all focusing on things that would come in subsequent fiscal years. And are the oil companies looking for something different, whether it be a use case or configurations just philosophically different today versus then very similar? I think they are very similar. I mean, these are long standing needs and the fields are have long lifetimes to them and they want to get into that early. So some of these are brand new fields. Other of these are fields that already exist. So I think that sums up the general nature of the discussions and it is why they are basically very similar to what they have been. And Rick, you said that you don’t anticipate any anything that would lead to revenue this year. Do you anticipate - you may see orders this year even though they would not contribute to revenue in this fiscal year? I think that is possible, but again, I’m not putting high probabilities on that occurring given the slip that has already occurred in several occasions on some of these anticipated tenders. Alright and then, finally, what was the revenue that was associated with the lost OBX equipment that was then per customer? You know, we did not reveal that exact number. And quite honestly, the only ones that need to know that exact number are those that are party to the transaction largely because competitors both in our area and in our customer’s area could try to leverage that information to their benefit in some way. But I will say that, it was significant and that was and we didn’t make note of that to be as transparent as we could in our revenues. But I will also say that, that same the fact that we had quarterly revenues that were the highest, they have been in 8.5 years, within that same span. Even without that sale taken out, there would have been very few maybe three quarters that would have in that time span that would have been better. Hi. Good morning, gentlemen and congratulations on the new results. And within the commentary, you talked about a path to profitability and that is encouraging to a lot of investors I think and realizing you don’t discuss, could you talk at a high-level on the components you envision to get you to profitability and realizing it is probably is dependent on higher revenue, but as you think about your business plan and your business model, you can highlight the components you need to improve either on a revenue or cost side to get you to where you want to be. I think that would be a helpful way to frame it to the investment community. Yes. I think all fronts are going to have to be pursued, Mike. And that is exactly what’s in our plan. Part of that is examining in great detail the cost structure of our manufacturing operations, which aspects have the greatest efficiencies, which ones do not, where our assets and our working capital is best put to use? So those pieces of the puzzle are ones that we are still putting together and we are going to be acting on those, as we discover them. On the revenue side, there is a clear aspect that, revenues need to increase in all of these segments. So there are expansion efforts going on in some areas within the organization, to increase our capacities for very well known products that we see good forecasting on. So it is going to be a combination of those sorts of things. But as you say, none of which in any specific manner can we really annotate at this point. I think it can be challenging from our side to think about how those all come together. Could you highlight any timeframe that you thought about internally to get you close to your profitability goals? Well, we are certainly targeting this year, as making significant improvement on that. As far as what you have seen in this quarter, you are going to see more of that as we go forward in terms of our examination of things, restructuring of things, as it were. So it is not something that happens overnight and it is something that requires some really pensive examination, as we go forward on this stuff. So I wish I could give you a timeline, but that would kind of be not really something I could give you something accurate on it. Okay. And just maybe a quick clarification, on the OBX rental equipment that was lost, was that included in product revenue or rental equipment revenue? And we will take our next question from [Father Amagou Levenson with Levenson Capital Management] (Ph). Your line is now open. Thank you. Good morning. I think really the bottom-line here is from a qualitative and a quantitative perspective is that, under the current leadership of the company, something like 97% of shareholder value has been destroyed. Retained earnings and owner’s equity is dramatically been reduced for the owners of the company. And the only way you guys have come close to breakeven this last quarter apparently is because of an equipment loss, the Board’s bloated, management salaries and benefits are always hidden in SG&A, which is always going up. The Quantum acquisition hasn’t really panned out at least not yet and it is been a couple of years. And it just feels like you guys are always hanging a carrot in front of investors. But in the meantime, while the Board and the management team is pretty well compensated, investors are getting host. To me, that looks like corporate governance failures. And it really should lead to Rick Wheeler’s outster. A Board that leaves the management team in place this long with this many loss. It is 42 quarters of losses? I mean, the price of oil goes up, you guys lose money. Price oil goes down, you guys lose money. The economy is great and booming, you guys lose money. The economy is doing badly, you lose money. That is the corporate governance failure. And I think until the investors and the Board are honest about it, you are going to keep losing money. Every conference call, somebody asks Rick Wheeler, when are you going to be profitable? You can never give a clear, intelligent solid answer. Investors should be very, very concerned about that. I have always said, you guys have great technology, you have got great R&D. You are sitting on a ton of assets, but the day’s going to come when you run out of real estate to sell, and you are going to run out of hard assets to sell to buttress your cash position. These are just not adequate answers for investors, and I think the company needs to take a hard look at who really owns that company and start thinking about why these failures are going on year after year after year. I wonder what you guys have to say about that. Well, I think in many respects, you are really all wrong about how the business operates. I mean, in most respects, we are managing ourselves well -. I’m not construction of shareholder value under your leadership. Rick, is that wrong? Am I overstating? I’m understating that number. Is that wrong? Well, businesses exist to earn a profit and to increase the value of their shareholders wealth and their investment in that business. You have not done that. You have been in reverse for eight years. Is that not a true statement? Show me where on the income statement a balance sheet. I’m wrong. Look at your retained earnings. You have eroded them. Look at your shareholder equity, it goes down every single quarter. That is straightforward -. Well what are you going to do about it? That is what we got to find out. Well, I think, that is something that you are seeing, I mean, to the extent that we are restructuring what we are doing and aligning ourselves with those components that are more revenue producing you are going to see that occur. Well, I hope that is true, because honestly, I think this board should be cut in half. I think it is extremely bloated for a company with your market cap size. And honestly, Rick, you should step down. Your performance has been terrible economically. You seem like a nice guy, but I think these shareholders would rather have an effective CEO than a nice guy. And this is just an indefensible performance. The price of oil shot up, you guys can capitalize on it. Your compositions capitalizing left and right. There is record spending with E&P companies. Well, I mean, somebody just asked your CFO, he, he answered we are going to be cash flow - cash positive. Well, that is not that encouraging. I mean, look at your burn rate. The bank is cutting your credit line, your cash is constantly dwindling. You are selling real estate left and right, but you are going to run out of real estate. In fact of the matter is, when Gary was running the company, he was a great CEO, but Gary’s retired. He is out on some exotic vacation every time I talk to him. You are not Gary Owens. And that is the problem here. And all of those assets were accumulated under Gary’s leadership, and now we are just burning through them. Look, this isn’t an indictment of you personally - Rick, but something has got to change, and it is got to change quick. And you got to get all these academics off your board who all they talk about is playing with rocks. And you got to get some people who understand Wall Street on that board because that is who you are talking to. You are talking to Wall Street, you are not talking to geologists from the Colorado School of Mines. So that is my $0.02 and I hope you guys take it to heart. It appears we have no further questions at this time. I will turn the program back over to Mr. Rick Wheeler for any additional or closing remarks. Alright, well, thanks Brittany, and thanks to all of you all who joined our call today, and we look forward to speaking with you again on our conference call for the second quarter of fiscal year 2023 in May. So thanks again and goodbye. Thank you. This does conclude today’s Geospace Technologies’ first quarter 2023 earnings conference call. Please disconnect your line at this time, and have a wonderful day.

EarningCall_241

Good morning, and welcome to RGC Resources 2023 First Quarter Earnings Call. I am Paul Nester, President and CEO of RGC Resources. Let's review a few administrative items. [Operator Instructions]. At the conclusion of the presentation and our remarks, we will take questions. The link to today's presentation is available on the Investor and Financial Information page of our website at www.rgcresources.com. Joining me this morning are Jason Field, Chief Financial Officer; Tommy Oliver, Senior Vice President of Regulatory and External Affairs; and Kelsey Davenport, Director of Finance. Moving on to Slide 1. This presentation does contain forecasts and projections, and Slide 1 has our forward-looking statements. The agenda for today's call is on Slide 2. As usual, we will review operational and financial highlights from the first quarter, talk about our fiscal 2023 outlook, and again, we'll be happy to take questions at the end of the call. Moving on to Slide 3. We continue to have good customer growth. You'll notice that the bar chart there shows a slight decrease in customer count from 2021. You may remember, as we've discussed extensively going back to 2020 about the moratorium that was imposed on utility disconnects and the effect that, that had on our customer counts in March of 2022, we were able to resume our collection processes for nonpay turnoffs. And consequently, as we've gotten into the colder weather this winter, we have been able to re-add some of those customers. Our total customer count is just under 63,000. We're really happy with that number. We fully expect to go over 63,000 here in the coming months. We had a good first quarter, adding new services and main extension, another 1.1 miles of main. We really believe that the housing development in the Greater Reno Valley is still strong. We expect again this year to add approximately 500 to 600 new customers. Would be happy to, Paul. Thank you. We are on Slide 4. Our first quarter delivered volumes were up approximately 620,000 decatherms compared to the first quarter of 2022. That's a 23% increase due largely to the colder-than-normal weather compared to a year ago. Heating degrees overall were 31% greater than last year. Additionally, we continued to benefit from an increase in transportation and interruptible volumes due to our single multi-fuel customer that has continued its higher natural gas utilization during the quarter. Moving to Slide 5. Our financial results are highlighted. For the quarter, our operating income of $5.544 million was up from the previous year, approximately $166,000. Operating revenues adjusted for normal weather were up, while nongas operating expenses for the quarter exceeded the prior year due to higher expenditures for contracted services, bad debt expense and personnel costs. Interest expense for the quarter was higher compared to last year due to increases in rates on our variable rate debt, primarily in our midstream affiliate. Overall, we saw a reduction in net income of approximately $329,000 compared to the first quarter of last year. On an earnings per share basis, we recorded $0.33 per share, which was down about $0.10 per share, and that was a result of the dilutive effect of the equity offering, which occurred in March of 2022 and the small reduction in net income. The comparison of our 12-month operating results ending December 31, 2022, is difficult due to the impact of the impairments that we recorded again in our midstream affiliate relative to the Mountain Valley Pipeline. We've adjusted for that impairment on Slide 6. If you move to Slide 6, you'll see our underlying net income, which removes the after-tax impact of those impairments and reflects the underlying net income of $8.851 million. As you recall, we recorded those in the second and fourth quarters of 2022. This result is down $112,000 compared to the 12 months here in 2022. And overall, we're pleased with that financial performance. Our management of costs in this inflationary environment were -- we feel like we did a good job with that. We'll discuss a little later the nongas rate case filing, which we filed in early December, which we expect to alleviate some of those cost pressures through the remainder of the year. If we transition on to Slide 7, you'll see that we experienced strong investments made by the Roanoke Gas utility for utility property in these first 3 months of the fiscal year. Overall, we invested approximately $7.5 million in utility property, and that was up compared to the first quarter of last year by about $1.8 million. This increase was primarily the result of investments that we've made in the RNG project and SAVE eligible renewal projects. Thank you, Jason. I'd just like to make one comment about the first quarter before we review the fiscal year forecast. I'm really happy with our Roanoke Gas operation and the overall quarter we had, but just incredibly thrilled and proud of the efforts in mid-December leading up to Christmas with the extreme cold weather event that we had in our part of Virginia here. Our folks and our teams performed exceptionally well. We did not lose a single customer, and that's something that we are very proud of and happy about. So as we look at our 2023 forecast, we will look at the capital investment projection for the full year. Tommy is going to give us some further details on our nongas base rate case filing. We'll talk about our earnings per share projection, and then Tommy will conclude with a nice update on our RNG facility project. Moving on to Slide 9. You can see, we are still leading our capital investment with $6.8 million of SAVE spending. Just a little comment there. Tommy is going to talk about this in a minute, but we -- that's renewal spending essentially. In other words, we're still renewing pre-1973 adelaide plastic pipe. That's been about our annual spend for the last 3 or 4 years. We're going to continue on that trajectory through the remainder of this year. We actually have a couple of other noteworthy projects in addition to the RNG facility that I'd like to update you on. We're in the process of doing an Enterprise Resource Planning, or ERP, system upgrade. We're projected to spend about $1.4 million on that this fiscal year. Our old system is at its end of life. It's actually 30 years old. It's been a very good system, but it's time for us to modernize and get a new tool there, and our teams in our finance area and IT areas and operations areas are working through that project right now. We're going to invest about $1.7 million in the Carilion and Virginia Tech, Carilion Medical School area to support the growth. It just continues down there. There's a new addition to the Reno Memorial Hospital, and the medical school is also building another building. We're going to put a large 8-inch plastic main to reinforce the distribution system in that part of downtown Roanoke. We also have approximately $2 million of Virginia Department of Transportation related projects. And what those are is, our general assembly over the last 5 years, in particular, has resumed funding, if you will, for important and necessary road infrastructure projects. And we have a pretty major bridge replacement that's occurring as well as some other road maintenance that requires us to relocate existing gas mains. And we'd like to take those opportunities to make the mains either larger for more capacity or in fact, safer. The bridge mains an example. We're going to be putting that main underground instead of hanging on the bridge as it presently does. So again, those are good projects, good for the community in terms of transportation, but also good in terms of making our system safer and more reliable. All right. Well, thank you, Paul, and good morning, everybody. We are on Slide 10. As we mentioned in our earnings call from last quarter, the company did file for a rate increase with the Virginia Commission in December of 2022. We put those rates into effect on an interim basis on January 1, 2023. We requested an increase in nongas base rates of approximately $8.55 million, of which approximately $4.500 million is being recovered through the SAVE. Since we are now collecting costs associated with our SAVE plan through interim rates, we did terminate our SAVE Rider effective January 1. As Paul mentioned, we continue to spend on renewals, but those costs will be recovered through our base rates. We will be filing for approval of a new SAVE plan later this year for rates to become effective October 1. The increase in nongas base rates will result in the average monthly residential customers bill increasing by $5.78. Since early winter, natural gas commodity prices have been declining and are currently below $2.50 per decatherm for the prompt month. We started incorporating these lower gas costs in our gas rates on January 1, and again, February 1. As a result of these changes or these adjustments, customers are now experiencing an overall decrease in their bill of approximately 19%. With the roll-in of our SAVE year capital spend of approximately $22 million, our total net rate base coming out of the rate case will be approximately $190 million. Thank you, Tommy. And just as a reminder, we last filed a nongas base rate -- or for a nongas base rate increase in October of 2018, which the commission final ordered in January of 2020. So we've been about 3 years [indiscernible] since the last rate case. Okay. We're on Slide 11, and we haven't changed our EPS guidance from the last quarter for fiscal 2023. And again, as a reminder, fiscal 2022, as Jason mentioned earlier, is adjusted for the noncash impairment loss recorded in the midstream subsidiary. For 2023, we are projecting a $0.20 per share loss in the midstream subsidiary, primarily due to interest costs, which have increased greatly due to the higher interest rate environment that we all presently exist in and the lack of offsetting operating income from the Mountain Valley Pipeline. Just as an update, MVP joint venture is presently working with the respective agencies to have the needed permits reissued so that construction can hopefully resume in the very near future. Roanoke Gas, as you can probably tell from our update, is on track to have another solid year, certainly pending the outcome of the rate case and other general economic factors. We would like to note that the dilution effect from the March 2022 equity offering approximates $0.07 per share. We'd like to conclude with what's really one of the great stories probably in the history of this company, and it will probably get greater as we continue to move toward ultimate project completion and end service, but Tommy, give us an update on what's happening with our renewable natural gas facility project. Sure, Paul. We're on Slide 12, and we've been talking about the RNG project for some time now, and it has finally come to fruition. We did receive commission approval of the project and approval for cost recovery through a separate Rider in January of this year. We're working on the administrative approval of the rates and tariff for the project, and we expect to have everything in place to start billing March 1. Rates will be designed to recover the cost associated with operating and maintaining the facility as well as a return on the $7.7 million investment. Construction has been progressing largely on time and on budget, and we expect that the project will go into service in March as well. As a company, we've been working on this project for about 2 years, and we are very pleased with the outcome, and I believe the quote from the commission's order summarizes the project well. And the commission in their order stated, Roanoke Gas project has the potential to achieve a rare combination of increasing local fuel supply, reducing greenhouse gas emissions and increasing utilities profit while also lowering customers' rates. Yes. Thank you, Tommy. It really is credit to Tommy and his team and the other folks in the company that supported the application process there with the Virginia State Corporation Commission. It is, in fact, the first such approval of a project in the state of Virginia by gas utility, and we haven't done the finite research, but possibly, on the East Coast of the United States. So very proud of receiving that order, and what it means to our company and the community. Our partner on the project, the Western Virginia Water Authority, has done a fantastic job, and we're so pleased to have them as a partner on the project and look forward to turning the switch on Tommy here in about 45 to 60 days. Well, it feels more like North Florida here in Southwest Virginia. Today, it's been very warm here. And in fact, January -- we're closing the books for January now, but January was approximately, what, Jason, 240 heating degree days warmer than normal, one of the warmest January on record. February continued with that trend. So they're not -- these are not good gas days, Mike, but just construction days. We try to be the best in all the weather. I only really had one question that was, you spend a lot of time on the R&D facility. I'm just wondering, once you get past this one, which is like a couple of weeks away, is there anything else out in your geographic footprint you're looking at doing in terms of renewable projects in general, not just RNG, but anything else you might see? Mike, we've been contacted by a couple of organizations that are looking at RNG projects in the area. Some want to just inject into our system. We're talking to them. Others want us to run pipes to interconnect them, and we're evaluating all that and make a decision based on the economics once we have to make that decision. Okay. Does solar have any benefit for you given the -- I know you're in a very mountainous region there and in some parts of it, does it make sense? Yes. So there's been some move, Mike, in the last, I would say 2 years, of course, primarily by the big electrics to site, some solar facilities in this region. And so there -- if you find an appropriate piece of ground to your point that's southernly facing, it probably can make sense. But you're right, those pieces of ground are fairly precious in our area due to the mountainous terrain. We have not spent a lot of time looking into solar since we put the solar facility on our headquarters building here back in 2021. But Tommy's good comment a moment ago that now that we're coming out of this RNG project, it's going to give us some time and opportunity to explore some of those other options. Well, thank you. We wouldn't mind having a little more cold weather before winter officially leave. I'd only add one more comment to your solar question, and there's press to this. So this is not, per se, my opinion. But like we've seen with the Mountain Valley and other infrastructure projects, the solar projects in this area that are being proposed by our electric provider are facing stiff opposition to get permitted and cited. Almost impossible to have them permitted and cited. So back to the permitting reform that was percolating in the United States Congress in the fall of 2022, there's still a need for that. It's not just for Mountain Valley Pipeline and other natural gas infrastructure, but even renewable infrastructure. Well, I wish you the best on that Valley. It'd be great to see them actually get back in the field. Yes, that's our desire, too. And there's no question to be able to complete the project in a timely fashion is, I think, of utmost importance of this region and to our country at large. And to get the right of way restored and also the most environmental responsible thing, so we're doing everything we can to advocate and help push that along. Well, it doesn't look like we have any other questions today. We would like to thank you again for being with us. We certainly hope you have a safe and pleasant weekend. And this concludes our first quarter earnings call. We certainly look forward to being with you again in May to discuss our second quarter results. Thank you.

EarningCall_242

Thank you for standing by. At this time, I would like to welcome everyone to the Gates Industrial Corporation Q4 2022 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] Good morning, and thank you for joining us on our fourth quarter and full year 2022 earnings call. I'll briefly cover our non-GAAP and forward-looking language before passing the call over to our CEO, Ivo Jurek, who will be followed by Brooks Mallard, our CFO. Before the market opened today, we published our fourth quarter 2022 results. A copy of the release is available on our website at investors.gates.com. Our call this morning is being webcast and is accompanied by a slide presentation. On this call, we will refer to certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliations of historical non-GAAP financial measures are included in our earnings release and the slide presentation, each of which is available in the Investor Relations section of our website. Please refer now to Slide 2 of the presentation, which provides a reminder that our remarks will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially difference from those expressed in or implied by such forward-looking statements. These risks include, among others, matters that we have described in our most recent annual report on Form 10-K and in other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements. We'll be attending several investor conferences over the next month, including the Citi Global Industrial Tech and Mobility Conference, the Barclays Select Industrial Conference, and the Evercore ISI Industrial Conference. We look forward to meeting with many of you. Thank you, Rich. Good morning, everyone, and thank you for joining our call today. I would also like to take this opportunity and welcome Rich to our team. He, as you know, has taken the lead position in Investor Relations here at Gates. He's a seasoned professional with many years of experience on the sell-side as well as in-house. With that, let's start on Slide 3 of the presentation. Our global teams delivered mid-teens core growth in the fourth quarter. Underlying demand was stronger than expected in North America and EMEA, especially during the second half of the quarter and more than offset the COVID-induced slowdown in China. Growth was relatively consistent across our channels. Importantly, our conversion of orders improved as supply chain inefficiencies ease in the latter part of the quarter, particularly in Europe. We exited the year in a more balanced position with supply, meeting the underlying demand. The weaker dollar exchange rate at year-end and better fill rates of aged orders in Europe benefited revenues by approximately 250 basis points year-over-year and contributed to the elevated sequential revenue growth. We are pleased with the progress our teams have made to enhance order conversion and believe activity should be more normalized as 2023 evolves. Our profitability in the quarter improved nicely versus prior year and the resulting margin expansion was consistent with the guidance provided in November, while volume growth contributed to margin performance. We incurred incremental costs to convert past due orders, which modestly impacted the profit flow through. Our global commercial teams continue to price effectively to preserve margin neutrality. Our improved performance helped to generate a 34% incremental margin. Free cash generation was very strong in the quarter as anticipated. Free cash flow to adjusted net income was well in excess of 300% and benefited from the outline margin improvement as well as higher working capital terms, driven by inventory reductions. We are intently focused on increasing our working capital efficiency and boosting our free cash flow conversion as supply chain conditions moderate. Moving now to Slide 4. Our total revenue was $893 million, which represents core growth of 16% versus the prior year period. Foreign currencies were approximately 6.5% headwind year-over-year. We experienced double-digit core growth in nearly all end markets, led by personal mobility, which grew 41%, followed by our Energy and Off-Highway market, which collectively grew approximately 20% year-over-year. In general, we saw stable demand trends with improvements in our fill rates as we move through the second half of the quarter. Fourth quarter adjusted EBITDA was $166 million, which translated to an 18.6% adjusted EBITDA margin and an increase of 150 basis points year-over-year. We executed well, and the overall operating environment became more constructive. While we are not completely past supply chain challenges, we are encouraged by the stabilization experienced in the fourth quarter. Adjusted earnings per share was $0.25. Our operating income was up significantly year-over-year, contributing approximately $0.10 per share. However, tax headwind of $0.15 per share more than offset the improvement. Please turn to Slide 5 and our segment level highlights. The Power Transmission segment produced revenues of approximately $552 million in the quarter, driven by nearly 15% core growth year-over-year, offset by an 8% FX headwind. All end markets experienced healthy top line expansion. Similar to enterprise, Personal Mobility, Off-Highway and Energy were the leading growth engines for the segment. Our opportunity pipeline in Personal Mobility grew about 50% in 2022. We exited the year with solid margin expansion and price cost imbalance. Our Fluid Power segment posted revenue of $341 million, including 18% core growth and negative FX impact of 3%. We realized solid growth in all end markets with Automotive, Off-Highway and Energy being the outperformers. Our innovation efforts continue to pay dividends with new products contributing to Fluid Power segment core growth and share gain in 2022. The result of investments made in 2018, our existing capacity is sufficient to support our growth aspirations via new product development and market expansion well into the future. Our segment profitability improved nicely, fueled by a 45% incremental margin on higher revenues and included improved price cost dynamics compared to the prior year period. Thank you, Ivo. Moving now to Slide 6 and the regional breakdown of our core revenue performance. We experienced double-digit growth in all our major geographic markets with the exception of China. Our overall fourth quarter growth rate benefited from relative strength in North America and EMEA, our largest regions. In North America, we realized double-digit core growth in nearly all of our markets, led by Automotive and Off-Highway with each grew more than 20% year-over-year. The EMEA region delivered the strongest growth in the quarter with core revenues increasing 22% year-over-year. The Off-Highway and Energy end markets each grew by more than 30% year-over-year. Our Personal Mobility business grew nearly 80%, the highest quarterly growth rate we experienced in 2022. Overall growth was solid and aided by an improved supply of raw materials and some catch-up to customer demand. Our China top line performance posted a year-over-year decline due to shutdowns related to rising COVID infections during the quarter. Finally, our markets in South America and East Asia and India performed well, delivering accretive core growth rates. In aggregate, we were pleased with the growth trends and improvement in supply chain fundamentals. On Slide 7, we show details on our cash flow performance and balance sheet. Our free cash flow was $226 million, which was 317% of our adjusted net income for the quarter. The stabilization of the supply chain and improved order conversion helps contribute to higher inventory turns year-over-year. Our net leverage declined to 2.8 times and represented a meaningful improvement relative to the third quarter. During the quarter, we strengthened our capital structure by paying off our ABL revolver and issuing a new dollar denominated term loan with a maturity in 2029. This replaced an existing loan set to mature in March of 2024. We remain confident in our ability to further improve our balance sheet in the future. Moving now to Slide 8 and our full year guidance and views on the first quarter. For 2023, we are initiating guidance for core growth to be in the range of 1% to 5% year-over-year. Within that framework, we have factored flattish volume versus 2022. We continue to see solid demand trends in the early part of the year, providing near-term visibility. That said, we anticipate our customers will rebalance their inventory levels in the latter part of the year because of improved supply chain reliability. Our initial 2023 adjusted EBITDA guidance is in the range of $700 million to $750 million. At the midpoint, this guidance implies about a 90 basis point increase in adjusted EBITDA margin year-over-year. Our adjusted earnings per share guidance is $1.13 to $1.23 per share. Improving working capital efficiency is a high priority for 2023 and we expect free cash flow to be approximately 100% of adjusted net income in the coming year. For the first quarter, we anticipate total revenues to be relatively flat and in a range of $880 million to $910 million. We expect positive core growth to be offset by unfavorable FX. Our core growth estimate includes headwinds from the suspension of our Russia business and China COVID impact. We expect our EBITDA margin to increase approximately 100 basis points to 150 basis points year-over-year. Next, on Slide 9, we provide an adjusted earnings per share wall from fiscal year 2022 to 2023. Relative to 2022, our forecasted adjusted earnings per share is affected by non-operational items such as higher interest expense and a higher expected effective tax rate. Core growth and conversion should add about $0.06 per share. Productivity and an improved supply chain, which was a headwind in 2022 are expected to contribute nicely to our earnings growth in 2023. Thanks, Brooks. On Slide 10, I would like to provide a brief summary view. Specifically, I would like to highlight the following points. We were pleased with our execution in the fourth quarter, while managing through a challenging business environment. Our operating leverage on incremental sales improved to 34% and moved closer to our typical performance. Free cash flow generation was a quarterly record. We are encouraged by the slowly improving operating landscape and cautiously optimistic that it will continue to heal over the course of 2023. Our commercial team's efforts have been admirable. Price cost is in equilibrium on a margin basis, and we intend to protect our margins, should inflation trends escalate versus expectations during 2023. We anticipate customer inventories will begin to normalize as we move through the year. That said, we experienced solid order trends exiting Q4 and through January. We are cognizant of the risks in the global economy, but pleased with our execution and optimistic about the prospects in 2023. Turning to Slide 11. Before we take your questions, I would like to review the opportunities we are focused on to enhance our performance and drive shareholder returns as we pivot to the future. First, we are intently focused on several productivity measures ranging from bolstering our supply chain to driving incremental efficiencies in our manufacturing operations. We're optimistic that we can continue to drive margin accretion across the enterprise with the improvement to reliability of raw material supply and the resulting effect it bears on our operational activities. Second, we are accelerating the reduction of complexity across our enterprise by streamlining our product portfolio and minimizing customer complexity below and above the line as part of our 80-20 initiative. In the second half of 2022, we initiated projects in our auto replacement business and have begun to see early returns from the deployment. We expect to implement 80-20 across the rest of our portfolio over the next couple of years. Third, we continue to invest aggressively in our highest growth areas. Our Personal Mobility revenue grew approximately 23% organically in 2022 and our opportunity pipeline is robust. We are expanding investments in new products and applications, especially in industrial verticals. As such, you should expect our automotive OEM revenue, mix to get further diluted as we continue to execute on our selective participation strategy over the next few years without affecting the overall growth profile of the enterprise. Lastly, we are highly focused on delivering consistent free cash flow conversion in order to continue to improve our balance sheet. We believe a strong balance sheet is one of the primary avenues within our control to increase shareholder value. I'll finish by thanking our customers and suppliers for their partnership and our global Gates associates for their valuable effort and support. Yes. Hi. Thank you for the time. The comment about the rebalancing by your customers of, I think you mentioned as inventory given the improving supply chain, can you give us a little better sense of how you're quantifying that? It might even be where are inventory levels today at your customers versus where they'll probably want to move down toward with a better supply chain. And dovetailing that answer into the cadence of the organic sales growth for the year would be very helpful. Thank you. Good morning, David. Look, from the inventory perspective, I would say that presently, we continue to see the inventory levels to be in line with the underlying market demand. We've seen a pretty resilient strength in the overall markets, and we have very aware of the macro. We are very focused on staying and paying close attention to what's happening in the overall global macro and so we are monitoring the POS reporting from our largest distributors very, very closely. Now on the last call, I've indicated that we see somewhat uneven performance, particularly in the industrial replacement market. So we spoke a little bit about Europe. We've seen a little bit of that unevenness in North America in Q4. And while in one month, you may feel like you are finally starting to see some deceleration, in the next month, order trends reaccelerate nicely. So presently, we feel comfortable with the level of inventories there in the channel, but we are very aware of the fact that as supply chain stabilizes, lease time starting to shrink, we believe that the inventory level in a channel will start to be reduced. And so our view is that we are likely to see that in the second half of the year, and that is what we have taken into account in our guidance. Yeah. So I think we have headwinds still in the first half relative to China and what's going on. And then we also have the lap over of the suspension of our Russia business. And so we continue to have some core growth headwinds in the first half. And then, in the second half, as Ivo said, that's when we expect to see more of the rebalancing of inventory. So I would expect the core growth numbers to be relatively balanced through the year. No big impact from one quarter to the next, but just different things that offset the -- or different headwinds that kind of hit the core growth number as we move through the year. Maybe kind of start there where you all left off. I certainly understand the inventory commentary. Is embedded in that, is there an assumption that the underlying end market demand softens through the back half of the year, Ivo? In other words, you guys just trying to take a little bit more of a conservative approach to what the end markets look like in the back half of the year given lower visibility. And then maybe put that in the context of how you're thinking about backlog normalization timing. Yeah. Great, Mike. I think those are great questions. I mean we have included in our appendix our view on what we anticipate the global and market trends to be. And while we have obviously reasonably constructive on things like energy and automotive replacement for the obvious reasons, I mean, people are driving more low unemployment levels, people have plentiful of jobs. We believe that those trends will -- and very aged car fleets, we believe that, that bodes really well for an end market like automotive replacement. We have started to embed in particular or maybe being a little conservative on the second half of the year inventory activities. And we believe that as the supply chains are improving, I think customer in a natural way are going to try to ensure that they deliver a decent cash flow. So I think that, that's been a tough part in 2022 for everybody. And so we are being pragmatic about what we anticipate in the second half. And I think that we have been reasonably open-minded about the end markets as well. Thanks for that. And a follow-up question just on the margin side. Obviously, it's encouraging to hear that there was more stability emerging on the supply chain side. It seems like you're saying by the time at the back half of the year closer to normal. Maybe just put that in context and how you're thinking about the margin cadencing through the year. Obviously, there's going to be some different dynamics on the volume side as you work through the year. But cumulatively, is the expectation for a little bit of a ramp to the year that maybe is a little bit better than the revenue trends might imply, given the supply chain piece, given some of the internal stuff you're working on? And maybe just some thoughts on the cadence in there. Yeah. Well, certainly, I think the comps as you move through the year, year-over-year. Q1 is -- '22 was a little bit tougher. And then as you move through the year, we had more of the headwinds in the second half of the year relative to some of the supply chain stuff. But as we move through the year, if you think about our full year guidance, at the midpoint, our gross margins will be up over 100 basis points, that will be offset from by SG&A, which has some variable comp element to it, which kind of gets us to that midpoint number of 90 basis points to 100 basis points of improvement year-over-year. It's relatively balanced through the year as we move through the year because the first quarter is the easiest comp for us. And so that kind of gives a little bit more weight to the first half. And then the comps relative to the supply chain issues give us a little bit more easier comp in the second half. So it's relatively balanced through the year. Yes. Hi. Good morning, everyone. Nice quarter. I'm wondering if we could just talk about the acceleration that you saw in EMEA in the quarter, which end markets drove that? And is any of that momentum continuing into the first quarter? Yeah. Good morning, Jerry. Thank you. Look, I mean, Europe was a very strong performance for us and it was predominantly driven by Energy, Off-Highway and Personal Mobility. Personal Mobility up almost 80% year-on-year. Off-Highway kind of in the 40s. But all of our end markets, frankly, in Europe are very solid. Our overall auto business was up in the teens, driven by automotive replacement, strength in automotive replacement. And so there isn't really, frankly, any blemish in Europe. And so it was a really terrific quarter. Now auto benefited somewhat from some catch-up. As I had discussed on my prepared remarks, we were able to secure a little more raw materials and that gave us the opportunity to catch up to some age backlog, particularly in the auto space on the PT side. And so just a terrific quarter that the team has executed very well and the end market demand remained very resilient and maybe just -- very the follow-up question, I mean January, January was quite strong as well. Super. And then in terms of the full year outlook, core revenue growth 3% at the midpoint, assuming flat volumes, can you just say more about the pricing cadence because I think pricing alone should be high singles, low doubles in the first half of '23, which in and of itself would get you above the midpoint of that range of volumes are flat? So can you just unpack what's embedded in there a bit more if you don't mind? Yeah. Well, look, Jerry, price is somewhat of a moving target, right? As you -- as we see what's going on with inflation, as we see what's going on with our cost, the material cost and the energy costs, freight costs, things like that, I think you're probably a little hot on the price side. Certainly, will be a little bit higher on price in the first half of the year as opposed to the second half. But we also are seeing some signs of moderation of inflation where it's not quite as steeper a ramp as we have seen. So we expect price to be lower in '23 than it was in '22. And then I think you also have to remember that in the first half of '22, we also had the China and the Russia headwinds that are going to continue to be there. And that's going to affect the core growth some as well from a volume perspective. But I would expect the price numbers to be lower than what you said. And you can kind of do the math, if volume is flattish, then the price is kind of in the low to mid-single digit kind of range. Hi. Good morning. Just wondered if you could parse out a little bit the free cash flow guide because I think the guide embeds sort of net income, not growing much in 2023, but free cash flow is up about $150 million and CapEx is up a bit. So it looks like that free cash $150 million is all working capital. Maybe any sense of the main drivers within that? Is it solely inventory coming down that much or something else? And how do you think about the liquidation of the working capital through the year? Is it kind of similar to your customers, whereby it's more of a second half phenomena? Yeah. So look, I think on the net income side, there are some moving parts in 2022, particularly relative to tax, cash versus GAAP tax. So you've got to kind of strip that out. We certainly think we're going to see improvement in working capital year-over-year, primarily driven by inventory. So that's going to drive up a significant piece of it. And then everything else is kind of flowing through, but tax is a big piece of it, the GAAP tax versus the cash tax in '22 versus the GAAP tax and cash tax in '23 is a big part of what's generating the additional cash flow as we move from one year to the next, along with the inventory reduction. And is there any way of sort of quantifying at all of that $150 million free cash increase, how much is that cash tax aspect? Well, I mean, when you look -- I mean, cash taxes from a percentage perspective is relatively unchanged year-over-year. And then you look at our effective tax rate for 2022 was kind of mid-single digits. And then it's going to get back up to kind of 22% to 24% in 2023. So you can kind of do the math on that. That's helpful. And then I suppose, secondly, maybe one more for Ivo. But when you're looking at China, it was down for obvious reasons in Q4 and last year as a whole. Maybe help us understand how you're thinking about the volumes in China, the balance of the year. Is it sort of down again in Q1, up a bit Q2 and then sort of high single digit in the second half? I just wondered what you're seeing and assuming there. Yeah. It's a great point, Julian. Obviously, 2022 was very challenging in China with the second quarter shutdown -- full shutdown in Shanghai and then, obviously, the end of the year impact from first COVID restrictions and then reopening and the infections that rolled in. Look, January was very tough in China. Firstly, the first couple of weeks, pretty -- still pretty significantly impacted by COVID, and then you rolled right into Lunar New Year. So we have seen very little activity in January, but the activity is coming back. So we anticipate that Q1 is still going to be down, I would say, kind of in the high-single digits year-on-year, maybe 10% just for the sake of conversation. And then we anticipate that you're going to see a pretty strong rebound in Q2, predominantly because of the comps. Obviously, Q2 of last year was very weak, as I have indicated. So the comp is going to be unusually had in Q2 in China. But the second half of the year should normalize volume-wise and we actually anticipate that we will see a positive impact from China for the year, but we really need to see February before we can start getting more confident about how that's going to develop. Yeah. And let me kind of follow up on one thing on the cash flow, too. I think what you also have to remember is over the past couple of years, we've seen a significant increase in working capital, and that's what's driven the cash conversion below 100%. And so while we're going to get better on working capital certainly in 2023, I think just the fact that you're not increasing it as much as you have in the last couple of years, is going to drive the most significant part of that improvement in conversion. Even last quarter, you still sounded reasonably pessimistic about supply chain headwinds clearing quickly, especially in terms of polymer supply. The polymers just start to clear faster than you expected. And I know you said that '23 guidance bakes in gradually lessening supply chain inefficiencies and inflation. But is there a way to size the impact of these inefficiencies on you guys? I think last quarter, you mentioned 300 basis points to 350 basis points of headwind on the top line. What do you think that number came in at for Q4? And is there a headwind still for '23? Yeah, Andy. Thank you for the question. Look, Q3 was a really challenged quarter. I mean we have really suffered from the supply chain as we have outlined on that call. Q4 has gotten definitely better, but we started very slow recovery of the raw material supply. October was very, very challenging still. So October was more or less similar to what we have been seeing in Q3. And as I said on the 3Q call, it says, look, our suppliers are actually able to make it more reliably, but we were not able to get it into our factories. And so we were able to actually move the materials into the facilities in the second half of Q4 as we saw fit. It cost us a little bit of money, as I've indicated in the prepared remarks. So the conversion flow through margin improvement was slightly impacted by that movement. However, we were able to get everything that we needed at that point in time. And that resulted in very strong performance much more in line with the underlying market demand and what we have been able to do kind of in that Q3. So my anticipation, Andy, is that we are seeing improvements -- gradual improvements in our suppliers' ability to make these highly engineered resins, but we're still somewhat cautious about having a real predictability in the first half of the year vis-a-vis getting it in the factories as we need to get them through the normal means of transportation. So we still believe that there's going to be some limited impact while we believe it's significantly better. I just don't anticipate that we're going to get normalized until we exit midyear of 2023. That's helpful, Ivo. And then you mentioned in your '23 PS walk that you have $0.08 of improvement from productivity and supply chain initiatives. Can you give more color into what your major initiatives are in these areas? And then last quarter, you talked about, I think, a $45 million footprint rationalization plan. I think you said it would have limited impact in '23 with bigger impact in '24, but is there any benefit from this plan in your walk? And could you elaborate a little more on what the plan might entail? Yeah. Look, on the productivity improvements, again, I'll come back to kind of the performance that we have seen in 2023. So obviously, when you are struggling getting enough raw materials to keep up your factories operating, it becomes very difficult to actually absorb all the overhead in these facilities as you well know. But more importantly, to be able to get any traction on your kind of standard normalized productivity programs that you have, Lean, Six Sigma, whatever the flavor that you like to call, we call it, the GBS system here. And so we anticipate that if the factories start operating much more normally, we can get pretty aggressively back into the kind of a normalized rhythm of driving productivity as we have demonstrated that we do in the past. And so the headwind would give you actually the ability to kind of revitalize, if you would, your productivity efforts. So we are quite optimistic. We have a strong pipeline of productivity projects in the book and we are very intently holding our teams accountable and focused on executing on the biggest opportunities. I'd say that nothing's really changed from what we said on Q3 call about restructuring. We still anticipate some cash to be consumed on restructuring programs and the major benefits are not going to roll into our P&L from restructuring programs until 2024. Thanks. Good morning, everyone. I just want to go back to 1Q, that the guide for 1Q in a bit more detail. Maybe just looking at it from a sequential basis, looks like sales are pretty flat at the midpoint versus normal history where we have a pretty pronounced uptick into 1Q with the -- obviously, the Off-Highway season. So maybe just talk about what you're planning for from a sequential basis. I mean FX should also be a help as well. So I'm just curious if maybe the good news on supply chain and that backlog conversion we saw in 4Q, whether that's the offset that I'm kind of asking about here. Good morning, Nigel. I think it's a great question. Look, I would start with, as I've indicated, China down about 10%, and you have a full quarter of the Russia exit. That's a rather substantial headwind on organic growth on the enterprise that gets offset by the better performance and kind of the normalized seasonality that you would anticipate. So I would say that those are the two biggest headwinds that we are counting on in our guidance. And obviously, if China suddenly gets dramatically better and we are under calling it, we anticipate that the pole would get better, but I haven't seen it in January. And I think it's very difficult to predict that suddenly going to see a V-shaped recovery in China. So I would say that those are the two pragmatic issues. And then as I said, we are still facing a little bit of supply chain issues, and we are probably a little bit gun shy on being able to declare a victory on supply chain until we see that stability to become repeatable throughout certainly a couple of the first quarters of 2023. Okay. Just to be clear, the Russia and China, I mean maybe China is going to be a little bit worse Q-over-Q, but Russia would have been an impact in 4Q as well, correct? But as I said in my prepared remarks, Nigel, we had a really nice catch up to some past due orders that we have delivered on in Europe, in Power Transmission, and that's kind of would have given us a little bit of an outperformance in Europe in particular. So while order flow remained very robust and the book-to-bill remained above one, I would just caution to -- for everybody to extrapolate that exactly what happened in Q4 in Europe because of the catch-up. No, that's very clear. And then my follow-up is really around capital deployment. I mean if you get to that 100% plus conversion, you've got the kind of “problem of capital deployment, which is a good problem to have”. But in your plan, are you deploying capital? I mean are you seeming delevering with the cash flow? And then do you see opportunities to maybe buy back stock during the year? Yeah. So look, we've made a commitment in the midterm to get to 1.5 times leverage. We were below three as we ended the year. We want to continue to delever the business. And so as we continue to generate cash, we're going to lock in some of that lower leverage by continuing to pay down debt, reducing GAAP interest, reduce cash interest, certainly over the short term. This business generates a lot of cash. The capital allocation, for us, we're always going to look at different opportunities and figure out what is going to pay back the shareholder the best. We do believe we need to continue to pay down debt though and reduce not only our leverage, but our gross debt as well. And so I think in the short term, that's what we're focused on. Just wanted, if -- I apologize if I missed it, but can you just walk us through what book-to-bill was? You mentioned strong orders, I think, a few times, maybe just put a finer point on that. And how you stand today on kind of the total past due backlog? You mentioned you work that down. Just is any remaining and sort of what's the order of magnitude? Yeah. So great question. Thank you, Josh. Look, we've trimmed some of our past due backlog in the quarter, particularly in Europe, and we've taken a pretty nice chunk from the aged backlog there. Interestingly enough, in January, past to backlog start jumping back up on the strength of order flow. So Q4 book-to-bill was approximately 1.05. So it remained above one. We've eaten the past two backlog slightly down. It continues to remain elevated. And we just got to see a better flow through of raw materials to ensure that we can keep up properly with -- not only with the flow of orders, but also recover some of the aged backlog that we hold to our customers. Clearly, as a book-to-bill business, not only we not like having age backlog, but we really don't like to have an elevated backlog period. So both of these remain a reality still for us. So we still have challenges to work through. Got it. That's helpful. And then I guess just on kind of the surge that you've seen in the fourth quarter, the supply chain improvement, the solid orders. I'm just wondering if there's anything anecdotally or qualitatively, you've had discussions within your customers that some element of this is kind of the supply chain bolus effect, right? So like you're able to get more product out the door. Presumably, your customers are as well. Like, is the strength that you're seeing on the order side sort of representative of, hey, everyone can get more supply. So they're pulling back -- pulling through more product through the supply chain as a whole, but like demand never really changed. Like I guess, are you seeing any sort of demand volatility up or down or is a lot of this just kind of dictated by what we've been through in supply chain? Again, hard to quantify, but like any comment there would be helpful. Yeah. This is really, frankly, the crux of the situation that I think we are all dealing with. And I spent quite a bit of time talking to our customers particularly at this point in time with the volatility and, obviously, watching the macros and watching all the indices that are out there and being very cognizant of the trends that we are seeing, but the general feedback that I'm receiving is reasonably positive. The order trends that our customers still remain quite robust. But it is varied by the region. And so when we kind of talk about underlying market demand, we just want to make sure that folks understand that we are looking at it globally, not just from a North America perspective. And so while you may have a very strong demand trends in Ag, Construction and On-Highway in North America, that may not be the case in places like China, as an example, and those are large markets, right? So at this point in time, I would say that we are very watchful and what is happening in the diversified industrial in the industrial replacement channel. Again, I said it a couple of times, Josh, that's choppy, it's uneven. You may have a weak month, and then you may have a very solid month. But I'm just very, very focused on ensuring that we don't miss some trend line and we end up calling it wrongly. But so far, it's been reasonably positive in general. So really, if I do the math, it seems like incremental margins are high 40s. Just wanted to understand really how much of that is around the confidence in this kind of supply chain issue getting better versus something else in there. And I think we had quantified maybe a $40 million headwind in '22 from the polymer issue. And I'm wondering if that is the right number and how much of that reverses in '23 in the guide. Yeah. So as Ivo said, there were some encouraging signs, I think, as we work through Q4, but we're not out of the woods yet. If you think about our margins as we move from '22 to '23, core growth at the midpoint is 3%. We would expect to see less fall through on that as it's mostly price cost, and we've said that we're trying to maintain EBITDA margin neutrality as we move through. And then we expect to see significant improvement from supply chain improvements and from the productivity initiatives that Ivo talked about. And that will be partially offset by some higher SG&A expenses related to variable comp. So I think you're thinking about it the right way in terms of the gross margin improvement not only from the supply chain improvements, but from productivity as well. And then that will be partially offset by some higher SG&A as we move through the year. Okay. And then just back on this, the down low-single digit for market for industrial, the industrial and diversified industrial. And I think Ivo, you mentioned choppiness. Maybe just talk, one, about outgrowth. And two, just if you're seeing it equally between the FP and PT side. Thanks. Yeah. Look, Jeff, I think the best way to really reference it is just an uneven demand, right? Again, it's one month and maybe down next month and maybe up. Up maybe more than down next time. So right now, what we see is that the sell-through from customers remain very, very robust. I think that everybody is somewhat concerned about work capital. And as people start getting more comfortable with lead times, I mean, that you will see some movements in order flow, not necessarily driven by weaker demand. And again, we have not seen weaker demand yet from the POS reports, but I think people are just making sure that, on one side, they don't have too much inventory on the other side, they don't have too little. And so there is a continuation of rebalancing what is happening in the market -- in the channel. So I would say that’s probably to one area that we are very, very instantly watching. And -- but that being said, there's also an opportunity as people are getting more raw materials that also could result in higher demand generation because people are simply able to just get everything that they need, which wasn't the case throughout 2022. So we are reasonably balanced in our view as to what we anticipate throughout 2023, particularly in the industrial replacement market. And while we don't want to call it down dramatically, we also don't want to be in a situation where we miss any potential uptick that maybe should the market conditions remain robust. And there are lots of positives that one should like, right? I mean you have the infrastructure investment and you need lots of construction equipment, you're going to be building lots of industrial automation equipment. And those are all really good markets for Gates Corporation. So we are optimistic about the underlying trend line, but we also want to be realistic about what is happening with ISM and with some of these indices that are being reported on. So that's kind of what I would say that our perception is. And just maybe speak to the outgrowth assumptions. I know mobility has been something that you've called out, but changed about a big opportunity on the industrial side. Yeah. Thank you. So look, I mean, I'm not going to spend much time on mobility, but I think this is a perfect example of how we are driving an organic evolution of our portfolio. Again, I remind everybody that in kind of in 2019, it was kind of a $25 million business, and we kind of exited that -- we exited the year kind of [indiscernible] $200 million run rate, so growing at kind of 10 times in 3.5 years. Now we don't expect to be growing at 10 times over the next 3.5 years, where we are very optimistic about continuing to deliver kind of mid-20s growth rates in mobility and pretty quickly catching up to the size of our end market contribution that we generate in the auto OEM space as an example. Industrial chain to belt continues to build very strong pipeline of opportunities. Obviously, I've spoken about our Fluid Power business, our innovation available capacity continues to give us an opportunity to outgrow the end market, but those underlying markets, Jeff, are also very robust. Certainly, in North America, Ag, Construction, Heavy-duty, very robust markets. And then I've highlighted that, we've had a very strong growth in our Automotive business with Fluid Power as well. And that's an area of where we participate with electrification. That's an area where we predominantly participate in the replacement side of the business with Fluid Power. So it's generally speaking, we are very confident about our ability to outgrow the market. And we've demonstrated over the last five years, three years and certainly the last couple of years that we are capable of outgrowing our underlying end markets globally. So maybe a long-winded answer, but maybe providing you a little more color. Good morning. So I appreciate the underlying market assumptions that you've laid out for this year. Just given that Automotive is pretty significant for the business, could you perhaps just provide any further color on how you're thinking about the outlook for auto? I guess just a key assumption, maybe headwinds or tailwinds that are worth calling out. Yeah, it would be really helpful if you just kind of give us a walk around the globe for auto and that you expect this year. Yeah. So as you recall, Automotive OEM business is less than 10% of our revenue presently. And so, look, we anticipate that the overall production is going to be slightly net positive. I certainly don't fall into the category of individuals that will call a significant increase in the Auto OE output globally. We are thinking more in line of maybe 2% to 4%. Certainly some recovery in North America, where we have very little presence. Similarly, improved production output in Europe. But you also have to take into account some of the challenges that folks are going to have buying new automobiles when you take into account the increases in prices of new vehicles and, frankly, the interest rates. So while the carmakers may be more capable of producing, will you see some decay of demand in the end market affordability index that I don't know, I'm not an economist. But our view is that globally, you should see Auto OEM builds up kind of slow to mid-single digit. And then a bigger business is an automotive replacement. And frankly, we anticipate that we should see low-single digit end market growth. Positive dynamics in North America. Obviously, a very aged car fleet, high miles driven, high levels of employment bodes well for folks maintaining their vehicles. Very similar trend in Europe. People are certainly driving more miles. We believe that China is going to rebound very strongly. I think you can see it in some of the reports already that people are starting to drive significantly more than, frankly, they have driven over the last two to three years at an expense of even public transportation. So the setup for automotive replacement business is very strong for 2023 as the situation normalizes, particularly in the supply chain, this should be a net positive for Gates. Understood. Appreciate all that additional color. And then a follow-up call on the distribution inventory normalization that you're expecting later this year. Sorry if I missed it, but could you quantify how much of a headwind you've baked in the guidance related to that? And is that something that would likely bleed into 2024 or do you view it as more of a -- with transient adjustment? Yeah, Damian, I think it's very difficult to forecast. Firstly, when and/or if it's going to occur, is it going to occur in second half or is it going to spill into 2024. Again, I will repeat that we are very intensely focused on owning all the trends. We certainly are very focused on monitoring our POS. The POS trends remain positive, but we are being cautious with our approach for the year. And certainly, one should anticipate that as the supply chains normalize, you probably should anticipate that folks will be optimizing their working capital levels. And to us, we have embedded our view in our guidance, and I'll probably just leave it at that. Hey. Covered a lot of ground here. Just a couple of quick ones. First, Ivo, you didn't mention it, but I was hoping you have good news about your operations in Turkey with the impact of the earthquake. Yes. Thank you for asking. Obviously, our prayers are with the folks in Turkey, a devastating event. We are very fortunate all of our operations are not in the impacted area. We actually, is near, which is a reasonable distance away from the epicenter of the earthquake. And so none of our facilities, nor our suppliers have been impacted. But thank you very much for raising that and asking the question, Deane. Good. That's great to hear. Thank you. And then just lastly, you mentioned share gains in Fluid Power. Just broadly, can you talk about the contribution from new products and what's embedded in the guide? Yes. So as we have discussed, we continue to drive our contribution of new products as a percent of revenue up. We have exited 2022 in Fluid Power with over 25% of vitality in Fluid Power. So as you will recall, we have highlighted that our aspiration is to get kind of to 20% NPI vitality by 2023 across our portfolio. We certainly surpassed that objective in Fluid Power. And maybe the follow-on question is, so where you in Power Transmission. In PT, we're kind of in the mid-teens. So we still have ways to go in PT. And as I've highlighted in the past, we are now very laser-focused on revitalizing our portfolio in PPN, we're making good progress on that as well. There are no further questions at this time. I will now turn the call over to Ivo Jurek for closing remarks. Thank you very much for joining us for our Q4 2022 earnings call and we look forward to seeing some of our shareholders during the next couple of conferences in Miami. We are welcome to any follow-up questions as the time progresses. Thank you, and we'll speak with you on our next call.

EarningCall_243

Good day everyone and welcome to the i3 Verticals First Quarter 2023 Earnings Conference Call. Today's call is being recorded, and a replay will be available starting today through February 16th. The number for the replay is 877-344-7529 and the code is 3132661. The replay may also be accessed for 30 days at the company's website. At this time, for opening remarks, I would like to turn the call over to Geoff Smith, SVP of Finance. Please go ahead, sir. Good morning and welcome to the first quarter 2023 conference call for i3 Verticals. Joining me on this call are Greg Daily, our Chairman and CEO; Clay Whitson, our CFO; and Rick Stanford, our President. To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation to the most directly comparable GAAP financial measure by reviewing yesterday's earnings release. It is the company's intent to provide non-GAAP financial information to enhance understanding of its consolidated GAAP financial information. This non-GAAP financial information should be considered by each individual in addition to but not instead of the GAAP financial statements. This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding the company's expected financial and operating performance. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. You are hereby cautioned that these forward-looking statements may be affected by the important factors, among others, set forth in the company's earnings release and reports that are filed or furnished to the SEC. Consequently, actual operations and results may differ materially from those discussed in the forward-looking statements. Finally, the information shared on this call is valid as of today's date, and the company undertakes no obligation to update it except as may be required under applicable law. Thanks, Geoff. And good morning to all of you. We are excited to present to you our results for the first quarter of fiscal year '23. To kick things off, we set new records in revenue and adjusted EBITDA, and you will be pleased with our results and our focus on recurring revenue and adjusted EBITDA margin. Year-to-date, adjusted EBITDA grew 29% from Q1 fiscal year '22 to Q1 of fiscal year '23. The last several quarters you have heard me discuss recurring revenue, which has been above 80%. It was 84% this quarter and you will notice that, we had a lighter quarter of software license deliveries as multiple projects pushed into Q2. The backlog of software sales has never been deeper, in license revenue, which does not recur and fluctuate. In a quarter like this one, the power of our model is reinforced. SaaS, software transaction-based revenue, payments and other recurring revenue helped us to achieve consistent quality earnings. This quarter includes our first results of the operation of Celtic. We're pleased with our results, but even more excited about what is to come. Celtic is already going to market with our 2021 acquisition, DIS, who has a much more robust sales function than Celtic could ever avail itself of. Celtic and DIS have complementary, best-of-class products for transportation departments at the state level. And we can't wait to expand our already significant footprint across the United States and Canada. When we talk about acquisition targets with untapped recurring revenue opportunities, Celtic is a fantastic example. Earlier this quarter, we announced an acquisition of AccuFund, a strategic product for public sector. We hosted an internal sales conference in Nashville this week and our sales team was ecstatic about how this product can be cross sold in the public sector and the education verticals. Our teams are off to a great start. Now, I'll turn the call over to Clay and he will provide you more details on our first quarter financial performance. Following Clay's comments, Rick will provide an update on some role changes and addressed M&A, and then we will open up the call for questions. Thanks, Greg. The following pertains to the first quarter of our fiscal year 2023, which is the quarter ended December 31, 2022 -- 2023, sorry. Please refer to the slide presentation titled Supplemental Information on our website for reference with this discussion. We had another great quarter with record revenues and adjusted EBITDA. Revenues for the first quarter increased 16% in line with the seasonality comments we gave on the last call, $86 million from $73.9 million for Q1 2022, reflecting organic growth and acquisitions. Our revenue yield improved to 146 basis points for the quarter from 139 basis points for Q1 2022. Organic growth for this quarter was approximately 8%. Annual recurring revenues totaled $290.2million for Q1 2023, compared to $240.4 million for Q1 2022, a growth rate of 21%. Organic ARR growth generally runs a few percentage points above our total organic revenue growth. Over 80% of our revenues in the quarter continued to come from recurring sources. Software and related services remained the largest portion of our revenues representing 48% for Q1. Payments represented 47% and other 5%. Adjusted EBITDA increased 29% in line with expectations to $23.6 million for Q1 2023 from $18.3 million for Q1 2022 reflecting continued momentum in our software and services segment. Adjusted EBITDA as a percentage of revenues increased to 27.4% for Q1 2023 from 24.7% for Q1 2022, principally reflecting margin improvement in our software and services segment. Proforma adjusted diluted earnings per share increased to $0.37 for Q1 2023 from $0.35 for Q1 2022. Again, please refer to the press release for full description and reconciliation. Segment, performance, revenues in our software and services segment increase 19% to $53.2 million for Q1 2023 from $44.8 million for Q1 2022, principally reflecting growth in our flagship public sector vertical, which includes education. Revenues in our Education vertical continued a strong rebound, thanks to organic sales to new school districts and higher lunch and activity fees at existing districts. Software license revenues were light for the first quarter at $1.2 million, down from a big Q4 of $3.5 million. This is the most variable and difficult line item for us to forecast. Installations depend on our customer's schedules, which can be a moving target, particularly in public sector. Greg mentioned some software license deliveries, which pushed from Q1 to Q2. If those had landed in this quarter, Q1 2023 would've approximated our Q1 2022 number of $2.1 million. While we are focused on SaaS and other recurring sources of revenue, license sales carry 90% gross margins, so they favorably impact quarterly results as we saw in Q4. Despite license sales, the segments adjusted EBITDA improved 38% to $18.9 million for Q1 2023 from $13.6 million for Q1 2022 outpacing revenues. The growth was principally driven by our public sector vertical, including education. Public sector represents over half of our consolidated business. Adjusted EBITDA as a percentage of revenues improved to 35.4% for Q1 2023 from 30.5% for Q1 2022, reflecting high margin software and services acquisitions such as Celtic over the past year, and a return to traditional high margins in education. The AccuFund acquisition effective January 1 is high margin as well. Revenues for our merchant services segment increased 13% to $32.8 million for Q1 2023 from $29.2 million for Q1 2022, principally reflecting growth in our ISO, ISV and B2B channels. Adjusted EBITDA for our merchant services segment increased 8% to $9.4 million for Q1 2023 from 8.7 million for Q1 2022 with higher revenues partially offset by higher residual expenses. In keeping with our strategy since the IPO, we have steadily redirected acquisition and internal resources from traditional merchant services into higher growth and higher margin software and services, coupled with integrated payments. Our strong balance sheet has allowed us to continue to execute our acquisition strategy. On December 31, we had $259.6 million borrowed under our revolver net of cash under a $375 million facility. The face value of our convertible notes are $117 million. As of December 30th, our total leverage ratio, or December 31, our total leverage ratio was approximately four times while the current constraint is 5.25 times. The AccuFund purchase effective January 1 was $12.5 million cash plus $2 million in stock for total consideration of $14.5 million at closing. We paid roughly 10 times for AccuFund the high end of our range because it is a strategic asset integral to our unified public offering. The interest rate for the convertible notes is 1%, while the interest rate for the revolver is currently around 8%, but will increase as the Fed continues to raise rates. Over time we expect to convert roughly two thirds of adjusted EBITDA into free cash flow, which can be used for debt repayment, acquisitions and earnouts. We define free cash flow as adjusted EBITDA minus CapEx internally capitalized software, cash interest and cash taxes. Looking forward, the strong start to our fiscal year gives us confidence in the following guidance for fiscal year 2023, it excludes acquisitions that have not yet closed and transaction related costs. Revenues $360 million to $380 million, no change. Adjusted EBITDA $95 million to $103 million. We increased $1 million to account for the AccuFund acquisition. Proforma adjusted diluted EPS, a $1.50 to a $1.62, no change. From a seasonal standpoint acquisition activity could prove different this year, but we still expect the quarters of fiscal year 2023 to follow a similar pattern to those of fiscal year 2022. As we become more software centric, quarters might vary based upon perpetual license sales, even though our trend is generally toward more recurring revenue streams. Thank you, Clay. Good morning, everyone. Before I discuss M&A, I want to comment on a few developments within our business. The public sector vertical continues to show exponential growth as we further develop our existing products and add new products both from the ground up and via acquisition. As a result, we have seen enhanced levels of adoption. The combination of our motor carrier, title registration and drivers licensing offerings into the i3 transportation sector has been well received by the market. The i3 justice technology offering now effectively serves public safety as well as court offerings as span all levels of courts for a state. Financial ERP solutions are performing well, especially with the addition of the online general fund accounting company to our sector. In early January, we acquired AccuFund to lead our online general fund accounting GFA product suite. As a result of the architecture and configurable nature of the technology, we will deploy the AccuFund family of solutions to counties, municipalities, special districts and select tribal nations. In addition, our modular solutions support a range of non-profits including social services, education, endowments and faith-based organizations. We continue to expand our cross vertical pollination; our public education healthcare verticals will offer the enterprise AccuFund solution. As i3 education looks to the future, we continue to see the normalization of school activities post pandemic. In addition to launch there is an increase in broad-based student spending, inclusive of athletics, ticket sales and club activities. Our core objective is to provide our customer base with a seamless software experience across multiple departments. We are experiencing increased revenue as a result of high levels of adoption. i3 healthcare continues to refine and expand our product solutions through the application of the i3's unified product offering or UPO disciplines. The depth and breadth of our healthcare offering coupled with the responsiveness to our customer needs is resulting in multiple i3 healthcare subsidiaries, participating in new contracts. We just signed three large scale agreements with providers in Louisiana, Mississippi and Texas. All three healthcare, the public and education verticals is seeing growth with a reduction of friction, increase of synergies and cross vertical collaboration. I'll now speak to M&A. We continue to pursue growth by performing acquisitions of companies with our strategy with an emphasis on companies in our Public Sector and Healthcare Verticals. On January 6, we announced our latest acquisition. The acquired business AccuFund as a provider of fund accounting solutions for government entities, including education and nonprofits in the United States. The addition of this talented team will fuel growth in many of our verticals. We are very proud to have the AccuFund deal done and look forward to exciting things to come with this product and team. I would like to note that, this deal fell within our normal range of multiples. Our pipeline remains healthy with opportunities for acquisitions in public sector and healthcare that are similar in size to many of our acquisitions today. Good morning, guys. First, I just wanted to touch Clay on your comments about the push-out in license revenue, just want to make sure I got it right. It was about $900,000 difference. I think it was 1.2 versus you said it would've been closer to 2.1. I sort of just wanted to clarify that. Okay. And then on the margins, I think those were better than expected. And you obviously raised margins for the full year despite some of the software mix in one queue. So, have you guys taken any cost actions maybe that weren't planned three months ago to help offset it? Or is it just business mix and things performing better? It's just -- it's mainly business mix and education the rebound and education has brought it back to its historical margin. And then maybe Greg, big picture changes in macro versus where we were three months ago. Maybe comment on January, trends versus kind of your first quarter. You know, any changes in your view for the full year from a macro perspective for your verticals? Good question. Last three months, obviously we've been talking about a recession for nine months. We're not seeing it in our verticals. It seems like we're in for a soft landing. It is -- we're kind of protected in government and our verticals. But, no really changes. Just kind of feel like our timing is good. We're kind of in a sweet spot and I think we'll finish the strong, the year strong. Okay. Thanks. And then any commentary on January, how January? I know we're lapping some Omicron from a year ago, so some of your peers have seen some acceleration January. Just curious, how your January looked relative to the December quarter? You know, we never read much into January or February for that matter. They're the two weakest months of the year. You get a lot of returns from Christmas spending. I don't know that we've seen anything notable in January or February so far. This is Sandy Beatty for James. First, a question on M&A, it feels like your team continues to execute here. What would slow or stop the pace of deal closures for your team? Just mindful of a potential slowdown in growth or increase in interest rates or even the balance sheet. Is there anything on the horizon that would challenge the cadence that your team has generally been pretty consistent with? I don't see us slowing down. We are pickier because we've got -- I think we've done 46 deals. We've got hundreds of products very defined by verticals. This latest one AccuFund was like a bullseye of exactly what we needed -- talk, this guy in to join the team, but we have gotten him involved, excited. But we don't worry about capital. If we had a large deal, we'd probably do an offering and say, guys, the reason we're out here doing it is because this large deal was too good to be true or we needed it. But I just -- I think, four a year, five a year is kind of what we can digest comfortably. I'd like them to be larger, but it's not our sweet spot. It's still $2 million to $5 million of EBITDA. Got it. That's helpful. And then just one follow up, looking at ARR and ARR growth, it looks like it's slowed a little bit on a sequential basis, so the year-on-year growth numbers, but also just versus 4Q and I wanted to ask if there was anything to piece out just with regards to seasonality, any correlation with the comments on license sales, given the organic growth profile, anything that we should keep in mind within that ARR piece? Yeah, well ARR does not include the license sales, but from an organic standpoint each million dollars of license sales is 1.4% of organic growth. So, if Q1 this year had been like Q1 last year, we would've been at 9.4% organic instead of 8%. So that is a, and then in Q4 of course we jumped up to 12% because we had $3.5 million on that line. So that is a pretty good line to look at if you're looking at small variations in organic growth. That's really the, been the difference in the last several quarters, you know, it jumped from 10% to 12% in Q4 and the reason was that line and this quarter it's 8% and the reason is that line. So that seems to be the big variable for us. Hi, good morning and thank you for taking my question. Just a quick follow up on M&A, wanted to get the sense for if you're seeing anything different in terms of seller expectations on valuation? I know in the past you've commented that valuations were at the low, you were seeing valuations at the lower end of your target range and wanted to just get a sense for the environment right now. Yeah, great question. We're not seeing any changes right now. Keep in mind that we're kind of the smaller sweet spot and the trickle down of that kind of activity takes a while to get there. We feel like we're in a good position to negotiate at the lower end of our range on most of our deals. If it's a high growth company it's a great fit in our product suite. We may pay a at the higher end of our range, but we're not seeing any changes right now. I think the key thing you do is you self-source your deals. So yeah, these aren't guys that are getting called four and five times a week. We're typically the only ones talking to them and these are a referral from one of our existing companies. So, we're in a good position going in and our model's drastically different than some of the guys out there with a lot of cash. We don't expect to, lay off half the staff post acquisition to justify the price and they like that. Got it. And just as a quick follow up, I know you touched on the spend environment in public sector being favorable. And in the past, you have commented on federal funding providing a bit of tailwind to spend. But I wanted to drill into that a little further. And just get a sense for any particular areas of strength, whether from a geographic standpoint or a sector standpoint that you are seeing areas of strength and weakness? And any general comments you might have on public sector spending, I think would be helpful as well. So, I'll talk to the spending and maybe Greg can chime in on any strengths or weaknesses. The ARP was $2.1 trillion I believe and government entities having through 2024 to use those funds. We don't think a lot of governments have fully spent the funds. We are still in the process of educating them on the money that they have available to them and where they could use it. But I don't see any weakness there. I just see people taking their time. There were a lot of projects that pushed during the pandemic. And those are first order of business and then new sales are gradually coming in. We are responding to a lot of our -- We are pleased with the uptick in RFPs. And the fact that we have multiple subsidiaries combining efforts on one RFPs, giving us success level on those RFPs I feel like education and utilities are on fire. It's exciting as education can get, which is limited, but they are investing in technology, if things cost more. So, inflation has helped us. And in utilities, we have this one particular company internally milestone that has a pipeline that's insane. We are pretty confident about that over the next couple of years. Geographically, I think it follows our acquisitions, but we are strong in the Southeast, Texas, the Midwest. We have got a smattering out west, but that's our current geographic strength. Good morning, everyone. Just on healthcare, wanted to talk a little bit about where you got it, which solutions you'd lead with and how are you in terms of kind of bundling solutions focused on individual niches with healthcare? And where do you think you are strongest in terms of solution set and in niche market within healthcare? So, our strongest product is our RCM. We do quite a bit of coding work. We have a portal -- patient portal today. We are enhancing the features and capabilities of that portal. We think that will be strong in the future. Obviously, the addition of AccuFund, some products are in the works, are going to fill out our product suite a lot better. I will tell you that, last quarter, I guess, we announced that Paul Christians had been promoted to COO. One of his three initiatives is to create the unified product offering within healthcare similar to how we did it in public sector. And we are extremely pleased with the amount of work that's been done in short period of time in healthcare. And I think we will have some more exciting things to talk about in healthcare for next quarter. I think the icing on the cake in health care is payments. We’ve just really haven't scratched the surface yet. And it takes few quarters -- few years to put that in place but we haven't even -- we're first base on that. So, I'm excited about payments. And then just it back to public sector on the statewide deals, I think between a number of your deals you have easily a dozen states maybe close to two dozen on a statewide deal, but as you continue to grow that business and get more reference ability, do you expect that we could see some deal sizes that get quite a bit larger and could be notable on a quarter to quarter basis? Yeah, the combination of Celtic and BIS is strong in the market. Celtic, as you know, is in the 18 different states and a couple provinces of Canada. We think all of those deals that they land are going to be higher end deals for us. And ladies and gentlemen, with that, we’ll conclude today's question and answer session. I'd like to turn the conference call back over to Greg Daily for any closing remarks.

EarningCall_244

Good morning ladies and gentlemen. Welcome to TIM S.A. 2022 Fourth Quarter Results Conference Call. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company’s presentation. There will be a replay for this call on the company's website. [Operator Instructions] We highlight that statements that may be made regarding the prospects, projections, and goals of TIM S.A. constitute the beliefs and assumptions of the company's board of executive officers. Future considerations are not performance to warranties. They involve risks, uncertainties, and assumptions as they refer to events that may or may not occur. Investors should understand that internal and external factors to TIM S.A. may affect their performance and lead to different results than those planned. [Operator Instructions] Now, I will turn the conference over to the CEO, Mr. Alberto Griselli, CEO of TIM S.A.; and to Ms. Vicente Ferreira, Head of Investor Relations, to present the main messages for the fourth quarter of 2022. Good morning, everyone. Thanks for attending our results conference call. 2022 was a year relevant transformations in a volatile environment that require much focus on execution to deliver what we promised during the TIM Brasil Day. Looking at our results and what we accomplished, I'm sure we did a great job. Our plan to be the next generation team is at full speed. Let's recap some of those milestones of 2022. In April, we closed the deal with Oi and we started the immense job of integrating the assets with both. In June, the Reclame Aqui web portal recognized us for our customer service excellence. We were also awarded the Great Place to Work certificate. In July, we started with 5G journey for real. Brazil was the first capital to be covered and we were the first operator to implement a standalone 5G network in Brazil. In the subsequent months, we leveraged 5G to differentiate in Brazil from our peers and to reinforce our innovation positioning. We went for an all-in coverage approach in key Brazilian capitals. We showcase the 5G experience in key events and locations such as Rock in Rio and the Maracanã stadium. In the business pace, we pioneered partnership with industry leaders in several verticals such as agro business, automotive, and logistics. During the year, we became the operator with the broadest mobile coverage in Brazil. Those achievements and many others were accompanied by a robust set of financial results. Our top line grew close to 20% year-over-year. Our EBITDA also presented significant momentum, closing the year growing more than 17%, compared to 2021. This performance led our margin to exceed 47%. The proxy for operating free cash flow rose more than 26% yearly, which helped us to fulfill our promise of BRL 2 billion in shareholder remuneration. We fulfill all our promises to the market and our stakeholders. The entire set of goals we established in our guidance in May during our TIM Brasil Day was achieved. These solid industrial and financial outcomes correspond to one more year of long-term responsible progress towards an integrated ESG agenda, reflected by the increase in all this sustainability rankings. Environmental management highlights the increasingly distributed, clear, renewable energy metrics and the continuous improvement of energy efficiency of network data traffic. We adhere to the highest international target setting and monitoring standards in this road map. In the social sphere, team has been recognized for the second consecutive year as the worldwide Telco best practice in diversity and inclusion policies, which contributes to making our company one of the great place to work. Moreover, being the first and only Brazilian operator to have reached 100% of Brazilian municipalities covered is an undoubted contribution to digital inclusion. Governance was enhanced by the international recognition of our cybersecurity management and by the federal government's confirmation as a pro ethics company. Additionally, we are using the power of technology to help develop communities under a partnership with the NGO Gerando Falcões. So, when we say ESG is embedded in our strategy and everyday action, isn't just a claim. Now, entering into more details of our business performance, I want to highlight our revenue dynamics. In the fourth quarter, total net revenues grew more than 22% with a significant contribution from mobile services that expanded greatly to reach a speed of 23% year-over-year. Fixed services maintained a solid performance going up by high-single-digit. For the full-year figures, service revenues showed an excellent performance growing more than 19% year-on-year, driven by double-digit growth in mobile and high-single-digit in fixed. It is worth highlighting the contribution from customer platform partnerships and fixed broadband that now we call TIM UltraFibra. Since the transactions closing with Oi, I've made this point every quarter. TIM's revenue performance was driven by more than the Oi assets acquisition. Our organic performance continues to be helped by the positive net effect of our commercial strategy, benign macro environment, and rational competition. Analyzing the segments individually, postpaid revenues in 2029 presented a solid pace, up more than 19% year-over-year with an ARPU excluding machine-to-machine lines of [BRL 45.2] [ph] in the fourth quarter. Prepaid revenues expanded more than 21% versus 2021, pointing to an ARPU of close to BRL 14. Nonetheless, TIM's customer base and ARPU were significantly affected by the acquisition of Oi assets. In 20 23, we should see a normalization in the volatility seen in those two indicators as we complete the cleanup of Oi customer base from lines that do not generate any traffic or revenues. It is essential to highlight that the underlying trends for both postpaid and prepaid are positive. In postpaid, we are sustaining our volume to value strategy with offer innovations such as Amazon Prime, and in-flight connectivity, and continuous improvement of service levels. As a matter of fact, last quarter we registered our best Black Friday. In prepaid, all operational indicators are improving. The number of [client recharging] [ph] spending, the total amount of top-ups, our share of gross addition and our share of recharges are all showing [indiscernible]. Those are clear evidence of our success with innovation such as [indiscernible] and Prime Video. Since I'm talking about [indiscernible] impact on team indicators, let's go deeper into the integration details. Integration is on track. We have completed the two most relevant steps of network integration, and we are well advanced in the last phase. We expect to complete full integration by the end of the first quarter. As for client migration, we’ve totally completed the prepaid transition with close to 8 million lines moved to our systems. Postpaid has a similar scenario. We are close to finishing the migration with most of the remaining lines being machine to machine. The last point regarding the arrival of Oi's [former clients] [ph] is related to the cleanup that I mentioned earlier. As you saw in November, [indiscernible] figures, we disconnected 5.1 million lines with zero traffic. Now, the customers are in our systems and we will continue to analyze their behavior and profile, eventually additional adjustment would be necessary. This quarter, we are also planning some migration of control lines to prepaid to reflect the real customer's behavior. It is important to point that these actions do not impact our revenues. The third element in the integration agenda is [decide] [ph] the commissioning process. Different from the other two, this activity started in October last year and will accelerate in 2023 following the end of the antitrust required offering period. The first 500 sites were dismantled last quarter and we foresee their financial impact to appear in the early second quarter. Differently from what appeared in some recent reports, the commissioning process is not delayed on the country is ahead of schedule. And its financial benefits will have to build-up during the year to have a more pronounced impact in 2023. Our scheduled point to 3,000 sites being dismantled this year, leaving more than 1,000 sites for 2024. Still on mobile, let's discuss the evolution of our network. 2022 represented a major step who are becoming the leader in network quality. During the year, important milestones were achieved. Firstly, our indisputable leadership in 4G was confirmed. Secondly, we had started in 5G, having the most available network and being leader in key capital such as São Paulo, Rio de Janeiro, Curitiba and Recife as the result of our all-in 5G deployment approach. Lastly, in the second half of 2022, we achieved the broadest mobile coverage and in early January this year we reached 100% of Brasilia municipalities. The journey to build the differentiated infrastructure to transform customer experience and create new assets for brand positioning has only begun. We are on the verge of seeing the full benefits of closing the spectrum gap against our peers while becoming much more efficient in the point CapEx. In the next couple of years, we will see this transformation materialize. 5G has a crucial role in the process. As I say last quarter, the 5G launch is a success. The smart coverage approach and the well thought device strategy are delivering competitive differentiation and customer experience improvements. Additionally, the technology is starting to contribute to 4G CapEx avoidance as traffic of load exceed 10%. Please look for our communication on the 14th this month when we will update our guidance. The next topic is an update on an area of the business where we stood quieter in 2022. The truth is that we had a lot of on our plates and we had to prioritize. As we move forward with our strategic plan, would assume focus on going beyond the telecom core. And today, we announced a new partnership in the health sector. TIM Brasil is joining forces with [indiscernible] Group to address the massive opportunity created by population underserved by private healthcare services. Approximately 165 million people in Brazil do not have any at insurance when we analyze our client base more than 60% face the same situation. Not sure if you all know [indiscernible]. They are a well-established group with annual revenues exceeding BRL 3 billion. They are the largest popular medical cleaning network in the country present in all states with more than 400 clinics, covering 100% of the cities with more than 90,000 inhabitants. We plan to launch a [digital solution] [ph] to facilitate access to health services, starting with a premium offer to help build a distinctive value proposition. With this partnership and following LGPD rules, we can also offer and sell our telecom services to a client base of [18 million] [ph] customers that use their clinics. Let's change gears to the fixed services. By now, you all know that we have rebranded TIM Live to TIM UltraFibra. The novelty marks the beginning of a new moment in the history of TIM FTTH services, elected six times at the best broadband in Brazil by Estadão’s Best Services Award. The name change aims to bring the service even closest to consumers, generating a clear and immediate association with its attribute of very high download and upload speeds. A series of initiatives are planned to consolidate the new brand with the public following an expansion of the service to new markets that will be announced throughout the year. The first move started in Paraná State where we launched TIM UltraFibra and services will be available in 34 cities. Back to 2022, our focus was to guarantee a smooth transition to the new operational model using I-Systems as our network partner not impacting the growth profile of the broadband services. I believe it is fair to say, we achieved that. We grew revenues at around 11% versus 2021. We expanded the client base by mid-single digit, while doing a massive migration from FTTC to FTTH. Now, we have more than 70% of our user, which speeds above 150 megabit per second, better services driving improvements in customer experience and satisfaction, while helping churn to reduce. As a result of our efforts to grow sustainably with the high value service and portfolio, we maintain robust FTTH ARPU level of close to [BRL 98] [ph] despite competitive pressure. Thank you, Alberto, and good morning, everyone. As explained earlier, the fourth quarter, as well as the full-year figures point to robust performance in all relevant lines of our results. Even in the face of important challenges, such as the high inflation level in early 2022. This is the proof of TIM’s resilience and effective execution. Our OpEx line was impacted by this inflationary environment, as well as other elements such as temporary service agreement with Oi, additional costs, and expenses due to a more extensive customer and infrastructure base and the rental costs for the [fiber last mile] [ph]. Those elements are not new and we've been talking about them for the entire past year. They drove OpEx to rise more than 20% versus 2021 in the quarter and for the full-year. The good news is that most of those adverse effects will dissipate in 2023 because we will not face the same cost pressure from the TSA or because we will be comparing apples-to-apples under the FTTH asset light model. We also expect to start grabbing the additional opportunity to take the former Oi clients to the same level of digitalization as our team customers. In this context, fourth quarter EBITDA sustained an excellent performance, growing close to 20% year-over-year combining organic evolution and M&A contribution. As for the full-year, EBITDA rose more than 17% margins stood at 50% in 4Q and 47.4% in 2022. If we excluded the impacts of I-Systems' rental costs, the EBITDA margin would have been 51.2% in the quarter and 49% for the year. As we discussed in prior quarters, TIM Brasil is passing through transformations that impose transitory impacts on its results. That's precisely the case for our below EBITDA lines. They are receiving additional pressure from the leasing contracts we got from the M&A transaction. Those short-term elements will disappear in 2024, but improvements will already be noticed in 2023. Alberto already gave some details of our site decommissioning program that will help us in this process. Having said that, looking exclusively at our net income performance can be deceiving. To put in perspective, more than BRL 1 billion was added between depreciation and interest related to the leasing contracts without necessarily the same cash impact. So, a better way of understanding our evolution is to use metrics of operating free cash flow. EBITDA minus CapEx for example grew robustly by more than 26% versus 2021. The percentage over net revenues representing a proxy for free cash flow margin expanded to 25.5%. Another metric that we see the market using is EBITDA after leases minus CapEx. This is a way to consider the leases impacts as they were OpEx. It's similar to reverting IFRS 16 effect. In this metric, once again a solid double-digit increase was seen. As a result, despite posting a contraction in net income, we were able to deliver on the BRL 2 billion promise we made. RMB 1.4 billion was already paid, and the additional 600 million are being proposed in the end of shareholders meeting. So, as anticipated, we will be using reserves to complete the distribution. It's worth remembering that TIM has more than BRL 7 billon in distributable reserves. Ending my comments, I want to point out the strength of our cash position even in a year with relevant disbursements. Such as the payments of Oi and spectrum auction. This performance helped maintain a healthy leverage level with net debt-to-EBITDA ratio reaching 1.4x, below our guidance for this metric. Thank you, Vicente. 2022 was a remarkable year for us at TIM Brasil. The number of things we were able to deliver maintaining high standards and with great financial results is something to celebrate. We fulfill our promises to the market and our stakeholders. The entire set of goals we established in our guidance in May during the TIM Brasil Day was achieved. Double-digit service revenue growth, check; double-digit EBITDA growth, check; investment of [BRL 48 billion] [ph], check; free cash flow margin above 24%, check; in-depthness below 2x EBITDA, check; and 2 billion in shareholder remuneration, finally check. Those accomplishments confirmed that the first step to building the next generation team was taken and we are on the right plan to transform in this company into the best mobile operator in Brazil. The second step starts in 2023 and will require the same level of focus and commitment for the entire company. Nonetheless, despite the tough comps, our updated plan points to a better overall business dynamic when compared to our regional expectation for 2023. We are forecasting a significant expansion in free cash flow margin, some improvements in EBITDA margin, both driven by efficiency and synergy that will improve transfer revenues, OpEx, CapEx, and leases. Making sure our shareholder remuneration will benefit from those gains means at the core of our equity story. Stay tuned for February 14 when we will share our renewed guidance with the market. I'm reaching the end of my comments, so I want to share how grateful I am to close this first year as CEO of this fantastic company. No doubt that building this new chapter in team history is taking a huge effort, but I'm very confident we will get there. That is why I need to share this special moment with the entire team and thank them for the outstanding work and commitment. Looking back, it was worthwhile going the extra mile. Thank you, Mr. Alberto. [Operator Instructions] Our first question comes from Bernardo Guttmann with XP. Please Bernardo, you may proceed. The first question will come from Marcelo Santos with JPMorgan. Okay. I hope you can hear me. The first question I wanted to ask is about the competitive environment in the mobile. So, if you could please comment on how pre-paid, post-paid and hybrid are going to be great? And the second question would be about the impacts of Power decommissioning in 2023, how could we expect the impacts to be divided during the quarters of the year in terms of the financials? How much – what's the likely distribution of that impact? Thank you. Okay, Marcelo. So, let me take these two questions. So, on the first one, regarding the competitive environment, I think that when you look at the past months and you look at the overall dynamics, both for prepaid and postpaid that the market has been relatively rational [indiscernible], I would say over the last 18 months. We expect this trend to continue. As you know, this is a market where – as a sector, we were unable to pass through inflation for many, many years to the entry prices. And there are some positive updates in – so we did a prepaid price adjustment starting last year as we discussed in in previous calls and this already benefited our top line growth for prepaid. And for post-paid, there are some positive news that came along this week actually. There are some price adjustment happening, the market leader updated its control and postpaid prices. It was something that we were assessing also internally on our future plan. So, overall, I think that this rationality is going to stay in the coming months. When it comes to the lease, the commissioning plan, here it's – so as you know, we got a quite ambitious decommissioning plan that started in October last year with decommission a bit more than 500 towers in 2022 starting October and we plan to decommission another 3,000 towers in the course of 2023. Now, how does it work? There is a physical activity that is required basically to dismantle the equipment that is placed on the tower. And these results are in an economic saving after a few steps that are in between the physical decommissioning and the actual recognition of the saving. In-line of principle, I think we can say that it takes roughly three months to move from the physical decommissioning to the financial impact. So, when you look at the quarter, which is the question that you asked, you will see the number ramping up over time. So, as we move forward with the physical decommissioning, with the delay of roughly 90 days, on average, you will see this appearing in our lease payments. So, the first quarter is going to be the full value. And when we move to the last quarter, in the last quarter, we will accumulate the saving of the physical decommissioning of the [Reclame Aqui] [ph] portal. So, you can monitor the effectiveness of our plan looking at the decrease of the lease cost on a quarter-by-quarter basis. Okay. Perfect. Sorry. Okay. I have two questions here. The first one is about the effective tax rate. In our calculation here for this year, it remained at single digits. And obviously, you still have the IOC for 2023, a few fiscal benefits. So, if we can expect this line to remain somehow similar, 2023 over 2022? And then the second one is about CapEx. I know obviously you have the guidance, but just wondering in this scenario that we are seeing with this macro that is more challenging if there is room to reduce CapEx for 2023? Thank you. Okay. Fred, let me start with the CapEx question and then we'll move – I will ask Vicente to answer the tax rate question. So, on the CapEx one, as you know, our CapEx last year and this year has been impacted by, let's say, a few things that are one-off like the – primarily the Oi integration. We're talking about something like 500 million divided in between 2021 and 2022. And of course, the deployment of 5G technology that at the beginning, you see the CapEx that we deployed for a quick start while the revenue tends to build up later on in time. So, when we commented in the previous quarters, we already say that one of – when you look at the Oi acquisition, one the most important synergy comes from the infrastructure side. So, we acquired frequencies and we closed the gap that we had. And this frequency and towers that we are getting from them contributes something like 70% of the overall synergy back. Then we also commented that the deployment of 5G is driving 4G offload in excess of what we initially expected. So, when you sum up these two main drivers, so three actually. The one-off nature of [indiscernible] investment that we had in 2021 and 2022. The fact that we closed our frequency gap with the acquisition Oi Assets and the fact that 5G is delivering 4G offload faster than we expected. We already signal that we were expecting CapEx efficiencies already coming in the following years. So, what we are talking here, it's a nominal reduction in CapEx driven by these effects, that are industrial effects. And therefore, anticipating some of the previous planned targets like going below the 20% marker of CapEx on revenues. So, the main dynamics are there. So, the synergies from Oi are materializing. The 4G offload is happening faster than we expected and the one-off costs that we incurred to integrate Oi basically are one-off and so we won't be present in the following years. This will result in increased CapEx efficiency and you will see the number in a couple of days. Hi, Fred. This is Vicente. So, regarding the effective tax rate, first of all, I think it's important to highlight that we don't have a specific guidance for effective tax rate. So, let's talk just about the drivers. So, what is driving our effective tax rate today is, as you well mentioned, is interest on capital. Some credits that we have such as Sudan, [Sudani], and other related to prior credits. So, basically, the drivers will remain the same in 2023. We don't expect any specific change in regulation or our taxation rules for this year. So, the broad framework that is driving our effective tax rate is going to be pretty much the same. So, that's basically what we can say right now. Hi. Great. Hi, good morning everyone. Thanks for taking my question. I have one question related to the fiber business. The company accelerated a launch this month, several cities in Paraná. I suppose that most of these cities are through the [Vital] [ph] network. In this sense, I would like to understand, if this is the pilot project and what's the roll-out strategy to this new partner, which regions should you focus on? Since [indiscernible] has a very large popularity, so how to scale faster through this new model? Thank you. So, Bernardo, as you correctly pointed out, we are now working with two partners, I-System and [Vital] [ph]. So the strategy is sort of an unchanged. So, I-System is focusing on deploying new clusters building up fiber. We launched last year a joint [venture] [ph] and then we launched a [indiscernible] more recently. And so, the plan here is to deploy the new fiber deployment, generally speaking, where we do not find additional near-term networks, because we think this is an efficient way to move forward. The [Vital] [ph] partnership, it's a growth of optionality that we negotiated last year, whereby we can have access to a larger footprint because the fiber is already built up and generally always their main tenant. So, you are correct. We launched a pilot a few weeks ago in an area where we have a stronger commercial spending because we launched in Paraná. So, as you know, Paraná, it's a place where our – we are leader in mobile, both on postpaid and prepaid. Our brand recognition is high. Our commercial capabilities are quite strong. And so, we are piloting a new approach where we can address a larger area. So, this 30 something cities all at once. So far, we launched a few weeks ago. So far, the pilot is proving in-line with our expectations. And I think that we're going to be able to share with you a bit more detail in the next quarter when we, let's say, we consolidated the results. So far, the launch of the new brand and the offering and the commercial network is proceeding very well, but it's sort of early stages because we launched just a few weeks ago. But the idea is to use Vital as a complement to I-System, where I-System doesn't have coverage and doesn't plan to put coverage. Hi, good morning, Alberto, Vicente. I have just one question on mobile competition. We recently saw some competitors increasing the offers and store prices. And we want to just to take your sense if you plan to follow [indiscernible]? Yes. Also, Victor, let's put this way. There was a sort of an initial answer of the first question. So, the – as I was mentioning, it's – in the mobile market, basically, we do, we implement a more for more strategy, generally speaking, of our customer base. To make this strategy sustainable in the long-term, of course, we're always discussing the opportunity to do this at the entry point as well. So, in stores, for example, on the websites. Also, because these prices have not been adjusted for many, many years now and so we are not be able to pass inflation always on a more for more approach at the point of sales. So, as you correctly mentioned, the market leader in postpaid made the change a couple of days ago this week. And we were planning, we were starting this opportunity ourselves, and I think that the market is going in the right direction. We pioneered some price adjustment in prepaid where we are, sort of co-leader starting last year and always on a more for more approach. Everything is going well. It's – we got the good effects on prepaid revenues. We don't see any counter effect in terms of share level. So, I think it's where the market is probably heading in the next month. [Operator Instructions] Without any more questions from analysts, we will now start the public Q&A session from the webcast platform, and will be read by Mr. Vicente. Please, Mr. Vicente, you may proceed. Okay. So, the first question comes from, mainly from [indiscernible]. And he goes, Oi subscriber cleanup, excluding Oi subscriber cleanup there was a 1 million postpaid subs versus negative versus 3Q 2022. So, 1 million of disconnections. What was the driver of this decline in subscribers? Please Alberto. Okay. This is quite an important question because it give me the opportunity to describe in a better fashion the dynamics of our net additions. So, basically, when we look at this, we have a number of phenomena that are taking place. And so, the first one, let's put this way in our organic business. So, our organic business, let's put this pre-Oi is growing in net additions, constantly over time as it was growing in the first quarter and in the second quarter. Then of course, we got a new layer, which is primarily related to Oi in the fourth quarter, also to some cleanup that we do on our customer base. So, on the Oi side, basically, we have three main effects happening in the customer base. The first one is the cleanup of the customer base, which is around 5 million customers that we canceled in November. We basically finalized the cancellation, but as we migrated the customer to our own systems, there might be some fine tuning in the first quarter. The second one, which is also happening is related to the reclassification of control lines as prepaid. So, when you look at Oi customer base, they called, they labeled actually as control some customers that are actually prepaid in behavior. The number is in the range of roughly 1 million. And the profile of this customer is actually prepaid. So, this customer recharged to user service. Day spending is much lower, our control plans. And so, we are in the process of reclassifying these lines, control lines as prepaid. And this process is going to end up in the first quarter. The reason in the first clean-up scenario and in the reclassification scenario, no impact on revenues. Because in the clean-up case, there is no revenues at all. And in the reclassification, the revenues are maintained. It's just they appear prepaid rather than in control. And by migrating a control customer to prepaid, we are more effective in monetizing the prepaid customers as we move forward because our [BTL marketing] [ph] [indiscernible] action and offer are designed for that specific customer segment. In the third quarter, and so I finally get to the question that has been asked, the additional cancellation that we had are related to a couple of business contracts. If you look at the Anatel numbers and you split it up by consumer and postpaid and the business, you will see around 5,000 lines cancel. This is because – 500,000 lines cancel. This is because in the course of 2002 and 2001, some governments launched educational programs with a significant volume of lines at low ARPU. That was, sort of emergency contracts with a specific due date. We came to the end of two contractors, summing up to roughly half a million customers. And then as the last point, there is some clean up that we took the opportunity to execute on our customer base. The next question comes from [Ryan Gomes] [ph] from [indiscernible]. I would translate his question. So, it's regarding bad debt. The bad debts seen in your balance sheet increased, and it was originated by clients from Oi or there was organic deterioration in the TIM clients? Okay. So, in terms of the overall performance of bad debt, actually, our bad debt as a percentage of revenues decreased. And so, we see an improvement of the overall KPI. If this question is raised on an annual comparison, the recent increase because there are some adjustment that we mentioned in the last quarter of last year on a year-on-year comparison, but our bad debt performance is improving over time and therefore the weight of bad debt on our revenues is going down, accounts has been going down constantly in 2022. Now, when we look at the collection curves, and this is a very positive piece of information in terms of the health of our business, the collection curves have been improving over time, therefore, showing the ability of collecting money from our customers. The improvement of collection curves results and improvement of bad debt in terms of revenues is correct that the customer coming from Oi as a slightly higher bad debt versus our own customers, this is an opportunity for us to further improve bad debt by bringing the efficiency of our collection process to Oi customers in the course of this year. Thank you, Alberto. We have I think an additional question from our webcast. This comes from an individual investor called [Bruno Caldera] [ph]. He's congratulating our results and he's asking for additional information guarding the Vital contract. Alberto, if you could elaborate a little bit on that, please? Well, Bruno, there is not much actually that I can share on this contract because it's a commercial contract that is specific to us. I would say that we have a contractor that provide us a payback, which is in-line with our business plan and expectations. So, we closed what we think is a very good contract with Vital. And – but in terms of specific numbers of contractual terms, unfortunately, we do not share these with the market. An important point that is worth mentioning is that since we are second tenant, we do not have volume commitment or obligations with our partner. Okay. I think we have an additional one coming from [indiscernible] UBS. And it's regarding indebtedness level. This level of indebtedness close to 1.4x that you see as ideal in this moment for the company or do you believe that you could have room for improvement or allocating capital differently going forward? I will take this question. Well, [indiscernible], we will actually – this 1.4x net debt-to-EBITDA ratio is below what we expected in the beginning of the year. Is actually below even what we expected for 2024. So, we are ahead of schedule in terms of deleveraging the company. Of course, we will have – we expect to improve significantly our free cash flow. This can be to opportunities for us to either have a better indebtedness level, as well as distributing more to our shareholders. I think Alberto already mentioned this during the call. So basically, that's what we can say right now. Again, on the 14th next week, we'll be able to disclose more information regarding guidance and future expectations, but for now, I think that's it. The second question that comes from [André] [ph] is regarding the rollout of 5G. And it's – as we move to smaller cities, do you see possibilities of using other technologies such as [fixed-Vital] [ph] access to complement the coverage of a fixed broadband? Do you want to take this one Alberto? Yes. Yes. So, when it comes to FWA, we explained the way we look at it in our Investor Day in May last year. I think that there are a couple of opportunities here. The first one and the initial one is on B2B. So, as you know, the first point is to have coverage. And so, we at TIM as we mentioned, we will enter with an all-in coverage approach in main capitals. So, for example, if you take Sao Paulo or Rio de Janeiro, our 5G coverage is already a pretty widespread. That we cover the big majority of the population and every districts in the city. There, the opportunity is already existent. We are already leveraging it in the business case. So, for example, we closed [indiscernible] an agreement with Itau to put FWA in all their branches in some of their branches, and so we are working actively to extend this approach in the business segment. In the consumer segment, besides coverage, that is addressing some of the key capitals, one other aspects that today limits the adoption of SWA is the availability of CP at affordable prices. Now, given to the increase of scale around the globe and the commitment of some equipment manufacturer in Brazil, to reduce prices, this barrier is likely to be addressed by the end of this year. At that point, we will be in the position to leverage this opportunity in the consumer segment where we already have coverage. And this is not necessarily just suburban areas, but could be capitals as well. So, it's something that we're going to put in our pipeline likely at the end of this year to be commercially active in 2024. That is something that we are looking for. And it could be interesting as a mobile complement and complement to fiber. Okay. We have no further questions from our webcast platform. So, we are closing the Q&A session right now. We'll pass the floor again to Alberto for him to wrap up his comments. Please, Alberto. Thank you, Vicente. Well, everybody. I think it is fair to say that we enter 2023 as a bigger and more robust TIM Brasil in a more favorable Telco environment and with a significant cash flow expansion opportunity, in front of us. In a couple of days, we are going to share with you the updated guidance. And I'm very confident that we will deliver those guidelines once again this year. I look forward to meeting some of you in the one-to-one meetings in the coming weeks, and thank you for attending our conference call. Thank you. Thus we conclude the fourth quarter of 2022 conference call of TIM S.A. For further information and details of the company, please access our website tim.com.br/ir. You can disconnect from now on. Thank you once again, and have a nice day.

EarningCall_245

Good morning, and welcome to the SolarWinds Fourth Quarter 2022 Earnings Call. All participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Tim Karaca, Group Vice President of Finance. Thank you. Please go ahead, sir. Thank you. Good morning, everyone, and welcome to the SolarWinds fourth quarter 2022 earnings call. With me today is Sudhakar Ramakrishna, our President and CEO; and Bart Kalsu, our CFO. Following the prepared remarks, we will have a question-and-answer session. This call is being simultaneously webcast on our Investor Relations website at investors.solarwinds.com. On our Investor Relations website, you can also find our earnings press release and a summary slide deck, which is intended to supplement our prepared remarks during today’s call. Please remember that certain statements made during this call are forward-looking statements, including those concerning our financial outlook, our market opportunities, our expectations regarding customer retention, our evolution to subscription first mentality and the timing of the phases of fashion evolution, the impact of the global economic and geopolitical environment on our business and our gross level of debt. These statements are based on currently available information and assumptions, and we undertake no duty to update this information except as required by law. These statements are subject to a number of risks and uncertainties, including the numerous risks and uncertainties highlighted in today’s earnings release and our filings with the SEC. Copies are available from the SEC on our Investor Relations website. As a reminder, the financial results presented on this call reflect SolarWinds as a stand-alone business, and do not include any contribution from the N-able business we spun-off in July 2021. Furthermore, we will discuss various non-GAAP financial measures on today’s call. Unless otherwise specified, when we refer to financial measures, we will be referring to non-GAAP financial measures. A reconciliation of the differences between GAAP and non-GAAP financial measures discussed on today’s call is available in our earnings press release and summary slide deck on the Investor Relations page of our website. As a reminder, beginning with the first quarter of 2022, we no longer adjust our revenue for the impact of purchase accounting. For the fourth quarter of 2022, non-GAAP total revenue is equivalent to our GAAP total revenue. Finally, we note that financial results discussed on today’s call and in our earnings release are preliminary and pending final review by our external auditors and us and will be only be final once we file our annual report on Form 10-K. Thank you, Tim. Good morning, everyone, and thank you for joining us today. As always, I’d like to thank our employees, customers, partners and shareholders for their ongoing commitment to SolarWinds. Looking back at 2022, I’m incredibly proud that our team delivered top-line growth in a challenging macro environment. We believe these results are a testament to our business model resiliency, the value we provide to our customers and the entire SolarWinds team’s confidence, commitment and attitude. We had several highlights in the fourth quarter, including strong subscription revenue growth in line with our subscription-first strategy; continued execution on customer retention, demonstrating the value proposition of our solutions; growing traction with our observability solutions representing the superior value that we believe we deliver to customers; continued innovation in our service management, ITSM and database product lines, representing an increasingly diverse portfolio participating in growing markets; healthy cash flow generation and adjusted EBITDA margins, reflecting our commitment to our expense and operating discipline; delevering our balance sheet, which Bart will discuss further; and continued progress with our partners and global system integrators as we extend our reach to customers through our partners in a scalable and cost-effective manner. I will now touch on some of these before turning it over to Bart for more color on the quarter and our financial outlook for Q1 2023 and the full year 2023. In Q4 2022, we delivered total revenues of $187 million, above the high end of the range we provided and a slight increase year-over-year. On a constant currency basis, we delivered 2% year-over-year growth. I’m excited to report that in Q4, our in-quarter maintenance renewal rate was 92%, and our trailing 12-month renewal rates are now at 93%. Both of these metrics were negatively impacted by currency headwinds. But even with that, I’m happy to report our strong execution. I attribute these results to the commitment of our team, the relevancy of our solutions, the resiliency of our business model and the trust that our customers place in us. We continue to make significant progress with our subscription-first strategy and delivered fourth quarter subscription revenue growth of 45% year-over-year. As I’ve said before, I consider our evolution to subscription, not just as a business model change, but as a way of delivering greater value to customers. While shifting to this strategy has resulted in some total revenue headwinds, we continue to believe it is the right way to deliver customer value and focus on growing annual recurring revenues to over $1 billion in the coming years. We believe the conversion from maintenance to subscription; lay the foundation for even more predictable revenue and the opportunity to expand our lifetime value with customers. We ended the fourth quarter of 2022 with 889 customers who have spent more than $100,000 with us in the last 12 months, an increase of 7% over the comparable period in the previous years. We’re increasingly helping our customers reduce tools strong, achieve comprehensive visibility across multi-cloud environments, eliminate alert fatigue and accelerate their digital transformation, all while improving their productivity. Doing so has enabled us to win larger deals. Adjusted EBITDA was $74.5 million, representing an adjusted EBITDA margin of 40%, which is above the 38% to 39% outlook we gave for the quarter. Now, I’d like to take a step back and reflect on what we accomplished in 2022 and how this sets us up for 2023. 2022 was a transformational year for SolarWinds as we accelerated our progress on the SolarWinds’ platform and reached significant milestones in observability, service management and database monitoring. Simultaneously, we expanded our customer reach via our Transform Partner Program, critical GSI relationships and the ongoing evolution of our internal teams. I believe these vital foundations help us to be the vendor of choice to help customers accelerate their digital transformations in an increasingly multi-cloud world and to deliver the best time to value, time to detect issues and time to remediate them with simple AI-powered solutions. We are increasingly helping customers eliminate tools trawl, significantly reduce alert fatigue, improve productivity and reduce costs. In 2022, we evolved from a monitoring vendor to an observability solutions provider. We launched key new solutions last year. Our Hybrid Cloud Observability and cloud-native SolarWinds observability solutions. We introduced our Hybrid Cloud Observability solution in April and have since launched enhanced detection capabilities powered by artificial intelligence and machine learning. We believe our Hybrid Cloud Observability solution is the only true hybrid solution that allows customers to migrate from on-premises to SaaS at their own pace. We are seeing a healthy traction with Hybrid Cloud Observability and a long runway for growth. We believe that customers appreciate the simplicity of packaging and pricing along with the future richness of Hybrid Cloud Observability. We followed our Hybrid Cloud Observability launch with our cloud-native SolarWinds observability solutions in October, available on Azure and AWS clouds. As we evolve the SolarWinds’ platform, we aim to deliver observability solutions across network, infrastructure, systems, applications, databases, digital experiences and log monitoring in one platform across private and public clouds with single pane of glass visibility. While it is early days, we are excited about SolarWinds’ observability’s ability to support every customer regardless of where they are in their cloud journey with the flexibility to deploy on our private cloud, public cloud or as a service. Our observability solutions have already earned multiple industry awards and recognitions in recent months. As we look to 2023, we believe IT environment will continue to grow in complexity and budgets will remain constrained. Customers will value solutions that improve their productivity and lower their costs. I believe our products and services offerings are ideally suited to address these challenges with our compelling observability, service management and database solutions. It’s also my belief by establishing all our ongoing innovations on the SolarWinds’ platform, we can deliver even greater simplicity to our customers while creating the ability to expand the lifetime value of our customer relationships. With that, we invite you to hear more about our solutions at our upcoming virtual SolarWinds Day on Wednesday, February 15. During the event, industry experts and customers will share practical advice on solving today’s IT problems. We are also showcasing new AI-powered observability capabilities using a real-world customer use cases. Lastly, our channel partners are vital in helping customers accelerate their digital transformation with our solutions. Recall that in October, we announced the launch of our SolarWinds Transform Program, representing our enhanced focus on channel growth and development across distribution, global system integrators, managed service providers and cloud partners. As an example of our progress, during the quarter, we announced an expanded partnership with DRYiCE, a division of HCL Software. HCL Software powers millions of apps at over 20,000 organizations, including over half of the Fortune 1000 and Global 2000 companies. We believe the expanded partnership will focus on bringing together the best-in-class advanced AI ops, end-to-end observability and service management platforms from both companies. Now, I want to take a moment to address the macro environment. As we all know, 2022 was a challenging year for the technology industry and the broader community. Although we generally continue to see healthy demand and commitments from our customers, we are cognizant of the headwinds being across – experienced across the IT spending industry while focusing on our strategy and what we can control. And while we are not immune, we believe our highly cost-effective solution, compelling time to value proposition, diversified customer base across sizes and industries and high-velocity transaction model enable us to operate successfully through challenging macro environment. This is reflected in our Q4 results, including our consistently strong customer retention as demonstrated by our strong renewal rates and our ability to deliver year-over-year revenue growth in 2022. As I’ve said many times, our ability to deliver revenue growth and generate healthy cash flow while remaining focused on profitability is a solid testament to the resiliency of our business model and stickiness of our solutions particularly during challenging periods. We are and always have been focused on capital allocation, disciplined expense management and driving operational efficiencies across all aspects of our business while focusing on growth and our broader subscription transition. Given the uncertain macro outlook for 2023, we made further optimizations to our expense structure last month as part of our ongoing focus on improving operating margins. Looking ahead, we will continue to monitor the environment closely and we plan to hire selectively while seeking to improve profitability in 2023. We’ve worked hard to build a sturdy business model and are unwavering in our belief in our strategy, market and ability to execute. With that, I will turn it over to Bart to expand on our financial performance and provide a Q1 and full year outlook. Bart? Thanks, Sudhakar and thanks again for joining us today. I want to remind everyone of our 2022 strategic focus on growing with a subscription-first mentality. With this, it is essential to emphasize that our subscription transition will be multifaceted. The first phase of the evolution entails selling subscriptions for our existing on-premises products and our Hybrid Cloud Observability product. The second phase of the transition began with the recent launch of SolarWinds Observability, our SaaS solution. We believe that these two models of subscription growth will persist in our business and our overall focus is to grow subscription ARR, while exercising operating discipline. These efforts, when combined with our other subscription products have resulted in a subscription business with close to $175 million of ARR, and our fourth quarter results reflect our ongoing progress with this transition and another quarter of solid execution. Turning to the numbers. We finished the fourth quarter with total revenue of $187 million, which is a slight increase compared to the prior year and above the total revenue range of outlook we provided of $178 million to $183 million. On a full year basis for 2022, revenue finished at $719 million, which was slightly higher than the prior year and well above the total revenue range of the outlook we provided of $710 million to $715 million in our Q3 earnings release. Like other companies with foreign currency exposure, we felt the impact of the decrease in the value of the euro compared to the U.S. dollar. On a constant currency basis, our fourth quarter total revenue would have been approximately $191 million, which is an increase of 2% year-over-year. On a full year basis for 2022, constant currency revenue would have been approximately $733 million, which is also a 2% growth compared to the prior year. We ended the fourth quarter with total ARR of $636 million, also up 2% year-over-year. And on a constant currency basis, our total ARR would have increased over 3% versus the prior year. Beginning in Q4, we revised the methodology used to calculate total ARR. We now exclude the impact of price increases enacted during the maintenance contract renewal and only recognize the price increase impact to ARR upon the renewal of the maintenance contract. While this change does not have a material impact to ARR given our high renewal rates, we felt – this was a change that would bring our definition more in line with others in the industry. We recalculated prior year total ARR to conform to the revised methodology, which is reflected in the year-over-year growth rates. Our subscription ARR as of December 31 was $175 million, which is an increase of 30% year-over-year. This growth is mainly due to the execution of our subscription-first strategy and the conversion of a portion of our maintenance base to the Hybrid Cloud Observability solution. Digging into the revenue details, our fourth quarter subscription revenue was $50 million, up 45% year-over-year, with full year subscription revenue of $168 million, up 35% year-over-year. Our subscription revenue growth reflects the ongoing success of our subscription-first efforts. The transition to a subscription-first strategy creates headwinds in the current quarter’s total revenue. However, we believe that an increasing percentage of new deals made on a subscription basis will result in higher recurring revenue in the future. Maintenance revenue was $115 million in the fourth quarter, which is a decrease of 3% from the prior year and $459 million in 2022, which is a decrease of 4% from the prior year. As we have discussed recently, our maintenance revenue has been impacted by the conversion of a portion of our maintenance customers to subscription and the lower euro to U.S. dollar conversion rate in 2022 compared to the prior year. Our maintenance renewal rate is 93% on a trailing 12-month basis and 92% in-quarter renewal rate for the fourth quarter. These rates are consistent with our historical performance and currency headwinds impact both. The return in 2022 to our historical renewal rates is a testament to the loyalty of our customer base and our focused customer retention and expansion efforts. Note that as we convert maintenance customers to subscription arrangements, we exclude those customers from the renewal rate calculation. For the fourth quarter, license revenue was $22 million, representing a decline of approximately 34% compared to the fourth quarter of 2021 and $93 million in 2022, which is a decrease of 19% from the prior year. Remember that our new perpetual license sales performance will continue to be impacted by our subscription-first focus. As noted previously, our increased subscription sales offset the decline in license revenue in the quarter. We finished the fourth quarter of 2022 with 889 customers who have spent more than $100,000 with us in the last 12 months, which is another quarter of improvement over the previous year. I’m pleased to report that we delivered another quarter of strong non-GAAP profitability. Fourth quarter adjusted EBITDA was $74.5 million, representing an adjusted EBITDA margin of 40%, which is above the 38% to 39% outlook we gave for the quarter. On a full year basis, adjusted EBITDA was $280 million, representing an adjusted EBITDA margin of 39%, which is in line with the outlook we gave for the year. Excluded from adjusted EBITDA in the fourth quarter, our onetime cost of approximately $5.9 million of litigation and governmental investigation costs and other professional fees related to the December cyber incident. We expect onetime cyber incident- related costs to fluctuate in future quarters, and these onetime cyber costs are difficult to predict. Turning to our balance sheet. Net leverage at December 31 was approximately 3.9 times our trailing 12 months adjusted EBITDA. Our cash and cash equivalents and short-term investment balance was $149 million at the end of the fourth quarter, bringing our net debt to approximately $1.1 billion. In November, we refinanced our debt and extended the maturity date from February of 2024 to February 2027. In connection with the refinancing, we made a voluntary prepayment of approximately $350 million, which was in addition to the voluntary prepayment of $300 million that we made in September. We are also pleased that S&P Global Ratings upgraded our corporate credit rating from B to B+. We continue to seek to bring down the leverage further with adjusted EBITDA expansion and plan to evaluate opportunities for further debt payments in the coming quarters. I will now walk you through our outlook before turning it over to Sudhakar for some final thoughts. I will start with our first quarter guidance and then discuss our outlook for the full year. In formulating guidance, we are optimistic that the momentum behind our expanded product portfolio and enhanced go-to-market strategy, in addition to our strong installed base and customer retention, will allow us to grow our top-line in Q1 and the full year. That said, we are mindful of the macro headwinds, which affects all areas of IT spending and have carefully taken into account FX and the impact of our subscription-first business model, transitioning and providing our outlook. Importantly, we’ve increased our focus on our expense optimization efforts and are committed to improving our already strong profitability profile in 2023. For the first quarter, we expect total revenue to be in the range of $177 million to $182 million, representing a 1% year-over-year growth at the midpoint. Adjusted EBITDA for the first quarter is expected to be approximately $67 million – $67 million to $70 million. Non-GAAP fully diluted earnings per share are projected to be $0.15 to $0.17 per share assuming an estimated 163.9 million fully diluted shares outstanding. And finally, our outlook for the first quarter assumes a non-GAAP tax rate of 26%, and we expect to pay approximately $6.8 million in cash taxes during the first quarter. For the full year, we expect total revenue to be in the range of $725 million to $740 million, representing 2% year-over-year growth at the midpoint. Adjusted EBITDA for the year is expected to be approximately $290 million to $300 million, representing a 5% year-over-year growth at the midpoint. As you will notice, we are now providing adjusted EBITDA guidance in lieu of the previously provided adjusted EBITDA margin aligned with our commitment to deliver EBITDA growth on a dollar basis in 2023. While we continue to manage our expenses prudently, we remain focused on our product road map, robust core execution and subscription-first strategy. We have made meaningful investments in our product portfolio and go-to-market strategy and believe that these investments are starting to pay dividends. We will continue to make selective investments to support our product innovation while prioritizing our commitment to improving efficiency and profitability. Non-GAAP fully diluted earnings per share is projected to be $0.69 to $0.74 per share, assuming an estimated 165.9 million fully diluted shares outstanding. Our full year and first quarter guidance assumes a euro to dollar exchange rate of 1.05 to 1. Thank you, Bart. The midpoint of the outlook Bart provided represents year-over-year growth, which reflects our continued belief in the relevance of our solutions, the execution ability of our teams and most critically, the trust, our customers and partners place in us. I’m very pleased with the momentum building for our new innovations, and I’m confident as ever in the long-term trajectory of our business. We continue to maintain the economic conditions in a disciplined manner and make progress across several growth vectors. As we look to 2023, I’d like to reiterate three key near-term priorities for us. First, we have a robust renewal business with over 90% renewal rates. We remain very focused on customer retention and expansion efforts as we have been for the past 18 months. Second, we continue to aggressively seek to drive subscription adoption across our businesses. While this has resulted and will likely continue to result in some variability in our reported revenue, the accelerated shift to subscription is consistent with how our customers want to consume our products and a key to our long-term strategy to achieve $1 billion in ARR at mid-40s adjusted EBITDA margins in the coming years. We believe the increasing subscription base also provides an even more solid foundation for our revenue and margin expansion efforts. And third, we continue to exercise expense discipline in a challenging macro environment. As we begin 2023, we expect to continue to look for opportunities to invest selectively, managed excesses in a disciplined manner and improve our operating margins. We have an experienced management team that has led companies through many economic cycles, and we have demonstrated consistent discipline with operational efficiencies while appropriately targeting our investments in attractive growth markets. We believe our resilient business model should allow us to deliver continued healthy levels of growth and profitability. And as you heard from Bart, we are focused on margin expansion and guiding to $290 million to $300 million of adjusted EBITDA for 2023. I’ll conclude again by thanking our employees, partners, customers and shareholders for their commitment to SolarWinds. Bart and I will now be happy to address your questions. Great. Thanks guys for the questions. Sudhakar, for you. One of the things that a lot of us are talking about a lot of investors and end users are this whole idea of cloud optimization. With your increased focus on observability, could you talk about maybe how your SME customers are thinking about cloud optimization. Is that impacting spend? Or maybe just a little bit of color on that would be helpful. Absolutely. As I’m sure you have seen more broadly, there is definitely somewhat of a deceleration in cloud spend across public clouds. And here’s where our hybrid cloud solutions have come in really handy because the way we designed the solutions was not force a particular deployment approach on the customer. And instead give them a way where they can choose to deploy wholesale in the cloud, salmon the premises and extend it. So what that has allowed us to do is essentially pace their investments alongside their ability for them to evolve to the cloud. So that’s come in really handy because as is truly a hybrid solution. Now in terms of cloud spend and overall observability itself, as part of our SolarWinds’ platform, we are also able to evolve it such that they can keep an eye on how the infrastructure spending is going in the context of infrastructure observability and optimization. But that’s more of a future thing. The more immediate benefit that customers get is leveraging of the Hybrid Cloud Observability, which has seen some really good traction in this environment. Got it. Thanks. And then Bart, you guys had good results – 4Q results relative to your guide and expectations. Can you talk – and I don’t think you necessarily commented on linearity though. Can you talk about I mean you guys have such an expansive view of a large customer base. How the quarter progressed? Obviously, it’s back-end loaded, but maybe just spending patterns through the end of December and what you’ve seen through January? So yes, I mean what I’d tell you, Matt, is that the fourth quarter for us is always our biggest quarter on the commercial side of that business. And obviously, that happened again this year. From a linearity perspective, the good thing is that our business model doesn’t have the typical hockey stick. We have bookings progression throughout the quarter, and that held up this year just like it has in the past as well. So all in all, it was a strong quarter for us from a revenue standpoint and from a booking standpoint, definitely compared to what the guide is that we gave back in the third quarter. So, what I would tell you is that for us, we’re continuing to see improvement across the board. You saw that in our results from – as they trended throughout the year. And for us, from a seasonality standpoint, 2022 was just like every other year, we saw improved performance as we move throughout the year. Yes. Thanks for taking the question. Hey first off, what should we be modeling for interest expense given the restructured debt? And then secondly, can you expand a little bit in terms of how we should be modeling for your cost reductions? Can you comment a little bit about what kind of further changes you’ve made? And how we should be thinking of OpEx growth from 2022 into 2023? Erik, sure. Thanks for the question. I’ll take this one. As it comes to interest expense, all model around $110 million of cash interest expense, and this is in line with how we refinance the debt and our base of financing. And also, we have noncash interest expense, as you may expect, as the debt post to par, and we expect that to be, call it, around $8 million to $10 million. But that’s the high-level interest expense assumption. As it comes to expense optimizations to Bart’s and Sudhakar’s points, we will continue to be very prudent as it comes to our investments and be very selective. And we’ll make sure we are making the right investments at the right places where we are expecting the highest return. So as we go through 2023, you may expect to see that same trend of expense management and prudence. And we will observe expenses very closely and just make sure we are making the right trade-offs with focusing, expanding our margin as well as EBITDA dollar. Hey guys. Yes. Thanks for taking my questions. Just with the two observability solutions launched during 2022, it sounds like initial customer success has been pretty positive. Are you able to provide any customer stats around the success? And what’s embedded for expectations in 2023? Then maybe just any color you can ride on what types of conversations you’re having with customers? So, we’re not splitting out customer accounts and revenues at this point, but a large part of that is definitely implied in a continued healthy subscription growth rate. As I mentioned on the call, they grew about 45% in Q4 relative to last year. That will continue to be a trend for us in terms of focus. And my expectation is that we demonstrate progress across both sides. And as I was mentioning to Matt’s question earlier, the fact that we have Hybrid Cloud Observability comes in really, really handy at times when customers may either be hesitant about cloud spend or, let’s call it, a little bit more cautious than they were even in 2021 and 2022. So providing the optionality helps them a lot. And the way to think about our solution is that it’s actually a continuum while we may have introduced in two parts of the year, we’ll be merging them such that customers have a seamless migration. Let’s say, they choose to have 100% SaaS at some point down the road, they will have the optionality to do it. What I will say is that customers absolutely love how we have packaged the solution for them, obviously priced it on a per node basis and the feature richness of it because they don’t really have to buy a lot of tools or in fact, are able to consolidate a lot of tools, including third-party vendor tools to deliver – to take leverage of our solutions. Appreciate the color there. And then just on the international market, it seems like the macro environment in Europe is still impacting sales cycles and causing some increased deal scrutiny. But from an overall pipeline perspective, can you comment on any trends you were seeing throughout the quarter? Yes, absolutely. The pipeline for us, including in Europe has actually been quite robust and increasing. But the way we are modeling it in light of, call it, the broader macro conditions and the extra scrutiny that you mentioned is that we are assuming a lower pipeline conversion in our numbers than, let’s say, would be the norm. But on the flip side, we continue to see significant demand represented by our pipeline increases. Thank you for taking the questions. I had some more kind of higher level questions kind of beyond the current macro environment. We’ve been talking a lot about the observability opportunity and it’s really nice to you guys execute on the road map both this year on the hybrid cloud as well as the cloud-native solutions. But you sort of laid out in your investor presentation and in your script database performance monitoring as well as our service management. And I wanted to talk about those two opportunities, in particular, to Sudhakar. How should we think about the contributions of those opportunities to your revenue growth profile over the next couple of years? Do you sort of see that sort of incremental to the core observability opportunity? Or do you think they could be really meaningful contributors in and of themselves? First, the latter [ph], Sanjit. Thanks for the question. We look at them as meaningful individual contributors to the business. That’s the reason why I do not – while observability is a very strong pillar of ours, including our erstwhile monitoring solutions, I’d like to think of it as we are participating in three growth markets with service management and database. And as of now, they are increasing, meaning the service management and database monitoring parts of our business are robust growth. And because of the size that they have currently, you will not see the full impact of their growth rates. That being said, the way to think about this as we move forward, is that as a SolarWinds’ platform itself matures, a lot of the functionality will ride on the same platform. So for instance, when we think about observability and we talk about database observability as an element that comes out from the innovation of our database team. Similarly, we’ll integrate automation and remediation with observability, and that’s contributed by the service management team. So there is a stand-alone motion, as you know in the market, as well as a more integrated motion, which is why I’m excited about how our observability solutions be very differentiated than, let’s say, simply observing and reporting. Understood. That’s very interesting. Also in your investor deck, you have sort of some preliminary initiatives and goals for the team in 2024. And one of them was around product-led growth, which, in some ways, I kind of thought of SolarWinds as sort of the – an early pioneer of product-led growth, I guess, has been executed an online digital sales model for well over a decade now. Can you talk to a little bit about what you sort of mean in 2024 about moving into product-led growth? What are the aspects – capability standpoint, you’re looking to build that you don’t necessarily have today? Absolutely. So that’s a good call out, Sanjit. It’s more of a evolution/extension. You’re right about saying in SolarWinds’ historically has been, in many ways, a product-led growth company in the broad connotation of product-led growth. And broadly speaking, we used to call the motion, download try and quote. So that is how the whole velocity motion was nurtured. The way to think about this in this evolution is the download try and quote motion essentially become a try and buy with greater embedded technologies to both create demand and prompt demand with customers. So think of our velocity motion accelerating, leveraging newer technology paradigm as opposed to a completely new paradigm being created. Perfect. Thank you. Good morning guys. This is Connor on for Terry Tillman. I just maybe wanted to start also with a more high-level question. So just as we think about the long-term targets of achieving $1 billion in ARR and mid-40% EBITDA margins. Just if we grow ARR 10%, it takes about five years to get there, about 5% takes around 10 years. As you think about these long-term targets, where do we think in reality, this will kind of shake out maybe closer to the five-year, 10-year mark? Just any color around this is really helpful. Yes. Good question, Connor. I mean, when we’re thinking about it, we originally talked about having a target of those numbers in 2025. We need to see some acceleration in revenue, which we saw in the back half of the year. So if that trend continues, then we think these are targets that we think we can hit in the next five or six years, definitely not thinking about it on a 10-year horizon. We need to see more acceleration on the top-line. And then you’ll see us deliver the targets that we’re talking about. And Connor, we have taken absorbed the impact of subscription transition in both 2021, I should say, 2022 and 2023, and we’ll continue to do that. But as you can imagine, that also has a compounding effect as we get into the out years. And so I don’t believe that is fully internalized absorbed our model yet. And that’s the reason why I think the time horizon is nearer rather than farther. Got it. Okay. Yes, that makes a lot of sense. Maybe just as a quick follow-up. We saw the announcement that once ago Chad Reese being appointed as the President of Americas Sales and Global Channel. Maybe just any progress support on getting them ramped up on the SolarWinds platform? Thank you guys. Yes. So Chad has been here now for almost six months, Connor. And he’s, I would say, fully up to speed and in fact, on the road to meet our global channel partners in EMEA and APJ very sharply. So he and his team, not only have been driving, call it, the cadence around our partner program, but also scaling our Americas business and really supplementing our high-velocity motion with what I would call selective high-touch motion, because we see increasing opportunities as I noted in the script, as well as getting our partners more excited about our future and the possibilities that we offer them because there’s a lot of opportunities for partners to engage with SolarWinds solutions and become even more profitable than they previously were. Hello, Sudhakar and Bart. Nice to talk to you guys. If you can offer a perspective on your subscription transition? And are there incremental tweets to the subscription product offering that should incentivize the customer to move away from your big installed base of licenses. And also comment share that are there things that you’re doing on the go-to-market side or sweeten up the incentive. So from the product side, from the go-to-market side, what are the things that you could do to accelerate this transition. And also if you have a view on the maintenance fallout, the folks that are not converting to subscription, what are they doing? Are they just sitting out to wait for a certain level of proficiency with the subscription offer so they can jump on board or anything, any other dynamics? Thank you so much once again. Good to connect with you guys. Thank you, Kash, and always good to hear your voice. Both then have a set of questions where are very relevant and something that we have been actively working on. Number one is that, as I mentioned, the Hybrid Cloud Observability product was introduced in April with another extension in July and further in October. What I can say, Kash, is that our first focus was to ensure that customers saw both value and feature richness as well as the simplicity of pricing and packaging. So, we evolve the whole thing to note based pricing, which gives great pricing flexibility for our customers. And so that has been a significant reason why customers have been evolving. So the approach that we took was instead of stopping one model and starting with a new one, we decided as maintenance renewals come up for expiry is when reposition and pitch Hybrid Cloud Absorbability to our customers, and we’ve used that as a motivation to transition. And there, I would say the conversion rate have been very high. And even though it is less than a year since we introduced the product line, we have seen steady and accelerating progress all through 2022. And my expectation is that if you continue in 2023, and this is an opportunity for us. As you know, we have a very large installed base and a growing installed base as well. But this can be a multiyear growth opportunity for us is the way we are thinking. We have also, on the other side, to your point about go-to-market, given or incentivize both our partners as well as our salespeople to position that harder and better because of the value proposition. And finally, what I’ll say is that as we have converted maintenance to subscription, we are also experiencing meaningful revenue multiples on that, which, as you know, will have a compounding effect as we get into 2023, 2024 and 2025 and beyond. And also if I could follow-up on the observability side. Sudhakar, are you observing the severity markets, a tighter coupling of the trends that are seeing in the public cloud vis-à-vis declining consumption? Or do you think there’s more of a secular growth story for this particular product it’s still in early phase or somewhere in between? That’s it for me. Thank you. Yes, absolutely. So both hybrid cloud absorbability, which is what I just described, Kash as well as our, call it, the SaaS observability solutions are complementary and supplementary from our standpoint. And the approach that we have taken is because we are able to do a lot of tools consolidation, especially in this macro environment, it becomes even more compelling to them as we bridge, call it, the premises to the cloud. In terms of how customers are viewing our solutions, it is a combination of helping them optimize cost at one level and increasing productivity at another level. So it’s more of a must-have product as opposed to a nice-to have offering. And then going back to one of the previous questions by integrating service management onto the same platform, we’re able to give them even more efficiencies from an overall deployment standpoint. So this is a long-term secular growth trend in my opinion, both in the context of three distinct served markets as well as a more unified served market as well. We have no further questions in queue. I would like to turn the call back over to Dr. Ramakrishna for closing remarks. Thank you very much. Thanks again for everyone who joined our call and for your ongoing support. We are very excited about the prospects at SolarWinds, and we’ll continue to execute and continue to report out on a regular basis.

EarningCall_246

Good morning, everybody and welcome to National Retail Properties 2022 Year End Earnings Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Steve Horn, President and CEO of National Retail Properties. Sir, over to you. Thank you, Jenny. Good morning and welcome to National Retail Properties’ fourth quarter 2022 earnings call. Joining me on the call is Chief Financial Officer, Kevin Habicht. As this morning’s press release reflects, NNN’s performance in 2022 produced 9.8% FFO growth along with an all-time high in acquisitions of nearly $850 million. In addition, the year concluded with high occupancy of 99.4% and an impressive rent collection of 99.7% all driven by our best-in-class team here at NNN. The end of the year surge positions the company well headed into the uncertainty of 2023. A few highlights of 2022 that I am proud of what NNN accomplished. One, 33rd consecutive annual dividend increase, released its inaugural corporate responsibilities and sustainability report, positioned the Board of Directors for the foreseeable future, and 1 of only 13 REITs included in the 2023 Bloomberg Gender Equality Index. While there is a change at the helm in 2022, the building blocks to realize long-term value at below average risk for our shareholders remain in the most simplistic form. Continue to execute our strategy using a bottom-up approach, continue to increase our annual dividend maintaining top-tier payout ratio, focused on growing FFO per share in the mid single-digits over multiple years. We do this by setting our acquisition, disposition activity and our balance sheet management to achieve that objective. As I stated earlier, NNN is in solid footing as we were a month into 2023. First, at year end, NNN had $166 million drawn on our $1.1 billion line of credit after fishing the year at all-time high acquisitions. We have the option keeping leverage neutral to use a reasonable amount of availability of the credit facility to roughly $180 million of free cash flow plus $110 million of dispositions to execute our 2023 strategy. Using those three sources, as I mentioned, leaves NNN with a manageable equity requirements for the year. Secondly, NNN’s longstanding strategy of being selective while deploying capital and opportunistically raising capital over the years will not change for 2023. The sizable fourth quarter, which I will cover shortly, allows NNN to continue being opportunistic with acquisitions as the price discovery continues. The cap rates have been out there slowly increasing evidenced by our fourth quarter initial cap rate 30 to 40 basis points higher than our third quarter and we are still seeing further expansion in the first quarter of 2023. Shifting to the highlights of the fourth quarter financial results, our portfolio of 3,411 freestanding single-tenant properties continue to perform exceedingly well and we expect that trend to continue, maintain high occupancy levels of 99.4% for two consecutive quarters, which remains above our long-term average of 98% plus or minus a fraction. We also collected 99.6% rents for the fourth quarter. The recent headlines of certain retailers, Bed Bath, Party City, Regal, Red Lobster, etcetera that are assumed or have filed bankruptcy in the near-term have minimal effect on NNN. NNN’s exposure is limited, if not zero, in some cases. Turning to acquisitions. During the quarter, we invested just north of $260 million in 69 new properties at an initial cash cap rate of 6.6% and with an average lease duration of 16 years, a term you typically don’t associate with NNN and deviate. While we deviated from our historical trend this past quarter, typically, we sourced the majority of our deals from our relationships and don’t target investment grade deals. But during the quarter, NNN was in position to be opportunistic. As you noticed in the press release, our exposure to drug stores increased from 1.3% to 2.6% year-over-year. Over the years, NNN passed on drug store portfolios, because we viewed the opportunities as not the best risk-adjusted return to deploy capital at that given time, market pricing real estate metrics lease form. This particular portfolio was in line with our underwriting standards, the real estate and the lease form. But more importantly, the transaction is an excellent real estate play, well-performing assets, excellent locations for the long run. Currently, we are well into the price discovery period of the bid-ask spread has continued to adjust and we continue to maintain our thoughtful and disciplined underwriting approach. NNN continues to emphasize acquisition volume through sale leaseback transaction. Our 2022 average lease duration was slightly over 16 years with our stable relationship tenants with our long-duration net lease and more landlord-friendly than a 10/31 market. During the quarter, we sold 5 properties at 5.9% cap plus 2 vacant assets, raising $16 million of proceeds. For the year, we raised $65 million of proceeds from the sale of 17 properties at a 5.9% cap plus 16 vacant assets. Although job one is always to release vacancies, we will continue to sell non-performing assets, if we do not see a clear path to generating rental income within a reasonable timeframe. With that, let me turn the call over to Kevin for more color and detail on our quarterly numbers and updated guidance. Thanks, Steve. And as usual, I will start with the cautionary statement that we will make certain statements that could be maybe considered to be 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 may not release revisions to these forward-looking statements to reflect changes after the statements were made. Factors and risks that could cause actual results to differ materially from expectations are disclosed from time-to-time in greater detail in the company’s filings with the SEC and in this morning’s press release. With that out of the way, yes, headlines from this morning’s press release report quarterly core FFO results of $0.80 per share for the fourth quarter of 2022, that’s up $0.05 or 6.7% over year ago results of $0.75 per share and full year 2022 core FFO results were $3.14 per share, which is a strong 9.8% increase over year ago results. Today, we also reported that AFFO per share was $0.81 per share for the fourth quarter and that’s up $0.04 per share or 5.2% over 4Q 2021 results. As usual, we did footnote fourth quarter AFFO included $681,000 of deferred rent repayment in our accrued rental income adjustment for the fourth quarter without which would have produced AFFO of $0.80 per share for the quarter. Likewise, the full year of 2022 AFFO included $5.4 million of deferred rent repayments in our accrued rental income adjustment without which would have produced AFFO of $3.18 per share for the full year and that represents an 8.9% increase over the similarly adjusted $2.92 per share results in 2021. These scheduled deferred rent repayments and they continue to taper off materially in 2023, as you can see in the details that we provided on Page 13 of the press release, but the headline growth of 9.8% core FFO per share in 2022 is a very good result for us and notably above our historic mid single-digit growth rate. Admittedly, we did have some tailwinds in 2022, which added something probably in the $0.09 to $0.10 per share range for the annual results. These tailwinds, which we have talked about in prior calls, included some of the refinancing we did in 2021 most notably redeeming our 5.2% preferred which probably added $0.03 a share. We also – there was a $3.3 million increase in our cash basis deferred rent repayments in 2022. We did resume full rent from Chuck E. Cheese in 2022 that added about $3.3 million of rent at the beginning of the year. And we did have one less executive position, which generated some G&A savings in ‘22. Of course, layered on top of all of that, we entered 2022 with $171 million of cash on the balance sheet, which created some notable accretion once that got invested, but a good year. But let me move on. Our AFFO dividend payout ratio for the full year 2022 was approximately 67% and that created about $188 million of free cash flow after the payment of all expenses and dividends for the full year. As we think about it, this free cash flow funded over 40% of the equity needed to fund our 2022 acquisitions. Occupancy was 99.4% at quarter end. That’s flat with the prior quarter and up 40 basis points for the year. G&A expense came in at $10.8 million for the quarter, and that’s up from $9.9 million year ago levels. But more importantly, probably for the full year, G&A expense was $41.7 million and that’s down 6.6% from 2021 and it represented approximately 5.4% of total revenues and side note 5.6% of NOI. We ended the quarter ended the year with $772 million of annual base rent in place for all leases as of December 31, 2022. Today, we also introduced 2023 guidance with a core FFO per share guidance range of $3.14 to $3.20 per share and an AFFO guidance range of $3.19 to $3.25 per share. Core FFO guidance suggests about 1% growth to the midpoint in 2023. The more modest growth in 2023 guidance reflects the high bar of last year’s 9.8% growth that was created and the lack of tailwinds that were helpful in 2022 that I just outlined. And one particular headwind in 2023, I will mention in a moment. All of this is coupled with the slow repricing of cap rates on new acquisitions that we are all dealing with, but it’s coming along, price discovery, like I say, continues to move along. The supporting assumptions for our 2023 guidance are on Page 7 of today’s press release and include $500 million to $600 million of acquisitions, 100 to 200 – I’m sorry, $100 million to $120 million of dispositions and G&A expense of $43 million to $45 million. We modeled acquisitions at – running at 30% in the first half of 2023 and 70% in the second half of 2023, a little more back-end weighted than our more typical kind of 40-60 assumption. As we typically do, we have assumed 100 basis points of rent loss in our guidance and that’s a general assumption despite the fact that we usually experience less than half of that amount of rent loss. The one headline – I am sorry headwind of note in 2023 is the scheduled $5.8 million slowdown in the cash basis deferred rent repayment. And again, that’s detailed on Page 13 in the press release. Tenants continue to repay these rent deferrals on time, but what is owed is slowing notably. As usual, we don’t give guidance on any of our capital markets assumptions regarding our capital markets activity except for the general assumptions that we intend to behave in a fairly leverage-neutral manner over the long run. We are hopeful we can move our guidance higher through 2023 as we have done in most years. But for now, this is where we feel comfortable. Quick side note on our AFFO guidance, Page 13 details the slowdown we faced on the accrual basis, deferred rent repayments which has weighed on our headline AFFO growth in recent quarters. With these repayments largely completed, our 2023 AFFO per share guidance is back to its usual relationship with our Core FFO, meaning the annual AFFO is normally a few pennies more than Core FFO, and that’s reflected in our guidance today. Let me switch over to the balance sheet. We maintain a good leverage and liquidity profile with over $900 million of bank line availability. Fourth quarter was fairly quiet in terms of capital market activity. We did issue a $121 million of equity in the fourth quarter, executing trades and the $45 plus per share level. If you think about our funding of last year’s $848 million of acquisitions, equity issuance funded $250 million of that, operating cash flow after dividends funded $188 million and property dispositions funded $65 million. Sum of those three being $504 million, and that’s about 60% of our total acquisitions funded with those equity sources. After a few years of nearly no usage, we did begin to use our bank line a bit in 2022, largely because we can. Our weighted average debt maturity is now a little over 13 years, which seems to be among the longest in the industry. Our net debt maturity is $350 million with a 3.9% coupon in mid-2024, and all of our debt outstanding is fixed rate with the exception of the $166 million on our bank line, which represents about 4% of our total debt outstanding. A couple of stats – net book to gross – sorry, net debt to gross book assets was 40.4%. Net debt-to-EBITDA was 5.4x, interest coverage and fixed charge coverage for us is 4.7x. So we’re in very good shape to navigate the elevated capital market uncertainties and continue to grow per share results, which in our minds is the primary measure of success. The sector’s acquisition volume growth focus over the past 2 years has downshifted in recent months as the marketplace seeks to adjust to the new environment and appears to be getting a little more disciplined on price, which we think is a better environment. Yes. Thank you. Good morning, everyone. You spoke a bit about the drug store deal. I’m curious if you’re seeing a narrower spread between investment grade and sub-investment grade deals that might push you up the credit quality spectrum or if that deal was just a one-off? Yes, our strategy isn’t going to change in 2023. It was a one-off deal. We were in a great position, balance sheet and a lot of our competitors already had significant exposure to the drug store sector where NNN since we kind of laid low for a decade essentially of the drug store. And then this deal really because it was above average lease term that the company was willing to do is that’s why we jumped in and the economics were good. We don’t get into specific economics on deals but the drug store deal was above our average. Average is 6.6% cap rate for the quarter. Okay. Got it. Thanks for that. And Kevin, on the watch list, you mentioned a few tenants where you have a small or no exposure, but I’m interested to get your thoughts on AMC, given that the debt is obviously yielding 30% or so? Yes. I mean that’s been perpetually on our list for the last couple of years as well, a lot of folks, I guess, at this point. But yes, still current on rent, the liquidity to pay rent feels like they have a little bit more runway left. We will see if they have the ability to continue to raise some more capital here in the coming quarters. But I don’t have a lot of news to share on that front. They represent 2.8% of our total – total rent and ABR. Yes. Thank you. Just going back to the acquisition guidance, I know you guys mentioned you’re waiting to see how that bid-ask spread continues to adjust. But – just curious how much of that conservatism on guidance is reflective of your current tenant base not wanting to grow right now versus maybe conservatism on new prospective tenants? Yes. Spenser, yes, we’re always conservative in what we see in the pipeline. That being said, our pipeline is fairly robust as we sit here early February for 2023. Comfortable with our first quarter numbers if everybody behaves appropriately and deals close. Our development pipeline for 2023, to answer your question, it feels like our current relationships are growing, but our development pipeline is as robust as it’s been in 5 years. So very comfortable with that. Where we’re seeing the slowdown, there hasn’t been as much M&A with our relationships of picking up 3, 5-unit operators across the board. But no, we feel comfortable that they are still growing. And our acquisition guidance, as you always know, we pick it up through the year as time goes, we don’t want to get above our skis at this time. Yes. We don’t disclose cap rates in our guidance, but given that we were – we picked up 30, 40 basis points in the fourth quarter. I’m seeing expansion as we sit here today for the first quarter projecting that for the first half of the year. And then the second half of the year, your guess is as good as mine at this point. Thank you very much. Your next question is coming from Joshua Dennerlein of Bank of America. Joshua, your line is live. Yes. Hey, guys. I just wanted to follow-up on the drug store deal. Just curious, I think in the past, you might have straight away from drug stores just because they didn’t really have much rent bumps built in. Just curious if this kind of – was it different where there were rent bumps? And then was it a marketed or sale leaseback deal? Hey, Josh. So yes, the drug store deal as I mentioned, was north of our average cap rate deal for the fourth quarter. But this was – it was a real estate play. It was a sale leaseback. Therefore, it wasn’t the developer rent per square foot numbers, so it was very comfortable that the tenant set the rents, they are very market-rent deals. But more importantly, 85% of the properties are on in hard corners, I think 90% had drive-through. So it was really a real estate play. 1.6 acres was the average. So yes, we got the above average lease term that you see in the market for the drug store deals and more of a landlord-friendly lease than you typically would see. That’s why we jumped on this one. Okay. I appreciate that. And then just looking at your top 20 lines of trade, just kind of saw some themes. It looks like other increased year-over-year. Could you remind us what’s in that other category? No, on Page 15 of the sup, your top 20 lines of trade looks like you list other at 8.1% of the portfolio, it looks like it was up over the course of the year, just kind of curious if there is any kind of – what’s kind of in that other bucket and if there is any kind of themes what you are increasing in there? Yes. I mean, nothing notable, I mean, I can circle back to you and maybe give you a little more color on that. Hey, just going back to the 100 basis points assumptions on the bad debt, obviously, appreciate that historically, you’ve come in way below that. But just trying to get a sense of, is this year, is your expectation that just based on the watch list based on what you’re hearing could we be closer to that 100 basis points this year versus last year? Just trying to figure out how conservative that assumption is based on what you’re already seeing in the portfolio? Thanks. We don’t have any visibility on any near-term concerns. So yes, so the 100 basis points still feels fine. But I share your sentiment that this seems like a year where retailers may struggle a little bit more. And so it might get more utilized, that reserve might get more utilized than it has in the past. Time will tell. We like the fact that it’s – we’re contemplating more than what typically occurs, like I said, this feels like an environment that might be prudent. But there is nothing on the near-term radar that’s got us worried about that not being sufficient at the moment, but we will see how the year unfolds. Great. And then just looking at the cash flow statement in the K, I think it looks like at least in ‘22, that was close to $200 million of excess cash after the dividend base. I think you mentioned a similar number earlier in your opening comments. But is that sort of a fair sort of range for ‘23 as well given the FFO guide? Just to make sure we’re not missing anything. Yes. Good question. Yes. So it was about – in the way we think about it, it was about $188 million, which is close to the number you’re talking about. And it probably be a touch lower in ‘23 as the rent deferral repayment slowdown, and so that will take a little bit out of that number. So the number in our mind is – and we would suggest others think about is about $180 million of free cash flow after all expenses, all dividends being available to fund acquisitions. Got it. And then my last one if I could sneak it in. Just on cap rates, I guess, I’m surprised they are not rising faster sooner – more quickly, you guys are well capitalized and can be opportunistic. You had a little bit of a bump in 4Q. But again, maybe asking the question before, why shouldn’t we expect cap rates to be up 25, 50 basis points higher in a pretty in a hurry here. The deals that we started pricing near the end of the fourth quarter that are going to close in the first quarter is where we’re seeing that 30 to 40 basis points again and we’re starting to see the deals that we’re pricing today, which most likely we closed in the second quarter, we’re seeing the market accept the higher cap rate. Now when I say the market, that’s the sale-leaseback market where they seem to be a little bit more sophisticated and they have access or they do a debt cost, I should say, which they may or may not be able to get, but they are also seeing the pricing significantly higher. Now the 10/31 market is still fairly robust, that we’re not seeing the increase in that market unless you’re willing to do 5, 6 years or 10-year leases, then you can get the bump. But yes, 10/31 market is still holding a little sticky. But the sale leaseback market, they are understanding the – our cost of debt increased and they are accepting the cap rate increase. Thanks. Maybe just on that last comment, what was kind of as the 10/31 market there and maybe compress some of that bid-ask spread that we’re currently seeing? Yes. No, it’s really kind of the bid-ask spread, particularly on the 10/31 market. How do you see that playing out? What could actually make that start to close and see some more deals come through that channel versus the sale leaseback? Nick. I mean we are always looking through the 10/31 market but it’s such a small portion of our deal flow comes from the 10/31 market that I’m not really dialed in what it’s going to take to close that gap. If I had to speculate, the assets that are $15 million to $25 million in the 10/31 market, you are going to see the bid-ask spread close on those because you might require debt to buy them where the $2 million to $5 million, there is so much cash out there still that don’t require financing. I don’t see those cap rates moving all that much. But people [ph] are wanting to take the 4.5%, 5% returns. Yes. No, that makes sense. And then just on your disposition guidance for $100 million to $120 million this year. How are you thinking about pricing for those, particularly maybe relative to where you are thinking acquisition cap rates trend going forward? So, when we look at dispositions, it’s kind of – you got the offensive dispositions that somebody offers us a cap rate that they just love the real estate a lot more. So, they will trade significantly of what we are deploying capital at. And then you have some defensive sales because of our relationships that we will sell because we know they are not going to renew in 5 years, 7 years from now. So, we will sell those. And those cap rates typically will be where we are deploying money at the time into new 15-year, 20-year leases. But the overall, just like this past year, we got kind of 5.9 exit cap, and we were at 6.4 acquisition cap. I would see the same spread going forward or expect the same spread. We are assuming fairly flat occupancy. I mean it’s the 1%, gets fully utilized, I guess you would suggest maybe there is a 100 basis point loss there potentially. But assuming that doesn’t happen, we are assuming, like I say, fairly flat occupancy. Thanks. And then beyond the drug stores, can you talk about some of the other tenants you invested in during the quarter? During the quarter, it’s kind of representative of what we did all year. Auto service sector for the year was roughly 35% of our deployment of capital. And within the auto service, it was – the car wash is a big year. And then we did some child daycare services as well. The make-up, again, with the vast majority of our deals coming from our relationships, I think it’s fair to say we tend to represent what our current portfolio looks like going forward. That being said, our acquisition officers that team is continuously looking for the next opportunity. So, we will throw in one or two lines of trade in there historically that we haven’t done. But the vast majority, Linda, will look like our current portfolio makes up. Going back to the acquisition guidance, what’s driving the 30-70 split you are seeing in 1H versus 2H? Just trying to understand the kind of broad positivity on the pipeline, but a call for kind of less acquisitions in quarters where you theoretically should have more visibility into transaction flow. The 30-70 split is the approach that we are taking this year. We had a robust fourth quarter, and we have made the conscious decision to less the price discovery close the gap. So, we are planning to do a little bit less in the first half of the year close to that 40%, we typically would guide to. Just being a little bit more selective, no need to put the pedal down and go. Yes. I mean as others, and I think the market is trying to get real estate cap rate world caught up with capital market interest rate world. And so that process has been going on for a few quarters now and have probably got a little ways to go. And so it doesn’t seem a real compelling need to want to push the volume pedal very hard. Okay. And then on the disposition side of things, how should we think about the timing split on those? I also remember from the prior earnings call, you mentioned there was a notable transaction that might slip to this year. And so is there a potential for dispositions to maybe be front-end loaded in ‘23? I mean for modeling purposes, John, I would just – the $110 million midpoint just spread that over evenly throughout the year. Okay. And then one quick one on the balance sheet. How should we think about how you are feeling about longer term debt, just given where the interest rate curve is today and kind of the attractiveness stuff in more of a 10-year range versus shorter term debt and availability in the markets? Yes. We don’t have any real plans to be issuing long-term debt near-term and in no small part because as I have noted, we really have not used our bank line. So, we have the luxury of being able to lean on that in this environment where the rate market is a little rockier. And so we will see how that plays out as the year progresses. And so we don’t have any – I mean we did, like I said, chopped a lot of wood in 2021 on long-term debt. We have pushed our debt maturities, weighted average debt maturity north of 13 years, which like I said is among the longest out there. So, we have the flexibility to not need to issue long-term debt at this point and see where things might normalize a bit and possibly even maybe a year from now where rates might start to tail off a little bit. So, we will see, but no near-term plans that need to make that decision. The 10-year part of the curve probably makes a lot of sense today for folks, I am guessing, where rates have kind of backed up here recently in recent weeks. But we are unlikely issuers in the near-term of long-term debt. Hi everyone. I just want to go to the comments about the development pipeline being the most robust in 5 years. It looks like you have about $22 million under construction. I am curious to know what is the commitment for these projects, and how big could this pipeline get? Well, historically, pre-COVID, we have had about $100 million run rate of a pipeline. So, that would be a good ballpark figure to think about. And then it’s – we don’t do long-term commitments. It’s more once they are ready to buy the land, we will purchase the land. So, it’s kind of a three-month window. Okay. And then going back to your comments about the tenants you have named. We did see that you lost just one Regal. And then you mentioned I think Bed, Bath and Red Lobster. At one point, you did have just a few Bed, Bath & Beyonds were in of these part of your, I guess defensive dispositions over the last few years, or do you still have them? No. We still have, it’s three Bed, Baths and we still have them because they are fabulous real estate. And they were not on the initial list of Bed, Bath closures. They may be in the future, but they are good real estate. So, we will be able to replace that and we are very comfortable with that. And then you are right. The one Regal we had in Chicago land, we are getting good interest with that asset as well. Got it. And just for Kevin, since you nailed the bottom on rates by issue with a lot of long-term debt, I know that you are having a big, I guess willingness to have more floating rate debt, I guess you recall for rates to go lower. Yes. I wouldn’t probably underline Kevin’s call for rates to go lower, but boy, that’s kind of edgy for me. But no, we just – like I said, we have the luxury of being able to pivot the shorter term variable rate debt until the market sort themselves out and re-price a bit. And so we are going to – that’s the way we are going to dig in this environment. But we will see if rates go lower. They don’t have to for our model to work just fine, to be quite honest. But we don’t feel any real pressure to be issuing bonds in this market, and we have the luxury of not needing to. Hi. Good morning. Just kind of given some of the conversations around kind of retailer credit and credit losses and things of that nature, are you guys doing anything different from an underwriting perspective or even just from a credit monitoring perspective to kind of ensure that if this worst-case scenario happens, you guys at least kind of make it out okay. Is anything changing? No. I mean the beautiful thing about NNN’s business model is, we are real estate first. And while we understand credit is important, who our tenant is, at the end of the day, if you are near market rent, your downside, if you buy a highly desirable real estate and market rent, you can replace that cash flow. And in essence, that’s our underwriting. And then you do the relationships. This is kind of where our business model gets a little difficult to understand. There is a self-selection process. When we do a sale leaseback, a tenant doesn’t want to sign a 15-year, 20-year lease with high rents. They want low rent to ensure they can pay that rent for 15 years to 20 years. So, there is a self-selection process. So, we are very comfortable with our underwriting. As you saw kind of during the great financial crisis or during the pandemic, we have maintained the rent paying ability of the tenants. So, yes, we are not shifting yet. Got it. And then just a quick follow-up on that. I know most of you guys all track your rent coverage ratios and things of that nature, even if it’s not published. You just kind of talk about trend wise, what’s happening there with the rent coverage ratios, especially along the different trade lines? Is there any kind of real pressure on coverage in one particular trade line versus another? No, there is nothing notable changing there yet, recognizing that we get the data on a lag, meaning we don’t get real-time data. And so some of it comes quarterly, some of it actually comes annually. And so there is always that lag factor. But so far, we have not seen any levels that are keeping us up at night in any particular lining. [Operator Instructions] We appear to have no more questions in the queue, and that’s the end of our question-and-answer session. I will now hand back over to Steve for any closing remarks. Thank you, Jenny. I appreciate everybody joining the call this morning. We look forward to seeing many of you in person in the upcoming conference season, and we will catch up then. Thank you. Thank you everybody. This does conclude today’s conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

EarningCall_247

Hello and thank you for joining the Stewart Information Services Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. Later you’ll have an opportunity to ask questions during the question-and-answer session. Instructions will be given at that time. Please note today's call is being recorded. [Operator Instructions] Thank you for joining us today for Stewart's fourth quarter 2022 earnings conference call. We will be discussing the results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger; and CFO, David Hisey. To listen online please go to stewart.com website to access fully for this conference call. This conference call may contain forward-looking statements that involve a number of risks and uncertainty. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at stewart.com. Thank you for joining us today for Stewart's four quarter earnings conference call. Dave will review the quarterly financial results in a minute, but before that I would like to cover our overall view of Stewart in the current market. As I discussed before much of our efforts over the last few years is focused on fundamentally improving the company's operating approach to better position ourselves in our journey to become the premier title service company. The long-term goal remains to create a stronger and more resilient business that can thrive through the real estate cycle and economic conditions. We are focused on improving margins growth resiliency by improving our scale and attractive markets and enhancing our operational capabilities and our financial discipline. We have significantly improved our performance and our ability to manage in challenging market, but we were impacted by the significant downturn in the purchase market we saw in the fourth quarter. The challenges associated with higher interest rate environment increased materially during the fourth quarter as interest rates topped out over just 7% and we are planning for this difficult market to continue into 2023, and are managing our business with a balance of cost discipline and investing in skills and capabilities that will best position us for the long term. Although, interest rates have declined in early 2023 by 100 basis points and we've seen improving trends in January quarters. Interest rates, home inventory and housing affordability are all cadences to quickly turn it to a normal real estate market. Through 2022, we have been managing in a declining market, starting with a significant increase in bull market and moving to a rapidly declining purchase market. As a result, we have been taking material but thoughtful and targeted expense actions throughout the year to ensure we maintain financial strength, service our business well, and position us for normal market. In the fourth quarter, we saw an additional material increase in the purchase market, ending the year at a 46% decrease in closed orders and a 44% decrease in open orders year-over-year for December, our lowest point of the year. This trend led us to take additional significant, but targeted expense actions in the quarter to ensure we maintained our financial flexibility. We continue to manage our business with a long-term view, however, we have maintained strengthens, the investments and improvements we have made over the last few years, ultimately improving our structured and long-term financial performance. We remain focused on our strategic plan of building an improved competitive position by being more efficient in having a disciplined operating model that functions well throughout the cycle. We have emphasized growing scale in attractive markets across all lines of business that we have made significant progress in improving the customer experience in all our channels. While we are encouraged with our improvements on all four critical fronts, talent, technology, customer experience and our financial model, we recognize the work remains and the journey is not complete. We will continue to invest opportunistically during this market, but we'll be mindful of maintaining our current strong financial position. Financially, our long-term goal remains to generate high single to low double-digit margins over the cycle. However, in the living quarters like the fourth quarter and the first quarter of 2023 where margins will be challenged. Our adjusted margins for the quarter reflect the levels of investment in talent and systems necessary to achieve over the long-term. Disciplined management and seizing on growth opportunities as they arise are keys to improving stores financial position. On the margin front prior to getting the [indiscernible] pre-cash margins were below the single-digits in the normal market and lower volume markets we consistently lost lot money. Our efforts to improve scale in our direct operations improve our portfolio from acquisitions and real estate services and strength in our operating model have allowed us to better weather the margin pressure particularly in challenging environments. At the outflow of the journey, we identified areas that we needed to improve on in order to achieve our goal. Since then we have invested significantly improving our technology for tighter production process automation and centralization to improve operational efficiencies and capabilities. We have already made significant progress improving the customer experience across all channels and rolling our agency technology platform, which typically has the – ease of use of connectivity with agents. We continue to make excellent progress on these and other investments, but we know that what work needs to be done. We believe the current market will present opportunity to improve scale targeted and attractive direct markets which is to add additional services that complement our existing lender services. Share growth in direct target MSA markets remains a key strategic objective. During the fourth quarter, we added FNC Title Services, which specializes providing Title Services to -- for reverse mortgage transactions and BCHH the national provider of Title Services to institutional investors and lenders. Both companies are leaders in their respective fields that are important to our strategy to increase our service offerings and scale. [indiscernible] additional progress integrated completed acquisitions into our production and other systems, which improves our customers' experience as well as the overall operating efficiencies that we've been building over the past several years. In our agency business 2022 saw developments in key areas that position us now to increase scale in our growth markets and improve our share with the highest quality independent agents. We have made excellent progress on our deployment of technology and services that provide greater connectivity, ease of use and risk reduction for our agency partners. As we move through 2023, our platform of services for agents is as strong as it's ever been. Positioning our commercial operations for growth across all our business lines has been a key focus this year as these operators are important components to our overall strategy. We made significant investments in talent during 2022 and aid in achieving these objectives. We are optimistic regarding the commercial market long-term, although we recognize there may be some headwinds in the short-term given changing financial markets. Let me just finish by reiterating that we will both manage expenses and investments with a practical balance between an operating expense of the current short-term market challenges and strengthening Stewart for the long-term growth and performance. A strong financial footing should best position us to take advantage of the opportunities that this cycle will provide. I will conclude by reiterating my positive long-term view of the real estate market and the ability of Stewart to become the premier title services company. I would also like to thank our associates for all their hard work and our customers for their continued loyalty and support. Good morning and thank you, Fred. Let me also thank our associates for their amazing service and our customers for their steadfast support. During the fourth quarter, residential market was negatively impacted by 30-year mortgage rates that peaked over 7%. Consumer settlement has been forward due to the rate environment inflation, affordability and recession concerns. Commercial real estate is seeing the impact of higher rates and volatile markets as well. Yesterday Stewart reported fourth quarter 2022 net income of $30 million and diluted earnings per share of $0.49 on total revenues of $656 million. After adjustments primarily from net unrealized gains and losses on equity securities and office closure, severance regulatory and litigation expenses adjusted fourth quarter net income was $60 million or $0.60 per diluted share compared to $84 million or $3.05 per diluted share in the fourth quarter of 2021. Total title revenues for the fourth quarter decreased $255 million or 30% primarily due to the volume declines driven by higher interest rates. As a result, the title service pretax income was $27 million compared to $119 million in the prior year quarter. While on an adjusted basis the segment's pretax income was $35 million compared to $120 million in the prior year quarter. After adjustments for purchase intangible, amortization and other items listed in the appendix of our press release, adjusted pretax margin for the fourth quarter was 5.9% compared to 14.4% in last year's fourth quarter. In our direct title business, domestic commercial revenues decreased $26 million, or 28%, primarily due to lower transaction volume and size. Average commercial fee per file was $15,100 compared to $19,700 for the prior year quarter. Domestic residential revenues decreased $94 million, or 32%, resulting from lower purchase and refinancing transactions. However, residential fee per file increased 45% to approximately $3,500 from $2,400 last year due to the higher purchase mix. Total international revenues were $16 million or 34% lower, primarily due to lower transaction volumes in our Canadian operations. Total open and closed orders declined by 48% and 51% respectively in the fourth quarter compared to last year, primarily due to the economic environment. Similar to our direct title revenues, revenues from our agency operations decreased $133 million or 30% compared to last year's quarter. The average agency remittance rate slightly decreased to 17.6% compared to 18% last year, primarily as a result of geographic mix. On title losses, total title loss expense in the fourth quarter decreased $12 million, or 36%, primarily driven by lower title revenues. As a percent of title revenues, the title loss expense was 3.7% compared to 4% in the fourth quarter 2021. For the full year 2022, our title losses were 3.8% of total revenues compared to 4.2% in 2021. Based on the current economic environment, including a possible recession, we expect 2023 title losses to be at least at 2021 levels. Regarding our real estate solutions segment. Fourth quarter pretax income decreased to $400,000 from $5 million last year, primarily due to lower transaction volumes resulting from the economic environment. Pretax margin for the fourth quarter was 0.7% compared to 6.1% in the fourth quarter 2021. After adjusting for purchasing tangible, amortization and other items listed in Appendix A, adjusted pretax margin for the segment was 12.8% in the fourth quarter, compared to 9.1% in the prior year quarter. Regarding operating expenses, which consist of employee and other operating costs, total operating expenses for the quarter decreased primarily due to lower cost related revenues and lower incentive compensation based on lower results. Employee cost, as a percent of operating revenues, were 30% in the fourth quarter, compared to 23% in the prior year quarter, primarily due to lower operating revenues. Other operating expenses, as a percent of operating revenues, were 23% and 22% in the fourth quarter 2022 and 2021 respectively. Excluding office closures, regulatory and litigation expenses, the other operating expense ratio was 21% in the fourth quarter 2022 compared to 23% in the prior year quarter. On other matters, our financial position is strong to support our customers' employees in the real estate market. Our total cash and investments as of December 31, 2022, are approximately $430 million in the regulatory requirements and we also have a fully available $200 million line of credit facility. Total stockholders' equity attributable to Stewart is $1.36 billion and our book value per share was approximately $50 which is 5% higher than December 31, 2021. Lastly, net cash provided by operations for the fourth quarter decreased to $25 million, compared to $133 million last year's quarter, primarily due to the lower net income in the fourth quarter of 2022. We're always grateful for it and inspire our customers and associates. We advocate everybody safety and prosperity and are confident in our supported real estate markets. I'll now turn the call back over to the operator for questions. Hi, guys. Good morning. If I strip out the one-timers here, I'm showing the personnel cost is down maybe a little bit less than half the rate of revenue. Other operating expense is down sharper than revenues, I know it's important that you guys retain staff to avoid that share loss. And I know, you've invested to garner share and so you don't want to lose that on the other side of the market. So my question here is the 4Q movement in revenues and expenses, by those line items? Is that kind of a preview of what's to come? You're basically cutting the other operating expense faster than the salaries? A little bit, John. So the reality is that we're lagging a little bit. So we've done on both lines, we've done a material amount of stuff in the past three quarters. But when I saw this gift, kind of -- I mentioned actually a little bit in last earnings call, at the end of the third and into the fourth. We took about $25 million with action thoughtfully targeted in surgical like, we took that old action in the fourth quarter. I will say that will be probably 20 personnel five open order. So the balance changes in shifts kind of during the year kind of what we did. And so that's what you saw. And obviously you can see in the restructuring result of some of that stuff, with the office closures and some of this relevant stuff. But -- so the balance has been kind of that going in. And so what we see obviously, the first quarter is our toughest quarter always, and the order count obviously, we see the open orders to announce -- we kind of know what the first quarter is going to be like in some ways. And so, I thought it was appropriate to -- but to your point, otherwise we are being thoughtful about this because in my view is that two or three terrible quarters, we're going to get through, but we built great capabilities across the organization. And I got to make sure, we can take advantage of the market when it comes back and we will. And I want to make sure the momentum stays and the still stay. And so, we're trying to be really quite thoughtful about it. And I feel very good about how the team is has managed through it. John, this is Dave. Just one other thing on the other expense line, whether it may be a difference in the percentages there. A lot of the real estate services has third-party data and other cost and so that varies, a lot more closely to revenue than maybe the employee one. That's a great point. And then on the implied direct title kind of fee per file, I'm going a little bit of trouble back into that. If I take just the direct revenue divided by the closed orders, I think it's about a 40% lift year-over-year. I know there's a mix shift there. But if I look at that sequentially, it's kind of a similar mix shift and that was a 10% move sequentially. I'm thinking maybe the kind of recent acquisitions might be skewing that, a bit. So maybe if you could talk to that, help explain that. Yes. I think for that kind of a difference, John, I mean you're probably talking to geographic mix and stuff like that. Those acquisitions, the reverse fee for file isn't quite that high. And the other one closed later in the year, so we wouldn't see any impact of that. So that sense is that's just more geographic mix shift. Yes, this is my show today guys. If you could touch on the BCHH business. That's something obviously, you guys acquired in late December. If you can maybe talk to how that impacts the P&L? I'm thinking that probably falls in the Real Estate Solutions segment. But then also if, you could talk -- give a little bit of color on the synergy potential and kind of how that complements the strategy. Yes, John that actually is a title operation, so it's going to be in the title segment. I think the way to think about that is their primary customer base is, sort of the institutional investor side to think about single-family rental, think about build and run that kind of thing. And so, I think much like we did with the reverse business with FNC, we're sort of looking for market segments where you can differentiate in the half growth potential with what's happening sort of economy with demographics and the like. And some people and I'm sure you've done some work on it and sort of size that sort of family [indiscernible] institutional or maybe 10% to 15% of the total real estate market at some point. And so this is one of the premier providers there. And it's just an opportunity to go after that market segment. Okay. And then this is somewhat related to BCHH, but if you could go back to FNC, I think you had talked about in the past that was maybe going to hit in other orders. And then maybe I think you said last quarter maybe that was purchased. Is it a mix now? If you could talk about the impact to other orders that was -- that picked up a good bit sequentially and then also on BCHH if that's going to hit on purchase or other? Yes. It's -- FNC is another. With BCHH I think we're going to need to take a hard look at that because some of that could be other and so it's purchased. And so there's probably going to be a bit of a split there. It looks like that is our allotted time for question-and-answer session. I will now turn the program back over to Fred. Hey, good morning. Just wanted to follow-up on the question from John on expenses. As the benefit of the cuts that you did this quarter flow through is there a way for us to kind of think about what the margin range is for next -- for 2023 assuming sort of the market remains roughly in line with consensus expectations? I mean, I think again, [indiscernible] in the first quarter is going to be much more indicated by the poor order intake in the fourth quarter. And I think after that we believe it's going to improve pretty materially. The personnel stuff we've done in my view gives us -- obviously at some now that we have excess capacity in the system still given where we are and what we're doing. And so that as the market improves, obviously, those ratios improved materially through the year, if you have the capacity steady state as the volume increase those. So we feel pretty good about where we are and we're going to end up. And if you look at this year's year in total it gives you -- like if you look at kind of how we manage the full 12 months even though it was a declining business and you look at the way that ratio is on an annual basis you get a pretty good sense of how we can manage the business, right? So I feel pretty good about what we've done and where we are. The one disadvantage we have as you know is our portfolio is a little different, but we don't have a bag of investment income that goes to the revenue line that changes these ratios. So if you look at us on a comparison basis, we've actually managed pretty well apples-to-apples. It's just that we have a little different portfolio that others have. And obviously the big guys were three times, four times our size there's a little bit of overhead at the top. But I would say, on a relative basis the actions we take in, the level of actions we've taken its very comparable actually. Just one other thing on that, I mean, I think the one thing to think about is even though we have taken all those actions, I think some of the ratio of relationships that you saw in the fourth quarter where maybe you guys were a little bit lower than actual on the employee side. Some of that may continue, because we don't get quite the dollar-for-dollar, but maybe things that. I think the first quarter will be very challenging just like the fourth, because we're at the bottom right here. And what's interesting though, that I'm sure you've seen it. What's exciting or -- orders are up for us to January 28% both in orders and commercial orders are up by 20% or something. But your first quarter has driven what the fourth quarter invest higher-quality. So while it's really good that lags, right? So I feel like we're kind of we're bouncing off the bottom here which is excellent. But the first quarter -- and the other thing about us, remember is we're more seasonal than all the other competitors, because we have the least in California and Florida, everybody else's huge positions in California. We don't. So we had a little bit of a double win, of that fourth quarter and a weakish first quarter because we're big into our [indiscernible]. We're big in [indiscernible]. So we have a little bit more of a seasonal lag. But again, I would say that, I feel like we call it right, because we can see the kind of the trends coming and things balancing a little bit back. So it's good. Okay. Great. That's very helpful. Thanks. And then, actually can you remind us what drives that non-controlling interest line. Now, it's come down very modestly, despite the big move down in income. Yes. Yes, that's where we don't have 100% ownership in some of our businesses. And it varies from period-to-period. So we had done a slight majority purchase like a couple of years ago and then we've been staging into that. And so that was helping that line. And then, we had a couple of new entities in the fourth quarter so that might have kicked the ratio off a little bit. But in general, we're trying to minimize the partial ownerships, but there's going to be periods of fluctuation. So a lot of that was historic we did at the beginning I would try to buy and get rid of that and have had some ownership but one of the recent acquisitions for real good strategic reasons we get a little bit of a ownership to lining incentives. So that's why it bounced a little bit, but I don't see that getting huge or any base that's not going to jump. Okay. Great. And actually just going to add one more, just the legal and regulatory settlement was that kind of just a one-off? Any color on that? Yeah. It was with New York on anti-poaching if you will. Everybody in the industry is tired kind of we have looked at is that it came out of actually I believe, our transaction with Fidelity and some service they did about anti-poaching. And so we settled I think in the third player to settle on that. We just want to get it behind us. But I think a one-off [indiscernible]. So just first with respect to the near term, it sounds like activity is picking up. You don't necessarily get those revenues completely in the first quarter but you certainly have the expenses of the processing those orders. So as it shapes up, it sounds like directionally we're looking underneath more compressed margins sequentially. And I guess my main question is do you think you can make money in the first quarter? Great question. I think it’s a very challenging quarter, right, definitely our most challenging quarter. I think we've -- again, we've done a pretty aggressive job managing all our expenses. But again, I think first quarter is the most challenge. Okay. And then investment income, it looks like you had a pretty good uptick this quarter after I've seen much movement beforehand. David, did you reposition the portfolio differently, or is this just a lagged impact from the – you know money yields going up? Yes, Geoff. It's David here. I mean a lot of that's just the benefit we're getting in the money markets right now. I mean you can get the 4%-plus in money markets where you weren't getting that. And so, it's just the earnings on the excess cash. I think we're keeping the investment portfolio relatively short on the duration side and over indexing our ways to grow the business but that's mainly the effect of money market rates. Yes. As you know, the short money is so good right now, right? It's a very unique situation. How quickly it moved and how good short money is. And again, it shows a little bit of our gap and that we don't have a depository for our escrow. So, our investments are going to come really from our investment portfolio and a little bit from the 10/31 business. But we don't get the benefit of our $2 billion of escrow but it is a very unique time right? It's kind of the best time. It's a little countercyclical in a tough market right now with investments. And my last question is on commercial. I think a lot of people think of it as like a normalization year for commercial, but probably that can be very painful when you're coming off about the results. But can you talk to -- beyond maybe what you think as normalization, what remained the hotspots? What are the areas that seem like they're actually starting to get impacted on an economic basis? What are the pluses and minuses relative to the normalized level? Yes. Again for us what's interesting is that, -- I think the first quarter is interesting because I think it's going to be slow in some places but the orders are up so the tail, I think the year is going to shape up pretty good. I think there's some geography stuff going on right now. So I think US is a little bit slower. But for us, what's interesting given our mix, energy is very strong. And so for us, we have some advantages in that what we're seeing is really nice pickup in growth in the energy sector. And obviously, there's the obvious sectors that are going to struggle a little bit more than others, like on office, is going to struggle. But in general, we think it's going to be a pretty good market in commercial. I do think the comparison last year's first quarter was really good. So I think the there's going to be a comparison in the first quarter. But I think overall for the year, it's going to be a solid commercial year. But there is the puts and takes to your point. There's no question.

EarningCall_248

Good morning, and welcome to the Fourth Quarter and Fiscal Year 2022 Pilgrim's Cries Earnings Conference Call and Webcast. All participants will be in listen only mode. [Operator Instructions] At the company's request, this call is being recorded. Please note that the slides referenced during today's call are available for download from the Investor Relations section of the company's website at www.pilgrim.com. After today's present patient, there will be an opportunity to ask questions. I would now like to turn the conference over to Andy Rojeski, Head of Strategy, Investor Relations and Net Zero Programs for Pilgrim's. Good morning, and thank you for joining us today as we review our operating and financial results for the fourth quarter and fiscal year ended on December 25, 2022. Yesterday afternoon, we issued a press release providing an overview of our financial performance for the quarter and the year, including a reconciliation of any non-GAAP measures we may discuss. A copy of the release is available on our website at ir.pilgrims.com, along with the slides for reference. These items also have been filed at Form 8-K and are available online at sec.gov. Fabio Sandri, President and Chief Executive Officer; and Matt Galvanoni, Chief Financial Officer, will present on today's call. Before we begin our prepared remarks, I would like to remind everyone of our safe harbor disclaimer. Today's call may contain certain forward-looking statements that represent our outlook and current expectations as of the date of this release. Other additional factors not anticipated by management may cause actual results to differ materially from those projected in these forward-looking statements. Further information concerning these factors have been provided in yesterday's press release and our regular filings with the SEC. Thank you, Andy. Good morning, everyone, and thank you for joining us today. For the fourth quarter of 2022, we reported net revenues of $4.13 billion. We had adjusted EBITDA of $63 million and our adjusted EBITDA margin was 1.5%. Our Q4 performance highlights the importance of our strategies of portfolio diversification, key customer focus and operational excellence to mitigate market volatility. In the United States, our Big Bird deboning business experienced some down supply and demand and a period of severely negative margins. However, our diversified offerings and key customer relationships in a more stable Case Ready and Small Bird business along with our Prepared Foods, partially compensated impact, generating breakeven EBITDA margins for the quarter. Our U.K. and Europe business has completed a variety of those steps to enhance our operational excellence through optimization of our manufacturing network and integration of back office activities. The team also continue to work in partnership with key customers to mitigate persistent inflationary challenges. These steps and future efforts have and will further enhance margins and reinforce the foundations to scale profitable growth for the next year and beyond. In Mexico, our business faces a challenging quarter given an imbalance supply and demand fundamentals, increased pressure for imported chicken and continued challenges to our live operations. Nonetheless, the team's strengthening its relationship with key customers and grew its branded presence in Prepared Foods by double digits. For the fiscal year, the net revenues were $17.5 billion, an 18.2% increase over last year. Adjusted EBITDA was $1.6 billion, up nearly 28% compared to 2021. Adjusted EBITDA margin for the year was 9.4% compared to 8.7% in 2021 and 6.5% for 2020. Throughout the year, we experienced remarkable inflationary headwinds and exceptional market volatility. We are pleased with how our team engaged with key customers in all regions to ensure superior service levels and mitigate inflationary costs. Our diversified portfolio of branded and private label offerings enable us to adjust to rapidly changing consumer needs throughout the year. When these efforts are combined with our improvement in operational excellence, we establish growth both in sales and adjusted EBITDA margins. Turning to feed ingredients. Recent USDA reports have lowered final production estimates for the 2022 U.S. corn and soybean crop. December 1st corn stocks were down 7% year-on-year, whereas soybean fell 4% versus the previous year. Demand estimates were also reduced in line with the production cuts. The demand rationing is primarily centered on the export market. U.S. corn exports in the first four months of the crop year were down approximately 30% versus last year. Corn for ethanol demand has also been lower in that time. U.S. soybean export demand estimates were reduced by USDA January WASDE report, absorbing most of the production cuts, but still netting tighter ending stocks from previous estimates and previous years. Crush margins remained strong and supporting ongoing crush industry expansion. Globally, a dry start to Argentina soy production has their crop estimate shrinking, but Brazil production is expected to help swell global soy stock. As for wheat, USDS general report increased 2022 and 2023 were carried out by 1 million metric tons. With steady exports from the Black Sea, Russia wheat exports are on pace to hit the expectation of 43 million tons, up 35% year-on-year. Australia's production estimates are nearly 40 million metric tons, making it the largest crop in the last 10 years. Which markets look to be well supplied and are providing alternatives to foreign demand. Looking ahead, increased area and production of Brazil crops, continued Black Sea flows and reduced input costs year-over-year offer a pathway to more comfortable supplies and lower prices. But with all the growing season weathers, risk is still ahead. As for U.S. chicken supply, ready to cook production increased 6% relative to Q4 of last year, driven by headcount and a higher average live weight. This was the continuation of trends beginning mid-year as the industry maintain improved hatchability, while continuing to increase egg sets relative to 2021. In addition to the growth in headcounts, industry live weights materially increased in Q4, growing on average 2% relative to last year as the industry continued to reduce its production of small birds and increased placements in all other ways. This approach was particularly dramatic for the Big Bird segment as production pounds increased 12% from Q4 of 2021, more than any other segment. This growth in chicken production was in response to positive supply and demand fundamentals throughout most of 2022 and expectations for a tighter competing protein landscape in Q4. However, both broiler and beef production outpaced USDA expectations, driving total protein availability much higher than anticipated in Q4. Combined with smaller demand growth, this additional availability contribute to increasing cold storage levels and applied pressure to commodity markets, resulting in severe weak seasonal pricing during the quarter. With weak market pricing persisting throughout November and December, the growth of industry egg sets slowed recently. As a result, the most recent USDA outlooks expect production to grow only 1.1% in 2023, a slow downward revision from previous forecasts. Given the current rate of production, USDA estimates and suggest a decline in the second half of the year. Chicken may also benefit from other dynamics throughout the global protein complex. Beef production is expected to decline 6% in 2023, given the extended herd liquidation over the past several years. Moreover, the rebuild may take longer than previous cycles in a relatively lower level of beef cows. As for pork, availability is expected to remain flat in U.S. as production -- as protein availability is expected to decline 0.4% from 2022 levels. These factors when combined with pressured consumer available income suggests chicken may be advantaged given its availability, affordability and flexibility. Similar to trends experienced in Q3, domestic chicken demand experienced stable volumes in the fourth quarter. The retail channel continued to grow dollar sales at double digit rate, while volume sales remained relatively flat. Fresh Chicken volume sales were most flat throughout the quarter as continued growth of dark meat volume sales were offset by volume declines from white meat and whole bird options. In the frozen department, growth in value added items both volume and dollar sales, highlighting the increase consumer demand for value added products, which has remained robust even in the face of elevated pricing. Meanwhile, frozen meet items have provided mild dollar growth, but a material lower volume sales. The retail deli department consistently provided double digit dollar growth throughout the year and maintained its strength in Q4. More recently, we are seeing additional promotional support throughout the store, which may stimulate further demand and provide price relief to consumers who have experienced elevated grocery bills throughout the year. The foodservice channel grew volume and dollar sales, but experienced varying results depending on some channel. In Foodservice Distribution, volume demands was able to improve incrementally as stable breast meat demand was offset by improvements in a variety of the other cuts, such as wings, tenders, strips and thigh. We are encouraged by the food channel as it continues to serve a large base of operators relative to the prior year and has shown increased willingness for promotional activity and limited time offers. The noncommercial sub channel continues to post significant year-over-year gains, driven by an increasing number of operators buying, as well as an improved buy rate. Both positive signs as the sub channel looks to reach and surpass 2019 pre-COVID levels of demand. Although the U.S. had the marketable market fluctuations throughout the year across chicken parts, each experienced relative similar demand dynamics albeit at different times. Throughout 2021 and early 2022 was a shortage of wings given exceptional demand from foodservice and the wing pricing approach or exceed five year highs for USDA. As a result, foodservice operated, adjusted their menus, everyday pricing and feature activity which incurred limited demand and support the return to historical market prices or below. Given the decline in extended period of relative low prices, now, more operators are purchasing wings to support their menus and the market is responding as USDA whole wing price has trended upward in January. As for boneless skinless breasts, it experienced significant burnout throughout the first half of the year and achieved an all-time high May for the USDA. These record values combined with the remarkably strong cutout on value and [indiscernible] additional production later in the year despite normal declines in seasonal demand and elevated grain pricing. In addition, many retailers opted to preserve innovative chicken pricing, reducing the spreads for boneless skinless breasts against ground beef and pork. Despite the spread compression, sales of boneless still grew 1% in volume compared to the same period last year. As for foodservice, commercial broadline volumes grew nearly 2% despite consumers increasingly shifting to at home consumption, given persistent inflation, whereas non-commercial grew at a robust 10%. Despite growth across both channels, the significant increase in supply along with suppressed demand drove a dramatic decline in prices through Q4. Given this pricing declines, retail foodservice customers have adjusted tactics, by increasing promotional activity to spur interest. From a production standpoint, data suggests lower growth rates throughout the second half of 2023 as egg sets and hatch [indiscernible] have dropped compared to prior quarters. Most recent pullet placements, which are down 8.6% over the past eight trailing months, also support USDA projections of slower growth rates through the second half of 2023. This combined factors suggest that better supply and demand balance from the mentors may be emerging as overall chicken pricing, including boneless, skinless breast have trended upward throughout January and February. U.S. broiler exports continue to outperform expectations in Q4 despite the continued findings of high path AI in U.S., Mexico, China, Angola and the Philippines. As we saw a big volume growth in Q4. Year-to-date, exports have reached all-time highs in both volume and values according to FDA [FAS-3] (ph) data. The markets were supported by progressively favorable exchange rates to U.S. dollar, high priced alternative proteins and the need to bolster terminal inventories as the holiday season approached. The industry continued to enjoy an increasing more fluid and exports supply chain, which we are expecting to continue throughout 2020. The prevalence of the high path AI in U.S. continue to be of great concern. The current outbreak, which began in February of 2022 is the largest we've ever seen. To date, we've seen 754 outbreaks in commercial and backyard flocks in 47 states with over 51 million birds being depopulated. In contrast to 2015, where we had outbreaks in only 15 states and just over 50 million birds killed or depopulated. As in 2015 the greatest impacts in this current break are being seen in commercial egg layers and in the turkey industry. Broiler have had some events, but the actual impact has not been material for most. Besides the Broilers industry commitment to biosecurity in our farms, the primary reason we are seeing much less in our shale harm is due to having regionalization agreements with most of our trading partners. Limiting high path AI bands to either the state, country or zone level. In 2015, we had 14 trading partners that place ban on the entire U.S. Today, we have only two markets that ban the entire US and they are of maturity large. We continue to make progress with our trading partners as they need for U.S. poultry considerable. For example, Taiwan, one of our largest trading partners recently moved to non-poultry refining ever disqualified for export. This new prompted the release of 10 state that are now eligible to export to Taiwan as of January 19 of this year. Our trading related with China remains a concern. To date, China has yet to follow our regionalization agreement, limiting ban to the state for 90 days post an outbreak. As for today, only four of the significant broiler producing exporting states continue to have access to the China market. We have facilities in these states and we are maximizing our opportunity on pause and bonding parts for China from Big Bird, Case Ready, Small Bird and fresh food service place. Our geographic and channel diversity in U.S. continues to benefit our business. China is a very important market for U.S. poultry and we're hopeful for a return to our regionalization agreement in the near future. We have seen some signs of positive momentum with more US poultry processing and cold storage being approved for export to China in recent months, as well as the elimination of the COVID related bans on some of our plants. After reaching all-time highs during the year, our U.S. business faces a challenged quarter giving despite severe decreases [indiscernible] values, historically elevated input costs and continued inflationary headwind. This impact were especially difficult for our commodity business as revenues and profitability fell significantly from prior quarters and last year to heavy losses. Despite Q4, the business grew both top and bottom line relative to 2021 given the record strength in cutout values in the first eight months of 2022. Moving forward, we'll continue to pursue improvements and operational excellence to mitigate weak market fundamentals. In Small Bird, our focus on growth with key customers, recapture of inflationary costs and recovery from the Mayfield tornado, drove improvements in both quarterly and annual basis in both net sales and profitability. Our case ready business continued to grow and while the market only increased 1% in Q4, our key customers’ volume increased by close to 6%. Prepared Foods improved profitability throughout the quarter and the year throughout enhanced mix and operational efficiency. Ban momentum continue as [indiscernible] revenues collectively grew by 53% compared to Q4 of 2021 and 70% compared to prior year through key customer partnerships, new distribution and innovation. Our presence in e-commerce continued to grow despite lapping significant gains in Q4 last year. Throughout 2022, our e-commerce business grew 48% and now accounts for over 23% of our branded sales. Despite short term challenges in the commodity segment, we remain confident in the prospects of the overall [USA] (ph) portfolio and continue to grow and add value to our business. To date, we've made significant progress on our Athens expansion in Georgia to support key customers growth. Similarly, our investment in operational excellence through automation in our new protein conversion plant remain on track. As for the UK and Europe business, consumers continue to face challenging inflationary headwinds. Given the relative affordability of chicken and pork, many are switching from other proteins into those categories. In addition, our balanced portfolio across retail and foodservice have provided a flexibility to serve customers as they transition among grocery outlets, QSR and local restaurants. Within retail, our branded offerings have maintained their market share despite recent price increases to mitigate inflation. Equally important, we have either maintained or secured new business through innovation and superior service. The team continued to work in partnership with key customers to mitigate costs and continued deflation, although significant process has been made throughout the quarter and past year, works remain as costs are expected to increase albeit not as pronounced throughout 2023. Our team also maintained its focus on operational excellence through implementation of a variety of previously announced steps to optimize our manufacturing network and integrate back office activities. To date, significant process -- progress has been made and future efforts are slated throughout 2023. These ongoing efforts will provide the necessary skill to future acquisitions, expand our portfolio of offerings and meet growth demands from key customers. As a result, we now have an enhanced portfolio to profitably grow our business. These efforts may be further aided by pork and chicken fundamentals as market pricing appears to be trending towards more sustainable levels. Similarly, a variety of input prices, such as natural gas and grain have seen to stabilize albeit at very elevated levels, although risk remains, early signs throughout the month of January are really promising. Turning to Mexico, the business experienced a challenging cost environment. Given continued issues in our live operations. From a demand standpoint, inflationary headwinds continue to pressure consumers, while growing domestic supply and growing imports from United States and Brazil arrived during the quarter. As a result, the market continued oversupply. Despite these challenges, the team leveraged our broader geographic portfolio to maintain our service levels, especially with key customers. The business also grew its branded presence by double digits, demonstrating its ability to resonate with customers and consumers despite a difficult environment. We are seeing significant improvements in the beginning of 2023, both at our operations and at the market and we remain confident in long term prospects for both our Prepared Foods and Fresh branded business given the growth potential in Mexico over the coming years. As such, we will continue our investments to drive profitable growth and operational excellence. We also continue to make significant progress on our sustainability efforts as we received external recognition for improvements across all facets of our ESG scores relative to last year. We have conducted a variety of greenhouse emissions assessments throughout our locations and identified multiple opportunities to improve our operations, simultaneously reducing our emissions and enhancing our operational efficiencies. Our hometown Strong and Better Futures program continue to be exceptionally well received. Throughout 2022, we have approved investments of $50 million in our communities and over 1,000 team members have signed up for our free educational programs. Thank you, Fabio, and good morning, everyone. For the fourth quarter of 2022, net revenues were $4.13 billion versus $4.04 billion a year ago, with adjusted EBITDA of $63 million and a margin of 1.5% compared to $317 million and a 7.8% margin in Q4 last year. In the quarter, we reported a GAAP net loss of $155 million versus GAAP net income of $37 million in 2021. In the fourth quarter, we recorded a discrete income tax charge of $39 million associated with the previously disclosed Mexican tax matter that dates back to 2009 and 2010, which drove our full year effective income tax rate to 27%. For the fiscal year, net revenues were $17.5 billion versus $14.8 billion in fiscal 2021, with adjusted EBITDA of $1.65 billion and a 9.4% margin compared to $1.29 billion and an 8.7% margin last year. We achieved $746 million of GAAP net income this year versus $31 million year ago. Adjusted EBITDA in the U.S. for Q4 came in at $15.8 million with adjusted EBITDA margin slightly above breakeven. Throughout the fourth quarter, commodity market pricing fell dramatically, below historical averages for most of the period. Our diversified U.S. product portfolio across bird sizes and brands, along with our key customer partnerships, partially mitigated the impact of declines in market pricing in our big bird business. For the fiscal year, our U.S. net revenues were $10.75 billion versus $9.11 billion in fiscal 2021 with adjusted EBITDA of $1.37 billion and a 12.7% margin compared to $896 million and a 9.8% margin last year. The U.S. had a tremendous full year 2022 demonstrating our ability to participate in the upsides of a strong commodity chicken pricing market during the first eight months of the year, while buffering the downside during significant market declines with the diversification of our U.S. portfolio. In Europe, adjusted EBITDA in Q4 was $62.9 million versus $24.7 million in 2021. Despite continued inflationary headwinds and input cost, the European business delivered its third consecutive quarterly improvement in adjusted EBITDA. For the full year, Europe's adjusted EBITDA was $168.7 million versus $137.8 million in 2021. Note, that the second half of this year's adjusted EBITDA in Europe nearly doubled the first half profitability. Also during the quarter, we completed ERP system integration of Food Masters. The overall back office integration of the UK and European business will continue into this year, which will provide the foundation for cost savings and further growth opportunities. Finally, Europe announced a number of restructuring programs pursued a further operational excellence. The manufacturing network optimization will reduce costs while still allowing the business to maintain sufficient capacity to grow with our key customers moving forward. We recognized approximately $30 million of restructuring charges in the fourth quarter and anticipate approximately $15 million to $20 million of additional charges in the first half of 2023 associated with these programs. Mexico lost $15.8 million in adjusted EBITDA in Q4 compared to making $27 million last year. However, Mexico made $113 million in adjusted EBITDA or 6.1% adjusted EBITDA margin for the full year. The second half of the year was dramatically impacted by bird disease in our live operations and a more unbalanced supply demand dynamic in the market. Our Mexican team did an excellent job in keeping our fill rates high with our key customers, while recovering from the live operations challenges. We've already seen significant improvement in financial results in January as the market has moved more in balance and our operational improvements have taken hold. Overall, our GAAP SG&A in the fourth quarter was significantly lower than prior year, primarily due to the legal settlements recorded in 2021. However, even on an adjusted basis, our SG&A still decrease year-over-year by approximately 9%. We finished the year spending $487 million in CapEx, this included approximately $20 million to rebuild the Mayfield, Kentucky hatchery following the 2020 -- December 2021 tornado, in which we have received insurance proceeds to cover. As we start off 2023, we plan to be even more judicious in our capital spending prioritization as the U.S. chicken market improves from the steep decline incurred in the fourth quarter. We will continue to prioritize our capital spending plans to ensure the safety of our team members, optimize our product mix and strengthen our partnerships with key customers. We reiterate our commitment to invest in strong ROCE projects that will improve our operational efficiencies through automation and tailor our operations to address key customer needs to further solidify competitive advantages for Pilgrim's. One example of this is our previously announced plan to expand our Athens, Georgia facility, which we anticipate completing early in the fourth quarter. Also, we've made good progress in our construction of our protein conversion plant in South Georgia, which we anticipate completing by the end of the year. As the timing of certain capital spend will depend on U.S. market conditions, we're expanding our range of estimated capital spending in 2023 to $400 million to $500 million. As conditions evolve, we may revise spending either way to accommodate our growth aspirations. However, we will remain disciplined in capital allocation. We have a strong balance sheet and we will continue to emphasize cash flows from operating activities, management of working capital and disciplined investment in high return projects. Our liquidity position remains very strong. At the end of the fiscal year, we had approximately $ 1.4 billion in total cash and available credit. We have no short term immediate cash requirements with our bonds maturing in 2027, 2031 and 2032 and our term loan maturing in 2026. Also in January, following the receipt of our investment grade credit rating in 2022, we announced the registered exchange offers for our 2031 and 2032 notes for all bondholders to exchange the restricted notes for new registered notes. Bondholders [indiscernible] February 15 to participate in the exchange. At the end of the fiscal year, our net debt was approximately $2.8 billion with a leverage ratio of less than 1.7 times the last 12 months adjusted EBITDA, which is below our target leverage ratio range of 2 times to 3 times. Net interest expense for the year was approximately $144 million. We anticipate our 2022 net interest expense to be approximately $155 million and $165 million in that range. As I mentioned previously, in the fourth quarter we recorded significant income tax charge in Mexico that drove our full year effective income tax rate to 27%. We anticipate our effective tax rate to be between 23% and 25% in 2023. We will continue to follow our disciplined approach to capital allocation as we look to profitably grow the company and we'll continue to align investment priorities with our overall strategies of portfolio diversification, focus on key customers, operational excellence and commitment to team member health and safety. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Ben Bienvenu of Stephens. Please go ahead. So I want to ask my first question relative to supply demand in the U.S. market. You highlighted the USDA's estimate revision downward yesterday for broiler production this year. You talked about the pullet placements pointing to production cuts as we get to kind of the summer and the second half of this year. Do you see those cuts staying intact through the balance of this year? And then on the demand side, are you seeing any indications of demand shift from beef and red meat to chicken yet given the value that it offers consumers? Yes. Thanks for the question, Ben. Yes, I think we need to always go back and look at our portfolio, right? And for Pilgrim's, we have the exposure to the commodity market and I’ve always mentioned that it's important for us. And we've captured the upside when the market was really strong in Q2 and Q3. But of course, we were exposed to that segment in Q4. What happened in Q4? I think we addressed a little bit on the prepared remarks is that, the expectations from USDA and from the market was that there was a significant reduction in availability of protein in the Q4, easing the lower herd of this. And also the AI impact on the turkey. With that and with the continued record profits on the commodity segment for chicken, the whole industry started placing more chicks that you can see on the chicks placement report from the USDA, around 4 million to 8 million a week more than previous year. We improved hatchability, but it was also a lot of more eggs. That came into the market during the Q4. What we saw in Q4 was an increase of close to 12% of availability of chicken on the big bird segment or the commodity segment. At the same time, we saw an increase of 8.5% availability in the case ready segment. And as we saw because of the higher availability than expected of beef and pork, the demand on the retail segment only increased by 1%, which means that all this 20% more production in the big bird and the case ready segment ended up in the foodservice segment and the commodity segment, which pressured the prices, Q2 levels that we've had never seen, which created a severe loss for the big bird business in Q4. Starting in November – mid-November, as you can see, and we mentioned on the weekly chick placements from USDA. We saw that a moderation of that increase to actually some reductions and that's what we are seeing coming as production now in Q1. So USDA numbers are expecting an increase of total chicken production in Q1 around 1%. We believe that the die is cast on that one. But if the market don't continue to improve, we expect some significant reductions in chicken production for the second semester. Okay. And any -- now that maybe the pig is through the [pipeline] (ph) on beef and we should start to see shortages, are you seeing demand shift from red meat to chicken yet? I imagine given where wholesale prices are for chicken, there's a lot of margin for retailer maybe to feature chicken with more frequency? Yes, that's exactly right. I think over the last quarter, we also see that the retailers kept the price of chicken elevated and that compressed the spread between chicken and ground -- especially ground beef and pork. So there was not a lot of promotional activity during the quarter, but we are seeing that changing right now. And I think yes, the retailers have a lot of availability to do promotional activity on chicken and we are seeing some trading now from beef to chicken. Also very important is the foodservice promotional activity that they start setting for the year around this time. If the USDA expectations is correct, we're going to see the reduction of 6% in production of beef and that should lead to higher prices and lower availability, which tends to favor LTOs and promotional activity on the foodservice on the -- for the Chicken production. So just along those lines and you've talked a lot about obviously what the industry is doing in terms of bringing some of the production down. But at the same time, you've talked about spending maybe some $400 million to $500 million in CapEx adding capacity. Can you help us reconcile what kind of capacity that actually is you're adding and how you think about this in light of the production cuts and potentially postponing some of the delivery of these capital expenditures just to kind of keep the market in balance? Sure, Ben. It's a great question. I think we need to also come back and tie to our strategy of key customers. We plan our production based on the sales to our key customers. I think one good example on the retail side is, while the industry only increased by 1% in Q4 on the retail side. we increased by 6% because the demand for our key customer continue to excel. So I think that is despite what the overall market is doing. Our key customers continue to grow. On the CapEx expectations on Athens, Georgia is a small bird plant to support foodservice sales to a key customer that continues to grow double digit every year. So despite the market decreasing on the small birds, we continue to see more and more demand for our products. I think the increase in the market was all in the big bird category and on the case ready category and that is where the market is oversupplied and that's where we are seeing some reduction in production because of the severe losses. If you look into our portfolio compared to the same period last year. Actually, the results on the food -- on the small bird, case ready and on prepared foods were actually higher than the same period last year. The other investments that we announced, it's one on South Georgia projects to increase our protein conversion offerings, which is margin enhancing for us instead of selling to the outside market, we'll produce pet food and we'll produce food feed grade from our own operations. Okay, perfect. And then within the international operations, you've highlighted it, obviously, in the U.K, you've seen sequential trends, but then you have restructuring in there. Is that something that cost that you expect to continue to occur in the first quarter? Or is that all done on the restructuring side? And when do you expect the benefits of the restructuring to kind of flow through into operating profit? Yes, there's some small impact in Q1 on restructuring, but basically what we did was to adapt all of our operations, again, to the key customers' demand. And we saw that we could operate at a higher efficiency and higher operating levels in [indiscernible] in the Prepared Foods segment. From three plants, we will reduce to two plants, that will operate at a higher level. There was some investment needed to operate on those two plants instead of three plants. And there are some write offs that we had to do because we were shutting down one plant. And we expect that now the network rationalization is ready and we don't expect any more changes on the upcoming quarters. Yes. Ben, it's Matt. We recorded about $30 million in the fourth quarter and I committed that we'll anticipate about $15 million to $20 million of charges in the first half of the year. It's just the timing of when you can record those under GAAP and when they're incurred. Hi. So I mean, I appreciate the challenges in the big bird market in the fourth quarter. And prices have improved a little bit, but still not a -- not a kind of great start in January necessarily. But can you help us think about the profitability, especially in tray pack where the demand growth -- there's a little bit oversupply there. Demand growth has been a little better, but nowhere near supply log pricing, a little bit lower year on year and how to think about the profitability in the non-commodity parts, the non- Pilgrim parts of your U.S. chicken segment year over year first quarter, first half with where the markets are laying out? Sure. And again, as I have mentioned, we have a well-diversified portfolio and we can capture the upside when the commodity markets are really strong and we protect the downside. And I think once again, we proved that on the Q4 and proved that throughout 2020 and 2021 that we can counter the big bird or commodity segment losses with the margins on the other business. What we are seeing on the small bird is the reduction of supply overall in the market. And we are seeing a continuous growth for Pilgrim's with our key customers, both on the fresh food side, on the eight piece and on the deli side. So our partnership with our retailers and promotions on the deli side has helped a lot the demand on the smaller. So we're seeing stable margins on the small bird. And that's how we build our portfolio. We also see significant growth on the small bird deboning segment, which is for foodservice and for QSR -- specific QSR, so we continue to see growth in there. On the case ready, again, after some really strong growth years in 2020, 2021 we see the demand continues to grow, but at a slower pace. I think we saw some new plants in that segment and those plants put a little bit of pressure on the market, especially if they don't have a key customer. Because as I mentioned, as the market grew only 1% in the fresh retail in 2022, our sales increased by 6% and that's all driven by helping our key customers to grow. So we are seeing also moderation on the growth on that segment. Now the big bird, once again, it is supply and demand driven. We expected the foodservice to grow in 2033 as the labor rate continued to be tight. I think we're seeing despite some inflationary impact into the consumer spending, we're seeing the consumers continue to go to the foodservice and the foodservice, especially the non-commercial growing at double digits, especially on the leisure and on the governmental side. And so, we are expecting some significant improvement in the big bird market for 2023. Of course, given the supply demand continuing imbalance and the supply in line with the 1.1% expected by USDA. Okay. That's helpful. Can I just have quickly on Mexico? Obviously, challenges in the fourth quarter. Just help us think about kind of where profitability is there today, understanding that the live nature of that market will move quite rapidly, but just help us think about kind of where we've exited fourth quarter and through January? Sure, yes. Mexico, we always mentioned that it is very volatile quarter over quarter, but stable year-over-year. I think in 2022, the market was in line with that expectation of very volatile, a very strong first quarter and a very weak second quarter. Especially because of increased production on the domestic side, but also after a very strong first quarter, there was a lot of exports from Brazil that arrived late in Q3 and beginning of Q4 and also with the weak commodity markets in U.S. There's a lot of meat that end up in Mexico. We have our operational issues as well on the live because of some diseases and because of that restructure our live operations. And we expect the benefit from that restructuring to start in Q2 this year. We already see the market returning to more amortization, let's say, in Mexico, with double digit margins during the quarter. Fabio, I was just wondering if you could help us understand a little bit. You have a slide in there -- in the deck around cold storage levels. Obviously, we can track those through USDA and breast meat does come to mind, it’s pretty much close to all-time highs of fresh meat in cold storage. And so, I understand that you're seeing the improvement and expecting a back half. But can you just help us frame from the 250 million pounds of breast meat in cold storage, like what is the actual timeframe of how that gets worked through? What have you seen historically when levels get that high? Does it take three months, six months? Just any kind of timeframe around that would be super helpful. Yes, we see that especially during Q4 with this increase in production on the commodity segment that the inventory progress [indiscernible] especially on the [IQF] (ph) segment. If you look into the retail numbers, the IQF demand during Q4 was down close to 10% and that increased those levels, but if you look at the overall level of breast meat into inventory, that is close to two weeks of production. So it's not a significant number that will take a long time to be absorbed into the marketplace. Got it. Okay. That's helpful. And then maybe just to follow-up on Ben's question around Europe. I think you guys are kind of in a unique position to give an update on just the European consumer, particularly in the U.K. like I think from the seat that we sit in, it was all doom and gloom headed into the fall? It seems like there's been a lot of headwinds that maybe have been alleviated on the consumer there. So maybe just give us an update on what you're seeing European consumer wise from a top line standpoint and then just expectations for the year in that segment? Yes, I think we saw some elevated levels of inflation getting into the consumer wallet during Q1 and Q2. And that was a reflection of the increase in utilities and in grocery throughout the entire Europe. We adjusted our operations. And in partnership with key customers, we did some innovation to reduce the cost of our products to mitigate that inflation. We're seeing that we have a portfolio that is very well positioned. We talk about this trade down in terms of proteins. We saw the consumption of red meat going down double digit in Europe overall. While the consumption of chicken and pork remains stable. So we have a portfolio that is well positioned to capture that trade down possibility from the consumer in U.K. Now, what we are seeing that inflation is moderating. I think utility costs are actually decreasing in UK right now, albeit from very high levels. And we are seeing some consumer confidence coming up from very low levels recently. So we have good expectation in terms of demand for chicken and pork for 2023. Also, our branded products after suffering a little bit from volume, from price increases they're reaching a level where the retailers are doing some special promotions and we are spending a little bit on trade that is helping the volumes on the branded segment. Thank you. Throughout 2022, we experienced unprecedented cost escalation, market volatility and consumer uncertainty. I would like to thank all of our key members for consistently leading our values and driving our strategy despite these challenging times. Their leadership mindset and relentless focus on becoming the best were instrumental in managing through these volatile times and driving strong results for the year. We have strengthening our foundation by driving branded growth, optimizing our manufacturing network, implementing synergies and further expanding our portfolio through innovation. We did that combined with our new leading attention on team member safety, rather quality and sustainability. We are well positioned to create a better future for our team members and achieve our aspiration of becoming the best and most expected company for 2023 and beyond. Thank you.

EarningCall_249

Good morning, ladies and gentlemen and welcome to the presentation for Huhtamaki's Results for Full Year 2022. My name is Kristian Tammela, VP of Investor Relations. As usual, we will kick off with a presentation by our President and CEO, Charles Heaulme, followed by our CFO, Thomas Geust. And at the end, we will wrap up with a Q&A session, and leave enough time for that. Before we start, I will remind you that we have an upcoming Capital Markets Day here in Espoo on March 28, and more details on that will be made available bit late. Thank you, Kristian. Good morning to all of you and thank you for joining this session about our results for the fourth quarter 2022 and the full year of 2022. I will as usual start with on our second page on an executive summary, giving you a few highlights of the year, and particularly of the quarter four, where we have delivered a strong performance in a continued volatile environment. Volatility continues, what we mean with this is that we have seen variations in input cost development. And it's at the same time softening of the demand in many categories and geographies. In this context, our financial performance has been strong and continuously strong in line with the rest of the year, with a comparable sales growth in the fourth quarter of 9% and 15% for the full year 2022. Our adjusted EBIT is growing 14% in the fourth quarter and 25% overall in 2022. Third point, our Board of Directors is proposing a dividend of €1 per share for the year 2022, and that represents a growth of 6%. I would continue about our strategy execution. We're in line with the rest of the year, we are continuing to invest for growth and we're continuing to invest for growth in two streams, as we explained in the previous quarters. One is about increasing capacity in line with the projected demand in our core categories. And at the same time, we are developing our technological capabilities in order to deliver more innovation. And our delivery of innovation, I'll come back to that more precisely – has been illustrated with the highlight of the announcement of Nespresso paper-based compostable coffee capsule that was back in November, I'm coming back to this point specifically. And then last point about the fourth quarter in the end of November or November 30th last year, the EU was announcing the proposal for the PPWR, the Packaging and Packaging Waste Regulation. This is a project, and as well I would like to give you a few more highlights on understanding. In the following page, as I suggested a couple of words on our investments in the next-generation innovation. And again, this has been very much illustrated. This is the big highlight of 2022 with the development of paper-based coffee capsules. This is an exclusive partnership with Nespresso, and it is based on our proprietary, high-precision technology derived from the molded fiber technology that we own since decades. But where we have developed over the last couple of years a very high-precision new technology that enables us to enter into completely new categories and this product is the best proof of it, launch is planned in the market as of the spring of this year. There has been as well in 2022, other what we call next-generation innovations, which have to do all with putting in the market more sustainable solutions and across geographies, so one was the so-called ICON. It's a recyclable paper, ice cream packaging that's in, particularly in the US market. And then under the brand name blueloop, which stands for all our sustainable innovation, we have the new paper lead that has been as well developed and announced during the year. The Push Tab blister lid which is dedicated to the pharmaceutical industry, and lastly, the OmniLock ultra paper flexible packaging solution, which is a new innovative solution, a high barrier based on paper, which brings a buyer up to the quality and specification that we would have with Alufoil, so that's as well breakthrough innovation for our future. Now, as I said before a couple of words on the evolution of the EU regulations when it comes to sustainability and particularly with the PPWR, the Packaging and Packaging Waste Regulation, which has been proposed at the end of November 2022. And what I would like to highlight is if you aspect maybe not going into many details, unless you want to that we discuss details then we can take it during the Q&A session. First point is about understanding the implications, what is going to require into our businesses, into our core businesses. Three main aspect. First of all the requirement for recyclability at scale, which I would say is very much in line with our strategy. I would like to remind that in our strategy and commitment to 2030, we say that we want to design all our products, 100% of our products for recyclability, reusability or compostability by 2030, so that is very much in line. Second point has to do in this, PPWR has to do with the amount of recyclable content or you should say recyclable plastic content for plastic packaging there will be requirements on how much needs to be recyclable content into the packaging. And then the third one is about the reusable systems that need to be implemented in the HoReCa channel. There has been some interpretation about how much could be the impact on our core business and we would like to offer some light on it and trying to be relatively precise, so that as to gauge the direct impact on particularly on the reuse system in the HoReCa business. Our estimation is that by 2030 if the legislation is going through and I come back later now in a few seconds to the regulation that is process if it comes through by 2030 that would mean a potential impact in the worse case scenario of 2% of our current net sales and by 2040 of 5%. So that's really on the long run. Some products are outside of scope. Now, I would like to step back a little bit and third point, offer maybe a little bit more of a holistic view on our business from a long-term perspective, I'm talking about the foodservice business that is the one directly in focus of this regulation to say that we see on the long run a net positive impact. And the reason for being relatively positive on the long-term is that number one, this QSR or HoReCa business is a market that is growing in a relatively fast growing market in Europe, in the world, but in Europe in specific. Second, there is a strong plastic substitution that is continuing to go on in Europe and that is favoring our portfolio, which is two-thirds paper based, fiber and paper based. So that's the second point, which is positive. Third point, there are aspects in this legislation, which as well play in favor of our portfolio and I will take one example the legislation still not being finalized as it is a proposal was proposing end of November that non-compostable coffee capsules would be banned within two years after implementation of the law, which is planned in 2024. So that together at the time of our innovation in fiber based, paper based compostable coffee capsules is actually a very positive impact to us. So net-net when we add the negatives and the positives, we believe it will be a net positive long-term development for our foodservice business. A few words without going too much into detail into the regulation process, there has been this project on the 30th of November 2022. In practice, it takes usually 18 to 24 month in the EU for such a project to come as a regulation. The deadline for -- in the mandate of the current EU commission is by end of April 2024 in order to have certainty about this regulation to come through the legislative currently that is mandate. Last point, which is important to note is that, there is a requirement -- a Quorum requirement in the EU in order to pass the legislation which is a 65% support for the legislation in order to pass. This 65% is not as number of countries, but as population countries -- population, representing 65% of the entire EU. So, I believe those couple of words were important to clarify a few aspects on regulations, but of course, open to more questions if you have in the next session of Q&A. Now jumping to slide six on our business performance for the fourth quarter and starting with the sales. The sales have been increasing 10% in the fourth quarter, and that's a comparable net sales growth of 9%. You may recall that, the 10% compares to previous quarter's reported net sales growth of 31% year-to-date end of September, a major difference being that we have -- we don't have acquisitive impact anymore, since we integrated the Elif company, as of end of September 2021. That's a major impact. And second, major impact is the divestment of our Russian operations end of September 2022. So that's why we have -- in Q4 a minus 3% from divestment and then a plus 5% from continued positive currency impact, particularly USD. When we look at the same sales performance, but on the full-year basis, we are increasing our sales by 25% in reported terms 2022. This is comparable net sales growth of 15%, 5% from the Elif acquisition, minus 1% from the divestment of the Russian operations and 6% from the currency impact, reaching €4.479 billion close to €4.5 billion. Looking on the next slide now, how this sales growth is broken down by our different business segment. We see that we have a growth that remains strong in most segments to the exception in Q4 of flexible packaging. The foodservice packaging is growing 15% in comparable terms in Q4, 18% in the full-year 2022. The demand has slightly softened during the quarter four, in line with other categories as well. North America growing comparable terms 14% full-year, but 10% in Q4, where we have seen increasing variations in the demand across the different categories in North America. In particular, the demand in retail was good. However, we've seen consumer goods particularly on the ice cream consumption suffering during the fourth quarter. The demand for flexible packaging softened in our key markets and particularly in emerging markets, explaining why Q4 is at a much lower growth pace than the rest of the year which is full year 14%. And then, Fiber Packaging being consistent over all the quarters of the year, with 17% growth in Q4 '15, comparable growth full-year. The demand for fiber-based egg packaging and food on-the-go product remains stable in most markets. Moving on to now the P&L items, key items with an improved adjusted EBIT despite the inflation underlying that, we have managed the pricing extremely well again in quarter four, overall, I would say during the full year 2022. We have improved the adjusted EBIT through sales growth and as well operational efficiency. We see that the EPS is actually growing faster than the EBIT. The EPS in Q4 is growing 20% and it's the same 20% on full year basis, reaching 2.49 compared to 2.07 in 2021. And that's despite or including the 2.49 including the fact that we have divested in Russia end of September. And then final maybe important comment is the growth of our CapEx by 19% in Q4, 23% in the full-year, in line with our comments given during the previous quarters investing for as I said before, two streams growth on our core business capacity and then innovation in new sustainable product solutions. Moving on to Page 10 on our sustainability dashboard, I may not go through all the different KPIs but highlighting that we have an overall good performance, which is in line with the trajectory that we have defined for ourselves with our 2030 commitments. Highlighting maybe three important and significant improvements. Number one, renewable electricity, which is almost at 25% in the end of 2022 and I would like to compare it to two things. First to where we were in 2021, 18%. So that's almost a 7% – seven points improvement. And that compares to a zero base in 2019, when we set our targets for 2030. So that's a really very good performance, which will continue because that doesn't account for the VPPA contracts that we have signed in both in US and in Europe to buy renewable electricity going forward those VPPA starting in 2023. So a very strong highlight on this. Second is the industrial waste recycled is as well jumping three points from last year from 72% to 75%. So we are on our trajectory to 90%, which is our commitment for 2030. And maybe last point, which is of high importance is the waste to landfill. We are committed to zero by 2030 and we have increased that waste of – we have reduced our waste to landfill sorry by five points from 2021 to 2022 to a level of 12%, 12.4% at the end of 2022. That's for the sustainability highlights. Now by business segments, a couple of words one page summary for each business segment, starting with Foodservice, where we see in the sales that the demand for foodservice packaging has softened during the last quarter of the year. The sales are increasing in our key markets, driven particularly by pricing. However, China remains the main negative deviation in 2022 both in quarter four and the full year. The raw material prices continued to increase in the fourth quarter. Our adjusted EBIT improved driven by pricing and an improved mix, particularly with the innovation product. And then our investments in the Foodservice segment are mostly directed to what I mentioned at the beginning new innovative solutions, particularly for smooth molded fiber applications dedicated to FMCG channel. That's for the Foodservice segment, where our margin for the full-year is at 9.5% 9.1% in Q4. North America now where the growth has softened as well in the last quarter of the year ending with a comparable net sales growth of 14% for the full year with a margin for the full year close to 12%. We sustained the 11.7% for the full year with a strong quarter four. The net sales growth has been in varying in the different categories as I mentioned before. There has been a continued broad-based cost inflation. And therefore, our sales growth is as well driven by pricing management. The volumes particularly in Q4 have been declining and that's particularly due to stock management. So it's not so much market-driven even though in some categories like consumer goods for ice cream, it is market-driven but a lot has been about across the value chain, cash flow management and therefore, reduction of stocks, which has had an impact on the demand of Q4 likely to be recovered soon. So that was a very important point for December. Our adjusted EBIT improved. We see a positive impact from the net sales growth through pricing, but as well the operational efficiency that has increased. However, at the same time, the sales mix was relatively unfavorable. So that's for North America where, again, our margin remains strong, at close to 12%. Flexible Packaging, page 14, has seen very challenging market conditions and then a one-off item that is impacting the Q4 profitability. Overall, the demand for the flexible packaging in our key markets has declined during the fourth quarter, particularly in Turkey, in Eastern Europe and in UAE. On the other hand, we have seen, in Southeast Asia, a growing demand. The net sales increase has been driven by pricing, but partly offset during the fourth quarter by the decrease in the volume. And then, most importantly, the adjusted EBIT that decreased during the last quarter of the year. This profitability was weighed on by unfavorable currency impact in local operations. And when I say local operations, I mean particularly Turkey and even more particularly Egypt, with the strong devaluation of the Egyptian pound during the fourth quarter. Additionally, we have had, of course, as I said before, the unfavorable volume development that has an impact, of course, on our capacity utilization and therefore, profitability. And then, there has been a one-off inventory adjustment, which had a negative impact that was in our Czech Republic unit, where we had to make a one-off inventory devaluation in Q4, but that doesn't have an impact as such on the full year, because that was an overvaluation of that inventory in up to Q3 of the year. That's for Flexible Packaging. And then, lastly, page 15, Fiber Packaging, where the overall demand, as I mentioned before, has remained stable in most markets and where pricing has been sustaining as well on sales growth and we have an adjusted EBIT that increased in line with the sales during the full-year. So we see comparable net sales growth of 15%, adjusted EBIT growth of 10% and ending at 11% for the full year on an EBIT margin level. That's for the fiber. Thank you, Charles. I will move into the detailed profit and loss, a lot of these items, as usual, addressed already by Charles, so I will try to focus on some items which might not have been mentioned so far. So, first of all, you recall that we had a strong year-to-date growth of 31% roughly on net sales and adjusted EBIT by the quarter three. Now, it's 25% on both the items, but you can also see here that we have a slight acceleration in the adjusted EBIT growth following really the operational performances and then, of course, the activities we have had around pricing, slightly negatively offset by the Russian divestment, so that impacting the earnings slightly negatively. On the top line I would highlight that in Q4, we do not anymore have in -- from a comparable point of view, the Elif acquisition. So we had Elif in already in Q4 and then the Russia business is out. So that's also a negative impact in Q4 on the comparison year-on-year. If we move on to the net financials, you can see that the net financials are heavily up. That's mainly driven, of course, by the higher net debt levels we have. The full-year numbers also keep in some offsetting items related to Russia and then some smaller -- some losses again also related to the Egyptian pound devaluation. On a run rate basis, we are not on the level where we see the quarter, it will be slightly lower. The tax rate is now on 19% ETR versus 23% previous year. That was further -- the ETR rate was further improved if we say that way from a legislation change in Turkey allowing for the decrease of deferred tax liabilities in Q4. So, that one basically taking down the tax rate to 19%. And then as we already reported in Q3, we also have the positive outcome of the divestment of Russia where which is considered -- is considered a tax-free gain. Then you also see that our adjusted numbers are slightly below the reported numbers on full-year level which means that we have more benefits in our ISC than negatives in the items affecting comparability. On the currency, the currency continues to trend positively, but if you look on the column to the right, you can see that already some of the currencies start to trend negatively and especially they start to trend negatively if you compare to the average rate year-to-date. So, the tailwind from currency is with current exchange rates expected to not be as favorable in 2023. Take US dollar as an example, we have an average rate of 105 closing rate of 106 and currently, I think the euro-USD is trending at 107. So, from that perspective, some of the tailwind from currency currently at least is gone. But if you look then on the EBIT to net sales here then I stick behind my earlier statements that what we see in the currency net sales EBIT is mainly translational impact. Net debt here we are down roughly €50 million compared to previous years at net debt levels. And from that perspective, the main contribution comes from the -- comes from the sale of Russia, which contributed strongly to our cash not cash flow not free cash flow, but on reduction of net debt. And then in the last quarter, we also had a positive cash flow, which I will come back to later. The loan maturities are at 3.2 years. Currently, fixed rates 63% roughly of the overall outstanding debt and there is a increase in the interest rate currently clearly versus previous year. On the cash flow, we have an acceleration as I said in Q4 in cash flow. If you take quarter-by-quarter, we had a negative of €46 million in the first quarter €20 million in the second quarter and then a positive €6 million in the third quarter. So, €71 million now continuing the positive trajectory and that main contribution comes from the operating working capital so release mainly of inventory. The CapEx is -- are on a high level €318 million, reflecting our strategic intentions of organically building capabilities in sustainable packaging solutions. So, expected high CapEx level and which is also expected to continue on a high level next year. On the asset side, the main movements are from the divestment of Russia currency impacts and then the CapExes and operating working capital. So nothing as such dramatic on the balance sheet side. The operating working capital here we have a strong improvement in Q4, although as you can see the operating working capital on a full year basis significantly increased by €144 million. But if we take only Q3, we released I think roughly €150 million of inventories in the quarter alone. Charles already highlighted that the dividend proposal by the Board is €1 per share that's 6% up to previous year with adjusted EPS up 20%. The €1 per share is equal to a payout ratio of 40% so on the lower bracket of our payout ratio corridor. The share price at the year-end was €32. So with the proposed dividend, the dividend yield would be 3.1%. And with this one, Huhtamaki would continue as a year-on-year increasing dividend payer. So it would be the 14th consecutive year and I think with that we are the stock listed company in Finland with the longest consecutive increased payout. So moving towards the long-term ambition and as Kristian already highlighted, there will be a CMD where we will be discussing both our strategic intent, but also obviously the ambitions. But if you look at our development towards the ambitions on the organic growth, we are clearly above here of course supported by the pricing side in order to offset the inflation. But also on the margin side, we have a dilution from the pricing. And the net debt to EBITDA you can see we are spot on in the middle of the ambition corridor with then also the dividend payout continuing to match the bracket of 40% to 50% payout. Good morning, everybody. Thanks for taking my questions. I have three questions please. First of all, I was wondering about Q4, whether you saw customer inventory destocking and in what segments what markets? We have seen many similar companies to you being burning quite significantly in Q4 from customer inventory destocking. Can you just comment a bit and give some color on that and what should we expect? Is that continuing now in the start of 2023? Then second question I have is related to 2023 outlook in North America. Saw a very strong performance again in 2022 much better than I think was expected by investors and analysts. Are there any reason why the performance should became weaker when it comes to margin and absolute level of earnings when we go into 2023 or is it quite worse and the momentum you're bringing from 2022 will continue in this year? And then final question I have is, if I look at the group this is a bit of a holistic question, I think a lot of people wonder I mean your EBIT is up 25% year-on-year, probably all-time high, in a year when we have quite significant input cost inflation, which normally is negative at least temporarily for a packaging converter like you. What is the reason that you have been able to perform so well in 2022? And are there any sort of things that then would not be sort of there in 2023 that we should understand, when input cost starts to go down? So, those three questions. Thanks. Thank you, Robin. Good morning. So, I suggest, I start on the question by question and then Thomas, you can complement if you like. So on your first question, Q4 whether we have seen a destocking from customers and what impact on 2023. Yes, we have seen some destocking. So it's not been across the board, but this has been -- if one statement can be made about market/customers on Q4, is markets have been softening in terms of demand, so consumers have been softening. Consequence customers have been reducing their order pattern. In addition, there has been a destocking, because the entire value chain in the different channels, has been suffering low cash flows during the first part of the year, and this has been an important aspect in Q4. Where have we seen it particularly? I can say, we've seen it particularly in the US, and specifically in December, which will have likely an impact early 2023; which month is January February, but in the first quarter. We have seen it in other segments, but it has been particularly in the US. Thomas, anything you would like to add? No, I think the story of managing stock is something, we all we included are focusing a lot on. With the disrupted value chain or supply chain in the start of the year, many companies stocked up. And I think, it's more a category management now going on, so people are very focused on which categories will be growing and which are assumed to be more flat. Thank you. So Robin, to your second question on North America specifically, strong performance. Yes, we are very happy with the performance in North America, and this is as well a reason why, we have decided in -- you have seen our CapEx is relatively high in 2022. Part of it is because we have decided to focus some investments, a significant part of investments on the core business in North America to scale that business, because we see the US market growing particularly in the categories, where we are very present whether it's tableware, retail tableware or food service as well as folding cartons. And so we are investing because we see that we are very confident, that the profitability level is sustainable, going up from where we are will be a challenge. Of course, we want to improve permanently, continuously, but that will be a challenge. Now to your question, which was more should we worry and maybe your question is in line with the ambition, that had been given three years ago, about North America being between 9% and 10% EBIT margin. Now that we have climbed to 11% to 12%, we want to sustain this at least. And we see 2023, as a tight year, it's going to be another very challenging year particularly if volumes would be softening. But otherwise, we are confident and we will come back of course -- Kristian and Thomas mentioned the CMD, on the 28th of March. We will come back of course, on this and particularly on our ambition in North America. Thomas, anything you want to add on this one? Then your last question. I did not answer your third question Robin, on the EBIT improvement of 25% in 2022 where you said, somewhat beyond expectations. So you had two questions, so basically, how did we manage the inflation, but as well is there anything -- if I understood your question, is there anything special in 2022, that we should be worrying that it's not there next year? The answer to that part is no. There is nothing exceptional that should affect that will not be present in the following period. Two things. There is something that is in 2022 that hopefully we will not see anymore and that's the huge disruption that we've seen in emerging markets; particularly Turkey, Egypt; that has been affecting particularly our flexible packaging margin. So when you consider this margin that is much below what it should be and what we believe it will be then actually this is a positive aspect looking forward to our company margin. Now to your question about the inflation. The inflation has been a two-year story. It didn't start in 2022. It started basically in January 2021 with at that time the recycled fiber. The thing that we have done very well are two things. Number one, being very early at I will not say anticipating, but reacting to the first signs of inflation that was back in January 2021 as a company. But being very early that has enabled us to be in full swing in the pricing management in 2022. The second aspect is to reinforce our pricing processes resources in order not to get any deviation in our margin during this inflationary environment. Hi. Good morning all. A few more questions I mean to the flexible part. We covered it already, but now Q4 was many times mentioned soft and you also discussed the reasons. But how should we think about the coming few quarters in flexibles, I mean, it's probably going to continue weak in the first half of 2023 or is there some reason why it could or should all of a sudden bounce back to the good levels at a fast pace? That's the first one. Good morning. Jutta. Thanks for the question. So flexibles, yes, indeed in Q4 is definitely disappointing as well for us. But the 4% or the 4.2% EBIT margin that we are reporting is not reflecting the business performance and the reason is two things. One is the one-off issue that is relatively significant during Q4 about this inventory devaluation we had to make on our Czech Republic operations. That is a one-off, we won't see it in the coming periods of course. Second, there has been this strong devaluation of the Egyptian pound in Q4, which as well has a strong impact. There may be more devaluations in some emerging markets, we don't know. We can't project what will be the development in Egypt and a few other countries. But if you exclude those two items our Q4 profitability in flexible would have been 7%. 7% is not our ambition. It's far below our 9% to 10% EBIT margin ambition for flexibles, and we believe we will get there over next couple of years. We'll come back to that by the way in the CMD obviously. So long story short, we believe that one variable is going to be, of course, extremely important in the first quarter and the coming quarter is the volume development in the market. So volume demand is going to be determining our profitability. Second this weak level will not remain because there is this two one-offs which shall not appear again in Q1 2023. Okay. Very clear. And my next question would have been that if you want to quantify the inventory effect, but then I guess you probably did it is at 7% excluding those two items. So India has improved actually during the fourth quarter. I would not tell you that we are where we want to be. But you understood in the previous quarters that we had a cycle down linked to which just started basically in March 2020 with this COVID crisis that has impacted tremendously this market. We are now starting -- we have been in Q4 starting, what I would call, the ramp-up to this turnaround, so we are pleased actually with our fourth quarter. We still need to improve to get to the ambition EBIT margin that we have and the growth as well, but the development is encouraging. We have very good management in place now, since -- in different functions, the first part of the year and then since August with our new GM. We are equipped. There is strong support from the group for Indian operations. And to give you one indication, the India EBIT year-over-year in the quarter four, has been doubling, which is a sign versus 2021 that we are on the right path. We're not there yet, but it has been a relatively positive quarter. Okay. Thank you. That's good to hear. Then your volumes, a two-fold question. First of all now, I really note that you did not have any volume growth in Q4, but you probably had a solid volume decline. So what percentage you would suggest we apply for that? And then the second part of the question is that, what's your volume estimate for 2023, either on a divisional or geographic level or even a group level number, just to get a feeling? I mean do you expect volumes to decrease probably past or perhaps even grow? Thank you. Thank you, Jutta. So, on the volume indeed, as I said, our reported sales growth, look much lower than in the previous quarters. But again, we have to account for all the non-comparable items and acquisitions and divestments are there to explain the most part of it. But in the comparable net sales growth, the Q4 is fully pricing. The volume was actually a mid single-digit negative, okay? So, when you read basically across the value chain of our different channels of customers, this is very much in line, meaning we do not have any analysis showing that we would be losing market share. That's one very important aspect. Second, however, because of stock management but as well because of the looming recession in many different geographies, volumes have been negative in the quarter four of 2022. If we put that back into the perspective of the full year, remember that we had a relatively positive first half of the year then quarter three in volume was kind of starting to slide down without being negative, now it's negative in Q4. So overall, we're talking about flat volumes for 2023 -- 2022, sorry. Your question about 2023, I mean this is a very complex one. If you want our expectations, what we are building upon our capacity as well is we believe that we will see growth in 2023. However, relatively modest and it's not going to be a consistent evolution across the year, meaning that we are considering that Q1, eventually Q2 could be difficult but then the second half more positive and more positive from two perspectives. One, we would believe that this looming recession would ease in the second part of the year. Second, we will have some of our capacity investments coming into play where we have excellent projection, because if I take for instance investments in the US with our egg packaging additional factory that we are installing, we know that the legislation is very timely for us for this investment since with the ban of EPS in -- of polystyrene packaging in one-third of the state. So, just to say that in the second semester, it's not only the macro economy we're counting with, it's our capacity. I would add a few things both to 2022 and maybe also for the 2023, and that's a general statement on -- when looking at what report are out there. It seems like the food related businesses, including also QSR are doing quite well in this recession environment. The discretionary spend so to some extent is lower, especially in the emerging markets nothing new with that one as such. But then, maybe one element also to throw into the game would be the opening/closing of some market Q4 2022 all-in-all we should consider China to have been a closed market as an example. So from that perspective, that's maybe one of the markets where we will see some activity going up. Okay. That's helpful. Thanks. And then, I think my last question for now. On the pricing side, I assume that you still see some cost inflation although some items are down maybe you could talk us through that. And then, on the pricing side, that links to that one do you think you will start lowering prices during 2023 and are your clients asking for that already and how do those talks go? Thanks. So this question is complex because, compared to 2022, where basically the year started with inflation across the board, across all input costs, 2023 is starting in a very diverse situation where we are. I'll start with a lower item. Transportation distribution costs are going down to relatively low-level, in line with the demand that is going down obviously. Raw materials there are many variations. Some raw materials have already started to go down -- are still at a high-level, but have started to go down; all the resins and polymers as well as recycled fiber for instance. Some are still going up paperboard for instance. And then, energy prices are potentially starting to decline, but at a very high-level. So all-in-all we are still considering a net plus inflation in 2023. And from that perspective, pricing in average shall not go down. But the work for the teams together with the customer is going to be sophisticated in considering these variations, as opposed to a period where everything was going up significantly. Yes. Good morning and thank you for taking my question. I love that the perhaps more important questions were already asked and answered, but still have a couple left. If I look at for Q4 the items affecting comparability, you have something there called environmental case €8.4 million and then also settlement and legal fees this is $1.5 million. Can you help us to understand what these are and what this relate to and also that are these now kind of done and dusted or is there more to come? Yeah. So yeah I will comment only on the environmental case as such, because the legal fees and other are more I would say stuff that you will see across the company every now and then. So nothing dramatic around the legal fees as such. The environmental case is related to an old site not anymore with us where the negotiations and discussions with authorities have advanced to a state where we feel confident in taking in a provision and the provision is reflecting our view of potential upcoming cost. Okay. That's very clear. And then perhaps on the sustainability side. You showed the sustainability dashboard on page 10 of the presentation and I was just wondering about the renewable or recycled materials. It's been, kind of, sliding down now for several years. If I compare now the 2022 figure to 2019, it's down more than two percentage points. So is this, kind of, just related to some sales mix type of things or why is it kind of going down when it should be going up? Yes. This performance item that indeed goes the reverse direction to our commitment to 2030 is purely portfolio related and when I say portfolio it has to do not with the fact that we grow faster in flexible packaging where most of the raw material is recycled or renewable. It's not the growth. It has to do with the acquisition of Elif in 2021, which of course has been integrated only one quarter in 2021 three more quarters in 2022. So when you -- if I understand that you looked at two years' gap when you compare to 2020 baseline obviously technically it's driving us down. This is a ratio that unless other changes in the portfolio in 2023 you will see going up thanks to all our investments, which are mainly in capacity for paper-based and fiber products. Namely to give you illustration so that we speak concretely; the egg packaging in the U.S., folding carton in the U.S, the smooth molded fiber investments in Europe for instance in the fiber leads or that replace plastic or coffee capsules as well. So all these should be over time increasing or reverting to a positive trend. Okay. Good. Thank you. And then perhaps you mentioned there in one of the questions that you have new capacity coming on during 2023 from investments. Is there any way to kind of quantify the impact in terms of sales for example from this additional capacity coming on during the year so that we would have a better sense of how much the capacity actually is that's coming on. Yes. So not guiding from the capacity point of view. You know the investments we have been communicating around first statement. All the investments we do are in order to allow us to grow in accordance with our ambition. So the type of investments we have in very rare cases bring on at one time a significant uptick so that you could all of a sudden calculate in a 10% increase, sort of, coming in from a single investment. It's incremental year-on-year. But the investments we have coming onstream in 2023 are related to a lot of the things we have been discussing here already. So smooth molded fiber the FMCG related investments both with regards to coffee pods and to folded carton and then the first volumes out of the Hammond factory in North America, but for sure not full scope. And then obviously on top of that we still also have markets where we will be getting some better asset utilization on already existing machinery. So it's a very mixed picture in 2023 from that perspective. Okay. Thank you. And then lastly on CapEx for 2023. Is there any, sort of, ndication that you would like to give out on what level the CapEx could potentially be in '23? Thank you all for your interest. We are now running out of time. If you still have any questions please feel free to reach out to us. But with that we like to thank you for your interest and wish you a very good day. Thank you.

EarningCall_250

Good morning, and thanks for joining this call to discuss Equity Commonwealth's results for the fourth quarter and full year ending December 31, 2022, and an update on the company. [Operator Instructions]. Please be advised that certain matters discussed during this conference call may constitute forward-looking statements within the meaning of federal securities laws. Please refer to the section titled Forward-Looking Statements in the press release issued yesterday as well as the section titled Risk Factors in the company's annual report on Form 10-K and quarterly reports on Form 10-Q for subsequent quarters for a discussion of factors that could cause the company's actual results to materially differ from any forward-looking statement. The company assumes no obligation to update or supplement any forward-looking statements made today. The company posts important information on its website at www.eqcre.com, including information that may be material. The portion of today's remarks on the company's quarterly and 2022 earnings also include certain non-GAAP financial measures. Please refer to yesterday's press release and supplemental containing the company's results for a reconciliation of these non-GAAP measures to the company's GAAP financial results. On the call today are David Helfand, President and CEO; David Weinberg, COO; and Bill Griffiths, CFO. With that, I will turn the call over to David Helfand. Thank you. Good morning, everyone. Thanks for joining us. I'll review the company's results for the quarter and the full year as well as provide an update on the capital markets and our investment activities. For the quarter, funds from operations were $0.21 per share compared to $0.01 per share in the fourth quarter 2021. Normalized FFO was also $0.21 per share compared to less than $0.01 per share a year ago. Growth in FFO and normalized FFO was largely the result of a $0.20 per share increase in interest and other income as well as a $0.01 per share increase in same-property cash NOI. Same-property NOI was up 14.5%, and same-property cash NOI was 14.9% higher compared to the fourth quarter 2021. For the full year 2022, funds from operations were $0.41 per share compared to a $0.06 per share loss for the full year 2021. Normalized FFO was $0.42 per share compared to $0.01 per share loss a year ago. The growth in FFO was largely the result of a $0.35 per share increase in interest and other income, a $0.06 per share decrease in G&A expense and a $0.05 per share increase in same-property NOI. The growth in normalized FFO was largely driven by a $0.36 per share increase in interest and other income and a $0.06 per share increase in same-property cash NOI. Same-property NOI was up 17%, and same-property cash NOI was 19.1% higher compared to the full year 2021. At our properties, leasing activity increased in the fourth quarter. We signed 76,000 square feet of new and renewal leases. Rents on those leases were flat on a cash basis and up 3.6% on a GAAP basis. For the year, we signed 205,000 square feet of new leases and renewals. Rents on those leases were flat on a cash basis and up 3.8% on a GAAP basis. As of December 31, leased occupancy was 82.8% and commenced occupancy was 78.7%. Turning to the balance sheet. We have approximately $2.6 billion of cash or $23 per share and no debt. Change in our cash balance during 2022 was driven by the Fed's rapid pace of interest rate increases, our common distribution in October and our share buyback activity. Interest rate on our cash increased substantially during the year from 22 basis points at year-end 2021 to 4.5% at year-end 2022. Currently, we're earning roughly 4.75% on our cash balances. In October, we paid a distribution to common shareholders totaling $111 million or $1 a share. With respect to share buybacks, during 2022, we repurchased 6.1 million shares at a cost of $155 million at an average dividend adjusted price of $24.64. Since we began buying back stock in 2015, we have repurchased a total of 22.4 million shares or roughly 17% of our float as of 2014 for an aggregate of $595 million or an average dividend adjusted price of $21.73. We currently have $120 million of remaining capacity under our existing share buyback authorization. Commercial real estate is in flux and is currently trying to find a bottom in terms of value. In certain sectors, property-level performance remains strong. Other sectors have weakening near-term fundamentals. Investment sales volumes are down across all asset classes as buyers and sellers sort out the impact of the rapid change in the cost of debt capital. Since spring, the cost of floating rate debt nearly tripled while the cost of fixed rate financing more than doubled. At EQC, we continue to work to identify a compelling investment opportunity and to create value at our existing assets. We remain hopeful that the challenges in the real estate credit markets might be a catalyst for a large deal. The team remains focused, disciplined and optimistic. And with that, I'll turn this over to questions for myself, Bill and David. Just maybe an update here on how the opportunity pipeline looks today versus maybe at the time of the last call, and at this point, where your return hurdles are and whether you think things are going to play out over the next couple of months here to where you guys can find something to deploy the capital up to? Craig, it's David Weinberg. Good questions. In terms of how it's changed since our last call, I'd say not much. Three months or so isn't enough to see much of a difference, especially at this time of year, if you're thinking about things slowing down end of 2022 and taking some time to ramp up in 2023, which is the normal rhythm in the investment market. In terms of kind of the opportunity set overall, hurdles, et cetera, as we've discussed many times, it's really about the risk we're taking. As we focus harder on 2 sectors, which we have discussed previously, industrial and single-family residential, even more so build-to-rent communities, and we just like those, given our history with manufacturer housing parts and the ability to work the real estate. With the long-term strong fundamentals in those sectors, we view those, absent a specific story, perhaps to be less risky and warrant a lower return as we invest, compared to, while we don't redline anything, it'd be a higher hurdle for us to invest in something like office, just given the challenges in that space and the uncertainty going forward. And then over the next few months, hard to know. We are having conversations with large real estate owners. People are struggling with pricing, and we also are looking to whether there's a specific catalyst in any given opportunity that might give rise to a transaction. Once again, we're not looking to steal real estate or -- for a distressed seller. We just want to get good real estate at a fair price. But unless there is some motivation, it may be difficult to find that deal in this environment. Okay. I know there's been some news in the market about 1 big NTR in particular who got a cash infusion, I mean, and we've seen them sell some assets here as they've bought some recent portfolios. I mean, is there any discussion with a seller like that where you guys can offer surety of close, immediate liquidity? And I get that pricing is still fluid here, but the property types that you guys are really interested in, I mean, I don't know that cap rates are going to gap out, given the capital chasing them and the long-term fundamentals. I mean, I'm just trying to figure out if this is a waiting for the best pitch down the middle that you guys can slam out a stadium or if it makes sense to start getting some singles and doubles. And then hopefully, as you have some momentum on capital deployment, some of those down-the-middle pitches come where you can put it out there but at least get the ball rolling, get the market knowing that you are serious about putting the capital out the door. That's -- I think that's well said. This is David Helfand, Craig. What I would say is we are not expecting or waiting for cap rates to gap out. And I think David mentioned it but I'll elaborate. We haven't been and aren't looking for some screamer of a deal that we can drive out of the park. What we've been looking for is the foundation for a long-term business with attractive fundamentals that can grow consistently, where we can grow the business to provide liquidity, to provide opportunity for our team. Look, we don't need to buy that at a cap rate way wide. We just need a catalyst, most likely the debt capital markets, to provide a catalyst to a seller who can't refinance, doesn't have the equity to refinance, needs someone to come in and help them solve a problem. So we're hopeful that happens. It may not happen. And of course, we're always weighing that against what the alternative is, which is returning the capital. I'd say our headcount has followed our assets base for the most part. But the investments team is pretty much intact from the beginning because that's where our energy has been devoted and has continued to be focused. And then just 1 last 1 for me. The rationale here to keep doing the buybacks when most of the value in the portfolio is sort of a cash bounce. It's kind of like you're using cash to buy the cash back. I mean, should we just -- why not just hold the cash at this point until you guys decide what the ultimate decision this year in terms of winding it down or deploying it? That's a -- it's a fair comment. I think it's easy to look back in retrospect. We're constantly evaluating the use of shareholder capital for a number of things, one of which is a buyback. And when we bought the stock back, we thought we believe we're buying back at a discount to value and creating accretion. The buybacks have not been a main focus of ours. They've been a tool we can use when there's an opportunity to create a little bit of value. But in general, we're not here to buy back the stock. We're here to find a deal and create a long-term business for our shareholders. [Operator Instructions]. There are no further questions at this time. I would like to turn the floor back over to David Helfand for any closing comments.

EarningCall_251

Hello, everyone, and welcome to GN's Full Year 2022 Conference Call following our release this morning. Thank you all for dialing in. It's great to have you on the call. Participating on the call today is Gitte Aabo, CEO of GN Hearing; Peter Karlstromer, CEO of GN Audio; Peter Gormsen, CFO of GN Store Nord; and myself, Anne Sofie Veyhe, Head of Investor Relations, Treasury and M&A. Today's presentation, which can be found on gn.com is expected to last about 20 minutes, after which, we'll turn to the Q&A session. Thank you, Anne Sofie. Good morning, everybody and thanks for joining our full year 2022 call today. Starting on slide four with a snapshot of the performance during the year. We delivered revenue of DKK18.7 billion, equal to an organic revenue growth of negative 3%, while revenue growth was 18%, driven by the acquisitions of SteelSeries and Lively, as well as impact from FX. The growth achieved during the year is a result of significant market share gains across soft markets. Adjusted EBITA ended at DKK2.2 billion, equal to an EBITA margin of 11.6%. Growth in adjusted EPS ended at negative 31%, which was in line with guidance. As a result of the earlier acquisitions, the adjusted leverage ended at 5.5 times at year-end. During the year, we have launched multiple new products across the company, which Gitte and Peter will get back to later. These great innovations will be an important aspect of our ambition for '23, where we once again expect to take market share in challenged markets. Moving to slide five and our capital structure review. GN continues to be operating in long-term attractive markets and we continue to gain share. As part of the strategy, we invested into the large and fast-growing premium gaming gear market by acquiring the best assets out there. The financing decision was made in an environment with low interest rates and financing widely available. Now the world has changed. 2022 was different than expected. We generated less cash than expected due to a volatile macroeconomic environment, supply chain effects with high inventory buildup and channel investments in Hearing. At the same time, financing markets have completely changed with high-interest rates and less capacity. After assessing alternatives, we have deemed it right to switch to equity financing and we intend to raise DKK7 billion in equity through a fully underwritten rights issue. This will take us back to our long-term target of between one times to two times net interest-bearing debt over EBITDA in the short term and provide the appropriate capital structure to underpin further growth and allow us to pursue our successful strategy to create shareholder value. Once we revert to target leverage, we will recommence dividend payments and share buybacks. Thank you, Peter, and hello to all of you. The key messages I want to leave you with are, we had a very strong ending to the year with significant market share gains across countries and channels, driven by the successful ReSound OMNIA. A few days ago, we announced five new form factors which will finalize the ReSound OMNIA family. We look forward to seeing these form factors built on our current momentum in 2023. Based on the strong complete product portfolio and strong momentum, we expect to deliver market share gains and margin expansion in 2023. Let's have a look at GN Hearing's Q4 2022 and full year 2022 financial performance. In the full year 2022, GN Hearing delivered slightly more than 5% organic revenue growth, while the emerging business delivered 73% organic revenue growth. Specifically, in Q4 2022, GN Hearing delivered 14% organic revenue growth as a result of the strong commercial execution across the company, driven by ReSound OMNIA. This growth was executed in a soft hearing aid market, which had a slightly negative growth in the fourth quarter. The gross margin was spot in line with 2021, although it was negatively impacted by elevated freight costs, increased material costs, offset by pricing initiatives and the successful launch of ReSound OMNIA. The EBITA margin in the core business ended at 13.1% in 2022, driven by operating leverage with a strong focus on the cost base. The EBITA in the emerging business was negative DKK187 million in 2022, but saw sequential improvement in the quarters throughout the year, and it is well in line with the financial guidance as a result of the stronger-than-expected revenue growth. Non-recurring items of DKK146 million was booked in the year, primarily related to the previously announced supply chain initiatives. Free cash flow ended at negative DKK377 million for the year, reflected the earnings level as well as investments into future growth opportunities and strategic financial support agreements. Let's move to slide eight and some more color on the regional development in the fourth quarter. Beginning with North America, we delivered 11% organic revenue growth in the quarter in soft market conditions. We experienced very strong performance across the independent market VA and Costco, primarily driven by the successful ReSound OMNIA launch. To build on the short-term opportunities in Costco, following the removal of KS10, we launched an updated version of Jabra Enhance Pro in the beginning of November, building on the technology platform of ReSound OMNIA. Moving onto Europe, we delivered an organic revenue growth of 8% in the quarter, with particularly strong performance in Germany. In our Rest of World region, the organic revenue growth ended at 22% compared to Q4 2021, driven by strong growth in among others Japan, despite market headwinds we experienced, especially in China. Moving to slide nine and our finalization of the ReSound OMNIA family. I have to say that I'm very impressed by the development in our R&D department during the last one and a half year. Today, we can proudly say that we have finalized the ReSound OMNIA family. We have achieved this only six months after releasing the platform, which is much quicker than traditionally. This is a great testament to our R&D organization being back to where it has been for more than a decade. ReSound Omnia was originally launched in the RIC form factor in August 2022, and has shown impressive results in the last part of 2022. We're now finalizing the family and are introducing five new form factors. A new Mini RIE product that is smaller than the current RIC product on the market, and then two new rechargeable BTEs and two new custom-made products, one rechargeable ITE and one battery version of CIC. The new form factors will include the same benefits with 150% improvement in the ability to understand speech in a noisy environment. ReSound OMNIA is the only product in the industry utilizing a beamformer which improve hearing in noise without feeling cut-off. The products will be commercially available by the end of February. Let's move to slide 10 and the expected market development. Overall, we expect to see a soft, but resilient hearing aid market in 2023. In 2022, we saw very strong market growth in the beginning of the year but with some softness by the end of the year. As a result, we estimate low single-digit positive volume growth in 2022. The demand for hearing aid product remains intact, fueled by demographic changes. Let me just reemphasize that we're still not seeing any significant trade down. We continue to see the Managed Care segment growing faster than the private market in the US, but trading down as such has not been material. First time users continue to enter the hearing aid journey, but we do see some postponement in the replacement purchases for returning customers. Based on the above factors, we expect a low single-digit positive volume growth in 2023, and we continue to expect low single-digit negative ASP growth in 2023. To conclude, we expect flat to slightly positive market value growth in 2023, which is softer than normal and also slightly more uncertain. The long-term dynamics are fully intact and we don't see any reason why the market will not return to historical trends when the current softness is behind us. Let's turn to slide 11 and our financial guidance for the year. Our ReSound OMNIA product family has shown success in the end of 2022, and with the expanded and finalized product family, we expect this momentum to continue into 2023. Due to the market growth expectations, we expect an organic revenue growth in the range of 2% to 8% for 2023, driven by continued market share gains and catering for the uncertainties for a slightly lower-than-expected market growth. Consequently, the guidance range is slightly wider than normally. As for the adjusted EBITDA margin, in the core business, we expect it to be in the range of 13% to 16%, naturally correlated with the organic growth. EBITA for the emerging business is expected to land at minus DKK150 million for the year, improving year-over-year. We expect to have non-recurring items of around minus DKK150 million, which is driven by the supply chain initiatives and rightsizing of the organization. For the guidance, we are assuming the following for Q1. The organic revenue growth is assumed to be within our full year guidance range of 2% to 8%, driven by continued strong commercial execution and market share gains from ReSound OMNIA in an assumed soft market. Specifically for the Q1 EBITA margin in the core business, we assume a mid single-digit level excluding non-recurring items due to the revenue seasonality and launch costs. Thank you, Gitte, and hello to you all. Let me start by saying how happy I am to be joining GN. The first month in the role has shown me what a strong organization I'm joining, and I'm excited about the future we can create together. I am new to many of you, so let me start with saying a few words about myself. The last 25 years I worked in technology and telecom around the world. The first part of my career I was with McKinsey & Company, working with technology and telecom in the Nordics, Europe, US, Middle East, Africa and Asia. From there, I joined Cisco Systems, a leading significant parts of the European business, in close collaboration with global R&D teams. Most recently, I'm coming from Securitas, where the European business going through a major technology transformation. As of the month, I'm the proud new leader of GN Audio, and working hard to make a seamless transition from Rene and together with our teams to build a strong and exciting future for GN as stakeholders. I'm now pleased to take you through GN Audio's results for '22. Moving to slide 13. 2022 was a weak year in our markets and we experienced significant supply chain disruptions, in particularly in the beginning of the year, combined with the reduced consumer sentiment negatively impacting our consumers SteelSeries businesses. In this challenging environment, Enterprise gained market share and delivered a slightly positive organic revenue growth on top of the record high base from '21. For Q4 specifically, Enterprise delivered 9% organic growth, which is a testimony to our strong product lineup and commercial execution. In 2022, the gaming equipment market saw a significant year-over-year decline. In this challenging market, SteelSeries performed strongly, resulting in a significant market share gains, driven by product introductions and strong commercial execution. For the year, SteelSeries delivered an organic revenue growth of negative 19%. We saw an improvement of trends throughout the year, which is encouraging. Consumer was especially affected by current market conditions and delivered negative 35% organic revenue growth in '22. In total, GN Audio delivered negative 7% organic revenue growth in '22, which is in line with our updated guidance. The GN Audio adjusted gross margins ended at 43.5%, which is 7.1 percentage point below '21. This can mainly be explained by four factors. The first one is FX with a significantly appreciating US dollar, driving a negative impact of around 4% on our business compared to last year. Secondly, within elevated freight and material cost, thirdly, the consolidation effects from SteelSeries; and lastly, there were significant promotional activities more than normal in the consumer-oriented businesses due to the high inventory situation across the industry. To partly counter this, we put in place pricing initiatives in beginning of '22 and have also increased prices in January '23. The adjusted EBITA margin ended at 14.1%, reflecting the gross margin decline as well as offsetting effects from OpEx management. Non-recurring cost amounted to negative DKK460 million, primarily related to the SteelSeries acquisition and cost reduction measures across our business. The free cash flow ended at negative DKK91 million. We had a healthy operational cash flow, but were negatively impacted by significant inventory buildup. Excluding working capital changes, GN Audio would have generated free cash flow of almost DKK1 billion in '22. Let's move to slide 14, and give it a little bit more color on the regional development in Q4, which excludes SteelSeries. In North America, we delivered negative organic revenue growth of 18%, explained by a significant decline in consumer business and enterprise, which experienced softness in the quarter, which was also the case in the third quarter. In Europe, we delivered solid organic revenue growth of 9%, driven by a strong enterprise performance across countries and customers. In the Rest of World, the growth was negative 9%, explained by growing enterprise business and a significant decline in consumer business. Let's move to slide 15 and SteelSeries. In 2022, SteelSeries had an organic revenue growth of minus 19% in soft market conditions, although there were some improvements in the market and our performance towards the end of the year. During '22, we progressed well with integration of SteelSeries. We have now integrated supply chain and back-office functions and recently also combined our sales teams of SteelSeries with our consumer teams into a joint organization. During the integration process, we've been able to retain key personnel on all levels. During the year, SteelSeries had launched several products that have been very well received by the market. A result of this great work by our teams, we estimate that we gained approximately 2% of market share in core product categories. Let's move to slide 16 and the supply chain. We have used this traffic-like system throughout '22 to illustrate the different impacts on our supply chain. As you can see, the situation has improved. Today, the negative effect on our business is limited. With what we know today, we believe the supply chain will have no significant negative impact on our business in '23. We continue monitoring this situation carefully and will respond as needed. Let's move to page 17 and product launches. In 2022, GN Audio launched several new products showcasing our strong innovation. New products were launched across Enterprise, SteelSeries, as well as consumer. A week ago, we also announced the newest innovation to our PanaCast portfolio with a fully integrated video voice system utilizing the technology-leading PanaCast camera. This new very well-received product is based on Android, which will help us to significantly increase the addressable market for us in video collaboration. With our current product portfolio and roadmap for '23, we believe that we are well-positioned to continue gaining market share in particular in enterprise and gaming. With that, let's turn to page 18 and an overview of the market long and short-term. First of all, we want to stress that we believe the long-term growth drivers for our markets are fully intact. The world continues to adapt to a hybrid work environment and enterprises globally are continuously deploying productivity-enhancing tools. While we experienced strong growth during the pandemic, we believe there is significant more growth to expect in the future as we continue to demand a better quality of experience in communication. We're also confident in the long-term growth and attractiveness of the dynamic and growing gaming market. In short, we expect our markets to return to healthy growth when the current macroeconomic uncertainties behind us. At this time though, we experienced significant economic uncertainties which is also affecting enterprise and consumer demand. No one knows exactly how '23 will develop. In the last few months, there has been several revisions downwards and we expect the market growth in all categories. As we plan for '23, we're doing this on different market scenarios which also affect the guidance which we are giving. Moving to slide 19 on our guidance for '23. Given the economic uncertainties, we are giving a broader guidance range than what we have done in the past. As for revenue, we expect GN Audio to deliver an organic growth rate from negative 10% to positive 5% in '23. The guided range for the adjusted EBITDA margin is between 10% and 15%. The broad span is primarily driven by the difference in business volume. In all market scenarios, we assume that we will continue to gain market share, so the variance in performance is driven by variances in macroeconomic conditions affecting the growth of the markets where we operate. We expect the non-recurring items to be around minus DKK150 million for '23, as a result of cost reduction measures in relationship to the rightsizing of our organization. Our business is robust and well managed. Across our guidance range and scenarios, we expect to generate a positive cash flow for '23. For the guidance, we are assuming the following for Q1. Organic revenue growth is assumed to be a negative due to the current challenged market conditions. In Q1, the EBITDA margin, we assume a mid single-digit level excluding non-recurring items due to the top line development and investment in growth opportunities. Thank you, Peter. At Group level, GN delivered minus 3% organic revenue growth and an adjusted EBITA margin of 11.6. Total non-recurring items were minus DKK624 million, driven by the SteelSeries integration, the cost reduction measures as well as the supply chain initiatives in GN Hearing. Adjusted leverage ended at 5.5 times by the end of '22. To reflect accounting practices across PS [ph] we are now also including our FSA balance which is our launch to the [indiscernible] in our net interest bearing debt definition. Even when excluding this accounting policy change we still saw a sequential decrease in our leverage. Let's move to slide 22 and our cash flow for '22. GN Hearings negative cash flow was driven by impact from emerging business, supply chain initiatives, as well as strategic financial support opportunities to fuel future growth. GN Audios negative cash flow was driven by the lower adjusted EBITA, as well as non-recurring items. Although there was a high level of operating profit, the working capital was negatively impacted by inventory build up. Excluding changes in working capital and GN Audio, the free cash flow would have been close to DKK1 billion. We do have a very strong focus on cash flow generation in '23 and beyond, a key lever to drive strong positive cash flow in '23 is related to the inventory situation, which is expected to improve, especially in the second half of '23. Let's move to slide '23 and a recap of the financial guidance. Peter and Gitte already went through the guidance across Hearing and GN Audio, so I will keep this short. To conclude, for group level, we now expect organic revenue growth of between negative 6% to plus 6%, which will result in further market share gains in expected challenged market conditions. EBITA in other is expected to be around minus DKK200 million. Thank you to Gitte Aabo, Peter Karlstromer and Peter Gormsen for the updates. With that, I'm handing over to the operator for Q&A. Please limit your questions to two at a time. Yes. Martin Parkhøi, SEB. Just two questions both for Peter, but not the same Peter. I'll start with one on GN Audio. And I struggled a little bit, but your comment on the first quarter and - for the first quarter last year was extremely very weak. It served as the absolutely niches comparator going into 2023 for various reasons. So if you are not able to grow in the first quarter, how should we be convinced that minus 10% for the full year is actually at risk? So for example, for last year, you saw a 32% growth from Q1 to Q2, so is this downside actually higher than - worse than minus 10% for the full year with the market challenges you see in the first quarter. And then to the other Peter. I think it's to you and maybe to the Board, but they are probably not here, but that's a question. Do you feel comfortable that the authorization for the right issues will actually be granted at the Annual General Meeting or do you see other alternatives? And related to that question, have you been approached with other alternatives than the right issue to bring down the debt? Okay. Thank you for the question. Let us start with your first one. And as you rightly highlight, Q1 is relatively low compared to what we like it to be. What we see are a few things. I mean around the world, there's been a lot of uncertainties and probably increasing uncertainties, and also that is affecting the markets where we operate somewhere. And we believe that in particular in the US side of the market, we see a bit of a weaker demand at this point in time. So this guidance for Q1 should be exactly to clarify that we see a relatively slow start in the year. We expect though that the growth will improve over the year and we're also launching several products throughout the year that will support this growth of our business throughout the coming quarters. But you're right, Q1 is a bit lower than what would be normal. Hey, Martin, on your other question, this is Peter. So of course, maybe to take a step back. So we have of course looked at all the available options - alternatives that we had at GN. We have had many thorough discussions among management with Board, with Peter coming in, so we've spent a lot of time analyzing this. It's clearly - it's a big decision. So do we feel comfortable? We firmly believe this will put GN in a better position and puts us in a better position from where we can grow and we can continue taking share. I think that's the short answer. Of course, we understand there is different reactions when you come with a cap - decide to do a capital raise. I think we've done our homework. I think we are very well prepared. And again, we feel it's the right decision to put you in a much better position after a general meeting. Yeah, thank you. Also two questions from my side going over to the Peters in the group. Peter on Audio, I'm sorry, I'm coming back to the question that Martin has posted. If we have to look at a negative growth in Audio in Q1, and it's being the softest quarter throughout 2022, how are - what triggers are there that are going to accelerate growth or what visibility do you have that the markets are actually going to improve meaningfully throughout the year? That's my first question. And my second question, Peter, you talked about getting the leverage in the short term to one times to two times EBITA [ph] range. Could you maybe tell us what you consider being short-term in that within this year or is it something in the next 12 months? Thank you. Okay, let me start here. I mean, as I mentioned, we believe the range for the year is negative 10% to plus 5, and part of that range we are factoring in a slow start in Q1. What we see at this point in time is market related. It's not our ability to operate in the market. And we believe that even with this kind of conditions we see now, we should be able to meet our guidance. What we also should say is that towards the latter part of the year, we are introducing several new products which we also think will help our business to grow compared to the market. Okay. So you're not expecting the market to improve meaningfully towards the end of the year. It's more the product launches that you have? Yes. We believe if the market stays stable to the level where they are now, we believe we'll be able to operate within the guidance we have given. Hey Maja, this is Peter. So on the short-term, I don't think we will disclose exactly what month this will happen, but I think our definition of short-term is probably in the range of six to 18 months. Thank you very much. Good morning, everyone. I have two as well. First one, GN Hearing. A tough 2022 year, let's say, for the profitability. So it's surprising to see the guidance range starting at 13%, which basically implies no margin expansion despite you have - you will have organic growth and you have all product cost [indiscernible] like in 2023. So could you just walk us through the different scenario when building growth for the guidance? And then just on like capital structure, and you have some assets that you could sell so, for example, like the Portuguese retail one, you have some building, et cetera. Is it still expected to be - like to be sold at some point? Thank you. So, thank you for the question. And let me just underline that as we move into '23, we actually see the strong momentum of ReSound OMNIA continue, so that's obviously really nice. Nevertheless, we do see - as I spoke to a softer hearing aid market as such than we would see normally, and especially we expect that to be the case in the beginning of the year. So we expect overall the hearing aid market to be flat to around 1% value growth which is lower than normal. And that is the basis for our broader guidance range that we see this uncertainty. So when we guide to 2% to 8% on the top line, it's definitely reflecting strong momentum and that we're taking market share. Now in terms of the profitability, obviously, if we end up in the lower part of the range, say 2%, that has an impact on the profitability because although we've taken a number of measures to improve cost, we also expect our cost base this year to be impacted by inflation. And also we have important launches coming into the picture, and we've already announced the five new form factors in the ReSound OMNIA family. And obviously, there will be more coming into the market later in the year. So I think those are the key building blocks, are we at the upper end of our guidance in terms of top line, it will obviously positively impact our profitability. And if I may just before we jump to the second question. Do you confirm the sort of mid-term guidance for more than 20% EBITDA margin for this business after the 2022 being around like 13% in - like probably this year not exceeding mid-teens? I mean is it still a target for you? And if yes, just if you have sort of timeline in mind just when you would be able to get back to this level? The answer is yes. And we have communicated to the market that will be back at 20% in '24, and that still stands. Hey Julien, on your second question. So the short answer is yes, we certainly still are very focused on generating cash, and that also includes looking at our balance sheet and divesting some of our non-core assets, including the Portuguese retailer that you mentioned. Hi. Guys, good morning and thank you for taking my questions. I have two please as well. My first one is just on the cash flow structure, and Peter I was hoping you could talk to why you think one to two times and then why target leverage with this business. I think if we look at lot of your peers they do operate a fair bit [ph] higher degree of leverage between two, sometimes even after three times. I am just curious why you had decided in that review that one to two is the right number and therefore proposing the size of the right issue that you are? And then I have a follow up after that. But maybe we should start there. Hey, Veronika. Yeah, so as I said before, we spent a fair amount of time discussing this and we certainly reached a conclusion that we are quite convinced that one to two is the right level for DN. We want to go back becoming an investment grade company with all the benefit that entails. We are looking at high uncertainty, low visibility at the moment. So – but we are quite firm on coming back to a strong position with a strong capital structure that will allow us the flexibility we need to continue growing this business. Okay. And I guess, if you – presumably you get into that corridor already this year, with the free cash flow generation there would be further deleveraging. Should we read your comments on the buyback a set of [indiscernible] regime assuming you see that path for further deleveraging? I think exactly as we said, when we are back in that corridor then we also plan to go back doing both dividends and share buyback. Okay. And then if I could ask a quick one to Gitte and then I'll jump back into the queue. Gitte, just curious if you can comment on the impressive growth that you see in Hearing, where exactly its coming from the type of customers, the type of geographies, where you feel that you are winning? And maybe if you can just briefly state what the growth would have been excluding the contribution from Costco just so we have a flavour the independent? Yeah. So thank you for that question, Veronika. And maybe let me start with the first one. I mean, even if we exclude Costco where we obviously had extraordinary tailwind, we will still be growing double-digit organically in the fourth quarter. And I think one of the things that makes me really pleased with our performance in the fourth quarter, is that its across the board, its across all regions and countries and so on, we really see strong performance and it is due to the fact that we've launched ReSound OMNIA which is well received in the markets. Hi. Good morning and thank you for taking my questions. I have two as well. First one for Peter Karlstromer. And can you talk a bit about your expectations for the year for the SteelSeries business here in 2023? And how we should think about that relative to the overall guidance for GN Audio? And then my second question is to Peter Gormsen. And on the rights issue and specifically why the decision to wait till the AGM to conduct this – to get this approval? And as I read your articles of association and the Board should be authorized to do this straight away. And can you clarify this matter? Thank you. Okay. Let me start here. So If I take us back to what we've seen in the last year, I mean the gaming market has been in a [Technical Difficulty] a strong portfolio, that's been further strengthened during the year. In terms of expectations for next year, I mean of course also here we have scenarios depending on the market development, but generally, we're very positive to this SteelSeries trajectory. So we do expect that in several of our scenarios, certain top brand, SteelSeries will deliver growth in 2023. Hey Christian, this is Peter. So I think as I said before, reaching a conclusion after doing a rights issue is a fairly big decision. And I think we wanted to make sure that we had a very thorough review that we had all the necessary collaboration dialog with both Board and among management and advisors on getting to this conclusion. So that you don't do overnight and of course, we did not want to jump to any conclusions. We are certainly aware of what opportunities we had, but we feel this is the right process and we're at a very good price. Then these things take time, so - but I think we are exactly where we wanted to be. Thank you for taking my questions. I have two, please. Firstly, so following up on the cap structure and given the size that was higher than many investors had expected. Can you comment on whether you have any indication from large shareholders that they would participate in the rights issue? So that's the first question. And then secondly on Hearing. Could you talk about whether you're seeing any initial signs of spillover volume deferrals from the US into Europe, and any initial signs of down-trading in Europe, and whether you consider this to be a meaningful risk in 2023? So, Hassan. This is Peter. So of course, we have talked with our largest shareholders, and of course, they need to have a chance also read through this, but I think the feedback is largely positive. Yeah. And in terms of how the European market is developing compared to the US market, I think it's important to keep in mind that a big part of the European market is actually covered by reimbursement. So in many European countries, you will see hearing aids being subsidized by the governments. So we actually continue to see slightly stronger growth in the European market than what you see in the US market. Nevertheless, in Q4, when we look at the global hearing aid market, we saw a slightly negative development. That's very helpful. And if I can follow up just on the overall reception to OTC and whether you're seeing a younger demographic entering the market and expectations for your contribution this year, that'd be helpful. Yeah. So bearing in mind that it is obviously still early days in the OTC market. What we've seen is that we actually do reach a younger audience. Based on the data point we have so far, the average consumer in the OTC market is 59 years of age, whereas what we see in the traditional core business, people are in the mid-70's. So we're definitely reaching people earlier on in the hearing aid journey. On how that market will develop this year, I expect it to continue to grow, but obviously, it's still early days and it's something that we follow very closely. I think we're well-positioned to compete in the market. Thanks for taking the question. Maybe just one on Audio first. Obviously, the guidance is quite conservative given the start in the comp. I just wondered if you're seeing any weakness on the Enterprise side. Obviously, the consumer side was very weak last year. Wondering if you are seeing any actual softness in the Enterprise side? And then on the consumer side, you cited promotional activity in the fourth quarter. Just wondering how much the consumer declined in the fourth quarter, and how much of that was due to price/that promotional activity? Thanks. Thank you. I mean already last year, we saw a very uncertain market and continue to see that into the year, but we feel very good about our Enterprise product portfolio and our ability to gain share. Specifically what we've seen more market related is a bit of weaker development in the markets in the US than what we've seen in the rest of the world. But we saw a tendency of that also last year and managed to in total grow the business. So there are a few different dynamics going on that we're monitoring carefully. But in all the scenarios, we are very confident in our position and our portfolio. In terms of consumer, I think, help me, Peter, you have the numbers. Yeah. So Q4, we were down 38%, so you have both volume decline and to your point, David, also, price decline. Yeah. And just a further comment on that. And the split with that, I don't think we have that - I mean exactly in a way we can communicate, but certainly a combination of a relatively weak market and significant promotions, in particular towards the end of the year. Okay. I think you mentioned in the presentation, there is not a lot of visibility, but in terms of on the consumer side, what stock levels were like, and the inventory levels were like in the channel? I mean our assessment is that towards end of the year, they were relatively normal to what we have seen before. Good morning. Thanks a lot for taking my questions. The first one is on the planned equity raise. So if everything goes through, how are your plans to buy back debt? So it's fixed debt and it's the bigger maturities due in more than 1.5 years. So if you buy them back and they're trading still significantly below par, it means that at the end, you buy and back this strong premium or whether respected premiums or even today's bond prices or do you react quite positive? So how to think on it conceptually? Do you want to buy back earlier, or do you just want to remain the cash on your balance sheet until the debt is due? Second question is on GN Hearing, also on the organic growth guidance. So the range is just very broad. You made your comments, there is a higher level on certain kind of market. But given your current strong momentum in Q4, also what you have said regarding the first month. So for me, it appears like the lower end appears as a very adverse case scenario. So how do you derive to this lower end? How is this possible regarding your assumptions? Thank you. Hey Oliver, this is Peter. I think generally, we do not disclose those level of details. But of course, we're certainly aware that there is a possibility to tend the bonds, but those [indiscernible] not at a point of place to share with you today. But we certainly look at those opportunities. So thanks for the question. I admit that it is a broader range then we would normally guide on the Hearing aid market and it is reflecting that we've seen more volatility, although in an overall perspectives and market is still resilient. But we did come out – of Q4 where the market actually had negative growth. So I guess its on the mindset. And then bear in mind, that if the market we forecast that for the full year to grow 1%. So even if we grow twice to 2% we are growing twice the market. Obviously, as you allude to, we are in a very strong position and I expect us to take significant market share. Hi, good morning. Thanks for taking the question. First question is, you are thinking about the capital structure, is there sort of pressure from your distributor or enterprise customer about the capital structure, which is forcing you to factor that in at a lower level or is that a non-issue? I am so sorry about that. Is there a pressure from your customers or distributors, which is forcing you to factor that in that one to two times leverage or is that complete non-issue? Second question is that, when you think of the medium term strategy, you are raising a lot of capital from shareholders, you are raising a lot of capital from shareholders, what strategic direction changes are you thiking about? So this is Peter. On your question about pressure from customers, distributors and key area [ph] its a non-issue there, not duration. I mean, I take that for Audio at least. I mean, we feel good about the strategic direction we having, which is clearly to build on our core capabilities on Audio and Video and with those operate in markets where we find long term attractiveness. And as an example now, we investing to build a strong position in the Video market. So no major change as related to the capital increase here. No, I think that - I mean we definitely want to continue our strategy of being a growth company and operating in segments where we have the position to take market share. And I think we've demonstrated that throughout '22, and we want to continue doing that. So I think it's more the capital raise. It's a different way of refinancing the acquisition of SteelSeries. That's all. No change in strategy. Hi. Thanks for taking my first question. Its [indiscernible] from HSBC here. My first question is regarding your mid-term target. Of course, the lead from '23 to your mid-term targets become larger. So can you maybe give some color about how you see the projection from '23 levels to your midterm targets? And whether in terms of timing, mid-term changes or whether that stays around '25 as well? And a second, in terms of the inventory, the inventory progression was quite striking. So could you give some color about the dynamics whether the required inventory became more because of the reactions requirements of your supply chain, or whether is more to it? Thanks. Yeah. So as I've already mentioned, we did confirm our mid-term target, and also our target of being back at 20% EBITA margin in 2024. And the building blocks towards that is clearly revenue growth. That is an important part of that. I think we saw the impact of revenue growth in the fourth quarter. We obviously get a lot of leverage from that having had a strong focus on controlling our OpEx. In addition to that, we have both last year and this year, taking a number of measures to improve our supply chain and ensure that our products are designed for manufacturer. And as we move into '24, a larger part of our portfolio will be designed for manufacturer, which means that we should see improvement in our gross profit. So those are the main building blocks if you like, efficiency in our supply chain and top line growth. So here for Audio. I mean, first, on the mid-term targets, I mean we were almost there a little while ago, and now we're working through some market uncertainties. We are confident we will soon be back there again as those uncertainties in the market have cleared. So reconfirming that guidance. When it comes to the inventory, as many players in the industry, we have an elevated inventory situation on GN Audio. A few messages on that. First, it's of good quality. So we are convinced that we'll be able to take use of this inventory in a good way. And of course, there are many different components to the inventory situation. But if you look on the parts that we would like to reduce also gradually getting reduced. But of course, we still need to have a healthy inventory because we're also launching new products in particular here in the first half of this year. So I think it's fair to say that we probably will see a somewhat increase in the inventory now in Q1 and then throughout the year, we should see a decrease from that position. Okay, that's very helpful. Just to confirm in terms of the lead in margins, 20% you're expecting '24 and from '23 [ph] levels, seems that was quite a jump. That's what I wanted to check. And how we expect that progression? Whether you expect already towards the second half, the great difference first half or not. So that was just maybe as a follow-up, but thank you otherwise. The clarifications are helpful. Yes. Let me be clear. I confirm that we will be back at 20% in '24, and the two big building blocks are further efficiencies in our supply chain leading to a lower cost per unit and the other thing is top line growth. Yes. Martin Parkhøi, SEB And Gitte, stay on the 20% because I just wanted to confirm one thing is that this year you guided 13% to 16% on an adjusted EBITA margin for the core business. In the mid-term, is that 20%? It says only say 20% on an EBITA margin. So can you confirm that, that means that there will be no further one-off costs in 2024 as we have seen for the last couple of years? And then second, maybe Gitte you can elaborate a little bit on the market development because now we have seen you delivering 14% in the fourth quarter. We saw a statement earlier this week, delivering 11% in wholesale growth of [indiscernible], we saw WSA only 1%, but still we haven't seen any proper warning from Cenova [ph] yet. So how can you actually come to the very soft development because it's actually not what we have seen in reported numbers yet? So Martin, on the two questions, first off, are we planning non-recurring items in '24? No. On the last one on the market development, when I speak about the market development, it's actually based on numbers coming out of EHIMA [ph] so the manufacturing organization where we all share our volume numbers. So assuming that everybody has reported in the units correctly, this is actually the picture we see. Obviously, we cannot see the individual manufacturers, but we can see how the full market has developed. So those are the numbers I'm referring to when I talk about a negative growth in Q4. Yeah. Thanks for taking my follow up. Gitte, for you this time. We are seeing a good growth acceleration in Q4. And hearing yet what was quite surprising is the soft number that came out of VA where you were not able to hold on to the market share gains that you reported in November. So can you kind of share your thoughts what is wrong in the VA channel or why you don't seem to make any progress in the channel? And if you think that is going to change going forward and why? And then just a very short one, in your presentation, you were talking about the emerging business, and you said it's primarily JabraEnhance.com. I mean what is it you mean like primarily? Is there anything else that is in there? Thank you. Yeah. So let me take the last one first on the emerging business. I mean it is JabraEnhance.com, so sorry for not being more specific. I mean I'm struggling to remember if we book anything else under that, but I mean the top line growth and everything is JabraEnhance.com and nothing else, just to be clear. How are you accounting for that? Is there - because at some point in time, you said the OTC will be booked into traditional business. The JabraEnhance just sounds sort of traditional. How do we think about that going forward? Is it going to be split or one way or the other or... So I guess at some point maybe in '24 later on, I guess emerging business will become a normal business. But for now, everything that is sold through JabraEnhance.com is considered emerging business. And in terms of VA, obviously, I was also disappointed to see that our market share dropped in December, and obviously, that is not our ambition. We've seen such a strong reception of ReSound OMNIA in the rest of the market across countries for that matter. So obviously, also we expect to see a different development in VA. There's no secret that we've been struggling in VA for a while, and I guess it just takes time to rebuild the confidence in that channel. I am however confident that we will also see our share in VA develop positively over the year. First of all, I was very impressed by your European organic growth of 9% when we consider France at its high base from the reimbursement change and considering the fact German market was down high-single-digit according to the business. So can you - I know it's probably most likely only half - can you give us a bit more flesh on the bone? I mean, probably your market position in Germany and France is probably much lower than your other bigger rivals. That's the first question. And the second one is that has the battery feature helped you to gain market share with ReSound OMNIA [ph] as the bigger competitor decided not to have battery functions in this premium product which I hear from audiologists, it's a niche nowadays, but still quite important for some patients which don't have rechargeable possibility every day. So was battery as well a driver for your [Technical Difficulty] a lot of patients? So thank you for that question. And let me start with the battery question. I mean, obviously, we do see part of our sales of ReSound OMNIA in the rig version and the battery version. But I mean, by far, the majority is rechargeability. It's like more than 80% of our sales are rechargeability. So it adds, but I wouldn't say it's a key driver. It is just that ReSound OMNIA is really great reliable product. I think that's the reason why it's so successful. In terms of Europe, I mean, you are right in the sense that France has a lower weight in our all European business because our market share in France is relatively low. So although the French market didn't develop as much, it didn't have the same impact. And then we actually still managed to grow and take market share. And the same actually applies for Germany, if you like that, again, our market share in Germany is still relatively low. So we have a good condition to grow from and ReSound OMNIA was actually really well received in the German market, which led us to have very strong growth numbers in Germany. Hey, thank you. And could you provide a little bit of cash flow guidance for this year? And I know that interest rates of course would have an effect there, so I mean, if we assume that you don't do the rights issue this year, so where would you expect your free cash flow to arrive for this year? And what would be your assumptions for your net working capital development for this year? Thank you. Hey, Niels. This is Peter. So if we start with the net working capital, I think Peter spoke into it a little bit. We will see a phasing where we publish here some modest increase here in Q1. Bear in mind, we have a lot of components coming in still with some unfortunate up to 15 months lead time. But then we expect to bring it down again. I think we did manage to bring it down in Q4 already, so that worked well and we're continuing being extremely focused on doing that. As Peter said, we have the right products. It's healthy components and we can certainly sell those. But we're also very focused on not doing heavy discounting to get them out in a very fast way. So I think we balance it in the right fashion. That inventory reduction will drive a positive cash. And I think I've earlier shared that we actually work on having up to a DKK1 billion positive impact from net working capital. So, of course, all the uncertainty, we're looking into can spoil that a little bit, but we're still working towards that aim for the year. We don't guide specifically on cash flow, but as Peter said, we certainly plan to deliver positive cash in '23. And on that line, where would you expect your net financial cost in the P&L to arrive for this year, say, provided that you don't do a rights issue? I think normally we assume around a little less than DKK100 million per quarter, so that would be around DKK400 million for the full year on the financial items. Hi, thank you. Two follow-ups. First on Audio. So you have this ample slide where basically all the supply chain station is or has normalized in Q4. Enterprise was up by 9% in the quarter. Was there any impact from pent-up demand in the quarter? So would you say that the underlying development was below your reported results? Second question also on the Enterprise development in North America, so it's kind of weak. Is it more about reluctancy of customers to buy equipment or do you see some down trading in the market? Okay, thank you for those questions. First on the supply chain, and the answer is no. The growth in Q4 was not related to pent-up demand, so we see that as unrelated to that. Then your question on the US. I think it's more the uncertainty, which is probably quite broad-based in a macroeconomic environment is driving to longer decision cycles and hesitations to purchase. So we see a slowdown in particular the US market at this point in time. Thanks for squeezing me at the end for a follow up. I just wanted to clarify the comment around the Audio guide for the year, both for the year and for the first quarter. I guess, Peter, maybe just remind us. Within the range that you've given, if we just look at the midpoint of it, what is that assuming for enterprise versus consumer, and maybe the same comment for the first quarter? I'm just a bit surprised by some of the comments that you've made on the call. I just want to make sure we all understand it properly. Thank you. When we made those scenarios, I mean it's been in different of course expectations and different segments. So it's hard to call it out in exact way that you're asking the question. But I can say, I mean, as I tried to highlight in the intro here, I mean, we feel very good about the portfolio for enterprise and gaming where we continue to gain market share. And I think you should see that, that's probably where we see the strength in the portfolio at this point in time. So generally, you should expect those markets to perform well. But again, they of course operate in markets that are impacted by the macroeconomic situation. I will say that is driven primarily by the US market. And I would say that, that part is at this point in time also in the enterprise market in the US. Thank you very much, operator, and thank you, everybody, on the call. We appreciate your time today, and we will see you on the road. Thank you very much.

EarningCall_252

Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter 2022 HII 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. [Operator Instructions] I would now like to hand the call over to Christie Thomas, Vice President of Investor Relations. Ms. Thomas, you may begin. Thank you, Operator, and good morning, everyone. Welcome to the HII fourth quarter 2022 earnings conference call. Joining me today on the call are Chris Kastner, our President and CEO; and Tom Stiehle, Executive Vice President and CFO. As a reminder, any forward-looking statements made today that are not historical facts are considered our company’s estimates or expectations and are forward-looking statements made pursuant to the Safe Harbor provision of federal securities law. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially. For additional information regarding factors that could cause actual results to differ materially from expected results, refer to our SEC filings. Also in their remarks today, Chris and Tom will refer to certain non-GAAP measures. For reconciliations of these metrics to the comparable GAAP measures, please see the slides that accompany this webcast, which are available on the Investor Relations website at ir.hii.com. Thanks, Christie. Good morning, everyone. And thank you for joining us on our fourth quarter 2022 earnings call. First, I would like to thank the entire HII team for a solid year and express my gratitude for their outstanding contributions throughout 2022. It was through their dedication and commitment that we were able to deliver results that demonstrated consistent performance in a pretty tough economic environment. Now let’s turn to the highlights for the quarter and the year on page three of the presentation. In 2022, we reported record sales of $10.7 billion, net earnings of $579 million and free cash flow of $494 million. The demand for our products continues to drive a tremendous backlog of $47 billion and we grew sales and earnings across all three of our segments in 2022, setting the foundation for continued growth in 2023 and beyond. At Ingalls, in the fourth quarter, we delivered DDG 123 Lenah Sutcliffe Higbee and completed builder’s trials on DDG 125 Jack H. Lucas, the first Flight III ship just one quarter after DDG 123 completed her trials. Our DDG 51 team also started fabrication on DDG 133 Sam Nunn. In our amphibious ship product line, we were awarded a $2.4 billion detailed design and construction contract and started fabrication for LHA 9 Fallujah, the fourth big deck amphibious warship in the America class. Also at Ingalls, in January, we were awarded the advanced planning contract for the modernization period for Zumwalt-class guided missile destroyers. At Newport News in the fourth quarter, we authenticated a keel for SSN 800 Arkansas, honoring the ship sponsors to Little Rock 9. We continue to remain focused on reducing risk and meeting cost and schedule objectives on the Virginia-class boats. As for nuclear aircraft carrier, CVN 79 Kennedy is well into the test program. Distributed systems such as fire main, potable water, air conditioning and ventilation are coming to life. The EMALS Catapult system, which we began testing in 2022 remains on track and is progressing as planned through her test program and we expect to enter into the Combat Systems Test program later this quarter. And finally, for the refueling and complex overhaul of CVN 73 USS George Washington, we are 98% complete as we near planned re-delivery later this year. At Mission Technologies, we achieved solid revenue growth for 2022, with all of the business groups growing year-over-year and we ended the year with a robust potential business pipeline of $66 billion, of which over one-third is qualified. Significant wins in 2022 included, the Decisive Mission Actions and Technology Services contract, Mobility Air Forces Distributed Mission Operations contract and the Remus 300 selection as the U.S. Navy as small UUV program of record. From an operational perspective, we have integrated Alion into our Mission Technologies and HII team and with the integration complete, we can turn our full attention towards executing our growth strategy. Moving on to slide four. We are providing the major milestones for 2023 and 2024. I am proud to say that we met all of the Shipbuilding milestones that we highlighted back in the second quarter of last year for 2022 and we are maintaining all of the 2023 milestones. This demonstrates growing confidence in our ship schedules and provides a solid platform to continue to improve our cost performance. Notable anticipated 2023 milestones at Newport News include the planned delivery of SSN 796 New Jersey and planned float off of SSN 798 Massachusetts, as well as the planned re-delivery of CVN 73 and planned crew move aboard on CVN 79. At Ingalls, DDG 125, NSC 10 Calhoun and LPD 29 Richard M. McCool Jr. are all forecast to deliver this year, while LHA 8 Bougainville is expected to launch. In addition to these Shipbuilding milestones, Mission Technologies expects to see continued growth resulting from our large opportunity pipeline, including the several award decisions that we expect to be made in the first half of the year. Now I would like to discuss our operational focus areas. Our top operational priority remains hiring and workforce development. I am confident in our plans for hiring, and as importantly, our retention and training strategies. These strategies that center around employee skills and leadership development are gaining traction and we have had a good start to the year. After hiring over 4,900 craft personnel in 2022, we expect a similar hiring rate in 2023, while at the same time, improving our productivity, attendance and over time together to drive performance. Regarding inflation, we have some installation through our contracting terms and conditions. However, non-programmatic elements of inflation have impacted us across all of our programs. And finally, the supply chain is stabilizing and we have worked closely with our customers and suppliers to achieve the best possible schedules. To summarize and notwithstanding being our most significant risk, as labor and supply chain impacts continue to stabilize and inflation abate, we believe we have the opportunity for improved performance over the next few years. Turning to the budget environment, we are pleased with the passage and enactment of the fiscal year 2023 Defense Appropriations and Defense Authorization Bills. Both pieces of legislation strongly support Shipbuilding, including funding and authority for an additional DDG 51 Flight III ship for a total of three DDGs, 2 Virginia-class attack submarines, the Columbia-class ballistic missile submarine program, Ford-class nuclear aircraft carrier programs and the refueling and complex overhaul of CVN 74 John C. Stennis. Both Appropriations and Authorization Bills continue funding for LPD 32 and LHA 9 and provide new advanced procurement funding for LPD 33, LHA 10 and a third DDG 51 in FY 2024. The Defense Authorization Act also includes language requiring a naval fleet of no less than 31 operational amphibious warships, including a minimum of 10 amphibious assault ships. We continue to see bipartisan congressional support for our programs. We look forward to working with the administration and Congress on the President’s fiscal year 2024 budget request. So, with that, I will turn the call over to Tom for some remarks on our financial results and guidance, and then I have a few additional comments before we move on to Q&A. Thanks, Chris, and good morning. Today, I will briefly review our fourth quarter and full year results and also provide an outlook for 2023. For more detail on the segment results, please refer to the earnings release issued this morning and posted to our website. Beginning with our consolidated fourth quarter results on slide five of the presentation. Our fourth quarter revenues of $2.8 billion increased approximately 5% compared to the same period last year. This growth was driven by higher year-over-year revenue at all three segments, leading to record quarterly revenue for HII. Operating income for the quarter of $105 million decreased by $15 million or 12.5% from the fourth quarter of 2021 and operating margin of 3.7%, compared to margin of 4.5% in the prior year period. The decrease in operating income was primarily due to lower segment operating income. Net earnings in the quarter were $123 million, compared to $120 million in the fourth quarter of 2021. Diluted earnings per share in the quarter were $3.07, compared to $2.99 in the fourth quarter of the previous year. Moving to our consolidated results for the full year on slide six, revenues were $10.7 billion for the year, an increase of 12.1% from 2021. The increase was driven by year-over-year growth at all three segments, along with a full year of Alion revenue. Operating income for the year was $565 million and operating margin was 5.3%. This compares to operating income of $513 million and operating margin of 5.4% in 2021. The operating income growth was driven by year-over-year improvement at all three segments, as well as a more favorable non-current state income taxes and operating FAS/CAS adjustment. Net earnings for the year were $579 million, compared to $544 million in 2021 and diluted earnings per share were $14.44, compared to $13.50 in the previous year. Moving on to slide seven. Ingalls’ 2022 revenues of $2.6 billion increased $42 million or 1.7% from 2021, driven primarily by higher revenues in the LHA and DDG programs, partially offset by lower NSC program revenues. Ingalls’ 2022 operating income of $292 million and margin of 11.4%, both improved from $281 million and 11.1% last year. These results were driven primarily by favorable changes in contract estimates and price adjustment clauses, as well as higher risk retirement on the LPD program, partially offset by lower risk retirement on the DDG program compared to 2021. At Newport News, 2022 revenues of $5.9 billion increased by $189 million or 3.3% from 2021, primarily due to higher revenues in both aircraft carriers and submarines, partially offset by a lower revenue in naval nuclear support services. Increased aircraft carrier revenues were driven by higher volumes on the refueling and complex overhaul of the USS John C. Stennis CVN 74 and the construction of Doris Miller CVN 81 and Enterprise CVN 80, partially offset by lower volumes on the refueling and overhaul of the USS George Washington CVN 73 and USS Gerald R. Ford CVN 78. Submarine revenue growth was due to higher volumes on the Columbia-class and Block V boats on the Virginia-class, partially offset by lower volumes on the Virginia-class Block IV boats. Newport News 2022 operating income of $357 million and margin of 6.1% were relatively consistent with the performance in 2021 of $352 million and margin of 6.2%. 2022 results included favorable changes in contract estimates from facilities, capital and price adjustment clauses, as well as contract incentives on the Columbia-class submarine program, partially offset by lower risk retirement on the VCS program and the refueling overhaul of the USS George Washington CVN 73 compared to 2021. 2022 Shipbuilding margin of 7.7% was consistent with the performance of 2021, but below our expectations for year-over-year improvement, as the back half of the year provided limited risk retirement opportunities. Continued labor challenges, including high attrition rates, the impact of non-programmatic inflation and supply chain disruption all contributed to slower margin progress. At Mission Technologies, revenues of $2.4 billion increased $911 million or 61.7% from 2021, primarily driven by the acquisition of Alion in the third quarter of 2021. Mission Technologies’ operating income of $63 million compares to operating income of $50 million in 2021. Primary drivers of growth are the acquisition of Alion in 2021, as well as higher equity income from a joint venture, partially offset by higher amortization of purchased intangible assets in 2022 due to the Alion acquisition. 2022 results included approximately $96 million of amortization of Alion-related purchased intangibles compared to approximately $33 million in 2021. I will also note that the fourth quarter and 2022 results included a non-cash downward valuation adjustment of approximately $10 million or approximately $0.20 per share related to an equity method investment. Mission Technologies’ EBITDA margin in 2022 was 8.2% and adjusting out the onetime downward valuation adjustment, EBITDA margin was 8.6%, consistent with 2021 performance. Turning to capital deployment on slide eight. We ended 2022 with a cash balance of $467 million and liquidity of approximately $2 billion. 2022 cash from operations was $766 million and free cash flow was $494 million. Free cash flow generated in the fourth quarter of 2022 was significantly above our prior expectations, as we were able to accelerate several large cash collection events. This has a direct impact on our expectation for 2023 free cash flow, which I will discuss in more detail in a moment. I am pleased to report that the net capital expenditures were $272 million or 2.5% of revenues in 2022 at the very bottom end of the guidance range. Cash contributions to our pension and other postretirement benefit plans totaled $41 million in 2022. During the fourth quarter, we paid dividends of $1.24 per share or $50 million bringing total dividends paid for the year to $192 million. Over the course of 2022, we repurchased approximately 245,000 shares at an aggregate cost of approximately $52 million. Moving on to slide nine and our updated outlook for pension and post-retirement benefits. Our outlook for 2023 has improved modestly from the update we provided in November, given the increase in discount rates since that time. Asset returns for 2022 of negative 16.1% or about as expected compared to our update in the third quarter. Expectations for 2024 through 2026 have been updated and consistent with the Q3 update, the FAS benefit has come down considerably from our last update given the more immediate recognition of the negative asset returns experienced in 2022. This is partially offset by the impact of higher discount rate. We also have provided an initial review of our 2027 expectations. Turning to slide 10 and our outlook for 2023, while we continue to expect Shipbuilding growth of approximately 3% over time, our 2023 outlook range of $8.4 billion to $8.6 billion acknowledges uncertainties around the current environment, particularly the labor challenges we have discussed. For 2023, we expect Shipbuilding operating margin between 7.7% and 8%, as we continue to target incremental margin improvement, but acknowledge the current challenges have tempered the pace of that progress. For Mission Technologies, we expect 2023 revenue of approximately $2.5 billion, organic growth of approximately 5% year-over-year. We expect operating margins of between 2.5% and 3% and EBITDA margins of between 8% and 8.5%. In 2023, amortization of purchased intangible assets is expected to total approximately $128 million, of which $109 million is attributable to Mission Technologies. We expect 2023 capital expenditures to be approximately 3% of sales. Moving on to expectations for the first quarter of 2023, we expect overall revenue growth for the first quarter to be quite modest given normal seasonality in Mission Technologies and the strong fourth quarter performance for Shipbuilding, which benefited from favorable material timing. Additionally, given the timing of the Shipbuilding program milestones and the mentioned Mission Technology seasonality, we expect first quarter segment operating results to be the weakest of the year, with the Shipbuilding operating margin near 7% and Mission Technologies operating margin near 1%. The outlook we are providing today is based on the best information we currently have and assumes no further degradation in our supply chain, that non-programmatic impact from inflation continue to abate, and most importantly, that we are able to continue to hire and retain employees at a pace that supports our staffing plan. Additionally, on slide 10, we have provided our updated outlook for a number of other discrete items to assist with your modeling. On slide 11, we have provided an update -- updated view on our free cash flow expectations through 2024, consistent with how we presented this data in the third quarter, this outlook assumes the current R&D amortization treatment for tax purposes remains in place and we are reaffirming the $2.9 billion target. If Section 174 is deferred or repealed, all else equal, there would be an opportunity of approximately $215 million in total over the cost of 2023 and 2024. As I noted earlier, we significantly outperformed our 2022 free cash flow expectation of approximately $350 million by accelerating collections. This timing difference, along with the delay of the planned COVID-19 repayment now into this year have impacted 2023 free cash flow expectations. Consistent with our normal seasonality, we expect the first quarter of 2023 free cash flow will be the weakest of the year and given the pull-forward of collections into the fourth quarter of 2022 is likely to be an outflow of $200 million to $300 million. Our free cash flow expectation for 2024 remains unchanged, as it will not be burdened by COVID-19 repayment, will benefit from continued topline growth, and margin expansion potential as compared to 2022. Additionally, we expect to see sub-6% working capital levels as a percentage of sales in 2024. We are reaffirming our capital allocation priorities focused on debt paydown, which is on pace to retire about the $400 million bond this year and the remainder of our Alion acquisition term loan in 2024, and our commitment to return substantially all free cash flow after planned debt repayment to shareholders through 2024. To close my remarks, it was no doubt a challenging year, but I am proud of the entire HII team and the important work we accomplished across the business, from successfully meeting all of our planned Shipbuilding milestones to the critical integration work that was completed timely and under budget at Mission Technologies. Across the enterprise, we made meaningful progress in 2022, which resulted in growth across all segments and free cash flow results that were well ahead of our projections. We entered 2023 intent on driving execution and are well positioned to deliver profitable growth. Thanks, Tom. In summary, we delivered consistent results in 2022 and we believe we are well positioned to grow in markets of critical importance to our customers, while executing on almost $50 billion of backlog in 2023 and beyond. We will continue to make long-term strategic decisions that benefit our employees, customers and shareholders, creating long-term value for all of our stakeholders. Thanks, Chris. As a reminder to everyone on the call, please limit yourself to one initial question and one follow-up so we can get as many people through the queue as possible. Operator, I will turn it over to you to manage the Q&A. Thank you. [Operator Instructions] Our first question today comes from Myles Walton from Wolfe Research. Please go ahead, Myles. Your line is now open. Yeah. Definitely. I believe that we have come through some challenging times with COVID and we have got some ships that are still working through that. Ingalls is obviously north of that and Newport News is making great strides. And I think the biggest issue we can work on a Newport News is simply work in the operating system, getting the Block IV boats delivered over the next two years and three years and transitioning to Block V. So, yeah, absolutely, it’s a 9% business. I am not going to give a forecast for when that’s going to happen, but I do expect performance to continue to improve from here. Okay. And then, Chris or Tom, I don’t know, in terms of the plug for capital deployment for share repurchase, I guess, it’s $250 million to $300 million in 2023, 2024 is what you plan to do. Do you have any sights on doing that a little bit earlier or do you have to wait until 2024 as big cash flow come through to have confidence to execute against it? Yeah. Myles, this is Tom. We haven’t given an exact number, obviously, if you work yourself through the math of where we are, expectations on the revenue and the margin expansion, the free cash flow bridges that we have given you and then the capital expense as long -- as well as with the working capital, the numbers fall that way. So as we work ourselves through the year, we -- the cash is generated. We anticipate to continue to buy back shares as we see value in the share price. But we haven’t really guided on how that is going to be portioned over 2023, 2024. We stand behind our commitment to that all excess free cash flow will be given back to the shareholders after debt repayment schedule. Yeah. So I will give you an example of that, Myles. It’s related to expenses towards the end of the year that we didn’t -- that the actuals were higher than what we forecast, stuff like medical benefits, the insurance premiums, we just didn’t get that right. Thank you. Our next question comes from Robert Spingarn from Melius Research. Please go ahead, Robert. Your line is now open. Chris, you talked a lot about the labor constraint and I wanted to see if you could give us some granularity as to how that number splits between the two shipyards and Mission Technologies. One thing I have noted is if we look at your job postings, it seems like Newport News has 10x the openings of Ingalls and does that factor into the margins there? Not really. I will -- Mission Technologies is pretty stable, adding throughout the year with really industry standard attrition rates in a very competitive market. We plan to add about 5,000 shipbuilders throughout the year and then there are some positive indications in not only hiring, but also over time, attendance and attrition. So there are some positive indicators. I wouldn’t necessarily relate it back to margin. Newport News will hire more this year than Ingalls. We don’t break that out separately. But I wouldn’t necessarily relate that back to margin, no. Okay. And then just as a follow-up to that, could there be upside to the 3% topline growth if Congress appropriated more funds to expand shipyard capacity and the fund training and apprenticeship programs? Yeah. But the constraint is labor. Our shipyards are facilitized to grow in excess really of that 3% and -- but we need to be conservative and how we project -- how we are going to add labor over the next few years. But is there upside? Yes, of course. Yeah. I guess I am asking you is can they help you attract labor faster and train labor faster. The benefit to get the ship... Yeah. Interesting enough, there’s a lot of initiatives both at the state and federal level to help in workforce development. And we are actively communicating with both states that are involved in that and the federal government for infrastructure and workforce development support. Tom, did CVN 79 book a net-net negative EAC in Q4? Just trying to interpret what’s in the press release on the year-over-year comparison there? Thanks. Yeah. So we don’t provide the actual margin booking rates to step up, so step backs on any individual program. I would tell you -- to give you some color on that, on the adjustments, there was nothing significant either are up or down on any individual program. So the answer to your question is no on that. I would tell you that the effect that you are seeing at Newport News there is, although it’s net down as far as the adjustments it has, it was really a function of not having the upside that we would normally see. So if you kind of range bound to what we saw on the downside of EAC adjustments, because the timing on the milestones and just where they saw a little bit of a draw short on labor, a little bit of pressure on overhead costs, overhead absorption is a little bit higher on all the programs there and CVN 79 is not immune to that effect as well. But it was not significant enough as you see it’s not called out in the K. … CVN 79 had a pretty solid year. They met their compartment commitments for the year, EMALS is essentially built out. It’s pretty amazing. I was up there last week and the equipment is in and they started that test program. The topside test program has begun. So they have got a bit of momentum. I hate to use football reference, but the big game is this weekend, but 79 is what I call four yards in a cloud of dust, right? They are -- every week they are executing on a lot of volume work. They met their commitments for last year. They have got a lot of work in front of them, but I have high hopes for success on that program. Great. And then, Chris, what were the, sorry, if I missed this, but what were the gross and net headcount additions in the Shipbuilding business in 2022 and then just curious on how attrition trended in Q4 sequentially relative to Q3? Thank you. Yeah. So attrition got better throughout the year. I don’t have the specific number here. We added about 5,000 heads, but it did trend better as we move through the year and it’s gotten better in January as well. It’s pretty -- it’s what I call this a bit of stability showing up in the Shipbuilding organizations from not only a labor standpoint, but also supply chain and inflation. It’s not back to pre-pandemic levels, but it’s definitely stabilized and that’s what we need to execute. Just going back to Kennedy, it’s a big contract for you guys at fixed price, and I was just wondering, my recollection was 2023, 2024, you guys are going to have some big risk milestones on that project. It sounds like that’s still going to happen. But is just the labor situation has kind of eaten up the upside on that potential risk retirement, is that the right way to think about it? I wouldn’t necessarily say it’s eating up all the upside. I would say that we are very conservative in how we deal with the EAC and there’s a lot of really complex work in front of us. So I would not necessarily say it’s eating up all the upside. Okay. Okay. Just a follow-up to that, in Newport News, is VCS Block IV the bigger muscle mover margin wise? Is that kind of -- is the Block IV kind of roll-off over the next two years? Does that just give you a lot more relief than anything else? It will definitely give us a lot more confidence moving forward after we get those Block IV boats delivered and transition into Block V. Okay. And Chris, just on that, it’s -- obviously, labor impacts all your programs, but Block IV had kind of the unusually aggressive schedule. Is that a combination why that’s been such kind of a door on your side, is that fair? Well, remember, Block IV was impacted the most by COVID, right? We had a pretty material impact back in 2020, which really reduced our profit expectations on those boats. So we just need to get through them. We need to get them delivered. The program schedules are pretty stable right now and a lot of cooperation between electric boat Newport News and really senior Navy to get through those program schedules. So we just need to get through them and then we will transition into Block V. Chris, if I could hop on that too. Pete, so on that, to your question of IV or V, yeah, Block IV has been with COVID in 2021, 2022. So it’s long run rate, those contracts have had in the EACs with some additional costs. I think it’s two-fold. One, getting those Block IV boats done alleviates the mix in the portfolio at Newport News, so there’s a list that you talked about there. But then also it’s just -- those boats give us time to come down the learning curve, the lessons learned, the metrics and the operating system and the pressure on that we have on boat there. It truly is a production line of all programs you have, it’s the most serial production line with the modules go and then the boats are there, some will go from unit-to-unit with the same personnel. So getting through IV and then that kind of benefit lifts the Block V, which has higher profit potential. And then it will take the preponderance of the portfolio mix at Newport News. We crossed over the end of last year. So already now the sales proportion between Block IV and V is now more in V and IV. So there’s going to be a natural progression of improvement with learning for boats being accomplished and then that learning and higher profit potential on Block V is going to be affecting the New Port’s portfolio. Thank you. And our next question comes from David Strauss from Barclays. Please go ahead, David. Your line is now open. Tom, I have similar question that I have asked in the past around working capital. I mean you obviously had a big improvement in working capital in the fourth quarter. Looks like in your guide for cash, I guess, back into that, it looks like you are assuming relatively neutral working capital for 2024, is that correct or sorry, for 2023. And then could you help bridge us how you go from $400 million and $400 million, $450 million in cash to -- in 2023 to the number you are looking at in 2024, I guess, maybe a little bit of CapEx help, but what else gets us there? Sure. Yes. I will break that down. I have several points I want to hit. I will hit the percentage on working capital last as I walk you through that. So we have updated on slide 11 of the PowerPoint presentation there. So we finished at $494 million, pretty healthy against an expectation of start the year at $300 million to $350 million, we pulled that down to $200 million to $250 million kind of midyear with the re-guide and then Q3 we told you $350 million, we finished $494 million with healthy free cash flow in 2022. Obviously, that pulls ahead a little bit and so we have taken down the 2023 expectation. We hedge our $545 million to $595 million or midpoint of $570 million last time we discussed and because of the pull ahead that we have here right now, we reset expectations of $400 million to $450 million. You -- to your point of working capital, you are right, just a couple of quarters ago, we were at 11.1%, last quarter we were in the 10% range and we finished 2022 up at 6.1% of working capital. As we have been guiding over the last three years or four years, we saw that the workload and just the cadence of the ships, we are going to have more deliveries and launches on the back half of the five-year free cash flow commitment in the front half and that’s exactly what we see here. If you look at the milestone chart, you will see that we are going from three deliveries in 2022 to five deliveries in 2023. We also have three launches in 2023. So that’s a pretty big year. And then kind of it going forward to the following year on that, we take that perspective up and we have two deliveries and three launches in 2024. So a lot of activity there, which will continue us leading the working capital, getting rid of the retention that we have and helping in the free cash flow lift as we go forward. Also, I would tell you that, as much as we finished up at 6.1% on working capital, it will just grow a little bit. We have got a couple of advancements on incentives that we have had. So we will go from 6.1% to about 6.5-ish working capital in 2023. So more deliveries helped slight rise in working capital in 2023 slightly hurts. We re-guided on CapEx from 2.5% to 3%, so a couple of dollars of headwinds there. So two things against us, but with all those deliveries and launches, we will see working capital finish up around $425 million. And mind you, 2023 has to repay COVID, which right now is about $125 million, right? The way I look at it and give you confidence on where we are going with that. We have three years in the whole now against the five-year commitment, $757 million, $449 million and $494 million, that averages out to $567 million straight stick at BSC about $600 million a year that you need. So we are running behind for the first three years, but we knew there was a natural grant with retention with revenue and margin expansion. And also we have Alion on board now. 2022 we had them onboard for the first year. I was happy with the contribution they made. If you recall, we took the $3 billion to $3.2 billion with Alion and I am happy with the contribution they made in 2022 and Alion will be on board for 2023, 2024. As we look -- going forward, right, EBITDA margin stay flat from 2021 to 2022. We are foreshadowing some margin expansion into 2023. We have the topline growing in Shipbuilding right now that we gave you in the guidance $486 million and we expect we will continue incrementally guiding higher revenue and margin into 2024. And also I’d ask you to take a look at the three years that we have had, the $757 million, $449 million and $494 million free cash flow. That $757 million really had two things that actually helped it, and if you normalize it out, how to make sense of how we are marching to be north of $700 million in free cash flow as we get out to the 2024 timeframe, but the $757 million had the FICA release, which was $130 million and it also has the COVID repayment benefit for $160 million. So $160 million and $130 million is $290 million. $290 million of the $757 million is about $467 million is really how I look at the first of the three years, $467 million. The $449 million to 2021 has the FICA repay in it. So you throw another $65 million in that, that’s about $510 million for a normalized 2021 and now for 2022, $494 million, there’s $65 million of FICA in that too, that’s $550 million. So I really look at it, we have normalize for what we have seen because of COVID with FICA and repay, it’s more like a match of $460-ish million to $510 million last year to $555 million, $550 million this year. The guide we gave you is $450 million for 2023 only because I have the COVID repay. So it’s another with $125 million on top of the midpoint, that’s a $550 million year and I have the year in front of me to burn down risk and pulling cash. So I am comfortable with how margin passed by average of $567 million in the first three years. And then the last piece on how we get that up to, how do you get to $780 million is the working capital we see is going to swing about 2 points down. As I mentioned earlier, we finished 6.1% 2022, we will be in the mid-6s for 2023 and then it’s going to swing down below 5% for 2024 and 2 points of margin against the topline of $10.8 million, is about $200 million. So $550 million plus $200 million is $750 million. I got you at the midpoint of $780 million, because we still have revenue growth and margin expansion. So I am quite comfortable with where we are right now. The numbers play out. If you have any questions, you can -- as we have our calls afterwards, we can break that down for you further. Okay. That’s a lot of detail. Thank you for that. And Chris, as a follow-up on Mission Technologies, the EBITDA margin there, which I guess is the right way to look at 18.5%. How do we think about those as longer term? I mean those are well below kind of what we see out of typical kind of services companies and you pitch this is not just your typical kind of services business. So how do we think about those EBITDA margin, I guess, the potential there? Thanks. Yeah. Thanks, David. You have to remember that the vast majority of that work is cost plus. So that would indicate that you would have a lower EBITDA percentage. I do think there’s opportunity for upside as we present more solutions and move into a fixed price sort of arrangement. We are not prepared to say that it’s going to get better than that right now, but there is opportunity for improvement and that’s something we are evaluating. So I want to go back to Newport News and you had a 5.1% margin this quarter. That follows Q3 that if I take out the Columbia-class benefit, that was 4.1%. And what I want to understand is you have still got certainly the Massachusetts and the New Jersey flowing through there. And so the work that you have done on Block IV where you have taken charges in the past, I mean, how much of this, what I would call, kind of a low margin in Newport News is due to the overhang of those past charges. So then when you get out from under those, should we expect a step up? Well, yeah, Doug, this is Chris. I will start and then Tom can jump in there. There’s absolutely an overhang related to Block IV boats that we are dealing with and so we should expect a margin step up. Now we haven’t guided beyond 2023 and we need to be conservative, because we need to make sure the labor shows up and we get them trained up and they go execute. But I think you are right, relative to that overhang on Block IV, so we need to get those delivered. And as I said previously, those schedules are being very consistent right now. Cost performance, we are working on every day. Go ahead, Tom. Sure. If I can hop on the back of that, right? So we talked about Block IV here and what we took back in Q2 of 2020, I would tell you the portfolio with Colombia that’s coming on board and sales. So that’s a new stock program that’s booking along right now across that contract. I have some change, change in unadjudicated change that still has to get proposed and pushed through the system. So that’s going to increase, we are very conservative on that until those unadjudicated changes are definitized. That’s boat RC 73 and 74 as is in infancy too both cost type contracts. So the portfolio just has a little bit higher level of that as we see it. And then, lastly, I think, as we go forward, burn down risk as 79 marches to its completion, as Chris said earlier, there’s a potential with good performance there for additional upside here. So I think we just find ourselves in a situation where the ships are right now, not too many milestones, a little bit of drag on overhead, down on labor. And I think we are booking prudently to conservatively right now as we want to see us pushing ships over the goal line. Those deliveries I mentioned is two each for 2023 and 2024, and I think, that will assist in the margin list, as well as Block IV gets small in the portfolio mix with the potential of Block V as we move forward. I think the Columbia program will mature and with 73 out of here at this year, a 74 focus and maturity will assist the portfolio of profitability as well. So if I have it right, then Block IV, the overhang of these past charges is a contributor, but there’s still other -- there are a number of other things you just raised. So it’s sort of a blend of things that you are working through. I just wondered General Dynamics when they did their Q4 call and highlighted the number of issues that somewhat similar related to labor across shipyards and they did mention Virginia-class. Can you talk about how you are working with electric boat sort of together to deal with these problems and if they have been changed over time and how the -- how you work together and work through attrition issues… Thank you for that question, Doug. It’s an important one. The Newport News and EV team, they work very closely together in understanding when the work, what work and how that work gets executed. So there could be movement of work between the yards where it’s most efficiently done if there’s labor issues and they are working very closely together. Their objectives are completely aligned to deliver all the Block IV boats. And I would add also the Navy is engaged as well. It’s all from the deck plate to the senior executive force. Everybody is all in and all of our objectives are aligned to get those Block IV boats delivered. And I will say that we are fully staffed on Block IV and Colombia, and we are working very hard on execution there. And not only is a Newport News working between each other, but working to ensure that any sort of outsourcing is effectively managed to ensure that we get -- that we meet our production schedules. Unfortunately, we are not getting any audio from the line. So we will move on to the next question. And our next question comes from George Shapiro from Shapiro Research. Please go ahead. Your line is now open. I was curious that you wound up with 7.7% Shipbuilding margins and when you did the third quarter call in early November, you were looking for 8% to 8.1%. So just wondering what you missed here in two months, because I thought that Shipbuilding would be somewhat predictable sort of business? Yeah. It was just the drag that we talked about at the end of the year. We had a strong first half of the year over 9% and we guided to 7% for the back half of the year and even Q3 was in that lane and we thought that the remaining 13 weeks of the year, we had that. But the shortfall of labor that we saw, a couple of the overhead or the non-programmatic issues drove hit boat yards actually on the cost that we talked about, on medical and just that shortfall as we go through and take a look at EAC performance and then the cost and how overheads flow through there, there’s a little bit of a drag on where we thought we would land. So if you call it on the call, I was focused on saying I want to see how the year plays out. We did stay on the guide at 8% to 8.1% and we thought we could get that home. But as the EACs kind of rolled up, there was just a little bit of a drag. I would say both to this question, George, and the previous one. From a Newport News perspective, 6.2% last year, 6.1% this year, about the same type of performance overall, if you think about it, another year with some drag upfront, with the effects of COVID and then supply chain, inflation, big year on inflation and then the hiring demands that we had here. So I am quite comfortable with promise as far as what the Newport News team accomplished it. But to your point, we thought we would get that home and Q4 came in a little flattish on Newport News than we expected. Not yet, but I can. No. I did, yeah. I referenced them, just that we didn’t have a tremendous downside. We just didn’t have upsides at Newport News. But from a -- for the quarter perspective, what we saw was the gross favorable were $29 million, the gross unfavorable were $56 million. That was a net of $27 million. And effectively, about 100% of that was at Newport News, basically Neutral Ingalls and Mission Technologies. So it was quiet at the other two divisions and Newport News saw a net down of that unfavorable for the corporation of 27 now. Just maybe to follow up on that -- good morning. Maybe to follow up on that question, Tom, you talked about Newport News being in the low 6s for 2022 and 2021. I know you guys don’t typically guide segment margins. But if we are just to think kind of maybe qualitatively, overall Shipbuilding margins should be up 10 basis points to 20 basis points at the midpoint of the guidance. Does that mean there’s a little bit of improvement in each yard or given the way that some of the one-timers or some of the potential upside associated with the milestones that you are expecting at the shipyards. Is there opportunity for more expansion import news and maybe some headwinds in Ingalls? How do we think about that for this year? So I will start and then Tom can get into the details and thank you for saying we don’t guide by shipyards. We don’t do that. But I firmly expect Newport News will be better this year. I think they are executing their operating system very well. I think labor is more stable. I think the supply chain is more stable. I think the team has some momentum and I think Newport News is going to do better this year. So, with that, Thomas, you want to add anything about Ingalls, I think, they are pretty stable as well. I am with you that we don’t guide by division, but from a historical perspective, things 10.5, 11, 11.1 for the last three years, they have the same portfolio basically done there finding labor overheads, the pressures that we talked about, but very strong operating team, a leadership. They know what they are building, those ships are under production. So I would think historically, they are going to continue perform well. And I think from a Newport News perspective, as they just fight it way through here, new technology started with Ford and now Colombia. We had that booking we talked about back in 2020, a little bit of COVID pressure, inflation, supply chain and hiring. But you can see some stabilization both in the performance over the last two years. We see stabilization and some stability in hiring and the schedule here and our expectation is that that yard can perform better. So I would expect that to increase as we go forward in the year here too. Okay. Great. Great. And then maybe to follow up real quick on a similar type of question on Mission Technology, I think you said, the EBITDA margin there ex the valuation allowance was like 8.6% in 2022 and so what’s driving it down in 2023? We are probably just being conservative on the guide. So we had a 6.6% quarter with the impairment out of it, it was 8.3%. We have had quarters at Mission Technology anywhere from the low 8s to the low 9s. Last year was 8.6%. And as I said, adjusted it -- was unadjusted was 8% to 8.6% right now. So I think it’s just a function of net sales base. We have fixed and semi-variable costs there. It’s a good sized operation. We think we have the right people on board with the right strategy. The pipeline has grown year-over-year and the pipeline is more mature. And I think with the Mission Technologies integration into the HII family, with that behind us, as I mentioned in my notes, it was done under budget and is on time. That the team can completely focus on that pipeline, bids, execution and performance. So I think the 8% to 8.5% is just being conservative. Obviously, we want to see a couple of more dollars out of that division last year. We are guiding growth year-over-year right now. We did see Mission Technologies to grow 4% from 2021 to 2022 and each of the business units had growth in them. So those are all positive signs. I think the 8% to 8.5% is just waiting and seeing the awards happen. When the sales hit, I would expect we are going to be on the upper end of that range, if not over it. Great. Great. Hey. Thanks. I was curious if you could just give us some color on the timing of the milestones through the year. If you can tell us like, if there’s anything that’s in the month of December that has the potential to move out or things we should be watching… Sure. Sure, Gautam. When you look at the 2023 milestones, I think, Tom already mentioned that Q1 was pretty light. The pretty evenly distributed across Q2 and Q3, but then CVN 79, excuse me, LPD 29, yeah, is in Q4. So that’s at the end of the year. So that’s the one we will have to watch. We got a lot of confidence in and the team down in Mississippi, but that’s the one towards the end of the year. Not really. Pretty stable from a schedule standpoint on the VCS program. We have movement here and there, but it’s pretty stable. I got to hand it to that team, the program team and the construction team. They are getting after it and they are learning every day. So it’s been pretty stable. We need to stay on. Chris has talked about that rhythm of the program, launch one and sell one-off when we saw that in 2022 and in the milestones, you will see that in 2023 and 2024. So we are working it. Okay. And just on that last point, anything with respect to negative catch-ups or you can talk about 422 on VCS in aggregate anything, yeah, you can never call it out as material, but can we assume that there were kind of consistent negative marks in the program or anything you can tell us about that? Nothing really significant to highlight here. I mean I mentioned in the keel the -- the keel net was at Newport News on that, which was down and they just kind of sprinkled over the programs, but there was nothing really to highlight here. Thank you. Our final question today comes from Noah Poponak from Goldman Sachs. Please go ahead, Noah. Your line is now open. Yeah. Sure. Tom, so just back to the cash flow breakdown and appreciate all the detail you gave there and I appreciate that there are a lot of moving pieces. But if I just kind of zoom out on the cash flow statement and look at a long history, it sort of ranged $400 million to $600 million for a while and the business is pretty stable topline and margin. I recognize you have some opportunity to grow the business and expand margins going forward. I think the pension looks pretty net neutral. The CapEx looks pretty stable. It sounded like you said earlier that you expect in that 2024 $780 million midpoint about $200 million of working capital. And I guess, should I think of working -- change in working capital is not a sustainable recurring part of the free cash flow, and therefore, that kind of $580 million, $600 million as sort of a predictable, sustainable engine of the cash flow statement going forward or is there some other reason to think of the base business is eventually making up that $200 million? Yeah. So that’s a great question and we study that all the time and it’s the former -- it’s former with a caveat, right? So we are hitting the point right now. We have been impacted. If you look at the cash flow statement, we were in the $400 million to $600 million. I’d tell you from 2020, 2021 and 2022, those COVID, FICA repays and the COVID payments have tripped up and you have to normalize after that. A couple of things are happening. Obviously… … prior to this window, the margin has dropped in Shipbuilding as we have kind of run through COVID. So we are fighting and working ourselves back with incremental improvement. The revenue growth with the backlog that we have shown you there and we expect at least have 3% here kind of going forward when we get through this labor crunch, that’s in place. So I think you can model that out. The -- as we go forward, the working capital I believe we will be in that 5% to 6% range and both yards are in a good rhythm right now, the DDG program annually, what we are doing with launch and sell off boat on VCS, the rhythm of Block V is behind that, the two carry by following 79, the Columbia Build 1, Build 2. So I think we are settling down on the mix of the portfolios in each yard and the timing on when they are going to pop out so. We have told you in the past, traditionally a Shipbuilding is like 6% to 8% of what we would expect. That gets water down a little bit, because now with Mission Technology and Alion with more sales in the base the numbers kind of pop down. If you normalize in just to the traditional Shipbuilding what we have talked about, right, we were at 12%, I think, in Q1 of 2022, Q3 of 2023, we are at 14%. We finished the year at 7.8% just for Shipbuilding and now as we go from 7.8% to 8.3% for Shipbuilding sales, we will see ourselves go down to 6% in 2024. That’s in the range that we were highlighting, say, for the first 10 years of the corporation of 6% to 8% in working capital. We were at that range in 2018. We were in the 6% or so. I think that’s sustainable as long as we are in a normal rhythm of adding work, which we have the backlog, we are performing to schedule, so we are selling ships off timely. And although being either at 6% our Shipbuilding sales or is subside, including all my sales with Mission Technology is on the low end of the range. I think what offsets that is the revenue -- an incremental revenue and margin that we think we are going to have in the coming years. So I am still bullish on the north of $700 million is going to be a run rate in a couple of years from now and I think 2024 is that inflection point to kind of start that run. Okay. The north of $700 million in a few years, I guess, if 2024 is $780 million midpoint about $200 million of working capital, once you get to the working capital goal, you then cease to have positive change in working capital flow to the cash flow. So 2025 million, I mean, who knows exactly what it’s going to be, but sort of directionally would not have that. So is there a step down from 2024 as -- and then as the business grows, you over time get back to that $700 million? We are not going to forecast 2025 free cash right now. But I think your logic is okay. The business is going to grow. And if we stay down with those working capital numbers, you are not going to get a benefit from it. You are going to have to get it from growth and margin improvement. So I think your logic is sound. But we do definitely believe that free cash is going to get north of $700 million in 2024 and then continue to grow from there. I will tell you stick with a lot of the numbers, right? So I walk through how we normalize out the 2021 and 2022 because of COVID that you can see we are incrementally going from that $460-ish million to $510 million to $550 million with the guide of $425 million this year, COVID-adjusted, that’s another $550 million. And then I am telling you the working capital is going to get us there in 2024. So that is just say what’s the run rate. I think you are looking at… Great. And then, Chris, just on labor, you spent some time on it, but -- and it’s unpredictable, but I guess maybe just how -- when do you think you could get to something close to normal on your labor churn and development of the people you are hiring in. I guess with the amount of time you spent on it, the amount of time you have been in the business, obviously, it’s an unprecedented situation, but how much more time do you need to get to something that’s pretty stable? Yeah. Well, it’s absolutely more stable now than it was a year ago, okay? And that’s a testament to the hard work, the shipyards have put in to really kind of pivot who they were hiring, increase the training, increase the leadership training. So it’s absolutely better. I don’t know if you have ever done, right? There was a pretty generational change in our workforce where we lost a large swath of people through COVID. So we are retraining a workforce and retraining foreman and general foreman and construction superintendence and that’s happening. And the best thing we can do and the greatest learning potential is delivering ships. We are going to deliver five this year. Once you have been through that, you have learned a lot and they are going to continue to learn a lot. So I think it’s only improvement from here. I don’t think you have ever done, but I think we have made great progress. Thank you. This concludes our Q&A session for today. I would now like to hand the call back over to Mr. Kastner for any closing remarks. Thank you for joining today. I am proud of all the hard work put in by the team and I am confident the hard work we are doing will pay off and value creation for all our stakeholders moving forward. Thanks again for joining the call.

EarningCall_253

Greetings. Welcome to Rexford Industrial Realty, Incorporated Fourth Quarter and Full Year 2022 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Aric Chang, Senior Vice President of Investor Relations and Capital Markets. Thank you. You may begin. We thank you for joining Rexford Industrial’s fourth quarter 2022 earnings conference call. In addition to the press release distributed yesterday after market close, we posted a supplemental package and investor presentation in the Investor Relations section on our website at rexfordindustrial.com. On today’s call, management’s remarks and answers to your questions may contain forward-looking statements as defined by federal securities laws. Forward-looking statements address matters that are subject to risks and uncertainties that may cause actual results to differ. For more information about these risk factors, please review our 10-K and other SEC filings. Rexford Industrial assumes no obligation to update any forward-looking statements in the future. In addition, certain financial information presented on this call represents non-GAAP financial measures. Our earnings release and supplemental package present GAAP reconciliation and an explanation on why such non-GAAP financial measures are useful to investors. Today’s conference call is hosted by Rexford Industrial’s Co-Chief Executive Officers, Michael Frankel and Howard Schwimmer; together with Chief Financial Officer, Laura Clark. They will make some prepared remarks, and then we will open the call for your questions. Thank you, Aric. I’d like to welcome everyone to Rexford Industrial’s fourth quarter 2022 earnings call. I will begin with a brief introduction. Howard will discuss our investment activity followed by Laura, who will discuss our financial results and guidance for 2023. Our strong results reflect our unique position as the nation’s largest pure-play U.S.-focused industrial REIT driven by our entrepreneurial approach to creating value within infill Southern California. For the full year 2022, Rexford increased earnings or FFO per share by 20%, enabled by a full 45% increase in core FFO. This brings our average earnings per share growth over the prior three years to 22%, substantially exceeding the earnings growth of all other industrial REITs, which averaged 13%. We grew consolidated NOI by 40% compared to the prior year driven by strong internal growth, lease-up of our value-add repositionings and accretive external growth. We completed 5.1 million square feet of lease activity during the year, achieving leasing spreads of 81% on a GAAP basis and 59% on a cash basis. Our team closed on a record $2.4 billion of investments for the full year, 90% of which were acquired through off-market or lightly marketed transactions, thereby enabling substantially above-market projected return on investment. Although we face a higher level of potential economic uncertainty this year, we continue to see strong tenant demand. Our infill Southern California markets are operating at well above structural full occupancy of about 1% market vacancy and with the highest year-over-year market rent growth of any major industrial market in the nation. Infill Southern California continues to experience a virtually incurable supply demand imbalance due to an extreme scarcity of land and development constraints that prevent any material increase in new supply. In stark contrast, many other major industrial markets are experiencing increased new supply, reaching record levels. Looking forward, Rexford is exceptionally well-positioned with embedded internal NOI growth of 43%, equal to an incremental $200 million of NOI contribution over the next 24 months assuming no further acquisitions and assuming today’s market rents without further growth. This includes $78 million of incremental embedded NOI driven by the mark-to-market on our leases and our contractual annual rent steps plus $48 million of incremental NOI from repositioning and redevelopment projects stabilizing over the next two years and $74 million of incremental NOI projected over the next 24 months from recent investments closed during the fourth quarter and year-to-date. We continue to operate with a low leverage balance sheet at about 15% net debt to total enterprise value. This achieves the dual outcomes associated with protecting our business during uncertain economic times while also positioning the company to continue to capitalize upon highly accretive internal and external growth opportunities. Thanks to the hard work of the Rexford team, we are pleased to announce an increase in our first quarter dividend to $0.38 per share, which represents a 21% increase over the prior year. With this increase, our five-year dividend per share growth averages 19%, which ranks among the highest in the REIT industry. Above all else, we acknowledge that the primary determinant of our future success is the quality of our people and our deeply collaborative entrepreneurial team. We thank Team Rexford for your extraordinary work, creativity and dedication that continue to differentiate our great business. Thank you, Michael. I also want to acknowledge and thank our Rexford team for their excellent 2022 achievements. Our stabilized portfolio is operating at historically low levels of vacancy, and we continue to see a strong diversity of tenant demand. By way of indication, we have current leasing activity on over 90% of our vacant space available for occupancy. Based on our internal portfolio metrics, market rents increased 25% in 2022. And the weighted average mark-to-market for our entire portfolio is now 73% on a net effective basis and 58% on a cash basis. According to CBRE, vacancy across our infill markets was 1.1% at the end of the fourth quarter. Two of our largest submarkets, Orange County and South Bay, comprising nearly 0.5 billion square feet saw vacancy decline to 0.7%. Many other submarkets, including LA Mid-Counties, Commerce Vernon, San Fernando Valley and Ventura County, still have vacancy below 1%. Based on these unique market dynamics and our current leasing activity, we believe there is potential for upwards of 15% market rent growth this year within our infill Southern California markets. With regard to the investment market, we continue to see marketed transactions within our infill markets trading at cap rates in the mid-3% to low 4% range as buyers are still drawn to our market’s consistent outsized rent growth and stability through economic cycles. We continue to focus our acquisition efforts on highly selective off-market opportunities that we originate through our proprietary data-driven acquisition sourcing. For the full year, we completed $2.4 billion of investments across 52 transactions totaling 5.9 million square feet and 31.5 acres of land for near-term redevelopment, which, in aggregate, are projected to generate an unlevered stabilized yield of 4.8% on total cost. 90% of these investments were sourced through off-market or lightly marketed transactions. With regard to the fourth quarter, we completed $358 million of acquisitions, which are projected to generate an unlevered stabilized yield of 5.4% on total investment. Subsequent to quarter end, we closed two stabilized transactions totaling $405 million, which are currently generating an aggregate 5.1% initial unlevered yield, growing through contractual rent increases of about 4% per annum. We currently have a pipeline of over $125 million of highly accretive transactions under contract or accepted offer, which are subject to customary closing conditions. These prospective investments are projected to generate an aggregate initial yield of 5%, growing to a 6% stabilized unlevered yield on total cost. Rexford’s differentiated acquisition strategy continues to enable substantial growth opportunities with $405 million of investments closed year-to-date, $125 million in our near-term pipeline and 250 million square feet of off-market opportunities with identified catalysts tracked through our proprietary origination methods. With regard to our repositioning and redevelopment activity, for the full year, we stabilized 7 projects totaling $140.1 million in overall investment at an aggregate 8.9% unlevered stabilized yield, generating an estimated $175 million of value creation. In addition, we have another $1.1 billion of repositioning and redevelopment projects representing 3.3 million square feet in process or projected to start within the next 24 months. These investments have a remaining incremental spend of $385 million and are expected to generate an aggregate unlevered yield on total cost of 6.5%, representing an estimated $500 million of value creation, assuming today’s market rents and no further rent growth. Thank you, Howard. I want to first acknowledge our incredible team who produced another remarkable quarter of results and an exceptional year that exceeded expectations. Same property NOI growth for the quarter was 7.3% on a GAAP basis and 10.7% on a cash basis. For the full year, same property NOI growth was 7.4% on a GAAP basis and 10.5% on a cash basis, driven by our record 2022 leasing spreads of 81% and 59% on a GAAP and cash basis respectively. Strong tenant demand for our high quality portfolio coupled with low market vacancy resulted in average same property occupancy for the full year at 98.7% and 98% for the quarter at the high end of our guidance expectations. Annual embedded rent steps in our fourth quarter executed leases continue to remain at record levels at 4.4% compared to 3.9% a year ago. Bad debt as a percent of revenue was approximately 10 basis points positive for the full year, driven by the exceptionally strong credit of our diverse tenant base and reversals of prior reserves. Note that even if these reversals were excluded, bad debt as a percentage of revenue would’ve been approximately 20 basis points well below the historical average of 50 basis points. This solid operating performance combined with our accretive investments drove fourth quarter core FFO per share growth of 9% over prior year and 20% for the full year. As a result of this strong performance and Rexford continued commitment to delivering superior total shareholder return, our Board declared our first quarter dividend of $0.38 per share, representing a 21% annualized increase over the prior year. Turning to the balance sheet and capital markets, our capital allocation strategy includes a highly selective investment process and fortress balance sheet that delivers accretive near and long-term cash flow and NAV growth. Our low-leverage balance sheet with net debt to EBITDA at 3.7 times provides tremendous flexibility and access to attractive sources of capital to fund accretive future internal and external growth opportunity. In recognition of our balance sheet strength and the quality of our growth in 2022, we were upgraded to BBB+ from S&P and Fitch and to Baa2 from Moody’s. In the fourth quarter and subsequent quarter end, we executed on a number of capital markets transactions to fund investment activities. We sold a combined 12.5 million shares of common stock on a forward basis through the ATM and a public offering for total gross proceeds of approximately $700 million. In addition, we settled 14.1 million shares of common stock associated with forward equity sales for a total of $813 million in net proceeds. We currently have total liquidity of $1.1 billion, comprised of 73 million of net forward proceeds remaining for settlement, 51 million of cash on hand and full availability under a $1 billion revolver. Moving to our 2023 outlook. Our core FFO guidance range is projected to be $2.08 to $2.12 per share, representing a 7% increase at the midpoint over the prior year. As a reminder, our guidance does not include acquisitions, dispositions, or related balance sheet activities that have not closed. We have provided a roll forward detailing the drivers of our revised guidance range in our supplemental package. A few highlights include same property NOI growth is projected to be 9.25% to 10.25% on a cash basis and 7.5% to 8.5% on a GAAP basis. Components of our same property growth include full year cash leasing spreads of 55% to 60%, and GAAP leasing spreads of 70% to 75%. Year-end same property occupancy is expected to be 98% in line with year-end 2022 occupancy. Average same property occupancy for the year is projected to be 97.5% to 98%, and bad debt as a percent of revenue is projected to be 35 basis points. Hey, everyone. Laura, I noticed from the operating update today, you guys raised the mark-to-market assumption in the portfolio. Could you just give a sense of what you’re seeing in the last 30 days? It gives you comfort with that and also I noticed you gave the 15% market rent growth assumption. Seems like the first time you guys have put that out there. Maybe if there’s differences in some of the submarkets that you guys invest in relative to that average? Hey, Craig. Yes, thanks for your question. To answer your question, yes, we did project market rent growth of approximately 15% in 2023. And I think it’s important to talk about kind of the factors that went around generating that forecast. And part of that is the current activity that we’re seeing in the market. So first, really three factors went into that forecast. First is the current activity in the market and within our portfolio. Year-to-date is on pace to exceed our recent expectations. We’ve seen a pickup and activity since the beginning of the year. We have activity on over 90% of our vacant spaces, and while one month certainly doesn’t represent a trend, we saw a sequential market rent growth in January of about 1.5%. The second factor going into that forecast is really our ongoing tenant research and outreach. We conducted a very – as we can – we always do a deep dive into the regional tenant demand with an infill Southern California, and we continue to see a very wide diversity of demand. And then lastly in that forecast is we really take into account the ongoing and persistent supply and demand and balance that we expect to continue within our infill markets. That’s helpful. Maybe just on the mark-to-market commentary there and kind of is that just a space-by-space buildup that’s giving you that with all the activity you guys have on vacancy or is that an output of this 15%? Yes, we – so we – mark-to-market our portfolio quarterly and we do that from the bottom up from a state-by-state [ph] basis. We did that in our 4Q outlook that we posted about 30 days ago. We had done a mark-to-market in order to get that as current as possible. We did another mark-to-market of the portfolio over the – about a week ago. So we wanted to be able to provide an update on what that market rent growth looks like within the portfolio over the last 30 days. And we’ve certainly seen a strong resurgence of tenant demand and our forward outlook remains really strong. And that’s 1.5% sequential growth that we saw in market rents over the last 30 days. And then just turn into the acquisition market. I mean, it’s – you guys are coming out of the gate strong with the 405 million. Could you – and you guys are getting these at stabilized yields on your basis of 5% and higher. Could you just talk about how you guys continue to get these over the last couple months and it seems like spot cap rates are kind of all over the place from a market perspective with the longer-term leases seeing more pressure and maybe other shorter-term deals kind of not seeing as much pressure. So just any viewpoints on that would be helpful? Sure. Hi, Craig. It’s Howard. Yes, deals seem to be all over the place in the market. There’s still plenty of capital chasing transactions and we’re seeing that marketed transactions. As I mentioned in prepared remarks are still trading in those low 4% even, sub 4% in some instances. But the secret sauce here at Rexford is really the research we do, the relationships and our ability to transact in an off market or lightly [ph] marketed manner. For the year, we transacted 90% off market. For the quarter 100% off market. And relationships do pay off and we’re able to find situations where there’s a need by a seller. And for instance, the transaction we just mentioned closing in – the earnings disclosures, the 1 million feet in Inland Empire West. We actually had a relationship with that seller and they had a need to close quickly. And because of that, we were able to capitalize on those needs and were able to achieve a 5% yield on a building that you typically see trading well below 5%. And the one kind of topic that we’ve been hearing more recently, and I know I’ve brought up to you guys is when you look at issuing equity, you guys did the last deal sub 4%. But given the mark-to-market in your portfolio, your stabilized yield on your stock is probably in the mid-to-high 5s, right? And so you guys are putting that capital to work on your basis and stabilize yields in the mid-5s. Could you talk to maybe what – how you guys look at your stabilized yield or average yield over long term to put against that stabilized yield, right? It’s accretive on FFO, but long-term NAV, how should we think about the stabilized yields that you guys give versus maybe an average yield over a seven year to 10 year period as we think about sort of NAV accretion long term versus that stabilized yield where you’re issuing equity? Hey, Craig. It’s Laura, I’ll jump in here. I think it’s a great question about kind of how we think about growth. And when we think about, our stabilized yields that we’re acquiring at today, they represent a very healthy spread over current market yields. And certainly that – is what differentiates Rexford and our strategy. And I think that when you think about our business model, it’s about how we create value above market yields through our acquisition sourcing, through our asset management, through repositioning, redevelopment expertise. And so, when we think about investing, we’re investing a basket of goods. And so, we’re looking at core plus and value add opportunities. You’ve seen us acquire some core assets as well as our repositioning redevelopment. And when you put those together, we’re generating very significant cash flow growth. And if you look over the last five years, our FFO per share CAGR has been 15% annually, and that compares to the peer group of 10%. So, our business model allows us to generate that outsized cash flow growth. And so when we think about investing internal or external growth are not mutually exclusive. And both diversify our overall risk profile and contribute to accretive NOI and NAV growth, Is there a way to look beyond that 5.5% versus your cost of capital that maybe is a better gauge of where you guys are playing that capital out longer term in terms of, are you guys hitting high single digit unlevered hurdles? Is that five and a half plus bumps over the life getting you well in excess of that stabilized yield that you guys have on your stock? Just any kind of thoughts around that? Yes, that’s a great question, Craig. And I think a really good point. So when we quote these stabilized yields, these stabilized yields are a point in time. And the embedded rent steps within our leases are pretty powerful. If you look at the embedded steps that we signed in the fourth quarter within all of our executed leases, the average was 4.4%. For the full year 2022, the average rent step was 4.3%. So when you look at the power and the compounding effect of those embedded steps, those stabilized yields grow considerably over time. So that 5.5%, 6% stabilized yield is going to grow through those 4.4%, 4.5% annualized rent steps. Thank you. I wanted to ask about your leasing spreads in the fourth quarter very healthy compared to where it was historically. But just comparing every those last couple quarters, it did moderate a little bit and it seems like that’s going to continue next year. So I was wondering if you could just comment on that dynamic? Yes, John. In terms of our leasing spreads, maybe we continue to see extremely strong leasing spreads. In the fourth quarter, our leasing spreads were impacted by one lease that had a fixed option renewal at a 6% increase. So that lease had an impact, fixed option had an impact on our leasing spreads of about 700 basis points. So, if you were to look at leasing spreads without that lease, you look at GAAP and cash leasing spreads that are really in line with what we’ve experienced for the full year. Are there any leases like that in 2023? And when I look at your lease expiration schedule, it looks like the expiring rent of $14 is higher than it is in your overall portfolio and in subsequent years. So I was wondering if you could discuss that and if we could see potentially an acceleration of lease spreads in 2024 and 2025? Yes, in terms of our mark-to-market for 2023 is 61% on a cash basis and 75% on a GAAP basis. Our guidance incorporates cash leasing spreads of 55% to 60% and GAAP leasing spreads of 70% to 75%. So that would incorporate if we had – if there were any of these options, we don’t have a lot of fixed options within our portfolio. But if there were any of those anomalies that guidance would incorporate that. So when you look at the projected leasing spreads for 2023, we ended the year with 59% cash leasing spreads. And so our guidance is within – the 2023 guidance is within that range. As we look forward in terms into the mark-to-market over the next, call it two years. The mark-to-market for 2024 and 2025 is really within the area the 60% area that we’re experiencing in 2023 on a cash basis. Hey, thanks for taking my question. Maybe just the first one related to the funding question that was asked earlier. Historically, I don’t think you guys have done a lot of dispose, but clearly cap rates, like there’s support for high pricing right now to sell into. Would you guys ever consider doing more dispose as part of the funding calculus? Or what would change it, I guess? Hi, Nate. It’s Michael. Thanks so much for the question. Thanks for joining us today. Dispositions and recycling capital are part of the Rexford program. And we have an ongoing process where we’re constantly and continuously assessing the opportunity to recycle capital through dispositions. So you’ll see us doing that, and it will be on a selective basis. We don’t give guidance in terms of volumes, but it’s certainly a part of the Rexford program. Okay. That’s helpful. Maybe just a few on the Production Avenue acquisition. I’m just curious if you could kind of speak to the level of interest in that. Maybe what were the number of bidders? What was the walls [ph] on the property? What was the kind of mark-to-market on in-place rents there? Yes. Hi Nate, it’s Howard. First of all, this was a very unique opportunity for us. It’s not often that we’re able to – to be able to buy a quality building like this cross-dock in a strong location in the Inland Empire West at a yield that we’re able to capture. And it really had to do with timing on the seller’s part and urgency to close for some other capital needs that they had. As far as the rent, we believe there is some upside in the rent that was put in place. This was a sale leaseback. So the rent was negotiated at the closing. So there is some upside in that. As far as the tenant and the buyer pool, there were other buyers, but timing and ability to perform were a priority for the seller. So there were some other buyers that perhaps were able to – are willing to pay more but that certainly may not have been there from the eyes of the seller. We have a relationship with the seller on this particular asset. And the – that really came into play in terms of getting the seller comfortable in our ability to perform and perhaps our ability to achieve better pricing than maybe others were absence [ph]. Is it a new top tenant or is it going to be additive to an already top tenant? I’m just trying to get a sense of concentrations. Okay. That makes sense. Just maybe one last question on this. Does this tenant have other potential sale leasebacks they could do with you? They do have some other property in Southern California. They are national tenants. They have other assets in other markets. We, of course, don’t focus on those markets. So when you pursue those but there’s a possibility for that. There’s also a possibility that we might be able to do some build-to-suit construction for them as they expand. The sale and the capital generated here is for their growth. They’re in a growth mode, and we are discussing some other opportunities. Hi, Laura, I wanted to follow-up on your earlier comments around the projected rent growth. As that continues to be a key consideration, that seems to be underappreciated in our conversation. Have you run any sensitivity analysis on this projection? And like, for example, assuming 15% is the base case, what do you see as the lowest level of rent growth you think we could see or the potential upside from that? Yes, Camille, thanks for your question. We haven’t actually – we haven’t put out a forecast in terms of – from a sensitivity perspective. So not something that we’re including in the guidance today. And important to mention that the rent growth forecast that we have today is not included in our guidance metric. So it’s not our practice to embed rent growth into guidance. The more – to how we don’t include prospective acquisitions in our guidance. So as market rent growth is realized, we’ll adjust our guidance accordingly through the year. That’s very helpful. And on guidance, just trying to get a better understanding of what’s been factored into your occupancy outlook and the impact from the timing of expiry to lease commencement, could you update us on the typical downtime you’re seeing within the portfolio and how that compares to recent past and your expectations factored into guidance for this year? Yes, Camille, that’s a great question. So our occupancy is projected to be flat year-over-year. So we’re projecting in 2023 same-property occupancy to be 98% at the end of this year. That compares to 98% at the end of 2022. But our average occupancy is projected to decline about 75 basis points at the mid-point compared to 2022. So what’s impacting that average occupancy is our projection around downtime, and downtime being the time between lease expiration and lease commencement. Our 2022 downtime was abnormally low. Our 2022 downtime was 67 days, and that was driven by proactive move-outs where we had a tenant in place, and we were able to move out someone and then put a new tenant in with very little downtime. In fact, over 550,000 square feet of our new leasing had downtime of less than 15 days in 2022. So as we look into our 2023 forecast, we’re projecting 90 days, so about three months of downtime. To put that into perspective, that’s really in line with the downtime that we’ve experienced in the prior two years. That’s averaged about 90 days as well. So – and if you look back to pre-COVID levels was over four months. So 90 days in 2023 certainly continues to reflect the strength of demand within our market. The other thing that I’ll note is our expirations are skewed towards the latter half of the year. Actually about 1/3 of our expirations are in the fourth quarter. So as we get more visibility into our three and 4Q expirations, we’ll certainly provide updates to guidance as we go through the year. Really appreciate all the color there. And just finally for me, the operating dynamics of the 1 million square foot industrial property is very different from the typical asset within your portfolio. Should we expect a shift towards these larger acquisitions moving forward? Or was this more of a onetime deal? Hey Camille, it’s Michael. It’s a great and important question. And number one, we don’t expect a shift in Rexford’s strategy. And I think our strategy and our business model has been very consistent. I think even going back to the IPO, the way we communicate our business model and our strategy is that on average, you – one should expect us to be acquiring a high volume of single assets or smaller portfolios or even some large or medium-sized portfolios. And once in a while from time to time, you should also expect us to buy larger assets or substantially larger portfolios. The larger assets and the substantial larger portfolios are harder to predict in terms of timing. And they also tend to be heavily marketed. So that’s why we tend to see fewer of those. And however, one should expect to see some share of our investment activity to include larger assets and larger portfolios. And on average, we’re really targeting a blend of yield profiles through that activity. And there, one should expect 50% to 75% of our activity on the investment side should be able to have a core-plus or value-add orientation with relatively high yields. And then maybe 25%, 30% over time over the long-term might include more stabilized assets, most often times will include a larger transaction. So that’s how we would encourage you to think about the activity. Good morning, out there. Just wondering if you could talk a little bit about which types of tenants are creating the most demand across your portfolio today. And maybe if you could touch on tenant size and industry. And also if you’re noticing any differences in demand within or across your submarkets. Yes. Hi Jason, it’s Howard. Nice to hear your voice. I think really, it’s business as usual. There’s such a varied amount of demand in our markets that it’s really not typical to point to demand from any one particular user group. But yes, we’re – today, there are emerging industries and different groups that we see a bit more activity from. We’ve seen some heightened demand from food and beverage users. There’s incremental demand from building construction materials, electric vehicle manufacturing, medical devices and stable industries like fashion and apparel and e-commerce as well. In the past, we’ve seen some strong demand related to industries associated with housing and with some of the change in home-type sales. We’ve seen some declines in activity related to furniture and other household goods. But otherwise, very diversified still. And we’ve seen as Laura, I think, mentioned earlier, we see really a resurgence in demand after the New Year. That’s great. Thank you. And then just on the contracts, I mean, on the acquisitions that you have under contract at this point, any color you can give us on the breakout between core deals and the portion that might be value-add or land place? Yes. Yes. We really like – don’t like to report in advance on what that mix is. Of course, we’ll report on closing because these things vary from quarter-to-quarter. And generally, the mix Michael just referenced seems to blend out over the course of the year with that 75% value-add, core plus and then about 25% to 30% in the core or stabilized bucket. Hey Jason, I’ll add to that, that when you look at our acquisition pipeline, I mean, we’re seeing – continue to see strong yields approximately 5% initial yield on that $125 million pipeline and 6% stabilized yields. Great. Thank you. And then just lastly for me. Anything you guys can share on how you’re dealing with or mitigating higher construction and labor costs? And what kind of impact you might be seeing from that? Sure. It’s an interesting topic. And really, we think of it in terms of escalating construction costs. Costs are coming down here and there in different categories. Last year, we saw basically escalation that we were using in our modeling of 25% to 30% that occurred during the year. Today, we’re looking at underwriting 12% escalation, and we see potential for that to come down further. So our cost, for instance, in our supplemental on all of our repositioning and redevelopment projects include the expected escalation. So quarter-to-quarter going forward, we may actually be able to lower some of those projected costs as that escalation continues to come in. But typically, the main lingering issues out there are still permitting. Cities are under-resourced. So permitting occasionally takes longer than expected and labor, there’s a lack of available workforce. So really, it’s all about getting to the point where you can start the project because once we start a project, we’re generally going to be on track in terms of timing. And to make sure about that, we’ve got a strong program in place where we’re buying a lot of the materials that are needed in advance to avoid any delays such as roofing materials, electrical switch gear, HVAC and so forth. So I think we’ve done all we can to mitigate some of the costs and delays and so forth. And we’re really pleased to see the escalations starting to trim back. Yes, good morning out there. Maybe, Howard, Michael, you have talked about reacceleration in leasing and maybe a reacceleration of rent growth for the market in LA since the end of the year. But I guess going back to the fourth quarter market rent growth really kind of flatlined. Wondering about pushback from tenants on rents, I’m sure you always get it, but are they pushing back for more concessions? And then when you talk about 2023 having kind of more downtime, is this really just a function of higher churn in the portfolio where tenants just can’t keep up? I want to get a better sense for tenant health overall. And since I’m talking tenant health, I’ll just throw the last question for Laura, which is bad debt in the outlook and kind of any experience with bad debt so far late in 2022 or early 2023. Yes. Why don’t I start, and then Michael and Laura can jump in? As far as tenant demand, yes, it’s really been strong. We’re really pleased. And we have – as Laura mentioned earlier, we have activity on 90% of our vacant space that’s available for occupancy. So that’s very encouraging. In terms of what’s happening, there was a little bit of a slowdown and a pause in the fourth quarter, and we were hearing from people that they were concerned about inflation. They were concerned about interest rates. They’re concerned about the economy. But I think what’s happened is – and some people, I think, probably have this wait-and-see attitude thinking, let’s wait a little longer, maybe rents are going to go down, and so that obviously hasn’t happened. There’s still rent growth. And so the resurgence is really, I think, people realizing that they have to do something about their space needs, and they really can’t wait because they are hearing from the brokerage community that rates are going up. In fact, we – subsequent to quarter end, we signed a lease at a record lease rate on a renewal in the South Bay. We – on a – I think about 130,000 foot state-of-the-art building that we just renewed at $2.30 triple net. And that from our vantage represents fairly substantive near-term rent growth from similar buildings that were leased in that micro market just in the past 90 days. So we’re very encouraged with what we see. And maybe I’ll just add a little bit to that in that just sort of anecdotally, when we talk to tenants, and your question was around are we getting much pushback in terms of rents and given tenant expectations. And when you look at the availability of product in the market, in other words, if you look at what alternative space is available to the typical tenant, and we have an overall market vacancy of 1.1%. And as Howard mentioned earlier, many of our largest submarkets are well below 1%. But if you were to actually look into those vacant buildings and say, well, of the vacancy in the market, how much of that actually even begins to compete with Rexford? Because, again, we’re typically the best locations and the most functional product in each submarket we invest in, also thanks to our repositioning activity. And we believe that less than half of the stated market vacancy even begins to compete with our product on average on a locational and functional basis. So we continue to hear the same refrain from tenants, which is that, hey, they may not like the rent or the new rate, they may look around in the market, but it’s just so exceedingly difficult to identify alternative space for them that they eventually come back to the table in pretty short order typically. Yes. One other comment I’d like to add, Dave, is on subleasing. That is a very good indication of the health of tenants in the marketplace. And in the fourth quarter, we saw the fewest number of subleases occurred during the year. And if we then drill down and look at our sublease square footage as a percentage of our overall portfolio, it was lower than in 2019 pre-COVID, and it’s about half of what we’ve seen on average over the past three years. So that is a very, very close indicator that we track, which really speaks to the health of tenants in the market. And then, Dave, I’ll take your questions around downtime and then specifically around the health of the tenant and bad debt. In terms of downtime, as I mentioned, it’s really not directly related to anything that we’re seeing in the market in terms of demand. It’s more of that 2022 was abnormally low because of some of these proactive move-outs where we had very, very little downtime in the state. And we haven’t underwritten those when we think about 2023, but it’s possible that those could continue. But at this point, our forecast is in line with the downtime that we’ve experienced in 2020 and 2021 of 90 days, which, as I mentioned earlier, is still considerably less than the downtime that we were experiencing pre-COVID of four-plus months. In terms of the health of our tenant, our tenant base continues to exhibit incredible strength and stability. Obviously, as reflected in our bad debt was a positive 10 basis points in the full year 2022. Even if we exclude reversals, bad debt was 20 basis points compared to the pre-COVID average of about 50 basis points. So our forecast of 35 basis points at this point, I think, is prudent given that we’re early in the year, there’s certainly still some economic uncertainty out there. But I’ll note that we have not seen an increase in tenants on our watch list. In fact, bad debt as a percent of revenue in the fourth quarter was only 10 basis points even when you exclude prior year reversals. So the health of the tenant base, I’d say, is stronger than ever. Good morning. I was wondering if you could share your view on how the new transfer tax in LA might impact property values in the city and whether it has any impact on your external growth strategy? Hey, Jessica, thanks so much for your question. I think it’s a little too early to know the full impact of the transfer tax. But at this point, we’re not seeing a material impact on valuations in the transaction market. Importantly to note that the tax does not impact rental rates. So the impact on valuation actually could be potentially accretive to our yields on acquisitions. While it could have a modest impact on your IRR, it’s less impactful for us as long-term owners. So – and for us as well, our exposure is a bit limited there. This tax only applies to the city of LA. In our portfolio, about – only about 15% of our portfolio is in the city of LA. Just – I referenced just 150 municipalities within our infill markets. So the city of LA is just one of those. And if you look at our 2022 acquisitions, only about 8% of our acquisitions, over $2.4 billion in 2022 was in the city. So we’re continuing to watch and track the impacts and potential impacts across other municipalities. But at this point, we’re not seeing a material impact. Great. Thank you very much. And then just a second question from me. We’re seeing import container volumes at the ports of LA and Long Beach falling more than 20% year-over-year in the fourth quarter. Are you seeing any impact of that kind of trickling through to the warehouses at all? And then what’s your view on what it could mean for just overall tenant demand in the SoCal markets if this trend kind of persists in the next few months? Hey, Jessica, it’s Michael. Thanks for joining us today. First of all, the reduction in core volumes is principally and primarily a reflection of the comparison against last year, which was a record level for port volumes driven by the impacts of COVID and sort of the whipsawing effect of manufacturing and shipping and bottlenecks and all the rest as it flows through the supply chains globally. And actually, last year was the second best year on record in terms of volume. And I think about 8% greater volume than 2019 by way of indication. So there’s still a lot of noise in the market. We’re still – the full COVID whipsaw has – is still resolving itself throughout the supply chains globally to some degree. And with regard to the impact to our tenant base, we really haven’t seen an impact to the tenant base, and in part because the reasons I described because volumes are actually still quite robust, but also and maybe more importantly, that our tenant base is truly disproportionately focused on regional consumption. And so they’re really less concerned about where the goods come from or how they are received, whether they’re over the ocean, through our ports or otherwise. And the fundamental tenants that are within our portfolio is more driven by regional demand in terms of business and consumer consumption. And so we’ve seen even in prior years and prior decades when we’ve had port slowdowns or even port shutdowns due to labor or whatever, we’ve never seen a change in demand from the tenant base. In fact, not even – I can’t even think of an example of a tenant coming to us and saying, oh, gee, my needs have changed because of the ports. So I think we’re very fortunate in that respect. Yes, hi. Just curious, how should we be thinking about, I guess, headcount, G&A trends over the next few years just given the continued pace on the acquisition front? Hey, Mike, nice to hear from you. In terms of G&A, we continue to realize economies of scale within our operating platform relative to our portfolio growth. And when you think about 2022, we grew NOI by 40%, and we also saw that’s an 18% expansion in our square footage. So significant growth, but at the same time, we’re realizing operating synergies at an accelerated pace. So when you look at our 2023 G&A as a percent of revenue, we’re projecting about 9.8% G&A as a percent of revenue, and that compares to 10.2% in 2022, and 2022 was down from 10.8% in 2021. So we do expect for that downward trend to continue as our platform is nearly fully built out, and our team is very focused on continuing to find the operating efficiencies as well as innovation through technology. We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing comments. On behalf of the entire company and our Board of Directors, we want to thank everybody for joining today. We wish you a great day, and we look forward to reconnecting in about three months. Thanks, everyone. Thank you. This does conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.

EarningCall_254

Good morning. Welcome to Tenet Healthcare's Fourth Quarter 2022 Earnings Conference Call. After the speaker remarks, there will be a question-and-answer session for industry analysts. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell you may begin. Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's fourth quarter 2022 results, as well as a discussion of our financial outlook. Tenet senior management participating in today's call will be Dr. Saum Sutaria, Chief Executive Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represents management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide in today's presentation, as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. Thank you Will, and good morning, everyone. To kick us off, I want to thank all of our physicians and caregivers for their commitment and attention to our patients' needs throughout 2022. Three years into the pandemic, I continue to be inspired by the people I meet who have chosen to forge ahead and find their calling in health care. Second, I want to take a moment to acknowledge three of our leaders who have announced their retirements this year. Roger Davis came to Conifer in 2020, planning to transition to become the CEO of a spun out independent company. Roger has been a selfless leader acting upon the opportunities to improve Conifer's technology, point solutions, AR operations and global footprint with Conifer remaining a part of Tenet rather than advancing his own personal goals. For that we will always remember his leadership as a role model in the company. Brett Brodnax has devoted over 20 years to building today's USPI. He is a pioneer in ambulatory surgery and a rock star in his field. The relationships he has cultivated with health system partners and doctors will remain a hallmark of USPI, because he has never treated them as his, but ingrained them into the fabric of USPI. He and I jointly selected Andy Johnston to return to the company after gaining additional operating experience outside of the organization and I could not be more pleased with the way the three of us will lead this transition over a full year. And generously Brett's desire for USPI's success is so strong that he has offered the option for additional time beyond 2023 with us. Dan Cancelmi is approaching 30 years with Tenet, starting as a CFO in a hospital and building his career succeeding in every role he took as he ascended to our company's CFO. At every step, Dan championed his team members, brought the perspective of the leaders in the field to our home office, and relentlessly works to be solution oriented to the problems we face. In the last few years he's been instrumental in every aspect of our turnaround efforts, demonstrating his ability to adapt and take a fresh perspective on a company he's known his entire career. He creates value for our shareholders. Dan represents the highest model of integrity in our organization and I'm grateful for his dedication to help onboard a new CFO at Tenet. In the last five years, we've built a model for leadership transitions that are stable and collaborative handoffs and these should be no different thanks to all three of you. With that, let's turn to our 2022 results. In 2022, we recorded net operating revenues of $19.2 billion and consolidated adjusted EBITDA of $3.47 billion, which translates into an attractive 18.1% adjusted EBITDA margin. We finished the year strong and delivered results in the fourth quarter consistent with or slightly above the expectations we set for all three of our businesses, driven by stronger volumes and excellent cost management. For the year, USPI delivered $1.327 billion in EBITDA, with strong margins at 40.9%. Importantly, in 2022, USPI had 4.6% growth in same-facility revenues in the range of our long-term goal of 4% to 6% top line growth. But as we've discussed, the performance in 2022 was not consistent quarter-to-quarter and same-store EBITDA growth was below our expectations. We are pleased that the fourth quarter returned to positive same-store growth and the typical seasonality of strong December volumes that we used to see pre-pandemic. USPI's M&A engine under the Tenet umbrella continues to be an industry-leading differentiator. In 2022, we added 45 centers to the portfolio through M&A and de novo development, in addition to the SCD centers. This was highlighted by our acquisition of 22 facilities in our partnership with the United Urology Group. Turning to our hospital segment. We generated nearly $1.8 billion of adjusted EBITDA in 2022 during a challenging operating environment. Our operators navigated a cybersecurity attack, as well as continued COVID-related pressures. Importantly, we saw a meaningful improvement in clinical quality and patient safety metrics such as a 50% reduction in both MRSA infections and hospital-acquired pressure ulcers. We saw our peak in contract labor expense in September and by December we had reduced that by almost 23%, exiting the year with contract labor below 6.5% of our consolidated SW&B expense. We are confident in our labor management system and we'll continue to adjust as needed for critical patient needs. Over the past year, we have also invested in our workforce with increased pay bonus programs and incremental benefits. Importantly, our nurse retention and recruitment efforts continue to pay dividends, with RN hires up in 2022 over 2021. Retention has improved as well. In the fourth quarter, nurse turnover improved by 22%, compared to the average of the prior four quarters. Finally, Conifer had another strong year, with third-party customer revenue growth of 10%. Adjusted EBITDA margins remained strong at nearly 28%. Conifer's pipeline of sales opportunities remains robust, reflecting the investments that we have made in our commercial capabilities for both integrated and point solution initiatives. Let's transition to 2023 guidance. We are projecting full year 2023 adjusted EBITDA of $3.16 billion to $3.36 billion, which represents an attractive growth rate of 7.2% at the midpoint on a normalized basis. First, in our industry-leading ambulatory surgery business, we anticipate normalized adjusted EBITDA growth at USPI of 11% at the midpoint of our guidance, based upon our expectation of 4% to 6% growth in same-facility revenues, further accretion from the second SCD transaction and continued strong contributions from our M&A and de novo initiatives. Our guidance reflects a healthy 5% organic EBITDA growth rate for this year. Let me address the second SCD transaction in same-facility growth in more depth. The most direct way to characterize the second SCD transaction is that we are behind our expected ramp-up by approximately one year. Recall, unlike the first SCD transaction, where we acquired mature centers and achieved 100% in buy-ups to consolidate and deliver synergies into those centers. The second transaction had a broad range of assets, including many that were early in development. We had some planned buy-ups and center openings that did not happen on our original time line in 2022. The agenda to make progress has not stalled. Since Q3 we have completed six more buy-ups at multiples unchanged from prior buy-ups. We have opened the majority of the de novo centers, with the remaining seven on track to open this year. Collectively, the SCD transactions deliver a total of 135 centers, which have margins of approximately 40% and were acquired for an average multiple under 10 times pre-synergies. Turning to same-facility growth. The continued migration of procedural services into an ambulatory setting acts as a sustained and far-reaching tailwind for our business. Looking back from 2019 to 2022, the same facility business has recovered to pre-pandemic volumes. And at the same time our net revenue per case has risen by 12.8%, as a testament to our ongoing addition of higher acuity cases. We are also positioned to drive attractive growth in 2023 and beyond. Let's unpack that further given our Q4 2022 same-facility volumes and how we bridge into our 2023 guidance. First, as a foundational element, in 2022, on a same-facility basis, our active physician population grew over prior year. Second, the impact of Hurricane Ian causing facility closures during the fourth quarter was about 0.3%. Those facilities are now repaired and operational in the current year. Finally, reductions in certain lower acuity services and investment in higher acuity services are still ongoing. For example, in Q4 2022, this impacted same-facility growth by approximately 1.1%. We will continue to seek opportunities for service line acuity enhancements into the future. It is noteworthy that our same facility ASC total joint cases, as one of the highest acuity orthopedic sub-service lines, grew by 13.2% in 2022 relative to 2021. For these reasons, we have conviction in our strategy and we are comfortable with our guidance of same-facility growth returning to 2% to 3% in 2023. Let's turn to our USPI M&A engine, which represents the other critical value driver for Tenet shareholders. For many years we have consistently acquired centers at attractive valuations and driven post-synergy multiples for our acquisitions to below 5 times. And our latest 2022 vintage is estimated to do the same by the end of year two. We intend to invest approximately $250 million in ambulatory M&A each year and have a robust pipeline to support that level of investment. We continue to be active in the construction of new centers originating from our USPI development team and separately from our SCD partnership pipelines. We currently have 22 centers that are in active syndication or under construction. Adding centers with strong margins, and attractive post-synergy multiples, remains the best use of our cash for investments, to enhance tenants free cash flow. We recently announced a new development agreement with Providence Health System, a leading innovator in health care services in the Western United States, that will expand our strategic partnership and increased ambulatory access across new markets. We expect this relationship will expand to 15 to 20 centers in the next two years. Stepping back, USPI is among the best examples of value-based care in our industry. Our services are generally 30% to 50% more affordable than similar services delivered in a hospital setting. USPI is the preferred partner, for both high-quality physicians and health systems as our teams deliver the full range of management services. The linkage to our hospital business creates an unquestionably superior platform, from which to draw talent operating expertise and scale benefits. Turning to our hospital segment. We are expecting adjusted EBITDA growth of 4.6%, on a normalized basis at the midpoint of 2023. We anticipate this will be driven by 2% to 4% adjusted admissions growth, continued operating discipline and the expectation for further moderation in contract labor costs, partially offset by increases in employed labor costs. The year-over-year core adjusted EBITDA growth rate for 2023 is higher than our long-term forecast of 2% to 3% annually, because of the tailwinds created by the points I've noted, and also the continued recovery of our Massachusetts market and ramp-up of our hospital in Fort Mill. Our portfolio transformation also continues as we recently reached an agreement for John Muir Health to purchase Tenet's 51%, interest in the Santa Ana [ph] Regional Medical Center for $142.5 million slightly above a 10 times multiple. This transaction is expected to be completed in 2023 and subject to regulatory approvals, and customary closing conditions. Finally, Conifer is expecting adjusted EBITDA growth of 11% for 2023, on a normalized basis for changes in Tenet’s contract terms and client hospital divestitures, driven by new sales and a continued focus on automation and offshoring activities, to realize greater efficiencies in our operations. All in, our full year 2023 guidance of $3.16 billion to $3.36 billion, represents an attractive recovery target that is also respectful of the continued challenges of the current operating environment. Our management discipline has been a hallmark of our success, and we are focused on accelerating efficiencies and across our business segments, and investing for the future. Thanks, Saum. And good morning, everyone. We were very pleased with how we finished the year, with fourth quarter adjusted EBITDA excluding grand income, coming in at or above the midpoint of our guidance ranges, for all three of our businesses, driven by renewed same-store volume growth for USPI, strong same-store adjusted admissions growth in our hospital business, and lower levels of contract labor exiting the quarter, all of which gives us momentum as we begin 2023. In the quarter, we generated consolidated adjusted EBITDA of $897 million, which included $40 million of grant income. Our performance reflected strength in volumes and improved management of labor costs. Additionally, our results were supported by continued focus on high acuity service lines. Now I'd like to highlight a few key items for each of our segments, beginning with USPI, which delivered strong operating results. USPI's fourth quarter adjusted EBITDA grew 18.7% compared to last year excluding grant income and its EBITDA margin continues to be very strong at 43.6%. Surgical case volumes were 101% of 2019 pre-pandemic levels. Also USPI delivered a solid 2.3% increase in revenue per case and surgical cases were 70 basis points higher than fourth quarter 2021 on a same-facility basis. For the full year, USPI produced case volume growth of 2% and net revenue per case growth of 2.5%. We continue to be pleased with the strong margins and cash flow generated by our ambulatory business. Turning to our acute care hospital business. Fourth quarter same-hospital adjusted admissions increased 2.9% over the fourth quarter of 2021 and total same-hospital inpatient admissions increased 50 basis points, while non-COVID inpatient admissions increased 4.3%. Our labor management continues to be very effective, despite the cost pressures, specialty temporary contract and our staffing costs. On a consolidated basis, we exited the year with December contract labor at 6.4% of consolidated SWMB providing us momentum as we move into 2023. Total hospital costs were well managed in the quarter, as these costs were 3.1% lower than the fourth quarter of 2021 on a per adjusted admission basis. SWMB costs per adjusted admission were up only 50 basis points compared to the fourth quarter of 2021, despite more severe labor pressures this year. Our case mix index and revenue yield remains strong, as we continue our strategic focus on investments in higher acuity, higher margin service lines. Our 2022 CMI has grown at a 4% CAGR since 2019. Turning to Conifer, which again delivered a solid quarter. Conifer produced fourth quarter EBITDA of $90 million with a strong EBITDA margin of about 28%. For the year, Conifer resumed top line revenue growth of about 4% and revenue from external clients increased 10%. Next, let's review our cash flow, balance sheet and capital structure. As of the end of the year, we had $858 million of cash on hand and no borrowings outstanding under our $1.5 billion line of credit facility. We generated $321 million of free cash flow for the year or $1.329 billion before the repayment of about $1 billion of Medicare advances and deferred payroll taxes related to the pandemic that were received or deferred in 2020. All of these advances and deferred taxes have now been repaid. During the fourth quarter, we repurchased approximately 5.9 million shares of our stock for 250 million. Our December 31 leverage ratio was 4.1 times EBITDA, consistent with year-end 2021. As a reminder, we have no significant debt maturities until the third quarter of 2024 and have approximately $1.8 billion of secured debt borrowing capacity available, if needed. We have strengthened our balance sheet over the past several years and retired or pushed out debt maturities, which we believe provides us ample financial flexibility to support our growth initiatives. Let me now turn to our outlook for this year. Our projected consolidated adjusted EBITDA for the year is in the range of $3.160 billion to $3.360 billion. As we have discussed previously, there are a number of items that impact the comparison of our 2022 results to our 2023 outlook, which are outlined on slide 7 of our investor presentation. Let me summarize them. First, we are assuming consolidated organic EBITDA growth at the midpoint of approximately 6% over 2022, after normalizing for various items that I'll discuss shortly. The organic growth is anticipated to be driven by stronger ambulatory and hospital volumes lower levels of contract labor and other cost efficiencies, negotiated commercial rate increases and continuing investments in hospital higher acuity service lines. Second, we anticipate the USPI will drive $65 million of organic EBITDA growth which is about 5% growth. This organic growth coupled with approximately $78 million of additional earnings related to USPI's acquisition and development activities, is anticipated to result in normalized EBITDA growth of about 11%, for USPI. Third, we anticipate year-over-year EBITDA growth of about $100 million due to the estimated impact of the cyber attack on our hospitals last year and an additional $10 million of earnings from proceeds related to the attack that we received this year. No other insurance proceeds for this matter have been assumed in our 2023 guidance. There are also several other items impacting our 2023 EBITDA guidance compared to last year, many of which we previewed on our third quarter earnings call. First, we recognized $194 million of grant income in 2022, related to the pandemic. Our guidance, for 2023, does not assume any noteworthy amount of grants this year. Second, we realized $114 million of gains on asset sales completed in 2022. Next, there was $31 million of Texas Medicaid supplemental funding revenue, related to 2021 that we recognized early last year when the program was approved. Also, there are various revenue reductions this year that total almost $200 million for reimbursement changes substantially related to the pandemic, the 340B outpatient issue and the ACA that are detailed at the bottom of the slide. Finally, our 2023 guidance assumes a $14 million reduction in EBITDA, due to our planned sale of the San Ramon facility that we announced last month and a $27 million reduction in Conifer's EBITDA this year, due to transition contract expirations related to the sale of our former Miami Hospitals and CHI's divestiture of certain Iowa facilities. After adjusting for these items, our 2023 outlook represents year-over-year normalized consolidated EBITDA growth of 7.2%. A few additional assumptions related to our outlook. We are assuming 2023 same-hospital admissions increased 1% to 3% and adjusted admissions increased 2% to 4%. COVID admissions of approximately 3% down from 6% in 2022 same-facility USPI surgical cases are projected to increase 2% to 3% and USPI's net revenue per case is also projected to increase 2% to 3%. Another assumption I want to mention is that we are revising the rates and scope of services under the revenue cycle contract between Conifer and our hospitals. The revised contract continues to be on a commercially reasonable basis is anticipated to result in an approximately $40 million EBITDA reduction for Conifer this year and its corresponding $40 million increase in our hospital segment EBITDA. This has no net impact to consolidated revenues, EBITDA or margins. Finally, we would expect first quarter 2023 consolidated adjusted EBITDA to be $775 million at the midpoint of our range. And we anticipate that USPI's EBITDA in the first quarter this year at the midpoint will be approximately 22% of our full year 2023 USPI EBITDA guidance. Turning to our cash flows for 2023. From a cash flow perspective, we continue to target another strong year of free cash flow generation. We are expecting cash flow from operations of $1.850 billion at the midpoint of our range and capital expenditures of $650 million at the midpoint. We anticipate this will result in free cash flow of $1.200 billion at the midpoint, which does incorporate an estimated $170 million increase in income tax payments this year compared to 2022 due to us nearly fully utilizing our tax NOL carryforwards as a result of our improved profitability over the past several years. This free cash flow will be used in part to fund approximately $560 million of anticipated cash payments to non-controlling interests. I do want to point out that our 2023 guidance does not reflect the use of any capital deployment for share repurchases or debt repayment. However, this is not to say that we won't deploy capital for these items. It's just that we have not reflected any 2023 share repurchases or debt retirement in our guidance. Our free cash flow generation has improved substantially over the past several years and we expect to continue to drive strong cash flows, while executing on our growth plans. As a reminder, our capital deployment priorities have not changed. First, we plan to continue allocating approximately $250 million of capital annually to grow our USPI surgery center business; second, to enhance our hospital growth opportunities, including the continued focus on higher acuity service offerings; third, evaluate further opportunities to retire and/or refinance debt; and finally, share repurchases depending on market conditions and other investment opportunities. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Kevin Fischbeck with Bank of America. Please proceed with your question. Great. Thanks. I appreciate all the color on the USPI side of the equation and the expectations for improvement there. But I just would love a little bit more color on as you do the postmortem on what happened in 2022 and why you're a year behind on that first -- on the second part of the transaction, how much visibility do you have in that normalizing? What went wrong then? Why do you have visibility in improvement this year? And is there anything you're going to be doing differently around future deals or de novo developments? Thanks. Hey, it’s Saum. Just real quickly on that. I think it goes -- this goes back to the commentary that I made about a wide range of the types of centers that we purchased, many of which were much, much in earlier stages of development ramp-up. And again, some of them were literally just breaking ground. And so when you couple that with the disruption from COVID to physician practices that would impact ramping centers, you look at some of the supply chain issues we faced in getting centers opened and running with the right equipment and infrastructure on time, the ramp-up of those centers being slowed slowing potential timing for buy-ups. I mean all those things kind of played into a bit of a perfect storm on a great set of assets as we noted they're the center level asset performance on the ones that were more mature, we're doing just fine. But just when you look at all of that put together, we had a set of assumptions that entered not expecting a lot of that disruption and it just didn't play out that way. And that's why I figured, it's just easier to just be clear. It's a year behind the expectations but we still feel great about the portfolio. Hey. Good morning, guys. I was wondering if you could just spend a minute on what's in guidance for reimbursement, particularly on the commercial side. What kind of success are you getting in renegotiating contracts? And what visibility does that give you in terms of the rate update you'll see over the next two to three years, the contract duration? Hey Jamie, it's a Saum. Good morning. We believe we're in a very good position from a health plan contracting perspective, where is essentially fully contracted this year about 95% and in terms of the negotiated terms and provisions we negotiate contracts for all of our facilities hospitals, USPI facilities, our physicians on the national basis with the national plans and on a statewide basis for the Blues. So we feel very good where we're at. We get asked a lot about in terms of percentage increases. And are we having conversations about given the inflationary environment, we absolutely are. We talk about rate increases typically in the 3% to 5% range, and some more recent negotiations. We've, obviously, been discussing the inflationary aspects and I think we've been making progress on that too. So we feel really good where we're at from a contracting perspective. Thanks. Good morning. I wanted to ask another question on USPI. I appreciate all the detail. Dan said, I think 22% of EBITDA for the year in the first quarter that looks like it's up about 6% year-over-year, if I'm measuring that correctly versus 11% for the year. So what's driving that? What do you think is going to drive the significant ramp through the year to get to 11%? And then just quickly on NCI it looks like it's up a lot year-over-year materially faster than growing faster than EBITDA. Can you walk through the driver of that? I assume, it's at least partially due to the buy-ups. Thanks. Hi, Justin, it's Dan. Let me address – let me hit the second one, the point about the NCI. Our NCI expense assumption for the year, when you look at it on a – we refer to it as sort of like a flow-through basis EBITDA minus NCI. It's roughly 64% anticipated for this year, which is consistent with prior years. 2022 is roughly 65%. So the flow-through is really consistent between the year. You're right. There is – obviously, as some buy-ups are completed that can have an impact too. But the flow-through in aggregate is very consistent from year-to-year. In terms of the first quarter, we obviously laid out our first quarter assumptions on a consolidated basis $775 million at the midpoint and your point about USPI being 22%. Keep in mind, as USPI moves through the year fourth quarter is typically seasonally the strongest quarter for USPI, so we feel comfortable with where we've set our guidance at this point. Okay. But the seasonality wouldn't be impacted on a year-over-year basis then I would just say my right that it's up 6% in the first quarter, but 11% for the year. And if so what drives the ramp through the year to get to the 11%? Thanks. Yeah. Again, we feel comfortable with the growth. Obviously, the percentage can move around a bit depending on various factors. But we – again, we feel good with where we set guidance for the first quarter as well as full year. Hi. Good morning. Thank you. I just want to focus on surgery center organic revenue growth of 3%. You did give some detail on the call backing into it, it would be 4.3% and 1% being the reduction of lower acuity services. Can you tell me what inning you are in that process? How much of a headwind to growth? Is that – will that be next year? And also is there anything else that you think is currently impacting the company's ability to get back to that mid-single-digit growth target and maybe other things you're doing to achieve that in 2023? Thanks. Hi, it's Saum. First of all, just so that we characterize it the right way. I don't consider it a headwind to growth in the sense that what we're really trying to do is enhance acuity and focus on not only net revenue growth, but over time profitability from those higher-end services. I mean, the case counts it's a headwind to case counts in some respects more than it is what we're trying to do and build and grow. And really, we're talking about the lower end of really the lower end of services that you find in the ASC setting, which you're going to migrate over some time anyway. So we actually -- I mean, I'd reiterate we're going to continue to look for those opportunities. Now I think your question of what inning are they in particular for USPI is a good one. And the -- one of the reasons that we feel comfortable with this year's guidance is that the impact of the strategic and other initiatives as well as some of the reductions from those type of migrations that we saw in 2022, we expect to slow in 2023. That's not to say that sometime in the year or in the future, we won't look at other opportunities for transitions, but we expect them to slow, which is why I called that out as a bridging item into the 2023 guidance Hi, everybody. Thanks for all the detail on USPI. I might pivot over to labor. If you're saying in December contract label was about 6% of total SWB. Is that a good run rate that you're taking into 2023 with guidance on where you think that would be? And then I know your experience with contract labor throughout 2022 was a little different in pattern than some of the other public peers. How much of a tailwind gross basis would that represent if you're 6% or whatever the number you're thinking it will be for 2023 versus what you spent on contract labor in 2022? And then finally have you incorporated any of that into your outlook, or are you sort of holding that out in case you need it for the permanent labor? Hi, A.J. It's Dan. Good morning. In terms of contract labor - contract labor peaked as a percent of SWB in September. And as we move through the quarter it declined sequentially each month. And we exited with December at 6.4%. As we move into this year, we have assumed some further moderation this year in our contract labor spend, obviously, net of full-time employment costs because I mean what we're really focused on is replacing contract labor to the greatest extent possible with employed colleagues. And so we – obviously, we've been focused on now. We're going to continue to do that as we move through this year. And so, yes, we have built some moderation in aggregate contract labor into our guidance this year. Yes. We've obviously taken into consideration the incremental investment with our employees when we think about the reduction in contract labor it obviously will be replaced by some form of employed costs, right? Hi. Just a little confused about the cyber issue. How do we think about that last year versus this year in terms of a good guide to organic growth? Hey John, it's Dan. So, obviously, in terms of the EBITDA, we've sized that approximately $100 million and we did receive insurance proceeds in January of $10 million and that is reflected in our guidance this year. But we have not reflected any additional insurance proceeds in our guidance this year. Obviously, we're working that with the insurance carriers, but we have not assumed any additional proceeds. Obviously, in terms of the impact on volume, it did have an impact on volume. And we obviously took that into consideration when we built our volume assumptions for this year. Total was about $10 million in terms of the net impact on the P&L. But that offset -- that's part -- we rolled that into that net $100 million number. I see. So, in other words just to be clear it's about a $90 million good guide if we think about the organic growth help this year. Well, no, we view it as $100 million. That's what we put on the slide. Again the cyber estimate that was an estimate and it took into consideration some of the insurance proceeds that we received. Hi, thanks. Just first a clarification. I think the baseline that you guys were talking about last quarter was about $3.15 billion in EBITDA for 2022. And now it's $3.03 billion. So, I'm just curious what changed in the baseline assumption? And then my real question I was interested in the comment that Saum made around value-based care and USPI I'd be curious if the build-out of your ASC portfolio in the past couple of years has changed anything with respect to those contracts on a national or state level with the Blues with the big payers. And specifically are they looking at ways to move more volumes to ASCs? And how is that sort of impacting your negotiations? Hey Josh it's Dan. Let me address in terms of some of the funding reductions compared to what we talked about on the call in October a couple of things. One, there is -- we did recognize $40 million of additional grant income in the quarter that number through the end of the third quarter was roughly $154 million. We ended the year with $194 million. But also at that time we didn't have visibility -- clear visibility in terms of when some of the pandemic supplemental funding for the Medicare 20% add-on the FMAP the Medicaid, additional FMAP funding so when -- obviously, we know now when the public health emergency is anticipated to expire. And we have visibility into how the FMAP will be phased down during the year. Those are the primary differences. Yes, hey it's Saum. On the second part of your question, this is another reason why the continued push into what I described strategically around higher acuity services in the ambulatory surgery setting is important because on a differentiated basis relative to the cost in a hospital that continues to be a very attractive site of care value-based care initiative, I don't -- I can't think of other than the ASC setting a stronger site of care efficiency in the system that would exist relative to the alternative cost structure. And so yeah, we do see that as not only attractive to commercial payers, but also to government payers from the standpoint of the work that we do there and also the ability to do it with high patient satisfaction and safety levels. So I think over time as we continue down this path of innovating in higher and higher acuity things than our ASCs. I think the ASC business in USPI in particular will be viewed as a real value-based care enterprise. Great. Thank. Good morning, everyone. I mean the details on slide 10 for the adjustment [indiscernible] EBITDA for 2022. And I guess from that it seem like EBITDA margin for the total company [indiscernible] is right around 15%, if we're doing the math roughly, and then 2023 [indiscernible]. So just want to confirm that we are thinking about that right that are at least gradually determine the level of EBITDA margin expansion in 2023 versus 2022 [indiscernible] basis? And then [indiscernible] is there anything else where we're calling out if your point of view [indiscernible] that could drive some margin expansion at least on gross basis for 2023? Thanks. Hey, Steve, we were having a hard time hearing you and you were cutting out. I think you were asking about the margins on a normalized basis. When we look at the margins in 2022 versus 2023 projections on a normalized basis in 2022 15.9% call it 16%. And for 2023, it would be roughly 16.3% on a consolidated basis, after you normalize for those various items. So there is some margin expansion and that's obviously will continue to be a focus of ours to continue to expand our margins as we move through the year and into 2024 and beyond. I'm not sure I heard exactly on contract labor. But as I mentioned, we exited the year at 6.4% saw nice improvement. The operators did a really good job managing those costs down and we have assumed some moderation as we move through this year in contract labor that has been reflected in our guidance. So hopefully, that addressed your questions that we were having a hard time hearing you. Steve, you're breaking up entirely for us probably better to follow-up with Will off-line. We really can't hear you. We're kind of catching every other word. Hey, thanks. Maybe to ask one more on USPI sorry about this. But what actually did SCD contribute in 2022? That might be helpful. And what do you have in your plan for this year? Do you think you get back to that $140 million target, the $175 million? And then maybe just a quick follow-up. Looking at the bridge, it does strike me as odd that you expect USPI to generate the lowest organic growth of all the segments this year. And the prepared comments sound a lot more bullish and encouraging than maybe the percent that you're guiding to. So maybe just to challenge you a little bit on the 5% number like why that is the right number? Hey, Whit, it's Dan. In terms of SCD, as Saum mentioned in his prepared remarks, we're basically a year behind. And what we said for 2022 for SCD was we would anticipate generating approximately $140 million of EBITDA in 2022. So you should think of it as that in terms of -- for 2023. We're essentially a year behind in terms of that. In terms of the organic growth, USPI's organic growth we're projecting that to be 5% on a normalized basis. And the hospital growth is -- there's -- as Saum again mentioned in his script that growth is a little bit higher than what we historically project for the hospitals. But it's also being supported by further improvement in our Massachusetts Hospital, as well as our new facility outside of Charlotte. Hi, good morning. Hoping you could provide an update on the buy up activity in the second SCD transaction? How many SCD II buy-ups did you complete in 2022 versus your expectation I think of 30 plus to start the year? And what are you assuming in your guide for 2023? Thanks. Hey, Andrew, it's Dan. In terms of -- we have assumed some buy-ups in 2023. I would say we have very good visibility into them and we feel very comfortable with the assumptions that we have built into our guidance for this year for those anticipated buy-ups. Hey guys. Thanks for taking the questions. A couple of questions on the hospital side just for -- just some number of questions. Can you quantify the nurse-to-patient ratio you guys had in back office 2022? And how do you think about that for 2023. On the same topic, can you quantify the turnover you saw in the back half of 2022? And any details around nurse recruiting and how it's tracking versus your expectations? Hey, Pito it's Saum. We don't report our nurse-to-patient ratio. They're different state-to-state and some states have regulations and others don't. And it really depends heavily on the acuity. I'm not even sure how in an aggregated way one could describe a nurse-to-patient ratio given the differences in ICU, MedSurg, Forest [ph], Telly, et cetera and we don't plan on reporting on that. The second part of your question, it's important obviously I took the time to mention it and I appreciate you're highlighting it. We're very focused on our nurse, but also tech and other important clinical role recruiting and that's been going very well. As I've indicated, our hiring was up on employed staff in 2022 over 2021 and that's accelerating. But at the same time, importantly, because of the investments we've made in the workforce, our turnover rates have come down, which is important from a retention perspective. And I think, you could legitimately attribute those reductions to the investments we've made stabilization of the operating environment, coming out of the pandemic surges, the recurrent surges and also probably a somewhat less desire for nurses to continue on the pace at which many of them are choosing to travel for other assignments. And I think as all of those things help to stabilize the workforce environment in 2023. As Dan noted, we hope to make further reductions in our reliance on contract labor and expect that to moderate through the year. So, it is a very important agenda item as we look forward. I would tell you, one last piece of color on this that, over the past couple of years, I had mentioned a few times, that we have built a lot of relationships at the ground level with nursing schools. And our ability right now to bring on new graduates into our environment, it's better than I've seen in a long time and that's helping. Those investments in relationships that we made over that time, I think will serve us well in 2023. Hey good morning, guys. Dan thanks for the color on your capital deployment views. But maybe just thinking about the buyback announcement from last quarter and your views on debt pay down as well. Where do you think the right leverage ratio is, or have you set leverage targets? And maybe just to clarify, as we think about buybacks, curious as to your thought or philosophy on using debt at some point to buy back stock, or are we avoiding that altogether? Just want to clarify all these things. Thanks. Yes. In terms of leverage, we've obviously made substantial progress over the past four or five years. If you go back to 2017, we were north of six times and we brought it down to approximately four times since then. Reducing leverage is obviously a very important focus of ours. As we make all capital decisions, we take into consideration, what's it going to mean to our margins, what's it going to mean to our free cash flow generation, what's ultimately going to mean to our leverage. So, it's top of mind always. And we'll continue to look for opportunities to reduce leverage in the future. In terms of the mix of debt retirement versus share repurchases, as I mentioned in my remarks, we have four key priorities. Debt retirement is one of them, as well as share repurchases. We look at -- obviously, we'll look at where market conditions are at and as well as various investment opportunities that we have and balance -- balance our capital allocation based on what we think will drive a best return for shareholders. On the volume outlook. So on the hospital side it looks like if you achieve the growth you're targeting. I think you'll be in the upper 80s range compared to the 2019 baseline. I guess how should we think about the volume that you haven't recovered? I guess how much of that do you view as a real opportunity, if labor pressure eases and how much do you think could be service lines that might not make sense for the company going forward? And then just on the USPI side, do you think the volume growth on USPI is going to be pretty consistent throughout the year, or do you think maybe that's going to be ramping a little bit throughout the year maybe as the environment continues to normalize? Thanks. Yes. I'm happy to start, it's Saum. So on the hospital side from a volume perspective, I would say that it really – the year really depends on the assumptions that we've moved past significant disruption from COVID-related activity. Obviously, as the last three years have proven, that can be somewhat hard to forecast. But I think there's a lot of good reasons at this point to believe that that will in fact be the case this year. Even the acuity of the COVID that we're seeing and even during the winter the amount of COVID we saw has come down. It's been quicker to treat easy short stay in and out type of cases with much lower impact on acuity. And importantly for us, given our strategy, it had a lot less effect on disrupting surgical scheduling and other things in the acute care hospital environment. So anyway, that's just I think a good sign overall. Look, in terms of USPI, as I mentioned, we're bridging from an inconsistent quarter-to-quarter set of results in 2022 into 2023 with a very thoughtful, bottoms-up, comprehensive examination of our portfolio. It's – this is really important. We took the time to understand the physician additions, the initiatives, the service lines, et cetera before coming to our guidance and we expect to see more consistency through the year this year than we did in the prior year. And look, if there's a range on the guidance for a reason, if post-pandemic recovery is more attractive, the upper end of the guidance contemplates that. And obviously, we would love to deliver that. So that's what we're working towards. Yes. And just to add on just in terms of from an earnings perspective is for USPI, as we move through the year, as I pointed out, roughly 22% of the EBITDA for the year will be generated in the first quarter, which is great when you look at the first quarter last year, it's growth of close to 13%, you take into consideration there is some headwinds in the first quarter this year compared to last year related to sequestration the 340B, but still even with some of that there's still nice growth year-over-year in the first quarter. And obviously, the fourth quarter is the strongest quarter for USPI. We have reached the end of the questions at this time. This concludes today's teleconference. Tenet Investor Relations is available for follow-up questions. You may disconnect your lines at this time and we thank you for your participation.

EarningCall_255

Good morning, everyone, and welcome to TeamViewer’s Q4 and Fiscal Year 2022 Earnings Call. My name is Ursula Querette, and I’m pleased to host today’s earnings call. I’m joined by our CEO, Oliver Steil; and our CFO, Michael Wilkens. Oliver will kick off the presentation by updating you on the specific business and financial highlights in the fourth quarter and the full year 2022. He will also give a quick update on our product offering and strategic direction. Michael will then go through our financials in detail, and we’ll finish on our financial guidance and our capital allocation framework. As always, the presentation will be followed by a Q&A session. Before we start, I would like to draw your attention to our updated important notice and APM disclosure. As you already know, starting in 2023, TeamViewer’s financial performance will be reflected in an updated KPI framework, whereby billings has changed from a primary into a secondary KPI, and revenue moves more into focus. This means that the definition of adjusted EBITDA will change from a billings to a revenue perspective, which will be particularly relevant for our full year 2023 guidance that we disclosed on IFRS revenue and the corresponding revenue EBITDA margin. All our KPI definitions are included in the APM glossary on pages two and three of this presentation. Thank you for the introduction, Ursula, and good morning, everyone. Thank you for joining our Q4 and fiscal year 2022 earnings call. Let me start with a look at our fourth quarter 2022 on the next slide. Overall, we achieved a very successful year-end finish with strong momentum in Q4. Of course, the overall macroeconomic environment remains challenging, but TeamViewer once again displayed strong resilience amidst these circumstances, and our entire team was really leaning in. I would like to point out a few highlights in the fourth quarter. Firstly, strong development of our billings. Total billings came in at €191 million in Q4, which is a plus of 24% reported and 20% plus on a constant currency basis compared to last year’s fourth quarter. And in addition, our profitability was again very convincing. For Q4 2022, we reported an adjusted EBITDA margin based on billings of 51%. Compared to the previous year’s Q4, this is an improvement of 7 percentage points, and Michael will give you a few more details on this later. Thirdly, we continued to focus on targeted sales campaigns. We traded additional value by up-selling customers into significantly higher value tiers, but also by attracting new customers and thus actually enlarging our global customer base. In addition, we once again proved the stickiness of our business model as we were also able to successfully implement price adjustments, which we had announced in Q3. And fourth, if we look at our regional split, in the fourth quarter billings growth was particularly driven by the strong performances of our EMEA and APAC regions. Our largest region, EMEA, grew by 28% year-over-year, and with an increase of 32% we also saw clear acceleration in Asia-Pacific, clearly driven by the new management and her team. And I think this quarter proves, once again, that our regional diversification is clearly paying off. If we look at our customers, our enterprise business retained its growth momentum, showing 47% billings growth year-over-year, and the ever-growing ticket sizes proved our continued shift from SMB to enterprise as a relevant and value-add of our products for large businesses. And last but not least, also our large original core business keeps growing. In the fourth quarter, SMB billings were up 18% year-over-year, and the increase stems not only from larger ticket sizes and higher pricing with existing subscribers, actually our SMB subscriber base also grew slightly again, by 8,000 in the last three months of the year to a total of 622,000. To sum it up, we are actually very satisfied with our year-end finish. I think our solutions are highly relevant for our customers, even in these times. We help them to securely manage remote operations, increase efficiency and sustainability to overcome also labor shortages. This is particularly visible in our steadily growing ticket sizes. And I would like to take a closer look at this on the next page. Let’s look at the SMB and enterprise billing split. I think there was an overall shift towards higher ACV buckets. We again successfully increased the quality of our customer base. When we look at SMB on the left, the LTM billings in 2022 increased by 11% on a year-on-year basis and amounted to €503 million. This was driven by our very successful cross and up-selling efforts, resulting in the higher bucket actually growing stronger. In 2022, our highest SMB bucket, between €15,000 and €10,000, significantly increased by 27% and amounted to a strong €225 million. In addition, we saw again a net up-sell from SMB to enterprise, this time of €20.5 million. This was largely driven by shifting larger SMB clients to our Tensor license for enterprise connectivity. And this clearly shows the continued tender success for larger customers who are looking for more efficient and highly secure solutions as the right answer during these challenging times. Total 2022 LTM billings in our enterprise segment increased by 42% year-over-year, which is then €132 million, and this growth originated across all ACV buckets, as you can see from the charts on the right. If we go to the next slide, please, I just mentioned the growth among all the ACV buckets of our enterprise business, and as usual let me give you two examples of recent large enterprise deals with TeamViewer Tensor, our enterprise connectivity platform, just to give you an idea on what’s happening on the enterprise side. First, let us look at German multinational corporation, Henke. The IT team uses TeamViewer to streamline their global IT support for around 60,000 IT devices running on different operating systems with Tensor. Our solution in that case replaced several others that they were using before, making their workloads simpler and faster. It goes without saying that Tensor meets all the strict security and compliance standards that are mandatory for Henkel, but also worth mentioning that Tensor seamlessly integrated in Henkel’s IT infrastructure consisting of obviously many other software products from vendors like ServiceNow or Microsoft. And this flexibility of our solutions is highly appreciated by IT decision-makers in global corporations. Another example, very different of large Tensor deals that we closed in 2022 was the German global broadcast station, Deutsche Welle. They managed all devices of their correspondents in 140 countries with TeamViewer, and chose our solution because they needed secure and stable connections to work reliability in breaking new situations. And I think what’s interesting notably is that we won this contract via a European-wide public tender, as Deutsche Welle is a public state or broadcast station bound to the EU’s public tender regulations. The next slide please is where I want to touch upon the financial highlights from a full-year perspective. To begin with, we continued our top line growth. Billings and revenue increased by 16% and 13%, respectively. With total billings of €635 million and revenues of €566 million, we fully achieved our guidance for the full year 2022, and the share of enterprise business increased by 4 percentage points year-on-year. Our products are highly attractive to a wide range of customers from various verticals or industries, and we continued to establish TeamViewer as the go-to partner for high-impact, strategic investments in digital transformation across various industries and, at the same time, allowed our customers to increase short-term automation and efficiency. Clearly, this is key in the current economic environment. And all these factors, they have achieved a strong net retention rate of 107% at the group level and compared to 2021, we improved the net retention rate by 9 percentage points. In addition, TeamViewer is again growing very profitability. Our adjusted billings EBITDA grew by 16%, to almost €300 million, and our adjusted billings EBITDA margin was stable at 47%. And that’s actually the upper end of our guided range from 45% to 47%. This is also a result of our effectiveness and execution and, in turn, we raised our basic earnings per share to €0.37, which represents a 46% growth year-on-year. This was driven by the strong increase in our net income obviously, as well as our accretive share buyback program of last year. Michael will elaborate more on the drivers of our net profit in his part of the presentation. In total, we are well-positioned to continue our strong performance in the current economic environment as well in 2023 and beyond, and we believe the fundamental demand for TeamViewer’s solutions remains strong. And with that, let’s have a closer look at our regional performance on the next slide. Here, you can see that in 2022, EMEA has proven to be very robust, as it delivered the strongest growth of all regions, followed by an accelerating APAC performance. With a billings growth of 28% to €109 million in the fourth quarter, EMEA significantly improved its already strong performance which we’ve seen in Q3. And on a full-year basis, EMEA billings grew by 15% to €340 million. We actually accelerated our sales momentum and further penetrated or well developed base of satisfied customers. Our business in the Americas achieved billings growth of 16% in Q4 to €64 million, and 18% to €223 million in the full year. Clearly, if you look at performance at constant currency, it was weaker than we had hoped for, but we remain quite confident in our resilient product offering and the further growing IT spend for digitalization in the Americas. So looking at our current market share in the U.S., we believe there is still significant room to grow. APAC further accelerated its growth with a new organizational structure settling in, and achieved a 32% billings increase in the fourth quarter. And on a full-year basis, APAC billings were up 14%. This growth reflects two very different half years, and resulted in APAC billings of €72 million for the entire year, so not such a strong first half, very strong second half of the year, so good acceleration there. And also the easing COVID restrictions towards the year-end also allowed for more customer interaction, translating into strong pipeline build and enterprise momentum. As you can see from the slide, TeamViewer is well-positioned for the future. Our global footprint is growing, our products are highly relevant for our strong and loyal customer base, and we address major customer needs. Next slide, please. Let me now explain our strategic focus areas to reach our business goals and growth drivers in 2023 and beyond. As you can see from the slide, we are focused on four main segments. The first one is it is our objective to defend our leading position in the remote access and support market. We are currently preparing a major upgrade of our core connectivity product. The new release will come with a new modern user interface to improve usability and overall experience, and we will introduce new security and also many other features. And we are confident that this will further increase the attractiveness of our products for our core target audiences across SMB and also private users. Second, within remote access and support, we will offer additional features like remote monitoring and management of devices for ticketing functionalities. With these features, we can add significant value to larger SMB customers and also managed service providers. When it comes to enterprise connectivity, the third area, we will focus on remote access and control of operations technologies, in short OT, devices, such as industrial equipment, machines and other smart and IoT devices. A good example of this are the coffee machines of the Italian vendor, La Cimbali, I think we’ve talked about that use case already in one of our previous calls. This is exactly the type of remote connectivity, so-called embedded devices, that becomes more relevant as companies aim to streamline and digitalize support and maintenance processes. And once rolled out to hundreds or thousands of those devices, this becomes very sticky and attractive for us. The fourth area is then our frontline platform for digital workflows, with step-by-step instructions and frontline work assistance. I think with those we have established ourselves as a key player in the so-called industrial metaverse, which meets the digital transformation of frontline work processes, for example, logistics, manufacturing or after-sales, using augmented reality on glasses or handheld devices. And, going forward, our augmented reality offering should be further supported by megatrends like shortage of skilled labor and the need for digital onboarding, training and more efficient frontline processes. As you can see, we are targeting IT and OT use cases in companies of all sizes to leverage the full potential of our solutions. Next slide, please. Just as a reminder, you can see our product portfolio that matches the strategic focus areas that I just explained. We offer three main product lines. TeamViewer Remote, our core connectivity product for SMB customers and private users. With different license tiers and add-on features, we target different use cases and different company sizes. Then in the middle for larger companies and critical infrastructure, we offer our enterprise connectivity platform, Tensor, that provides relevant security features and can be deployed really at scale. It also includes capabilities to connect to the OT, operation technology and embedded devices I just talked about on the previous slide. And the third product line is Frontline, our AR-based enterprise productivity platform that enables digital workflows and assistance for smart frontline operations. The platform includes cutting-edge capabilities, based on mixed reality, but also artificial intelligence to run frontline operations even smarter. Thank you, Oliver, and good morning and a warm welcome to all of you. I’m very happy to guide you through our financials for the full year 2022 and in Q4, in particular. Q4 was my first quarter as the CFO of this exciting company. You heard Oliver’s remarks on our operational focus areas for 2023. Later in my presentation, I will explain to you how we think about 2023 from a financial point of view, and I will dive deeper into the different elements of our guidance, which you already read about in our press release this morning. Next slide, please. I presented this group overview for the first time in Q3. Back then, I already mentioned the growing relevance of revenue for our business. From Q1 onwards, you will see quarterly revenue and the adjusted revenue EBITDA on the top of this slide. Today, I start with billings and the excellent billings growth rate of 24% in Q4 2022. With this strong year-end finish, we delivered on our guidance, and this despite the discontinuation of our Russia and Belarus business and despite the difficult market environment. So on a full-year basis, billings increased by 16% or a 11% on a constant currency basis, to €635 million. At this point, let me say thank you to a great and highly-motivated sales team here in Germany, and all over the world. The strong billings performance in Q4 led to a high adjusted billings EBITDA margin of 51% in Q4 and 47% for the full year, which was at the upper end of our guidance. Let’s move to the revenue perspective. On the lower left-hand side, you can see that revenue follows billings development in a delayed way, with a more balanced growth rate. So revenue grew by 14% in Q4 and 13% for the full year. With the full-year amount of €566 million, we also met our revenue guidance for 2022. Given the numerator-denominator effect, and applying the exact same operating cost base to revenue, the adjusted revenue EBITDA margins amounted to 41% for the full year compared to the adjusted billings EBITDA margin of 47%. This adjusted revenue EBITDA margin is best-in-class compared to our wider software peers is from now on the profitability reference for our guidance. With this, let’s move to the next slide, please, where I will focus on SMB, which accounted in Q4 for around 79% of our total billing. Q4 saw a very strong SMB billings improvement, a proof point of our pricing power. Why is that? Part of the growth rate of 18% is the result of the targeted sales campaign, including up-sell and our pricing campaign. Free-to-paid played a minor role in Q4. In addition, U.S. dollar exchange rate tailwinds made up 4 percentage points of the Q4 growth. With this strong fourth quarter, full year SMB billings were 11% higher, at €503 million. On a constant currency basis, the growth rate was 6%. On the top right-hand side of this slide, you can see our pricing power translating into constantly increasing average selling prices. In Q4, one SMB customer paid €804 on average per year. Talking about subscribers. At a stable subscriber churn rate, we were able to increase our customer base by 8,000 subscribers year-on-year. At the end of Q4 2022, we counted 622,000 subscribers in our SMB business without customers from Russia and Belarus. This large subscriber base still holds significant upgrade potential, as Oliver outlined before. Next slide, please. Now, let’s take a more detailed look into our enterprise segment which, in Q4, accounted for around 21% of TeamViewer’s total billings. Despite the uncertain macro environment, enterprise billings growth remained at a high-growth level of 47% in Q4. This development was particularly driven by the EMEA region and improved pipeline conversion and customers committing to growing ticket sizes. This is also reflected in the high enterprise net retention rate, which increased to 116% in Q4 2022. As there has been an ongoing debate around multi-year deals since our Q3 call, let me tell you, yes, part of these growing ticket sizes are due to multiyear deals. The fact that customers accept or rather ask for this type of contract proves how much they like our products and that they are happy to commit themselves for more than a year. By the way, our multi-year deals are paid upfront and will convert to revenue over time. The full year 2022 enterprise billings amounted to €132 million, corresponding to an increase of 42%, or 35% on a constant currency basis. The average selling price increased from €34,000 in Q4 2021 to €36,000 in Q4 2022. While fuelling the enterprise bucket with strong enterprise up-sell, this also had a positive impact on the number of enterprise customers. Compared to the end of 2021, the enterprise customer base increased by almost 1,000, amounting to roughly 3,700 customers at the end of 2022. Combined with the large SMB customer base, this brings us to a total of around 626,000 subscribers at the end of last year. Next slide, please. As mentioned before, this large and loyal customer base is in need of high-class remote connectivity and frontline workflow solutions. Our products in this category offer simplification and efficiency in times of increasing complexity and labor shortage. Our increasing net retention rate is proof of this increasing demand and high customer satisfaction. As per year-end 2022, our net retention rate was at 107%, 4 percentage points higher than in Q3 and 9 percentage points higher than the year before. This was driven by successful net up-selling of our retained customer base, including the increased migration from SMB to enterprise. Oliver mentioned already the Q4 ATM net up-sells from SMB to enterprise in the amount of €20.5 million, a further increase over the already very strong €18.4 million in Q3. Additional building blocks of the growing NRR were the favorable U.S. dollar-euro development, our targeted sales campaigns, and upfront-paid multi-year deals. Let’s turn to the next slide now, where I want to introduce you to our new KPI, ARR. The annual recurring revenue stands between billings and revenue, and gives a realistic impression of the annual subscription value of our customer base at a given point in time. Multi-year deals do not distort this metric as they are only accounted for with the annual value. Since we have seen an increasing demand for multi-year deals in 2022, it is now a good time for TeamViewer to implement the ARR as the new metric. In total, we built multi-year deals with full upfront payments of €45.6 million in 2022. So while billings increased by 16% in 2022, the ARR increased by 13%. Revenue also increased by 13%, with a revenue-to-billings ratio of 89% in 2022. Next slide, please. Let’s now start to move from the top line to the bottom line, and take a look at our recurring cost base. On a full-year basis, recurring costs, consisting of cost of sales and total OpEx, increased by 16%. This was in line with billings growth and higher than revenue growth. Hence, the adjusted billings EBITDA margin remains stable at 47% and the adjusted revenue EBITDA margin resulted in 41%. Let’s have a look at some of the 2022 operating cost items in more detail. The main reason for the increase in sales costs were the expansion of the enterprise sales force, higher bonus payments and currency effects. The growth in marketing costs was due to the first-time full consideration of sports sponsorships in 2022. As you know, this cost item will be significantly reduced once Manchester United exercises the option to buy back the rights to the club’s shirt-front sponsorship. The increase in marketing costs was partly compensated by scaling effects in G&A costs. The full year R&D costs increased in line with billings. The main R&D focus was enriching our digital workflow offering and enhancing our core technology platform to be able to launch the major remote connectivity upgrade that Oliver mentioned within the next month. Lastly, the strong decrease in other operating costs was mainly driven by lower bad debt expenses, due to a higher share of the enterprise business with better payment behavior. Next slide, please. The table on Slide 19 dives deeper into our different profitability metrics. On the top of the table, you can see the difference between our old adjusted billings EBITDA definition and our new adjusted revenue EBITDA definitions. It consists of the change in deferred revenue. In 2022, the deferred revenue increased, driven by strong billings development, especially in Q4. Deducting the non-recurring items from the adjusted revenue EBITDA brings us then to the unadjusted EBITDA, which was 17% higher year-on-year at €197.5 million in 2022. Non-recurring items decreased in 2022, mainly due to the positive valuation of U.S. dollar hedges, which partly offset charges for the legal case I already mentioned in Q3. With only slightly increased G&A expenses of 6%, our EBIT increased even by 22% to €143.7 million in 2022. And net income increased by 35% year-over-year to €67.6 million, mainly due to our strong operating performance and an improved financial result. Our earnings per share increased even stronger by 46% year-on-year from €0.25 to €0.37, which reflects the accretive effect of our 300 million share buyback in 2022. For the first time, we also displayed the adjusted EPS, which increased by 25% in a full-year comparison. We’re adjusting here from share-based compensation, PPA amortization and other non-recurring and related tax effects. With this KPI, we give you a less volatile perspective of the EPS growth going forward. Next slide, please. On this slide, you can see that the IFRS pre-tax operating cash flow was up by 6% in 2022, despite the first-time full year sponsorship payment. Let’s go through the items, which result in the 2022 free cash flow. First, cash tax, which increased by 7% to €46.4 million. Second, CapEx. As most of TeamViewer’s investment and innovation and partnerships so far are directly expensed as operating expenses, capital expenditures were relatively low in 2022 and went further down by 42% to €8.8 million due to the finalization of a new application landscape in 2021. The lease payments were driven by additional office space and IT infrastructure amounting to €9.5 million in 2022, up 37% year-on-year. This results in an unlevered free cash flow of €186 million and a high cash conversion in relation to the adjusted revenue EBITDA of 81%. The levered free cash flow, which also takes into account interest paid, amounted to €171.8 million in 2022. The respective cash conversion rate was 75%, and therefore, stable year-on-year. Worth mentioning that we managed to keep the interest paid stable at around €40 million, despite the more challenging debt and interest environment. Next slide, please. As the waterfall on this slide shows, cash and cash equivalents at the end of 2022 amounted to €161 million. The reduction compared to the end of 2021 was mainly due to our €300 million share buyback program and net debt repayment of €286 million, offset by net cash inflows. On the back of these measures, our net financial liabilities amounted to €472 million as of December 31, resulting in a net leverage ratio of 1.6 on adjusted billings EBITDA, and 2.1 on adjusted revenue EBITDA. With this, we delivered on our capital allocation target of around 1.5 leverage. At the same time, we significantly strengthened our financial profile through the repayment of debt and by balancing out our debt maturities, and we created value for our shareholders by returning cash through share buybacks. I will come to the new share buyback, which we announced yesterday later in the outlook section. If you want to take a closer look at the development of our share count, you can find the respective slide in the appendix. Before I come to the outlook, let me conclude my financial overview section with a summary of the most important takeaways. First, we delivered a strong 13% growth on our new primary revenue KPI. This reflects the strong billings performance in the earlier period. With the continued mix shift towards higher value customers in SMB and enterprise, as well as higher demand for multi-year deals, we increased the predictability of our business. And high customer retention rates prove the stickiness of our customer base. Third, despite the inflationary environment, continued investment into our business and the first full year consideration of the sports sponsorships, we recorded a sustainable high margin; and, fourth, paired it with a continued strong cash flow generation. Fifth, we see significant margin upside following a potential early exit by Manchester United from the shirt-front partnership, despite some reinvestments into our marketing efforts. Lastly, let me conclude this chapter also with a personal note. I think it is remarkable how well we performed in 2022 despite the current environment. Our business demonstrated strong resilience with the right product portfolio and the right market positioning. Next slide, please. Let’s now focus on what is in front of us. What you see here is a confident view of our 2023 business development. We are operating in an exciting growth market and our performance is underpinned by a highly recurring and resilient business model. On the back of this, like in 2022, we see double-digit revenue growth in 2023. In absolute terms, this means that we guide for IFRS revenues in the range between €620 million and €645 million. We also aim for stable profitability reflected in the adjusted revenue EBITDA margin, which is expected at around 40% for the full year 2023. This margin forecast takes into account continued investments in our future. I will come to that in more detail on the next slide. Revenue guidance you see on this slide translates into an expected billings growth of 6% to 11% in our old guidance KPI world. This growth is based on last year’s average U.S. dollar FX rate of 105. Let me remind you that we achieved a constant currency billings growth of 11% also in 2022. This corresponds to the upper end of the billings growth rate we expect also for 2023. However, we have to see how the macro environment works out, hence the broader growth range between 6% to 11% resulting in an absolute billings range between €675 million and €705 million. The guided adjusted revenue EBITDA margin translates into an adjusted billings EBITDA margin of around 45%, which also takes into account short-term cost effects. We think these are best-in-class margins, which carry significant upside beyond 2023, following a potential early exit by Manchester United from the shirt-front partnership. Before I turn to the next slide, let me remind you that our official guidance relates to our new KPIs, revenue and adjusted revenue EBITDA margin. Next slide, please. The guidance I just outlined, and the ambition to achieve stable high margins come with diligent cost management across all dimensions. We already told you on several occasions that we want to strengthen our high-quality product offering through additional R&D investments. More specifically, we want to reinforce TeamViewer’s leading position in remote access and support with the major upgrade of our connectivity platform. At the same time, we want to underline our status as the key player in the industrial metaverse, by extending the frontline platform. This will also require respective infrastructure upgrades and, hence, additional investments. Besides these investments into our future growth, certain macroeconomic impacts, like currency effects on our sponsorships and more general inflationary cost pressures will increase our recurring cost base. In order to compensate for this impact and said costs, we have taken several actions. For example, we work with our suppliers and partnerships to minimize inflationary cost increases. With our attractive RSU program, we not only increase employee loyalty and strengthen the shareholder perspective, but we can also partly compensate for cash salary increases. Last but not least, we’ll apply a cautious hiring approach and an efficient people management. With the combination of these investments and savings, we are very confident to reach our margin guidance. And this brings me to my last slide. On the back of the outlook I just presented, TeamViewer will remain highly cash-generative and deliver a continued strong cash flow conversion. This allows us to reiterate our existing capital allocation strategy and confirm our target leverage ratio of around 1.5 net debt to adjusted billings EBITDA. This leverage target provides the company with sufficient flexibility to support organic growth and to pursue tuck-in M&A to expand competencies if needed. And with our high confidence in the 2023 outlook, we will return excess cash to our shareholders by way of a new share buyback program, and thus remain committed to our capital allocation framework. This program has a volume of up to €150 million and will be executed in two tranches. We plan to start with the first tranche of up to €75 million by latest mid of February. Thank you, Michael. So let me summarize today’s earnings call. The bottom line is we are very satisfied with our performance in 2022. We achieved our goals and delivered on our targets. We see prominent customer wins across industries and geographies, and we have successfully implemented pricing measures and also campaigns on cross-sell and up-sell over the last year. And this shows that we are able to steer our business actively and in a very targeted manner. As Michael just explained, in 2022, our financial profile remained very attractive. Our strong profitability and higher cash generation are important levers for shareholder value creation, which we were able to deliver with a 46% earnings per share increase. And creating value for shareholders will also remain a top priority for us in 2023, and this is why we announced a new share buyback program. Beyond that, we are also looking at 2023 with great confidence. We want to further capitalize on global megatrends in the modern workplace. Our solutions are more relevant than ever for our customers in the current challenging macroeconomic environment. And in light of this, we are confident of generating double-digit revenue growth, as outlined by Michael. With that, we would like to end the presentation. Thank you all very much for your attention, and we look now forward to your questions. Operator, over to you, please. Hi, morning, Oliver and Michael, thanks for taking my questions. I’ll kick off with three. Firstly, just on the margin outlook, you flagged some of the elements, including careful control of cost base, cautious approach to hiring. Can you give us a sense of how you’re set up now with respect to sales and support of the enterprise business segment? How much room is there to increase utilization of those sales staff, and how much incremental investment is going to go into that area in 2023? Secondly, on the guidance on growth, you’re expecting billings to grow at a more moderate rate this year compared to revenues. Can you talk through what you’re expecting in terms of multi-year deals growth in 2023? And then lastly on the enterprise business, 35% constant currency year-over-year growth in 2022, if you were to clean that figure up for the multi-year deals impact, or to look at it through more of an ARR lens, what was the rate of growth you saw there? Thank you. Let me take the first one and the second one. For margin outlook, I think on the enterprise side, as you’ve said, over the last years we have significantly invested into our support structure and sales structure, so we have enterprise account managers across the world. We opened a few more offices to be closer to regional markets, particularly in APAC. So I would say that the sales force there is very well invested. Obviously, there’s always churn in some markets and then replacement. We also have a solution delivery force, which is globally distributed across all offices. So I would say that for the enterprise business we’re very well invested at the moment, and clearly, especially given the environment at the moment, we are not at full utilization of the current sales force. So I think we are absolutely right in pointing towards additional scaling potential, because we do have people, which joined relatively newly throughout the year, not at their full quota, they’re still ramping, but the costs are already onboard. So pretty fully invested there in the service force, but not fully utilized, as you say. Secondly, billings growth, I think the whole question on multiyear and also how that’s related to ARR, quite frankly, I think it’s a bit too early to project anything very concrete there for this year. Obviously, the more we go into enterprise, the more multiyear deals will play a role. Obviously, customers want to secure pricing, so it will continue to be a factor. Yes. So on the multi-year deals, we see it in the vicinity between 50 million and 60 million. So the multi-year deals become more and more part of our normal business. This was, I think, one topic. The other one, when you said ARR, we disclose the ARR in total, which is the 30% growth, but we don’t disclose this now in the second phase or even on an NRR basis. We are very happy with our definition of NRR. We are happy to take currency discussions on NRR, and I think we have to always disclose currency versus NRR, but not also on ARR. That’s clear. Thank you. Maybe just one follow-up. When you went to customers in Q4 knowing they had these price increases, to what extent were they coming to you and saying, can you give us some discounts and we’ll sign up for a multiyear deal to counteract some of that price increase? Was that a phenomenon that you saw at all? You weren’t that clear to hear, but I think the question is around the purchasing behavior in the fourth quarter. Yes, I mean, obviously, this is the nature of the game on enterprise. Customers want to commit for a longer period of time in order to secure a certain price level. In enterprise, this is one-by-one discussions. I think we have – in all cases, we have customers that came on board a year ago and we haven’t increased prices, but also customers that have been with us for longer and we extend the license count, the number of technicians, the number of seats, if it’s a new deal, and then we commit to certain prices. It’s not necessarily a discounting game. I think in the current environment, it’s more a price stability and visibility for them, and obviously we have the same when we talk to our suppliers. It’s pretty clear that it’s not a great time to talk discounts, but what you can achieve is price stability and that’s more the motion that was going on. Yes. Good morning. Thanks very much for taking my question. A couple from me, please. Just on the 2023 outlook, as we think about seasonality or phasing, particularly I guess on the top line through H1 and then into H2, what are you baking into your guidance? And secondly, just looking back at the last quarter, could you give us an indication on how much impact did your price increases have in Q4 2022? So what contribution did that have to growth? That would be helpful. And then lastly, just on the new guidance framework, shifting away from billings to revenues, will all KPIs shift to revenue and billings eventually be phased out? So your detail on things like enterprise versus SMB billings, or billings by the ACV bucket, will they become revenue-based? And if so, will you restate that for us to help us look at that on a more continued basis? Thanks. Let me start with the first two. I have not heard or understood the third. Maybe we can pull up on that one separately. On the seasonality of the 2023, so first, from a billings perspective, the structure of the seasonality should be more or less the same like it was in the previous years. From a cost perspective, and we don’t guide quarterly, so please take this with a massive grain of salt. What we see is that the first quarter will be, from a cost perspective, in the vicinity of Q4, and the second quarter more or less also in the same vicinity like Q1 and Q4, but then we expect to see rising cost base, and this is it. On the pricing perspective, so the second question, we were actually seeing exactly in Q4 what we expected with the Q3 call, so more or less a high-singled-digit-million number, and this played very well into our overall equation. That question is now that we’re guiding with revenue instead of billings, whether we will change all KPIs that we’re disclosing, enterprise, SMB and everything else on revenue instead of billings. That will shift to revenues, okay. And will you help us with – restate it from prior years, just so we can look at it on a look-through basis? Yes. Hi, thanks. Thanks for taking the questions. A couple from me. Just – firstly, just on the new billings development in Q4, it looked like it was a little bit lower than the Q3 number. So could you just help us understand some of the drivers there around the new billings? And also just how we should think about the mix between existing and new billings into 2023? And then also just how much of a pricing contribution you would expect to billings growth in 2023? And then, on the cost savings side of the bridge, could you give us a little bit more detail on the side of the RSU program that you’ve highlighted as a source of cost saving? Thank you. Yes. I think new billings, Q4 versus Q3, clearly, the main sales motion that you have in enterprise software towards the end of the year is pipeline conversion with your largest opportunities. And one of the, I think, big advantages of us is that we have this large number of existing customers with, I don’t know, 622,000 subscribers or so, and there are many companies in this subscriber base that actually qualify for larger deals, larger solutions, wider rollouts of Tensor or rollouts to embedded devices. So as you can imagine, towards the end of the year, the sales force is fully focused on these larger opportunities, and it happens that most of the larger deals that we’ve done towards the end of the year are actually with existing customers. While in Q3, this motion is, I would say, less pronounced, and therefore there were new billings – more new billings, new billings in the third quarter. On that discussion, because we had that before as well, I think it’s important to understand that new billings in our definition means a company is not having a single TeamViewer license anywhere in the world, so not even a €350 business license, only then we qualify as new. Whereas if a customer, and that’s quite likely, or a company, quite likely has a license somewhere in the world, it’s called under retained. And as you can imagine, when you do enterprise moves and you move customers from €2,000 to €3,000 license counts to €20,000, €30,000, €100,000, €150,000, this is a massive sales motion and a massive achievement, even though it’s falling under the retained bucket. And that’s one of our key motions that we’re having. I think very different from other much smaller enterprise software companies that need to actually always win new logos to be able to grow. I think that’s important. Yes. So far let me start with the RSU program and how we think about it. So first, by making the employees to shareholders, we are all sitting in one boat, which is creating shareholder value. This is so important for us. We launched this program therefore last year. While we mentioned it here as an element of contribution to cost savings, there’s a following. We do the same program also in 2023, so we continue the program. And we have a little bit of a shift between leaders to employees, so now everybody gets the same share of RSU. But what is important is that we explain to the employees that, hey, we’re in the same boat and we win together and we lose together, and it’s not inflationary rises and they need to have more salary increases. So we are saying we will be able to balance out expected salary increases with the RSU program. So it’s a win-win, and therefore, it will also contribute to the overall success. Yes. So it will be moderate. We start as we did, by the way, in Q4, we start cautiously into the year. We did that already obviously in Q4, so the first cohort for the first quarter already executed, and we will continue very cautiously in our base through the cohorts Q1, Q2 and Q3, and then we check it. In total, a little bit less for the third quarter than in Q4. It has to do also with the cohort size. Hi, thanks for taking the questions. A couple, if I may. On the SMB side, can you talk a little bit about how the free base has trended in the last two quarters? And since you mentioned the free-to-paid conversion contribution was lower this quarter, from a billings perspective, I’m curious as to how much of that 6,000 net new SMB subscribers are from the free-to-paid conversion. And then lastly, maybe can you give us some updated color on your partnership with SAP, Siemens and Google? And are they more focused on augmented reality? Victor, very difficult to hear you, but I’ll touch base on the SMB growth in the context of free-to-paid campaign. So as I said before, free-to-paid, we do this very moderately, this was a mid-sized million amount in Q4, and this was part of the growth but not all of the growth. And Oliver mentioned basically all of the elements. Of course, there was a factor of currency embedded in this, but most of it came from all of the campaigns. And from the free base, this is actually nicely developing now because we see they stuck to a more or less flattening out between Q3 and Q4, between the active devices, if you refer to this topic. Yes. So free user base is kind of stable, despite the fact that we are extracting a bit of subscriber growth. As you say, as you pointed out, this is a small additional subscriber number, mostly at entry level. We explained before, also, even if we have a few thousand more subscribers at the entry level, that is significantly less relevant than a significant up-sell in one existing subscriber to drive billings to enterprise, the example I made before, so that’s the play that’s happening here, but the ecosystem is largely stable while were doing that. On your last question, partnerships, SAP, Siemens, Google, I would say mostly focusing on workflows. Part of is it augmented reality, yes, frontline, based on glasses for handhelds, that can be part of it, but it’s effectively a workflow integration, SAP and Google specifically. And then Siemens, slightly different. Here we talk about integration into – on the product lifecycle software of Siemens, where we provide mixed reality visualization capabilities to generate digital twins of actual industrial equipment. So it’s slightly different. Yes. So clearly, the partnerships are now a year in – a bit more than a year in for SAP, Siemens a bit less, and Google I think a year or so. We have some pipeline conversion in the fourth quarter, so for the first quarter where we saw meaningful deals coming in. One was with a nice equally [ph] Mexican retailer or logistics company, if I’m not mistaken. That was sizeable, a nice six-digit deal. So it’s starting to happen. A good pipeline for Q1 and beyond, and the organization working through and progressing, obviously, these partnerships and these deals and these customer relationships are [indiscernible] they are significantly longer than what we would normally see in a classical Tensor deal, which converts much – which converts faster. It’s smaller and converts faster. But it looks good. Yes. And for Siemens, we are not even done with the integration, so we need to be a little bit more patient. But from the overall product line-up, it looks good. Yes, morning. Thanks very much. Firstly, just on the sponsorship situation, wondered if you could help us a little bit there with how you’re beginning to think about the margin opportunity versus reinvestment of that, as we start to think about the business post the sponsorships moving away. I guess some of the current investments that you’re putting in the business are clearly in the context of knowing that you have that tailwind coming through. The second question from me, just on the buyback second – sort of sizeable buyback that you’ve announced today, is it a fundamental shift in how we should think about the business, that you’re now just prioritizing almost the complete payout of the free cash flow generation of the business? And how do you balance that versus the ongoing leverage in a rising rate environment for you? Thank you. Let me start with the Manchester question on the margin. So we see – well, we expect a clear, high-single-digit margin uptake once Manchester decides to take the options back. And we also think that we will only reinvest a couple of margin points, so the major part will flow down to the bottom end. And this is why we think that we will see also going forward, whenever it happens, a strong margin increase based on this exit. The other one on the shareholder buyback, this is not a change in structure for us today, it’s a reconfirmation of an existing capital allocation strategy, and we love the share buybacks. By the way, more than the dividend, because there’s always a discussion would we do a dividend policy, yes or no, we think the share buyback offers both shareholder value creation and gives, on the other hand, also a little bit more flexibility. Plus, with the share buyback amount of what we now announced, we still keep all optionality in our hands and if there are small, right, tuck-in M&A coming along the way, we can actually pursue both. And especially with our, we think, wonderful refinancing structure which we have in place, we have a wonderful basket for all and everybody. And we feel super-strong about this. Yes. That’s very clear. Thank you. Just on the ARR, which I think is a really helpful additional disclosure, given the multi-year billings effect. Are you going to be disclosing that quarterly? Just wanted to check. Yes, yes. Oh, this is very important for us and for you in order to create more transparency and to get the distortion and noise out of the multi-year system. We love the multi-year deals, but maybe not everybody. But ARR should be – should close all discussions. Yes, James, this is a little bit too early. Give us a little bit more time. I think we gave a strong guidance today on many KPIs. Give us a little bit more time on ARR. By the way, it’s a brand new KPI also for us. We also learn and grow with this KPI. [Operator Instructions] The next question is from the line – and I’m sorry I think I’m going to say that wrong, Deepshikha Agarwal with Goldman Sachs. Your question, please. Yes. Thanks for taking my questions. So like two questions, if I may. So first of all, on the top line, you’ve guided on double-digit growth for revenue for FY ‘23. Any color on the expectation around the various elements, which is basically SMB and enterprise? And any comment around outlook around enterprise IT spending based on the customer conversations you’re having? The second one is basically on margins. We’re just trying to understand what kind of cost flex do you have? So first of all, like, on your guidance of 40% on adjusted EBITDA, what would be the variance? Like, would it be around tens of bps or hundreds of bps? And like how should we think in terms of a slowdown or better-than-expected performance? Like, what cost flex do you have? Will any upside be invested back into the business? So those would be my two questions. Okay. So let me start with the top line. I think generally, what we see is enterprise IT spend, they’re a regional development, clearly a bit longer sales cycles and more cautiousness in the Americas, but EMEA and APAC we saw good development. And I think from what we see out of Q4 movement into Q1, so what we see the first four weeks of the month, early days, but it seems to be relatively consistent. Clearly, when you think about spend, everything which is related to automation, efficiency, remote work, less people, this works well in the current environment. Everything that requires additional investment and has a little bit of time where you can also push the decision out by six to nine months or so, obviously, companies are trying to do that. So therefore, I think, we know the recipe on what to focus on, and also in the past EMEA has always been very resilient through economic downturns because companies need to, in these times, actually focus on efficiency even more. And generally speaking, on our top line growth guidance for 2023, it’s clear that enterprise will significantly outgrow SMB, and will gain share on the basis of all the investments we have done in the past. And the second question on margin range. I think your question was when we – on that margin range, whether – how narrow that range would be, or how wide that range would be, or what was your question? So I think, maybe let me repeat the question to see whether we’ve got it correctly. You wanted to understand what is our cost flex in case something goes wrong, right? Okay. Yes, yes. So the around 40%, it’s for us, then 39% to 41%, obviously, but most importantly when we talk about the 40%, first of all for us, it’s important that we invest and make the right decisions to grow the business going forward. This is to us super-important. The other topic, and this is what Pete, Oliver and I do, we steer the business super-direct. In case something goes wrong, we of course have levers and we will pull the levers where we will then adjust, so that we manage our cost base diligently. I think this was your question. And also, you should see, the margin development of last year, we had, at the end, when we were in Q3, we were talking about achieving year-end guidance without Russia, Belarus business, and then we saw over-performance relative in Q4 closing, I think we all agreed, and all would agree that Q4 came out strong, and that is then a fall-through to margin and we saw the margin came out at the upper end. So I think the way to think about the guidance for this year is we take a realistic, cautious view on the billings development and the same on margins. And I think there is flex on the cost structure to work against adverse developments, but there’s also flex to the upside, if we would outperform on the billings, then obviously on revenue there’s a fall-through into margins. So that’s the way to think about it, and it’s actually quite a narrow range that you can assume here. Ladies and gentlemen, there are no further questions. And with this, we conclude today’s conference. Thank you for joining and have a pleasant day. You may disconnect now.

EarningCall_256

Now, let's move to slide number two with the agenda for today. Christoph Aeschlimann, our CEO, starts the presentation with Chapter 1, the 2022 results where he dives into the key achievements of last year, commercially, operationally, and financially. In Chapter 2, trends and strategic priorities, our CEO gives a short overview of the trends and an update on the macroeconomic situation in Switzerland and Italy before elaborating on our group strategy and ambitions 2025. Christoph continues with Chapter 3, presenting the 2022 achievements, financials, and the strategy for Swisscom Switzerland before updating on our network and IT activities and priorities for next year. Dirk Wierzbitzki, Head of Residential Customers; and Urs Lehner, Head of B2B customers -- of Business Customers will present thereafter the achievement 2022 and the priorities 2023. Alberto Calcagno, CEO of Fastweb, will then talk in Chapter 4 about industrial and financial performances of our Italian business and its plans going forward. After Alberto's presentation, Eugen Stermetz, our CFO, will present in Chapter 5 in all details the financials 2022, including the outlook 2023. And in the wrap-up Chapter 6, some final remarks from our CEO. After the presentation, we will directly move into the Q&A session. Thank you, Louis and welcome also from my side to this full year 2022 results presentation. Just as an introduction, a couple of highlights. We still have these five group goals that we pursue since a couple of years. In Switzerland, we remain voted the strongest brand in Switzerland and we also won one of the benchmarks as being the strongest telco brand in the world, which made us extremely proud as well as winning all or several of the relevant benchmarking tests. In Italy, Alberto will dive into more details later, but we were again able to deliver four quarters of growth in an extremely challenging market which is, from my perspective, an outstanding achievement in Italy. All of these achievements in Switzerland and Italy led to solid financial results in overall for the group, which Eugen will present in more details later on. Also on the sustainability side, we were able to move ahead and remain the industry leader according to World Finance as the most sustainable telco in the planet. On the product side, we launched many new products, both in Italy, but also in Switzerland, B2B and B2C, which Dirk and Urs will talk about later. And also on the network side, we were able to increase our network coverage, both in mobile and in wireline and many tests, as previously mentioned. Overall, the market results are pleasing. We were able to continue our growth story on the mobile postpaid side and increasing our RGUs by 166,000 units. Whereas on the broadband and the TV side, our base was slightly declining, but in also overall declining TV market, we were actually able to increase our market share on TV despite losing 21,000 RGUs. Fixed voice is still declining as it was in the past years at roughly 100,000 RGUs per year and we also expect this decline to continue this year moving forward. On the wholesale side, we had minor losses after the Sunrise including some of the Sunrise optimizations and migrations, but we are now, again, in a stable situation on the wholesale business side. In the Italian business, we were able to maintain our growth engines and increased our mobile subscriber base by 25%, winning over 600,000 new customers in the mobile B2C space. And if you look at the wireline market, we continue to pursue our value strategy on the B2C side, losing some RGUs in broadband, but largely over compensating them by an increased wholesale coverage and new wholesale contracts where we serve all the new market entrants in the Italian market, which allows us to compensate the losses we have on the private side and Alberto will detail a little bit more later on. So, overall, we can say a good performance in a challenging market environment, both in Italy and Switzerland and we are very pleased with those results. Overall, on the financial side, we were able to post CHF1.1 billion revenue. On an underlying basis, this has increased by 1% and also on the EBITDA side, we were able to write a profit of CHF4.4 billion, which, if you compare it on a like-for-like basis without all exceptional we had in 2021 and 2022 corresponds to a 3.1% year-on-year increase over the last year. On the right-hand side, you can see how we managed or how the EBITDA is composed. So, overall, the underlying EBITDA increased by CHF139 million, most of it coming out of Swisscom Switzerland, but also Fastweb delivered its EBITDA growth, contributing CHF30 million to the overall EBITDA result. And then at the bottom, you can see the CHF211 million exceptionals linked to provisions and other effects that Eugen will explain later on in his presentation, bringing us to CHF4.4 billion EBITDA in 2022. Now, if we look a bit forward in trends and strategic priorities for Swisscom. On the trend side, I would say the trends are largely still the same as last year. So, on the technology side, the most important trends for Swisscom are related to cloud, AI, and cybersecurity, but we also have emerging trends such as Web 3.0 or the meta where we are doing first experiments to see how we can enter those new markets and provide new products for our customers. Talking about customers, we can say that the trends are also largely the same. They have higher and higher expectations more reliable, more secure, more instant, and more digital, and we have many initiatives underway, especially in digitizing our interfaces towards the customer interaction to make these -- to match the expectations of our customers. And also on the stakeholder side, I think we can say, especially in Switzerland, ESG is taking more and more relevance or importance in the market, also on the customer side, our customers expect us to behave in a certain way and contribute positively and sustainably to our environment. Also, the war of talent is something which is an important aspect of the company. As you know, in many markets, there is a talent shortage, especially on the IT side, and we are deploying many efforts to counter this shortage. We are increasing or accelerating our education, upskilling our own employees, but also training new market or new employees with our internal training facilities, but we also invest a lot in the branding activities around our Swisscom brand to attract and retain more employees at Swisscom. Now, in terms of economic environment in Switzerland, the country is fairly robust. We have a limited inflation in Switzerland, running slightly below 3%. We have a stable economy. And I would say we have unchanged dynamics in the telecom market. Most of the market is not growing or declining with the exception of mobile, which is still slightly growing, but you can see that the price battles and promotion battles have increased again in the Q3 and Q4, where we have seen very aggressive and sustained promotion from our competitors, and we expect this to continue in 2023. The regulatory environment is also increasingly challenging, and this is also reflected in one of the provisions that we have made last year in our overall reevaluation of regulatory risks, which Eugen will explain later on. But what is positive in Switzerland, but also in Italy, is the IT market, which is growing substantially in many different segments and it is also still a very fragmented market, which offers opportunity for consolidation for Swisscom. If we look at Italy, the situation is slightly different. We have a country with a declining population versus a growing population in Switzerland with a much higher inflation. So we have a sort of, let's say, a more challenging macro environment. And you can also see the effects of this challenging macro environment in the behavior of all the market participants, where we all know that the market is extremely competitive, and we are facing many new entrants which despite having already a very competitive market or entering the market and try to win market share, in the wireline market and resell or cross-sell broadband subscriptions to their existing customer base. And we expect this to continue this year on the telecom side, but also in Italy, we are focused on IT, and we are continuing to expand our footprint because the market in Italy is still very fragmented, and it offers a lot of possibilities for Fastweb to increase its current business. So, overall, we can say that Swisscom as a group is very well positioned today. We are in excellent shape for the future, both in Switzerland and in Italy. We are doing the best to extract the maximum value on the telecom side and invest heavily on the IT side to grow in line with the market in this very important market for the future. So, overall, our 2025 strategy and ambition is unchanged previous to our -- which -- is unchanged compared to before. So this is a strategy we decided over two years ago, and we continue to remain completely focused on executing this strategy. We are defending our market position in Switzerland to remain the market leader in Switzerland, being also investing heavily in the networks in Switzerland, and we remain the leading challenger in Italy -- or basically the only challenger, which is growing -- and growing on the topline and increasing its profitability, and we want to continue this growth in the coming years until 2025. If we manage to do this, this will lead us to excellent profitability and rock solid financials. And as I already mentioned before, we will continue to execute on our corporate responsibility side and continue to create new innovative products and increasing the reliability on our services. And we will now go into more details in these five different domains later on. Before we move to Italy and to Switzerland, I will quickly talk about corporate responsibility and innovation and reliability to highlight some of the achievements of this year. So, on the corporate responsibility side, our strategy is based on three pillars. We are focusing on the environment, on the people, and on good corporate governance. So, on the governance side, it is quite simple. We have been voted again as the best Board of Directors out of 171 companies in Switzerland, which is extremely pleasing, but we are continuing to invest in the governance of the company to ensure that the company is well run and ethic business behavior is in place everywhere. On the people side, we are heavily investing on educating our own employees, but also our customers. We have a digital academy in Italy. We have an academy in Switzerland to continue to train the citizens in the media usage and the profit of the digitalization or the chances of digitalization. And on the environment side, most of the focus is invested into decreasing our use of energy and decreasing our creation of CO2, where we are focused on all four scopes helping our customers saving CO2, but also decreasing CO2 in our supply chain and in our own operations. On the innovation side, we have three -- seven -- sorry, seven different cluster or focus areas where we are investing in. So, I will not go through all of the seven areas to probably be way too boring. But just to highlight a bit or to make you aware in which areas we are actually concentrating on because these areas are the basis of our business, being the network, AI analytics, but also the entertainment side, especially in Switzerland with a big entertainment business. But also, I think the cybersecurity area is increasingly important for our customers, both on the B2C side but also on the B2B side, and we continue to invest heavily in these areas to take advantage also of future opportunities where network and security continues to merge more and more together, which is, for us, a very interesting avenue to create future growth. Now, moving to Switzerland. So, Swisscom Switzerland has achieved many things in the last year. Urs and Dirk will highlight them in more detail. But maybe from my side, just one word about the IT aspect. We have clarified the FTTH rollout strategy in last October where we announced that we will move to a point-to-point construction model versus previously point to multipoint. And we will continue to execute this strategy. And actually, the change is on track as well as all the other IT consolidation projects which are ongoing. On the B2C side, I would highlight the launch of the blue product portfolio, which is actually the launch after three years, a major product launch, which is always a big undertaking. And I think the B2C organization executed it marvelously well. The customers love the product. We have a very good market uptake and Dirk will explain in more detail what we are doing on the site. On this side, this was also one of the reasons which we helped us to stabilize for the first time in seven years, the service revenue evolution in Switzerland where we had a flat service revenue on the B2C side in Switzerland in 2022. On the B2B side, we managed to slow down the service revenue erosion on the telco side and the IT side actually grew by 6.3% which is a very good achievement in the IT market and managed or led to an overall growth on the B2B side as well. Now, in Switzerland, the financial results are CHF8.27 billion net revenue, which is up CHF37 million compared to 2021. And also on the EBITDA side, we have an increase of CHF30 million, leading to CHF3.483 billion, which is an increase despite all the provisions that we had to do due to the regulatory actions, which is very pleasing. The strategy on the other side, in Switzerland is also unchanged compared to last year. It resides on three pillars. The first one is delivering the best customer experience. This has two aspects. One is based on delivering the best products for our customers. And the other one is based on the best service in all the touch points, being it in the shops, the call center also the digital interaction with our app for customers and we were able to generate or increase our NPS lead on this side, which demonstrate that the actions we have in place and the strategy we pursue is working, and we can increase the distance towards our competitors. On the operational excellence side, this is focusing on two different aspects as well. The first one is increasing quality of services, quality of network, quality of products. And the second aspect is delivering a lower cost base, so decreasing our cost and most of the initiatives in this bucket are based on simplification, automation or introducing AI, which at the end, makes the products and the services faster, better and cheaper at the same time. And then on the new growth side, we also want to continue our growth in Switzerland. We want to maximize the telecom business we have. This is with various strategies on the B2B or B2C side with a multi-brand approach. But we, at the same time, want to grow on the IT side, as mentioned before, with a special focus on cloud, cybersecurity, AI, but also application business delivering in SAP or other areas where we still believe that the market is growing and offers up interesting opportunities for Swisscom. Okay, I will now move to the networks and IT piece. In Switzerland, delivering -- giving you some insights on our strategy for networks and IT. So, in the technical area, we are working on five different pillars. As mentioned before, we changed and clarified the rollout strategy for FTTH and we are now implementing full speed this change to switch the whole construction model to point-to-point, but we are advancing at full speed and as expected, and were able also to increase the UBB, the broadband coverage at all levels and win all the relevant benchmarks both in mobile but also in wireline which is extremely pleasing result for the team. On the mobile side, we were able to really keep our lead. We have in the -- on the quality side, but also in the coverage side an increased population coverage substantially. I will come to this later on in a more detailed slide. Another important action on the IT side is the consolidation and simplification of our landscape as historically, we have built up quite a complex IT architecture and I will talk a bit about this later on to show you where we stand on the simplification initiatives, which will also deliver or contribute in an important way to the future cost savings of the company. And then reliability, I will come to later as well, where we were able to increase our stability substantially. Now, the priorities 2023 actually remain the same as the priorities 2022. We want to continue the rollout in mobile. We will continue the roll out on wireline, continue to invest in securing or making the network and services more reliable and secure. And also going back into a growth model on the wholesale side to secure really the contribution of wholesale to the value creation of Swisscom. Now, if we go a bit into details on these 5 different pillars I talked about before, so the first one is the wireline area where you can see that we actually were able to increase the broadband or ultra-broadband coverage by 3%, moving -- covering now 91% of the country with over 80 megabits, which is the new universal obligation speed in Switzerland starting 2024. And we were also able to increase the footprint on the fiber rollout side. And maybe I would take some time now on the fiber side because there are quite a lot of numbers on this slide. So, we have to distinguish on the fiber side between constructed and marketable footprint because some of the footprint we have built are still in the multi-point topology, which is today blocked by the COMCO. So, we are standing end of 2022, we actually constructed footprint corresponding to 43% of the country, marketable is 34%. The difference is the multipoint topology. And for 2025, we actually plan to reach between 55% and 60% constructed and between 50% and 55%marketable as announced in October last year. So, this is in line with our October announcement. What is also interesting to note is that we have roughly 10% fiber footprint in Switzerland, which exists outside of the Swisscom footprint, which was built by third-party companies. So, this means that if Swisscom achieved and we plan to execute and achieve our target of 55% to 60% constructed footprint, Switzerland will have approximately two-thirds of the country covered with FTTH footprint in 2025, so in three years. And important most of the interesting areas will actually be completely built in 2025, which is, I think, an excellent news for the future. What we will also do this year is written on the bottom right, we will start testing copper phase out as we start to investigate this topic, how we can be in the most effective way, reduce the copper coverage in Switzerland. We will do first municipalities this year to test the best way of migrating and collaborating also with the authorities to see the -- to decide on the future of the copper phaseout strategy related to the fiber -- ongoing fiber construction. Now, on the mobile side, we were able to increase the mobile coverage by 12%, and we now cover roughly three quarters of the population with 5G plus. So, the new 3.5 gigahertz 5G frequencies, which is a substantial increase compared to last year. And we will continue to build out new towers to increase the 5G plus coverage. Also this year, our goal is to reach at least 90% 5G plus coverage in the coming years, and we will keep our CapEx envelope of about CHF300 million stable on the mobile side to continue to upgrade and densify our network. The goal being to create extra capacity in the network and also extend our coverage leadership, which is already today about two times ahead of competition. Now, on the IT and network simplification side, which is a very important topic and quite close to my heart. When I became CTIO four years ago, we decided on a radical simplification program, and we are continuing to execute on these goals in the coming years, also with the new CTIO joining us in the next two weeks, because it is the basis for a lean, simple and automated operations in the future, which will allow us to operate our network in a higher quality, more reliable and a lower cost base, but also deploying in the future new products in a much faster manner. And you can see where we stand. So, we were able, in the last three years, to remove a quarter of all our network platforms. Some of these projects are, let's say, executable in a couple of months or by half a year. Some of them take four or five years like the 2G phaseout, which we completed a couple of quarters ago. But it just shows you that some of these projects are very heavy lifting, inquiring, involving a lot of people and a lot of resources. And our ambition is to reach nearly two-thirds of less network platforms in 2025 and we are well underway to execute this target. On the IT side, we also continue to remove IT applications in a continual phases. We actually decreased the number of IT applications. We are operating by 15% and we are continuing to remove IT applications every year and reaching the 25%. On this side, we are slightly ahead of our plan and we might be able to even decrease IT applications further than the initial set target in 2025. Also on the supply reduction side, we are well ahead of our plan, already reduced 70% of our supplier base compared to 2019. And we continue to reduce our supplier base to simplify contract management interaction with supplier, decreased costs and simplify the overall landscape. So, this, in summary, is an important pillar contributing to the reliability and security of our services. We were able to improve the reliability by around 40% last year compared to the year before, and we are continuing to heavily invest in this area to further reduce the number of incidents we have on our network. We have a stability program in place with very ambitious targets until 2025 because I am convinced that the stability of our services creates the trust in the brand and the reason or is a big reason why customers also stay with Swisscom. And therefore, it is important that we continue to execute on this topic. And also, I think on theB2B side, a customer which is happy with the stability of services delivered is much more inclined to renew his contract and it is much easier to sell new services to a happy customer. And therefore, this is a key pillar of a technology department contributing to the success of B2C and B2B. And next to this or last but not least, we also want to ensure the best monetization of our network investments. So, as I previously outlined, we are investing a lot of money in the fiber rollout and we want to ensure that it is best used. And this is the role of our wholesale division where most of our competitors in Switzerland are customer of Swisscom wholesale buying wireline services from our wholesale branch. And we -- I think have quite a stable evolution on this side. We had a minor loss of revenues last year because of the MVNO effects of the UPC merger, which was still visible in the first half year 2022. But this year, this effect will not be there anymore. And the goal is to, let's say, try to increase the wholesale activities again this year to make a meaningful contribution to the network utilization. All right. Thank you very much, Christoph. So, a lot has been said already. B2C has had a good year in 2022, particularly around the stabilization of the revenues. And I would like to expand a little bit into it what we see as the drivers for that achievement. I think 1 key aspect is certainly that we have played our multi-brand strategy. And I would like to talk about the Swisscom brand first and then about the second and third brands. On the Swisscom brand, from my perspective, we clearly doubled down on delivering our customer promise and that means the customer promise in all aspects. Christoph already talked about the quality of the network has never been as great as it has been now. And that is clearly perceive by -- by the customers, nobody else offers more performing and stable network than we do and it clearly pays off. Similarly, that is true also for the touch pound service, B Digital or people and customers are experiencing. Similarly also for our offers and for products and other experiences that they are using. That as a package that is recognized also by the external world. I believe there are the only price that we have not obtained last year regardless of service networks or products and for the brand as such but be the strongest telco brand in the world. And that then, in turn, obviously, leads to a very satisfied customer base. We are by a huge far distance, the NPS leader in Switzerland. So, quality play does pay off. And then in terms of numbers, it clearly shows itself and again, in a record low churn that we have seen last year. The other aspect I would like to highlight on is we focus quite substantial efforts on the ARPU management and value play. One thing that you might have noticed, for instance, that we substantially have been reduced our promotions. In terms of duration, maybe went from 12 to six months, but also in terms of the height of the discount which were like half prices eventually. But now you get between, let's say, 15% to 20% of the discount. So both effects then basically provided for a good ARPU result also. And also, the additions performance has not suffered from a reduction of promotional activity. And again, the explanation for that is the Swisscom brand and all that it delivers has never been as strong as last year. And then thirdly, to the right-hand side, Christoph touched also upon that briefly already, we have launched an entirely new mass market proposition I would dare to say a board first. It's kind of like a mass market digital-first product that also actually make service a tiering dimension in the portfolio scheme as such for those customers that opt in and prefer to interact with us in a digital-first way. They also get a certain pricing advantage. But not only is that, obviously, the entire way we rethought the presentation of telco services in terms of simplicity and in terms of versatility is entirely new and totally new setup. And by the way, also here, we managed that quite a big part of the customer base got substantial improvements on the performances for instance, in connectivity. So, I think it's like these three things are -- I will expand a little bit further later on, on that. And then there is the second and third brand play where most particularly Wingo, our second brand has stood out. And I think it has been particularly standing out because of great offers, but also great execution of marketing and communication, some channel expansion that overall yielded particularly in the mobile domain, very positive results for us. And lastly, in terms of margin contribution, as you see on the right-hand side, the quality play and the shift-to-digital is paying off also there. We had substantial decrease in the customer care. Where there is no problem, there is no reason for anybody to call in. And when there's good digital possibilities, people prefer these. Contrary to what might some people think, already more than 50% of customers appreciate the digital interaction with it and not the least, the pandemic time has even accelerated that a little bit, and particularly the new customers that come into the market, they are digital first. And they don't look at digital as a burden. They see it as a preferred choice for us -- for them to interact with us. All of this has worked from our perspective that well that in 2023, there's a very simple strategy. We just continue what we have been doing in 2022 and pursue the trajectories as I laid them out, and you'll see the five big categories here. Obviously, we continue our value play in defending ARPUs by further looking at our promotional behavior and pricing measures. They want to maintain a strong market position, obviously, still expanding on the newly launched Blue offer. There's still a couple of things that we have in mind that we will bring to the market. And again, in terms of -- for the price-sensitive segments continue to make our way with the second brand, Wingo. Then obviously, churn prevention remains high on the agenda by continuing our play on quality and brand and all the things that I have been mentioning. Revenues is not only a topic then for core connectivity, but we also see pockets of growth, for instance, in entertainment and certain value-added services in the accessories business and so on. And last year, of course, the shift to digital is in full swing. We are particularly well underway for the shift to digital and care. We are well underway for the shift to digital in digital sales for the second and third brands. We still see an opportunity to beef meters on the Swisscom brand in that respect. When we look into the particular categories here, as mentioned in 2022, we have substantially cut down on promotional activities. We will explore further measures that we might explore on that path. Clearly, promotional activity is still intense in the Swiss market. Nonetheless, let's say we are performing well. So, we don't see any reason to become more aggressive again. Actually, to the contrary, as I said, we see how can we further maybe lower promotional activity also in 2023. For pricing, as I said, we already have executed some, as we call it, targeted pricing in 2022. We see certain pockets of opportunity also in 2023, particularly if you look, for instance, as the customer base in the back book, if you wish, there are certain older tariffs where we will develop customers into the newer tariffs and by that also hoping to gain a positive ARPU momentum as we do these phases out of these shifts actually to front book tariffs. And obviously, we're going to continue Wingo in the second brand space. When it comes to the Blue in the next year, as said earlier on, we launched an entirely new proposition. There's still elements that can be exploited further and paid out further. So, clearly, on the dimension, for instance, of entertainment, and other solutions, we will enrich the portfolio. We will also enrich the possibilities of the digital sales service with the chatbot we have launched and so on. We see some good opportunity also to exploit FTTH again after all the things that have been happening that you are also aware of we are happy and look forward that we can recommend to sell FTTH, and we see some potential there also, again, be it in the base, but also be it to gain new broadband customers as we are now servicing them. And then obviously, as I said earlier on, we are going to continue the Wingo Play and then reach that offering, too. Here on that chart, I would really like to draw your attention on the graphic that we had put in there for the NPS development. Of course, you might want to take it with a grain of salt. I mean, that is our measurement with our customers, but also with customers from competitors. And as you can see, the last couple of years, the NPS gap has been substantially widened up. I would almost dare to say we are playing in a different league now. If not two leagues above use competition. And I think the reason for that is all that I explained about the focus on quality, on customer experience, offers and so on and so forth. And that is then clearly paying off also in very low churn rates as you see them at the bottom of the chart here. And obviously, the strategy as said, we continue the route that we have embarked upon in 2022 also for 2023. We want to continue with our activities in loyalty and retention management, which we have substantially beefed up and also gained some real, let's say, operational sophistication and professional in that we are going to continue our brand and experience play and so on and so forth. There's pockets of growth in entertainment, so next to like core connectivity business, there's pockets of growth in core entertainment. You see some index numbers here around, for instance, the spot users, the spot customers, which have been very nicely growing in the last couple of years. And here also, we want to continue onwards on that trajectory. We're also obviously beefing up our entertainment proposition with new possibilities and functionality and obviously also content, some of which that we provide, but also many opportunities that we see by reselling content and also other applications from others as we want to increasingly try to leverage that a trusted customer relationship is not only serving telco services, but also content services and maybe even services beyond that. And then to finish up, obviously, as I said, the shift to digital is in full swing. We want to continue on that path. We are well underway on -- in care and the shift to care. We managed down workloads quite substantially. Christoph mentioned the deployment of AI, which we already do. But I guess you all have seen that AI is making tremendous advancements in these days. And that is certainly something that we believe we can likewise profit from -- for us, but equally also deploy provide a profit then for our customers with it. In terms of assisted channel, we are halfway in the rollout of our totally new job [ph] concept, which also deploys lots of digital opportunities in the job, which again provides for better sales and better service opportunities but also higher degrees of efficiencies that we are looking for. And similarly, also, we want to more and more personalize and digitize and optimize the entire digital customer life cycle management so to say, from the first day, you are a customer until -- well, hopefully, you never leave, but let's say throughout the entire customer life cycle. And a particular focus in the coming year, we want to put on the sales channel share for the own brand. Thanks a lot, Dirk and also welcome from my side. Happy to share some additional insights to all these, which was already explained by Christoph concerning our B2B business in Switzerland. Our core achievements in 2022, we definitely can build on strong results commercially and operationally. Some highlights. I'd like to explain first, starting with the telecommunications business where we definitely have exceeded our own expectations. I guess our quality approach really pays starts to pay off, not bidding for every price in a very demanding market also in 2022. I guess we definitely could, let's say, reduce our revenue erosion above, let's say, our own expectations. And we are trying to continue also working on that way forward. But I definitely see still a very demanding and, let's say, challenging market environment in telco B2B space where our opponents pretty often in a one-off approach, draw prices in a way which, from our perspective point of view, sometimes are definitely not reasonable at all. But having said that, we definitely work on our quality strategy and execute on it way further. We launched in Q4, our 5G FEA solution with very promising first results. And we definitely are also working strongly inleading the software-defined technology business, our technology approach in our telco, offering also in the SME market, and also in the corporate space way forward. As was elaborated by Christoph, we had a strong growth in our IT business, outperforming on the topline, let's say, the revenue erosion on the telco side, which led to an overall growth in B2B business 2022. We could tacitly expand on one side on our core elements around cloud, around security, but also had a very nice growth in our software business, driven by SAP and other elements where we are working on and also the positive trend in profitability evolution goes into the right direction, but still a lot of challenging and work ongoing there. Our growth in the security space, we double, for example, in the threat detection response area, our revenue for the second time in a row on a year-on-year basis and trended off also some large cyber-attacks, which, let's say, meant through our networks where we really could play an important role for our economy and our customers here in Switzerland. Last but not least, we were executing strong in the -- in digitizing our customer interactions in the corporate space, we have fully closed our migration towards a new self-service portal for our corporate customers. And in the SME space, this migration and transformation is half underway, which will lead us to, for sure, better, let's say, execution and more efficiency also way forward and also more sales service capabilities, especially in the SME space, where from a historic perspective point of view, we definitely had still some work to do. As already laid out by -- in the B2C space, by Dirk, also I'll come back to that later in a minute, our NPS result is really very promising, and we are working hard to make sure that, let's say, it's easy to make business with us as we come in the B2B space here in Switzerland. Our priorities 2023. First of all, further on pushing our telco value differentiation. We will enter into the market with some additional elements, especially in the SME segment, where we have a pretty old portfolio actually in place. There is definitely more to come within 2023. We will further expand our position in the IT -- Swiss IT services market in the corporate domain but also strongly in the SME space. And for sure, we will act further on to deliver seamless customer experiences and work in our priorities to make sure that our strategy is executed in a relentless manner. If you dig in a little bit further into telco business, as laid out, I guess, we improved operationally. We have maximized, let's say, our approach in working on differentiation. We started with new products, with new services as laid out. And also, for example, in the IoT business, we made steps forward into a direction to be able to provide integrated solutions, not only based on connectivity, also added business solutions, including applications, analytics, where we definitely have very solid results. On the RGU basis, which is laid out in the middle, you definitely can see that besides the fixed voice, we were very stiff still had some losses in the RGU base, we were very stable on a year-to-year basis. Our blended ARPU is still under pressure, as mentioned before. Let's say, we had a certain decline in price erosion, but price erosion in the B2B space is still ongoing. And I don't see, let's say, a huge potential there. I believe also looking forward to 2023, we have to let's say, have a look on it, but we are pretty sure that, let's say, the pressure will remain. I don't see a fundamental trend change there, but we are working the best we can on that. And last but not least, the IoT space, we have after corona, seen a pretty nice, let's say, ramp-up in implementing solutions. So a lot of rollouts, which were stopped over the last two years have started to take off, which helped us also to grow the RGU basis in the IoT business. If we have a deeper look into our IT activities within the market here in Switzerland, where we see a CAGR also way forward of somehow 5% per year. We definitely have the ambition to grow at least the market level or above, which we delivered in 2022. I guess we have our portfolio, our unique differentiation that we are really able to be the one-stop shop for B2B customers here in Switzerland. We execute on that, try to reduce complexity to make it more simple. And as also laid out by Christoph, the profound foundation and stability in our existing services where we had for sure made a lot of advancements in 2022, but where still a lot of work has to be done on a -- in a joint effort with in Swisscom Switzerland to make our ambition 2025 real that we don't have to talk about stability anymore concerning services here of Swisscom. If you look to the quarterly evolution in our IT business, we definitely can say on a year-to-year basis, we had a solid trend in every quarter. For sure, depending somehow in a quarter basis also from certain large project situations, but fundamentally spoken, we believe we definitely have delivered well. Also -- and we will continue to work on that trajectory way forward in 2023. We have integrated very successfully over the last year, some organic moves last year in the SME space with MTF, which delivered a great first year under our umbrella and where we are working on also to push the IT business in the overall, let's say, percentage of our business in the SME space, we did a very solid, let's say, ramp-up, which will evolve over the next year. Coming to some elements of our value, let's say, security and hybrid ICT product. We truly see that there is a huge transformation ongoing every customer, every B2B customer in his own speed and his own strategy how it comes out of these data centers into either a full public cloud world or normally into hybrid situations where we definitely have all the capabilities in-house to support our customers in their digital transformation. We are by far the largest Microsoft Azure partner; Azure expert partners here have on also a lot of exclusive partners later there. Also, we are very strong together with AWS as a partner in Switzerland, and we are working on this transformation to be the integral partner on the infrastructure, security, but also application transformation side for our Swiss-based headquarter customers here in Switzerland. And this will remain our focus way forward also in 2023, advancing unified communication collaborate space. We will bring new cloud-based services in the workspace and workplace environment, which is for sure very near, let's say, very asked need for our customers, and we will advance to make it easier to work as an integrated partner for our B2B customers. For us, also there we are really also proud of that we can see over the last years, we have let's say, ramped up our already very solid NPS level to next heights. And it's, first of all, in the corporate space, but also in the SME space, let's say, the trend is our friend there, and we are working at the, let's say, also to write the story way forward because we truly believe differentiation comes from customer satisfaction when it comes to these two business that they can't decide either they want to let's say, two changes wherever it's possible on their own, on their timing or hand it over to us as a partner. And this flexibility is a part of our B2B transformation on the telco side, which also will deliver in 2023, new elements of our portfolio starting in the mobile space in the first half of this year. And yes, we are maintaining on the way to reduce complexity to get rid of a lot of legacy applications and also products phase out is a very important function we are working on, but also we will deliver new additional services on the foundation that we have built on over the last two to three years. I'm pretty solid that there is a set of opportunity in a market where we are really able to deliver a broad variety of services to our B2B customers in Switzerland. Closing with the really mark, I'm convinced that at least in the telco space, it will also in 2023 be more risky than an opportunity business. Okay. Thanks Urs. Warm welcome also from my side. And so let's cross the border and go to Italy, okay? Soon the main achievement 2022, yes, we did it again. So, we are -- we reached the 38th consecutive quarter of growth. And this based basically on several, let's say, things, but the main message is that the growth comes from each market we address. Clearly, such result is underpinned by strong commercial and customer results. We grow -- we grew as a whole by 700,000 even if the vast majority will come has come -- sorry, from the mobile, but also the wholesale, we see has been a terrific contributor. Clearly, this helped our positive financial performance. If you ask about the recipe, clearly is the, I would say, the old investment that we keep going and we keep doing in our infrastructure and actually following a well-consolidated Swisscom tradition, we have been also let's say, awarded with the best wireline, best FTTH for 2020 -- network for 2022 and also the best mobile network for the second half of 2022. So, clearly, to have the most reliable and also dense infrastructure is extremely important. As I was saying, we have been performing consistently in all the markets, also in the consumer where we have, let's say, two strategy. If you look the fixed line, basically here, the goal is to stabilize ARPU, not to follow any price war to really go for value and that what we are successfully achieving on the market. We are pushing clearly on ultra-broadband penetration because we want to leverage on the superior quality of our network. And clearly, on the other side, the second strategy on mobile is to be extremely aggressive as wearer leading the monthly net adds since a long time now. So basically for -- in the year, we were able to achieve more than 600,000 new customers as an evidence of our success in the market. If we go to enterprise, also here, we have a very well consolidated reputation, all the EU funds, specifically related to school and to the health systems have started. Also, we launched the 5G mobile. For us, the 5G mobile in this market represent a unique growth opportunity. And we just started, but we have already the first response from the market and the response is very, very satisfying for us and for the customers. Clearly, we are also now paving our let's say, a path to become leader in the cloud space and in the cybersecurity space. we have done some acquisitions. We have done some important partnership with major hyperscaler. So, also here, we really want to be -- and to strengthen our already consolidated position as one-stop shop for big enterprises. Also, the wholesale market for us represents, as I said, a very good contributor to growth. We have been growing revenues double digit. We have been growing our customer base significantly and we have a very strong pipeline also for 2023. In terms of sustainability, we have been, let's say, announced in our new purpose that is basically to safe tour [ph], which means that as a company, we feel a strong responsibility for the digitalization of the society, not only by delivering the best infrastructure, but also by delivering the best digital training. So, we have launched not only -- or we have strengthened not only our Fastweb Digital Academy, but also we opened our step -- our, let's say, gate or museum of the future, where basically we train and we offer for the tailor-made, let's say, digital courses to all Italian population. Clearly, environment is extremely important for us. In terms of zero CO2 emission, we have already achieved significant results as this is really clearly embedded in our overall strategy. If we move to financial results, we start with the net revenues. The Q4 was extremely strong. The good news is that, as we were saying, the growth comes from all the markets, specifically, it was a very good quarter because of wholesale performances, but also enterprise. If I look at the year, we almost reached CHF2.5 billion revenues. And also here, the growth was coming from wholesale enterprise, also consumer with, I would say, mixed feelings because, yes, on the fixed line, let's say, we are kind of flattish, while mobile is growing. If it comes to EBITDA, the first -- the last quarter was clearly almost CHF230 million, plus 1%, because of different mix -- the mix of revenues is different in Q4 was more revenues at lower margins. But I would say also that Q4 has been impacted by seasonality effect and also from the energy bill that has been particularly severe during this Q4. If I look at the full year performance is almost CHF850 million EBITDA, so representing an absolute growth of roughly CHF30 million or more than 3.4% in percentage. Also operating free cash flow, I would say, growing and free cash flow almost reaching CHF200 million. Our relationship CapEx to sales, stable at 25% as we really want to continue to accelerate on our investment. Just a quick history, just to remember our performance, also relative performance versus the market in the last almost 10 years that we are growing. So, if we look at overall customers, we have done a significant growth because basically, we more -- almost triple our customer base while the market is actually decreasing. If we look at our revenues basically, we grew almost by 50%, while the market went down by 25%. And if we look to EBITDA, we were able to add 70%, almost CHF300 million where the market has lost almost 40%. So, I think this is a unique, I would say, performance not only vis-à-vis Italy, but also vis-à-vis Europe. And the reason for that is because of our sound strategy because in terms of growth, we want to achieve a profitable growth. Clearly, we have several engine that contribute -- engines that contributes to our growth surely, we want to scale up on our 5G mobile market because we are already very, very strong in the consumer space, but also there is a very strong opportunity in the enterprise. In the enterprise, there is also the opportunity of cloud and security where we are already today a very clear leader in the Italian market, but we can actually become even stronger vis-à-vis the clients. And then we can monetize our superior infrastructure by leveraging on the wholesale opportunity. Clearly, this strategy relies on a superior network. So, we want to continue to roll out our gigabit or ultra-broadband footprint. We wanted to continue in our path to becoming really an infrastructure over the top, which means that we are -- we have already abandoned the, let's say, old telco traditional telco model, but we are becoming more NICT-type of company where infrastructure is important, but also service platform and code is even more important. So, we can really have an end-to-end control of our services. And that's why we want actually to position ourselves not as a price leader, but as a quality and innovation leaders. We want also to have a distinctive position by trying to be the best-in-class in terms of reputation. Clearly, this is a strong commitment to digitalize the Italian population for us is part of our core strategy, also the environmental attention is very clear. We want to become carbon neutral by 2025, exactly aligning ourselves to Swisscom, and we want to be clearly a role model also for inclusion in Italy. In terms of priority. So, we just need to continue to roll out as much as possible and so to expand and strengthen every quarter our network. As a matter if it comes to fiber, FWA or 5G, we need, as we did actually also in 2022 to manage the macroeconomic scenario, as Christoph was anticipating at the beginning of the presentation, Italy is facing very, very high inflation, but I think that we have been able to manage correctly in2022, and we'll do the same also in 2023. When it comes to markets, clearly, for us, on consumer, we want to -- on the mobile side to continue to accelerate on our growth, while on our wireline and we want to go for value. For enterprise, we need to leverage our mobile entry and then to strengthen our position in cloud and in the cyber security. In terms of wholesale, it's just a matter to continue increase our ultra-broadband customer base. We have a strong and important pipeline of new entrants that has chosen Fastweb as main supplier. So, I think that the pipeline is very strong, and we have just to deliver. And also, last but not least, SG, really, we'll see in a second, but we really want to continue to distinguish ourselves from the others, we have become a benefit company, and we want really to push hard also on this target. So, when it comes to infrastructure, as you can see, our ambition is very spread because we want to continue to expand our fiber network. We have done it in 2022, and we will continue to do in it also in 2023. Also in the 5G FWA, we have been basically at the end of 2023. We will be almost 3.5 times, almost four times the network that we had in 2021, 5G FWA for us is extremely important in gray and in white areas where clearly, fiber is the best technology for the black areas. And then there is the 5G mobile, which is, I would say, it's an umbrella technology that, let's say, brings ultra-broadband everywhere. Also here, at the end of 2022, we are very well-positioned in Italy as the, let's say, the more -- the widest 5G mobile network. And also, we want to develop it further and to reach 75% by the end of 2023. If it comes to the, let's say, the management of the macroeconomic headwinds. For us, basically, we had 2kinds of issues, not only just personal -- just Fastweb, sorry, issue, but we are, I would say, country issues. One is related with the energy cost. As you can see, energy costs have been an issue, particularly in Q4, but I would say that has been impacting negatively our P&L all across the quarters. Here, we have done a very strong revision of our consumption in our consumption, basically the major contributor to the electricity bill are the wireline network and the data center. Here, we have developed consumption, a new project that aim at reduced consumption by 20%, and they are -- all the projects are overall on track. Also, I think in terms of inflation, we have been clearly, very, very cautious. We've been revising our cost structure significantly. And as we said, it was not impacting the overall growth per quarter and also for the full year. For consumer, I would say that for the wireline, here, we want to actually go for value. We did not enter in the price war that started back at the beginning of 2022. And actually, also here, we see that the market is becoming a bit more rational. But nevertheless, we have been always counting just on our strategy. We want to extend our fixed offering with value-added services. We are pushing our WLAN extender, which helps us also to have a very strong coverage. Indoor, we are pushing our loyalty programs. We are also launching ancillary services like the home insurance. I think that all the results or the KPIs shows that the more you push towards ultra-broadband and quality services, the more your services are innovative, the more you have an ARPU uplift reduction of churn. So, that's -- we are going to continue such strategy and execute such strategy also in 2023. In terms of mobile, we want to continue to grow. Actually, in October and November, we have been the best performer in terms of mobile number portability. Our ambition is to become the best performer also for a quarter or maybe also for the full year. I think we now have a very -- the most extended 5G network, where we have the best network has also the award of Ookla certify. So, it's just a matter to continue to push and getting new market share, but I think that the quality of the network is certainly key in order to achieve this target. In terms of enterprise, it was, again, a very strong year, plus 4%. We have an overall market share of 35%. If I look at the public administration sector, we almost reached 50%, so we are definitely recognized in the enterprise as a leader. We will continue to push for cloud services, for cybersecurity. We have been awarded as the Italian AWS Raising Star of the Year. So, we are now doing a very strong partnership with hyperscalers and where we find opportunity also to expand inorganically our offer, we do it. We have done in the last basically two years, two, three years for acquisition, two in the cloud, two in the cybersecurity because it helps us really to have -- to expand our hands-on approach on a wider market. Definitely enterprise will continue to perform also in the future. Same thing will apply also to wholesale, where we almost reached a growth in revenues by 20%. If I look at the customer base, it grew almost by 50% in the last quarter. Also here, I think we have basically signed all the new entrants that enter in the Italian telco or will enter in the Italian telco business. So, is a proof that we are considered also a leader in the wholesale space. Also here, we will be able clearly to exploit our FTTH expansion. And so we will be considered even more interesting for the existing and for new customers in this particular market. If we look at our position of Tu sei Futuro, as I said, as a benefit company now, we don't have just only financial targets, but we do have also ESG targets. One just for your reference with our, let's say, digital courses at Fastweb Digital Academy, we want to reach 500,000 certificates by 2025, and we state is this I would say, a permanent workshop on future, we want to become the most visited location in Milan by 2025. Also, I think this is extremely important because many times, tariff are focusing just on digital infrastructure, but we do think that it's also important to release digital skills because this will make the difference. In terms of 2023 and environmental target, we already said we wanted to become carbon neutral by 2025, also following Swisscom mission. In terms of summary, as I said, 2022 has been a terrific year. We have been awarded with the best, let's say, award for both wireline and mobile. We were able to grow even if clearly, especially in Italy that has been a macroeconomic scenario that was adverse, and we have been able also to grow our best-in-class reputation by adding to the consolidated quality in the infrastructure also this ambition to digitalize people. We have several engine of growth that are both -- they are also all working. So, mobile -- consumer mobile, enterprise, cloud and security and wholesale. So, it's -- that gives us high comfort and confidence on the outlook of 2023, which will be other four quarters of growth and specifically an objective to reach 4% growth in revenues, 2%, 3% EBITDA while CapEx will be stable, and so free cash flow will grow accordingly. Excellent handover with growing free cash flows. Welcome from my side. Let's move to the numbers. As usual, I start with group revenue, page 57. So, group revenue was down by CHF71 million at first half, but that's entirely due to the weak euro. So, the euro-Swiss franc exchange rate was a negative currency effect of minus CHF187 million on revenue. Now, net of this currency effect, underlying revenue actually grew by CHF116 million with Swisscom Switzerland contributing CHF37 million in Fastweb, CHF97 million or €90 million as we heard in euros with a 3.8% growth. Walking through the individual segments, B2C revenue was down minus CHF18 million. We had a very benign service revenue development, as we shall see, hardware revenues were lower. So, this basically added up to the minus CHF18 million. In B2B, revenue was up by CHF99 million, as usual. And during the year, a mix of lower service revenues on the 1 hand, but higher hardware revenues and as we heard already, higher solution, IT solution revenues, about half of it organic and about half of it non-organic. Wholesale was down minus CHF43 million, but you already know the effect that accounts for half of that number, about minus CHF20 million of those minus CHF43 million is the second half of the MVNO agreement that we lost last year. So, that's totally as anticipated. The remainder to the CHF43 million is from roaming revenues, which were down and the interconnection revenues, which were down CHF23 million without any margin impact whatsoever, we have the mirror image later in our payments that were also downing the same order of magnitude. Fastweb, as you already heard, €90 million -- or €97 million up over the year as we heard consumer more or less flat, but enterprise and wholesale with strong growth. Q4 was particularly strong, driven by wholesale revenues, and we had one or the other euro revenue in there that made the growth in the fourth quarter, particularly strong. If we take a look at the Swiss side, as usual, on the left-hand side, the components of the revenue development of Swisscom Switzerland, I spent some time on service revenue, as this is obviously the most important driver of our P&L. So, service revenue was down CHF49 million. B2C actually up CHF6 million and B2B down minus CHF55 million. Now, most of you remember the numbers we had in the previous years, in particular, on the B2C side, the difference is stark. We had in 2021, a year-over-year effect in service revenue of minus CHF105 million and now it's plus CHF106 million [ph]. So, the question is what happened? We heard a lot already from Dirk on some of the things that happened, I'll repeat the most important drivers for the change in service revenue trend. Number one, excellent commercial performance both on second and third brands, which provided us lots of net adds, but also on the Swisscom brand with a very low churn. So, that was factor number one, in particular, on the wireless side, with the success of Wingo. Factor number two, on ARPU, much less aggressive promotions from our side. The market is pretty much as bad as ever, but much less aggressive promotions from our side, also a structural discount that contributed to service revenue decline over the last couple of years seems to fade out now, which is fixed mobile convergence. Fixed mobile convergence, for those of you who remember gave us service revenue downdraft in the order of magnitude of CHF100 million or so per year, that's now a single-digit figure. So, that also played an important role. And we should not forget voice on the ARPU wireless side. We do have a bit of an uplift from roaming in there. So, there's a bit of a roaming rebound. It's not a huge number. It's single-digit both on B2B and B2C in Q3 and Q4, but it does distort the overall picture a little bit to the upside. And finally, in particular on the wireline side, ARPU, Dirk already mentioned this as well. We did some selective repricings on content packages, on fees, on charges, on discount on charges that previously we granted and now we don't grant anymore. So, this was also very important. It seems more at first sight, but in total, it does add up. So, in a nutshell, less aggressive pricing from our side on the B2C side and still very decent commercial results. So that formula works for us in 2022. The other revenue components, B2B solutions, as we mentioned, up CHF70 million, a very good result, 6.3% growth. I think it was already mentioned about half of it organic, half of it organic. Hardware was up, mainly also on the B2B side. B2C hardware revenues were down and wholesale we already talked about. On the top right corner, service revenue evolution over the last eight quarters, so I'm not going to talk too much about it because I already talked about this major shift that we can see there from a situation in 2021, where we lost minus CHF189 million and just minus CHF49 million in 2022. I'd like to talk, obviously, a bit about the outlook because your obvious question will be, how is this going to evolve into 2023. Now, my message islet's not get too excited about the pluses on that chart, okay? But for B2C service revenue, we do think that a flat service revenue evolution is achievable. We don't take it for granted and neither should you, but we think freight service revenue evolution in B2C is too ever. On the B2B side, we already heard it from Urs, we rather foresee an evolution similar to the run rate that we had in the previous quarters on average, so that might average out about CHF50 million service revenue loss for 2023, I'll pick that point up again when I talk about the guidance. Bottom right, I'll leave it to you to look at that. There is not much change in Q4 compared to Q3 and the main drivers of service revenue change. So, I'll move on to the next page with group EBITDA evolution. As we are already -- EBITDA was CHF4.406 billion, CHF72 million down versus previous year. However, a whole list of exceptionals that accumulated over the year. One is FX. So there is a minus CHF65 million effect in there as well. But there were also adjustments on EBITDA. In particular, we had -- we booked provisions for regulatory litigation; one in the second quarter when we had to pay a fine of CHF72 million and booked the provision of CHF82 million. We paid the fine in the meantime. But we booked another one in the fourth quartering the size of CHF75 million as we reassessed the probabilities of our litigations and the potential outcomes. And there was also, as some of you might remember, positive pension effect in the prior year, CHF60 million of that shows up now as a negative year-over-year effect. Now, with all that out of the way, underlying performance of the business was really plus CHF139 million with Swisscom Switzerland contributing CHF121 million and Fastweb, CHF30 million in swiss francs or €28 million. The fourth quarter was particularly strong, that was mostly due to phasing issues on the cost side. We anticipated some of that and commented on it already during the year. I'll highlight it once we go through the individual segments. Starting with B2C. B2C, EBITDA up CHF58 million. Obviously, on the one hand, we have the flat or even slightly positive service revenue, but we also had significant cost savings in the B2C segment and lower subscriber acquisition costs year-over-year. Fourth quarter, particularly strong, mostly driven by phasing. The phasing of the cost savings was very much geared out the fourth quarter on top of that, we had lots of advertising spend compared to 2021 in the fourth quarter in 2021 yes -- sorry, lots of advertising spend in2021 in the fourth quarter and in 2022 in the second quarter when we launched our Blue offering. So that also contributed to the positive development and some seasonality in direct expense in the B2C segment like sports rights and others. B2B EBITDA up CHF9 million. So, on the one hand, we had the service revenue decline. As we talked about, we also had cost savings on the telco side in the B2B segment and obviously, positive EBITDA contribution out of the profitable growth of the IT Solutions business. Wholesale down CHF7 million. So, that's much less than what we saw on the revenue side. So, we managed to compensate for the EBITDA impact of the loss of the MVNO with some cost savings in the wholesale segment and also with a small increase in other excess services. The whole roaming story that I mentioned when I talked about revenue has no impact on EBITDA at all. Finally, in Switzerland, infrastructure and support functions up CHF61 million. This is where a lot of our cost savings take place in the infrastructure section and in the support function. Also here, heavily geared towards the fourth quarter. We talked about this evolution during the year, so this should not come as a surprise. And finally, Fastweb up CHF30 million. The fourth quarter was a bit weak on EBITDA. Alberto mentioned it we had higher energy costs, in particular, in the fourth quarter compared to the previous years and some other seasonal effects. Moving on to the Swiss side. EBITDA, Swisscom Switzerland. We talked about revenue. Subscriber acquisition cost was lower this year, no change in the fourth quarter. Our payments were lower. So, this is the matching position to the lower wholesale roaming revenues that I talked about no margin impact. Costs for goods and services purchased were higher than in the previous year by CHF33 million obviously, due to the higher hardware revenues that we booked in the B2B segment. Most importantly, also in 2022, we achieved our indirect cost savings target in the telco business with plus CHF104 million. Most of it -- or a lot of it in the fourth quarter, as we discussed in the previous earnings calls. And obviously, costs for the Solutions business were up CHF47 million compared to previous years because-- to the previous year because of the increased revenue from the IT Solutions business. Talking about cost savings, just a quick glance at what we did over the last seven years. Over the last seven years, we managed to save in total, CHF712 million in indirect costs, so an average of CHF100 million per year. What is the outlook on this? I always said, you can't save CHF100 million costs forever, that's mathematically not possible, but we don't think we are there yet. So we still think we can manage to save costs in the order of magnitude of CHF100 million per year. But there are compensating effects in 2023, we will have increased costs due to inflation. Salary increase is one of them. Energy increase is another and some other smaller items. So, while we do still aim for CHF100 million of gross cost savings, the net figure will be about half of that. I'll also take that up again when we talk about the guidance. CapEx on the next page. CapEx was essentially flat at CHF2.3 billion for the group, slightly up for Switzerland at CHF1.7 billion, slightly up in euro for Fastweb and down in Swiss francs, but no major change. Alberto also mentioned that before on the right-hand side, you see the main building blocks of our CapEx spend in Switzerland. We did spend as anticipated, a bit less on wireless this year than in the previous year and a bit less on fiber. On fiber, I'd like to remind you that the FTTH rollout has come to an end that was an very expensive piece and so as anticipated of spend was bit lower than CHF500 million. However, we do confirm that the envelope going forward, for the fiber rollout will be between CHF500 million and CHF600 million over the next three years. We spend on backbone transport infrastructure. I think Christoph mentioned some of these initiatives on IT and others, obviously, some of these investments need in order to reap the benefit and cost efficiency down the road. First you need to invest and then you can harvest. I move onto page 63, free cash flow bridge. So, free cash flow is very strong at CHF1.349 billion, down CHF164 million year-over-year. Two reasons; one is operating free cash flow box. It was down CHF80 million, but that includes all the exceptionals. So, if we would adjust that, that would obviously be significantly higher. And the second reason was CHF99 million cash -- income tax is paid. So, cash -- more cash taxes paid in 2022, which is a mere phasing issue. So, still, again, very good dividend coverage of our dividend of CHF1.14 million. I'll move on to the net income bridge. Net income, very solid at CHF1.602 billion, main components, EBIT, CHF2.040 million, down year-over-year, just CHF26 million. Also this unadjusted and including all the exceptionals. From EBIT, the other two components to net income tax expense minus CHF57 million, still very low. As we shall see, we still have about 1% average interest rate and tax expense was CHF360 million at18.3%. We are now close to what you should assume is our expected tax rate going forward, which we highlighted before is 19%. So this year, we are very close to the steady state in that regard. Net income was CHF230 million below last year, but that's due to a whole list of exceptionals. On the 1hand, the EBITDA exceptionals that I mentioned, but also mentioned many times during the year, we had an exceptionally high financial income in the previous year due to the FiberCop transaction and the BICS transaction and the positive effect on taxes also in the previous year. So, if you add all that up, that becomes quite a big number for CHF410 million. If you were to adjust that to get to an adjusted net income increase you would end up with a plus of CHF180 million. Financing side, not much news. Net debt down to CHF7.374 billion, leverage stable at 1.7x, rating stable at A, still a very conservative financing mix with a very spread out maturity profile over the next many, many years, higher fixed floating mix with 82% fixed interest, very low interest rate, 1.05% on average on our debt portfolio and very strong liquidity position with CHF2.2 billion in committed credit lines unused. So, let's talk about the outlook for 2023. I'll walk you through the guidance step by step. Revenue guidance for 2023, CHF11.1 billion to CHF11.2 billion; Switzerland, about CHF8.6 billion, so stable; and Fastweb growing with 4% as Alberto mentioned. Jumping to CapEx, stable at about CHF2.3 billion. That gives me more time to talk about EBITDA, which is certainly the more interesting piece. Guidance for EBITDA 2023 is CHF4.6 billion to CHF4.7 billion. Now, how do we get there from CHF4.406 billion in 2022 to CHF4.6 billion to CHF4.7 billion? Let me walk you through it step-by-step. Number one, first, we need to deal with technical effects. So, we need to eliminate the one-offs, the exceptionals in the EBITDA figure 2022. So starting from 4.0 -- sorry, CHF4.406 billion, we need to add back CHF152 million of exceptionals in 2022, which yields an adjusted EBITDA of CHF4.558 billion. And you will find that number on page 71, in the appendix to the analyst presentation. So, CHF4.558 billion is the adjusted EBITDA for 2022. Then we have another technical effect. Our pension expense -- that's IFRS pension expense. It's a non-cash effect. Our pension expense will decrease by CHF90 million in 2023 compared to 2022 due to higher interest rates. That's how the formula works. So, that gives us another uplift of CHF90 million. So, the real starting point is about CHF4.650 billion, 4.650 is the real starting point if you add back the technical components. So, from there, we start actually talking about the operating changes from 2022 to 2023. And here, our guidance -- the operating guidance for EBITDA Swisscom Switzerland is flat. We assume, as mentioned, the service revenue decline of about CHF50 million. Compensating for that, a decrease in indirect costs of about CHF50 million. So, these two factors we expect to balance out over the year. There are some other risks in the Swiss business, which we would like to highlight. One is on the wholesale side, BTS back holding might come in lower than in the previous year -- than in 2022. There could be a normalization of subscriber acquisition costs. So, that's on the risk side. There are also upsides, obviously, profitable growth from the IT Solutions business, that's a clear upside. But we do expect, from today's point of view, these risks and upsides to balance out. One word to a potential upside that you might have in mind but that doesn't play a big role at least in 2023 is the potential renewal of the Salt agreement. You remember the discussion we had in Q1 2021 about IFRS 16 and all that, while we still believe that the economic essential -- the long-term economic effect of this agreement will be in place, the short-term impact on our EBITDA in the wholesale segment will be rather small and it doesn't play a big role in the guidance for 2023. Finally, Fastweb, EBITDA growth in the order of magnitude of 2% to 3%, and this is how we end up in the range of CHF4.6 billion to CHF4.7 billion. If we reach these targets by the end of the year, we will again propose to pay out the dividend of CHF22 per share. Thank you, Eugen. So, just one last slide as a wrap up before we go into questions. From my point of view, the situation is simple and clear. We had a successful 2022. We have a good strategy with clear priorities for2023. And we are very focused on executing this strategy to deliver and reap the benefits in the coming quarters. And we are, as Eugen said, committed to solid financials and the continued stable dividend in the future. Thank you, Christoph. Now, it's time for the Q&A session. [Operator Instructions] Let's kind start the second part of the meeting. And with the first question coming from Polo Tang, UBS. Hi, thanks for taking questions and I have three. So the first question is really just about competitive dynamics. So, you mentioned that the Swiss market remains promotional. But can you comment in more detail in terms of what you're seeing from the competition in terms of the current quarter, Q1 2023? And how does this compare to a year ago? Second question is really just about use of cash going forward. So, just given the better than expected trends across the business, can you maybe talk about how you're thinking about shareholder returns longer term? Is there a scope for either a growing dividend? Or alternatively, given the low leverage, would you consider share buybacks? And my third question is really just about Italy in terms of EU recovery funds. How much of an uplift will this be for Fastweb in 2023? And how much of an impact have the EU recovery funds had on the Italian market if we look back in 2022? Thanks. Thank you, Polo. I think the first question on competition can be answered either by Dirk and maybe -- or also by Urs. Thereafter second question, use of cash by Eugen and then the Italy question by you, Alberto. Okay. So, regarding competitive dynamics, I believe the question was also particular to Q1 this year against last year. First of all, I mean, quite a lot of what you see in Q1 already happened in Q4, obviously. As the order entries become additions or as churn entries become real churn. So, in Q1, you quite often do see a little bit of what happened in Q4. We had rather, let's say, competitive Q4 from a promotional standpoint, particularly around Black Friday or now it's even the Black November turbo days, which for some really accumulate a large chunk of sales proportion throughout the year is centered toward not only Q4 but then to November. We see even that some sales that usually happened in December now come are being brought forward to November and others are, let's say, put on hold until November actually occurs. That in itself, we don't find too much of a healthy development as Swisscom own brand, we had had almost no promotional activities. We work quite active with Wingo, and that is paying off with additions that we see right now. We do see some cancellations, but nothing to overly worry about with the competitors' activity around the Black November that is coming in now, there's slight signs. I mean, obviously, the January is then not as intense as a November is. For instance, with Sunrise, we have seen, and that's something we welcome you know that they have cut back promotions from 24 months to 12 months. It's in any case, not a good idea to have a 24-month promotion because that coincides with the minimum contract period and -- but this is for a store, so they have basically cut back a little bit there, but it does remain competitive. It does remain competitive, particularly around the second brands, like our brand Wingo or Salt or Yallo. And I think one thing that remains to be seen and it's really interesting to look at in the marketplace, where do Sunrise positioning itself? Are they playing with a brand in the, let's say, price-sensitive price-led market or as they actually desire and sometimes communicate but the work doesn't, let's say, follow through with the action, do they also want to be seen like in a quality segment of the market, which, by the way, is still the majority of Swiss consumers are quality led? When we look at our own customer base, we see that only 25% or so are price-sensitive. There's 30% to 40% that are not at all price-sensitive. You just buy whatever you can sell them the highest tariffs and so on and another 30% to 40% are like in between. So, they're looking, let's say, for value. But as Christoph said that the Swiss consumer environment or the macro environment is still a good environment. I mean, there's a low unemployment compared to other places, low inflation and so on and so forth. So, we are not overly seeing, let's say, any accelerated trend towards seeking bargains. There's a certain segment that is after bargains, but we are not seeing any acceleration. And to my perspective, au contraire, I think what we have seen in the marketplace that people that were lured into cheap tariffs eventually figured out that cheap tariffs and great quality just don't go along which is the reason why the competition has rather high churn. And it's also the reason that I'm not sure whether Louis is going to kick me. But for the first time also in last year, we had a balanced net porting relationship. So, as many customers that has left have come back from the others because eventually they figure out a cheap price alone doesn't do the trick as they are seeking for quality, with still the majority of Swiss consumers do. On B2B, I guess, in the SME space, more or less the same dynamics, as mentioned by Dirk. And in the corporate segment, we had a strong Q4 in order entry, which for sure will drive also our business in Q1, but overall, I would say, more or less stable in comparison to a year-on-year basis for Q1 2022. As far as we can see it now just starting into February. Very good. Then I'll take question number two on shareholder remuneration. So,, as you know, our financial policy has two main pillars. One is attractive shareholder returns and the other is a very solid balance sheet. So, we have achieved both over the last many, many years. On attractive shareholder return, we are committed to pay out a high share of free cash flow in dividends. We have done so in the past and will do so in the future. We will not pay uncovered dividends, but we do have a high payout ratio. At the same time, we are committed to a stable dividend policy and stable and reliable dividend policy. So at this point in time, there is no discussion whatsoever on the board level with regard to cash or cash utilization policy, as you mentioned. Now, sometimes, we do get the smart question, what would it take for such a discussion to happen at the Board level? So, I anticipate this question. And our answer is always it takes -- it would take a proven substantial and sustainable increase in free cash flow, proven substantial and sustainable. And we are not there. Okay. Then I'll take the third question. So, basically, just to refresh what kind of bid has been backed by EU funds. We are talking about the -- for the school, the let's say, provisioning fiber connection to 10,000 school. And for the second one, we are talking about the fiber provision into 12,000, sorry, health care sites. So, it's a project that will take a long time. So, basically, we started in September. So, I would say that the financial impact in 2022 was extremely limited also in 2023, we will be not completing the project. So, I would say that it will have an impact into 2023, but nothing major. Bear in mind that our -- these are normal bids for us because we are used to win big bids coming from the public administration. So, I would continue to assume a solid growth for enterprise regardless these European funds. Thanks. Hi, good afternoon. Hopefully, you can hear me okay. I've got three questions as well. Firstly, on the guidance, you're guiding for flat service revenues from B2C, given the very strong performance you've delivered and I'd say the generally fairly upbeat message on that segment, why are you not more bullish in your guidance on B2C's revenue contribution? Is that just being a bit conservative? Or if you can maybe just elaborate on that? Secondly, on free cash flow, which obviously described as the sort of key underpinning element for your future thinking around dividends. Can you maybe just help us bridge free cash flow for 2023, I guess you've got tax normalizing, some of the one-offs going away and EBITDA going up. So, where should we land sort of roughly on free cash flow, kind of CHF1.6 billion-ish. Is that kind of the right ballpark? And then just thirdly, on fiber specifically, is there any pressure on you to go beyond your current fiber coverage targets I appreciate right now Switzerland is not a sort of major outlier on fiber. But if you look at the fiber rollout for some of the other European countries, the sort of 55% to 60% would be one of the lowest fiber coverage ratios in Western Europe in the sort of longer term. So, can you just help us understand, is there a pressure from politicians to go beyond that? You envisage eventually ending up above that ratio. So, just your thinking around how far could you go on fiber coverage in the long-term? Thank you. Thank you, Jacob. The first two questions are typical CFO questions, guidance and free cash flow. And the third question, fiber rollout will be taken by our CEO, Christoph. Yes. Maybe on the B2C service revenue guidance, and happy for Dirk to jump in. What I mentioned when I talked about the service revenue trend is that on the B2C side, as well as on the B2B side, in particular, in the third and the fourth quarter that you might take as a reference point for what could happen in the next quarters, we do have a positive effect from roaming rebound. And it's not massive, but it's big enough to make it look like there is an increase, but in reality, it's more a flat evolution. So, this is the very simple answer from my side. I don't know be any additional comments. No, it's -- it will continue to be a competitive environment. And when you look at 2022, I think we were on the mobile side, quite successful with gaining customers on second and -- particularly the second brand lost a few on the own brand and then had a bit of brand shift and with the respective ARPU impact there. I think we are on a good trajectory there. Nonetheless, I think not only for the first brand but also for the second brand, we are looking at what type of promotional levels we want to maintain. If you look at the second brand market, basically, you got -- there's the anchor price for like a full flat in mobile that went from CHF30 to CHF25 to CHF20 roughly. And we want to make enough for to bring that up again towards the CHF25 really. And how that exactly then pans out, I think remains to be seen as we are also playing with price and promotion level in that space. And on the broadband side, broadband is -- has been a challenging year also for some external effects. We need to see how that pans out as we are ramping up again our fiber sales. And then also we need to be able on the second branch to activate the mobile base in terms of cross-selling also for the broadband and there are some uncertainties around that. And lastly, I alluded to the fact that we do quite a lot of migrations from the base in terms of the back book pricing to front book pricing. And there's always two sides to this. There are certain customers in the base where we can do a value uplift, but then there is others also as you phase out that can do some optimization, yes? Obviously, we are not looking for the customers optimization. We look for our optimization in that case. But again, in some even might because of price increases, there might be a limited churn and so on. Sot, here's some uncertainties around it, and I think all of that is reflected a little bit in the plan, yes. Thank you. Second question, on free cash flow, I certainly would not like to get into guidance for free cash flow. There is a reason we guide for EBITDA and CapEx. However, let me give you two or three hints in that regard. One is the bridge from the EBITDA 2022 to 2023, where I explained what you have to add back to get to the starting point. Most of that is non-cash. So, provisions taken in 2022. The pension cost effect is not -- that's all non-cash. That will not end up in a free cash flow year-over-year positive change from 2022 to 2023. So, that's one important element. And another element you mentioned tax, tax has pretty much normalized in our view. I mean, obviously, it depends on EBITDA of the respective year. But this has pretty much normalized. So, if you think about free cash flow going forward, and build your bridge from 2022, you need to take into account our operating improvements in EBITDA, but you need to take a very close look at those things that are technically up, but that are not cash. So, on the fiber question, actually, last year in October, when we announced the new 2025 target, we also announced a 2030 target, which might have not been noticed that much, but we announced that our intention is to build 70% to 80% fiber coverage until the end of the decade. Obviously, it's driving for the upper end. And if you take into account the already existing other fiber turf in Switzerland because it's roughly today about 10% third-party or non-Swisscom fiber coverage. Then you get up to quite substantial fiber coverage in sort of around 80, 85-ish, 90% range by the end of the decade, which is totally in line, I would say, with what other European countries are doing as well. So, that's the plan, and it's not fully committed yet, but we are let's say, striving to achieve those targets by the end of the decade. All right. Thank you, Jakob. Next question coming from Georgios, Citi. And good to welcome you, Georgios, not outside down this year. Thank you. And I'll follow a little, follow Jakob I will also ask three questions. The first 1 is on the improvement we are seeing in a relative commercial performance. And I know you discussed the behavior of the customer, but I'm curious because there was a pause in the active footprint for fiber. So, that cannot be the driver of your stronger related performance. So, I just wanted to understand whether you believe it's the mobile network, whether it's execution in terms of the customer experience that is making this different. And also, I did notice on page 32. You have this graph of the Net Promoter Score and one of your competitors is seeing quite a significant deterioration, whether you expect that to normalize any comments you can make I know you may not want to comment extensively on that, but anything you can give us in terms of your expectations for 2023? My second question is on [Indiscernible] and it's been fairly modest in recent years in terms of the growth of alternative networks. But there are some ambitious plans that have been announced or are being planned. I just wanted to get a better understanding whether you believe there are areas where you could be overbuilt in -- as part of your existing plan of deployment? And I just wanted to also better understand whether there are new options on IRUs or co-investment as you are rolling out your own network, whereas some of these open access platforms can engage with you. And then the final question is to Alberta, and I think I asked this question almost every year. There are new scenarios again coming out on the infrastructure side in Italy. I wanted your comments in terms of your expectations, but also your position as the biggest alternative call from either in the market were then you'll be supportive of these things, whether there's anti-trust concerns you want to raise? Thank you. Thank you, Georgios. I think the first two questions on commercial performance and FTTH deployment goes to our CEO, Christoph. And last question is very clear, Alberto will take over. So the commercial performance, as you mentioned, there is an improvement last year. We believe that this improvement has several different components. So some of you, you mentioned already, we are extremely focused on delivering a better customer experience, both in B2C but also on the B2B side, improving the digital interaction, self-service capabilities, both on the sales side, but also on the service side. And I think this is an important contributor afterwards to the Net Promoter Score of -- in our customer base. We have a super high quality focus as well as we outlined in the presentation, continuously improving the reliability, but also the speeds in the network. And last but not least, in a market where products become more and more interchangeable especially on the B2C side, I mean, everybody basically delivers the same speed profiles. We believe that brand becomes much more critical in the execution or success in the country. And we, therefore, invest heavily in our brand posture, especially also in the area of sustainability because itis a topic that is quite important for the Swiss citizens and it sort of pays into the brand position we have in the country. And I think if you add all those components together, next to some other things we are doing, then you end up with a better commercial performance. Next to, obviously, executing well within the sales force and having the right pricing, the right bundles, the right product configurations, which is obviously also -- I mean, it's needless to say also important. Now, on the fiber build, I think it's quite an interesting question you're raising. We are fully committed on building as much fiber as we can. We are basically using nearly all available construction capacity in Switzerland, rolling out hundreds of thousands of lines every year. And I think with the market share we have today in B2C and combined with wholesale, you have to be quite optimistic to start overbuild scenario because it's probably going to be not so easy to get your, let's say, make the investment profitable. So, I would argue that the overbuilt scenario is -- I mean, it is always possible but seems to me not so likely. And maybe you also alluded to sort of joint construction. So we are also open to co-construct locally, and we have built with local partners, mainly utility companies in many areas to reduce cost, but there have lately also been rumors about us engaging in a nationwide fiber JV, which I would like to comment on that this is absolutely not true and we are not negotiating or have not agreed on any nationwide fiber JV rollout. Okay. On the single network or on the national network, I think this topic has been extremely fashionable. Now, there is just a new chapter, which is the KKR. I think new chapter will come also because by reading newspaper also, probably, there could be also another bid coming from cash depositive price it. Our point is that -- we are not involved. We are just basically -- we want competition to be preserved because as I said in my presentation, we do believe in our role in infrastructure, we do believe that -- we want to continue to compete also in the wholesale business, which is extremely important for us. And if you mentioned antitrust, if there will be some remedies that are necessary, we will be more than happy to look at such a remedy package. And if there is some sustainable business to do with it, we will look carefully to the dossier. Hi there. Josh Mills at BNP Paribas Exane. A couple of questions from my side. The first one was just related to the pricing in Switzerland. So, you talked to you about selective price adjustments. Can you just confirm whether that's on front book or back book pricing? And then maybe just a few lines on your thoughts around back book price increases going forward. So I know the salt has introduced the provision to allow them to do this, but haven't yet taken a step to do so. And then the second and third question is just around Fastweb. So, historically, they've had a fairly lumpy one-off incomes, which have helped EBITDA, I think, in the second quarter this year to the tune of about CHF40 million. In the past, you've said that you don't include that kind of one-off benefit in your guidance. But when I look at the 2% to 3% EBITDA guide for next year, it looks like something may be included. So just a bit of a sense of whether or not you think you can continue to gain those regulatory incomes? And then third and finally, again, related to Fastweb. Could you comment on how much you received for the sale of IRUs in 2022? What that was for revenue and EBITDA? And then also how much you're assuming for 2023? Thanks very much. Okay. So, in terms of -- I think the question was particularly around front book, back book. There's still quite a few hundred thousand consumer in the base that have older tariff schemes that are now outpaced like Vivo, as it was called on the wireline side or Infinity and in inOne on the wireless on the convergence side. And we are basically looking at phasing out these old portfolios. And as we do that, obviously, we will try to migrate people to higher value and then obviously, also higher priced schemes, which I believe, let's say there's good arguments for it because the deal mostly is a pay a bit more, but you get a lot more in terms of whatever connectivity, broadband, TV and so on and so forth. So, I think that can pan out quite nicely and there's quite a potential for that. We're looking at other spaces also there's like one-time fees and so on and so forth that occur here and there. We look at our content pricing also in sports. I think that is what I can say. How to make certain adjustments there. And then I believe the other question was or what you were alluding to is that others also in the marketplace have made CPI provisions in the terms and conditions. We are looking at that and we also will make a CPI clause and introduce that. We will announce that in early March and then it comes active in June. From my perspective, that type of a provision is a little bit, let's say, overstated in a way. We know that in the U.K. and elsewhere, they have that and they regularly actually execute the consumer price, index price increase. As that inflation is still low, luckily is low. It hopefully remains lower, becomes even lower. Nonetheless, that we want to introduce such a provision vis-à-vis actually, let's say, utilize it or not is a totally different story, and that is something we might want to look later in the year. But first of all, we want to see how the year develops, our activities, as we have laid them out actually come through and shape up, and then we look at potential other measures or not. Yes, I'd say that again, our growth in EBITDA, I wouldn't say that it's particularly linked to regulatory one-off, certainly, also in our -- you were mentioning also in our history, there have been cases where regulatory impact has favorably contributed. But I would say that in 2022 and also in 2023 this will be limited. Bear in mind, if you were referring also to the overall performance of EBITDA growth in 2022 of roughly 3%. We were able to absorb an extra cost of energy roughly CHF20 million to CHF25 million. So, I would say that our EBITDA performance has been consistent regardless, let's say, these regulatory one-off. And I could say the same thing also to IRU have been always part of our business by having this extended infrastructure are just a service that we deliver to our customer as they were in 2022, there will be also in 2023, but I would consider them as I said, just a part of our business because just to mention wholesale, we are really -- a lot of the growth will come from the ultra-broadband customer base development. So to cut a long story short, I would say that this one-off really did not impact or they were not determinant for the EBITDA growth, neither in 2022 and nor in 2023. Thank you, Alberto. All right, Josh. I think your questions are answered. That moves to the next question coming from Yemi Falana. Afternoon everyone. Yemi Falana at Goldman Sachs. Thanks for taking my questions. So, if I start on Swiss competition, given the numerous moves you've seen at the value end of the market, Yallo, Wingo, et cetera, while your performance has been strong, do you have any concerns that the value segment of the market is expanding? Secondly, just on energy costs, you've absorbed some energy headwinds in both Switzerland and Italy this year. Could you talk about the absolute headwind at the group level and perhaps the individual businesses into 2023? And then finally, maybe I could ask the use of cash question in another way. How urgently and what scale with -- will you pursue inorganic opportunities on the IT solutions side in both Switzerland and Italy? Thank you very much. Okay. If I understood it correctly, the question was this kind of price sensitive. You call it value, we actually see value more like in the price in it, but probably, let's say, definition question. So, the price-sensitive segment is that growing that is being served with the likes like Yallo and Wingo and so on. Yes, it is somewhat growing. I mean you have seen that also with us. I mean we have growth on Wingo others have growth on Yallo and so on and so forth, it is somewhat growing -- but overall, as said earlier on, to our insight and our experience, Switzerland is a quality-led market. And there's a particular segment, which is not the entire market, it's actually it's a subset or a smaller piece of the market that is served by these types of brands. An interesting factor is you might even know that one competitor had even introduced a new scheme for CHF10, that is solved with GoMo, and that is not, at least to our knowledge, not getting any traction because even consumers find that so cheap that they have doubt that anything this cheap can be of any quality at all, which is, I think, good and that is how it should be. And -- that's my point to the second brand market. And I said earlier on, I believe also in the second brand market, there is opportunity, and we want to execute that to lower promotional activity in that space. Yes, energy costs into 2023, so on the Swiss side, we are almost fully hedged, so we know what we'll get in 2023. And the impact year-over-year will be an additional energy cost in the low double-digit numbers. And it's part of those that CHF50 million I mentioned of inflation-driven cost increases that compensate for our gross cost savings. So, that's the Swiss side. In Fastweb, we are now at about 50% hedging for 2023. So the situation is a bit more open and depends on the spot prices to come during the year. But at price levels that we see right now, we expect no year-over-year impact to 2022, if any, maybe a bit of an upside. Okay. So regarding use of cash for inorganic IT moves. I think what is important on that side is that from our point of view, the IT market is a growing market. IT and telecom services are moving closer together and or converging in some areas like in cybersecurity and networking with the SASE trends. So, since several years, we are constantly screening the market, both in Italy and in Switzerland for potential M&A moves, and we will execute any opportunity, which, at the end, creates shareholder value and is good for the customers and Swisscom as a company and its shareholders. So, I think it is -- and we have already done numerous acquisitions in the past. We will certainly look at some this year as well in both countries and -- but there is nothing, let's say, more to say around that area today. Yes. Thanks very much for taking my question. Good afternoon. Thanks for a very comprehensive presentation. Just a couple from my side. First, maybe a quick follow-up on Yemi's cost question, given you have this CHF50 million guidance for the Swiss division. Just could you give us a bit more insights into what wage inflation you would expect from April 2023. I think Sunrise had a lot about 2% to 3% increase in the wages. Is it a good proxy for you? And on the cost savings side, should we expect a similar development throughout the year that you have more cost savings in Q4 and Q3 compared to the first half? And then maybe quickly on your enterprise segment, given that it's still a bit negative and actually slightly weaker compared to Q3. Just do you see any impact from the macro environment on demand apparently not on the Solutions business, but on the telco side, even though you have this kind of quite good economy in Switzerland and relatively low inflation. And maybe just if I can, a very quick third question just on the 500,000 fiber homes, which are going to be upgraded or change from -- to P2P. Why does it take such a long time given that I think you plan to still have quite a few of them in 2025? And what should we expect as a reasonable cost for upgrading one of those households from one technology to the other? Okay. Quick answers. So, the 2% to 3% wage inflation from April 1st is a reasonable guidance, that's it. And on the phasing of cost savings over the year, we have nothing very useful to say. It's also getting small numbers by quarter, if you start CHF50 million number for the whole year. There are lots of variations within the quarters. So, we have no useful guidance in terms of trend over the year at this point in time. Over to you. Right market for the telco business, we definitely still have solid dynamics in, let's say, losing some customers and winning back other ones on lower price levels. This is, as I laid out in my explanations, also our perception towards 2023, still a market environment, which is rough. We see definitely, let's say, some potential upsides on winning back customers, which have made experiences, which was -- were not good enough to their expiration on quality after leaving us. But on the other hand, we definitely can say our win-back ratio 2022 was solid, but we also lost a few large customers in 2022. But I fundamentally believe that the guidance that we put into place looking forward is series and has a balanced profile on risks and opportunity. So, on the fiber rollout, what is important to understand is that we have about a one-year delay between decision of changing the strategy and the actual implementation in the field. So, we decided in October last year to change to point-to-point. And everything that we have built since then and that we will build roughly until end of the summer, early autumn, is still in point-to-multi-point mode. So, at the end of last year, we had 500,000 lines which were constructed in multipoint. So, this number will actually go further up this year and increase to roughly 800,000 lines that need to be retrofitted. And in our plan, currently, we will retrofit about approximately a bit over half of those lines until 2025. But there will still be a chunk remaining after 2025. And that's why it also it takes such a long time. And we -- in terms of money, we expect to spend about CHF50million per year on the retro fitting, but this is included in the CHF500 million to CHF600 million wireline FTTH rollout CapEx guidance. Hi, everyone. Thank you for the opportunity. I've got two questions, please. The first question was just going back to the comment at the start of the presentation about the tougher stance from the competition authorities. So, could you perhaps give an indication of which area the higher provisions were taken in 2022, including the provision taken in Q4. And if the actual exposure has a risk of being much higher than what has been provided and if all of this is related to that one case of market abuse on ADSL? So, that was the first question. The second question was going through the -- some news flow that came out, I think, late last year about a quick line, the cable network looking to expand on a national basis and we're interested in a deal with you to expand their network. I just wanted to ask if you're willing to comment if you are in talks with them? And if any deal like that with a party other than sold on your fiber network would be interesting or not. Thank you. Okay. So, the first one, yes, the tougher stance from the competition authorities. So, every quarter, every quarter, we look at our pending regulatory and competition litigations and form an opinion about the likelihood of various scenarios taking place and the financial impact of those scenarios and we learn as we go. So, every quarter, the outcome is not necessarily the same as in the previous quarter. In the fourth quarter, we did such a reassessment and booked this provision that I mentioned. Yes, what did we learn in the fourth quarter, we had another 2 or 3 rulings that came our way that went against us again. One example is the Federal Court that upheld the measures of the competition authority on the fiber rollout after we lost the Federal Administrative Court. We lost the final court. So, that is just one example, but there are others. And so we reassessed the probabilities and financial impact of some of the outstanding litigations. Now, I trust you understand that we cannot give any indication whether this is for one legal case or for several legal cases or for which legal case, that would not be a good service to our shareholders to do so. Okay. So a quick line is a quick answer. So quick line is a wholesale customer of Swisscom. We have a wholesale agreement with them for the entire Swiss national footprint, and this is what they are using as a basis for their national expansion. Yes, good afternoon Louis. Thanks for letting me ask the questions. I'll go for three, if I can. First of all, I guess, if we look back over 2022, the big sort of positive surprise has been your outperformance on Swedish -- sorry, Swiss service revenues, particularly in consumer. It feels like your execution has been pretty consistent, but I guess your competitors clearly have been less so. So, I would love just to sort of hear an explanation as to what does surprise you positively? Is it just the Swiss consumer sort of unwillingness be dragged in by discounted tariffs that you kind of alluded to? And how do you see that going forward, because clearly you're talking about promotional market and yet you're spending less on high position subsidy. You're doing all the right things, but just curious where that positive surprises really be and how you think about that evolving? Secondly just looking at your sort of -- your cost performance in Q4, clearly the -- your other operating cost seemed very, very good. But obviously your drag cost went down despite the fact that your equipment revenues were quite substantially in the quarter. So, kind of -- I think you talked about lower content cost, any further light you can shed on that because when I do the math, your gross margins gone up by 250 basis points is quite a big move. So, just any sort of -- any color on that direct cost performance? And finally, just on capitalized costs. I think you were up about CHF70 million this year. You're up about CHF200 million in the last two years. Clearly, that's quite supportive to the overall cost picture and EBITDA. So, -- just to sort of follow-up on Josh's question on other costs and capitalized costs. Can you help us understand how we should think about the capitalized cost picture in 2023 and beyond? Is there still upside there more to be capitalized? Thanks. Thank you, Steve for those three questions. The first question will be answered by Dirk. Second question, third question, are financial questions, by Eugen. Okay. So, in terms of revenue performance, B2C last year. I think there is not the single one thing that happened. I mean it's really probably a dozen or two that has happened. Some is like external influence and some, I would say, like internally engineered and executed. Like external Eugen already mentioned, better than expected roaming revenues. We had less than expected voice line cuts, for instance, and that helped and a couple of other effects. The biggest part is really truly cutting down on promotions from 12 to 6 months. And instead of giving half price promotions only giving a moderate discount. I think that is really one of the biggest impact there. We did increase certain fees -- initial setup fees, both in wireline and in wireless. In wireline, do for whatever reason, we had a high level of rebates or discounts on that and we eliminated that so we really consequently asking for that fee to be built. Then we really put the entire organization on value and ARPU management. We beefed up our effort, for instance, in customer retention -- by now, we are able -- 40% of customers that request termination from us to hold them back. And we upped that from like a 30% level. And that in its own right, it makes an impact. We are consequently going into minimum contract duration management, be it for those customers that have been acquired like new customers as they come out of period or when we go into the base and do retention deals, we consequently demand a new contract period, thus having a more locked in if you wish customer base. The whole incentive scheme for the channels is such that they better sell a higher tier tariff than a lower tier tariff. I mean which of course, sounds logical. Well, some of that we have just not executed or not executed well -- and so we sophisticated our efforts in that, both from a channel perspective, but equally also as we do the tiering for subsidies or incentives as seen from the consumer, which then makes for a better ARPU. And then obviously, particularly on mobile, the biggest reason is really the better than expected performance, particularly on the second brand. I mean there we had really, really great export that we didn't see thus far as it turned out, and we're very pleased with that. So, that were the 2022 effects. Now, not all of them, you can redo in 2023, which is what informs our outlook then for 2023 as we discussed it. Can I just -- can I quickly follow-up and ask whether the decision to sort of cut promotional discounts was in response to seeing the NPS of your competitors falling. Was that something you envisaged? Or was that -- did you see enough evidence in the marketplace to allow you to do that? Because it doesn't feel like it's something you predicted at the start of the year when you gave guidance? Or is that something that you were able to do in response to others failures for one of a better work? Well, look, I think, yes, we had a strategic discussion if your vision and Christoph talked about that look, we want to execute on our brand promise, particularly when it comes to Swisscom as a brand and go for quality, customer experience and all of that. We saw also like weaknesses coming up with the competition. You saw the NPS chart as I had it there that was not entirely new last year, but it was kind of like showing. And so we said we go clearly into a brand and quality play and reduce our activities on the promotional side. Okay. Question number two, so the direct costs in Q4, in particular in B2B -- sorry, in the B2C segment. That was on the 1 hand tied to the accounting for our sports rights and sports content rights but also some other items. All of it is seasonal. So, there is no sustainable effect to be drawn out of this Q4 development. So I would focus on the full year number as a guidance for the future. We also don't have a massive year-over-year effect planned for these items from 2022 to 2023. For capitalized costs, yes, we have an increase in capital cost because of our in-sourcing of software development CapEx. That's a development that has gone on for two or three years. It will continue, whether this will lead to a specific increase in capitalized costs next year, I cannot comment on. We do not guide on individual P&L lines. I think you should take into account our guidance on overall OpEx from 2022 to 2023 in thinking about these topics. Is there a World Cup effect in there with the fact that the leagues, I guess, didn't take place during the World Cup so some of the rights get pushed into Q1 and Q2 -- on the sports content side, sorry? Yes. Good afternoon gentlemen. Thanks for taking my questions. I have two or three. You mentioned you are not going into a fiber nationwide on venture. But can you please give us some color on what circumstances you will go for the proposal of feet what would deter you to elaborate there? And if you went for the model, would that go beyond the 500,000 block lines just on this footprint. That's the first question. The second is, when do you see the sole contract being readopted, do you look -- does it look different from what we know about it? Then maybe the first -- the third question would be in the B2B business. Can you just say a bit the margin trends for services and for IT Solutions, I think you gave a comment that in IT Solutions margins are going up was a trend in the two kind of business lines? Thanks. Thank you, Andreas. The first two questions on fiber and consult partnership, potential sold partnership goes to Christoph. And the third question, the B2B will be taken over by Urs. So, on the maybe on the -- first, on the upgrade of the blocked 500,000 lines. So, these are lines that Swisscom has constructed without a partner in its own like fully 100% paid by Swisscom. And we actually don't need any partner or a JV to upgrade all those lines. We are -- basically have already started to retrofit all those lines and we will continue to retrofit all those lines fully in our own execution. So, I think that's important to understand because those lines have not been built in a partnership with another company. There is no reason to now to expand this to a JV level, but we actually intend to upgrade them on our own. And I mean, whether we can build something with SFN in the future together, we will see. We are discussing with many partners always a potential construction co-construction as most of the time with local utility companies. But it always depends on the local situation, you have to analyze basically municipality-by-municipality to see if a co-construction makes economic or financial sense. And if there is an opportunity to build faster and at lower cost, we will obviously look at it. But there are many, let's say, parameters to take into account. Now, on the Salt side, we are in discussion with Salt to adapt the old fiber contract to a new wholesale contract. We have agreed all the headline terms but we are not completely through with the contract, the final contract negotiation, and we will communicate on the contract once it is signed and executed but you can expect the deal to be sort of a regular type wholesale deal because we already have a wholesale deal today with Salt on the existing fiber turf. So, the contract of the new fiber turf will be quite similar to the one we have in place already with providing then also, let's say, normal wholesale revenues and not linked anymore to sort of IFRS special accounting treatment as the one we had with the last contract. Concerning the profitability profile in the IT Solutions business in Switzerland. We definitely are looking going forward to further improve it. We are coming out of a mix of portfolio of activities where we especially handsome long-lasting old project contracts where we definitely have improved and are still working to improve. So, therefore, I truly believe that there is a certain upside, but as we know, in the IT Solutions business and the outsourcing business, one big failure in one particular project and let's say, make a huge difference to whole profitability of the overall business. So, it's also about the maturity and the evolution of our skills and capability to work on that as an organization. Yes, our ambitions are way for to further improve it, and we are convinced that there is some potential, but not let's say, on a very short-term basis. But in our plans towards 2023, there is an evolution included in ramping up our profitability profile, one or two basis points for the IT Solutions business, yes. The telecom service business in B2B is that since it's a bit under pressure, would there be kind of a margin drag there? Let's say, I truly believe in the SME space, I believe it will be capable, let's say, to maintain our profile, our profitability profile, but we still have to work heavily on our, let's say, cost basis. And as I mentioned, we will come into the market with a new let's say, you integrated on B2B portfolio on the telco side, which, over time, after migrating the installed base to the new portfolio, where there we definitely see an upside in the efficiency and which will not impact very heavily in 2023, but further on, depending on the migration speed and the adoption rate we are able to make. Yes, good morning -- good afternoon everybody. Thanks Louis for taking my questions. So, the first one is on price indexation. So, the changes in the contract terms to include CPI link. I understand it's an option and not something you will necessarily do. So, I'm curious to understand first in Switzerland, what changed your mind? Because I remember in maybe in the last conference call, you defined it as a last resort. And at that time, Salt had already done their move. So, what has changed your mind and leading you to change the contract terms? And in parallel in Italy, I would be keen to hear Alberto's view. I mean now we have essentially all the big players, team Vodafone changing their contract with the possible indexation in 2024. Do you think this is something that will changed dramatically the price dynamics in the Italian market? Does it have the potential to do that? So, that's my first question. The second question is on fixed line network strategy, and it's like the FTTH versus cable debate, there's a consensus, I think that FTTH is the future-proof solution. So, how do you see UPC evolving in Switzerland? Do we expect them to become a more and more important wholesale customer of yours? Or conversely, will they use more aggressive pricing to retain customers once their network becomes evidently less performing than yours? And my last question is on the 5G monetization, which is lagging behind everywhere in Europe. And I always think of Swisscom as a great innovator, both in terms of services and tariffs. I remember you were the first 1to introduce speed tiers in your mobile tariffs. So, what do you think can be done to improve the 5G monetization, both on services and pricing? Thank you. Thank you, Luigi, especially for your smart approach, by splitting the question one into A and B. So, I think the first 1goes to Christoph and then the second one to Alberto on indexation. Okay. So, on indexation, what we ruled out or what we mentioned as being the last resort at the last call was actually across the board price increases. But we mentioned that we are open to -- or we are actually executing already targeted price increases. Last year, we will do so again this year, as Dirk outlined. And on the CPI link, I mean, we had inflation last year. We will have some inflation this year. Nobody knows how much. Nobody knows what happens next year. So, it is more also a question of being prepared in case that inflation continues to be high and sustained. And obviously, at one point, you need to maybe act in a different way. So, this is our thinking around the price indexation piece. Yes. And for Italy, I wouldn't talk about price indexation, but overall, I would say that the market after years and years of extremely poor profitability is -- I'm talking clearly about the fixed to try and somehow to increase overall price because I saw that you saw that Iliad increased prices. I think that -- also some other players are somehow adjusting the prices for faster, but we decided, but not to enter in such let's say, price war. We have been always competing not with prices, but with more innovation. So, I think it's just -- I believe that the industry today is becoming more rational. So I would say that overall, we do expect regardless, yes, there is a macroeconomic scenario that is clearly unfavorable. But I think that overall, the industry will look more carefully at profitability going forward, which I think is correct. Thank you, Alberto. Second question goes to Christoph. And last question, 5G monetization, I think, goes to Urs because there's a couple of examples. So, on wireline strategy. So obviously, we try to monetize our fiber footprint through the wholesale division. And Sunrise UPC is already a wholesale customer of Swisscom and uses some of our fiber lines. But I think you'll understand that I cannot comment on the strategy of our competitor. So, you would have to ask Sunrise this question. And I think at the end, it essentially also depends on the evolution of customer behavior and how the customer ultimately sees the performance of cable versus fiber, which is probably be more a driver than sort of a proactive strategy of a company. But I think at the moment, I cannot say much more than that. I guess the golden bullet around 5G monetization. If you would have it already finally, we wouldn't let you know yet. But for sure, we are working on several, let's say, dimensions as 5G FEA MPN mobile private network monetization, but there are also strong elements looking ahead with public spectrum for the industry in Switzerland starting 2024. So, unfortunately, we don't have the golden bullet, but I can make you can assure that we are still working on it in an intense manner. And hopefully, we are the first one, which really has the golden bullet, and we will let you know. Hi. Thank you. So actually, most of my questions have been answered, but I just have a follow-up on what you said about the Salt -- potential Salt fiber wholesale deal. So, if I remember correctly, previously -- the previous plan handsome CapEx benefits. So, I just wanted to clarify, like does this mean that it's no longer a possibility to at least some of the burden on CapEx, if we do go into a deal with this new fiber architecture? You can -- the answer simply you can throw the previous numbers, you can throw them out. So, there will be no CapEx benefit, no IFRS 16 financial lease accounting. As Christoph mentioned, the contract is not signed by the head of terms we have, and it will look much more like a normal wholesale deal with wholesale revenues, but no CapEx impact. Yes, thank you. Yes, Russell from New Street, saving the best last obviously. Three quick ones. On the Salt deal, are you worried about the impact the Salt might have on your retail business? I mean, it only covers a third of the country at the moment. And given that, it's actually built up a reasonable share within region? So, yes, that's my question. I mean, do you think your customers are going to be the main target? Or will it card target another company's customers given the kind of profile? Second question is just you talked about the copper switch-off. I mean, obviously, it's very early days, but have you thought about kind of quantum of savings and the timing of those? And then the final question, yes, just on the -- you said there's maybe 10% of the country, I think that's covered in fiber by other providers. I mean what's your plan to cover that 10% of the country? Will you overbuild about 10%? Or will you have to take a wholesale product to offer a fiber product in that region? And if so, when would that happen? And when would we see that overbuild happen or when would we see those wholesale costs rising? So, regarding impact of the Salt agreement, I mean yes, obviously, will have some impact on the retail business. I mean if a customer -- existing customer switches to Salt, I mean they -- I mean I assume they will target the whole population base, which lives in a municipality. And there will also be some Swisscom customer switching. So, how big it will be, we will see in the overtime. But on the other side, I mean, they could also move through other wholesale products we offer at the same --today, they could also buy copper services from us. So there is no real way of like preventing them entering the turf. And so they are there. And then we will see and we have to deal with the fact that there is sold in the market, and we just have to be better in service and quality and brand to retain the customers. On the copper switch-off, I would say that it's a bit early for -- to quantify savings and timing. This is also the reason why we are running those tests with sort of select municipalities to sort of test a bit more how can we execute it? How much will it cost us to switch off copper Because, let's say, upfront, it will essentially mean more costs actually switching customers to fiber, removing the network and cost savings, I would say. There will obviously be cost savings, many of them on the electricity side because the copper platforms are quite intensive on the electricity side. But those energy savings, they will rather come probably more towards the latter part of the decade than in sort of this year or next year. And we will certainly communicate more once we have reliable figures to communicate, but I wouldn't expect anything on this year. And then on the remaining or third-party FTTH turf. So ultimately, yes, we plan to cover at least some of that turf, could be by overbuilding the turf if we don't find an agreement, and otherwise, we are obviously also talking to some of the actors to actually buy part of the infrastructure in a sort of a co-invest model. What we are certainly ruling out is a whole buy. So, we will never rent infrastructure from an existing network builder because we believe that as an infrastructure company, we want to own our own network. So, whole buy is excluded. But let's say, purchasing half of the network that is already built and moving it into our property, that's obviously something that we are discussing with some of those local actors. Right. Thank you very much, Russell. And obviously, there is still a very, very last question coming from a phone call. Please raise your questions. Okay. And unmute yourself. Otherwise, we close down the conference. Well, I think at this point, it is from our side, in case of any follow-up questions or outstanding questions, please do not hesitate to contact us from the IR team. We are available for you. Thanks for your participation and attention. Have a nice evening. Bye, bye.

EarningCall_257

It is now my pleasure to turn the floor over to Suzanne Shepherd, Senior Vice President of Investor Relations and Sustainability. You may begin. Thank you, operator. Good morning, everyone. We look forward to discussing our fourth quarter and full year 2022 results with you today. Joining me for Assurant's conference call are Keith Demmings, our President and Chief Executive Officer; and Richard Dziadzio, our Chief Financial Officer. Yesterday, after the market closed, we issued a news release, announcing our results for the fourth quarter and full year 2022. The release and corresponding financial supplement are available on assurant.com. We'll start today's call with remarks from Keith and Richard before moving into a Q&A session. Some of the statements made today are forward-looking. Forward-looking statements are based upon our historical performance and current expectations and subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contemplated by these statements. Additional information regarding these factors can be found in yesterday's earnings release and financial supplement as well as in our SEC reports. During today's call, we will refer to non-GAAP financial measures, which we believe are important in evaluating the company's performance. For more details on these measures, the most comparable GAAP measures and a reconciliation of the two, please refer to yesterday's news release and financial supplement. Effective January 1, 2023, we realigned the composition of our segments to better manage our risk and fee-based capital-light businesses. Global Housing is now comprised of two primary lines of business, homeowners and renters and others. Certain product lines, including our lease and finance business, previously reported in housing, have been moved to Global Lifestyle to better align with our go-to-market strategy. While this change has no impact on our consolidated results, it will modestly impact the earnings trends within the segments. Our 2023 outlook is based on this realigned view. Please refer to the financial supplement for a reconciliation of certain key data for these changes. Thanks, Suzanne, and good morning, everyone. Reflecting on my first year as CEO, I couldn't be prouder of the extraordinary dedication and commitment demonstrated by our employees in delivering for our clients and customers around the world. During the year, we made progress in executing our vision to be the leading global business services provider supporting the advancement of the connected world. We continue to grow and strengthen our partnerships with key clients, and delivered new innovative solutions, all while navigating more volatile market conditions. Our portfolio of Lifestyle and Housing businesses proved resilient, but not immune to macroeconomic headwinds. In 2022, we grew adjusted earnings per share by 11% and delivered over $1.1 billion of adjusted EBITDA, both excluding reportable catastrophes. Adjusting for $27 million of unfavorable foreign exchange, adjusted EBITDA growth was 3%, and 2022 represented our sixth consecutive year of profitable growth. This is a reflection of our compelling strategy and resilient culture. We've held true to our company's purpose of helping people thrive with a steadfast commitment to being a socially responsible company for all of our stakeholders. I'm proud that we've been recognized as a great place to work in 13 countries, and most recently in the U.S. for the second consecutive year. Our focus remains on engaging and developing our diverse talent pool through enhanced leadership and skill development programs. We also continue to reduce our environmental impact as a core pillar of our ESG strategy. Building on our progress to date, we announced in December our goal to reduce greenhouse gas emissions by 40% by 2030. This target aligns with the Paris Agreement, and ensures we drive meaningful reductions. We've also taken a number of actions within our businesses to strengthen Assurant for the future. In Global Housing, we initiated a business transformation, including exiting certain noncore businesses, such as our sharing economy, as well as international cat-exposed business where we did not see a path to leadership positions More broadly, across Assurant, we realigned our organizational structure, as Suzanne referenced, to drive more focus and better deploy talent. We also took decisive action by accelerating several expense initiatives to realize additional efficiencies and position us for continued long-term growth. As we announced in December, we expect to realize $55 million of annualized gross savings by the end of 2024 through the simplification of our organizational structure, and our real estate consolidation program given our increasingly hybrid workforce. These actions will help mitigate the impact of higher labor costs and headwinds from the macroeconomic environment, as well as fund additional investments, including increased automation. In addition to ensuring a more streamlined organizational and cost structure, we've gained momentum throughout the year in both Global Lifestyle and Global Housing, renewing and winning new clients in each of our major lines of business. In Global Lifestyle, adjusted EBITDA increased 7% in 2022, with growth from both Connected Living and Global Automotive. On a constant currency basis, adjusted EBITDA expanded by 11%, aligned with our original expectations for the year. In Connected Living, we grew adjusted EBITDA by 15% on a constant currency basis, driven by mobile protection program growth in North America. Our ability to continuously innovate our products and services has supported a stronger and more differentiated customer experience, resulting in increased Net Promoter Scores. In addition to key partner renewals, including T-Mobile and Xfinity, we secured new business opportunities and new client partnerships, continuing to diversify our broad client base. In our mobile protection business, we now protect nearly 62 million global devices, driven by the 25 new protection programs we've added since 2015. We serviced over 28 million devices in 2022, mainly from our mobile trade-in business as we add scale and further demonstrate our position as a market leader with this important value-added service to our clients. We added several new trading clients and now have over 40 trade-in programs globally. We continue to invest in talent and strengthen supply chain operations to maintain our competitive advantage. In Global Automotive, we grew global protected autos in 2022 by 2% to 54.1 million vehicles, helping to generate adjusted EBITDA growth of 5%. Recently, we expanded and enhanced our EV1 protection offering in the U.S., and coverage is now available for battery electric vehicles and plug-in hybrid electric vehicles, including comprehensive battery coverage. In our newly combined leased and finance business, we partnered with CNH Industrial in the U.S. and Canada to provide service contracts and physical damage insurance. CNH is the third largest agriculture and construction equipment company in the world. This partnership was made possible by the talent and expertise of our teams, including through the acquisition of EPG. In Global Housing, we took swift action to mitigate the impact of high inflation within our lender-placed business. We began to see improved performance as we exited the year, reflecting the rate increases implemented over the course of the year. We expect higher rates to roll through our book into 2023 and beyond, while we manage ongoing elevated claims costs. In 2022, we renewed eight lender-placed clients, including several of our most significant partnerships with multiyear agreements. These renewals represent 36% of our over 31 million loans tracked. In Multifamily Housing, we now have over 2.6 million renters policies. While we've seen slower growth from our affinity partnerships, our volume with property management companies continues to expand as we signed several new partnerships, including two top PMCs with over 100,000 combined units. We also successfully completed multiyear renewals with six key client relationships. As we continue to convert clients to our Cover360 platform, we expect to see ongoing policy growth in that channel. Throughout the year, we maintained a strong balance sheet as we navigated increased macroeconomic uncertainty. Our businesses contributed a total of $550 million in dividends to the holding company or roughly 52% of segment earnings, including catastrophe losses. Together with the remaining net proceeds from the Global Preneed sale, we returned a total of $718 million in share repurchases and common stock dividends. Looking ahead, we believe we have a compelling vision and strategy that will drive outperformance and shareholder value long term. As a business services leader, we will continue to pursue profitable growth in more fee-based, capital-light businesses, which continue to account for the majority of our earnings. In addition, we'll continue to optimize results and cash flow generation in our risk-based business. In 2023, we believe we can drive continued profitable growth, though at a more modest pace given strong '22 results in Lifestyle and our near-term view of the broader economy. Specifically, we expect adjusted EBITDA, excluding cats, to increase low single digits, with results improving as the year progresses, reflecting trends in the business and the broader market, as well as the restructuring actions taken in 2022. Earnings growth is expected to be driven by improved performance in Global Housing, as well as more modest growth in Global Lifestyle. Adjusted earnings per share growth is expected to trail adjusted EBITDA growth, primarily reflecting a higher annual depreciation expense related to several strategic technology investments critical to executing our strategy, a higher consolidated effective tax rate compared to a favorable 2022, and timing of capital deployment. We've had a long-standing track record of strong cash flow generation and disciplined capital deployment, and we continue to believe that a balanced capital deployment strategy drives long term value. Our capital management priorities for this year will be focused on supporting the organic growth of our business and maintaining our investment-grade ratings. We expect share repurchases will remain a core component of our capital deployment strategy given the attractiveness of our stock. But in light of the continued uncertain macro environment, we believe it is prudent to preserve flexibility over the near term. Therefore, based on current market conditions and expected business performance, we anticipate that any share repurchases would occur in the second half of the year and could be below 2022 underlying buyback activity. As the broader environment begins to stabilize, and visibility improves, we will re-evaluate levels and timing of capital deployment as part of our overall capital deployment strategy. Our M&A strategy will continue to focus on compelling deals in Global Lifestyle. However, the hurdle rate for M&A will be high given the attractiveness of our stock. As we enter 2023, we remain well positioned for long-term growth through our differentiated Lifestyle and Housing portfolio. We are focused on creating new sources of growth, scaling new client wins and deepening current client relationships to continually drive added value for our key clients and customers. I'll now turn the call over to Richard to review the fourth quarter results and our 2023 outlook in greater detail. Richard? Thank you, Keith, and good morning, everyone. As Keith has outlined, our full year 2022 performance, I will focus on fourth quarter trends, particularly as we outlined our expectations for 2023. Given some of the significant changes in foreign exchange rates during the year, I will be citing some growth rates in both absolute and constant currency terms. For the fourth quarter 2022, adjusted EBITDA, excluding catastrophes, totaled $296 million or $39 million or 15% year-over-year and 19% on a constant currency basis. Our performance reflected improved results from both Global Housing and Global Lifestyle. Now let's move to segment results, starting with Global Lifestyle. The segment reported adjusted EBITDA of $166 million in the fourth quarter, a 6% increase year-over-year, but double that, or 12% on a constant currency basis. The increase was driven by higher Connected Living earnings, which grew 21% or 31% on a constant currency basis. Connected Living strong growth was primarily from three factors. First, reduced mobile service and repair expenses compared to the prior year period, second, continued modest mobile subscriber growth in North American device protection programs from carrier and cable operator clients, and third, higher investment income. As expected, strong U.S. results were partially offset by continued weak performance in Europe and declines in Japan as programs mature. In device trading, we serviced 7.5 million devices in the fourth quarter, our highest quarterly volume this year. While volumes were strong, trading results declined as margins were pressured by device mix resulting from carrier promotions. Claims cost in Connected Living overall remain steady. Although we did see some pockets of higher costs from labor and materials within our extended service contract business. In Global Automotive, earnings decreased $7 million or 10%, primarily from weaker global performance and higher claims costs. In the U.S., a higher portion of higher claims costs are expected to be recovered over time from client contract structures. The earnings decrease was partially offset by domestic growth across distribution channels. Turning to net earned premium fees and other income. Lifestyle was up $20 million, or 1% and 3% on a constant currency basis. This growth was primarily driven by Global Automotive, reflecting strong prior period sales of vehicle service contracts. When adjusting for unfavorable foreign exchange, Connected Living's earned premium fees and other income increased slightly from growth in mobile subscribers in North America, partially offset by premium declines in mobile from runoff programs. Based on the new reporting structure for full year 2023, Lifestyle adjusted EBITDA is expected to grow modestly from our revised 2022 baseline of $809 million, driven by both Connected Living and Global Automotive. Over the course of the year, we expect Connected Living to benefit from modest subscriber growth in existing North American mobile programs, as well as increases in U.S. auto. The gradual ramp-up of our new mobile and connected home programs, and expense savings from the previously announced restructuring plan should benefit results as we get into the second half of the year. We do anticipate some continued headwinds to partially offset these growth drivers. These will be more pronounced in the first half of the year. Specifically, in 2022, we benefited from a number of favorable items that are not expected to recur. These included $24 million in investment income from real estate joint venture investments, and $11 million from a client contract benefit. We also anticipate continued headwinds in our international business, particularly in the first half of the year given lower volumes in Europe, and modest subscriber declines as programs mature in Japan. In addition, unfavorable foreign exchange, which will impact both the top and bottom lines. And finally, we anticipate continued higher claims costs particularly in extended service contracts as well as less favorable loss experience for select ancillary auto products. In terms of net earned premiums, fees and other income for 2023, Lifestyle is expected to grow modestly as growth in Global Automotive is offset by declines in Connected Living and ongoing foreign exchange headwinds. Connected Living will be impacted by the implementation of two new contract structures, which we estimate will lower top line in 2023 by $230 million. It is important to note, though, that these two changes will have no impact to our bottom line. Excluding these changes, we would anticipate growth in Connected Living net earned premiums fees and other income. Moving now to Global Housing. Adjusted EBITDA was $135 million, which included $22 million of reportable catastrophes from winter storms and Hurricane Nicole during the quarter. Excluding catastrophe losses, adjusted EBITDA was $157 million, up $31 million or 25%. The increase was driven primarily by lender-placed insurance, partially offset by $15 million in higher non-cat loss experience across all major products, including multifamily housing. Lender-placed earnings significantly increased, accounting for most of the increase in housing earnings from higher average insured values and premium rates as well as policy growth. In addition, expense savings and higher investment income contributed to the increase. These items were partially offset by higher cat reinsurance costs. Based on the new reporting structure, for the full year 2023, we expect Global Housing adjusted EBITDA, excluding cats, to grow from a revised 2022 baseline of $417 million. Improved earnings performance is expected from two main drivers. First, top line growth from rate recovery and lender-placed, and second, ongoing expense actions to be realized over the course of the year. We expect ongoing elevated non-catastrophe losses, including higher seasonal weather-related claims in the first half and increased cat reinsurance costs to continue in 2023. Gradual improvement in lender-placed non-catastrophe losses is assumed later in the year. We also expect lower Multifamily Housing profitability from lower contributions from our affinity partners and higher non-cat losses as they return to more normalized levels. In terms of our cat reinsurance program, in January, we secured two thirds of our 2023 program. Similar to much of the industry, we've seen significant price increases, but the cost is relatively in line with our expectations. We anticipate elevated pricing will continue in June when we place the final third of the full program and have reflected this in our outlook. Given the significant increase in reinsurance prices, and in order to optimize risk and return, we expect our per event retention level to increase to $125 million. This incorporates the growth in lender-placed exposure, primarily from inflation, partially offset by some declines in our international risk exposure. Reflecting on these expected changes, we now believe the appropriate cat load for 2023 is $140 million. And finally, I'd also note that our outlook for housing assumes no meaningful deterioration in the broader U.S. housing market that would cause an increase in placement rates or a worsening of loss experience. Moving to Corporate. The fourth quarter adjusted EBITDA loss was $27 million, up $2 million, and was driven by lower investment income. For the full year 2023, we expect the Corporate adjusted EBITDA loss to be approximately $105 million. Turning to holding company liquidity. We ended the year with $446 million. In the fourth quarter, dividends from our operating segments totaled $89 million. In addition to our quarterly corporate and interest expenses, we also had outflows from three main items, $13 million of share repurchases, $38 million in common stock dividends and $81 million related to the two strategic acquisitions previously announced that will strengthen our position in the commercial equipment space. During 2022, Lifestyle and Housing contributed $550 million in dividends to the holding company. This was below our expectations given changes in investment portfolio values, reserve strengthening and accounting changes for non-core operations. In 2023, we expect our businesses to continue to generate meaningful cash flow. Cash conversion should approximate 65% of segment adjusted EBITDA, including reportable catastrophes. This accounts for the previously announced restructuring charges. This also assumes a continuation of the current economic environment and is subject to the growth of the business, investment portfolio performance and regulatory rating agency requirements. In summary, we continued our track record of profitable earnings growth and strong cash flow generation in 2022 despite some challenging conditions. And although we do expect to face continued macroeconomic uncertainty in 2023, we firmly believe we're well positioned to serve our current and future clients and customers and to continue to grow Assurant. Good morning. Thank you for – good morning. Thank you for the opportunity. There is definitely seems to be a lot of conservatism in the outlook as it relates to the first half of the year. How different does your outlook differ for the first half versus the second half? And why does the second half give you confidence? Thank you. Great. Maybe just a couple of comments on '22, and then I'll talk about how we think about '23. So certainly happy with how we finished the year, obviously, a tremendous amount of change in the marketplace, very dynamic. And the fact that we were able to grow, not just EPS, but also grow EBITDA for the full year, really proud of the work done by the team to do that. And we do feel really well positioned as we think about our market position, how we're engaged with our clients. So expect that to continue as we roll forward. As we think about 2023, I guess there is a couple of things to remember. We certainly had some favorability, particularly in Lifestyle in '22 that doesn't repeat. Richard mentioned about $35 million between real estate gains, as well as the onetime client benefits. So we've got to grow our way through that into '23. We also expect continued foreign exchange pressure in our '23 outlook in Lifestyle. And then on top of that, we do expect to grow even though we've got some pressure certainly in the international markets, which we've talked about over the last couple of quarters. And then in terms of the housing business, obviously, a really strong fourth quarter. We're excited by the progress that our team has made, not just in terms of getting rate, adjusting average insured values, but also the work done on expenses, simplifying the organization, expect continued momentum as we head into '23. Obviously, there's a natural reset between Q4 and Q1 in the housing business. We typically see higher losses in the first quarter due to winter storms and seasonality. We also had really favorable losses in Multifamily Housing in the first half of '22. That was a carryover from '21 as well. So we've got to overcome that as we think about the progression through the year. So again, expect each quarter to improve as we get through '23 and then accelerate growth into '24. Thank you for that. And then my follow-up question. It looks like there was growth in global mobile devices protected, serviced and global protected vehicles. Can you maybe talk about that? One, maybe the upgrade cycle, market positioning and then that trade-in issue that was occurring in the third quarter, that seems to have resolved itself? Thank you. Great. Yes. So I think if I start with auto, steady progress, as we've seen over many quarters in terms of protected vehicles, and that trend certainly has continued and we continue to be well positioned there. On the mobile side, you're correct. We saw about - pretty significant growth in the U.S. market. So if I look at devices protected up 300,000 sequentially, 500,000 of that is actually from growth domestically in the U.S. market, and that's offsetting some natural runoff that we have. So pretty strong growth in the U.S., great results in the U.S. for Connected Living overall for the year. And that's driven just by market share gains from the clients that we partner with on the insurance side. So if you think about our device protection partners in the U.S., they're gaining roughly 70% of the net adds for postpaid customers. So that is helping us significantly in the U.S. market. And then we've got a little bit of softness internationally in terms of subscribers. I'd say a little bit of growth in Europe, offset by some declines in Latin America, and then a little bit of softness in Japan, which we've talked about the last couple of quarters. And then finally, on the trade-in point, we did see the issue resolve itself that we talked about in the third quarter. That did get resolved in the fourth quarter. We saw good volume growth flowing through. We saw some different margins in the business based on the mix of devices in certain client contracts. Part of our fees are based on selling prices of devices so sometimes you can have higher volume, but a potentially lower quality devices, and that can affect the ultimate margins in the business and move around from quarter-to-quarter. Hey, good morning. Kind of along those lines, the 5G upgrade programs, I think you mentioned you're getting 70% of the net adds among your customers, that's an interesting number. Where do they stand in terms of the marketing, the push to get those 5G upgrades? Does that help or is that activity decelerating? How do you see it? Yes, I think we saw a little bit of lower marketing activity in the fourth quarter. There were certainly some supply constraints in the market. So that affected some of the traded promotional offers that we would normally see that can bounce around and be quite seasonal and also depending on the competitive nature of the market. But there's no doubt the push by carriers to move customers to 5G, to unlimited plans, to higher-end devices continues. We'll see how that evolves in '23. We obviously had a tremendous amount of trade-in activity in 2022, a relatively high watermark. Expect to see continued strength around that as we go forward. But it ebbs and flows, I would say, depending on the dynamics and the competitive landscape. And in the coastal property markets, I think there's some reference to maybe a lender-placed being held in states like Florida, just because the standard policies are getting so expensive. Are you seeing a dynamic like that? Is that an opportunity for you, do you think that will help push out placement rates in Florida and other coastal markets? Yeah. If you look at the fourth quarter, and we think about lender-placed, we had about 12,000 incremental policies come into the book. So we are seeing growth in in-force policies. I'd say half of that growth is we brought on a new client, which is why you'll see loans tracked up fairly significantly. And then the other half is entirely due to what I would say is the hard market. Florida is certainly a big chunk of that as well as California and other areas. So I do think that is helping support policy growth. We saw a pretty strong policy growth for the full year in lender-placed. And none of that is really from deterioration in the economy more broadly where we might expect to see placement rates increase over time if there's a lot of pressure in the economy. It's all just the difficult insurance market. So it's definitely helping us. We're well priced with our products in those markets, and we feel we're well positioned to grow from it. Hey. Good morning, guys. Thanks for taking my questions. Yeah, so first one, can you just go into a bit more detail on some of the drivers for pausing the buyback? I guess, I think of this business really holistically is less exposed to the - some of the economic cyclicality. So it's a bit surprising to see that as the driver for pausing the capital distribution. So if you could just go into a little bit more detail on that, that would be great. Sure. And maybe I'll start, and certainly, Richard can chime in. But first and foremost, I would say our capital management philosophy, as an organization, has not changed. At third quarter, we signaled a disciplined approach that we wanted to exercise prudence. There's just a lot of market uncertainty today. It's been a pretty dynamic macro backdrop. So we're trying to exercise caution and make the best decisions we can with our capital. We've talked about this in the prepared remarks and consistently over time. We're definitely supporting the organic growth of the company. We still see lots of opportunity to grow organically. We want to protect our ratings, which are important to us. And then we've signaled - we do think share buybacks will be an important part of our capital deployment strategy going forward. We've talked about being balanced long term between capital deployment through share return and also M&A. But based on where we sit today, we think our shares are very attractive. And so I think about it as being prudent for the moment, getting better visibility, understanding how results are progressing and then making those rate decisions with all of that additional information as we head into the back half of the year. But, Richard, what else might you add? Yeah. Thanks, Keith. Hi, Tommy. Yeah, I think exactly what Keith said in terms of being prudent and really wanting to see how the macroeconomic environment plays out. I'd also add that, last year, in terms of returns of capital to shareholders, it was a high point for us with a return of about $720 million when we talk about share repurchases and dividends together. So we have shown and demonstrated over time that we won't sit on excess capital for a long time, but we do want to be prudent in the markets here. And if everything plays out, we would expect, at some point, to be back in maybe late in the second half, but we'll see how things go. We want to be prudent. Thanks. And then just my other question, going back a little bit to the Connected Living side, you talked about being some of your partners, with T-Mobile, Sprint and some of the charter spectrum [ph] Can you talk a little bit about the opportunity around Verizon and AT&T, and just kind of remind us what services you are providing for them and kind of what any kind of incremental opportunity might be? Sure. So we do business with both Verizon and AT&T and support their trade-in business domestically in the U.S. So great partnerships, actually came through the HYLA acquisition, and there's certainly long term opportunity. We talk about our business being built on deep client relationships with the world's leading brands. Those are certainly two examples of really, really important clients and brands that we can partner with. So no doubt there's opportunity over time to help them solve problems, innovate and create value for their customers. And we certainly work hard every day to serve them today, and then look for opportunities to grow with them in the future. Hey, good morning, everybody. A couple of them here for you. First, I'm just curious, Richard, maybe NII outlook here going forward in the Global Housing business? Or is there still potential upside given where new money rates are? Yes. Thanks for the question, Brian. Yes, I think in terms of new money rates fixed income, we do see overall yields continuing to move up in the future as the portfolio rolls over and the lower yields that we've had in the past convert themselves into the new higher yield. So we will see that as we go forward over the next couple of years. So a nice tailwind for us. We've obviously seen short-term rates come up to. That's a nice tailwind for us. I would say that relative, if I think about '23 versus 2022, as Keith mentioned earlier and in our prepared remarks, we did have some good real estate gains during the course of the year. So I kind of look at it for 2023, that the increase in investment income will be a bit modest just given those two factors, increase in yields being offset by the real estate gains. That makes sense. Thanks. And then I guess my second question, Keith, you talked a little bit about the international markets and some pressure we're going to see in the first half of the year. I'm just curious what your thoughts are, and built in your expectations and guidance for kind of the domestic consumer here in the U.S. What do things look like potentially if we do go into a recession second half of the year? Yes. So our U.S. business has performed incredibly well if we think about where we're at in 2022. And we expect to continue to see growth going forward in '23. We obviously have to offset the one-time client benefit we talked about in Q3. But we do feel like, domestically, we're well positioned. If you think about the business, and I'll talk about mobile and then maybe auto quickly. On the mobile side, bulk of our economics are driven by the in-force subscribers that we protect. And as you saw that actually increased in the fourth quarter, consumers continue to want to protect their devices, and that's an in-force monthly subscription. So we don't see a lot of movement quarter-to-quarter and month-to-month. So we do feel like we're quite well protected there. To the extent there's less trade-in activity, if consumers are less incented to buy new devices because the economy is a little more pressured, we might see a little bit of softness in terms of that side of the business. It's not the biggest driver of total profitability, but it's still obviously an important factor. And then if you think about the auto business more broadly, we do expect sales of - retail sales of cars to be relatively steady in '23 versus '22. A little more growth on new offset by softness on the used side, but probably 80% of the economics in '23 are from policies that have already been written that will earn through the book. So from that perspective, we're relatively well positioned, and we've done well through typical downturns in the economy in our product lines because it just puts more focus on the sale of these ancillary products with our partners. Hi. I've seen some forecast out there for potential lower smartphone shipments to the U.S. next year. And I was just wondering how the domestic Connected Living business might be affected if that were to happen, and just the extent to which that might be reflected in your outlook for next year? Yeah. Certainly, and I've seen the same reports. And like I said, that would definitely have an impact on trade-in volumes if there is less devices being purchased by consumers. I still expect to see a healthy number, certainly in '23 overall, but maybe a little bit muted from '22 levels. A lot of the growth that we're getting is because our clients are actually adding subscribers. So we're seeing that through the fourth quarter as well. So from a device protection point of view, we think we're well positioned there, and we have seen meaningful growth in the last quarter as a result of that. So I do feel like we'll see strength in domestic Connected Living. And obviously, that will drive to offset some of the other factors that we talked about in 2022. So we had some help in 2022 from the items we discussed. We've got to overcome foreign exchange. And domestically, we expect our business to perform well to allow us to generate that growth in '23. Thank you. And on the housing side, kind of back to the question about the Florida market. How does the risk profile of the policies that you've been adding due just to the hard market dynamics compare versus the remainder of the book? And I was wondering if the recent reforms in Florida have any noticeable impact on the growth outlook for the housing book this year? Yeah. I think - so certainly, the housing - the reforms in Florida should be helpful to the industry over time without question and obviously looking to try to stabilize the insurance environment and really for the benefit of the end consumer try to control pricing over time. So I think, over time, that will benefit loss ratios and reduce some of the litigation. Obviously, that's not something that we're building into our forecast at this point. There's a lot of work yet to be done to see how that will roll through. I think growth in Florida for us is a positive thing. We're well priced and well positioned. And lender place is a scale business. We're tracking the loans already. So if we pick up some additional policies, we're not adding a tremendous amount of incremental expense. We've done an incredibly good job in housing in '22, actually driving down operational expenses year-over-year, even though we've seen policy growth, which demonstrates our focus on digital investments, but also the scale advantages of the business. So I think growth in Florida is a good thing for our business, and we're well positioned to take advantage of it over time. And we have been getting rate race as well. So as Keith said, it's - we have been getting a little bit more, but it's - from our point of view, it's good business. And the reforms, as you pointed out, should help over time. [Operator Instructions] And we have a follow-up question from the line of Mark Hughes from Truist Securities. Your line is open. Thank you. Yeah, the $15 million you talked about in higher non-cat losses on the property side, you really haven't mentioned inflation. But I wonder if there's any thoughts you've got how much of that may be weather, if you have already seen that or anticipated versus just materials, labor costs, things like that? And whether you are kind of over the hump on that? Or has there been any material inflection? Just how do you see it now? Yeah. Maybe I'll just start at a high level, Richard, and then you could add some color. But I definitely think we're - from an inflationary perspective, we're still seeing elevated claims costs, there's no question. I think where we are seeing the favorability overall is really the rate rolling through from both rate increases and average insured values, and that is obviously offsetting some of that inflationary pressure. But we definitely see inflation still, that will persist and construction inflation is different yet again from other measures of inflation. But what would you add, Richard? Yeah, similar to what Keith said, I guess I would say that - I would say most of it is in severity. I think severity these days, it's we think inflation. Actually, frequencies have been coming down just in terms of weather, whatever, we haven't been seeing an increase in smaller weather-related items, so more in severity. And as Keith said, we have been getting some price increases with that. We do the rate filings on an interim basis. So we think we're in a good position. We also think as we go forward this year, we're being prudent and I guess, appropriately prudent with regard to our expectations of inflation. Obviously, that's big headline out in the markets. We do see inflation staying a little bit resistantly high for the near term, but really coming down slowly as the year goes on. So we've kind of factored that into our analysis and should be in a good place there, not trying to go -- be too aggressive about bringing inflation down. Yeah. And one - just one other point to make, and I referenced it earlier, we did see favorability - set aside lender-placed for a second, we did see favorability of loss ratios in some of our other lines, renters and some specialty products, particularly in the first half of '22. We've seen that normalize over the balance of '22 to what are more natural levels. I think we were really at kind of pandemic level lows with respect to some of the losses that we were seeing. So that also will normalize. That puts a little pressure on the first half of the year for housing and then obviously, lender-placed where we're getting a lot of rate tries to help overcome that over the course of the year. And there are no further questions at this time. I'll turn it over to Keith Demmings for some final closing comments. Wonderful. Well, thanks, everybody, for participating in today's call. And obviously, we'll look forward to speaking to you all again at the end of the first quarter and our call in May. In the meantime, reach out to Suzanne Shepherd or Sean Moshier, if you have any other follow-up questions. But again, thanks for the time. Have a great day.

EarningCall_258

Greetings, and welcome to the PolyPid Fourth Quarter and Full Year 2022 Conference Call. [Operator Instructions]. As a reminder, this call is recorded. And I would now like to introduce your host for today's conference, Brian Ritchie from LifeSci Advisors. Mr. Ritchie, you may begin. Thank you all for participating in PolyPid's Fourth Quarter and Full Year 2022 Financial Results Conference Call. Joining me on the call today will be Dikla Akselbrad, Chief Executive Officer of PolyPid; Ori Warshavsky, Chief Operating Officer for PolyPid's U.S. operations; and Jonny Missulawin, PolyPid's SVP Finance. Earlier today, PolyPid released financial results for the 3 and 12 months ended December 31, 2022. A copy of the press release is available in the Investors section on the company's website, www.polypid.com. I'd like to remind you that on this call, management will be making forward-looking statements within the meaning of the federal securities laws. For example, management is making forward-looking statements when it discusses the regulatory pathway for the potential NDA submission for D-PLEX100, including the potential of the SHIELD I results and SHIELD II study to provide support, the potential for wide use of D-PLEX100, the timing of resumption, completion of patient recruitment, the design and top line results of the revised SHIELD II study, the company's expectations regarding its cash runway and financing opportunities, goals for 2023, including with respect to interactions with European regulatory authorities, its ability to attract additional partners and enter collaborations and the potential timing thereof and the expected timing for the commercial manufacturing process and packaging validation for D-PLEX100. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond our control, including the risks described from time to time in our SEC filings. Our results may differ materially from those projections. These statements involve material risks and uncertainties that could cause actual results or events to materially differ. Accordingly, you should not place undue reliance on these statements. I encourage you to review the company's filings with the Securities and Exchange Commission, including, without limitation, the company's Form 20-F, which identifies specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. PolyPid disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information. It speaks only as of the live broadcast today, February 8, 2023. Thank you, Brian. On behalf of our team at PolyPid, I would like to welcome everyone to our fourth quarter and full year 2022 earnings call. Before discussing the details of our clinical program, I would like to reiterate how thrilled we are to now have a clear regulatory pathway for the potential NDA submissions for D-PLEX100 in the U.S. following a positive Type C meeting communication with the U.S. FDA on the SHIELD I Phase 3 data. As a reminder, in advance of the Type D meeting, we provided the FDA currently available data from the SHIELD I study evaluating D-PLEX100 in abdominal colorectal surgeries. Based on these data, particularly the 54% reduction observed in the primary endpoint in a prespecified subgroup analysis of 423 patients with surgical incisions greater than 20 centimeters compared to standard of care, which represented a p-value of 0.0032. The FDA acknowledged that the SHIELD I results may provide supportive evidence on this population. The agency also recommended that the company conduct an additional study to support a potential NDA submission. The FDA confirmed that the ongoing SHIELD II study, which to date, has enrolled approximately 40 patients with the appropriate large surgical incisions could potentially serve as such a study. Importantly, the FDA also recognized that since D-PLEX100 proposed indication is for the prevention of infection, this has potential for wide use. While we are currently working expeditiously to finalize the design of the revised Q2 trial and expect to resume patient recruitment next quarter, we wanted to take the opportunity today to provide some color around what this study will look like. First, we view SHIELD II as a derisked Phase III trial, given the more focused patient population in which we have already generated highly positive data in SHIELD I and the fact that it will not be conducted within the tight COVID-related restrictions that were in place during the pandemic and throughout the duration of SHIELD I. Moreover, we have the opportunity to leverage the key learnings from the SHIELD-1 study, notably with regard to countries and specific site and patient profile. In order to ensure we are properly leveraging these key learnings, we conducted a Clinical Advisory Board meeting late last year to gather clinical feedback from key U.S. opinion leaders specialized in SSI, including both surgeons and infectious disease specialist. We intend to recruit a total of approximately 600 patients or an additional 550 subjects behind the 40 patients already recruited into SHIELD II. Total recruitment time into the study is expected to be approximately 12 months from the time we resumed SHIELD II enrollment next quarter. Top line results are expected mid next year 3 months from completion of enrollment. I would highlight that this anticipated time line is similar to the one seen in SHIELD I. We also plan to conduct an unblinded interim analysis once a total of approximately 400 patients completed their 30 days follow-up. To put this in context, you will recall that it took us 22 months to recruit 977 patients into SHIELD I, and it was during the most challenging period of the COVID pandemic. Importantly, the ability to leverage the ongoing SHIELD II study will significantly reduce the time and resources needed as compared to having to initiate a new trial. The design of the SHIELD II trial will be very similar to the SHIELD I study in terms of primary and secondary endpoints with patient intervention arm receiving D-PLEX100 on top of standards of care and subject in the control arm receiving standard of care alone. The primary endpoint of the trial will be a combination of SSI, reintervention and mortality rate at 30 days post index surgery and defined in the CDC SSI guidelines. Patient safety will be monitored for an additional 30 days. The study will take place in the U.S., EU and Israel. In Europe, as we have done with the FDA in the U.S., we are also preparing for expected near-term interactions anticipated in the first half of this year with the European regulatory authorities regarding D-PLEX100. I should add that we are working closely with our European partner, Advanz Pharma with regards to the EU pathway and are fully aligned on the regulatory strategy for this region. In regard to our financial position, we continue to expect our current cash runway to extend well into the third quarter of this year. With that said, we anticipate having a number of compelling financing opportunities to enhance our balance sheet in 2023 and to fund Q2 to a successful completion. We are grateful for the continued support shown by our largest institutional shareholders. Thank you, Dikla. We view 2023 as a potentially transformational year, not only in the clinical and regulatory areas, but also on business development and manufacturing fronts. From a business development perspective, first, we intend to focus on attracting additional strong partners for D-PLEX100 in different geographic territories like U.S. and China. Second, SHIELD I validated the PLEX technology platform in a large clinical trial, providing local and controlled release of drug molecules directly at the disease target organ over a predetermined period of time. This validation of the platform can serve as a starting point for platform-related collaborations. Importantly, we have in-house research development and GMP manufacturing that can support various potential partnership opportunities. Using our in-house capabilities, it is a matter of only months to encapsulate new API into the PLEX platform and achieve proof of concept. PLEX platform collaborations will be focused on 2 key areas. The first, the delivery of innovative drug specifically local delivery, where systemic delivery is either not effective enough or too toxic, for example, in oncology. Second, the life cycle management of an approved drug, where prolonged local delivery provides significant clinical benefits. Specialty companies are always looking to differentiate their existing product portfolios and leveraging the PLEX technology is an excellent way to accomplish this. Our planned objective is to formalize 2 partnerships in 2023, although the exact pace of partnership discussion is inherently difficult to predict. On the operations side, we expect to complete the commercial manufacturing process validation and packaging validation for D-PLEX100 in the first half of this year. We plan on having the CMC and preclinical data needed to support an NDA submission by the end of the year. With that, it is my pleasure to turn the call over to Jonny to review our current financials. Jonny? Thank you, Ori. As of December 31, 2022, the company had cash, cash equivalents and short-term deposits of $12.6 million as compared to $32.2 million at the end of 2021. Now let's turn to our income statement. Research and development expenses for the 3 months ended December 31, 2022, were $4.7 million compared to the $9.6 million in the same 3-month period of 2021. The decrease in R&D expenses resulted primarily from the completion of the SHIELD I Phase III clinical trial. For the full year ended December 31, 2022, and 2021, R&D expenses were $28 million and $30.6 million respectively. Marketing and business development expenses for the fourth quarter of 2022 were $350,000, a decrease from the $1.1 million during the prior year period. General and administrative expenses, for the fourth quarter of 2022 were $1.6 million compared to the $2.9 million recorded in the same 3-month period of 2021. For the fourth quarter of 2022, the company had a net loss attributable to ordinary shares of $6.5 million as compared to the $13.5 million in the fourth quarter of 2021. For calendar year 2022, the company had a loss attributable to ordinary shares of $39.5 million, compared to a loss of $42.6 million in the full year 2021. Congratulations on the progress. Maybe just a few for me, if you don't mind. Maybe just as we think about SHIELD II, can you just elaborate in terms of how you control for the potential of a lower infection rate in the comparator arm? And then similarly, how do we think about the health economic benefit? So assuming we are successful in SHIELD II, how do we think about the proposition to hospitals when commercializing the product in this sort of larger incision surgeries? Just any pushes and pulls there? And then maybe just -- I'll ask also upfront, if you don't mind. On the interim analysis, what should we expect there? Any chance of stopping early? So Brandon, first, thank you for joining us, and I will start with the first question around the infection rates and how we look at it in terms of SHIELD II. And then I'll let Ori elaborate about the health economic and I will also cover the aspect of the interim. So first of all, what we've done, we now have a very robust data of close to 1,000 patients, which is the basis for our assumption. Although it was all conducted during COVID, and we mentioned several times that this has an influence on the infection rate. We are taking what we've seen in this period, although it might be a bit conservative as our baseline assumption. And this is also when we are talking about the derisk program. From our perspective, this is another aspect of why we think this is a derisked Phase 3. Because we are taking under assumption infection rate that were during the 2 years of COVID. There are a number of papers showing that there was a reduction in infection during this time and this is a plus, obviously, that we're taking. Other than that, and we referred to it briefly in today's prepared remarks, we've done a process to evaluate as many as lessons learned that could be taken both internally, but also with external adviser. We had at the end of last year, a Clinical Advisory Board, trying to evaluate and look at the patient population, many parameters that were reviewed them. Some of them are also potential health economics and how in the future surgeon and hospital would look at the product, but also looking at the specific countries, specific centers. All of these parameters are now into the protocol as well as into the operational planning. As to the interim, so the interim has, obviously, a possibility for an early stop due to efficacy, also sizing modification as well as if things are not as we expect, stopping for fertility. So it's a full entry. And we do have -- prior to the entry, we also have some -- as we did also in SHIELD I, blinded assessment that can help us refine things as we go along. Ori, you want to touch the aspect of the health economics? Brandon, I think what we see in this trial is -- I think the story itself hasn't changed from a health economic. If anything, we just even made it a little bit more clearer to the hospitals. We're now better defining the population, we will make it easier for a surgeon to understand where the potential issue is, right? If a patient comes in with either patient-related risk factors or procedural-related risk factors, the surgeon can flag this as this is a patient in risk and they apply D-PLEX. So when a hospital kind of assesses the risk factor where should -- where the problem is we -- I think we're making it a little bit more clearer for them. And as before, right, when there is an infection, there's additional costs from additional time in the hospital, reintervention, readmissions and so on. So we just -- if anything, we just made the story a little bit clearer to the hospital. This is [indiscernible] for Balaji. You mentioned that it took about 22 months to recruit 990 patients for SHIELD I and for SHIELD II given that the patient eligibility criteria could be different for the 2 trials. What is your expectation on timing of the patient enrollment for SHIELD II? So thank you for this question. We were very clear on that. So we expect that the recruitment time will be 12 months. And this is also what we've done here -- we've also looked at the pace of recruitment of patients in SHIELD I. Those specific, more focused population, what was the pace during SHIELD I and how fast we got to those numbers and extract from that. By the way, we are hopeful that we'll have a faster rate. Although, again, our assumptions were based on what we've seen in SHIELD I, because we need to remember, SHIELD I was completely conducted during the COVID time, which obviously slowed down processes in terms of opening centers as well as patients going and taking surgeries and having laparoscopy test and then getting surgery when needed. So all of those points have slowed down recruitment. But still, at the end of the recruitment, we had around 250 patients per quarter and close to 45% out of those patients were patients with incision length of over 20 centimeters. So this can give you a sense of what our expectation was in terms of recruitment at the peak. I guess just a follow up on the last few questions. Just want to make sure I'm clear on the -- what's the prespecified patient group for the primary endpoint in SHIELD II. Incision over 20 centimeters, are there any other criteria? And then I think you just said, Dikla, but I kind of missed it. So I think you had about 200 patients in SHIELD II and 40 with the large incision, so it implies about 20% with the appropriate criteria? Is that accurate? So first, yes, this is right. We had about 20% of SHIELD II meeting the prespecified criteria or the more focused population that we are targeting in SHIELD II. I'll just remind everyone that SHIELD II originally had a broader eligibility criteria. It wasn't just open abdominal colorectal, but also minimally invasive. So it makes sense that you wouldn't see the same ratio of large incision that we've seen in SHIELD I. And this is why in SHIELD I, we had around 45% of the patients having longer incision. And in SHIELD II, with the 200, it's about 20%. But now that we are focusing the trial based on the FDA feedback, we expect to see this number growing. Now you had another point that you wanted to cover, Roy? Did you get it? [indiscernible]. So same type of surgery, same patient population that we had in SHIELD II, we are just focusing on the subgroup, the prespecified sub group that we had in SHIELD I, which was the longer incision where we received a p-value of 0.0032 and also discussed this with the FDA and the FDA view it as a supportive data and recommended that we add additional data focusing on this group. Okay. Great. And then a couple on the interim. On SHIELD I, you had a max enrollment threshold, does that also apply for the unblinded interim in SHIELD II? And you mentioned some blinded assessments prior to the unblinded assessment. Do you have a sense of when you can expect the first blinded assessment to occur? So those are -- first of all, there is -- the blinded assessments are done internally on an ongoing basis. There is no real point to do that until the point we have sufficient patient where we can actually get some understanding, but this is something that was done in SHIELD I and will be done in SHIELD II on an ongoing basis. It's something that helps us see that we are within the statistical plan, within the underlying assumption, obviously, there is no blinding here, so nothing about the effect. But an idea about the overall management of the trial and that things are going well. With regards to the interim, we do have, in the interim, the possibility to have a sample size reassessment. I think it is a bit early to go into those details because the blinded assessment, what we are doing is around the SSI or, I would say, the primary endpoint, the understanding of the primary endpoint versus a -- overall versus our underlying assumption. And once we'll start to see how this is progressing, we can discuss in more detail, but we do have the possibility, if needed, to have a sample size reassessment. Okay. Great. I guess -- sorry, a couple of more. You had partnering discussions ongoing for D-PLEX100 previously. Are those pretty much continuing? Or do you kind of have to hit reset with the SHIELD I data? And then what about OncoPLEX, what about partnering that? It seems like it's going to be kind of on hold for a year or more as you deal with D-PLEX100? Is that true any way to get that advanced maybe more expeditiously? Again, I'll start with the latter part of your question. Our top priority right now is, obviously, D-PLEX100, but we are fully intending to continue the development of OncoPLEX and potentially also other products in our pipeline and it's remained a priority. What we have done up until now is developing the CMC processes. And as we continue our effort to begin clinical development, this will be a very valuable asset to get to this stage. I think another thing that is quite in a good stage is the preclinical package. Obviously, we will need a decent study to go into the clinical stage. But this is a priority. But you're right, as I said before, our focus is on D-PLEX100, so obviously, the resources that are invested in OncoPLEX in the near terms are limited. Yes. And I can add on the D-PLEX partnerships. All of the conversations that we had in the past, we're still in contact with all of these potential partners. There's actually a few new ones from other geographies that showed interest in partnering for different territories. So this is all ongoing. Obviously, a lot of it will depend on the trial, but no one really stepped back and lost interest in the product. I would add to that one thing, which is -- the new thing that we are seeing with the robust data, the robust clinical data that we have from SHIELD I is a better understanding and some additional interest around our platform, around collaborating, around the PLEX platform pairing it with novel or known molecules in different areas, and this is very encouraging for us. Thank you for joining PolyPid's Fourth Quarter and Year-End 2022 Financial Results Conference Call. I would like to emphasize our firmly, we continue to believe in our long-term prospects, especially the potential of our promising late-stage product candidate D-PLEX100. We remain grateful to our team members and all of our external partners for their commitment to our mission and their support in continuing to advance towards achieving our goal of bringing D-PLEX100 to health care providers and patients as quickly as possible. We look forward to speaking with you again on our next call.

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Thank you. Good morning and welcome to Unilever's full-year results. We expect prepared remarks to be around 30 minutes, followed by Q&A of around 30 minutes. All of today's webcast is available live transcribed on the screen. First, can I draw your attention to the disclaimer relating to forward-looking statements and non-GAAP measures. And then straightaway, I hand it over to you Alan. Thanks Richard and good morning everybody. Before we start, I'm sure you will all have seen by now that Unilever is appointed Hein Schumacher, as our new CEO as from the 1st of July, and I like to use this moment to congratulate Hein on his appointment. From the limited time that we spent together over the last few months, I have every confidence that Hein will be a great leader for Unilever, and that he will take the business to new heights in the coming years. I look forward to continuing to work with him on our Board ahead of handing over the keys as CEO at the end of June. But meantime, it is full steam ahead to sustain the current good momentum in Unilever's business. My team and I remain fully focused on that task at hand. Right, this is how we'll run today. I'm going to give a quick overview, and then Graeme will take you through the details of the results. I'll then give an update of our progress against our strategy, and Graeme will share our outlook before of course we move on to take questions. 2022 was an important year for Unilever. We navigated levels of commodity cost increases that we've not seen in a generation taking price increases responsibly to protect the shape of the P&L, and thereby enabling us to continue to invest in our brands. We manage the impact on volume as well and as a result delivered growth levels not seen for over a decade. We suppress €60 billion of turnover for the first time and added two more brands Lifebuoy and Comfort to the €1 billion club, which now stands at 14 brands. And then within that group, Dirt is Good passed the €4 billion milestone and Hellmann's and Rexona passed €2 billion. The important point here is, of course, not the rather arbitrary turnover milestones, but the contribution of our biggest and best brands to Unilever's growth. The €1 billion plus brands collectively grew at 11% for the year. And these brands are our first priority for innovation and for investment. Through this volatile period, we landed margin in line with guidance. We exited the global tea business, and we fundamentally reward Unilever implementing our new organization model, which is delivering increase speed, accountability and focus. There is more opportunity and more value creation ahead from unlocking the full potential of Unilever. 2022 represented a big step forward, and we come into 2023 full of energy and ambition to accelerate the pace of our transformation. First, let's review our performance in 2022. We delivered Q4 underlying sales growth of 9.2%, that was driven by 13.3% price, with volumes down 3.6%, and that resulted in full-year growth of 9% with price up 11.3% and volumes down 2.1%. While the volume impact was greater than in previous quarters, it is still less than we would have modeled at these levels of price growth. We saw a measure of competitiveness percent business winning a dip below 50% on an MAT basis in Q4. This was not altogether unexpected as we've trailed clearly in our previous calls. It is a consequence of the necessary pricing action that we're taking in the face of extraordinary inflation, and also some decisions that we're taking to streamline our product portfolio. We faced further commodity cost increases in the first half of '23, as Graeme will explain. However, our brands are strong and we are investing for growth. As things stand, I expect business winning to be back over 50% in the second half of 2023. Underlying operating margin for the year was 16.1%, that's down 230 basis points versus 2021, bang in line with our guidance. Absolute underlying operating profit was up slightly at €9.7 billion, helped by favorable currency. Underlying earnings per share were €2.57, that's down 2.1% as reported, down 8.2% in constant exchange rates. Free cash flow was robust at €5.2 billion, and that's reflecting a cash conversion ratio of 97% and after financing an increase in our capital expenditure of €400 million. Let's take a closer look at these results through the lens of the five business groups. I hope you'll see how the business group structure is allowing a differentiated focus on categories that are seeing different consumer behaviors through this inflationary period. Beauty & Wellbeing reported 7.8% underlying sales growth for the year, 7.5% price and positive volume of 0.3%. Fourth quarter growth was 7.7%, that's 8.4% of price, minus 0.6% on volume. Prestige Beauty delivered another year of double-digit growth with a strong performance by Paula's Choice, which was included in underlying sales growth from the third quarter onwards. Hourglass, Tatcha, Living Proof all finished the year strongly. Health & Wellbeing also maintained double-digit growth through the year, powered by Liquid I.V. Although Q4 did see a slowdown in the vitamins, minerals, and supplements market globally. Skin Care grew mid single-digits with volumes only marginally down, and we saw particularly good performance from Vaseline in Southeast Asia helped by the continuing success of the Gluta-Hya innovation. Carver's performance was negatively impacted by reduced consumer demand in China and by disruptions in cross-border trade. While Carver's recent performance has been disappointing, we remain confident about the future opportunity for the AHC brand as China reopens post COVID. Hair also grew mid single-digits with a strong performance from our largest Hair Care brand, Sunsilk, which benefited from its naturals relaunch. Nexxus also had a very good year and is a good example of our strategy to premiumize our portfolio in Hair Care and Skin Care. Personal Care reported 7.9% underlying sales growth for the year with 12.1% price and volume lower by 3.7%. Fourth quarter growth was 9.1%, 13% of price and minus 3.5% volume. Deodorants had a particularly strong year with positive volumes despite double-digit pricing, Rexona, Dove, and Axe, all contributed to this excellent performance. Rexona's 72-hour nonstop protection product is a particular highlight. It's a great example of where we have a significant product superiority which we will continue to drive as a multi-year growth initiative. Skin Cleansing grew well with double-digit pricing, partially offset by volume declines. Dove saw the introduction of the improved deep moisture body wash, while Lux introduced new bars with enhanced skincare benefits. Oral Care also grew well helped by the launch of Pepsodent -- sorry, the relaunch of Pepsodent. Dollar Shave Club, whilst marginally profitable continued to decline in a fiercely competitive market. We've been clear that performance of Dollar Shave Club has not met our expectations. And consequently, we've taken an impairment charge on DSC for our full-year 2022 results. Home Care reported 11.8% underlying sales growth for the year, 15.9% price, with volumes lower by 3.5%. Fourth quarter growth was 12.3%, driven by 16.7% price, with volumes down 3.8%. Price elasticity has remained stable and volumes have held up better than our models predicted. The Home Care business group has undertaken a rigorous program to reduce complexity, and this has led to some short-term volume loss through 2022 with a greater impact in the second half. Fabric Cleaning had a particularly strong year, growing double-digit overall and in all formats and all main brands. And this growth was very broad-based across geographies with South Asia, Brazil, and Turkey, all delivering double-digit growth. Fabric enhancers also grew well helped by the Ultimate Care range, which protects clothes from damage as well as leaving them smelling fantastic. Home & Hygiene grew more modestly, in part due to changing consumer habits in Europe as people dial down their need for disinfection in the post-COVID era, but also because Surface and Toilet Cleaning is a relatively more discretionary category with higher elasticity in the face of rising prices. Nutrition. Nutrition grew 8.6% in the year, price up 10.9% and volumes down 2.1%. Fourth quarter growth was 10.1% driven by 14.7% of price and volumes down 4.1% and that includes the impact of lockdowns on our large food solutions business in China. Dressings grew double-digit in 2022, driven particularly by Hellmann's and particularly in North America. We benefited from the continuing success of the Make Taste Not Waste campaign. And I must admit we are looking forward to seeing the business impact of this year's Hellmann's Superbowl campaign. We also took advantage of the good growth momentum to exit some unprofitable lanes, which impacted the volume and market share but strengthens the long-term health of our dressings business. Scratch Cooking Aids grew mid-single-digit with Knorr successfully introducing zero salt bouillon. And despite the lockdowns in China, our global professional food solutions business delivered double-digit growth in 2022 and actually returned to pre-pandemic volumes. Ice cream grew 9% in the year with price up 9.7%, volumes down only 0.7%. Fourth quarter growth was 2.9% with pricing of 14.2% and a volume decline of 9.9%. And we really need to break down these results to understand them. And let me do that for the full-year results. Our out-of-home Ice Cream business, which is roughly 40% of total Ice Cream recovered very strongly, and that was helped by favorable summer weather in Europe. The volumes in total are not yet back to pre-pandemic levels. And that partly reflects the closure of some Ice Cream sales outlets. In-home Ice Cream, which is 60% of the total also grew in the year with strong price growth and this came on top of lower volumes, which reflects a step down from elevated sales during the lockdown period. Nevertheless, in-home volume and value indices are still both above 2019 levels. In the fourth quarter, in-home delivered positive underlying sales growth with lower volumes for the reasons that I've just described as well as higher levels of pricing and some choices we made to step away from unprofitable volumes. Out-of-home volumes in the fourth quarter were impacted by an early close to the season. What was happening was that shopkeepers in some markets responded to fears about rising energy costs by switching off their cabinets earlier than they otherwise would have done. In practice, the fears did not materialize. And so we don't anticipate this having a big impact on the start of the 2023 season. Magnum and Cornetto are both in great shape. They grew double-digit in 2022. Magnum driven by the classic remix innovation, and Cornetto benefiting from the introduction of the new Premium Format, Cornetto Rose again an example of a successful multi-year growth initiative, we remain very optimistic about the outlook and prospects for our Ice Cream business. So that completes a quick run-through of the business group performances. Thanks, Alan. Good morning, everybody. As Alan just said, full-year underlying sales growth was 9%, driven by price at 11.3% and with volumes modestly down by 2.1%. All five of our business groups grew driven, as Alan said, by the €1 billion plus brands. Now prices stepped up sequentially for eight quarters in response to rising costs. Volumes have held up well overall, and we continue to carefully manage the triangle of price, margin and competitiveness market by market. Turnover for the year was €60.1 billion. That's up 14.5% versus 2021. Underlying sales growth contributed 9%, as we've just seen, and we saw a negative impact from acquisitions and disposals of 1% with the inclusion of Prestige Beauty brands Paula's Choice and neutrophil offset by the exit of the Global Tea business. Currency had a positive impact of 6.2% as our basket of currencies strengthened against the Euro. If we look now at performance through the regional lens, our largest region, Asia-Pacific, Africa, grew by 10.3% in the year with 11.3% from price and minus 0.9% volume. In the fourth quarter, growth remained strong, driven by India, Southeast Asia and Africa. China declined due to the period of strict lockdowns, which impacted our large China foodservice business in particular. Indonesia saw negative volumes as we reset price and promotional strategies and reduced trade stocks in a number of categories across selected channels. The market context in Indonesia remains highly competitive. But every one of our business groups is focusing attention on this very important market. And from a base of mid-single-digit growth in 2022, we are confident that performance will continue to improve in the coming year. North America grew 7.9% with price at 9.4% and volumes down only 1.4% despite constrained supply during the year in a number of our categories. Pricing remains strong at 10.1% in the fourth quarter, with volumes down 4%. This in part, reflects the proactive steps we've taken in Nutrition and in Ice Cream to remove unprofitable business, as Alan just highlighted a few seconds ago. Latin America grew 14.9% with price up 20.4%, offset by volumes, which declined 4.6%. Price elasticity remains stable and lower than our historical models would have predicted. This reflects a well-positioned portfolio and the strength of both our brands and our in-market execution across the region. Europe grew 4.1% in the full-year, with price up 8.3% and volume down 3.9%. The fourth quarter saw a step-up in price to 13.2% and a volume decline of 6.8%. All our business groups were down in volume with Ice Cream, the most heavily impacted. Price elasticity in Europe has increased during the course of 2022, and we've recently seen share gains by private label in Europe in most categories as the economic situation weighs on shoppers. This brings me on then to margins. Underlying operating margin for the full-year was 16.1%. That's down 230 basis points from last year and in line with our guidance. Gross margin was down 210 basis points, reflecting the fact that despite stepping up pricing and landing higher delivery from our savings programs, we were very mindful of the pressure on consumers and chose not to fully offset the extraordinary level of cost inflation through pricing. We did, however, continue to invest more behind our brands with brand and marketing investment up €0.5 billion in constant currencies versus the prior-year and with more than 80% of that investment going directly into media. BMI as a percentage of turnover was down 10 basis points though this is perhaps less useful as a measure when turnover has been driven so high by pricing. That said, however, media investment as a percentage of turnover was up in Beauty & Wellbeing, in Personal Care and in Home Care. Now our tracking measures reassure us that our support levels are competitive, and the business groups have built strong plans for 2023, which will reflect further increases in brand and marketing investment. Overheads were up 30 basis points with productivity programs and turnover leverage more than offset by further capability investments in areas like our 29 digital marketing, media and e-commerce hubs around the world, which Alan is going to comment on a little later. We also have a mix effect in overheads caused by the higher growth of Prestige Beauty. As well as looking at percent margins, we look at absolute profit delivery in Euros. Underlying operating profit was up 0.5% at €9.7 billion. This reflects the fact that the lower underlying operating margin was offset by strong turnover growth with a little benefit from favorable currency translation. It's important to put the decline in gross margin into perspective, and this chart sets this out quite clearly. The net materials inflation, or NMI, that we've experienced this year has been the highest for decades. Inflation was already rising before the war in Ukraine and the conflict only served to put more pressure on commodity and energy costs. The total increase in 2022 landed at €4.3 billion, only slightly below the €4.5 billion that we indicated in our first half results call. We reacted quickly to the cost inflation and implemented price increases through the year with underlying price growth stepping up sequentially across the quarters and reaching 13.3% in the fourth quarter, contributing to a full-year increase of 11.3%. Even with these increases, we fell a little short of recovering the full amount of the NMI reaching price coverage of around 95% over the complete year. This is, however, not the whole inflation picture. You can see from the chart that we saw a further €1 billion of cost inflation in our production and logistics costs, of which €0.7 billion fell in the second half. Now these cost lines have not moved very much historically. So we don't normally cover them in detail, but 2022 was different, and we saw significant increases in fuel, energy, and labor costs in our supply chain. This theme is relevant for 2023, and I'll come back to it a little later. Taking both NMI and production and logistics inflation into account. Our price coverage to date sits at around 75%. So still some way short of the 100% needed to hold gross margin. And as a results of this, the gross margin was down by 210 basis points. This is normal in an inflationary cost environment, and we will need to see higher price coverage together with continued delivery from our savings programs in order to build gross margin back up. Underlying earnings per share were down 2.1% in current currency with a favorable foreign exchange tailwind contributing 6.1%. Constant earnings per share were down 8.2%, mainly due to the lower operating margin, higher financing costs and tax, partially offset by the impact of the share buyback program. The higher tax rate reflects changes in profit mix and favorable one-offs in the prior year, which led to an underlying effective tax rate of 24.1% versus 22.6% last year. Free cash flow for the year was €5.2 billion, down by €1.2 billion. This includes an increase of €0.4 billion in CapEx, which is now back to 2019 levels. Also reflects investments in higher inventory to support customer service levels and a higher tax outflow, including €330 million tax paid on the Tea disposal. Our net debt-to-EBITDA ratio fell from 2.2x at the end of 2021 to 2.1x, which is in line with our broad leverage target. Our net debt level stands at €23.7 billion, down from €25.5 billion at the 2021 close. The reduction was driven by our free cash flow generation and the net inflow from M&A partially offset by dividends, the share buybacks, and an adverse currency movement. Our pension surplus fell from €3 billion at the prior year end to €2.6 billion. The decrease was driven by negative investment returns on pension assets and foreign exchange, largely offset by lower liabilities as interest rates increased. Turning to restructuring now. We spent €0.8 billion in 2022, that's around 1.3% of turnover, and we delivered savings as expected at €2 billion. Return on invested capital ended the year at 16%, down from 17.2% at the prior year end. The main driver of this was higher goodwill and intangibles, which is a result of both a stronger dollar on balance sheet translation and the acquisitions of Paula's Choice and Nutrafol, partially offset by the disposal of our Global Tea business. We continue to adopt a very disciplined and focused approach to capital allocation. The first priority is to invest in the business. Brand and marketing investment increased by €0.5 billion and R&D increased by around €50 million, both in constant currency, so on a more representative like-for-like basis. At the same time, we increased capital expenditure by $0.4 billion to 2.7% of turnover. That's back to 2019 levels and it actually sits well above 3% if you factor in our volumes that are produced by manufacturing partners. Secondly, we made good progress in reshaping the portfolio into higher growth areas with the acquisitions of Nutrafol and the disposal of the Global Tea business. And thirdly, we return cash to shareholders through both dividends and our share buyback program. We completed the second €750 million tranche of the €3 billion program in December and expect the next tranche to commence in due course. Thanks so much, Graeme. Let me take this moment to give a short update on the progress that we've made against our growth strategy, and I'll start with brands and innovation. I mentioned earlier our 14 €1 billion plus brands now make up 53% of our group turnover and delivered underlying sales growth of 11% in the full-year. Our growth is being underpinned by bigger, better innovation and a relentless focus on functional product superiority. As Graeme mentioned, brand investment was up significantly in absolute euros and will grow again in 2023. We will ensure that brand support remains at competitive levels in 2023. We've also made good progress on our second strategic pillar to move the portfolio into high growth spaces. The Tea disposal was completed on the 1st of July, and we completed the acquisition of Nutrafol at around the same time. Thirdly, our priority geographies: the U.S., India, China, and key emerging markets. The U.S. maintained strong growth momentum in 2022, 8% driven by price with a modest reduction in volume. Growth in the U.S. continues to benefit from our portfolio changes with Prestige Beauty and Health & Wellbeing, both contributing strongly. And we continue to see ongoing customer service challenges in the U.S. caused mainly by labor availability. You may have picked up our announcement yesterday that we are going to invest $850 million on the transformation of our North American supply chain over the next three years. And that reflects our commitment to invest behind the U.S. growth opportunity and our determination to increase resilience and deliver outstanding customer service consistently. India posted 15.6% growth, price up 11.2% and volumes up 3.9%. And the growth is broad-based, because it's driven by strong competitiveness and a portfolio that's been built with brands competing across all price tiers. Market growth in India remains stronger in urban areas than in rural areas and that reflects the high impact of high food inflation on low income consumers. We're seeing rural markets broadly flat in value terms with lower volumes. But we remain confident that we can continue to grow ahead of the market in India. China declined by 1.3%, volumes down 2.2%, and that reflects basically the impact of the lockdown on both consumers and supply chains. The changes to the COVID policies came too late to have a major impact on 2022. And the first quarter will still reflect some disruption as life returns to normal. We are optimistic about the outlook in China, especially for the recovery of the out-of-home food business and our beauty categories. Nearly 60% of Unilever's turnover, some $35 billion came from emerging markets, which together delivered growth of just over 11%. They remain a key source of competitive advantage and growth for Unilever and the business groups will continue to invest a further build strength and depth through 2023. We saw particularly strong performances from Vietnam, the Philippines and Brazil. Our priority digital commerce channels grew 23% in the full-year. They now represent 15% of Unilever's turnover. We saw faster growth in B2B and more modest growth in B2C as consumers in some markets return to physical stores, though often after searching online and purchasing offline. These channels are going to remain a key source of growth, and we're seeing rapid changes in the landscape as different channels, different models compete for consumers' attention and spend. As Graeme hinted earlier, we've invested in 29 leading edge digital marketing, media, and e-commerce hubs. We call them our DMCs. They're aligned to our five business groups, and those DMCs comprise experts in media, in data-driven marketing, in content excellence and sales capabilities, and they will ensure that we deliver seamless consumer experiences and optimize our investment across all channels. And these DMCs represent a key investment to ensure that Unilever continues to win in this important channel of the future. At the start of the year, we set out our intention to implement a new organization and new operating model, and that new model went live on the 1st of July with the objective of making Unilever simpler and faster, more focused in our categories and with greater impairment and accountability. And it's a model based, as you know by now on five business groups on a lean corporate center and on a low cost technology-driven transactional backbone Unilever business operations. The new business groups are now in place. They're fully responsible for their portfolios from strategy all the way to monthly performance, which Graeme and I reviewed carefully. And Unilever business operations is now responsible for all transactional processes, technology and infrastructure that benefit from Unilever skill. We call that the power of one. Now it's still early days for the new model and we're cautious to avoid declaring victory too early and what is a very substantial change for the company. But I must say the first six months have gone very well. We're already seeing benefits in the speed that decisions are being made out, sharper accountability for improving business performance. And for example, we've seen Nutrition and Ice Cream taking tough decisions to exit unprofitable businesses. And Personal Care and Home Care working quickly on simplification and SKU rationalization. And such actions are simplifying the business and releasing funds that we can invest behind growth. The business groups have defined their distinct strategies. And as this chart is one that we presented in our investor event last December, I'm not going to laboriously dwell on it now. The key point is that all the business groups have a role in driving growth. Remember, each is capable of growing faster than Unilever's historical growth rate. They have differentiated approaches based on their geographical footprint, the consumer they serve, the channels they operate in and the competitive dynamics of their categories. Our primary focus is on organic growth and acquisitions will be focused and disciplined mainly, though not exclusively, in Beauty & Wellbeing. Disposals to prune the portfolio will continue where they are needed, and that will be across all business groups. As we look forward, we do so with some optimism. We're benefiting from the progress we've made in improving our end market execution, better products, better innovation, better advertising, better distribution, increased savings. Our portfolio is stronger now, and we're well placed in several new high growth spaces. Our strategic choices by brand, by category, by geography, by channel, are crystal clear and are driving resource allocation and the new organization is off to a good start. We remain laser-focused on executing our strategy and will continue to invest for growth. Let me start with this chart, which is really just a reminder of our multi-year financial framework. It's exactly the same as I presented at our Capital Markets Day back in December. The headline message really is that growth is the priority. We aim to deliver USG at the upper end of our 3% to 5% range, helped by a step up in volume and with continued strong competitiveness. We want to deliver this with higher consistency, reflecting our global leadership positions within the staples sector. We do expect modest margin expansion on the back of that higher growth profile, and that's going to be led by gross margin and we'll continue to reinvest in brand support and in R&D to fuel our virtuous flywheel of growth. Unilever is a strong cash generator, and we aim to deliver long-term value creation by driving sustained constant currency earnings growth with high cash conversion alongside an attractive dividend. Narrowing in on 2023, our priority remains to drive organic top-line growth. In the first half, we expect price growth to remain high from a combination of carryover pricing and in quarter price changes and volumes will remain negative. For the full-year, underlying sales growth will be at least in the upper half of our multi-year 3% to 5% range. We will continue to increase investment behind our brands, while managing the inflationary pressures, which will persist. We expect to again increase levels of investment in brand and marketing investment, in R&D, and in capital expenditure. We'll continue to deliver the benefits from our new operating model with continued cost discipline and high savings delivery. Overall, we expect a modest increase in underlying operating margin for the full-year with UM landing at around 16% in the first half. Let me give more color on this by sharing our latest views on the outlook for gross margin. Now as we said earlier, cost inflation is going to remain a key theme in 2023. We successfully managed the trade-offs between price, margin, and competitiveness across 2022 and are confident that we can continue to manage these relationships dynamically as the cost landscape evolves through the year. In our last quarterly update, we shared our views around net material inflation or NMI for the first half of 2023. One quarter further on, we expect to see around €1.5 billion of NMI in the first half. One-third of this comes from the underlying commodity costs, one-third comes from supplier conversion costs and one-third comes from transactional currency impacts, mostly a strong dollar versus local currencies. I think it's important to remember that our NMI reflects transactional FX impacts, not just quoted dollar commodity prices. 65% of our first half NMI cost is now covered by physical contracts or paper covers, and so we have better visibility now on the H1 cost outlook. Because of the mix of inflation across commodities, nutrition and Ice Cream will be more negatively impacted in H1 than Beauty & Wellbeing, Personal Care or Home Care. We will also continue to experience inflation in production and logistics costs, mainly from labor and energy increases. The high inflation in production and logistics costs that we saw in the second half of 2022 will continue into the first half, and we expect this to result in an additional €0.5 billion of cost inflation in H1. Carryover pricing will be supplemented with further price rises where needed. With this continued pricing, we expect price coverage to continue to rise but still be below 100% for the first half. And so the first half gross margin should come in lower than the first half of 2022. For the second half, we still have much less cost inflation visibility. As things stand today, we are expecting significantly lower cost inflation, but this comes with a wide range of possible outcomes. Net material inflation should slow as will the inflation in production and logistics costs, though we are not expecting overall cost deflation. We expect second half underlying price growth to moderate, but we will see an improving picture for price coverage and gross margins should then begin to improve. I'm not going to provide estimates as to how much since there's still too much uncertainty around the various moving parts. Coming to the key financial metrics for 2023, we're expecting that CapEx will be higher again at around 3% of turnover. Restructuring will return to being 1% of turnover, as we've previously communicated. We expect that the underlying tax rate will be around 25%, and that net debt-to-EBITDA will be in line with our model at around 2x. Our expectation for net finance costs is unchanged from the information I shared with you at the Capital Markets Day in December. That's between 2.5% and 3%. Based on spot rates, we would now expect a full-year currency translation effect of around negative 4% on turnover and a little more negative than that on underlying earnings per share. Our modeling also shows that currency translation, as things stand today, will be a headwind on our underlying operating margin of some 20 to 30 basis points in 2023. So we will have to pedal harder to deliver the increase in margin that we're guiding to for the year. To wrap up, we're going to remain focused on delivering higher growth. We will invest for that growth and improve our competitiveness while continuing to carefully navigate very high, but moderating cost inflation. That concludes our prepared remarks. Thank you, Graeme. Thank you, Alan. [Operator Instructions] So our first question will come from John Ennis of Goldman. Go ahead, John. Hi, good morning everyone. Thanks for taking the question. I'll stick to one actually because I know we're quite tight on time. But it's around your investment plans. You've obviously been quite clear that you're stepping up investments again in 2023. So I'd just like to hear a bit more color on where those investments are going, either by division or region or whether it's more promotional or versus advertising? A little bit more color there would be great. Thank you. Thanks, John. Well, let me just say, when we talk about investment, it actually involves at least four different parts of the P&L. We've been investing in an area that we don't speak much about, which is in some overhead costs, where we've really beefed up our digital capability with these digital marketing centers that I talked about earlier. Secondly, our R&D investment was up by around €50 million last year. And we expect that to continue as well. CapEx, as Graeme pointed out, is up as we support the expansion of capacity to support growth but also actually to build in resilience and higher levels of customer service. You will have seen that yesterday, we announced a substantial program in North America. But the biggest space will be in brand and marketing investment. And I would expect as we look into 2023, all of our business groups to be building plans. In fact, they have all built plans that involve aggressive savings, continued pricing and therefore, the ability to step up their BMI investment. It won't surprise you if I say that, I would expect Beauty & Wellbeing to probably be the biggest beneficiary of increased investments. So it is quite broad-based. It's targeted in multiple lines in the P&L and the biggest single number will be in brand and marketing investment. Thank you. I'll go for two, if I can. Firstly, just on the new CEO appointment. I guess you guys were involved with that. So I'm just trying to understand, obviously, you came in October was when that appointment was made at a Board member, was there an option of thinking that, that may extend into the CEO or when you joined or does that change after he joined. And I guess just in terms of your headline proposition to the Board during the process of assessment, what was it that you would say was this kind of key vision point that kind of differentiates you from the other competition that I'm sure that was very severe. And then in terms of sort of going into the beginning of the new year with the new division set up. Just wondering if there's any impact on inventory or volumes in terms of those businesses being sort of reconfigured so that as we go into 2023, [indiscernible] everything in place, where there's any volume impact from that kind of process? Thanks so much. Thanks, David. Good questions. I think it's appropriate if I take the first one and Graeme has raised his hand on the second one. If you look at the chronology, Hein joined our Board and was going through the interviews to join our Board, long before we announced my intention to retire. And before we initiated what was a substantial external and internal search, -- so Hein was brought on to the Board as a non-exec for what he brings in that capacity. No other part of that story. However, when emerge that we were looking for a new CEO, he checked so many of the boxes and the Board included Hein obviously in the search process. It's not for me to comment on what Hein's agenda would be. But what I can tell you is that in an internal video that he recorded unscripted, unprompted, he highlighted three things: number one, his absolute focus on performance and value creation; number two, his commitment to the organization that Unilever has put in place. I think that's important, A, as validation of the organization, but also to keep our troops come. And the third thing is his belief that performance can be enhanced by staying the course on Unilever's long-standing commitment to sustainable business. So those are some of the messages that Hein chose to put into the organization. And apart from being very experienced in consumer goods with a good track record, outstanding values. He happens to be an extremely clear communicator, a hell of a nice guy. So I'm looking forward to seeing what he does at the home of this great company. Graeme -- down to the earth subject of year end volumes and the… Good morning, David. Yes, I mean, it's a great question. So we are seeing -- and we saw in the second half immediately really from the establishment of the new organization, some really fast and decisive decisions from each of the business groups. We touched on a few of them. I'll just comment on one or two that came through in the prepared remarks. But let me turn to Indonesia. So actions in Indonesia to address promotional and pricing strategies were taken by all five of the business groups very, very quickly, and we've moved to reduce trade stocks in some channels just to make our overall supply chain more efficient as we start to learn better innovation and our products in Indonesia. So that's one example for you. Turn to Nutrition. We made -- we touched on this as well, some decisions in U.S. dressings to exit unprofitable lines of business. That actually tipped our very big U.S. dressings business from winning into not winning just at the end of the year. You see that in the drop-down in percentage business winning. It's the right thing to do for the business, absolutely the right thing to do for the health of nutrition, and we're very confident that we'll get that big sell back into winning performance around about the midpoint of the year. So that's another example. Also in Ice Cream, removing unprofitable volume in Ice Cream tubs. I should talk a bit about Personal Care, tremendous SKU rationalization happened very quickly in personal care. We delisted about 5,000 SKUs in PC already. and we've actually discontinued 50 or 60 local brands, which frankly add up to less than 1% of PC's overall sales. And I could tell you a very similar position in Home Care. So much work happening by the business groups to -- and you see some of it reflected in volumes and some of it reflected in inventories. But the end to the year in good shape with good strong plans -- and much of that tidy up work happened in the first -- in the last -- second half of last year and will continue as we go forward. Yes, thanks Richard. Good morning everybody. Just I wondered if you could say some things about how the levels of net revenue management have progressed over full-year '22 and what the expectations are going into full-year '23, particularly thinking about in response to pricing what's happened on sort of pack sizes and promotion? And then thinking specifically, I suppose where do you think you'll end-up promotion levels versus sort of 2019, '20 by the end of '23 please? Yes. Let me take that, Tom. So when we talk about net revenue management, there are multiple levers. So of course, it includes list price changes. We'll frame it, first of all, list price changes, pack, price architecture is the second lever, and that's the idea of upsizing and downsizing and developing specific sizes to meet specific consumer or channel needs. The third is the way that we use mix. The fourth is consumer promotion and the fifth is trade margin management. And I think the overall story for last year was that we use that first lever of straightforward list price increases more than we have for eight years. And in full candor, I don't think our muscle was as strong on landing list pricing as it should have been going into this period. And in a way, we were surprised how quickly we were able to fire up that machine after many years of avoiding list price increases. It's almost impossible to give you a flavor of the work done on pack, price architecture. Because it is literally done brand by brand, category by category, pack size by pack size and channel by channel in every country. But many examples of introducing different pack sizes as a way of satisfying consumer preferences. In different parts of the world, we see different big consumer behaviors. We've talked about this before. So in places like South Asia, Southeast Asia, small sizes, affordable unit pricing is really important. In South Africa and Latin America, some of the most price stressed consumer environment actually big sizes take off at times like this where people realize the superior value that can be realized even through group buying and things like the stock well phenomenon in South Africa. So we are using pack, price architecture a lot. We believe looking forward, there's more opportunity in mix. And the final one I want to talk about is promo levels because there's been some coverage around that. For quarter four, actually, we see Unilever's deal promotion -- sorry, proportion of our turnover sold on deal is down year-on-year in the fourth quarter, particularly so in Europe. And this is not surprising because when you are trying to land and establish new pricing, if you accompany that with promotional chaos, it certainly does not help the landing of the new price levels. So that's a bit of a comprehensive towards on the last year characterized by heavy levels of list pricing and pack price architecture, lower levels of promotion. This year, we will need some list pricing and probably we'll use mix more in 2023 than we have historically. Yes, good morning everybody. I got one on Q4 volumes and one on FY '23 margins. On Q4 volumes, you'll be aware there was a lot of apprehensiveness coming into the quarter on that. Can you just sort of disentangle the minus 3.6% a bit more for us? How much was underlying consumer price elasticity? How much was planned SKU rationalization? And then was there any trade destocking effect in there given your peers have pulled that out. On FY '23 margins, guidance of modest improvement relative to lower level of NMI in H1 than you expected, capture of the bulk of the €600 million savings. And I would also assume positive gross margin category mix. So that seems worth a lot to me at the gross level. So why the caution on margins? Is it that you expect pricing to come off more quickly than you expected? Or is it that you're pumping in a lot of investment? You've talked about investment directionally, but I'm wondering if you can be a bit more precise on that. Those are the questions. Thanks. Hi, Martin, I'll take the first one, and I'll let Graeme comment on the second one. So Q4 volumes, you'll have noticed that a large proportion of the volume deterioration was in Ice Cream and Nutrition. Now at a macro level across the company, the majority of the negative UVG is a straightforward response to the pricing that we've been taking. In Nutrition and Ice Cream, it was complemented by some strategic choices to exit unprofitable business. So we've talked, Graeme's shared an insight on in Nutrition, in particular, Dressings North America at a time when Almonds is absolutely flying, we took the opportunity to ease back on some frankly, structurally unprofitable business in our preferable brands in Dressings North America. Also Nutrition was impacted by Unilever Food Solutions in China where there was obviously a marked slowdown as COVID restrictions were actually enhanced in Q4. Ice Cream, a slightly different story, where we exited some tubs, unprofitable tubs business in Europe, so sort of a low value in-home. And we also were up against difficult comps in in-home Ice Cream volumes in Q4 of 2021, which were partially offset by an acceleration of our out-of-home business in 2022, but not fully. So you see in the numbers that the UVG was particularly pronounced in Ice Cream, somewhat in Nutrition. And it's a combination of primarily price elasticity, a little bit of exiting bad business and some year-on-year effects for Food Solutions and Ice Cream. Graeme, do you want to talk about the other part of Martin's question? Yes. Hi, Martin, on the '23 margin, let me -- I think my first reflection is we've got a pretty good grip on this. We were one of the first to call out the original inflationary environment. And our estimate for net material inflation in '22 proved to be pretty accurate. We landed at €4.3 billion, and I think we guided to €4.5 million. So we feel we've got our hands around it. It is, however, inherently more uncertain in the second half than it is on the first half. And as we've said, we currently see a drop from €2 billion of NMI inflation to €1.5 billion in the first half, but we do see continued inflation in production and logistics of about €0.5 billion. So that's the bit that we have got a good grip on where we have the visibility. Second half, not so much visibility, but we do expect, as I said, it to be materially lower in the second half. I think the key thing to bear in mind, Martin, is that at this point, we are only at 75% price coverage to get our gross margin and our margin -- bottom-line margin will be driven by gross margin improvement. We're only at the 75% point as we exit the year. So we're still some way adrift from the 100% that's needed to get the gross margin moving forward. We will have the benefit of continued high savings programs, again, €2 billion plus of savings. Obviously, the mix of that changes over time. Within that, we've got -- and you mentioned the €600 million savings from the Compass organization, that's landing well. And we've got a big contribution for that factored into those savings plans. We will get some benefit in gross margin from mix. We're driving mix hard. Alan just mentioned it there in the context of net revenue management. We do need to push mix harder. And one final point, and I touched on this, we will continue to invest behind resetting the company to a higher growth profile. We're guiding to a higher growth profile today, and that requires investment. And when we manage all that to get to what we think will be a modest improvement in the bottom-line UOM for the year. Bear in mind that we'll have transactional currency headwinds -- sorry, against that. We think that currently sits at 20 to 30 basis points. So as I said in the prepared remarks earlier, we're going to have to pedal a bit faster than you see in current exchange rates in order to deliver that number, because we are going to face 20 to 30 basis points of headwind to the margin from transactional foreign exchange. Yes, good morning everybody. It's Warren here at Barclays. Good morning, Alan. Good morning, Graeme. First one for me is on market share. You said 47% on your 12-month MAT. I think you also said it wouldn't go back above 50% until the second half of '23. Is that a concern where we've got maybe three quarters in a row below that kind of 50% threshold. I wonder whether you can kind of dig into that. Where are you losing? Why are you confident it improves about 50%? And how does it all marry with your brand equity health scores, which I think at the CMD, you were talking about 80%. Just trying to sort of triangulate all of that? And then the second one is really around Europe, in particular. I know you've called out some moving parts already, but with volumes down almost 7% as pricing has really stepped up there. Can you maybe sort of dig into what you're seeing on the ground, maybe by country, what's the U.K. looking like versus Northern Europe, Southern Europe? Any kind of de-listings you've seen as that price has really stepped up? And are you expecting pricing to step up further as you finalize negotiations with retailers and could that volume even get worse? So I'm just trying to sort of work out at what point do you start to worry where the volumes are down kind of mid to high single-digit that you might need to look at other kind of bit more draconian measures around factory utilization or dialing up promos? Yes, those are my two. Insightful questions. Warren, I'll let Graeme talk about Europe. Let me just say a word or two about market share. First of all, our percent business winning is well above 50% in three of the five business groups. So in Health & Wellbeing in -- sorry, Beauty & Wellbeing, in Personal Care and in Home Care, our market share percent business winning is above 50, it's below 50 in Nutrition and Ice Cream. And those are particularly impacted by two big cells. One is U.S. Dressings and the other is India Tea. And the India Tea position is that that market has shifted into very, very, very low price, low margin powdered tea where we choose not to compete. In the Premium Tea segment, in fact, we're gaining share, but there's a shift within the market to very low cost teas, where we frankly see no margin to be made and don't want to participate. And then I think we've talked a lot about cleaning up our U.S. Dressings portfolio and accepting some short-term dips in market share. Our brands are in terrific shape. You've seen the step-up, a very substantial step-up in constant currency. In fact, it looks like an even bigger step-up when you look in current money in the brand and marketing investment. Our brand health measures are very strong. And our biggest and best brands was 12 no 14 as two new brands who joined our top 14 €1 billion brand portfolio. Those are growing 11%. And so all I can say is that even on an MAT basis, the quarterly percent business winning is quite volatile with different cells coming in and moving out. And as we continue to make progress in Indonesia, as we continue to make progress in North America, I think we'll see that business winning figure repair from where it is right now. And in truth, Warren, we just don't want to be too optimistic on when exactly it might repair, but the underlying signs are all very positive. Graeme, Europe. Yes, good morning, Warren. I think the first thing to say about Europe is that the current pricing environment is a bigger step change versus history than we've seen. I think you need to bear and this applies to everybody, I guess, European elasticity in the context of taking price for the first time in many, many years. It's gone into price inflation from a situation where it was in long-term deep price deflation for many, many years. So the net move from deflation to inflation is bigger than it is in other region. It really is quite a step change. We had really strong growth in Ice Cream and Nutrition in Europe, modest growth in PC, a slight decline in home care and a slight decline in Beauty & Wellbeing, which is quite small for us in Europe. And we did see positive volume growth in Ice Cream where we took a lot of price in dressings and in Unilever Food Solutions. So it's quite a mixed picture across the piece. I would point out in terms of retailer negotiations and retailer dynamics, all very positive, to be honest, never easy in Europe, but we're working very constructively with the grocers in Europe. They're very demanding in terms of the information that's required around granular cost inflation data at an SKU by SKU level. We're not really seeing any destocking in our categories, but that's going okay so far, never easy, but we're working very, very collaboratively with them. One thing to point out, I mentioned in the prepared remarks that the material inflation that we're seeing for the first half falls disproportionately in Nutrition and Ice Cream. And both of those business groups have got a higher footprint in Europe. So it is a focus area for us. And certainly, we're concentrating on that. And then finally, just to come back to something Alan referred to earlier on promotional spend in Europe, we are seeing far less volume on deal in Europe compared to normal. That's obviously quite understandable when we're trying to land price increases with our retailers and our retailers are moving prices. So hopefully, that gives you a little bit more color on the European situation. Thanks, Graeme. So we're over the hour. Let's just take two more questions. Can we go to Pinar, would you like to ask the first one, at Morgan Stanley? Hi, thanks for taking my questions. Just two quick follow-ups to Martin and Warren's questions are there. The first one is, could you please talk a little bit about why you're not expecting a deflationary cost environment in H2? Is that because of hedging, FX? Or are you making certain assumptions on commodities beyond where the spot rates are. And then the second one is coming back to Warren's question. Unilever's volumes are holding up a little better than some of your global peers despite strong pricing. But I guess at what point the declining share of business winning share becomes a longer-term concern for you that you might reconsider the balance between pricing volume and competitiveness. Pinar, let me take both of those. They are two of the most important areas that we're focused on. We're not expecting a deflationary environment in H2, but there is a wide range of potential outcomes. And I think there's two things that are going to -- two bellwethers to keep an eye on, on what's likely to happen in the cost environment. The first is what happens to demand from China. We're anticipating quite a strong opening up and recovery of China. There's $1.5 trillion to $2 trillion of excess household savings in China. There's limited places for the Chinese consumer to put that, the housing market is not an attractive investment option. There are limited financial investments they can make. And so we are expecting to see a little bit of a consumption boom in China. And if you look at things like air flight bookings, travel and hotels, cinema occupancy, China is coming back quite quickly. And that demand will have an impact on global commodity pricing. Second is, frankly, what happens to crop yields, of which the soy crop in particular is very important. And the soy crop yields are very affected by weather patterns and have a knock-on effect on the cost of other soft commodities like palm, et cetera. As far -- we will take advantage of spot pricing to lock in contracts. Frankly, most of our forward cover is through contracts. It's not through hedging arrangements. And we'll take advantage when we think that there's a particularly low moment to lock in a contract. But watch China and watch the crop yields in particularly the soy crop. And then in terms of volumes are holding up, but should we be concerned about competitiveness? Yes, of course, we're concerned about competitiveness. It's a very high priority measure for us. It's in our team's long-term incentives. And I can assure you, when Graham and I sit down and do the monthly performance reviews with our business groups, literally, the first thing we look at is not the rearview mirror of what happened over the last month or the last quarter. It's what's the outlook for competitiveness in the coming months and the coming quarter. Our best estimate is that we'll start to recover across the 2023 quarter-by-quarter. And whilst we don't hedge much on commodities, we are hedging a little bit on giving an exact moment when we think we'll move back into positive shares. The one thing that we're very comfortable with is our innovation and investment plans behind our brands for 2023 are stronger than any of us can remember in the last 10 years. So let's watch the space but we are very focused on market share. Thanks, Alan. Okay. Let's squeeze in one last question and for that last question, let's go to Celine Pannuti at JPMorgan. Thank you very much. Good morning everyone. So one last -- I'll try to make two small ones. The first one is on volume. You said that volume would be worse in H1 and potentially still negative in H2. Should we expect to be sequentially as bad as Q4? I mean I understand that in Q4, there were some extra elements that you mentioned earlier, Graeme. So can you give us a bit of a scale of what we should expect if volume effectively would continue into that same level for the first half? And then my second question is -- you spoke about Europe. Just about emerging market, a lot of your emerging markets, Southeast Asia, excluding China or Latin America had benefited from a recovery in '22. What is your view on how the consumers are behaving in those emerging markets as you enter '23 with higher pricing. Thank you. Celine, I'm going to ask Graeme to talk the SCA situation, but he is not going to have much time to prepare that because the answer on volumes are very straightforward, which is, for the first half, we expect a sequential recovery in UVG from Q4, although not crossing into positive volume growth until the second half. Now of course, there's the usual caveats around difficulty of predicting the future. But just to be crystal clear, what we're guiding to is volumes still negative in the first half, but sequentially recovering versus Q4. Graeme, Southeast Asia. Good morning, Celine. Yes, I think we -- in the 60% of our business in emerging markets and in the sort of powerhouses that we have in South Asia and Southeast Asia, we are in optimistic mood. If we look at Southeast Asia, Indonesia and Philippines have got sort of mid-single-digit or slightly higher GDP growth, consumer confidence is starting to return in Indonesia. Our markets are currently driven by price as we sort of -- as we reset the business in Indonesia, we will be benefit from that. I said in the speech that all five of our business groups are extremely focused on getting Indonesia back to its strength. Philippines, consumers are looking for value. We've got a lot of value in our portfolio. Thailand, the market is recovering from COVID, I think there'll be a big beneficiary. I think as well Vietnam actually from the return to Chinese tourism, Alan just mentioned that. But as Chinese tourists start to venture overseas, Thailand and Vietnam will be big beneficiaries. Our business in Vietnam is extremely strong. And there's an economic recovery happening there. So at Southeast Asia, yes, we feel good about it. And obviously, our performance in Southeast and -- South Asia, strength continuing in India. It's very important that we continue to hold on to that. That's strength for us. It's the Urban markets are up in value. Rural is a little bit more flat. The monsoon was good overall. But food inflation is rising fast. And that's having a bigger impact on the less affluent part of the Indian population than elsewhere. The rest of South Asia, we've got some challenges to manage. We've got a big and successful business in Pakistan, which had terrible floods and is rather challenged economically as a consequence. We're having to manage that similarly in Bangladesh. But overall, I think we're feeling good about the prospects for emerging markets in '23. Thanks, Graham. We'll end the Q&A there. Thanks for all the questions. If you've got any further questions, just e-mail the Investor Relations team, and we'll set the time to speak to you. Alan, would you like to make any closing remarks? Yes, I will actually, Richard. A little bit of a break with traditional close. I would like to take this moment to thank the 150,000 or so women and men who make up the Unilever team around the world and who have worked incredibly hard through extraordinarily difficult external conditions and a major internal structural change that we imposed upon them as well to deliver a set of results that we're proud of. So to any of the Unilever team who are listening on the call and on behalf of the whole company, a massive thank you. Richard? That's it. Thank you. Thanks, everyone. Thanks for the questions. Thank you, Alan. Thank you, Graeme, and have a good day.

EarningCall_260

Welcome to the Teva's Fourth Quarter and Full Year 2022 Earnings Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to our first speaker today, Ran Meir, Senior Vice President, Head of Investor Relations. Please go ahead. Thank you, Nadia. Thank you, everyone, for joining us today. We hope you have had an opportunity to review our press release, which was issued earlier this morning. A copy of the press release as well as the copy of the slides being presented on this call can be found on our website at tevapharm.com. Please review our forward-looking statements on Slide 2. Additional information regarding these statements and our non-GAAP financial measures is available on our earnings release and in our SEC Form 10-K and 10-Q. To begin today's call, Richard Francis, Teva's CEO, will provide an overview of Teva’s 2022 results and business performance, recent events and priorities going forward. Our CFO, Eli Kalif, will follow up for reviewing the financial results in more detail, including our 2022 financial outlook. Joining Richard and Eli on the call today is Sven Dethlefs, Head of North America business, who will be available during the question-and-answer session that will follow the presentation. Please note that today's call will run approximately one hour. Thank you, Ran, and welcome, everyone. I'm excited to be here today, and I'd like to start by saying, it was great meeting many of you in San Francisco JPMorgan last month. And I look forward to getting to know Teva shareholders, investors and analysts, so that you can have an open dialogue going forward. I'm excited to be here because there's a lot of opportunity at Teva. The team has done a tremendous work to get the company back to a solid foundation. And now there's an opportunity to get back to growth. Before I start my review of Teva's 2022 results and discuss our guidance for 2023, I would like to update you that I've already initiated a strategic review process with my leadership team. Our teams are already hitting the ground running, and we are working hard on analyzing some of the core strategic questions, how the segments we operate are going to evolve over time. And we understand what options we have. It's going to be a very clear, purposeful strategy with real intent behind it. Every function, every dollar should follow that strategy going forward. Once the work is down around midyear, I'll come back with the team and we'll present that to the market. Now let's move on to some highlights for 2022. We ended 2022 with revenues of $14.9 billion, and adjusted EBITDA of $4.6 billion. GAAP diluted loss per share was $2.12, and non-GAAP diluted earnings per share was $2.52. You should note that our revenues were still affected by the strengthening of the U.S. dollar during the fourth quarter. And we are, therefore, still seeing significant headwinds from exchange rate movements on our revenues. We had a net impact of $780 million for the full year compared to 2021. Free cash flow in 2022 was $2.2 billion, and we continue to reduce our debt in accordance with our strategic targets. Net debt is now down to $18.4 billion. Moving to the business overview. AUSTEDO, our leading brand is growing very nicely, up 20% year-over-year, and AJOVY also grew across all three geographies, U.S., Europe and International Markets. I'll further discuss these two products in a few minutes. We've also seen nice growth in our generics and OTC revenues in Europe, reflecting our strong position there and also some successful product launches. We've also seen good growth in Generics and OTC in our International Markets through a combination of volume growth as well as price adjustments to address inflation. So good to see 9% growth in Europe and 5% in international in local currency terms. We're also excited about the progress we're making on our pipeline. We recently initiated the Phase 3 trial of subcutaneous long-acting olanzapine for schizophrenia, together with UZEDY, our risperidone long-acting product, which I'll talk about in a few minutes. We're developing an exciting franchise for patients suffering from schizophrenia. As for the nationwide opioids litigation settlement, we announced last month that we are moving on with the settlements after receiving broad support from the State Attorney Generals. We already settled with 49 of the 50 states and the sign-on process for the state subdivisions has begun. And given the very positive response from the states, we remain optimistic that the settlements will garner a similar support further. Moving on to the next slide to look at our revenue and how it's developing. Overall, you'll see a fairly stable business with the portfolio of products and geographical spread that are well balanced. I'd like to point out that in 2022, Q4 was the strongest quarter in terms of revenue, similar to previous years. If you exclude the impact of FX, revenues in Q4 2022 were actually up 1% compared to the fourth quarter of 2021. So in local currency terms, we had a nice single-digit growth in both Europe and International Markets. Moving to the next slide and expand on the comment I just made on Europe. It's a market that I'm very positive about. Europe is good, stable business to Teva. In markets like Europe, if you have a good pipeline, good go-to-market model, the business is predictable and it can drive continued growth. And we believe we have all of those elements in our European business. We have a good portfolio, good pipeline and strong leadership in many of the markets. And this also supports a good margin profile, as you can see from the slide. And this is all playing out well. As you can see, revenues grew in Europe in the fourth quarter, 4% in local currency terms, which we're very pleased about. Now moving on to AUSTEDO on next slide. Quarter four was a record quarter for AUSTEDO as we continue to see strong growth in both total and new prescriptions. Revenues grew 20% for the full year and 22% in the fourth quarter. I am happy to see strong continued development with nice increases in both revenue and the numbers of prescriptions. So all-in-all, the trajectory looks positive. And Eli will elaborate on it when he will be talking about our 2023 outlook. Now to better understand the potential of AUSTEDO, I'd like to take a look at the next slide. As you can see, there are approximately 785,000 patients suffering from tardive dyskinesia in the U.S. But unfortunately, only 15% of these patients are diagnosed and then even more disappointing 5% are getting treatment. So clearly, there is a lot of unmet need. And of course, we're working hard to broaden that base, making sure they can benefit -- the benefit of the product reaches more patients who need this therapy. This will drive increased prescriptions and also presents a significant long-term growth potential for AUSTEDO. Now moving on to AJOVY. Full year, our revenues grew more than 20% globally. This was despite the foreign exchange headwinds we faced in Europe and International Markets. Now I think AJOVY is a great example of Teva's strong commercial and execution capabilities. As you know, AJOVY was not first-to-market in the U.S. and Europe, but we're still capturing really strong market share and actually second in Europe. So that's been very impressive and another proof point to me that the innovative and commercial go-to-market capabilities of Teva are strong. What we're seeing now in the U.S. is really about slow growth is around the injectable anti-CGRP therapies, and while most of the growth in migraine space is driven by the oral therapies. Outside the U.S., we expect AJOVY to benefit from continued patient growth and launches in additional countries in Europe and International Markets. Now moving on to the pipeline, the next slide, please. In my six weeks at Teva, I've met with R&D teams. And I have to say that I'm very impressed with the capabilities and the people we have. I was also pleasantly surprised by our innovative pipeline. We plan on sharing more details on it when we discuss our updated strategy throughout mid-year. Now let me highlight a couple of exciting assets that are under regulatory review. Firstly, our biosimilar to Humira is expected to launch in July 2023, pending FDA approval, which I'll talk about in a bit more detail in a few minutes. I'm also happy that the FDA has accepted for review the BLA for our biosimilar Stelara, and we anticipate that the review will be completed in the second half of this year. Moving to our innovative medicines pipeline. As I said before, we are building a strong foundation for the schizophrenia franchise. UZEDY, an important product for patients suffering from schizophrenia which I will elaborate on in the next slide; and olanzapine long-acting, another exciting prospect in the treatment of schizophrenia, we recently moved into a Phase 3 trial. Both olanzapine and UZEDY represent complementary approaches to schizophrenia patient management by addressing unmet needs in the long-acting market. And together with the AUSTEDO, which treats tardive dyskinesia, a side effect for schizophrenia treatment. We're building a strong franchise for schizophrenia therapies. So moving on to the next slide to talk about UZEDY. As you know, we have resubmitted the file to the FDA for review and expect to have a decision in the first half of this year. So just to frame the market landscape, there are approximately 2 million treated schizophrenia patients in the U.S. and approximately 10% of them receive long-acting injectable products. And this long-acting category is growing steadily. In terms of sales, the overall schizophrenia long-acting market in 2021 was estimated to be $4 billion. Now relative to other therapies on the market, UZEDY, our product, will have more patient-friendly injection mechanism, which is subcutaneous, a small needle and is lower volume, and it comes in a ready-to-use prebuilt syringe. Basically, an easy and effective way to get you therapy. And we are very much looking forward to bringing these benefits to the patients who are suffering from schizophrenia, and who need stable therapy to avoid relapses. Now let's talk about Humira, which I know has been getting a lot of attention recently and is the largest product in the history to face biosimilar competition with annual revenues of over $17 billion. Now based on our most recent updates from our partner, Alvotech, we're preparing for the launch on the 1st of July this year. The FDA has confirmed that the target date for the decision on Alvotech's application is April 13 of this year. The FDA has also confirmed that the data provided by Alvotech is sufficient to support a determination of interchangeability. And approval, of course, requires a satisfactory outcome from the upcoming facility inspection or reinspection, should I say, which is scheduled for March. It should be noted that while we are still waiting for the approval in the U.S., Alvotech's biosimilar of Humira is currently being marketed in 17 countries around the world, including Canada and numerous markets across Europe. Now to be clear, we have risk-adjusted its contribution to our 2023 guidance, similar to the way we risk adjust other significant launches in the U.S. market. That said, we believe biosimilar to Humira, like other biosimilar products will continue to be an important product in our portfolio beyond 2023. Now moving on to the next slide. ESG is everyone's business at Teva. Let me be clear about that. The Board and the executive management team firmly believe that ESG is critical and inseparable to our long-term sustainability and success. Over the last few years, the team has worked hard to lay strong ESG foundations and formalize our ESG strategy. We have set ambitious and meaningful targets that are tied to our business, enhance the reporting and disclosures and strengthen our governance. Our ESG strategy focused on advancing health and equity through our medicines, minimizing the impact of our operations and products on the planet and dedicating the company to quality, ethics and transparency. So now let's talk about our 2027 long-term targets. First of all, I'd like to say, as I said in the beginning, I do think the management team has done a great job over the last few years to get the company back to a solid foundation. As we define our strategy going forward over the next few months, we will look for the opportunities to prioritize and to reallocate the best position to have long-term growth and success. We'll come back and share that with you with our new strategy around midyear. Please stay tuned, I am very much looking forward to it. But with regard to these long-term financial targets, these will remain in place. Thank you, Richard, and good morning and good afternoon to everyone. I'll begin my review of our 2022 financial results with my main focus being on the fourth quarter performance. This will be followed by an introduction to our 2023 non-GAAP outlook and some of the important assumptions behind it. Beginning on Slide 16. I would like to start with our Q4 GAAP performance. Revenues in the fourth quarter of 2022 were $3.9 billion, representing a decrease of 5% or an increase of 1% in local currency terms compared to the fourth quarter of 2021. This increase was mainly due to higher revenue from Anda, generic products in our Europe segment, AUSTEDO and AJOVY, partially offset by lower revenue from generics products and certain respiratory products in our North America segment as well as COPAXONE. In Q4 2022, we recorded a GAAP operating loss of $855 million compared to operating income of $78 million in Q4 2021, with a net loss of $1.2 billion compared to $159 million in Q4 2021 and a GAAP loss per share of $1.10 compared to $0.14 in the same period a year ago. GAAP operating loss, net loss and loss per share were mainly due to goodwill impairment charges in the fourth quarter of 2022, partially offset by lower legal settlement and loss contingencies. The goodwill impairment charges were mainly related to exchange rate fluctuations in our International Markets and updated projections in our Teva’s API business. The strengthening of the U.S. dollar versus other currencies during the fourth quarter of 2022, including hedging effects, negatively impacted our revenue and GAAP operating income by $270 million and $132 million, respectively, compared to the fourth quarter of 2021. Turning to Slide 17. You can see that the total non-GAAP adjustment in the fourth quarter of 2022 were $2 billion, and this is versus $1 billion in Q4 2021. The most notable non-GAAP adjustment was a goodwill impairment charges of $1.3 billion, which I just mentioned. Now moving to Slide 18 for a review of our non-GAAP performance. I've already discussed our fourth quarter revenues, which totaled approximately $3.9 billion. Annual revenues were $14.9 million, a decrease of 6% or 1% in local currency terms compared to 2021. For the full year, we saw the same trend regarding U.S. dollar appreciation, which including hedging effects negatively impacted revenues by $780 million compared to 2021. Now let's move down to the P&L and look at the margin. Our non-GAAP gross profit margin was 54.2% compared to 56.1% in Q4 2021. The decrease in non-GAAP gross profit margin was mainly due to the higher revenue with the lower profitability from the Anda in our North America segment, partially offset by higher revenue from AUSTEDO in our North America segment and a favorable mix of generic products in our Europe segment. Our non-GAAP operating margin in Q4 '22 was 29.1% versus 30.4% in Q4 '21. This decrease was mainly driven by a lower gross profit margin, I mentioned above, partially offset by lower operating expenses, which I will discuss in the next slide. 2022 full year non-GAAP operating margin was 27.7%, similar levels as in 2021. We ended the quarter with a non-GAAP earnings per share of $0.71 compared to $0.77 in Q4 2021, mainly due to the negative impact from foreign exchange fluctuations and the lower gross profit, partially offset by lower operating expenses as well as lower tax rate. Now let's take a look at our spend base on Slide 19. As you can see, our quarterly spend base declined by $97 million and increased by $38 million net of FX. For the full year 2022, our total spend base declined by $690 million or $174 million net of FX, annual decrease in our spend base was due to a lower cost of goods sold related to a lower annual revenue as well as ongoing active management of operating expenses. Looking ahead to 2023, we expect the overall spend base to remain at the level of $11 billion as we continue with our ongoing efforts to transform our global operational networks and ongoing active management of operating expenses. If you look at Slide 20, we continue our journey to improve margins by reaching 28% operating margin by end of 2023. Despite of some of the macroeconomic headwinds related to the inflationary pressures, and while we continue to face these pressures, our ongoing efforts to reduce and optimize our cost of goods sold and operating expenses are expected to continue to help us partially mitigate these global macroeconomic headwinds. As Richard mentioned earlier, we continue to target 30% operating margin by end of 2027. Turning to free cash flow on Slide 21. Our free cash flow in the fourth quarter of 2022 was $1.1 billion. The increase in our free cash flow in the fourth quarter of 2022 compared to the fourth quarter of 2021 resulted mainly from the sale of accounts receivable under a U.S. securitization facility entered into November 2022, partially offset by changes in working capital turns. For the full year 2022, free cash flow was $2.2 billion, an increase of 2% compared to 2021 and on the high end of our 2022 guidance. Free cash flow into 2022 was largely affected by the sale of accounts receivable under a new U.S. securitization facility entered into in November 2022, partially offset by an increase in inventory levels, lower proceeds from divestitures of business and other assets as well as higher payments of legal settlement in connection with opioids litigation. Turning to Slide 22. Our progress continued in terms of reducing down our debt. The net debt at the end of Q4 2022 was $18.4 billion, compared to $20.9 billion at the end of 2021. The decrease in our gross debt in 2022 was mainly due to the debt repayment, partially offset by exchange rate fluctuation. The decrease in our net debt was mainly due to our free cash flow generation during the year. Our net debt-to-EBITDA ratio continued to decrease coming in 4x for Q4 2022. Looking at Slide 23. Debt reduction continues to be our primary focus. As you can see, we have made significant progress in the last six years as we had committed to reduce the level of the debt we had on our balance sheet. During these six years, we've paid back approximately $20 billion to our bondholders, including interest payments and we expect our net debt to further decline as we continue to make progress towards 2027 long-term targets. Turning to Slide 24, which represents our upcoming debt maturities. If you recall, we did a 5 billion SLB refinancing to address the '22, '23 and '24 maturities back in November 2021. We continue to assess market conditions for opportunities to refinance upcoming maturities. Given the interest rate environment, we expect this to result in a higher financial expenses in 2023, which I will discuss in a few moments. Looking at the cash conversion on Slide 25. We established a target of 80% by end of '23. In 2022, we made further progress on this. As we keep focusing on our net working capital enhancements, our efforts to optimize our working capital turns in light of our revenue mix is key for our liquidity. We're really happy to see that it came in at 80%, up from 77% in 2021. As Richard mentioned earlier, we'll continue to manage our business and working capital with a focus on generating cash to earnings at this level. Now let's turn our attention to our 2023 non-GAAP outlook, which we are introducing for the first time today. Here in Slide 26, you will find the five main components of our outlook: revenues, operating income, adjusted EBITDA, earnings per share and free cash flow; as well as additional components, including expected revenue range for key products. Our company worked hard throughout 2022, navigating and addressing the ongoing impact of the geopolitical and macroeconomic headwinds. We expect this volatile environment in the markets to continue in 2023 based on leading global financial institutions' forecast. With this in mind, we begin with 2023 total revenue, which we expect to be between $14.8 billion and $15.4 billion. This is very much in line with our revenue levels in 2022. We expect continued momentum of AUSTEDO with a total annual revenue to grow to approximately $1.2 billion or 24% in 2023. Furthermore, AJOVY is expected to benefit from continued patient growth in the U.S., Europe and International Markets. Global sales for AJOVY are expected to be approximately $400 million in 2023. We have factored into our guidance the continued erosion of global COPAXONE revenues, which we expect to decline during 2023 to approximately $500 million. The majority of the decline is expected in the U.S. The expected ongoing growth of AUSTEDO and AJOVY is greater than the offset effect by the decline in COPAXONE sales. Our non-GAAP operating income is expected to be between $4 billion and $4.4 billion, and our non-GAAP adjusted EBITDA is expected to be between $4.5 billion and $4.9 billion. As discussed earlier, we continue to explore opportunities to refinance the upcoming debt maturities to align our debt maturity profile for the coming years with our core operational performance. There could be a meaningful step up in our finance expenses if we were to pursue any refinancing due to the higher interest rate environment. We expect an increase of approximately $100 million reaching $1 billion in 2023. Looking at our tax rate in 2022. Our non-GAAP tax rate was 11.7%. As we look ahead to 2023, we expect our tax rate to be in the range of 14% to 17%. You might recall that our non-GAAP tax rate in 2022 was below our initial guidance as it was mainly affected by realization of the loss related to an investment in our -- one of our U.S. subsidiaries. This expected increase in our finance expenses, tax rate expected to have significant impact on our EPS 2023 outlook in comparison to 2022. This brings us to the expected earnings per share in the range of $2.25 to $2.55, using a share count of approximately 1.1 billion shares. 2023 free cash flow is expected to be in the range of $1.7 billion to $2.1 billion. This guidance reflects our expected higher plant expenses, which I have outlined before as well as increased legal expenses related to the nationwide opioids settlement. As you know, we do not provide quarterly guidance, but I thought it would be helpful to share with you how we are thinking about the progression of both revenue and earnings throughout the year. Based on our expectations to date, we anticipate that similar to the progress in 2022, the first quarter will be the last of our four quarters of revenue and earnings with a gradual pickup in the second quarter. I hope this color will assist you with your modeling. This concludes my review of Teva’s results for the fourth quarter and fiscal year 2022. And now, I will hand it back to Richard for a summary. Thanks, Eli. Before moving to the Q&A, I'd just like to summarize some key points. So I'm happy with the progress that has been made so far, and I want to congratulate the entire team, all my colleagues across the globe on a solid Q4 and full year 2022. AUSTEDO and AJOVY continue to drive growth. And as I mentioned before, there is still a large unmet need that will drive growth in the future for AUSTEDO in the U.S. and AJOVY continues to see good traction, particularly in Europe and International Markets. We have strong performance in Europe and International Markets and our European business is steadily growing with leadership positions in most markets. We have an exciting pipeline across innovative medicines, biosimilars and generics. And these interesting and differentiated assets will set us up for future growth. And finally, I look forward to sharing with you sometime in mid-year our updated strategy to ensure how we can position Teva for long-term success. Umer here. A couple of things, if I may. First, on guidance, I think there's a little bit of confusion on how much Humira is in the number. And I guess, said differently, what people are really focused on is, is it still a growth year off of '22, if there was no Humira? That was first. Second, I wanted to touch up on the TL1A program a little bit. Could you tell us if the asthma trial was a complete zero? I know it was terminated. And also for the IBD Phase 2 you initiated in August last year, how is the recruiting tracking? And could you be in a position to take an interim analysis on 14-week data perhaps later in 2022, which could inform a more accelerated Phase 3 start, just given how competitive this could get? Umer, thanks for the question. So on the guidance, as I mentioned, we do have Humira that is risk adjusted. And I think your question was if we don't have Humira, will we still be able to drive growth. And I think I'll have Eli contribute, but what I would say is we have a number of opportunities to drive revenue in 2023. Humira is part of that. But obviously, we also talked about AUSTEDO, we've also got UZEDY, and we have other pipeline products that we haven't highlighted in this call. It is an important part, but we've risk adjusted it to take into account the uncertainty. But maybe I'll let Eli give some more color. Yes, Umer, you see the range that we have there, and you can look on the midpoint versus the '22 revenue, so you can see kind of a modest increase, and I will say that to echo Richard, what he mentioned, Humira is in the guidance and is risk adjusted. And we have a few others, elements that might potentially hedge that element if it will not come through. Thanks, Eli. And then going on to your question on the TL1A. I am sort of glad you put up because I think this highlights some of the interesting assets we do have in our pipeline, which we’ll, as I said, fully discuss in midyear when we do a review of our pipeline and let people see some of the things that I'm excited about. But to try and answer your question, we have initiated a clinical Phase 2 basket trial that started in August of 2022 in ulcerative colitis and Crohn's disease. So that is underway. I can't give much more information than that. But as I said, midyear, we'll probably be able to go into a lot more detail on the clinical development plans for that asset and some of the others. Okay. Great. So Richard, you have a clear strategy of building out your biosimilar capabilities while a competitor decided to sell off its biosimilar… That's okay. So I'll start over. So you have a clear strategy of building out your biosimilar capabilities while a competitor decided to sell off its biosimilar business. So how much more critical mass do you need to maximize value in that market long term? And then how do you see market formation, particularly with Humira biosimilars and the benefit of having an interchangeable available? How does that impact your payer discussions? If you could give us some color on that. And then just on the generics business, Richard, will you be able to get back to $1 billion per quarter or so in North America, that was previously a target the company had. Just talk about some of the dynamics there, and you think you'll be able to stabilize that business? Will it continue to decline maybe talk a little bit at a high level about the pipeline and maybe how that could return that business to growth over time? Thanks, Gary. Thanks for your questions and sticking with us on the technical issues. So on the biosimilar one, I'll take a stab at these questions and also maybe tag team it with Sven, my colleague. So on the biosimilar, I don't want to comment on other companies' strategies. We're focused on our own. But what I would say is, and I've got a history here, I do believe in the biosimilar opportunity in the market, and I think it's significant. And I think it's significant in the U.S., and I think it's significant in Europe and the rest of the world. I do believe it has an opportunity to drive growth over the short, medium and potential long term. I do think to answer one of your parts of your question, it does require you to have a deep pipeline. And I think one of the things is you've got to be able to continuously launch biosimilar products as they become available. And so I think the team have done a good job here in building out a pipeline. We want to make sure we continue to do that. We want to make sure we continue to have a geographical spread of that pipeline as we go forward. But yes, I see biosimilars as an opportunity to drive growth in the short and medium term. Now when we talk about the market formation of biosimilar Humira, what I would say is let's not forget the size of the price here. This is over $17 billion in the U.S. I was part of the introduction of Humira into the European market. So this is a big asset where I think payers and healthcare authorities can garner some significant savings. I think that's going to bear out over time. I'll let Sven talk a bit about how quickly that can happen. I personally believe the interchangeability in some of the product profile characteristics we have biosimilar Humira really differentiates us and allow payers to think about actually switching and transferring patients a bit more easily than they would on other products that don't have those characteristics. But I'll let Sven answer a bit of that. And then on the GX, I'll take a stab at that as well. In the -- look, I obviously don't have history with this $1 billion comment. And so I can leave that behind from my perspective. What I would say is in the U.S., stability of our generics business should be driven by our product pipeline, what we launch, when we launch and the ability to do that. And what we focused on and what we'll continue to focus on is complex generics. Now obviously, they have unpredictability. But when you do get into the market, they are very profitable and sustainable. So I think for me, it's not so much about getting back to a revenue number. So in that making sure you have a GX business that is profitable, predictable and allows you to get growth in the right areas. And that comes back to profitability. But I'll hand over to Sven to give his view on those two questions. Thanks, Gary. I think you were interested in Humira market formation and the benefit of interchangeability. So in what concerns market formation, I think we will go through three phases. Phase 1 is right now because Amgen already entered the market with a non-interchangeable Humira biosimilar. Then we have the next inflection point, which will be our market entry it's July 1. And then we see a clear transition towards biosimilars with the formulary changes that come in 2024. So there will be basically three phases for the Humira market formation. I believe we are well positioned. We have discussions with all our customers on the July 1 date. Our customers very well recognize the importance of interchangeability, and I believe it has become even more important since FDA has guided to this year staying on formulary. And if you have [API], the originator on formulary, of course, you need an interchangeable biosimilar to really drive uptake of biosimilar generics in this space. And we also did recently market research on the question of pull-through with pharmacists and HCPs. And here, we also saw that interchangeability is actually well known in this professional community and especially HCPs look for interchangeability designation when writing a biosimilar other than Humira. So I believe, overall, our product profile is quite strong. We have high concentration, citrate-free interchangeable product. We are working towards FDA approval. And for that reason, I believe we can participate in this Phase 2 market formation starting in July. And adding to Richard's comments about the complex generics of the U.S. generics business and our run rate, so the run rate was $3.75 billion in 2021 and $3.55 billion in 2022. Our focus is now this year on creating a Humira success and, of course, to bring more complex generics to the market because what we've seen in our portfolio is despite the hurdles that you have for FDA approval with complex generics, they show themselves to be very resilient and drive longer-term value and especially when we look at our gross margin structure, you can see how important complex generics became over the last years. So for this year, we talk about, especially Forteo as an opportunity, Xulane as a second opportunity and then the other complex generics that we also talked about in the previous years, such as RESTASIS or Sandostatin. And then we have a couple of other complex generics in the pipeline potentially to be launched in 2023 if we get FDA approval. Hey, Eli, I just wanted to unpack the revenue guidance a little bit more, if I could. I mean essentially, last quarter, you guided fiscal '22 revenues of $14.8 billion to $15.4 billion. And now you're kind of just rolling that same guidance on '23. And obviously, you're building in some contributions from the growth in AUSTEDO and some risk-adjusted contributions from UZEDY and Humira. So I was wondering if you could just talk about the offsets to that -- to those numbers, to that growth. Will it be the same in '23 as it was in '22? Should we expect sort of a similar type of deceleration in the U.S. generics business and a similar type of runoff in COPAXONE? Or is there something else we should be thinking about, for example, like FX playing a bigger role? Okay. Thank you, Glen, for the question. So a few dynamics in that range. First of all, if you look on the midpoint 15.1%, you will see versus '22 kind of a modest growth, call it like 2% but this is based on a risk adjusted in terms of several launches mostly related with North America. Now if you think about the combination of AUSTEDO, AJOVY and COPAXONE, that's actually around $70 million higher than how we came in '22. And we believe that there is still modest opportunities both in AJOVY and AUSTEDO as we're actually running now the trend on the TRx. And so that's one element. And then a few other elements really related to our stabilized business in Europe in terms of generics and OTC. We see there also kind of a modest growth, and we live in kind of an environment which is very volatile in terms of FX, and we keep kind of enough spread in order to make sure that we're capturing any potential rebounding in terms of mostly on the euro appreciation versus ours. Okay. Maybe if I could just ask one quick follow-up question on the balance sheet. Richard. You sort of seem to suggest that debt reduction remains a primary focus, but how do you think more broadly about the leverage situation, right? Because as Eli sort of talked about in his prepared remarks, right, there's significant maturities coming up in the next sort of few years that are at or above the level of free cash flow you're generating now and ultimately, there's going to be some opioid payments that are going to have to be made. So how do you think about getting that debt down to those sort of 2027 targets, just sort of given the current level of cash flow that you're generating, how should we think about that over the next couple of years in '23 in particular? Thanks for the follow-on question, Glen. And what I'd say before I hand over to Eli is we think and plan about our debt and repayment of the debt thoroughly and long term. So the way we think about some of the payments we have to pay in '23, '24 and '25, we've been working on for some time. So firstly, just to give you that background. And maybe, Eli, if you could go into more specifics about that? Okay. Yes, Glen. So looking mostly on liquidity and free cash flow and the debt. So I will start by -- if you look on the guidance we gave for the free cash flow, 1.7 to 2.1, that midpoint 1.9, if you compare it to where we end in '22, call it, around 15% kind of a reduction, this is mostly related to the fact that we are considering coming back to the market to address our '25 maturity debt take. And that means that we will -- according to the current interest rate environment, we'll need to step up in our fund expenses. So this element that I mentioned already in my prepared remarks, this is a third out of this, I would say, a decrease. Other elements according to the ongoing development with the time lines on the opioid settlement, we see ourselves paying the first payment, and that's actually modeled in our free cash flow generation into Q3 '23. And this is around incremental additional $300 million versus what we paid in '22. So this is kind of the dynamic on that midpoint. Now if you look on the lower end, it's actually 1.7, part of the refinancing that we're planning in '23, actually planning to actually get a bit lower debt take for '23, '24 and '25 to the level of 1.7, 1.8 in order to make sure that we have enough cushions to drive the business mostly because of those developments that I mentioned. And as I mentioned in my prepared remarks, we have ongoing actions going on our working capital. And that cash conversion improvement in the last three years mainly coming from those elements. So high level, in terms of liquidity, we see ourselves really strongly positioned in order to -- the ability to start the debt as well to meet our commitments in terms of obligations, mostly with the coming of settlement. Just wanted to follow up on that free cash flow comment, I think that you used the term incremental for the $300 million of added opioid costs, but I think you had some payments for opioids in 2022. So should we think about that as like the $300 million plus what was kind of the run rate of payments in 2022? Or just the total of about $300 million of opioid-related payments? And then on the '23 guidance element, I just wanted to ask the Humira question a little bit differently. So everybody is saying '23 is going to be more of a modest year of biosimilar Humira uptake. But if you were able to get the interchangeability, mindful that you're giving guidance on a risk-adjusted basis, but is there a big upside scenario? Or is it too early to say and you need to kind of get to July contracting before you can kind of comment on that. Okay. Thank you, Jason. Thanks for the question. I think I'll hand you, obviously, the opioids and the cash to Eli and then Sven can talk about the opportunity with Humira and some of the variables in that. So Eli, first. Yes. So Jason, thanks for the questions. I will clarify. As you recall, we had already before getting to that mature development on the nationwide, we already stated that we settled. And during 2022, we paid already around $130 million in our free cash flow. And that amount will have kind of carryover of around $150 million for next year. Now this is not including the $300 million nationwide that we will need to pay in -- according to the current trajectory of the process in Q3 2023. So you can actually model around $430 million to $450 million that's going to be paid for opioid this year. Is it clear? Okay. Humira, our plan and the risk adjustment that we took, I think that was the topic. So first of all, we plan as having an interchangeable product in July, so that we get approval for it. Just as a reminder, the weekly process by the FDA for the interchangeable Humira from our partner, Alvotech, has been concluded and the outstanding issue for approval is now the site inspection that was scheduled for March 6. So we expect if the site inspection will be successful, we get approval for both BLAs that are with the FDA. The guidance that we have. So is there an upside? Of course, there's an upside if we sign all the contracts, and we have a limited number of competition within these contracts. We are quite confident that we can generate pull-through because of the product profile. But we have to wait and see for the next step, and I would say we take it step by step. We're quite confident in approval. We also are quite confident in our ability to supply the market with the required volumes. So that's all on track. Richard, you have articulated the importance of biosimilars for Teva over the next few years. And as I look at the long-term guidance that you provided of mid-single digits, I want to understand the role of specialty segments within this, especially as we look at the pipeline and the late-stage assets in specialty as parts? And secondly, coming to this year's guidance, excluding FX and biosimilar Humira, are there any other major variables which influenced the $600 million revenue or $400 million EBITDA spread? Thanks for the question. I'll take the first part and then maybe tag team with Eli on the second part. So I think your question was around sort of drive growth to our specialty portfolio going forward. So let me sort of touch a bit upon that. I think I highlighted within the call already that the opportunity we still see around AUSTEDO and AJOVY, particularly when you look about the patient numbers that that still are not being treated, I think the opportunity is significant to bring that therapy to a lot more patients. So I see that as a major driver and AJOVY as a driver that can probably be worthwhile outside the U.S. as we expand more into Europe and the international market because of the introduction of the oral therapies into the U.S. But then I will touch upon the pipeline as well. So you said the risperidone product, we have olanzapine, that product that's gone into Phase 3 clinical trials. So I think -- and then we have our innovative pipeline which we'll talk about midyear, which I see more as the medium term. But excited about it. I think that could bring some significant growth going forward, obviously, if that gets through the clinical development phase. So I think we have a number of assets already. And that's not mentioned some of the complex generics that Sven spoke about earlier, which we're still waiting for FDA approval. So I think we're well positioned with our pipeline across specialty, biosimilars and complex generics. Obviously, the challenge always is making sure we get those to markets in a timely fashion, and that's what we're going to be working hard on. Now with regard to the spread on the revenue, I'll let Eli take that and I think your comments are about you understand the FX, you understand the biosimilars, but what else is driving that. So Eli, if you could help you clarity there? Yes. So Balaji, thanks for the question. Yes, when you drive the kind of range when you start the year, you look on -- mostly on programs that require risk adjustments. So in addition to Humira in the U.S. generics, we have a few of them that risk adjusted. So they might come and be better than what we expect. So this is part of that range and also the solid business that we have with Europe generics and OTC even considering, I would say, the average of current run rate in '22 that we see this one, also with a great potential. So this is -- those two elements, I would say, also part of those range. Maybe I could ask Sven to just follow up on the last question with respect to sort of the range of possibilities within the North American Generics segment in 2023 and specifically thinking about new product launch opportunities. If there's anything you can highlight in terms of date certain items or launches with certainty pursuant to settlements, and then maybe specifically just some of the complex generics that could enter the equation in 2023? I know we've -- I feel like we've been talking about teriparatide and cyclosporine for three presidential administrations here. And obviously, the FDA has been slow on complex generics, but any additional clarity you could add there with respect to the new product dynamic in 2023 would be helpful. And then for Richard, outside of the reiteration of the company's prior long-term financial targets, wondering if the strategic review or the updated strategic plan, in fact, could modify any of those parameters and thinking specifically about the 2027 debt-to-EBITDA target of 2x. Certainly seems like financial markets, equity holders will be much more comfortable with a higher leverage ratio, 2.5x to 3x and if they were comfortable with the company's use of discretionary capital in terms of pursuing pipeline enhancement initiatives in additional strategic investments. So I'm wondering if there's maybe some flexibility, particularly with respect to that parameter would free up quite a bit of cash flow for reinvestment into pipeline and longer-term growth assets Thanks for the two questions, Elliot, So look, I'll go in the order you deliver them. So I'll ask Sven to answer one around the almost complex generics approvals that you've been experiencing through the last three presidential campaigns. Yes. So the usual suspects -- thanks for the question, Elliot. So U.S. generics this year, overall, we'll see a weak patent expiring year. So this year doesn't have a lot of, let's say, launches that are naturally driven by patent expiry dates. It will be more driven by FDA approvals and settlement entries. As you also pointed out, Humira, we already talked about. For TO, we received this year that we answered to the FDA. We are working with them closely to sort out this issue. Just as a reminder, this product has been launched many years ago in Europe already with EMA approval and we know how to manufacture it, of course. And I believe the product is high quality and that we will get the FDA around to give us approval. Then we have the reentry of Revlimid, of course, due to our settlement date that is working on an annual cycle. So when we enter this market with a higher volume allocation within the settlement with BMS. And then we have, of course, Xulane, which is a new drug on the list for launch this year. And then I have a couple of other products that we say, prepare for launch, assuming that we get FDA approval. But since we have made some experiences with the FDA about how difficult it is to get complex generics approved. I don't want to give you a certain let's say, now I think once we get approval, we will communicate more around that. But overall, I can say, let's say, complex generics are still quite attractive for us because if you analyze in the classical 80-20 analysis, our gross margin and the cash contribution within the generics portfolio, complex generics are certainly a major stabilizer in our business in North America. You also see that our price decline is quite stable in the base business. So that has improved over the last year, and we don't expect the organic changes in that space. So overall, I would say, U.S. generics will be up if we get all the approvals that we discuss on a regular basis in these calls. Thank you, Sven. And then to ask you a question about the framing of debt and the EBITDA target we gave in 2027 and flexibility around that, if I heard you correctly Elliot. So look, we're in the midst of doing our strategic review and understanding our plan going forward. And that's a strategy that's going to deliver growth. That's the whole point of putting that strategy together. I think what we think is important and what is the team has worked hard on is to get credibility around our debt and on the payment of it over the last few years. And so we don't want to squander that too quickly. So I think as we work through the strategic review and understand the opportunities and the need for capital both within the company to reallocate resources to drive some of our pipeline on our market products as well as to do some BD&L, we need to think about that. But I'd also like to say that I think we think we have the ability to pay down that debt in the fashion that we've outlined and still be able to have some capital to allocate to drive the company back to growth. But we're in the midst of that, but I appreciate your point of view and your question to challenge that. And we'll be able to give a bit more clarity on that midyear. Just two for me. I guess, first, maybe, Eli, how should we be thinking about gross margins this year. I know you're targeting flat OpEx, but just maybe a little bit more color on the components of OpEx as we think about '23? And the second one was just kind of a bigger picture question on the biosimilar business. As you talked about this -- as this continues to ramp and it's an important growth driver for Teva. I guess there's a continued kind of partner-centric approach make the most sense for the company or would these be capabilities you would want to develop, I guess, to be more in-house over time as you think about kind of really trying to maximize the value of this opportunity. Thanks, Chris. Thanks for the question. So Eli, you take the first one and then I can chime in with a few on the second. Thanks, Chris, for the question. So we end up '22 around 54% gross margin. And actually, when we are looking on '23, we're going to see a bit higher, I would say, additional 0.3%. And one of the things that we need to remember that the macroeconomic headwinds actually, overall, if you look on the numbers, hit us around 2% on our revenues, call it around $300 million. With all the activities that we've already done and all those, I would say, optimization that were part of our long-term financial targets to expand our margin there has helped us, as I mentioned in my prepared remarks, we partially offset the elements. Now there is also a kind of element on revenue mix, and you can actually see that the -- with the growth of AUSTEDO and as well on AJOVY and a few other elements that we are actually working on, we're going to see a very modest increase but not more to the level of [54.5%], I would say, in '23, which means that our ability to keep the current level on the OpEx will stay the same and the residual amount will flow through the OP margin. Thanks, Eli. So on the biosimilars. So I think the question, Chris, was around as we move forward, we see it as a growth driver. Is this continued partner strategy or not. So firstly, let me clarify that although we have a good and productive partnership with Alvotech, which is delivering a nice pipeline, we also have, I think, it's six in-house biosimilars that we've developed ourselves. And going back to a comment I made on an earlier question. What I think is important with biosimilars is that we have a broad and deep pipeline that we can address most of these large biologics when they come off patent. And to do that, to do that effectively from a capital allocation point of view, I think it's a combination. It's a combination of partnering and it's a combination of doing some things in-house. And so that's what I see going forward. That combination, just to make sure we have the right pipeline and we're launching the products at the right time. Thanks for your question, Chris. I just want to confirm a few things and then talk about -- or ask a few questions on your balance sheet. With regards to your free cash flow, that $1.7 billion to $2.1 billion, I want to confirm that, that includes the $450 million of opioid payments? Or is it a different number? Okay. Great. And then with regards to your maturities, if I heard you correctly, I think you said that you're going to address your '23, '24 and '25 maturities, which is different than what you have said at the JPMorgan conference. I was hoping that you could just walk us through what led to that change? Is it something related to your free cash flow or something related just to the interest rate environment, but I would love to just have you walk through that. Yes. So when we actually set the market, you will appreciate that the interest rate environment is higher than what we expected to tender on our debt take, and that means that we will have an impact on our -- that will flow through impact on our free cash flow. This is one. The second thing is that as we move forward and we see ourselves now more inside of positive momentum with the opioid, we actually want to make sure that we have enough cushion to manage that liability. And coming back to your first question, and that's actually already embedded there. So we used to have kind of a 2.1, 2, 1.9 range on the debt take. Currently, the '23 is 2.1, '24 is 1.9. We're going to take it lower a bit in order to make sure that we have enough cushion there to manage it, and it will be part of the upcoming refinancing, which majority will be focused on the debt take of '25. And then with the drop-down in your AR financing next year to $500 million, one, can you walk us through why it's declining by $500 million next year? And is that also affecting your thoughts around how you're looking to address your debt maturities this year? Yes. So I don't understand the drop on the AR for next year. Where you're actually considering that one? But I can mention the dynamics. This year, in terms of working capital, we were able to optimize our outstanding tables as well DSO. And that actually offset part of inventory increase in order to support our production plan for mostly for the first half of the year. Yes. Sorry, I was just referring to the new AR facility that you entered into. I think it's $1 billion through November of this year, and then it drops to $500 million from November '23 onwards to November '25. And I was just hoping for an explanation behind that drop? Yes. So actually, the facility is around $1 billion. We are not using the full of it. We use the 800 million as an opportunity for us to be flexible on that program by actually initiating further enhancement on other elements of working capital that will allow us to be more flexible and you reduce that program going forward. Thank you for your questions. I'd like to thank everybody for the questions and interest in the call today. And I'd like to also apologize for some of the technical issues at the start. That's always out of our control, but I appreciate you bearing with us. And on that, I'd like to close the call. Once again, thank you for your interest and look forward to talking to you on future calls.

EarningCall_261

Good day and thank you for standing by. Welcome to the Q2 2023 MasterCraft Boat Holdings, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. Thank you, operator and welcome, everyone. Thank you for joining us today as we discuss MasterCraft's second quarter performance for fiscal 2023. As a reminder, today's call is being webcast live and will also be archived on our website for future listening. With me on this morning's call are Fred Brightbill, Chief Executive Officer and Chairman; and George Steinbarger, our Chief Revenue Officer. Fred will begin with a review of our operational highlights from the second quarter. I will then discuss our financial performance for the quarter. Then I'll turn the call back to Fred for some closing remarks before we open the call for Q&A. Before we begin, we'd like to remind participants that the information contained in this call is current only as of today, February 8, 2023. The company assumes no obligation to update any statements, including forward-looking statements. Statements that are not historical facts are forward-looking statements and subject to a safe harbor disclaimer in today's press release. Additionally, on this conference call, we will discuss non-GAAP measures that include or exclude special or items not indicative of our ongoing operations. For each non-GAAP measure, we also provide the most directly comparable GAAP measure in our fiscal 2023 second quarter earnings release which includes a reconciliation of these non-GAAP measures to our GAAP results. We would also like to remind listeners that there is a slide deck summarizing our financial results in the Investors Section of our website. As a reminder, unless otherwise noted, the following commentary is made on a continuing operations basis. Thank you, Tim and good morning, everyone. Net sales, diluted adjusted earnings per share and adjusted EBITDA were all the highest for any second quarter in the company's history and it is our ninth consecutive year-over-year record-setting quarter. When compared to the second quarter of fiscal 2022, net sales were higher by more than 10%. Adjusted EBITDA grew by nearly 10% and adjusted net income per share grew by nearly 19%. During the quarter, strong operating results and diligent working capital management allowed us to generate the most cash flow from operations and free cash flow in the company's history. This exceptional operational and financial performance was enabled by our strategic focus on the consumer and through investments in people and operations. During the quarter, we continued to make progress in building much-needed dealer inventory ahead of the summer selling season. As of the end of the second quarter, dealer inventories are approximately 55% higher than the second quarter of fiscal year 2022 and about 20% lower than the second quarter of fiscal year 2019. We believe that business process and dealer network improvements we have implemented over the past few years will allow us to maintain more levels of dealer inventory than was typical in the past. Early boat shows results, recent retail sales data and industry commentary suggest a return to historical seasonal demand patterns. For historical context, approximately 70% of the annual powerboat retail sales occurred during the 5-month period from March to July. To date, both dealer and consumer demand remained resilient and dealer inventory and production plans position our dealers to capitalize on the boat show and summer selling seasons. Early boat show results are up for MasterCraft and Crest versus both last year and 2019 levels. As a result of the reversion to historical seasonality, we expect to have a clear picture on retail demand as we progress through the third and fourth quarters. We continue to closely monitor economic conditions and evaluate the potential impact on our business. Since last year, there have been no significant changes in our view of macroeconomic or other demand indicators and the associated implications for the upcoming summer selling season. We remain prudently conservative in our approach to wholesale production for fiscal 2023 and we have developed plans for a range of potential retail demand scenarios. Given the high degree of macroeconomic uncertainty and the historical cyclicality of our industry, we are committed to running the business in a manner that prioritizes strong performance throughout the business cycle. Guided by this philosophy, our intent is to maximize our fiscal 2023 financial performance while maintaining healthy dealer inventories. Moving on to supply chain. The general environment, including cost inflation and delivery disruption is improving with certain pockets of lingering risk expected to continue for some time. Tight supplies and longer-than-normal lead times in certain components, including those with upstream exposure to Asia, continue to intermittently affect our production schedules. However, we do not expect supply chain disruption to be a constraint on our full year production. The tireless efforts of our world-class supply chain team have enabled us to provide consistent production and capital-efficient inventory control. This cautious optimism reflects a welcome change from the incredibly challenging supply chain environment in the past 2 years. Our strong operating performance has resulted in record cash flow, driven by record earnings and diligent working capital management. We've built a fortress balance sheet that provides us with abundant financial flexibility. We are well positioned to pursue our capital allocation priorities, first and foremost of which is invested in growth. We are laying the foundation for future growth by making targeted investments and initiatives that will take advantage of the strong underlying secular industry trends. Let now briefly review some of the latest developments across our brand. Our MasterCraft brand performed exceptionally well by growing net sales to a second quarter record of nearly $109 million and expanding adjusted EBITDA margin by 80 basis points year-over-year. This tremendous result is due to the extraordinary efforts of the MasterCraft team and the continued success of MasterCraft operating model. MasterCraft's best-in-class powerful and clean engines and expanded entry and mid-priced product offerings have been very well received. MasterCraft has gained share in 6 of the last 7 months and remains the number 1 brand in the fastest growing and highest margin category in the powerboat industry. At Crest, net sales were up by more than 23% year-over-year. Continuing a trend of generating exceptional profitability. Crest achieved a gross margin of nearly 20% for the quarter. Since its acquisition in fiscal 2019, Crest has doubled net sales and expanded gross margin by 340 basis points. Crest has and will continue to add points of distribution to its dealer network, fulfilling a key element of its growth strategy. On the innovation front, Crest new all-electric pontoon boat, the current and newly redesigned classic series have both been very well received by dealers and boat show participants. Crest sales and earnings growth demonstrates the success of the Crest acquisition and highlights our value-enhancing growth strategy. At Aviara, net sales were up by more than 75% compared to the prior period, driven by a 48% increase in units and higher prices. According to the most recent all states reporting SSI market share data as of the rolling 12-month period ended September 30, 2022, Aviara increased its market share by 280 basis points in the 30- to 43-foot premium day boat category. Aviara continues to outpace all competitors, further solidifying the brand's position as the preeminent luxury devote. Looking ahead, Aviara will soon begin to launch innovative new models. These introductions will represent the next phase in Aviara's product evolution and will position the brand for continued revenue and earnings growth. Thanks, Fred. We delivered another excellent quarter of financial performance. Focusing on the top line, net sales for the quarter were $159.2 million, an increase of $14.8 million or 10.2%. The net sales increase reflects higher prices, partially offset by slightly lower unit sales volume and higher dealer incentives. Incentives increased primarily due to greater floor plan -- floor planned financing costs driven by higher interest rates and recovering dealer inventory levels. When compared to the historically low amount in the prior year, discounting was also higher as we anticipate a return to more historical patterns of consumer demand and seasonality. For the quarter, our gross margin was 24% as we -- a decrease of 120 basis points when compared to the prior year period. Lower margins were primarily a result of higher costs for inflationary pressures, changes in mix, higher dealer incentives and increased warranty costs, partially offset by higher prices and improved production efficiencies. Operating expenses were $11.8 million for the quarter or 140 basis points lower as a percentage of net sales compared to the prior year. Turning to the bottom line. Adjusted income for the quarter increased 11% to $21.3 million or $1.20 per diluted share, computed used in the company's estimated annual effective tax rate, 23%. This compares to an adjusted net income of $19.2 million or $1.01 per diluted share in the prior year period. Adjusted EBITDA increased nearly 10% to $29.8 million for the quarter compared to $27.2 million in the prior year period. Adjusted EBITDA margin was 18.7%, beyond 10 basis points from 18.8% in the prior year period. Our balance sheet remains incredibly strong as we ended the quarter with nearly $190 million of total liquidity and including nearly $90 million of cash and short-term investments and $100 million of availability under our revolving credit facility. We also ended the quarter with 0 net debt. Strong earnings and favorable working capital management has translated to record cash flow from operations and free cash flow. Year-to-date, we have generated a record $79.9 million of cash flow from continuing operations were nearly 200% higher than the prior year period. Year-to-date free cash flow from continuing operations was a record $67.8 million or more than 210% higher than the prior year period. Our balance sheet positions us exceptionally well, provides us with ample financial flexibility to ensure sound operations through the business cycle and the ability to grow aggressively in alignment with retail demand. Given our recent operating performance, strong balance sheet and our positive long-term outlook, we believe our stock represents an outstanding value at recent prices. During the quarter, we spent approximately $4.8 million to repurchase nearly 225,000 shares of our common stock. To date, we have spent nearly 70% or $50 million program authorized in June of 2021. Cumulative activity under our share repurchase program provided an 8% benefit to our Q2 adjusted earnings per share. We expect to continue to opportunistically return cash to shareholders through the program while prioritizing financial flexibility and high return investments in the business that generate growth and long-term shareholder value. Looking forward, we are raising our guidance for the full year based on our strong performance and incremental retail demand visibility. We will continue to monitor the strength of retail demand and adjust our production plans as appropriate to maintain healthy dealer inventories. Our guidance continues to reflect the potential for a range of retail demand scenarios as we approach the all-important summer selling season. For full year fiscal 2023, consolidated net sales is now expected to be between $620 million and $640 million, with adjusted EBITDA between $111 million and $118 million. And adjusted earnings per share of between $4.40 per share and $4.66. We continue to expect capital expenditures to be approximately $30 million for the full year. For the third quarter of fiscal 2023, consolidated net sales is expected to be approximately $158 million and adjusted EBITDA of approximately $26 million and adjusted earnings per share of approximately $1.04. Despite the dynamic business environment and macroeconomic uncertainties, we are confident in delivering strong financial results for our shareholders. Thanks, Tim. Our business has performed extremely well through the first half of fiscal 2023, delivering record financial results which have exceeded expectations. Our diligent approach in business planning and our best-in-class operating model have allowed us to operate efficiently and have provided us with the confidence and agility to respond to a range of potential retail demand scenarios. A robust portfolio of innovative products, healthy dealer inventory levels and our flexible production capabilities position us to capitalize on the boat show and summer selling seasons. Despite significant macroeconomic uncertainty, we remain on track to achieve the second best year of financial performance in the company's history. We look forward to delivering strong results by prioritizing resilience throughout the business cycle while maintaining a key emphasis on the pursuit of long-term growth opportunities and thereby generating exceptional shareholder returns. Certainly. But I'd like to note a correction, Tim Oxley, CFO, with our beginning host today. [Operator Instructions] And our first question will come from Joe Altobello of Raymond James. So a couple of questions on the guidance. I guess, first, if you look at the top line, you beat the sales guidance that you gave us 3 months ago by about $9 million, raised the full year by $22 million, at least at the midpoint. Is that on a better demand outlook? And maybe help us out? Is that coming from more units or more pricing? Yes. It's George. So I think when you think about the retail demand environment, I don't think that our overall view of industry retail has changed. But obviously, we've got an additional 3 months of visibility in terms of how our brands have performed at retail. We're continuing to take market share. So I think that is a factor in how we have adjusted our guidance to reflect our confidence in our ability to deliver retail against a challenging environment. With that said, we obviously still have an eye out to that March through July period which accounts for 70% of retail. So we still are being very prudent and cautious with our production plan and our guidance gives us the flexibility to modulate our retail -- I'm sorry, our production to make sure that we are achieving returns and healthy inventory levels that we've committed to providing both our dealers and our brands. And also, you're still looking for a sales decline in your categories this year of, call it, 15% to 20%. Is that correct? That's correct. We're still kind of -- from an industry standpoint for our fiscal year. We still expect retail to be down in that mid-teens level. Okay. And then on EBITDA, the beat was a little bit better than the guide. So maybe tell us where the incremental margin pressures are coming from in the second half. Sure. The floor plan financing costs are kind of number 1 as the interest rates continue to grow as we are successful and restocking the dealers. That's the big one. Another important one is a mix, we -- as George mentioned, we try to build what's retailing and we've introduced some new NXT models that have been very successful in the marketplace. So we're mixing down to some of our smaller models as a result. Craig, you kind of broke up there for a minute. I caught the last piece of that. Would you mind repeating the question? Sure. Sorry about that. My question is on the promotional environment. Would you please comment on trends across your 3 brands? Yes. Sure. So given what we are seeing is kind of a return to more retail seasonality with that, we've also seen a return of higher levels of discounts, certainly higher than we've seen in the last past couple of years. And so that's pretty consistent across our brands, probably not as much as Aviara given where that brand is positioned. But certainly, with our Crest pontoon product and the price points that we have there, we are seeing higher levels of promotional activity and then also in the Ski wake category, we have seen a return of promotions. With that, we try to be good partners with our dealers. So we're really working with them to help how do we help them drive retail. And so that's a combination of not just us providing promotional activity or support for our dealers but helping our dealers get more aggressive with pricing. And so far, they've been very receptive to that. And I think that's very much our approach to how we want to work with dealers and be very dealer-centric as much as we are consumer-centric. Craig, I'd like to add that while the promotional environment is higher than the last couple of years, it's not back up to historical levels. So we're comparing to a period where it's kind of an all-time low. Yes, that's very helpful. And then just on the floor plan issue, a lot of dealers are struggling with the fact that there's interest cost now on all of their inventory. Just wondering what the pushback has been among dealers to take on inventory? And whether maybe you have the infrastructure in place to be more demand-driven and operate with less inventory in the channel and keep that floor plan expense down? Yes. So I'll answer the latter part first. We absolutely have the flexibility and we believe that we can operate our businesses and take market share and get the dealers the product they need while maintaining lower levels of inventory in the channel versus historical levels. We think the dealers very much view that similarly as we do. And so that's very much built into our financial plan and how we manage the business every day. We're tracking retail activity every day, every week. And so we're making sure that our production is getting inventory into the markets and the dealers where it's retailing. And as I mentioned previously, we're very much focused on how do we help our dealers retail product, not just pushing them wholesale inventory. In terms of the floor plan financing, I mean every OEM programs are different but with our free flooring upwork to pro-flooring support that we provide, right now, we're not getting any pushback from our dealers in terms of taking product. And so we feel very confident that our programs are structured in a way that really allows the dealer to minimize the stocking risk throughout the selling season and allows us and positions us to be able to get the inventory to the dealer to maximize on our retail opportunities. Just to follow up on that. How long does the free flooring last for dealers? And how does that flow through the income statement? Is that a contrary revenue or is there a cost? Craig, correct. It is contra-revenue and every boat has at least 6 months of free flooring. And if it's bought early in the season, say, July, it will get up to 9 months; so to between 6 and 9 months. There's also a cash alternative which has taken advantage of primarily in Q4 of our fiscal year. Maybe just sticking with the brand commentary and specifically on MasterCraft, maybe a little more detail on the unit sales performance down 12% year-on-year in the quarter. And any commentary in terms of what you're seeing at retail in terms of consumer demand. And then separately, on Aviara, can you talk about how the brand is tracking relative to some of the financial targets you had set out for the fiscal year? I think from a unit perspective at MasterCraft, Drew, we have gone back to a more level-loaded production schedule throughout the year. That's a big part of the efficiencies that we get in manufacturing. So I think some of the year-over-year comparisons are challenging, especially when you compare to last year and some of our production was more dictated by supply chain and product availability than what we would consider more of a normal manufacturing cadence. So this year reflects a more level-loaded production versus what we expect to ship throughout the year and that's going to influence the year-over-year comparisons but nothing we would note there from a negative perspective, nothing from a retail perspective that's driving that more so than just manufacturing efficiencies. And then the second part of your question. I'll take that. Aviara is on track. This year, we expect them to at least breakeven and that's a significant improvement from the past year and a stair step toward where we see that brand in the future. So there may be variation month-to-month but certainly quarter-to-quarter and overall for the year, we see steady opportunity to continue to improve the margin and profitability. Got it. Okay. Very helpful. And then maybe 1 for Tim. Tim, you talked about some record cash flow metrics. Any notable call-outs in the quarter? And what should we expect in the second half of the year for cash flow? I think you're going to continue to see some improvements in the working capital partly its a result of supply chain, greater supply chain reliability, if you will but stock going to be as much as you saw in Q2. But it's just to be a continuing theme for us. So we generate strong cash flow and that's going to continue in the second half. A couple of questions kind of follow-up on what's been asked so far. I guess, you made the comment that you're kind of watching inventories and kind of expect to be a little more efficient with inventory and possibly lower inventory levels. I think you said you're about 20% below inventories where you were in '19. Is this the right level here? Or what do you think the right kind of percentage decline or lower level from '19 is the right level going forward to be efficient in dealerships? Can I maybe respond to your question slightly differently but hopefully tells you how we think about it, how we look at it. We estimate what we think retail demand is going to be, we back into what we think is an appropriate level of inventory based on turnover and based on model-by-model mix. And that's the way we drive what we think is the right level. Now we certainly can compare to '19 or '20 or any other period but that's not the way we set our goals. We set our goals based on looking forward and our expectation of retail sales and overall industry trends and segment trends. So in that regard, we're getting very close to where we want to be at MasterCraft and probably in a very good shape in the Crest brand. So I -- the other thing I think that's important to consider is we've expanded distribution significantly in those additional points of distribution, take additional inventory to support across the brands. So when you merge that all together, the key is that we expect to turn inventory at our dealers at a much higher rate than we have in the past. Got it. That's helpful. I guess just last question. You mentioned some of the pressure on margins is mix as you've introduced some lower-priced NXT models based on where you're seeing demand. Maybe talk a little bit about what other kind of demand drivers you're seeing in terms of where consumers are shifting their purchasing? Are they going towards lower models kind of overall? Are they going to less options? I guess maybe kind of get a sense of is that the only indication of where you're seeing maybe some pressure on spending. Or are there others as well? Yes. What I would say, we're not seeing a real change in the consumer habits in terms of options and whatnot. I think part of it is in our NXT portfolio, we've previously had 3 models in within the last 12 months, we've added 2 incremental models. So part of it is just as we level load our production and try to make sure that we're getting those new models into the marketplace into the consumers that are demanding that new product that is partly driving the mix towards some of the higher percentage of NXT production relative to prior years. But we're seeing pretty good -- very strong ordering patterns throughout the portfolio, both at our premium X line all the way through our midline and NXT models. So -- and the consumers continue to option up the boats and put different features on. That being said, we are seeing a higher percentage of stock boats. The dealers are ordering more boats that are going into stock inventory versus the last couple of years, we had a high percentage of retail sold boats being ordered where the customers were ordering the boats, stocking them out to their particular needs. And when you have a higher percentage of retail sold boats you tend to see more options, more higher-margin type of option selected versus the stock boat. So it's really less about what we're seeing from the consumer and more about just the mix of retail sold to a consumer retail orders which is consistent with kind of past seasonal type of patterns. [Indiscernible] sometimes you have a segment mix going on with Crest versus MasterCraft that can impact margins as well as -- again, just a reminder, in the model mix and we refreshed the NXT and the XT product offering. And so those have been doing very -- refreshed and expanded. So those have been doing very well. And then in some other cases too, in the COVID era, we were able to constrain, if you will, the mix of models based on our ability to managed throughput. And now we're much more responding to true retail demand. So there's some reversion there in some models there that we've constrained in the past that there's pent-up demand for. Just maybe a quick question on -- I think you mentioned that NXT is kind of margin dilutive in the back half of the year. But I think if we go back a couple of years, the commentary was there was no real difference between kind of the premium MasterCraft and the NXT sub-brand, if you want to call it that. So I guess has something changed in that margin relationship between the 2? Or is this totally a commentary just around kind of content or attachment rates? It's really content. The NXT models don't have the same level of options available to them. So when those are ordered because we have very healthy margins on the options they tend to have on a base-boat basis, it's comparable. But when you add the options in, that's when the margin erosion comes about. It's not terrible but it's less. And Mike, I would just comment, we have competitors that are being very aggressive in terms of pricing. And so it's very important for us to make sure we content these models so they can compete with that pressure. Okay. That's helpful. And that kind of leads into the next question. I think, Fred, you had made comments just on maybe what you've seen at some of the early boat shows. And I think you said you're up both year-over-year and versus 2019 levels. But just a clarification on that. Is that in units? Or is that in dollars? And then maybe just clarify a little bit on the -- some of the discounts or incentives or rebates that are being offered at some of these shows. Is there any way to quantify maybe the level of discounting this year versus 2019? Well, the first comment is, with the boat shows, that's with regard to units. That's why we track those -- we track amongst it 2-week window after the end of the show. So we're giving you the results from those shows that we've had -- the shows have taken place and we've had a couple of weeks after to finish up closing leads. So that was one part of your question. Yes. In terms of promotional activity, I think, as Tim mentioned earlier, while we're certainly seeing higher promotional activity this year versus the last 2 years compared to '19, we're not seeing -- we're not back to '19 level of promotional activity. If you recall, we ended '19 with heavy inventory which resulted in heavy promotions. And I would say as a whole, we're probably not back to that level. But I think certainly, our expectation is that the competition will get more aggressive as we get into the retail selling season, depending on what happens in the macro-economic environment and our guidance and our plan provides us the flexibility to appropriately adjust our level of discounting to make sure that we are appropriately taking share where we expect to. So -- but I would say it's still lower than where it was in 2019. Sure. If I had to put a number on it, I mean Q2, a combination of retail rebates as well as additional floor plan cost probably would be a headwind of about 150 basis points if I were to drive a number. Okay. And then just final question for me, just more of a house -- maybe a housekeeping question. In the second quarter, I think there was a pretty big drop in OpEx dollars. Was there something timing-related in that? Or was this kind of the new run rate that we should be thinking about going forward? There is some seasonality there, Mike. Obviously, we've got a return to boat shows. So you're going to see some higher operating, especially on the sales and marketing side in the second half of our year as we kind of go back to boat shows, travel expenses supporting the port -- boat shows, those types of expenses are going to be more back-end loaded or second half of the year loaded as an example. So I would expect to see higher levels of operating expense in the second half of the year versus the first half.

EarningCall_262

Good morning, ladies and gentlemen. Thank you for standing by, and welcome to the StoneX Group Inc. First Quarter Fiscal Year 2023 Conference Call. At this time all participants’ are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host today, Mr. Bill Dunaway, Chief Financial Officer. Please go ahead, sir. Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our first quarter ended December 31 2022. After the market closed yesterday, we issued a press release reporting our results for the first fiscal quarter of 2023. This release is available on our website at www.stonex.com as well as a slide presentation, which we'll refer to on this call in our discussions of our quarterly results. You will need to sign on to the live webcast in order to view the presentation. The presentation and an archive of the webcast will also be available on our website after the call's conclusion. Before getting underway, we are required to advise you, and all participants should note, the following discussion should be taken in conjunction with the most recent financial statements and notes thereto, as well as the Form 10-Q filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended. These forward-looking statements involve known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance. Thanks, Bill. Good morning, everyone, and thanks for joining our fiscal 2023 first quarter earnings call. The first quarter of fiscal 2023 was marked with the continuing effect of inflationary pressures on global markets and significant increases in short-term interest rates. Volatility continued in both financial and physical markets, however, at a more diminished level than we experienced for much of fiscal 2022, especially towards the end of the quarter. Turning to slide three in the earnings deck, which compares quarterly operating revenues by product versus a year ago. Listed derivative revenues were essentially flat as higher volumes were offset by lower revenue capture. Revenue from over-the-counter derivatives were down 9% off the back of lower volumes and slightly tighter spreads. Physical revenues were up a strong 46%, due to the addition of CDI, as well as good results from the precious metals activity. This was despite a $4.2 million mark-to-market loss on derivatives held against inventories, which should reverse next quarter. Securities operating revenues were up 91% as a result of significantly higher volumes and also interest rates. While the higher interest rates helped drive the increase in securities operating revenue, we experienced significant increase in interest expense related to our fixed income trading as well. This happens as when we trade bonds, we earn the carried interest on our positions, but also incur related interest expense on financing the securities, which results in a bit of a gross up on the income statement. We have changed our method of calculating securities rate per million revenue capture for this quarter and the prior year to address this and are now deducting the related interest expense associated with our fixed income trading. Factoring this in, the securities rate per million declined 20% to $422 in the first quarter, as compared to $529 in the prior year. Securities net operating revenues, which deducts the interest expense in aggregate, as well as the peering costs and IB commissions, increased 29% versus the prior year driven by increased volumes. Global Payments recorded their best ever quarter with revenues up 31% and volumes up 23% and revenue capture up 7%. Our FX and CFD revenue was down 32% largely due to tougher market conditions, which resulted in lower revenue capture, down 27% versus a year ago. Interest and fee income on client balances was $86.2 million, up over 900% as we realized the impact of the cumulative interest rate increases off the back of a 56% increase in our total client float, which now stands at $9.8 billion. Moving on to slide four, which shows the same data for the trailing 12-months. Over this longer period, we realized strong double-digit revenue growth across all products, except listed derivatives, which was up 9%. We have generally seen increases in both volumes and revenue capture over this period with the exception of securities and listed derivatives showing declines in revenue capture. Turning now to slide five and a summary of our first quarter and trailing 12-month results. We recorded operating revenues of $654.8 million, up 45% versus the prior year. Our operating revenues were boosted by interest both on our client float and also the interest that is embedded in our fixed income trading, as I mentioned earlier. Net operating revenues, which nets off the interest expense, as well as introducing broker commissions and clearing costs, was up 22%. Total compensation and other expenses were up 19% versus the quarter -- for the quarter with variable compensation up 18%, slightly below the net operating revenue growth rate. Fixed compensation and related costs increased 8% versus a year ago and were in line with the immediately prior quarter. During the quarter, we acquired CDI, a global cotton merchant business based in Switzerland, with clients and producers in Brazil and West Africa, as well as buyers in the APAC region. This acquisition resulted in a gain on acquisition of $23.5 million, both before and after tax. Excluding the acquisition gain of $23.5 million and the intangible amortizations we recorded, adjusted net income of $55.3 million, up 27% over the last year and up 2% on the immediately prior quarter. On this same basis, we achieved an adjusted ROE of 19.7%. Including the gain on acquisition, and as reported, our earnings were $76.6 million, resulting in an ROE of 27.3%. We realized record operating revenues for both our Institutional and Global Payments segments. Looking at the summary for the trailing 12-months. Operating revenues were a record $2.3 billion, up 33% over the prior year. Net income was a record $242 million, up 75% and, excluding the acquisition gain and the related intangible amortization, was $226.6 million, up 60%. Our diluted EPS was $11.59 for the trailing 12-months, up 70%. Our ROE was 23% despite equity increasing 47% over the last two years. Our financial results were boosted by higher interest and fee income on our client float as we started to realize the full benefit of the accumulated interest rate increases. As mentioned last quarter, our interest-earning assets generally take about 45-days to reprice to new rates. Our average gross yield on our client float was 303 basis points for the quarter versus 193 basis points for the fourth quarter. And our net interest and fee income after deducting what is paid to finance increased $36.3 million versus the prior year quarter. We ended the quarter with a book value of $57.17, up 21% versus a year ago. Turning now to slide six, which is our segment summary. Just to touch on some highlights before Bill gets into more detail. For the quarter, segment operating revenue was up 44% and segment net income was up 19%, with very strong performances across all, but one of our client segments. Our Commercial client segment was up 26% in segment income off the back of a 20% increase in operating revenues, with strong performances from our physical business following the acquisition of CDI, as well as the effect of higher interest rates. Our Institutional segment was 113% increase in revenues, which translated into a 94% increase in segment income. This was largely due to a much-improved performance from our securities business and particularly equity market-making versus a softer quarter a year ago, as well as the increase in interest and fee income. Retail had a tough quarter with more challenging market conditions, resulting in a lower revenue capture compared to a much more favorable environment last year. Operating revenue was down 27%, which resulted in a segment loss of $4.2 million, demonstrating that the high operational leverage we have with the digital platform works both ways. Global Payments revenue was up 31% and segment income was up 32% with solid increases in both volumes and revenue capture. For the trailing 12-months, we had segment operating revenue and segment income up double-digits across the board. These were strong quarterly results, but as we have said repeatedly, we take a long-term view on how we manage the company and grow our franchise. As such, we believe that the best way to gauge our results and progress is to look at longer-term performance, such as the trailing 12-months rather than specific quarters taken in isolation. Turning to slide seven, which sets out our trailing 12-month financial performance over the last nine quarters. These numbers have all been adjusted for the accounting treatment related to the gain in CDI acquisitions as disclosed in our prior filings, and which appear the reconciliation provided in the appendix at the end of this earnings deck. On the left-hand side, the bars represent our trailing 12-month operating revenue over the last nine quarters. As you can see, this has been a smooth and strongly upward trend as we have steadily expanded our footprint and capabilities. Our operating revenues are up 64% over this period for a 28% compound average annual growth rate. Our adjusted pretax income likewise has grown significantly at a 40% CAGR. On the right side, you can see our adjusted net income in the bars, which is up 107% over two years for a 44% CAGR. The dotted line represents our ROE, which has remained above our 15% target, even though our capital has grown by 47% over this period. Thank you, Sean. I will be starting with slide number eight, which shows our consolidated income statement for the first quarter of fiscal 2023. Sean covered many of the consolidated highlights for the quarter, so I'll highlight a few more and then move on to a segment discussion. Transaction-based clearing expenses declined 5% to $67.3 million in the current period, primarily due to lower fees and equity products and the decline in FX/CFD contracts average daily volume. Introducing broker commissions declined 4% to $36.8 million in the current period principally due to declines in our independent wealth management and retail FX/CFD business, which was partially offset by incremental expense from the CDI acquisition. Interest expense increased $138.6 million versus the prior year, primarily as a result of the $93.3 million increase in interest expense related to our institutional fixed income business, which Sean noted earlier, as well as a $36.1 million increase in interest paid to clients on their deposits as a result of the significant increase in short-term interest rates. Interest expense on corporate funding increased $2.6 million versus the prior year, also as a result of the increase in short-term interest rates, as well as an increase in average borrowings. Variable compensation increased $18.1 million versus the prior year, due to the increase in net operating revenues and represented 31% of net operating revenues in the current period, compared to 32% of net operating revenues in the prior year period. Fixed compensation increased $5.9 million versus the prior year with the growth principally related to salary and benefit costs of increased head count, which increased 13%, as compared to the prior year, which was partially offset by an increase in deferred compensation. Other expenses increased $23.7 million as compared to the prior year to $110.2 million, which also represented a $3.8 million increase over the immediately preceding quarter. As compared to the prior year, trading systems and market information increased $1.6 million, primarily in our securities business. In addition, professional fees increased $4 million versus the prior year principally due to higher legal, accounting and other consulting fees. Non-trading technology and support increased $1.8 million due to non-trading software implementations, and selling and marketing expenses increased $1.9 million principally due to increased campaigns in our retail FX/CFD business, as well as additional hosted conferences and marketing expenses across our businesses. We continue to see an uptick in business development, increasing $2.8 million as compared to the prior year. Finally, depreciation and amortization increased $3.6 million as compared to the prior year due to incremental depreciation related to internally developed software, as well as higher average leasehold improvements and intangibles acquired. We had bad debt expense net of recoveries of $700,000 for the quarter versus a $200,000 recovery in the prior year period. Net income for the first quarter of fiscal 2023 was $76.6 million and represented an 84% increase over the prior year and a 46% increase versus the immediately preceding quarter. As Sean noted, net income includes a non-taxable gain on the acquisition of CDI in the current period. Moving on to slide number nine. I'll provide some more information on our operating segments. Our Commercial segment added $29.8 million in operating revenues versus the prior year, however declined $2.8 million when compared to the immediately preceding quarter. This increase was driven by a $20.7 million increase in interest earned on client balances versus the prior year as a result of a 25% increase in average client equity, as well as a significant increase in short-term interest rates. In addition, operating revenues from physical transactions increased $16.3 million, compared to the prior year principally due to the acquisition of CDI, as well as an increase in precious metals activities. These increases were partially offset by $3.9 million and $4.2 million declines in operating revenues from listed and OTC derivatives, respectively. Segment income was $82.8 million for the period, an increase over the prior year and preceding quarter of 26% and 3%, respectively. Moving on to slide number 10. Operating revenues in our Institutional segment increased $182.2 million versus the prior year primarily driven by $115.5 million increase in securities operating revenues, compared to the prior year as a result of a 56% increase in the average daily volume of securities transactions, as well as the increase in interest rates. The increase in securities ADV was primarily driven by an increase in volumes in both equity and fixed income markets as a result of continued volatility and increased market share. As Sean mentioned earlier, the increase in interest rates also led to a significant increase in securities related interest expense for the period, which I will touch on momentarily. Operating revenues increased $3.1 million and $3.9 million in the listed derivative and FX products, respectively, driven by growth in both listed derivatives and FX contract volumes. Finally, interest and fee income earned on client balances increased $56.7 million versus the prior year as a result of the increase in short-term rates, as well as a 106% increase in average client equity. The rise in short-term interest rates drove an increase in interest expense for the period with interest expense increasing $132.9 million versus the prior year. Interest expense related to fixed income trading and securities lending activities increased $93.3 million and $2.2 million, respectively, as compared to the prior year, while interest paid to clients increased $33.1 million. Segment income increased 94% to $62 million in the current period as a result of the $50.3 million increase in net operating revenues. Variable compensation increased 37% or $13.1 million as a result of the growth in net operating revenues. Fixed compensation and benefits increased $1.7 million versus the prior year as we build out our product offering, while other fixed expenses increased $5.6 million, including a $1.7 million increase in professional fees, a $1.5 million increase in trading systems and market information. Segment income increased $17 million versus the immediately preceding quarter. Moving to the next slide. Operating revenues in our Retail segment declined $25.9 million versus the prior year, which was primarily driven by a $27.3 million decrease in FX and CFD revenues as a result of the 29% decline in RPM, as well as a 10% decline in FX/CFD average daily volume as compared to the prior year. Operating revenues from securities transactions declined $4.1 million, while operating revenues from physical contracts added $2.5 million, as compared to the prior year period. Operating revenues in the Retail segment declined $31.3 million versus the immediately preceding quarter. We recorded a $4.2 million segment loss in the current period versus segment income of $23.4 million in the prior year primarily as a result of the decline in operating revenues. Other fixed expenses increased $6.5 million, compared to the prior year driven by a $1.1 million increase in selling and marketing, a $1.8 million increase in depreciation and amortization, $600,000 increase in non-technology and support costs and a $300,000 increase in travel and business development. Closing out the segment discussion on the next slide, operating revenues in Global Payments increased $13 million versus the prior year driven by a 23% increase in the average daily volume and a 7% increase in the rate per million as compared to the prior year. Non-variable expenses increased $2.4 million and is primarily related to the expansion of our payment offerings. Segment income was $32.3 million in the current period and represents a 32% increase over both the prior year and immediately preceding quarter. Moving on to slide number 13, which represents a bridge between operating revenues for the first quarter of last year to the current period across our operating segments. Overall operating revenues were $654.8 million in the current period, up $204.3 million or 45% over the prior year. I have covered the changes in operating revenues for our segments. However, the $5.2 million positive variance in revenues in unallocated overhead is primarily related to an increase in unallocated interest income net of an FX hedge-related loss as compared to the prior year period. So next slide number 14, represents a bridge from 2022 first quarter pretax income of $52.5 million to pretax income of $95.6 million in the current period. The positive variance in unallocated overhead of $15.5 million was driven by the $5.2 million positive variance in revenues I just mentioned, as well as a $23.5 million gain on acquisition, which was partially offset by a $4.1 million increase in variable compensation as a result of improved performance, a $2.3 million increase in professional fees, a $700,000 increase in depreciation and amortization, a $900,000 increase in trade systems and market information and a $1 million increase in travel and business development. Finally, moving on to slide 15, which depicts our interest and fees earned on client balances by quarter, as well as a table which shows the annualized interest rate sensitivity for a change in short-term rates. Interest and fee income net of interest paid to clients and the effect of interest rate swaps increased $36.3 million to $44.3 million in the current period as compared to $8 million in the prior year. As noted in the table, we estimate a 100-basis point change in short-term interest rates either up or down would result in a change to net income by $28.8 million or $1.40 per share on an annualized basis. Thanks, Bill. Let's move on to the final slide, 16. We achieved very strong results in the fiscal first quarter 2023, delivering double-digit increases in operating revenues and net income, which resulted in diluted EPS of $3.62 and an ROE of over 27% for the quarter. These results included a $23.5 million non-taxable gain on the acquisition of CDI, which contributed $1.11 of earnings per diluted share and a significant increase in interest income, reflecting the growth in our client assets and higher interest rate environment. While trading conditions moderated towards the end of the first quarter, the multiple drivers of our business, including our disciplined approach to acquisitions, the strong growth in client assets and our core operating performance, exemplify the diversity in our operating model. We believe that these multiple drivers and our ongoing investments position us to continue to empower our clients and drive our growth and deliver shareholder value. When our performance is viewed through a slightly longer-term lens such as trailing 12-months over the last two years, which evens our quarterly anomalies, our results continue to show a strong upward trajectory, growing our revenues at a 28% CAGR and our adjusted earnings at a 44% CAGR. We continue to see strong growth in client trading volumes and client assets across all products and all client segments, which speaks to growth in our underlying client engagements. We continue to invest in our financial ecosystem, expanding our products, capabilities and talent. We have a unique and a comprehensive financial ecosystem with a very large addressable market in front of us. I would just like to note that this week represents the 20th anniversary of the investment into what would become StoneX. 20-years ago, the stock price was $0.64 and the market value of the company was $1.5 million, and the annual operating revenues were well less than $10 million. Over the past 20-years, we have compounded operating revenues at 32% per annum, shareholder equity at 29% per annum. And by harnessing the phenomenal power of compounding, we have increased the market value of the company over 130 times. Our commitment to our clients, our discipline around risk and acquisitions and our long-term owner-based approach to investing into and growing our business have all been key underpinnings of the success. While we are proud of our track record and believe that it is largely unmatched by our peers, we also believe that we are still in the early stages of the opportunity that is available and in front of us. I have no doubt that the next 10 years are likely to be much more -- for StoneX than the last 20 were. Hi, thanks for taking my question. This is actually June on behalf of Dan. So maybe we can just start off with a quick discussion on the current environment and maybe just on 2023, how has that started versus what was the backdrop of 2022. Sure. Obviously, things can change fast in our business. So these general comments can change by the minute. I think if you go back to our discussion at year-end, my view was we were going to continue to see somewhat elevated volatility, which is obviously a key driver for our business. And that volatility would be higher than it was pre-pandemic, but maybe slightly lower than it had been for the last two years. And I think that's what we still see. Things obviously quieted down last quarter over the Christmas period. And maybe it was just the way the days fell over Christmas. It might also be that it was such a rough last quarter that I think a lot of people sort of closed down. In the beginning of December, it went down. We've seen things pick up to a more normal cadence here in January. So I think we're going to see an environment that is moderately good for us on the volatility side, not quite as good as it was in COVID, but better than it was pre-COVID. And I think that will continue for some time yet. On the other side, we're obviously now starting to feel the full impact of interest rate increases. We always forget how quick and how fast these interest increases came about. And we really only started to see them showing up in our financial results by any magnitude in the fourth quarter. And obviously, now we're starting to get to the point where we've seen that interest really kick in. And I think we're going to be in an environment where interest rates are sort of either side of 4% for a while. I mean I'm not sure they'll stay at 5%, which is where it looks like they're going. But I don't see a sort of a 2% environment out there anytime soon. That's obviously very attractive for us, and that's a much better environment than we've had at any point in time over the last four years, I mean, and certainly better than last year. I mean, last year, as I said, we only saw a very small benefit from the interest rates. So I would say if you put those two things together, I think it's a pretty good environment for us, honestly. The interest rate impact is material. And I think we're still in a decent environment for volatility. So that would be my view. So as I said, things can change dramatically -- quickly in our business. Obviously, volatility changes faster than interest rates do. But I think this is going to be a good environment for us for at least 12 to 18 months. I mean beyond that, hard to know how far interest rates might go down, but I still don't see them going to below 2%. So anything above 2.5% for us is a very attractive environment in our business. Does that answer your question, June? Yes, yes, absolutely. That was super helpful. And then since you mentioned interest rates and just it seems like markets pricing interest rates going down maybe at some point this year or next, so just on the way down as your earnings sensitivity to rates sort of similar -- will be somewhat similar on the way up versus way down? Or is there some kind of dynamic here? Yes, it will be the same. I mean, the assets sort of might take a little quicker to reprice from the way down. But the dynamic will be the same. I mean, obviously, our incremental take of interest as it goes up reduces, because we pay more weight to clients. And on the way down, same thing happens. We take more of the interest rate on the way down. So it's a little bit muted each way as you get sort of above 3%. But it should be symmetrical. And maybe just in terms of margin balance -- margin requirements and client balances, do you see any dynamics between that related to interest rates -- interest rate changes? Yes. We have seen some small changes here and there. I mean I think they're largely immaterial. But certainly, in our equity clearing business, we've seen some retail clients take money or full deposits. I don't know if that's because they could find higher interest rates elsewhere or people were starting to buy into the market rather than having money on the sidelines. But we've seen that go down 1% or something. And then on the other side of our business, it obviously depends on the volatility in the markets because that somewhat drives how much margin people have to leave with us. So if volatility moderates a little bit, we may see a little bit of a pullback on our aggregate client balances. The top sort of, I guess, 10% or 15% of our client balances tends to be more volatile. But there's a core level of client balances there, which sort of just underpins our client footprint, right? And as long as markets are reasonably active, that's probably going to be reasonably stable. But it could move around on the margin just a little bit for those reasons. Got it. Got it. And just specifically on the Retail business. You mentioned capture rate decline was mostly due to diminishing market volatility. So going forward, what would you describe as a normalized rate? And maybe you can go a little bit more in depth on the dynamics of just market volatility and the rate that we're seeing here. Yes. So we have data around sort of revenue capture in that business over a long period of time. And it's pretty damn stable over a period of time. What we do see is, in the short-term, weekly, monthly, even quarterly, there can be quite a lot of volatility in that revenue capture. So I would say something around $90, $95 in terms of revenue capture on the CFDs is sort of about where we think the long-term average is. I mean that obviously also differs with product mix because we make a lot less on the FX than we do say on indices. So something in that region is probably where we'd like to see it. Now we are at 82 this quarter. So we were significantly below the sort of 9,500 type level that we see as the long-term average. But if you look at the prior quarter a year ago, we're at 115. And in the immediately preceding quarter, we had 140. So I would say we're sort of massively overachieved in those quarters. And you trend back to the mean at some point. We're probably going to see a couple of quarters where we're going to underperform to bring that average back in line with the sort of 95, 100 type levels that we think is sort of the long-term average. So we certainly saw exceptional market conditions over the last 12 to 18-months in that business. Our revenue capture was above trend. And now we've seen a bit of a tougher environment and now we're below trend. So we should be evening out somewhere in the middle here over time. Understood. Thank you. And maybe, Bill, just a quick one for you. I understand that the business is doing well, but how are you thinking about fixed expenses for 2023? Well, certainly, it's something that we look to try to continue to control, right? And the increase was relatively modest from Q4 into Q1 here. We're cognizant that, obviously, we're riding the tailwind a bit of higher interest rates and slightly elevated volatility. So I think that the growth that we kind of saw over Q4 to Q1 is probably more indicative of what we would expect going forward versus when you looked at Q1 versus last year Q1 with a relatively sizable increase in fixed expenses, kind of, due to what Sean's talked about on previous calls, us trying to digitize the business and expand our offerings. But our expectation is that would moderate here on a go-forward basis like it did from Q4 to Q1. Got it. Got it. And then just lastly on M&A. Do you think you're still sort of digesting the CDI acquisition or you are kind of looking for more opportunities at this point? I'll take that, Bill, if you like. So CDI is a relatively small deal for us. I mean, it had a disproportionate impact on our financial statements through, sort of, how you have to account for these things. That deal is going to be digested, I think, pretty easily and quickly by us. So it is not a gating factor for us looking at anything else at this point. And we're always in the market. We're always looking at opportunities. I would say, and I've said this on previous calls, up until now, we've seen financial businesses hit peak earnings, and we've seen owners want to put sort of spat multiples on peak earnings, which obviously -- of no interest to us. And I think we were well served not getting involved in any acquisitions on that basis. What we're now seeing is, obviously, as you read in the press and see everywhere is a totally different environment, right? Some of these businesses are now not performing so well, and they've realized that it was maybe a little bit of a COVID sort of bump that got them there. And additionally, funding has dried up for a lot of the sort of start-up businesses, and a lot of them are sort of halfway down the road of building out their capabilities. So we're seeing a lot of those kind of opportunities. We're not a -- we don't like to take sort of -- I guess we start businesses all the time ourselves, but we don't think of ourselves as venture capitalists. So we will look at those businesses. And if we think there is real capability there and real opportunity and with a modest amount of additional investment bias, we can bring those to accounts and grow our ecosystem. That's sort of interesting. But I think we're getting into a more interesting and more rational environment now for M&A. So I think it's still going to take another six to 12 months for that to sort of settle down and for people to become totally rational around prices. But that could happen. I'm not saying that will mean we go buy anything, because I think we've expanded our footprint. We filled in a lot of our gaps. And so our gaps are fewer and our needs are less. And our default is always focused on organic growth. That's the way we can add to shareholder value the best, right? When we buy something, we have to make it significantly better than it was when we bought it. Otherwise, we've added no value. So our default is -- our ecosystem. I think we have a tremendous run at the moment. We seem to be garnering market share all over the place. And the story is exciting at the moment, and I think clients and talent and so on are taking notice of us. So our default is just to continue doing what we think we're good at, which is growing our business organically. And if we see an opportunity to do it faster through a good accretive acquisition that is well priced, we'll always think about that. Thank you. Yes, sir. [Operator Instructions] And our next question coming from the line of Paul Dwyer with Punch & Associates Investment. Good. Maybe just to follow-up on CDI. Can you spend -- I think it's only like a $40 million deal. Can you talk about what drove this gain on the acquisition? Yes. I mean I don't want to get too much in the weeds on this, but this was a sole proprietorship. And I think we sort of said some of when we announced we were doing the deal a quarter ago. One of our top employees in Brazil joined the company, I think it's five, six years ago to become sort of the heir apparent. We were sad to see him go, and he was a tough competitor in the cotton business for us. And when the principal wanted to sell his business, he immediately thought of us and said this is right up StoneX's alley, let's call them. And there was no process. We just did a deal. I think the owner took the view that if I can just get my capital out of the business, and there was a big tax advantage for him, he had let the profits remain inside the company because, as I understand it, this tax treatment would be -- he would be taxed on anything he took out of the company. But if he sold the company, that would be a tax-free receipt for him. So there was a significant tax advantage for him to sell a business that accumulated sort of capital over the years. So the pressure price is sort of in the $30 million, which was tangible book value. That was the deal we did. And there were a few sort of add-on payments based on the results of the company on a cash basis up until December. So we made some small additional payments. So that's the deal we did. I think that's the deal he wanted. There wasn't huge amounts of negotiation. I think that's the deal he was looking for. The difference is, for him, he always accounts for his base -- his company on a cash basis, which is how Swiss GAAP does it. We have to account for the business on a mark-to-market basis. And their business, they have a significant portion of their next year's revenue contracted in. So we obviously had to mark that to market, which led to some of the gains. So we've now brought forward some portion of their next year's revenue. And because we sort of -- that came as part of the acquisition, that was sort of part of the gain we realized. Additionally, we have to go through an independent valuation process when we acquire businesses. And we use a third-party to do that. They do it for all our acquisitions. And they have to value the business independently, and they do look at things like the value of the relationships, the suppliers and so on. So there is an intangible write-up of the value of the contracts and the suppliers. I mean if it were up to me, I would prefer, and I think Bill agrees, we prefer never to write up those intangibles, because we just have to write them back down. And for me, intangibles aren't worth anything really. It's not hard cash, and that's how we think. So part of that is just sort of an accounting anomaly that happens. So we will have to write some of that down. But that's really the gist of it. So it was sort of a bizarre outcome when we saw how much of a gain would show on a relatively small acquisition, but that's the reason. Yes. Okay. Sounds like a nice deal. On Global Payments, it seems like it's continuing to accelerate in its growth. Can you just spend a little more time talking about what the drivers have been to get the acceleration and just the general landscape for that segment? Yes. I mean definitely, we sort of feel that, that business has got sort of renewed energy and we're starting to invest in the business in sort of new angles, which I think maybe three, four, five years ago, we weren't doing so much because our core business was sort of [on affair] (ph). And that's always frustrating to me is when businesses do well, people stop investing because they're sort of busy making money, right? And I think we've always got to do both. You've got to take advantage and make hay while the sun shines, but you've also got to sort of -- you've got to think about investing in your business, because we want to grow the franchise. And sometimes those market conditions that make your business profitable or sustainable in the long-term unless you invest. So I think with the payments business, we pushed them really hard about two, three years ago to really think about how to sort of reinvest and grow the business. And they are -- we're making big investments in that business right now. And not a lot of that is showing up yet in the P&L. But I think it sort of energized the team. We've got a lot more sort of younger people in the team. We've recruited people. All these new initiatives are very much technology-based. So we've recruited sort of younger technology-based people. So sort of feel good about the general sort of tone of the business and where it's taking us and our local payments capability when we launched that, I think, would be very significant, potentially for us. In terms of why the business is doing better now, I think this perversely was one of the businesses that didn't experience a COVID, kind of, tailwind. People stopped investing overseas. I mean, the payments where we really make a lot of money on with corporations are investing and making larger size payments into the subsidiaries, a lot of that slowed down during COVID is now picking up. So I think, on the margin, I would say that sort of high-level takeaway is COVID was sort of a tough environment for this business, and we're getting back to a more normalized environment, which is a little bit the opposite of some of our other businesses, right? So that's what I would describe it generally. Yes. Okay, great. Yes, that's perfect. And then really nice operating leverage again this quarter. just big picture, how do you think about continuing to be able to drive, I guess, segment income relative to unallocated costs, particularly if the interest rate benefits are now starting to be more accurately reflected in the business. Well, when you say we got better operating leverage, my response to that would be finally. So we always seem to be investing so much in trying to make our infrastructure more efficient, more scalable. But in the short-term, it's just a net add in costs. And you sort of hope that, at some point, you start to see those benefits of scalability and that operational leverage sort of come to the fore. So it's been a long time in coming. And hopefully, we're now getting to the point where we will see our aggregate, sort of, unallocated cost base sort of level out. And if we can continue to keep the volumes and the revenues going up, I mean, we should have very significant operating leverage going forward. It's hard to do, because not only are you trying to digitize your business and leverage technology better, but there's always a continual push on costs from the regulators and the environment, right? The regulators are always imposing more and more costs on us, more and more processes. Some of that's good. Some of that maybe is more than is required, but you have to continuously, sort of, work with that environment. And then as we're all digitizing, so you have to deal with things like cybersecurity and all the costs that are related to that. And those costs are going up faster than even the high inflation we're seeing at the moment. So there's -- even though we're starting to flatten out at some point, there are some real pushes to costs here that we've managed to work with, and there's going to be a challenge going forward. But we definitely feel we should be tapping out. We've made some major investments over the last 10-years. I think we're starting to see a little bit of the payoff for that. So hopefully, that will continue. Obviously, it always looks better when you have interest coming in and a positive environment, because your revenues grew, kind of, faster than your cost at that point. And always remember that without interest, we have zero cost against that, right? There's no operational costs, no systems cost. So the operational leverage on interest is 100%, right? So that also skews the numbers a little bit. So I sort of rambled on it. Did I answer your question, Paul? Yes. No, that's great. That's perfect. And then just last for me, in terms of just being able to continue to grow the core business, it sounds like you're having no issues with market share gains, but any color you can add just the current competitive landscape and the ability to keep taking market share? Yes. I mean we seem to be organically, sort of, growing our market share in line with what's happened over the last five to 10 years, which is 10% to 15% incremental growth in customers and activity. And we're giving you guys some of the data now on revenue capture. I mean, there was always the argument that you tend to face revenue capture pressure. But if you look at it over sort of five or 10 years, we haven't seen any material decline in our margins on the revenue capture side. That may happen at some point, and it's happened in some of our activities. But generally speaking, we managed to maintain our pricing. And we've managed to increase our market share in our client base. And I don't see any reason why that won't continue. I mean, I do think maybe the environment has given us a boost because volatility was high and revenue capture was higher. So it sort of looked a bit better than it was. But underlying that trend has been a pretty steady kind of organic growth in customers. And that's the core long-term driver for us. And I think we feel good. That's in fact and in some ways, relative to the comments I made at the end, I think the next 10-years is going to be much more exciting than the last 20. And the reason I say that is I think we're getting to sort of a tipping point in scale, in acceptability from counterparties. People know who we are. People want to come and work here. Clients see the value in our offering. I mean five or 10-years ago, we were a tiny little business that no one had heard of. And if I think back 10-years ago where we were sitting and how we managed to grow, I'm sort of like holy [Indiscernible], we managed to pull that off, right? And I think this does become a little bit easier as you get a little bit of scale and as you grow your ecosystem. So not that I'm saying it's easy, but I think there's an opportunity for us to continue that trend and feel confident about it. So anyway, we'll see, but that would be my view. Okay. Well, thanks, everyone, for attending. I appreciate your support, and we will be speaking to you in three months' time. Thanks very much. Bye-bye.

EarningCall_263

Good afternoon, and welcome to the MGM Resorts International Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining the call from the company today are Bill Hornbuckle, Chief Executive Officer and President; Corey Sanders, Chief Operating Officer; Jonathan Halkyard, Chief Financial Officer and Treasurer; Hubert Wang, President and Chief Operating Officer of MGM China; and Andrew Chapman, Director of Investor Relations. [Operator Instructions] Please note, this conference is being recorded. Good afternoon, and welcome to the MGM Resorts International fourth quarter and full year 2022 earnings call. This call is being broadcast live on the internet at investors.mgmresorts.com. We've also furnished our press release on Form 8-K to the SEC. On this call, we will make forward-looking statements under the safe harbor provisions of the federal securities laws. Actual results may differ materially from those contemplated in these statements. Additional information concerning factors that could cause actual results to differ from these forward-looking statements is contained in today's press release and in our periodic filings with the SEC. Except as required by law, we undertake no obligation to update these statements as a result of new information or otherwise. During the call, we will also discuss non-GAAP financial measures in talking about our performance. You can find the reconciliation to GAAP financial measures in our press release and investor presentation, which are available on our website. Thank you, Andrew, and thank you all for joining us today. I'm proud to announce that MGM Resorts International drove record fourth quarter adjusted property EBITDAR for Las Vegas and regional resorts. What's more, our full year Las Vegas Strip adjusted property EBITDAR increased by more than 80% year-over-year. These outstanding results are evidence of our focus on optimizing growth in our business and operations as well as our strategic vision of becoming the world's premier gaming entertainment company. These outcomes are also a testament to our employees who will go above and beyond every day to take care of our guests and create an amazing, great experiences, which drive loyalty among our customers. Our employees are true heroes of this story, and we need to be celebrated. I couldn't be proud of them for delivering these financial results alongside the steady improving guest and record employee satisfaction scores we are enjoying. As we look forward, we expect many of the drivers for our 2022 performance to continue into 2023. Importantly, we are well positioned on weathering a variety of environments, given the inherent long-term benefits of MGM's diverse portfolio. In fact, we have the most diverse offerings in the gaming space. And as such, we are a well-balanced organization that benefits from both scale and a host of premier brand offerings. This distinction -- the distinct pieces of our business that creates this diversification are number one, our number of nine Las Vegas Strip and eight regional domestic properties in the U.S. that cater to all market segments and produced consistently strong profitability; two, our two integrated resorts in Macau, the pre-pandemic generated EBITDAR of over $700 million and are just now beginning to see a very real return to profitability; three, our digital strategy with 50% ownership of BetMGM, one of the leading U.S. digital sports betting and gaming operators. BetMGM is the leader in what is financially the most important segment in the nation, iGaming, and is making overall progress towards its profitability. And our ownership of LeoVegas, which we're using to grow our digital business internationally and extend both MGM's brand and content reach. And ultimately, our balance sheet, allowing significant flexibility to invest in areas with the highest return on capital including New York, Japan, further expanding our digital footprint via LeoVegas and other substantive international opportunities we're pursuing in that space as well as funding and continued share repurchases. In fact, as you know, we have just announced that our Board approved another $2 billion repurchase program. Looking ahead, we see multiple opportunities for growth and momentum in our business, coupling these opportunities with a relentless focus on free cash flow per share, our operating model, our margin control and disciplined expense management, which we believe gives us a great confidence that our best days are ahead of us. Let me walk through the business case for '23, starting with our U.S. properties. First, we are encouraged by the early success of The Cosmopolitan of Las Vegas as we migrate the business into MGM Resorts infrastructure. On an annualized basis, we have double-digit growth in revenue and EBITDAR compared to the reported 12-month period prior to the acquisition. We are already beginning to produce cross-property play with hundreds of high-end players from The Cosmopolitan database attending MGM Resorts customer events and driving millions and win at our other sister properties. This is a trend that we saw continued for the Lunar New Year celebration at our properties in Las Vegas, and we expect to expand to the mass market as we integrate MGM Rewards into The Cosmopolitan system. Next, we have a strong event calendar in Las Vegas. CES has a 115,000 attendees last month, up from 45,000 in 2022. CONEXPO and CON/AGG next month is setting up to be the best ever. And March Madness, Sweet Sixteen and the Elite 8 games are coming to Las Vegas. Together, the calendar in March is positioned to have us have the best hotel revenue month, we believe, in our history. Additionally, Formula 1 is expected to bring $1 billion in economic value to the city, which we believe we are the best positioned to take advantage of. Las Vegas also has Allegiant Stadium, which has brought 40 events and over 1.5 million visitors to Las Vegas in 2022 and is expected to bring even more visitors, even higher quality events in 2023, driving significant spend, particularly at our South end properties. Another tailwind is the ongoing growth in visitation. The LVCVA expects domestic flight growth capacity to reach 120% of 2019 in the first quarter of 2023, and international recover further with 80% of 2019 available seats. Harry Reid Airport hosted a record 52.6 million passengers in 2022. Outside of our domestic business, we also see tremendous opportunities for growth. Starting with China, fully stated Macau is back. As you well know, COVID restrictions impacted our Macau operations in 2022, causing an operational loss that negatively impacted our overall results. But we are experiencing a rebound in 2023 as our guests are returning in force just that they did in Las Vegas when restrictions were lifted here. In fact, quarter-to-date, we are excited to report that MGM China's combined properties are the highest earning businesses within our company. As part of the concession renewal process, we committed to bring nongaming entertainment events to Macau. Those events were strong drivers to visitation to our property during the Lunar New Year and at the end of January. We see these early results as validation and our confidence in Macau markets recovery and the long-term viability upon which we are retendering commitments were built. And unique to MGM China, we have secured 200 additional tables as part of our new gaming concession, which combined with our premier mass positioning, should allow us to drive market share into low to mid-teens. In fact, during the month of January, our market share was 16%, which compares to high single-digit market shares pre-pandemic. This outstanding performance was driven by the MGM Chinese team, strategic focus delivering full gaming floor renovation, a complete hotel product mix for our targeted customers various marketing efforts in producing strong nongaming events, shows and promotions plus our team's improvement in service levels and operational efficiencies. These collective efforts position us for a long-term growth story in Macau. We've also reason to be optimistic about the growth prospects of our business well into the remainder of this decade, especially in light of the two new gaming licenses that we hope to receive in the near future. We expect to submit our RFA in New York in the first half of this year, and we hope for response in the near future. One advantage we have over the competition in this market is our ability to add tables to our existing casino floor and thus incremental tax revenue for the state almost instantly once approved for license. We expect to spend about two bed in New York inclusive of the license fee. We will fine-tune our program and planning. But right now, we're expecting extensive property improvements such as a significant entertainment offering, new food and beverage opportunities, covered parking and an overall increase in the casino floor space. As you may recall, we also submitted our RFP in Japan for an integrated resort license to operate in Osaka approximately 10 months ago. Unfortunately, I'm still waiting for the response from the government, but we are being patient and believe we will hear so soon. MGM Resorts has presented a compelling offer with our partner, ORIX, to develop an integrated resort, which will develop international tourism and growth to that region. We're extremely excited for the ROI opportunity in a market in which we may be the sole operator for some time in the future. Each of the projects I just mentioned are expected to generate returns well above our current free cash flow yield. These are all future capital investment decisions, we weighed upon that same standard. In closing, 2022 was a phenomenal year for MGM Resorts, and we're confident we will see progress into 2023 and beyond. Thanks very much, Bill. Before I dig into the financial results, let me also thank my colleagues here at MGM Resorts for an outstanding quarter and a truly amazing year. I'll now share with you some of the exceptional financial results that we achieved. Las Vegas Strip same-store revenues, and so that's excluding The Cosmopolitan and The Mirage, grew 11% and adjusted property EBITDAR grew 6% in the fourth quarter compared with last year. Fourth quarter occupancy of 91% was up 500 basis points year-over-year and ADR was $260 in the fourth quarter, which grew 30% over last year. Several volume metrics for us set records as well as our Las Vegas slot handle set its seventh consecutive quarterly record in the fourth quarter. Demand in Las Vegas remains strong across all segments, driven by our exceptional entertainment offerings and other customer demand drivers. The strength continued into January, where occupancy was 90% and rooms booked during the month were on record pace with rates up double digits to last year. In the regions, fourth quarter revenues grew 10% and adjusted property EBITDAR grew 3% year-over-year. While EBITDAR was down 1% versus the third quarter, this sequential decline is in line with normal seasonality for the fourth quarter. Importantly, labor expense as a percentage of revenues was flat sequentially and our current headcount remains approximately 20% below 2019 levels, all while we achieved historic highs in NPS and other indicative customer satisfaction. In the fourth quarter, corporate expense, excluding stock compensation, was $113 million, which includes $5 million related to MGM China, global development costs of $6 million and transaction costs of $2 million. Going forward, we expect corporate expense for the full year 2023 to be approximately $380 million to $400 million, a decrease of approximately $30 million to $50 million from 2022. Included in MGM's corporate expense this year is $44 million for MGM China and approximately $37 million in anticipated development expense related to Japan and New York. We intend to invest approximately $800 million in domestic CapEx in 2023, and this compares to the $727 million in CapEx invested in 2022. Maintenance capital will be approximately $600 million of this spend this year. And this year, it includes room remodels in the Bellagio Spa Tower, Borgata's Water Club and the completion of our New York-New York room renovation. Since 2019, we've reduced the average age of our room since renovation by roughly 3.5 years, and our room age will continue to decrease over the coming years as we refresh our room offerings. The remaining CapEx in 2023 is growth capital, projects that include the Mandalay Bay Convention Center remodel, a new pedestrian bridge connecting The Cosmopolitan to Vdara and investments in technology to drive better customer experience, ease and engagement. Finally, on the development front, we expect to contribute $70 million -- $75 million to BetMGM in 2023 and the only material investment in New York this year will be the $500 million license fee, depending upon the timing of the license awards. I'll conclude with just a few comments on our strategy for capital allocation. First and foremost, we'll maintain a strong balance sheet by sustaining adequate liquidity for our enterprise. And as you can see in the presentation that we posted today, we concluded 2022 with $5.3 billion of domestic cash against domestic debt of $4.5 billion. Our resources this year were bolstered by the disposition of The Mirage in December for $850 million in net cash proceeds after tax. Next week, we expect to close on the sale of the Gold Strike in Tunica, which will be in $350 million in net proceeds after tax. Next, we'll prioritize capital investment to deliver the highest return for our shareholders. Our acquisition of The Cosmopolitan of Las Vegas expanded our reach into the high end of the Las Vegas market. Our acquisition of LeoVegas jump-started our international iGaming strategy. Our new President of Interactive, Gary Fritz and his team are evaluating a number of opportunities in this area, and our shareholders should expect that we'll be deploying more capital to grow the MGM brand internationally in iGaming and in digital content development. And finally, we're going to return capital to shareholders. During 2022, we repurchased 76 million shares for $2.8 billion. Since the beginning of 2021 through yesterday, we've repurchased $124 million for a total of $4.7 billion and have reduced our share count to 375 million shares. And we're not done. As Bill mentioned, our Board of Directors yesterday approved an additional $2 billion share repurchase program. In evaluating our share repurchase strategy, I consider a number of factors, including the liquidity profile of the company as well as the development and M&A opportunities that are before us. But I also consider the free cash flow yield available in our own shares. So as I conclude, consider the following: adjusted property EBITDAR from Las Vegas last year was approximately $3.1 billion and from our regional operations was $1.3 billion. From that, we had adjusted domestic corporate expense of $400 million and cash rent of $1.7 billion on an annualized basis. Consolidated cash interest was $574 million, but that includes $205 million related to MGM China. And cash taxes and domestic CapEx totaled about $750 million. But our company also has significant reservoirs of value that did not contribute cash earnings in 2022. This includes excess cash of over $2.5 billion; our ownership position in MGM China, which yesterday had an approximate value of $2.6 billion; and of course, our stake in BetMGM. It's a lot of numbers, but when taking all of this into account, I see a double-digit yield opportunity in our shares, which is why I see share repurchases as a responsible and accretive use of our capital. Thanks, Jonathan. I hope the comments that -- you've conveyed the excitement that we all have towards our business this year and ultimately beyond. In all my time with the company, I've never been more excited about our present and future as I am right now. I think we're stronger, more agile, more focused and more determined than ever to win. And with that, we're happy to take your questions. [Operator Instructions] And our first question will come from Joe Greff from JPMorgan. Our next question then will be from Shaun Kelley from Bank of America. Thank you for all the detail and color. So a lot of different places we could start, but I want to start with a high-level, strategic one. Jonathan, you ended on walking through a really robust liquidity position, still a lot of cash on the balance sheet that's either collecting interest at a better yield than before, but not a huge yield. So the question we get all the time remains kind of that ownership interest in upping the stake in maybe one of those areas that you discussed, BetMGM being the big one. And obviously, we know there's a partner there, but if you could give us your latest thoughts around the strategic value there and how you fold that in with your comments around maybe a more organic or stand-alone international online expansion? Thanks, Shaun, for the question. And I'll just step in and kind of give the first part of it because I think it's time to be definitive and give a little direction. The simple answer on Entain is no, we've moved on. While we remain highly focused on BetMGM's business through our partnership with Entain and making sure that, that business continues to grow, we see great potential in LeoVegas expansion capabilities. I've said before, we like their technology platform and their leadership team. We're also interested in the content studio business, we think there's a real play there. We've seen that proven effective with brand when we combine great product in our brands at BetMGM. And over time, we like the live dealer business and the expansion of other global markets and frankly, and directly under our own purview. So for now, the answer is no, not within Entain. We're going to go down our own direction, and we begin to allocate capital. We think Gary Fritz has got the right motive, the right drive and the right person to help us lead this forward. We value the relationship with Entain. We value BetMGM. But as it comes to rest of the world, we're going to move forward with a different proposition. And Shaun, just a couple of comments, the broad strokes around capital allocation as we look forward. We do have a maturity in March, $1.25 billion at 6%. So present plan is to, of course, redeem those bonds and that will capture about $75 million of free cash flow for the business. We were active share repurchases just in the past three quarters. We spent almost $2 billion at a price of about $33 to $34. So we'll continue to be repurchasers of our shares, but we'll moderate that depending upon market conditions. And then, of course, funding what Bill described, which is our interactive ambitions, which will be predominantly through M&A but we're reserving a significant amount of capital for those activities as well. And I'll -- I don't want to be greedy with my time here, but just the follow-up to stay on the same theme then, Jonathan, you directly hit it kind of M&A. Or could you just give us some parameters around are we thinking more bolt-on options? Or are there still platform-level investments that could be made to drive up and expand that opportunity to be meaningful to the base business? It's a combination thereof. When you talk studio business or even live dealer, the technology aspect of that is on our scale, relatively de minimis. When you talk about stepping up to other marketplaces, whether it's South America over time or rest of Europe, we'll have to take a different view on that as these opportunities unfold. But for now, it's more bolt-on and relatively small. All right. Nice speaking with you. In Las Vegas, can you talk about how you're thinking about FTE count and payroll expenses and how they'll trend this year? Maybe you could break it up between both sort of on a same FTE basis as well as just wages. And what kind of revenue growth do you need to offset wage expense growth in Las Vegas? I’ve got another one. I will open it and I'll kick it to Corey. If you go back and you look at FTEs, particularly in Las Vegas against 2019, we're down anywhere from 12% to 15%, depending on the property. Obviously, wage inflation since '19 has crept. And just so we're all on the same page, looking forward, we have substantive labor negotiations later this year with about 28,000 of our colleagues, which we're going to have to contend with and work our way through. And so Corey, maybe the second part of it, just scale... I think from the standpoint of levels of FTEs, from a fixed cost perspective, there will be no increases. It will all be on variable. So if there's additional catering and banquet business, it would match that revenue component of it. But I think we're pretty comfortable that we could service our properties, service our guests at the levels we're at today. Yes, I think on the revenue growth side, if we're running now with occupancies that are basically full on the weekends. There's a bit of room during the weekdays. So really, it will need to come through pricing as opposed to occupancy gains largely in Las Vegas. And I think if that's in the low single digits, we should be able to cover any increases in payroll adequately. I mean, overall, I think we think our margins are going to sustain is really the guide, I think the answer to that. And then Bill, we're dealing with another earnings call and release today as well, so I want to make sure I understood your comment -- your prepared comments you talked about Macau being back that in the month of January, it led the company in profitability or something along those lines. Can you just explain that? Or give a little bit more detail on that? Yes, I can put a little color around it, and then we have Hubert on the line, these guys have worked hard at this for three years. So I'll let him talk a little bit about the business. But look, the rebound was, interestingly come January 8, fairly instant. I think we peaked during Chinese New Year, making a little over 5 million a day. I mentioned in my prepared comments, 16% share. And for us, for all the reasons I mentioned, our mass piece, volumes were 100% over our '19 levels. Now we're talking about a whopping 30 days here. But for the company, particularly from where we have come from, we activated 150 to 200 new tables we have. We're very excited about what's happened in the first 30 days. Sure. Thanks, Bill. Thanks, Joe, for the question. For -- since the beginning of the year, I think the market has been growing back and has exceeded the expectations of many participants and observers. For us, in January, on the gaming side, we have seen very healthy, above the market average recovery in both mass and direct VIP segments. And for the month of January, as Bill has mentioned, our market share reached 16%, which is a record high for us. Our daily mass GGR was on par with the 2019 level for the month of January during Chinese New Year, far exceeded last year's Chinese New Year level actually. And we are also encouraged to see that direct VIP segment in terms of rolling volume far exceeded 2019 level as well. It is also very encouraging to see that January run rate extend into the first week of February so far. So all in all, we are very confident in a solid and sustainable recovery of Macau market this year and beyond. This is Cassandra on David's behalf. I want to expand on Macau's margin longer term. As we think about the shift in VIP mix from junket to direct, I believe your competitors have also called out increased labor costs and some labor shortage and increased utility. So how should we think about the margins in Macau longer term? Well, again, I'll kick this to you, but my only initial comment is -- I believe everyone knows this, the junket business, I mean, when it was all said and done, it was a 20% margin business. And so while there was a great deal of volume in that business and we all -- was accretive to us and obviously, a vehicle for capital into the market, it didn't help the margin, I can assure you. So over, I don't know if you want to talk about more generally what you think will happen there. But I do like where we're positioned for VIP, Mass VIP. Remembering our branch environment and system is broader than almost anybody else is in the market. We've been doing it for 30 years into Las Vegas, and we've now taken that network and put it to work directly to the benefit of Macau. Yes. I think that in terms of margins, I think that we expect in this year and beyond, probably we'll at the high end of -- in the 20s, but in the higher side of the 20s. And in terms of junket to direct, certainly, there are some conversion in that space, but it's really too early to give you any concrete numbers. But from the strength we have observed in January and Chinese New Year in our direct business, I think that we're still very confident in the growth of the direct business and particularly given the wide network of MGM Resorts in terms of global reach of high-end customers. Great. And for the follow-up, if I may shift here on Las Vegas. There were a lot of very bullish or favorable commentaries. The ADR has been substantially higher than pre-COVID levels. Do you think that is sustainable? And looking beyond '23 and especially if we're thinking about a recession, how resilient do you think that ADR should be? Yes, this is Corey. Yes, I think it's sustainable. As we look at the event calendars on weekends and our forward-looking pacing and what we're booking rates at now, we have pretty good visibility further out. On the midweek, we see our -- not only our convention business getting better, but the whole city's convention business getting better. So the pricing that we're seeing today, we should be able to sustain, given where the economy is today. Just looking at some of the disclosure in Las Vegas and trying to decipher what is kind of the delta between gaming revenue and your net casino revenue has widened in the last few quarters. I'm assuming that is kind of all mix related with Cosmo coming online? And is that kind of a range, that delta, that pretty much will hold firm moving forward? Yes, Carlos, hi, Bill, I think the answer to the question is yes. We got a -- we needed to through COVID because obviously, the group segment of note went away. Very active with our casino market, entertained marketing database, personalization and other things we might do in that sector, and we've sustained it. And so it's helped that tremendously. Obviously, now convention business is going to come back and carryout 18%, 19% of our mix this year. But I think it is sustainable is the way to think about the business. Great. And then, Corey, just on that, on the topic of convention mix, you made a comment earlier, I believe that the bookings that were done, were done at double digits. If you look at kind of the entirety of the group business on the books or the targeted group business on the books from a pricing perspective, how does that look year-over-year or relative to 2019, however, you guys kind of want to think about it? Yes, I think -- look, many of those contracts were in place over 2019, 2020. I think they have price escalators in there. It's probably an area of opportunity for us in the future as we look at future convention bookings. But just as a reminder, it's 18% of our business. The new business is getting booked based on where rates are today. Okay. And do you believe, like when you think about it overall, just that taking the pricing aside, thinking about the visibility that it provides you do you believe as you look through 2023, all things equal economically and from a macro perspective that there should be pricing power year-over-year on a same-store basis? Yes. I think there should be some pricing power based on the amounts we have on the book and the foundation we have in our bookings. And remember, Carlo, one thing we have strategically decided to do is push more business out of weekends and back into midweek. And so that has an overall play in ADR. Obviously, it brings down the convention ADR, but it raises the overall company's ADR because it gives us more opportunity we where we see, frankly, and continue to see real upside, particularly in the luxury segment, across Cosmo, MGM, Mandalay, Aria, Bellagio. Maybe turning to Japan, that was another one that you referenced is still out there. You're waiting on some approval but still looking for a return that's above it sounds like your free cash flow yield. Wondering if you could just elaborate on any of your updated expectations for that market and anything that's either evolved from the terms of the transaction, even the timing of when construction could start and when the proper to be coming out of the ground.. Yes. Steve, we got to be a little careful because some of this is NDA with the government, et cetera. But having said that, we had hoped to hear in October. Obviously, we sit here now in February not having heard. The process lies today with MLIT, the government agency that is going through and consistently asking us questions about the project, about the contract with the government of Osaka, et cetera. Time to tell whether we get through that efficiently over the next 30 days. We would like to think and believe we might, but we've been thinking that for a while now. As it relates to macro, look, I'm excited to think that we may be the only player. And so instead of a market of 19 million people, we're talking about a much larger market. Having taken the journey many times from Tokyo, it's only 2.5 hours away by high-speed train, et cetera, so we see upside. Inflation has not hit Japan like it's in other places, and particularly for us, at our end of the partnership, the value of the yen has gone tremendously in our favor, but we're still looking at a $10 billion project. We're looking at a return on that project, we think can bring 15% plus in cash flow and then maybe then some, but it has to mature. And overall timing, the goal was -- now we're going to be challenged with that if we don't hear soon to get this thing open before the decade close in 2029. But since -- there's a bridge to getting there. That's helpful. And maybe a follow-up on BetMGM, just to make sure I understand you correctly. I guess, are you anticipating far out, but any additional capital being put into that JV beyond this year, given the targets for kind of profitability or standalone at this point? No, none substantively. If BetMGM gets into the M&A business for some particular product, maybe. But generally, no. It's the $50-odd million, I think we've -- well, collectively, but call it, our $35 million or $45 million we've identified. It gives us every reason to believe it should hit its target this year, starting to make profitability in the second half of the year. We all have to be rational players. There is growth left. There are six additional states yet to go that have been identified. But no, there's no large-scale capital. That business should begin to mend and take care of itself. Bill, Jonathan, another one on Vegas, just given your diverse portfolio with luxury and core. Can you just kind of help us think about broadly how these segments compared to against each other in '22? Bill, I think you said obviously, a lot of the group events and the city-wides in '23, just those compression nights should help probably a little bit more in luxury, but just trying to see -- I know you're not breaking it out, but kind of where the -- which way the wave is moving luxury and core. Yes. In 2022, the majority of the growth here in Las Vegas was driven by the Bellagio, Aria, Cosmopolitan and the MGM Grand. Mandalay Bay had a fantastic year as they, of course, capitalized on the return of the group business to Las Vegas. I mean in the fourth quarter, just as an example, our group room nights were up about 50% versus the fourth quarter of 2021. So it certainly has skewed to the luxury properties. But I will tell you, from a portfolio strategy perspective, all of these properties here in Las Vegas are really important role players. We've invested some capital in the Luxor in the last year. We just -- we're doing the rooms in New York-New York right now. And those businesses, we expect, are going to be very solid cash flow generators over the next several years. But no question, the growth is coming from the luxury segment. And then can you just talk a little bit more about the omnichannel opportunities with driving your players from BetMGM back to Las Vegas, given it's probably one of the more important years of your players wanting to come out and see some of the events, kind of where that stands now and how that should progress in '23? So I think simple answer is more. And when I say that in the context, it's now becoming thousands of players that have obviously touch both brands. It's interesting. The combination of the two, the players spend about 40% more. Now that's kind of intuitive but 40% more is interesting. The other thing that plays to the events, whether it's sports or otherwise, sporting events, is that 85% of the players are under 49 years old. And so that network and that combination is bringing us a younger player, bringing us people who have to date have the propensity to spend more when combined with both brick-and-mortar and digital activity. And we're now reaching thousands of them coming in. We've set up fairly elaborate CRM systems, both at BetMGM and ultimately, a hosting program here that captures them. And so there's one-to-one dialogue about certain VIP players and what their needs, wants and desires are. And so we've treated that network like we would treat any of our branch offices, if you will, when the phone rings and they have somebody of substance, we're set up to take care of them. So excited by it. We need over time to automate it more, so that there's true connectivity between BetMGM and its loyalty system and ultimately MGM Rewards system. But for now, focused on the high end between the spend, the use and the numbers, all pretty exciting. I wanted to ask a little bit about -- you showed the breakdown of same-store gaming revenue in Vegas being down about 10%. And I think it was down a little bit in Q3 as well. I wonder if you could give us some sort of color on what's happening with the gaming consumer in the last two quarters. Is that kind of fewer trips year-over-year because there are more options in the world? Or is it just lower spend per trip? Or kind of what do you think is driving that in the last few quarters? No. We've seen same-store handle and drop and win growing modestly in Las Vegas. Although there's no question, the majority of the growth that we've seen in this quarter on a same-store basis, it's been on the hotel side. So the gaming customer is healthy here in Las Vegas, the -- it is driven mostly by our higher-value gaming customers, but it's very healthy on a same-store basis. With -- are the declines -- just to sort -- Jon, you're saying it's coming from the higher-end gaming player? Or you mean they're holding up, it's the sort of broader market player where the with the same-store decline? No, we're -- what I'm talking about our slot handle and table game drop and and slot win and table game win increasing. Okay. I was looking at your slide showing casino revenues down 10% on a same-store basis in Q4. Kind of know there were some properties and in properties out, but I was just using the number from your slide. Yes, some of that will be on a net basis after accounting for the cost of hotel rooms that are comped against those players. And so that is having an impact on what we're describing is that gaming revenue. But in terms of the way I consider the health of the gaming customer is to look at the volume metrics and the gross gaming revenue, which are growing on a same-store basis. Does that make sense, Robin? That's kind of when I think about what the behavior of these customers actually is, it's on the gross basis. Okay. Okay. I was just trying to clarify that number, that's helpful. Also, I was just curious, given obviously the strength of your liquidity and cash position and what you have going, why suspend the dividend? And I realize it was a small dividend only remaining at this point. But I'm just curious why suspend that when you -- liquidity is certainly not the issue? Yes, it's not. It was really an administrative issue. It was burdensome. It was complex. And that measured against the size of the of the dividend itself, which was de minimis and just how much capital we've returned, and we expect to continue to return through the form of share repurchases. We just felt that it was a practice that we did not need to continue. That doesn't mean that we wouldn't reconsider it or our Board wouldn't reconsider it at some point, and in so doing, would make it a more substantial dividend than a de minimis dividend, but it was mostly an administrative solve. Maybe just, Jonathan, a quick follow-up on Robin's question regarding casino revenues. So just to clarify, with the higher ADR now essentially the dollar amount that you need to net against casino revenue is what's causing that kind of accounting decline? Yes. That is the major issue that -- that's the major dynamic which is causing this topic that we are talking about. And it's not just ADR, but also the size of the casino segment generally. Okay. Understood. Thank you for that additional clarity. Maybe just for a follow-up question. Bigger picture, I think it was pretty clear as to where you target growth investments, digital international, but the last 24 months or so, you've moved a lot of chairs and upgraded the asset base in Las Vegas and opportunistically, I think, divested Gold Strike. Curious if you could give us some comments on how you feel about the domestic portfolio today, both regionally and in Las Vegas? And if there's potential opportunities you'd consider, more on the M&A side? And we kind of know plans in New York and if other big markets were to open. But on the M&A front, either buy or sell, anything that you'd think about doing or might make sense. Well, let me kick it off. A, I think, particularly after the moves that we've made, we've truly enjoyed the portfolio we have. In terms of Las Vegas, obviously, we own 40-odd percent of this marketplace, and we love the properties that we have here. We love the positioning. And what's happened at the south end of the strip, particularly via Allegiant has been productive. When it comes to our regionals, obviously, we're in a different regional game in most of our markets, A, whether it's Detroit, Atlantic City or Mississippi, we lead in a big fashion. We're market leaders there. We tend to want to do that and try to tie out the product offering, integrated resort to integrated resort. We just think there's an opportunity to get the right kind of customers to transition to Las Vegas and otherwise. I would never say never on any M&A acquisition. There's always, I suspect an asset here or there that might be of interest, but I don't think we have any immediate designs or plans on anything substantive sitting here today. I think our growth will come through the development opportunities we've defined, through the digital opportunities that we have defined to date and are going to seek. And yes, we've always got an eye and an ear open, but there's nothing specific that -- nor would I actually tell you if there was. Guys, given the strong strip outlook for '23, is the high end of that 400 basis point to 600 basis point margin expansion, the right place to think about how the year could shake out? Or could you still go higher? And then just with that, can you remind me what the starting point is here? Is it the reported pre-COVID 2019 number or based on sort of a pro forma portfolio? Yes, when we use that 400 basis points to 600 basis points sustainable margin improvement, we're referencing the 2019 year. So we're not trying to adjust it for acquisitions or dispositions just because we're getting pretty far back in the past at that point. We're very comfortable that for across all of our domestic properties that we can be within that range or possibly exceed it. And exceeding it will be driven mostly by our -- the pricing environment. but we're comfortable with that and that compares to 2019. Great. Great. And then just a follow-up. I think iGaming, we're hearing that the industry is taking more of a push. I'm curious how you think about the impact that iGaming is having on land-based gaming. Not sure if you're able to quantify what you've seen more recently and say, Michigan, but you could -- can you help us understand some of the puts and takes with what would seem to be some cannibalization threat? Yes, I'll take that. Obviously, in Michigan, to your point, is the best example where we have market-leading brick-and-mortar, and we have obviously a market-leading digital. The digital business now has outsurpassed the brick-and-mortar by about 25%-ish. They're both doing well over 300 million GGR. Digital is approaching almost 400 million in GGR. It's an interesting market when you look at it because it's gone through smoking and nonsmoking. COVID lasted longer there in terms of its policies than anywhere else. I will tell you, there was some concern early in the middle part of last year. The last three months in Detroit, now that we've come off of most of those COVID restrictions, we've made allocations for smoking and some smoking opportunities for customers who still want to do that. Our numbers have not only stabilized, but it continued to grow in Detroit. So while it's obvious that there's a subset amount of play going on in digital, the chance to connect that with brick-and-mortar and ultimately reward and recognize. And simple things like bonusing or jackpots that I leave -- that I'm playing at home, I can come pick up in the brick-and-mortar where I left off as a player and have a contiguous experience is things that we're highly focused on. And so we think it's been a great opportunity. We think it can continue to be one. And we are -- we've seen nothing -- Michigan, we have the best laboratory in that. Michigan gives us confidence that going forward, we can replicate some of that in any of these other states, I think we'll be in great shape. So actually I want to ask about your regional assets. And obviously, there's a fear out there in the investment world that at some point, some of these consumers could start to slow down. And we've heard from a lot of your peers so far that there really hasn't been any softness as of yet. And I just want to understand, have you guys seen the same fundamentals there, meaning no real weakening? And then also, margins were impacted by the inclusion of nongaming amenities in the quarter. I'm just wondering, how much more of that potential margin headwind could those present going forward? So let me take the top end of that and Corey, you can speak to the margins. We have several different kinds of regional properties. And so Maryland this year had an all-time record and then some. It was fantastic. We always dream at that property making over $300 million, and it did. And I know I'm getting dirty looks some of my folks, but -- and it did. Atlantic City, given all of the competitive set and the reawakening of Hard Rock and what happened with Oceans, it's a highly competitive market, and we're holding our own and that property continues to do the same kind of EBITDA. It's done traditionally no matter where the marketplace has been. It's kind of interesting. Detroit, as I just mentioned, continues to do well. We saw a little softening with Empire as it came out of COVID. Springfield has enhanced and been improving. Look, obviously, it will be the place that I think any major recession activity shows. But I will say, to date, particularly up until and through January, we haven't seen it. Yes. On the other regional properties, mainly in the third quarter, we increased on many of our nongaming amenities. And I think we're to the level where we're comfortable with what we have for our guests. So from an additional margin impact on that, I don't think there's much there. And then just on the business. December had a little bit of softness, as Bill mentioned, but what we're seeing in January and February so far as all of our regional markets are performing extremely up. Got you. Good to hear. And then second question real quick, and it's more of a follow-up here. But going back to Macau, it sounds like, Bill, I think you said -- or Hubert said this, you were doing about 5 million a day during Chinese New Year. And again, I'm not sure if this was you, Bill or Hubert, but did I hear you say that even after Chinese New Year, which, look, I know it's only, let's call it, 7 days or so, but you're still somewhere in that ballpark? Yes, it was me. I said 5 million during Chinese New Year, but no -- but we are at a great pace and a great place. And so no, but that's extreme. Having said that, it's still very profitable, and this last -- it's been 5 days or 6 days, whatever it's been, but it's been good. And so -- but no, I mean, Chinese New Year is one -- it's a unique environment, it happens once a year. So first question, just on Macau. It's a two-part question. The 16% share you guys called out, to what extent do you think that's sustainable? And if you can maybe parse that out, how much of that step-up has been driven from growth in mass or premium mass or direct VIP versus pre-COVID. And then that quarter-to-date comment about the MGM China properties, the highest earning business in the company. I mean should I -- if I kind of go back and piece together some math, should I interpret that that they're pacing well over $100 million of EBITDA for the first quarter? No, no. For the month. Not the quarter, for the month. So you could think about it -- if we put them together, it would be the highest EBITDA property we had for the month in our system. Way to think about it. Yes, Dan, in terms of the market share question you asked, it's too early, but to give you a definitive answer or whether it's sustainable or not, but they are the things that ahead of us because as you know, we have additional tables, almost 200 additional tables. And we haven't fully deployed all these tables yet. We're in the process of doing that, along with some casino floor reconfiguration. So we plan to deploy all these tables by the end of first quarter. And I think that, that's number one. Number 2 is that in the retendering commitment in terms of investment, we also have a lot of, I think, earning accretive projects. And I think that these offerings that will drive additional traffic. I mean just to give you some color on the nongaming side for Chinese New Year, I mean, our own occupancy approached 100% and our restaurant covers actually exceeded 2019 Chinese New Year level. And a lot of that was because of all the nongaming events and concerts that do a lot of incremental visitors to us. And we're also seeing a longer stay by our hotel customers. I think that as we invest more in these nongaming amenities, well, that will help with our market share growth down the road or sustain at that level. Got it. And then just for my follow-up, this is for Jon. On the pace of buybacks, obviously, you have the new $2 billion authorization, I mean, it sounds like trends are very stable, if not outright encouraging. I mean to what extent would you feel more comfortable giving kind of a quarterly pace of buybacks. And then also, I think it was last quarter or maybe a couple of quarters ago, you mentioned kind of a decelerating pace of buybacks. So given the outlook on Vegas, is there kind of a run rate we can think about here? I don't want to give a quarterly pace. I do think you can look at our pace over the preceding four quarters. I think we actually did a bit more in the fourth quarter than we did in the third quarter. And so all I would say is that we have a healthy authorization from our Board. I hope I was able to communicate during the prepared remarks, the value we see in the shares. And despite all of the opportunities we have before us, the liquidity position the company has is going to allow us to continue to be an active share repurchaser. Beyond that, Dan, I just don't want to give any more specific outlook. Can you just talk about the contribution from Far East play during the quarter in Las Vegas? And then what do bookings look like from Far East play for this point -- or for this year at this point? I can -- I know the Chinese New Year number fairly well. Corey, I'll lean on you for the fourth quarter. Last year, Chinese New Year, we had about 35 million in sale. This year, that number was just under 100. And so the opportunity and what that opportunity provided us this year was 3x what it was last year. And so while not back at the '19 levels or '18 levels. It was meaningful. And the Far East play during the fourth quarter, it was up about at least 1/3 over the fourth quarter of 2021 and constituted pretty much all of the growth in our international play during the fourth quarter. So very encouraging. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bill Hornbuckle for any closing remarks. Thank you, operator. I just want to thank everyone for joining us today. I know it gets late back on the East Coast. Just a couple of thoughts. Obviously, we continue to show organic growth here in Las Vegas, particularly in our premium product, our luxury brands. If you think about Aria and Bellagio last year that made over $1.2 billion in cash flow, and we see hopefully that sustaining. You think about now Macau and the returning and I think our 200 extra tables will make a difference throughout the course of this year. You think about our development pipeline. You think about both brick-and-mortar digital. I would say, without any disparaging comments to our competitors, that we think about the balance of regional location, domestic location, Las Vegas, international, digital, we are the most well balanced and prepared for growth. We have no net debt. We have -- we're sitting at about $5.3 billion of cash liquidity. And since Jonathan and I have joined the senior roles, the company has bought back over 25% of its shares, and all of it on the back of an amazing team that we've put together here that's got extensive experience over many decades in many different jurisdictions. And so to say I'm excited by our future would be an understatement.

EarningCall_264

Good morning, and welcome to the Healthpeak Properties, Inc. Fourth Quarter Conference Call. All participants will be in listen-only mode [Operator Instructions]. Please note this event is being recorded. Welcome to Healthpeak's fourth quarter 2022 financial results conference call. Today's conference call will contain certain forward-looking statements. Although we believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, our forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from our expectations. A discussion of risks and risk factors is included in our press release and detailed in our filings with the SEC. We do not undertake a duty to update any forward-looking statements. Certain non-GAAP financial measures will be discussed on the call. In an exhibit of the 8-K furnished with the SEC yesterday, we have reconciled all non-GAAP financial measures to the most directly comparable GAAP measures in accordance with Reg G requirements. The exhibit is also available on our website at healthpeak.com. Thanks, Andrew. Good morning, and welcome to Healthpeak's fourth quarter earnings call. Joining me today for prepared remarks are Pete Scott, our CFO; and Scott Bohn, our CDO. Senior team will be available for Q&A. Through all economic cycles, our business is driven by two fundamentals: The Demand for our real estate led to an estimated 17 million visits to our MOBs last year. Our buildings are critical to outpatient healthcare delivery in Dallas, Houston, Denver and Nashville and many other attractive markets. Biotech tenants are producing life changing therapeutics, for cancer, heart disease, sickle cell and many other diseases. To clear, our buildings have an impact, not often seen in real estate, and we expect that impact to grow, driven by the ongoing push to outpatient care and exciting advances in personalized medicine and drug discovery. Certainly, there will be periods of belt tightening in biotech, but Healthpeak is in great shape with only a modest amount of space to lease both this year and next. Our new developments are fully funded and 78% pre-leased. We didn't chase non-core submarkets or conversions and kept our pipeline in check. Most important, we finished the quarter at 99% occupancy and continue to sign leases, when we do have availability often with existing relationships. Our significant scale in each of our submarkets is a competitive advantage against small landlords and second tier product. And in recent weeks, there has been positive momentum in the public markets for biotech. A sustained improvement could lead to reacceleration in demand. Moving to operating results, which were strong across the company. Full year same-store NOI grew 5.1% in Life Science and 4% in medical office. We achieved those results despite difficult comps as we had best in sector, same-store growth in 2020 and '21 in both segments. Our fourth quarter results exceeded the full year growth rates, a positive way to close out 2022. Last quarter, we increased earnings guidance by $0.02, and we finished the year at the high end of that new range. We're projecting another solid year of operations and development deliveries in 2023. Offset by the change in interest rates and some non-economic timing issues that Pete will cover. The underlying business is strong and the NOI growth opportunity that we described in our November investor presentation is unchanged. We're in great shape from both a leverage and liquidity standpoint. The attractive spread on our January bond issuance reflects our strong balance sheet and support in the credit markets. The $113 million sale of two R&D buildings in Durham for a 5 cap is a good transaction comp in an otherwise quiet market. The price was negotiated in December, enclosed last week to an unlevered buyer. Also, the rents are at market, whereas most life science sales comps have below market rents that make the cap rate less relevant. The sale was opportunistic given we recently signed a long-term lease extension and had maximized the value creation. For progressing entitlements across our core markets, but it's possible for the first time in several years that risk adjusted returns on acquisitions will be more attractive than development. This could impact capital allocation in 2023. We'll have to see where cap rates and cost of capital settle and what happens with construction costs as the economy slows. Either way, our balance sheet allows us to be opportunistic and the land bank provides optionality. In South San Francisco, our sovereign wealth partner has agreed to allow Health Peak to continue owning 100% of the Vantage Development campus. A lot has changed since the agreements were signed a few quarters ago, including a 2x increase in the allowable density, and less clarity around the timing of commencement given the environment. As a result, it made more sense for Healthpeak to own 100% of the project. Nothing has changed from the standpoint that will utilize third party capital if and when it makes sense for our shareholders. Depending conversion to an upgrade announced yesterday aligned us with peers and will provide a more flexible structure to grow the company through acquisitions. I would like to congratulate Ankit Patadia, who was promoted to our executive team. Ankit is a 13-year veteran of Healthpeak and runs Treasury and FP&A with great skill and leadership. He'll continue to report to Pete Scott. We have a strong bench and continue to promote from within. Finally, we're advancing sustainability initiatives across the portfolio and are proud of our ESG recognition, that includes being named as CDP's Leadership Band for the 10th consecutive year and being named a best managed company by the Wall Street Journal. Thanks, Scott. This morning I'll provide some color on life science sector fundamentals, an update on our life science portfolio and close with an update on our development and redevelopment project. I'll start with a life science industry update. Overall, the industry remains healthy. There's been a slowdown in demand from the toward levels of 2021 and 2022, but there are a number of tenants actively seeking space, and we've captured more than our share of that demand. From a funding perspective, pharma has been active on the partnership and licensing front and continues to funnel cash into biotech R&D, and the secondary equity market has been open for companies with solid data. Just last week, a long time tentative of ours in South San Francisco, Client Therapeutics closed a $288 million secondary offering on the heels of positive interim data in its Phase 2A study in idiopathic pulmonary fibrosis Also, last week, we saw a successful $161 million biotech IPO, and there was another nearly $200 million IPO scheduled for later this week, so hopefully a sign that the IPO market is beginning to reopen. VC fundraising of $25 billion, while trailing 2021’s record of $41 billion with about 50% higher than 2019, than record high. DCs will continue to invest these funds in the new company formation and B&C rounds of existing companies. The 2023 NIH budget was approved at $49 billion, a 6% year over year increase, which will continue to provide scientific discovery and at the academic and early stage levels. Public company R&D spend through the third quarter of 2022 was $115 billion and is on pace to be the highest year ever when year-end numbers are reported. Now I'll move to our life science portfolio. We had a great year on the leasing front with over 1.4 million square feet of leases executed across the portfolio, 68% of which were new leases. This amounted to 186% of our leasing budget for the year and included a 35% cash re-leasing spread on renewals. Additionally, 79% of the executed leases were done with existing tenants, again, highlighting the importance of our scale and deep relationships within our core markets. 2023 is off to a great start with an additional 143,000 square feet currently under LOI. Year-end portfolio occupancy remains strong at 98.9% and rent collections exceeded 99% in the fourth quarter. Mark to market within our portfolio remains strong at approximately 25%, and our watch list remains consistent with prior quarters. We have very modest leasing exposure in both San Diego and Boston in 2023, and even though we have some work to be done in South San Francisco on our redevelopments as Lisa's role, we've had great success on those projects to date and look to continue that momentum into the New Year. Shifting to our developments and Redevelopments. Healthpeak nearly $900 million life science development pipeline is 78% pre-leased and is 100% under GMP contracts, locking in our costs and estimated returns. In the fourth quarter, we delivered 142,000 square feet, a fully leased class A lab space at 101 Cambridge Park Drive, bringing our total life science ownership in greater Boston to 2.6 million square feet. Our sole remaining availability is at our Vantage campus in South San Francisco, where we remain confident in our lease of success based on our dominant market position with approximately 40% market share, and deep, long-lasting tenant relationships and what we see as the most favorable near term supply demand dynamics of the three core markets. Moving to our point, grand redevelopment. We converted 100,000 square feet of LOIs to leases during the quarter and now have an additional 29,000 square feet under LOI. Of the 245,000 square feet that went into redevelopment in 2022, we have 76% already leased or committed. It's been an outstanding start to this redevelopment and we look forward to continued success as more spaces roll this year. We also continue to advance our entitlements. In Cambridge, we've made great progress on the rezoning efforts in our LOI project. Since June, we've been part of a city and community led working group tasked with recommending zoning for the district. This first step in our entitlement process comes to an end this week, culminating in a zoning proposal that will be brought to the city council. We're very pleased with the relationships we developed and are excited about the vision and direction that city staff, local residents, other property owners and Healthpeak collaborated on for this zoning recommendation. We look forward to working with the council in the coming months. Thanks, Scott. Starting with our financial results. We finished the year on a strong note, delivering excellent operating results. For the fourth quarter, we reported FFO as adjusted of $0.44 per share and total portfolio of same-store growth of 6.6%. For the full year, we've reported FFO as adjusted of $1.74 per share and total portfolio same-store growth of 5%. Let me provide a little more color on segment performance. In Life Sciences, as Scott Bohn mentioned, same-store growth for quarter with a very solid 5.7% and we finished the year 99% occupied in each of our major markets. Turning to Medical Office, we had another fantastic quarter with same-store growth of 5.4%. For the full year, we commenced 3.6 million feet of new and renewal leases, the highest year on record for Healthpeak. Our tenant retention rate during 2022 was a strong 82%, reflecting not only the competitive advantage of our largely on-campus portfolio, but also our deep relationships, high-quality team and industry-leading platform. Finishing with CCRCs, same-store growth for the quarter increased 15%, bringing full year growth to the midpoint of our 8% guidance. During 2022, we recovered 340 basis points in total occupancy and generated NREF cash collections of approximately $101 million exceeding our NREP amortization by $22 million. Last item under financial results, for the fourth quarter, our Board declared a dividend of $0.30 per share. Turning to our balance sheet, which continues to be a competitive advantage. A quick update on recent activity. First, in late October, we settled the $500 million of five year delayed draw term loans that we opportunistically swapped to a 3.5% fixed rate through maturity. Second, in late December, we settled the remaining $308 million of equity forward at a weighted average price of $34 per share, based on the net issuance price, the blended FFO yield was 5%. Third, in early January, we successfully issued $400 million a 5.25% fixed rate 10-year bond. In a challenging capital markets environment, the deal was 6 times oversubscribed and priced with no new issued concession. Credit market clearly sees the differentiated nature of our high-quality portfolio and ascribes a premium value to our bond spreads. Fourth, in late January, we closed on the $113 million sale of our Durham asset at a 5% cap rate, allowing us to further improve our balance sheet metrics. All-in, these four transactions represent over $1.3 billion of capital raise at a blended yield of 4.5%. The net proceeds from these transactions allowed us to reduce floating rate debt exposure to approximately 5%. In addition, we currently have a net debt-to-EBITDA of 5.3 times, $2.5 billion of liquidity, no bonds maturing until 2025 and our development pipeline is fully funded, eliminating any capital markets risk in 2023. Turning now to our 2023 guidance. We are forecasting FFO adjusted of a $1.70 per share to a $1.76 per share, and we are forecasting blended cash, same-store NOI growth of 2.75% to 4.25%. The major components of our same-store guidance are as follows. In life sciences, we expect same-store growth to range from 3% to 4.5%. Portfolio occupancy is 99% and we have very modest lease maturities in the same store pool giving us less of a positive rent mark to market benefit. As a result, growth this year is primarily driven by contractual rent escalators in the low 3% area. Medical office we expect same store growth to range from 2% to 3%. Our portfolio produced outside same store growth of 4% during 2022, and we expect 2023 growth right in line with our historical average despite the difficult year-over-year comp, and in CRCs, we expect same store growth to range from 5% to 10% excluding CARES Act grants. I did want to spend a moment expanding on some important items underlying our guidance. First, the midpoint of our guidance assumes $1.17 billion of cash NOI an increase of $65 million compared to 2022. The increase in cash NOI is driven by same-store growth and the earning of some key development projects, including the Shore, Boardwalk and 101 Cambridge Park Drive. Second, the midpoint of our guidance assumes $205 million of interest expense. The assumed average interest rate in 2023 for floating rate debt is 5.5%, up over 300 basis points compared to 2022. The average line of credit balance during 2023 is expected to be approximately $750 million. Third FFO is adjusted is negatively impacted by $0.03 of deferred revenue recognition. We have two large life science leases, one at Callan Ridge and one at 65 Hayden that were delayed due to tenant M&A. However, cash and NOI and AFFO are not impacted. We have included an AFFO per share range on our guidance supplemental page, which is a better measurement of year-over-year growth. Fourth, we assume no CARES ACT grants in our guidance. As a reminder, we did receive approximately $8 million or 1.5 pennies of FFO from CARES Act grants in 2022. Fifth, we have included a high-level sources and uses on our supplemental guidance page. Our guidance assumes $600 million of development and redevelopment spend, up modestly from 2022. This does not assume any new development starts and its spend associated with completing our active pipeline. We also do not assume any speculative acquisition activity. Any accretive acquisition activity that could occur throughout the remainder of the year would be additive to our guidance range. Please refer to Page 39 of our supplemental for additional detail on our guidance. Finally, let me quickly comment on the UPREIT conversion. We anticipate closing the UPREIT conversion on February 10, because of the conversion, we need to file an updated shelf registration statement and other various documents, including an ATM prospectus. Over the course of the following days, you should expect to see some administrative 8-K items get filed. Thanks. Hi, good morning, everyone. I guess first question is, if you could just give a little bit more detail on what kind of leasing pipeline looks like in South San Francisco right now? And sort of the depth and breadth of the market. And in particular, I guess, for Vantage, how you're thinking about timing on getting the rest of that lease, what's underway right now? Nick, it's Scott. So I'll start there. I'll start with Vantage. As you know, we produced 45% of it the first building to a global pharma tenant, and they should be taking occupancy later this year, they started the TIs this past month. That group is an existing health peak portfolio tenant. With the other building, the 189, we do have activity for multiple prospects of varying size. It's probably too early in the process to get the detail on those deals, but hopefully more to come there. Overall, we feel really good about our ability to execute given our market share and our tenant relationships and history of doing the leasing on our development deals with existing portfolio tenants in South San Francisco in general. We continue to feel good about the near-term supply and demand balance. And when you look at the staff in 2023, there's about 1.4 million square feet delivering South Francisco and Brisbane, which is the true competitive set for the bulk of our portfolio. And that space is about 72% preleased, which is pretty solid sitting here on February 8. There's a few large projects that come in in 2024, but we feel good about kind of being first to market with Vantage versus those deals and again, leaning on our market share and tenant relationships in the market. Thanks, Scott. Just second question is on the acquisition market. If you can give a little bit more feel, maybe Scott Brinker or Pete, about kind of what you're seeing in terms of cap rates and opportunities and how to think about whether the company would be active at all with acquisitions of more stabilized type product. And if so, how you would plan to fund that? Thanks. In terms of how we funded the balance sheet is in great shape. So we do have capacity there. I'd say the likelihood of doing acquisitions is higher today than it would have been six months ago or 12 months ago. The fourth quarter was really quiet, really not much happened. So a lot of the feedback is more anecdotal, obviously, given just how much cost of capital has changed for public and private companies in the last six to 12 months. But just as a general rule, underwritten IRRs in our two core segments were in the 6% range or a bit higher a year ago, that's probably more like 7% a little bit higher today, so 400 basis points, plus or minus, obviously, depends on the asset, but just as a general rule. Harder to peg cap rates for life science just given the rental rates are often pretty far below market, so you just have questions around, which submarket, the tenant profile the amount of the mark-to-market as well as the timing that could make the initial cap rate somewhat misleading. So the asset that we sold in Durham last week, really two buildings lease to do kind of a long-term basis. Those rents are at market. with a new lease in place. So the 5 cap we thought was pretty good pricing, probably demand a premium in today's market, just given the lower obviously, risk profile of the tenant. So that hopefully gives you a general feel for the acquisition market, but we are starting to get people reaching out, which is interesting. I mean across the company, there's some pretty deep relationships. So if cost of capital makes sense, I would expect we could be pretty active in 2023, we'll see. Hey, good morning. Scott, you just -- Scott Brinker, you just referenced kind of the balance sheet being in a great position, but your guidance does assume $300 million to $450 million of the debt capacity is used to fund your existing capital commitments, predominantly development. So I'm just curious how much additional capacity do you have to pursue acquisitions. And what's sort of the thinking on funding that on a medium-to-longer term basis? Yes. Austin, it's Pete here. As Scott mentioned, our balance sheet is in great shape. We did and the year at 5.3 times net debt to EBITDA. So we could do a modest amount of acquisitions, but to do anything more than that. Since we do have a pretty significant development and redevelopment pipeline, would require additional capital recycling or accessing the ATM. We have not accessed the ATM in quite some time. We will be quite disciplined about how we think about that. We do pay attention to consensus NAV as well as our own internal NAV. Our stock is not trading at levels right now, where I think we feel like it's appropriate to access the equity markets. But as Scott said, we feel more opportunistic today than we did six months ago, and we'll continue to look at our cost of capital and assess whether we would want to access the ATM to do accretive acquisitions. But our base case right now for guidance does not assume that we do any accretive acquisitions. We think that's probably the most appropriate way to level set how we're looking at 2023 right now. That's helpful. And you guys have spent a lot of time talking about the attractiveness of the development pipeline that you have. And last quarter, you alluded to potential starts in the back half of this year, clearly pivoting as a result of how you're viewing risk-adjusted returns today. But how should we think about sort of the next wave of starts and how much you could look to do in any given year going forward? Yes. Well, I mean the potential pipeline is pretty big and it's really core submarkets within our three existing markets. So we're advancing entitlements across all three of those markets so that we're in a position to proceed if and when cost of capital and spread versus acquisition cap rates make sense. From where we sit today, we'd be less aggressive on development than we have been for the past five years when there was a pretty enormous spread between return on cost for development relative to acquisition cap rates as well as our cost of capital we've had in the last year, Austin, I think you realized cost of capital as adjusted, but return on cost is probably down in most industries, certainly in medical office and life science. But that's a point in time, development makes a lot of sense at certain points in the cycle, and then there are other points where it makes more sense to look more at acquisitions or value-add shorter turnaround time. So from where we sit today, we'd be less aggressive on new development starts, but that could change. There's a lot of uncertainty about what development construction costs really look like. They've been escalating in the 10% to 15% range per year for a little while now, but we're starting to see evidence as well as anecdotal feedback that, that's slowing down. So that would obviously make a pretty big difference. So I would view our land bank as something that's a valuable asset, if and when it makes sense for us to start. I mean on some of the life science deals, what yield today in your mind would make sense to give you enough of a premium to move forward? And that will... I mean it depends on really two major things. One is just timing. So a 24 to 30-month development is obviously a lot more risky than a 12-to-15-month development. So you compare what we do in medical office, which is a much shorter time line between when you make the decision and when you actually have to invest the capital. that makes an impact or has an impact. And then the other thing is just spread to acquisition cap rates. And today, that spread is lower than it would have been in the past. Our current pipeline is going to yield about a 7.5% return on cost. If we were to start construction today on new projects, it'd probably be a bit less than that realistically. And it's unclear exactly where acquisition cap rates have settled. So in general, I think the spread of development relative to acquisition cap rates, it's somewhere in the 50 to 200 basis point range. If you have a fully leased MOB that's delivering in 12 months that needs a lower risk premium than a 24-to-30-month spec development in life science. So that hopefully gives you just a general view of how we approach it. Hi, good morning. Just hoping to go into the guidance a bit. And for the MOBs, what -- if anything is assumed in ad rent for '23 and if you could just remind us what was the contribution in '22 in the long-term impact that typically has on what we think of historically is kind of the 2% to 3% type growth? Sure. Juan, this is Tom Klaritch. Typically, we've seen the ad rent at Medical City grow kind of in the 5% to 8% range. We did have a significant growth in '22. Part of that was some onetime items. Part of it was just great results at the hospital recovering from the pandemic. So we saw close to 10%, we think that will moderate given the big -- the large growth in '22 that we're kind of assuming right now that's kind of a 3 plus, little bit higher than that ad rent growth for '23. So that's why the number is down a bit in our guidance for MOBs for this year. We typically -- the bulk of our growth comes from mark-to-market and in-place escalators, which are quite strong at an average of 3.1%. And on the escalators and mark-to-market kind of in the 2% to 3% range. And then obviously, you have some offset from net expenses. Thank you for that comment. And then just on development contributions for guidance for '23, you guys give fantastic details so kudos to you, but just curious on how much development NOI should we expect to contribute in '23 and any sort of insights into at least currently, what would be incremental in '24, not to get ahead of our skis, but just curious of whatever details you can provide on development NOIs. Yes. Juan, it's Pete here. One thing I will point out is starting in our investor deck in November last year, we did start giving development yield by project, and we've included that in the supplemental. So that should we hope, assist with modeling going forward. That said, let me just talk about the '23 development earn-in contribution. I did say in my prepared remarks that we have $65 million of NOI growth when you look at '23 relative to '22. A big chunk of that is development earn-in. We had three projects that delivered during the course of 2022, that's the shot Boardwalk. And then at the very end of the year, 101 Cambridge Park Drive, which is coming in phases. There's still a very small piece that's coming in earlier this year. And you think about the blended yield on that was around 7%. So we have, from a cash NOI perspective, another $30 million. So when I said $65 million of NOI growth, about $30 million of that is the incremental earn-in from those three projects I mentioned. And then on our active pipeline right now that has not yet delivered and they will deliver over the course of the year, you've got Nexus, Sorrento Gateway as well as Vantage Phase 1 and then also Calen Ridge. And the cash NOI contribution from that is a little less than $10 million. So that's really the significant driver of NOI growth, '23 to '22, and then the balance of that would be just same-store growth that's included within our guidance. Around your question on '24, certainly, we'll have some additional earnings because, as I mentioned, some of those projects interactive pipeline are delivering during the course of the year. It's a little too soon for me to start saying exactly how that would phase in. But in the aggregate, the blended yields on that active pipeline is in the mid-7% range. And I gave you the number of what's coming in this year. So you can kind of back into what would be the balance that would come due or at least earn in, in 2024. So hopefully, that gives you enough pieces on it. Juan, we just got notice that the operators line crashed. So we're still here and I guess we'll soften the two-question rule for you. Just with regards to CCRC, just curious on any conversations you've had or any interest in those assets as you kind of maybe foreshadowed an eventual exit. So just the latest thoughts on how -- when anything may transpire for you to exit that portfolio? and what the buyer pool or interest looks like? Yes. I mean, Juan, it's Scott. I mean last quarter, we said we'd be opportunistic. That hasn't changed. But we didn't hire a broker, we're not running a process. So I wouldn't expect any updates in 2023, just given the state of the financing markets, and it's a big portfolio, but we'll see. Right now, there's no update. But the business continues to perform well. So we're happy to hold it in the interim. Great. Thanks. Scott, I guess I wanted to circle back to your opening comments about the change in kind of the venture structure up advantage. And maybe just if you could provide a little color on what happened there and just the overall appetite from kind of sovereign wealth funds to continue to come into life science. Yes. We have a successful venture with them right next door at Point Grand, our team on the ground, led by Scott Bohn is making tremendous progress getting those assets redeveloped and leasing them up. So our sovereign partner is really happy with the investment there. A lot has changed, though, in the interim. That transaction was really negotiated over the summer, so a pretty dramatic change in the allowable density in that campus now up to 1.3 million square feet of future development, a pretty massive opportunity for Healthpeak. And in terms of return on cost, I mentioned it earlier, we would, at Healthpeak, be less aggressive today on starting new construction than we would have been 9 months ago. So for us, it made more sense, given it's less likely that, that project would commence in 2023 to go into the joint venture because we lose quite a bit of control and flexibility. And it was more important to us to have that control and flexibility moving forward. Okay. So the sovereign wealth funds haven't lost to earn interest, it just sounds like you're pulling back just given where yields are that you guys are less likely to go forward? Okay. And then I guess, secondly, just on the UPREIT, I guess, conversion. I mean, have you felt like you lost deals or that has been a competitive disadvantage to help Pete not having the UPREIT structure and hence, your desire to put it in here? Yes. I mean we did one on the Medical City campus about 18 months ago, we've got 7 or 8 legacy down reach structures in the portfolio today, which are pretty cumbersome and expensive to manage. So yes, I would expect that we would be able to use that structure going forward. Morning. Thanks for taking the question. Just two. First -- maybe. Can you just go back to the guidance and I’m sorry if I missed this, but just maybe walk us through Life Sciences, in particular, how much conservatism are you baking in? You typically started, I think, at around 4%, 4% or 5%, and then you've exceeded that the last, I want to say, three or four years. I know you have fewer expirations, but can you just walk us through what are you baking in, in terms of occupancy and the bumps that there, but occupancy and rent spreads? Juan -- excuse me, not Juan, Vikram, sorry. I got so used to Juan asking questions that I had to adjust. But it's a good question, Vikram. And as you noted, we've guided 4% to 5% the previous five years, five years in a row. So we had a lot of consistency on that. One of the contributors, though over the last five years was the fact that we still had pretty significant net leasing activity every single year, allowing us to increase our occupancy. The good news is we're at 99% occupancy across the portfolio right now. But the bad news is there's really not a lot of room to go higher than that at this point in time, just given how many tenants we have in the portfolio and the weighted average lease term. So when you look at our guidance for this year, it's primarily focused on the rent escalator, which, on average, is around low 3%. We do have some modest lease maturities, and we do have some modest mark-to-market benefit embedded within our guidance. Not all of that though was within the same-store pool. Some of that is within our large redevelopment campuses, Point Grand and Oyster Point to just name the two biggest one. So that's really the reason for the 3% to 4.5%. It's not a deceleration within our portfolio. And the other thing I would just add to it, you asked about bad debt. And I think you've asked this before, we do include a little bit of bad debt within our same-store guidance at the beginning of the year. And to the extent that we don't utilize the bad debt cushion or we don't need all of it, that certainly would be a benefit throughout the course of the year. A little early in the year to comment on that at this point in time, although we've been very pleased to see the capital markets improve significantly for our life science tenants. So that's really the gist of our 3% to 4.5% guidance range in that segment. Development and redevelopment, it always -- you sign a long-term lease, it comes with free rent. I mean we're not taking the benefit of that free rent either. So all the NOI growth that you see coming from that development and redevelopment portfolio, that's not benefiting same-store at all, but it's obviously generating a heck of a lot of NOI that will eventually flow through earnings absent some unique issues that we're overcoming this year. That's helpful. And maybe just, Scott, sticking with you, just a follow-up. You mentioned on the call at the beginning of the call that for the first time, acquisitions are appearing more attractive than development. Can you maybe give us more color on specifically what you're seeing in terms of types of opportunities, pricing expectations or IRR? And if you can just link that sort of acquisitions over development to maybe how that feeds into broader goals for the executive team as you think about long-term compensation and what metrics you may be gauging as it pertains to altips [ph]. Yes. I mean we don't have a metric focused on just volume of acquisition or development. But obviously, we have a lot of metrics around total shareholder return, FFO growth and leverage. So if growing the company can help us accomplish those objectives, then we're going to do a lot of it. So it's made overwhelming sense for five years, not a new development. The spread relative to acquisition cap rates was 300-plus basis points is a pretty easy decision and there's a nice spread to our cost of capital as well. It feels like that spread is down quite a bit today. Some of that is anecdotal. But the big commercial banks really aren't doing secured financing yet. So big portfolios are harder to trade, which can make things more interesting. Some of the regional banks are starting to be more active. But obviously, interest rates that are 100 if not 150 basis points higher than what you would have seen 1.5 years ago, LTVs are probably down a touch. That is a huge impact on levered buyers. We're not really a levered buyer at least in the traditional sense. And you saw the pretty strong execution in the bond market two weeks ago. So we do feel like our cost of capital relative to conversations we have with counterparties, whether it's the big LPs, private equity, the brokers, the banks, it feels like there's a higher likelihood that acquisitions could make sense this year, but it's still early in the year. In the fourth quarter, as I had mentioned earlier, it was just really quiet. So not much happened. But activity is picking up, and we're starting to get a lot of phone calls on things that are more interesting and potentially more actionable than what we would have said for the last couple of years. And sorry, just if I could clarify that, that you mentioned the life sciences non-core assets traded at I think it was a 5. Would you give us -- can you just share any more color on where kind of asset pricing in life sciences are today like core, not higher quality -- non-core versus higher quality core? Yes. I mean I'll do my best, but some of it is anecdotal just because not much is actually closed, but I still think it's directionally correct. But like the assets in durum at a 5 cap relatively small portfolio at $113 million. It's an unlevered buyer that we've done -- they've done a counterparty of ours in the past. So we know them well. But we had signed a 10-year lease extension with Duke a couple of quarters ago. So there's really not much more work to do in collecting rent. And it's a 3-ish percent escalator on top of the 5% initial cap rate. So when I said earlier, the unlevered IRR expectations for the highest quality product in our segments was probably started with the 6%, plus or minus 6% a year ago, that's probably more like plus or minus 7% today, and that seems to line up with the type of price that we got in Durham. Now we do think that it was a strong price just given the environment that maybe a buyer was willing to pay a bigger price for what's deemed as a kind of a low-risk collective rent type investment. Thanks. I think I'll just wait 30 seconds to ask my question because I like that anticipation with Juan. So on the acquisition versus development conversation, I may have based on this, but I understand the spread is making it more interesting on the acquisition side. and you have some cost to capital advantages and so on. But is the spread also narrowing because of just the general cost structure of development still because I would have thought that, that would have been a conversation last year with costs sort of starting to moderate now. I just want to get a sense of what driving that declining gap between acquisitions and development? If I can have more detail on that. Thanks. Yes. I'm happy to take that one. Rich, I mean, what's driving the change in acquisition cap rates is just cost of capital. Risk-free rates are obviously a lot higher, which is changing return expectations for equity, LTVs are down, cost of borrowing is up. So that one is pretty straightforward, as I'm sure you appreciate. On the development side, costs have been up 10% or more for a couple of years in a row now, just given supply chain issues and a lot of demand. As a result, the cost to build continues to climb. And rents for a while we're keeping up, if not exceeding the change in construction costs, but that's obviously starting to change a little bit in 2023, which is putting some compression on return on cost. Now obviously, it's cyclical. So both of those things will change over time. But from where we sit today, that's the dynamic that we see in our two core businesses, Rich. Okay. Great. And then another follow-up on the UPREIT conversion. Is that -- I know -- the question was have you missed on some things and perhaps this is sort of a rainy day opportunity or optionality for you down the road. But maybe more real-time or near term as well. Are you seeing more UPREIT potentially OP unit type of deals in medical office versus life science, I imagine it'd be more on the medical office side, but maybe you could just sort of give some color on that in terms of the opportunity set using the UPREIT structure. Yes. I think that's more likely, Rich, it's certainly possible we could see it in life science, but it's more likely to be applicable to individual owner, a small group of owners, which, generally speaking, that's going to be more in medical office. It tends to be more the institutions that are doing the big life science projects. But there are examples that we could envision OP units being used for life science as well. And do you think from the standpoint of taking on OP units, would it be more individuals? Or could you see even hospitals and health systems willing to do a deal of that nature? Yes, we'll see. I mean we didn't really have a structure in place that allowed us to effectively pitch the idea. I mean we could use the antiquated downrate model, but it wasn't ideal for us or the counterparty. This is a much better structure for both sides that would allow us to be a little more aggressive in pitching the idea. Obviously, it still requires an equity price that we're happy with. But the execution risk is far different from our perspective, and obviously, the outcome for the counterparty could be quite a bit different as well. Just two quick ones from me. I'll second the comments on the disclosures, which are really, really helpful on the guidance and the sources and uses. But sort of the first one I have was just going back to -- if I think about the deck you guys had put out about a total NOI peak opportunity of $13.25 by 2025. And so I'm comparing that to sort of the guidance for '23 of $11.70 on cash. So that suggests going forward, you're going to need to be at sort of a 75% to 80% growth rate a year to get there. Just trying to get a sense of post those numbers post the guidance, how are you guys thinking about sort of that long-term opportunity if it still makes sense, feeling better or feeling worse about it. Thanks. Yes. Look, what I can say, Ronald, it's a great question, is that NOI growth story is firmly intact. And typically, we would not provide a cash NOI supplemental measure within our guidance page. We did this year. We will continue to do that going forward as well because we wanted to be able to provide a bridge to what we did put in that deck. Obviously, nothing is guaranteed. But when you look at our portfolio, I talked about the development earn-in before, we still have significant earnings again next year and the year after as well on our active development and redevelopment pipelines plus the same-store growth that should be pretty consistent across our portfolios. And when you think about the three segments we're in, irrespective of the economic environment, we believe they should perform well. So we feel like that NOI growth story is very much intact, and that was actually one of the reasons we wanted to provide some additional line items in our supplemental disclosures this year. Great. Really helpful. And then just going back to the same-store questioning for the life sciences. I guess I see the stocks down today, maybe people thought that was a little bit lower than expected. I guess the question really is, given that you're basically at potentially peak occupancy, you're getting sort of a low 3s rent bumps I'm looking at sort of the exploration schedule, which is pretty small for this year and next year. So it's sort of the 3% to 4.5% sort of a new normal, if you will, for the next couple of years which is still pretty good. It's just going to be sort of slower than it was for the past couple. Is that the takeaway there? I mean it's probably the right range and a fair amount of that lease expiration this year and next is going into redevelopment between Point Grand and Oyster Point, both in South San Francisco. So obviously, that comes out of same-store. But the overall mark-to-market across the portfolio is still in that $145 million range. That's a gross number. Present value is probably closer to $100 million. But the biggest mark-to-market and the biggest lease maturities are in 2025 and thereafter. So you could see a reacceleration at that point. And then obviously, what happens with market rents relative to our escalators would have an impact over time on whether that mark-to-market opportunity grows or contracts. Great. Thanks. On the 140,000 of leases under LOI that you mentioned in your prepared remarks, I guess, what's the momentum and demand you're seeing for the rest of the year? And then maybe Bohn, what are tenants asking for when you're talking for them in terms of space needs, concessions, anything like that would be helpful. Sure, Michael. So, demand -- I'll start there, demand numbers certainly come off the record highs in the past few years, as I mentioned. But they're in line with pre-pandemic levels and the markets continue to be strong with low single-digit vacancies kind of in all three core markets. There's a lot of active users in the market. Deals are getting done, just like we've done at our Pointe Grand campus. I think from a demand perspective as well, I think one note I would say there's been several larger deals -- large and mid-size deal I would say that where a tenant wasn't necessarily up against the clock with an expiration that got put on hold. I think as the markets continue to improve here, several of those will come back to the market into those demand numbers. I think in importantly to remember, too, is the fundamental drivers of demand are still incredibly strong with VC new fundraising and investment in biotech. NIH funding the biotech index, S&P increased 40% since mid-June. So, well the valuations are still well off their 2021 highs, we've now had six or seven months of fairly steady improvement, which is very encouraging. There's also capital really available in the secondary markets for companies with good data. And we've -- in the past week or so, as I said, we've seen some good signs in the IPO market. So, I think that from a demand standpoint, we feel pretty good where things are heading on the tenant concessions and what tenets are looking for. We haven't seen a big uptick on concessions and good, well-located product. I think some smaller deals with Series A type companies may require a little bit more of a turnkey type build, but those are spaces where you may have otherwise done a spec suite to get at least and get the market quicker. So, your kind of I view those as a little bit of a spec sheet with the tenant and two. We certainly take a good look at the credit on those if we're going to put in those larger TIs on some of those smaller deals and make sure that we're building generic space. But the tenants who are out there looking at bigger spaces or new build shelter spaces or have a different credit profile that are still pretty strong. Great. Thanks. And I was curious if you could give a little more color on the deferred revenue as a result of the tenant improvement delays. I think you mentioned that it was something had to do related to M&A activity. And I know that's obviously harder to predict in the future, but could we see this, I guess, occur down the road? Or do you think this is more kind of a one-off? And any color there would be great. Yes. Michael, it's Pete. I'll take a stab at that. I think you were pretty astute to point out when we spoke yesterday that the two main issues with regards to revenue recognition this year are one is a redevelopment project, 65 Hayden and the other is our development project, Callan Ridge, where we push back the initial occupancy dates on those. We actually will have those leases commence, one with Dicerna, who was bought by Novo Nordisk and 65 Hayden and the other one with turning point who was bought by Bristol Myer, they will commence. Actually, the Dicerna lease has commenced at this point in time and they are paying cash rent. They've just decided to invest a heck of a lot more money their own money into our campus. So it's a great credit upgrade for us, but the project just takes a little bit longer, about three quarters longer to complete, and we can't recognize that cash rent we are receiving into FFO right now. So that's the basic gist of it. And then at Callan Ridge, Bristol Myers has decided to acquire Turning Point that they would like to sublease that space and wait on spending any TI dollars until a subtenant is identified. So at this point in time, we're just pushing out the initial occupancy dates to as conservative of a date as possible. As I think about M&A, generally, there are a lot of pluses to it with regards to the credit upgrade. And sometimes there can be minuses to it. I don't know that this is really a minus because we're getting such a great credit upgrade in both cases, it's just a matter of the timing of when we can recognize it in one metric versus when we recognize the cash rents received and another metric. So sometimes, these delays don't occur. Sometimes they do occur just through the M&A and transition process. So it's hard to tell you what the overall trends are, but sometimes it works in your favor and sometimes it doesn't. Maybe just one follow-up on that. What's your ability to kind of get that $0.03 back from the tenant-driven TI delays, is that a next year event or potentially something that might come in this year? Yes. I think on the larger of the two, the 65 Hayden project, we are highly confident that we'll start to get that back beginning later this year. With Callan Ridge it's hard to say, right, because it really depends upon when Bristol Myers identifies a subtenant. So I think we've pushed it out to the most conservative date in the beginning of 2025. But it is important to recognize that the FFO that we aren't able to recognize in our earnings this year we do get to recognize that over a slightly shorter lease term versus the way we recognize the cash NOI. So if it takes on a 10-year lease, for example, if it takes a year delay before you start recognizing FFO, you would recognize that FFO over nine years, so a slight modest benefit. from that perspective. So you do eventually recoup it. It just doesn't begin to get recouped until after that TI project is done. Okay. And then maybe just on the MOB guide. I think if I recall correct, I think last year, you guided like a Q1, Q2 well ahead of that this year, Q3. Curious kind of what gives you the confidence that come out with Q3 this year versus Q1 Q2 last year? And then how do you get to the high end and the low end of the range? Yes. This is Tom. This year, we did benefit, as I said earlier, from the 3.1% escalators. So we didn't anticipate that higher number last year when we started out. So we would expect that to continue given where CPI is and the fact that our fixed escalators jumped up about 10, 15 basis points to the 2.8% range. So that's, again, the biggest driver of growth. The other thing we benefited from in '22 is our recovery percentage jumped up about 150 to 200 basis points as we were able to shift some more leasing to net leases from gross. So we were expecting to be at about a little over 50% recovery percentage in '22. We ended up at 52%. We don't expect that kind of growth again next year, but we expect that higher number. So that's why we were more confident in putting out the 2% to 3% this year. And obviously, we can benefit from some of the other drivers we hit in '23. And Medical City does much better than we expected. We'll get some growth there. Parking income we still have some opportunity. Most of our markets are back up to pre-pandemic levels, but we still have two that are below. So we could see some pickup there. So it could be a little conservative, but I think we're pretty comfortable with that right now. Thanks everyone. Thanks for taking my questions here. And then last one, you might have just touched on this. I might have just missed it, but the -- again, within the model portfolio and the growth guidance, was there any assumption for higher occupancy or that still one of the drivers of upside relative to the guidance? And then a separate question. You have the $0.05 FFO headwind in '23 versus '22 from the assumption of no CARES Act grants for this year. I guess the question is, is it pretty much set in stone that you're probably not going to receive any grants in '23? Or is there still some potential to receive some, and you just haven't baked it into the guidance. Just wanted to get your thoughts around that? Thanks. Steve, we'll tag team this. This is Pete. I'll take the CCR -- excuse me, the CARES Act grant question. So we had $8 million last year in CARES Act grants, which was about 0.015 benefit to FFO that we are assuming we do not receive any CARES Act grants this year. which is a roll down. I know you said $0.05. I just wanted to confirm that the 1.5 could we get some? Sure, we could, but that's not baked into our guidance. And our expectation is that, that program is winding down at this point in time. So it would just be upside to our numbers. Sure. On the occupancy, if you look at our historic occupancy percentages, we kind of run that 91% to 93% range. Same-store occupancy right now is at 91.5%, give or take. So I think we have some opportunity to see a little bit of an increase from occupancy. But Overall, when you look at our growth each year, occupancy has a slight benefit, but it's typically only 30, 40 basis points, either up or down. So -- but as I said earlier, the bulk of our growth really comes from the pricing either in escalators or mark-to-market on renewals. Okay. That $0.05 on the CARES Act grant, that's the live transcript. So hopefully, that will get corrected in the final version of the transcript. I just want to mention that. So I'm glad you corrected that. Thanks. I appreciate that. So the 0.05 just with regards to the interest expense roll down, but we'll make sure on the final transcript it's accurately reflected. Yes. Good morning. Yes. The comment you made earlier on about financing still being available for life science companies that have good data, I think that context is appreciated. Just kind of curious, maybe other companies out there where maybe things are not going quite as well they did get good results from the data. I mean, in the days of cheap financing, those guys who kind of got a lifeline and still got some time to try to turn things around. Could you describe today what's happening to companies like that, whether they're all just kind of closing up shop, basically, VC is not being a patient with them and what implications that could have just for demand in the market? Sure. It's Scott Bohn. I can take that. So one thing I would note in the secondary market over the past, call it, six to nine months, you really needed that positive data. This is a little bit anecdotal because it's just one or two, but we've seen some pretty decent secondary offerings over the past couple of weeks with companies who I would call it more neutral to maybe slightly negative data that have come out over the past several months. So it's an interesting development there. We've also seen a number of tenants raise capital via debt offerings or private placements. They tend to be pretty creative in times like this in ways that are pretty resilient as an industry overall. And there's also pharma. We've seen several companies who have been short on capital, not in a position to raise it in a public market enter into partnerships and licensing agreements with pharma to kind of push on there. Yes. I mean whether it's trade M&A or reverse mergers or just pure partnerships and licensing of molecules or programs out to pharma. I think those are the best and simplest path for tenants in that situation? Okay. That's helpful. And then just going back to some of the earlier comments about development, again, the contribution to the bottom line, the guidance is helpful. But could you just talk a little bit on the redevelopment side again, some of the purposeful redevelopment that you are doing today, pulling some things out, moving them out of the things pool and things of that nature. What impact is that having on some of your life science same-store numbers in 2023? And what potential earnings drag is also being created to '23 numbers as a result of that? Yes. Tayo, it's Pete. It's really two big redevelopment projects. We have some in addition to that, but it's the point brand as well as the Oyster point. It doesn't have really any immediate impact on the same-store numbers because we do appropriately take those redeveloped campuses or the redevelopment projects, and we pulled them out of same-store. There is typically downtime associated with the fact that we aren't receiving rent during the redevelopment period, and then there could be a little bit of downtime with regards to how long it takes to lease up. We've had a lot of success on leasing up redevelopments before we even deliver them. And we do get the capitalized interest benefit, but that's typically a lot lower than the yield we get on the rental income. So there is drag during the redevelopment period as a result of that, but there is also when those campuses do deliver, there is actually a nice earn-in from those as well. And as we talked about the NOI growth story over a three-year period of time, we certainly have embedded in there the development -- excuse me, the redevelopment earn-in from Pointe Grand as well as from Oyster Point. So you have noted there is a little bit of drag during redevelopment, but we do expect to see some earn-in the next couple of years as those projects come online. And there's no real impact on same-store because those assets are not in same-store, they go into a non-same-store bucket while they're redeveloped. Got you. And then last one if you would indulge me. Again, I know not no acquisitions in the guidance numbers, but I get you guys are talking about acquisitions may look a little bit more attractive now than they ever have related to development as part of that thought process, any interest desires, ambitions to do acquisitions more on global markets like life science in the U.K. or something of that nature? No, I wouldn't say that time of priority list. I mean most other countries don't have a for-profit healthcare market, which is really our model. It's much more government reimbursed, especially on the medical office side, that product really doesn't exists in the same format that would be interesting to us from a private pay standpoint. There is some global R&D that's done, but so much of that is government funded and I wouldn't put that high on the party list to a lot of international investing over the years. It can make sense, we have to do it in pretty dramatic scale to really try to form a competitive advantage, and I don't see a scale opportunity in our two segments. We've got a lot of opportunity here in the U.S. So we'll stick with that. Thanks for taking my call. Just one question for me. Pete, could you give us the revenue growth and expense growth assumptions that underpin the 5% to 10% CCRC, NOI growth guidance? Yes. Maybe I'll just be even more high level than that. We still have about call it, 500 basis points of occupancy to recapture to get to stabilized occupancy levels and more of a stabilized NOI there. I think a good rule of thumb is we probably get about half that back this year and the balance of it next year in '24, and that has a pretty significant NOI benefit to us. I will say one thing we are dealing with this year is labor costs are still kind of stubbornly high, right? It's a pretty full labor market right now. So those costs are still more elevated today than they typically have been, and that's a bit of a wildcard. And then what I would say is on a rate perspective, we are seeing year-over-year rate growth probably closer to 10% as it tracks higher towards an inflation number. So those are really the main drivers, occupancy growth rate growth, but expense, unfortunately, not just in labor, but a couple of other line items remain elevated. I mean they're better. I mean contract labor is down 70% from the peak. So I mean, things have improved. But part of bringing that number down is just paying workers more. So despite the headlines around labor, I think for the most part, the service level employees making $20, $25 an hour, that's still a very competitive market. So we have seen contract labor come down, but certainly, there's still pretty strong cost inflation, utilities, food insurance. So our margins are improving. We're a couple of 100 basis points higher in the fourth quarter than we were throughout 2022 as we recapture occupancy. Pete mentioned, we'll get a big rate increase this year, but some of that gets spread out because the residents a lot of them are on anniversary date increases as opposed to January 1. Nonetheless, we'll get good rate growth over the next year, but margins aren't going to reflect all of that improvement in rate and occupancy. And then just last point is, I think you know this, but that cash receipts continue to be really strong and far exceed what we're able to recognize in earnings is about $22 million in 2022. So when you think about year-over-year growth rates in both 2022 and 2023, our actual cash results are a lot stronger than what we're able to recognize via gap because of that entry fee amortization model. One general question for me. But given that life science demand appears to be normalizing and supply will likely pick up in a few of the major costs, what is your expectation of market rent growth in 2023 and 2024? This is Scott Bohn. I can take that one. So in 2022, we saw rent growth kind of across all three markets in the mid-single digits. I'd say pegging bank growth in 2023 is probably a bit challenging as we sit here today, given the macroeconomic environment. We do see rents doing well currently with minimal concessions on goodwill located products, properties in A locations with experience life science sponsorship continued to perform well from a rent standpoint, this type of product that and always will capture the bulk of the tenant demand. So I would say any slowing in the market persists, there will be probably more of an impact on rents in secondary markets or submarkets, Thankfully, we don't really have much of that product is really any of that product in the portfolio. So really more anecdotal they are from other landlords and brokers. But I think things will generally hold up pretty well in 2023 and good product. This is Daniel Hogan on for Dave. I just wanted to ask, you mentioned balance sheet strength being a big positive. I was just curious about with the remaining swap from the new debt versus commercial paper, do you intend to do anything that along those lines in 2023? Or is that just reserved for if short-term and long-term rates continue to move further apart. Yes. I think I understand the question. If you think about our commercial paper rate, we look at the forward curve for 2023 and that's what's embedded in our guidance, and that translates to around 5.5% average rate for the year. Could we do better than that in the bond market today -- think we could. So, that is the plug in there is worst case. We would draw down on our line to fund any debt needs we have for the year, but we certainly could look to access the market inside of that rate, and that's something that we are actively looking at. So while we have no capital markets risk because we don't need to do that, we certainly could have an accretive opportunity as the year progresses to do some permanent financing inside of that. This concludes our question-and-answer session. I would like to turn the conference back over to Scott Brinker for any closing remarks.

EarningCall_265

Welcome, everyone, to the MPS Fourth Quarter 2022 Earnings Webinar. My name is Genevieve Cunningham, and I will be the moderator for this webinar. Joining me today are Michael Hsing, CEO and Founder of MPS; and Bernie Blegen, VP and CFO. In the course of today’s conference call, we will make forward-looking statements and projections that involve risk and uncertainty, which could cause results to differ materially from management’s current views and expectations. Please refer to the Safe Harbor statement contained in the earnings release published today. Risks, uncertainties and other factors that could cause actual results to differ are identified in the Safe Harbor statements contained in the Q4 2022 earnings release and in our latest 10-K and 10-Q filings that can be found on our website. MPS assumes no obligation to update the information provided on today’s call. We will be discussing gross margin, operating expense, R&D and SG&A expense, operating income, other income, income before income taxes net income and earnings on both a GAAP and a non-GAAP basis. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our Q4 and full year 2022 earnings release, which we have filed with the SEC and is currently available on our website. I’d also like to remind you that today’s conference call is being webcast live over the Internet and will be available for replay on our website for one year, along with the earnings release filed with the SEC earlier today. Thanks, Gen. For the full year, 2022, MPS achieved record revenue of $1.79 billion, growing 48.5% from the prior year. This is despite industry-wide supply chain capacity constraints. This performance represented consistent execution against our strategies and having more Tier 1 customers recognize MPS for advanced technologies, product quality and excellent customer support. Here are a few highlights from 2022. We introduced a new product line of isolated power modules for applications exceeding 1 kilowatt with a fully integrated controller, isolator and power devices. Our initial revenue ramp for this highly integrated and reliable solution is targeted for 2024. These modules are critical building blocks for power management applications for data centers, EVs, plug-in traction inverters, EV chargers, solar power, wind turbines, battery power storage and other industrial applications. Our products are designed to set the industry standard for these critical system-level applications. MPS’ first advanced data converter products for high precision industrial and medical applications were made commercially available during 2022, and we expect to have an initial revenue ramp in 2023. We continue to diversify our global footprint in the expansion of our R&D centers, supply chain partnerships and facilities outside of China to better match our resource distribution with our customers’ geographic demand profile. With our global presence, we believe MPS is in a strong position to support our customers worldwide. Turning to our full year 2022 revenue by market segment compared with 2021. Enterprise Data revenue was up 116.1%, Storage and Computing revenue up 76.8%, Communication revenue up 53.2%, Automotive revenue up 46.8%, Industrial revenue up 18.6% and Consumer revenue up 13.2%, demonstrating broad-based full year 2022 revenue improvement. Full year 2022 Enterprise Data revenue grew $135.1 million over the prior year to $251.4 million. This 116.1% increase is primarily due to higher sales of our power management solutions for cloud-based CPU and GPU server applications. Enterprise Data revenue represented 14.0% of MPS’ total revenue in 2022, compared with 9.6% in 2021. Storage and Computing revenue for 2022 grew $196.7 million over the prior year to $452.6 million. This 76.8% increase primarily resulted from strong sales growth for storage applications and enterprise notebooks. Storage and Computing revenue represented 25.3% of MPS’ total revenue in 2022, compared with 21.2% in 2021. Communications revenue grew $87.4 million to $251.5 million. This 53.2% improvement reflected higher sales of products for both 5G and satellite communications infrastructure applications. Communications revenue represented 14.0% of our 2022 revenue compared with 13.6% in 2021. Automotive revenue grew $95.7 million to $300.0 million in 2022. This 46.8% year-over-year gain primarily represented increased sales of our highly integrated applications supporting automated driver assistance systems, the digital cockpit and connectivity. Automotive revenue represented 16.7% of MPS’ full year 2022 revenue compared with 16.9% in 2021. Industrial revenue grew $34.4 million to $218.2 million in 2022. This 18.6% year-over-year increase primarily reflected higher sales in applications for smart meters and industrial automation. Industrial revenue represented 12.2% of MPS’ full year 2022 revenue compared with 15.3% in 2021. Consumer revenue grew $37.2 million to $319.5 million in 2022. This 13.2% year-over-year increase primarily reflected increased product sales for home appliances and smart TVs. Consumer revenue represented 17.8% of MPS’ full year 2022 revenue compared with 23.4% in 2021. Let’s talk about the general business conditions. During our Q3 2022 earnings call, we highlighted that customers were becoming more concerned with near-term business conditions and order patterns might oscillate in the near future. As a result of this change in ordering patterns, we indicated that our inventory levels would likely catch up to our target of 180 to 200 days and possibly be higher in the near-term. During the quarter, ordering patterns stabilized as customers requested push outs slowed. While this is positive, customers’ orders are still trending below historic norms. In our Q4 2022 inventory is above our target levels. As a result, we remain cautious about near-term business conditions. We also believe MPS can swiftly adapt to market changes as we have done so successfully during similar macroeconomic changes in the past. Switching to Q4. MPS had a record fourth quarter with revenue of $460.0 million, down 7.1% from revenue generated in the third quarter of 2022, but up 36.7% from the comparable quarter of 2021. On a year-over-year basis comparison by market segment, fourth quarter 2022 revenue for automotive grew 72.8%. Enterprise Data revenue increased 69.0%. Storage and computing revenue grew 55.0%. Communications revenue grew 40.1%, and industrial revenue grew 13.3%, while consumer revenue decreased 20.1%. Fourth quarter 2022 GAAP gross margin was 58.2%, down 50 basis points from third quarter 2022 with 60 basis points higher than the fourth quarter of 2021. Our GAAP operating income was $136.9 million compared to $151.9 million reported in the third quarter of 2022 and $78.6 million reported in the fourth quarter of 2021. Fourth quarter 2022 non-GAAP gross margin was 58.5%, 50 basis points below the third quarter of 2022, but 60 basis points higher than the fourth quarter of 2021. The year-over-year expansion in fourth quarter non-GAAP gross margin was largely due to a shift in sales mix favoring high-value greenfield products and operational efficiencies, which more than offset higher product input costs. Our non-GAAP operating income was $174.1 million compared to $193.7 million reported in the prior quarter and $102.0 million reported in the fourth quarter of 2021. Let’s review our operating expenses. Our GAAP operating expenses were $130.9 million in the fourth quarter compared with $139.0 million in the third quarter of 2022, and $115.3 million in the fourth quarter of 2021. Our non-GAAP fourth quarter 2022 operating expenses were $94.8 million, down from the $98.4 million we spent in the third quarter of 2022 and up from the $83.0 million reported in the fourth quarter of 2021. On both a GAAP and a non-GAAP basis, fourth quarter 2022 litigation expense was $3.2 million compared with a $2.1 million in Q3 2022 and a $420,000 credit balance in Q4 2021. The fourth quarter 2021 litigation credit reflected in IP settlement and refund of a legal retainer. The differences between GAAP and non-GAAP operating expenses for the quarters discussed here are primarily stock compensation expense and income or loss from an unfunded deferred compensation plan. Fourth quarter 2022 stock compensation expense, including $1.0 million charged to cost of goods sold was $35.3 million compared with $43.0 million recorded in the third quarter of 2022. The quarter-over-quarter change in stock compensation expense reflected a change in the planned vesting assumptions. Switching to the bottom line. Fourth quarter 2022 GAAP net income was $119.1 million or $2.45 per fully diluted share compared with $2.57 per share in the third quarter of 2022 and $1.51 per share in the fourth quarter of 2021. Q4 2022 non-GAAP net income was $154.0 million or $3.17 per fully diluted share compared with $3.53 per share in the third quarter of 2022, and $2.12 per share in the fourth quarter of 2021. Fully diluted shares outstanding at the end of Q4 2022 were 48.5 million. Now let’s look at the balance sheet. As of December 31, 2022, cash, cash equivalents and investments totaled $739.6 million compared to $738.1 million at the end of the third quarter of 2022. For fourth quarter – for the fourth quarter of 2022, MPS generated operating cash flow of about $52.2 million compared with Q3 2022 operating cash flow consumed of $18.2 million. Fourth quarter 2022 capital spending totaled $12.8 million. Accounts receivable ended the fourth quarter of 2022 at $182.7 million or 36 days of sales outstanding compared with the $153.4 million or 28 days of sales outstanding reported at the end of the third quarter of 2022, and the $104.8 million or 28 days reported at the end of the fourth quarter of 2021. Our internal inventories at the end of the fourth quarter of 2022 were $447.3 million, up from $397.4 million at the end of the third quarter of 2022. Calculated on a basis consistent with our past practice, and as you can see on the webinar video, days of inventory rose to 212 days at the end of Q4 2022 from the 167 days at the end of the third quarter of 2022. Historically, we’ve calculated days of inventory on hand as a function of current quarter revenue. We believe comparing current inventory levels with the following quarter’s revenue provides a better economic match. On this basis, again, you can see days of inventory increased to 214 days at the end of the fourth quarter of 2022 from 188 days at the end of the third quarter of 2022. I would now like to turn to our Q1 2023 outlook. We are forecasting Q1 2023 revenue in the range of $440 million to $460 million. We also expect the following: GAAP gross margin in the range of 57.4% to 58.0%. Non-GAAP gross margin in the range of 57.7% to 58.3%. Total stock-based compensation expense of $40.2 million to $42.2 million, including approximately $1.2 million that would be charged cost of goods sold. GAAP R&D and SG&A expenses including litigation expenses between $135.1 million and million $139.1 million. Non-GAAP R&D and SG&A expense to be in the range of $96.1 to $98.1 million. This estimate excludes stock compensation expense, but includes litigation expense. Interest income is expected to be in the range from $1.8 million to $2.2 million before foreign exchange gains or losses and charitable contributions. The non-GAAP tax rate for Q1 2023 will be 12.5%. The non-GAAP tax rate remains unchanged from 2022 as there have not been any material changes in tax regulations. Fully diluted shares to be in the range of 48.2 to 49.2 million shares. Finally, I’m pleased to announce a 33% increase in our quarterly dividend to $1 per share from $0.75 per share for stockholders of a record as of March 31, 2023. In conclusion, while we remain cautious about near-term business conditions, we believe MPS can swiftly adapt to market changes and take advantage of the current environment to focus on business development and investing in infrastructure necessary to support long-term growth. Thank you, Bernie. Analysts, I would now like to begin our Q&A session. [Operator Instructions] Our first question is from Quinn Bolton of Needham. Quinn, your line is now open. Hey, guys. Congratulations on the strong results and the nice outlook in this environment. I guess I wanted to start Bernie and Michael, the computing storage business was much stronger than at least I expected in the fourth quarter. You grew revenue quarter-on-quarter when the rest of the PC [ph] market is clearly experiencing softness and inventory correction. So I guess, can you give us sort of your outlook? How do you see that business trending over the next couple of quarters? And then I’ve got a follow up. Thank you. Sure. I think that there’s been a lot of press recently around weakness in notebooks as far as unit sales. And in addition, we’ve started to see some word [ph] here about declines also in the memory market. Interestingly, memory continued to be very strong for us offsetting a decline in notebooks. And as we look ahead here, we actually see notebooks beginning to improve in the early part of 2023. And probably those gains will offset a decline in memory. So we’re basically looking at this category at least for the first half of the year to be flattish. The one component the AI portions still remain to be very strong in the near futures. And then we see a very high growth. Absolutely. In the enterprise data we’ve really got good traction with the GPUs for artificial intelligence and so that should really be one of our growth drivers in the first half of 2023. That was going to be my next question, enterprise data was down slightly in the fourth quarter. But it sounds like you see the ramp or just strong results in the first half driven by. It sounds like specifically GPUs, is that right? Yes. When we look at CPUs in the enterprise data, there’s still initial softness as we’re waiting for the platform launches for both the Sapphire Rapids and Genoa to take off. Do you expect that in the second half than the CPU to on a take [ph] in more second half of the year? Yes. Thank you. And congratulations on another record year. Michael, I was hoping you could talk a little bit more about the power isolation module business, they expect to ramp in 2024. Is this still based on the company’s BCD technology or are you now starting to venture into some newer technologists? I’m just curious, because you haven’t talked a whole lot about potentially getting into silicon carbide or GaN or anything like that? Yes, so we do have programs that are going to a wide bandgap materials, okay? And in the past, I think we talk about it in, we have a program to make to investigating and develop those devices since 2017. And now we see the first result and we do have some samples ready, but not in the production yet. My prediction is that are somewhere in the middle of the years, okay, or second half of the years. And related to the – your questions about the isolated modules, when any higher powers is pressuring inverters, solar and solar inverters and data centers also chargers, onboard chargers and all these in the wind turbines. All of these have one basic component in all these very high power applications, which is all the power devices driven by using the isolated modules. And MPS is using, again, using our own BCD process and as well as our bandgap materials and we combine togethers and making a very simple [indiscernible] and a very ease of use power modules for those type of applications. Some of these products already in production in the EVs currently. And things that we expected higher growth in the next couple years. That’s very helpful. And as my follow-up, could you just give us an update on the manufacturing footprint both from a capacity perspective, but more importantly about diversification. You talked about, looking at all sorts of regions to partner with some new manufacturing partners, so yes, both capacity, but then also from a geographic – geographical perspective perhaps an update that? Thank you. Yes. We see as everybody else see in the geopolitical tensions and as you know MPS in the past, we always want to be a local company in every political regions. And we did that successfully in R&D site. And because for one thing is close to customers, other ones and – other ones we isolated from these tensions from between the countries. And for the manufacturing side, currently, we can fulfill all our customer demand to – demand for wherever they want to manufacture it. And we want to – by end of the year or by the next – by end of the year or next years, we will have fully rent and for the new capacities just in case the [indiscernible] really separated. Our next question is from Alex Vecchi of William Blair. Alex, your line is now open. Our next question is from Matt Ramsay of Cowen. Matt, your line is now open. Hey, Michael. Hey, Bernie. The – one question that I wanted to ask you that we’ve heard, I mean, you guys – I guess, addressed in your prepared script how you are working to move sort of the operations at manufacturing footprint and other pieces outside of China to in the long term, more sort of align with your TAM and revenue mix for the really, really long term in the company. And you’ve been very clear about those plans. But there’s been some more, I guess, acute reports of maybe some customers that want to very quickly use product sources outside of China. And you’ll probably know some of those reports that I’m talking about. I guess, have those impacted your revenues at all? Are you seeing any strange behaviors from customers that maybe you want to move and source product outside of China more quickly than you’re able to? Or are you already sourcing outside of China to support many of your global customers? Thanks. Yes, it’s a misconception for MPS is that we are – lot of manufacturers that’s in China. That’s true. But it’s a misconception. So, okay, we do in a prior COVID – we do – most of, we do at least half of it manufacturer and at least we have capacities is outside the countries or outside of China. And to answer your question, whether zero impact in the – for whoever customers request to manufacture in the outside of China in the past and the futures. All right. Thank you for that, Michael. That’s really clear. Just a question we get a lot. I wanted to talk a little bit about the consumer business, which is kind of the – maybe the least important strategic segment, but also the most volatile. If you look at where, I guess the numbers came in the fourth quarter. And I guess what I’m wanting to understand a little bit is the philosophy that you guys might have if and when some of those consumer markets and the China market in general recover. Are you excited to keep that segment down around 10% of revenue and will continue to prioritize everything else? Or is that a business that you want to serve Michael as it potentially rebounds? Thank you. Yes, and again, I would say that I mean, in the past, last year capacity issues like a constrain the consumer growth. And we do have a lot of opportunity. We just didn’t pick it up because of the capacity issues. And in the downturns in the past, as you know, that again and will be a lot more aggressive for in these consumer market segment because when you react to a price and you react to the opportunity how fast you react to the opportunity. And within the six months, you’ll see the – you’ll see the bigger number change in a consumer segment. And that’s what we would do. And Matt keep in mind, the resilience of our business model has to do with the diversity of the end markets, the customers, the geographies that we serve. So consumer, well, it has dropped to around 10% of the quarter remains a very important part of that strategy and will continue to invest in it. Hey, Michael. Hey, Bernie. [Indiscernible] And thanks for taking my question for the first time as a covering analyst. And related to that, I apologize in advance if I ask an uninformed question here. But the inventory for you guys, that 212 days, that’s internal inventory. I believe, however, your sales, 83% of your sales roughly go through distribution. So maybe you can give us a view in terms of distribution inventory and did it increase and if so, to what extent did it favor revenue? Okay. Gary, it’s okay. So when I look at the channel inventories from Q4 to Q1, or I’m sorry, from Q3 to Q4, they basically stabilized. So we didn’t see a significant increase either in terms of dollars or days in the quarter. Likewise when we talk about inventory on our balance sheet, and I’ll address that out as well. There’s about a six month lead time from when we can slow down wafer starts when you see it on the balance sheet. So likewise, as we’re looking now to head to Q1, we see both inventory in terms of dollars on our balance sheet as well as in the channel, stabilizing sell-through in the channel remains very good. And then it should normalize in the second half of the year. It’s fair to say like I mean, in 2019, we deliberate build 200 days plus inventory because we did see all these opportunity. And then now the inventory goes this highs because go over 200 days again. And that is because the customers demand start to pushing out and this is on the high side and we will cautiously and reduce it. And it’s not – this is not the same as it was done in 2019. Got it. Thank you for that. And I wanted to ask about contributors to the revenue growth for the fiscal year, for the quarter, 48.5% is quite commendable. I was hoping maybe you can deconstruct that between ASP increases and unit increases and how you see that playing out for fiscal year 2023 as well? It’s very diverse to growth in – with a little more aggressive activities in the consumer segment. And this is different from 2020 to 2021. And everything is the same because we are not – we don’t – it’s not a one trick ponies, and like not a two trick pony either. So I mean we have a multiple product. We have a product like 5,000, 6,000 different products. We have a few thousands of customers, large customers, let’s say, biggest customer is less than 4% in a different industry. And with our – that’s the same way as we do in the last 10 full years. And we’re still continue to pass. Clearly, as you look at a business driver in 2022 and as we look ahead, you can also see the impact of selling higher value technologies and higher ASPs that go along with it. So while many companies use this supply-demand imbalance as an opportunity to raise prices to their customers, we only had one single-digit price increase back in February and all of the other is representative of higher ASPs and volume gains. Perfect. Well, first, I also want to welcome Gary to the call and thank him so much for being the one asking the inventory question… I knew you would. So I had just one question, one follow-up. The question on the near-term first was, you talked a little bit about stabilization in your orders, but said they’re still below normal. So any color on that? And then folding another near-term follow-on is the first quarter, you said it sounded like Storage and Computing would be flat and Enterprise Data would be up a bit. If you’re flat overall, what’s going down sequentially in the first quarter to get you to that? So that’s kind of an aggregate first question. So when we look at Q1, and obviously, we’ve guided down about 2%, which is sort of consistent with seasonal trends. And it’s – the industrial is likely to come down. And I may have left you with an incorrect impression because Enterprise Data is likely to go down even though GPU, AI will improve. And then on the plus side, the momentum in automotive continues to be very strong. Yes. We’re seeing better activity. I think that we commented both in Q3 and repeated it here, that customers have gotten a lot more near-term focused and you can point to consumer, you can point China as being areas that was very observable. And right now, we’re seeing a lot better activity but it hasn’t necessarily translated into what I call a normalized ordering cover. Got it. Thanks for that. And I guess as my longer-term follow-up, a question I get a lot from investors is the really impressive growth you guys did in 2022, up about 50% round numbers. That’s about 30% faster than the SIA defined analog category. And that delta is kind of 2x what you guys historically have done. And some people are concerned that that’s just because of insufficient supply and competition and assume fungibility that you guys are just growing because other people can’t, or some of your competitors had some product issues that they’ll soon rectify. And so those tailwinds could turn into headwinds this year. I know you’re not going to guide for the full year. But are you at all concerned about those two dynamics having kind of overinflated 2022 and turning into headwinds this year? Our investors, our customers choose to buy our stocks. And hey, we don’t do it in the pay to pay, the me-too products. Everything is pretty much single source product. And our products a lot more programmable, a lot more versatile and gave me and our customer can configure those products. And of course, we’ll take advantage of it, okay, in a shortage. Our customers can use our product in a multiple way, I mean, lot of them are software based. And announced and as you know, in the software side and I mean is a lot more stickier. And we will continue to use our technical strengths and to gain the market share and I mean headwinds, okay, for those people they don’t believe that, okay. We have a hearing I mean that’s fair, but our numbers delivered like our past number to show that. Thanks and I’ll add my congratulations, guys. If I could ask my first question, it’s kind of a broad question on your module, just your overall module strategy. I mean, say, it doubles this year to sort of 10% or so of revenues. Bernie, I’m sure you’ll correct me if that’s all base there. But sort of what’s the right contribution long-term? I mean, Michael, I mean, eventually, do you want sort of everything to move in that direction toward module, or is it weighted more to specific end markets, maybe a couple of them already. And I’m curious if you can comment on the margin implications as module becomes a bigger contributor. I think in the past you said this a 5x type ASP multiplier. But again, please correct me. So I’ll give you the numbers correction and Michael will give you this strategic answer. Modules currently are about 5% of our business. Yes. And so it’s a significant business now. I mean and eventually, yes, that’s what all I want to see. And MPS all going to move into a new type of modules I mean in modules, power module has a bad connotation, I know that I mean lot of companies in a power module business and those are 30% gross margins and I don’t know what’s the right word to use it, it is a power modules and like in place okay with, but that’s not your old grandpa’s, again, power modules. And again, this is very different. Our margin is above core average. And some of the solutions much, much higher. But – and we sell it was all well over $100 stuff, and that’s kind of I see as a part of its hardware plus service and customers, the users, they don’t need to know like how does – how to use the product or how to – you have to have a very deep knowledge how to design a power supply, okay. And they should use very simple solutions like what we provide. They don’t need the headaches to design a power supply, I think that we’re going to end up with MPS or without MPS will be that, okay, but MPS want to be a leader in that. And I’d like to go back to Rick’s earlier question, I would say that back in the day, the single biggest ingredient as far as making a decision for design win had to do with the lowest cost. And I think that what our customers are seeing, particularly in the last three years is there are other value drivers consider as far as time to market how much design resource they want to be saved from having to do a total cost of ownership. And those are areas that we’re able to meet our customers’ demand as well, if not better than any other analog or power provider… Yes, as well to give you examples and okay, we build our own test equipment, semi equipment test equipment and all based on the MPS power modules. And if you buy those kind of power modules, they can selling well over $50. And so that in semi equipment market segments that’s a perfect thought for that. And these are very high ASP and very much, much compact than on the current market. Okay. Thanks for that color. And it actually leads you to my next question. I appreciate all the color that and you guys have certainly discussed with the power isolation module. But just specific to the silicon carbide update, just it does – it sounds like you’ll be sampling this year. Do we – should we expect any material contribution from silicon carbide this year? Or are we kind of looking at 2024? And Michael, I mean, we’ve heard different numbers, but what is the addition of silicon carbide modules for traction inverter, et cetera? What does that do to your potential content per vehicle? Our trashing inverters and using silicon carbide, okay, it’s not this year and maybe even if we will see it next year. Our silicon carbide devices, okay, we design our own – we develop our own, okay. And we want – we picked up some market segment that proves our products are reliable in the first. And that’s the first step. To answer your questions, and this year, okay, and there’s no large number of building in our revenue stream, yes, okay, and so we don’t expect that, but that’s just approved the technologies now. Great. Thanks for taking my question. Someone beat me to the module question this time. So I’ll focus in a little bit different direction in the past. I know a few quarters ago, you talked about a team that you hired to work in the converter area, which is something you’re not really that known for, but I think this is also another being ASP and a big growth opportunity for Monolithic. Can you talk about your traction in converters so far and what you expect to come in the coming quarters? Yes. We can – are glad to ask the questions, okay, a couple of days ago, I saw an image and we received from our customers, and we use our customers, use our imaging for the X-ray machines and much better than their prior versions. And so when is – we sample other biotech companies and they are – our product is designed in and we will see the revenues probably a small revenue this year in the next years. This is a slow ramping products that get very high barriers. And the bottom line is we have the technologies, and we have the know-how to design a very high performance data converted. These are – is comparable if it’s not better. And we will broaden the product portfolios and as we expand our teams and these take lot of efforts and a lot of investment. And so far, we built up a pretty good sizable teams. And now you will have – see more general product coming up in the next couple of quarters. Thank you, Michael, appreciate that. Maybe one other, if I can. Something we haven’t heard the company speak a whole lot about lately, and that’s the e-commerce effort. Any update on how your traction is progressing there? E-commerce. Well, maybe it’s not as fast as I want to be. And I said my expectation too high and I think it’s better here is that we launched MPS now I mean, actually, I’ll take back. I think it’s not as – it’s true, not I expect more, okay, but there’s a lot of resistance. I mean – but our modules lot of module ramp-up. It’s from e-commerce. And we – after last year, yes, after maybe 13 or 14 or 15 months ago, we launched MPS in a remote technical support. And that helped a lot. And especially our module side, again, help our customers can schedule a meeting online. And we can solve their – when they’re logging we solve their technical issues. That helped a lot. And I think the most part of the ramp-up is from the MPS now from a website. But overall, all things and it will take time, okay? And you are talking about engineer change their behaviors, okay, how do you design the product and how you’re purchasing the product. And I think as next 10, 12 years, even now in the next five to 10 years for the millenniums and to design a power supply and they want to do Google search rather than do the fundamental design like in the past 20 years ago, like the last 20 years. And so these are the products designed for that, okay, for easy plugging play use and easy to use and can buy from the Internet. Yes, thank you. Good afternoon, everyone. The question is about where lead times are right now and the degree of product shortages. With your inventory up now, has that helped to bring down lead times and alleviate some of the shortages? And if so, has that taken away perhaps some of the incentive for customers to place orders for a product they didn’t – they don’t need. What – it’s obviously one of the things we worry about as we go through the cycle, interested in your view on that. I’d agree that lead times have been coming down. They were up as long combined as much as 26 weeks or six months. And they’re coming down more slowly than you think. So I don’t know. Obviously, our customers have changed their ordering behavior. And if that could be attributed to the change in lead times or the fact that they have adequate inventory or that they’re uncertain about with the next six months, I can’t really say which is a driver in their decision. Got it. Okay. As a follow-up, Michael, you mentioned in some earlier remarks, plans to be a little more aggressive on consumer business as you go through the year. So wondering if you could expand on those comments? Is that something just opportunistic this year, something that you see in the market is that just a function of the diversity of your business model where some other business is slow. So you can go find business elsewhere, if you could give us some more color on that, please. I think you made a very good comment. It is opportunistic, okay? Remember, we – how many years ago, we – years ago, let say and we have more than 50% of our MPS revenues is all from consumer. And these are five fast design cycles in fast revenues and cycles product and on opportunities. And we have the right product, right support and right price and you can move the needle quickly. And obviously, in contrary to the other industrial automotive cloud computing and these are much longer design cycles and they’re kind of slowing down one segment to the other or relative in – it’s not as – clearly, it’s not as in the last couple of years. And the consumer is our opportunity again, and we know how to do it, okay? And we have the product and we have the price structures and not as high as all the other segments, and we will do that. If I could just follow on that, does that imply when business improves elsewhere, we’ve got a better macro and such some of the product cycles elsewhere with maybe higher margin opportunities develop that you sort of back away from some of that and come back to some of the other segments that have driven growth more recently. No, it’s not. Okay, consumers is a – diversity is always our strategies. And last couple of years, we didn’t grow because of capacity constraints, okay? And we sacrifice on the consumer side. Yes, thank you. I just wanted to come back to the data converter business. So you’re obviously getting into the kitchen of 400-pound gorillas here and I think historically, it’s been very difficult to crack into this market. You talked about the high barriers to entry. And other than the product being higher precision, I get that, but is there anything else about your business model that will allow MPS to be successful in this market? I think it’s – we don’t know what is the business model. I think it’s – I know this size takes time. And the market is large, a few competitors. All these, you said these are 800 pounds of gorilla, okay. We are well little highs going around – and we had to run fast. And it’s just to take opportunities and okay, what presents the product and our customers. And they do have an eye on the different suppliers especially come from the last couple of years. And it’s – we have a good hope, but we know it take a while. That’s fair. And just lastly, could you give us an update on the time line for the $3 billion and the $4 billion capacity that you’re working on? Yes. As we said in next couple of years – next two years, and we’re still on it. And we work with our suppliers and the gaming I just mentioned the consumer business, okay? And one of the reason is we do have obligations and to fill up these facts. And we’ll be aggressive and getting all these – getting these orders, fill the capacities. And that’s our gaming in the past. We repeatedly and do this – have done these kind of things in several cycles already. And this cycle, I don’t see a difference from the last downturns. And – but – so for the capacity expansion, we’re still intact in the game. We’re not – we may slow down a little, so I mean, but we really have obligations with our fabs, okay? Great. Thanks for letting me take a quick or ask a quick follow up. Bernie, I just wanted to ask your sort of thoughts on gross margin. You guided to 58% at the mid-point. It looks like the Street consensus was probably 50 to 100 basis points higher than that through the year. So as you look at 2023, do you think March is sort of the bottom and margins can trend higher into the second half of the year? Or is this push in the ability to be opportunistic in the consumer segment likely to keep margins flattish in this 58% level through 2023. Yes, I’d probably look at it as being flattish for the remainder of 2023. And when you look at what’s taken the margin down and while you’re right, we’re down 50 basis points. It’s not a significant deflation from the rate that we’ve been at trending at over the last two years. And it’s really because we have the additional manufacturing capacity, lower revenue. And as we look at the next two quarters at least, the sales mix is not as desirable. Okay, just a quick follow-up on my side on the margin side as well. And this time on the OpEx side, you guys did a good job on the OpEx. I know you’re putting litigation expense up into regular OpEx, which thank you for doing that. But just the trend in OpEx throughout the year last year grew maybe half the rate of what revenues did? How do we think about this year? I think as Michael is expressed here between diversifying our supply chain and continuing to invest in R&D capabilities that we have some very real opportunities for additional investment that would show up in growing our operating expenses. Having said that, though, there is a fair amount of uncertainty as far as what the revenue outlook is, and we want to be good financial managers as we go through these market conditions. So I would expect that it’s likely that operating expenses won’t grow much more than 50%, 60% of revenue growth in the current year. Having said that, in the past, in the past two years, now we reached $2 billion companies and they all one point okay, whatever… Yes, 1.8, okay. I mean, our infrastructure hasn’t really grown that much. In the last couple of years, and it’s difficult to hire people and now we have a lot more breathing room, okay, this is the time to build up a company. Great. And I guess for a quick follow-up, I just wanted to revisit one of the questions that was asked, I think it was the very first question or close to the beginning on the storage and computing strength. I know you said notebook was better than you thought and the memory/storage was weaker, and those two kind of go the opposite direction in the first quarter then. But those markets in aggregate have been weak across the board for quite some time. So I’m still a little surprised at the strength in the fourth quarter and the stability in the first. What would you attribute that to? Obviously, you’re getting the orders, but are you guys taking share? Is it the Tier 1 penetration? Is it content? Just any more color on that because it’s such a disconnect to the end market in general? Great. Thank you very much and for joining us for this conference call, and we’ll be talking again here for the first quarter update, which will likely be in the late April. So thank you very much.

EarningCall_266

Ladies and gentlemen, thank you for standing by and welcome to the Reynolds Consumer Products Fourth Quarter 2022 Earnings 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 call is being recorded. Thank you, operator. Good morning everyone, and thank you for joining us on Reynolds Consumer Products fourth quarter and fiscal year 2022 earnings conference call. Please note that this call is being simultaneously webcast on the Investor Relations section of the company’s corporate website at reynoldsconsumerproducts.com. Our earnings press release and accompanying presentation slides are also available on the website. With me on the call today are, Lance Mitchell, our President and Chief Executive Officer; and Michael Graham, our Chief Financial Officer. For our agenda this morning, Lance will focus his remarks on market performance and the Reynolds cooking and baking recovery plans, as well as discussion of our performance drivers, while Michael will review our fourth quarter and full-year financials, as well as our 2023 outlook. Following prepared remarks, we will open the call for questions. Before we begin, I would like to provide a few reminders. First, this morning's discussion may contain forward-looking statements based on current expectations and beliefs. These statements are subject to risks, uncertainties, and changes in circumstances that could cause actual results and outcomes to differ materially from those described today. Please refer to our Risk Factors section in our SEC filings, including our annual report on Form 10-K, and our quarterly report on Form 10-Q. Please note the company does not intend to update or alter these forward-looking statements to reflect events or circumstances arising after the call. Second, during today's call, we will refer to certain non-GAAP or adjusted financial measures. Reconciliations of these GAAP to non-GAAP financial measures are available in our earnings press release, investor presentation deck, and Form 10-K. Copies of which can be found on the Investor Relations section of our website. Thank you, Mark. Thanks to our people, our integrated brand and store brand business model and our unwavering commitment to category leadership, we made strong progress on our key initiatives in 2022. We enter 2023 with increased market share in our largest categories, service returned to pre-pandemic levels, and profitability restored in three of our four business segments. However, as you can see from our fourth quarter results, the Reynolds' Cooking & Baking business segment performance fell short of our expectations. On our earnings call in November, we reported that the Reynolds Cooking & Baking business segment entered the fourth quarter having experienced periods of unplanned equipment downtime, resulting in additional manufacturing costs, and impacting our ability to adequately supply customers. Equipment reliability remain challenging in the fourth quarter, driving inefficiencies and manufacturing costs higher than expected, while also driving continued higher aluminum costs. These factors drove the EBITDA shortfall versus the expectations we shared with you in November. In addition, while we were successful driving Reynolds' Wrap share to the highest quarterly level for the year. Household foil consumption was weaker than expected. Also, contributing to lower than anticipated net revenues for the quarter. Now, let's turn to our plan to return Reynolds Cooking & Baking to historical levels of profitability. And as I do so, I want you to know that we enter 2023 with a thorough understanding of what has been impeding Reynolds Cooking & Baking's margin recovery, as well as the team and resources in place working to correct the issues impacting that business segment. Key actions underpinning the Reynolds recovery plan include the following: management changes including several key operational leadership roles. Redesign of equipment reliability processes and practices incorporating benchmarks and input from experts and operational excellence, return to pre-pandemic preventive maintenance disciplines, and new initiatives focused on improving operational excellence, including implementation of condition based monitoring and predictive maintenance, cross functional teams focused on critical asset efficiencies, investments aimed at improving equipment reliability and performance can increase technical expertise alongside key production assets. We believe that these and all the improvements we are making to the Reynolds Cooking & Baking operations will not only drive a major improvement in manufacturing efficiencies, but also a decline in our use of the higher cost supplemental purchases of milled aluminum that I mentioned previously. Michael will speak more to our expectations for phasing the Reynolds Coating and Baking business segment earnings recovery. Now, let's review key drivers of our performance overall. Pricing, consumer demand, innovation, and manufacturing and supply chain capabilities. First, pricing. We continue to selectively increase trade promotions, which are expected to be up in 2023 versus 2022 levels. We also remain watchable commodity trends and the cost of aluminum and resin is up versus end of December levels. On balance, I would describe the pricing environment as far more stable than it was either last year or in 2021. Second, consumer demand. Our categories have settled into a new normal. And in 2023, we expect a return to household formation is our main driver of growth, offset by inflation's continued impact on consumption and lapping of elevated demand in the first several months of 2022. We also enter 2023 in a position of strong category leadership. Consumption in many of our categories is up 5% or more since 2019. And we have built market share in our largest categories in a multiple adjacencies over this period. We've also gained additional share in these categories in 2022. Reynolds Wrap’s market share gains accelerated in the second half of 2022, driven by promotions to key price points nearing price gaps to private label, and consumers appreciation of Reynolds Wrap performance advantages by comparison to private label foil. In waste bags, Hefty’s household penetration increased in 2022. Hefty waste bag brand increased buyers in almost every generational group, especially among millennials. And in disposable tableware, Hefty again gained share in 2022, driven by disposable plates, including our rapidly growing Hefty ECOSAVE line. Our third performance driver is innovation. Innovation remained a major source of volume in 2022. In 2023, we plan to continue leaning into the success by expanding distribution across a number of high velocity products, while also introducing multiple major new products and increasing our emphasis on sustainable solutions. In Reynolds Cooking & Baking, we plan to increase distribution of Reynolds Wrap Pitmaster foil and Reynolds Kitchen's Air Fryer liners among others, while also introducing Reynolds Kitchen stay flat parchment, and other products designed to meet the increase in Cooking & Baking among young adults and other major segments of the population. In waste and storage, we plan further distribution gains for our portfolio of Hefty Fabuloso products, including new Hefty 4 & 8-gallon drawstring trash bags and we're excited to announce that Hefty trash bags is launching a new Fabuloso Refreshing Lemon Scent in the first quarter. In dollar sales, Refreshing Lemon is the Number 2 scent of Fabuloso, multiple purpose cleaners and lemon citrus scented waste bags are growing at 2x the rate of the larger waste bag category. We're also doing a lot in the area of sustainable solutions. ReynoldsKITCHENS butcher paper and wax paper are now compostable. Hefty ECOSAVE continues to grow rapidly with additional strong growth expected driven by SKU expansion, further distribution gains, and continuing strong consumer demand. Early results for the Hefty compostable printed paper plates also gives us confidence in our expansion plans for this new solution. And in waste and storage, a wide range of sustainable products are lined up for commercialization. For example, our recently launched private label food bag made from 20% renewable plant and ocean materials is off to a strong start. Manufacturing and supply chain is our fourth driver of performance. Our entire organization is focused on the execution of the Reynolds Cooking & Baking business segment recovery plan. In addition, we've expanded the scope of Revolution cost savings giving us confidence and another year of at least 200 basis points of incremental margin as a source of funds for reinvestment and margin expansion. Legacy revolution programs still have considerable runway and we are undertaking new procurement and operations related programs and 2023 as well. Before I turn the call over to Michael on your questions, I'd like to leave you with the following. Our people have responded to the many opportunities and challenges in the last three years with exceptional resilience and resolve to serve our customers combat inflation and leverage our integrated brand and store brand business model to help consumers simplify their daily lives and make our business stronger. Our market share, our category consumption levels, and full recovery of pre-pandemic profitability in three of our four business segments are proof points of our success. Looking forward, the Reynolds Recovery Plan is in place and I have the utmost confidence in our plan and our ability to deliver a strong recovery of that segment's profitability. I'm extremely proud of the entire RCP team and we look forward to earnings growth in 2023 and the years to come. Thank you, Lance, and good morning, everyone. I'll start with a review of our full-year 2022 and fourth quarter financial results before turning to our 2023 outlook and the actions we're taking to return to pre-pandemic profitability this year. For the fiscal year 2022, net revenues were a record $3.8 billion, up 7% from $3.6 billion in the prior year. This growth was driven by pricing, up 13% taken in response to increased material, manufacturing, and logistics costs, and partially offset by lower volume. Volume was lower driven by price elasticity and increased activity outside the home, which was partially offset by share gains in household foil, waste bags to submersible tableware and other categories. Adjusted EBITDA was $546 million, down 9% from $601 million in the prior year, due to lower volume and higher advertising costs, partially offset by the timing of pricing actions to recover increased material, manufacturing, and logistics costs. Operational inefficiencies in the Reynolds Cooking & Baking segment and continued supplemental purchases of milled aluminum at a premium to our cost drove the EBITDA disappointment versus our previously provided outlook. Lower household fuel consumption together with higher cost aluminum also contributed to the earnings decrease. Adjusted earnings per share for the year was $1.28 versus $1.59 in the prior year. Turning to our fourth quarter results. We delivered a record net revenue of $1.1 billion during the fourth quarter, up 7% from the prior year's Q4 of $1 billion, and in terms of profitability, each of Hefty Waste & Storage, Hefty Tableware, and Presto segments, fully recovered to pre-pandemic profitability, while also reporting record earnings. With improvement driving a 10% increase in adjusted EBITDA to $200 million by comparison to $181 million in the prior year. Operational inefficiencies in the Reynolds Cooking and Banking segment and continued supplemental purchases of milled aluminum at a premium to our cost drove the EBITDA disappointment versus our previously provided outlook. Lower household foil consumption together with higher cost aluminum also contributed to the earnings decrease. Adjusted earnings per share for the quarter increased 4% to $0.53, compared to $0.51 in the prior period. Unpacking our volume performance. Elasticity and increased consumer activity outside of the home drove a 4% volume decline, driven by a 10% decrease in Reynolds Cooking & Baking volume. However, all 4 segments did gain volume share in their largest categories and tracks channels, driven by innovation, strong retail partnership, and service. Hefty Tableware and Presto delivered volume increases in the quarter, driven by innovation and share gains. Looking ahead, I'll start with a summary of our earnings outlook for the full-year 2023, followed by our expectations for the first quarter. I will then turn to the topic we were all keen to discuss in more detail. Our key performance drivers, our expectations for Reynolds Cooking & Baking, and more information on the first quarter guide and post first quarter expectations. For the full-year 2023, we expect continued pressure from elasticities and our net revenues to be flat, plus or minus 1% with pricing flat to slightly up on net revenues of $3.8 billion in 2022. We expect rates for key commodities to be relatively stable by comparison to the levels that we saw at the end of January. We expect SG&A to increase to approximately $420 million, driven by compensation related comparisons and increased investments in advertising and market research. We expect revolution related cost savings to be a source of approximately 200 basis points of incremental margin for reinvestment and potential contribution to margin expansion. In 2022, revolution growth initiatives were a source of approximately 2 percentage points of revenue and we expect a similar contribution from revolution growth initiatives in 2023. Adjusted EBITDA to be in the range of $605 million to $635 million, which is a low double-digit to mid-teen increase by comparison to results in the prior year and EPS to be in the range of $1.30 to $1.41 per share. Other key assumptions for the year include depreciation and amortization of approximately $120 million, interest expense of approximately $120 million as well, and an effective tax rate of approximately 25%, and capital spending of approximately $120 million to $130 million. For the first quarter, we expect net revenues to be flat plus or minus 1% with pricing up mid-single-digit on net revenues of $845 million in the prior year period. Adjusted EBITDA to be in the range of $75 million to $85 million, down by comparison to adjusted EBITDA of $112 million in the prior year period. And EPS to be in the range of $0.06 to $0.09 per share. Now, let's talk about the performance drivers and phasing, including the first quarter guide. We entered 2023 with margins benefiting from pricing alignment to the current cost environment and expect the significant improvement, which is evident in the fourth quarter results to drive adjusted EBITDA growth and margin expansion on an annual basis as well. In terms of segment performance, we expect 2023 results to be driven by continued solid performance for Hefty Waste & Storage, Hefty Tableware and Presto, and improving performance for Reynolds Cooking & Baking as we move through the year. Focusing on the first quarter, while volume comparisons are more challenging in the quarter and expect it to be a drag on year-on-year EBITDA growth, the major driver of the expected decline in year-on-year adjusted EBITDA is Reynolds Cooking & Baking performance. Between Reynolds Cooking & Baking's fourth quarter operational inefficiencies and continued supplemental purchase of milled aluminum at a premium to our cost we expect limited if any EBITDA for Reynolds Cooking and Banking in the quarter. Obviously, our first quarter expectations are far shorter what we normally expect for Reynolds Cooking & Baking profitability. And with that in mind, I thought it would be helpful to elaborate on the factors driving our confidence in earnings growth after the first quarter. Each of our business segments is winning at retail and entered 2023 with increased share in our largest categories. We have the in-store display, promotions, and advertising plans in place to reinforce and build category leadership and a profitability in all of our business segments. Pre-pandemic profitability is already covered in three business segments, and the level of pricing and margin achieved in the fourth quarter translates into margin expansion for these businesses in 2023. After the first quarter, we expect to see a lot less reliance upon supplemental milled aluminum in-turn resulting in a sizable improvement in average product cost. And our other big headwind in Reynolds Cooking & Baking is operational and efficiencies. We expect operational efficiencies to improve over the course of the first quarter and continue to improve during the second quarter, driving a significant increase in earnings by comparison to the first quarter results and to return to pre-pandemic profitability as we entered the third quarter. Now, before I turn the call back over to Mark and your questions, I'd like to leave you with the following few thoughts on cash flow. We remain committed to leading our categories and driving progress towards recovering pre-pandemic profitability across our business, leading to stronger cash flows. Our increased emphasis on cash conversion benefited fourth quarter results and we expect further cash flow gains in 2023 as we grow earnings, further emphasize balance sheet efficiency, and maintain capital spending discipline. All of this is expected to drive return to debt pay down this year. And finally, our capital allocation priorities are unchanged. Thank you, Michael. As I turn the call over to the operator for your questions, in the interest of time, we ask that you please ask one question and a follow-up and then rejoin the queue if you have additional questions. Operator? Thanks so much. Good morning. I guess to start at a, kind of high level and appreciating you went through in, kind of key bullets on this plan to recover in the Cooking & Baking business. I guess upon first getting to know the company, you know my assumption was, this is going to be a great manufacturing operation, right? Reynolds comes out of packaging background that this is a manufacturing company and then my positive surprise with how – what great marketers the company is. But now what we're finding is where there seem to be cracks is in what I thought was core, right, the manufacturing. So, I just – knowing you've offered words already on the plan to repair, I just need to go back and understand a little bit better. What's going on in terms of equipment reliability? Is it a matter of underinvestment in capital? I'm struggling with, kind of what's broken down operationally because last quarter when you had these downtime, you discussed it as temporary in nature, and so, there's something here that wasn't temporary was a misunderstanding of the issues that began in the third quarter. So, just a little bit more color on all that would really be great. Thanks. Lauren, that's a very fair question and very accurate. We are a great manufacturing company. And the cause really goes back to the pandemic. Our focus during that period of time, really strong demand from consumers, particularly for Reynolds Wrap, included some swings and production rates that we've never seen historically and it compromised our maintenance programs and therefore our equipment reliability. In addition, we paid heavy attention to restore any element of production to [unpreventive] [ph] maintenance. So, the resolution of that is to return to historically effective preventive maintenance disciplines, while also implementing multiple new initiatives, including the ones I mentioned in my prepared remarks. I think it's also worth reminding that we have a very strong team. And along with the input of some outside expertise that we brought on board, it gives us a high degree of confidence in the effectiveness of our plan. The key here is the improvement in operational efficiencies as that reduces the manufacturing cost while also decreasing our reliance on supplemental purchases of milled aluminum. And we expect to [proceed] [ph] along the lines of Michael reviewed in his prepared remarks. Our plan is very detailed and it has multiple elements to it. I think that ultimately the key assumptions are that, one, we have a very firm grasp on the causes of the downtime; two, a prescription match to the causes; and three a team to apply that prescription. I mentioned the confidence in our team and I'm equally confident in our understanding of the loss of efficiencies and our plan for fully reversing them. Okay. That's great. Thank you for that. And then just in follow-up, in the release it was specifically that you're not going to offer non-GAAP or adjusted net income and EPS and sticking with EBITDA. So, [the time] [ph], you know EBITDA’s cash, it's closer to cash, but any sort of perspective you can offer on some of those non-GAAP adjustments or just maybe even why, right, is it because you don't yet know the cost of restructuring and sort of remedying the plan that you're detailing and you don't want to put a number out there for the cost of the plan? Is that the key reason we're moving away from adjusted EPS? The reason we're moving away from adjusted EPS, and I'll let Michael elaborate on this is there is no transaction costs anymore. And so, we don't expect there to be any adjustments to any of the GAAP measurements, three years after the IPO. And as a matter of fact, our compensation is based on EBIT, not EBITDA based on the incentive plan. So that comment in the release was primarily just to say, there's not going to be an adjustments period. Okay, that's great. Okay, great. That was a misunderstanding. I was reading it and thinking is this about there being restructuring costs that can't be quantified, but it's rather that there's – that the adjustments post IPO or that's in the past? That's great. Hey, folks. Thank you for letting me in. A couple of questions. First, you hinted that the issues you're seeing in first quarter are going to bleed into 2Q with comments like lapping elevated consumption through the first half; comments like, you're still going to be working through the inefficiencies through the second quarter etcetera. Can we just put a finer point on that? And can you unpack what really are your expectations through the first half of the year with the implicit second quarter? Yes. So, as I said in my prepared remarks, after Q1, we have significant less reliance on supplemental milled aluminum, resulting in lower average cost. Operational efficiencies approved over the course of first quarter improved further in Q2 followed by a return to pre-pandemic profitability in the second half. A bit more color on this, you'll see carryover of Q4's additional purchases for supplemental – supplemented by milled aluminum into Q1. Also, since Q1 is seasonally a smaller quarter, the profit impact will be more pronounced in the second quarter, which is a [larger one] [ph]. Okay. Okay. So, let's switch gears then back to, sort of Lauren’s angle of questioning and if we go back to your pre-IPO days and I remember all the hype about your shake and bake technique of taking and starting to, kind of form your own stuff. So, you don't have to go out there in the open market and buy this. And I recall it being, kind of new. It's not like you've been doing this for a decade. It's something that you began to implement really just a few years ago and it sounds like given that you're now going back out to the market to buy this, it sounds like that's the issue, like this new approach that's still relatively young isn't working for you. So, do you have to, kind of revisit that whole model, this whole shake and bake approach and why should we have confidence that it's just a couple of tweaks on the preventative measures and you'll be back to [prime] [ph]? Shake and bake is about melting aluminum. It's about melting scrap aluminum. It's that production process is in Hot Springs, Arkansas. It's part of our aluminum melting facility and it's 100% operational. What we're talking about here is the milling operations in Louisville. That is the area where we have the challenges and that we're addressing. So, we're able to melt more aluminum that we can mill. And so, we have to buy milled aluminum from a third party. That's the significant issue here that we're addressing. There are two different manufacturing processes that you're addressing. Hey, everybody. Good morning. So, clearly something didn't go, I guess, according to plan in Cooking & Baking. It sounds like you have a grasp on what occurred. Is there – are you able to put some – perhaps some numbers around precisely what it cost? Obviously, your guidance for 1Q, EBITDA for the segment gives us a sense, but did it cost $20 million of EBITDA or $40 million or can you just give a little bit of a read on what it might have – what the expense might have been that is a little more one-time? We missed the guide by let's call it $20 million. $10 million of that was volume, approximately $5 million of it was the metal purchases, and the other $5 million was the operations disruptions. Thank you. Thanks for being so clear. And typically we don't ask for guide by segment or anything, but I think in this instance, it might be helpful to just get a sense for the full-year as Cooking & Baking has made between [200 and 250] [ph] of EBITDAs, you know as we're thinking about the full-year for 20233 or if you can at least give us a sense of where you expect it to end up once we get past 1Q? Yes, you're right. We don't give guidance on individual segments. We did try to be very clear about the cadence of the earnings recovery in the Cooking & Baking segment. And Michael in his prepared remarks talked about Q1 being breakeven type EBITDA and then recovering the full profitability by the second half with good progress in Q2. For the full-year, that business segment will be better than it was in 2022. It is back half loaded, but specific numbers, we're not going to guide specific numbers on segments. Thanks and good morning everyone. This is Tristen on for Mark. I just have two questions. First, just on cash flow, they saw that working capital was dragged down by increased inventories. So, what gives you confidence that working capital or inventories can improve to get net debt to 1.8 billion to 1.9 billion as forecasted in your guidance? And what's the reasonable expectation for cash flows from operations? And I have a second question after that. Yes. A big drivers, you know obviously a big part of [it] [ph] return to profitability within our Cooking & Baking. We also see commodities as being stable. We have a number of revolution initiatives that we've talked before and we've had a great track record in terms of driving that and that materializing and bottom line results. Beyond that, we also have a number of working capital initiatives that we continue to push. Inclusive in that, obviously, is making sure that we manage our CapEx spending, but that's going to be supplemented by a very high focus on accounts payables, as well as managing inventory levels. Great, thanks. And my second is just, you mentioned an increase in [A&P spend] [ph] in 2023, and so how does that compare to pre-pandemic levels? Is there a certain threshold where volumes respond? Thanks. Yes. This brings us back to historical levels of advertising spending. It will be approximately $20 million higher than it was in 2022. Hi. This is [Shobana] [ph] on for Andrea. You did mention that you are expecting to see improvement of profitability by Q3, end of Q2 progressing and laid out all the foundational, but can you please go over the specific reasons, like is it the timing of the commodities? The addressing the inefficiencies and/or promotions? And if you could please give us a sense of the, kind of numbers you're allocating to each of these reasons? Thank you. Yes. I did say that in my prepared remarks that we do expect that we're going to see increased operational efficiencies throughout the quarter. And obviously, a big part of that is going to be the timing of the actions we've put in place. We do also see commodities. As I mentioned earlier, our commodity is not being as much of a drag on overall business. And we see the lower Cooking & Baking have a better performance, as we've mentioned earlier. Those are the key drivers. Thanks, operator, and good morning, everyone. I hope you're doing well. So, I wanted to ask about the profit outlook, but more just, kind of what's embedded in terms of the commodity cost. I think the release date that you're expecting spot rates from the end of January to hold, is that simply just being conservative or is there something that you're seeing that would, kind of actually drive these spot rates to hold at current levels? And then maybe just a follow-up on that. I mean a lot of news around potential tariffs on Russian aluminum, any thoughts on how this may or may not impact your profit targets? Let me answer the last question first. We don't buy metal from Russia. So, it will not have any impact on us either way. The first question – remind me the first question, again, it was... Yes, just more around why are you assuming spot rates, kind of hold? I mean, I think most people are more of the view that you could see some moderation in commodity costs from here. So, just any thoughts on… Yes. Aluminum prices closed out, the LME plus the Midwest premium closed out December to $1.29. It's now trading at the high $1.40 to $1.50. So, we've seen some already some increases in aluminum costs from where they closed out the year. And polyethylene recently went up $0.03 a pound as it closed out January. So, we do see stability, compared to what we saw in 2021 and 2022 in these commodity costs, but I think further declines plus other inflationary costs are factored into our guide. That's super helpful. And then I guess I just want to go back to the commentary around gross profit return to pre-pandemic profitability in terms of gross profit dollars. And Michael, I think back in July, it was kind of this $950 million number in November, the change in elasticity, kind of shifted that number lower. So, just – I know it's kind of the gross profit recovery is more of a back half dynamic now, but just how should we be thinking about gross profit recovery for the full-year, just in the context of what you've outlined previously? Yes. So, I think the context you provide is accurate, you know drivers, we see gross profit being around $920 million now. We did previously guided that – we did previously give an indication around $950 million, which we later lowered to around $930 million. It's lower for Reynolds Cooking & Baking and higher for the other business segments, but net down Reynolds for we've reviewed operational efficiencies and the purchases of supplemental milled aluminum at a premium. Those are big drivers of that. And then on other business segments – other businesses, as we enter 2023, they have healthy shares across the businesses. They've demonstrated strong performance, and it's going to be a bit of an offset there. So, the confidence is high as we move forward, but clearly, it's been a drag, primarily driven by the Cooking & Baking business. Great. Thank you very much. Maybe if you could talk a little bit about – you had some initial comments that you expect trade promos to be up in 2023, how should we think about that in the context of still an inflationary environment, still a lot of room to recover on the margins. You guys are the category captains. So, how should we think about that statement? And maybe if you can reference percent of volume or sales that were sold on trade promos, kind of pre-pandemic at the bottom and kind of where we are now. Thank you. Yes, Robert, we're talking about a 1% increase in trade year-over-year, and most of that being in the segments that are performing at historical plus levels from a margin standpoint. The trade promotions that we took in Reynolds were completed in Q4 and probably maintain those levels, but we may have to revisit that based on the fact that aluminum has gone up and we may have to reduce some trade and move some price points around. I think we've had a great track record of demonstrating across our business over the years evidenced recently by how we've managed share with Reynolds Wrap that we can manage trade to ensure that we hit the right price points and ensure that we get growth and share as a result. But we're not talking about a significant – it's 1 point of revenue that we're talking about. Great. Thanks. First thing was just on that detail you offered earlier on the drivers of the EBITDA miss, the 10 million from volume. I was curious, how much of that would you – have to ask for more detail on [that’s already] [ph] great detail, but conceptually, was the result of the lower consumption in terms of consumer takeaway or was some of that related to the production challenges in the foil business? The year it was about [5] [ph]. Yes, it was almost exclusively consumer consumption related and a lot of it occurred in December time period from a retailer replenishment from Thanksgiving and then the December holidays. It just did not play out from a consumption standpoint the way that we had forecasted. Our share actually went up in Q4. So, we had – it was not a share issue. It was a category consumption issue that occurred from a consumer standpoint, and we have factored that into our guide as part of 2023. Okay. Okay. And assuming that consumption remains lower than historic trend or what you previously might have expected, is that slightly softer [indiscernible]? Okay. Great. And then – so Hefty, so profitability, kind of off the charts – sorry, Waste & Storage, I should be more specific. Profitability, sort of unbelievably strong this quarter, right, both in dollar terms, in terms of EBITDA and then also on margin. So, maybe any update on kind of, A, the competitive environment; and B, separate from the comments you've made on a little bit more trade promotion? I think we've spoken previously about just whether or not pricing would prove so sticky with easing in the raw material cost basket? So, yes, just any kind of thoughts there as we think maybe towards – as we move into next year, I'm going to assume this kind of 70 million EBITDA isn't a run rate for the business. So, just kind of any thoughts there would be helpful to make sure we don't get ahead of ourselves on that business. Well, that category has grown significantly since the pandemic, right? So, it's not as high as it was in the peak of the pandemic, but pre-pandemic, this category is up. And the pricing has been stable. And I think all of us in the category have been focused on ensuring that we maintain profitability and not with a lot of – not a lot of promotions, but ensuring that we get the right price points to ensure consumers continue to have high takeaway. So, I think things are relatively stable in that category, and there's no reason to believe that these profit levels can continue. Okay. Because it was a huge – I mean [indiscernible] sequentially, right, it's a very material step up. So, would you say what we're seeing there is a combination of better resin costs flowing through, plus the higher pricing that's been enacted over the last – the prior 18 months or so? Okay. Okay. Because there was a final increase I think that went in September, October, but again, just that sequential jump in profit would suggest it was much more sizable than prior rounds or again, getting back to better coverage on stable resin cost. Resin costs came down some, and then the pricing went up. So, we've crossed that threshold where we're back to higher profitability. Thank you. Thanks for taking a second. I think you guys are in a better position than most on having a sense of the consumer and any shifting between private label and branded. Can you just give a sense of what you're seeing from a consumer perspective? Is there any trading down? There's reduced consumption, but are decisions being made to save dollars at the shelf? Any insight there would be useful. In our categories, label share was actually down in a number of our categories last year and in the fourth quarter. Private label shares down in foil. It's down in food bags. It's down in slow cooker liner and oven bags for both the year and the quarter, Q4. And private label share in waste bags was down for the full-year, was up slightly in Q4, but the Hefty brand was also up slightly in Q4. We are seeing a higher private label in party cups, plastic wrap and parchment paper. And all of those, at parchment paper, we have a very strong private label position. So, those three segments, we are seeing some trade down. We've also seen some trade down in some channels to lower pack sizes, but not a shift from brand to private label. Hey guys. Thanks for letting me double dip. Michael, you said your guidance is now predicated 920 million of gross profit. You had previously said, you expected SG&A of 400 million. That gets you to a $640 million EBITDA figure, about 20 million ahead of what you're actually guiding to. So, implicitly, you're now expecting higher SG&A. What's driving the higher SG&A outlook? Yes. The significant driver of the SG&A increase is the higher variable comp and increased advertising, as you noted, as well as market research, but it is just a reminder from a variable comp standpoint. Our variable comp is linked to our year-over-year earnings growth. And as such, as we expect to increase in earnings over the year with that will become – come higher SG&A expense. That is a big driver. No, I'm telling our telling you that our incentive comp is linked to earnings progression, right, and our forecast has that going up. Okay. And then on the volume outlook for, sort of flattish on the year and you're coming in down mid-singles, what gives you confidence in the inflection to growth later in the year? And is there any like reroll or anything that we're not going to be able to see in the consumer link data that would drive that? As a company, our volumes are up roughly 4% versus 2019. Of course, pricing has been taken over this period has been significant. And implying some elasticities for a sustained period of time. At different points in 2022, our categories did return to pre-pandemic elasticities. And we're using those elasticities I've mentioned in a previous question, as part of our guide. Our confidence in our assumptions on elasticity is based on a number of factors. Price increases are largely complete when assuming a more stable and easing commodity environment. Consumer activity outside of the home is increasing versus the pandemic rates continuing at a relatively stable level in recent months. Our categories and our portfolio's response to trade and other forms of promotion has proven to be very effective. And our planned levels of trade and advertising we've talked about are – we expect to have that impact. We have reached the end of our question-and-answer session. I would like to turn the conference back over to Lance for closing comments. Thank you all for your questions, and we do appreciate your time this morning. We have strengthened our competitive position over the last three years. We've recovered pre-pandemic profitability in three of our four business segments, and we enter 2023 with a strong team and a robust plan for recovering Reynolds Cooking & Baking profitability. We'll translate to even stronger performance for us overall. I want to also thank our employers and our retail partners for their dedication and contributions during these challenging and dynamic times. Thank you. Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.

EarningCall_267

Good day. And welcome everyone to the Blackstone Mortgage Trust Fourth Quarter and Full Year 2022 Investor Call. At this time, all participants are in listen-only mode. [Operator Instructions] I would like to advise all parties that this conference is being recorded. And with that, let me hand it over to Tim Hayes, Vice President with Shareholder Relations. Please go ahead. Thank you. Good morning. And welcome to Blackstone Mortgage Trust fourth quarter and full year 2022 conference call. I am joined today by Katie Keenan, Chief Executive Officer; Tony Marone, Chief Financial Officer; and Austin Pena, Executive Vice President of Investments. This morning, we filed our 10-K and issued a press release with a presentation of our results, which are available on our website and have been filed with the SEC. Like to remind everyone that today’s call may include forward-looking statements, which are uncertain and outside of the company’s control. Actual results may differ materially. For a discussion of some of the risks that could affect our results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update forward-looking statements. We will also refer to certain non-GAAP measures on this call and for reconciliations you should refer to the press release and our 10-K. This audio cast is copyrighted material of Blackstone Mortgage Trust and may not be duplicated without our consent. For the fourth quarter, we reported a GAAP net loss of $0.28 per share, while distributable earnings were $0.87 per share. A few weeks ago, we paid a dividend of $0.62 per share with respect to the fourth quarter. If you have any questions following today’s call, please let me know. Thanks, Tim. The snapshot of this quarter’s earnings comes down to two key numbers, $0.87 per share, our distributable earnings, an all-time record for BXMT and $0.94 per share, our net change to book value reflecting the impact of our CECL reserve increase given the more challenging credit environment. The two are integrally related. The primary factor pressuring credit performance is also driving record income for our business and that is the precipitous rise in short-term interest rates, 425 basis points over the course of 2022, the status tightening cycle in 50 years. They are also integrally related for our company, our powerful earnings stream protects the lion’s share of returns for our investors, as we work through a credit cycle. Our dividend is delivering a nearly 10.5% current income yields, well in excess of the 3.5% impact on book value of our reserve increase. That dividend is well protected, 140% coverage this quarter, creating meaningful cushion against non-accruals. It is recurring. We paid it for 30 straight quarters. And when we out earn our dividend, the difference is retained as additional equity, further offsetting the impact of increased credit reserves on our book value. This interplay will persist, rates are still increasing and the Fed has made clear that they will stay high for some time. This will continue to pressure credit performance for the most challenged real estate assets. At the same time, elevated rates drive outsized earnings power and current return, a powerful hedge for businesses like ours. The broader market has figured this out. After a year of massive outflows from all sectors, inflows into fixed income so far in 2023 are robust. Credit assets are inherently defensive and floating rate credit is even better today. This does not mean, we will be immune from an economic slowdown. Few businesses can be, but we believe our business is well positioned to withstand it. We start with an asset base of loans made to best-in-class borrowers with significant subordinate equity. With the benefit of insights gleaned from the far reaching Blackstone footprint, we then built up our defenses for a more difficult environment. Having seen cracks in the capital markets, we shifted BXMT to a more conservative posture at the outset of 2022. We raised the bar for our lending activities, focusing on our highest conviction themes and top tier borrowers. We raised over $1 billion of corporate capital accumulating a deep well of liquidity. And we proactively worked with our existing borrowers to collect paydowns and recourse, reaping the benefits of our well structured loans to enhance our credit cushion, while importantly maintaining constructive relationships. At the same time, the impact of rates on carry costs, valuations and market liquidity will continue to weigh on the most vulnerable assets. This is an important concept. The impact of the current economic and interest rate environment on real estate is uneven. Income growth in multifamily, industrial and hospitality assets remains robust and supply has become more constrained due to rising construction costs, providing a longer term tailwind to fundamentals. Capital demand is even more concentrated in these best performing assets, providing strong support to valuations. On the other hand, offices facing well known headwinds from post-COVID work patterns and the slowing economy. But here too the outcomes are uneven. The segment is not monolithic and basis and quality matter. There is scarcity in true Class A office space, as evidenced by record setting rents at trophy assets. Meanwhile, commodity office in cities that were already experiencing slowing growth prior to COVID are facing the sharpest headwinds. Our reserves are concentrated in these assets as are the bulk of our asset management efforts. The four loans with new specific reserves this quarter, date back to well before COVID, 2017 on average, on assets that where well suited to their markets at the time. The COVID was not in the model and three of these loans are backed by office properties that are bearing the brunt of the post-COVID realignment in demand, most notably a significant reduction in government tenant office utilization. The loans also share the commonality of a material change in sponsor wherewithal towards the assets. We are sober about the value to clients impacting the most challenged of commodity office. On average, our reserves are 20% of our loan balance and imply asset value reductions of nearly 50%. But these assets are not typical of our broader office portfolio. 54% of our office loans are backed by assets that are newly built or recently substantially renovated, with an average vintage of 2021 and an average origination LTV of 60%. 34% of the office portfolio, most of the remainder, carries one or more significant credit enhancing qualities, such as particularly low leverage, high debt yield, location in high growth Sunbelt markets or material additional sponsor equity commitment in the last year. Our four and five rated office loans round out the rest and represent only 5% of the overall BXMT portfolio. A small fraction where we have meaningfully increased our reserves to account for the credit challenges we see today. Our overall loan portfolio is 97% performing. This year, we collected $3.7 billion of repayments, nearly 50% of which were on office loans. Our borrowers contributed $675 million of incremental equity, continuing to invest in their assets. We captured nearly $350 million of partial paydowns or increased recourse on 17 existing loans, primarily office, resulting in an average 16% reduction in our basis. We were able to negotiate this deleveraging, because our loans carrying many structural protections, performance tests, cash flow sweeps, guarantees and rate cap requirements. And of course, the most important protection for a lender is leverage plan. The insulation provided by our loan basis should not be overlooked, it would take lasting declines of 30% to 40% in real estate values for us to experience a loss at our position in the capital structure and because the vast majority of our sponsors remained committed to their assets and have contributed more equity along the way, our business has been further de-risked over time, enhancing the embedded credit protection in our portfolio. In 2020, we encountered an unprecedented disruption for the real estate market. We address that challenge much as we are addressing the delayed COVID impact on office today, actively asset managing our loans, making appropriate risk rating and reserve adjustments, negotiating for credit enhancement and providing time where appropriate. It is our job as a fundamental investor to look past the broad-brush sentiment and judiciously and proactively manage our portfolio based on Blackstone’s deep experience taking the long view and where the impacts of asset underperformance, capital markets and sponsor behavior combined to create a workout dynamic. We have the experience and the infrastructure as one of the largest owners of real estate in the world to identify and execute the best path for value preservation over time, a differentiator that will become increasingly important through the credit cycles. At the same time, we believe the origination environment will become still more opportunistic as values adjust and new capital is needed. We started the Blackstone Debt business in the GST and we are uniquely positioned to access the once in a cycle capital relief trades that create outsized returns on well underwritten risk. In the current market, we have found pockets of attractive regular way lending opportunities as well, exemplified by our nearly $700 million of second half originations that were 70% industrial with yields 173 basis points wider than our overall portfolio. So with transaction activity far below the norm, the addressable universe of standard new originations is smaller and to stand up to the opportunity cost of our capital, new deals today must be more attractive from both the risk and return perspective. Most importantly, the outstanding earnings power we have been already established with our existing portfolio means, we can well afford to be patient. As we look ahead, the market outlook is mixed. We see some green shoots with the turn of the calendar. The CMBS market has reopened with AAA spreads retracing 50% to 75% from historic wides in December. The corporate debt market is active. Thanks, having cleared their stress tests are signed. Stabilizing long-term rates create support for asset values and rational long-term borrowing costs, an important dynamic that should lead to more liquid markets. But there are still headwinds, the accumulating pressure of sustained high interest rates, geopolitical uncertainty and slowing economies around the world. As a result, we continue to position the business to withstand a more challenging period, while continuing to capitalize on the advantages that supported our performance this year. Well performing portfolio, record earnings power, substantial liquidity and a well structured balance sheet. While upcoming year may present challenges, challenge creates opportunity and there is no platform better placed to navigate this environment than Blackstone. We are the largest alternative asset manager in the world with unparalleled information experience and relationships. We have a four decade track record of performance for our investors in all market cycles. And here at BXMT we look forward to continuing to deliver for our shareholders. Thank you, Katie, and morning, everyone. I would like to start by unpacking our financial results for the quarter. We reported a GAAP net loss of $0.28 per share and distributable earnings or DE of $0.87 per share. DE is up $0.16 from the third quarter, driven by continued income growth from our 100% floating rate portfolio, as well as a notable prepayment fee of about $0.07 per share this quarter. Excluding this fee, our regular weighted DE of $0.80 per share is up 13% from 3Q and 21% from the equivalent metric in 4Q of last year, reflecting the significant beneficial impact of rising rates on our portfolio. We continue to see rising rates as a tailwind for our business, but 100-basis-point increase in rates from 4Q levels generating around $0.05 per share of incremental quarterly earnings all else equal. The primary difference between our GAAP net loss and DE is the $189 million increase in our CECL reserve this quarter, primarily related to four loans with specific CECL reserves, as well as an incremental general reserve to reflect the broader market uncertainty and potential risk to our portfolio. Our aggregate asset specific CECL reserve outstands at $190 million or 20% of our five-rated loans and our general CECL reserve of $153 million represent about 55 basis points of our total portfolio, which is up from 35 basis points last quarter. While these reserves will not impact DE unless and until they are realized, we have also placed our loans with specific CECL reserves on cost recovery status effective as of 12/31. These loans received all interest payments due in the fourth quarter and generated about $0.05 per share of interest income. However, as we collect interest payments in the first quarter of 2023 and onward, cost recovery accounting will instead apply the cash payments we receive against our basis in these loans. Ultimately should these loans fully recover, all such deferred revenue will be recognized at the time of repayments. The interim these headwind earnings will be substantially offset by the benefit of rising rates I mentioned earlier. Continuing on the topic of credit, we upgraded eight loans this quarter as performance for these assets continue to improve and downgraded eight loans inclusive of the four loans with asset specific reserves, I mentioned earlier. Our five-rated loans with specific reserves represent only 3% of our gross loan portfolio, 10% of our loans have a risk-rating of four, all of which are performing and current where we see the possibility of further stress if economic conditions worsen. Remaining 87% of the portfolio is rated three or better. We continue to see business plans progress including outstanding performance across many of our multifamily, industrial and hospitality assets, fine, represent over half of our portfolio. We will continued to collect 100% of all interest due under all of our loans and the vast majority of our loans, 97% remain fully performing and recognizing income as usual. Although, loan repayments remained muted, we did collect $648 million of repayments this quarter, roughly in line with our $690 million of loan fundings. Turning to our capitalization, we continue to run BXMTs business with a focus on balance sheet diversification and stability. During the year, we added $3.6 billion of new credit facility capacity with our key banking relationships and we remain an important customer for them during a period when banks are increasingly selective on credit. One of our credit facilities allow for margin calls based on market based valuation and 64% of our total financings are non-mark-to-market, either structurally immune from any form of margin call or mark-to-market provisions limited to defaulted assets only. Our liabilities are term matched to our assets and we have no material corporate debt maturities until 2026. In the fourth quarter, we strategically upsized our term loan by $325 million, effectively refinancing to $220 million convertible notes maturing in March and bringing our corporate debt raise to $1.1 billion for 2022. This incremental term loan was leverage neutral as we use the proceeds to repay revolving credit facilities. However, our reported debt to equity ratio did increase this quarter to 3.8 times from 3.6 times as of 9/30. This is not the result of increased leverage against our assets, but rather the result of our CECL reserve, reducing the GAAP equity used in this calculation. Excluding the impact of CECL, our adjusted debt-to-equity ratio is 3.6 times, in line with 3Q and a level we generally expect to be stable going forward. Incremental capital we raised this year, as well as the incremental earnings we have been able to retain have grown our liquidity to $1.8 billion as of 12/31 or $1.6 billion net of our convertible notes maturing in March. This capital provides us with plenty of resources to manage our business during a volatile period, increase further stability in our balance sheet. Similarly we believe our $0.62 per share dividend will remain stable and is well supported by the cash flow generated by our business. Our DE covered our dividend of 116% over the course of the year and 140% this quarter, giving us ample dividend coverage and a wide range of credit scenarios. For example, in an onerous downside scenario, where all of our five-rated loans and all of our four-rated office loans stopped paying interest, our 4Q earnings level would still cover our dividend with a healthy cushion, all else equal. Of course, we are not expecting this scenario to unfold, but it highlights the inherent resilience of our business and ability to maintain dividend stability. We look forward to continuing to deliver consistent reliable current income for our stockholders and we maintain our focus on stability and downside protection admits a more challenging environment. Thank you. Katie, hoping you could talk a little bit more about the four loans that you put reserves on kind of what specifically kind of occurred in the quarter that kind of led to that the down grade and specific reserves? Sure. So the loans that we added specific reserves this quarter were three office loans and one very small rent stabilized multi-loan. We previously had them on the watchlist and talked about a few of them last quarter as areas of concern. They -- we had the general sponsor -- supportive sponsorship behavior, and as Tony mentioned, all of these loans have been paying interest. But we are in a dynamic environment and the performance of these loans have changed over time. In terms of the office loans, which are the lion’s share are in some of the most challenged markets, DC, Long Island City, Orange County. And I think also worth noting, the quality of these buildings is quite distinct from the norm in our portfolio. They are generally more commodity buildings. We made the loans knowing that at low leverage points, because they were relevant to a specific niche of the market that has now changed materially. So the setup of these loans became more challenging in the post-COVID world and then that combined with the impact of higher rates on carry costs and liquidity combined with some upcoming maturity has created a decision point and we made the decision to move those loans to five and take the specific reserves. We are actively working on these loans to resolve them and bring them to a conclusion. And as a reminder, the loans we downgraded our only 2.4% of the overall portfolio and really represent a different paradigm than what we are seeing in the most of the portfolio. Just on the maturity point, Katie. I guess what are the -- kind of the final maturities or what would be or extension dates that could kind of trigger the next decision point from the sponsors? So I think we are already in that conversation. They have office loans have their maturities this year and so that’s really part of what is resulting in these reserves and the conversations we are having. So there isn’t another sort of impact or relevant timelines. And our next question is coming from Don Fandetti with Wells Fargo. Please go ahead. Don, we can’t hear you. Maybe you are on mute. Hi, Katie. Can you talk a little bit about how higher rates are pressuring borrowers and can they handle much more if the Fed continues to raise and were you able to give modifications in that type of thing to manage through that? Sure. So I think that clearly higher rates and especially the accumulating impact of higher rates for longer create pressure for borrowers. They may carry costs more expensive. They make the option value more expensive for assets that are already challenged. They changed the perceived cap rate and certainly the higher rates and overall Fed tightening is having a very material impact on liquidity. So those impacts are happening. I think it’s important to note that even with that we still have a 97% performing portfolio. So our assets are withstanding those impacts, which we have been felt for quite a period of time now and I think that’s a testament to the equity value and the assets and our sponsors view about the long-term value of the assets, which we share. I think the other dynamic that you brought up and it’s really important, and I mentioned in my script is that, the impact of higher rates, it creates pressure on assets that were already more susceptible. But for the lion’s share of our portfolio, it creates very substantial excess earnings and that creates insulation in our business in terms of our ability to retain those excess earnings in book value, our ability to cover our dividend and our ability to work with borrowers. If they have a viable business plan and it’s really just the significant increased interest costs that’s causing the pressure we have some flexibility there to put the asset on a better path, allow it to manage carry costs a little bit more reasonably and get to the other side here. And the fact that having much higher rates and the result of that on earnings in our portfolio gives us substantial margin to be able to have those conversations and a lot of optionality in terms of putting these assets on the right foot to manage through this period. Good morning. Thank you. Good morning, everyone. Congrats on a strong report in, obviously, a difficult environment. I am curious on the $0.80 of distributable EPS, excluding the $0.07 in prepays. I mean it was very strong, $0.08 to $0.10 above consensus and your own third quarter number of $0.71. Was there anything other than the obviously higher average LIBOR, was there anything unique or one-time in that number, such as maybe recognition of some interest -- accrued interest that had been deferred. Just help us if there is, if you really, I guess, my question is to Tony and to you, Katie, is the $0.80 a reasonable run rate for distributable EPS in the near-term? Thanks. The $0.80 that is the earnings power of the business, it’s the impact of rising rates on the portfolio and the full performance of the portfolio. When me talk about run rate, I’d say, the two things to bear in mind, which I highlighted on the call. On the one hand, we have some of the loan is going to cost recovery that cut against that. On the other hand, we have the benefit of further rising rates that will be a tailwind. Those happen to roughly offset. But if you are thinking about the go forward, those are the three things that I would think about, is the 80% baseline and then those two variables going forward. Great. Thank you, Tony. And on the $1.10 boost to the CECL reserve, $1.10 per share, about $180 million. Can you clarify how much of that and I think there was certainly the specific, you mentioned, the loans that had been four, five loans that have been put on the cost recovery, but is there a material increase in the general reserve include embedded in that $1.10? Sure. So the general reserve went from 35 basis points of our loans to 55 basis points, which is about like $0.13. So it’s majority is that change in the impaired loans. Yeah. No. I think that’s important, because we at least have some hope or expectation down the road and improving market that some of that may revert to book value. Thank you very much for the comments. Thank you very much. I wanted to ask about multifamily. We are seeing negative new lease rent growth, slowing demand, so it’s a matter of time before renewal rents catch up in terms of magnitude of growth? And in addition to that 1 million of multifamily units under construction, so a massive increase in supply will pressure multifamily fundamentals. This sector had the lowest cap rates, a lot of deals done even below 4% caps and many of those deals have challenges with interest rate caps that are coming up. So what are your thoughts on multifamily and how exposed you think BXMT is to any credit issues there over the next 12 months to 24 months? Sure. Thanks, Jade. I would start by saying, what we are seeing on the ground in multifamily is, perhaps, a little bit distinct and it may speak to the quality of the markets and the assets that are in our portfolio, and more generally Blackstone. While we do see some deceleration in the growth of rents, we are still seeing positive releasing spreads. And I think you alluded to it a little, but it is really critical to focus on the fact that the loss to lease in these rent rolls is still very significant. So even if you see topline market rents decelerating or flattening out, there is still significant loss to lease, that will create positive NOI growth going forward and that’s what we are seeing. I think the other important thing to note is, if you look at the vintage of origination of a lot of these loans, the real question is, where is NOI going to be relative to when we originated these loans and there’s still a lot of growth between those two things, which supports our basis. I think the other thing to focus on it and supports DSCR and other cashless. The other thing to focus on is, there’s a tremendous amount of capital that is focused on multifamily. There has been new capital formation focused on filling some of the gaps in the capital structures that may be caused by interest rates or rate caps rolling off or other needs. And generally, I think, multifamily owners are very positive about the long-term prospects of their assets. The market in general is supported by the agency financing market. And I think as a whole, the combination of continued positive, albeit to your point, probably, somewhat less quick or decelerating growth, but continued positive growth, combined with the fact that there’s a lot of capital markets interest and support for this asset class makes us as a lender feel very good about where our loans are relative to the NOIs and the value of these assets. There will be a little bit of a pop near-term in supply. But beyond what’s already on the ground this year, the supply pipeline is really very significantly falling off. And so, I think, people will also see through interim sort of short-term delivery of some of the assets that are under construction and understand that over the next couple of years after this, there’s going to be very little new supply. Thanks very much. On the office side, as I go through the portfolio, there’s many markets where we seeing pressure, it’s extremely widespread including markets like Austin, Nashville, parts of Dallas and then the other obvious markets. So how confident are you that your fourth quarter CECL reflects a broad view of the office exposure and that we shouldn’t expect material degradation in credit on that portfolio in the coming quarters? Yeah. I think a lot of it comes down to quality. I mean, we are in a dynamic environment. So we look at the data and the trends we see today, and that informs what we do with our reserves and our overall risk-rating process and we identified the fives and the fours where we see more susceptibility. But I think in particular with some of the markets you mentioned, there is really a difference in the dynamic between San Francisco and in Nashville. There is still growth in Nashville, may be coming down a little bit. And --but you think about rents and mark-to-market of where those assets were renting out historically versus today and the overall fundamental long-term dynamics. Combine that with the quality of assets we are focused on. I mean, Austin our large office there, is going to be the newest office building in the market. It’s a mixed-use project, 62% of cost with an outstanding sponsorship and it’s really going to be the most premier asset in the market. And I think that that’s part of why we feel good about the overall office portfolio. It’s really looking at quality. We are seeing in most markets is just a continuation of an accelerating flight to quality and so you see the larger market statistics and certainly they have challenges and our portfolio is not immune from that. That’s why we have the fours and fives. But by and large, the very high quality assets in the market. We broke our sort of new and recently constructed at 2015 vintage. Those assets are seeing very different dynamics. They’re seeing good net absorption, growing rents, 5 point to 10 point differential and availability, and while the overall market is slowing, those assets we think are going to continue to outperform. Hey. Thanks. Good morning. How would you describe the approach to reserving and even potentially modifying loans, because of the fact that price discovery is so weak in the market right now. Like how do you handicap for that, in cases where you think there could be more meaningful discrepancies between where you think value sits and where sort of the unknown of where it could realistically transact? Yeah. And I think for office, we are in a very liquid market, there’s not a lot of transaction activity that’s going on. There is small amounts of transaction activity are generally in the more distressed category. And sorry, I think, it’s fair to say, no one can be perfect in that context. But that said, we have an extremely rigorous process. We do a full deep dive underwriting in coordination with our broader real estate team, using all the best available information we have on our assets, on the market, all of the constant information flow we have coming into Blackstone, both transactions that have occurred and transactions that have not occurred and we inform that all through our process, which has been thoroughly vetted by our senior leadership. The reserves also go through an audit process, so there is a third-party auditor element to it and so it’s an extremely rigorous and detailed process that we think reflects the appropriate level of reserves that we see today. Great. Thanks. That’s helpful. And how would you maybe describe the outlook for sponsors to capture NOI growth, as a result of the capital investment or the business plan that they are pursuing? Would you say that your sensitivity has changed with respect to unfunded commitments or construction financing in general? So I think it certainly depends on the asset class. We still feel very good. As I mentioned about the prospects on the majority of our portfolio, multifamily, industrial, hospitality, some other segments that are seeing good growth. On the office side, the majority -- the vast majority of the future funding is a new build office. And as I mentioned earlier, the new build office elements of the portfolio, which is naturally where most of the future fundings are, those assets continue to see very strong growth. There has been just recently in the last month, good leasing coming out of Hudson Yards including at The Spiral, which is our largest office loan. As I mentioned, seeing continued very strong rents on new build offices across markets. And so I think when we look at, think about, our fundings going into new build office buildings, which are also just because of the way we make construction loans tend to be lower leverage on average than the rest of our portfolio, and again by definition, the best quality assets coming into the market. We feel good about continuing to invest capital in those assets. Good morning, everyone. Kind of following up on some earlier questions, could you provide any update or color on the LTVs for the risk weighted five loans? Well, I think that, the best indication and where we sort of see that today is really around our reserve levels. And as I mentioned in the call script, we are pretty cautious and pretty sober about where we think values are for the most susceptible or sort of the most vulnerable commodity office assets. We have taken 20% reserves on those assets, reflective of asset values down 50%. That is specific to the assets that we see as most challenged, older vintage, markets that are really tough, situations with the individual assets, where they were addressing a segment of the market that has really changed, the government tenant segment being most significant. So I think that’s really how we think about the metrics on those assets. Okay. Thank you. And then I realized that BREIT is principally an owner of a real estate, but is there any investment overlap between BXMT and BREIT? Hi. Good morning. Katie, can you talk about, what’s your expected resolution path to be for the five-rated loans and how we should think about the timing of those specific reserves moving into realized losses through the -- through distributable earnings? Sure. So I think that, with these loans and the benefit of what we have here in the platform being the largest owner of real estate in the world, we are really taking a deliberate and thorough approach. These loans do generally cash flow, as Tony mentioned, they all paid interest in the fourth quarter, they are on cost recovery. So we continue to see cashless coming in which will apply to our basis. And in the meantime, what we are doing is assessing the various potential outcomes, whether it’s a sale in due time of structured solution, taking them REO and we are going to make the decision that we think is, most beneficial for long-term value preservation for our shareholders. I think that’s a process that’s going to take some time, because we really want to be deliberate about it and make the right decision and these are a very small part of our portfolio that supported by the tremendous earnings power we have throughout the rest of the portfolio and so our goal is to preserve the most value we count on these assets over time using an ownership mentality. Thanks. And just a follow-up to that, Katie, can you talk about how these loans are currently financed and in the event that they are on facilities that have credit market exposure. Can you give us an update on how those discussions go and kind of what the options are for financing these loans? Yeah. Absolutely. So their finance consistently with the rest of our portfolio, which is a mix of different asset level financings. I would say generally our conversations with our -- all of our credit providers are extremely constructive. They have recognized the same thing, we see in terms of our ability to preserve and create an enhanced value over time and they have recognized how responsible we have been with managing views and all of our assets in terms of creating deleveraging, putting ourselves into a better credit position. They know that, we are going to act in the best interest for the long-term preservation of value of these assets, which of course owners to their benefit and they also have the additional credit enhancement of these generally being in crossed pools with a lot of credit enhancement. So we have a lot of flexibility. They are calm. You keep them comfortable. And they are well aware of all of these situations and it’s been a very constructive dialog. Hey. Thanks everybody for taking my questions. Katie, you talked about the fact that higher rates are driving higher EAD [ph] and that totally makes sense. But to some extent that is ultimately zero sum, it puts more pressure on your borrowers to the extent yields are going up. I realize that so far a great deal of that has been offset by rate caps. I am curious as we see scenarios where loans are extended either because of execution or because of unattractive takeout financing, how you think about those rate caps, does that -- will you continue to have the same level of coverage if the portfolio fully extends? Yeah. It’s a great question. And I think rate caps are one of the really important tools in our toolkit that allow us to have conversations with borrowers and sort of right-size our credit exposure on these loans. It really starts with the borrowers’ equity value in terms of what they have to protect, and to your point in a higher interest rate environment, clearly that eats into some of the equity value. But most of our borrowers still have a lot of equity value to protect, even if it’s less than what it was in a zero percent interest rate environment. So that’s a really positive backdrop. And then we have the cap conversations our portfolio is still 95% covered by rate caps or interest guarantees. We had a lot of loans come on those conversations in the last year, so that gives you an indication of our ability to preserve that structural protection. And we take a thoughtful approach, we will -- we have rate cap requirements, we will require that if we think that’s the right thing. We may also trade it for an interest guarantee, more cash in an interest reserve or whatever we think is the best alignment for us and for our borrowers. We have 25 people on our asset management team that are working through all of these decisions and discussions with our borrowers every day and really always just looking for a way to put our loan and the asset on the most stable path going forward. So I think it’s been a great sort of dialog with our borrowers. We have been able to preserve a lot of this protection, be able to -- been able to pick up more sort of credit enhancement in the form of guarantees and interest reserves potentially along the way and we will continue that approach. Hey. Thanks. I was wondering, if you could just talk a little bit about the office market and how much of this is driven just by rates and required cap rates versus the actual fundamentals. Obviously, folks are going to the toughest is less and using less office space. I am just kind of thinking about what could turn this around, it is only REITs or do you really have to see a dramatic change in the fundamentals of folks in the offices themselves? It’s a great question and it’s really a combination. I think that there are assets that are outperforming and doing fine even in the context of higher rates, whether that’s in the multifamily or industrial sectors or new build office, where we continue to see good leasing at strong rents. There are assets that have real secular issues, assets that just targeted a component of the market like government tenancy. As I mentioned, that just really is not a growing or it’s a significantly shrinking part of the market going forward. Commodity, obsolete physical quality office has been something that’s been challenged for years long before COVID and so there is a continuation of the trend. And then there are assets in the middle that cash flows perhaps were not growing or not as substantial as they once were. But they work okay, in a low interest rate environment and less so in the environment that we have today. So I think interest rates become a decision point for assets. Some assets that we are experiencing some challenges, but not really sort of permanently issues, and so as rates fall, you may see some of those assets crossover. But there’s certainly a number of assets in the market and a few in our portfolio that were just built and targeted at a part of the market that has had lasting change and I don’t think rates are -- there’s certainly a contributing factor, but I am not sure that lower rates are really going to change for some of those assets. But again that’s a really small part of our portfolio. Thank you very much. Just wondering if you could walk through liquidity post the convert repayment, what are the primary sources of liquidity, is it just undrawn available borrowing capacity and do you expect to issue any form of capital to potentially replace that convert, whether it would be a preferred securitization or something else? Sure. I will start with the second part of your question. So we think of the term loan that we issued earlier this quarter as effectively the replacement for the convert. We thought that was a good time to issue that in the market, so that was a bit of a pre-refinancing. So we would not expect at this point that we are going to handle the convert maturity other than paying it in cash. As far as the sources of liquidity, we always keep some cash on hand, but the majority of the liquidity is under our credit facilities and those are revolving credit facilities where we can as of right borrow that money in 24 hours. That is not some sort of contingent availability that the banks need to approve or need to approve assets. So it’s really as good as cash. We just don’t keep the cash drawn to manage the interest expense. No plans to issue a CLO in the near-term. I think, Katie, you did talk about some of the improvement in spreads that we have seen in that market. Yeah. I mean, we are certainly tracking the CLO market and it’s nice to see some additional liquidity in that market. If we issued a CLO, it would really be a factor of our sort of opportunistic management of our balance sheet. As we talked about in the past, all of our asset financing is designed to be term match those CLOs, we really do if we see it as an opportunistic refi that improves our pricing, our structure, some way that we think is better than the in-place credit facilities that we have. And certainly, if we see that opportunity in the market, we will take it. But I think the market is not quite there yet, but certainly the momentum is moving well and we will be tracking that.

EarningCall_268

Good morning, and welcome to the Radware Conference Call discussing Fourth Quarter and Full-Year 2022 Results. Thank you all for holding. As a reminder, this conference is being recorded, February 08, 2023. I would now like to turn the call over to Yisca Erez, Director of Investor Relations at Radware. Please go ahead. Joining me today are Roy Zisapel, President and Chief Executive Officer; and Guy Avidan, Chief Financial Officer. A copy of today’s press release and the financial statements as well as the investor kit for the fourth quarter are available in the Investor section of our website. During today’s call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. These forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from Radware’s current forecast and estimates. Factors that could cause or contribute to such differences include, but are not limited to, impact from the COVID-19 pandemic, general business conditions and our ability to address changes in our industry, changes in demand for products, the timing and the amount of orders and other risks detailed from time to time in Radware’s filings. We refer you to the documents the Company files and furnishes from time to time with the SEC, specifically the Company’s last annual report on Form 20-F as filed on April 11, 2022. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date of such statement is made. Before I turn it over to Roy, I would like to remind you that we are hosting a virtual Investor and Analyst Meeting on February 22, which will include executive presentations and updates. If you haven’t registered and would like to do so, please e-mail us at ir@radware.com Thank you, Yisca, and thanks to all of you for joining us today. Today, we report that despite the challenging macro environments, we ended the fourth quarter of 2022 with $74 million in revenues and $0.17 of EPS. These results were driven once again predominantly by our subscription and cloud business, a trend that we expect will continue as we shift to assess model and grow our ARR faster than total revenues. As we closed 2022, we continue to see longer sales cycle and multi-faced contracts as we noted in previous quarters. Despite customers being more cautious with short-term spending, there are four reasons we remain optimistic about our long-term growth. First, cyberattacks are not only increasing in terms of sheer numbers, but they are also more powerful, frequent and complex. This creates a critical customer need and market demand for our solutions. Second, the rapid transition to the cloud also continues to generate demand. Multi-cloud environments expose customers to configuration and visibility issues and introduce gaps in protection. We solve these challenges by offering consistent security across cloud environments, so applications are protected regardless of where they are running. The third reason for our optimism is the accelerating pace of digital transformation. The speed in which applications are developed and introduced has become a competitive advantage. To securely manage this process, organizations are looking for frictionless security solutions that support innovation without getting in the way of business. This is a need we are well-positioned to meet. Fourth, our sales team is ramping up to drive growth in North America, where we just hired a new head of sales. We are focused on growing our footprint in the mid-sized enterprise market and working with our channels and OEM partners to win new logos. We’ve reallocated resources and made adjustments to enable the teams to capitalize on these opportunities. While we remain confident in our future growth prospects, we also recognize that security, like other industries, is not fully immune to economic downturn. To tight budgets with the critical need to secure the applications, we believe more companies are opting for cloud deployments, fully managed services and vendor consolidation. Trends were serving very well with our solutions. The growth engine behind our 2022 performance is our cloud and subscription ARR, which grew 14% year-over-year, up from 12% in the third quarter. We won a record number of new customers in the fourth quarter across all cloud security offerings, particularly among mid-sized enterprises. Let me share with you few examples of our successful cloud bookings in the fourth quarter. We signed a large deal with the Fortune 500 pharmaceutical company for a hybrid cloud DDoS solution. The customer experienced a large DDoS attack and was looking for a solution to support multiple sites and automatically mitigate zero day attacks. We also expanded our cloud security business with an existing financial services customer. This customer was using our hybrid cloud DDoS protection service and added our Cloud WAF and Bot Manager. This customer was being hit by web application and bot attacks and appreciated our seamless onboarding, integrated security and the ease of use for our cloud security portal. In another large cross-sell deal, we expanded our relationship with a leading banking group in Europe. They were already subscribed to our cloud DDoS and Cloud WAF and now added our Bot Manager. As we enter 2023, we are laser-focused on scaling our cloud security business. Cloud security provides our customer with a significantly stronger security solution, while it maximizes customer value and improves our visibility and long-term profitability for us. To that end, we intend to expand our footprint in the mid-sized enterprise market, grow our channel partnerships and enhance our cloud security offerings. We have several new cloud security offerings in the pipeline that we will announce soon. To further support our global cloud business while helping our customers reduce latency and meet regulatory requirements, we also continue to open more cloud security centers. Last quarter, we launched a second center in Australia, one in Auckland, New Zealand and one in Toronto, Canada. During 2022, we opened eight cloud centers for DDoS and WAF and increased our mitigation capacity to 12 terabits. Our cloud security offering is a best-of-breed offering and it continues to earn us industry recognition. For instance, Quadrant Knowledge Solutions named Radware the leader in its 2022 SPARK Matrix report for Bot Management. According to the report, Radware Bot Manager offers comprehensive capabilities and the industry widest mitigation options. And Aite-Novarica Group named Radware a leader, recognizing us as a best-in-class provider for Bot Detection and Management. We received the highest marks for vendor stability and client strengths. Beyond the strength in our cloud business, our fourth quarter performance was backed by our on-prem security business. We closed a very large deal with a Tier 1 Asian carrier. This customer experienced a massive DDoS attack, causing hundreds of organizations to go offline. They chose Radware to replace the incumbent due to our comprehensive security solution, strong SLA and enhanced functionality. We also landed a large deal with a major U.S. communication platform company. This customer was hit with costly DDoS attacks, which also created extended outages for their carrier resellers. We won their business with our DDoS solution and our expertise in protecting voice and video over IP attacks. In closing, we are laser-focused on the cloud security opportunities in front of us. Backed by our expertise and our broadening cloud security offerings, we are well-positioned to grow our cloud ARR and expand our addressable markets in 2023. At the same time, we remain mindful of the macro environment and disciplined in our expense management so that we can deliver profitable growth. Coupled together, we believe we are going to continue to grow our ARR and profitability in 2023. I would like to take this opportunity to thank our employees worldwide for their contribution and we look forward to more success in this new year. Thank you, Roy, and good day, everyone. I’m pleased to provide the analysis of our financial results and business performance for the fourth quarter and full-year 2022 as well as our outlook for the first quarter of 2023. Before beginning the financial overview, I’d like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investors section of our website. Fourth quarter 2022 revenue declined 3% year-over-year to $74.1 million in line with the midpoint of our guidance as compared to $76.6 million in the same period of last year. Full-year revenue was $293.4 million, an increase of 2% compared to the full-year 2021. These results were achieved despite the current macroeconomic environment that we experienced since the second quarter and still witnessing today. As we highlighted in previous quarters, the macro headwind impact our customers spending and result in elongated sales cycle, budget scrutiny, and multi-phase deployments. In 2022, topline was driven by our cloud and subscription business revenue, which increased 13% in 2022 to $105 million and accounted for 36% after the revenue in 2022, up from 32% in 2021 and 26% in 2020. As for the annual recurring revenue, total ARR grew 7% in 2022 to $202 million and cloud and subscription ARR accelerated to 14% growth in the same period. We expect to scale our cloud and subscription business to improve visibility and profitability despite revenue headwinds in the short-term as a result of the shift towards subscription-based business model. On a regional breakdown, revenue in the Americas in the fourth quarter 2022 increased by 2% to $32 million compared to Q4 2021. For the full-year 2022, America revenue decreased by 4% to $124 million compared to the full-year 2021. As Roy mentioned in his prepared remarks, we are working in multiple fronts on improving execution in the U.S. and expect to see improvements in the second half of the year. EMEA revenue in the fourth quarter was $24 million, representing a decrease of 18% when compared to the same period of the last year. For the full-year 2022, EMEA revenue grew by 6% to $104 million compared to 2021. The performance in EMEA is related to the macro headwind that we are experiencing globally since the third quarter. APAC revenue in the fourth quarter increased by 14% to $18 million compared to Q4 2021 and 10% revenue increased to $65 million for the full-year 2022 compared to 2021. Americas accounted for 43% and 42% of total revenue in the fourth quarter and full-year 2022, respectively. EMEA accounted for 33% of total revenue and 36% in the fourth quarter and full-year 2022, respectively, and APAC accounted for the remaining 24% and 22% of total revenue in the fourth quarter and full-year 2022, respectively. I’ll now discuss profits and expenses. Gross margin in Q4 2022 was 82.7% compared to 82.4% in the same period of 2021. For 2022, gross margin expanded by 60 basis points to 83%. The gross margin improvement is related to the successful integration of SecurityDAM, offset partially by higher costs related to recently launched cloud security centers. Operating expenses in the fourth quarter of 2022 were $54.9 million, slightly below our midpoint guidance, representing an increase of 5% compared to the same period in 2021. Full-year 2022 operating expenses increased by 8% compared to 2021 and totaled to $214 million. The increase in the operating expenses is a result of additional R&D headcount, the full impact of SecurityDAM integration, and an increase in salaries. Due to the current macro environment, we are mindful of our expenses and we are committed to improve our profitability in 2023. Net income in the fourth quarter was $7.7 million as compared to $10.3 million in the same period of last year. Full-year net income was $31.3 million compared to $38.3 million in 2021. Radware adjusted EBITDA for the fourth quarter and full-year was $8.2 million and $37.7 million, respectively, which included $3 million and $8.5 million negative impact for Q4 and 2022, respectively, on adjusted EBITDA of the Hawks Group. Diluted earnings per share for Q4 and full-year 2022 was $17.68, respectively, compared to $22.81 in Q4 and full-year 2021, respectively. Turning to the balance sheet and cash flow statement. During Q4 2022, we generated $9.6 million in cash flow from operation compared to $28.9 million during the same period of last year and $32.1 million in the full-year 2022 compared to $71.8 million in 2021. Cash flow from operation in 2022 was impacted mainly by $21 million extraordinary tax payment that will partially be returned in the future. During the fourth quarter, we repurchased shares in the amount of approximately $12.3 million and $59.5 million during the full-year 2022. Out of the $100 million share repurchase plan that we have in place, we ended the year with approximately $432 million in cash, bank deposit and marketable securities. I’ll conclude my remarks with guidance. We believe that our current cash position and agile cost structure will help us cross the current environment and come out stronger. We expect total revenue for the first quarter of 2023 to be in the range of $70 million to $73 million. We expect Q1 2023 non-GAAP operating expenses to be between $53 million and $54.5 million. As for Q1 2023, we expect non-GAAP diluted net earnings per share to be between $0.12 and $0.15. Before I turn over the call for Q&A, I’d like to invite you to our Virtual Investors and Analyst Meeting, taking place on February 22. During the event, we will provide additional KPIs, along with long-term model. Hi. Thank you for taking my questions. I know you mentioned already the slower sales cycles and the multi-phased deployments. But I was wondering if you could comment on any color and customer behavior you’ve seen from last quarter to this quarter, if anything has changed, in particular, or maybe in a particular segment? Yes. Thanks a lot, Chris, for the question. So we didn’t see much deterioration in terms of the behavior. I would say that we’ve seen it maybe in more areas, Europe maybe a bit stronger than we’ve seen. And we believe though that our ability to move some of those deals into cloud and subscription deals will actually provide us with bigger long-term value for these customers. So while in the short-term, we are seeing obviously the heat of the multi-phased approach and less large CapEx deals available. We believe it’s actually the right time to accelerate the transition to subscription and, as Guy mentioned, get out of it stronger. Okay. And regarding the new partner program, you announced recently, can you give some color on how that differs from your previous partner relationships? And how does that fit into your overall strategy in reaching into the mid-sized enterprise market? Yes, absolutely. So the new program beyond the regular anchors of the channel program is heavily focused on cloud security. So a lot of the rewards, the kickback, the marketing fund, the certification and so on are centered around the ability to execute and promote together with the cloud security solutions. So this is the major, I would say, change and shifting focus we’ve done beforehand. It was mainly based on total revenue generated over a year and we were not, I would say differentiating between product line or cloud versus CapEx type of business. This program is heavily tuned to cloud security as a service. Regarding your question, how does it fit our overall strategy? As we’ve mentioned and you’ve mentioned in your question, we want to expand our business to the mid-sized enterprise. We see we’re doing very well and you heard some of the new wins in the very large enterprise in the Fortune 500, we have a very significant share and successful track record. However, with the cloud solutions, it’s clear to us that every mid-sized enterprise will require the same level of security, but could not afford the CapEx budget. So cloud security, which is in our case, also fully managed, the DCO for the mid-sized enterprise is very, very good. If you just think about the savings on the headcount cost and the export cost that we offload with our fully managed solution, it’s a very, very attractive offer to that segment. That segment can only be served through channels and dedicated channels through cloud security. So hence, the launch of the partner program is in a lockstep with our strategy to increase presence in this mid-sized enterprise and with other steps we’ve taken in the last three, four months to achieve that. Great, thanks. Can you give us a little bit of a sense of what your expectations are for sales and marketing and other OpEx lines in terms of growth in FY2023 year. I know you don’t want to give the full-year guidance, but just some indication of are you planning on holding it steady? Are you benefiting from the exchange rate shekel decline year-over-year, therefore, you’re able to offset cost increases? Are you planning on investing in front of revenues to position for 2024? What’s the strategy for it? Hi, Alex. So first, you saw from the guidance, we guided OpEx to be between 53 to 54.5, which is lower than the OpEx we posted for Q4 that was around $55 million. And the – actually, two things. One is, we did some changes in headcount. We lowered headcount from Q3 – end of Q3 to end of the year by around 20, and the real impact is going to be in Q1 and throughout the year. And the second thing you touched already, that’s the FX we’re hedging. So the hedging position in 2023, shekel versus U.S. dollar is going to be more favorable and the hedging position we had in 2022. So again, not talking about the year, but we’ll expect lower OpEx in Q1 versus Q4. We are also mentioned in the call that we’re going to keep an agile structure to A, if recession is going to be longer than expected, we can adjust expenses and vice versa. If we’re going to grow faster than expected, we can adjust OpEx to meet the new goals. Two line items that are pretty difficult for people to forecast outside of the company or the interest income line and the tax line, I assume the tax line is still around 15%. Is that accurate? And on the interest line, I’m assuming that the solid cash balances are going to get much better interest rates as they roll to the new rates over the course of the year. We’ve got it up around $14 million, I think you were 6.5%, 7% kind of range in 2022 if I remember correctly. So is that in the right ballpark? And can you give us any help on those two lines, which are pretty tough to forecast externally? Yes. So taxes, we’re still forecasting 14% to 15%. Regarding interest, we expect the interest income to continue to grow throughout the year. So looking at close to $2.5 million in Q4, we expect an increase quarter-over-quarter based on the same cash position. That’s a result of a higher interest rate and based on marketable securities that’s going to be open throughout the year and we’re going to close on a better interest. Okay. One last question and then I’ll see the floor. The new products that you talk about launching, are you anticipating those to benefit results this year? Or should we be thinking about a six to nine-month sell cycle, which would imply that it’s more of a 2024 benefit? And certainly nice announcement to get new products is always good, but not so much impacting 2023 revenues. Is that fair way to think about it? Yes. So I think we’ll be able to give obviously more color on that on the Analyst Day. However, some of the announcements we believe definitely will contribute to DC revenues. And as you said, some of the announcements might have – they might expand our offering, they might take a big longer to ramp. So we have a mix of new announcements that I think are strengthening our solutions and portfolio very much. And in sum, we do expect to contribute to DC revenues. Thanks, guys. When you’re doing cloud security for mid-sized enterprises, are you also doing their on-prem security? Or are you ready doing on-prem for these customers and extending it into cloud just understanding the dynamics? Or is it a bundled sale at this point? Hi, Tim. So generally, the mid-sized enterprise was not able to afford our on-prem solution. So if you think on our hardware security solution, the minimum investment would be close to $100,000 of our three years. So and that’s without the cloud component. So generally, for the regular mid-sized enterprise, that would be above the budget they could have allocated to that business. So in that market, we’re actually looking for a cloud-first solution where the cloud security as a service, the DDoS, WAF, bot, API security will all delivered from the cloud on a subscription basis. And this is why this has become relevant as our cloud security solution has become stronger, more scalable, available in more markets, we feel that this market is now open to us while in the past, it was simply not a good fit for our product portfolio. Correct. Correct. So from the cloud security, we can serve both the on-prem applications and the public cloud. Applications through the same infrastructure, all of that is going to a unified portal fully managed by the same emergency response team of Radware. So we actually provide those enterprises consistent security across any form factor and we know that the mid-sized enterprise are already transitioning faster to the cloud and to the public cloud and the large ones, but definitely more open to cloud security as a service. Got it. And that’s irrespective if they’re moving to – it doesn’t matter if they’re moving to a large hyperscale cloud provider or not but your cloud solution will cover their needs no matter what? Got it. That’s really helpful. And do you see – can you talk about what – when the typical mid-sized enterprise would pay? And do you see much churn there or any churn from mid-sized enterprise using the solution? Yes. So, mid-sized enterprise might pay 25,000 to 30,000 day allowance for a solution, but that solution might encompass both web security and DDoS on a broader set. So on a three-year plan, around the 100,000, but covering all the application and the security, API security and DDoS needs. As I mentioned in my remarks, in Q4, we won a record number for us of cloud customers. So we are actually already starting to see those mid-sized enterprises coming into us and onboarding our services. So we believe there’s something very interesting here for us and something that can provide, as Guy mentioned, long-term visibility, profitability for the whole business. And I guess they’re generally taking all three of the primary products or I guess how many more options would they have like if they took all your products, what would that – how many options would that represent? Got it. And then just last, back to the macro impact. Do you think things have bottomed a little bit? Are we stable? It sounds like Europe maybe is improving? Are you seeing any improvement out there? So it’s hard for me to say. On one end on our business, I think, it’s maybe that’s an accurate statement. But when I read the global headlines from the hyperscalers, from the large tech companies and so on, it seems that it’s still deteriorating. So I think we need to be very cautious at this point and then follow closely the market was going on there. Hi there. Thanks very much, guys. Maybe you could talk a little bit about what you’re doing on the sales front in North America. I think you mentioned you’re reallocating resources and maybe shifting headcount around. Can you just talk about more directly exactly what you’re doing there? Thanks. Yes. Hi, George. So several things we’ve done. First, we hired and he joined us as a new Head of Sales for North America, so he is already onboard. Second, we mentioned we are targeting more the mid-sized enterprises. Now I want to balance that. We continue with all our enterprise sales team to focus on the large enterprise. Obviously, we’re doing very well there. It’s a very important market, strong customer base, very loyal to us, growing with us for use. So it’s not that we’re shifting from the large to the mid. What we’ve done we’ve rationalized some of the investments on the large enterprises to continue to cover them very well and continue to gain more customers and grow the existing ones. And with the delta of the budget, we’ve allocated that towards the mid-sized. So we’ve added more marketing inside sales and channel salespeople to focus on the mid-sized enterprise. With that and we – I answered previously, we’ve launched more focused cloud oriented channel program and more resources to the channel to boost that move. Last but not least, I think we’re working now more and better also with some of our OEM partners. For example, I’m talking to you today from Amsterdam, where we are at Cisco Live. And we do see also, I think, enhanced the momentum there. That we think also would help us in towards the Cisco Commercial segment or the mid-sized enterprise as well as the larger enterprise. So we’ve done several things. I think we have a good plan in a solid and we are now executing it. Got it. Great. And then also I wanted to ask about your investment in security centers. I think you said you added eight this year. Any sense for how many you expect to add in 2023? And then also, I assume that dilutes your gross margin to some extent, I assume those new security centers as they come online, they’re more lightly utilized. What do you think the margin impact is for the company as those security centers come up to a more normal types of utilization rates? Thanks. Yes. So at this point, I would say, at least the same amount, maybe more. We’re seeing some markets open and some markets that are asking us for more investments in opening those local markets. The reason to open a cloud security center is generally not technology, but in many cases regulation. More countries, more financial institutes want to keep the data and the customer nation within the country. So it’s not about the latency, it’s not about the scale, it’s mainly because of GDPR and similar regulations that are driving that. So as we want to play in more markets, we are still in this build-up phase and adding those centers. At the same time, the centers that we open are gaining more popularity in the amount of customers’ applications are growing there. So on one hand, that improves our gross margin as we scale with the existing location. And like you said, the new centers have a drag on gross margin. So far, I think even with the supply chain and the cost issues of components, I think overall, we were able to manage it pretty well. You see our gross margin as a whole. Although, of course, we’re seeing the cost increase in the hardware and the build out of those data centers. All of that being taken into account, we were able to manage the gross margin pretty well. I expect that to continue. Over the long run, I think that’s what you’ve alluded to as the cloud network is becoming bigger, the marginal impact of building additional set of data center would become smaller. Got it. Okay, great. Thank you. And then last one for me, you mentioned the financial impact from the Hawks. I missed that earlier. Could you tell us what the EBITDA impact was from the Hawk businesses? And then also curious on the revenue impacts? Thanks. Yes. So I’ll just repeat the numbers we gave before. So we said the EBITDA for the quarter was $8.2 million and for the year $37.7 million. The Hawks attributed negative EBITDA of $3 million and $8.5 million for the quarter and the year, respectively. So just to translate it for the core EBITDA, core EBITDA was $11.2 million for the quarter and $46.2 million for the year. The impact of the Hawks on revenue is really marginal. That will give you – give me another opportunity to invite you to our Investor Day, where we will break down between the Hawks, EdgeHawk and SkyHawk, and we will disclose more information regarding the P&L’s of both companies and their contribution to lottery consolidated financials. There are no further questions at this time. I now turn the call over to Mr. Roy Zisapel for closing remarks. Okay. Thank you very much for joining us today, and we look forward to seeing you soon in our Analyst Day. Thank you.

EarningCall_269

Greetings, and welcome to Model N's First Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Good afternoon. Welcome to Model N's first quarter and fiscal 2023 earnings call. This is Carolyn Bass, Investor Relations for Model N. With me on the call today are Jason Blessing, Model N's Chief Executive Officer; and John Ederer, Chief Financial Officer. Our earnings press release was issued at the close of market and is posted on our website. The primary purpose of today's call is to provide you with information regarding our first quarter of fiscal 2023 performance and offer an outlook for our second quarter and fiscal year ending September 30, 2023. The comments made on this call may include forward-looking statements. These forward-looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual statements may differ materially. Please refer to our risk factors in our most recent Form 10-Q filed with the SEC. In addition, during today's call, we will discuss non-GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for or in isolation from, GAAP results. Reconciliations of the non-GAAP metrics to the nearest GAAP metrics are included in the earnings release we issued today, which is available on our website. I encourage you to visit our Investor Relations website at investor.modeln.com to access our first quarter fiscal 2023 press release, periodic SEC reports and the webcast replay of the call today. Finally, unless otherwise stated, all financial comparisons in this call will be made to our fiscal year 2022 results. Thank you, Carolyn, and welcome to our call today. I’m pleased to report that our first quarter results beat expectations on total revenue and subscription revenue, and professional services came in at the high end of our guidance range. I’m very proud of our team and the strong quarter that we posted to start the year. As we look ahead, we remain committed to driving profitable growth throughout the year. I'd like to highlight two important Q1 metrics that stand out to me. First, our SaaS ARR grew by 36% year-over-year. In addition, our remaining performance obligations, or RPO, which reflects the strong visibility into our business, grew 32% year-over-year. In short, we had a good start to our fiscal year. Now I'd like to share some of the business highlights from the quarter. Success in Q1 was driven by a healthy contribution from all areas of the business. We signed new logos, closed a meaningful new SaaS transition, saw numerous customer base expansions, and we also enjoyed strong renewals across the board. Starting with SaaS transitions. During the quarter, we signed a top 10 global pharma company and a longtime Model N customer to begin their cloud journey with us. Our SaaS platform will allow them to take advantage of Model N innovations more quickly and cost effectively as well as give them access to the latest regulatory updates. This win is just the latest example of Model N's industry standard revenue management and compliance platform helping global pharma companies to operate more efficiently. I’m personally sitting on the steering committee for this project and look forward to partnering with this customer to achieve their Model N objectives. In Life Sciences, we also posted wins with several new logos. In Q1, we signed Lantheus as a customer. Lantheus is an established leader in the development, manufacture and commercialization of AI-powered diagnostic and therapeutic products. Lantheus sought a best-of-breed solution to address their revenue optimization and compliance challenges, which had grown in scale and complexity due to acquisitions and new product launches. This win includes U.S. government and commercial contracting as well as State Price Transparency Management. This suite of products is critical to managing the increasingly complex regulatory environment while also helping our customers maintain commercial and regulatory compliance. Model N was also selected because of our deep experience in global pricing and our successful track record of integrating with SAP. During Q1, we also signed Kate Farms as a new logo. Kate Farms offers products that help support the nutritional needs of people with a variety of critical health issues. Kate Farms required a comprehensive solution to help their flexible approach to contracting and pricing as well as a system to help with compliance, membership management and tracking chargebacks and rebates. They selected Model N based on our industry-leading solutions, our domain expertise and track record for quality project delivery. This win also shows our ability to expand to a close adjacency to our core pharma market. During the quarter, we also enjoyed strong expansions in our Life Sciences customer base. One such example is at AbbVie, a top 10 global pharma company. Following the mega merger of pharma giants, AbbVie and Allergan, AbbVie expanded their investment with us to fold Allergan into AbbVie's Model N platform. This is another great example of where Model N is once again being chosen as the standard for a top 10 global pharma company that is growing organically and through M&A. Turning to High Tech. We continue to leverage our leadership position in the semiconductor industry by extending into other adjacent segments. Further, our land and expand strategy is paying dividends, and during Q1, we closed several upsell opportunities in High Tech. One example is Solidigm Technology, a global provider of flash drive technology that was spun out of Intel. At the time of the spin-out, Solidigm selected Model N as one of their core business systems. After successfully going live on Revenue Cloud and Channel Data Management, Solidigm has continued to expand their usage of Revenue Cloud and recently added Global Pricing and Deal Management modules. As you may recall, we signed Solidigm as a new customer just a year ago, and it's great to see this global company live on Model N and continuing to expand their usage. During the quarter, we also expanded our relationship with Enphase. Enphase is a technology company that develops and manufactures solar micro inverters, battery energy storage and EV charging stations. In Q1, Enphase expanded their Model N footprint by adding additional Channel Data Management partners to support their ongoing growth. Enphase is also a great example of how our High Tech solutions can be leveraged in adjacent markets that involve complex technical components and distribution channels similar to the semiconductor industry. Turning to professional services. Our team had another very strong quarter to kick off the fiscal year. Professional services demand remains near an all-time high, and our backlog continues to be very robust. Following Model N's latest product release, we had several customers take this update during the quarter and successfully go live. This update includes a new payment management solution for High Tech companies as well as improvements to our Global Price Management application for pharmaceutical and med tech companies. A large cohort of our customers went live on this update during Q1, which once again proves out our core SaaS value proposition of keeping our customers current and leveraging our latest innovation. Speaking of successful go-lives, we continue to do a terrific job of getting new customers live on time and on budget. The latest example of this is Moderna. As you know, Moderna is a leading pharmaceutical and biotechnology company that focuses on combating disease by leveraging its mRNA vaccine platform. As Moderna's business grew during the pandemic, they needed a solution to help them scale their Revenue Management processes. We started our journey with Moderna in EMEA with Global Price Management and international reference pricing, which helps companies make more informed decisions on how to price and sequence product launches across countries. Moderna then added our Global Tender Management product to more effectively distribute their products in EMEA. Then in Q1, Moderna turned to Model N Business Services to support its U.S. commercial operations. This is a great illustration of how we can land and expand and how our flexible delivery model allows us to tailor solutions based on how a customer wants to consume our Revenue Management products. During the quarter, we also released our fall 2022 product update. This latest release demonstrates our commitment to continued investment in our industry-leading products and to deliver continuous innovation to our customers on our cloud platform. Highlights of this release include a new customer value dashboard that shows real-time savings and processing volumes in Model N. This is a great example of us delivering on our data and analytics vision. We also delivered enhanced features to help pharma companies better manage drugs coming off patent protection. We made several regulatory updates to support Medicaid changes, and we also delivered a new analytics application to help better visualize deal profitability. Finally, earlier today, we issued our new 2023 State Of Revenue report. This marks our fifth annual report, which identifies pressing challenges and opportunities for pharmaceutical, medtech and high-tech manufacturers. This report is based on the result of a survey of more than 300 C-suite executives directly responsible for revenue management. As organizations continue to navigate the current economic climate, the quality and reliability of technology solutions are more important than ever. The top three highlights from this year’s report include, supply chain disruption is the number one theme impacting revenue management for the second year in a row. Second, 70% of executives believe their industry is losing billions of dollars due to issues like inaccurate or ineffective pricing and quoting. And finally, 96% report that staffing and expertise issues negatively impact their revenue management processes. These insights help us understand how to empower our customers to create and bring their life-changing products to market. I encourage all of you to read the 2023 State of Revenue report by downloading it from our website at modeln.com. Let me conclude by saying that I’m pleased with our continued execution in this environment and I am proud of the strong SaaS ARR growth that we posted, while also showing leverage on our bottom line. I would also like to thank our customers who continue to partner so closely with us, and of course, these great results are a reflection of the great model enters around the world and their dedication to our DARE core values and company culture. We kicked off the year with a solid Q1 and I am excited about the year ahead. With that, I will now turn the call over to John to discuss our Q1 financial results and provide guidance for Q2 and fiscal year 2023. John? Thank you, Jason, and good afternoon to everyone on the call today. As Jason noted, we had a solid start to fiscal 2023, and we believe that we are right on track for the full year. The first quarter was a continuation of the key themes that we’ve been highlighting about the business. One, our balanced approach of delivering both revenue growth and improving profitability, and two, the emergent strength of our underlying SaaS business as demonstrated by our SaaS ARR growth, net retention and RPO growth. Looking specifically at our financial results for the first quarter. Total revenue grew 15% to $59.2 million, which exceeded the top end of our guidance. Subscription revenue increased by 16% to $44.2 million and also exceeded the upper end of our guidance range. Lastly, professional services revenue grew by 11% year-over-year to $14.9 million and was at the upper end of our guidance range. In terms of our profitability, please keep in mind that we’ll be discussing non-GAAP numbers and a full reconciliation of our results is provided in our earnings release. For the first quarter, total non-GAAP gross profit was $36.1 million, representing a gross margin of 61% versus 60.3% in Q1 last year, an improvement of 70 basis points. Non-GAAP subscription gross margin continued to improve, hitting 69.3% compared to 67.6% in Q1 of the prior year as SaaS revenue increased as a percentage of total subscription revenue. Non-GAAP professional services gross margin was 36.2% compared to 39.7% in Q1 last year. As we have said for several quarters now, operating north of 40% gross margins on our Professional Services business was not sustainable, and we would expect this year to be more in line with what we saw in Q1. As Jason mentioned, this is not a change in demand. In fact, our professional services backlog remains robust, but rather the challenge is managing the mix of resources required for specific projects and avoiding over utilization. Adjusted EBITDA was $9.1 million, an increase of 27% from the first quarter of fiscal 2022, and within our guidance range. Adjusted EBITDA margin improved to 15.4% compared to 14% in the first quarter last year. And finally, non-GAAP net income was $8.7 million or $0.23 per share, which was at the high end of our guidance. Key driver of our results in the first quarter, and our business overall is the accelerating transition to SaaS revenue. For Q1, our SaaS ARR reached $115.8 million, which was an increase of $30.4 million over Q1 of last year. Our SaaS ARR growth rate has been accelerating over the last couple of quarters from 24% in Q3 to 31% in Q4 and now 36% in Q1 as we are benefiting from SaaS transitions. In addition, our SaaS net retention number hit 134% in Q1, which reflects our ability to successfully cross sell and upsell customers, but it is also getting a boost right now from SaaS transition activity. As we noted on our last call, SaaS revenue represented 60% of total subscription revenue for the full year of fiscal 2022. In Q1, this ratio improved with SaaS revenue contributing 66% of our total subscription revenue, another proof point that our transition to SaaS is accelerating. In terms of the balance sheet, we ended the quarter with $175.2 million in cash and equivalents, which was down from the end of September but in line with our typical Q1 seasonality, due to the timing of our annual bonus payouts and the biannual interest payment on our convertible debt. Current deferred revenue of $67.1 million was up $4.8 million sequentially versus Q4 and up $9.1 million versus last year. At a high level, we’ve been seeing increases in SaaS deferred revenue, partially offset by declines in maintenance deferred revenue. As a reminder, deferred revenue can fluctuate depending on invoicing cycles, the timing of renewals and other factors. In addition to deferred revenue, we also focus on RPO or remaining performance obligations as an indicator of the future predictability of our business. For Q1, our total RPO grew to $339.7 million, which was up 32% on a year-over-year basis. The current portion of our RPO balance was up to $144.5 million, representing growth of 17% year-over-year. The key driver of our total RPO has been the success we’ve been having with SaaS transitions, which tend to be larger longer-term deals. In terms of our outlook for the remainder of fiscal 2023 for the second quarter, we expect total revenue to be in the range of $59 million to $60 million with subscription revenue in the range of $43.5 million to $44 million and professional services revenue in the range of $15.5 million to $16 million. We expect adjusted EBITDA to be in the range of $6 million to $7 million. And for non-GAAP EPS, we are expecting a range of $0.15 to $0.18 per share based on a fully diluted share count of approximately 43.3 million shares. For the full year of fiscal 2023, we are raising our outlook for subscription revenue and total revenue reflecting the strong SaaS performance in Q1, and reiterating our guidance for adjusted EBITDA and non-GAAP earnings per share, which calls for continued margin improvement versus last year. In summary, for fiscal 2023, we expect total revenue to be in the range of $242 million to $245 million, subscription revenue to be in the range of $179 million to $181 million and professional services revenue to be in a range of $63 million to $64 million. We expect adjusted EBITDA to be in the range of $37 million to $40 million and non-GAAP EPS to be in the range of $0.90 to $0.97 per share based on a fully diluted share count of approximately 43.7 million shares. A few reminders regarding our guidance for the second quarter and fiscal 2023. First, there are some seasonal elements to the second quarter, including two fewer days of subscription revenue compared to Q1 and increased expenses for payroll taxes and other benefits. Second, we adopted new accounting standards at the start of the fiscal year with regards to our convertible debt, and the fully diluted share count includes approximately 5 million shares for the as if converted method versus the traditional treasury method. Finally, our guidance reflects the ongoing transition of our business model, which is driving accelerated SaaS ARR growth, but partially offset by steeper declines in maintenance revenue. On our earnings call last quarter, we noted that we expect maintenance revenue to decline by 30% or more in FY2023. While we do not provide specific guidance on SaaS ARR, we do expect the growth rate to be at an elevated level again in Q2 due to SaaS transitions and an easier comparison to last year with more moderated growth in Q3 and Q4 as the year-over-year comparisons get more difficult. For the full year, we expect SaaS ARR growth to be comfortably above our long-term target of 20%. We also expect SaaS net retention to follow a similar trend to SaaS ARR growth over the course of this year. In summary, we executed well in Q1 and believed that we are on track for the year. We continue to build strong momentum in our SaaS business as evidenced by SaaS ARR growth, SaaS net retention, and RPO metrics and we remain committed to continued improvement on profitability. Thank you. [Operator Instructions] Our first question comes from the line of Matt VanVliet with BTIG. Please proceed with your question. Yes. Good afternoon. Thanks for taking the question. I guess, when you look at the remaining pipeline of potential SaaS transitions for existing customers, how – I guess, how much of the overall workloads out there do you feel like you’ve gotten through? And maybe more importantly, as you announced another new top 10 pharma here, any major logos that you haven’t yet gotten to migrate that we should think about going forward? Matt, good afternoon. This is Jason, I’ll answer that. So yes, a couple of data points I’ll share. So as we talked about at the beginning of last fiscal year, we were at 50% of our customers who had either transitioned or started their transition. And then just a quarter ago, we said that number was now 70%. And so we’ve got 70% plus now with this quarter under our belt of customers that have made that transition or are in the process of transitioning. And we do have an end-of-life date that’s looming at the end of this year, where we will stop providing regulatory support for our products. And so that’s a pretty good carrot for that remaining, call it, 25% to 30% to move this year, and we’ve got pretty good visibility into that. So we continue to make progress. This was an important quarter for us because it was one of our few remaining top 10 customers to move. And we just continue to be bullish on the progress that we’ve made on SaaS transitions and the effect that’s had on our business model. And maybe just a secondary question there. Are you seeing the macro impacting the willingness of any of these customers to take on the migration projects, or maybe conversely knowing that the efficiencies and sort of future-proofing the platform are there, that maybe it’s speeding things up due to the macro? Just kind of curious on how the overall economy is impacting the decision-making. Yes. Certainly, with respect to SaaS transitions, the macro has not become an issue in those discussions. Pharma companies just cannot afford to go unsupported on one of their core regulatory and compliance platforms. So SaaS transition certainly continued to be prioritized very highly within our customer base. And maybe just a comment more broadly on macro. We certainly haven’t seen any major changes in demand signals, particularly in life sciences. And I’d say high-tech also continues to be strong as there’s some pent-up demand coming out of the pandemic and companies coming back and inventory issues and channel issues coming back to the table and investing. So not a huge impact for us in our first quarter. Thanks. Hi, everyone. Maybe I’ll start going back to the anecdote on Moderna choosing Business Services this quarter. How common does that tend to be, I guess, the question is uptake of Business Services within the Revenue Cloud installed base? And then maybe part B to the question, one thing that popped up in the State of Revenue Report, was, I think, added constraints when customers are asked about the available consultants or contracting resources they have out there. Do you think that might actually lead more potential customers your direction since you have an established franchise that can provide those services? Joe, this is Jason. That’s actually a great question. We have actually started to see this pattern materialize around a mix of business services and software products in the customer base. Moderna is not the first. We’ve had a few previously. But we’ve also talked about – I’m not sure what logos we’ve mentioned, but we have started to see this pattern in the base. And Moderna was interesting, because their Global Tender Management use in Europe is being driven out of a fairly well staffed, strong tenders group there, but the market access function here in the U.S. is fairly nascent, believe it or not, for Moderna, and so the Business Services proposition – value proposition resonated very strongly with them. And then yes, interesting you pick up on that people component of the State of Revenue Report. And as I said and as John said, we continue to see very strong demand for our services across the broader portfolio of services that we offer, and customers really are coming to us for that domain expertise and as a strategic addition to their teams to help them with their needs. That’s great. And then I’ll stick with the data revenue report because there is just a lot of detail in there. A few things that I thought were interesting actually pertain to how customers could be using more of Model N. So I suppose this is a net retention question, ultimately. But two specific areas that were highlighted. One is that by geography, if you tend to use a dedicated solution for that geography, so not kind of one consolidated or platform-based source. And then second was just the overall interest around analytics associated with your revenue management. I would guess that these are relatively small contributors to net retention today. Where does this go? Could these be bigger contributors in some sort of near-term time frame? Yes. I’ll make a couple of qualitative comments on that. As we’ve talked about in past calls, we’ve definitely been investing in Europe and have a small but mighty team there that is driving some of these victories. And I think one of the things that’s interesting when you look at Moderna as an example, Baxter was another one earlier this year, big name brand companies where we landed in Europe and sold to a different segment of the company and then moved to – excuse me, moved to the U.S. And so it is not atypical to have the buying be geographically centralized like we saw in those two cases. And so having dedicated products and teams that can cater to those needs is certainly important. And then I would say on the analytics front, we haven’t even scratched the surface of that yet. We do have some products in the market today, international reference pricing in Europe, a product that helps customers make better decisions on how to price and sequence launches across different geographies is a very interesting analytic product that we offer and I think is a great example of what’s to come. And coincidentally, that was actually one of the initial products that we landed at with Moderna in Europe. So when you look at the net dollar retention today, as John talked about in his remarks, it is getting a little bit of a boost from SaaS transitions. It’s getting a boost from a lot of the cross-sell and upsell that we pull through on SaaS transitions. But in terms of major geographic expansion and analytics, that’s really – I think of that more as a future opportunity and something that’s not really driving that number today. Great. Thanks for taking my questions. Nice job again on the quarter. So just – Jason, I don’t think I’ve heard a ton from you or a lot from you on adjacencies in life sciences and high-tech. And I know you pointed out a couple on the call that looked very interesting. Can you talk about, I guess, from a pipeline go-to-market standpoint, how long or how far along we are in really looking or approaching these adjacencies and maybe what the opportunity is for Model N, because I think it’s something that – I know you’ve been laser-focused on the core life sciences biz and core semi high-tech biz since you got there, but it seems like something that’s opening up a bit. Yes, it’s a good question, Chad. I appreciate you noticing that as well from the script. I guess there’s a couple of things I would say. I mean, first and foremost, we’re excited about the white space in our customer base in high-tech and life sciences as it exists today. We remain excited about new logos and geographic expansion as it exists in our wheelhouse today. And so we don’t actively today spend a lot on sales and marketing going into adjacencies. But these wins this quarter I talked about, I think, do a nice job of illustrating the art of what’s possible in the future. And I would also characterize the wins that I talked about today as not even a full standard deviation away from the markets we’re in today. If you look at life sciences and some of the pattern recognition, our products play well in life sciences, where things are heavily regulated and there are complex incentives to distribute and reward the channel for those products. And then on the high-tech side, if it’s a highly engineered product that’s distributed through a multi-tier channel – complex multi-tier channel, the high-tech products are a pretty good fit for that pattern. And so these customers that come in, we’re opportunistic about them. And if they fit with the patterns and the situations where we know we can win, we will pursue them, and some of these early returns have been good. Got it. I appreciate it. Maybe one for John. Just in terms of the cadence of SaaS ARR for the rest of the year, should we think about it similar, whether it’s seasonally, sequentially as to last year? And then if you look at it from a net new SaaS ARR standpoint, I mean, you put up a very good net new SaaS ARR quarter in the December quarter. Does net new SaaS ARR grow year-over-year in the next three quarters? Any way you want to address that one? Thanks. Yes. Thanks, Chad. Maybe I’ll just reiterate a couple of the comments that we made upfront and try to address your question that way. I think that we want to stay just shy of providing very specific guidance on SaaS ARR, but we did want to try and provide some color commentary in terms of how we see the year laying out. And over the last – this actually goes back over the last couple of quarters, we’ve seen SaaS ARR growth accelerating as we’ve been benefiting from SaaS transitions in particular. And so the last few quarters, you’ve seen that number tick up, hitting 36% year-over-year growth in Q1. Our long-term target, as you know, is 20%. But as we look at the course of this year, we do expect to be at an elevated level again in Q2, where we also have an easier year-over-year comparison to Q2 of last year. But then as we get out to Q3 and Q4 of this year, the comparisons do get a little bit tougher for that year-over-year growth number, and so we would expect it to moderate a little bit based on those comparisons over the second half of the year. And then I would just add, similarly, we would expect the SaaS net dollar retention metric to follow the same type of trend. And so we would expect to see that a little bit elevated as it was in Q1 and over the first half of the year and then moderate a little bit over the second half of the year. Got it. And then maybe – sorry, one last quick one for you, John. Just on subscription gross margin, how to think about that going forward. It was – it's obviously showed significant year-over-year improvement. I think it was kind of flattish sequentially. Should it kind of stay around this level? Or do you expect to see further improvement there? Then I'll hop off. Thanks so much. Yes. No, thanks for the question. So a couple of things there. So first, what we saw in Q1, I would say, largely reflected the increased mix that we're getting from SaaS revenue. And so when we look at that total subscription line, the SaaS piece of it is at a higher margin, and so an improving mix there helps us. And that was the couple of points that you saw of improvement in Q1 this year versus Q1 last year. One thing I would caution you on over the balance of this year, we do have, of course, headcount-related expenses that hit that line, our cloud hosting team, our support organization. And in Q2, we do have a seasonal uptick in headcount-related expenses for payroll taxes and things like that. And so that will impact that line also. But in general, we're making good progress and a lot of it has to do with the shift to SaaS. Hey, guys. Thanks so much for taking the question. I appreciate the color on new logos. And specifically with Lantheus, it was interesting to hear that you landed the State Price Transparency Management as one of the modules they picked up. I'm just curious if you have any qualitative or quantitative comments around attach rates for that product on new logos and how you're doing there with current customers as well. Yes. Thanks for the question, Joe. So as we've reported the last few quarters since we partnered with Pfizer to build and release this product, demand has been strong. And we continue to see new states enacting state price transparency rules. And even more importantly, they're now stepping up enforcement over the last year, and the forecast is for enforcement to continue to be pretty robust over the next couple of years. So as our existing customers and our new logo pipeline, they're definitely turning to us and looking at this product. And I would say State Price Transparency Management in new logos is – if it's not a part of every deal, it's a part of just about every deal. And it's also garnered a lot of interest as well in our customer base, and we've got quite a bit of pipeline tied to the base as well. So it's been a good add-on product. It's been a good wedge product for us to get into new logos. It's got a fairly easy implementation footprint with it, but it solves a major issue. So yes, State Price Transparency Management has been a good product for us. Awesome. Great to hear. I think you've talked about Global Price Management and Global Tender Management as potential drivers for growth in 2023. It sounded like you had some success there in the quarter with Solidigm. I'm just curious if these are a material percentage of revenue right now and what they could be exiting this year. Thanks very much for the questions. Yes. Certainly Global Price Management and Global Tender Management are both 50 project – products and an important way that we land. Global Price Management as the name implies, is used by our customers to manage their price list in both the U.S. and rest of world and specifically in Europe. So the product market fit for that product is pretty much universal for global pharma companies. And so that is a product that's quite honestly, it's been a good seller for us over a number of years now, but that's not a new product. Global Tender Management is really tailored for geographies where pharmaceutical purchasing processes are run through centralized health ministries through a tendering process. And so Europe is really the first geography that we focused on. That's a relatively newer product and demand has been brisk for it because it is tailored again specifically to pharma companies. And as we've talked about, we've landed some big new logos with that combination, that one-two punch of Global Price Management, Global Tender Management, with Moderna just being the most recent one. So they're important products in terms of wallet share, and they're also important products in terms of how we land and then open up the expand opportunity in an account. Thanks for taking my questions and congrats on a nice quarter. Jason, you talked about the AbbVie-Allergan deal in the quarter, and also in the Q&A about sort of the excitement you have sort of with the opportunity within the existing base. Just curious, given all the M&A that we've seen over the past few years here, what the expansion opportunity looks like from just purely M&A deals, and what you've historically seen in terms of when that opportunity comes to the table post an acquisition. Thanks. That's a good question, Ryan. On the balance, we have benefited from M&A and a typical pattern that we will see, and this is the case with Allergan and AbbVie and we've seen this with others as well, that the two companies will not have the exact same footprint of Model N, and so the M&A transaction is a catalyst for us to get in, in the combined company, expand product footprint, potentially usage, potentially geographies. So M&A has been good for us. Again, a catalyst to get in front of customers and has, generally speaking, been a nice cross-sell and upsell opportunity for us. That's helpful. And then maybe one for John. John, on the updated guidance, you talked about some of the moving parts in terms of seasonality within the business and maybe some higher payroll taxes. As we look at that adjusted EBITDA guide for second quarter, is that the – I guess, the step down in second quarter, is that primarily being covered by the additional tax payments? Or is there other incremental investments that you're perhaps pulling forward into the second quarter that's going to hit then versus the back half? Thanks. Sure. Yes. No, maybe a couple of different threads in there. So first, just with – reflect to the guidance itself, it's really two factors. One is actually on the revenue side of things. We have two fewer days of subscription revenue, so that cost us in round numbers about $1 million of subscription revenue. The second piece is related to the expenses, and that's due to Q1 – or, pardon me, Q2 being the first calendar quarter of the year. And so we have higher payroll taxes and other benefits compared to the December quarter. So it's really those two factors that are rolling into that. And then just in terms of operating expenses more generally, we have been making select investments in the business. And I think if you go back and look at our results over the last couple of quarters, probably starting in fiscal Q3 last year and then looking sequentially in Q4 and Q1, you'll see that we've been making investments in R&D and sales and marketing in particular. So we continue to focus on the product and sales capacity, and those are underlying our model as well. Great, thanks so much for taking my questions. John, did you disclose the amount of maintenance revenue you had in the first quarter? I apologize if I missed that. We did not update that, so we'll just do that on an annual basis. And so at the end of fiscal 2022, I believe we had $17.5 million in maintenance revenue. And we did indicate on our last call that we thought maintenance revenue would be down 30% or more this year, but we're not going to update that quarterly. That will just be an annual metric. Understood. Okay. Yes. Okay. And then I believe you still have about $20 million or so of term license revenue in the subscription line. Can you just talk about the stability of that term license revenue stream and maybe how we should think about that going forward? Yes. I'm not sure where your $20 million number comes from. That's not something that we've disclosed in the past. But what I would say is that we do still have some term license activity in the subscription line. It's gotten down to a pretty small level, frankly, and not overly material. Okay. And then I guess last question for me is in the State of Revenue Report that came out today, nearly half of company's share – captured in the survey show that they leverage different revenue management systems across different regions. I guess as these companies are looking to become more cohesive with maybe things that they've acquired globally, are you seeing and reaching and finding more additional efficiencies in their businesses? Are those type of conversations having more frequently, people are actually trying to expand, kind of, or standardize on a single platform? Yes, Joe, this is Jason. I'll take that one. I mean the simple answer is yes. I mean there's definitely economy of scale of having 1 vendor, and then we do provide some consolidated unified reporting for companies that are, for example, using our tenders product in Europe and the full suite of products here in the U.S. And that analytics layer that will sit on top of the global products will continue to expand over time. So yes, I mean, we – as I talked about with Moderna specifically on this call, customers are increasingly looking for 1 vendor who can fit their needs across different geographies and keep up with the fluid regulatory environment. So that's definitely a tailwind for us. We have time for one last question. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question. Hey, this is Johnathan McCary on for Brian. Thanks for taking the question. So with the SaaS transition driving a lot of the recent growth, I'm just kind of curious qualitatively how you see that trending after the sunsetting of on-premise solutions. Do you guys anticipate investing more into sales and marketing post that transition narrative? Or how are you thinking about balancing margins and growth there? Thanks. Yes. Thanks for the question, Johnathan. I mean, there's a couple of things I would say there. As we reported throughout the balance of last year, we have hit a tipping point where the majority of our bookings are actually coming from things other than SaaS transitions, and it's really reflective of two things. One, the strong product portfolio we have and the white space opportunity to sell more broadly into a customer who has gone through a SaaS conversion; and then, of course, the new logo opportunities. So we really have seen that. I would argue that tipping point really hit last year. And then as John noted in one of the answers to the prior questions, we have been selectively investing in sales and marketing for life after SaaS transitions. And when you put that with the product component that I just talked about, that really is what's driving the business today. Thank you, operator, and thank you to everyone for joining us today. As we discussed on today's call, Model N started our fiscal year 2023 with a good quarter and once again delivered strong profitable growth. John and I are going to be out on the road at several investor events this quarter and look forward to seeing many of you in person. Thanks again for joining today, and have a great night. 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_270

Good morning, and welcome to the Malibu Boats Conference Call to discuss Second Quarter Fiscal Year 2023 Results. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that reproduction of this call in whole or in part is not permitted without written authorization of Malibu Boats. And as a reminder, today’s call is being recorded. On the call today from management are Mr. Jack Springer, Chief Executive Officer; and Mr. Wayne Wilson, Chief Financial Officer; and Mr. Ritchie Anderson, Chief Operating Officer. Thank you, and good morning, everyone. On the call, Jack will provide commentary on the business, and I will discuss our fiscal second quarter 2023 financials. We will then open the call for questions. A press release covering the company’s fiscal second quarter 2023 results was issued today, and a copy of that press release can be found in the Investor Relations section of the company’s website. I also want to remind everyone that management’s remarks on this call may contain certain forward-looking statements, including predictions, expectations, estimates or other information that might be considered forward-looking and that actual results could differ materially from those projected on today’s call. You should not place undue reliance on these forward-looking statements, which speak only as of today, and the company undertakes no obligation to update them for any new information or future events. Factors that might affect future results are discussed in our filings with the SEC, and we encourage you to review our SEC filings for a more detailed description of these risk factors. Please also note that we will be referring to certain non-GAAP financial measures on today’s call such as adjusted EBITDA, adjusted EBITDA margin, adjusted fully distributed net income and adjusted fully distributed net income per share. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in our earnings release. Thank you, Wayne, and thank you for joining the call. We delivered another great quarter as we move through the first half of our fiscal year. The retail environment remains resilient with strong demand carrying the tide for our premium boats. While we see no worsening of our expected outlook, we are paying close attention to the evolving macroeconomic conditions. During the quarter, we have seen incremental improvements in the lingering supply chain disruptions and are optimistic about our production capabilities and normalizing dealer inventories. We have a multiyear track record of strong execution during periods of uncertainty and remain confident in our ability to execute in any macro environment. Through our unmatched operational capabilities, vertical integration efforts and visionary team, we look to deliver profitable growth and long-term value for our shareholders. For the second fiscal quarter, we posted strong net sales of $339 million, increasing nearly 28% over the prior year, with adjusted EBITDA growing approximately 20% to $58 million and net income growing 18% to $36 million. Since the beginning of COVID and all of the issues with the supply chain, labor and inflation, the MBI team and all brands have navigated the difficult never before seen environment and have continued to produce stellar results. I want to thank every team member for their focus on MBI, their diligence, their hard work, and capability and overcoming obstacles. You have been fantastic, and I commend you for it. For the second quarter, gross margin declined 180 basis points to 22.3% while adjusted EBITDA margin declined 120 basis points to 17%. As I mentioned, inflationary pressures and supply chain disruptions have impacted availability and prices on parts and components during the quarter. Despite these challenges, we maintained a stable margin profile in line with our expectations through improved unit volumes and strong ASPs across all of our brands. While inflationary pressures have begun to lessen, as of right now, we expect that we will see a more normalized cost increase structure for FY 2024 pricing. Historically, our second fiscal quarter has been a slower season, but we are seeing positive results coming out of our recent boat shows, which bolsters are confidence in demand remaining strong. Boat show results for 2023 are up considerably over last year, which was the first year back after shows were canceled in 2021. Cobalt and Pursuit are performing very well and shows are up in sales by over double for Cobalt; and by 39% for Pursuit when measuring unit sales. We also measure revenue dollars for Pursuit and 2023 revenue dollars are up 55% versus 2022 shows. To date, shows of note include Portland, Minneapolis, Detroit, Fort Lauderdale, Newport and Toronto, all of which had good attendance, which shows appearing to be back to historical norms. Two weeks ago, the New York show took place and it was fantastic with great crowds and sales. Cobalt saw a record sales number for that show and pursuit outpaced the New York show results for the previous five years. In all boat shows, we are also seeing a return to normal discounting. As I said a year ago and have been consistent in saying since then, Marine will and is returning to a normal environment and cadence. Dealers must be in boat shows because they are back. We all need to return to tried and true sales techniques and lead follow-up. Pricing could better be in line. And if a dealer does not have adequate inventory, they will lose. It is important to note that while retail demand has disproportionately affected more entry-level aluminum-based lower-length boats, our customers remain unphased. Speaking for MBI brands and for what we are generally seeing at shows the premium buyers looking to purchase and has not really been affected by economic conditions or interest rates. They are more measured in comparing models and brands because there is not the shortage of inventory that we have seen in the past 18 months. My strong conviction continues to be the household wealth creation over the past three years and the stock market continuing to be strong in sustaining our consumer. That is why our objective of building a business on premium brands we know we can improve has served us so well and will continue to drive our – being the top marine company in existence. Conversely, we are hearing of weakness in the smaller foot link segments in entry-level priced boats. This consumer profile has been impacted the most by inflation and interest rates. Thankfully, that is not our model, and we remain positive on our premium business. Meeting existing demand and building channel inventories continues to be a primary focus and a major tailwind in the quarters to come. While we have seen incremental improvement with lead times decreasing and the ability to source greater quantities of parts, the current supply chain environment is still far from running like clockwork. Disruptions are still prevalent for our engine and windshield manufacturers as well as our electronic supplier base, generating inefficiencies in our plants. However, as these headwinds abate, we are confident in our ability to ramp up production volumes, if necessary. Charting a course through these choppy waters, we have made great progress over the quarter to mitigate these challenges. Our unit volumes continue to climb, and we see promising signs for our vertical integration efforts and our production capacity enhancements in our Maverick plant. Today, we are building more boats and more large boats out of this facility, and we expect greater output as we enter the second half of the fiscal year. As a result of these initiatives and the gradual improvement across the supply chain, we have begun to normalize channel inventory across all segments to varying degrees. Absent a major shift in demand for our retail customers, we expect freshwater channel inventories to be near normal by the end of this fiscal year. Our saltwater brands remain a bit further behind due to pent-up demand and lower production volumes and will likely reach normalized levels in the first half of fiscal year 2024. I will now provide an update on our integration of the businesses we have acquired. As you hopefully know, Cobalt is well down the path and has performed extremely well. We acquired a fantastic brand from a magnificent family, the St. Clair’s. We have improved the brand, modernized it and it has grown tremendously in all financial metrics. The modern lineup is almost completely new in paying huge dividends. We continue to be the largest sterndrive manufacturer in the link space we compete with about 30% market share and we have grown our outboard offerings from Oblivion [ph] at 4% share to the number two player in the foot length segment we compete in around a 16% share. Cobalt equals a home run. Pursuit has built upon success every year we have owned them. The addition of the new plant in 2020 has allowed us to expand the number of boats we build as well as the size of the boat that we build. We have driven the margin profiles higher and higher and we see significant opportunity to grow them further. Again, we have significantly expanded the introduction of new models and that will continue. An area we have not yet been able to capitalize on is the expansion of the dealer network. Our commitment is to supply existing dealers with sufficient channel inventory first and then look to expansion. As a result, we have not yet begun our distribution expansion, and it has been delayed throughout the COVID era. Currently, I expect to begin expanding distribution in fiscal year 2024 and how soon we have adequate inventory and our current dealers will determine the rapidity of the expansion. Pursuit has equal the home run. The Maverick brands, Cobia Pathfinder, Maverick and Hewes have really come into their own this fiscal year. Integration of an acquisition is an evolution. And as you recall, we acquired MBG at the very end of 2020. Our first step was increasing throughput and efficiency and adding the additional capacity with the Plant 2 addition that allowed us to build more and larger boats. Those objectives have really matured in fiscal 2023, and we are having a fantastic year with MBG. Despite the supply chain, we are setting new production and shipping records almost every month. The new Pathfinder product is performing better than even we expected and is in high demand. We have now turned our attention to Cobia and will aggressively bring new product, which will further enhance market share and growth. Lack Pursuit, we have a distribution growth road map that we have not yet been able to execute, but that is coming in fiscal year 2024 as well. MBG today equals a triple, but the ball is in the corner, we are rounding third base, and we are confident we will have a home run with MBG. In summary, our integration acquisition of acquisition has gone as well as we expected, and the dividends have been better than we expected. The great thing about all of them is that we have additional at best coming to score even more. We are very, very good at acquisitions and integrating them, and we will entertain any acquisition of a premium asset that we can improve at any point in time. Overall, Malibu is again in a great position to execute as we enter the second half of the fiscal year with strong tailwinds across our business. As supply chains continue to improve, inflationary pressure subside and labor shortages lessen, our teams are prepared to execute our strategic priorities. Our vertically-integrated business model and Operational prowess set us apart. And with the resilient nature of our customer base, strong dealerships and battle-tested teams, we are optimistic about our future. With that, I will now turn the call over to Wayne to take you through our financial performance in more detail. Thanks, Jack. In the second quarter, net sales increased 28.4% to a record $338.7 million. Unit volume increased 17.7% to a record 2,439 boats. The increase in net sales was driven primarily by increased unit volumes generated by resilient wholesale demand across all three segments and strong ASPs. The Malibu and Axis brands represented approximately 54% of unit sales or 1,318 boats. Saltwater Fishing represented 24.3% or 593 boats and Cobalt made up the remaining 21.7% or 528 boats. Consolidated net sales per unit increased 9.1% to approximately $138,880 [ph] per unit, primarily driven by inflation driven year-over-year price increases and favorable mix. Gross profit increased 19% to $75.7 million, and gross margin was 22.3%. This compares to a gross margin of 24.1% in the prior year period. The decline in gross margin was driven primarily by an increase in dealer flooring program costs and increased mix of Cobalt and saltwater sales and partially offset by improved saltwater margins. Selling and marketing expense increased 9.5% or $0.5 million in the second quarter. The increase was driven primarily by promotional events as sales efforts return to normalized pre-COVID levels. As a percentage of sales, selling and marketing expenses decreased by 30 basis points over the prior year period. General and administrative expenses increased 19.2% or $3.1 million in the second quarter. The increase was driven primarily by compensation and personnel-related expenses and professional fees. As a percentage of sales, G&A expenses, excluding amortization, decreased 50 basis points to 5.6% compared to 6.1% for the prior year period. Net income for the second fiscal quarter increased 17.5% to a record $36.4 million. Adjusted EBITDA for the quarter increased 19.7% to a record $57.6 million, and adjusted EBITDA margin decreased 120 basis points to 17%. Non-GAAP adjusted fully distributed net income per share increased 22% to $1.83 per share. This is calculated using a normalized C Corp tax rate of 24.3% and a fully distributed weighted average share count of approximately 21.3 million shares of Class A common stock. For a reconciliation of adjusted EBITDA and adjusted fully distributed net income per share to GAAP metrics, please see the table in our earnings release. We continued our momentum throughout the first half of fiscal year 2023 and operated to our expectations. Market conditions have continued to be largely consistent with our expectation for the fiscal year and, varying by brand, we expect channel inventory normalization sometime in calendar 2023. We remain optimistic about our path forward as we look to the back half of the year and beyond. There’s no doubt that we continue to be the industry leader in the marine space, repeatedly exceeding expectations despite persistent headwinds from a challenging supply chain and inflationary environment. As Jack mentioned earlier, demand for premium boat buyers remains as evidenced by the performance at our recent boat shows. Overall, Malibu is in an enviable position as we continue to capitalize on this resilient demand environment and normalize our channels, all while maintaining strong growth and a stable margin profile. Based on our current operating plan, our expectations for fiscal year 2023 remain unchanged and are as follows. We anticipate revenue to grow mid- to high-single-digit year-over-year. We expect Q3 year-over-year growth to be about flat. Consolidated adjusted EBITDA margin is expected to decline slightly year-over-year. We expect Q3 EBITDA margins of approximately 21%. In closing, Malibu continues to perform at a high level in fiscal year 2023 despite an uncertain macro environment. We believe our strategic positioning and our historically proven operational prowess, provide us with the ability to deliver a strong fiscal year 2023 performance and an attractive setup to drive long-term shareholder value. Hi, good morning. So, I guess it would be helpful to understand what levers do you guys see that you have available to pull to mitigate some of the expenses that you’re seeing on the inflationary side, it seems like they’re still pretty impactful? The primary levels – the levers that we and everybody have used in the past has been the pricing and increasing pricing. I think those days are over Jamie from what we’re seeing, and I made the comment, we’re looking at a more normalized cost environment as we started our budgeting process in the second half of this year. So, I think we’ll be back to more of a norm and largely the inflationary era that we’ve been under is starting to dissipate. Okay. And then can you just add any additional color you might have on the floor plan financing commentary and sort of how the dealers are feeling right now and what you think the anticipated sort of commitment of that looks like over the rest of the fiscal year? Thanks. Yes. The floor plan financing – and I’ll lead off the floor plan financing is coming back. And I think a natural human reaction is if you’ve not had it for a couple of years, and it starts back up again. It causes you to step back and take a pause. And I think that did occur when the floor plan started kicking in for the dealers. It’s become more normalized now. I think it is that getting back to normal scenario. So, I do think the dealers are becoming more accustomed to it. But they are, certainly, like we are watching inventories very closely. And from a financial impact perspective, Jamie, the impact of flooring expense on our P&L was actually primarily felt in the first half of the fiscal year. There’s a much more modest impact or incremental impact that occurs in the second half. And so the implication from the guidance is that we’ll have margins relatively consistent with last year in the back half of the year. And that’s because there is some more pricing being taken and less of an impact to flooring. Hey, guys good morning. I just wanted to touch on the saltwater business. I think obviously, the two acquisitions you’ve made there; I think at the time when you made the acquisitions, there were something 13%, 14% EBITDA margin. So maybe – just give us an update of maybe where we stand today? And I guess, what’s embedded in guidance and maybe think about go forward into fiscal year 2024 and beyond? In terms of what’s embedded in guidance, look, where we stand today, I think you’re probably being a little bit generous on a blended basis in calling it a 13% or 14%. And so I think what I would tell you is that we’ve embedded in guidance is a modest expansion from where they were at. I would tell you that Maverick’s going to be more in a neutral position, but larger and that Pursuit has expanded meaningfully, and that will have provided the uplift to the aggregate saltwater EBITDA margin. In the longer term, we think that there’s a real opportunity to continue to expand those margins as we expand distribution, expand the product portfolio and drive further efficiencies. Okay. Great. And then on your commentary around the boat shows, you threw out some fairly large numbers for Cobalt and Pursuit. I just want to clarify that what you were saying, I think it was mostly on a volume basis and year-over-year. But I didn’t hear any commentary on the Malibu business. Maybe just provide some color on what you’re seeing there just in terms of boat show activity? Yes. I think on the Malibu side and really on the towboat side, as a whole, it’s spotty from market to market. There are some markets that have been pretty strong, and we’ve had good uplift. And there are others that have been a little bit weaker. What my observation is that there’s been more of a holding of price on the Malibu side of the equation and the competition at the boat shows. And I think that’s probably having a little bit of impact. Overall, it’s about flat with last year. If I rate them, certainly, the saltwater shows are doing better. There’s a lot of strength. There seems to be a lot of strength in saltwater shows. Cobalt is doing very well. And then on the Malibu side, it’s more flattish. Hey guys. I just wanted to follow-up on the comments about the market performance. I think you said it was largely in line with your plan. But has your underlying or the embedded retail outlook for the rest of the fiscal year changed? Or is that still in line with what you were thinking last quarter? Just in line with what our outlook has been. The comment that I’ll make is really more on the channel inventory side. We do think that from a Malibu, Cobalt side of the equation, it will be by the end of this model year or fiscal year, that channel inventories would be where they need to be, but it will continue to be in the fiscal year 2024 before saltwater Pursuit and Maverick get there. And just to follow up on the inventory comment. That is targeted dealer inventory levels, right? You’re not assuming it’s back to pre-COVID type levels here, it’s a bit of a haircut to where that was previously? Yes. Fred, the way we look at it is weeks on hand of inventory. And as we know, it’s a very cyclical nature within the year. So there are points in time, it needs to be higher and other points in time, it needs to be lower. And so we’re looking at more on that, what is needed to propel the market share and propel the retail sales that we need. Perfect. And then just lastly, the hurricane-related impacts that you guys had outlined last quarter, did those wind up, I think, it was $5 million on revenue and $1.5 million on profit. Was that where it sort of wound up for the quarter? Yes. We did recover that. What we have not seen, and I think it’s due to the insurance checks for both have been slow and coming, we do think that there’s tailwinds that are coming related to the hurricane of people that have not yet replaced our boats. Hey, good morning. Thanks for taking my questions as well. I wanted to unpack guidance a little bit. When you look at your fiscal 2023 revenue guidance, what’s the embedded shipment volume assumption there? And then maybe you can comment on the embedded kind of retail assumption you need to get there? Yes. So the – we don’t give unit volume assumptions. But ultimately, you can back into the implied guide from a revenue perspective in the back half is obviously down, right? And so that’s going to probably – I would guess a range depending on what ASP assumption that you’re going to use is probably down 5% to down 12% in unit volumes in the back half of the year. Got it. Thank you. And then just as we look further ahead, Jack, I think you said something about the era of pricing and getting significant price increases maybe over. I’m just wondering, what that means for ASPs as we look at fiscal 2024? Could we actually see prices come down on like-for-like units? And then just looking at the restocking opportunity in 2024. I’m assuming you still have some recycle left maybe in the first half, as you mentioned, but we won’t see the same level of restock benefit in fiscal 2024 as well. To answer the latter first. I think that’s exactly correct. It really is going back to that normal environment. And I’m going to bifurcate between wholesale and retail as we talk about the pricing dynamic. For Malibu, it becomes like it was in 2019, 2020 time frame where you look at an overall increase in the ASPs and it’s going to be about one-third price driven or one-third product driven or one-third feature driven. As it relates to that – the environment of pricing and prices coming down at the retail level, prices I do think will come down next year. And the rationale and the reason is because prices have been in the MSRP for two years or more, and the dealers have got to bring the pricing down. So it’s not necessarily going to be on the wholesale side, but that retail customer will see pricing degradation. Thanks. Hey guys, good morning. Just want to follow up on Craig’s question regarding units. You said laying down 5% to 12% in the second half. I assume that’s mostly Malibu, right, since you’re still filling the channel to a large degree, on Saltwater Fishing and Cobalt? I would tell you that, that’s the bigger portion of our business. I don’t have it off the – at the tip of my fingers, but it’s got to be – and I was just doing that based off of the implied revenue guide and some generic ASP assumption. So – but I would tell you to do the math and put your ASP assumption in there to get your volume number. Okay. And then in terms of second half margins, I think when you said you expect the second half to be roughly flat with last year. And I think you just guided to a 3Q number of 21% versus 23% in the base period. And then in the fourth quarter, you’re lapping a 21%. So it sounds like you expect EBITDA margins to improve fairly significantly in Q4. What’s driving that? The – really, it’s the timing of how that price flows in various mix elements. But the impact of flooring has a very negligible effect in Q4. It has a smaller impact in Q3, but the impact of year-over-year price increases in the Q4 period as we waited on the Malibu line is going to have more of an impact in Q4. Hey, good morning. A couple here. First, the impact of discounting in the quarter, the impact on gross net sales or gross margin and your outlook on discounting for the balance of the year. Also I was curious about the engine comments you made about engine constraints where you see the most limited supply. And then I’m not sure if you answered, I think it was Craig’s question about your outlook for the industry and how that’s embedded in your guidance? Thanks. Yes. With respect to discounting Gerrick, it really is not a meaningful factor incrementally from a boat show or year-end sales event perspective, it’s – you’re not seeing an incremental discount drag versus what we’ve seen historically. On a year-over-year basis, there’s probably a little bit, but we anticipated that. I’ll let – I’ll punk on the engine constraints to Jack here in a second. But with respect to the outlook, what we had initially said with our guidance back in the August time frame was a down high single-digit percentage for the market as a whole. And we continue to have that as our primary driver in the model. If you look at the domestic registration data for our primary segments, you’re down about 12% on a blended basis, and you’re seeing a decelerating decrease. So kind of second derivative function, but – and ultimately, when you look at on a six month basis. So, we think that the current estimate that we have in terms of a high single-digit down market for the fiscal year is still as appropriate and is the embedded assumption in our guidance. Gerrick, coming back to engines. We continue to see all of the engine companies struggle to one level or another, and it’s to varying degrees. There has been improvement. I will tell you that Yamaha has improved, and they seem to be getting more product to us. They’re getting the parts that we need to us. So there is some catch-up going on. But part of the equation there is we were way behind. And so we’re not fully caught up yet, although we see improvement. On sterndrive, on the Cobalt side, on the sterndrive and also that forward-facing engine, we’ve seen improvement there as well, still not out of the woods, but we have seen improvement. So if I put it in an overall nutshell, the engines are improving, but still not where we need them to be. We don’t necessarily get all of the parts and all the engines that we need when we need them on the line, but that is improving. Good morning. Thank you for taking my questions. First, just on the ski way category, it seems like the category was underperforming the broader industry in the last few months of the year. Could you comment on anything that might be going on specifically within your category and your outlook for the industry in calendar 2023, specifically for the ski way category? Yes. I think generally, you’ve had a better scenario of putting inventory into the channel as it relates to that ski way category. And that’s not only from us, but that would be from all competitors. But the main thing that I’ve seen, we have black [ph] pontoons, have had a very strong four, five-year period of time. And so it may be a little bit of a pause. And then the third thing I would point to is the dealers need to take pricing down. The other thing I would add to that is that if you look at the details of those monthly numbers that you’re talking about, you’re talking about comps that are still really, really high, if you look at them in a historical context, when you elongate the period that you’re looking at that and you look at the first half of the fiscal year performance, it’s in line with the entirety of the market. And so I don’t think it’s something that’s a symptom of a broader disease for that segment. It really is a function of a very short window of time and a really high comp in a historical context. And when you spread it out over six months, it’s very much in line with the industry. Okay. Great. And you had commented on dealers needing to cut prices. Is it solely on them to cut prices? Or would you guys potentially lower pricing to get pricing more in line with consumer demand? It’s on them. They’ve been carrying MSRP for two, three years, and we’ve gone back to our normal support related to the programs that we have. But what I’ve seen in boat shows is they’re still holding pricing too high. Okay. And just lastly on the boat shows. How much of the year-over-year increase at retail is driven by improved inventory availability versus actual stronger consumer demand? I feel like last year, there wasn’t a lot of inventory in the channel to show or sell at these boat shows. No, I think that’s very accurate. And one of the things that we’re seeing is people are not in that hurry. They’re not being told that if you don’t place your order, you’re not going to get a boat by the beginning by Memorial Day or the beginning of summer, whenever it would be. So there is more price comparison. There’s more, what I’ll call, kicking in the towers – tires, excuse me. So, I think that absolutely plays into it. The decision point, I’ll put it this way, is taking longer than it did last year because people were afraid they would not get a boat. That may pay dividends as we go forward. But instead of buying at the boat show as they might have last year, it may be more of a two, three, four-week long process. Thanks. Good morning. Two quick questions, hopefully. I guess first off, kind of thinking back to when the supply chain issue was first popping up a year and change ago, you kind of talked about how much that was keeping you from optimal efficient levels of production, 20% kind of plus from where you want to be. As you think about now where we are with inventories getting back to more normalized levels within the next year or so in the three categories where you see demand shaping up, how do you think about production versus where you’d want to be on an optimal level? Is it still the same than it was before? Or is has to come down a little bit just to get more ER [ph]. What I would tell you is that our capacity is increasing. And so the capacity – whereas in the past, capacity has been the issue, in terms of keeping up with demand, that is becoming less and less of an issue. But eloquently comes down to is, what are the channel inventories looking like. Quarter or the weeks on hand of inventory for our various brands and within the segments. And we’re going to be very responsible, and I can only hope our competition will be responsible and not irresponsible. Got it. And then second question, last question. You kind of went through the various successes you had with the acquisitions you completed and talked and mentioned that you definitely would be interested in something else of quality out there to acquire if the situation is right. Does that seem to indicate that that’s more a priority versus launching something greenfield internally? Or would you still consider launching another brand or another kind of extension internally? I think we have to have those options open for both at all times. It’s easier and it’s more – it’s quicker if you make an acquisition, but it also costs a lot more. But if you look at the acquisitions we’ve made, we’re immediately in the business. We’re immediately in a point of improving it. And so I’m not going to say that’s the desired path but it’s easier, quicker path, but we would keep the option of an acquisition or a greenfield open in the right circumstance. And I’m not showing any further questions at this time. I’d like to turn the call back over to Jack for any further remarks. Thank you. In summary, our first half results yet again demonstrate the inherent strength and capabilities of our brands. We remain confident in our ability to deliver value to our shareholders while maintaining our guidance for fiscal year 2023. We continue to capitalize on the resilient retail environment, particularly across our saltwater segment as evidenced by the success of our recent boat shows. While supply chain disruptions continue to impact production, we’re seeing incremental signs of improvement and have increased unit volumes year-over-year. Our channel inventories have begun to normalize across all segments to varying degrees, led by our freshwater segment, specifically Malibu and Cobalt. Our strategic planning, operational excellence and supply chain management continues to support our outperformance, and we remain confident in our ability to execute in any macro environment as we will continue to leverage the horsepower of our unmatched operational capabilities, vertical integration efforts and visionary team to deliver profitable growth. As always, I want to thank you for your support and for joining us this morning as we look to deliver on our strategic objectives and grow our leading brands through the second half of fiscal year 2023. Have a great day.

EarningCall_271

Good morning, and a warm welcome to the BrightView First Quarter Fiscal Year 2023 Earnings Conference Call. My name is Candice, and I will be your operator for today's call. [Operator Instructions] I would now like to hand you over to our host, Faten Freiha, Vice President of Investor Relations. Please go ahead. Good morning. Thank you for joining BrightView's first quarter fiscal 2023 earnings conference call. Andrew Masterman, Chief Executive Officer; and Brett Urban, Chief Financial Officer, are on the call. Please remember that some of the comments made today, including responses to questions and information reflected on the presentation slides are forward-looking and actual results may differ materially from those projected. Please refer to the company's SEC filings for more detail on the risks and uncertainties that could impact the company's future operating results and financial condition. Comments made today will also include a discussion of certain non-GAAP financial measures. Reconciliations to comparable GAAP financial measures are provided in today's press release. Disclaimers on forward-looking statements and non-GAAP financial measures apply both to today's prepared remarks as well as the Q&A. We are pleased to start fiscal 2023 with a strong first quarter underpinned by robust organic growth, acquisition benefits, disciplined cost management and a steadfast focus on executing our growth strategy to continue to drive momentum in our business. We delivered seventh consecutive quarter of land organic growth, and we grew our annual snow contracts in the mid-single digits. And our development business continued to deliver excellent organic growth. From a profitability standpoint, adjusted EBITDA exceeded the high end of our guidance, driven by the strength of our top line, pricing efforts, improved operating performance and disciplined cost management. Investments we made over the last few years in our sales force and technology are driving the strength and durability of our top line results, and these benefits are being realized in our profitability. Our priority is clear. We will continue to execute on our strategic plan to deliver solid organic growth, focusing on elements we can control, while implementing initiatives to mitigate against externally driven headwinds and improve profitability. Looking into fiscal year 2023, I would like to emphasize my conviction that despite the low snowfall, we intend to deliver strong organic growth and margin expansion in both our land and development businesses. Let me begin by reviewing the highlights for the first quarter on Slide 4. Revenue performance was supported by robust organic growth across maintenance and development as well as accretive M&A transactions. Land organic growth of 1.5% was driven by new sales growth, stabilized retention rates and ancillary growth. We benefited from additional hurricane cleanup revenue in the Fort Myers area, which was offset by significant rain across our coastal markets impacting ancillary installations. Our snow services business consists of annual contracts and our results vary based on actual snowfall realization. In Q1, our snow services revenue grew by 50% organically relative to the prior year, reflecting 6% growth in annual contracts and 44% in snow volume realization. It's important to note that in the prior year, we experienced significantly below average snowfall. Even with this quarter's growth, snowfall was about 15% below historical averages in our footprint for Q1 of fiscal 2023. The Development segment delivered 5.9% organic growth this quarter, underscoring a clear momentum in the business. Our team is working hard on expanding our customer base. And as a result, our backlog is extremely robust. Adjusted EBITDA for the quarter was $49 million, significantly above the high end of our guidance range of $44 million, driven by organic growth, pricing benefits as well as continued recovery in our development margins. Adjusted EBITDA certainly benefited from a snow increase. However, margin flow-through was lower than expected due to significantly below average snowfall in the Northeast and the Mid-Atlantic. Total consolidated adjusted EBITDA margin of 7.4%, reflects 20 basis points year-over-year improvement, underscoring our focus on profitability and supporting our long-term expectations of improving margins over time. From a balance sheet perspective, we entered into hedge agreements that effectively fixed interest rates on 70% of our total current debt or approximately $1 billion. Through these agreements, we kept our exposure to interest rate headwinds and structured a hedge that enables us to benefit with rates decline. Brett will have more details in his remarks about our debt management. And importantly, we remain disciplined stewards of capital and continue to manage capital expenditures prioritize select accretive acquisitions and target improving our leverage ratio through EBITDA growth. Before I get into a strategic update on the business, let's turn to Slide 5 to review snowfall data, the largest variable to our results for the first and second quarters. On the left-hand side, the slide showcases snowfall averages in our top three markets for the first quarter versus the prior year. As you can see, Denver snowfall came in above historical averages. While at the same time, snowball in Chicago and Boston were significantly below average. Across our footprint for the first quarter, snowfall was at 85% of the 30-year average compared to the 30% in the prior year. We experienced snowfall in the Midwest and Pacific Northwest. However, we saw little to no snow events in the Northeast and Mid-Atlantic, our two largest regions with higher levels of self-performance and margins. Therefore, while our top line benefited from snow removal services, the benefit to our adjusted EBITDA was lower than expected. As we have noted in the past, snow margin is driven by many factors, including when, where, how much and how often it snows and will change every year. Looking ahead to Q2, it's prudent to call out that snowfall totals in January of 2023 are significantly below historical averages, particularly on the East Coast, which represents 60% of our total snow business. As you can see, snowball averages in January across our total footprint are down from the prior year. Furthermore, the elevated temperatures indicated that snow levels will likely remain low. As a result, we are guiding to a second quarter adjusted EBITDA range with the snow expectation that reflects this reality. Brett will provide the detailed guidance in his remarks. Let's move to Slide 6 to review our top line growth drivers, which remain unchanged. Our sales force is driving strong sales growth across our entire business. Their consistent execution drives the confidence behind our expectation for robust organic growth in fiscal year 2023. We continue to see solid customer demand in our contract-based business, ancillary penetration remains high, and our development pipeline remains robust. Importantly, we are not seeing any indications of a slowdown in our landscaping markets. On the technology front, our digital innovation across a number of platforms has helped drive net new growth, and it is one of the reasons we continue to enjoy organic growth that exceed industry rates. Our initiatives around digital implementation tools have a time horizon of several years as we continue to roll out enhancements based on customer feedback. Our streamlined customer engagement tool, BV Connect, enables us to continue to transform the industry and our business into a more digital and future-focused organization. Furthermore, our integrated suite of applications drives efficiency, seamless acquisition integration and robust data analytics. The net result being superior operational efficiencies with better service quality and safety over time, technology investments will drive enhanced customer engagement and retention as well as team member engagement. Let's turn to Slide 7 to discuss our strategic M&A, which remains a key growth pillar. Our acquisition strategy is focused on increasing our density and leadership positions in existing local markets, entering attractive new geographic markets, expanding our portfolio of landscape enhancement services and improving technical capabilities in specialized services. Most recently, we completed our acquisition of Smith’s Tree Care, a leading service provider based in Newport News, Virginia. In addition, we acquired Island Plant Company, or IPC, a leading commercial landscaping provider on the island of Maui and Hawaii. With IPC, we have further expanded our presence and strengthened our leadership position in this very attractive market. We believe BrightView is now the leading landscaping provider in Hawaii. In addition to the Hawaii market over the last two years, through attractive and accretive M&A deals, we have meaningfully expanded our presence and build a strong leadership position in Minnesota and Boise, Idaho to excellent high-growth MSAs. As we have said on our last call, we are focused on select strategic transactions at very attractive valuations that will add significant shareholder value over time. Importantly, our M&A pipeline remains robust, with more than $700 million of opportunity, enabling us to continue to execute on our expansion strategy and deliver robust free cash flow over time. Let's now move to Slide 8 to discuss our cost structure. We continue to take a disciplined and strategic approach to managing our costs as evidenced by our margin expansion in the first quarter. While we have seen strong top line growth in our business over the last two years, total profitability has been impacted by a number of externally driven factors, including variability in our snow business, historically high inflation rates and most recently, a spike in fuel prices. We are determined and focused on managing through these headwinds to enhance our profitability and better position the company for the long-term. And we have taken measures in each of our business segments to enhance and improve our profitability and - help offset these headwinds. In our land maintenance business over the last couple of years, wage rates and material costs have risen significantly. Through our pricing initiatives, which we began implementing in the second half of last year, we succeeded in offsetting these increases. In recent quarters, the pricing benefits we realized were masked by the unexpected spike in fuel costs. We took a balanced approach with customers, absorbed some of the incremental fuel costs while focusing on strategic pricing initiatives, improving ancillary penetration and attracting larger and more profitable clients. While the spike in fuel has subsided, we remain diligent in balancing customer relationships, fuel surcharges and market dynamics. Turning now to our snow business, while this business is highly reliant on a mount and geography of snowfall, our goal remains to improve and stabilize the margin profile over time. As we have said in the past, we began the expansion of our self-performance snow business, self-performing snow management where services are performed through direct labor without subcontractors, secures' higher margins, eliminates the middleman and increases reliability. Furthermore, we are investing in our snow removal equipment to drive operational efficiencies. In summary, our snow leadership team is intently focused on rightsizing crews, converting our equipment to enable efficiencies and managing subcontractor usage more effectively. Due to lower snowfall, the benefit from these actions will be modest for fiscal year 2023. However, we believe these efforts will benefit total margins over time. Let's move to our development business, which has been historically impacted by the increase in material costs. As you know, we shifted contract lead times to allow 10 to 15 days of pricing commitments compared to three to six months historically. And this has resulted in significant improvement in our development margins in the last couple of quarters. Our development team is focused on targeting larger, high-margin projects to continue to drive margin expansion over time. As we look ahead to the second half of the year, we are extremely encouraged by our project pipeline, which has surpassed our expectations. As a result of these efforts, we continue to expect development margins to improve by approximately 40 to 60 basis points in total for fiscal 2023. Lastly, let's discuss our overhead and support team structure. We are intensely focused on optimizing our costs while continuing to invest in the growth of our business. The vast majority of our expenses are related to labor and material costs, which are variable. Importantly, our decentralized operational model provides ample flexibility in managing support and overhead expenses on a regional basis. From a fixed cost standpoint, our teams have done a great job managing expenses with an eye towards driving efficiencies and maintaining a disciplined approach. Brett will share more insight on this in his remarks. This fiscal year, we remain committed to very strict cost management protocols. We are curbing hiring, bringing outsourced operations in-house and thoroughly managing overhead expenditures. We're reducing T&E expenses, strategically managing marketing costs and reducing reliance on third quarter consultants. Importantly, these actions are manifesting in our results as we have kept our SG&A levels in line and scaled our corporate costs relative to business growth. Our prudent expense management supports our continued investments in business growth to further drive top line momentum. Before turning it over to Brett, let's move to Slide 9 to review our ESG efforts. As the company dedicated to designing, developing and maintaining the best landscapes on earth, prioritizing sustainable solutions is core to who we are. ESG is not only integral to our business strategy and deeply rooted throughout all aspects of our operations, but also a key component of our value proposition. On February 1, we published our second ESG report, highlighting our achievements for fiscal 2022 across environmental, social and governance pillars. From an environmental perspective, we continue to make progress against reducing our carbon footprint by investing in a cleaner fleet and converting our two-cycle gas powered equipment to rechargeable electric models. Let me further illustrate our progress with a couple of recent examples. First, we tested and deployed one of the first all-electric F 250 trucks in the U.S. and are excited to convert our fleet over time. Second, started - starting in January 2023, all new management vehicles ordered by the team members across our footprint will be either electric or hybrid. These initiatives will enable us to continue to make progress against our commitments and to reduce our reliance on fossil fuel. From a social perspective, we continue to diversify our workforce, and we accelerated our commitment to foster inclusion and belonging by launching a formal DE&I strategy. Over the past five years, the number of women managers increased by 60% and management team members identifying as Hispanic have more than doubled. Importantly, protecting our employees continues to be a top priority, our industry-leading safety record remains below the industry average. Inspiring people and nurturing landscapes is at the heart of what we do every single day at BrightView. Looking ahead, I believe our purposeful ESG strategy positions us for continued success, while supporting our team members and our clients' needs and sustainability objectives. I'm pleased to start the year with a strong first quarter, anchored by robust top line growth and margin improvement. I'm thankful to our team members who continue to execute at the highest levels to support our business and drive solid financial performance. Our priorities remain the same: consistently growing our business, improving our profitability enhancing our balance sheet and executing on capital allocation plans that create long-term shareholder value. With that, let me now provide a snapshot of our first quarter results. Moving to Slide 11, total revenue for the first quarter increased by 10.8%, supported by 5.5% total organic growth, maintenance revenues increased by 10.3%, driven by 5.5% organic growth and M&A contributions of $21 million. Our maintenance business was supported by land organic growth of 1.5% and snow organic growth of 50.5%. In quarters where we have a strong increase in snow revenues, land organic growth tends to fall close to the low end of our long-term organic plans as we are not engaged in as much land work compared to the prior year. Development revenues increased by 12.7% compared to the prior year. The increase was driven by a combination of strong organic growth of 5.9% and M&A contributions of approximately $11 million. We remain very optimistic about our development business and pipeline of projects for fiscal '23. Turning now to profitability and the details on Slide 12, total adjusted EBITDA for the first quarter was $49 million, up 14% compared to the prior year, and reflected adjusted EBITDA margin expansion of 20 basis points. The improvement in our adjusted EBITDA was driven by enhanced operating performance across both of our segments as well as disciplined cost management. In the Maintenance segment, adjusted EBITDA of $50.5 million was up 11.5% or approximately $5 million from the prior year, and adjusted EBITDA margins expanded by 20 basis points. The improvement in our adjusted EBITDA was driven by solid land contract growth, improvement in our ancillary services and snow revenue increases relative to the prior year. Importantly, our pricing efforts offset the rise in labor and material costs. In the Development segment, adjusted EBITDA increased by 13.8% for the first quarter, and adjusted EBITDA margin was up 10 basis points year-over-year. This improvement was driven by strong revenues and continued disciplined cost management, which were partially offset by the costs associated with the mix of projects relative to the prior year. Our development projects change from year-to-year and the timing and mix can impact quarterly comparisons. Looking ahead, we expect these mix-related costs to normalize and we continue to anticipate fiscal '23 development margin improvement of 40 to 60 basis points relative to the prior year. For fiscal Q1, corporate expenses represented 2.8% of revenue, implying a 10 basis point improvement relative to the prior year and demonstrating our focus on cost management. Before I turn to our balance sheet, I want to take a minute and showcase our disciplined expense management on Slide 13. The top chart shows revenue since fiscal '19, and the bottom chart shows GAAP SG&A expense as a percentage of total revenue. Over the last four years, we delivered top line results while improving SG&A trends. Since fiscal '21, our SG&A ratio improved by 100 basis points while we added about $300 million in top line revenue. As of Q1 fiscal '23 on a trailing 12-month basis, our SG&A ratio is in line with fiscal '19 levels despite significant inflation during this time. In addition, we consistently improved our corporate cost as a percentage of revenue over the last four quarters. And most importantly, we were able to achieve all of this while investing in our sales force and technology to drive momentum in our business. As Andrew noted, we are committed to remain very prudent managers of cost especially given the current inflationary environment and low snowfall expectations for this year. As we look ahead, we believe these cost management trends will be sustained and will deliver margin expansion over the long-term. Let's now move to Slide 14 to discuss debt and interest expense. We are taking a proactive approach to managing our debt in terms of maturity and rates. First, we are extremely pleased to have refinanced our debt back in April of 2022 with favorable terms and no significant maturity until 2029. Second, we hedged $1 billion of our current debt that was swap in collar instruments. Looking at current SOFR rates and compared with the blended rates we locked in for our hedges, we have effectively saved about $10 million in interest expense on an annual basis relative to our prior estimate. We are pleased to have capped our interest expense with these hedge agreements. As a result, we now expect total cash interest expense to be approximately $100 million for fiscal '23, $27 million for the second quarter, and we anticipate under $100 million for fiscal 2024. Let's now turn to Slide 15 to review our capital expenditures, debt and free cash flow. Net CapEx for the first quarter was $26 million compared to $28 million in the prior year, reflecting a 70 basis point year-over-year decrease as a percentage of revenue. We are taking a very disciplined approach to our capital expenditures, which is evident through our Q1 results. In addition, we enhanced our target for fiscal '23 to be 3% to 3.25% of total revenue compared to the 3.5% we provided last quarter. We expect this benefit to our free cash flow by $10 million to $15 million for prior expectations. Sequentially, net debt was up modestly and leverage was 4.9 times roughly in line with Q4 as expected. The sequential increase in our debt is consistent with historical periods where we typically see an increase in debt levels in the first quarter of the year. As we continue to improve our adjusted EBITDA performance, we expect our leverage ratio to improve over time. For Q1 of fiscal '23, our free cash flow usage was $55 million compared to the $50 million in the prior year. While our cash flow benefited from enhanced operating performance, this improvement was offset by the $13 million year-over-year increase in cash interest expense as expected. Excluding the interest rate headwind, we saw improvement in our free cash flow year-over-year. Let's now turn to Slide 16 to review our cash profile. As we said on our last call, the strength of our business fundamentals gives us the confidence to anticipate cash improvement in fiscal '23. This improvement will be driven by a number of factors, which are laid out on the slide. We are pleased to have improved upon two of these factors, which will drive the incremental benefit of about $20 million to free cash flow. We are very encouraged by the strengthening of our cash position for fiscal '23, which enables us to continue to invest in our business to drive growth while also lowering our leverage ratio. Let's now turn to Slide 17 to review our outlook for the second quarter of fiscal '23. As you can see on the slide, we expect total revenues of $610 million to $650 million and total adjusted EBITDA of $33 million to $43 million. Our guidance assumes 2% to 3% organic growth in land despite the heavy rainfall affecting our West Coast markets in January. And we are on track to deliver our eighth consecutive quarter of land organic growth. We continue to expect our pricing efforts to offset increases in labor and material costs, and we expect fuel to be neutral to our profitability if fuel prices remain consistent with prior year averages. For our snow business, we are forecasting $100 million in revenues at the low end and $140 million at the high end for the second quarter. In addition, our guidance assumes that snowfall will remain significantly below average in the Northeast and Mid-Atlantic, our two largest regions with higher levels of self-performance and margins. For development, we expect top line contraction for the second quarter of approximately 8% due to the mix of timing of projects. However, we anticipate that margins will expand by 20 to 40 basis points as the team focuses on disciplined cost management. We expect this revenue contraction to be more than offset by the expected growth in the second half of the year. As a result, for the second half of the year, we expect development organic growth to be approximately 10%, resulting in mid to high single-digit organic growth for the year substantially above our long-term plans of 2% to 3%. We remain optimistic about the strength of our business, its underlying fundamentals and our prospects ahead. For the full year 2023, as Andrew mentioned, despite the low snowfall, we intend to deliver strong organic growth and margin expansion in both our land and development business. Before turning the call back to Andrew, let's turn to Slide 18 to highlight our capital allocation priorities. Our robust cash flow generative business model affords us the flexibility to execute our M&A strategy and continue to drive robust long-term profitable growth. We remain opportunistic and strategic in allocating capital effectively to fund our accretive acquisitions. Additionally, we are focused on improving our leverage ratio over time, primarily by growing adjusted EBITDA. Ultimately, our goal remains to effectively deploy capital and drive shareholder value. Now let's turn to Slide 20 to wrap up. It is clear that we have a strong, resilient and agile business. We are leaders in our industry with an unparalleled customer value proposition, supported by the investments behind digital services and sustainability. We serve marquee customers across various end markets. Our business and customer mix give us the, agility to continue to thrive in a rapidly changing environment. Secular trends, including moving towards electrical equipment and limiting water usage are in our favor and position us well competitively. We have invested heavily in our capabilities in these areas to be able to address our customers' needs. We have multiple opportunities, organic and M&A that will power our growth and drive long-term profitability. Importantly, we are executing against our growth initiatives and driving strong momentum in our business. We are close to delivering on two years of consecutive quarter-over-quarter land organic growth. Our strong business fundamentals and strategic plans give us confidence that we continue to be poised for long-term profitable growth. In summary, we are pleased with our results and proud of our financial and strategic progress amid a dynamic environment. We are executing on our key growth drivers investing in our sales team and technology, which power net new customers and improve the ancillary penetration, leading to solid organic growth. At the same time, we are maintaining a prudent approach to managing our SG&A expense, which is currently in line with fiscal year 2019 levels despite the inflationary environment. Our M&A strategy continues to be a reliable and sustainable source of growth and our disciplined pricing efforts build on that expansion and support our ability to offset cost headwinds. Our disciplined cost management has enabled us to continue to invest in the business through sales force and technology investments to continue to drive growth. Importantly, we are dedicated to positioning the business to thrive in the face of external macro headwinds, changing secular trends and regulatory requirements. I am confident that our efforts will continue to position us for success over the near and long-term. I remain as optimistic as ever about our future, and I thank our teams for their dedicated response to the winter storms and their continued attention to designing, creating, maintaining and enhancing the best landscapes on earth. Thank you for your interest and for your attention this morning. Thank you [Operator Instructions] So our first question comes from the line of Bob Labick of CJS Securities. Your line is now open. Please go ahead. Hi, so I wanted to start with the spring contract renewal environment. Last year, you were able to get some reasonable pricing to offset some of the headwinds at that time, headwinds had shifted. There's - fuel is different, everything else. How does the contract renewal environment? And what are your thoughts on getting some price given the rapidly changing macro environment? Yes, Bob it is quite a dynamic environment out there. And as we sit here today, fuel costs are about where they were last year at the same time. And so some of those headwinds we face towards the second and third quarter last year subsided to a certain degree all that being said, we're in the midst of those negotiations across the board in all of our regions. And I am happy to say that recently, we just did a review over our January results, and we're actually seeing good acceptance by our customers and actually are ahead of where we were last year and making sure that we're getting price covering the inflationary trends we're seeing in the marketplace. Okay, that sounds super. So - and you gave some comments, not numbers in terms of guidance, but in terms of margin growth for the year, is that - you're expecting EBITDA margin growth in the second half or is that the full year number? Or I wasn't entirely sure how to interpret the EBITDA margin growth comment for the year? Go ahead, sorry. Yes, sure, sure. And let me kind of a couple it between our two segments. If we start out with the maintenance segment, there's no variable out there. We just don't know exactly how much it's going to snow. So I can't really guide specifically on what's going to happen for the entire segment. What I can say is that in the land portion of that segment is we're going to unquestionably see margin expansion there. That will be evidenced and very clear as you look at Q3 and Q4 results because those won't have any snow in them. We see the underlying position that you saw in Q1 of land margin expanding. And yes, we said that snow was better. We also said that the snow margins actually weren't quite where we thought they would be. And it was land, which we really helped us out on the maintenance side of the business. In development, again, we saw in Q1, expansion of margins happen. We know as we look out with not only top line growth helping propel that in the second half of the year. But overall, our development segment, we're expecting to see margin expansion in that segment as well, giving us in total in the land portion non-snow of maintenance and the development segment, we're expecting to see margin expansion in both of those areas. Okay super. Last one from me, I'll get back in queue. Can you just talk about the labor and staffing environment out there? Are you - how are you doing in terms of your, I guess, utilization your staffing? Are you having to pay overtime because of lack of labor availability or what's the environment like and how is that - how are you expecting it to play out for the rest of the year? Right now, sitting here in February, this is not our peak time of employment, and we really are going to be coming up on that as we get into April and May as we bring more people on board. So right now, we are not seeing a significant problem in attracting folks across the entire business. And typically, every year, in the April to May period, we bring on over 5,000 people as we ramp up. One thing to note is that we believe that this year with some of the changes that have done in the H2B program sponsored by the government that we're actually seeing a higher degree of reliability in securing H2B labor in advance of the season, which is going to help us as we look at filling those positions with the growth that we see coming our way. Thank you. Our next question comes from the line of Tim Mulrooney of William Blair. Your line is now open. Please go ahead. Just a couple of clarification questions from me on the guide. So first, on maintenance land so your business grew, I think, 1.5% organically in the first quarter, and your guide assumes a pickup in the second quarter, I think, like to 2.5% despite the harder comparisons with last year. So can you just walk us through the various factors that are helping to drive this expected acceleration on a tougher comp? Sure yes, Tim, what we're seeing is out there, and we're seeing it every single quarter is what we call our net new measurement, which gives us confidence about going forward. And that net new is a combination of new contracts, minus losses, and then increasing price and scope kind of all mixed together. And as we see that, we're seeing continued acceleration into the quarters, which gives us a lot of confidence about that as we see going forward. Of course, you have to have ancillary penetration if it comes along with that contract, that's the one variable we can't specifically tell exactly what that's going to be in a given quarter. But in the contract base, which is the kind of the bedrock of the company, we're seeing that solid growth coming in, which gives us that confidence to be able to forecast that higher level of growth as we get to the back half. Thanks Andrew. Yes, I know that net new is a key KPI for you guys. So it's good to hear that is moving in the right direction. I'll let someone else ask about ancillary. I want to stick to the guide here. So now moving to your cost section I mean, you noted that SG&A on an LTM basis is near 2019 levels as a percentage of sales. My question is, is that your expectation for fiscal 2023, somewhere in that low 17% range because our model is closer to 18%. So I just want to make sure we all get our models right here? Yes, we expect that to continue. Now the variables, obviously is going to be is how much it snows or not. And so that's going to change the numerator, right, depending on what the sales are. Actually there, I should say [ph]. So outside, I think when you look at our overall dollar levels of spend, you take that percentage and kind of look at, that is kind of more the trajectory that we're going at as a business. Got it, that's very helpful, one more quick, one from me. You lowered your CapEx projection by $10 million to $15 million. Can you just talk about what investments you're planning to make that you no longer think it's necessary to make this year, just we always think about, are they cutting in the growth CapEx or what's going away so anything there? Thank you. Yes, hi Tim, it's Brett. And I just think this shows kind of the resilience of our business and one of the levers we can pull when we kind of see a low snow quarter coming, we look at the balance sheet and determine what leverage we can pull CapEx being one of them, right? I think if you look at kind of the minimum level of CapEx of the business, just maintaining our equipment is probably around 2.5%. So we're still guiding to 3%, 3.25% which I would say we're still investing in some growth on top of that while maintaining. But I think the key point is really this is the lever we can use to offset some of the cash that we're going to potentially lose from low snow to kind of pull down that CapEx level a bit in years like that. Yes, Tim, we don't expect this to impact the business. In fact, if you look at the investments we've made over the course of the last five or six years, we've actually improved the age of our fleet by about a year over that period of time. So whenever we see a downturn or shift in any part of our business, these are the kinds of things that we can do on a short-term basis without really affecting any of the growth initiatives that we have in place. Thank you. Our next question comes from the line of Phil Ng from Jefferies. Your line is now open. Please go ahead. Hi guys, this is Maggie on for Phil. My first question on the 2Q guide, the sales number makes sense. But on the decline in EBITDA dollars and margins, can you kind of parse out how much of that is loss of new volume versus some of those development timing headwinds you called out or any other incremental headwinds baked in there? Yes, Maggie, you can basically take the entire shortfall in our guide relative to prior expectations it is almost 100% to a shortfall in snow. And that's really what it is. If you can think about - back in 2020, we talked about some of the drop-through rates that we have on revenue. It's the same situation where a shortfall in revenue drops through at about a negative 30% on margins. So it reached $1 million [ph] that's about $300,000 less of EBITDA relative to the snow levels. So if you just take that kind of calculation that really pretty much takes into consideration. The other aspects of our business are actually doing quite well. And so as you look at the underlying land performance, the underlying margin performance and development, we're seeing good momentum there. It's just masked by the fact that the snow levels are happening. Yes and I would be a little bit more specific. I think it's exactly right. Almost 100% of the change in guide is snow related. And if you look at snow last Q2, we had $208 million of snow revenue posted last Q2. This quarter, the midpoint of the guide is $120 million of snow revenue. So an $88 million decline in snow revenues at the midpoint of the guide. If you apply around the 30% margin to that guide, it's an additional $26 million. So the midpoint of our guide, with the same amount of snow revenue last year, it would have been in the mid-60s from an EBITDA perspective and showing margin improvement of almost 100 basis points. And if you kind of look at our guide now, and I'll just echo Andrew's comment, it is 100% snow-driven, and really just the lack of snowfall specifically in the Northeast and Mid-Atlantic region. Okay, okay that's very clear. And then my second question, how do the development headwinds in 2Q impact how you're thinking about the segment for the full year? And can you kind of remind us how much visibility you have to those projects flowing through and maybe how that's driving your confidence in the 10% organic growth you're talking about in the back half? Yes, we have very good visibility, let's say, six months out with our development pipeline. And the situation we're at right now in Q2 is really just the timing of projects. As you know, these projects come in, they come out. They're just depending on when the subcontractors before us get done. And so the timing of these projects that we're seeing in Q2 is slightly less than it was the prior Q2. But we know right now that as we look at our backlog and this is a book backlog - this is not forecast backlog. These are projects that are signed. And frankly, from where we're at in landscaping, we're the last one of the projects. So these buildings are being constructed as we speak. These landscaping projects are going to happen, and we're very confident that 10% plus organic growth in the back half of the year will happen, which will give us kind of that mid to high single-digit total organic growth for development in the fiscal '23. Thank you. Our next question comes from the line of George Tong of Goldman Sachs. Your line is now open. Please go ahead. January snowfall is now tracking below historical levels hi, as you noted. Can you elaborate on the assumptions around February and March snowfall that you're embedding into your guidance? And overall, how much conservatism is baked into your outlook? Yes, so George, as you look at the range, we factored in clearly January, no snow at all on the I-95 corridor. As we look at February, we're factoring in the range frankly at the midpoint is a very low snowfall in the I-95 corridor. At the low end of our range, we are factoring in no snow environment in I-95 with continuing performance in the Midwest and Rocky Mountains, which we've seen, historically happened. So in summary, at the low end of the range is continued no snow in the corridor with average though in the Midwest in Rocky Mountains and at the high end of the range, says that actually in the second half of February and into March, there is a return to kind of normalized snow in that I-95 corridor. Got it, that's helpful. And then diving into the land business, perhaps ancillary services, can you talk a little bit - about the uptake there, how trends are performing and especially given potentially the macro sensitivity of ancillary in the more discretionary in nature of ancillary services, if you expect to see any volatility there or any pullback in spend as we potentially head into a macro slowdown? Yes, we're not seeing any indications of our customers reducing their amount of inquiries on ancillary spending from the properties. And in fact, as you're seeing increasing return to work happening out in the marketplace and in commercial buildings, you're seeing increasing travel for hospitality type areas. We're actually seeing continued investment in properties and external environments that really fuel our ancillary part of our business. And so, we don't see that happening as we're at sit here today. And also, frankly well, this may be a temporary situation due to the lack of snowfall, the budgets that typically were allocated towards snow removal will likely be able to be freed up to a certain point to be allocated towards ancillary services as we move into the spring. Thank you. Our next question comes from the line of Justin Hauke of Robert W. Baird. The line is now open. Please go ahead. Hi good morning. Most of my questions have been answered. I've got kind of two technical ones here. I guess first, congrats on the putting the hedge in place and on so much of your debt and saving the cash interest expense, that's great. But I guess I wanted to ask, so the gains on that hedge, it looks like there was about $3 million in the quarter? And I don't see that backed out of your EBITDA reconciliation. And so I'm just clarifying whether that is backed out and what we should expect, how you would treat that going forward since there's such a large hedge in place now? Yes, Justin hi, this is Brett. You look at our Q1 results should be backed out of interest - interest related. We did have a hedge about $0.5 billion hedges that rolled off the last quarter was Q1 of this quarter we just finished. And essentially, I have to comment. I mean if you think about the headwind is entered into about 70% of our total debt, we feel very excited about that. Not only that, it's going to essentially save $10 million of cash interest on an annual basis. But since we've done that, we've actually seen rates pick up slightly from the time we put that hedge in. So we feel great that we've made that move and it's essentially capping our maximum amount of interest for the year and giving us some opportunity given the floor that we have in one of the hedges to share some upside if rates were to revert course. Okay all right, just want to make sure. And then my second question is, if you could just give us an update on the amount of acquisition revenue in total you're assuming now for the year based on the wrap from the acquisitions last year and then plus you've done another three so far year-to-date. So just to kind of - obviously, you always - there's more that could come in, but just what you have already in place on the '23 number? Yes, I'll take that again. This is Brett. If you look at our first quarter results, and we did have a significant amount of acquisitions we did in years past, but thinking back to our guide in Q4 - our statements in Q4. This year, we're looking at about 2% acquisition growth in the company. That would be around $40 million. In years past, we've kind of guided more towards 3%. And then we've outpaced that 3%. Look, we're continuing to be strategic and opportunistic in acquisitions We've made 3 so far in fiscal '22. I will say we've spent significantly less on that line through kind of Q1, Q2 combined, wherein prior years, we've spent upwards of $50 million to $60 million through two quarters. And now, we're south of $15 million. So we're balancing our debt levels and our acquisitions. We're going to continue to be opportunistic in doing that. But we're guiding to about 2% growth in total in the P&L through acquisition this year. Hi Andrew, I know predicting snowfall is difficult and you just gave us your sense of this winter. But do you feel like we might be in a situation with temperatures warming over time where kind of lower snowfall is the more typical situation kind of over the winters ahead? Yes, it's a clear question. This year was the third year in a row of a La Nina effect, which caused the situation where you have lower snowfall in the East Coast and higher in the West. I think if we talk to someone who lives in California or folks who live in the Seattle or Nevada, they did not experience a lower snowfall. In fact, they've experienced a higher average snowfall. And that's not where our primary footprint is. But I do believe as we look out into years where potentially we're going to see a non La Nina effect is that you should see some return to more of a normalized pattern. You did see it two years ago in February, where we had actually the highest level of snow ever recorded in February of '21. So while, certainly, this has been a tough year and - unprecedented low situation in snow in that I-95 corridor, I think it's too early to call to say that, that's any kind of a permanent type of a situation reducing profile. But certainly, it's something that we're constantly monitoring and studying as much as we can about those weather trends. As there are no additional questions waiting at this time. I'd like to hand the call back over to management team for closing remarks. Great, thank you very much. And once again, I'd like to thank everyone for participating in the call today for your interest in BrightView, and we look forward to speaking with you when we report our second quarter results. Stay safe and be well. Ladies and gentlemen, this concludes BrightView's first quarter fiscal 2023 earnings conference call. Have a great day ahead. You may now disconnect your lines.

EarningCall_272

Good morning, and welcome to the AECOM First Quarter 2023 Conference Call. I would like to inform all participants, this call is being recorded at the request of AECOM. This broadcast is the copyrighted property of AECOM. Any rebroadcast of this information, in whole or part without the prior written permission of AECOM is prohibited. As a reminder, AECOM is also simulcasting this presentation with slides at the Investors section at www.aecom.com. Later, we will conduct a question-and-answer session. [Operator Instructions]. I would like to turn the call over to Will Gabrielski, Senior Vice President, Finance, Treasury and Investor Relations. Please go ahead. I would like to direct your attention to the Safe Harbor statement on Page 1 of today's presentation. Today's discussion contains forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the SEC. Except as required by law, we undertake no obligation to update our forward-looking statements. We use certain non-GAAP financial measures in our presentation. The appropriate GAAP reconciliations are incorporated into our materials, which are posted to our website. Any references to segment margins or segment adjusted operating margins will reflect the performance for the Americas and international segments. When discussing revenue and revenue growth, we will refer to net service revenue or NSR, which is defined as revenue excluding pass-through revenue. NSR and backlog growth rates are presented on a constant currency basis, unless otherwise noted. Today's remarks will focus on continuing operations. On today's call, Troy Rudd, our Chief Executive Officer, will review our key accomplishments, our strategy, and our outlook for the business; Lara Poloni, our President, will discuss key operational successes and priorities; and Gaurav Kapoor, our Chief Financial Officer, will review our financial performance and outlook in greater detail. We will conclude with a question-and-answer session. I'd like to begin by acknowledging the continued commitment of our approximately 50,000 professionals fulfilling our shared purpose of delivering a better world. We have the best teams in the industry, and our widening competitive advantage stems from their passion, technical expertise, and global collaboration. Our continued high win rate, record design backlog, continued margin expansion and strong cash flow are a testament to the strength of our team and the benefits of our strategy. All of our end markets are growing, and we are aggressively adding to our workforce to deliver on our commitments. Strong end market conditions and the continued growth of our professional workforce differentiates us from many businesses that are seeing macro conditions continue to soften. I also want to highlight that for the third year in a row, we'd have been recognized as the most admired company in our industry by Fortune. This is a great accomplishment and I couldn't be more proud of our people. Turning to our financial performance. Organic NSR growth accelerated to 8%, which included strong growth across both segments and was led by 9% growth in design, which matches our highest for the past decade. Notably, our growth in the Americas design business continued to accelerate. State and local activity remains strong, and when combined with the unprecedented infrastructure funding in the U.S. and the increases in the recently enacted 2023 U.S. federal budget, we are confident in a multi-year growth cycle. Our segment adjusted operating margin increased by nearly 40 basis points to 14%, which is a new high for our first quarter. Our profitability leads our industry and reflects strong execution, the benefits of our strategy and our lower risk, higher value backlog composition. We are well advanced in our path to deliver on our 15% fiscal 2024 margin target, and we are increasingly confident in our continued margin expansion over time. Adjusted EBITDA of $224 million and adjusted EPS of $0.86 were consistent with our expectations and included strong underlying operational growth. Consistent with our track record of delivering on our commitments, strong operational performance contributed to 19% growth to year-over-year earnings, which allowed us to deliver on our targets despite macro-related factors. Free cash flow is also strong, which enabled the execution of our returns focused capital allocation policy. Our primary use of capital include investments in organic growth opportunities, share repurchases, and our quarterly dividend program. I should highlight that our recent January dividend marked a 20% increase over our prior payment, which is consistent with our intent to grow our per share dividend by a double-digit percentage annually. Importantly, we are prioritizing our investments to pursue transformational growth opportunities where we have a competitive advantage. This resulted in another near record high win rate, strong backlog momentum, and an unprecedented level of visibility. The design backlog increased by 9% to a record high, which is an acceleration from the prior quarter and was driven by a 1.3 book-to-burn ratio. In addition, our pipeline of opportunities is also at an all-time high. This includes a nearly 30% increase in proposals and bids submitted, which is up from 20% growth in the prior quarter. As a result, we are confident that our design backlog will continue to increase as the year progresses. Across our business, the benefits our Think and Act Globally strategy are apparent in the changing composition of our backlog. Let me share a few examples. During the quarter, we were selected for the sizable water program management contract in Southern California. This win resulted from collaboration between our world class water and program management practices, which led to an unrivaled technical solution for our client. In addition, this win fortifies our leadership position in this rapidly growing region where last quarter we won the sizeable Padre Dam Advanced Water Purification Program in San Diego. As a result, we are well-positioned to benefit as the billions of planned investments to address persistent drought and water supply challenges increase. We were also successful in our selection for the Navy Pacific CLEAN program, which builds on our success with this client, including last year's award of the Atlantic CLEAN program. Both programs will run for at least five more years. We are experiencing a similar trajectory in our number one ranked global transportation business. In Canada, we were selected to serve as the technical advisor on a transformative light rail project, creating visibility over the next decade on a marquee project in the region. In addition, will not reflect on our first quarter backlog, we've been notified that we were selected on another nine figure win in the global rail market. We are very deliberate in how we allocate time and capital, with a focus on the best return and highest value opportunities. As a result, an increasing share of our wins are generated from scope increases and additional phases on existing programs. In fact, our largest first quarter design win was an additional phase to the existing project we already held. Several of our first quarter wins have the potential to increase in value. We've identified more than $500 million of potential incremental opportunity from the first quarter wins that we expect to add the backlog over time. This demonstrates the more valuable composition of our wins and backlog, and with it contributes to our visibility and confidence. Also contributing to our confidence is the funding growth across our largest end markets. In the U.S., the initial wave of IIJA funding is beginning to materialize in our pipeline and we continue to expect the benefits from IIJA funds to accelerate through the coming years. An increasing share of our activity today is helping clients position for this funding and clients are increasingly turning to us to utilize our digital AI powered tool fund navigator. In Canada, provincial investment rail infrastructure and market where we lead is supporting NSR, backlog and pipeline growth. The same is true in the UK where we have an established position on key frameworks and are converting large pursuits to wins. In Australia, our momentum continued including another win in the first quarter, which has further extended our backlog visibility. And finally, in the Middle East, our backlog and NSR have increased at a double-digit pace due to our positioning on the substantial infrastructure investments transforming Saudi Arabia. As we look ahead, we remain committed to executing our strategy, which is focused on expanding our addressable market through organic growth in our advisory, digital and program management practices, driving collaboration to fully capture the strength of our global platform, prioritizing our time and capital on the highest returning growth opportunities, investing in digital AECOM at an unprecedented rate to lead our industry through digital transformation, and finally, creating an industry-leading employee value proposition to attract and retain the best professionals in the field. Taken together, we are better positioned than ever to capitalize on the growing set of opportunities in front of us. Our competitive advantages are expanding the long-term earnings power of the company. As a result, we are reaffirming our 2023 financial guidance and remain confident in delivering on our long-term 2024 financial targets and aspirations. Please turn to the next slide. I'd also like to acknowledge our teams across the globe for another strong quarter. We've built a culture around collaboration and expanding our competitive advantages and our strong performance represents the realization of our strategy. In nearly every conversation with our clients, we receive consistent feedback. Our teams are delivering unrivaled technical solutions. Our technical proposal is the most often cited factor in our wins. These technical capabilities are an essential element of our competitive advantage, which is apparent in our consistently strong win rate, and we are winning half of every dollar we bid. The great work we do is a reflection of our professionals and we are energized by the opportunities ahead. Across our markets, we are ideally positioned to capitalize on the three secular megatrends, including growing global infrastructure investments, investments in sustainability and resilience, and post-COVID supply chain and asset investments. These drivers were prevalent in several of our recent wins. In the U.S., our leadership in sustainability and resilience continues to be a differentiator. For instance, investments to modernize and strengthen the U.S. electric grid are expanding. This was highlighted by our selection to support a key renewable energy client in the U.S. on a large interstate transmission line that will leverage both our technical capabilities and our innovative digital plan engage tool for the NEPA environmental impact statement. In addition, PFAS activity is accelerating ahead of expected regulatory milestones in 2023. We are the leaders in this market, and our backlog for PFAS-related programs increased by 40% in the quarter. Finally, we were selected to advise the City of New York on its Cloudburst program, which creates clustered storm water management projects in flood prone and underserved communities across the city. This win positions us to deliver similar services in other metros globally, which plays to our strengths. In Australia, the government is investing at record levels in transportation infrastructure. We won the design contract for a substantial highway tunneling project in the first quarter, building on a series of large transportation wins over the past year. The ingenuity of our global tunneling expertise was critical in developing a technical solution for the client that reduced the environment and biodiversity impacts of this project. This was a key differentiator in our successful bid. Finally, in the UK, where the government has reaffirmed its commitment to expand its rail network and reconnect communities as part of its leveling up strategy, we are winning marquee projects that support this vision. To fully capitalize on the accelerating set of opportunities ahead, we are continuing to make investments in our teams. This includes our increased investment in U.S. healthcare benefits, which we rolled out earlier this year, and ongoing investments in technical academies to bring professionals together and foster collaboration. I am pleased to report that we are experiencing a strong return on these investments. Our workforce is growing, employee engagement is high, and employee retention across the globe is ahead of our internal targets. The return on these investments is essential to retaining and attracting the best professionals, which is key to expanding our competitive advantage. Across our business, our technical excellence empowered by a culture of collaboration and focus on pursuing the best growth opportunities have contributed to substantial momentum in our business and energize us as we pursue a record pipeline of opportunities today. Please turn to the next slide. The strength of our financial results is a testament to our focused allocation of time and capital to the highest returning opportunities, the strength of our teams, the power of harnessing that strength through collaboration and our disciplined capital allocation policy that is driven by one key element, return on investment. Importantly, we exited the first quarter with even more momentum than we entered. NSR and backlog growth accelerated, our win rate, especially on transformational pursuits is at historic levels and funding behind the three secular megatrends, driving our business is firmly in place. Just as importantly, we are delivering profitable growth, our segment adjusted operating income margin increased by nearly 40 basis points, which is consistent with the expectations in our fiscal 2023 guidance for a 14.6% margin. Our performance reflects the competitive advantage we are creating by investing to expand our addressable market, collaborating across business lines and geographies, and narrowing the focus of our time and capital on the highest value opportunities. Please turn to the next slide. NSR in the Americas design business increased by 6% and marked an acceleration from the prior quarter. The adjusted operating margin expanded by 50 basis points to a new first quarter high. Visibility continues to increase with backlog up 7%, driven by a 1.2 book-to-burn ratio. In addition, our contracted backlog is at all-time high and bid and proposal activity increased by double-digits. These trends are a direct result of our accelerated business development activity we spoke about on our fourth quarter conference call. The growth and profitability profile we are delivering is enabling us to invest to capitalize on the growth opportunities ahead to create the best long-term earnings power, while also continuing to deliver on our margin expansion targets. Please turn to the next slide. Turning to the International segment. NSR growth increased by 12% led by the UK, Australia, and the Middle East, where we have built an incredibly strong backlog position over the past two years. Margins also expanded, which reflects our narrowed focus on key markets and sectors that drive the most value to the organization. Backlog growth accelerated to double-digits with 1.5 book-to-burn ratio. We are now positioned on several multi-year projects with billions of dollars of committed funding, which creates an enhanced level of visibility. Please turn to the next slide. We had a strong start to the year on cash flow with $84 million of free cash flow in the quarter, which continues to reflect better phasing. It bears repeating. Our cash flow remains consistently strong because of the rigor we put into converting earnings to cash and the inherent attributes of our professional services business, which includes high quality clients with strong balance sheets and the higher margin and lower risk nature of our work. As a result, we are able to invest in our organic growth opportunities and have substantial available cash to execute our other capital allocation priorities. After investing in organic growth opportunities, share repurchases remained the highest and best use of our cash flow. Our quarterly dividend is a key element of our long-term commitment to return capital to our shareholders. During the quarter, we've returned approximately $70 million in total, and we have returned approximately $1.6 billion to the shareholders over the past two-and-a-half years. Our balance sheet remains in great shape with no bond maturities until 2027 and 80% of our debt is fixed or tapped at highly attractive interest rates for several years to come. Please turn to the next slide. Turning to the financial outlook, we are affirming our guidance for all metrics built on strong foundation we set in the first quarter and the strength of our strategy that has created strong visibility for the remainder of the year. We continue to expect 10% adjusted EBITDA and EPS growth at the mid-point of the ranges on a constant currency basis with organic NSR growth accelerating to 8% for the year compared to 5% last year. We also continue to expect segment adjusted operating margin to increase by 40 basis points to 14.6%, which would mark a new annual high and continue to lead our industry. Our ability to expand margins, while investing in our teams and delivering accelerating top-line growth is a testament to the strength of our platform. Hi everyone thanks for taking my question. Troy, there's some concerns in the market with these headlines in DC. I think it -- a lot of the headlines want defense budget, but can you just help us understand when we look at your exposure to public funding, how locked in some of the funding is? Are you hearing any issues on the ground about that that pipeline seems like the building could slow it off. Just curious if you can kind of comment on some of the headlines we're seeing? And if we flesh that out, what the actual risk to your growth outlook there? Okay. Yes, Michael, thanks for the question. So I'm going -- that's a broad question. I'm going to take it in a few parts. I guess first of all, in terms of the federal government, there certainly is an ongoing debate about spending and debt certainly [ph]. And it's our perspective, first of all, that we think that our government will ultimately act rationally. If we go back and look at history, it always does seem to turn out that way. At the very least, there have been some periods of time where the government has been impacted for a few days. For us, we only have low-single-digit exposure to the federal government, and that really has no material impact on our business in the short-term. And again, most importantly, those times of shutdowns are really irrelevant for the long-term performance of our business and the long-term investment cycle and infrastructure. And again, I think the second part of that question is, when we look at the again in the United States, the funding that has come into infrastructure has been building for a period of time, and it certainly has been bipartisan and those funds for the most part have been appropriated. So when we look forward, we really don't see there being a significant risk to the monies set aside by the IAG or the other act. And so in the long-term, we see that as not having an impact on the opportunity for our business in the U.S. And then, going a little bit even deeper than that, when we look at our state and local governments, state and local governments have very significant funding, and we see the rainy day funds in state and local governments being at the highest level since I think going back to the 1980s. And so again, I think there's just really strong underpinning for the long-term investment that's been set aside for infrastructure, there certainly is demand for it. And the last comment just about our overall business. Again, we're focusing on the U.S., but the trends that we're seeing are across our entire business. So they're global in nature, and we certainly see, again, while there are always going to be blips in terms of the long-term opportunity, we really don't see that being any significant risk to the long-term value of the business. Thank you. And Troy, over the last 12 months, many of some of your public peers have acquired other businesses, you stayed the course and are talking about some increasing win share. So how do you view your organic approach versus the M&A approach as we think about capturing some of these bigger projects, these growing bigger projects more scale as, as the funding level start to really pick up and ramp up into 2024. Yes. Again, so Michael, our focus and our strategy has been built on taking advantage of the long-term opportunities. And so again, we built a strategy around that, and we're executing against it. And then in terms of allocating capital, we had disciplined around our return profile. And we look forward and said the highest returning opportunities to invest in organic growth. We still believe that, and it is certainly paying off for us. And I'll expand upon that in a second, but it is paying off for us. Now we look at just the next best opportunity, it is certainly returning net capital to shareholders. Maybe it changes over time, but as of today and as we look forward, investing in organic growth, and return it to our shareholders is what we're focused on. And when you contrast that to doing M&A, we just had a difficult time being comfortable that doing transactions at 15x earnings in businesses that really have organic growth opportunities that are in the mid-single-digits. So certainly, they can reach double-digits at certain points in time. It is hard for that return on the capital being deployed at a 15x transaction and makes sense. And so again, we're just -- we are governed by the discipline to making sure we're providing the best return on capital. And so our strategy built around that, and we don't see that -- we just certainly don't see that changing. And we look at the opportunities in the market they're robust and it's paying off. And we made reference to the fact that the large wins that we're seeing in our portfolio business has increased significantly. So now almost 30% of our wins are over $25 million. And if we go back a number of years, that number was approximately kind of 12%, 13%, 14%, and that bodes really well. We've created for us because those are long-lived projects. We get a great visibility in the future. The other is they expand the relationship that you have with your customers. And using those long projects actually have the ability to expand and statistically speaking, we see them expand fairly significantly. So by winning those long-term programs, you're not just winning what's in backlog, you're winning something over the long-term, it's a much higher number. Great. Thanks for taking my questions, guys. I guess you guys are guiding NSR growth of organic 8% for this year and the quarter, the first quarter, you posted that. And you've got the benefit of some of the stimulus things that you referred to and previously even said that you expected the year to accelerate as the year goes on. So seems to me that the 8% could be conservative. And I was wondering if that is the case, or if there is an offset that's developed somewhere in your forecast or planning that we should know about? Hey Andy, this is Gaurav. I'll take that question. There's no change in our outlook and the plan we have committed to in FY2023. Look, we're early in the year and as you noted correctly, a little bit ahead of our expectations for Q1 and underlying bookings growth was very strong across our design business. But similar, what prior years have thought us is to be prudently conservative due to ever-changing macroeconomic conditions, but the management team will always be focused on delivering on its commitment. Got it. Thanks. And maybe, Gaur, maybe you reiterated the 2024 longer-term, which is not that longer-term any more guidance here today. In that, you've said that 15% margin would be kind of the target. And so I guess when I look at like 15% margin, and the $475 million with, frankly, the newer interest expense assumptions, does imply a fairly material acceleration in organic growth rates to get to $475 million. I guess my question is, what's the most likely way that you get there? Is it by exceeding or well exceeding the 15% margin target? Are you increasing the confidence in the organic growth rate in the medium-term? Yes. Good question again. Thanks for that, Andy. So you're right. There's no change in what we have committed to, including when we spoke just two, three months back. In our FY2024 outlook, we feel confident. In fact, as we sit here today, we're more confident than we were three months ago. And it's a dynamic model. The three key pillars we're focused on are growth, margin expansion, and our capital allocation strategy. We have outperformed to-date on every single one of those metrics. Our growth ahead of expectations, our margin expansion has been faster, and we expect to deliver on that 15% with the focus being to maximize that delivery as we move forward over the next call it 21 months -- 20 months into 2024. And these things are allowing us to overcome some things are outside of our control, like FX or interest, as you said, but even those, if this management team is focused on making sure we put the best foot forward on every single facet we can control. A great example of that is our balance sheet and how the strength of our balance sheet we've created over the last two years, where 80% of our debt is fixed at very favorable. And I want to really emphasize very favorable interest rates. So those headwinds are absolutely there. We over delivered on the factors that we can control. Now you layer on top of that, our strong book-to-burn you've seen over the last 18 months continuing into Q1, it really supports not only our 2024 model, but put forth strong results we expect to deliver for years to come. Hi, great. Thanks and good morning. Just a question on the earlier comments around still continue to sort of ramp up hiring given the demand outlook. I guess how are you balancing that against maybe just some of the uncertainty in the backdrop? Or do you have enough visibility to support some of this hiring? And I know some of your peers kind of used contract engineers and things like that. Are you using some of those tools just trying to understand how you're balancing hiring needs with sort of the evolving backdrop? Yes. Sabahat thank you. It’s Troy. Kind of an unusual predicament. In that, we're focused on trying to continue to create capacity to keep up with the rate which we're winning work. And so we are focused on hiring broadly across the business. And at the same time, we're focused on trying to increase the capacity of our entire professional team, and we're doing that by using digital tools to be deployed on projects, and we're also building and expanding our enterprise capability centers, which allow us to actually create efficiencies and delivering some of our work. And so at this point in time, we don't -- again, our focus is really -- I'm trying to increase the capacity to keep up with the rate at which we're winning work. Great. And then just, I guess, the comments around the increased win rates, particularly on larger projects. So maybe you could share some color on are these changes that you made to win these projects, and are these structural things that you think could last sort of through the economic cycle, through the demand cycle, how do you sort of adjust your approach to bidding and things like that, the demand environment over the next 12 months to 24 months may be moderate. Just a little bit of color on maybe the changes you've made and how sustainable you think some of those impacts are? Okay. Yes. So I guess I'm going to start by saying I think that they're highly sustainable. We've again focused in our strategy and trying to create competitive advantage. And I think we're seeing that pay off. And I guess the payoff is, again seeing backlog grow, but also seeing the composition of our backlog change in a meaningful way that creates much more long-term visibility and therefore, opportunities for the people that are here. The other thing we've done is we've exposed ourselves to more of the client spend on projects. In the past, if you're a design business, you're exposed to certain components of the spend on a project. And so by building out an advisory in a program management business and our program management business has now been growing at over 30% per year. It exposes us to much more of that client budget. And so again, that's sort of structural and things that we don't think will change. And then in terms of creating that competitive advantage, it really is built around investing in our teams, making sure that we provide the best technical solutions to our clients. It is focused on bringing the best that we have around the globe to our clients, which are most important projects. And it's our investment in building changes in how we deliver. And we refer to as digital AECOM, but it really is delivering some different consulting services and different external tools that are used by our clients. But importantly, it's focused on how we actually deliver that work differently and create efficiencies. And I'm going to give -- I'm going to send this over to Lara, just to talk a little bit about what we're seeing in terms of winning around the world is a great example of the competitive advantage that we're building. Yes. Sabahat, I mean, I think to answer your question, the technical academy is a great example of the difference and that point of differentiation. So -- and another key element of our investment in our people and the return on investments that we're seeing with that. So we have invested in technical academies and we've got great uptake and engagement from all of our 50,000 employees and that is ongoing technical learning. And that's how we show up to interviews and a key differentiator in terms of our positioning. And anecdotally, we know that on nine out of the 10 recent key enterprise critical wins that we've had, AECOM earned top technical scores, which means that our technical province and capability is that key differentiator and a key reason why they're winning. So I think that's a very material point of differentiation for us at the moment, and it's really paying off in terms of that investment in technical talent. Book-to-bill accelerated bids -- how are you doing? So book-to-bill accelerated bid in Q1 1.3x. I think you mentioned the 30% increase in bids and proposals from last year. You obviously had a nice movement in contracted backlog as well. So just two questions. Can you maintain this kind of book-to-bill based on your increased proposals for the next few quarters? And do you see Americas NSR growth based on current conditions continue to rise from 6%? Or is it more that double-digit international growth that will carry you to the 8% growth for the year? So Andy, I -- yes, the answer to your question is, yes. I do see it being able to consider the high book-to-burn. Just again, given the fact that, as Lara pointed out in our prepared comments, we're actually winning $1 out of every $2 that we did. So our capture rate is at 50%. And frankly, it's been that way now for five quarters. So you create a lot of confidence when you are winning the things you define is really matter. Secondly is with our pipeline, growing so significantly, and the pipeline is in the U.S. and around the world. With that increased pipeline, yes, we do think as we keep winning at this rate, we're going to keep building our backlog at the clip that we're seeing. So we do have confidence around that. And I'll take it to Gaur to answer your second question. Yes. Andy, as we look forward, what's really driving our confidence in the market how we -- our priority in the marketplace and how we were being successful is if you really look at it, our strategy is simple, yes, focus. We're focused on the nine key geographies that have significant funding macroeconomic tailwinds. Our people are some of the best professionals in the industry. We're investing significantly in ensuring that their brand, their technical brand continues to outpace competition in the marketplace. While at the same time looking at those key geographies and being very focused on return-based investment as Troy alluded to earlier, program management, advisory and digital tools. So all this builds and bodes so well not only sustaining what we have done, but to continue to take our competitive differentiating platform we have created into the future and capitalize on the funding that's going to continue to be available for us. And then could you update us on your construction management business? Are you growing backlog in that business? And I know last quarter, you mentioned some non-traditional developers are pointing out on the market but your business was more than supported by aviation convention centers other end markets. Can you give us an update on what you're seeing? Yes. So we're seeing sort of the same thing happening. I mean while there certainly is some softness in residential and commercial markets and the businesses in the United States, we are still seeing a great pipeline of opportunities. In particular there's some large opportunities, and it is a more diversified portfolio of opportunities, and it's focused around the same thing. It's aviation. It is certainly sports and leisure; it's investment in convention centers and investments that cities are making across the country. So we do see -- we continue to see a robust pipeline. But I think the really important part around that business is that we do have almost four years of work and some large projects that will create great long-term visibility for us to build upon. And then again, just to the last point about that business is, even with some softness in the market, and we do have -- it is lumpy in terms of how wins were. Our book-to-burn was almost 1 in this quarter. So I think our seating business is exposed to some market is slower, but it's because of the exposure we've created to other market segments is in great shape. I guess just two questions. One, Troy understanding that your win rates are up and you have projects with longer duration, which helps create visibility. Can you talk to sort of the margin profile of the backlog today relative to where we were 12 months ago or 24 months ago as you're refocusing on higher profit type opportunities. And then my second question, just confidence level in getting the international margins to double-digit, like what are the two or three things that need to happen from here in order to execute against that? Thank you. Okay. Thanks, Jamie. I'll take the first part of that question. I'll let Gaur handle the second question. And first of all, with respect to win rates, they didn't -- again, I'd say we're really pleased with those kind of high win rates. Even in the large projects, our win rates are even higher than that. And in terms of the margin profile over winning, the margin profile continues to get better, which, again, is part of gives us confidence in expanding margins as we move forward. If you go back a few years, the margins that currently exists in our backlog by comparison are up more than a few percentage points. So again, part of the progress we're making on improving margins, which gives us the opportunity to continue to invest to our margins is because the profile of the work that we're winning comes with significantly higher margins than it did years ago. Yes. And Jamie, looking at the margins going to double-digit that is our focus. We're going to deliver double-digit margins in 2024, and there's going to be various pieces, some of which we've already spoken about during the call, they go from making the right investments in our people providing the right platform for them to be successful in the marketplace, while at the same time, being very rigorous in how we review our portfolio to make sure it meets our risk and return profile. Something you signed in the first quarter, as we spoke in Q4, we exited parts of our Southeast Asia business because we knew, on a long-term basis, the risk in those businesses and the return available in the marketplace is not consistent with what we want to expect and deliver for sustained shareholder value creation. Our expectations on the long-term for the international business are not just to get to the double-digit margins. It is similar to what we have done in the U.S. in our Americas business; it should be the leading path on top of the path in terms of margin delivery. And that's going to be significantly driven by the growth, not only what we're seeing in the marketplace in our international marketplace. And maybe, Lara, you can speak to that factor a little bit more. Yes, sure. Jamie, the 1.5 backlog that we have at the moment, we have a lot of momentum in the international side of the business. And we have definitely taken market share across all of the key geographies that comprise our international business. And we have confidence because infrastructure is one of those long-term secular trends, and we're winning more than we ever had before and they are great examples of the long-term nature of some of those wins. So whether it's the key wins we talked about in ANZ, the very transformational long-term wins in the Middle East and particularly Saudi Arabia, where we have a leading position in the market. And then even in the UK, where some might consider that a somewhat uncertain market that we had a very simple plan, if you to go to -- we ensure we had a strong position on all the key infrastructure frameworks and we secured all those positions. And we've had some great wins. So again, long-term, we have confidence around our margin improvement strategy and the strength of our business to capitalize on those infrastructure trends, which are very long-term. Troy, you mentioned in your prepared remarks, you've been very successful helping your state local clients and others, I guess, in the whole ecosystem of IIJA, et cetera, finding and capturing funds. Can you maybe talk a little bit about the base business of just a typical block and tackling in your water municipality transportation highway work and then that acceleration and timing of that acceleration for the federal funding and some of the projects that get left from there? Is that going to provide a big uplift as we move in 2024 and 2025? Yes. Mike, the answer to that is, yes. And I think the long-term uplift goes beyond that. So if you think about how the IIJA funds or other funds from the investment -- the federal investment offers build, have been put in place that it would slowly start. And so we're starting to see the impact in the marketplace today, but we think we'll see the more significant impact of the funding from IIJA when matched with the state and local funding in 2024, but we see that going well through 2026 and 2027. In fact, what we're forecasting is the peak of that money being in the market and infrastructure project is probably in 2026 and 2027, and again, moves out to 2028 and 2029. But that's when we'd see that peak. So we see those opportunities extended for quite a long period of time. And again, I made the comment like the local governments, they again have -- they're well-funded. They have good rainy day funds. And they set aside funding for these large investments in infrastructure. So again, I think this is an opportunity that's been for a long period of time. We're looking to take advantage of it. Thank you. And to follow-up, maybe you could share us some thoughts on your exposure to new energy, renewable energy certainly those, the transmission projects you've been booking are quite, quite supportive and, is a big wind offshore wind phase here in U.S. and certainly in Europe. So, yes, how's a) composition there? Can that be an improving part of the pie over the next couple of years? And is there any margin? Or is that an area where some of the higher margin or better value work that you -- you're talking about, capturing in that -- in that subset? Yes, Mike, we do see that as, again, I'll expand the opportunity as funding is coming into and just call it the generation of new energy to support the economy, and then the infrastructure to support that generation of new energy. We're well-positioned across the entire business. So it's not our group of people that actually focused on those elements of projects like you made reference to some of our transmission wins, yes. But the -- our crossover business, we participate in that. So in the beginning of the process, our environment teams would participate in that. And then all of the infrastructure that has to go and in place around that are usually able to see our entire business participate in that. So again, those are as part of the long-term mega trends that will participate in and I think that the-- the investment in infrastructure and energy infrastructure isn't just something that's going last for years is that that investment will last for decades. So again we're very well-positioned for that, and very broadly. Hey, guys, can you give a little more color on private sector demand. Troy, I think in response to Andy's question, you mentioned there was a little bit of weakness in resi. And non-resi, particularly in the U.S. just curious what your outlook is there. So our, again, our exposure to residential is very limited in the U.S. So it really is been through our construction management business. So that exposure for us is limited. And again, I'll just remind you our construction management represents only 9% of our overall business. When we look across the broader private portfolio of work, most of our exposure is at -- is in our environment, our water business, our transportation business, our ports, our aviation. And so our -- our private customer base really, really touches on all those pieces of the economy that are being invested in. And so we're just -- we're really not exposed significantly to residential. Perfect. And then when you're talking about adding capacity, I'm just curious if now, might be a good time to ramp up M&A? Not for us. That's the best I could answer that. I'm going to say -- I'd say, look, I'll give you a little bit more color on that, which is, we're having great success in the business because we're building momentum, right? It's sort of like a flywheel effect, you invest in organic growth, you create competitive differentiation, and the business starts to expand. And then, people will join you, clients pay more attention to what you do, and you deliver a better solution. And you keep creating this flywheel effect, and really important around that, as you create a consistent culture. So everybody is, again, working together, collaborate and produce much better results. And that's where our focus has been. And I think that's important too, because it's returns driven -- returns driven strategy. But it's where our focus is, and we don't want to be distracted by having an inconsistent culture being focused on having to integrate businesses and other people into that culture. We want to focus on just continuing to drive that flywheel effect Hey, good morning. Good afternoon. Thanks for taking the time. I'm on for Steve Fisher. Just in terms of, the resources that you have today in place, is it enough to meet that 8% growth for the year? Or if it's not, how much would you need to add? Or is kind of the question there with international being up double-digits and presumably an acceleration from the 6% in Americas, just in terms of when work is actually ready to burn? Hey Avi, thanks for that question. This is Gaur. So we did deliver 8% in the quarter with the labor base we have. And a good question you asked is as we look forward, we're focused on is not only providing, again, the right platform for our people to be successful but making sure the investments we're making are very focused in delivering our 2024 and long-term ambitions we have. We continue to expand on this competitive edge, this differentiation we talked about. Great example of that is digital automation. We have been making investments in the business more than ever over the last three years to capture -- to not only capture in the marketplace, but to out deliver our competition. And part of that strategy is also what we call our enterprise capability center, right, where only very few firms have the opportunity to truly use scale for a benefit, and that's what we're doing, is making sure we're able to capture in the marketplace and deliver it as effectively and efficiently we can across the globe because we do have the number one or two position in practically every single geography that we operate and the business lines that we operate. Got it. That's very clear. And then just in terms of the market share that you're capturing, so are there any areas where you're notably outperforming? Or are you gaining share in pretty much every sector. I would characterize this as broad-based across our sector. But really, what we’re seeing that is in the, I'll call it, the larger projects. And so we're seeing that very broad-based across the business, whether it's by geography or whether it's by business line, but that’s what we're seeing -- that's where we've seen ourselves gaining the market share. Hi guys, Alex on for Sean. I just have one question. So I just wanted to get your -- I just wanted to hit on IIJA into that your updated thoughts and where we will see it go to the model first. Like what will it be your water and environment business, what would be transportation? And is there a major difference in margin profile between the work you guys do in these two end markets? I just wanted to get your thoughts there. So yes, I wouldn't see there being any difference in terms of how we see it roll out that the IIJA funds when matched with signal of funds are coming broadly across our entire portfolio that's covered by all our business lines. I don't see any difference. And in terms of a margin profile difference, generally, we don't see that across our business line. Obviously, you see across the project but not across the business lines. And as I said earlier, what we haven't seen is that margins within the profile of our backlog continues to improve. Those were all of our questions. So I will now hand the call back to CEO, Troy Rudd, for closing remarks. Again, I want to thank everyone for joining us on the call today. I appreciate the questions from our analysts. And I want to most importantly thank our teams for their great contributions to the first quarter, and the work that they've done is to create great momentum across our entire business and create opportunities for our professionals and the opportunities to continue to do great work for our clients. As we look around the world, we certainly see a lot of conditions in many markets that are volatile. But we're lucky we're in an industry that's benefiting from very favorable long-term funding trends. And yes, I'm proud to say, I've work involved with people here, we've really done -- really created a great opportunity to position ourselves to take advantage of or capitalize all those opportunities for the long-term. So again, I thank you all the professionals here at AECOM. And we'll talk to you next quarter. Thank you.

EarningCall_273

Welcome, and thank you for joining Oaktree Specialty Lending Corporation's First Fiscal Quarter 2023 Conference Call. Today's conference call is being recorded. At this time, all participants are in a listen-only mode, but will be prompted for a question-and-answer session following the prepared remarks. Now, I would like to introduce Michael Mosticchio, Head of Investor Relations, who will host today's conference call. Mr. Mosticchio, please go ahead.. Thank you, operator, and welcome to Oaktree Specialty Lending Corporation's first fiscal quarter conference call. Our earnings release, which we issued this morning, and the accompanying slide presentation can be accessed on the Investors section of our website at oaktreespecialtylending.com. Our speakers today are Armen Panossian, Chief Executive Officer and Chief Investment Officer; Matt Pendo, President; and Chris McKown, Chief Financial Officer and Treasurer. Also joining us on the call for the question-and-answer session is Matt Stewart, our Chief Operating Officer. Before we begin, I want to remind you that comments on today's call include forward-looking statements reflecting our current views with respect to, among other things, the expected synergies and savings associated with the merger with Oaktree Strategic Income II, Inc., the ability to realize the anticipated benefits of the merger and our future operating results and financial performance. Our actual results could differ materially from those implied or expressed in the forward-looking statements. Please refer to our SEC filings for a discussion of these factors in further detail. We undertake no duty to update or revise any forward-looking statements. I'd also like to remind you that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Oaktree fund. Investors and others should note that Oaktree Specialty Lending uses the Investors section of its corporate website to announce material information. The company encourages investors, the media and others to review the information that it shares on its website. Thanks, Mike, and welcome, everyone. Thank you to all on the call for your interest in and support of OCSL. Prior to my remarks, I would like to note that all per share amounts that we reference on this call have been adjusted for the one for three reverse stock split that we implemented on January 23, 2023. Now turning to the results. We generated strong results in the fiscal first quarter as we identified compelling investment across sponsor and non-sponsor deals. This robust origination activity enabled us to further capitalize on higher base rates and spreads driving profitability. First quarter adjusted NII was $0.61 per share, a 10% increase from the $0.55 earned in the prior quarter. The increase was driven primarily by higher total investment income that more than offset increased interest expense. Even as we grew, we remained highly selective maintaining our defensively positioned portfolio and strong credit quality. We again had no investments on non-accrual. We are mindful that in a rising rate environment, overall consumer spending and business investment tend to slow, creating the potential for a recession. As a result, we are proactively managing risks that may arise in our portfolio should the volatility persist. Given the strength of our earnings, our Board increased our quarterly dividend by 2% to $0.55 per share, this marked the 11th consecutive quarterly increase and our dividend is up more than 90% from its pre-pandemic level at the close of fiscal 2019. Looking more closely at our first quarter results, we reported NAV per share of $19.63, down from $20.38 for the prior quarter. This decrease primarily reflected the $0.42 special distribution paid by OCSL during the quarter as well as unrealized depreciation related to price declines on certain public debt investments. In January, our portfolio experienced recovery in the prices of our core investments and our NAV as of January 31 was estimated to be up approximately 1% to $19.83 per share. Turning to the portfolio. We originated $250 million of new investment commitments in the first quarter more than double the level of the previous quarter. Of these 85% were first lien loans. The weighted average yield on new debt investments was 13.1%, which compares favorably to the 9.9% yield on new originations in the September quarter, as we were able to identify and capitalize on investment opportunities with wider spreads in the December quarter. We received $104 million from paydowns, sales and exits in the first quarter, as we continue to selectively reinvest proceeds into better risk-adjusted opportunities. Importantly, the pipeline is very robust in the current quarter. We are drawing upon the breadth of the Oaktree platform to source attractive deals with strong downside protections. Looking ahead, we expect substantial benefits from our merger with Oaktree Strategic Income II, Inc., or OSI2, which we closed in January. Our combined company has more than $3.3 billion of assets on a pro forma basis resulting in an increase in first lien investment to 74%, creating greater scale and financial flexibility, while maintaining our value-driven investment strategy. We expect the merger to be accretive over the near and long term through cost savings, which we expect will total approximately $1.6 million of cost and operational synergies annually. We also will benefit from reduced management fees for the next two years as Oaktree, our manager has agreed to waive $9 million of base management fees in total, $6 million in the first year and $3 million in the second. Since the closing of the merger, our trading liquidity has improved, and we have been making enhancements to our capital structure. Together, we are in excellent financial shape with strong liquidity and capital levels, and we are well positioned to continue delivering attractive returns to our shareholders. With that, I would like to turn the call over to Armen to provide more color on our portfolio activity and the market environment. Thanks, Matt, and hello, everyone. I'll begin with comments on the market environment. The US job market finished calendar 2022 in relatively strong shape with steady job growth. The economy also grew at an annual rate of 2.9% in the calendar fourth quarter. However, both measures marked slowdown from earlier months, likely reflecting the Federal Reserve's aggressive rate actions. While futures markets anticipate additional rate increases at the next two Fed meetings, they are also betting that they will pause by late spring and before the end of the calendar year, begin to once again lower rates. The case for this dovish pivot appears driven by the expectation that US inflation will continue to decline at a fairly rapid rate. However, while inflation in the US has slowed, China, the world's second largest economy has fully reopened, which will likely boost global economic growth and may simultaneously exert upward pressure on global inflation this year, impacting prices in the US. Further, the US labor market continues to be historically tight with strong job growth and the lowest unemployment rate in more than 50 years. Still, recent figures show a mixed picture of US economic health, wage growth is leveling off and consumer spending is starting to ease, signaling that the US economy is slowing and could slide into recession. All of that noted, the uncertain economic backlog creates new opportunities for Oaktree. We have experienced across all market cycles and with a strong capital base and a long-term perspective, we have the conviction needed to withstand short-term volatility and continue to invest and generate strong returns for our shareholders. While we will remain cautious moving forward, we are also confident in our team's long history of identifying new investment opportunities, while maintaining solid credit quality. As you have heard me emphasize on previous calls, we focused on relative value in areas of the market where we can find the best risk-adjusted returns. We draw upon Oaktree's scale and resources to invest across multiple areas, including the sponsor and non-sponsor backed markets, leveraging the firm's ability to negotiate and structure customized deals that provide downside risk protection. Altogether, we are deploying capital on favorable terms to further build our portfolio and generate strong returns for our shareholders. Now turning to the overall portfolio. At the close of the first quarter, our portfolio was well diversified with $2.6 billion at fair value across 156 companies, up from 140 a year earlier. 86% of the portfolio was invested in senior secured loans, with first lien loans representing 72%, underscoring our emphasis on being at the top of the capital structure. We continue to emphasize larger, more diversified businesses that present lower risk, because they're better equipped to navigate downturns. Overall, our borrowers have been navigating the current inflationary environment very well and have continued to experience steady performance despite the challenging market conditions. Median portfolio company EBITDA as of December 31 was approximately $128 million, generally in line with the prior quarter. Leverage in our portfolio of companies was relatively steady at 5.1 times, well below overall middle market leverage levels. The portfolio's weighted average interest coverage declined slightly to 2.5 times as of December 31 from 2.7 times in the prior quarter due to rising base rates. We leverage the Oaktree platform to originate $250 million of new investment commitments, of which $235 million was committed to new portfolio companies in the quarter. Let me share a few representative examples of our new investment activity. First, we originated a non-sponsored loan to Superior Industries, a public company that is a leading designer and manufacturer of aluminum wheels. It sells to original automobile and light truck equipment manufacturers, as well as aftermarket distributors in North America and Europe. The company holds a strong market share, maintains a low leverage profile and generates high free cash flow, supporting healthy margins. The deal consisted of a $400 million sole Oaktree commitment in a senior secured term loan that was used to refinance existing debt. OCSL was allocated $40 million and the loan was attractively priced at SOFR plus 800. LATAM Airlines Group is another good example from our first quarter. It is a leading provider of passenger and cargo air transportation services throughout Latin America and it also applies to major destinations in North America and Europe. As you may recall, OCSL previously had an investment in LATAM as part of its restructuring in late 2020. The company came back to the market to refinance existing debt and raise additional working capital. A deal involved an Oaktree led $1.1 billion syndicated loan, of which Oaktree funded $750 million, priced at SOFR plus 9.5% with call protection and an 8.5% original issue discount. OCSL was allocated $26 million of the total loan. Notably, we are also continuing to find opportunities in discounted CLO debt and ABS. Our CLO and ABS purchases totaled $20.7 million in the quarter with an average price of 87% of par. We see significant potential for upside should these return to par over time. In summary, our strong liquidity position, experienced across both periods of growth and contraction as well as the sourcing power of the Oaktree platform continue to put OCSL in excellent position for 2023. Thank you, Armen. OCSL delivered another quarter of strong financial performance beginning fiscal year 2023 with good momentum. For the first quarter, we reported adjusted net investment income of $37.1 million or $0.61 per share, up 10% from $33.7 million or $0.55 per share in the fourth quarter of fiscal year 2022. The increase was primarily driven by higher interest income resulting from rising base rates, partially offset by higher interest expense. Net expenses for the quarter totaled $40.3 million, up $6 million sequentially. The increase was mainly due to $5 million of higher interest expense as a result of the impact of rising interest rates on the company's floating rate liabilities and modestly higher base management fees and Part I incentive fees due to the larger portfolio and its strong performance for the quarter. Professional fees were up slightly due to seasonality. Turning to our credit quality, which continues to be excellent. As Matt mentioned, we had no investments on non-accrual at quarter end. With respect to interest rate sensitivity, OCSL still remains well situated to continue to benefit from a rising rate environment. As of December 31st, 87% of our debt portfolio at fair value was in floating rate investments. Our strong earnings in the first quarter were again due to the higher base rates, which in turn drove our interest income higher. We expect the most recent rate hikes will continue to have a positive impact on earnings. If base rates as of December 31st were in effect for the entire quarter, we estimate that our adjusted net investment income per share would have been about $0.03 higher resulting in adjusted NII of $0.64 per share. Now, moving to the balance sheet. OCSL's net leverage ratio at quarter end increased from the September quarter to 1.24 times based on our robust and opportunistic originations in the quarter, lower repayment activity, and a modest decline in NAV. Leverage is now towards the higher end of our target range of 0.9 times to 1.25 times debt to equity. However, leverage will come down slightly on a pro forma basis with the OSI 2 merger to approximately 1.16 times. As of December 31st, total debt outstanding was $1.5 billion and had a weighted average interest rate of 5.6%, up from 4.4% at September 30th due to higher base rates. Unsecured debt represented 43% of the total debt at quarter end, down modestly from the prior quarter. At quarter end, we had ample liquidity to meet our funding needs with total dry powder of approximately $357 million, including $17 million of cash and $340 million of undrawn capacity on our attractively priced credit facilities. Unfunded commitments -- excluding unfunded commitments to the joint ventures, were $172 million with approximately $130 million of this amount eligible to be drawn immediately as the remaining amount is subject to certain milestones that must be met by portfolio companies. Shifting to our two joint ventures. At quarter end, the Kemper JV had $409 million of assets invested in senior secured loans to 59 companies, up from $385 million last quarter, primarily driven by $25 million of additional contributions from the company and our JV partner, as well as new originations and partially offset by declines in the portfolio due to market credit spread widening. The JV generated $2.6 million of cash interest income for OCSL in the quarter, up from $2.2 million in the fourth quarter as a result of the portfolio's continued strong performance and the impact of rising interest rates on floating rate investments. We also received a $1.1 million dividend, up from $875,000 in the prior quarter. Leverage at the JV was 1.4 times at quarter end, unchanged from the prior quarter. The Glick JV had $137 million of assets as of December 31, down from $147 million at September 30. These consisted of senior secured loans to 40 companies. Leverage at the JV was 1.3 times at quarter end, and we received $1.9 million of principal and interest repayment on OCSL's subordinated note in the Glick JV during the quarter. In summary, we are very pleased with our financial results for the quarter. We continue to believe that our solid portfolio and strong balance sheet position us well for the remainder of the fiscal year. Thank you, Chris. Our strong financial results for the quarter enabled us to generate an annualized return on adjusted net investment income of 11.9%, up from 10.7% in the prior quarter. While we are very pleased with the growth in our earnings over the past several years, including our solid first quarter results, we believe OCSL remains well positioned to maintain and even build upon our strong ROE going forward. First, we believe OCSL continues to be positioned well for this rising rate environment, with 87% of our investment portfolio in floating rate assets, we expect to further benefit from the remaining interest rate increases that are expected to occur in the next few months. And as we have discussed on prior calls, we continued to benefit from higher ROEs being generated at our joint ventures. During the first quarter, both joint ventures delivered ROEs of over 14%, as they are also benefiting from the rising rate environment and our ongoing portfolio rotation efforts. As I noted earlier, we expect that the cost savings and management fee reductions resulting from the OSI II merger will also support our returns. In conclusion, we are very pleased with our strong start to the fiscal year. Our portfolio is healthy, and we are well positioned to continue to capitalize on this increasingly attractive investment environment with our ample dry powder. Thank you for joining us on today's call and for your continued interest in OCSL. We will know begin the question-and-answer session. [Operator Instructions] Thank you. And our first question is coming from Melissa Wedel from JPMorgan. Melissa, please go ahead. Good morning. Thanks for taking my questions today. First, I just wanted to say thanks for the information that you provided sort of pro forma for the combined portfolio. I think it was slide 18 in the deck. Unless, I missed it, I was wondering, if you could help us think about what that combined pro forma portfolio yield looks like. With OSI 2 a little bit lower yielding than OCSL? Hi. It's Matt Stewart. The pro forma yield is going to be pretty much unchanged post merger. The overlap from OSI 2 into OCSL was around 97%. So, significant overlap, and so there's no material move in the portfolio yield. I think, Melissa, it's Matt, as you think about kind of the merger, I think the question – and you build the pieces, to Matt's answer the portfolios are pretty much identical. We've got tailwind from rising rates that Chris talked about. We've got the cost synergies, $1.4 million operational synergies, plus $200,000 to $300,000 of interest expense plus the fee waiver and you kind of add all those together to kind of build your – if you look, kind of your March quarter. Got it. That's very helpful. Thanks. And I assume the floating rate exposure would be similar as well given the high degree of portfolio overlap. Thanks. Good morning. Wanted to maybe start on just the origination activity for the quarter, a nice strong quarter from a commitment and funding perspective, wanted to get a sense for you all if this quarter's activity was more kind of seasonal strength, or would you say the opportunity set was just more attractive here in the December quarter? Thanks for the question, Bryce. It's Armen. So I think that, in the first half of 2022, pricing on the sponsor side of the market was generally not that attractive. We were very cautious about what we were doing on the sponsor side for most of the year. But beginning in August and September, it seemed like there was an air pocket in the market, especially on the sponsor side, pricing widened legal terms improved. And we're able to originate some very attractive sponsor and non-sponsored transactions. I think, it's hard for me to say that, it was a seasonal thing. But our activity was faster than what it had been because of the quality of the deal flow, the pricing of it, the lower loan to values, the better legal terms. So I wouldn't characterize it necessarily as seasonal, but it certainly was opportunistic, and I would say that in January, it's been a little bit slower, but we have been building up a decent pipeline for the rest of the first quarter and into second quarter. So I think there was a little bit of a rush to get deals done in November and December that is now resulting in sort of pulling forward of deals that would have otherwise occurred in January. I don't know if you would call that seasonal, but it's -- these are kind of situations that have different time line. So I think that just in light of the fact that we saw some good deals, we really pushed heavy in the fourth calendar quarter to get that -- to get those deals done. That's helpful, Armen. And then just around pricing of the new commitments, you highlighted a 13% plus weighted average yield, are you still seeing that level? And I think you mentioned at least you called out to specific investments. It sounded like both of those carry pricing that was around that level that you highlighted as far as the weighted average yield for the new commitments for the quarter. So I'm just trying to get a feel for whether that's an anomaly, or you're still seeing that level of pricing on actionable opportunities in the current environment? Yeah. I would say the frequency of our deal flow, if you were to line up the pipeline that we have, there is a little bit of a difference between sponsor-led deal pricing versus non-sponsor. The non-sponsored is certainly in that 13, 14, sometimes higher ZIP code. The sponsor deals that we're doing these days are pretty much always first lien. The pricing is pretty much in the SOFR plus $650 million to $700 million range and with SOFR 4% and with OIDs on origination of two or three points, they're solving to about 12% -- 11.5% to 12% for sponsor-led deals. So it is, I would say that most of the deals we're seeing are a little bit shy of 13%, but not a lot. Not -- I wouldn't say several hundred basis points lower, it's maybe 100 or 150 basis points lower. I do think that as long as base rates stay where they're at and as long as the market technical stay in this type of dynamic where there's a more balanced interaction between lenders and private equity sponsors. That this type of pricing in the, call it, 11% to 14% range is possible. Okay, okay. All right. Maybe last one for me. In terms of the joint venture, you saw a bit of an uptick in the dividend coming into OCSL from the -- from at least one of the joint ventures. Just curious if that's more a function of the higher ROEs that the joint ventures are generating, or is it a function of the, I guess, the increased investment you made in the JV here in the December quarter? Thanks. Hi, it's Matt Stewart. It's a little bit of both. During the quarter, we drew down about $25 million of additional capital into the JV that we deployed into the market. But we did get the benefit of base rates that we saw in the portfolio, in OCSL as well. But it's a little bit of both, and we were able to deploy a decent amount of capital during the December quarter. I want to follow-up on Bryce's question on the investment landscape. Clearly, it was a very active quarter of investment activity. And I'm just curious, how you would compare the attractiveness of the current vintage of deals that you're doing relative to historical periods? And then if you can maybe parse out sponsor versus non-sponsor opportunities? Sure. Thanks, Kevin. So I would say, let's talk about non-sponsored first. Those deals are always bespoke. It's hard to say what the "market pricing" is for a non-sponsor deal, because every one of the transactions are so different. The competitive dynamic is very different between non-sponsored and sponsored, while it feels like non-sponsored pricing is wider, it doesn't feel several 100 basis points wider. It's maybe 100 to 200 basis points wide of where it was a year or two ago. But more importantly, the legal terms and protections around non-sponsored transactions have always been tight, but I feel like they're a little bit tighter these days versus a year or two ago. And the loan-to-values are a little bit lower these days than there were a year or two ago. Now with that said, loan-to-values and non-sponsored transactions are always lower than sponsored deals, at least the deals that we do are always lower loan-to-value. So this is kind of incrementally tighter loan-to-values versus non-sponsor historically versus non-sponsor today. So it is certainly more attractive. But non-sponsor deals are certainly very difficult to find. And they've always been that way, and they continue to be that way. On the sponsored side, a typical first lien transaction for a new deal, I would say, has changed in two very important dimensions. One is pricing. A typical first lien sponsor deal with 4.5 to 5 turns of leverage was usually done at a roughly 55% or 60% loan-to-value and pricing of SOFR plus 500 to 550. That's what it was -- what the market was in for 2019 and 2021 and for the first half of 2022 that range kind of held true. But pricing these days, especially since August or September of 2022, for that same deal loan-to-value has declined. So that's the first dimension of change that's important. It's loan-to-values are now 40% to 50% rather than 55% to 60% and pricing has widened. And I would say, typically, pricing is SOFR plus 650, 675. And for -- if leverage is a little bit higher, it could get as high as soups 700 for a sponsor transaction. These are for businesses that are not tech or software LBOs, tech and software LBOs are at least 50 basis points wide. They're usually SOFR plus 725 to 800 in that range for a tech LBO deal. So again, pricing was wider by, call it, 150 basis points, 125 to 150 basis points and loan-to-values are lower by 10 to 20 percentage points in sponsor land. I think in -- on the third dimension that we would like to see more change is actually in the case of covenants. The middle market sponsor deals have always had a covenant, a maintenance covenant or two. They continue to have maintenance covenants. On the large cap end, it ebbs and flows, we saw a return of covenants in the fourth calendar quarter for large-cap deals, sponsor deals. So, companies with $100 million of EBITDA or more. We did see a return of covenants there, because the banks have stepped back with a broadly syndicated loan market, and we're no longer an alternative for that borrower base. But that technical shifts pretty rapidly. We saw a deal that we were engaged on with a very large private equity sponsor a few weeks ago, very large equity check, something like 65% of the total capital structure, 35% loan-to-value on that deal. And effectively, that sponsor was able to syndicate it out to a group of direct lenders, probably 10 to 20 direct lenders for a roughly $800 million transaction. And we're -- and in so doing, that competitive dynamic was able -- they were able to remove the maintenance covenant and essentially execute a covenant-light deal. And we passed on that transaction when we saw that the covenant was falling away, because we thought that the company actually had cyclicality to it, and we're not inclined to do a covenant-light deal for that. But -- so that dimension in terms of maintenance covenants is an important one to us. And I think that in the fourth quarter -- fourth calendar quarter, it looked really good, but it could -- that could change kind of quickly depending on competitive dynamics in the sponsor space. Hey, good morning, guys. Thanks for taking my questions. Curious to get your take on expectations for credit this year. Obviously, it seems like rate increases haven't yet impacted company credit performance broadly, including your portfolio. But is that kind of a timing thing? Like, how long can companies continue to perform under this higher rate environment? And how do you expect credit performance for the industry this year? And do you see any opportunities resulting from that? Thanks, Kyle. This is Armen, again. So credit quality, I think, you've got to parse out the two pieces that influence credit. First is unlevered performance of companies and the second is the elevated cost of borrowing. In terms of the unlevered performance of companies, I would say that, generally speaking, if the company has not been a beneficiary of inflation. So, for example, an energy-related company or a commodity company that benefits from inflation, assuming the way -- assuming that is not the case, the typical borrower in the US, generally speaking, has raised prices, and therefore, revenues are generally up and were up in 2022 year-over-year. However, the pace that -- of inflation in the cost structure has outpaced the revenue increases generally for companies. So I would say that, while revenues are up, dollars of gross profit or dollars of EBITDA have not materially changed, and, in some cases, might have even declined. So the EBITDA margin or gross margin of these businesses, I would say, by and large, is flat to down, even though revenues are up. And that -- it's very generic statement. Obviously, there are exceptions to that type of generic statement. But I would say that the unlevered performance in an inflationary environment is troubling because, with the increase in prices that companies have passed through to their customers, we are approaching the point where, in some industries, there's demand destruction and you're seeing a slowdown in the growth rate of quantities sold. So that's something we're watching closely. I would say, there isn't a very rosy picture, an upside picture for unlevered performance of companies. I don't think any business is just crushing it and doing a great job, inflation notwithstanding. Now in the case of leverage free cash flow, which is, obviously, cash flow after the cost of -- the elevated cost of borrowing, that is a problem, especially as base rates become consistent through the quarter. I mean, they’ve -- base rates have been increasing for the last 9 months, 12 months. And every quarter, you sort of -- you have a lagged impact of base rates as the SOFR or LIBOR contracts reset, base rates continue to rise in the fourth calendar quarter. And in fact, our dividend or our ROE on our portfolio would have been higher at base rates at the end of the quarter were the same at the beginning of the quarter. So, there is certainly some catching up of -- in company performance because there is a lagged effect on the cost of borrowing rising through quarters. So that doesn't bode well for borrowers. It's great for the yield on portfolio for investment managers like us, but for borrowers, obviously, it has become a material change in their performance on a levered basis. A lot of these businesses ignoring our portfolio, but let's just look at the market overall, direct lending was pricing at LIBOR plus 500 to 550 generically for the last three or four or five years. When LIBOR was at 25 basis points, these companies at a 1% LIBOR floor, so those -- that cost of debt at the time of issuance was 6% to 7%. Now, you have a 300 basis point increase in SOFR above that LIBOR floor, which is a 50% increase in the cost of borrowing for the unhedged borrower. That's pretty material in light of the fact that on an unlevered basis, the corporate performance of these companies is challenged, as I mentioned earlier in my answer. So, I do expect for there to be elevated risk in portfolio generally elevated defaults, especially in broadly syndicated loans. In direct lending, it's hard to say if the risk will translate into default because of the bilateral nature of lenders and borrowers in the direct lending landscape. So, I think defaults will probably be muted, but the reality is that there will be stress in portfolios that will need to be handled by direct lenders, especially those lenders that have been that have been supporting highly levered LBOs over the last few years at pricing of LIBOR plus 500 because they will have borrowers that are the most stretched in terms of debt to EBITDA and the most stretched in terms of interest coverage ratio. So, it's something to watch. And I think the default rates on broadly syndicated loans will rise and that should be a proxy for what's happening in terms of stress in direct lending portfolios. Got it. And then one quick follow-up for me. Just in terms of your prepayment or repayment pipeline, it doesn't sound like the merger should have really any material impact on that given the overlap, but kind of the outlook for repayments broadly in 2023, given all the moving parts macro-wise? Yes, it's a good question. It's hard to predict. But I would say that our non-sponsored deal flow, the characteristics that those borrowers have are that they took on leverage from us to achieve a strategic goal, not to financially engineer equity results. So, when those strategic goals are accomplished, we get repaid. We got repaid on several transactions that met this definition in 2022. We have some expected repayments over the next several months, again, in the non-sponsored area where we lend to businesses that were experiencing some growth and they had to make some capital expenditures to sustain that growth. So, we -- and that cost of debt, as I mentioned, on non-sponsored lending is generally higher than sponsor lending, which means that we are going to look very expensive when these businesses to achieve their goals. And so we expect to get paid off, refinanced in some of those non-sponsored transactions this year. On the sponsored side, it's hard to see that happen. Sponsor LBO transaction volume seems to be declining because of the elevated cost of borrowing on new deals, which means that a lot of sponsored businesses that are in our portfolio or in the markets overall, they're unlikely to transact from one sponsor to the next or from a sponsor to an IPO, which means that those particular loans on the sponsor side probably don't see material repayments in 2023. So that's our expectation. Now with that said, we also do have a publicly traded book. January has been a very strong month. In the publicly traded book we view that over time as a source of cash as well. And therefore, you might see some "repayments" because of trading activity that we take on. And we will turn that cash around and deploy it into private debt, hopefully, higher yielding, more sort of structured private debt than what you typically see in the market? And just picking up on that, we've covered this a bit earlier. It's Matt, Kyle. The OSI II portfolio has the same liquid makeup as OCSL. So it's just more of that asset we can rotate out of. Good morning. Thank you. Just wanted to first start with a question on portfolio leverage. You indicated that you're at the top of the range now and with pro forma for OSI II closing down to about 1.16. But given the fact that over the past 12 months, you were able to go from kind of call it the bottom of your range to the top of your range and it seems like investment opportunities are still plentiful today. How do you think about managing that leverage and continuing to grow out the portfolio here in the near-term? Yes. Thanks, Eric. So a couple of things. One is, we have seen some of the best opportunities in direct lending over the last several months than what we -- better than what we've seen over the last several years. And that's why we felt the conviction to increase our leverage and take advantage of those opportunities. We did also buy publicly traded debt as that market went through some very deep choppiness in 2022. And I would say that public book is a source of cash to fund new private deals without increasing leverage. We don't intend to increase leverage from the current levels. We're always looking at potential market activities, where we can increase the size of our portfolio as well. So we're -- I think that – I think that we can grow, but we're not going to want to grow through leverage at this point. We're just going to kind of work within the portfolio and do whatever we can on the capital market side, when appropriate. So that's all I could say about that. Yes. I think one of the things that as you look at the December quarter, that balance sheet was pre-merger, but we were working on the merger, announced the merger. We had the vote for January. So we are anticipating and expecting kind of managing the portfolio, assuming the merger would be completed. So that's why like the 1.16 number is really more operative than the 1.24 times That's helpful. And just a bit of a follow-up on the secondary market. Opportunities you mentioned, certainly a little bit slower in the last two quarters, but the pricing that you saw in the most recent quarter, according to Slide 6 was the most attractive you've seen. So just curious if that was a, a one-off opportunity, or would you expect to continue to see similar opportunities maybe in the next quarter or two at attractive pricing like that? Yeah. I think the pricing is relatively consistent in terms of the opportunities we're evaluating now. Again, sponsor-led private credit is SOFR plus 650, 675 for the typical deal non-software transaction, software's at SOFR plus call it 750 or thereabouts. That's pretty consistent today versus the last quarter or the quarter before. And on the non-sponsored side, its north of that, generally, what's hard to predict at this point is the pace of the deal flow. It's – on the non-sponsor side, especially, there are periods of time, where we do a lot in one quarter. It just happens to be the case. But because it's pretty opportunistic and bespoke, we really have a tough time predicting the pace at which we originate on the non-sponsored side. But pricing-wise, it's I would say, holding in there, at least for now year-to-date versus last year – versus the back half of last year. Got it. And one last one, if I can squeeze it in. Just looking at the press release that there was 42 equity investments currently today, 30 of which you also hold a debt investment. So for those 12 where you don't currently have a debt investment, are these opportunities whether the debt has repaid and you still have equity investments, or are there times or you take solely make an equity investment in companies? Yeah. We generally don't take equity investments solely. It would be in a small handful of instances, the legacy portfolio that we acquired from Fifth Street that had restructured and we own equity in those small handful, or it's an equity position that is left over from a debt position that did repay. But we don't buy just straight equity without – without a debt component attached to it as a matter of policy. Hey, good morning. First question I had was just when I look at your liability structure post merger with OSI 2. It looks like your guys' total unsecured borrowings drops to about 36% from 43%. Are you guys comfortable operating at that range where you'd be post-merger, or are you guys – would we expect you guys to look at the capital markets to increase that number to a level closer where you guys have kind of operated historically? Yeah. Ryan, it's Matt. Good questions. So specifically answers, are we comfortable at this level? I'd say, the answer is we are comfortable. The liability structure in OSI 2 with the liability structure we created, we knew the assets. That was one of the advantages of the transaction. So that just kind of moves over and we're able to actually re-price some of it more attractively. That being said, we're always looking at the unsecured market. We've had very good success, the two unsecured deals. I think, we're priced well, traded well. I think we have a very happy base of fixed income investors. So we'll continue to look at that as that market performs, or kind of reopened. So we look at both, but we're comfortable where we are, but we obviously like to have a very balanced liability structure and capital structure in general. Okay, understood. And Armen, you gave, I would say, fairly downbeat commentary on the outlook for credit quality, at least in the private credit markets broadly, given that fundamentally, it sounds like unlevered business performance is performing not great, given tightening EBITDA margins and then obviously there's pressure on levered cash flow given higher rates. Do you expect now that inflation is showing some signs of easing, it's still pretty high, would you expect there to be any reversal in 2023 of any of those trends from a margin pressure, or is inflation just still too high? And then kind of a separate question on that, because you mentioned pressure on EBIT or on levered cash flow. You all provided the estimated range of interest coverage of 2.5 times, which is slightly declined from the prior quarter, which provides some, I think, some value, but really in this marketplace, it's really going to be the tail end risk of those borrowers that are going to be -- is really the tail risk from higher rates on certain borrowers that are running closer to that lower leverage point. So have you guys done any analysis that looked at your current portfolio where either rates are currently or where the forward LIBOR curve is, what percentage of your current portfolio would fall below that one times interest coverage? Yeah. Good question. So we are always looking at our portfolio in terms of assessing risk profile levered on a fundamental basis or on a levered free cash flow basis. I don't have what percentage of our portfolio would be less than one times fixed charges, but it wouldn't be much or any of the portfolio. And you're right that the tail risk is the part of the market to look at -- or the part of the portfolio to look at versus the average. But generally speaking, our portfolio is pretty lightly levered. And we do look at it on what our fixed charge ratio is and leverage profile is for sponsored versus non-sponsored versus publicly traded. And we've done a good job of managing leverage profile and fixed charge coverage to a point where we really don't have meaningful watch-list names, and that's evidenced by the fact that we don't have anything on accrual. So we're watching it closely, but I wouldn't -- I don't have anything to report to you to say like X-percent of our portfolio would fall below one times coverage if base rates stayed here for 12 months. We don't have something like that to report at this time. But in the first part of your question, do I think that if inflation moderates, that some of this will reverse? It's a great question. So I think, generally speaking, companies have increased prices, but at a slower clip than the increase in the cost of goods sold. Now for a reversal to occur, that means prices would need to decline in terms of the cost of goods sold, but the revenue side of the price equation would need to stay flat. Now there will be a period of time where that's possible, where price increases are happening on a delayed basis, but cost of goods sold are stabilizing. Generally speaking though, you don't see a material reduction in cost of goods sold after an inflationary period. Inflation slows, but it doesn't go negative, generally. In some industries, it could, sometimes building products like timber prices, steel prices, concrete prices may for a period of time decline, if demand declines. But I wouldn't say, by and large, that that's something that we would expect to see that a meaningful price decline in cost of goods sold that create an outsized profit earning opportunity. Now it's hard to predict what happens in 2023 with inflation and rates. I do think that the pace of inflation is showing signs of slowing, that's a good thing. It does point to a pivot at some point. However, the market seems to believe a pivot is going to happen in 2023. I think that's probably a little bit too rosy. I think the downside surprise here with the Fed is that they leave rates high for a little bit longer than what people expect to make sure that the inflationary picture is under control. So I wouldn't bet on this outsized profit earning opportunity in 2023, but it could happen. I think stability is possible in late 2023 or more likely in 2024 with a more stable kind of supply-demand balance and cost of borrowing stability for most companies. So it's coming, but I just don't think it's this year. And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Mosticchio. Please go ahead. Thank you, Marliese, and thank you all for joining us on today's earnings conference call. A replay of this call will be available for 30 days on OCSL's website in the Investors section or by dialing 877-344-7529 for US callers or 1-412-317-0088 for non-US callers with the replay access code 6846351 beginning approximately one hour after this broadcast.

EarningCall_274

Good morning. Thank you for standing by, and welcome to the Madison Square Garden Sports Corp. Fiscal 2023 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Good morning and welcome to MSG Sports Fiscal 2023 second quarter earnings conference call. To begin, I’d like to welcome our new President and COO, David Hopkinson to today’s earnings call. David will provide an update on the company’s strategy and operations. This will be followed by a review of our financial results with Victoria Mink, our EVP, Chief Financial Officer, and Treasurer. After our prepared remarks, we will open up the call for questions. If you do not have a copy of today's earnings release, it is available in the Investors section of our corporate website. Please take note of the following. Today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Please refer to the company's filings with the SEC for a discussion of risks and uncertainties. The company disclaims any obligation to update any forward-looking statements that may be discussed during this call. On Pages 4 and 5 of today's earnings release, we provide consolidated statements of operations and a reconciliation of operating income to adjusted operating income or AOI, a non-GAAP financial measure. Thank you, Ari. Good morning, everyone. I’m delighted to be here speaking with all of you today, and I look forward to meeting with many of you in the coming months. I am honored to have taken on this new leadership role at MSG Sports. Our company has a collection of iconic professional sports assets, and with significant opportunities for growth ahead, I am excited to drive the business forward and realize this potential. Our portfolio is highlighted by the Knicks and the Rangers, who kicked off their 2022, 2023 regular season in October. And following on last year's record financial performance, I'm pleased to say that we have continued to build on that positive momentum this season as consumer and corporate demand remains robust. The strength of our business is reflected in our fiscal second quarter results with revenue of $354 million, an increase of 22% year-over-year and adjusted operating income of $77 million, up 38% as compared to the prior year period. This growth was broad based with total revenues, as well as per game revenues across tickets, suites, sponsorship, food and beverage, and merchandise all up year-over-year as compared to the fiscal 2022 second quarter. As we look ahead, our strategy remains focused on continuing to execute on our many opportunities for growth from offering new ticketing and premium hospitality products to forging deeper relationships with our fans, to strengthening our brands globally. Based on our current trajectory, we are positioned to deliver year-over-year growth across key revenue lines this fiscal year. And our announcement in October to return $250 million to our shareholders reflected this momentum, coupled with our confidence in the underlying value of our marquee professional sports franchises. And now, let's discuss in detail how our business is performing. Our teams are more than halfway through the NBA and NHL regular season. And both the Knicks and Rangers have talented rosters, including the Rangers’ Igor Shesterkin, Adam Fox, and our Artemi Panarin, who participated in the NHL All Star game this past weekend. And to Knicks’ Julius Randle who was recently selected as a 2023 NBA All Star. Both teams are currently in playoff contention and we look forward to the coming month of exciting competition. We continue to be energized by our fans, whose enthusiasm for our teams have only grown stronger during the last few years. Our average combined season ticket renewal rate is above 90% and we have also seen strong sales of new season ticket packages. As a reminder, season tickets represent a significant majority of our ticketing revenue. We're also pleased to say that our group and individual ticket sales have returned in full force, which reflects improving tourism, as well as our enhanced results across dynamic pricing and improved efficiencies in data analytics and marketing. In fact, average tickets sold per game for individuals and groups through the fiscal second quarter has not only significantly exceeded the prior year quarter, but has also exceeded the pre-pandemic second quarter of fiscal 2020. This robust demand combined with higher average ticket yields drove substantial year-over-year growth in ticketing revenue this quarter with both the Knicks and Rangers maintaining their position amongst the league leaders in average gate receipts so far this season. Beyond ticket sales, we have seen the enthusiasm from our fans again lead to increases in per capita spending across food and beverage and merchandise in the fiscal second quarter relative to last year, which as you may recall was a robust year for guest spending. We are strengthening and growing our fans community using a multipronged approach to forge impactful to rest relationships with our customers at multiple touch points in their experience. On the merchandise front, we've continued to introduce bespoke product offerings to build connections with guests, while driving business results. We are once again partnering with popular streetwear fashion brand, such as Jeff Staple with the Rangers. And Kith with the Knicks to create new collaborative collections this season, following prior year's success. In fact, in November, we also named Kith Founder and CEO Ronnie Fieg as our first ever Knicks’ Creative Director. In addition to developing an in-house line of products, Ronnie is focused on helping to provide a distinctive look and feel across our marketing, content and merchandise initiative. We're extremely excited to have Ronnie join us for this continued and expanded collaboration that we believe will further develop a global community around our iconic Knicks brand. On the Rangers side, we recently welcomed thousands of our fans to watch the team's first ever open [indiscernible] at The Garden giving them the opportunity to get up close and personal with their favorite players and another great example of unique ways in which we look to connect with and develop our next [generation of fans] [ph]. And our efforts to foster our fan community also extend outside [indiscernible]. Across our social media platforms, we've been rolling up compelling exclusive content, including behind the scenes player interactions, locker room footage, and lifestyle looking. It's clear this content is resonating. So far this fiscal year, we have added over 600,000 net new social followers across both teams bringing our combined total following to over [17 million] [ph] across our social channels. As we continue to demonstrate through co-branded social media content, our global marketing partners view this social content as the unique avenue to connect with both our [avid and casual things] [ph]. Our marketing partners have also continued to demonstrate solid demand across all of our assets in fiscal 2023. In partnership with MSG Entertainment, the first half of the fiscal year was highlighted by extensions with signature partners Verizon and Spectrum, as well as with other brands such as Dunkin' and Jägermeister. At the same time, the company has made strides in expanding into new categories and we welcome the leading insurance brokerage firm, Hub International, as the signature partner earlier this year. As a reminder, this fiscal year for the first time, we are also realizing the full run rate impact of our expansive deals with sports gaming companies BetMGM, Caesars Sportsbook, and DraftKings. Our sponsorship momentum demonstrates the strength of our brand and our expansive reach in the New York market and beyond. And with the NBA's expanded international sponsorship opportunity beginning this year, we are increasingly focused on growing our commercial opportunities globally for the Knicks. To that end, we recently announced MSC Cruises as the official cruise line partner and first official global partner of the Knicks. We fully expect this global partnership will be the first of many as we remain confident in the reach and appeal of the Knicks internationally. Corporate demand has also extended to our premium hospitality business. We have seen robust renewals and new sales of suite licenses through the first half of the year, positioning us for continued growth in this category. On the media rights side, we continue to see increases in local and national media rights fees due to annual contractual rate escalators. And with the NBA, media rights renewals coming due after the 2024, 2025 season, we remain confident in the opportunity ahead. Before I turn the call over to Victoria, I'd like to touch on the recent third-party valuation for the Knicks and Rangers. In December, Sportico published its annual ranking of NBA team valuation with the mix coming in at an estimated $6.6 billion, up 8% from last year. That day month, Forbes updated its NHL team valuation with the Rangers maintaining the top spot at $2.2 billion, a 10% increase year-over-year. And there continue to be record transactions for professional sports franchises as evidenced by the recent Phoenix Suns News. Just two months ago, the Suns were valued by Forbes at an estimated [$2.7 billion] [ph]. And now, with a reported sale price of $4 billion, the Suns are delivering the highest ever sale for the [NBA team] [ph]. We feel great about our position, owning two iconic franchises that have dedicated fan bases and play in the largest media market in the country. We remain encouraged by the continued increases in estimated team valuation along with the transaction to continue to come in well above those estimates. Our recent share buyback program is a demonstration of that confidence, recognizing the gap that persists between the current trading price of our stock relative to the intrinsic value of our marquee sports franchises. And so, with more than half of fiscal 2023 already behind us, we are proud of how our business is performing and we remain confident in our ability to generate long-term shareholder value. Thank you, David, and good morning, everyone. I would like to start by reviewing our fiscal 2023 second quarter financial performance and then provide an update on our balance sheet. Results for the fiscal second quarter reflect pre-season play and the start of the 2022, 2023 regular seasons for the Knicks and Rangers. In aggregate, we hosted 41 pre and regular season games across both teams as compared to 35 games last year for six more games, which positively impacted this quarter's results. I'd also note that our fiscal third quarter will reflect two additional home games, while our fourth quarter will reflect eight fewer regular season home games, both as compared to the prior year period. Turning to results for the fiscal second quarter, total revenues were $353.7 million, as compared to $289.6 million in the prior year period with increases across all key revenue lines. Event related revenue of $142.3 million, increased 30% year-over-year. This mainly consists of ticket related revenue, as well as food, beverage, and merchandise sales, both of which saw higher average per game revenue, driven by the enthusiasm from our fans. The increase in event related revenue also reflected the additional games played at The Garden during the current year quarter as compared to the prior year period. National and local media rights fees of $118.2 million increased 5%, primarily due to the impact of contractual escalators of both our local and national media rights agreements. Suites and sponsorship revenues of $81 million increased 38%, due to a higher number of games year-over-year, as well as an increase in per game revenue for both suites and sponsorships. These results reflect the demand we have seen from news suite licenses at The Garden and robust renewals, while sponsorship includes the full run rate impact of our sports betting partnerships and the impact of the NHL's new digitally enhanced DasherBoards. Adjusted operating income increased 38% to $76.6 million as compared to the prior year period. This improvement was driven by the increase in revenues, partially offset by an increase in direct operating expenses and to a lesser extent higher SG&A expenses. The increase in direct operating expenses reflects higher team personnel compensation, as well as other team operating expenses. The increase in SG&A expenses was primarily due to higher employee compensation, reflecting executive management transition costs recorded in the current year period, as well as higher marketing costs. As we look ahead, we continue to expect our business to deliver growth across key revenue lines in fiscal 2023, while our AOI will also reflect higher team operations expenses. Turning to our balance sheet. As David mentioned earlier, in October, we implemented a program to return approximately $250 million to our shareholders. This was comprised of an approximately $173 million special cash dividend and a $75 million accelerated share repurchase program, which was completed in January. In total, the company repurchased approximately 456,000 shares at an average price per share of approximately $164, representing about 2% of Class A common shares outstanding prior to the buyback. We now have approximately $185 million remaining under our existing share repurchase authorization. In connection with the special dividend and share repurchase, the company borrowed an additional $55 million under the Knicks revolving credit facility and $160 million under the Rangers facility, of which $30 million in total was subsequently repaid during the quarter. At the end of the quarter, we had $435 million of debt outstanding comprised of $260 million under the mix senior secured revolving credit facility and $145 million under the Rangers senior secured revolving credit facility and $30 million advanced from the NHL. I would also add that in addition to the $30 million of total debt repayment in the quarter, last week we paid down an additional $15 million on the Ranger's revolver. Our quarter-end cash balance of approximately $44 million, represented a net decrease of $37 million, compared to our September 30 balance of $81 million. With regards to liquidity, as of December 31, we had $164 million of liquidity comprised of $44 million of unrestricted cash and cash equivalents, and $120 million in borrowing capacity under the team's revolving credit facilities. Based on the momentum we continue to see in the business and the growth opportunities ahead, we remain confident in our ability to drive long term value creation for our shareholders. Hey, good morning. David, you mentioned the Forbes valuations and those recent sales of teams at pretty hefty prices, most relevantly, the Phoenix Sun sale, but that's nothing really but illustrative for investors without a sale of the Knicks or Rangers or at least a minority sale as a mark. Are either of those things in your consideration set? Hi Brandon, good morning. Let me start by saying that we're as confident as ever in the value of our teams. These are incredibly scarce assets. They've got strong business fundamentals that we just reviewed and we believe they've got significant opportunities for long-term growth. So, as I mentioned in my remarks, we just don't think that is appropriately reflected in our current stock price. And that was one of the reasons that we made to the recent share repurchase. There's also changes in the ecosystem. The NBA has recently allowed for private equity to come into the marketplace, as well as sovereign wealth funds. So, we've got new pools of capital available. So, to answer your question, we have no plans to sell either team and if you [indiscernible] no current plans there, but we would certainly not rule out the possibility of selling a minority stake in the Knicks or the Rangers. Thank you. David, just given the potential for major bankruptcies in the RSN space that could significantly impact distribution for the NHL, NBA, how are you thinking about risk to your own distribution over the next several years, and the potential need to maybe adjust existing terms or payments you receive if only to establish a wider or more sustainable carriage for your games? Yes. Thanks, David. That's a good question. If we take a step back, we all know and we can see that the media landscape is evolving, but we believe strongly in the value of live professional sports content and especially in the case of premium content like the Knicks and Rangers. We're happy that we operate here in the nation's largest media market. So that benefits us and it benefits our partner MSG networks. Sports rights, we've seen proven over and over is a great investment, especially over the long-term. So, we have confidence as we look ahead. And answering your question specifically, I want to flag for you that we've got long-term local media contracts in place with our partner MSG Networks. And those agreements provide exclusive local distribution of all of our live content, including our digital rights. MSG Networks have been great partners and we're really supportive of what they've been doing on the distribution front, including in terms of new digital offerings. Recently, MSG Networks announced plans to launch a direct-to-consumer offering in our market, a product that's designed to appeal to sports fans that do not currently subscribe through a traditional linear package. We're also pursuing a variety of additional ways to increase engagement and grow our reach amongst our fan base, especially on social media. A priority for us is delivering compelling exclusive social media content, giving our fans behind the scenes, player interactions, locker room footage, live look-ins and we think it's working. We've added 600,000 new social followers across both teams so far just this season alone and now have a total social media ecosystem of 17 million followers across all our social channels. Social is a priority for us and as the media landscape evolves with DTC offerings, we're going to complement distribution outreach using social media. And then maybe for Victoria, both the Knicks and Rangers as of today are playoff teams, which means potentially playoff revenue? I guess how should investors think about potential use of fiscal year-end cash flow assuming you guys have deep run? Sure. Thanks, David. First, let me say, we are really looking forward to the coming months of what's sure to be really exciting competition. Just as a reminder, we were really pleased last year with the financial impact of the Ranger's playoff performance, which drove significant increases in revenue and AOI for the 10 home games, playoff games that we played. So, we're definitely excited for the end of the season. But when we think about what to do with the potential of the excess cash flow, our near-term focus continues to be on paying down debt [indiscernible] as we talked about, we borrowed $215 million in addition to the cash on hand that we had generated in order to return $250 million to our shareholders. As you've heard us discuss, of course, this return of capital was a reflection of the strength of our business, which has continued through this fiscal year so far, as well as our confidence in the value of our sports franchises. So, when we look ahead and think about our capital priorities, they're generally the same, certainly near-term as of course, to maintain that appropriate liquidity to fund our operations and invest in our core business. And importantly is to keep a strong balance sheet. So, we will, as I mentioned, continue to focus on paying down debt in the near-term. Right, the $30 million we paid in the quarter and then another 15 million over the last week, but third, our longer-term capital considerations, right, we would of course consider other uses of our cash flow over time, including another return of capital, potentially in the future. Thanks. Good morning. David, welcome to the call. Nice to meet you over the phone. Wanted to ask you about, sort of the corporate demand backdrop. You mentioned really strong suite renewals and sponsorship trends, but we are seeing corporate spending, you know pretty soft in the advertising marketplace. We're seeing layoffs obviously in a lot of sectors like tech. Can you just tell us what you're seeing when you look out into the forward bookings? And also, just the nature of these multi-year contracts, you know would you have already seen a weakness in your business if it were to show up or might that be ahead of us? And then I just want to ask Victoria if she could maybe pick up on her last answer, is there a way to think about leverage on at this company in terms of more traditional metrics, whether it's debt-to-EBITDA or debt to value the teams because it would – I know you're paying [debt and debt] [ph], but it would seem like you've got a lot of capacity if you wanted to use more, but obviously the, sort of league oversight plays a role as well. So, I’d be curious in your thoughts there. Thank you both. Great. Thanks Ben. I'll tackle the first half of that and then I'll let Victoria answer the second part of your question. The short answer is, no. We're just not seeing an impact on our business other than a really strong demand for the product. Look, like you we're really mindful of the broader macro environment, but if I look across, sort of three big sectors of our business, all of them are really strong. Ticketing, as I mentioned, we had season ticket rules that exceeded 90%, strong sales for both teams strong demand for new packages, strong group, and individual ticket sales. As I mentioned in my remarks, the group individual ticket sales exceeded last year's Q2, but they were also above the pre-pandemic Q2 in 2020. So, tickets on an individual basis look better than ever. Specifically, with respect to corporate demand, our business remains strong and if I think about sponsorships, we're seeing, as I mentioned, the full run rate of mobile sports gaming with our three partners in their first full-year with us. We see great demands for new offerings in the marketplace, the NHL introduced the digitally enhanced DasherBoards this year. We're seeing great demand from – on that inventory from our partners. And have introduced the new partners, the renewals and with Spectrum, Verizon, Dunkin', Jägermeister, a new deal in Hub. So, we're seeing strong demand from the corporate sector. And we think we've got opportunity for headroom as well with both international as an opportunity for the mix and patch partners yet to come for both Knicks and Rangers. With respect to the suites and premium products, we had a great year for renewals. We're having a great year for new sales. And in conclusion, yes, we're taking none of that for granted. We're working hard every day. We follow the economy like you do, but so far we're seeing absolutely no softening whatsoever, and in fact, really robust demand. Sure. So, yes, we have not publicly provided an official will target. But I will say it is certainly something that we're thinking about and that we are discussing internally, right. And you're correct, the leagues do have oversight as to the amount of debt that either one of the teams could carry, but sort of as we mentioned, we're going to feel very good about our overall liquidity position, the amount of debt that we currently have outstanding. Again, we just think it's prudent to use our excess cash flow at this time. So, to just continue to pay it down given the overall cost of borrowing these days, but like I said, it is certainly something that we spend a lot of time thinking about. But at the end of the day, when I really take that step back, it's really the trajectory of the business that we feel good about and our ability to generate free cash flow and then it's the potential as to what we can do with that cash going forward. Again, with some variety of capital allocation and opportunities that are out there, including returning money to shareholders as we did that we were very pleased to be able to do. Thanks. My question is related to the upcoming NBA National TV rights renewal. The values that are being talked about are multiples higher than the current deal. Could you talk about how strong the flow through of incremental revenue to cash flow could be from a new deal? And if and how it would change your capital allocation priorities? Sure, Devin. So, first-off, right, we continue to believe in the value of live sports and particularly as well as our leagues appeal domestically and internationally. And we fully trust the NBA to maximize the opportunity when the time comes, which – so just as a reminder, that's going to be after the 2024, 2025 season, which is where the current agreement runs through. So, sort of what we're talking about would be out into our fiscal 2026. But specifically to answer your question, in terms of that financial impact, all teams across the league, which share equally in the increase from national media fees with a net impact of, I would say, roughly about half before revenue sharing dropping down to increase our AOI. So, certainly some good potential for a positive financial impact. And when I talked about the capital allocation policy, a little earlier, we sort of focused a bit more on the near term in terms of the potential for excess cash flow on – with play-offs. But I think thinking out several years, I think the priorities still remain the same in terms of maintaining a healthy balance sheet, maintaining enough liquidity for our ongoing operating needs, and then again, from a longer-term perspective, which is, I think is what we're talking about here is that opportunity for additional returns of capital. Thanks so much. I was hoping we could dive a little deeper into some of the comments earlier around the sponsorship space. In terms of cohort, is there any color you could give? It's apparent that the mobile sports betting cohort seemingly media as well has been strong, but are they, sort of mopping up any excess supplier inventory, sort of in the spot market from others that might be weaker or is it pretty much all spoken for in terms of the strength that they're able to deliver as the largest component of your sponsorship revenue? And then secondly, just wanted to see if we could get a little more color on the jersey patch sponsorship process? Thanks so much. Yes, sure thing, Paul. Those are really good questions. With respect to the three mobile gaming partners that we have, DraftKings, BetMGM, and Caesars, you know we’re – that was a big focus for us. When that category was introduced, we want to make sure that we were able to maximize that opportunity and we're really happy with where we landed. They are not just from a revenue perspective, but also from a brand perspective. We believe we found the right partners and the right mix to fully profit from and benefit from that new opportunity. We think about the partnerships business in those two dimensions that you mentioned. One is category, and one is inventory. I was pleased to introduce Hub as a signature partner of ours new this season, which was an important category for us insurance brokerage is an important strategic category. I'm glad that we filled that opportunity with such a strong partner and good economics underpinning that deal. So, we'll continue to look for key categories that we can sell to the right partner on an exclusive basis on the right package. When it comes to inventory, sort of the second half of your question and on jersey patches, we currently are not playing with a patch on the next jersey. We've got that opportunity open and available. And we believe that when the right deal presents itself, which we're working on, on a daily basis, we'll conclude that. For us, it's about the right partner, the right economics, and we're prepared to sit and work that category because it's such a strategic priority for us. We want to make sure we get the right deal done. With the ranges we're taking the exact same approach. The NHL introduced that opportunity just at the beginning of this year. We are watching the marketplace very closely because baseball has also introduced the sleeve opportunity this year. And so, it's a noisy marketplace out there. I really believe that we've got to work this every day and conclude the right deals, not the – not necessarily the quickest deal. However, when we do so, whether it's the Knicks or the Rangers or ultimately both, we've got material upside in our partnership's business. And this ends our question-and-answer session. Mr. Ari Danes, I'll turn the call back over to you for some final closing comments. Thank you all for joining us. We look forward to speaking with you on our next earnings call. Have a good day.

EarningCall_275

Good day and welcome to the Chipotle Mexican Grill Fourth Quarter 2022 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cindy Olsen, Head of Investor Relations and Strategy. Please go ahead. Hello, everyone, and welcome to our fourth quarter fiscal 2022 earnings call. By now, you should have access to our earnings press release. If not, it may be found on our Investor Relations website at ir.chipotle.com. I will begin by reminding you that certain statements and projections made in this presentation about our future business and financial results constitute forward-looking statements. These are based on management's current business and market expectations, and our actual results could differ materially from those projected in the forward-looking statements. Please see the risk factors contained in our annual report on Form 10-K and in our Form 10-Qs for a discussion of risks that may cause our actual results to vary from these forward-looking statements. Our discussions today will include non-GAAP financial measures. A reconciliation to GAAP measures can be found via the link included on the presentation page within the Investor Relations section of our website. We will start today's call with prepared remarks from Brian Niccol, Chairman and Chief Executive Officer; and Jack Hartung, Chief Financial and Administrative Officer; after which we will take your questions. Our entire executive leadership team is available during the Q&A session. Thanks, Cindy, and good afternoon, everyone. We delivered another year of strong results in 2022, expanding AUVs and restaurant-level margin despite facing one of the highest inflationary periods on record and an uncertain macro environment. These results demonstrate Chipotle's resiliency driven by our talented teams, delicious food made fresh daily, convenience, customization, and of course, our tremendous value. For the year, sales grew 14% to reach $8.6 billion driven by an 8% comp. Digital sales represented 39% of sales. Restaurant-level margin was 23.9%, an increase of 130 basis points year-over-year. Adjusted diluted EPS was $32.78, representing 29% growth over last year, and we opened 236 new restaurants, including 202 Chipotlanes. Turning to the fourth quarter. While we are pleased with our overall growth, our results were impacted by a few factors that were unique to the quarter, including a lower-than-expected benefit from garlic guajillo steak and a headwind from loyalty accounting. For the quarter, sales grew 11% to $2.2 billion driven by a 5.6% comp. In-store sales grew by 18% over last year. Digital sales continue to represent 37% of sales. Restaurant-level margin was 24%, an increase of 380 basis points year-over-year. Adjusted diluted EPS was $8.29, representing 49% growth over last year, and we opened 100 new restaurants, including 90 Chipotlanes. Our transaction trends improved throughout the quarter as we lapped brisket, and I'm pleased to report that our underlying trends have further improved entering 2023, with transaction trends turning positive. For the first quarter, we anticipate comps in the high single-digit range. Our focus on getting back to the basics and running great restaurants is beginning to pay off, and we plan to further emphasize this in 2023. Additionally, we will continue to build upon our five key strategies that will help us to win today while we create the future. Now let me provide an update on each of these strategies, which include: number one, running successful restaurants with a people-accountable culture that provides great food with integrity while delivering exceptional in-restaurant and digital experiences; number two, sustaining world-class people leadership by developing and retaining diverse talent at every level; number three, amplifying technology and innovation to drive growth and productivity at our restaurants and support centers; number four, making the brand visible, relevant and loved to improve overall guest engagement; and number five, expanding access and convenience by accelerating new restaurant openings. Beginning with our restaurants. As we discussed on the last call, Chipotle is a restaurant business with high standards, and it is critical that we treasure the guest and delivering an exceptional experience, including great culinary and in-restaurant execution. During the pandemic, there were unforeseen challenges, such as supply outages, staffing challenges and exclusions from COVID that resulted in a need to create workarounds. We have been eliminating the workarounds and reestablishing operational standards with Project Square One while continuing to build a culture of excellence in every aspect of our business. This means ensuring all ingredients are in stock, that our teams are fully staffed and properly deployed during peak periods to drive throughput, that our delicious food is prepped and cooked on time, that we are improving throughput on the frontline and improving on time and accuracy on the digital make-line; and of course, that we are delivering exceptional customer hospitality. Project Square One has helped to lay the foundations, including training in each of these areas. We are also bringing back more shoulder-to-shoulder training. One thing that I believe everyone has learned from the pandemic is that virtual training is not the only tool needed. So we are reducing the amount of virtual training and bringing new crew members into our restaurants sooner for on-the-job training. This helps to accelerate onboarding and gives more confidence to our new crew members as they are learning by doing. Shoulder-to-shoulder training by experienced managers is an essential process. I'm also happy to see an improvement in turnover with December being one of our best months in the past two years for both hourly and salary turnover rates. And our staffing levels continue to improve with 90% of our restaurants fully staffed. This, combined with better stability, leads to more experienced teams. When you combine this with Project Square One training for the past two quarters, positive signs are emerging across the operation. We are focused on operational excellence and have intensity and collaboration to achieve it, great people and great culinary drives performance. And speaking of great people, I'm proud to share that in 2022, we promoted over 22,000 people, surpassing 2021, and 90% of all restaurant management roles were internal promotions. And we have tremendous growth ahead. In 2023, to open our new restaurants, we will have the opportunity to promote over 1,800 hourly manager roles, over 255 GMs and over 40 field leadership positions. And these numbers will continue to grow as we expand our restaurants by our targeted range of 8% to 10% per year. As we have said in the past, our goal is to be the employer of choice. In addition to career advancement opportunities, industry-leading benefits and competitive wages, we will continue to look for ways to improve the overall experience for our teams. We know one way is to continue to invest in technology and innovation. There are a couple of new stage gate initiatives that I'm excited to share along with an update on improvements to our app functionality. First, we are currently testing a new grill to improve the overall cooking process for our chicken and steak. The grill is much faster and has consistent execution, which lowers the learning curve significantly. Importantly, we believe it maintains our high culinary standards and can cook the chicken and steak to perfection. We look forward to further validating it through our stage gate process. And second, you may remember that in the second quarter, we announced Hyphen as one of our first investments in our Cultivate Next Fund. Hyphen is a food service platform that automates the assembly of meals on the digital make-line and could help fulfill our promise to deliver on-time, accurate orders for our digital guests. This would allow our restaurant teams to focus more on our in-restaurant guests on the frontline, further improving throughput. I'm thrilled to share that together with Hyphen, we are developing our first automated digital make-line prototype, which we will test and learn on, and we expect to have it in our Cultivate center in the first half of this year. Speaking of our digital business, it is over $3 billion in revenue and represents 39% of our sales, and we're constantly looking for ways to improve the experience for our guests. Last quarter, we started testing advanced location-based technology to enhance our app functionality. For guests who opt in, the program can engage with Chipotle app users upon arrival to our restaurants and utilize real-time data to enhance their experience with order readiness messaging, wrong pickup location detection, reminders to scan the Chipotle Rewards QR code at checkout and more. The results from the stage gate process were very encouraging, including an improvement in delivery speed, a reduction in customers going to the wrong location and an improvement in the experience for our rewards guests, allowing them to quickly scan for their rewards points without impacting throughput. As a result, we rolled it out nationwide last month. Moving on to making our brand more visible, more relevant and more loved. Our Real Food for Real Athletes platform has been a success as we partner with athletes of all levels who are fans of Chipotle and focus on helping them perform their best by providing proper nutrition through real food and real ingredients. During the fourth quarter, we teamed up with U.S. Men's National Soccer Team stars, Christian Pulisic and Weston McKennie to showcase their journey to soccer's biggest international tournament while featuring the athletes' go-to orders in our app. We also continue to leverage social media to remain relevant with our consumers, especially Gen Z. This year, we surpassed 2 million TikTok followers, which to put into context rival some of the largest brands in the world and we were the first brand to launch on the new social media platform, BeReal. Shifting to menu innovation. As we mentioned last quarter, 2023 will consist of one to two LTOs. I'm delighted to share that Chicken Al Pastor has been validated and ready to be rolled out in the near future. This new menu item is operationally simple to execute while still providing a new exciting flavor that drives transactions and sales. We also recently launched a new lineup of Lifestyle Bowls that cater to contemporary wellness habits of Gen Z and millennials. The lineup spans a wide range of healthy habits such as our Balanced Macros Bowl, our High Protein Bowl and our Grain Freedom Bowl. Lifestyle Bowls are a great way to show our customers that they can create balanced meals made with our existing ingredients that taste great and that they feel great eating. Turning to our Rewards program. In 2022, we increased our rewards members by 20% to 31.6 million. Our program continues to get more sophisticated as we better understand who our members are and serve them with relevant content, targeted offers and gamified badging to help drive transactions. In 2022, 60% of our rewards program promotions were personalized, and we plan to increase this going forward. To drive engagement and enroll new members, we recently introduced Freepotle, which offers each rewards member 10 personalized free rewards throughout the year. Our fifth strategic pillar is to expand access, and our development team has done an outstanding job of navigating headwinds such as material shortages and permitting and inspection delays while successfully opening 236 new restaurants in 2022, including 202 Chipotlanes. In fact, we opened 100 new restaurants in the fourth quarter, which was a record for the company. We also opened our 500th Chipotlane during the quarter as we expanded access and convenience through our unique digital drive-through format, and the performance of Chipotlanes continues to be strong. In fact, since we began opening Chipotles in 2018, our new restaurant productivity has improved by about 1,000 basis points. We plan to open 255 to 285 new restaurants in 2023 with over 80% including the Chipotlane. Within our 2023 expansion plans, we will accelerate new restaurant growth in Canada and continue to open restaurants at a measured pace in Europe. In Canada, we have built out a strong local field leadership team that works closely with our U.S. team to ensure best practices and a consistent culture, while adapting to local needs. We are now ready for accelerated growth and plan to add around ten new restaurants in 2023, which will be the fastest development growth rate since we entered the Canadian market. We also remain encouraged by the performance in Europe despite a challenging macroeconomic backdrop. In 2023, we plan to add a few additional locations in the UK, and we are also rolling out our digital capabilities to further expand access. We remain optimistic about the growth opportunity, and we will continue to update on Europe's progress of the stage-gate process along the way. In closing, I want to thank our restaurant and support center teams for another terrific year. Our focus on getting back to the basics is starting to pay off. Our teams are energized, and I'm excited to see further progress over the coming quarters. We have a long growth runway ahead with the ability to more than double our restaurant count, grow AUVs beyond $3 million and expand margins. I believe we have the right team and strategy in place, and we will remain focused on meeting the standards of excellence that make Chipotle, Chipotle. Thanks, Brian. And good afternoon, everyone. Sales in the fourth quarter grew 11% year-over-year to reach $2.2 billion as comp sales grew 5.6%, which included about an 80 basis point headwind related to our loyalty program. In Q4 of each year, we reevaluate the estimated loyalty breakage for points that will expire. And this year, we decreased our estimate due to higher member engagement. Restaurant-level margin of 24% increased about 380 basis points compared to last year. In addition to loyalty program headwind, restaurant-level margin was impacted by a higher level of sick pay and medical claims in the quarter compared to our expectations. Earnings per share adjusted for unusual items was $8.29, representing 49% year-over-year growth. The fourth quarter had unusual expenses related to legal expenses, our previously disclosed 2018 performance share modification and corporate restructuring. Turning to our sales outlook for 2023, as Brian mentioned, we've seen the transaction trends turn positive as we remain focused on delivering a great guest experience. January comps were in the low double digits. For Q1, factoring in momentum we've seen quarter-to-date as well as tougher comparisons as we move through the remainder of the quarter, we anticipate comp sales to be in the high single-digit range. While it's difficult to forecast comps for the rest of the year, considering economic uncertainty, including the possibility of recession, we expect comps to moderate as we lap menu price increases in early Q2 and the middle of Q3. I'll now go through the key P&L line items, beginning with cost of sales. Cost of sales in the quarter were 29.3%, a decrease of about 230 basis points from last year. The benefit of menu price increases and lower avocado prices offset elevated costs across the board, most notably in dairy, tortillas, beans, rice and salsa. In Q1, we expect our cost of sales to be in the high-29% range due to higher prices across several items, including queso, salsa, spices and oil. Labor costs for the quarter were 25.6%, a decrease of about 80 basis points from last year. The benefit of sales leverage was somewhat offset by wage inflation in addition to higher-than-expected sick pay and medical claims. For Q1, we expect our labor cost to improve slightly, but remain in the mid-25% range, due to seasonally higher employee taxes as employee taxes start the year at an elevated level due to resetting of wage caps. Other operating costs for the quarter were 15.7%, a decrease of about 60 basis points from last year. This decrease was driven by a decline in delivery expenses due to lower delivery sales as well as sales leverage, partially offset by higher costs across several expenses, including natural gas and maintenance and repairs. Marketing and promo costs for the quarter were 3.4%, 20 basis points below last year. In Q1, we expect marketing costs to be in the mid-3% range with the full year to come in around 3%. G&A for the quarter was $135 million on a GAAP basis or $129 million on a non-GAAP basis, excluding $4 million in legal expenses, $1 million related to the previously disclosed modification to our 2018 performance shares and $1 million related to transformation expenses. G&A also included $119 million in underlying G&A, $18 million related to noncash stock compensation, which includes a reduction in the estimated payout levels of our performance-based stock awards and was offset by $8 million reduction in performance-based bonus accruals. We expect our underlying G&A to be around $121 million in Q1 and continue to grow slightly thereafter as we make investments in technology and people to support ongoing growth. We anticipate stock comp will be around $25 million in Q1, although this amount could move up or down based on our performance and is subject to the 2023 grants, which are issued in Q1. We also expect to recognize around $7 million related to employer taxes associated with shares that vest during the quarter and $2 million for costs associated with our field leader conference in February, bringing our anticipated total G&A in Q1 to around $155 million. Depreciation for the quarter was $74 million or 3.4% of sales. And for the full year 2023, we expect it to inch up slightly each quarter as we open more restaurants. Our effective tax rate for Q4 was 26.3% for GAAP and 25.1% for non-GAAP. And for 2023, we continue to estimate our underlying effective tax rate will be in the 25% to 27% range, though it may vary based on discrete items. Our balance sheet remains strong as we ended the quarter with $1.3 billion in cash, restricted cash and investments with no debt, along with a $500 million untapped revolver. During the fourth quarter, we repurchased $199 million of our stock at an average price of $1,487. And we repurchased a total of $827 million in 2022, which was the largest amount ever repurchased in a single year. We increased our level of stock repurchases during the quarter when our share price fell with the market overall, and we'll continue to opportunistically repurchase our stock. During the quarter, our Board authorized an additional $200 million to our share authorization program and at the end of the quarter, we had $414 million remaining. We opened a record 100 new restaurants in the fourth quarter, of which 90 had a Chipotlane. And we remain on track to open 255 to 285 new restaurants in 2023 with at least 80% including a Chipotlane. Development delays remain a headwind, including utility installations, permitting and inspection delays, construction, labor challenges, and component and raw material shortages. While we expect these challenges to persist into 2023, our pipeline remains strong, and we expect to move toward the high end of the 8% to 10% openings range once these headwinds subside. To conclude, we're off to a strong start in 2023 with early signs of progress from our focus on getting back to the basics of running great restaurants and treasuring our guests. While we cannot predict how the macroeconomic environment will play out over the next 12 months, we will continue to strengthen our operations and work hard to earn each and every customer visit. I want to thank our restaurant teams and our restaurant support teams for all their hard work this year and for their commitment to Chipotle. Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from David Tarantino from Baird. Please go ahead. Hi. Hi, good afternoon. I have a couple of questions about your commentary on traffic trends. I think Brian, you mentioned that underlying traffic trends have turned positive if I heard that correctly. So I'm wondering what you meant by the word underlying if you're making some adjustments to that. And I know January had a lot of puts and takes with respect to the comparison against Omicron last year, and then perhaps we had some favorable weather this year. So I'm wondering, it seems like you're linking some of the traffic progress towards some of your internal initiatives. And I'm wondering how you're adjusting for some of the factors that maybe were outside your control. Yes. So, first of all, underlying just means transactions. There wasn't anything there. So, thanks for asking for the clarity. And basically, what we saw is as we exited the quarter, our transactions turned positive, and then we saw that continue to build in January. You are right, there was some Omicron and then there were some good weather. But what we've also seen is our staffing is at the best it's been. Our turnover is at the best it's been in two years. And I think the combination of focusing on the basics, meaning no menu deactivations, keeping the lines open, both our frontline and digital make-line from open to close, teams deployed correctly, is also a key driver in why we're seeing the traffic progress in January throughout that whole month. So we're feeling good about where we are operationally. We believe we can still get even better as we get closer and closer to our infamous burrito season. But it's a great position of strength that we're walking forward from. And we like how we exited December and we like how January shaped up. Great. And if I could just ask one follow-up on the operations, I'm wondering if you could maybe elaborate on what metrics other than transactions that you're focused on and how those are progressing? And what you think maybe the ultimate target for those should be as you progress through the year or maybe work towards your goals there. Yes. Sure. So I'd like to put a little color on this, menu deactivations in our digital business. Obviously, during the course of the last couple of years, we've had a lot of supply chain challenges, and one of the workarounds we created was allowing teams to deactivate certain items, right, so whether it's clock or chips or anything on those lines. And we've kind of just reestablished with both our suppliers, our distribution partners and our teams that that's not a fallback position anymore. Okay. The expectation is you should be in stock, and then you should be prepared from open to close with those items. So there were points and times during that quarter where we had hundreds of menu deactivations, and now we're back into the single digits on how that's going. So that's a key metric. Another key metric would be our digital on-time percentage. That's improved by nearly ten points. And so I think that's a function again of being deployed correctly, staffed correctly and then obviously, having the ingredients you need in order to build the order correctly. And then we've seen some progress on throughput as well on the frontline. And I anticipate really where we'll see big movement on throughput is more towards the second quarter, when we get into kind of more of our peak performance, and that's why you saw us focus on hiring so many additional people. So there is a lot of good indicators beyond just the traffic trends that we've seen. I always like to start with, hey, if you got more stability, your teams are deployed correctly, they are trained correctly, and then we keep it very focused on the basics of running the restaurant, we know we get good outcomes. Hi, thank you. I have a follow-up on labor and staffing and then a quick one on the new units. So just on the labor piece, I guess, could you help me reconcile? I think you’ve been saying mid-single-digit wage inflation, and I think you had something like 15% price on the menu. So were those hours coming from what you were talking about like the sort of shoulder-to-shoulder drop training? Or is that 90% staff – 90% fully staffed, is that a lot higher than it was? I just trying to think about as we look forward to the year if the late there should be more labor hour investments. Yes. Well, I think what we’ve been referring to more often than not is just the absolute wage that we’re paying and then what that inflation subsequent with that has been. The stores, fortunately, are – we keep track of an at-model metric. And that’s what we’re referring to, where we’re closing on 90% of our restaurants being at-model. In regard to the shoulder-to-shoulder training, that’s just part of our process. And I think there was an element at some point where we’re maybe getting too reliant on virtual training versus the shoulder-to-shoulder training, meaning our field leaders, our team directors also need to be in the restaurants doing shoulder-to-shoulder training with our general managers and our new crews. So that should not result in any additional labor cost with having more shoulder-to-shoulder training. But Jack, I don’t know if there’s anything you want to add to that. No. No, I think that’s right, Sara. And we don’t think we need to have incremental investment in labor for the training, because the best training is, you put your teams in position. You have somebody that’s chosen what to do and you have somebody that’s watching them to kind of self-correct along the way. So it shouldn’t be extra labor per se. Now when we hire 15,000 people, there’s going to be some additional training. But I don’t think it’s going to be anything that you’ll see will blow up the labor line on the P&L going forward at all. Okay. So, just as we’re thinking about kind of the labor, there’s still room, I think, what you’re saying for improvement on just the restaurant-level margin line is the new comp? Okay. And then just quickly on the new store productivity. Could you clarify that sort of there, it’s 1,000 basis points better? Is that because the Chipotlanes open at higher volumes than non-Chipotlanes, and so it’s just sort of comparing the different models? Or is there something else going on where across the board, new store productivity is better? Thank you. Yes. Sara, I’ll take this. I think it’s really more based on the Chipotlanes. Because if you look over the last four years or so, you got to look over a longer period of time to look at all the opening, we’ve moved up our productivity. So for example, today, our restaurants open up on average around 85% of what our existing comp stores are doing. If you look back three years or four years ago, we were in kind of the high 70% range or so. So there’s been a step change. And the biggest thing that’s happened from the three years, three and a half years ago to today is we’ve moved from having just a handful of Chipotlanes to having the majority of our portfolio is Chipotlane. And we still – when we look at what our Chipotlanes are doing, the 85% compared to 15% without a Chipotlane, they continue to outperform that non-Chipotlane cohort. So, we think the main driver is the Chipotlane and the convenience that our customers find with that digital drive-through. Thanks. I wanted to ask a question about digital orders. I’ve been somewhat surprised by the level of decline there. I think back in the third quarter, we estimated that digital traffic per store decline in the mid-teens. That’s including both delivery and pickup. Maybe you can comment on where you think that was correct, but also how much you think digital traffic per store declined in the fourth quarter. And just relatedly, what are your thoughts about that channel? I know it’s important to you. What’s your outlook for it? And are there things you can do to stabilize that line? Thanks. Yes. I’ll get started, David. Listen, there’s a couple of things that are driving it. One is, we’re having a surge in return to in-restaurant. And so that part of our business is growing very, very healthily throughout the last year and a half or two years since we’ve been moving away from the pandemic. But secondly, delivery has been declining as well. Delivery transactions in the fourth quarter declined 15%, and that’s I think just again a normal kind of move away from people getting out and about. And I think there’s probably some people who are deciding that while that channel adds a lot of convenience, there is a higher price that comes with that. So those are the two main drivers. And we figured that digital would kind of settle in this high 30% range. And so we’re at 37% range now. So it’s within the range that we thought we would be in. And early on in the pandemic, we saw our two markets that were the least affected, that’d be the Southeast and the Southwest. When they were starting to normalize, they were normalizing towards that high 30% range. So it feels like about the right range for us. So is your view that you’re going to start to kind of lap the second quarter, things really step down? Or do you think you’re going to enjoy that comparisons when it comes to digital orders and start to stabilize on that channel, and then perhaps enjoy some of the benefits you’re talking about with throughput on the front make-line? Is that – is your belief that you’re going to get a dual benefit there? Yes. That’s right, David. I mean the way we think about it is, we feel like we’ve reset the delivery business to be now where it makes sense economically. And as such, our order-ahead business, I think, has started to show the right trajectory. And then obviously, our in-store business has shown tremendous acceleration. So, I think you said it well. Great. Thanks. Jack, I have two margin questions for you. There’s obviously a lot of noise in 4Q. Labor cost was 1Q guidance for labor. And I’m curious what the impact of higher expected sick claims have in 4Q. And then I missed the term, but there’s some external factors that you’re betting within the mid-25% labor margins. Can you just help tease us out in terms of what that impact is from that external factor? And then my real question is that if we zoom out and fast forward to when you get the $3 million sales volumes, what’s your level of confidence in achieving 27% restaurant-level margins relative to what you might have said a quarter ago if the sales structure has obviously been up and to the right and you’re rapidly getting towards that target? Yes. So let me start with the fourth quarter. Our expectations were that our margin would be more in the 25% range rather than the 24% range. And when you look at the pieces of how we got down to 24%, part of it was the loyalty breakage. Frankly, there was an 80 basis point change year-over-year in the comp related to just that journal entry that we had to book for the breakage. If you look at just the – there was 30 basis points of additional or reduced breakage that we had to reflect this year, that cost us 20 basis points on the margin. It was 60 basis points on – we saw higher-than-expected medical claims and sick pay during the quarter as well. We typically do see those things pick up a little bit in the fourth quarter and especially in December. But it – the surge was more than we expected. That’s not something that we would expect to recur. And then sales softened during December as well. I think that went hand-in-hand with softer retail sales. We know there was some weather and a seasonal shift in the holidays and things like that. And that was 20 basis points, 30 basis points or so. So, we look at that margin in the fourth quarter. And we think if those things normalize, there is as much as 100 basis points or so that we can get back. We don’t get it back all at one time, but we definitely think we have the potential to do that. So with that in mind, if you’re looking at more of that high 24% and that 25% range on a normalized basis, then we are confident that as we move from the current volumes on a menu price-adjusted basis just over 20 – $2.7 [ph] million up towards that $3 million, the flow-through that we know our model provides will still get us to that 27%. And can you just clarify – I’m sorry, you said sales were a bit softer than you guys expected in December. But I think earlier in the script, you guys talked about how there was improvement through the quarter. So was that just a reflection that December didn’t perform to the level that you guys were really expecting? Yes. I mean, listen, the way I would describe the quarter, we started out soft and we talked about that in October that we were doing a mid-single-digit comp, that GGS, while there was an attachment rate that was as expected, it wasn’t driving transactions. So, we started out soft in the quarter. We picked up as we stopped comparing against brisket. That was in the middle of November. So we had, call it, high single-digit comps for a while. And then we lapped the menu pricing increase from December of 2021. And then just as we got around the holiday, we just didn’t see that pop, that momentum that we normally see in – so December. So the way I would describe it is, frankly, we started the quarter soft and we ended the quarter soft. Now what we’re happy about is, as the holidays – we got through the holidays and we got into January, that’s where our transaction, not just from a comparison standpoint but just on a trend month-over-month, really did improve. And so we feel good about where we go from here. But yes, listen, the fourth quarter was a tough quarter for us. Thank you. Thanks for the question. As you move throughout 2023 and you lap some of these large menu price increases as the year progresses, would you think about replacing them with some type of increases, albeit probably a lot more normalized, more lower price increases? Or do you plan to let these fully roll off? And Jack, as you sit here today, what do you anticipate the total pricing factor to be for the full year 2023 for the same-store sales model? Yes. So, I mean I’ll start with that and then we can talk about expectations. We’re running right now in that kind of 9% to 10% range. And as I mentioned, it rolls off early in Q3. And then in – I’m sorry, early in Q2 and mid-Q3. And then there were a couple of delivery adjustments, target adjustments in there as well. We’ll end up being somewhere in that kind of mid-single-digit because by the time you get to the end of the year, we’re running basically zero pricing. So overall for the year, it will be somewhere in that kind of mid-single-digit. In terms of pricing action, we're not going to take a price increase just to cover a lap over last year. The main thing we're going to do is we're going to want inflation, and we're going to hope that inflation is tame. Right now, we know that there is some pressure on a few of our ingredients. Beef is the one that we keep hearing about. We haven't seen it yet, but everyone is predicting that there's going to be greater supply versus demand. But we'll watch that carefully and see what inflation does. But it's going to be more about inflation and wages, inflation and ingredients and do we need to take pricing action to cover some of that, but I – we wouldn't take a price increase just to cover a comp lap. That makes sense. And just a clarification on the same-store sales guidance for the first quarter. I know you've talked a lot about traffic flipping positive here in January. But if we just hypothetically land in that high single-digit range for the first quarter, what do you think mix and traffic would separately be in that build if it kind of played out how you thought? Yes. I mean, right now, we're running, call it mid-single-digit positive traffic. We expect for the quarter, that guidance range assumes that we're also going to be positive transactions more in the low-single-digit as we move away from Omicron. Pricing will be that 9% to 10% range that I mentioned. And then there's going to be a mix component. We think it's kind of probably be in that low maybe 2-ish, 3-ish percent something like that. Mix is a little harder to predict, but those are the main components. Great. Thanks for taking the question. Quick clarification on the question. On the new store productivity, I know we talked on this a little bit earlier. During the quarter, was there anything about timing where – based on the way that we can calculate it looks like the productivity of the stores might have been a little bit lower than the normal. And I don't know if that's related to timing or something else. That's kind of the clarification. The question is then on thinking about the Garlic Guajillo Steak, it didn't live up to your expectations. Curious if you could dissect that and give us a reason as to what you might have missed. I know it hasn't been that long, but curious to know how it didn't perform versus your expectations and why you think that happened? Yes. You hit the nail on the head. We opened a record 100 restaurants during the quarter, but it was very, very back-loaded. Our teams did a great job of just scratching, clawing and doing everything that they could to get the restaurants open. And I think we probably had a record opening in the month of December as well. We had more than half of the openings or in the last month of the year. So yes, you're not – you didn't see a typical sales flow-through, considering we opened 100 restaurants. And then on your question about Garlic Guajillo Steak. Look, I think it's one of those things where we tested it in a very different environment than when we rolled it out. And as a result, we got the check benefit, but we didn't get the transactions. And it also had the challenge of rolling over brisket, which was arguably one of our best-performing menu items that we've done to date. But we'll continue to analyze that we make sure we learn from it going forward and that's why we use the stage-gate process so that we are always learning. Hi. Good afternoon. I wanted to ask a question about staffing and the lower turnover that you're seeing. Is there a way to kind of compare and contrast tenure on the frontline now versus 2019? And if we think about throughput opportunity as we enter high season, I mean, how much is the frontline because it is less experienced kind of lagging where you were in 2019 or dimensionalize kind of how – how much throughput opportunity is really on the table here as you have more productive frontline staff? Yes. Look, thanks for the question on this because I think this is an important one, which is what we know is when we have our teams at model and deployed correctly with leadership present for shoulder-to-shoulder training, our restaurants perform and that's what we saw in 2019, and that's what we anticipate occurring going forward. So we know there's upside in how much throughput is our teams are capable of doing. And obviously, we're targeting to get those throughput numbers back to where they were in, call it, the 2019-time-period. The one thing that's nice is our turnover levels have dropped. So we're getting more stability in the teams, which means they're getting more reps. So that as we walk into these higher-level or higher-volume months, they've got more reps and being deployed correctly, working together correctly to ensure that we get more throughput. And that's what we're focused on is the people that we have today, how do we get them trained, how do we get them deployed and then how do we make sure those teams stay together. Yes. And Sharon, just to add, when we look at the timing position back to 2019, and there's two factors here. One is turnover. The other one is promotion rates as well, but when your turnover slows down, people are going to be in their position longer. In for example on the kitchen manager, we're very close to where we were in 2019. So the average tenure in the kitchen manager role was like 0.69, meaning it was about eight months or so. Today, it's like 0.64. So it's like maybe seven, 7.5 months something like that. In apprentice, we're not quite back to 2019, but we're ahead of where we were a year ago, and we're in striking distance again. So those are areas that we were seeing that our average tenure was going down during the high-turnover period of the last year – year-and-a-half or so. But those numbers appear to just like with the turnover be stabilizing and moving back up. Hi. Thank you. I know you've been working on a number of different automation or technology practices in the store that could potentially reduce the demand for labor and also make you efficient and perhaps more consistent in some ways. So I was just hoping you could take a few minutes or a few seconds and just kind of talk about some of the different packages that you have. How far along they are and when you – we actually might be able to start to see some benefit, even if it's on a limited basis at a market level? Thank you Yes. Sure. So probably the one that's closest in is the new grill work that we've got going on, which I mentioned in my earlier remarks. It just gives our teams a tool that allows them to cook the chicken, frankly just perfect every time and a lot faster, significantly faster. And the same thing goes for steak. And we're actually moving that from a one-store test now to a multi-store test as we speak. So we're excited about that one. Obviously, we're working on an automated digital make-line, which is in partnership with Hyphen. And we'll get the first one of those into a real live prototype in our Cultivate center probably end of this quarter, early in the next quarter. So that one's a little bit further out. And then we just got rolling with a live pilot on the, what we call Chippy, which is our automated arm or robotic arm to fry chips. And – so I have much more information on that as that goes live in the one restaurant. So I'd say the one that's probably close in is the grill, and the ones probably furthest out probably is our digital make-line – automated digital make-line. But all these are really promising because when you can significantly reduce cook times and then make the practice of grilling chicken and steak easier, good things happen with our culinary, and that's what we've seen in the one restaurant. People are giving us feedback that the steak and chicken taste great. Our team members are giving us feedback that they love using the new grills, and so we're more consistent with great culinary, everybody wins. Thank you. Just first wondering if it would be possible to give the traffic mix price for the 4Q? And then the question is really about pricing – another one on pricing. Just curious if you believe you've seen any customer resistance to pricing levels, how that's kind of shaped how you thought about the pricing that you talked about for the year. And related to that, any kind of update on value scores, the low-income customer that you spoke to last quarter, anything as it relates to shaping your view on how the business performs into a potentially tougher macro? Thanks guys. Yes. Sure. So look, we really have not seen any meaningful resistance to our pricing, especially as it relates to our in-store experience. Obviously, the delivery channel was down, but I think that's a function of a couple of things. One, you do have to pay a premium for that occasion, combined with that the in-store experience is back and people are back out and about. So potentially, they see the convenience, the customization of coming in the restaurant and getting it on kind of their control terms. We continue to see the higher-income consumer, the individual that earns over $100,000, coming more often. And frankly, I think the same thing would have happened with the low-income consumer regardless of what the pricing was that we acted on. And we made the decision not to go chasing people with discounts. That's not what our brand is, and that's not what we're going to do. We're better off winning the value gain through great culinary, great speed/convenience, terrific customization, and we know that continues to resonate. Our value scores continue to be really strong. If you look at people that I would say are comparable that are in the fast-casual category, we're still at 10% to 30% discount. So look, I think we've made a lot of really good moves to kind of move with the challenges that we've had to deal with. And as a result, I think we're seeing stronger operations, stronger teams. And we're seeing, I think that work come out to bear in January and where we are here in February. No. I think you said that perfectly, Brian. And just – I think you were looking for the components in the quarter. The components of our pricing was about 13.5%. Transactions were down about 4%, mix was down about 3%. So that gets you to an underlying comp about 6.5%. And then we had the journal entry that deals with breakage, and that was 80 basis points. So that gets you to the 5.6% comp. Great, thank you very much. First question is just on the restaurant margin. I know for full year 2022, you ended in that 24% range, though you talked about maybe some headwinds in the fourth quarter that brought that in below expectation. Just wondering, if you can give any specific thoughts as you look to full year 2023. I know you gave some color specific to the first quarter, but as you think about the environment going forward, your pricing perhaps rolling off by the end of the year and what you know today based on kind of the key cost pressures. And just wondering your thoughts on the full year 2023, whether it’s reasonable to assume or return to 25% plus in 2023 or beyond. I know you mentioned getting to more like 27% when you hit the $3 million, but just wondering kind of on the interim what you’re thinking specifically of the 2023. Yes, I mean, it’s so hard and the reason we gave, some color on the first quarter, but not beyond that is we don’t know what’s going to happen to the economy. We think inflation will be reasonably tame. Hopefully that will come true. And we don’t, we haven’t made any decisions on pricing action right now. So Jeff, the way I would think about it is we’re going to kind of let the year play out. We’re going to do everything we can in terms of managing supply chain, managing as we recruit people we’ve got to pay the wages to, make sure that, we gear up for burrito season. We’ll watch how the inflation element plays out. And we don’t have any plans right now to take pricing action. So we might be, more patient this year than we were last year. The inflation kept coming at us, and then we could see more ahead and we take pricing action, we see even more ahead. It doesn’t feel like it’s, at that fever pitch. So I think, you could see us being more patient this year. What I can tell you is when things do normalize, whether that’s later this year or into 2024, we absolutely have at these kind of volumes, the ability to get a margin up into that 25% range on a sustainable basis, and then it’ll grow from there. I just don’t want to make any promises on a quarter-by-quarter basis. Just because so many things has happened – have happened in the last several quarters, and it’s hard to predict what’s going to happen, but I do know that our model is intact. Understood. And I’m just following up on a couple of bigger picture topics. I think, Brian, you mentioned that international growth’s going to be at, I think you said a measured pace. I’m wondering if the headwinds, to your point about the economy in Western Europe perhaps, is the primary reason why it’s measured or maybe there are other causes for concern. Anything around that international acceleration and when the timing of that might be would be great. Thank you. Yes, sure. So obviously Canada its full steam ahead, right? We’re opening; I think the most restaurants we’ve ever opened from a percentage standpoint and probably absolute standpoint ever in Canada which is really exciting. And those economics continue to perform really well. When you look at Europe, look, the top line is really performing. And frankly, we’ve been much more patient on pricing there because we want to make sure that people have the experiences with Chipotle. So, there’s a lot of inflation that we’re still dealing with in Europe. But look, we like what we’re seeing; the good news is feedback on the experience is really very positive. Feedback on the culinary is very positive, and the most recent restaurants that we’ve opened are performing really well. So, we’re just taking our time with it because unfortunately, the last three years have not been normal in any way. So we just make sure we aren’t getting any false positives or false negatives on any part of the business. So the good news is we’ve got a tremendous growth runway in the United States that we can be, very patient with how we approach our international expansion. But look, the early signs are people like burritos and bowls and they like our culinary and they like the convenience and they like the speed. So that’s a recipe for a lot of opportunity down the road. Great, thank you. So if I understand correctly, the traffic improvement you’re seeing seems to be standing primarily from productivity and operational improvement also as you are moving along in 2023. But I’m wondering your expectations on the demand side from consumers and in particular, whether you are seeing or expecting any trends that could be possibly offsetting the productivity and operational improvements as we are moving along in 2023? No, look, the consumer demand, especially if we use kind of our in-store experience right now looks to be there. Especially as you look at the higher income consumer, their purchase frequency has actually gone up. So, we fundamentally believe that better we operate, the better our performance will be. And that’s why we’ve got, Scott and the team have a full court press, frankly on, great people, great culinary. If we do those two things against our operating standards, we believe we’ll continue to make progress on throughput and we’ll continue to see the gains that hopefully, we’ve experienced in the first part of this quarter. Thank you. And I think you also mentioned there are some positive signs that are emerging from Project Square One. I was wondering if you can elaborate on that one and maybe like share a couple of metrics, where you’re particularly proud of. Yes, look I mentioned this earlier obviously one of the things that we’ve seen is a lot less incidents of many deactivations. So when you go to order online, all the products are available chips, guac, chicken, steak. That is dramatically decreased. And we know that’s a big deal because when you order online, if you don’t have what you want available your conversion rate goes down. And so we’ve seen when we have the products in stock, our conversion rate gets back to where it should be. We’ve also seen a huge step up in our on-time percentage, on-time in a meaningful way. And then we’ve also already seen some progress on throughput, albeit small movement, but I think that has more to do with the time of year than a testament to the impact of Project Square one. What I also think is also really great news is we have more stability in our teams than we’ve had in over two years, and we’ve got more teams at model with less turnover, and I think Scott’s got these teams focused on deploying correctly and getting trained shoulder-to-shoulder, so that they’re ready to go when the rush shows up. Yes, thank you. Maybe first just a question on delivery, are you able to see in your data that those customers have shifted to coming into the stores or mobile order-ahead, or do you think those customers have basically fallen off as you’ve seen that business decline a little bit? What it looks like to us is we’ve definitely seen people make a shift in restaurant and then some shift to order ahead. That’s probably been the biggest trends that we’ve seen. Obviously the premium especially when you operate in our white label execution is one of those places where you can quickly compare, like what’s the difference between ordering delivery versus ordering pickup. And that’s an obvious one where I think we’ve seen as a result, people they toggle between the two and then they choose order ahead. So yes, we’ve seen people stay committed to the idea of getting Chipotle. I’m sure there are those customers where if something’s, free somewhere else for delivery, they might take advantage of a freebie. But look, we’re not interested in renting or borrowing customers. We want people to be a part of the Chipotle business because the value proposition is right for them, they buy into, the food that we provide, the culinary that we provide at the convenience and speed at which we provided. So that’s been a conscious choice, and I think it’s going to serve us well in the long run. Okay. And maybe just a related question on kind of some of the new perks that you rolled out, the Freepotle that you launched in January. I mean, is it your view that, that drives kind of a step up in frequency or how else do you think it’ll affect customer behavior? Is there any margin impact of that? And then I guess, also you, it sounds like you’ve seen kind of mobile ordering stabilize, but do you want that to grow as you go into the next couple of years and do you think this can kind of be a catalyst for that? Yes, look it’s doing two things. One, it’s hopefully keeping more people engaged in the loyalty program. We’re only what, one month in on it. And then also acquiring more people into the rewards program. And so it looks really promising that it’s doing exactly what we’ve want it to do. But again, it’s only one month in. And what was your second part of your question? Yes, look, what we definitely know is when people are engaged in our rewards program, we get more purchase frequency out of them. And the most engaged people come through our digital business when it comes to our rewards program. So I do think the combination of, high engagement with rewards specifically around the amount of personalization that we’re doing here, will result in more frequency out of customers down the road. And usually, that comes via a digital experience is where you see more of the impact from the rewards program. Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Brian Niccol for any closing remarks. Okay, thanks. And thanks everybody for all the questions and being a part of the call. Obviously, 2022 was another one of these years where a lot of unexpected things occurred. But I do think once again, we’ve demonstrated the resiliency of Chipotle and the power of our food with Integrity purpose combined with the culinary and convenience that we provide. Again, we were able to expand our AUVs our margins. We had a record number of store openings in the fourth quarter. And, we’re optimistic about where the business is today because of the focus on great operational execution, combined with great culinary and great people. And you’re going to continue to see us stay focused on executing those basics while we continue to execute against the other strategies to make the brand more visible, loved and hopefully engaged with. So off to a good start in 2023 and we’re optimistic about our growth runway going forward. So thanks everybody for being a part of the call and we’ll talk to you soon, I’m sure. Take care. Bye.

EarningCall_276

Greetings, and welcome to the VF Corporation Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to our host, Allegra Perry, Vice President, Investor Relations. Thank you. You may begin. Good afternoon, and welcome to VF Corporation’s Third Quarter Fiscal 2023 Conference Call. Participants on today’s call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. Unless otherwise noted, amounts referred to on today’s call will be on an adjusted constant dollar basis, which we’ve defined in the press release that was issued this afternoon, and which we use as lead numbers in our discussion, because we believe they more accurately represent, the true operational performance and underlying results of our business. You may also hear us refer to reported amounts, which are in accordance with US GAAP. Reconciliation of GAAP measures to adjusted amounts can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management’s view of why this information is useful to investors. Unless otherwise noted, results presented on today’s call are based on continuing operations. Joining me on the call will be VF’s Interim President and Chief Executive Officer, Benno Dorer; and EVP and Chief Financial Officer, Matt Puckett. Following our prepared remarks, we’ll open the call for questions. Hello, everyone. Since I stepped into my new interim role about two months ago, I have been fully immersed in the business. I have uncovered areas of strength and promise, but also gained a deeper understanding of where we must improve. And I have been impressed with our talent at all levels and their leadership and commitment to VF on which our future success is dependent. Many of you know about my career history, which culminated in roles as CEO and Chair of The Clorox Company until my retirement from a full-time corporate career two years ago. This gave me the opportunity to lead a global purpose-driven consumer portfolio company towards more profitable, sustained and responsible growth with financial discipline, a fully engaged organization, brands people love, consistently strong product innovation and a differentiated approach to the portfolio to maximize value. You also know that, I have served on the Board of VF for the last six years, including as leading independent director from July 2021 until December 2022. I believe that, my deep insight into VF. My passion for the company, its people and brands, coupled with my prior career experience gives me a solid foundation for the interim CEO role. And I do plan to use my time to make a positive difference to VF's business and organization. My overall theme for today is that, VF will sharpen its near-term focus on the biggest consumer opportunities, within our existing brand portfolio and on enhanced operational performance. Consistent with this objective, we are shifting resource priorities across the company. This will include rightsizing our dividends, exploring the sale of non-core assets and cutting costs in lower value areas to strengthen our execution and to enable incremental targeted investments in our brands and the consumer. With that, I'm pleased to speak with you today about four topics. VF's results in Q3, our near-term priorities to address performance, how we're taking prudent steps to build a stronger company for the future and why I'm even more optimistic than I was two months ago about the long-term prospects for VF. First, we overcame a very challenging environment in Q3, where our performance highlighted examples of success, while also clearly showcasing areas to improve. Amidst the difficult geopolitical and economic backdrop, we grew Q3 revenue 3% in constant dollars. And today, we are reaffirming our revenue outlook at the low end of our prior range and also the midpoint of our EPS outlook for fiscal year 2023. Our EMEA business continues to be a bright spot, with Q3 revenue up 10%, our seventh consecutive quarter of double-digit growth driven by broad-based strength, including the North Face of 13% and Vans up 7%. Another strength in Q3 has been our consistent performance of the outdoor brands led, of course, by the North Face, where revenue was also up 13% globally with growth achieved in each region and channel. We also saw nice growth in Timberland, up 6% in the quarter with solid performance in EMEA and in wholesale globally. And our outdoor emerging brands continued to grow strongly, up 10% highlighted by Ultra. Finally, in Asia, we saw a sequential improvement with Q3 revenue up 4%. This was driven by the beginning of what could be a return to stronger momentum in Greater China, which was close to flat at minus one. Secondly, we are clear-eyed about VF's performance barriers, which are predominantly operational in nature. And our near-term priority is to put aggressive plans in place to improve our execution. We are not reaching our full potential as a company. The good news, though, is that doing so is largely within our control. We must consistently delight consumers with exciting products, engaging content delivered with effective marketing tools and with great shopping experiences in-store and online. Where we do this well, see the North Face and the broader portfolio in EMEA, our brands continue to thrive where we are inconsistent with Vans being far the highest impact, but not the only example, we must improve our consumer execution to return to full strength. We must also return to delivering products to our consumers and customers on time and at lower cost to VF. Supply chain has long been a core competitive advantage of VF but our recent performance also requires focus. So to improve execution, we have two near-term key priorities, which represent significant value creation opportunities. First, turning around our Vans performance through improved consumer execution; and second, returning to supply chain excellence across the company. On Vans, we clearly have been challenged for some time now. This is predominantly a challenge in the Americas, and it is mostly executional in nature. For perspective, Vans Q3 revenue rose by 7% in EMEA, but declined by 13% in the Americas, which is primarily North America and accounted for 90% of the global Vans Q3 revenue decline. While there are differences in EMEA compared to the North American market, the relatively stronger performance of Vans in EMEA also reflects the benefits of a clear growth strategy and stronger marketplace execution. We must do better with Vans in its home market, and we will. Our action plan follows the four growth drivers laid out in our Investor Day last September; consumer, products, marketplace and operating model. Here are a few specific examples of actions. We will sharpen our view of the changing consumer landscape through a new consumer segmentation, which is underway and will inform the business' overall growth strategy and begin to influence our direct-to-consumer plans as of summer this year. We need to delight consumers in ways that are relevant to their specific needs. And to do so, we must be more intimately familiar with them. We will also better turn data and insights into significant consumer opportunities available today. For example, a strong untapped opportunity exists with our UltraRange product line. Here, awareness is very low at around 10% among all consumers and at below 30% even among Vans loyalists. So we've started to boost awareness, and this is starting to yield results. UltraRange revenue grew 34% in Q3 with much more growth to be had. The MTE and Half Cab product lines have similar potential. And going forward, we will drive these and other promising platforms longer and more continuously. We will significantly increase our investment in product innovation, funded by a reduction in costs in lower value areas with actions, including SG&A reduction and improving store profitability. Vans product development investment as a percentage of revenue lags well behind the company average. We will change that starting with fiscal year 2024. This will help us aggressively pursue new styles and make our innovation pipeline more consistently strong. We will also eliminate unnecessary SKU complexity to simplify and importantly, amplify the shopping experience. A small test at our Irvine, California store led to a footwear revenue improvement of plus 12 percentage points with 30% fewer SKUs. We will begin to expand this initiative as of fall fiscal year 2024. We will move our digital spending principle from budget cap based to flexible and ROI-based to take advantage of available spending opportunities that translate into incremental revenue and profits. It is early days, but we have already seen an improvement in profitable DTC growth rates only a few weeks into this change. We will sharpen our processes. In fiscal year 2024, we will go-to-market at retail, including wholesale customers with clearly aligned and integrated product calendars. This will lead to better plans that are more centered around the consumer. And to drive Vans forward, we have made tremendous progress putting a world-class Vans leadership team in place. Two critical leaders, our new Chief Product and Merchandising Officer; and our new Chief Digital Officer, have both joined in December, and they're off to a fast start. Vans continues to be a fundamentally strong brand. The number of consumers buying Vans during the last 12 months was up, as was brand advocacy. But many people buy the brand less often. So what we do need to do is to fuel the brand more consistently and give people more reasons to buy more Vans. That is on us, and that's what we will do. The momentum we continue to generate with The North Face further proves this point. The brand continues to perform strongly, driven by strong consumer engagement and iconic products. And we will keep investing to fuel that momentum. Our Explorer Pass membership continued to grow significantly in Q3, up 2.1 million members to approximately 17 million in total. It's more than a jackets marketing campaign, launched the season and drove strong outerwear growth globally with the Nuptse jackets, and the recently relaunched Summit Series premium product line leading the business. Our recent first-ever performance-led collab launch with American artist and designer cars was highly successful. Net, the brand's momentum is strong and broad-based. The North Face is a solid and transferable execution blueprint for Vans, and frankly, the entire VF portfolio in the Americas, where we must grow with consumers more consistently. The second near-term priority at VF is to return to the company's hallmark standard of excellence in the supply chain arena. We are working through a variety of external and internal issues that impacted revenues and profits in a high-volume quarter like Q3. Lengthened manufacturing and freight lead times, larger upfront product buys, unpredicted demand spikes from elevated promotional activity in the quarter, plus higher than normal customer order cancellations add up to unsatisfactory customer service, elevated inventory and significantly higher costs. So we're taking aggressive actions to address these issues. We expect to be able to work excess seasonal inventory down to more normalized levels by the end of Q4 of this fiscal year. Our customer service levels are also improving, albeit still below our own and our customers' expectations. We have a plan in place to get back to target levels by the end of the first half of fiscal year 2024. We will also leverage our logistics partnerships to reduce costs by improving ocean and parcel rates for the next fiscal year. And we will see a return to more normalized and predictable promotional patterns and anticipate moderating inflation, which we expect will contribute to lower costs through fiscal year 2024. We are committed to serving our customers better and to getting back to strong supply chain performance at improved costs. Again, much of this is within our control. My third message is that we're taking prudent steps to strengthen VF's financial position and build a stronger company. VF is committed to strong financial discipline. This all starts with a strong core and growth that is profitable and sustainable. And to reinforce this, we are taking significant actions now. We will focus our near-term growth efforts on our existing portfolio. Smart acquisitions will remain part of the VF playbook. But near-term, we believe we are best served to return to strong shareholder value creation by taking advantage of the many opportunities offered by our portfolio of beloved brands, including those acquired in the recent years. Our growth strategy laid out in the company's Investor Day last September, continues to be a solid foundation to achieve this, but we will lean into the consumer even more strongly than in the past. We will also pursue strategic alternatives for our PACS business. This business is performing well, but we need to make sure that we are the highest value owner and that we focus our resources against the highest value opportunities within our existing portfolio. To grow margins and profit while supporting strong investments in the business, we will lean into cost savings through a more systematic and ongoing cross-functional approach to eliminate costs that do have lower strategic value and are less consumer oriented. And we're making the tough, but what we believe to be a principled and financially responsible decision to cut our dividend by about 40%. We do not take this last step lightly and fully understand the value of a solid dividend as part of a comprehensive approach to total shareholder value creation. But we also believe that it is prudent to right-size the dividend to accelerate the path back to our target dividend payout and debt-to-EBITDA ratios and to rebuild the dividend from there based on solid expected cash flows and a return to sustained earnings growth beginning with fiscal year 2024. Returning cash to shareholders through a strong dividend remains a key capital allocation priority. In a continued difficult environment, we are committed to return to a more profitable and consistent growth next fiscal year. Matt will talk you through these actions and the shape of our initial fiscal year expectations in more depth in a moment. My last message for you is that I'm even more optimistic today than I was two months ago about VF's future and our ability to return to strong long-term shareholder value creation. We have significant potential to unlock value from our unique brand portfolio. While not immune to the challenging macroeconomic environment near-term, these brands will benefit from significant long-term category and consumer tailwinds. We will leverage these tailwinds and apply VF's best practices, scale, and capabilities. A distinct competitive advantage. We have a clear set of near-term priorities to inject consistency of execution, which will improve performance across the business over time. We will sharpen our consumer growth strategies on all our brands and ensure we have the right investments against each of them to realize their full potential funded by cost savings. And we have permission from consumers to broaden our reach by taking many of our brands into new financially-attractive categories and countries, and we are putting in place strong future plans to do so. We are committed to returning to strong operational discipline, which will help drive predictability, profit and margin growth and strong and consistent cash flow generation. And we will remain committed to the dividend as part of our comprehensive shareholder value creation plan after today's adjustments. Lastly, we have a talented, engaged and passionate workforce. And we continue to nurture our superb internal talent and attract great new outside hires, reinforcing our confidence that VF remains a top destination for exceptional leaders. Thank you. Thank you, Benno, and good afternoon, everyone. As Benno mentioned, our Q3 results amidst the continued difficult macro environment, exhibited areas of continued strength, as well as parts of the business with clear opportunity for improvement. During the quarter, revenue was up 3%, with balanced growth across both direct-to-consumer and wholesale. Adjusted gross margin was down 140 basis points. And adjusted operating margins declined by 280 basis points, leading to adjusted EPS of $1.12, down 17% or 10% in constant currency. Taking a look at our revenue results across geographies, the Americas region was down 1% during the quarter. As Benno alluded to in his remarks, North America was particularly challenging at Vans and also at Dickies due largely to the continued impact of inventory actions taken by their largest wholesale partner, as well as softer performance across the value and work consumer. Momentum continued in the EMEA region, with revenue up 10%, which marked our seventh consecutive quarter of double-digit growth and represented broad-based strength across brands, with 10 out of 11 brands in the geography growing during the quarter, including the five largest brands. Looking at the countries, all major markets were growing with four of the top five by volume, up double digits. Lastly, in our APAC region, we saw further sequential improvement versus half one, with revenue up 4%, driven by improving performance in Greater China, which was down 1%, coupled with strong mid-teens growth in the rest of Asia, where most countries were up double digits. Moving on to gross margin, which was down 140 basis points during the quarter. As anticipated, we saw mix become a tailwind in Q3 for the first time in several quarters, driven by the strength of our international business and channel mix. However, this was more than offset by rate, which was down 170 basis points at higher discounts and an increased promotional environment, also impacting our direct channels, were partially offset by strategic pricing actions and FX transaction benefits. Moving down the P&L. Our adjusted operating margin was down by 280 basis points, reflecting the lower gross margin and 110 basis points of deleverage in SG&A, which grew at a 6% rate in constant dollars in the quarter, as compared to the revenue growth of 3%. The primary driver of deleverage was higher marketing spend, which accounted for about 75% of the increase in the SG&A ratio. In addition, deleverage in distribution and freight spending and some direct-to-consumer costs were mostly offset by spending reductions across G&A. As it relates to our cash position at the end of Q3, as anticipated, our liquidity increased during the quarter to approximately $1.9 billion, benefiting from the seasonality of earnings and a reduction in working capital. Within the quarter, we paid the Timberland tax deposits of approximately $875 million, funded by the issuance of a $1 billion term loan, which will mature in December 2024. As Benno outlined earlier, we are taking clear actions to improve our operating performance while maintaining cost discipline and continuing to support our brands' growth opportunities. Turning to the supply chain environment. We continue to see higher lead times across the supply chain during the quarter impact the business. In addition, higher volatility on the distribution and logistics side of things, particularly in the Americas, coupled with the higher volumes of the quarter and event driven spikes in demand, led to inconsistent on-time delivery performance to our wholesale partners and inefficiencies in support of our direct-to-consumer business in the US during parts of the quarter. Looking forward, lead times are improving as anticipated, which will lead to better on-time performance, and we're seeing that with spring deliveries. Importantly, the predictability of ex-factory dates or when the product leaves the factory is more reliable and aligned with historical performance. This is an important data point that will better position us to more fully service the business in fall of 2023 and beyond. In addition, we expect to see reduced and more normalized levels of airfreight volumes moving forward, a continued easing of ocean air rates and generally more modest FOB inflationary impacts expected for fall 2023 and spring 2024 versus what we have seen over the last few seasons. Let me take a couple of minutes to unpack our elevated inventory position today and the work we are doing to reduce it over the next few quarters. Net inventory levels are up 101% versus last year. With gross inventory, excluding the increase relating to change in eco terms to support the supply chain financing program, up 67% or approximately $850 million. Importantly, from a makeup standpoint, the dollar increase is primarily driven by core and excess replenishment inventory across brands, particularly in the Americas. This is primarily driven by COVID challenges affecting the supply chain with prolonged lead times leading to earlier and less accurate inventory buys, coupled with higher cancellations and lower demand, as well as the prior year value comparison having been lower than optimal. We expect to reduce total inventory levels by about $300 million during Q4, but will carry higher levels of core and replenishment inventory into fiscal year 2024 across Dickies, the North Face and Vans, which are contemplated in the assortment and buy plans of the next season, and which will moderate throughout the back half of calendar 2023. Moving on to the outlook for this fiscal year, we are affirming our EPS guidance at the midpoint of and our revenue outlook within the previous range. Within our revenue guidance of about 3% constant dollar growth, we now expect the North Face to be up at least 14% as the brand's broad-based momentum has continued through Q3 and into Q4. In fact, year-to-date, the brand is growing 17%. On the other hand, Vans is now projected to be down high single digits as the performance in the Americas region decelerated in Q3, and we expect Q4 will be impacted by the high inventory levels in the wholesale channel in the US particularly. On a reported basis, we now see about five points of impact from the translation of foreign currency, which is slightly less negative than our previous outlook. As a result of higher promotional and markdown activity and also reflecting higher order cancellations, we expect full year gross margins to be down about 200 basis points. We expect our operating margin to be around 9.5%. Our tax rate is expected to be 13% as we have a greater portion of the mix of regional profit from lower tax regimes, mainly in international markets. These changes lead to a tightened EPS range of $2.05 to $2.15, which sits within our previous outlook of 2 to $2.20. Our adjusted cash flow from operations, excluding the Timberland tax deposit made during Q3, is expected to be about $700 million as we continue to generate solid cash flows despite near-term setbacks in our operating performance. As we highlighted earlier in the year, we will be disciplined with our approach to spending on non-strategic areas. And today, we've moderated our projected CapEx for the year to approximately $200 million from $230 million previously as we sharpen our investment focus on value creation opportunities and specifically those things that impact the consumer experience. In summary, despite the challenges impacting our financial results this year, I'm pleased with the great progress and performance we're seeing in several of our businesses and geographies. And at the same time, the clear enterprise focus on improving our results in those areas where we are underperforming. So let me say a few words about the next fiscal year, particularly our mindset and preliminary financial expectations. First and foremost, with the heightened intensity on planning, we will sharpen our execution in order to strengthen our operating performance and deliver more profitable and consistent financial results in fiscal year 2024. We are watching very closely several factors that have a varying on our plans. The macroeconomic environment impacting consumer sentiment and spending on discretionary goods, particularly in Europe and the US. The recovery trajectory, travel and spending of the Chinese consumer as that market now fully begins to open back up. The inventory rightsizing that is happening across the marketplace. And finally, our own progress in turning around Vans, and the timing of an inflection in that business. As we focus on driving profit margin expansion during the year, we expect continue broad based growth across much of the portfolio and all geographies. And as a result we expect revenue will increase in the range of at least low single digits. As for Vans, you heard Benno reference a number of actions to sequentially advance our plans to reset and reaccelerate, some of which will impact the business more quickly and others which will take longer. In addition, our wholesale partners have adopted a more conservative approach to the Spring/Summer order book impacted both by higher inventory levels in the channel and the ongoing challenging macroeconomic environment. As a result, we will continue to see declines in the business, particularly in the Americas through the first half of fiscal year 2024. We would expect to generate low double-digit operating earnings growth with an expansion in both gross and operating margin. Our actions to increase earnings will include improving profit margins at Vans, while revenue stabilizes, generating cost savings from a more efficient supply chain and continuing to realize the benefits of our ongoing SG&A optimization. We'll also benefit from the efforts to realign inventories over the next few quarters. And coupled with earnings growth, we expect to deliver meaningful increases in both operating and free cash flows in fiscal year 2024. In fact, we expect operating cash flow to grow at an accelerated rate relative to earnings. I look forward to updating you with more details when we provide our full outlook and plans in May. Our capital allocation priorities in the near to medium term will be focused on supporting and driving the performance of our current portfolio, reducing leverage and returning capital to shareholders in the form of the dividend. And today, we announced a number of strategic actions to accelerate the path to our target leverage ratios, while enhancing our focus on value creation. First, the Board has declared a dividend of $0.30 per share, were a reduction of approximately 40% relative to the last quarterly payment. An action that demonstrates the company's financial prudence, considering both an uncertain macro environment and recent inconsistent operational performance as we look to right-size the dividend to our target pay-out ration of about 50%, and accelerate the path toward gross – gross leverage target of 2.5 times. In fact to do a little math for you based on the adjustment to the dividend and the comments today about earnings growth next fiscal year, the payout ratio would be in the mid-50% range in fiscal year 2024. We will then increase the dividend in the future in line with our earnings growth. In addition, as part of our ongoing active portfolio management, we are announcing our intention to explore strategic alternatives for our Packs business, including the Kipling, Eastpak, and JanSport brands. As we take another step in streamlining and focusing our portfolio of brands. As an outcome of this process, we're committed to ensuring these brands are optimally positioned to achieve their full potential while enhancing VF's management focus on our top strategic priorities. Also, we are executing a number of asset sales, which are aligned with our strategic priorities and combined will generate more than $100 million in cash proceeds. We will reduce working capital and align inventories to optimal levels over the next few quarters. And finally, we will increase our efforts to reduce costs in order to point resources toward the company's highest value creation opportunities. This includes several previously announced cost-saving actions, which have been progressively building towards delivering approximately $225 million in annualized savings once completed in fiscal year 2024. I'm confident these actions will enable us to strengthen our financial position and sharpen our focus, specifically providing the financial flexibility to enable an accelerated path toward our target leverage metric, ensure even if facing ongoing macroeconomic challenges, we'll have continued capacity to fully support our biggest organic value creation opportunities. And finally, to continue returning cash to shareholders through the dividend. In summary, VF's brand portfolio is well positioned to deliver long-term, sustainable and profitable growth. That hasn't changed. And importantly, in the near-term, I'm confident the steps we are taking now will lead to elevated shareholder value creation through improved operating performance and consistent earnings and cash flow growth. Thank you. And ladies and gentlemen, at this time we will be conducting a question-and-answer session [Operator Instructions] And our first question comes from Laurent Vasilescu with BNP Paribas. Please state your question. Thank you very much for taking my question. Benno, I'd love to ask about Vans. What gives you the confidence that changes you're implementing at the brand are the right strategies and will make a difference in turning this business around? And then I have a follow-up question regarding the dividend. Yes. Thanks for the question, Laurent. And several ways of answering your question. The first one is that we have a role model in-house that does exactly what we're trying to do at Vans and that's North Face. And that's performing exceedingly well as results even this last quarter. The second thing that gives me confidence really is that it's clear that improving the performance is not some obscure concept, but it's entirely within our control. We know how to do this. And the way to do – the way to bring Vans back is by consistently executing against consumers with excellence. What that means is great product, great marketing, great shopping experiences and of course, the customer service issues that we talked about. And then when we think about the specific plan in which we indeed have quite a bit of confidence. There are a number of actions that impact the business now. As I said in my remarks, we're moving to ROI-based digital spending, and we're seeing really strong results behind that. We're boosting awareness of existing product platforms like UltraRange, and we're seeing good results behind that. We have new products expanding now like a low land and our new school shoes and also UltraRange VR3, those are going out now, and we think that those are attractive new products. And finally, I have seen the new challenge that we've brought in to complement our leadership team in action and I have high confidence in them. And if you add to that some of the more fundamental changes that we're making, which will begin to impact the business in the second half of next fiscal year, like the new consumer segmentation like a digital-first operating model and a new go-to-market upgrades, which again, we've already applied in EMEA, in Europe, and that's working well. The SKU reduction for which we have a store test with really strong results. And then they had on top, the increased spending that we're planning to put in place behind product innovation. Those are all very tangible things. Those are things that have worked for Vans in the past. Those are working elsewhere in the portfolio, and those are all on us. And that's really the good news here. The good news/bad news, I should say. The bad news is that we're in this situation but the good news is that addressing the performance opportunity that we have on Vans is entirely within our control, and we're pursuing a plan that is very specific very credible with a high sense of urgency. That's where my confidence comes from. Very helpful, Benno. And then Matt, on the dividend, what changed since your last update? Is this an indication that capital allocation priorities has shifted? How do we know there isn't a bigger dividend cut coming? And then on the PACs business, I think it's about a $500 million, $600 million revenue business. Can you kind of give us some framework, I think you talked about $100 million cash proceeds from noncore assets. Any kind of benchmark on how we think about potential cash proceeds from the sale of these noncore assets? Yes. Laurent, I'll get going on a dividend, and I'll let Matt comment on your second question around PACs. So, as I also said in my remarks, right-sizing the dividend is not a step we took lightly and but we strongly believe it's necessary and prudent. What this does is it strengthens our balance sheet. Our gross debt to EBITDA right now is about 4.5x and this gets us much closer to our target of 2.5:1. It realigns to our target payout ratio of 50%, and we expect to land close to that in fiscal year 2024. Of course, we'll continue to offer strong dividends to our shareholders, which is important. So, to answer your question directly after this one-time adjustment, we remain very committed to the dividend. This was an important part of comprehensive TSR package for our shareholders and we expect to grow it in line with earnings from here on out. And then what are we going to do with the capital, pay down debt, serve the dividends. And then I would say, secondarily, but still importantly, it gives us flexibility to invest in our brands and consumers. And as you've heard, that's the core theme for us today, free up money from within our P&L that we can invest in our brands and consumers. But this would protect us against the potential downside scenario macroeconomically if there's a downturn, we will still be able to execute this plan. But in an ideal scenario, we'll also invest incrementally in the progress against our plan. As you've heard, we have confidence in it, but it's also early. But what we'll do is stay agile to invest and when we think we can get a return, we'll also be confident to increase our investment. And this dividend cut will put us in a position to do so. Matt, do you want to comment on Packs? Yes, Laurent. Really, both of these announcements, the dividend and Packs, we believe are the prudent actions to take at this time, specific to the Packs, active portfolio management, small mini core competency and strength of VF and remains a priority of our Board. The evergreen evaluation efforts that are always underway and the process has led us to the determination, we're likely not the best owner of these brands at this time. And we need to ensure the focus of our management team, and the focus of our capital, while at the same time, giving these great brands the best opportunity to reach their full potential. Let me state though, and really to those brand teams as well. These brands are core brands and businesses and they're performing well. We've seen strong revenue and margin growth in fiscal year 2023 from all these brands. And this is Eastpak, JanSport and Kipling collectively as they're benefiting from a return to the usage occasions that they really are leaders in travel gear, school packs, and school care, other activities. It's a process we've begun. It's going to take some time. We certainly won't rush it. We don't need to do that, but we're very confident with the term and find the right and best owner of these brands. And as it relates to proceeds, it's kind of the same message that we Benno reiterated in terms of the proceeds, in terms of the use of capital, accelerating our path to deleverage, supporting growth and value-creating opportunities in our organic business and we continue to prioritize the return of capital in the form of the dividend, and we'll grow it with earnings moving forward. And lastly, on the non-core assets that I mentioned in my remarks, $100 million, that's really primarily non-strategic land and real estate. Also includes the previously announced at least it's certainly an external known the sale and leaseback of our headquarter location in Stabio, Switzerland, which we thought made infinite economic sense. So that's all inside that $100 million, which will all be finished in cash in the bank, so to speak, by the end of our fiscal year. Good afternoon everyone. As you think about the initiatives for enhancing the business in all the brands, frankly, what do you see is the inventory structure going forward, how that changes given the wholesale account base and how they're placing orders go forward? Thank you. Yes, hi, Dana, thank you. Yes, I mean certainly, inventory has been a challenge. It's been an overhang for us for a couple of quarters and continue to certainly persist. Our inventories kind of nearly doubled on an absolute value, if you just look at the balance sheet, clearly, there's an impact there of the in-transit inventory on the comparison. When you back that out, we're up about 67% on a gross, kind of, comparable basis year-over-year with most of the increase in the Americas. I think as you think about moving forward, we actually think there's opportunity to get more efficient with our inventory as we get closer to market. One of the challenges that we faced this year is the elongated lead times led to earlier buys, which ultimately led to lower forecast accuracy, which created excess inventory that's been exaggerated by the higher level of cancellations through the fall and even the late deliveries at the same time, which also led to higher cancellations. So we've got a lot of inventory today. Fortunately, it's primarily in core carryover replenishment inventory. We'll carry that moving forward into fiscal year 2024, even after a pretty substantial reduction in inventory here Q4. And we've got plans in place. It really is contemplated in the next season in terms of merchandising and assortment plans, and we'll work our way through it. But if you think about where we're moving forward, our direct-to-consumer business becoming a larger percent of the total, we think that's a good thing, overall. I mean, from an inventory management standpoint, certainly, we love the idea that we have a large outlet network to move through excess inventories, and that's always our first avenue. But the work that we're doing to more modernize the supply chain, and Benno talked about some of the things that we need to be doing there, we think will allow us to be more efficient from an inventory utilization moving forward, not less. Hey, guys. Thanks for taking the question, here. I guess, just the first one, Benno, the company is known over long periods as a best-in-class supply chain operator. You pointed to a medium-sized list there of items that you think -- it sounds like you think got off track. I'm curious what you think happened in the supply chain, what do you think has changed there? And then maybe, this one is for Matt. But I think to get to double-digit EPS growth on the low single-digit revenue growth next year, trying to think about how you're building that. I think you need to pencil out to about 100 basis points of EBIT expansion -- EBIT margin expansion. Maybe just trying to help us think about some of the high-level drivers there? I'm assuming it tilts to the back half of the year, given the comments on Vans revenues in the first half and how to think about the gross margin expanding next year with the inventory up relative to sales in the fourth quarter heading into the year? Hey, Michael, thanks for the question. I'll take the one on supply chain. And I will say coming into this role. Clearly, as you say, supply chain is known to be a whole much strength for VF. And I think, in general, and over a prolonged period of time, that's a reputation that's well reserved. But that doesn't mean that we can't be clear eyed about the issues. And some of the issues, certainly, I think, were known before, especially the longer lead times on the manufacturing and freight. But I would say, these issues were exacerbated in Q3, given that it's the high-volume quarter, but also because there was so much volatility, high promotions to get rid of inventory, order cancellations from customers in part because the consumer, of course, is somewhat cautious, but in part also, because we haven't been able to meet their expectations and therefore, they cut cancellations in anticipation of perhaps further customer service issues. And then, you add the strain from the longer lead times, that really gives you a confluence of issues that created a perfect storm in this quarter. And I would say that, part of it is maybe that my added perspective coming into the business shift is the perspective within our team a little bit and our own role in these issues. But the fact is this quarter had a lot of volatility and pressure on the supply chain. And it did expose some of the internal issues, and we'll talk about them all fixable, but certainly requiring a lot of focus. So maybe first, where we are is against the higher manufacturing and shipping lead times, we're seeing improvements. Those have started to come down, and we need to continue to focus on that trajectory. The customer service clearly is unsatisfactory. And we're putting a lot of work in place to be back on track by the end of the first half and fiscal year 2024. Matt talked about higher excess seasonal inventory. We're making good progress and assuming that to be more normalized by the end of Q4 of this fiscal year. And our cost to serve clearly are higher, and we'll see improvements throughout fiscal year 2024 starting with Q1, so this all is going to stay with us a little bit, but we're expecting improvements from here on out. So specifically, what we're going to do about it is -- first off, this is a business-by-business action plan. The businesses that are most affected by this are the North Face and Timberland. So those businesses saw growth in Q3, but they could have frankly seen more growth in the quarter. Had we not held them back somewhat through these issues. So we have So we have a high focused on distribution network, optimization. We are working on peak warehousing capacity planning, so we don't have to use as many external facilities which you know, gives you inflexibility and also gives you higher costs. We need greater agility to react to short-term changes. So the business by business action plan is very detailed and varies a little bit by business. We're working with our strategic supply chain partners to address the lead times and costs, which will include improving ocean freight costs and we're starting to see positive movement there and expect quite a bit of improvements starting in fiscal year 2024. Importantly, we need to return to better sales and operations planning. And again, to your question, what happened? I would say that's an area where the team would suggest that we've lost some focus during the COVID period, and we're now getting back to reestablishing strong routines. It seems that this company knows that this company is well capable of executing and as a complement, also as an executive team, we're spending a lot of time focusing on this. We have five weekly meetings. We are eliminating barriers to getting rid of these problems. And we're helping with agile decision-making, which certainly is going to make a big difference. So I would say the overall theme here is operating discipline, and that's something that VF has been very good at and that's something that we can reinstill in the business. We're taking aggressive actions, we're seeing improvements. And beyond that, we're also advancing the strategic work to transform our supply chain to be more digitally led, more automated, more agile and more consumer-centric. That's worth that our EVP overseeing the supply chain, Cameron Bailey, outlined in the September Investor Day. And I would say, the short-term work that we're doing gets us back from where we are to good. And then this more strategic work gets us back from good to great, and that's certainly our aspiration. And again, that's all within our control. Yes, Michael, the second part of your question on the outlook for next year. And I think certainly, we're in the midst of our planning process. So, I'm sensitive here in terms of not getting too far ahead of ourselves, but we clearly wanted to provide some expectations and kind of how we're thinking and how we're seeing next year unfold as it relates to top and bottom-line. I agree with your kind of sentiment in terms of what it would take. My comment was about double-digit operating earnings growth, I haven't said anything yet about what it means below EBIT in essence. But we do need to see a little bit of margin improvement and how I think about that and kind of what the puts and takes there are from a from a margin standpoint, it's primarily in gross margin, I would say, in my view. There are tailwinds. We do expect an overall lower promotional environment through the year. We'll come into the year with a bit heavier inventory. But remember, most of that inventory is core carryover replenishment product that won't necessarily need to be marked down or discounted in a significant way next year. We're biting the bullet pretty aggressively here in Q4 to move through that seasonal excess which is a bit heavy at the end of December, we're going to be back at the end of March, kind of at a normal level of seasonal excess coming out of our fiscal year, maybe a little elevated, but something pretty manageable. So, we think the inventory position, while heavy and will create some cost pressures in the short-term, we don't think it's a huge overhang from a promotional standpoint throughout next year. Freight, we expect to be a bit of a tailwind. That's both -- the mode, we're going to see a lot less usage of air freight. That's already happened. We're not going to see a lot here in Q4, by the way. But as you look throughout the year, we're going to see, we think, some moderating costs on the freight side. We do have some targeted pricing actions; less than we've seen in prior seasons that we have some there. And we think mix will be a slight benefit. It was good to see mix come back and be a benefit here in this most recent quarter. There are headwinds for sure. There will continue to be some FOB cost increase, a little bit more modest than we've seen over the last few seasons. We expect FX given our hedging program to be a little bit of a headwind as well. So, there's definitely some puts and takes that we would net on the side of our gross margin expansion opportunity, which will flow into operating margin. Good afternoon. Thank you so much for taking our question. My question is on the North Face. As you exit the lending selling season, can you talk a little bit about the channel inventories that you have for that brand? And any initial order books that you're seeing for calendar 2023? Are there any new innovations or product pipelines that we should be focused on? Maybe said another way, how do you comp the comp following a very strong year for the North Face? Let me take the first part of that and then maybe Benno will talk a little bit about kind of the innovation pipeline. Actually, inventories at retail with our wholesale partners are in a pretty good place for the North Face. We had a good selling season. We've had good performance in our own channels. Our DTC business grew 18% again in the quarter across the world. And we're seeing a similar kind of sellout results with our wholesale partners. If anything, we would have probably benefited from having more inventory on the shelves. And Benno referenced the challenge that we faced with the higher cancellations in the North Face and Timberland as well, but certainly the North Face. So, inventories are really in a pretty good position. Now, that said, the wholesale partners are taking a really cautious approach in the near-term as we look forward. We're not going to disclose anything about the order. But certainly, contemplated and kind of the underlying expectations for next year is a cautious environment -- a cautious wholesale environment in the US and to some degree in Europe as well. Yes. And then to your good question, Brooke, on what we're doing going forward. So dealing – first of all, most importantly, I'm product fanatic, and I think that's the backbone for every ongoing business success, and we feel good about the pipeline. What the North Face does particularly well is to establish platforms, platform innovation that we can drive over multiple years. And the Summit here is, is one of those platforms that has done well for us for an extended period of time, and we'll continue to drive that, because there's so much growth left. Right now, we're relaunching the platform because there's a lot of extra awareness and trials to be had. They're also loyalists that are waiting to buy more products within the platform. And we're giving a new apparel and also new footwear. So you'll see that on our website starting now. The business also does a nice job sequencing. So obviously, the Nuptse jacket is very hot right now, but we have the next generation of jackets waiting in the wings. This winter, we started to see the Sierra jacket, and we expect to ramp up our efforts and growth on that jacket next season, hoping that, that can become the next generation of North Face jackets that will excite consumers. And we have successor to the Sierra already waiting in the wing. So this is a strategic and long-term approach to the innovation pipeline that is complemented by more tactical executions that drive excitement and the cars collab that we executed this last quarter was tremendously successful and is an example of how the brand is able to engage consumers with great products, but also great marketing content. In particular, in digital. The North Face is the business that has the strongest digital growth among all of our brands, and that's another area that Vans can learn from, and we're reapplying some of the North Face learning on Vans. Beyond that, what I would say also reflecting that perhaps knowing that high tides always 2020. When we saw the particularly strong growth on Vans, one opportunity we perhaps missed was to invest into it. And what we're doing on the North Face now and what you can expect on the North Face in fiscal year 2024, is an increase in our investment towards the consumer. And the money will go towards digital performance marketing, the money will go towards brand building and the money will go towards innovation. We fully realize that we cannot take growth momentum for granted, but that we have to keep earning it. And we will invest into that. And that coupled with the strong execution and what we know to be strong future plans give us really a lot of confidence on the North Face long-term. We have a lot of momentum, but we'll keep investing in it. Great. Thank you so much. Can you just talk about the business in China? Can you give us an idea of how the business of China has performed since the country started to reopen? And sort of what's embedded in your guidance for next year as you think about that market recovery? Thank you. Yes, perhaps detailed. Too early to talk about the specific guidance for next year. But what I can tell you is what we're seeing. The business has certainly seen sequential improvements in Q3, was about flat at minus 1% in constant currency. And that's been better than in previous quarter. And we've seen that momentum carry forward into January, as the country continues to reopen. So we're certainly cautiously optimistic, especially for the back half of fiscal year 2024. But it's too early to say when and how much the momentum picks up. There's certainly a possibility that we may see more momentum earlier and we’re watching that closely. We should be in a much better place to predict that and give an update in May. But what we do know is, first, that there's a long-term investment case that's quite strong. We have a nascent, but growing outdoor and active markets, and we have leading brands that serve that. It's a great white space for many of our brands. It's a great space to apply our digital capabilities, as we all know, that market is very strongly driven by digital capabilities and that's, of course, an area of focus for us as a company. And what you should also know is that, we're willing to invest in that momentum. So as we continue to see, hopefully, a pickup in consumer off-take, we will invest in an increase in brand penetration, which in many cases quite a bit lower than here in our home market. We have an opportunity to enter new categories and also enter with new brands and Supreme and Ultra are just two examples of brands that have a strong right to win in that market. And we will apply our marketing prowess to drive localized and engaging omnichannel experiences. And the teams did a nice job there that maybe hasn't shown in results just yet, given the state of the country. But we feel bullish about the long-term prospects, and we could be, knock on wood, at an inflection point that could lead to much stronger momentum, certainly, throughout the calendar year of 2023. Yes. Thank you all for joining today. As you hopefully will have heard from us today, our commitment to our consumers, our people, our shareholders and also VF's purpose in service of the greater good is what's going to continue to guide all of our actions. And the last two months in the CEO role, for me, have reinforced my excitement in the company's potential. And add to that, that we have a clear view of the areas which are critical to help us realize it. And those are world-class leadership, the company's executive leadership team and its broader organization is stable. Talented and committed to leading this great company, improved execution near term. Clearly, we have a clear idea of what must be done to improve performance, and we're starting to implement aggressive actions to do so. And that starts with a much greater focus on the consumer to realize our brand's full potential, a future with sharpened strategies, the right investments, exciting product innovation and excellent marketplace execution and importantly, financial strength and predictability. The board and I are committed to strengthening our financial position and also to returning to consistent value creation, emphasizing a unique portfolio of core brands. So in a nutshell, we're confidence that -- we're confident we're taking the right steps to improve the strength and consistency of VF's performance to deliver strong shareholder returns over the medium and long-term and we look forward to updating you on our progress in May. Thank you all, and have a good rest of the week.

EarningCall_277

Thank you, Mandy. Good afternoon, and thank you for joining us to discuss Vanda Pharmaceuticals fourth quarter and full year 2022 performance. Our fourth quarter and full year 2022 results were released this afternoon and are available on the SEC's EDGAR system and on our website, www.vandapharma.com. In addition, we are providing live and archived versions of this conference call on our website. Joining me on today's call is Dr. Mihael Polymeropoulos, our President, Chief Executive Officer and Chairman of the Board; and Tim Williams, our General Counsel. Following my introductory remarks, Mihael will update you on our ongoing activities. I will then comment on our financial results before opening the lines for your questions. Before we proceed, I would like to remind everyone that various statements that we make on this call will be forward-looking statements within the meaning of federal securities laws. Our forward-looking statements are based upon current expectations and assumptions that involve risks, changes in circumstances and uncertainties. These risks are described in the cautionary note regarding forward-looking statements, Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operations sections of our most recent annual report on Form 10-K as updated by our subsequent quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the SEC, which are available on the SEC's EDGAR system and on our website. We encourage all investors to read these reports and our other filings. The information we provide on this call is provided only as of today, and we undertake no obligation to update or revise publicly any forward-looking statements we may make on this call on account of new information, future events or otherwise, except as required by law. Thank you very much, Kevin, and good afternoon, everyone. Thank you for joining us to discuss Vanda's fourth quarter and full year 2022 results. I will first discuss key highlights from our clinical programs and then I will ask our General Counsel, Tim Williams, to provide a brief update on litigation matters before turning the call over to Kevin to discuss our commercial progress and financial results. I will begin with our announcement of positive results in the Phase 3 clinical study of Fanapt in the treatment of bipolar I disorder in adult patients. This was a large placebo-controlled study conducted in the U.S. and Europe that enrolled approximately 400 patients with acute episodes of bipolar I disorder. The primary endpoint of that study was measured in week 4 of treatment and it was assessed by the Young Mania Rating Scale, YMRS, a rating scale of clinical severity in the core symptoms of Mania. At the end of the study, week 4, Fanapt's patients saw a large improvement on placebo-treated patients and this difference was highly statistically significant. YMRS was assessed at end of weeks 1, 2, 3 and 4. Statistically significant benefit in the Fanapt group over placebo was observed as early as week 2 of treatment. Consistent with the total YMRS score, the individual YMRS subscale items also showed improvement in the Fanapt group versus the placebo group over the course of the 4-week study. Other outcomes such as clinical global impression of severity and clinical global impression of chains also achieved high statistical significance. We plan to submit a supplemental new drug application, SNDA, for Fanapt for the treatment of acute manic and mixed episodes associated with bipolar I disorder in adults in the first half of this year 2023. As a reminder, bipolar disorder is estimated to affect 2.8% of the U.S. adult population, a number approximately up to 10 times higher than the estimated prevalence of schizophrenia. Therefore, an indication of bipolar disorder presents a substantial opportunity to expand the Fanapt front size above and beyond the already approved indication of schizophrenia in adults. We also reported results for VQW-765, a Novel alpha-7 nicotinic acetylcholine receptor partial agonist from clinical study 2201 in the treatment of acute performance anxiety in social situations. In study 2201, participants who receive VQW-765 sold numerically lower stress levels compared to those who received placebo. The stress level was assessed by the Subjective Units of Distress Scale, SUDS, a self-rating scaled level of nervousness or distress ranging from 0 to 100 at multiple time points during the duration of the TSST test. In particular in female participants, approximately 70% of the total participants a larger magnitude of effect was observed, which was also statistically significant. This is the first time that the alpha-7 niconitic acetylcholine receptor partial agonist has shown efficacy in a clinical study of performance anxiety, and we look forward to confirming the efficacy in future studies. On tradipitant, preparation of the new drug application NDA in gastroparesis is ongoing with an expected FDA submission in the first half of 2023. Additionally, an open-label study of tradipitant in patients with gastroparesis is ongoing with the first 400 patients having already completed this 12-week study. Patients continue to seek access to the expanded access program with a number of patients having been treated with tradipitant for over a year. On tradipitant for the treatment of motion sickness, enrollment in the clinical program is over 75% complete, and we expect results by mid-2023. We've experienced great success in recruitment as a result of target advertising, some of which you may have seen during Sunday football and other sporting events. On HETLIOZ, we continue to pursue regulatory approvals, HETLIOZ in the indications of insomnia and jet lag disorder supported by robust clinical program results that we have previously reported. We look forward to bringing our clinical programs to successful completion in pursuit of regulatory filings and approvals. As we reported today, 2022 was another successful year commercializing HETLIOZ for Non-24 in SMS and Fanapt for schizophrenia. The adverse decision in December by the District Court on the HETLIOZ patent litigation poses a significant challenge, but we remain focused and determined in asserting our patents. As you probably know, in December, the Delaware District Court found certain of our HETLIOZ patent claims invalid or not infringed by the generic defendants in our Vanda litigation. We appealed that ruling and we have a hearing at the Federal Circuit scheduled for March 14. We expect the decision by the court after that hearing. Teva Pharmaceuticals has since launched a generic version of tasimelteon, and we have brought several actions against Teva based on problematic aspects of that launch, including infringement of other HETLIOZ patents, [Vanda Act] of violations, and patient safety issues, to name a few. These are separate and distinct cases from our Federal Circuit appeal, but are nonetheless important to protect the safety of patients and to protect Vanda's legal rights. As an example, we discovered that Teva's generic tasimelteon is sold without braille labeling, which presents an immediate risk to blind HETLIOZ users who are accustomed to the braille labeling, packaging, and safety information that is accompanied HETLIOZ since its launch. To address this concern, we filed a citizen's petition with the FDA and filed suit in Federal Court requesting immediate action from the FDA. On the regulatory front, we continue to pursue multiple actions against the FDA on a variety of regulatory matters in an effort to continue to hold the FDA accountable to law. We intend to continue this litigation to protect the interest of Vanda and to make our products more broadly available to the patients we serve. I'll begin by summarizing our full year 2022 financial results before turning to discuss the fourth quarter of 2022. Total revenues for the full year 2022 were $254.4 million, a 5% decrease compared to $268.7 million for the same period in 2021. HETLIOZ net product sales of $159.7 million were the primary contributor and driver of our 2022 revenues and saw an 8% decrease compared to 2021. The year-over-year decline in the HETLIOZ business reflects continued reimbursement challenges for prescriptions for patients with Non-24. Fanapt net product sales of $94.7 million for the full year 2022 were essentially flat compared to 2021. For the full year 2022, Vanda recorded net income of $6.3 million compared to net income of $33.2 million for 2021. Net income for the full year 2022 included an income tax provision of $5 million as compared to an income tax provision of $9.2 million for 2021. Vanda's cash, cash equivalents and marketable securities, referred to as cash, as of December 31, 2022, were $466.9 million representing an increase of $34 million as compared to December 31, 2021. Turning now to our quarterly results. Total revenues for the fourth quarter of 2022 were $64.5 million, a 5% decrease compared to $68 million for the fourth quarter of 2021. HETLIOZ net product sales were $40.1 million for the fourth quarter of 2022, a 9% decrease compared to $44.1 million in the fourth quarter of 2021. Consistent with the full year of 2022, net sales for the fourth quarter reflect the continued reimbursement challenges for prescriptions for patients with Non-24. Fanapt net product sales in the fourth quarter of 2022 were $24.4 million, a 2% increase compared to $24 million in the fourth quarter of 2021. Fanapt net product sales in the fourth quarter of 2022 increased by 2% as compared to $24 million in the third quarter of 2022. Fanapt prescriptions in the fourth quarter of 2022, as reported by equivalent exponent, decreased by approximately 2% compared to the third quarter of 2022. For the fourth quarter of 2022, Vanda recorded net income of $6.9 million compared to net income of $7.1 million for the fourth quarter of 2021. The net income for the fourth quarter of 2022 included an income tax provision of $2.8 million as compared to an income tax provision of $1.5 million for the same period in 2021. Operating expenses in the fourth quarter of 2022 were $57.9 million compared to $59.4 million in the fourth quarter of 2021. The $1.5 million decrease was primarily driven by lower R&D expenses related to the late-stage Fanapt development program. Operating expenses in the fourth quarter of 2022 decreased by $3.6 million as compared to $61.4 million in the third quarter of 2022. This decrease was primarily driven by lower R&D expenses related to the late-stage Fanapt development program and our previously announced OliPass agreement, partially offset by higher SG&A expenses related to spending for ongoing litigation. As a reminder, a $3 million upfront fee was expensed in the third quarter of 2022 upon entering into the OliPass agreement. Giving uncertainty surrounding the U.S. market for HETLIOZ for the treatment of Non-24 as a result of the ongoing HETLIOZ patent litigation, Vanda is unable to provide 2023 financial guidance at this time. Vanda will continue to evaluate its ability to provide financial guidance as the year progresses. Thank you very much, everybody, for joining us on this quarterly call, and we look forward to discussing our progress in the future. Thank you.

EarningCall_278

Welcome to the Nordic Semiconductor Q4 Conference Call. For the first part of this call, all participants are in listen-only mode. Afterwards there'll be a question-and-answer session. [Operator Instructions] This call is being recorded. Thank you, Erasmus, and good morning everyone. We are recording this presentation and it will be available on our Nordic Website under the IR section. Also on the IR section, you will also find the earnings press release, quarterly report and the quarter presentation. Joining me today, we have the CEO, Svenn-Tore Larsen; and CFO, Pal Elstad. They will -- will be discussing our latest financial results as well as review recent business activities. After the presentation, we will open up for Q&A. We will do both call-in and we will do the call-in questions first. And if anyone are writing in questions on the webcast, we will do that afterwards. As usual, the presentation contains forward-looking statements that involve risks and uncertainties. Actual result might different materially from those expressed or implied in such statements. We encourage you to review our full quarterly report for more information on the risks and uncertainties that may affect our business. Good morning, and welcome to our presentation for Q4 and full year figures for 2022. I'm Svenn-Tore Larsen, and with me as always, I have my CFO, Pal Elstad. We reported 12% revenue growth for Q4, which was within the guidance we provided. The development reflects a very turbulent environment with varying demand across technologies, verticals, geographics and customer segments. In term of technology, Bluetooth revenue increased by 26% year-on-year. And obviously then you understand that the revenue from proprietary products and seller IoT declined in the same quarter compared to 2021. Gross margin was around 53% and this generates a flat gross profit of $101 million for the quarter. And we maintain the EBIT margin about 20% despite higher R&D costs, and this is because we do have a strategy. We do have project with customers now that we are continuing to execute on. Our guiding for Q1 2023 is lower. Demand for legacy products, proprietary and first generation of the 51 family is lower-than-expected, especially in consumer verticals. And we had a strong PC sales. Previous quarters, we see that -- after COVID, we basically see that this is softening. In terms of geographics, we see software contribution from China due to both low allocation and weaker demand. At the same time, we remind in competition with the automotive industry for wafers for our 52 family and 53 family. And this will also continue into Q1 and that's a challenge for us, and hence we guided pretty low in Q1. This means that we're guiding $140 million to $160 million for the first quarter. We believe this will be the low point in terms of revenue for 2023. Gross margins for Q1 are expected to be bigger or greater than 52%. As a final note, on wafer supply situation, we are making investments to secure future supply. We need to do that, because we have so many projects in pipeline. And in Q1, we are making a prepayment of $100 million for to -- going to be deliveries from 2024. Our largest customer continuing to grow. And they are maintaining a high demand, despite what you see in the economy because there's new projects coming out that never been basically in the market previously. And also we see that our concentration is getting higher, but we are reporting their commitment and prioritizing our location to their products. The top 10 customer share of Bluetooth revenue increased from 40% in 2021 to 44% in 2022. And if you isolate Q4 only, it was more than 50% of the top 10 customer were the Tier 1s. As we are prioritizing some customer in a situation with scarce supply, this means that others have not been getting the volumes they wanted. The combination of overall scarce supply and lower demand in some markets means that we are seeing a relatively lower sales in SMEs in the broad market, and particularly in China. Next slide. Weak sales to domestic customers in China is really being difficult for us. We saw that the share of China used to be around 20% to 25%. Currently it declined to less than 10% in Q4 '22. We also see the outlook for Q1 pretty weak, meaning the pace of and importance [ph] [indiscernible] (735) off a rebound in China is extremely important for us and is going to determine some of the outlook for the product demand going forward. As we talked about in 2022, we've been working much better to align the size of the order backlog to actually delivery capability. As you can see, we are getting closer in Q3, reflects increased order cancellation, but also normalizing of lead times to over larger Tier 1 customers. We have committed volume deliveries to these customers and have at the same time ask them to return to normal order patterns with shorter lead times, which has reduced the order backlog. Given the supply demand imbalance through 2021 and '22, it's clear that the order backlog has not been a good indicator of neither real demand or future earnings. If you look at certification and market share, we are maintaining steady and high share of designs with around 40% share. And as you can see, the overall numbers of design has been around 1,100 to 1,400 new design. And given the increased value of the total Bluetooth market, this is a indication that value per design is increasing. And this really fits well with the trend of our own designs and sales with more high volume application for Tier 1 customers. As we stated in our third quarter presentation, we saw that a tougher economic environment was creating a more uncertainty short-term outlook. Our project base continues to expand, but we see financial -- it's actually financial support for many of these medium sized small customers, which are startups has been a little bit slow and a lot of these customer have not really get into production but we believe they've been getting -- are going to get into production with the cellular IoT project in the second half of this year. But the outlook remains cautious, also for the first quarter, but we expect to see growth return with increased sales and revenue later this year. We do show this slide every year, every quarter. New product launches in the quarter include both Bluetooth PowerToys such as Harry Potter Magic Wand. It's a combination of the 52832. And over PMIC nPM1100. It really shows that we now are getting these adjacent component besides over radio into designs. Customers have also launched cellular IoT product. And they do -- we also hear and see that there is a combination of both Bluetooth and cellular IoT. So we are pretty excited to see that the strategy that we put out in 2019 that we should combine both Bluetooth and cellular is actually working now. That gives us really good hope for the long-term strategy that we have. [Indiscernible] you have wanted to hear more about is the audio vertical. And I'm happy to report that we see good traction. We are engaging both with developers, design partners, and we have shipped more than 2,000 audio development kits, which is also a great -- it's a huge number. We also are delivering parts today to products that are in the market, both in the hearing aid and in the headphones, microphones and speakers. I'm also happy to report that we are now shipping our Wi-Fi 6-enabled, the nRF7002 development kits in volume through our distributors. The 7002 is a low power, very robust and secure companionship, designed to be used alongside over Bluetooth family products, and can also be obviously working with our 91 cellular SiP. We showcased this in the first third-party Wi-Fi in CES at -- in Las Vegas. And we have seen strong interest in these development kits. Actually, we got 2,000 kits in here just before Christmas, and we have already shipped them out. Next. Moving on to power management. We are continuing to expand our portfolio. We just added a new nPM1300 to the family. This is a power recharging and a broad - has broader set of management features. I mean, it will enable us to take another part of the market and also will be able to increase ASP a bit. This product will be out in volumes from mid 2023, adding to the rest of the family that's already in the market. As a final note, I'm glad to see that we are back on the road with our Nordic Tech Tours. After a couple of years where COVID made travel extremely difficult, we were able to visit 45 cities across the U.S and Europe with more than 1,700 customers attending. And when you ask them, more than half of these are planning for a project to use Nordic. If you look -- focus on this year's Tech Tour was the new [indiscernible]. We spend quite a bit of time on cellular IoT and Wi-Fi. And these are new product lines that are adding to our Bluetooth revenue. While we are really excited and looking forward now to help our customer to be successful with a new products based on new products with new standards. So exciting times for Nordic. Thank you, Svenn-Tore. I'll now run through the financials for the fourth quarter of 2022. As Svenn-Tore mentioned, revenue increased 12% year-over-year in the quarter. For the full year 2022, we received a very strong 27% growth. Revenue came in at the lower end of our guided rage. These top line figures hide significant changes in the revenue composition over the course of the year, in terms of both product technologies, customers and geographies. At the back end of COVID, in 2022, started a very strong in the consumer PC markets. But during the year, our focus has shifted towards industrial and health care. Bluetooth revenue increased by 26% in the quarter, and 33% for the full year. So growth is well above our previously communicated 20% to 30% rates. The growth in Q4 2022 reflected a combination of price increase and somewhat higher volumes. During 2022, we've also been able to increase the revenue and ASP from our high-end Bluetooth products. Compared to last quarter, Bluetooth revenue is down 4%, mainly as a result of lower ASP due to customer mix. As Svenn-Tore mentioned, proprietary product revenue declined by 56% in the quarter and by 10% for the full year. So the 10% for the areas is more or less in line with previously communicated targets for proprietary. Proprietary is now just 10% of total revenue for the year. The decline mainly reflects lower demand for PC accessories and other home office equipment after boost during COVID, as well as the technology migration to Bluetooth low energy. The decline started earlier in the year and revenue has relatively flat compared to last quarter. Cellular IoT revenue declined by 14% in the fourth quarter, although it increased by 49% for the full year and accounted for about 3% of total revenue in 2022. For new technologies like PMIC and Wi-Fi, we are seeing increased design in and we'll start reporting details when we have meaningful revenue in these technologies. Looking at sales from another perspective. In terms of end use market, we see that growth within the consumer segment stalled in the quarter, whereas industrial and health care continue to grow at a reasonable healthy pace. However, consumers still are by far our largest market with 57% of the total. Although this is actually going down, it was 62% in last quarter. Consumer is down 5% compared to last year and 14% compared to last quarter. As discussed earlier, this is a mix of reduced proprietary, low demand in China and low demand among small and medium sized customers. Industrial continues to be strong and is up 34% compared to last year -- flat compared to last quarter. Industrial is about 27% of our total and we see especially strong demand in the European market. Health care with $22 million in Q4. So strong growth both compared to last year and compared to last quarter. Turning to gross margin, we delivered a gross margin of 52.7% in Q4. This was lower than in Q4 2021. However, December or Q4 2021 was very special as we had large price increases that the supplier costs first came in or took effect until Q1. We do not see the same effect this year. If we compare gross margins to last quarters, the gross margin reduction is driven by mainly three factors. We took a write-down of some cellular inventory of $3 million impacting gross margins by almost 2%. As committed by Svenn-Tore, revenue to our largest customers are exceptionally high with above 50% in Q4. And we also have very low proprietary revenue and proprietary revenue has over the later years shown strong gross margins. On the positive side, we continue to sell more of our high-end Bluetooth products. Now we're going to turn to our operating model performance for Q4. Although revenue is at the low end of our expectations, we continue to deliver EBITDA margins for the group above 20%. if we just look at the short range business, EBITDA margins is still around 30%. Gross profits are the same as last year, but the reduction in BTA margins come as a result of continued high investments. Although we see a reduced growth for Q4, we see an overall strong long-term demand for products and continue to invest to capture this future growth. So total R&D is up from $40 million last year to $45 million this year, which is from 23.3% of revenue to just below 24%. of revenue. SG&A is down this quarter, mainly as a result of operational leverage and also positive effects. Both R&D and SG&A have already been favorable -- very favorable impacted by stronger USD compared to NOC and Europe. Although we continue to invest, we of course monitoring the situation closely. We are investing for growth, so total cash operating expenses amounted to $61 million in Q4. When adding back capitalized development expenses and deducting depreciation and equity based compensation. This compares to $56 million in Q4 2021 and $55 million last quarter. The 9% increase is, of course, well below or revenue growth. U.S dollars for $42 million relates to payroll expenses, only marginally higher than Q4 2021, despite the 21% increase in the number of employees. We're now above 1,4,50 employees in the group. This mainly reflects the favorable effects developments, which have lowered the payroll measured in U.S dollars by about 6% -- $6 million, adjusted for the $6 billion salary expenses increased by 17% year-over-year. Other OpEx increased from $15 million in Q3 last year to $19 million this year. The increase comes partly as from Tour we're now much more on the road, selling the products. And we are also doing several tape outs to be ready for the future. CapEx was $8.4 million in Q4, so slightly higher than that what we've seen earlier in 2022. It mainly reflects investment in additional test capacity and IT infrastructure. CapEx intensity overall remains below the previously indicated level of around 4% of revenue. Finally, I'll go through the cash flow, cash position. We can continue to see healthy cash flow and a strong cash position in the company. During Q4, we overall added $26 million to our cash balance and that $379 million at the end of December. Operating cash flow was $36 million in Q4, mainly driven by a strong EBITDA. Only partly offset by increased working capital. We did see although increase in net working capital of $13 million, mainly driven by higher accounts receivables and inventory. Net working capital is now around 22% of revenue. As Svenn-Tore mentioned, during the first quarter 2023. Nordic may have a prepayment of $100 million related to ongoing initiatives to strengthen supply resilience and diversification. Thank you, Paul. As you have understood, we have had mixed near-term outlook across different segments, even though we maintain a positive view on our long-term outlook. I mentioned that our large Tier 1s are taking a higher share of business and we are continuing to see strong Bluetooth demands from these customers. However, players in the automotive industry continue to drive competition for the 55-nanometer wafers. And this has limited the shipment of over high revenue maker, the 52 family and the 53 family. We see weaker demand for our legacy products, the proprietary products and the first generation of the 51 family. We are also seeing a temporary slowdown for cellular IoT, which we expect to turn in the coming quarters. Across verticals, we see that the consumer verticals are more exposed than the industrial. And we see -- continue to see strong growth in health care applications. And obviously being a responsible company we are -- we have decided to ship 100% to health care applications. And as mentioned, we see generally low demand in China. Maybe are rounding off the Chinese New Year's, it remains to be see how demand will develop. And the pace of rebound in China is one of the key question marks for 2023. Summing up, this means that we have to guide for a lower revenue -- revenue range we guide for is $140 million to $160 million for Q1. We're going to see a highest share of revenue from Tier 1 customer. And we expect the gross margin in Q1 to remain above 52%. Nordic setup for a plan to reach 1 billion and I kept the market stay in 2019. We stick to that plan, we have delivered. And we also were so eager when we saw that we have more design wins than expected. So we pull that forward 1- year. Unfortunately, we didn't manage that. But we did deliver on the promises we gave on the Capital Markets Day back in 2019. And we have seen growth around 40% annually over the past 3 years. As we have heard today, we are now seeing a more uncertainly near-term outlook. We are slow start with 23, we no longer can expect to meet the 1 billion goal [ph] already in 2023. We expect to be back to run rate of $1 billion revenue in the second half of this year. Our long-term growth ambition remain intact. And we will continue to invest in R&D and organizational development to make sure we take the most of our growth opportunity. These long-term ambition built on assumption of continued economic growth and continued demand growth from both customers and consumers and industrials. This is in line with what our larger customers also indicates to us. And obviously, if we see a persisting negative macro economic development, or major change in customer behavior, we will obviously adapt to that situation. We haven't seen that yet. We know this is a short-term bump. We have a capital light model with fabulous production, external distributors and this leaves us with high flexibility to adapt to changes in the business environment, if necessary. Thank you, Larsen. We will soon open up for Q&A. To accommodate as many as possible before the market opens, I would like to say to everyone that we take one question for everyone and a follow-up question if needed. We will start with the call-in first. And then we will go over to the question asked in the webcast page. I hand it over to our operator to open up the Q&A. Thank you, Steel. [Operator Instructions] The first question is from [indiscernible] from UBS. Please go ahead. Your line will now be unmuted. Hi. Good morning. Thanks for taking my question. I was wondering, could you provide a bit of detail on what visibility you have on the recovery to the $1 billion run rate in H2? Yes, it would just be useful to know what gives you confidence in that. What we see is that we are bringing more new products to the market. And we also have major project at Tier 1 customers. So what we need to get is more wafers. And we have taken action to secure supply in '24. Okay. And just a quick follow-up, if I could. On the wafer supply, you -- [indiscernible] you're seeing slowdown in some end markets or customers, how easy is it for you to shift that supply over to other customers? [Indiscernible] seeing weakness amongst Chinese customers shifting that to Europe, quite a [indiscernible] stronger. Fortunately, we have different technologies and the 55 nano wafers is the one that most new or all new applications are using. And those are the ones that we have more shortest than the older technologies. So it's just the mix of wafers available that make this additional -- extra difficult. It's been basically slowed down in the older technologies. Thank you, Harry. Our next question will be from Christopher from DNB. Please go ahead. Your line will now be unmuted. Hey. Good morning and thanks for taking my question. So I want to piggyback on the previous question in terms of the bridge from here to the billion rate in the second half which is the [indiscernible] Svenn-Tore. So currently it seems that the guidance on the midpoint of $160 million. Is it -- can you give some more on the mix there? Because this is basically what you had in revenues on a quarterly basis for the 55-nanometer base product back in 2021. So if we kind of factor in the price hikes that you guys have out in the market, it seems you're basically getting less way first than you booked in 2021. So how should we [indiscernible] that you guys will get from [multiple speakers]? I could put some color on the -- that Christopher. I mean, if you recall, Q2, Q3, we said that we have been pulling in wafers from previous -- from coming quarters. We have done that through the year. This result really successful in Q4. And it's not going to be successful when you look into Q1, look, which we are in now. But we've also been committed higher wafer amount in queue [ph] from Q2 and onwards throughout the quarter. We can tell you -- we can tell you, we get higher volumes of wafers from Q2 and outwards. Exact numbers, it will be easy. We didn't expect the Q4 to end like this, neither allocation for Q1 to end like it's turned out. So unfortunately I can only say we get more wafers. And it makes us pretty sure that we are into the run rate that will support $1 billion in '24. Someone is speaking, I can't hear anything. And Svenn-Tore in the mix for Q1, so this guidance seems like it's basically zero -- [indiscernible] zero revenues for proprietary and cellular and these other areas or a significant step down in with [indiscernible] sequentially. So which one is it? We don't comment on the mix. It's a different customer mix, obviously and we are continuing to support the Tier 1 customers both loyal to our medical health support and to our largest customers. Thank you, Christoffer. Our next question will from -- will be from Oliver Schüler Pisani from Carnegie. Please go ahead. Your line will now be unmuted. … for taking the question. My question was on FTE investments. I think you added about 70 employees in this quarter. How do you think about further hiring some investments in the organization for '23 in light of the new economic environment? Yes, I can answer. We grew 21% '23 -- to '22 versus 2021. Of course, we are looking at the overall environment, so we'll adapt our investments compared to what we see in the market. Thank you, Oliver. [Operator Instructions] Our next question will be from Adam Angelov from Bank of America. Please go ahead. Your line will now be unmuted. Yes, hi. Thanks for having me on. So just two for me, please. Firstly, I wanted to just confirm if you have or have not seen any weaker demand on Bluetooth? In other words, is the demand specifically just related to the legacy nodes, or are you also seeing from SME some weaker demand on Bluetooth as well? We have a legacy node on Bluetooth, mainly used by early adapters, and also where we used to have our revenue out of from China. And if you saw the slide, I mean, we've been reducing revenue in China with close to 65%. year-on-year. And these were legacy Bluetooth products. On the new products, we have extreme demand from new project at Tier 1 customers. And obviously, legacy products proprietary has weakened after COVID. Yes, okay. So just to confirm, before I move on to the question, then it's basically for the lion's share of Bluetooth revenue, its suppliers issue not a demand issue, that's what you're saying? Okay, okay. The other question just to confirm the one-off on write-down you had in Q4, do you expect that to continue maybe is that or is that really something trends go as you're expecting and demand picks up, that's really just a Q4 story. And it is a one-off and it's not something we should potentially expect through 2023 to happen again? Now that's related to the write-off of some cellular products that was one-time in Q4 related to older products of the cellular, that was in the inventory. So it -- when demand picked up, we have and you look at our inventory in the balance sheet, you will see that we have significant amounts of inventory versus last year. A lot of that is related to cellular and proprietary. And we have a good plan to deplete this inventories. Thank you, Adam. Our next question will be from Christoffer from DNB. Please go ahead. Your line will now be unmuted. Thank you. My second question is on the outlook for 2024. So you mentioned that you're doing prepayment of $100 million in the current like in Q1. So can you help us a bit more in terms of understanding what that actually gives you? So what we're getting in return for paying up that [indiscernible], and when that will mean you can start delivering significant volumes? Probably we are pretty sure if it takes us above $1 billion, at the same timing we lined out for in the Capital Markets Day in 2019. Thank you, Christoffer. As there are no further question at this moment, I'll hand it back to the speakers for any written questions. Thank you, Erasmus. We have a few questions on the webpage. You can start with Rob Sanders, Deutsche Bank. Can you discuss the Chinese sales collapse? Is there any element here that Nordic now prefer to leave this business to other competitors? I think they're -- actually when we analyze it, there is a mix. Yes, there is quite a lot of low complexity Bluetooth designs in China. But we also have had historically quite a few designs with volumes in China. And they've been basically affected by the strong lockdown. We are run through our customer base. These customers hopefully will get back when doors are open again in China. Thank you. Then we have a question from Kristoffer B. Pedersen, Nordea, on the same topic. How comfortable are you that demand will recover in China given that you have not prioritized these clients over the past couple of years. What we have done is that we have kept some customer alive. And we have seen that these customers have had a dramatic downturn on the revenue. The customer feedback we get is that I are expecting some pick up through 2023. And that's what we relate to. Thank you. Then we go over to the topic guidance, Petter Kongslie, SpareBank 1. Q1 '23 revenue guidance of $150 million and a backlog of plus $800 million, what is the best proxy for run rate revenue potential in nodes? It's very much driven by wafer supply on each department, I know. We will guide quarter by quarter and I think it will be evidence when we show by guidance for Q2 after Q1. Currently, we need to see that the capacity support plan from our vendor is coming back to what's already been indicated to Nordic. Thank you. And then from Kristian Spetalen, Arctic. Q1 revenue guidance is below total Q4 revenue. As such, do your Q1 revenue guidance only reflect lower demand or our wafer allocation lower than Q4? As I said during the presentation, we've been cooling in wafers through all of '22 from the quarter ahead and the same exercise all quarters, we are not managing to do that for Q1' 23. And then we have the supply capacity. Kristian Spetalen, Arctic. Can you say that supply constraint persist, but at the same time you are encouraging customers to return to normal purchasing pattern of placing orders only two quarters ahead. Can you elaborate more on why you do this? Because we have had discussion with Tier 1 customers and committed to deliver through the true volume I need through '23 and hence they don't need to bid and place holders for a long time. Thank you. Then we’ve a question regarding backlog. And this is from Petter Kongslie, SpareBank 1 Markets. Order backlog declined from Q3 to Q4. How much is order cancellations? We haven't been calculating the exact constellation part of it. But this is being active sort of exercise from our regional sales managers to align, as I showed in the presentation, the backlog to our revenue. Thank you. We have two questions regarding gross margin. Christians Arctic, you mentioned lower demand among small medium enterprises, while the Tier 1 is holding up. Does this change in customer mix represent a risk to above 50% gross margin for 2023. Now, as I was commented on Capital Markets Day, we -- one of our main focuses is to keep gross margins above the 50%. So we consider this not a risk. Thank you. We have a question regarding OpEx. Petter Kongslie, SpareBank 1 Markets, how should we think about OpEx intensity giving lower revenue in 2023? So OpEx is, of course, a mix of salaries. And as I commented on in one of the questions, we are managing salary compared to where revenue is, but although a lot of our salaries is of course fixed cost. The same on OpEx. We can of course, suggest, travels, et cetera. But a lot of the [indiscernible] costs, which are really the big part of OpEx are fixed, because we have to get our products out in the market to secure future growth. Thank you. Then we have a question regarding price increases. Petter Kongslie, SpareBank 1 Markets. Can you say -- can you say something about expected price increase in the rest of 2023. And when will they take place take effect and what is the net effect will be on the gross margin. We are in the process of doing price adjustments just now. It will be effective from Q2. And we will be sensitive to, I will say, verticals and products that would be affected negatively. And we might be able not to put an increase on this. And other verticals, we will put the price increase. So that's something we evaluate with each individual customers that are contributing with high volumes. Thank you. And our final question today comes from Rob Sanders, Deutsche Bank. Can you discuss when matters should be visible as a growth driver for your business? It's certainly visible for us for Nordic at the moment. This might be one of the verticals we are working most on. We are working with nitric companies. And I think you're going to be able to see revenue from this at least in '24. Some of it will already appear in the end of this year. But the major revenue burst I think you're going to see in '24 driven by some Tier 1 customers. So thanks for everyone to join and listening into our quarterly presentation. This concludes today's call. Have a good day. Thank you.

EarningCall_279

Greetings. Welcome to the Natural Health Trends Corp. Fourth Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Thank you, and welcome to Natural Health Trends fourth quarter and full year 2022 earnings conference call. During today's call, there may be statements made relating to the future results of the company that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results, performance or achievements could differ materially from those anticipated in such forward-looking statements through the result of certain factors, including those set forth in the company's filings with the Securities and Exchange Commission. It should also be noted that today's call will be webcast live and can be found on the Investors section of the company's corporate website at naturalhealthtrendscorp.com. Instructions can be found for accessing the archived version of the conference call in today's financial results press release, which was issued at approximately 9 o'clock a.m. Eastern time. Thank you, Michelle, and thanks to everyone for joining us this morning to discuss our fourth quarter and full year 2022 financial results. With me today is Scott Davidson, our Senior Vice President and Chief Financial Officer. So a lot has happened has changed since early December. Most of the fourth quarter was still under some forms of COVID restrictions for much of the urban Chinese population. In this typical operating environment, our revenue of $12.5 million represented a 7% increase compared to our third quarter's $11.7 million. During the quarter, we also generated positive operating and net income as well as cash from operations due to our ability to protect margin by diligently controlling costs in exercising discipline in marketing and product mix. In Hong Kong, we continue to see traction around the structured online training system officially rolled out earlier in the year. This coordinated corporate and theater training approach coupled with smaller, local and regional in-person gatherings kept our members and teams engaged in connected. Now with a swift move away from a Zero COVID policy, we look forward to in the coming year. We have a full calendar of activities planned, complete with in-person product and business training, team building activities and international incentive travel. The first of which is our upcoming Super Me incentive trip to Shanghai in early March. Our members have communicated their excitement to travel and convene again in larger recognition, training and motivation building events, and we look forward to seeing them again in these settings. The commitment our members have demonstrated to our product offering and to our business, despite the challenging environment, is evidence of their resilience to overcome adversity, and for that, we are thankful. I’ll say Hong Kong and China and North America and Taiwan, we successfully launched Collagen Supreme, a unique formulation to help support healthier looking skin, hair, and nails along with joint and connected tissue support. But these markets, Collagen Supreme cells contributed meaningfully to their quarterly performance. We’re currently working on registration for a European market introduction in the coming quarter. Later this month, we will hold the official grand opening for our Healthy Lifestyle Center Plus storefront in Rowland Heights, California. This is the third North American fully branded location, designed to be a product pickup center, as well as a comprehensive training and prospecting venue for members in Southern California and beyond. Also in North America the end of the quarter March, the close of our Caribbean cruise qualification period, and we’re pleased to share that we’ll be accompanying over 70 qualifiers on an eight-day seven-night cruises in March. This marks the first incentive trip our North American team will embark on since the start of the pandemic and we look forward to celebrating with them. Our international markets were active during the fourth quarter with a whole series of events, road shows and trainings both in-person and online. In Peru, we hosted a three city tour to launch our TwinSlim Probiotics weight management product that attracted more than 550 in attendance. Meanwhile, in October, our European market stage and educational wellness event in Gothenburg, Sweden featuring one of the market’s favorite products standard view. In fact, many of our markets, including Taiwan, North America, and Peru, experienced sequential quarterly growth leading into 2023. The worldwide digital enhancements we announced and initiated last quarter or well underway, and we are making progress to world this implementation. These initiatives are designed to improve new member and customer acquisition, member onboarding and retention, and to enhance the overall shocking experience for those interested in our products. As previously share, we believe this focus will be a key driver for future growth and enhanced productivity in support of shareholder value. We’re pleased to end the year with an increase in sequential revenue and we’re hopeful to carry this positive momentum into 2023. Now that three years of strict zero COVID protocols, government restrictions and lockdowns are mostly behind us. We also look forward to when we can return to in-person meetings and events that are important to our operations. As we begin the new year, I’d like to thank our dedicated leaders, members, preferred customers, employees, and stockholders for their continued support of NHT Global and our product line. We believe our business provides a tremendous opportunity for consumers of all ages, professionals, and the millions of prospects around the world looking for alternative beings to improve their personal outlook, whether that be through earning a little extra or taking meaningful steps to improve their overall health and wellness with the use of our great product offering. With that, we wish everyone much health and success in 2023 and look forward to speaking with you again next quarter. And now, I will turn the call over to our CFO, Scott Davidson, to discuss our financial results in greater detail. Scott? Thank you, Chris. Total revenue for the fourth quarter was 12.5 million, an increase of 7% compared to 11.7 million in the third quarter of 2022, and a decrease of 22% compared to 16.1 million in the fourth quarter of 2021. As Chris mentioned, we were able to increase revenue sequentially, despite most of the quarter, still under some forms of COVID restrictions for much of the urban Chinese population. For the full year of 2022, total revenue was 49.1 million compared to 60 million in 2021. Our active member base declined slightly to 38,660 at December 31 from 41,170 at September 30 and was down 12% from 45,760 at December 31 last year. Turning to our cost and operating expenses. Gross profit margin of 73.9% in the fourth quarter, decreased slightly from 74.2% in the fourth quarter of last year. Commissions expense as a percent of net sales for the fourth quarter decreased to 43% from 44.1% in the prior year quarter. Excluding the impact of administrative fee revenue, commissions expense as a percent of net sales was flat compared with the fourth quarter last year. Selling, general, and administrative expenses for the quarter were 3.8 million compared to 4.4 million a year ago. The decrease in SG&A from the prior year quarter reflects lower professional and credit card fees. We returned to positive operating income for the quarter, which totaled 43,000 compared to operating loss of the 145,000 in the third quarter, an operating income of 487,000 in the fourth quarter of 2021. For the full year of 2022, our operating loss was 270,000 compared to operating income of $1.6 million in 2021. We recorded an income tax provision of 255,000 for the quarter compared to 286,000 recognized in the fourth quarter of last year. Net income for the fourth quarter totaled 188,000 or $0.02 per diluted share compared to 47,000 or breakeven per diluted share in the third quarter and 232,000 or $0.02 per diluted share in the fourth quarter of 2021. For the full year net income totaled 313,000 or $0.03 per diluted share compared to $1.1 million or $0.09 per diluted share in 2021. Now, I'll turn to our balance sheet and cash flow. Total cash and cash equivalent for $69.7 million at December 31 down from $70.7 million at September 30. Total cash and cash equivalent decreased by $14.2 million from $83.8 million at December 31 last year, primarily due to dividends paid in 2022 and cash used in operating activities during the year. Net cash provided by operating activities was 938,000 in the fourth quarter compared to $1.6 million in the fourth quarter of last year. For the full year, net cash used in operating activities was $4.9 million compared to net cash provided by operating activities of $1 million in 2021. For the full year of 2022, we paid out $9.1 million in dividends. As returning capital to our stockholders remains a priority, I am pleased to announce that on February 6, our Board of Directors declared a quarterly cash dividend of $0.20 per share, which will be payable on March 3 to stockholders of record as of February 21. In conclusion, I am very pleased we were able to close out the year by increasing revenue sequentially compared to the third quarter, as well as generating positive operating income, net income and cash flow from operations for the quarter. As we cautiously emerged from the ongoing COVID restricting environment we've been operating under for the past three years, we're committed to revitalizing company-wide growth and supporting the fundamentals of our business to deliver value to our investors. We are hopeful that with the ending of the zero-COVID policy, our members can conduct more in-person meetings. While we support more events and incentive trips. We wish to thank all of our hardworking members who have endured the past few years and demonstrated strong commitments to our product and our business. That completes our prepared remarks.

EarningCall_280

Good day, and welcome to 23andMe's Fiscal Year 2023 Third Quarter Financial Results Conference Call. At a reminder, this call is being recorded. At this time, all participants are in a listen-only mode. After the prepared remarks, there will a question-and-answer session. I would now like to turn the call over to [indiscernible] at Argo Partners to lead off the call. Thank you. Please go ahead. Thank you, Justin. Before we begin, I encourage everyone to go to investors.23me.com to find the press release we issued earlier today reporting our financial results for the quarter. A replay of today's webcast will also be available on our website for a limited time within 24 hours after the event. Please note that certain statements made during this call regarding matters that are not historical facts, including but not limited to 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 section entitled Forward-Looking Statements in our press release, which applies to this call. Also please refer to our SEC filings, which can be found on our website and the SEC's website for a discussion of numerous factors that may impact our future performance. We will also discuss certain non-GAAP measures. Important information on our use of these measures and reconciliation to US GAAP may be found in our earnings release. Joining us on our call today are Anne Wojcicki, our Chief Executive Officer and Co-Founder; and Joe Selsavage, our Interim Chief Financial Officer and Accounting Officer. Kenneth Hillan, our Chief Therapeutics Officer will join us for Q&A. Thank you. We made significant progress in both our consumer and therapeutic business this part quarter as we continue to focus on leveraging our genetic database, the world's largest recontactable database for genetic research to unlock the potential of the human genome to treat and prevent disease like no other company. Starting with the consumer business, we made significant progress this quarter and continue to enhance our efforts to provide our customers with a leading genetic health service that focuses on prevention and wellness. We added two new genetic health reports for our 23andMe+ subscribers on asthma and Hashimoto's disease, an autoimmune disorder. The reports are generated using data and insights gathered from millions of customers who have consented to participate in our research. As a reminder, 23andMe is the only company with multiple FDA authorizations for direct-to-consumer genetic health reports and the only company that the FDA has authorized to provide genetic cancer risk reports and medication insights without physician involvement. In total, we have over 60 health reports in our personal genome service that estimate a person's genetic likelihood of developing a specific condition. We also added finer ancestry composition detail for people of Ashkenazi Jewish ancestry. Our product can now enable members to trace their family connections back to seven genetic groups corresponding to regions within Eastern and Central Europe. During the past quarter, we also celebrated the one-year anniversary of our acquisition of Lemonaid Health. We are continuing the integration of the telemedicine and online pharmacy platform into 23andMe to enhance our genetic health service, and we look forward to continuing to create new customer experiences that combine genetics with our telemedicine and pharmacy services. Turning to our therapeutics business, in November, we announced that 23ME-00610 will be evaluated as a monotherapy and tumor indication specific expansion cohorts. These include clear cell renal carcinoma, epithelial ovarian cancers, neuroendocrine cancers, small cell lung cancer and microsatellite instability high or tumor mutational burden high cancers that have progressed on standard therapies. We also intend to present an update from the Phase 1 dose escalation portion of the study at a scientific conference later this year. In addition, we presented seven scientific posters at the American Society of Human Genetics Conference, including new insights into conditions such as cataract, systemic sclerosis, pericarditis and others. We also presented preliminary data from what we believe is now the largest and most diverse genetic study of sickle cell trait ever conducted at the American Society of Hematology Conference, the largest annual medical conference dedicated to hematological malignancies. The consumer and therapeutics teams have again made great progress this last quarter and I look forward to the enhanced personalized health offerings we are working to deliver for our customers. Thanks, Anne. I'm pleased to report continued solid revenue growth in our consumer business in the last quarter that puts us on track to exceed our previously disclosed full year financial guidance for fiscal 2023. I am pleased to report in our performance in Q3, which is typically our busiest of the year operationally on the consumer side. We had good execution on the consumer side as we maintained focus on improving profitability. Despite the challenging macroeconomic environment, consumer demand remains strong during the holiday season. We carefully controlled discounting and promotional spending, which led to improved contribution margin versus the prior year, all of which gives us confidence in raising our full year guidance, which I will talk about more shortly. Along with our current cash position and an opportunity to sell additional shares to our recently announced APM program. We are sufficiently positioned to continue our plans to enhance our genetic health service and advance our therapeutics programs for 23andMe. Our revenue for the three and nine months ended December 31, 2022 was $67 million and $207 million respectively, representing an increase of 18% and 21% respectively over the same periods in the prior year. Third quarter revenue growth was primarily due to an increase in telehealth services revenue from the Lemonaid acquisition last November. Growth in our subscription services revenue and Personal Genome Service, PGS revenues and an increase in research services revenue primarily related to the GSK collaboration. Nine month revenue growth was primarily due to an increase in telehealth services revenue, higher research services revenue from the GSK collaboration and research contracts with third parties and growth in our subscription services revenue, partially offset by lower PGS revenue. Looking at the composition of our revenue, consumer services revenue represented approximately 80% of the total revenue for both the three and nine months ended December 31, 2022 and research services revenue, which was primarily derived from the GSK collaboration, accounted for approximately 20% of total revenue for those same periods. Our gross profit for the three and nine months ended December 31, 2022 was $31 million and $95 million respectively, representing a 13% and 10% increase over the same periods in the prior year. The three and nine month year-over-year increase was driven primarily by the previously discussed increase in revenue, offset by lower margins from the telehealth revenues, as well as increased supply chain logistics and labor costs. Operating expenses for the three and nine months ended December 31, 2022 were $128 million and $349 million respectively compared to $124 million and $271 million for the same periods in the prior year. The increase in the three and nine month periods was primarily attributable to increased personnel-related expenses driven by increased salaries and related taxes as a result of inflation and growth in headcount, along with an impairment charge for intangible assets and the addition of sales and marketing expenses from the previously acquired telehealth business. Looking at the bottom line, net loss for the three and nine months ended December 31, 2022 was $92 million and $248 million respectively, compared to net losses for the same period in the prior year of $89 million and $148 million. The increase in the three and nine month period was primarily attributable to the increase in operating expenses previously noted and a benefit from the changes in the fair value of warrant liabilities of $3 million and $33 million respectively recorded in the prior year. Next, our adjusted EBITDA; for details on how we define adjusted EBITDA as well as the corresponding reconciliations to GAAP, please see our earnings press release. Total adjusted EBITDA for the three month end of December 31, 2022, improved to a deficit of $43 million compared to a deficit for the same period in the prior year of $64 million. Total adjusted EBITDA deficit for the nine month period was comparable to the same period for the prior year. We ended the quarter with $433 million in cash and cash equivalent compared to $553 million as of March 31, 2022. As we recently announced, we now have an ATM program providing us with the option to sell an aggregate of up to $150 million of shares of Class A common stock from time to time subject to market conditions. We are increasing our full year guidance following our fiscal year 2023 third quarter financial results. Full year revenue for fiscal 2023, which will end on March 31, 2023, is now projected to be in the range of $290 million to $390 million with a net loss in the range of $325 million to $335 million. The full year adjusted EBIDA deficit is projected to be in the range of $170 million to $180 million for fiscal year 2023. As a reminder, this guidance includes the full impact of the consolidation of the company's acquired telehealth business and to its overall consumer segment, as well as the current anticipated effects of general inflation, uncertain of their cost. Thank you, Joe. We continue to make significant strides in our mission to help people access, understand and benefit from the human genome. We are continuing to see consumer demand as we offer more personalized and actionable genetic reports and innovative customer experiences that are helping to drive growth in revenue and profit margins. Our proprietary genetic database is also directly translating to the development of personalized medicine, and we look forward to providing more updates in the future as we advance our clinical trial of 23ME-00610 in advanced solid tumors. We're making great progress in our efforts with genetic-based healthcare and therapeutics as we strive towards delivering on the promise of true, personalized healthcare. 2023 is the year for DNA powered health, and we are excited to be kicking it off with these exciting updates. Before we go into questions, I'd like to just make sure that one thing was clear and on my -- when I was giving full year guidance, the full year revenue for the fiscal year 2023, which will end on March 31, 2023, is now projected to be in the range of $290 million to $300 million with a net loss in the range of $325 million to $335 million. I think I may have misspoke. So I just wanted to make sure that was clear. Hi guys, thanks for taking the question and congrats on a strong quarter here. I just want to kind of dig into to guidance real quick. So you beat my expectations for the quarter, but you raised guidance even more than the beat for the full year. So I'm just curious if you're seeing some outsized demand in any one of your core consumer products. And if this kind of reflects a stronger than expected holiday season, given that you'll recognize most of the revenue in your fourth fiscal quarter from the holidays? Thank you, Daniel. We were seeing strong demands and strong revenue growth in prior quarters, and we were conservative and before in raising -- before we raised guidance in last quarter's earnings call. We did see our holiday sales that met our expectations and we were expecting that with inflationary and other macroeconomic conditions that they may have been -- we could have saw some degradation there, but we did not see that and we saw strong demand and in addition we were able to hold on discounting and promotions. So we also saw revenue growth there because we were doing less discounting and less promotions. Yes, got it. And on the cost side of the equation, I noticed that your advertising and brand expense has come down nicely this quarter year-over-year. What's driving that decrease? Are you seeing tax come down? Have you changed your advertising funnel and strategy at all? And related to that, the full year guidance now implies a bit of increase in EBITDA loss. So perhaps costs are increasing in the fourth quarter. Curious, what's driving that increase in EBITDA loss for the fourth quarter? Okay, so on the marketing spend, we've actually changed and we're really being very cautious in how we actually deployed marketing throughout fiscal year 2023. We actually were looking to shut off all inefficient channels and really making sure that our marketing spend was efficient, which really has helped our bottom line. And there was no really other big change in Q4 -- Q3, and nothing really big changes coming Q4 or Q4 as well. On the EBIT standpoint, we actually continued to really no additional large expenses coming in Q4. This is just a result of -- just the expectations for revenue and expenses in Q4. And thank you. And one moment for our next question. And our next question comes from Steven Mah from Cowen. Your line is now open. Oh, great. Thanks operator. Thanks for taking the questions and congrats on the quarter. I had a question on the telehealth services revenue strength. Is that a reflection on the Lemonaid acquisition and the fact that that integration is fully complete now and if so, can you provide any color on the genetic space primary care service? When should we expect to launch or details on that new product offering? So I'll take the first part of that question, Steven. The first -- with telehealth revenue, we still continue to see growth in telehealth revenue. However, we also had a comp because we actually did the Lemonaid acquisition in November 01 of last year. So we basically had additional revenue this fiscal year, one month additional in telehealth. And then we are continuing to look and work on the integration of Lemonaid into 23andMe and we'll actually be launching and discussing more our products in the summer of this calendar year, 2023. Yeah, I would say, Steven, just the integration is not -- it's not complete yet as you sort of defined it. The integration is still underway in terms of definitely putting all those various services on the 23andMe check platform, and I think you can expect a more material update from us in the summer. So that's when we hope to be able to at least talk more in more detail about the plans, what we want to do and what that could look like. And I hope also at that time, probably to have Nora who I don't think we have had on any calls, or I don't think he's met yet, but Nora, to be able to talk more details about sort of the clinical genomics and the direction we're going to go. Okay. No, I appreciate that caller and then maybe on a similar note on the 23andMe plus subscription services revenue, I appreciate you said you're only giving annual updates, but could you give us any sort of color on how that 23andMe plus subscription business is going? Any sense for uptake rates by existing customers or retention rates of customers already subscribing? Thank you? Sure. We only give guidance on our subscriptions on the annual basis. So we'll be talking more about that in our Q4 earnings goals. We did note in this quarter in the earnings release that we are seeing increased subscription revenue. So that is really helping our revenue line. So we're pleased with growth and retention in that product. But let me also just make clear like it's -- the subscription and the acquisition of Lemonaid, is definitely like that whole combination is the future that we are building towards. So how you actually have a genomic experience where you can get access then the services like pharmacy or care and putting that into a subscription product. So just to fly to you, you should expect our subscription product as it is today to evolve, relatively substantially over the next 12 months. Yeah, yeah, it makes sense. I guess, I was just trying to dig into see if it's -- if the subscription was coming more from existing customers or people that are buying the kit de novo [ph] and just signing up for this subscription then and there. It's a combination -- it's a combination of new kit sales as well as existing renewals as well as upsells into the subscription product. And one moment for our next question. And our next question comes from Gaurav Goparaju from Berenberg Capital Markets. Your line is not open. Hey, can you hear me okay. Perfect, just two kind of big picture trend questions from me. The first on the consumer side, right? Have you seen any correlation between members who leverage PGS platform with those who leverage a telehealth platform? Basically, our entirely new 23andMe users tending to adopt both PGS and telehealth services, or does it seem to be one versus the other? Well, as Anne mentioned, we're really looking to integrate, both the telehealth and genomic health services and [indiscernible]. And so we will be seeing cross population between those two customer bases over time and… Right now it's still two different logins. So I think that's at some point it will definitely become that experience where you could go -- you could have different ways of entering and crossover to the other groups. Got it. Thanks for the clarification. And then the last thing from me, Should we expect any new future partnership announcements before the GSK exclusive period occurs, or is that just something that we should just kind of remain on standby until that July date? Well, we cannot announce any new partnerships until the exclusivity ends in July of 2023. So we will need to just hold on any announcements until that time. Thank you. We have a few questions from investors that came in through our Q&A platform that we use through say, technologies. I'm now going to ask those top questions that we got on the platform for the management team to answer. The first question is, what is the top priority for management for the year 2023? I'll take that. This is Anne. So I would divide this into three sections. So first the consumer side; consumer, we are focused on it fully integrating Lemonaid, making sure that there's a single experience for customers that they can get access to their genome, they can get access to care, pharmacy, potentially labs, other features in the future. So that is a single experience and we can really help evolve and enhance our customer's experience when they learn about their genome and they want to do more with it. Secondly, I'm definitely thinking, we got the last question just about what is in a post GSK world? It is definitely a top priority to make sure that we are always doing what we can on behalf of our customers to make sure that we are making discoveries and that we are advancing therapeutic opportunities. So we will absolutely be evaluating different opportunities to partner the database. That can take in a number of different types of forms. We definitely think about programs that we want to be able to own and how we are going to move that forward. But thinking about post GSK world is also top priority. And last our therapeutics programs are the wholly owned programs are incredibly exciting and I'm very eager to continue to support those and look forward to the time periods when we're going to have more clinical data on it. So this is Anne, I'll take that one as well. I'm very excited about our opportunities for marketing and DNA task, and I have to just call out here that it is the year '23. It is a year that is absolutely made for us. We do have a new Chief Marketing Officer, John Ward who has a mix of a number of people who've been here for a while as well as the players. It is an incredibly exciting time to think about how we are going to market right now with the fully integrated experience between 23andMe plus Lemonaid, additional services. And just to remind people, we are the only platform out there that has these FDA cleared tests where they can go without a clinician, without a healthcare provider intervening either in the beginning or in the end. So there is a huge opportunity for John and his team to be -- out in the market, and I am very excited about the year of '23. We have things like our Times Square near Eve, and you'll see various moving 23andMe pop up experiences coming around the country. Yes. Happy to take that. Thanks. You have to -- in terms of new partnerships, the exclusive target discovery period with GSK will be ending in July. As we've said, of course, we're still focused in fulfilling the obligations of that collaboration through that end date. But I'm also very excited about preparations we're making in terms of pursuing other opportunities, as Joe said, that we could potentially announce towards the second half of the year, if we're successful with that. It's certainly a top priority for me and for the team to really think about those partnerships and collaborations that will help us to continue to leverage the 23andMe database to bring real value to our customers and to patients. So, just, we'll obviously look to provide further information when those are announced. I'll take that one. For our consumer business, we've made significant progress this quarter and continue to enhance our efforts to provide customers with a leading genetic health service that focuses on prevention and wellness. We added two new genetic health reports for our 23andMe plus members on asthma and Hashimoto's Disease and Autoimmune Disorder. We also added finer ancestry composition detail for people of Ashkenazi Jewish ancestry. Our products can now enable customers to trace their family connections back to seven genetic groups corresponding to regions with in the Eastern and Europe, Central Europe. And we continue to expand on these offerings and it's a key objective for our consumer team and as Anne mentioned earlier, we'll be announced talking a little bit more this summer about our expanded offerings combining both genetics and the telemedicine business. Just a reminder about both of these businesses, 23andMe and Lemonaid were very complimentary. But since the integration of Lemonaid telemedicine platform, our focus has really been on enhancing our genetic health service. And going forward, we'll continue to create new customer experiences and looking to increase lifetime value for every customer over time. Great. Just want to say thanks for joining and we look forward to updating you on our progress on both the consumer business and our therapeutics efforts. Look forward to talking to you next time.

EarningCall_281

Good afternoon to all. We have a lot of people connected to hear our results. My name is Ana Ribeiro, Head of Investor Relations at BrasilAgro. We're here to talk about the earnings in Q1, the harvest, our financial statements follow the harvest year to minimize the impacts of seasonality, planting and harvesting. So here we will be talking about Q2 2023 and first six months of the same period. For those who are hearing in English, the presentation is available in chat. So the presentation is available in the chat for those who are following us in English. Today, we have our CEO, Andre Guillaumon; and Gustavo Lopez, our CFO, to explain to you a little of what happened in the last few months and talk about perspectives for the future. Thank you, Ana Ribeiro. I'd like to thank you all for participating. I'll comment the earnings, bringing the company's numbers, the expectations. Ana used a very wise word seasonality. Seasonality is a characteristic that is inherent to agro business. And we will explain some important numbers and some of these things have to do with seasonality and also the decision to sell. And I hope that at the end of the call, we will have questions. We continue believing a lot in the company's results in the company's business. We will have a quarter with interesting points about sugarcane. But surely we'll see the meaning of these numbers. Another challenge, companies like us who have a double strategy, operational results plus sale of farms, real estate happens, the sale of real estate. It happened. We made a small sale, and of course, the objective is to really take the decision to sell at a time when we have a good liquidity in the market. Let's see the highlights. We need a lot of time for the questions. Financial highlights. We have net revenue R$484 million, net income R$29 million, adjusted EBITDA R$124 million. We had a sale, a small sale, approximately 900 hectares. A sale in Rio do Meio, sold for R$62.4 million, showing once again, reminding you, this asset came from the purchase we made. We sold part of this land previously. And once again, we have a good result selling another part. Operational highlights. In the semester, we finished planting grains. Here we have cotton also. So everything that was planted in the semester until December 30. We still have some grains -- some grain, the end of the planting in Paraguay and which is not included in this number, but these are important highlights. A little later, we will talk about what is happening in this harvest. Next, when we talk about what we expect for this year and the next years, the earnings, we have important sustainability in commodities when we talk about soybean, we're talking about a super harvest more than 150 million tons in Brazil. But when we look at international levels, we have 4.5 million tons in inventory in the world. We have a super harvest. We have also Argentina with an important drop in the harvest. And this is positioning, this is affecting Chicago in an aggressive way. Brazil has a record of a 100, a little over 150 million tons. And every day, the number surprises yes, but the number was around 430 million tons, 435 million tons. Someone said, I'm speaking a little low. When we looked at the other commodities, we have a drop, a small drop in the price of cotton. This is linked to inflation, to restrictions due to the Coronavirus. So it's a commodity that is going like we always say it is -- has a stable price. So also we have the China effect and ethanol. Ethanol is a highlight. We will talk a lot about this here. We have many effects, but especially 10 taxation and talking about taxes. No one likes to talk about taxes. Our tax burden in Brazil is going down. But this brings competitiveness for non-fossil fuels with a carbon footprint, which is low. So in fact, if we are concerned with the climate around the world, so this is one of the points that will bring transformation. Here we show the behavior of the curve. Next, when we -- it's important when we talk about seasonality. We're in a harvest where we had a cost of planting. I don't remember such high prices for planting during my life. All the farmers paid a premium in to be able to plant the purchase of fertilizer during last year for this harvest now in progress and we begin to see signs of fertilizer prices going back to historical levels. So we saw a math going from 400 to 1,200. The company really bought at 950. But when we look at chloride, we bought a little before the war. I already mentioned this. And urea, seasonality. What I would like to highlight a graph that is here where we see the numbers, the number of tons per bag. When you have stable prices for soybean, we see this relationship between product and fertilizer, going back to levels that are close to historical levels. And this will give us a recovery in the margins for farmers bringing also liquidity. And we will be talking more about this. Well, just a little information here just to fertilizer was a concern. We have bought everything and we're now buying some fertilizers that we believe are strategic and we have seen some changes in the prices. And we'd like to remind you, when we decide to buy fertilizer, we look at contribution margin. So we always make the decision based on how much we will sell. So this is a new slide that we're including showing once again the company's concern with its business and also sustainability. As I always said, sustainability is in the company's DNA. A company that developed -- develops land in frontier regions and also is concerned about social issues. We're the first company to be part of the Novo Mercado in the SEC and I will show you highlights for each one of these lines. The highlights for harvest 2021, 2022, 2023 in the environment, we determined to do the first report, the inventory of greenhouse effect gases. This is fundamental for us to measure to begin working on this and to be more efficient as the years go by. In the social -- concerning social issues with our institute, we have a summary in the institute; we're closing the semester here. In the institute, our projects are annual projects. So we have this highlight, the institute led by Ana Paula and her team, Tanya and Carla. We help more than 18,000 people. Reminding you that there is a focus on education: education, building schools, preparing teachers in the regions where we are working. In governance, not only due to new regulations from the SEC, in Brazil, the CVM. We had the approval of transactions with related parties. This also is very good for the investors. Also we have an audit committee now and the maintenance of the tax committee. On the same page, what do we have? We have the metrics. We hired an outside company that does this -- does these reports on materiality. Eight points are analyzed in this metrics. Eight points beginning with health and in the workplace develop -- people development also greenhouse effect gases, climate changes, compliance, management of water resources, relationship with communities. So what changed from the previous metrics to the current metrics? It included the SaaS methodology. So a new balance, some factors were included in the metrics. One thing that is new innovation and technology productivity we already had. Now it is more important greenhouse effect gases relationship with communities in biodiversity. So what do we do with this? We bring this inside the company and we work with a company's management and also civil society. We work on an action plan. We work on an action plan, and then we will have new surveys and make the necessary changes. Well, here it's important to say that we're preparing the company more and more. We will show the growth, but the company this year is investing more than R$85 million. And here we separated some Groups. I'd like to highlight when we talk about technology, we had projects in connectivity and important projects for monitoring and mapping in a just in time way. Also in technology, bio inputs in infrastructure, we are building -- we are now an important producer of soybean. We had a very small production of seeds for our units. We were a small producer of seeds. We're expanding this. We want to be able to supply seeds that are our own seeds certifying this. Initially, we want to have a production unit for seeds for our needs. And this one has to do with the following. When we talked about irrigation, this is in a unit where we have an irrigation project that allows us to improve the production of seeds. Some that we have some seeds that we use are difficult to replicate. So we're checking all the units where we have irrigation to produce seeds. I'd like to call your attention. The company is beginning to have a more integrated vision, looking at where we can be more efficient within the chain and where we have value we're analyzing and working on this. The company also most of these R$85 million in investments are being invested in transformation during the semester, we increased land. We acquired Panamby farm in a partnership also Regalito, we acquired in Mato Grosso, Panamby and Fazenda Regalito and São Félix do Xingu and São Domingos farm new region in the West of Mato Grosso. So these are 15,000 hectares that are now in operation that we transformed. And we'd like to remind you, all these units will plant the second crop. So 15,000 hectares is a physical area. A little over 15,000, almost 16,000, 17,000 hectares are being transformed. Well, I believe that here we have a highlight in spite of being a company that sells acids. When we look at the graph on the left, we went from 134,000 hectares to 170,000 hectares in the last five years. So this is a highlight the company had the capacity to add a little more than 22,000 useful hectares. When we add the growth of area even with sale, we saw the company's capacity to always increase its capacity to generate value to investors. And in the pie charts we have here on the right, the breakdown of crops, the company is more and more diversified now due to volatility in prices in commodities. The graph on the right shows areas that that are ours, areas that are leased to third parties. So our objective, I already mentioned this many times, leasing must mitigate volatility. Our own land reduces the need for captive. So it's a win-win situation. Well, here everyone's interested to see what happened with sugarcane and the harvest. The harvest, a 100% of the planting is over. We finished planting within the windows that we call ideal planting windows in Brazil and in Paraguay. We began the harvest. We began the harvest for soybean, especially in Mato Grosso, a little in Xingu. We have been harvesting since January 11 with very good productivity in a certain way. The company is not different from Brazil in the last few months -- in the last five weeks, all the production units are working and we saw this in many regions in soybean has been spectacular. So we have a problem in the South. We don't have production units in the South where there are problems. And as I always say, there we still have some work to do, but we can see that the harvest will be very good within the company. Rainfall has been good. We have seen rain that was present in the central part of Brazil and also in the North. And we see La Nina losing strength. The ideal world for farmers for those who don't know is to plant with La Nina and harvest during El Nino. So La Nina anticipates rain and El Nino does the opposite. So we're -- we have a more neutral situation, which will certainly make the rainfall continue and this will affect productivity in the second crop and will also help a lot in sugarcane. Next, please. Well, here we begin to see some more color. Fundamentally, let me see if I can use the mouse. Beginning with tons produced, we have a drop. We had foreseen in our release, we had foreseen this drop and we had an impact, especially you who follow us. Some of you follow this sugarcane crops. We had a drop in the center in South and also in Maringá. Maringá in the North, maybe rainfall, and also a fire that we had during the harvest. When you have a fire, you don't lose sugarcane, but you have to anticipate the burned sugarcane. You anticipate maybe a sugarcane that was going to grow during 12 months. You have to anticipate, for example, and you have to harvest cane with eight months. This has an important impact in productivity and also an important impact in the sugar content ATR. The great highlight later on we will say more. What I'd like to highlight in this slide, in this drop in productivity later on we'll have a vision looking at each year, and I say 2021 for every farmer was a spectacular year. We had a combination of productivity in the case of sugarcane and also high prices, a very positive price for the sugarcane sector. When we look at the harvest drop here, well, from 132 to 124. But when we look at every, at six months, we see a drop of from 145 to 140. So this is the impact. Later on we will explain in detail. But first, we're in the -- we have six months already. As we said, two-thirds of the harvest was already harvested and we have the sale of the previous harvest. When we look at six months, 2023, we have a profit of R$29 million and it's important to tell you about expectation the company had concerning this number. When we compare with the same period last year, we see a large difference. But in terms of inventory, we had soybean 35,000 tons, 620,000 tons of corn. This inventory was sold at the soybean with the same price, very similar prices to the previous year. In the case of corn, a little higher than we had reported in the previous year. And we saw a contribution margin that was a little lower due to the increase in the prices of fertilizer, especially in the second crop. And we understood this expectation for a better sale, when you would represent R$90 million. And in fact, we were able to carry out our plan. When we compare this with the previous year, we add 50,000 tons extra more in soybean. We have to remember that the costs that we had R$3,600 per hectare prices, the price of soybean bags went to R$160. We had a result of R$90 million more in the six months of the previous year. So there's a difference between what we estimated and the operational EBITDA. We had a difference in sugarcane. In sugarcane, Andre said we had already foreseen 100,000 tons less in production. This had an impact of R$50 million when we compared with the same harvest previous year. We knew R$25 million actually, R$15 million was the cost. And we had a higher price in diesel oil from R $4.80 to R$6.60. And the impact on each ton that is harvested two to three liters. So it's -- this is a very relevant cost and we had calculated R$50 million. Also the price and the effect in September, October, November, which had a strong impact on the semester's results, especially the last semester. So when we look at the revenue R$455 million, when we compare this with the previous year, and here we have R$80 million in volume and the difference comes from sugarcane, the less volume. We know we have a combination of the sale of real estate last year. In the six months, we had recorded part of the sale of a farm. We have another part that will be recorded in the next year. And we had the sale of part of a farm in Rio do Meio worth R$316,000. So we hope to continue this. When we look at the adjusted EBITDA, we see everything that we expected due to the impact of price and lower volume, which was estimated and we will explain in detail, but I'd like to say once again, and I've said this constantly, we're going back to historical margins, very attractive. Last year, we had a margin of R$10,000 per hectare. Now we're working with R$4.25. So it's important to have this vision. When you look at every six months, you see the impact. When you have a drop in price that happened last year, we -- so we had -- you have these -- this effect and this is the impact that we will analyze in detail. Well, everyone knows about this. This is the data for cattle. As I always say this, it's -- we use cattle raising while we transform the land. And it's a transition phase. So we have here the number of heads of cattle. We have been maintaining. Some of this area will be transformed in the next few years to arable land. And we have GMD. Here as you can see, I'd like to see that the highest GMD is in December, January, February, and March. So when we look at the semester, the semester includes one month of GMD. This is average daily gain in weight during the semester, the other semester it's a little lower. Here too we had late rainfall in Paraguay. So in Paraguay, we had a lower GMD in December and January. Today everything is back to normal. Rainfall has gone back to normal. So this is a picture of the semester. Well, talking about how the company is positioning itself. Let's look at 2022, 2023. The company has 65% -- 68% of the soybean sold at a price of R$14.62. I'd like to remind you, we began to sell products with soybean at R$12.13, R$13.20, R$13.70. So today we have an exchange rate, as I mentioned around R$5.52. So our exchange rate R$5.52, the other crops we're making progress less in corn. Most of this corn is second crop. In Mato Grosso cotton, the opposite cotton is a crop that you sell more rapidly and you have interesting operations in the beginning. We have sold more than 60% of cotton at the price of R$0.87, R$0.88 per pound. And here we sold at a time of volatility in with the exchange rate and the months before the elections in Brazil. We sold at R$5.70 per dollar. Unfortunately, Brazil is not a recurring model for sugarcane, but we're hedging part of the production, especially in Maringá entering the harvest, we did hedging of 34% and the initial graph today, ethanol is being sold for 2,600 per cubic meters and this is the price we used. Well, the next slide. Now I'd like to pass the floor to Gustavo, our CFO, and he will talk about the numbers. Let's begin first on lower volume, which was estimated and especially due to the fire. So in the end, this had an effect of R$360 million. So in the adjusted amount, we see a combination of two activities. The sale of farms and operations, R$124 million, last year R$600 million. The difference is R$250 million due to the sale of farms. And the other difference, R$180 million is due to the price of sugarcane and R$50 million, the higher costs, especially in sugarcane. On the next page, we prepared, these are the three main activities. This is some detail about what I mentioned. We knew that this year we would have 35,000 tons of soybean last year, 83,000 tons. Last year, we had an EBITDA to recognize during this semester, this year we anticipated the sale of soybean. The prices that we sold for were very similar. The cost when we look at Reais per ton, the cost was higher and the margin began to be adjusted at 30%. Last year, we had an extraordinary year, 50% margin for grains, and 65% margin for sugarcane. But when we compare with the last year, especially when we look at the cost, chemicals, fertilizers, and diesel oil, as I mentioned for sugarcane, this affected the contribution margin. When we look at corn in the middle 114,000 tons, and we sold almost all the inventory. The prices were a little higher, 7% higher, but the cost also went up. So here we have the price of fertilizer, and this is generated a lower contribution margin per ton, 30% margin. Sugarcane on the right, we're looking at the semester, we see that the price of sugarcane began very high, and then prices began to drop with floor in September, then going up in October, November. But during the 12 months, we saw that the price is still high. Prices are still high. We have a big -- large difference in this semester. Last year, R$200 per ton, and I remember that 60% of our production, we have a contract with a premium of 20% and this leveraged even more this price showed during the -- in the -- in these six months, we see the price per ton and also the ATR, which Andre showed and so the margin, when we look at the full harvest, the margin is 30%, 35%. But we highlight last year when we had R$230 million, we had a margin that we had never seen before. And when we look at R$118 million in the same amount of land, we see that there is a margin of R$4,500, R$5,000 per hectare still above if we consider that EBITDA R$8,000 extra because of depreciation. But if we consider this, we see that margins are still high. Here we made all the adjustments eliminating all biological aspects, and we see sugarcane represents between 35%, 40% grains a little more. Here as I said, in the next six months, we will have the total harvest for soybean 150,000 tons of corn and all this will be in the result and will be represented in a bit. On the next slide, we will see debt. We said that we have a company, we have -- we are not very leveraged when we look at receivables. So we don't have high leverage R$550 million without considering Alto Taquari farm, which we will deliver. The farm we will transfer because it was sold and we will be receiving the payment next year. So here this is our debt R$560 million. In the last quarter’s we took out a loan with an interest rate of 10.5%. This allows us to continue to have a debt that is low; the interest rate is lower than the CDI rate. And we're working with a debt that is a little longer. We did this to buy some inputs, especially for the next harvest. And we have a cash R$300 million in cash in adjusted EBITDA, a net debt -- net adjusted debt is very low. So in terms of debt, the company is very healthy. And now the evolution of our shares, share price. Here as always, we believe we have a great opportunity to have a higher price for our shares. We have prompt -- we know that this was foreseen as we mentioned due to the price of commodities, especially sugarcane, we don't control the prices. We are always doing our best to guarantee the productivity, but still we understand that the company has a great potential selling farms, having good harvests and especially the company will also continue to transform cattle raising land into farmland. And we understand that there are excellent opportunities for investments. Thank you, Gustavo. Good afternoon, Andre, Gustavo. Two questions. The first involving the results from the sugarcane operation. You talked a lot about the price of sugarcane, the ATR ethanol. Yes, you gave us good information on Slide 13 -- Slide 12 or 13 about the gross results. But when we look at the results in the quarter -- when we look at the quarter, what really hurt more than price was the cost during the quarter with the strong drop in productivity and relevance increase in the price unit price. So does this make sense? The cost was much higher than the average cost of the semester as you show, but more than this, I'd like to understand. First of all, do you believe that the cost per hectare that you projected for this harvest 2022, 2023 of 10,300, does this still make sense in spite of the result of this semester? And, how much do you believe there will be a drop in the price of cost when we believe productivity will increase in your region next year? So I'd like to know about this. And the second question. Andre, in one of his comments to the press yesterday night, Andre was very optimistic in relation to the sale of land. So if you could give us more details where you see opportunities to sell farmland. I believe that there are more opportunities to sell land than to buy land. Thank you, Thiago. Very good questions. Gustavo, would you like to begin with the cost allocation and the impact due to the drop? Then I can talk about the cost in the future and sale of land. Thank you, Thiago. In fact, yes. If we look on Slide 13, we will see that we have R$50 million in higher costs. Higher costs equivalent to R$50 million in Reais this represents 45%. This is what we estimated in price increase, the price of diesel oil, the impact of fertilizer prices. What you said is true. What happened in the last quarter, the area that suffered the fire that was burned? We prepared strategies to avoid having impact in the next harvest. So we bought some inputs. We began to use some fertilizers. And when you look at the last quarter, yes, there is a great impact. Now we have to understand that we have a higher cost. When you have 200,000 tons less, the price per ton also goes up. So this increase is that's why it's this high. So in fact, for next year, we want to avoid this impact next year. We want to maintain our revenue and we understand that now we have to begin looking at costs. There's news about a drop in the price of diesel oil. This has a great impact. There will be a drop in diesel oil. So we have to revisit our costs. Thank you, Gustavo. Supplementing this issue of costs. Gustavo explained well. Thiago, we begin to see prices. Recently there was news about a lower price of diesel oil. This has a great impact. I was talking to investors and I made a calculation in the soybean harvest you use 12 liters per hectare diesel oil. In sugarcane, you spend 170 liters of diesel oil in the harvest. So there is a great difference. So when we look at our forecast, we saw an increase in the use of diesel oil -- in the price of diesel oil. So when we look at 2021 diesel oil used to cost R$3.80 and today it's twice R$6.80 per liter. So it's twice the price with this impact. Well, second question. When we talk about land, sale of land, purchase of land, there's an interesting thermometer. In the last few months, there has been a great interest in buying our assets. Brazilian agriculture is not separate from other things, but in a certain way farmers still have a good liquidity. We had a year; we're talking about margins of 28%, 32%. When we look at this, we cease -- I made a calculation this morning, when we look at the cost of production of a hectare of soybean last year, R$31, R$32, to produce a hectare. Today the price has dropped to R$28. And with this, I always say that what brings liquidity to the farmer is a good harvest even more than good prices. I always say the farmer tolerates greater fluctuations in price, but they don't tolerate fluctuations in performance. So we're looking at a very high harvest in the Midwest and in the state of Bahia, in Bahia, we should have a record harvest. So we -- there's a lot of liquidity and that we're going to capture this. This is for the sale of farmland. So we will probably have more sales in the next few months. We're looking at purchase too. We -- so you can expect that the company, everyone asked me, how much will you sell? And I say, look at the last five years, this is what we want. So it's important to say that during the last year, we made purchases in 2021. Now we had a small sale, but it becomes important in the last six months, it became important. Good morning, Andre, Gustavo, Ana. Thank you for the opportunity. First, a follow-up of Thiago's question. I'd like to confirm about sugarcane. In terms of production productivity, it makes sense to think of a recovery in the next harvest going back to 2100 which you had estimated for the harvest in 2022. Is that correct? And the second concerning what Andre mentioned in the beginning of the presentation, that the company was seeing new prices. So today, we have a good situation in performance. What can we expect in terms of hedging in the short-term hedging? Do you see an opportunity in a certain commodity or not? Thank you. Thank you, Pedro. Okay. I'm sure that we're recovering. Yes, there's a detail. It's difficult to see this impact, but when we had the Coronavirus, beginning of the pandemic, no one knew what would happen. And like every company, we also be disaffected the planting of sugarcane. And also we discussed this, this week. So in 2020, we preserved cash. Now we -- last year, we planted -- we are planting an important amount of sugarcane. Yes. We're expecting a recovery for this reason and also a recovery because we're in making important investments in irrigation. Irrigation for our plantations in Maringá, we're installing more piping, more irrigation equipment and sugarcane. Sugarcane grows with fertilizer, sun, and water. So we should have a good result. In the Midwest, sugarcane is doing very well. We expect a good recovery in Midwest, which is what is happening in the center in South, Brazil going from 540, going back to 740 million tons. Now in terms of performance, in the morning, we had a meeting and we discussed this point this morning. Yes. We're making progress with more hedge -- more hedging because we begin, we have -- we're very cautious until we get the first estimates. And today, we began to receive the estimates, the farms that will begin harvesting the next 15 days where estimates were already made. These estimates are favorable. So there is a trend to sell more especially soybean and still -- and with this price -- a good price in Chicago. So this is the recovery. Pedro, you say what opportunities are you seeing? We saw -- we have two things we're looking at and trying to capture. One we captured part of already, we saw recently you must also follow cotton. We saw a strengthening of the premiums for cotton. We always worked with more negative bases and now we're closing cotton in the next harvest with 500. Just to remind you, we were selling at 250. Now we see a recovery in basis points for the next harvest an important increase. And when we see a recovery in basis points, we can be more aggressive in the sale. In the case of soybean, there is a great concern in the market and maybe an opportunity, a super harvest that is arriving. But we have two factors that we're discussing. We have the farmers selling points is low, farm selling is low. Second, we have the main ports, especially in the South, that so there's a great opportunity, this can happen to strengthen the basis. Talking about this during harvest, it's difficult to believe I know, but there is a lack. There is a lack of soybean. China will buy soybean again from Brazil. So high prices in Chicago and strengthening of the basis where we see this on a regional basis. So in our cases, we're looking at each region, each farm, looking at logistics. So the strengthening of basis will not happen in the same way. For example, it will not go up everywhere. We believe there are some regions, some corridors that will have bottlenecks. While we have bottlenecks, there may be a drop in the premium. So we're monitoring the opportunities and when you ask me about new things, I would say basis of cotton and a lot of attention in the basis of soybean in the next few months. Thank you. Well we received; I will join here two questions from Vinicio [ph]. What are the perspectives for the next quarters concerning the recovery of historical profits? And if we can go back to historical profits in 2020 -- that we had in 2022. And also Claudio, question concerning the margins of the main products. We stressed that in the last two years, they were well above the historical averages. Can you talk about the historical averages and prices we can have in the medium-term? Well, Vinicio [ph] and Claudio let's begin with profit. Yes. Last year, as we said, we had a perfect combination. So we have a commitment. The company will continue to grow, increasing leasing, purchases, operations. Now the picture of last year in terms of sugarcane, when we talked about margin, we had a margin of R$10,000 per hectare. So in the next few years, being realistic, we can -- we believe that the margin per hectare for sugarcane will be R$5,000 or R$6,000. When we summarize margin and crop, we would have a soybean with the cost reductions I mentioned. We're talking about historical margins of soybean around R$30, R$40. This is what we see. Now, the different thing, what is challenging is the margin for corn. Corn has been a crop that in the second crop has been very profitable and Brazil is exporting a lot of corn. We have two challenges in corn. The increase in exports, and of course, there is a bottleneck in logistics. We're talking about Brazil with 130 million tons. In 2030, we will have 180,000 tons, so 180 million tons. We have two large drivers that have to grow, the exports, production and consumption of ethanol from corn -- ethanol made from corn. I see this with; there was a lot of optimism the ethanol used in the market and exports. Now corn was always had highs and lows. So depending on the domestic market, when we look at corn in the long-term until 2030, we will be important exporters and the local industry using corn will try to have a more regulated supply. So we have -- I wouldn't call it a recovery in the case of corn, we have different profit levels. In the case of cotton, it is leveraged due to the growth of income around the world. And cotton, even with the pandemic is -- has less growth. In the case of cotton, the way I see this, there is competition with synthetic fibers. I believe that oil at $80, $90 will make cotton advantages. It cannot compete with corn and soybean. When you look at the capital invested, cotton with a margin of 4,500, 5,000 per hectare. So when you look at the investments, it's 30%. When you look at soybean, you're also talking about R$4,000 with a lower investment. So I will tell you that to help you in your forecast, soybean 30%, 40%. Now corn, second crop six years ago had no margin, and now we have a margin of almost half, half, half of the margin of soybean. This year was even better. This year corn was similar -- very similar to soybean and cotton. Now, sugarcane, I'm optimistic in the medium and long-term with the carbon footprint. Ethanol we know is better. So when people buy fuel, they buy ethanol. It's a clean fuel and this is being seen all over the world. So the ethanol market is important. Another important point for sugarcane, another thing that is important that I see in sugar, we see important players, sugar producers using part of the production for ethanol, you have the mixture of 20%. Other countries are also using ethanol. We have an inventory of sugar. We have an inventory of sugar. The world has sugar for one month, so inventories are tight. Corn also inventory is tight around the world. We have a consumption of 1.170 billion and a consumption of 1.60 soybean too. I can see in the short-term, the same prices. I can see the same prices in the near-term; we have to look also at the exchange rate. All this has agreed influence, especially the exchange rate. So we're imagining that the exchange rate will be R$4.9 to R$5 per dollar. The million dollar question, Julia. That's difficult. Even with a crystal ball, I can't -- well, we have to look at the basis and then we see what we can expect. If you look at ethanol, we see Brazil growing production all the time. Brazil in ethanol, 27 billion liters of ethanol, Brazil with ethanol from corn 4.5 billion, ethanol from corn billion liters. We saw an important growth. When we look every year, the growth of almost a billion liters in one year growth. And we see also exports -- ethanol exports that are now higher and higher. This year we exported 2.5 billion liters of ethanol. So we're beginning to position ourselves as a country that exports ethanol. When I look at this, you can see a more regular price because you have domestic market that is very strong and an export market demanding Brazilian ethanol. In the case of sugarcane, when we look at India. India, the fluctuations we have in the regions sugar unfortunately without Brazil, it's produced in monsoon climate regions. They are very erratic. These other regions outside Brazil, one year, a lot of rainfall, another year without rainfall and sugarcane depends on this. So it's a product that is always with highs and lows. Now, but you also -- sugar is the cheapest energy in the world. When we look on a worldwide level, we see still regions with a lot of poverty. Sugar is very important in some countries for food. So when we look at all of this, we see ethanol becoming, growing and becoming interesting. We see sugar linked to climate fluctuations and a new driver. Some new countries producing ethanol. If we look at historical prices, I would expect historical prices higher than in the last 10 years for these two commodities. But we have annual fluctuations too. Many people thanking us and many -- we have some questions that were already answered. What the company is thinking about dividends, whether we will have an intermediate dividend. This is not in the radar and what we expect. That's the billion dollar question. The billion dollar question. If we expect higher share prices and will we buy back shares? That is another question whether we will buy back shares. Okay. Well, dividends, the company's policy, you have heard us when we have good results due to the sale of farms, and this has been happening. We're very aggressive in paying dividends. It's very fair to pay back the investors that trusted in us. And if we need money to make investments, we will also request this. So now we have seen that my guess, one to five. When we have good projects, we will be less aggressive in paying dividends. When we have less good projects even with projects, in the last year, the company did the following. The company sold, lease, and buy last year. This is what we did. We sold, we leased and we bought. So when you have a portfolio becoming mature and then you be -- you sell more. And we know that most of our gains, most of our profit comes from the sale of land. In the next few years, we will see this. Now in buying back shares, we discussed this a lot last year. We will never make a decision that everyone will be having. Some shareholders wanted dividends; others wanted us to buy back shares. So in this scenario, the best we can do is giving the money back to shareholders. And if they want to buy, they can buy shares. The company has a good liquidity. In the past, you said either I pay dividends; people want dividends to buy more shares. So it made sense to buy back shares. Today, our company has a much better liquidity after the follow-on R$20 million. So this changed a lot. So today, if I use the investors' hat, if I -- if there's liquidity and if I want to reinvest, I can buy. So shareholders now has -- have more options than in the past when we didn't have liquidity. So we -- there's nothing in the radar concerning buy back -- buying back of shares. But this can change if we believe the prices are discounted, we might decide to buy back shares. If we believe that we don't have good land to buy and that we will and if we have resources left over after paying dividends, we could in the future buy back shares. But we don't have that in the radar. Yes. I always say there's a great challenge. So our team is always looking at this. When we began, we had NAV 1.6, 1.3. Today, an NAV, which is much higher when we look at the company, the shares -- the price of shares should be R$40, our shares had to be worth R$40. So when we look at the NAV in the past we're always increasing the company's NAV. So I always say that we're looking at this, we increase NAV and we close gap. But this is good. The company's always growing. So it's a good investment. It's an investment that has brought an excellent profitability for investors and will continue this way. When we paid 16% dividend yield, 16% plus the appreciation of the land, it was a spectacular profitability. The company pays dividends and is always growing. We're increasing the NAV. We're increasing the operation. We're generating more cash flow. So I have no doubt that there things should improve much more. Andre, just supplementing your words. So in the last five, six years, we paid R$1 billion in dividends and the company is strong, R$280 million in cumulative results and we mentioned that we still -- we sold farms and we will receive the payment. Now, in terms of the price of shares, what we have seen, many people look at the company, looking at cash flow. And although, we have been buying and selling farms every year, but I believe that we have a challenge to increase the planted area and generate more cash. Recently, we leased farms. There is one that was acquired and has a potential for a crop in a second crop. Its pasture land. We're transforming into arable land. And with this, we believe that with the cash -- with this, we would have more cash flow. This is what we want. This is what we're after on a permanent basis, growth -- a growth of 10%, 12% a year in planted area. Well, we're running a little late, but we have some questions from Gabrielle, which is important. Let's see. First question, the last quarter apart from sugarcane, we had a drop due to the sale of soybean. What is the sale strategy this semester and why did we have less revenue and volume? The increase in short-term debt and would you extend the maturity of this debt? And whether it's time to sell and also the cost of freight? Is it going down or is the price of freight still very high? No, we could talk about this for another two hours. Okay. Let's talk about the revenue. Freight, we're not seeing lower prices in freight. We see signs in the -- of dropping the price of diesel oil, harvest is arriving. Where prices are not going up, but we don't see the price of freight going down. In terms of debt, the company is -- we have cultivated areas 170,000 hectares and this needs a lot of working capital. And since we have been working with some banks for a long time, yes, you saw growth in debt. But as Gustavo said, it's a short-term debt. But with a price that is lower than the CDI interest index. It's a loan for working capital. The company is growing a lot. Five years ago, we had a working capital of R$200 million. Today, we have a working capital of R$700 million every year. So we have a growth in area and also we had to grow the working capital. Third point, the profitability is, we make decisions to sell when we believe that the price of an asset is going down not due to operations, not due to commodity prices, but because of higher prices of assets, we know it's time to sell the farmland. This is the logic. Now concerning the strategy of selling grain, every year you have a different situation. So we explained the fluctuation in quarters. Some years we see a certain curve. What I can tell you is the strategy in the near and medium-term has new factors for decision making. So two, three years ago, with an interest rate of 2%, 3%, 4%, 5%, you would say, I can wait more or less. The way we see it today, you have to be very efficient because you can wait to sell soybean in April, May or in September, but you will have a cost of one point something a month. So the sales strategy is always to have this the best profitability. So we see the price and the cost of capital in the period. If we believe it makes sense to hold the grains we hold. In some regions, you have to hold the sales due to logistics. I'll give you an example. In Xingu, we have a problem for soybean. The whole region has because of the roads in Pio XII, the opposite; it's easy to export from the Itaqui port. And so the sales strategy to hold back or to sell is cost of capital. And these points that I mentioned. Well, Andre. Andre, you answered the question, but what we do, we have a capacity for 40%, 50% of we can hold back 40% to 50% for the next semester. As Andre said, we had logistics problem and trading companies were paying premiums. So since the premiums were highly anticipated, the sale of this inventory in the last semester of last year. So this decision, Andre mentioned premium cost of freight with a cost of 3% we couldn't hold. So we look at logistics, inventory to sell 40%, 50% of the harvest. Every year, we make decisions based on these points. Well, I believe this is it. If we have more questions, please get in touch with us in our Investor Relations department. I will be available to answer any other questions you may have. We're running a little late and someone said, we might, we will -- we could spend all afternoon, but unfortunately we have to close the meeting. Thank you very much, Andre, Gustavo, for your time. We had a very good participation and I hope we clarified all the points. And now I'd like to pass the floor to Andre for his final comments. Thank you. Well, once again, thank you for trusting for your trust. I would say that once again, since we have a good participation, many participants, we've said this in the media and even in the other calls; I'd like to reinforce one point, the company's ability to work with people. We were recognized with the award Great Place To Work, one of the five best companies to work in agro business. And I repeat this recognition shows the sustainability of the business. It's not only myself, Andre and Ana Paula. We had such a good award because we have a team that is engaged, that is focused. So once again, I'd like to thank the investors for the trust in our team. This work will continue working with people, revisiting our strategy, looking at everything and making the company grow.

EarningCall_282

Good day, and thank you for standing by. Welcome to the PrairieSky Royalty Limited announces their Fourth Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Andrew Phillips, President and CEO. Please go ahead. Thank you, Latonia. And good morning everyone and thank you for dialing in to the PrairieSky Royalty Q4 and year end 2022 conference call. On the call from PrairieSky are Cam Proctor, COO; Pam Kazeil, CFO; and myself, Andrew Phillips. There’s certain forward-looking information in my commentary today, so I would ask investors to review the forward-looking statements qualifier in our press release and MD&A. I'll provide an operational update and then hand the call to Pam to walk through the financial results. 2022 was strong across the entire Western Canadian Sedimentary Basin. PrairieSky saw 850 wells spot on its royalty lands throughout the year. This allowed our company to achieve double digit organic growth over the year, well ahead of any Canadian or US peer. The benefit of undeveloped land is clear in a strong capital cycle. The major investments in CIPO all in downturns include Canadian Natural Resources' fee mineral title in 2015, Cenovus' royalty lands from Heritage in 2021 and our large Clearwater land base beginning in 2016. The fee mineral title lands acquired represent Canada's largest land position in the heavy oil fairway. A land position that is irreapplicable. These were acquired prior to the multilateral drilling techniques being exported from the Clearwater to other areas of the basin in a meaningful way. Our company's WCS exposure is now significant and represents 50% of current oil volumes and is our fastest growing commodity. This is in advance of the Trans Mountain mine fill in the back half of 2023 or early 2024. This new export pipeline to the West Coast to access Asian markets represents 590,000 barrels of new capacity. Structurally lower WCS differentials should result over the medium to long term. In the fourth quarter, we entered into 64 new leases with 53 different producers, which contributed to a record year in 2022 as far as the number of leasing transactions and a record number of counterparties, many of whom are newly capitalized teams with new play ideas exclusively on PrairieSky lands. Strong leasing momentum continues into 2023. Currently in the basin 250 rigs are active versus 225 one year ago. Numerous new startup companies have been recently capitalized leading to incremental activity in the basin. Clearwater production exited the year at approximately 1,600 barrels per day, significant new discoveries and step outs made last winter in the play will see first development activity in 2022, which should lead to new growth in the play. In addition, secondary recovery in the more mature areas of Nipisi and Marten Hills are showing promising early response. PrairieSky is in a unique position in this play as the majority of our 1.3 million acres in the play are undeveloped. This will provide a decade or more of organic growth for our shareholders without incremental capital. PrairieSky continues to receive some of the strongest ESG ratings in all sectors of the North American economy, including top 1% as ranked by Sustainalytics. PrairieSky will have its biannual Investor Day in Toronto on May 17th at 9:00 am at the Royal York Hotel. Concurrent with the presentation from management, we will publish our 2023 asset handbook, detailing the book value of the current development locations that exist on PrairieSky lands directly offsetting known production. The focus of this Investor Day will be the Clearwater and the differentiation that PrairieSky has with its significant undeveloped land inventory. We will also provide a range of outcomes for the business over the medium to longer term. We hope our investors are available to attend either virtually or in person. Thank you, Andrew. Good morning, everyone. As Andrew mentioned, there’s certain forward looking information in the notes today, so I would remind investors to review the forward-looking statements qualifier in our press release and MD&A for Q4 and the year ended of December 31, 2022. PrairieSky had a very strong Q4, which closed down an exceptional year where we generated record annual oil royalty production, record annual royalty revenue and record annual funds from operations. Q4 2022 funds from operations totaled $119.5 million or $0.50 per share, bringing annual funds from operations to $507.6 million or $2.12 per share diluted. Strong funds from operations were a result of increased royalty production volumes from organic growth as well as acquisition volumes from 2021. Annual production averaged 25,914 BOE a day in Q4 and generated royalty production revenue of $144.8 million. Annual production averaged 25,206 BOE per day and combined with strong commodity pricing to generate annual royalty production revenue of $615.7 million. PrairieSky’s oil royalty production grew to 12,166 barrels per day, a 22% increase over Q4 2021, excluding acquisition volumes, and 7% over Q3 2022. Annual oil royalty production totaled 11,739 barrels per day, 56% above 2021 and representing 22% organic growth. Growth in volumes and strong benchmark pricing combined to generate oil royalty revenue of $98.9 million for the quarter. We were very encouraged by the organic growth from third party drilling already seen in our oil royalty volumes, and by the continued leasing of our lands. At current commodity pricing, we anticipate another active year of third party drilling across our royalty properties in 2023. Natural gas royalty volume average 66.4 million a day, 11% over Q4 2021 and in line with Q3. Higher royalty production volumes and strong benchmark pricing generated natural gas royalty revenue of $32.4 million, 46% ahead of Q4 2021 and 34% over Q3 2022. Natural gas royalty volumes averaged 64.7 million a day for the year, 9% ahead of 2021. Natural gas royalty revenue totaled $116.3 million for the year, an 81% increase over 2021. NGL royalty volume averaged 2,681 barrels per day in line with Q3 2022 and up 32% over Q4 when volumes were negatively impacted by ethane curtailments. Due to strong benchmark pricing, PrairieSky generated NGL royalty revenue of $13.5 million, an increase of 5% over Q3 and 26% over Q4 2021. NGL royalty production volumes averaged 2,684 barrels per day for the year, 10% above 2021 and generated $58.6 million of NGL royalty revenue. There were 248 wells spuds in our lands in Q4, which were 85% oil. This is up from Q4 2021 when 194 wells were spud. The Mannville was the most active play with 48 heavy and light oil wells spud followed by the Viking with 46 wells spud and the Clearwater with 43 wells. An additional 73 wells were spud across the basin in the Mississippi, Cardium, Bakken and a number of other oil plays. There were also 38 natural gas wells spud in the quarter, including 20 shallow gas wells, seven Montney wells and 4 Mannville wells. And active Q4 brought total spuds for the year to 850 wells as compared to 548 wells in 2021. PrairieSky estimates that $1.5 billion of gross capital and $84 million of net capital was spent on PrairieSky's royalty lands in 2022. Net capital increased 127% year-over-year, which led to PrairieSky's strong production growth. Looking forward, PrairieSky's 2023 annual pricing sensitivities, which are all net of taxes, are as follows: A $5 dollars per barrel change in US dollar WTI would increase or decrease funds from operations approximately $21.5 million; a $0.25 per Mcf change in April would increase or decrease funds from operations approximately $4.5 million; and a $0.01 change in the US to the Canadian dollar FX rate would increase or decrease funds from operations approximately $4.5 million. Other revenue totaled $5.8 million in the quarter and included $2.1 million in lease rental, $700,000 of other income and $3 million of bonus consideration for entering into 64 new leases with 53 different counterparties. This brings annual other revenues to $27.6 million. In 2022, we entered a record 228 new leasing arrangements with 119 different counterparties, up from 139 leases with 85 different counterparties in 2021. This is an increase of 34 new counterparties year-over-year. New leasing is typically a precursor to increased sales activity and is another reason we anticipate drilling on our lands to remain strong in 2023. PrairieSky is forecasting other revenue in the range of $25 million to $30 million in 2023, including lease rental bonus consideration and other revenue. Compliance cost recoveries will be incremental to this amount and included in royalty revenue. Cash administrative expenses totaled $5.1 million or $2.14 per BOE in the quarter. This brings annual cash administrative expense to $25.5 million or $2.77 per BOE. We expect 2023 cash administrative expense to be around $30 million due to strong stock performance positively impacting share based compensation. Current income tax expense totaled $20.2 million in Q4 and this brings 2022 current tax to $85.6 million. Entering into 2023, PrairieSky has $1.55 billion tax pools offset future taxable income, mostly deductible at 10% per year. For 2023, that means first $155 million of pretax cash flow is tax free with incremental cash flow taxed at 23.5%. During the quarter, PrairieSky's funds from operations totaled $119.5 million and we declared dividends of $57.3 million or $0.24 per share with the resulting payout ratio of 48%. Annually, PrairieSky generated $507.6 million of funds from operations, which were used to pay dividends of $143.3 million with remaining cash flow primarily used to reduce PrairieSky's bank debt. PrairieSky's net debt at December 31, 2022 totaled $315.1 million, a decrease of 50% from December 31, 2021 when net debt totaled $635 million. Once again, in 2023, PrairieSky will receive the full pricing reduction related to our sustainable credit facility as we further improved our Sustainalytics ESG rating and are now ranked number 51 in Sustainalytics’s Global Universe of over 15,000 companies. Since IPO PrairieSky has generated approximately $2.2 billion in funds from operations and returned $1.6 billion to shareholders through dividends and buybacks. This conference call, I can't remember the last time you guys were talking about how many lease agreements that are going on in your lands here. Can you walk through what these new lease agreements look like this time versus maybe how they deferred from a couple years ago, are there more well licenses with the agreements, more commitments, higher royalty rates, the type of plays that these new lease agreements are chasing? And then just my second question here, would you mind just reminding us what are the two fastest growing plays on your lands and just kind of your expectations of where those may go here? The leasing arrangements is an interesting year last year, because we were leasing everywhere from Manitoba all the way to Northwestern Alberta, so extremely active across the entire basin for all commodity types throughout 2022. I guess there was a certain focus on the kind of new multilateral opportunities within the Mannville stack in the heavy oil regions, and that's where we saw a number of new discoveries in a number of different zones, including the Waseca, the Sparky, the upper and lower Cumming. So pretty interesting new developments there. And in terms of the fastest growing plays with WCS exposure, the Mamnville stack is obviously one of them, the Clearwater at 1,600 barrels a day, growing somewhere in the range of 50% this year, again, is another very important one. And even the Viking last year actually grew from 2,000 to start the year and ended at 2,400 barrels per day of net oil production. So a 20% increase in that play where we have 9,000 drilling locations. So we've got kind of a 20 year inventory of development locations. I think the focus there was WCS did have a bit of a blowout in the back half of the year, but light oil ended up still trading over $100. So the payouts were very quick in those plays. So we did see some growth in the Viking. This is more of an, I think, modeling question, but I don't know the answer, so I figured I'd ask. What portion of that $1.5 billion of gross industry spending that landed on your royalty lands would've been gas, like specifically gas targeted versus oil targeted? So 20% of the capital spend was actually on the gas side, Aaron, and it was actually the highest number we've seen in about five years. I think back in 2014, it was almost 50% was spent on natural gas lands but 20% was a high number for us. And maybe a question for Pam. You talked about cash flow sensitivities and maybe I missed it. But what would be your cash flow sensitivity be to Western Canadian [indiscernible]? Yes, that's the -- that's G&A. And then probably the bigger, like a narrowing in WCS, the bigger impact it has is on leasing and then of course growth in that part of the basin, because I think, it has a pretty strong effect on producer economics. So I think a narrowing of the differentials should see the growth rates increase pretty substantially for us on those plays. I think you just mentioned kind of in the upcoming Investor Day kind of highlighting and talking about medium sort of long term opportunities in the land base. I'm just wondering if you could sort of touch on those at this time, and what you do kind of see as future potential opportunities over the medium and long term? So one of the things we highlight at Investor Day is we have our kind of proven reserves, which would be the 40,000 plus wellbores just being blown down, and that's a couple billion dollar value. We don't book any proven undeveloped locations, so the development locations directly offsetting those wells that are proven. And so what we do with the asset handbook is try and give investors a feel for what book value looks like in today's commodity environment with today's technology, no new discoveries, no new technological advancements, et cetera, and it's still well above our current share price. So we are just kind of -- it’s almost highlighted the intrinsic value of the business or the book value of the business. In addition to that, we will provide some outcomes for investors over the next five, 10 and 15 years for the business in terms of potential returns in a variety of different capital spend and pricing environment. But I think each Investor Day as highlights and a kind of a focus play, and I think the Clearwater will be the focus of the upcoming Investor Day. And I would suggest that in two years’ time, when we have our next Investor Day, it'll probably be on secondary recovery and water floods, polymer floods, et cetera because that's starting to become a big theme across a lot of our oil acreage on our more mature pools is a lot of activity on that front to lengthen the duration of those assets. I was wondering if you could comment on capital allocation going forward and your thoughts on buybacks versus dividends and in general, the balance sheet, how much of debt you're comfortable holding if any? And given where the stock is trading, things seem pretty cheap. So just curious how you think about overall balance sheet and what your plans are for the cash on a kind of rolling forward basis? So on capital allocation, we obviously got the dividend, which is about $229 million commitment. Cash flow is significantly higher. We, over the next year , want to take debt levels down to very low levels. Ultimately, we want zero debt on the balance sheet. But buybacks will start to become part of the capital allocation sometime in the next couple of years. I think we're a business that trades well below intrinsic value, because we get very little value for the 10 million acres of undeveloped land that currently doesn't generate cash flow, but there's been a number of discoveries on those lands that have kind of proven some of the potential on those undeveloped acreage pieces. So I think the buyback definitely is an important part of the return over the long term for our business. I think we had a buyback in place for a long time and we had net cash. We chipped away at it, did it very programmatically. And then, during COVID when things got dislocated, we bought back 10 million shares at $9.30 a share. So we always like to have the available liquidity when things get challenging for both acquisitions or potential buybacks, which we view like an acquisition as well. So hopefully, that answers your question. And then on the dividend, we expect rateable increases over the next decade, just kind of parallel to the [growth] and free cash flow for sure. I mean, my only comment would just be perhaps contemplate some allocation between debt reduction and share buybacks given you never know where the shares are going to trade in the future and they're certainly seem pretty cheap now and you guys having very healthy high margin business. So maybe you could operate with a little bit of debt and just keep chipping away at it. Just by 2 cents. Yes, I appreciate the comment. I know, it's interesting when we bought Heritage, we closed at December 31, 2021 and we were borrowing at 2.1%. We rolled over the BAs last week at 6.31% at over 200% -- 300% increase in cost of debt. So definitely a good time to be retiring the debt. And we have one of the lowest cost of borrowing in the entire business because of our 98% operating margins. So it's definitely something we want to get lower in the near term. Just thank you very much to all our shareholders for their support over the year. We're going to work very hard for you in 2023 to continue to lease land and grow the business. And thank you to all the staff who've been exceptionally busy over the last year and continue to be into this year. So have a great day, and take care.

EarningCall_283

Good day, and welcome to the Blue Bird Corporation Fiscal 2023 First Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask question. [Operator Instructions] Please note this event is being recorded. Thank you, and welcome to Blue Bird's Fiscal 2023 First Quarter Earnings Conference Call. The audio for our call is webcast live on blue-bird.com under the Investor Relations tab. You can access the supporting slides on our website by clicking on the presentations box on the IR landing page. Our comments today include forward-looking statements that are subject to risks that could cause actual results to be materially different. Those risks include, among others matters, we have noted on the following two slides and in our filings with the SEC. Blue Bird disclaims any obligation to update the information in this call. This afternoon, you will hear from Blue Bird's President and CEO, Matthew Stevenson; and CFO, Razvan Radulescu then we'll take some questions. Let's get started. Matt? Thank you, Mark, and good afternoon, everyone. It has been just two months, since our most recent earnings call, but Razvan and I are still very excited to update you on the progress of Blue Bird. As we discussed last time through the hard work of the Blue Bird team, we have positioned the organization for a significant success this year and a dramatic turnaround from the results we posted in fiscal year 2022. This quarter, we are pleased to report that the business continues on its upward trajectory. And as we will review during this call is even ahead of plan. On Slide 6, you can see some of the key takeaways for the quarter. Overall, industry demand continues to be robust and the backlog for Blue Bird school buses is incredibly strong. In this past quarter, we also built the last major tranche of legacy price buses in our backlog. As we have forecasted in previous earnings calls, this will drive a significant inflection in our financials. We define these legacy price units as those at price levels prior to October of 2021. We also continue to aggressively manage costs throughout the business, which you will see in Razvan's portion of the presentation. Through strong leadership tenacity and lean process improvements, we are seeing some of the best operational performance in the company in nearly two years. We also continue to be incredibly excited about the impact the Clean School Bus program will have on our business and we are starting to see orders for our leading electric and propane buses come through. The market demand is strong. The business is back on track to deliver and is beginning to fire on all cylinders. We are incredibly upbeat about what is in front of us. Now let's take a look at some of the highlights from the first quarter. The financial performance for fiscal year 2023 quarter one shows a number of bright spots. Our units sold were nearly 2,000 which drove a record first quarter revenue for Blue Bird, up over $100 million from fiscal year 2022. This was over an 800-unit increase from the same period last year. As a result, adjusted free cash flow for the quarter was up $54 million compared to the first quarter of fiscal year 2022. Overall, it is an incredibly solid first quarter for Blue Bird with the legacy priced units being the main thing holding us back on the EBITDA conversion which was negative $4 million. The great news is that those units are now largely behind us. On the right-hand side of the slide, you can see some of the ongoing highlights for the business. As I mentioned, demand continues to be strong with the industry having roughly eight months of backlog. Blue Bird is seeing that strong demand as well. Our backlog is incredibly robust with over 5,300 units worth over $675 million in revenue. Included in that backlog is $120 million a firm orders for electric buses and we are starting to receive orders from the EPA's Clean School Bus Program. In fact, we are already seeing some of the largest volume EV orders to date for customers in the states of Nevada, Kentucky, Tennessee and Utah through this program. Our sales for the quarter were 63% alternative power, demonstrating our continued leadership in the space. Part of that was our EV volume growth, up 130% year-over-year and we recently crested over 950 electric school buses on the road today including, Type A, C and D. As we have discussed in previous quarters, we have raised pricing considerably since July of 2021. The average selling price for our backlog is up 22% year-over-year. Part sales continue to be a bright spot for us also up 34% year-over-year. We recently completed a grassroots meeting with our dealers in Atlanta, where we laid out the vision for the company for the next three years. It was well attended by our dealers, whom we consider to be the best in the business. They are incredibly excited about what they saw and heard. Part of that meeting included a plant tour, where they saw some of the examples of a lean transformation in our operations. As you can see on Slide 8, these improvements in operations helped us hit some major performance milestones. In fact, we are seeing some of the best performance in nearly two years, in several critical areas. Missing parts are down dramatically, due to our efforts to improve material flow to the plant. Those have included, adjusting our warehousing strategy, resourcing numerous problematic suppliers, revising production constraints and making changes in leadership to increase the level of tenacity, to ensure we have all the necessary parts at production start. We also saw tremendous improvements in plant efficiency, over time and production hours per bus. This helped us achieve a number of first quarter records for Blue Bird including, first quarter revenue, volume and EV bookings. We also realized a record alternative powertrain mix and parts revenue for the first quarter. All these achievements are further proof, that the company continues to progress in the right direction. Slide 9, is a reminder of our key pillars around care, delight and deliver. Our focus areas within those pillars remain the same for fiscal year 2023 and include our people, lean transformation, expanding our total addressable market and scaling EV. I want to briefly touch on the progress of each of those since our last call. Regarding our teammates, we continue to update our facilities to enhance the working environment. In addition, we rolled out a large-scale wage increase for our hourly teammates to increase job satisfaction and help offset attrition. A new organizational structure of the plant is also in its final stages of implementation. It provides more resources for our frontline teammates by narrowing the span of control, and offering essential support functions by creating manufacturing cells or what we call quality leadership teams. Development of our commercial chassis offering continues to progress, while we stay focused on meeting the demand for our core school bus offerings. The work on our new EV centers is advancing nicely, and we expect it to be complete by the end of March. As we have mentioned in previous earnings calls, this will allow us to take EV production from four to 12 units per day by the end of June, with the ultimate goal of 20 units per day by the end of December. On the next slide, you can see some of the specific examples of initiatives rolled out across the plant focused on teamwork, safety, accountability, material placement and reducing waste. Pictured on the left, is an example of our quality leadership teams or QLTs. These teams work to deliver the best output at the lowest cost, and focus on immediate problem resolution, accountability, training and coaching. Each cell works as a team with defined roles and responsibilities around production, quality, materials and manufacturing engineering. Specific colored vest, identify the teammates by function. Every morning the QLTs have huddle meetings to review the prior day's performance. And we have also installed AI bots [ph] so they can track their progress throughout the day. One of the first areas in which we implemented these QLT, is nearly six months ago, was the chassis lines. We are now seeing dramatic improvements in these areas and in the quality of the product coming off the line. Through lean methodologies, we have also enhanced lab of areas of our plan to make them safer and more efficient. A few examples of this include our new air conditioning installation center and new detail center. Changes like this helped our final finish area pictured in the bottom right to increase output by over 30%. Slide 11 is a reminder of the EPA's Clean School Bus Rebate Program. This program allocates $5 billion over five years for clean and cleaner emission school buses. Approximately, 2,500 buses will be funded in this first year with an average rebate of $375,000 per electric bus. Customers have until the end of April to submit payment request forms to the EPA demonstrating, that new buses and eligible infrastructure have been ordered. We have already seen many buses come in from this program and we expect that to pick up as we near the deadline for customers to submit their information to the EPA. We are working closely with our dealers to secure orders for the customers for whom we collectively applied and secured funding for. We are also partnering with our dealers to aggressively market the merits of our industry-leading EV solution to the remaining customers, who make up the 1,200 buses that are not yet allocated to a specific OEM. Therefore, we expect the total impact of the first round of the program on Blue Bird to be at least $200 million of revenue, based on securing 500 to 700 additional EV orders. The long-term impact of this program will be well over $1 billion in revenue to our organization. The next round of the EPA's Clean School Bus Program is expected to start early in 2023 as a competitive grant program and we will be right there with our customers supporting their applications. I would now like to hand it over to Razvan to walk through our fiscal year '23 quarter one financial results in more detail, as well as our updated fiscal year '23 guidance. Thanks, Matt and good afternoon. It's my pleasure to share with you the financial highlights from Blue Bird's fiscal 2023 first quarter results. The quarter end is based on a close date of December 31, 2022, whereas the prior year was based on a close date of January 1, 2022. We will file the 10-Q today February 8 after the market closes. Our 10-Q includes additional material and disclosure regarding our business and financial performance. We encourage you to read the 10-Q and the important disclosures that it contains. The appendix attached to today's presentation includes reconciliations of differences between GAAP and non-GAAP measures mentioned on this call as well as important disclaimers. Slide 13 is a summary of the first quarter for fiscal '23. It was a very good operating quarter for Blue Bird, with somewhat reduced supply chain disruptions, but with a significant number of legacy priced low-margin units. We have exceeded the revenues and adjusted EBITDA midpoint of our quarterly guidance provided in the last earnings call. The team has done a fantastic job and generated 1,957 unit sales volume, a record Q1, which was 808 units or 70% higher than prior year. Consolidated net revenue of $236 million was also a record for Q1 and $107 million or over 80% higher than prior year, driven by higher units, improved mix of electric buses, and pricing actions that are starting to take hold. The adjusted free cash flow was $20 million positive, $54 million higher than the prior year first quarter. This outstanding performance was driven by the further reduction in inventory back to normal levels during the quarter and support our great liquidity position at the end of this quarter. Adjusted EBITDA for the quarter was negative $4 million, due to increased material costs and still a relatively large amount of lower-priced oil backlog units. The missing pricing accounted for approximately negative $10 million. So excluding this, we would have posted a positive adjusted EBITDA of approximately $6 million. Moving on to slide 14. As mentioned before by Matt, our backlog at the end of Q1 continues to be extremely strong at over 5,300 units with the vast majority of these units at much higher price levels compared to the fiscal '22 build unit. Breaking down the $236 million in revenues into our two business segments, the bus net revenue was $213 million, up by approximately $100 million versus prior year. Our average bus revenue per unit increased from $98,000 to $109,000 or about 10%, which was largely the result of pricing actions taken over the past 18 months, as well as the higher mix of electric buses. Parts revenue for the quarter was $22 million representing a growth of $6 million or 33% compared to the prior year. Over the past few quarters we have seen higher part sales, which is also a reflection of our improved supply chain in aftermarket. Gross margin for the quarter was 3.2% or 930 basis points lower than last year due to the old backlog fixed pricing and increased material costs. In fiscal 2023 Q1, adjusted net income was negative $10 million or $8 million lower than last year. Adjusted EBITDA of approximately negative $4 million was down compared with prior year by $8 million. Adjusted diluted earnings per share of negative $0.30 was down $0.23 from the prior year. Moving on to slide 15. We have all across the board positive developments year-over-year on the balance sheet. We ended the quarter roughly with $6 million in cash and reduced our debt by $16 million. The improvement in operating cash flow and adjusted free cash flow were primarily driven by trade working capital due to our operational improvements leading to inventory reductions. As a reminder at the end of November we entered into the sixth amendment to our credit facility extending the maturity date through December 31, 2024. The sixth amendment provides for revised covenants, modifications to the revolving credit facility and the new pricing grid. The amended covenants and the extended maturity of our loan provide Blue Bird with both flexibility and stability as our business continues to recover from the COVID-19 pandemic and associated global supply chain disruptions. On to slide 16. As a reminder together with our dealer partners, we also were able to increase partially the prices for backlog units beginning in the middle of last fiscal year and recovered about half of the missing pricing for each respective price level. However, during fiscal 2023 Q1, we still had approximately one-third of our production with very old units and some of the worse margins. We estimate this headwind to be 5% or approximately $10 million for fiscal 2023 Q1, but confirmed by our reported results today. Nevertheless starting with fiscal 2023 Q2 in January, we will have put the vast majority of the old backlog units behind us and have locked in pricing and backlog units at increasingly better margin. In fact our production schedule is almost full through the middle of fiscal 2023 Q4 with some production slots left open for EPA EV orders. While on some models Type D for example, we are sold out for the entire year. Currently, we are feeling the remaining slots open in fiscal 2023 Q4 for Type C and EV with very good margins. Slide 17 shows the work from fiscal 2022 Q1 adjusted EBITDA to the fiscal 2023 Q1 results. Starting on the left the $3.6 million the impact of the bus segment gross profit was negative $13.3 million mainly due to the large number of old legacy price buses from 2021. The impact of dismissing prices was negative $10 million. This was offset by favorable development in the parts segment gross profit of $4.6 million driven by higher sales and improved margins. Furthermore, we reduced our fixed cost by approximately $1 million compared to Q1 a year ago. The sum total of all of the above-mentioned developments drives our reported adjusted EBITDA result of negative $4.2 million. However, if you raise that fiscal year 2021 orders just to fiscal 2022 pricing level or 5% that would have generated approximately $10 million more as reflected on the chart. It is also worth noting, if we assume all bookings at current fiscal 2023 pricing at the 25% level plus an additional 10% in throughput, we would see an additional $15 million positive impact and this is how we are viewing the fourth fiscal quarter of this year. On slide 18 looking at fiscal year 2023 we want to share with you our updated forecast by quarter which serves the basis for our fiscal year 2023 total year guidance. As a reminder, we are taking a more transparent and conservative approach this year, but it will still be a somewhat uncertain year from a supply chain perspective that we are confident that we have course corrected all the other business levers that we could address. Looking forward at fiscal 2023 Q2 and Q3, we have higher prices taking hold higher revenues, more improvement from lower material costs, partially offset by increased labor costs due to inflation. Therefore, we forecast $245 million to $260 million in revenues and approximately $10 million in adjusted EBITDA for Q2, and $255 million to $270 million revenues and approximately $15 million of adjusted EBITDA for Q3, each with a margin of plus/minus $2 million. Finally in fiscal year 2023 Q4, with higher volume increased EV mix, best pricing and lower material costs, we expect to generate $265 million to $285 million in revenues, with adjusted EBITDA of approximately $20 million plus/minus $2 million. This represents a run rate of $80 million, or approximately 8% going out of the fiscal year 2023 and set us up for taking it to the next level in fiscal 2024 and beyond. Putting it all together for the total year, we expect revenues in excess of $1 billion and an increased adjusted EBITDA of approximately $43 million, with a range of $40 million to $46 million. Moving to slide 19. In summary, we are forecasting a significant improvement year-over-year in all aspects with revenues up more than 25% to over $1 billion, adjusted EBITDA in the range of $40 million to $46 million and positive free cash flow of $5 million to $11 million. On slide 20 we want to reiterate our outlook beyond 2023. Once the supply chain further normalizes, we expect to sell approximately 9,500 units including 1,500 unit EVs, and generate $100 million or 8% adjusted EBITDA on approximately $1.25 billion in revenues. This could be as early as fiscal year 2024, if the business environment is further stabilizing by then. Looking beyond that in the medium-term our EV growth and operational improvement can support volumes of 10,500 to 11,000 units including EVs in the range of 2,500 to 3,500 units generating revenues of $1.5 billion to $1.75 billion, with adjusted EBITDA of $150 million to $200 million or 10% to 11%. Our long-term target remains to drive profitable growth towards $2 billion in revenues comprising of 12,000 units, of which 5000 revs and generate EBITDA of approximately $250 million or 12%. We are incredibly excited about Blue Bird's future. All right. Thank you, Razvan. On to slide 22, as detailed in the fiscal year 2023 guidance that Razvan walked through we are now past the vast majority of the legacy price units that were holding back our financial performance. Plus, we are seeing the results of all the hard work around operations starting to flow through to the P&L. We are now plan on booking at least 8,250 units, a 20% increase over fiscal year 2022 and driving a top line of $1 billion, a 25% increase year-over-year. Parts sales will continue to be on plan, with line of sight to have leased $84 million of revenue up 10%. We now expect the EBITDA performance to be approximately $43 million, up nearly fourfold compared to fiscal year 2022. EV bookings continue to be on plan, and we expect those to double to over 500. There have been no significant changes in the ACT Retail Sales forecast for fiscal year 2023. It continues to be supply chain constrained across the industry and our targeted bookings will put us right where we want to be around that 30% market share. I cannot emphasize enough the exciting demand in front of us. Retail sales have been off from their average of 32,000 units per year for the past three years in a row and the national school bus fleet is aging. The market was first constrained by COVID and school closures and has been held up more recently by the supply chain. This aging fleet must be replaced, and we expect substantially robust years ahead of us to address this pent-up demand. ACT is forecasting a compound annual growth rate of 10% from our fiscal year 2023 to fiscal year 2027. Our business is back on track, and we look forward to the robust market ahead. There are so many exciting things in front of Blue Bird. Let's turn to slide 23, as a summary reminder as to the strong investment highlights around our company. First is the market demand for Blue Bird school buses. We are a great countercyclical play to many companies and industries being affected by the slowdown in consumer spend. Plus not only are the fundamentals of our industry is strong, it's just starting to heat up with a 10% compound annual growth rate expected over the next five years. Second, there is a commitment from the highest level of government to electrify this country's school bus fleet. Not only will this reduce greenhouse gases, it will help reduce particulates that are found and being contributor to childhood asthma. Electrifying school buses is a mission that makes sense to everyone. And Blue Bird will be a direct beneficiary of this as we have more electric school buses on the road today than anyone. We also have a proven reputation as a leader in alternative powered school buses for over a decade as evidenced by the 20,000 plus propane powered Blue Bird's on the road today. Our exclusive partnership with Ford and ROUSH offers us a distinct performance advantage no one else has with the propane. And on EV, our collaboration with Cummins offers something to other electric school bus manufacturer provides, a powertrain partner with over 100 years of experience and who knows the school bus industry inside and out. Razvan walked through our long-term forecast and as impressive as the outlook is, it does not even factor in our efforts to expand our total addressable market. The commercial strip chassis offering could add a few thousand units per year to the long-term forecast. We have discussed previously how we restructured the organization to be leaner. And with our lean transformation efforts, we are removing non-value-added processes and reducing standard production hours per bus. We are continuously looking for ways to take cost out and then at the same time increase quality. As we touched on today, we have now gotten through the last significant tranche of legacy price buses and are beginning to fire on all cylinders. All of these factors will provide us with 10% plus adjusted EBITDA margins in a mid-term normalized operating environment. As you saw in the guidance we provided for the second half of fiscal year 2023, we get back to approximately 7% adjusted to EBIT on supply constrained volume proving and that in a normalized operating environment double-digit adjusted EBITDA will be in our reach. As I mentioned at the beginning of this call, we continue to be extremely excited about the progress of Blue Bird. Our team has worked incredibly hard to get the business back on track and the results continue to show it. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mike Shlisky with D.A. Davidson. Please go ahead. Good afternoon and thank you for taking my questions. I wanted to maybe first ask a few about the outlook. Matt you had mentioned the 10% CAGR for the industry over the next five years. But if you look at the chart you put out there and its constant risky as well. The very big jump between 2023 and 2024, because if you know if there's any reason why there'd be a big jump there, are there any regulatory changes taking place or have a pull-forward or push back on revenue or anything else unusual that makes it such a strong growth rate from this current fiscal year to next fiscal year? Hey Mike, it's Matt Stevenson. Thanks for the question. Really my concern is around the pent-up demand. If you look at an industry that historically is around that 31,000, 32,000 and then in the more recent history around that 35,000 mark. There's just a lot of pent-up demand for school buses there. And the forecast is we've seen some improvements in the stability of the supply chain. And then by the time you get into 2024, the feeling is lot of this is going to get -- the case will be worked out and it will enable us to get higher production capacity as well as our competitors. Okay. That makes perfect sense. And then talking about your EV outlook as well. You had mentioned that you expect to get $1 billion plus out of the $5 million from the EPA program. And that sounds okay, but your overall share of the market is roughly 30%. You're talking about low 20s here in your comments. Is there anything out there from the competition or anything we should be thinking about as to why you might not get 30% or if not quite a bit higher than that when all is said and done on the EPA program? Yes, Mike, I think you're spot on. We're just being conservative in terms of how we're looking at it. But if you take our – like you said our historic market share and our leadership in the EV position that would forecast an opportunity to have more than that but we're just being conservative with our approach here. Okay. Maybe one last one for me on pricing. Can you just give us a little more color on some of the cadence of pricing going forward? Could it just kind of inch up through the rest of the year as backlog evolves and as EV mix grows? And do you think there's opportunity for further growth in pricing in 2024? Hi, Mike, this is Razvan. I'll take this question. So as you would see on Slide 16, you can observe that the makeup of our upcoming project itself based on the different price levels. We had already sold out almost all the way through the end of fiscal 2023. So those are pretty much locked in. We are now feeling the second half of fiscal 2023 Q4 with orders at the current price level which is the 25% price increase versus 18 months ago. So in terms of fiscal 2023 it's pretty much set and we are also getting good orders coming in at this price level. As far as fiscal 2024, it's a bit too early to predict how it's going to go and we will update you as we have more visibility into fiscal 2024 later. Hey. So I mean obviously, a really strong start to the year, I think above where you had kind of forecast last quarter. And it looks like maybe not as steep as your typical ramp and it's more of a general ramp throughout the year. So just curious, what do you attribute the first quarter strength to? I mean is it that you had a modest loosening of the supply chain? Obviously, there's pent-up demand, something around productivity of the plant because that was a pretty eye-opening number. So just curious if you could fill in some blanks there? Yes. Thanks for the question Eric. It's Matt. We talked about the operational improvements we've been working on for well over a year now. And month-over-month week-over-week the team continues to get better and we're really starting to see the realization of those efforts. And there has been some improvement in the stability of the supply chain which always helps. But it's just the hard work is starting to pay off. Got it. And then thinking about sort of the remainder of the year except in the second half of the fourth quarter, you're pretty much full. I mean is that limited more just by customer delivery schedule request? I mean because it seems that you actually could push harder on that. Now it sounds like you're also holding off on filling some slots so you can have them open when electric orders are placed here over the coming months but maybe some thoughts on the ramp? Yes. So I think you touched on it Eric, historically Blue Bird's would have a much bigger second half on volume than first half and it's more even fueled throughout the year and that's really due to supply chain constraints. We're seeing it across the industry still suppliers are having issues finding frontline labor and having those teammates available to increase their capacity. And the same with the commercial truck market still holding in there pretty strong. So really it's just -- it's centering around supply chain limitations from taking volume higher, because the demand is there. Got it. Okay. And then maybe last one for me. Just on -- obviously, you expect a nice order flow on electric and you're expecting that to pick up here over the next couple of months. But when you think about the coming quarters here in fiscal 2023, I mean, I would assume that you're not able to fulfill all of those orders within the fiscal year. And I guess what I'm getting at if you're talking about an $80 million EBITDA run rate just trying to get a sense, it would seem like in fiscal 2024 and I haven't done the math yet on the slide you had, but in fiscal 2024, I mean, you certainly would look at that $80 million as a number that you would grow from year-over-year? Yes, hi, Eric, this is Razvan. I'll take this question. So it's a bit too early to give guidance for fiscal 2024. Obviously, there are still many variables. However, as we've shown in our outlook on Page 20 in our presentation in the short-term for a normal year, we expect to have about $100 million plus of EBITDA with 8% on roughly 9,500 units with a good mix of EVs. So this could be as early as fiscal 2024 assuming the business continues to improve and the supply chain continues to stabilize a bit more. This concludes our question-and-answer session. I would like to turn the conference back over to Matthew Stevenson for any closing remarks. All right. Thank you Sarah, and thank you to all who is joining us on the call today. As you heard during our prepared remarks, demand in our market continues to be strong and the backlog for Blue Bird buses is robust. Orders for the EPA's Clean School Bus Program are beginning to come in, and will continue to fuel our leadership in alternative power in electric school buses. The business has turned the corner. As evidenced by the numerous first quarter records for the business, including revenue, bookings, EV sales and our parts business. Plus, we are increasing the total year EBITDA guidance. Blue Bird is starting to fire on all cylinders, as the vast majority of legacy price buses are now behind us, and numerous operational improvements are starting to take hold. We are very confident and certain about where we are headed and that is back to historic margin levels and beyond. Should you have any follow-up questions, please do not hesitate to contact our Head of Investor Relations, Mark Benfield. Thank you, again, for your time and we look forward to update you on the continued progress of the Blue Bird in next quarter. Thank you and good evening.

EarningCall_284

Good morning, everyone and thank you for joining us today, as we present the 2022 Full-Year and Fourth Quarter Results and an outlook for 2023. My name is Vincent Clerc, I'm the CEO of A.P. Moller Maersk and I'm joined today by our CFO, Patrick Jany. We can move past those, yeah. As I take the helm from Soren Skou, I'm thrilled to deliver a record financial year in all aspects. Last February, Soren looked back on a record financial performance in 2021 and yet 2022 full-year revenues of $81.5 billion and EBITDA of $36.8 billion, topped the previous year's by 32% and 53% respectively. Each segment contributed to this record result right across the board. We delivered precisely on the guidance that we set after Q2 2022 despite the fact that just after we gave that guidance, ocean freights and volumes tumbled as lower consumer demand and inventory corrections set in. We also generated record free cash flow of $27 billion, exceeding our guidance and enabling us to propose a dividend payout of DKK4,300 per share. Together with our proposed share buyback of approximately $3 billion, this means that we intend to return approximately $14 billion of cash to our shareholders this year, an incremental $4.4 billion more than in 2022 or an increase of 46%.After the many pandemic related supply-chain disruptions, we're not heading back into normal as we knew it from before, but into a more volatile and unpredictable world, one that will necessitate new capabilities to be successful. We have learned the lesson that there is a growing demand for supply chain resilience and significant value to capture by delivering it. Beyond the current inventory correction and volatility, that is what the integrated strategy is about and that is what we will keep working on at a faster pace. With a broad operational control that we enjoy, the logistics capabilities we have acquired and the resources we now have available, we know that we are the best-positioned to take advantage of this opportunity and deliver sustained growth and more resilient earnings for AP Moller Maersk. But before we look in 2023, let's take a moment to review the highlights of 2022 on Slide five. Aligned with our strategy, we decided early on in the pandemic to invest in the long-term potential of our customer relationships rather than maximize the short-term rate gains of the commoditized freight market. Our goal with this is to sustainably lower volatility in the ocean business, accelerate the commercial growth synergies in logistics and move towards a higher service quality level. This paid-off for us as our Net Promoter Score hit a new record of 33, an increase of nine points year-on year. This is an excellent result in an environment where customers still have to face historically high price and many hurdles. It is also a lead indicator of the continued growth potential we see in logistics and services as we head into 2023.Moving to our employees, we won't be able to reach our full potential as a company without being able to recruit and retain the best talent. And for this dimension, we measure and react to our company's engagement score. We have a goal to be in the 75th percentile as measured by Gallup and in 2022 we made substantial progress earning eight percentage points year-on-year to have the global organization in the 67 percentile. I'm very pleased by this proof that Maersk is an employer of choice and I know we couldn't have gotten where we are today without the tremendous energy and dedication that our people bring to their jobs every day. On behalf of everyone here, I want to thank all of them. As we discussed many times in the past, our M&A strategy is focused on enabling us to build and scale logistics capabilities across the full supply chain rapidly. In 2022, we made significant strides closing in -- closing on our three largest logistics acquisitions to date with Pilot, Senator and LF Logistics together worth approximately $6 billion. We are delighted to welcome our new colleagues from these organization and the integration of each of these three companies is progressing very well. Finally, our sustainability agenda is also part of how we differentiate and here we made significant progress. We were able to accelerate our goal to net 0 from 2050 to 2040. We ordered an additional six vessel that can run on green methanol and we work towards securing the green methanol supply for those ships. In 2023, we look forward to the first delivery of a green methanol feeder vessel and achieving further milestones as the industry leader in decarbonization. Turning now to Page six to review our segment highlight for the fourth quarter. While we had anticipated a steep normalization in the ocean market -- freight in the ocean market freight rates for the second half of 2022, this was accompanied by a steeper than expected decline in volumes with import volumes into North America and Europe from Asia falling in the mid 20s percentage due to inventory corrections at large retailer and lifestyle brands. The effect of this volume decline are visible across all our segments. In ocean, our average contract rate remained essentially in line with the levels expected earlier in the year, despite the tremendous drop in demand customers continue to support us with their volumes and we maintain 70% of our long haul volumes on contract for the full-year. This is also what we expect for 2023 as customers continue to appreciate longer-term certainty and closer direct relationship. Naturally, the effect of the drop in the spot rate is having a profound effect across the industry during the annual contract negotiations and we expect our average 2023 contract rates to eventually move towards prevailing spot rates. We are also seeing continued resilience of our multi-year contract portfolio, index rates contracts with approximately 1.9 million FFE by the end of 2022, despite the higher trailing rates. Logistics and services was not immune to the inventory correction, affecting the global supply chain. In Q4, we saw a 2% decline in organic revenues as volumes dropped. The drop was less pronounced than in Ocean because of the high underlying commercial momentum we're having. Thanks to large wins, illustrating this momentum, our top 200 customers who are our main targets fared better. They contributed 4% to our organic revenue growth and they're contributing to about half the revenue growth in the fourth quarter. Going forward, we aim to continue to grow our penetration across our top 200 customers where our share of wallet is still low and has big potential and gradually expand the scope of target customers beyond those 200. In Terminals, the story was similar, remembering that the changes in shipped volumes are visible in the turbulent volumes with a delay of about 30 to 45 days. As we will see in the next slide, lower volumes have reduced port congestions, which also affected the extraordinary storage revenues and incomes which drove the outstanding performance in 2022. That said, once we factor out the impairment of our Russian activities, the resilient and attractive return profile of our terminal activities is clear at over 12.3%. Turning now to Slide seven. Let's review where the market stands in terms of pandemic related congestion, as we are hopefully putting the worst effects of that behind us. As you can see from the chart on the left, after successive waves of congestions over the past two years, the Global Port situation has returned to close to pre pandemic levels at least across most of the western economies. Moving to the middle of the page and right hand charts, you can see that the sharp decline in import volumes I previously mentioned with levels in North America and in Europe now trending below pre pandemic averages. This decline appears to be caused by inventory correction and therefore we expect demand to stabilize back up, but to stabilize at a lower level in H1. As we just saw the effect of this normalization was visible across all Maersk segments in Q4 and we expect this to play-out similarly in 2023 as well, with a reversion to the mean, in H2 benefiting logistics and services and terminal in particular. Ocean volumes will benefit as well but supply side risks following the delivery of large tonnage order will bring new uncertainty during that period. Predicting when we will see the last of the pandemic related effect has been very challenging -- has been a very challenging exercise, as we simply have never seen this kind of volatility before, but slowly it seems that we are getting to a place where volatility is more moderate than what we saw at least in the last two years. Moving to Slide eight, before I get to our 2023 guidance, let's touch on how we delivered our long-term transformation KPIs in 2022. As for most of the year, we are solidly in the full green range except for logistics services and terminal EBIT margins. Here we do see the effect of the impairment, primarily of our Russian activities. Adjusting for those impairments, which Patrick will get to later, we would have been in the green on those KPIs as well for the year. Although I have been with Maersk for over 25 years, I took over the wheel just shy of 40 days ago and it is a tremendous privilege to lead Maersk. I am very excited to build-on the foundation that we laid with Soren. I have seen the potential of the integrated strategy and believe in its ability to take us away from the commoditized and volatile aspect of the ocean shipping industry, even if some hard work still needs to get done before we are fully there. One of the first changes I have made is to bring an expanded executive leadership team. We have a wealth of experience in-house that I want to draw from as we head into the next phase of our transformation. In challenging periods, such as the one we are facing now, it is important that all key decision-makers are at the table together which is why I have assembled this expanded team. Specifically, I want to capture the full breadth of experience and expertise that we have all I expect of diversity play a role here, in particular diversity of thought and opinion. So, my team is made-up of colleagues from around the world, some of whom are Maersk lifers and other who bring valuable external knowledge to the table. Our first concrete change has been one that many things was a long-time coming to integrate and unified our brand structure. We believe that this move allows us to make it easier for customers to get access to the full integrated offering seamlessly and will create internal efficiencies. Now as we look into the challenge of the market in 2023 and beyond, as a team, we will have to relentlessly focus on operational excellence and productivity, increase the scalability of our activities, while maintaining a tight grip on cost. Turning to slide 10, as I mentioned earlier, our experience during the last couple of years has convinced us that our integrated strategy is the right response to the needs of our customers in rapidly changing and volatile environment. Now is the time to lean-in and accelerate. The world of global logistics remain fragmented and inefficient. Every day our customers struggle with difficulties related to visibility, reliability and resilience. With the forces of climate change and geopolitical tension at play, the potential for systemic shocks and increased complexity will only rise. Our response continues to be to integrate our logistics activities and take our platform both digital and physical to the next level, so that we can better serve those customers needs. Our by Maersk models are the ideal framework to do that and take accountability for the supply chain outcomes when it comes to transport, fulfillment and visibility and flow management. Through external growth, we have acquired significant capabilities. Our next step is to focus on scaling those capabilities worldwide to improve productivity, while keeping the pace of launching new products. A key proof points will be to deliver continued double-digit growth in logistics and services, while maintaining profitability above 6% in the more difficult 2023 market environment. As I mentioned earlier, the foundational aspect of the integrated strategy is to disconnect from the commoditized aspects of the ocean shipping industry. And therefore, we have made a clear decision not to renew the 2M Alliance with MSC. When we created 2M back in 2015, there was a significant value in pulling networks as we had to face in a new generation of more than 20,000 TEU plus tonnage and needed to maintain flexibility on capacity management. Since then, we have grown our volumes significantly, gained scale and got better at capacity management, so much in fact that the synergies from the pooling have decreased significantly. At the same time, the dis-synergies from having divergent strategic goals have increased. Following our strategy, we are convinced that this is the time to move beyond the traditional ocean service model. It is time to make Ocean an integrated part of the end-to-end value proposition we bring to our customers to seize the opportunity I mentioned a few minutes ago. To do this, we need to regain and retain a strong level of control of the service levels we provide, that cannot be achieved in an alliance structure. Our customers require their service providers to step-up whether it is in providing sustainable transport solution or moving complex land side or solving complex land side challenges and this will be the direction of travel for Maersk. We have the scale and competitive costs base to stand on our own and deliver on our customer expectations for the future and look-forward to rolling out a new exciting products for our ocean customers. For 2M, it will be business as usual over the next two years as the notice period is served and our focus will be on the transformation of our ocean product as part of our global integrator strategy. Now let's turn to the 2023 guidance on Slide 12. I won't read out all the bullet points from this slide, but I want to highlight a few specific drivers to our guidance. As I mentioned previously, we expect the first that the first phase of 2023 will see a stabilization of the inventory correction, which marked the second part, the second half of 2022. That said, at this point in time, economic growth is expected to be muted or essentially flat for the full-year. Demand stabilization in the back-half year -- in the back-half of the year should help the recovery of all segments in particular in logistics and terminal business. However, as we note in the Blue sidebar, given the ocean industry outlook, there could be supply side risks for Ocean in the second half of the year. Based on these assumptions for the full-year 2023, we expect an underlying EBITDA of $8 billion to $11 billion, an underlying EBIT of $2.0 to $5 and a free cash flow of at least $2 billion. Our cumulative CapEx for 2022 to 2023 is unchanged at $9.0 billion to $10 billion and we introduced a new cumulative target for 2023-24 of $10 billion to $11 billion. From a reported earnings perspective, we will take an impairment and restructuring charge primarily for the restructuring out of our brands that I touched on earlier, but of course, our annual guidance is on an underlying basis. With that, I would like to hand over to Patrick before I get myself too deep into the financial highlights. Patrick? Thank you, Vincent and also from my side, thank you to everyone for joining our conference call. As Vincent touched on previously, 2022 was a record year, with peak profitability reached during Q3 and the long-awaited normalization in ocean setting in, in Q4 as congestions disappeared. Despite the rapid drop in both spot rates and volumes, we delivered fully on the guidance set-in August even exceeding guidance when it comes to free cash flow. For the quarter, it meant an EBITDA of $6.5 billion and an EBIT of $5.1 billion respectively down year-on-year by 18% and 25%. Free cash flow continued to climb though, driven by operating cash flow, up nearly 15% to $6.5 billion, which contributed to the record full-year free cash flow of $27 billion, $3 billion ahead of our guidance. Thus, we ended the year with a significant cash position of $28.6 billion when considering short-term deposits and securities. And our net-debt position was effectively a net cash position of $12.6 billion in Q4.This supports our proposed dividend payment of DKK4,300 per share equivalent to a cash out of $10.9 billion, which implies a total of $13.9 billion returned to shareholders when considering the ongoing share buyback program of $3 billion for 2023. Now let us turn to the development of cash flow on Slide 15, starting with our operating cash flow on the left. In Q4, we generated $8.2 billion driven by our EBITDA of $6.5 billion, as well as a favorable unwinding of net working capital of $1.7 billion, which led to a cash conversion of 125%. Our gross CapEx was $895 million, bringing us to a full-year gross CapEx spend of $4.2 billion in line with guidance. As a reminder, we guided back in 2021 for a total CapEx of -- for 2021 and 2022 of $7 billion and we came in at $7.1 billion. So we are on track with our investment plan and as you've heard, we are maintaining our two-year cumulative cost CapEx guidance to be $9 billion to $10 billion for 2022 and 2023 and we are guiding for 2023 and 2024 to be between $10 billion and $11 billion. In those years, we will have reached the CapEx run-rate of both investments in our integrated growth and also our green methanol fleet renewal program. Coming back to the quarter, our $6.5 billion of free cash flow was used to distribute $708 million in form of the share buyback, while the majority nearly $3 billion was placed in short term deposits over three months, bringing us to a net cash flow of $1.8 billion by the end of the quarter. Turning to Slide 16 and our balance sheet, which we introduced last quarter. This table provides details on our cash position, reaching an all-time high as we continue to accumulate cash over the quarter, with our cash balance of $28.6 billion, implying a $6 billion progression compared to -- in Q4 and $12 billion compared to the previous year. This leaves us with a tremendous balance sheet and the priority of shareholder returns. Therefore, we propose a dividend of DKK4,300 per share, a 72% increase on the dividend paid in 2022 and a reflection of our record financial results. This proposal represents 37.5% of our 2022 underlying net result and is in line with our dividend policy of a payout between 30% to 50%. It also means a 27.5% yield based on our share price of the end of the year 2022. Following approval at the March 28th AGM, the resulting payout of $10.9 billion is expected by March 31st. Including the anticipated share buyback of around $3 billion the return to shareholders as previously said in 2023, we'll be at $14 billion or nearly 36% of our market cap. And looking-forward, we remain committed to approximately $3 billion annual share buyback until 2025, which implies an additional $6 billion to be returned in 2024 and 2025.Thus we will not only return most of our cash position overtime, but we anticipate a progressive re-leveraging of our balance sheet, like to remind you that our goal is to maintain our BBB rating and therefore a normalized leverage ratio should be in the range of 1.5 times net-debt to EBITDA by the horizon of 2025. Moving to Ocean on slide 17, the quarterly progression starts to show the effect of both lower rates, coming off the peak levels in mid-2022 and lower volumes as lower consumer demand and inventory destocking hit seamlessly [indiscernible]. Our Q4 volumes were 14% lower compared to previous year, which is actually a relatively good performance when seen in the context of the mid 20% declines in the major Asia, US and Asia Europe had holdings where we have a significant exposure. Our fourth quarter average freight rates on the other hand were only 3.5% lower year-on-year, but the bigger drop came sequentially where rates were down 23% quarter-on-quarter, almost entirely due to the fall in shipment rates, so very much in line with our forecasted rate erosion pattern we had been guiding for since early last year. We saw the benefit of our contract coverage in our EBITDA margin, which was lower than previous quarter in the year, but still at a tremendous 45%, very close to the margin achieved for the whole year of 2021. The decline in EBIT was primarily due to a lower top line, of course, but with a smaller offset from lower operating cost ex-bunker. Moving to Slide 18, we show the relative in respect of elements of the change in EBITDA. Here we see that the principle driver was really the volume effect and for the first time since Q2 2020, we see a negative effect on freight rates. As in Q3, when freight rates began to decline, the release of revenue recognition is seen as a benefit under other revenue. As long as we continue to see shipment rates decline, this will continue, but to a lesser degree as the rate of change has slowed. On Slide 19, we look into the details of rates and volumes and the retreat from the Q3 peak levels in average rate is clear as I touched on previously. When we think about the progression of 2023, we expect to have some continued benefit from our contract rates in the first part of the year and particularly in the first quarter. But over the course of the year that advantage will disappear as contracts are progressively negotiated at rates close to prevailing shipment rates. As mentioned earlier, Q4 loaded volumes fell by 14% year-on-year as inventory corrections led to ship as dramatically reducing the volumes which led to blankings and a lower capacity utilization of 83% when compared to 90% in the previous quarter. This volume decline showed up quite evenly between shipment and contract volumes. Close observers will know that we finished the year at 70% of our long-haul volumes on-contract compared to 71% where we were after the first-nine month. So yes, there were substantially somewhat lower volumes on contract, but the vast majority of them held up and we expect a similar contract to shipment split for the long-haul volumes in 2023.Moving to Slide 20, as in previous quarters of 2022 bunker remains the primary cost driver. Lower port congestions growth slightly lower container handling costs, but as anticipated, the inflationary pressure meant that bunker was also going up. Without the bunker, costs were actually down by 5% when compared to previous year. Although the cost of bunker actually came down sequentially, it was still up 17.3% in the fourth quarter, driven by a 29% average broker increase, partially offset by lower consumption due to lower volume shipped. On slide 21, we turn to logistics and services, revenue growth of 28% this quarter was driven primarily by our acquisitions. LF in particular, which contributed just over [ $270 million ]. As we touched on earlier, the destocking is being felt across all segments and volume driven aspects of our product offering in NNS, for example, in supply chain management, our warehousing volumes which were particularly affected. Thus, we saw a 2% decline in organic revenue in Q4 2022.If we look a little deeper, the picture is a bit more positive as our top 200 customers contributed 4% to the organic growth. In terms of profitability, the lower volumes clearly weighed on margins as of the organic business as did an impairment for partnership assets of $21 million. Excluding impairments, the full-year underlying EBIT margin would have been in line with our full-year target of over 6%, with a figure of 6.1%.Moving into 2023, we expect the early part of the year to be similarly affected, but that demand will stabilize when the current destocking in multiple verticals ends and volumes at our customers improve. From a profitability perspective, we expect to be in line with our long-term targets for the full-year, but the recovery will be loaded towards the second half of the year. Taking a look at the details of logistics and services on Slide 21. In -- managed by Maersk, we see the effect of inventory corrections in lower supply chain management volumes. The custom services volumes continued to grow year-on-year though, but was sequentially lower. This volume and the new contract signed particularly in lead logistics were the main drivers of the strong EBITDA margin. Fulfilled by Maersk, we see the effect of the consolidation of LF Logistics in terms of revenue growth. Lower organic volumes were affected by contract logistics and e-commerce and the latter is where we particularly see the effect of lower consumer demand and this is where the impairment took place this quarter. In Transported by Maersk, we continue to benefit from the integration of Senator, but lower volumes especially in NCL and Intermodal made themselves felt. In all, it was not an easy quarter for [ LS ], but looking at the full year, we are encouraged by our 21% organic revenue growth and look forward to improve profitability in 2023 when the current destocking ends. As we progressively roll out new digital visibility products and improve our ability to scale our integrated logistics offering globally, we will be able to gain an even greater share of our customer as expected.On Slide 23, we turn to Terminals, where once again the effect of lower volumes is visible. As we have been anticipating, the extraordinary storage revenue and income driven by port congestions has started to recede as the flow of goods improves. In addition, the lower volume shipped in the Q4 in absolute terms also had an effect, which was observed specifically in our ports on the West Coast of the U.S. and in Spain. Therefore, the lower revenues and profitability in the segments are very much expected. That said, terminals remains an extremely resilient business with strong pricing and good cost control, which made it possible to offset the inflationary cost increase in 2022. The segment ROIC of 7.6% is still affected by the impairment of our Russian activities and adjusted for that, we continue to have an excellent ROIC of 12.3%. As we look towards a full normalization of the extraordinary storage income, we are confident that the segment ROIC will remain above the targeted 9%.Moving to Slide 24 for the terminals at average, here we see the effects of lower volumes quite graphically compared to Q3 2022, we noticed a much smaller revenue per move effect as lower storage revenue offsets the higher revenue based on tariff increases. Rising inflation and [ hedging ] prices are seen in the cost element, but changes in provision are also a significant element this quarter. As is typical for this industry, most of our customer pricing is CPI linked with price increases occurring primarily at the beginning of the year, which implies an eroding positive effect as the year progresses. To finish up on the Slide 25, we turn to Towage & Maritime Services. While each of the businesses here has quite individual drivers, the segment itself showed quite a balanced picture. Maersk Supply Services has benefited from this year's activity in the oil and gas industry. Towage also enjoyed a strong quarter, while Maersk Container Industries is affected by a very weak market demand, another late effect of the pandemic volume driven demand normalization. Profitability in Q4 was driven by strengths in impairments, specifically in this case as regards our holding autoliner which impacted results positively, while previous year was impacted by an impairment in Maersk Supply Services. I have a question for Vincent on strategy, if I may. Vincent, you've been the CEO of Ocean and Logistics since 2019, you've been -- I think it's fair to say instrumental in the development of the global integrated strategy. You've also I think been pretty clear since taking over as group CEO you don't anticipate any significant changes with respect to the group strategy with Soren over store. But equally not two people are exactly the same, so perhaps could you provide some color on areas where you do see things differently than Soren previously or any areas where the strategy may evolve going forward? Hey, Rob. So I think what we have seen is that this strategy has really, really worked for us. If you look at the growth that we have been able to generate on the logistics side for the past two years now consistently, it's something that for me is a strong proof point. What we will see now in 2023 is that we can bring those proof point even when the container markets are in a completely different place. We strongly believe that we can because fundamentally, even though the congestion that we have seen in the last couple of years has abated, the problem -- the fundamental supply chain problems that our customers have about visibility, about reliability, about resilience, these problems are still there. And the opportunity for Maersk to actually solve these problems has so much value potential for customers and for us that this is worth pursuing. So the strategy will largely continue as it is. My own preference or my own philosophy to it is more of an organic first because what we're trying to do is very differentiated and very different from what customers are otherwise getting. So we will only do acquisition in very, very specific cases and otherwise, we'll continue to focus on the organic growth engine that we have. And we will otherwise continue to integrate also Ocean much further into what we do in logistics, so that it is really one business towards the customer. It's basically -- if I look at the $8 billion to $11 billion EBITDA guidance, could you give us a feeling for how much benefit there is there from the sort of higher contracted rates you had through 2022 flowing into the first few months of 2023, basically trying to get a sense of approximately what the exit rate of profitability looks like or maybe the profitability of the group in the second half of the year once those high contracts are out. Yeah. Hi, Sam. So indeed, we will enter the year with -- we're still quite a high level of contract rates as you've seen in the Q4, we have had an erosion of the shipment rates, but we are still living with a high contract rates, we have been able to secure with our customers. These are now being renegotiated progressively and therefore, you'll see Q1 and Q2 being fairly strong in terms of EBITDA contribution and EBIT contribution from promotion and that will level out in the second half of the year where progressively seeing the major contributions in terms of EBIT, particularly but in also terms of EBITDA will come from the other businesses as we move on. Maybe can you share some color on how you see costs development. You have previously stated that cost base will be pretty steady when it comes to network, handling, et cetera. How should we see that developing in the course of '23 and are we starting to see some relief in the cost base? Yeah, Dan, so we -- on one hand, as you can see also, when we talk about our terminal segments, we're still seeing some inflationary pressure in our cost base from some of our vendors. But we're also seeing relief in different areas. One of it is as the market normalizes, time charter rates will also normalize. And then the other thing that is really, really important is the fact that throughout 2022, we've been selling basically at max speed because we're always trying to catch up on the delays that there was. This is something that we have stopped doing. Now with the current level of normalization and we're able to actually reimplement slow steaming across most of our network, which will also help us actually abate some of the pressure. So the goal for us on cost is that we can roll back the inflationary pressure and try to maintain our current cost level about equal on a unit cost basis and that is true for across the ocean and logistics. I got a question around the demand. Can you clarify what is your current visibility on bookings across Ocean and Logistics? Last year, you like had about three months of visibility on bookings. Any color on that that have actually started off the year would be helpful. So our visibility is usually about three months out and that's pretty common because of all the aggregate level of purchase orders that we handle from our customers through our managed by Maersk activities, indeed, logistics. That continues to be the case. That's why we see this -- the importance of the inventory reduction here in the fourth quarter. We expect that this will continue in the first quarter and then a gradual recovery in the second and then a more normal environment in line with the consumption, assuming that the macro stands to where it is today, that's how we should see the year pan out. Just looking at your logistics print in Q4, there seems to be quite a slowdown in the pace of organic revenue performance and also profitability. And it does seem to coincide with the easing of capacity constraints on the ocean side. And I know you've pushed back on the idea that logistics benefited from the tightness in Ocean that you've seen in '21, '22. Is this still your view? Or should we prepare for a bit of market share loss perhaps in '23, '24 in the division? And then secondly, are you confident in the cost and integration measures you've put in place to protect profitability? Yes, so let me just take that quickly. I mean basically what has happened is quite simple. When you have that inventory correction, it doesn't only affect ocean volumes, it basically works itself through the entire supply chain. And what that means is, you have fewer POs to process fewer containers to consolidate, fewer containers to move, fewer containers to deconsolidate, distribute and so on and so forth. And you have the warehousing footprint that you have, you have the organizational footprint that you have. We're not going to start reducing the size of the organization, while we still expect the growth to come back on the other side of this. So what you're seeing with the performance on logistics and services is, as we see a sharp adjustment of volumes, this on top of the cost base that we have will mean that the margin will suffer a little bit for a couple of quarters and then it will come back. What is actually reasonable is that volumes have dropped overall by more than 10% and our volumes have dropped only by 2% in -- our revenues have dropped only by 2% in logistics and services and what that means is underlying, we still have a lot of growth that growth comes from the implementation of new customer wins that we're having and there our pipeline continues to be strong. So I think for us the goal on logistics and services is very simple. We made the commitment that we're going to have a growth above 10% on an organic basis. We intend to deliver that and that we can deliver every year margin above 6%, which shows that it's a profitable growth and we don't just buy it and we're going to deliver that. And that's really what the proof point of the strategy is going to be this year. Question regarding the Ocean volumes, you've been growing I know that ocean global growth has been down by around about 4% and I think also in the presentation that you compare to growth more with what goes on in the big East, West trade lanes. But still on a global basis, you've probably been underperforming a little bit. Given the indications that you will keep your capacity flat and what we see of inflow from some of your competitors, I want to hear your thoughts about your comments that you expect to grow in line with the market in '23. Yeah, so as you rightfully say in Q1 to Q3, we made -- we took the conscious decision that we were not going to grow our fleet at a time where the price of tonnage was at historic high. And we knew that this -- the circumstances would abate soon and so we would be stuck with the cost for a long time. So we let go of some volumes there. In Q4, there is no doubt that with the market going -- dropping 10% or we think about 10% to 11% and us dropping 14%, we have underperformed a little bit because of the exposure that we had to this East-West trade line specifically to the verticals in retail lifestyle and technology, which have been the ones where we have grown a lot and that have actually felt the normalization you could say or the inventory correction the most. Going forward, I mean, our ambition is that since the market is going to be flattish, our ambition is actually to deliver also flattish volumes. We will make a few adjustment possibly to the size of our fleet, which has actually grown -- going into the pandemic, we're at 4.1 million TEU, we worked our self up to 4.3. So we will probably decrease it a little bit in order to move the volumes that are similar to this year, but on a smaller fleet, right? My question relates little bit to the working capital. Are you -- since rates are coming down, are you also expecting to release a part of your working cap here? Yeah, indeed, as you actually have seen in Q4, we have already quite a positive impact on our cash flow and the difference between the EBITDA and the operating cash of working capital being released. And we are progressively unwinding the capital which -- working capital which has been increasing over the last two years with the higher rates, right? So as we collect the receivables and volumes came down, we are unwinding that. We would still expect an impact here, probably also skewed towards the first half of the year, more in Q1 and Q2 of probably more or less the same magnitude as we reversed in Q4 will be the amount probably for the whole year of 2023 and that would bring us back to levels where we were pre-pandemic in terms of working capital. On your tax investments for '23 and '24 of $10 million to $11 billion, can you perhaps just a broad breakdown of those costs and also clarify if potential M&A is also included in that guidance? Yes, so on the CapEx, we are basically just having the -- we are arriving as we said in speech now, as well other run rate, right? So we had guided for $9 billion to $10 billion now for '21 -- '22 or '23, which means we have 4.2 in '22, which means that for '23, you can expect anything with a five in front. And if you continue that as a run rate, you're probably between the $10 million, $11 million that we have -- we are guiding for the next two years, right? So we are coming at a level which is close to the run rate where we replenish our fleet with a green methanol replacement and we have also enough to invest in new terminals for the growth of terminals and obviously, the main component here, the growth in the [indiscernible]. That is therefore pure organic growth and CapEx expense, has no M&A. I just wanted to go back to your statement that, obviously, contract rates are correcting close to spot and we have a bit of a timing lag in the first quarter until those contracts are repriced. But clearly, spot is going close to pre-pandemic levels, if not hitting them and you've just said that your unit cost is going to stay flat at best case of current levels, which are 45% above pre-pandemic. So is it fair for us to expect post Q1 that we will likely see losses in the following quarters that may potentially par forward into '24 as clearly oversupply is coming in both years. So indeed, the mechanism is absolutely correct, right? So you will see in Q1, Q2 an erosion of the contract rates as we renew new contracts closer to shipment levels or spot levels, that will imply a reduced profitability of Ocean in the second half of the year. And then as we highlighted as well, there is obviously the risk of this additional capacity coming into the market in the second half of '23 and '24, which will have to be tackled by the industry in terms of blankings and slow steaming and we see the reaction here of the industry. As far as we are concerned, we remain disciplined, we are blanking, we are slow steaming and we are not increasing our capacity. In terms of our cost, it will remain, as we just said fairly flat, always component considering the bunker component, right? So we expect bunker to come down, which in absolute terms is also then an absolute cost reduction when you look at the second half of the year. But it certainly means a lower profitability, very low profitability for Ocean in the second half of the year. My question is more on demand outlook and speaking to perhaps your theme or different verticals data that you see, do we have a sense of if the U.S. retailers have managed to address excess inventory situation in the past peak season. And it's more of a matter of improvement in business and consumer confidence that will bring them back to the market? Or you think that excess inventory situation will persist well into the first half of 2023 and that is backed into your guidance? So our understanding of this, Parash, is that they have -- their industry -- the inventory, sorry, are in the process of correcting, different companies are at different stage, some have had more, some have had less, some have had earlier, some have it later. But it's still a process that is unwinding right now. What we understand is that the pace of sale is more sustained than the pace of shipments because that's how they work it down. And that's why we expect that in the second half, we will see -- assuming that the level of consumption holds which so far, that's the indication. We will see the volumes that move through the supply chain, converge back up to trend where consumption actually is rather than to be lower than that because of the inventory correction. Just if you could give some color on contract negotiations so far, like how much of Asia Europe have you signed so far? Are you also kind of signing new contracts on Transpacific kind of just a bit more color on the contract season this year. So we've signed about half of our contract, we have half of our volumes for -- contracted volumes for 2023 signed up. Some of them are through the long-term contracts that we have signed off already in '21, '22 and that continue into '23. And the other part is some of the contracts that we have that are calendar year based or and that we have negotiated. So that gives us about half and that's why I think we have a pretty good foundation for the guidance. A lot of the contracts that we have negotiated so far are contracts of customers that are housed in Asia and in Europe because, as you know or as you may know, U.S. contracts usually are based on fiscal year started from May 1st. And so those contract negotiations with our U.S. customers are mostly negotiations that take place in the second half of March and beginning of April. So it depends on whether you consider this on the short-term freight rate, which would be kind of the lead indicator of where this is going or the average. The short-term freight rates, if you look at the CFI and so on seems to have stabilized. So that would be one indication. Of course, as Patrick mentioned, the contracts are being renewed slower. So the average freight rate will continue to decrease as those contracts get renewed and implemented with lower tariff levels. So expect the average to continue to decrease into -- up into Q3. And then what we should see is a stabilization at least through the next couple of quarters of the short-term rates. My question relates to the alliances. You are now stepping out of the 2M Alliance as natural step you say and I guess two-part questions. To what extent do you expect that to still hold you back for the next few years being in that Alliance? And secondly, how do you expect the concept of Alliances to develop in the container industry going forward further from here? So if I start with the latter part of your questions, I think that the situation that 2M wasn't as quite unique because it's an alliance of the two largest carriers and both of us had reached a size where actually we could stand alone if we wanted to. I don't think any of the other carriers today would be able to have the comprehensiveness of coverage that is required to be competitive or the cost base to say I can stand alone. And therefore, I think the way to think about what is happening with 2M is today there are three major networks on the East West, in the future, there will be before. There will continue to be probably a couple of alliances and Ocean Alliances going into 2027, so that's at least in the next four years of stability there. It's hard to see how the alliance would make a significant change given that both MSC and Maersk intend to have a mostly standalone network. So I would expect some -- simply a transition from three to four networks and that is really meant to -- I think it's not as much of a change as what has been made today. At least I don't expect this role of musical chairs that has been talked about with everybody trying to find new partners. With respect to how is it going to hold us back? Well, there is no doubt that as we -- as I mentioned, what is the future for us is not to have Ocean as a separate business from logistics, but is to have our Ocean business fully integrated into our logistics business. And in order to do that, we need to have a much higher level of operational control of our -- the service that we deliver to customers. And so the quicker we get there, the more it allows us to accelerate the integration of Ocean and moving away from this commodity game that we're in that doesn't really -- that we can see very clearly now doesn't lead anywhere and moved in a more differentiated offering. So it's going to slow us down a little bit to implement this and we'll have to see also with MSC what are some of the measures that we could implement within the alliances for -- during the next two years that will allow us to test and progress what we're trying to do here. Yeah, so just following up on the cost comment actually. If I look at your fuel consumption, it's actually down 9% quarter-on-quarter. So just to understand, on the slow steaming, are you like already in that process of time implementing slow steaming in Q4? Or is it more like an addition you'd see more reduced of in consumption? Sorry, so in Q4, we already saw as basically terminals decongested, we already saw that ships no longer had to basically sail at full speed and actually even the ships that were delayed because we were blanking sailing, they could simply slide into the next position and we could slide everything. Now what we're doing is we're actually institutionalizing it in the schedules and that is something that is being implemented right now. Ladies and gentlemen, in the interest of time, we have to stop the Q&A session and I hand back to Vincent Clerc. Please go ahead. Okay. Thank you all of it and in closing, I would like to leave you with the following final remarks. Our record 2022 results leave us in the extraordinary position of proposing a dividend of DKK4,300 per share, which in combination with our existing share buyback program means that we intend to return approximately $14 billion to our shareholder over the course of the coming year. Despite this tremendous payout, we keep a strong balance sheet as we head into what is clearly a more challenging economic period. We believe that we have a window of opportunity now to accelerate our investor strategy. Together with my new executive leadership team and all my Maersk colleagues, we will lead the way in increasing visibility, reliability and resilience to the global supply chain, leaving up to our corporate purpose statement of improving lives for all by integrating the world. And with that, I would now like to hand back to our operator and close the call, sorry. Thank you. Bye, bye.

EarningCall_285

Good morning, ladies and gentlemen. Welcome to SGX Group's First Half FY 2023 Results Briefing. Today's agenda will be as follows: First, we'll start off with an update on our financial performance by our CFO, Mr. Ng Yao Loong; followed by a business update by our CEO, Mr. Loh Boon Chye. We'll then end off with a question-and-answer session. I will be quite grateful if you identify yourself before asking your question. A very good morning, and thank you for joining us this morning as we present our first half FY '23 results. So on a headline basis, our group revenue increased $50 million or 10% year-on-year. It was a resilient operating performance in a rather challenging economic environment. Our derivatives franchise was the key growth driver, which I will talk about a little bit more later. Headline expenses also grew 10% year-on-year or $25 million. And if we exclude MaxxTrader, revenue on a like-for-like basis would have grown 7%, expenses at a lower rate of 6%. And we acquired MaxxTrader in January of 2022, and so it wasn't in the first half FY '22 results. Group earnings on a headline basis, up 30% to $285 million. There are several noncash items, which I will again talk about later. If we adjust some of these items out, the earnings would have increased 7% to $237 million. Now let me run through the details of our financial performance. So Derivatives, if I aggregate the revenue, across the different asset classes, it grew 28% or $52 million. So derivatives, as a whole, contributed 44% to our group revenues, includes both trading and clearing and also the associated treasury income. The outperformance of this segment reflects the value that global investors place on SGX as a platform for Asian access and portfolio risk management. The growth was broad-based across all asset classes, equities, currencies and commodities, and we saw growth also from higher volumes and average fee increases. The DDAV, or the daily average volume, rose 10% year-on-year to over 1 million contracts. I see that the momentum has carried on to the new year in January, where DDAV rose 18% month-on-month and 6% year-on-year. Average fees increased 5% year-on-year to $1.58 due to the higher fees from our key equity contracts. And if I look back over a 5-year period since the first half FY 2018, this number have increased at a CAGR of about 4% over that period. Treasury income also benefited from a growth in the open interest and the uptick in interest rates. And in January, we saw further increase in open interest, up 11% on a month-on-month basis. While not surprising, like many other cash markets, our securities, trading and capital raising activities slowed. We saw lower growth in fixed income listing, IPOs, cash equities trading and post-trade activities. We have been disclosing adjusted earnings to facilitate investors' understanding of our numbers. As a recap, these adjusted numbers gives a better representation of our underlying performance. And this chart or slide shows the reconciliation between the reported, the GAAP numbers and the adjusted earnings. So you can see the difference is largely due to the noncash items in the red box as follows. First, we had a fair value gain of $27 million from our investment in a private equity fund managed by 7RIDGE. This is a fund that is invested solely in the trading software provider Trading Technologies. This investment was made almost a year ago, December 2021, and the fair value adjustment reflects the strong operating performance of TT, or Trading Technologies. This adjustment, or the mark-to-market, flows through our P&L given its accounting classification. Next is a $10 million recognition of our stake in Climate Impact X, or CIX, which we received as a result of our contribution. As a market operator, we contributed towards the development of the auction matching platform and also advisory work on how to operate the marketplace. And just to recap, CIX is a global carbon exchange and marketplace for voluntary carbon credits. It was established jointly by SGX, DBS, Standard Chartered and Temasek. And then finally, we wrote back $15 million of the earn-out revenue relating to the acquisition of MaxxTrader as the calendar year 2022 revenue did not meet the qualifying threshold. And the earn-out is a mechanism precisely designed to protect us as the acquirer from overpaying and to help bridge the price differences between the buyer and seller at the point of acquisition. And what this means is that we do not have to pay the $15 million in cash to the seller, and there's actually no impact to the carrying value of MaxxTrader on our books. So back to something that's a little bit more familiar our segment reporting, FICC, equities and DCI. Our FICC business, fixed income, currencies and commodities, grew 35% year-on-year, driven by our FX business, both from the exchange traded and OTC space and the commodities business. And if we exclude MaxxTrader, FICC revenue will still be up 25%. In the FX space, exchange traded currency volumes grew strongly, 48%, from higher activity in our flagship CNH and INR contracts. As for our OTC FX business, the headline ADV, or average daily volume, was up 34% to $68 billion, largely also due to the consolidation of MaxxTrader. And so if we look on a half-on-half basis, which is second half of FY '22 versus first half of FY '23, those 2 periods will include MaxxTrader. ADV was slightly lower at about 3%, but this decline wasn't unexpected. This was due to BidFX' focused efforts in migrating their customers to a new FX trading platform and getting the customers used to the new system. And this migration is necessary to lay the foundation for growing our OTC FX business. This has since been completed, the migration. And both entities, BidFX, MaxxTrader, are now focused on acquiring new clients across our key geographies, and we see momentum coming back in January. We continue to be the largest player in the offshore iron ore futures market. The DAV for iron ore rose almost 50% to a 6-month high of about 130,000 contracts. We broadened our market participants, including having more screen trading. Sorry. Moving on to equities. Equity Derivatives revenue, up 21% or $30 million, mainly due to higher trading and clearing revenue and also treasury income. Fees was higher due to our Nifty 50 and FTSE contracts. Daily average volume was up 1% to about 720,000 contracts. Revenue for cash equities, 10% lower or $20 million down. Not surprising, as I said. Activity level, measured in terms of SDAV, was down 7% to about $1.1 billion. We saw lower trading activity in the small and mid-cap segments. In terms of fee, the average clearing fee was down by 3% to about 2.53 basis points. We saw a higher proportion of value traded from our market makers. Revenue from DCI was flat, mainly due to lower revenue from our Index business. This was offset by higher connectivity revenue from a higher -- or increase in subscription of our co-location services. Expenses on a headline basis increased 10%, but as I say, if we exclude MaxxTrader, it's lower at 6%. So the cost increase, largely, not a surprise. Staff costs went up 7% or $8 million from a salary adjustments. We also had a headcount increase as we brought in MaxxTrader, about 100 staff from MaxxTrader. So this led to a 12% increase in average headcount over the period. Processing and royalties rose 12%, which -- not surprised because we've got higher volumes across our key contracts such as iron ore. Expenses went up 9% or $7 million. We saw a resumption of traveling expenses. We saw greater marketing activities and also the consolidation of MaxxTrader. Our first half EBITDA margins was comparable at about 58.5% to a year ago. So at the core, the securities and derivatives this platform level, we saw improved margins. But the overall group margins remain comparable as our new business pillars like OTC FX have lower margins compared to the core business. Financial strength remains, I would say, very healthy, which is very important in an environment where interest rates are a lot higher. Absolute debt levels have come off as we repaid our bank loans. Leverage ratio declined from about 1.4x a year ago, down to 1.1x. Interest coverage ratio remained strong at more than 100x. The Board of Directors has declared an interim quarterly dividend of $0.08 per share, bringing total dividend for half year to $0.16 per share. We will make as part of our regular assessments on the dividend levels towards the end of the financial year, where we would have a full financial year performance and also better visibility on the next financial year. So with that, I will now hand over to our CEO, Mr. Loh Boon Chye, who will deliver his business update. Good morning, everyone, and once again, thank you for joining us for the first half FY '23 results briefing. As Yao Loong had shared, we delivered a resilient and robust performance in the first half of FY '23. And you can see that our multi-asset strategy provided participants with a diverse portfolio of risk management tools in a very challenging macro environment. Our multi-asset platform also provided the revenue diversification in an inflationary and cautious economic backdrop with the strong performance in the derivatives business across equity, commodities and FX, and no doubt, a softer cash market business performance as the rising interest rate environment and uncertainty weigh on sentiments globally. Our derivatives platform, as you heard earlier, registered higher volumes, and that's across all asset classes, equities, currency and commodities. And the daily average volume increased 10% year-over-year to now over 1 million contracts, clearly demonstrating the strength of our multi-asset platform and the relevance of our portfolio risk management solutions for global investors. In this regard, very glad and excited the SGX was named Global Exchange of the Year at the FOW International Awards 2022, capping a year of many accolades from major media propagations covering different asset classes across the international derivatives industry. Notably, we registered record volumes across the various asset classes in equities, clearly, a venue of choice by the institutional clients as demonstrated in the growth across the different contracts. For the calendar year itself, 2022, our flagship, China, India and Singapore contracts, saw record volumes, both in the Asian and non-Asian trading hours. Most notably, the SGX FTSE China A50 Index Futures exceeded 100 million contracts for the calendar year itself, calendar year 2022. It clearly provides global investors liquidity availability round the clock via a trusted and efficient venue. In FX, or foreign exchange, there were also record volumes for the month of November itself, with a total notional of over USD 200 million traded in the flagship CNH Futures contract. In the INR FX Futures contract, volume traded exceeded 42 billion. And even in the Korean won contract, which we have been incubating for a while now, we saw volume across $3 billion. In the commodity space, DAV was up close to 40% as we strengthen our position as a global price discovery center for key commodities. We can expect our commodity suite to continue to garner interest as a macroeconomic proxy for market cycles, enabling market participants to manage their risk and investments as the economic landscape evolves and optimism rise surrounding China's reopening. Now let me share with you the growth journey of our iron ore contract. You heard quite a bit over the last few halves in terms of us talking about financialization of the iron ore contract. We talk about screen trading. What you see on the screen here, I think, perfectly represents our commitment and approach to building a trusted and vibrant ecosystem for our clients globally. As a recap, we launched our iron ore contract almost 15 years ago. Today, the SGX iron ore market is a very vibrant trading venue and a focal point for liquidity in a commodity that has gained significance as a macroeconomic proxy through market cycles. This success clearly is not alone by SGX. It's really a collective effort of an ecosystem coming together from producers, traders, consumers, brokers and clearing members. To advance the market, we have introduced over the years, market microstructure changes, including adjustment, [indiscernible] size of the contract and adding new functionalities, which cater to more diverse trading strategies. In the last few years, we have expanded the ecosystem, which is what we'll be talking about financialization of iron ore, we've expanded the ecosystem to reach more financial market participants such as asset managers and hedge funds. So the outcome has been an increasing proportion of screen trading and growing interest in trading iron ore outside of Asia as represented by the higher proportion of trading in the non-Asian hours. So for the whole of calendar year '22, screen trading accounted about 37% of the total trading activity. Volume in the T+1 session accounted for 19% of the screen volume in calendar year '22, and that was up from 12% in calendar year '21. And in the first half of financial year '23, screen trading accounted for 42% of the total trading activity, as you can see from the slide. So the total iron ore derivatives volume crossed 3 billion tonnes, and that is equivalent to roughly a DAV of close to 100,000 contracts a year. And indeed, for calendar year '22, that was a record. So what does 3 billion tonnes of iron ore being traded kind of represents. So for context, 3 billion tonnes of iron ore is equivalent to building around 37,000 Sydney Harbor bridges, and that's the size and scale of our iron ore market today. We are at the start of our journey to grow and entrench our key commodities, not only iron ore, but also freight as macroeconomic proxies. We are continuing to grow the ecosystem. And as liquidity deepens, drive further adoption of our contracts in benchmark indices that could potentially lead to the issuance of structured products for investors. For FX, we are truly the most liquid venue globally for Asian currency derivatives. On CNH and INR FX futures, it is clearly amongst the most liquid FX futures contracts globally. Building on this, we are now growing the OTC FX pillar. Let me share with you the progress in growing this pillar. To recap in context, when we define OTC FX pillar, that comprises BidFX, MaxxTrader and our own SGX currency note. The combined OTC FX pillar contributes about 6% of the group's revenue. And in the first half of FY '23, the ADV reached close to $70 billion. You heard from Yao Loong, there was a very slight decline half-over-half, and that's because we migrated clients to a new platform, new access, and there was a clear focus on migration of the client. But pleased to report that for January, where we just released our market stats this morning, the average daily volume has reached now USD 80 billion. We continue to enhance our client and product ecosystem for both BidFX and MaxxTrader by onboarding new clients and expanding our geographical reach across Asia Pacific and Europe. We also transitioned, as you heard, the clients to this new web-based BidCentral platform. This platform is unique and interesting because it does provide our clients with an enhanced customer experience, workflow and obviously, new functionality. And in September of 2022, to complement the overall FX OTC pillar, we launched SGX currency note with the trading of NDFs, non-deliverable forwards. And this now completes the build-out of the SGX FX OTC infrastructure. CurrencyNode were built on the strength of BidFX and MaxxTrader. You will combine both the buy side and sell side onto one platform, and clients can access multiple sources of OTC FX liquidity anonymously through a single venue. It adopts a central prime brokerage model where the central prime broker bridges participants without the need for them to have direct credit lines with each other. With relative strength in Asian economies, we continue to enhance mutual market connectivity to deepen access to Asia's leading economies and broaden our ecosystem, clearly making good progress on our mutual market connectivity and the various initiatives. In the coming months, we will commence the full-scale operations of the NSE IFSC-SGX Connect. And that is for the Nifty 50 contract, which will bring us closer to combining the growing domestic liquidity in India in GIFT and the international liquidity that SGX brings to this combined trading on the GIFT venue. Secondly, you have seen that the SGX Group and Shenzhen Stock Exchange welcome 3 participating ETFs under our ETF product link that was launched in the first half of FY '23. And the listing of those ETFs happened in December 2022, clearly deepening the financial collaboration between China and Singapore, and we look forward to continuing to grow the ETF product link. Besides cash equities, we are also deepening our access to China across other asset classes. So for example, in fixed income, we entered into a strategic cooperation agreement with China Central Depository & Clearing, CCDC, to promote SGX as the offshore bond listing venue of choice for are bonds that are cleared by CCDC and can be subscribed by investors in China's free trade zone and also by the offshore investors. To date, 12 of such Pro bonds have been listed on SGX. And in Southeast Asia, which is clearly a vibrant and growing region, we're making progress in the SET, Stock Exchange of Thailand, the SET-SGX depository receipt linkage, and target to launch it by the end of this financial year. Under this linkage, investors in Thailand and Singapore will be able to participate in the other market by a DR, or depository receipt, through their local broker and in their domestic currency. Such linkages will enable us to continue to broaden our product shelf. In the cash equity product shelf, this allow investors, for example, while ETFs to help and facilitate portfolio allocation and also in our DLCs, which has now been listed for a while, enable them to really navigate and manage a volatile market environment. So in ETFs itself, we did see inflows in the first half of FY '23, and we look towards broadening that shelf further in the months ahead. Also saw good turnover in the DLC, which actually the volume in DLC doubled as market participants use this instrument to gain exposure to China-related indices and stocks. We are not stopping here. We are further strengthening our commodities business. So in September of 2022, we added 2 variants of the cobalt and 2 lithium contracts to add to our virtual electric car complex. We have also launched the Shanghai Steel Rebar Futures to complete the virtual steel mill and to complement our iron ore contracts. Later this month, we'll be launching the container derivatives, building on our position as the largest dry Forward Freight Agreement, or FFA, clearing venue. Last but not least, we will continue to broaden the ecosystem in sustainability. We have launched initiatives to enable companies, issuers to showcase their sustainability practices through the launch of ESGenome portal as well as the SGX sustainable fixed income mark. These are 2 separate initiatives that will enable investors to better understand the sustainability efforts of companies. We have also entered into an agreement with MSCI to license the recently launched MSCI Climate Action indices for listed futures contract. So looking ahead, the reopening of China's border could potentially boost global GDP this year. Also, the inflationary outlook of the environment remains uncertain and could provide opportunities for higher portfolio risk management and market access activities by our derivatives platform. For the cash equities, near-term uncertainty may continue to persist as inflation, and interest rate risk concerns may impact growth and corporate earnings. We remain very focused on extending our mutual market connectivity initiatives. And as I said earlier, in the coming months, we will commence the full-scale trading of the NSE IFSC-SGX GIFT Connect. Our guidance for the FY 2023 expenses remain unchanged. And barring any unforeseen risks, we expect full year expense growth to be at the lower end of our guidance. And our capital expenditure guidance for the year remains unchanged at $70 million to $75 million. So looking forward, to building on this resilient and robust first half '23 performance, and importantly, helping our clients navigate the evolving environment while delivering value to our shareholders and stakeholders. Yes. And congratulations on the results. It's Nick Lord from Morgan Stanley. Two questions. One sort of about the numbers and one a little bit more strategic. Just in terms of the numbers. I've just looked at the Q1, but I couldn't remember what the full or the half year was. But am I right in thinking the derivatives contract per fee came down in Q2 versus Q1? I just -- I think that was the case. And if that was the case, could you just tell us -- talk a little bit about some of the moves, Q-on-Q and that derivative fee? And then on the longer term, and it was a very interesting slide, I thought on iron ore on the screen slaving -- screen trading and the financialization of that market. You spoke a lot about freight and you spoke about your EV sort of infrastructure. Are there any other sort of big commodity can trade? I mean, in particular, you used to do LNG? Are there any sort of thoughts as to how you might be able to move back into some of those other commodities over time? Yes. So if I recap the numbers, I'm trying to remember, I think Q1, we were talking about just above $1.60, and now we are talking about over half $1.58. So I think that's why you look at $1.60. Yes. So I think, average fee is due to a combination of proportion of contracts depending on where each of them have a different fee structure and fee level as well. So I would say that the decline, you can look at one of the reasons would be commodities, which now plays a larger impact. Financialization, while it helps drive up DAV, does actually have a downward pressure on fees as we get more participants and financial participants on screen trading, which is critical to building the iron ore franchise. So I think you will see that there has been an impact from a Q-on-Q basis. But I would like to bring it back to what I started as well. Look at it over a period of time, over a 5-year period, average fees have gone up 4% on average CAGR. Yes. Maybe yes, can you -- yes, Nick. So on the new contract itself, I think when we look at the complex, clearly, a big part of the DDAV is iron ore. We think that we are hitting a new phase of adoption, financialization as we have seen on the screen percentage and volume. Given that, I would say that we are now potentially on a more sustained path. Clearly, in the near term, if you look at quarter-on-quarter, it's next quarter to be higher and lower, it's all subjected to market supply and demand. But I would say that iron ore is likely to continue to be an important driver, followed by freight. Now while we want to focus on growing the key contracts, adoption, financialization through our global network, it's also important that we continue to look out for a very interesting future growth areas that we want to invest, so that we have a next batch of cobalt product that's coming up. So you mentioned, I think EV is something that we are investing, it's still at a relatively nascent state because, as you know, global cobalt itself is still relatively small. At the same time, I think you mentioned LNG. I think you might have seen in the news that we have also announced our plan to launch the Container Index on the 20th of Jan. I think those are very interesting buildup of our overall freight complex because then it means that we have dry bulk today where we are a market leader, we have LNG, but more importantly, I think, on -- especially on the container part, and we know that container is around 3, 4x the size of dry bulk. It's still, again, early stage. We do not think that there's going to be a very impactful near-term impact on revenue. But just from a medium-term perspective, I think those are the new contracts that we want to invest in. Nick, maybe just also to extent that I think for us, it is important to build on the strength and position that we have. So clearly, we are a very important and liquid venue for iron ore today. So lots to build up on that. And by that, what do I mean? You heard us talk about, for years now, financialization of the iron ore contract, getting screen trading, getting other players coming in. And I hope we can continue to see that proportion increasing. The next is really to try and get the contract, the benchmark, the pricing out the way into key indices globally. And when you get into that, what that means is structured products could be issued by banks, by sell-side for investors to participate with a view around the macroeconomic outlook. So that's clearly important. And along with that, we will also then extend when we talk a lot about it, our virtual steel mill, right, other contracts around it. But you build from the strength of what you have in iron ore. And then the second way to think about it is, then you want to create a cluster. And it's not by accident that we acquired the Baltic exchange 6 years ago. So today, we talk about the overall transport and commodity and freight is in there, and you heard, Beng Hong said, we're going to launch now container, having been in a good position on the dry bulk freight. And that's the way we see in terms of creating markets where liquidity begets liquidity. I know the other big commodities we can talk about, [indiscernible] is clearly one, or is clearly one, but I think we also have to understand the kind of the kind of cluster the -- strength the core platform that we have, building on strength, I think, give us a better chance of succeeding. Can I just ask one follow-up on that just for my understanding. The fact -- I mean, you said it's taken years to get financialization of iron ore. Now that you've got financialization of iron ore happening, does it mean that the lead time to financialize other products now becomes shorter because people are used to trading -- the financial clients are used to trading maybe? Would that be a fair statement? Well, so obviously, not everyone trades commodities. So obviously, for iron ore, we started off with the OTC market, the clear product, but we have the inherent strength of multi-asset. So capital efficiency, financial players are in our platform. In the stem from that, you build from introducing what iron ore really means as a proxy in trading. And that's how we created the liquidity, build coverage globally. We get our [indiscernible] going. So I think it's on a good path. And yes, I think your question also talks about you would not want to extend that into one of the big commodities. Yes, those are opportunities on the horizon. But I think building on the core strength and then drawing in more and more participants and client coverage across geography is clearly a focus that SGX Group, as a whole, will do. Okay. Maybe just to add a bit to Boon Chye's point, we are already a global financial access hub. So the same financial client likely would also be trading A50, Nifty and the rest of product right, for the longest time. I think that more -- an important part around the financialization of iron ore, to some extent, is that the more that you can get a new player, financial clients to look at your commodity suite, and when we are -- and you might be aware that we have also launched rebar, right? And then we have the other part that is our virtual steel mill, it also helps clients to also gain attention to look at the basis. So to some extent, I think it helps the related product. So if I'm trading iron ore, I think that that's a correlation to bulk. If I'm already doing this, why not we look at dry bulk? Which is why I think we have also seen more financial players in the FX space, to some extent. So it's true, but there are clients that are known to us and access us today. As a follow-up to that question on financialization, one came in from Goldman Sachs. Very strong commodity. But how much can screen trading grow further in iron ore? And what's the mature level for comparison? Yes. I would say that when we embark on the financialization strategy, we are not really thinking about the screen percentage, per se. But really, to what extent is the screen deep enough, right, where there's sufficient visibility for people who are -- do not access market through brokers, but directly through a screen. At what point do we think it's a trigger point that people are comfortable to access? We have gone through many layers of -- over the years to get some indication. I think if you recall, 24 months ago, we were on screen. Volume is closer to a 10,000 mark. Today, we are consistently at the 45,000 mark, right? So at 45,000 screen volume over the last 6 months consistently, I think that we have crossed the threshold for a large segment of financial client to be considered accessible, right, and tradeable. So I would say that one is that Boon Chye has showed the number 42%. We are happy to say that actually in the last 2 months, we are actually closer to 50%, right? So we are around 48%, 49%. So that level continues to go up as the percentage of financial participant on screen continue to grow. If we look at the very developed products out there, that number is closer to, let's say, 75%, 80%, 90%. But we would say that the voice market will continue, especially within the commodity space and important component of the overall ecosystem. It doesn't mean that actually, the voice market is shrinking, right, as we financialize or we have screened. What we have actually seen is that the voice market continues to grow, right? At the same time, the screen continues to grow, right? So we do not think that is expense of one or the other. But the number, I would say that for a very developed product is not -- is seldom 100%. It's closer to 70% to 90% mark. I think that's from Gurpreet from Goldman. Yes. So Gurpreet, I know you'd like to try and compare. I mean, look, I'm not going to point you to -- I mean, there are many others that can compare screen over physical like or whatever. And also, I do not want to pay in a picture that I show you that it's going to be upward sloping. I think what's important really is when participants belief and adopt screen trading, it makes lots of difference. You may see half-on-half, on a quarter that screen percentage may change, but what's important is the adoption, and we want obviously to see that growing over medium to long term. Why is that important? Because for the financial players, it now trades and I know, they were in equity derivatives. They were in FX derivatives. And now they have one more contract to trade, which means I'm more likely to retain them on my platform. And then if they have other offices around the globe, it's much more easier for us to be cross-selling. And that's, I think, the important point. And they are going to get some variation, but I think the adoption, I think, speaks of a more important broader ecosystem that SGX can offer to our clients and participants. Next question, Harsh. Harsh from JPMorgan. A couple of questions. First on dividend. It looks like you had fantastic numbers and fantastic visibility, the entire multiple sources of revenues, multi-asset platform, all the numbers you showed across different asset classes. So that provides a lot of visibility to your revenues. Despite higher base, your operating margin is still pretty steady, 58.5%. So why not pay out more? Why stay at $0.16 or, whatever, $0.08 per quarter? Well, I mean, Harsh, we've been saying [indiscernible] The system revenue [indiscernible] of medium-term growth for the business. But I think what is important, we want to reward our shareholders. And if you look at how we've moved this journey in the last 5 years, clearly, balancing between investing for growth, building all those pillars. And as you already pointed out, in an environment like that, yes, it's a platform that offers participants different solutions, but it's a description of revenue, and now we can see the different pillars. And from that, projecting how we want to grow organically, M&A opportunity and then rewarding shareholders. So those are things that we will clearly be focused on. Right. If I could just understand a couple of things, better, Boon Chye. One is in terms of payout ratio, we have -- we used to be 19s a couple of years, went to 18s, now we are closer to 17s. Is that how you look at it? Or do you look at it in absolute dollar terms that you are less retaining $100 per year or $150, whatever? Or is it more on the debt-to-EBITDA level? So what are the considerations that get into your payout discussion? And let's say, as I think Yao Loong pointed out, there seems to be some guidance that full year you may consider increasing your dividend. So any guidance on how you think about the process would be useful. Yes. So I think if you look back maybe as far as 10, 15 years ago, as you look at our dividend policy, we clearly had a policy of paying the last -- before the change was $0.20, higher $0.20 a share or 80% of net profits, and then we moved it to absolute. And I think what is important is we want to grow the business. And I know there is a segment -- dividends are important to investors. I think there's a segment of also the investing of analyst community that continues to look at the payout ratio. The reason I point to 10 years ago or how we have shifted, we have shifted from the high of $0.20 or 80% of net profit to absolute dividend, and we want to grow the absolute dividend payable to shareholders. And if you look back, we haven't really moved or changed or lower or rather lower our dividend in that regard. And I think total shareholder returns are important. The market should do what it does with the share price. But we want to make sure that we create value and then we pay our shareholders. Okay. Finally, on the inorganic opportunities as you think about them. You have already delevered a bit from 1.4 to 1.1. Can you just remind given that interest rates have changed meaningfully since we last spoke? What is the new normal in terms of comfort zone, if you have to lever up? That's one. And what dollar amount effective we are looking at in terms of total size? And next, let's say, 6 months or in calendar '23, should we expect a meaningful deployment of capital for inorganic purposes? And any guidance around what kind of stuff you're looking at? Yes, I will take the first part. So with -- just a reminder, we are AA2-rated entity. So when we look at what the rating agencies operate on, I mean there's a few metrics and clearly, gross debt-to-EBITDA line that they draw, not a red line, but kind of a guidance is around 2x. Consistently, we've kind of managed within that number, actually way below that number. So now we are about 1.1x combination of lower absolute debt levels and rising EBITDA. So as we look at the sizing of our opportunities, I think in the next 6 months, clearly, the focus is on organic execution, OTC FX. We have put in place the pieces with the ECN. So it's about driving that growth. We clearly need to balance some of that with rewarding shareholders. But we will take a view on all these opportunities. We will size it up. But I think if you look at it, being a AA2-rated clearinghouse is an important value proposition to our customers. Harsh, I think hard to really point out what are the big M&A. But what I would say is to Nick's question earlier on our commodities and iron ore, it's important for us to think about building on the strength. So some big demanding may come about. We obviously scan the horizon quite a lot, and we think through that. But at this call to what we do, I think building on those strengths. One area that I talk about is really transplant commodities. It could be in other areas like FX. But if you can build on the FX pillar, transport commodities, and if we add to that, those are really, I think, within what we've been able to invest by cash flow, some leverage. And if the big thematic will come up, we'll then look at it and what it means for SGX, for our stakeholders. Okay. There's a question from Maybank. Last year, you made some fairly positive statements about pickup listings in the next couple of years. You made positive statements on listings in the next couple of years, particularly in new segments. Can you give us an update on the outlook? Well, I guess we come off quite an extraordinary year in terms of capital markets activities, where we've effectively seen the market, the IPO market globally at very low activity levels. That's unusual. And we also know that markets don't remain shut forever. So if I look at where we were a year ago, I would actually say I'm more optimistic today. Now I'm the sales guy, so you would expect that. But what are we seeing? And frankly, I don't really see this reopening in all earnest in the next 3, 4 months. There is still some uncertainty in the market, but we see some bright spots, some early activity in capital markets in China at the start of this year. Probably towards the end of this upcoming results season, we may see some activity from other parts of the world. But a lot of this is linked to the macro outlook. The consensus is for Q2 to see a stabilizing rate environment. Very important for IPO activity. So I do expect on the back of that, the markets to come back, I would say, towards the second half of this year. In the end of the day, company still needs capital to grow, and shareholders still need liquidity. We also see across this region, a huge amount of companies that are now large enough, mature enough to start thinking about their public market journey. A lot of these are in the newer economy sectors. They fit the sweet spot of what we can offer. We also see that Asia capital is becoming more relevant for Asia underlying assets with the focus that investors have increased on the region here for macro reasons, the inflows that we've seen as a result of that. So I remain optimistic for the medium to longer-term outlook here. I think there's a huge opportunity ahead, but still cautious for the next couple of quarters. Andrea from CGS-CIMB. Just 2 questions from me. Firstly, on your treasury income, do you think you could give us the group revenue figure, excluding the treasury income, just to get a better comparable figure with previous quarters? And also, how should we think about this treasury income potentially where it can end up, barring any pause or cut in your Fed rate in this first half of the calendar year, are we likely to see this going back up towards the 2020 figure? Or perhaps even exceeding that? Two parts to your question. So the treasury income for first half is so I think you can do the math. Guidance for the whole year, I think it depends on a few factors where rates will be how active our derivative markets, the OI that will have an impact on the amount of collateral that we have. So I will not hazard a guidance at this point in time. But having a look at some of the reports that are out there, I must say, you guys don't need any guidance from me. You guys are pretty good at estimating the treasury income outlook as well. So look, there are many factors. So at this point in time, sharing with you what the first half numbers and think second half, we will see what happens. I'm Tabitha from DBS Bank. So I only have one question. Are you able to share specific updates for Scientific Beta and BidFX in terms of the client acquisition targets, talent retention? And how are the financial performance against your projections? Are we able to get a sense of the revenue and net profit for first half '23 or FY '22? Okay. There are multiple areas that you're asking on Scientific Beta. In terms of talent, we have been expanding the number of people we have in multiple geographies, whether it's in the U.S. And we have announced as well, we opened an office in Australia. We are very positive about the prospects there. We are continuing to hire new talent in Europe. So this is exciting times for Scientific Beta. In terms of revenue, clearly, the equities pull back globally has affected all index providers. So if you look at across the industry, anybody with asset-based fee, such as ours as well, would have seen some potentially up to double-digit decline percentage-wise. So we did see a pullback in some of the revenue for the first half. We are obviously positive about the fact that equities market will not be down forever, and we will continue to see growth in the future. The world is also clearly increasingly interested in more strategies or indices in climate and in smart beta as well. So we just announced some mandate that we won in Europe for some of our climate indices. Clearly, we do not announce that frequently. We only announce it when the pension fund or our clients are comfortable with it. In this case, we are very happy to have been able to share the news with the industry on the progress and growth of the business. So we are very confident that the index business continues to be a very exciting opportunity for the group. So on the -- yes, on the BidFX side, I would say that we continue to be excited and glad that we have made this investment. On the people side, I think despite what you have heard on the news around all the movement in technology staff last year, when we look at the top senior executive, the COO is actually here. JP is sitting there. He's one down, and 2 down. We are fortunate that we have been able to retain the staff. I think on the revenue perspective, I think while Boon Chye and Yao Loong briefly mentioned that the revenue growth has slowed down, but we are optimistic. And now given that we have actually made a major migration to a new trading platform for clients, it will be off HTML5, delivered through Google Edge Node to ensure that clients, who are trying to sign up to the platform now will be -- the process will be even easier, because you don't have the usual local in-store requirement, just a bit of details around that. So with that itself, I would say that we are back to the growth trajectory. We would -- we are planning to continue to invest. We are bullish around foreign exchange as a growing asset class. We continue to be bullish around Asian FX that we have a significant market share and the synergy that we have around futures OTC and complemented by technology. So I would say that we are -- I think we are over from a BidFX perspective, the more challenging part that imagine they are trying to change Office 365 from every single client and getting them to reinstall and use it. And then you've come find the icon and don't even know where to click for certain functions. I think we are -- we have successfully migrated the clients to the new platform. It's a lighter platform. You will put us in a better place to grow, because it'll be easier for clients to access the platform. There's another question from Goldman Sachs, Gurpreet. He wants a little bit more information on NSE Gift. Particularly when is it happening? Are we keeping our clearing fees and clients? And how is the client responds? So we did go out in November, addressing the market at large, talking about full-scale operation of the Connect happening by the middle or slightly after the middle of this calendar year. I'd say we've been carrying our community with us all the way through this journey of this project. Of course, we've had to. There's been widespread consultations. There's 2 regulators involved. There's 2 market infrastructures involved. It's a fairly complex and fairly unique project. I would say that we have been very blessed in some ways with the recent, quite heightened interest in sort of the addressable investment in risk management pool, which India's capital markets represent. I think when we began this journey, there may have been some skepticism. Is India interesting enough, big enough to be worth a Connect? I think that's off the table now. People know it's big, it's interesting, volatile, returns are idiosyncratic. So clients are really quite interested in making sure that as and when we're ready, they come with us. And the pressure we're actually facing is, can you give us access to more things? So to your question about fees, our first and most important priority is to make sure that existing products are well reset with liquidity. It helps a great deal that the clearing house remains the same. But to remind everyone, that is the construct of the Connect, that before and after the go live of the Connect, you are still facing SGX-DC clearinghouse. So our first and most important priority is to make sure that liquidity is properly set -- reset. And then after that, there's a much larger addressable market, and India will develop in derivatives the way you've seen all other markets. Any last question from anyone online or in person? Okay. In that, thank you very much. I appreciate your presence and participation. Have a good day.

EarningCall_286

Thank you for joining QuinStreet's Second Quarter Fiscal 2023 Earnings Call. Today's call will be recorded. Today we're joined by QuinStreet CEO, Doug Valenti; and QuinStreet CFO, Greg Wong. Following the prepared remarks there will be a Q&A session. [Operator Instructions] Thank you, everyone, for joining us as we report QuinStreet's second quarter fiscal 2023 financial results. Joining me on the call today are CEO, Doug Valenti; and CFO, Greg Wong. Before I begin, I would like to remind you that the following discussion will contain forward-looking statements. Forward-looking statements involve a number of risks and uncertainties that may cause actual results to differ materially from those projected by such statements and are not guarantees of future performance. Factors that may cause results to differ from forward-looking statements are discussed in our recent SEC filings, including our most recent 8-K filing made today and our upcoming 10-Q. Forward-looking statements are based on assumptions as of today and the company undertakes no obligation to update these statements. Today, we will be discussing both GAAP and non-GAAP measures. A reconciliation of GAAP to non-GAAP financial measures is included in today's earnings press release, which is available on our Investor Relations website at investor.quinstreet.com. Thank you, Laine. Welcome, everyone. Well, first the headline. The anticipated sharp reramp of Auto Insurance client marketing spending has begun. And it looks like it's up into the right from here. Our Auto Insurance revenue is expected to jump by over 60% this quarter, the March quarter, versus the December quarter. So we are seeing the significant positive inflection we anticipated. Excitingly though, even with the January search and its immediate positive impact on our results, we are so early in the full recovery and reramp of Auto Insurance. We expect much more to come. We've been predicting this significant positive inflection in Auto Insurance, our biggest client vertical, for some time and we have been preparing for it. We believe that we are at the beginning of a ramp that over coming quarters will lead back to Auto Insurance client spending levels seen prior to the inflation challenges of the past couple of years and then, to further strong growth from there, as the share of marketing budgets and consumer shopping, represented by digital media, continues its relentless march up into the right. The return of Auto Insurance marketing spending is due mainly to carrier progress adjusting their products and increasing their rates to offset higher costs and to the resetting of carrier combined ratio targets as of January 1. Consumer shopping, traffic, online fraud insurance is also up as expected, spurred largely by the rate increases. QuinStreet revenue and margins are increasing rapidly, as growth in insurance, combined with already strong momentum and our other two nine-figure annual revenue client verticals, those of course being Home Services and credit-driven Financial Services. As a result, we expect record total company revenue in the current March quarter and a significant jump in adjusted EBITDA. We expect record revenue again and a further jump in adjusted EBITDA in the June quarter. Looking back at the December quarter, which was our fiscal Q2, results were good, especially given conditions in Auto Insurance and the shifting macroeconomic environment in the quarter. Our business model, once again, demonstrated its resilience. And we, once again, demonstrated our ability to successfully and profitably navigate even the most complicated environment. We grew revenue year-over-year in Q2 and generated positive EBITDA in what is our softest seasonal quarter and despite facing both the bottom of the Auto Insurance market and the shifting macroeconomic environment. December quarter results also included continued investment spending on exciting long-term growth initiatives and capabilities as promised. And as our positive results demonstrate, we are making those investments with the efficiency and margin and cost discipline you have come to expect from QuinStreet. Our commitment to continue our disciplined investment and long-term initiatives through the transitory challenges in the insurance market is paying off. Revenue and margins are rebounding quickly. We expect them to continue to ramp in coming quarters and that our long-term prospects have never been better. I want to make some brief comments about the macroeconomic environment, which we continue to assess and that we believe is reflected in our outlook. Most importantly, we expect the reramp of Auto Insurance client spending to be the dominant driver of our performance trends in FY Q3 or the March quarter and likely in quarters to come as carrier spending continues to reramp. Related and in addition, consumer shopping for auto insurance typically increases during periods of economic uncertainty. We would expect that to be another net positive for our insurance results, especially given rate increases. As for our non-insurance client verticals, the majority of our business there is leveraged to homeowners and to prime and near-prime consumers. As you have heard from the banks and credit card companies, the balance sheets, credit and spending levels of those consumers continue to be in good shape. Turning to our outlook. We expect total revenue in fiscal Q3 to be between $160 million and $170 million, a company record. We expect adjusted EBITDA in fiscal Q3 to be between $7 million and $8 million, reflecting the immediate, significant, but still early impact of top line leverage on reramping insurance revenue. For full fiscal year 2023 ending in June, we expect revenue to be between $610 million and $630 million. And we expect full fiscal year adjusted EBITDA to be between $25 million and $30 million. Our financial position remains excellent with a strong balance sheet with almost $80 million of cash and no bank debt. And we are entering a period that we believe will be represented by ramping revenues expanding margins and strong cash flows. Thank you, Doug. Hello, and thanks to everyone for joining us today. The December quarter demonstrated the strength and resilience of our business model and client vertical footprint. We delivered solid year-over-year revenue growth of 7% to $134 million despite challenges in Auto Insurance as well as a shifting macroeconomic environment. Our non-insurance client verticals represented 64% of total Q2 revenue and grew 31% year-over-year. Looking at revenue by client vertical. Our Financial Services client vertical represented 67% of Q2 revenue and was $89.3 million approximately flat year-over-year. This was a result of the continued strength in our credit-driven and banking client verticals, which largely offset expected challenges in the insurance -- in insurance for the quarter. Within insurance, carriers continued to limit their marketing spend in the December quarter to manage calendar year 2022 combined ratio targets. That said, as anticipated, we have now seen the significant positive inflection in revenue beginning in January. This carrier combined ratios reset, carriers begin to benefit from rate increases and consumer shopping intensifies in response to higher rates. Most importantly, we expect insurance revenue to continue the ramp up into the right over the coming quarters, as we believe we're in the early stages of the full recovery of that market. Our credit client verticals of personal loans and credit cards as well as our banking business delivered excellent results in Q2 growing a combined 35% year-over-year. Revenue in our Home Services client vertical grew 27% year-over-year to $43 million or 32% of total revenue. As we've discussed in the past, Home Services may be our largest addressable market and our strategy to drive long-term growth here is simple. One, grow from existing service offerings, like window replacements, solar system sales and installation and bathroom remodeling none of which we believe are anywhere close to their full potential. And two, expand into new service offerings, where we see the opportunity to at least triple the number of these sub-verticals we currently serve. This multi-pronged growth strategy is expected to drive double-digit organic growth for the foreseeable future. Other revenue was the remaining $1.8 million of Q2 revenue. Adjusted EBITDA for fiscal Q2 was $1 million. Turning to the balance sheet, we closed the quarter with $79.1 million of cash and equivalents and no bank debt. In closing, we are excited about our business and financial model as we head into the back half of our fiscal year. The significant positive inflection we are seeing in insurance combined with the continued strength of non-insurance client verticals is expected, to drive strong total company revenue growth and rapid expansion of both adjusted EBITDA and cash flow in the March quarter. We also expect revenue growth, adjusted EBITDA and cash flow to strengthen again, in the June quarter. Thank you. And at this time, we'll be conducting our question-and-answer session. [Operator Instructions] Our first question comes from Jason Kreyer with Craig-Hallum. Please state your question. Thank you, gentlemen, just wondering, if you can help us bridge the profitability gap because I certainly appreciate the record revenue that you're forecasting over the next couple of quarters. But if we go back a couple of years like the back half of 2021 the last time you were kind of at revenues at these levels we were seeing EBITDA margins in kind of the double-digit range. So I'm just wondering, what's different about it this time. Or do you expect that to maybe, occur a couple of quarters out from now? Yeah it's a great question Jason. And thank you for it. I'd say and a short answer would be we expect it to come pretty soon. The longer answer is, we are spending on growth initiatives across the company and -- including insurance. And we're doing that because we see big attractive growth opportunities with great incremental variable margins, and because we have the capacity and a surplus to do it. And we are getting great results from it. But we are nowhere near that, to where we expect to get with insurance over the next few quarters. It is still very early in the revamp there. So we're not getting the kind of top line leverage from insurance or the full top line leverage you would expect because we're about $20 million a quarter. Even in the March quarter it will still be about $20 million a quarter short of the pre-downturn peak in insurance. And we're also not getting the full media margin or variable margin leverage we would be getting, because all the carriers aren't back which means we have fewer matches for consumers which means our media efficiency and yield are down which means we don't have that first level margin. So, now all that being said, we're going to go from about breakeven in the December quarter to about a 5% adjusted EBITDA margin in the March quarter. So you can see that, it's coming back very rapidly. And all indications are we're going to keep gaining the top line leverage and that media efficiency. And therefore, you should just continue to see -- I know we've already told you, we expect to see continued expansion of adjusted EBITDA margin in the June quarter and certainly beyond. So that's the -- that's what's going on. The -- but I think we're spending that money -- spending on growth. I think is being done very effectively and obviously disciplined way. Effectively, hey we grew noninsurance work was 31% at great scale in the December quarter year-over-year. And we are seeing a big fast reramp and bounce back as the insurers come back, both in our top line to record levels and adjusted EBITDA as I said from kind of breakeven to 5%. So I think we're really well positioned for the next cycle and position to take advantage of continuing to scale all of our businesses including insurance as it comes back. And you'll see -- you won't see any degradation of variable margin. The variable margins we're driving in noninsurance are very attractive, certainly consistent with it in many cases above our historic levels. So that's happening. It's just insurance again. Top line is not fully back yet, nor is media efficiency, because not all the carriers are back fully yet, although we have some that just started coming back again this month. Obviously, we had a number of them coming back in January and then we have even more on their way. So, the outlook is very, very positive. I would also argue that, as we've looked at -- we've been talking for the last couple of quarters about continuing to spend on these growth initiatives. I would argue suspending modesty momentarily that we've done that pretty optimally. We -- in December, we spent -- just we didn't -- we spent very aggressively on everything that we think made sense to spend on for the future in the noninsurance and insurance verticals. And we still made $1 million EBITDA. So, we're spending to the capacity we think makes sense, because we have great big long-term opportunities and we're delivering opportunities. We'd see more opportunities to keep doing that and to keep growing at big scale and to keep big driving margins at big scale. So, I'd say right where we are, would we love for insurance to come back faster? It's going to keep coming back. It does look very sustainable. And it looks -- our own indications from the carriers are it's going to continue to come and continue to scale and be sustainable because our rates are really reflective of the current environment and are delivering great results for them. But super happy with where we are. What's happening is what we said was going to happen. Okay. Thank you for all that. Sorry, apologies in advance. I've got like a three-part question on Auto Insurance. So, I know January was a tougher comp for you and then the comps ease in February. So I just -- first of all just, wondering if you can give a little bit more clarity on the cadence of what you've seen so far in early '23. And then second question just if there's any details you can provide on how traffic is ramping up like if there's any numbers behind that? And then the third question. As you see these rate increases, I'm just curious if that means you're making more money on all the opportunities that you're delivering to the carriers. Yes. Got you. The [indiscernible] in early 2023 is kind of what we indicated quick snapback from a few of the bigger client carriers that are furthest along in terms of their rate and product adjustments are pretty immediate. And that's why 60% Auto Insurance jumped from the December quarter to the March quarter. And we have other carriers, another big carrier I think just yesterday or maybe today coming back into the channel in a pretty significant way. And we're talking to the carriers and they are all at different stages of coming back in. Some are back in very strongly, some are not yet, but planning it. We haven't heard anybody say hey I'm just not going to be big in 2023. That's just not something we're hearing. So that's kind of the cadence. But again we're -- even with all that we're $20 million shy of the pre-downturn peak in Auto Insurance revenue per quarter. So that gives you a sense and a feel for how much more top line leverage is to come. And also, as they -- as more carriers come back, not unimportantly, we have more places to match consumers, which means we have better media efficiency, better media margins, better overall margins. So you have a double effect on overall margins as that happens. So it's coming. It's ramping. The ramp is -- hard to say at this point the ramp is accelerating or not, but it's a steep ramp 60% quarter-to-quarter is a steep ramp to begin with. And we expect, as we said continued ramping. That's the indication, we're getting from everybody. That's the indication we're getting from the industry in terms of the rate. That's the indication we're getting from inflation, as we look at what's happening with used car pricing and supply chains and another factor. So everything is lining up for this to be – particularly with the rate increases of course. Good year – very good year and the beginning of a big cycle for insurers. In terms of the details on the traffic, I don't have the details in terms of how much is up, but it ramped up very quickly in January from December. Double-digit percentages plus. And we've seen it – we see it. It came up and it ramped into January, and it's kind of plateaued. And it plateaued at a significantly higher level than it was in the last part of last calendar year. Also, industry folks are reporting increases in shopping behavior. J.D. Power came out with a report I think a week and half, two weeks ago it said that, the percentage of consumers shopping for insurance is the highest since they started tracking. So again, nothing about that is surprising, right? We know that, everybody got the rates increased on them over the past year or so or just about everybody. And those rate increases were not small 10% sometimes 15%, 20%. So if you're a consumer, even if the economy is good you're probably going to go and see if you can save money somewhere else. If you go to shop your – a big percentage of those – of you are going to wind up on QuinStreet insurance marketplaces. So good solid ramp and participation by consumers and not – again not unexpected and that should be a continued positive driver of revenue and insurance for us. The rate increases don't reflect themselves directly in our pricing. But they certainly give the clients more surplus with which they can spend on marketing and higher lifetime value than they would have without the rate increases which means that the level that they can spend or the pricing they can spend can be higher. So there's not a super direct connection, but there's a very strong connection between the rate increases and what the carriers are doing. What we've generally seen with the carriers that have gotten their rates increased to the levels that they think are working is good strong demand and good strong pricing for the segments of consumers across the board. It's what you would hope and expect is the rate is now reflective of a healthy economic model and they're able to spend like they would in a normal positive cycle on that – on attracting those segments and on underwriting. So that's probably the best I can do on that. Hey. Doug back to the guidance, I mean, really good revenue outlook. Obviously, the midpoint on the EBITDA it looks like 90 bps of kind of compression year-over-year. And you just touched on this, but I want to make sure, I get a good grip on it. So it sounds like it's not a mix shift issue. It's basically you guys staffed up a good bit to basically handle a higher level of insurance than what you're seeing today and maybe what you're expecting to see in the quarter or two ahead. But as the top line continues to kind of lift from here we should – I guess, are we expected to see better-than-average incremental margins maybe as you move into the next fiscal year? Is that the way to think about it? It is. It absolutely is. We have very good incremental margins right now across the board except in insurance, where the incremental margins are fine and accretive, but not yet where they will be as we get more top line out of that vertical and more media efficiency out of that vertical with the participation of more and more carriers. That's kind of the gist of it really pretty mathematically simple and not complicated. That's exactly what's going on. And we've said this all last year, we said listen, we – I think we said it, the year before. We were not going to stop investing in long-term growth and big initiatives during the insurance downturn, because they knew it was transitory, and we wanted to be ready for the other side. And this is the other side. And as I said, I think we kind of -- from our perspective, given the size and the attractiveness of the opportunities we have in front of us, we feel like it was pretty optimally done. Again, we did it even in December, which was a very soft quarter from every angle with a lot going on seasonally from -- insurance went down. They got down again because of the late season winter storm. And then you had -- we had started to see some impacts along the edges, on low-income consumers and we still drove $1 million of adjusted EBITDA. And you said this last call, we know how to make money. And so despite, all that despite spending very aggressively, but in a QuinStreet kind of disciplined way on big opportunities, we still made money. So you know we're going to make money, and we expect to just make more and more money in coming quarters, as we continue to get more back in insurance. Okay. Makes a lot of sense. And then also on the consumer credit-driven verticals, there's a lot of fear out there around kind of deteriorating consumer balance sheets. That's not necessarily bad, for some of those businesses I guess, maybe personal loans, if you can go, a little bit deeper down the spectrum. But I'm looking for a little bit of commentary or just some color around, how that progressed in the quarter, maybe start of the quarter and maybe even up until January, kind of what you guys are seeing in that channel, what the consumer appetite looks like versus the sources of credit. Sure. Let's start with credit cards, which is one of -- is a big business for us and good business for us. We're seeing very strong consumer demand, particularly for travel-related cards, which is what we're -- we have the most leverage to. That's the biggest part of our mix. And particularly in travel-related cards with prime and near-prime consumers, which is a dominant consumer base that we serve in our credit cards business. As far as the issuers go, and their credit standards we have seen almost no timing. Strong demand, enthusiasm, very successful limited time offers. Any adjustments that we've seen have been very incremental on the edges and probably represent less than 5% impact, on the aperture of their marketing appetite. So, it's kind of full steam ahead, with the big banks and the credit card issuers and we serve all big credit card issuers. And so we're keeping a close eye on it. They're keeping a close eye on it, but their balance sheets are in great shape. The consumers are not even yet back to pre-pandemic card balances or delinquency rates. And so we're -- the consumer, is in very good shape there. Where we are seeing some deterioration of credit, and it's been -- and it's fully incorporated into our outlook and offset as you said, by other things we do in the same business, is in personal loans. A little bit more of tightening than credit cards, as the lower income consumer is under more pressure, understandably from inflation than those prime and near-prime consumers. And so, we have seen some effect there. Not huge, but some. And it's partly -- I almost said largely, marginally might be the better adverb, but let's say for now partly offset, by the fact that as you know in our personal loans business, we also match to credit repair, credit counseling and debt settlement clients. And so oftentimes, there are two things that can feed our personal loans business about credit. One is as consumers are trying to get more on their credit card balances, we see stronger demand for credit card debt consolidation in personal loans, and that is beginning to happen. And we also see more consumers get into a little bit of trouble, with our credit particularly at the lower income levels, and they end up needing assistance of other types of assistance like, credit repair, credit accounts and debt settlement, which we and we have a big business and big clients, big high-quality clients that serve those consumers. So net-net, the credit side of the business is in really good shape. Hi, guys. Thanks for taking my question. I just want to touch on the guide for next quarter. So you had a nice quarter out of Home Services. I think they grew 27%, maybe not growing that fast next quarter but let's think mid-teens low 20%. Do you think Q3 grows at similar rates? Just trying to get a gauge on how much growth we could see out of the Auto Insurance and Fin Services segment? Thanks. Thanks, Matt. Greg, I'm not sure, I mean, we -- I think year-over-year growth implied in the guide is what Greg for the March quarter? Yes. But, I guess, I'm trying to gauge whether or not we should see similar type growth out of the Home Services segment because I'm trying to gauge how much Financial Services would grow year-over-year. I guess, that's what I'm trying to ask. We don't guide specifically by verticals. So those are numbers that -- not numbers that we put out there that said I expect Home Services to continue like I said in my prepared remarks due to raw double-digit organic growth rates. Depending on the quarter it can vary anywhere from 15 to what you just saw 27. So -- but I expect that business to continue to perform well and throw off double-digit growth. It's going to be in the same range as it has been in the 20-ish percent range is not a bad assumption. You might be off plus or minus a couple of points, but that business is pretty solid 20% year-over-year growth quarter-to-quarter and has been for a while and we expect will be into the future. We had a particularly strong quarter last quarter of course and we'll have those as well. But it's not a bad range to consider it being in that that's all. Hi. Thank you. All right a couple of questions. The first one – one of the trends recently has been auto sales have been at low levels for both new and used cars over the past couple of years and the mix has varied. And I'm wondering if that mix element does have any impact on the demand for your insurance, sort of, the pricing of the policies. I imagine it would but wondering what you actually thought. We -- not meaningful. Demand doesn't change the market in a meaningful way. And we've not heard that from carriers and we haven't seen it in the budget allocations. Most insurance as you know is really bought for existing ownership. Not that there aren't any policy sold for new ownership, but most of it is for existing ownership. And the softening is really incremental in those markets. So A it's not a big part of the overall mix annually; and B, it's relatively -- while it's meaningful it's relatively incremental on what's happening with new. And when I say you want new whether they be brand new or used and so it's just not a meaningful impact. And we have not seen that and we have not heard that from our carrier partners. Okay. Doug also I wondered if the soft period recently has given you an opportunity to maybe gain some share of budgets in some of the key carriers. I know Progressive has always been a key one, but you've had [indiscernible] getting a bigger share and certain of the other ones. Has that been a part finished before you. It's part of why we've been spending so aggressively. We wanted to put ourselves in a position to -- as the market came back have gained and to be able to benefit from the most share as possible. So we have -- we do believe we have gained share on -- from the clients in both the media side and the budget side. Okay. And one last one. I was wondering about the comment that was made earlier about tripling potentially the subverticals served in the consumer products area and consumer services. And I'm wondering how you would pace such growth in terms of the cost positioning that would be required to enter new markets relative to embedding yourself further in existing markets? Yes. It's in the Home Services trades that Greg was talking about and the trade would be like kitchen remodel would be a trade. We are in about a dozen verticals there now trades there now we think we can be in a lot more. We think we can triple the number we're in. We pace that really based on how fast those we're able to do that within a reasonable contribution margin range. We invest a lot in Home Services, because there is such a big opportunity but we can -- it's more limited by our execution capacity than it is financial capacity. So we haven't found that it's been a drag. And in fact, Home Services is one of our highest contributing businesses. When I say contribution, I mean, you got several layers of margin, right? The first layer of margin is media efficiency. Second layer of margin is you then take the people in that business out. And after media costs and after people cost you have contribution margin. We're pushing Home Services kind of as fast as we can execute and to grow those markets and it's still one of our highest contributing businesses in terms of percentage and dollars. So it’s not limited financially in what we're doing in Home Services. Sounds like a great quarter. Just wanted to ask about insurance, I know you've talked about Q3 and Q4. Just wanted to get your feeling and color on how it would continue into Q1 of next year? Yes. It's a good question. We would expect it to continue to ramp. We think we're in a very -- in a multi-quarter ramp as these carriers are getting their legs back under economically with the rate increases. And as they get the products and states aligned with those rate increases to get their portfolios where they want them they've got a lot to come back from as they had to really close down a lot of their efforts in marketing and expansion over the past couple of years with the issues they had with combined ratios. So, every indication is a continued ramp. I think I said a few quarters ago about that we might be entering a super cycle. I think we are likely to have a good long multi-year cycle in insurance, because the rate increases have been very healthy. They've been very smart. And the carriers are just going to keep making those economics and reflecting them in their market activities in the market presence. So we expect a good long trend up into the right for insurance. And that's again driven quite simply by the fact that they now have rates that are more reflective of the new cost environment, both on the catastrophe side as well as on the repair side. Okay. Thanks, and then, can you help me understand more about the increase in product development expense. Is this going to occur basically as long as insurance continues to ramp. Can you help me understand that? I think we won't keep increasing it. I think we're kind of at the level we're going to be at for a while. And then what's going to happen is, it won't grow like it's been growing or like it grew this past couple of years, but revenue will. And so that's how you get the margin expansion, right? You get more revenue driving more incremental variable margin on top of a semi-fixed, relatively fixed product development and other cost base, which is why you're going to see that margin continue to expand and why you're seeing the jump like it did like we expected to in the March quarter from, again, breakeven to 5% already in adjusted EBITDA in the March quarter and more than that in the June quarter. As you run your numbers, you'll see our assumptions there that they're going to expand another point or two in June. Thank you. And there are no further questions at this time today. Thank you everyone for taking the time to join QuinStreet's earnings call. For a replay of this call, please dial 844-512-2921 domestic or 412-317-6671 international and use the passcode 13735822. Once again that passcode is 13735822. This replay information is also available on the earnings press release issued this afternoon. This concludes today's call. Thank you.

EarningCall_287

Good day and welcome to the Amtech Systems Fiscal First Quarter 2023 Earnings Conference Call. Please note that this event is being recorded. I would now like to turn the call over to Erica Mannion of Sapphire Investor Relations. Good afternoon and thank you for joining us for Amtech Systems’ fiscal first quarter 2023 conference call. With me on the call today are Michael Whang, Chief Executive Officer; Lisa Gibbs, Chief Financial Officer; and Paul Lancaster, Vice President of Sales and Customer Service. After close of market today, Amtech released its financial results for the fiscal first quarter of 2023. The earnings release is posted on the company’s website at www.amtechsystems.com in the Investors section. Before we begin, I’d like to remind everyone that the Safe Harbor disclaimer in our public filings covers this call and our webcast. Some of the comments to be made during today’s call will contain forward-looking statements and assumptions that are subject to risks and uncertainties, including, but not limited to, those contained in our SEC filings, all of which are posted within the Investors section of our corporate website. The company assumes no obligation to update any such forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of today. These statements are not a guarantee of future performance, and actual results could differ materially from current expectations. Among the important factors which could cause actual results to differ materially from those in the forward-looking statements are changes in technologies used by customers and competitors; change in volatility and the demand for our products; the effect of changing worldwide political and economic conditions, including trade sanctions; the effect of overall market conditions, including the equity and credit markets and market acceptance risks; ongoing logistics, supply chain and labor challenges; capital allocation plans; the worldwide COVID-19 pandemic, and our ability to effectively integrate our acquisition of Entrepix Inc., which we acquired in January 2023. Other risk factors are detailed in our SEC filings, including our Form 10-K and Forms 10-Q. Thank you, Erica and everyone for joining us today. In the fourth quarter, we generated $21.6 million in revenue representing a year-over-year decrease of 19%. As we discussed last quarter, driving this expected decrease was the softening of demand in our both advanced packaging and SMT products following two strong years of capacity expansion and as customers are currently evaluating capital spending projects, due to the changing market conditions. Helping offset this, we continued to see very strong demand for our high temperature belt furnaces for EV applications. Overall, we remain excited and steadfast about our long-term opportunities across all of our businesses. Within the semi division, while we are currently transitioning through a downturn in the spending cycle for some of our products, our competitive position in the industry remains strong which creates an opportunity to capture additional upside in the next investment cycle. Fortunately, we are currently experiencing a record surge in demand for high temperature built furnaces with EV applications as a driving force. While still early, repeat orders like the recent press release today makes us optimistic regarding the scale of the opportunity ahead. Adding to this EV tailwind, we continue to see strong demand for silicon carbide consumable products as the industry undergoes this multiyear capacity expansion cycle. Turning to our strategic growth initiatives, three weeks ago, we announced the acquisition of Entrepix, a globally recognized expert in CMP and wafer cleaning. With the addition of Entrepix, Amtech now offers one of the industry’s broadest sets of substrate processing solutions, providing robust cross-selling opportunities across the combined customer bases. To provide additional perspective, I’d like to take a moment to discuss Entrepix’s business in greater detail. Starting with the engineered products, these are upgrades, obsolescence and replacement parts developed by Entrepix for the most popular 200-millimeter and below CMP systems and cleaners and together represents roughly half of the business on an LTM basis. Utilizing Entrepix’s engineered products, customers are able to maintain their existing CMP and cleaning tools and ensure they are operating at peak performance. As the OEMs for these legacy tools tend to focus on 300-millimeter platforms and are often not well resourced to support 200-millimeter and below tools in high volume, Entrepix fulfills the need for customers and OEMs alike. In fact, given the improved performance, reliability and lower operating costs created by replacing legacy parts with Entrepix’s modernized engineered products, many OEMs have become both customers and a referral source. The very large installed base of these tools in the market, the replacement and upgrade opportunities are very robust. Drawing from these advancements and experience, Entrepix has additionally become the OEM for the new on-track double-sided scrubber, the most cost-effective wafer cleaning system for wafers from 100 to 200 millimeter, which is very well suited for many applications, including compound semiconductor materials like silicon carbide and gallium nitrite. Given the wafer size and volumes of these applications relative to the scale and volume of 300-millimeter silicon processes, many cleaning tools on the market today are ill suited to meet the specific demands and needs of the compound semiconductor processes. As a result, there has been a strong demand in the market for new on-track double-sided scrubber, driven in large part by the investments in silicon and silicon carbide front-end manufacturing. In addition to the equipment and engineered products, Entrepix also provides field service and training as well as CMP foundry services. Field service and training enables Entrepix to maintain in-depth contact with customers, creating stickiness and promoting the sales of engineered products, the on-track double-sided scrubbers and other products and services from Entrepix. CMP foundry services in turn provides Entrepix a unique perspective of being both the end user and supplier further enhancing the quality and efficacy of the CMP-related products, processes and services provided. Additionally, the CMP foundry has been qualified by several leading IDMs and foundries to backfill their existing capacity. As we look ahead to the opportunities for Entrepix as part of Amtech Group, we see meaningful synergy potential. On the customer front, overlap with existing customers allows us to further cement our relationships in the substrate market while expanding our process into the device manufacturing market. Similarly, in areas with no current customer overlap, several cross-selling opportunities exist. Lastly, while Entrepix has built a solid foundation in the U.S., international expansion has been an area of focus as the company scales. Leveraging the footprint and channel and resources Amtech has established overseas, we believe Entrepix can cost effectively accelerate these expansion efforts. Our company share a culture of technical leadership, combined with deep domain expertise and unparalleled customer service. Macro themes of EV adoption and compound semiconductor proliferation are driving growth across the entire portfolio. As existing and future customers make the necessary capacity investments to address these opportunities, we expect to strongly benefit in the years ahead given our respective position in the market. In closing, we are very confident that our strategy to align our divisions to high-growth megatrend markets such as EV and the greater pursuit of energy efficiency is gaining traction. We believe that a strategic alignment to megatrend growth areas across multiple product and customer touch points creates a strong and durable foundation for value creation in the coming years. Thank you, Michael. Expanding further on the demand environment as anticipated, in the first quarter, we experienced a softness in our orders for the advanced packaging in SMT products, which is continuing into the second quarter. Additionally, due to the timing of order shipments at the end of the quarter, a portion of revenue expected in Q1 moved to Q2. These products have since shipped and are reflected in our guidance for Q2. Barring further deterioration in the macro environment, which may impact customer spending plans, we expect Q1 to represent the trough in new orders for these products. At this stage, however, it’s difficult to predict the timing and shape of a recovery given the macro outlook as it relates to the impact changing market conditions may have on semiconductor demand. That said, we continue to see healthy mid to long-term interest as the industry moves further towards advanced packaging architectures and as the complexity and sophistication of surface mount process increases. In such applications, thermal uniformity and repeatability is of paramount importance when choosing a reflow of it. And we have demonstrated our PYRAMAX product line is capable of delivering against these strenuous requirements. As a result, we have become the tool of record for many of the leading OSATs as well as leading fabs looking to incorporate advanced packaging capabilities. We believe we are well positioned once capacity investment resumes since we are levered to the highest growth areas in the market. As it relates to our high temp belt furnaces, which are manufactured here in the United States, we again saw strong demand this quarter from EV applications. Specifically, our customer in this market are leading automotive suppliers, which manufacture components and subassemblies for EVs, such as sensors, battery cooling assemblies and power module substrates amongst others. Similar to the SMT market as the complexity of these assemblies grow and due to the strict safety requirements for automotive application, consistent and uniform thermal processing is critical. Evidenced by the repeat orders we continue to receive from existing customers as well as interest from and dialogue with potential new customers, we believe there remains a large opportunity ahead of us. Additionally, we continue to see a robust forecast for our horizontal diffusion product line for both 200-millimeter and 300-millimeter applications. Some of which are slated for supporting silicon carbide production. With our current and growing backlog of high-tech furnaces, predominantly due to EV-related demand, we are taking steps to improve our manufacturing operations to increase both capacity and profitability through greater efficiencies and operating leverage. By utilizing outsourced manufacturing for certain subassemblies and adjusting our supply chain to support this growth, our goal is to ramp capacity in 2023 to better serve our current backlog and reduce lead times for new orders while improving the contribution margins of these products. Within our Materials and Substrate segment, we continue to see healthy demand for our consumable products, including those for silicon carbide applications. As we discussed previously, with the silicon carbide portion of our consumable business up over 100% year-over-year, we anticipated a stabilization of consumable demand as existing wafer capacity is fully utilized and before the next phase of wafer capacity expansion has brought online. This is progressing as expected, with demand likely to remain at current levels until anticipated additional capacity is brought online towards the end of this calendar year. Specific to silicon carbide consumables, it is important to note that Amtech has been a leader in this market for many years with existing relationships across both industry leaders and newer entrants. As a result, growth-in-demand for our consumable products tend to follow that of overall wafer capacity in the industry, which is undergoing a phased multiyear expansion cycle. While there are several companies looking to either grow existing capacity or enter the market, the pace of wafer capacity additions is often longer than that of traditional silicon, and it will take time for each of their contributions to grow the market as a whole. Taking together, the near-term demand for our products, namely high temp belt furnaces and silicon carbide consumables remains very robust. While over the mid to long-term, we believe we are well positioned to participate in the growth of both silicon carbide and semiconductor industries when capacity investment cycles return. Thank you, Paul. Net revenues were $21.6 million, decreasing 33% sequentially and 19% from the first quarter of fiscal 2022. The decrease is primarily attributable to lower shipments of our semiconductor and polishing equipment, partially offset by an increase in consumable shipments compared to the prior year quarter. Gross margin in our material and substrate segment decreased primarily due to changes in product mix. On a consolidated basis, gross margin was relatively consistent among periods. Selling, general and administrative expenses increased $1.9 million on a sequential basis and $2.1 million compared to the prior year period due primarily to $1.4 million in acquisition costs as well as higher consulting and ERP expenses. Operating loss was $2.7 million compared to operating income of $3.9 million in the fourth quarter of fiscal 2022 and operating income of $1.2 million in the same prior year period. Net loss for the first quarter of fiscal 2023 was $2.7 million or $0.20 per share. This compares to net income of $4.2 million or $0.30 per share for the preceding quarter and net income of $1 million or $0.07 per share for the first quarter of fiscal 2022. Unrestricted cash and cash equivalents at December 31, 2022, were $44.5 million compared to $46.9 million at September 30, 2022. Approximately 83% of our cash balance as of December 31, 2022, is held in the United States. Looking ahead, our cash balance – cash position will be materially lower with our acquisition of Entrepix. We used a term loan of $12 million plus cash from our balance sheet to fund the $35 million purchase price. Additionally, we now have access to an $8 million revolving line of credit for our working capital needs. In the coming days, weeks and months, we will be working with Entrepix to leverage the synergies that are key to our success, which are focused on growth and customers. We expect that any cost synergies or reductions that we identify will be reinvested back into the business. Additionally, with Entrepix operating at two locations in Phoenix and one not far from our corporate office, we will evaluate synergies in our real estate footprint, which could include making use of part of our corporate building for additional production or storage capacity or back office space. As a reminder and as indicated in our Form 8-K filing on January 17, 2023, the historical financial statements of Entrepix will be filed as an amendment to the 8-K by April 3, 2023. As it relates to the rest of our business, we continue to make focused investments to fuel our future growth. As Paul discussed, we are making targeted investments in labor and capacity and are partnering with contract manufacturers to both decrease our lead times and to improve our operating performance. We expect these investments to have a negative effect on operating margin in the near-term, but we believe they are warranted to support the opportunity ahead. Now turning to our outlook. For the quarter ending March 31, 2023, our second fiscal quarter, which includes the contribution from Entrepix. Revenues are expected to be in the range of $30 million to $32 million, with operating margin in the low single digits, excluding approximately $1.1 million in acquisition-related costs. The company’s outlook reflects the ongoing logistical impacts and a related delay for good ship to and from China as well as supply chain delays, we are experiencing in our operation. Actual results may differ materially in the weeks and months ahead. Additionally, the semiconductor equipment industries can be cyclical and inherently impacted by changes in market demand. Operating results can be significantly impacted positively or negatively by the timing of orders, system shipments and the financial results of semiconductor manufacturers. A portion of Amtech’s results is denominated in RMBs, a Chinese currency. The outlook provided is based on an assumed exchange rate between the United States dollar and the RMB. Changes in the value of the RMB in relation to the United States dollar could cause actual results to differ from expectations. Thank you. [Operator Instructions] Our first question comes from the line of Craig Irwin with ROTH Capital Partners. Please proceed with your question. Hi, good evening. Thank you for taking my questions. I wanted to start off with the $8 million booking that you guys had for high-volume thermal systems for the EV supply chain. Can you maybe talk about how many furnaces this might be? And if this is for a silicon carbide application or a silicon application, I am kind of guessing that it silicon carbide. But – and then if you could give us geographic color, North America, Europe or maybe Asia? Hi, Greg, thanks for joining us and ask the question. I’ll lead off with that question, and I’ll turn it over to Paul. In terms of number of systems, it’s around 8%, and the application varies from silicon carbide and also battery cooling modules and other substrate assembly. So it’s a pretty broad spectrum. Okay. So then this is multiple customers. This is not just one individual mega facility. This is probably multiple customers that are adopting cutting-edge product that, I guess, Bruce’s offering, if I’m correct. Yes. So Craig, these are our high temp belt furnaces, and they are across, as you said, several customers located not only in Asia, but also Europe and here in the U.S. or North America. So these are not Bruce’s horizontal diffusion furnaces. These are custom thermal in line furnaces used for heat treating and brazing applications, direct bond copper applications, all of these end applications for power electronics supporting EV production. So that kind of gives you a flavor of what we’re shipping in that – in those categories. Thank you for that. So, one of the most exciting companies in the silicon carbide space finally announced a second mega facility. This one is going to be built in Germany, and there is wide expectation from investors that there is going to be a third facility for that same company here in the U.S. Obviously, several other companies have expressed that they will be in the silicon carbide market in a similar way in the future. Can you talk about the necessary lead times if someone wants to have the facility up and running in 2027, when would they be likely to order equipment from you? And do you see much in the way of competition for Bruce’s offering into the silicon carbide market? There are definitely competitors across all of our product lines, Craig. But as you know, and our strong belief is we definitely hold leadership positions in multiple product segments, whether it’s Bruce horizontal diffusion furnaces or the BTU in-line belt furnaces and then the Hofman consumables. Typically, lead times will vary depending on the actual products, consumables can be a matter of weeks. And then when you get into the actual toolsets, it can range anywhere from 12 months to 18 months, some of them – like some of our competitors is even longer. So, they will need to start placing tools set orders to start their phase testing and validation at least 2 years ahead to be safe, if the current supply chain condition that exists throughout the world continues. But we are seeing some signs of that improving, little bit by a little bit even for us. And also, as Paul mentioned, we are very cognizant of that, and that is a risk for our growth, especially in the EV space. And so we are definitely taking action. We saw that last year. And in order to reduce our lead times and also expand our capacity and improve our operating leverage. Thank you for that. So, the next thing I wanted to ask about is Entrepix. First, I guess I should start with congratulations. It looks like a really interesting asset to tuck into your existing resources. Can you maybe describe for us the customer overlap at Entrepix with the traditional Amtech customer base? Is there a minor amount of overlap, or is this something where the sales force knew many of the same customers that you were already calling on? And do you see opportunities for synergy on the engineering side, given a focus similar to some of your other businesses where you have not only capital equipment, but services and engineered products that I guess are consumable that serve different areas of the same business. Absolutely, Craig. So, we do see definitely a large overlap of existing customers, very familiar names, right, across silicon front end and also our silicon carbide substrates side of the market. The names will be different. But in terms of the actual customers, there is a strong overlap. And with that, there are very strong synergies across wafering and then also on the fab side that we will definitely leverage and also explore new opportunities that we didn’t have before. So, I am very excited with the internal synergies and also the greater depth and product suites and service suites that we can offer in the near and long-term. Excellent. Then last question, if I may. You guys have been really proactive in supply chain management and pretty transparent about some of the short-term changes in I guess what can be cyclical businesses. Are there any updates maybe you can share with us about issues that resolved over the last couple of months, things that give you the confidence to give us the solid guidance that you shared today? Hi Craig, yes. So, what we have done, and we announced that we hired Louis Golato as a VP of Operations last year. And at this time, we are implementing and adjusting our supply chain to support this growth that we are seeing, especially in our high temp belt furnaces, which are manufactured here in the U.S. I think the supply chain is somewhat fragile. We saw that. We had to make adjustments in some cases, terminating certain suppliers, adding suppliers where there was a single source issue. And I think we are going to start to see that come to fruition here towards the end of this year, we will be able to turn that backlog at greater efficiency. Yes, I want to congratulate you on the order for the belt furnaces. Can you give a little insight about the margin of these belt furnaces? Are they above or below corporate – recent corporate margins? Hi Mark. We have talked previously about product mix and how it can affect our gross margins. And certainly, our product mix here with the belt furnace and the BDF is part of some of the improvements we are trying to make in our longer term results. And so it’s – when we don’t mix in the products out of Shanghai, you see that in our margins where we are in the 30s. And so these products are around there in the 30s, and we certainly would like to see some improvement as we work on these various initiatives that we discussed. In terms of your overall backlog, how does that compare with your recent margins? Are margins in the backlog of the equipment and consumables going to be an improvement, or is it going to be kind of flattish in terms of the margin…? I would say at this point, again, with the softness we are seeing out of Shanghai and our factory there, I think flattish is a good estimate. We mentioned in the guidance the acquisition costs. So, that’s certainly going to be an increase. We are going to have some other targeted increases based on some of the initiatives that we are undertaking, like with contract manufacturing and some other things. So, we are also going to be looking at some expense control procedures and some other things that we can do. But I think we will see some increase in the coming couple of quarters. Off the top of my head, honestly, Mark, I don’t have the exact number in front of me. But we guided – we came in a little bit lower than we had anticipated in our guidance. I think we still hit right about consensus. So, certainly, we would have liked to have been on the higher range of our guidance there of $21 million to $23 million. Hi Mark, this is Paul Lancaster. Yes, I did make that comment. I mean now it’s related to our advanced packaging and SMT products. We have seen a continued weakness there, primarily in Asia as that semiconductor demand has dropped off for us. And so we consider this to sort of be the bottom of where we are going to see that business going. Hi, everyone. Great speaking with you again, and let me echo my congrats on the Entrepix acquisition. Just a few quick questions on my end. For the first one, and it’s kind of a multipart question. The Entrepix acquisition, does the acquisition help with converting your backlog more quickly to capture EV revenues, or is it kind of more about expanding your product portfolio and revenue streams, or is it a little bit of both? And then secondly, I think the Intersurface Dynamics was your last acquisition. So, what lessons have you learned from that acquisition that you can apply to this one? Hi Kevin, this is Mike. Thanks for joining us and for your questions. So, the first part of your question, your question is the Entrepix acquisition will not have with the backlog that we have now related to EV. That will be handled by the operational improvement plans that we are undertaking right now. And hopefully, we will start seeing some of the fruits of that towards the end of our fiscal year. Regarding Entrepix and IDI and PR Hoffman, definitely there was always improvement opportunities. And I view Entrepix as a couple of value adds. It expands our market size. We can touch different segments of the market that we have not been able to since we disposed of our European divisions 2 years ago. And also, it provides or acts as a force multiplier for our existing PR Hoffman and IDI divisions. Entrepix brings in more than a decade’s worth of CMP process and technology experience, they know polishing very well, although it’s more on front end, but CMP in my eyes is very similar regardless of the toolset. And more importantly, due to their inherent capabilities from their CMP foundry and also their engineered products, those will also be a combination of a force multiplier and also provide greater access to markets that we have not been able to touch before. Okay. Great. That makes a lot of sense. Thank you for that. And then just quickly, Lisa, I know you touched on it in your prepared remarks and in a previous question, and I know I asked you this last quarter, but after acquiring Entrepix and kind of checking off one of the boxes, any change to your focus in terms of capital allocation? And can you kind of remind us what the focus is for 2023? Great question. It’s evolving, obviously, as we took a good chunk of cash off of our balance sheet, and we are – we have re-forecasted our cash. We are going to be looking closely at how and when we want to tap into that revolving line of credit. We did renew our share repurchase program at our Board meeting yesterday. We continued to look at key investments in our business. So, I would say right now, we are digesting the loan facility and our cash flows, and we will continue to evaluate capital allocation on each of our Board meetings and then discussing that thoroughly. There are no further questions in the queue. I would like to hand the call back over to Lisa Gibbs for closing remarks. 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_288

Greetings. Welcome to the Medexus Pharmaceuticals Third Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Thank you and good morning, everyone. Welcome to the Medexus Pharmaceuticals third fiscal quarter 2023 earnings call. On the call this morning are Ken d’Entremont, Chief Executive Officer; and Marcel Konrad, Chief Financial Officer. If you have any questions after the conference call or would like further information about the company, please contact Adelaide Capital at 480-625-5772. I would like to remind everyone that this discussion will include Forward-Looking Information as defined in securities laws. Actual results may differ materially from historical results or results anticipated by the forward-looking information. In addition, this discussion will also include non-GAAP measures, such as adjusted net loss and adjusted EBITDA, which do not have any standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. For more information about forward-looking information and non-GAAP measures, including a reconciliation of each adjusted net loss and adjusted EBITDA to net loss, please refer to the Company’s management discussion and analysis, which along with the financial statements is available on the Company’s website at www.medexus.com and on SEDAR at www.sedar.com. As a reminder, Medexus’ reports on March 31st, fiscal year basis for the quarter ended December 31, 2022 was the Company’s fiscal Q3 2023. Medexus reports financial results in U.S. dollars. Thank you, Victoria. Good morning, everyone. Thanks for joining us on the call today. We are proud to announce another record quarter for Medexus. As one key indicator we achieved revenue of 28.7 million for fiscal Q3 2023. We saw growth across all of our leading prescription products this quarter, which was further complimented by the addition of Gleolan net sales in the U.S. Our third quarter revenue of 28.7 million compares favorably to 21.3 million for the same period last year, or 35% growth year-over-year. The 7.4 million increase is mainly due to an increase in net sales across our portfolio and the contribution from Gleolan in the U.S. Third quarter adjusted EBITDA increased to 5.2 million compared to 1.9 million for the same period last year. The 3.3 million year-over-year increase is mainly due to the increase in net sales I mentioned and the reduction in research and development costs. I would like to highlight, this is our fifth consecutive quarter of positive adjusted EBITDA demonstrating strength and stability in our product portfolio as we close out fiscal 2023 and look ahead to fiscal 2024. We produce a net loss of 1.5 million for Q3 compared to a net loss of 1.2 million for the same period last year. Our adjusted net loss, which adjusts for unrealized losses or gains related to our convertible to ventures that are included in that loss was 0.9 million compared to 3.4 million for the same period last year. As at December 31, 2022, we had 9.3 million in cash and cash equivalents with 10.1 million in total available liquidity. We are actively evaluating options regarding our capital structure. Including as it relates to our debt financing arrangements with a view to preparing for plan future growth. I will let Marcel comment on this project later in this call. Turning to our specific product lines. Our core business is still growing and we continue to work on potential additions to our product portfolio to generate additional growth momentum. IXINITY saw strong unit demand in the U.S. during the trailing 12-months at December 31, 2022. This reflects new patient conversions on top of stable existing base of patients following the resumption of in-person selling earlier in the year. We continue to improve the IXINITY manufacturing process, which has had a positive impact on IXINITY’s manufacturing costs. Rupall continued to see strong unit demand achieving 25% growth for the trailing 12-months ended December 31, 2022. This continues Rupall’s trend as one of the fastest growing antihistamines in the Canadian prescription market. This strong performance reflects successful execution of our sales and marketing initiatives over the five-years since launch. Turning to Resuvo unit demand remains strong for the trailing 12-months ended December 31st, 2022, maintaining the product’s leading position in the moderately growing US branded methotrexate market with a limited sales force allocation. However, increasing competition in the U.S. branded methotrexate market continues to negatively affect the Resuvo product level revenue. On Metoject, Metoject saw unit demand increase in the trailing 12-months ended December 31, 2022. This was despite the ongoing impacts from a generic entry into the Canadian methotrexate market in calendar 2020. Although product revenue was negatively impacted due to a decrease in effective unit level prices, the trial for the patent litigation we launched against the generic competitor in 2020 completed in January 2023.We anticipate that the federal court which is the court overseeing this trial will issue its decision later in calendar year 2023. In March of 2022, we acquired the exclusive of right to commercialize Gleolan in the U.S. As I mentioned, September 2022 was the first full month, and December 31 2022 was the first full fiscal quarter where we recognize 100% of Gleolan net sales. Sales have continued to be in line with expectations. This reflects our successful execution of a seamless transition to full U.S. commercial responsibility and puts us in a position to continue executing on our commercial plan. We also actively pursue opportunities to build our product portfolio by licensing and acquiring new products and by exploring additional indications within our current product portfolio. The advancement of any one of these pipeline opportunities would provide significant step up in our growth profile. We are also pleased to welcome Harmony Gardes, Chief Medical Officer for Veev Healthcare and Manasi [indiscernible] previously a senior executive at Pfizer and Vietris to the Medexus Board of Directors. Harmony’s significant experience leading medical affairs and medical regulatory matters, and Manasi’s strong management experience and expertise in corporate finance will undoubtedly the assets as we grow our business. In particular, I would like to highlight Harmony’s medical leadership for over a dozen new drug applications and new product launches and Manasi’s 26-years of experience leading large commercial and cross-functional organizations. Thank you. Thank you, Ken. Total revenue for the three-month period ended December 31, 2022 was 28.7 million, an increase of 7.4 million compared to revenue of 21.3 million for a three month period ended December 31, 2021 and a one million increase versus prior quarter. The year-over-year increase of 7.4 million was mainly due to an increase in net sales across our portfolio and the contribution from Gleolan. As a reminder, the three-months period ended December 31, 2022, is the first full fiscal quarter in which we recognized 100% of Gleolan revenues. Gross profit was $15.9 million for the three-months period ended December 31, 2022 compared to gross profit of $11.5 million for the same period last year. The gross margin was 55.4% for the three-months period ended December 31, 2022 compared to 54.1% for the three-months period ended December 31, 2021. The increase in gross margin is a result of product mix and ongoing improvements to the IXINITY manufacturing process, which has had a positive impact on IXINITY manufacturing costs. Selling and administrative expenses were 11.9 million for the three-months period ended December 31, 2022, compared to 10.7 million for the three-months period ended December 31, 2021. Research and development was $0.70 million for the three-months period ended December 31, 2022. This compares to one million for the three-months period ended December 31, 2021. The decrease was primarily due to reductions in investments in the IXINITY Phase 4 clinical trial as it approaches its analysis and clinical study report stage. As a result, adjusted EBITDA for the three-months period ended December 31, 2022 was positive 5.2 million compared to 1.9 million for the three-months period ended December 31, 2021. This is another all time high quarterly adjusted EBITDA and the fifth sequential quarter of positive EBITDA, which we view as a significant achievement for our company, demonstrating the durability of our operations. The net loss for the three-months ended December 31, 2022 was 1.5 million to a net loss of 1.2 million for the same period last year. We believe that adjusted net income or loss provides a better representation of performance of our operations, because it excludes non-cash federal adjustments on liabilities, which may be set for shares. Our adjusted net loss for the three-months period ended December 31, 2022 was 0.9 million compared to 3.4 million for the three-months period ended December 31, 2021. Cash and cash equivalents was 9.3 million at December 31, 2022 versus 9.6 million at September 30, 2022. Our available liquidity hasn’t changed versus prior quarter and was 10.1 million at December 31, 2022, which consisted of 9.3 million in cash and cash equivalents and an undrawn credit of 0.8 million available under our ABL facility. We saw an increase of our accounts receivable and inventory positions versus prior quarter and the beginning of the fiscal year and we anticipate seeing the benefit in our cash flow in the coming quarters. We are also actively continuing to evaluate options with respect to our capital structure. We are making very good progress on securing options to manage our near-term liabilities and are in advanced stages of a competitive process that has involved a number of highly interested capital providers. We have been consistent in executing our plan quarter-after-quarter, with sequential revenue growth and improving profitability. Again, this is the fifth consecutive quarter, demonstrating positive adjusted EBITDA and we are looking forward to continuing to build that momentum in quarter to come. Thank you. [Operator Instructions] And the first question today is coming from Andre Uddin from Research Capital. Andre your line is live. Thank you. Hi, Ken and Marcel, just looking at your IXINITY pediatric trial, when should that approximately read out. If we could have a bit of color on that, and if that data is positive, when would you expect to file a supplementary BLA? Thanks. H Andre and thanks for the question. The IXINITY trial, we would expect to file it first half of calendar 2023, and that would hopefully end up with a decision later end of the year. We haven’t decided what to do in terms of releasing the data. We do believe it is sufficient to support an application. So, we haven’t really contemplated putting the data out. Good morning Ken and Marcel. Thanks so much for taking our questions and congratulations on the revenue this quarter. So in your pre-announced earnings you talked about Trio the timelines are on Trio, which sort of push it out minimum about a year. And you had talked previously about the cost structure associated with which that Salesforce, which is obviously applicable to different parts of the business. So we see that the SG&A did come down by million dollars, which net netted out as a positive contribution to your EBITDA, which is great. So how should we be thinking about your SG&A going forward and sort of right sizing of that cost structure? Yes good question Rahul, thanks for that. The IXINITY expenses are all completely allocated elsewhere now. So there is no spending associated with Trio - excuse me, may have said IXINITY. So there is no Trio spending, so everything is allocated. The restructure that we did in October took out anything that was applied to Trio and the rest of the infrastructure got applied to the new Gleolan product. Obviously, it is the same institutional cell. So going forward we would expect the SG&A to be basically what you saw this quarter. Great, that is very helpful. And then just is a housekeeping question, you noted that the improving gross margins on IXINITY is helping with the bottom line. However, we did see sort of a net increase in cost of goods. So, you know, can you give us a little more color on that and how should we be thinking about, you know, cost of goods going forward and total gross margin? Yes, I will make a bit of a comment and then turn it over to Marcel for a more detailed answer. So it is really got to do with product mix, remember we brought Gleolan in without really deploying any capital and in exchange for that, we, you know, gave a higher royalty than we might normally. So that is part of it and so it is mainly product mix. And so I will turn it over to Marcel to give a little more detail. Yes, that is really what, at the end, that is what’s mainly driving, we have got multiple sort of forces that are coming to COGS and go through COGS. One of the upside forces is the IXINITY continuous improvement project that we talked about a few quarters ago, which we had in the inventory. Now we see the benefit in COGS, for example this quarter, this is counted by the IXINITY acquisition, so to speak, from the license perspective where we set this product is a, as a reminder, very low upfront, but we are having about a 50%, 50% hit into COGS for this product. So bit of counter effect there, but bottom line, very accretive very quickly as an investment. And then there is been, and then there is other elements in COGS that usually flow there where we monitor ups and downs. On the margin side this is going to continue, be driven by these forces, but again, going forward mainly on the product mix, we will keep an eye on that and we will see these ups and downs. Perfect. That is really helpful. And one, just one quick last question. You made very specific mention about, you know, continuously looking for new products and expanding the product portfolio and as a result, the top line. Could you give us a sense for your pipeline, how should we be looking at your new product acquisitions in this year? Yeah, great question. So the way we are looking at it, and we have two things. We do have a pipeline of products already built including Treosulfan, IXINITY Pediatric, Gleolan Meningioma, and [Transitional Hexacyanide] (Ph) U.S. So we do have a pipeline, and then we are looking to build that obviously. And so the licensing options are always good options, when we don’t have a ton of capital to deploy. So that is primarily what we are looking at. And there is good opportunities there, we are very active and we hope we have got something to announce soon. Hi, good morning Ken and Marcel, thanks for taking my question. I have just one, in terms of the options for capital providers that you are looking at, you know, given those how do you look at interest costs going forward? Hi, Prasath. Yes. Good question. So I will start to answer that question and turn over to Marcel, see if you have got anything more to add. And I think you need to start with the background, you know, clearly, midcaps been a fantastic debt provider for us. They were there to support the acquisition of IXINITY and in 2020, they expanded that facility by five million. I guess that was September 2022. So they’ve been a great partner. Our debt, our debenture holders are - many of the big blocks are long-term Medexus investors, so we know them well. So those two groups have been great support for us growing our business. Now as we go forward, as Marcel mentioned, we have had five quarters of strong revenue growth, strong positive EBITDA that opens the door to other debt providers. And we are in discussions with Tier 1 institutional lender that we think will help us with our growth plans into the future. Thank you and there were no other questions in queue at this time. I would now like to hand the call back to Ken d’Entremont for some closing remarks. Ken, actually we did get a couple more questions and are you okay to take few more? Thank you. Good morning, gentlemen. Firstly, I’m wondering if you can speak to the investment in working capital this quarter. Frankly receivables were up pretty meaningfully. What exactly does that - like why is this the investment that you have chosen and what are you doing for your free cash flow in future quarters? Yes. Hi, Tania. I can take that. So as we have said in previous quarters, as we have grown the business. Now this particular quarter, we have seen our cash position relatively stable quarter-over-quarter because we are growing revenue. Obviously our accounts receivables has grown with it. We have been invested, so to speak, on the inventory side, specifically in our truly - products. And you have also seen the top of our payables came down quarter-over-quarter and since the beginning of the year. So one of the effects of bringing new products on board is obviously that we are collecting these receivables as a bit of an administrative process to collect those. So we are monitoring our receivables very closely. We had a very good quarter for Gleolan for example. So we are monitoring our cash position going forward, as we always do, but expect some of the benefits as I said in my prepared remarks in the future quarters, as we collect those receivables, just for example. Okay, excellent. And then if I’m not mistaken, I believe Gleolan loses or connects connectivity in 2024. Could you just remind me what kind of IP protection you have for that asset and how long that is going to provide protection for? You are correct. The IP runs out in that time frame as you described. There are no generic competitors worldwide. So the LA API is managed tightly by our partner. And so, we don’t really expect generic competitor. There are actions on foot that we will provide. We hope some additional protection. But I can’t talk about those right now. Okay, excellent. And then lastly here, if for any reason the outcome of the - litigation is not in your favor, do you have any plans for that product different than current for example, would you perhaps reduce your sales force allocation to it? Yes. We have already done that. So it is getting a pretty minor allocation at this stage. We have got Blue Lion, a Trio - in Canada. So that is where the allocation has gone. In spite of that, the unit volume of metal jet continues to grow even with the generic direct competitor in the market. So, we are really pleased with the performance of the product. Should we lose? We wouldn’t change anything. Should we win? We would be in line for pretty substantial recovery of losses and we probably would put some sales force allocation back on the product. Hi thanks for taking my question, this is Julian speaking on behalf of Justin today. Ken I was wondering if you could provide an update on the milestone payments regarding Trio soften whether there is any discussions on extending or perhaps adjusting these adjustments and what is the most likely outcome? Hi Julian, good question. There are none due. So, we owe nothing unless it gets approved or until it gets approved. There is a contractual obligation to renegotiate the financial terms of the agreement in April of this year, should the product not be approved by that point in time. And we obviously don’t think it will be approved by that point in time. So, those discussions are ongoing, can’t really comment on the outcome. Thank you. And there are no other questions in queue. I’d like to turn the call back to Ken d’Entremont for closing remarks. Thank you everyone for joining the call today. This was an excellent quarter for Medexus, demonstrating both the strength and stability of our product portfolio and our ability to generate consistent revenue growth and positive adjusted EBITDA. We remain excited about all the opportunities within our product pipeline, and we will continue to work in advancing these projects. We look forward to a strong full fiscal 2023 and continue our momentum into fiscal 2024. Thanks for your time.

EarningCall_289

Thank you for standing by. This is the conference operator. Welcome to the Regional Management Fourth Quarter 2022 Earnings Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there'll be an opportunity to ask questions. [Operator instructions] Thank you and good afternoon. By now, everyone should have access to our earnings announcement and supplemental presentation, which were released prior to this call and may be found on our website @regionalmanagement.com. Before we begin our formal remarks, I will direct you to Page two of our supplemental presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP financial measures. Part of our discussion today may include forward-looking statements, which are based on management's current expectations, estimates, and projections about the company's future and financial performance and business prospects. These forward-looking statements speak only as of today and are subject to various assumptions, risks and uncertainties, and other factors that are difficult to predict and that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance and therefore you should not place undue reliance upon them. We refer all of you to our press release presentation and recent filings with the SEC for a more detailed discussion of our forward-looking statements and the risk and uncertainties that could impact the future operating results and financial condition of Regional Management Corp. Also, our discussion today may include references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found within our earnings announcement or earnings presentation and posted on our website at regionalmanagement.com. Thanks Garrett, and welcome to our fourth quarter 2022 earnings call. I'm joined today by Harp Rana, our Chief Financial Officer. We closed out 2022 having taken several meaningful steps to repair us for the New Year. Harp and I will take you through our fourth quarter results, discuss our growth and the credit quality of our portfolio, update you on our strategic initiatives, and share our expectations for the first quarter and 2023 more generally. Fourth quarter results came in better than our expectations on an adjusted basis. We earned $2.4 million of net income and $0.25 of diluted EPS inclusive of a $2.7 million impact to net income from the sale of $27 million of non-performing loans, $17 million of which would've otherwise been written off in early 2023. On an adjusted basis, excluding the impact of this loan sale, we produce $5 million in net income and $0.54 of diluted EPS. The non-performing loan sale allowed us to dispose of a distressed portion of our portfolio at an attractive price and enabled us to refocus our personnel on early stage delinquent accounts as we enter the first quarter tax season, which seasonally is our best quarter for collections. As a result of the sale and the acceleration of the net credit losses on the sold accounts from the first quarter to the fourth quarter, our net income was negatively impacted by $2.7 million in the fourth quarter, but net income will be positively impacted by similar map in the first quarter. While the timing issue created some noise in our fourth quarter financial results, the sale provided operational value and allowed us to put a portion of the stress segments of our 2021 and early 2022 vintages behind us. The sold loans were funded by our senior revolver and warehouse facilities and excluded any loans in our securitization transactions. As a result, the sold portfolio contained a greater proportion of higher rate, higher risk loans than our total portfolio, including 1.9 million of loans from the eliminated direct mail segments and digital affiliate that we've highlighted on prior calls. Roughly 38% of the sole portfolio balances had APRs greater than 36% compared to 14% of total portfolio balances, and they had an average FICO of 613 compared to 640 for our total portfolio average. As a reminder, we began tightening credit in late 2021 and continued our tightening actions throughout 2022. Our second half 2022 vintages are some of the strongest in our portfolio and are currently performing in line with expectations. At yearend, our 2021 vintages represent just 22% of the portfolio and we expect that number to decline to around 7% by the end of 2023. We ended 2022 with a 30 plus day delinquency rate of 7.1%, only 10 basis points higher than 2019 pre-pandemic levels and our early 1 to 29 day and 30 to 59 day delinquency buckets, monthly roll rates improved sequentially from the third quarter to the fourth quarter by 80 basis points and 120 basis points respectively. Delinquency rates in those early buckets were also 50 basis points and 10 basis points better respectively than fourth quarter 2019 levels. Our first payment default rates were also strong in the fourth quarter, improving to 7.1% in December, which was 240 basis points better than September, 2022 and 130 basis points better than December, 2019. We attribute these early indicators of credit improvement to tighter underwriting and shifting additional collections resources to early stage accounts. Excluding the impact of the eliminated direct mail segments and digital affiliate, our yearend delinquency rate would've been 10 basis points better than pre-pandemic levels. The portfolio associated with the eliminated direct mail segments and digital affiliate was down to $22 million at the end of the fourth quarter from $31 million at the end of the third quarter, and we expected to be off our books in the second half of the year. Demand for our loan products remained strong in the fourth quarter as it was throughout 2022. We grew our receivables by $92 million to $1.7 billion in the quarter slightly above our guidance. Continued strong demand has allowed us to be picky about the borrowers to when we make loans, particularly as we've intentionally slowed our growth rate over the past few quarters, given the economic environment. We grew our receivables by 19% year-over-year in the fourth quarter, down from year-over-year growth rates of 31%, 29%, and 22% respectively in the first three quarters of the year. Our full year receivable growth was disproportionately impacted by growth in the first and second quarters as fourth quarter originations were up only 8% year-over-year. We continued to tighten credit in the fourth quarter most significantly to new borrowers. While our credit tightening actions slowed our year-over-year receivables growth in the fourth quarter, we believe that the trade-off between credit and growth is appropriate in this environment. New borrowers represented 29% of our 2022 originations compared to 22% of 2019 originations with the increase in 2022 principally attributable to our geographic expansion since 2020. New borrowers naturally perform worse on average than our seasoned at present borrowers who remain in our portfolio following loan refinancing. A higher credit losses on our new borrower portfolio reflect a component of our investment and growth. By tightening credit over the past year, we believe we continue to strike the right balance between growth and credit quality. We offset some of the loss volume from our new borrow credit tightening actions by increasing our former borrower direct mail programs. Similar to our present borrower portfolio, our former borrower portfolio performs better than our new borrower population as we're able to use past on-us credit performance in determining which former borrowers to include in mailings. Throughout 2022, we increasingly targeted former borrowers in our mail campaigns. In the fourth quarter, 45% of our direct mail volume was to former borrowers, compared to 29% in the first quarter, and 70% of all originations in the fourth quarter were to present and former borrowers. The increased former borrow production coupled with present borrow renewal activity in the branches drove much of our growth in the fourth quarter as we continue to focus on the highest quality originations. With our credit actions, our top tier risk ranks made up 63% of our originations in the quarter up from 46% in the fourth quarter of 2019, and 54% from a year ago. More than 80% of our third and fourth quarter originations had FICO scores of 600 or above compared to 71% in the fourth quarter of 2019, and nearly all of our new borrower originations in the fourth quarter had FICO scores of 600 or above. Our auto secured portfolio has topped a $100 million for the first time as of yearend. The credit performance on the growing auto secured portfolio has been strong to date with the 30-plus day delinquency rate of only 2.2% as of the end of the year. It's worth a reminder that for every dollar of growth in any given quarter, we lose money on the growth in that quarter as we book the credit reserve upfront to cover lifetime losses. In the fourth quarter alone, we reserve $9 million pre-tax on our $92 million of receivables growth. Our fourth quarter receivals growth, however, provided us with a higher jump off point for the new year and will generate nearly $30 million of incremental revenue in 2023. In addition to the fourth quarter credit tightening, we also completed several key risk and pricing initiatives to support our portfolio going into 2023. First, we completed the rollout of our second generation custom underwriting scorecard to all of our states. The new advanced model evaluates more than 5,000 attributes including alternative data and has more complex segmentations that will allow us to further fine tune our underwriting strategies, make better credit decisions at the margin and improve our credit loss experience while holding loan volume stable, which should benefit net credit losses as we slow our growth in the near term. Second, we expanded our relationship with our external collector, improved their capabilities and increased our internal and external collector capacity by 50% in the second half of 2022. These moves allow our branch team members to focus more of their efforts on early stage collections, renewal activity and loan production. Third, we began rolling out our new customer online portal, which significantly enhances the customer experience and includes improved payment functionality. Finally, as a result of the rising rate environment and normalizing credit, we began to reprice parts of our portfolio in the second half of 2022. Most of the pricing actions were put in place late in the fourth quarter with additional repricing occurring in the first quarter. Our revenue yields fell in 2022, largely due to the mix shift to larger loans below 36% APR, increased credit tightening on our higher risk, higher rate segments and the impact of the worsening credit environment. The credit environment has caused a larger portion of our loans to reach non-accrual status as they enter later stage delinquency and an increase in the reversal accrued interest when these loans are written off. We expect that our recent pricing actions will help to stabilize revenue yields over longer term, and while we anticipate continued yield pressure in the near term as a result of recent credit tightening and higher rate, higher risk segments, we expect yields will improve in the future as the macro impact on credit reverses back to more normalized levels. As we look ahead to the New Year, we believe that the actions we took in 2022 position us to address potential further deterioration in the macro-environment. In the coming year, we will continue to place our focus on our highest confidence originations, emphasizing quality over quantity. We will originate loans only where we can achieve our return hurdles under an assumption of additional credit stress beyond today's levels, as well as higher future funding costs. The greater percentage of our originations will be the present and former borrowers with new borrower lending disproportionately skewed to our newer states. As a result, we expect receivables growth to slow to the mid to high single digits in 2023 compared to 19% in 2022. As we begin to benefit from the more meaningful impact of second half 2022 credit tightening, we anticipate that delinquencies will begin to improve in the first half of 2023, which will support improvement at our net credit loss rate in the second half of 2023. By the end of 2023, we expect our second half, 2022 and 2023 vintages will account for more than 80% of our total portfolio. While we expect an economic downturn in 2023, most signs indicate that our customer base will fare better than average. We're encouraged by the recent trends in inflation and the continued strength of the labor market, including low unemployment, high number of open jobs, and strong wage growth in our customer's industry and in commands. However, if conditions worsen, our tightened underwriting provides a powerful mitigate to further economic deterioration. As a result of expected stronger credit performance and higher revenues on the second half of 2023, we anticipate that our net income will be strongest in the third and fourth quarters of the year. As always, we'll monitor our credit performance and the macroeconomic environment closely and we'll make further adjustments to underwriting as dictated by the circumstances. Most critically, we'll monitor the inflation rate and how it compares to wage growth for lower income segments. Should we observe an improving macroeconomic environment, we have the ability to quickly lean back into growth. From an investment standpoint, we'll seek to capitalize on the opportunities available to us in the seven new states that we've entered over the past couple of years, which have increased our addressable market by nearly 80%. We'll tightly manage our expenses while our pace of new state entry significantly and open only five to seven new branches in 2023. In the first quarter, we plan to enter one new state that carried over from 2022 and we may enter a second new state in the second half of the year if justified by the economic conditions. Our expense growth in 2023 will be driven primarily by the carryover impact over 2022 investments as we look to grow and capitalize on prior year investments. Our efforts will include the completion of several important technology, digital and data and analytics projects as we continue to modernize and involve our omnichannel business strategy. I want to thank all of our team members for their tireless effort this past year. Together we made major strides in growing and transforming our business and these efforts, including the actions taken in the fourth quarter, put us in a strong position going into 2023. While the economic environment remains uncertain, I'm confident that the actions we took in 2022 position us well for 2023 and beyond. Thank you, Robin. Hello everyone. I'll now take you through our fourth quarter results in more detail. On Page three of the supplemental presentation, we provide our fourth quarter financial highlights. We generated GAAP net income of $2.4 million and diluted earnings per share of $0.25. GAAP results are inclusive of a $2.7 million or $0.29 per diluted share charge related to the loan sale that Rob described earlier, excluding the loan sale, we would've generated, net income of $5 million and diluted earnings per share of $0.54. Our core results were driven once again by high quality portfolio and revenue growth and careful management of expenses, partially offset by our base reserve build for portfolio growth, increased interest expense, and macroeconomic impact. For 2022, we produced returns of 3.3% ROA and 17% ROE. Turning to Page four, our loan products continue to experience strong demand enabling us to drive high quality growth, despite a number of credit tightening actions and an increased focus on collection activities in our branches. Fourth quarter direct mail originations were up compared to the prior year with an emphasis on former borrowers while digital and branch originations each trailed the prior year. We had $470 million of total originations in the quarter, an 8% increase over the prior year period. The 8% increase is modest compared to the fourth quarter of last year where originations were up 19% year-over-year. As you can see on Page five, we continue to grow our digital channel through affiliate partnership expansion. In the fourth quarter, we generated digitally sourced originations of $48 million, representing 27% of our new borrower volume in the quarter. We continue to meet the needs of our customers through our multi-channel marketing strategy. Page six displays our portfolio growth and product mix through the fourth quarter. We closed 2022 with net finance receivables of $1.7 billion, up $92 million from the prior quarter slightly ahead of our prior guidance. As Rob noted, we've intentionally slowed growth in recent quarters, and while our portfolio is up $273 million or 19% year-over-year, much of the annual growth rate is attributable to the strong origination activity early in the year. On a product basis, we continue to shift to large loans and loans at or below 36%. As of the end of the fourth quarter, our large loan book comprised 71% of our total portfolio and 86% of our portfolio carried an APR at or below 36%. Looking ahead, we would expect to see normal seasonal liquidation in the first quarter, as we continue to monitor the macro environment and keep a close handle on our underwriting. In the first quarter, we anticipate that our net finance receivables will contract by approximately $25 million. As we've noted before, we're focused on smart controlled growth, and if dictated by the circumstances, will further tighten our underwriting, which would impact receivables at the end of the first quarter. As shown on Page seven, our growth initiatives, lighter branch footprint strategy in new states and recent branch consolidation actions and legacy state, contributed to another strong same story year-over-year growth rate of 15% in the fourth quarter. Our receivables per branch, were at an all-time high of $4.9 million at the end of the year. We believe considerable growth opportunities remain within our existing branch footprint, particularly in newer branches. Turning to Page eight, total revenue grew 11% to $132 million in the fourth quarter. Our total revenue yield and interest in fee yield were 32.1% and 28.5% respectively. Due to our continued next shift towards larger higher quality loans, credit normalization and the impact of the loan sale, our total revenue yield and interest in fee yield declined 300 basis points and 290 basis points respectively year over year. Of those declines, 40 basis points is attributable to the loan sale, which involved the acceleration of net credit losses and interest accrual reversals from the first quarter to the fourth quarter. We estimate the credit impacts in the macroeconomic conditions on revenue reversals and non-accrual loans to be approximately a 100 basis points with the remainder of the decrease in yield, the result of credit tightening, and the next shift to larger higher quality loans. We continue to believe that tightening underwriting on higher risk, higher yield segments, and the shift in our portfolio towards higher quality large loans is appropriate in light of the uncertain macro macroeconomic environment. In the first quarter, we expect total revenue yield and interest and field to be approximately flat for the fourth quarter as the impact of continuing credit normalization and additional credit tightening is offset by the first quarter benefit of the loan sale. As the credit environment improves, our yields will also improve, benefited also by the pricing actions that Rob described earlier. Moving to Page nine, our 30-plus day delinquency rate as a quarter end was 7.1% down 10 basis points sequentially and up 110 basis points year over year due to macroeconomic impacts, partially offset by the benefit of the loan sale. Our net credit loss rate in the fourth quarter came in at 15% with approximately 320 basis points of the NCL rate attributable to the loan sale and 90 basis points attributable for the eliminated direct mail segments and digital affiliate that Rob discussed earlier. Excluding the loan sale, our net credit loss rate for the fourth quarter would've been 11.8%. In the first quarter, we expect delinquencies to improve consistent with normal seasonal trends, and we expect that net credit losses will be approximately $42 million or $20 million lower than the fourth quarter as the first quarter benefit of the loan sale, more than offset the typical seasonal increase in net credit losses. Turning to Page 10, our allowance for credit losses declined slightly in the fourth quarter as the reserve reduction of $11.8 million due to the loan sale, more than offset a reserve build of $9.1 million due to portfolio growth and $1.7 million of additional macro related reserves. As of quarter end, the allowance bid at $179 million or 10.5% of net finance receivable. Our allowance model contemplates that unemployment rates will peak at 6.7% in the fourth quarter of 2023 and then gradually decline. The allowance continues to compare favorably to our 30-plus day contractual delinquency of $120 million and includes the macro related reserve of $21 million. These macro-related reserves amount to 12% of our total allowance for credit losses, a strong position as we continue to monitor the health of the economy and the consumer. In the first quarter, we expect to build reserves as the late stage delinquency buckets are partially empty due to the loan sale begin to refill. This build will be partially offset by a small release in the base reserve due to seasonal first quarter portfolio liquidation. As a result, we expect to end the quarter with a reserve rate between 11% and 11.1%, subject to macroeconomic conditions. Assuming the credit improvement described earlier by raw materializes, by year end, we would expect our reserve rate to decline to between 10.5% and 10.7%. Over the long term, once the macroeconomic environment improves, we expect that our net credit loss rate will be in the range of 8.5% to 9% based on our current product mix and underwriting, and we believe that our reserve rate could drop to as lowest 10% with the improvement attributable to our shift to higher quality loans. Of course, as we've always done, we'll manage the business in a way that maximizes direct contribution margin and bottom line results. Flipping to Page 11, we continue to manage our G&A expenses tightly in the face of normalizing credit. G&A expenses for the fourth quarter, were $55.1 million better than our prior guidance. Our annualized operating expense ratio was 13.4% in the fourth quarter, a 290 basis point improvement from the prior year period. We are very pleased with our disciplined expense management in this challenging economic environment. We will continue to manage our expenses tightly and prioritize those investments that are most critical to achieving our strategic objectives. Over the long term, we believe that our investments in our digital capabilities, geographic expansion, data and analytics and personnel, will drive additional sustainable growth, improved credit performance, and greater operating leverage. In the first quarter, we expect G&A expenses to be approximately $62.5 million. Turning to Page 12, our interest expense for the fourth quarter was $14.9 million. In the first quarter, we expect interest expense to be approximately $17 million. Page 13 displays our strong funding profile and healthy balance sheet. Over the last several years, we have diversified our types and sources of funding, enabling us to mitigate interest rate risk and maintain access to liquidity throughout economic cycles. As of the end of the fourth quarter, we had $555 million of unused capacity on our credit facilities, and $101 million of available liquidity, consisting of unrestricted cash on hand and immediate availability to draw down our revolving credit facilities. Our debt has staggered revolving duration, stretching out to 2026, providing protection against short term disruptions in the credit markets, with ample capacity to fund our business, even if further access to securitization market were to become restricted. We have also aggressively managed our exposure to rising interest rates as 88% of our debt is fixed rate as of December 31 with a weighted average coupon of 3.6% and a weighted average revolving duration of 2.1 year. Our fourth quarter funded debt to equity ratio remained at a conservative 4.4% to 1%. We continue to maintain a very strong balance sheet with low leverage, healthy reserves, ample liquidity to fund our growth and substantial protection against rising interest rate. We experienced a $1.2 million tax benefit in the fourth quarter due to R&D tax credit. For the first quarter, we expect an effective tax rate of approximately 26% prior to discreet items such as any tax impacts of equity compensation. During the first quarter, we will continue our return of capital to our shareholders. Our board of directors declared a dividend of $0.30 per common share for the first quarter. The dividend will be paid on March 15, 2023 to shareholders of record as of the close of business on February 22, 2023. We're pleased with our fourth results and our 2022 performance, our strong balance sheet, and our near and long-term prospects for controlled sustainable growth. Thanks Harp, and as always, I'd like to thank our team for their strong execution in a challenging environment. We're pleased with our fourth quarter results and the meaningful steps that we took to prepare ourselves for 2023. As we enter the new year, we feel good about having put a portion of our stress loans behind us starting year with 30 day delinquencies, nearly flat to pre pandemic levels and observing early signs of credit improvement, including lower first payment defaults and lower delinquency, and improved roll rates in our early stage delinquency buckets compared to the third quarter and pre-pandemic levels. These green shoots are thanks to tighter underwriting, our next generation scorecard and improved collections capabilities. With these proactive steps on credit and increased pricing, we're well positioned as we enter the first quarter tax season and are prepared to weather additional economic stress if it materializes. We're cautiously optimistic that we'll see an improvement in delinquencies in the first half of the year and net credit loss rate in the second half of the year. If so, our sophisticated underwriting model will enable us to respond quickly to take advantage of the improving macroeconomic conditions. As we've done in the past, we'll manage our expenses tightly while continuing our investment in those things that will generate the greatest returns in the form of controlled discipline, portfolio growth, improve credit performance, and greater operating leverage. Ultimately, these efforts will position us to sustainably grow our business, expand our market share, and create additional value for our shareholders. Thank you again for your time and interest. I'll now open up the call for questions. Operator, could you please open the line? Certainly. We will now begin the question-and-answer session. [Operator instructions] Our first question comes from David Scharf of JMP Securities. Please go ahead. Hi, good afternoon. Thanks for taking my questions, Rob and Harp. Hey I wanted to kind of dig in a little bit to maybe sort of some of your underlying assumption and on how the year plays out, kind of recognizing how many variables there are and I think one of the things sort of piqued my interest, I may have heard it incorrectly, but when you were discussing reserve levels did you say that your forecasted year end unemployment rate was, I heard 6.7%, was that correct? Yeah, so what we have is our model contemplate that the unemployment rate will peak at 6.7% in the fourth quarter of 2023, and then just for reference, right in third quarter, our unemployment peaked at 6.4% in the third quarter of 2023. So the reflection of that increase in the unemployment rate is based upon scenarios that we use from a large rating agency, and it is basically a reflection of a higher probability of recession that you're seeing there. Yeah, and David, just to be clear is, when we made those assumptions, it was obviously before the most recent, unemployment figures were released. Right, and I guess that that was maybe really what I wanted to dig into Rob a little bit. That's even prior to that very strong January jobs report, I know quite a number of peers in their yearend earnings calls have base reserve levels on an assumption of 4.5%, 5%, and that seems to be consistent with kind of a lot of economists out there, and I'm just wondering what are some of the metrics that you may have your eye on and how quickly might those come in terms of just maybe one or two more months of jobs reports? Yeah, what I'm really getting at is, I'm wondering, not just as the reserve level, should we view it as maybe very, very conservative, but would more granular or more comfort that unemployment is going to peak potentially 200 basis points lower year end, 4.5% seems to be more a consensus. Would that impact your origination plans as well? Yeah, so let me address that. So from a seasonal standpoint, we were probably lined out. We were more weighted towards, a little bit more weighted towards a harder landing than a softer landing at the end of the year and we made that shift, obviously, looking ahead and not being sure what the impact was of the rapidly increasing fed funds rate and impact on unemployment, particularly with all the layoffs we've been reading about and hearing about, and particularly the tech industry. So, we took a slightly more conservative approach in the fourth quarter and increased our macro reserve by $1.7 million. So it stands at, $21 million today and again, that was before the most recent print. I think if you're -- if we're thinking about what are the levers that would induce us to lean back into growth, besides the early credit indicators and we talk about some of the green shoots in our prepared comments, we'd like to see that continue for a period of time. But then also it's as we said, it's where's the inflation rate particularly, you know, those categories most sensitive for our customers, food, home energy and the like, and how that stacks up relative to the wage growth. Now, one of the things that we've been tracking more closely is that you, one indicator of real wage growth is if you look at non-supervisor and production workers, which includes, services workers as well. Five on the last six months, there's been real wage growth. Now on a 12 month basis that's still 1.1% negative on a real wage basis. But, seeing that trend for five out of the last six months and we'll be watching it will be important. Now, some economists have come out and said wage growth is flowing but I think the indicator that I just mentioned, which I haven't seen many people talking about or anybody talking about, that when you look at real wage growth overall, I think what's slowing may be for higher income folks, the lower income folks, based on the metrics I just quoted, you seem to be you know, at least the last six months doing better than inflation, which is, hopefully a good sign. So we'll be watching all that and that will help us decide when we might lean back into growth. And of course there's 11 million open jobs out there, and as I've said before now, a couple quarters, that's a plus for our customer base when, they have multiple opportunities if they lose their job to replace their income. Good afternoon. I just want to clarify two things. So the G&A guidance you gave was $62 million, correct, for 1Q? Okay. And then the adjusted figure that you gave a $0.54, that does not include, I wouldn't say reversal, but that does not exclude the $1.2 million -- $1.2 million tax gain that you reported in the quarter. Okay. So because it looked like, it looked like in the press release that the table still had a tax credit in the non-GAAP table. So I assume that that $1.2 million gain is included in the $0.54 of adjusted earnings that you reported. Just want to make sure I have that. Hey, before I take the next question, one thing that I wanted to mention is I wanted to correct one thing in my prepared remarks. So I misspoke earlier when I said our December, 2022 first payment default rate was 130 basis points better than December 19. It's actually 170 basis points better. So I just wanted to correct the record on that and sorry about the miscommunication. So we'll take the next question. Thank you. I was hoping that you would discuss the difference in the rate of loan origination growth between small loans and large loans, and whether that was something that you all had done intentionally, and if so, why or if it was related to the environment and how that was a driver, please. Yeah, sure. Absolutely, Bill. So yeah, what you're seeing here is as we were tightening credit really since the fourth quarter of '21, but more aggressively after July of 2022, we tightened credit on our higher rate, higher risk loans, which tended to be disproportionately small loans. And so that's why you see the growth rate slow there. Now that is obviously done because of the current environment and the uncertainty, but where we've cut is also where there's opportunities to lean back into growth when we see the economic environment have a little bit more certainty and that naturally within help our yields and the like. So it's really just the result of our tightening credit and taking risk off in this environment. This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Beck for any closing remarks. Thanks, operator, and thanks everyone for joining this evening. I'd also like to thank our team again for their exceptional execution in a challenging environment. We've taken numerous actions in the fourth quarter of 2022 that I think put us in an even stronger position as we enter this year. So, just a quick summary; as I said, we began tightening in fourth quarter '21. Obviously we increased that tightening in July or mid-2022, and we tightened again here in the fourth quarter. But it's important to note that as of year-end of 2022, 47% of our portfolio had been originated since July 01 and by year end 2023, more than 80% of our portfolio will have been originated since that time as well and obviously those are the portfolio that has the tightest underwriting. We still have incredibly strong balance sheet. 88% of our debt is fixed as the year end. We have plenty of liquidity fund growth for the next 12 months based on our growth projections for 2023. It's great that we're entering 2023 with 30-day delinquency, nearly flat to pre-pandemic levels, having -- after having sold the $27 million of distress loans in the quarter and we are seeing early indications of proving credit, as I said in the prepared remarks. So besides the first payment default that was 7.1%, and as I said 170 basis points lower than 2019 when it was at 8.8%, we saw improvement in the early bucket roll rates versus the third quarter. Our early bucket delinquencies are down versus pre-pandemic levels, as I said in my prepared remarks and our 30-day to 89-day delinquencies are flat compared to fourth quarter of 2019. And we attribute these green shoots, if you will, to our tighter underwriting next shift and the early impacts of our next generation scorecard that we fully rolled out in the fourth quarter. We also, as I said, began to reprice the portfolio more aggressively and we increased our collection staff by 50% in preparation for the tax season this quarter. And while inflation is coming down, as I mentioned in the Q&A, we're encouraged by that continuing to drop. We're encouraged by what's happening with the number of open jobs for our customers, we're encouraged by what looks to be fairly strong real wage growth in recent months. And with all that, we're remain cautiously optimistic that we'll see improvement in delinquencies in the first half of the year and net credit loss rate in the second half of the year and of course, if the macroeconomic conditions improve later this year we know that our sophisticated underwriting models will enable us to respond quickly and take advantage of the better operating environment. So thanks again for joining. Have a good evening.

EarningCall_290

Good morning, ladies and gentlemen. Thank you for standing by. I'd like to welcome everyone to the Canaccord Genuity Group, Inc. Fiscal 2023 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions]. As a reminder, this conference call is being broadcast live online and recorded. I would now like to turn the conference call over to Mr. Dan Daviau, President and CEO. Please go ahead, Mr. Daviau. Thank you, operator, and thanks to everyone for joining us today's call. As always, I am joined by Don MacFayden, our Chief Financial Officer. Today's remarks are complementary to our earnings release, MD&A, and supplementary financials. Copies of which have been made available for download on SEDAR and on the Investor Relations section of our website at cgs.com. Within our update, certain reported information has been adjusted to exclude significant items in order to provide for a transparent and comparative view of our operating performance. These adjusted items are non-IFRS measures. Please refer to our notice regarding forward-looking statements and the description of non-IFRS financial measures that appear in our investor presentation and also in our MD&A. And with that, let's discuss our third fiscal quarter results. The environment in the three month period continued to reflect the impact of persistent inflation, continued tightening with central banks, and significant levels of uncertainty. Amidst these headwins, our business performed as expected with contributions from global wealth management and M&A advisory continued to offset the ongoing delays in capital raising activity. Adjusted firm-wide revenue for the three month period was $382 million in line with the previous fiscal quarter, but down 31% compared to the same period a year ago. When measured on a year-to-date basis, revenue for the first nine months of the fiscal year amounted to $1.1 billion, which compares favorably to the full-year revenue in pre-pandemic years. I will also note that fluctuations in foreign currency contributed to certain changes in the third quarter revenue and expense items for our international operations as reported in Canadian dollars, as well as the value of client assets in our UK and Australian wealth businesses. Excluding significant items, we earned pre-tax net income of $31 million for the three-month period and $110 million fiscal year-to-date. This translated to diluted earnings per common share of $0.16 for the quarter and $0.53 fiscal year-to-date. We recorded a goodwill impairment charge of $103 million during the quarter in connection with our Canadian capital markets business. To help you understand this process, goodwill is required to be tested for impairment at least annually or when there are indicators of impairment. The confluence of macroeconomic and cyclical factors that have dampened activity levels in our core focus sectors for most of the fiscal year have weighted on earnings in this business for three consecutive quarters as seen by losses recorded in each quarter of this year. As past performance would substantiate, we continue to see material value in this operations. However, accounting standards require a fair value test albeit at a time that we perceive to be at the bottom of a cycle. This goodwill charge is a non-cash accounting entry that does not reflect any current or future cash outlay for the company. Turning to expenses. Adjusted firm-wide expenses declined by 21% and 20% respectively when compared to the three and nine-month periods of last fiscal year. In difficult markets like this, we are carefully monitoring our cost, while taking great care to ensure that we are not impairing our culture or compromising the client experience. Our compensation expense for the three-month period decreased by 30% or $101 million compared to the third quarter of last year, partly reflecting the decrease in incentive-based revenue, most notably in our Canadian operations. Reflecting the softer revenue environment and the impact of a higher share price on our stock-based compensation, our third quarter compensation ratio was elevated to 63%. On an adjusted basis, fiscal year-to-date compensation expenses as a percentage of revenue were 61%. Absent particularly bad performance in any of our regions, we expect to be able to manage within our historical comp ratios for the full fiscal year, except for charges related to stock-based compensation, which are subject to mark-to-market fluctuations beyond our control. Third quarter adjusted non-compensation expenses as a percentage of revenue increased by 11.4 percentage points when compared to the same period a year ago. This increase reflects the impact of higher G&A expenses attributed to promotion, travel and conferences in addition to increased communication and technology expenses. Interest expense also increased in connection with bank loans outstanding for our wealth management acquisitions in the UK and Crown Dependencies. Excluding significant items, our effective tax rate was substantially lower in the three-month period at 10%. This decline is due to deferred tax recoveries recorded in higher tax jurisdictions partly offset by the re-measurement of deferred tax assets related to share-based payment plans and which reflect changes in the market value of unvested stock-based awards when compared to the previous quarter. Our business continues to be well capitalized and our Board of Directors has approved a quarterly common share dividend of $0.085. Turning to the performance of our operating businesses. I'll start with capital markets. Third quarter transaction volumes continue to be impacted by the challenging backdrop consistent with industry trends. While our advisory activity outpaced the broader market in the first half of our fiscal year, M&A completions during our third quarter were down from the yearly and quarterly comparison periods. Our combined global capital markets business earned revenue of $197 million for the three-month period, a decrease of 46% when compared to the same period a year ago. On a consolidated basis, revenue from capital raising activities was down 70% year-over-year, but increased 6% sequentially, which reflects quarter-over-quarter increases from our Australian and U.S. businesses. Our Australian capital markets business experienced the most notable increase in capital raising activity with a sequential increase of 42% in investment banking revenues to $27 million. Investment banking revenue in our Canadian capital markets business was down 90% year-over-year and 49% sequentially. Looking at our core sector contributions, the metals and mining sector continued to be the most active, largely driven by our Australian and UK businesses. We also had increased contribution from the energy sector primarily in Canada and the UK. Our sales, trading and specialty desks remain steady. Principal trading revenue increased 4% year-over-year and 30% sequentially. The sequential increase was primarily driven by our U.S. business, which contributed $31 million or 88% of our trading revenue for the three-month period. While M&A activity in the three-month period remained comfortably above fiscal 2021 levels, advisory revenue declined by 51% when compared to the record set in the same period a year ago. The technology and consumer sectors were the most active in the segment reflecting our investments in expanding our U.S. and European capabilities in these sectors and benefiting from increased collaboration between these teams. Our wealth management business continued to perform well despite the lower transactional revenues in our Canadian and Australian businesses. On a consolidated basis, this division contributed adjusted pre-tax net income of $36 million for the three-month period, bringing the fiscal year-to-date contribution to $89 million. Firm-wide assets were $94.4 billion at the end of the three-month period, down 7% from their peak of $102 billion in the same period a year ago, but up 6.5% sequentially, reflecting improving market values. In our UK business, revenue, net income, and margins all improved in the quarter. The business contributed revenue of $86 million, which is 11% higher than the average of the last seven fiscal quarters. Adjusted pre-tax net income in this business was $23 million a year-over-year increase of 3% and an increase of 27% sequentially. Client assets amounted to $54 billion, down 8% from the record set in the same period last year, but up 9% compared to the second quarter. Our Canadian business contributed revenue of $77 million for the three-month period, a year-over-year decrease of 6% and an increase of 5% sequentially. The decline in revenue from transactional activity was largely offset by higher interest revenue, which increased 161% year-over-year to $13 million. The adjusted pre-tax net income contribution from this business was $12 million, its strongest quarterly result in the current fiscal year. Last week we announced we've entered into an agreement to acquire Mercer's Canadian private wealth business. Subject to customary closing conditions, we expect to complete this transaction in the next three months and is expected to add approximately $1.5 billion to our total client assets. We look forward to welcoming this team and supporting the continued success of these advisors and their clients. And finally, our Australian wealth business returned to profitability this quarter with a modest increase in revenue reflecting contributions from recently recruited investment advisors. Client assets in this business were $5 billion, up 8% compared to the second quarter. Since the start of calendar 2023, there's been a modest increase in the likelihood of a soft landing, which gives us cautious optimism in our outlook. Having said that, until there's more certainty with respect to the outlook for inflation, interest rates and the broader economy, we can expect continued instability in the capital markets. Our core business segments remain well-positioned to benefit from an upturn and investor sentiment and increased risk tolerance. Capital raising activity remains low, but we're beginning to see some recovery of activity, particularly in the resource sectors where we've established leadership over many years. In closing, I would like to say thank you all for joining us today. Securities law considerations related to the recently announced proposed takeover bid preclude us from hosting a Q&A session on today's call. I appreciate your understanding. And thank you for your continued support. Operator, you may now close the lines. Thank you, sir. Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and you may now disconnect your lines.

EarningCall_291

Good afternoon, and thank you, for attending today’s Informatica Corporation’s Fiscal Fourth Quarter 2022 Financial Results Conference Call. My name is Daniel, and I'll be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] It is now my pleasure to pass the conference over to our host Victoria Hyde-Dunn, Vice President of Investor Relations. You may now proceed, Victoria. Thank you. Good afternoon and thank you for joining us to review Informatica's fourth quarter and full-year 2022 earnings results. Joining me on today's call are Amit Walia, Chief Executive Officer; and Mike McLaughlin, Chief Financial Officer. Before we begin, we have a couple of reminders. Our earnings press release and slide presentation are available on our Investor Relations website at investors.informatica.com. Our prepared remarks will be posted on the Investor Relations website after the conference call concludes. During the call, we will be making comments of a forward-looking nature. Actual results may differ materially from those expressed or implied as a result of various risks and uncertainties. For more information about some of these risks, please review the company's SEC filings, including the section titled Risk Factors included in our most recent 10-Q and 10-K that will be filed for the full-year 2022. These forward-looking statements are based on information as of today, and we assume no obligation to publicly update or revise our forward-looking statements, except as required by law. Additionally, we'll be discussing certain non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for measures of financial performance prepared in accordance with GAAP. A reconciliation of these items to the nearest U.S. GAAP measure can be found in this afternoon's press release and our slide presentation available on Informatica's Investor Relations website. Well, thank you, Victoria. Good afternoon, everyone, and thank you for joining us today. Before we begin, I would like to welcome our new Chief Financial Officer, Mike McLaughlin, to his first earnings call with us. Mike brings 30 years of extensive financial leadership experience and a successful track record, recently serving as the CFO at FICO. Mike has been with us for about a month and has already proven himself to be an incredible addition to the team, and I couldn't be more excited to have him join the Informatica leadership team. So welcome Mike. Now, I'll start with my reflection for 2022 and details on Q4 and the full-year highlights for the year. I will then share my observations for 2023. So let’s begin with 2022. 2022 as you all know was our first full reporting year as a public company. While the year witnessed external fluctuations with an uncertain macro environment, we delivered against our commitment to balanced growth. We exceeded Cloud ARR, Subscription ARR, and non-GAAP operating income guidance for the fourth quarter and full-year of 2022. In fact, Cloud ARR and non-GAAP operating results were also better than our initial expectations shared a year-ago in our February 2022 earnings call. We achieved four new annual milestones – we grew cloud ARR to over $450 million, subscription ARR to almost $1 billion, and surpassed $1.5 billion for both total ARR and total revenues. These results highlight the resiliency and durability of a balanced growth business model. Our accelerated investments in the cloud continued to bear fruit. All products are now on the IDMC platform, and we accelerated our strategic cloud partnerships with AWS, Azure, GCP, Oracle, Snowflake, and Databricks. We also received many awards from our partners and industry experts over the course of the year. Our IDMC platform, powered by our CLAIRE AI engine, processed 53 trillion transactions mission-critical may I say cloud transactions per month in December, a 91% increase year-over-year, demonstrating strong customer usage. With our modern cloud architecture, 50,000 metadata-aware connections, and leveraging 18 petabytes of active metadata in the cloud, IDMC is the only platform at scale in the market with all the data management capabilities, enterprises need to deliver measurable outcomes for data analysts, data scientists, data engineers, CIOs, and the CDOs. Our enterprise sales motion continues to strengthen, as evidenced by 93% plus renewal rates, gross margins up 82%, and strong global wins with enterprise brands serving mission-critical workloads. Lastly, while cloud migration remains in its early innings, we ended the year with solid momentum. We have migrated 3.6% of our maintenance installed base over to IDMC, up from 2.8% last quarter with a 2.1 conversion ratio. GSI and channel partners continued to scale their Informatica migration practices and provided more trained resources to meet customer demand. Now, turning to our strategic priorities and continued key areas of investment focus, let me share highlights from product innovation and then go-to-market. Beginning with Innovation, we prioritized our R&D investments to support accelerating the cloud roadmap and strategic cloud partnerships critical for our long-term success. IDMC is now the platform of choice as customers build the modern data stack at scale versus stitching together many solutions which takes time, is more risky, and definitely more expensive. Some innovation highlights amongst the many over the course of the year are here. In our Data Integration services, we recently announced the public preview of two new IDMC Services, ModelServe and INFACore. With ModelServe, you can put AI into action in minutes with a one-click, serverless deployment of AI/ML models with our IDMC. INFACore extends IDMC platform capabilities to Data engineers, Developers, and Data Scientists, directly in their own Integrated Development Environment, making them more productive by turning thousands of lines of code into a single function. In our MDM and 360 Applications services, we improved data modeling to allow more flexibility while managing multi-domain relationships, introduced a new real-time data enrichment framework, and tracked detailed usage and consumption metrics that accelerate cross-sell and up-sell opportunities for our customers with their end customers. In our Cloud Data Governance and Catalog service, we enabled data entity classification, which uses metadata intelligence to automate the labeling and categorization of data assets, helping improve data discovery, understanding, and governance of data assets. Now I want to talk a little about our AI engine, CLAIRE, that has continued to scale and power all our products on IDMC. Now we have been believers in the potential of AI to drive intelligence and automation. In fact way back we launched CLAIRE in 2018, and still then we have been refining it, growing it and it has now grown to subsea operational scale. I will give you two examples of CLAIRE in action – operational action. One, organizing customer data, CLAIRE can automatically classify, label, and relate datasets, saving users thousands of hours of tedious and manual work. An American Health Insurance provider saves $1 million monthly using these advanced AI capabilities. And other one is generating data pipelines: CLAIRE automates data pipeline generation by providing AI-based pair programmer, like GitHub Copilot. This improves data engineer productivity by accelerating development, automating repetitive tasks, and enabling more users to connect and integrate data quickly. Additionally, CLAIRE is intelligent so it becomes more and more accurate with each utilization, providing more targeted recommendations. More than 85% of IDMC Cloud developers tell us that they use this capability daily. Now as a pioneer in cloud data management, we are honored to be recognized for our commitment to product innovation. Informatica is recognized as a Leader in the 2022 Gartner Magic Quadrant for Data Quality Solutions. This makes 15 consecutive times of being a Leader, and Informatica is once again positioned highest on the ability to execute axis. Informatica also Scored Highest in three data quality use cases in the 2022 Gartner Critical Capabilities for Data Quality Solutions report and received a “Strong” rating by Gartner in Product/Services and Support/Account Management in the 2022 Gartner Vendor Rating report. Lastly, Informatica won the 2022 Digital Innovator Award from industry analyst Intellyx. Now let me turn to our go-to-market, where our ‘Switzerland of data’ partner position and our scaled platform with best-of-breed solutions position plays a very important role in customer engagement. This has allowed us to serve customers of all sizes across all geographies, towards choosing the IDMC platform to enable their digital transformations in the cloud. Momentum continued in Q4 from customers spending more than $1 million in subscription ARR, increasing by 35% year-over-year to 206 customers. We more than tripled the number of customers spending more than $5 million in subscription ARR. Customers spending more than a $100,000 in subscription ARR increased 15% year-over-year to 1,916 customers. We also closed over 80 cloud modernization deals in 2022, our highest ever in a single year and more than doubling the number of modernization deals lifetime to date. Customer success is an important priority for us. For the second consecutive year, Informatica has earned “an outstanding customer service experience” from J.D. Power in their Certified Technology Service & Support Program 2022. We also announced an Assurance Service to optimize and advance the customer experience on IDMC platform, with risk mitigation and observability at its core. Now co-selling with our ecosystem partners has proven very successful, as reflected in our continued acceleration of cloud marketplace transactions, which grew 43% year-over-year. We were honored with two partner of the year awards from AWS, including the 2022 Global Design Partner of the Year and the 2022 North America Data and Analytics partner of the year. We also announced a set of new integrations with AWS services to democratize access to data and expand IDMC to new user personas, such as data scientists and data developers. These integrations included native integration of Informatica’s Data Loader for AWS Redshift into the Redshift user experience and a new plugin providing access to IDMC capabilities to data scientists and data developers directly from AWS Sagemaker. We also saw substantial progress with our GSIs and Platinum Channel Partners. More than 20 partners have now been certified as a part of our cloud migration program and have built Centers of Excellence to deliver the work, including eight GSIs. We saw a significant increase in the amount of work that will be delivered by partners and from the Migration Factory deals that closed in Q4. We expect more to be delivered by our trained and certified partners, giving us the additional scale and faster time to value for our customers. We recognized a few of our esteemed partners at our Sales Kickoff held earlier this year in January. Global Partner of the Year was Deloitte, Global Innovation Partner of the Year was KPMG, Global Growth Partner of the Year was TCS, and Global Cloud Modernization Partner of the Year was Capgemini. We also saw continued strong growth with our Channel Partner program, which incentivizes our partners to source new opportunities and provides rewards when those opportunities close. Many of our partners doubled in their efforts to position Informatica in their customer base. We continue to win opportunities with new and existing customers. Let me give you a few examples, BayWa r.e. is a leading global renewable energy developer, service distributor, and energy solutions provider. Facing new supply chains they selected Informatica’s IDMC cloud-native platform with MDM Supplier 360 to keep in step with emerging requirements as they remain focused on actively shaping the future of energy. Another one, founded in 1945, Kaiser Permanente is recognized as one of America’s leading healthcare providers and nonprofit health plans. This past quarter we expanded our existing partnership with them, supporting the enterprise migration to the cloud as well as analytics tools that support this work. Federated Co-operatives Limited is Canada’s largest co-operative across 3,000 retail locations in 500 communities throughout Western Canada. FCL was looking for a better way to enhance insights, profitability, provide a differentiating customer experience, and drive sustainable organizational growth. A long-time Informatica PowerCenter customer, they selected Informatica’s IDMC platform to modernize its critical business systems, centrally manage their data, and help them scale for the future. So hopefully that gives you a good perspective of 2022 in Q4. Now let me turn to 2023 strategy. Well as I step back over the past 25 years, Informatica has pioneered many categories in data management – from ETL and its inception to Data Quality to Master Data Management to Data Catalog to Data Marketplace and now the most comprehensive at-scale cloud-native AI-powered data management platform, IDMC Intelligent Data Management Cloud. In my conversations with customers, CIOs, CDOs, and business buyers across the globe, our partners and as I look at market trends, including Informatica’s annual CDO Insights report, all clearly state that data management and digital transformation led by data is enabling – enabled by a cloud delivery model will continue to be a top priority of IT spending in 2023 and beyond. So through thoughtful planning, we are now transitioning to a cloud-only, consumption-driven strategy. We are looking to achieve three primary strategic objectives for long-term value creation: First, we will drive cloud-only organic growth for net new business on the foundation of our continued investments in innovation for IDMC. As you all know all of our IDMC suite of solutions are cloud-based. Cloud is already growing faster than self-managed, and most of our new business pipeline opportunities are cloud-only. IDMC offers a consumption-based pricing model that enables higher NRR for the cloud business. Customer interest in Informatica Processing Units, or IPUs, as we call it is continuously growing. Expanding on the success we have observed with IPUs, we will launch flex IPUs later this quarter to meet our customer’s seasonal usage patterns so that IPUs can be pre-purchased and consumed for 12 months. This is additive, to our current IPU model, which is pre-purchased and consumed monthly, thus enabling greater choice and flexibility for our customers. Second, we will continue accelerating cloud migration opportunities from existing maintenance customers while maintaining best-in-class renewal rates. Lastly, and most importantly, a cloud-only, consumption-driven strategy is part of a multi-year plan to drive balanced growth by managing the topline as well as significantly improving operating leverage. Focusing on this new model allows us to simplify our organization from hybrid to cloud-only, create operational efficiencies and synergies, and improve the speed of execution by being focused. This will enable us to create better operating leverage in our multi-year plan. Our 2023 guidance in that context is also appropriately prudent as we navigate an uncertain macroeconomic environment while transitioning to a cloud-focused sales motion. We are committed to balanced growth, creating operating leverage, investing in cloud product innovation and cloud-driven growth, and delivering a durable and sustainable business. I’d like to thank all Informaticians for delivering great results. And I also like to thank our partners, customers, and shareholders for their continued support of Informatica. Thank you, Amit, and good afternoon, everyone. As a new member of the Informatica team, I am very pleased to be with you today. I’ll begin my remarks this afternoon with a review of our Q4 results. Total ARR for the fourth quarter of 2022 increased to 11.5% year-over-year to $1.52 billion, at the high end of our revised guidance range, driven by strong new business sales and Subscription renewals. This reflects $157 million in net new total ARR versus the prior year. For the full-year, foreign exchange negatively impacted total ARR by approximately $20 million on a year-over-year basis, in line with our expectations when we set our guidance in October. Cloud ARR increased over 42% year-over-year to $451 million, exceeding the high-end of our October guidance range by $20 million. We expected our sales mix to continue to shift from self-managed to cloud going into the quarter – but that shift happened even faster than we expected. Cloud ARR now represents approximately 45% of total Subscription ARR, compared to 40% in the prior year. We added $134 million in net new Cloud ARR during the year. As Amit has made clear, our cloud-native products are the core of Informatica’s growth strategy, and we are very pleased with our Q4 results in this segment. Turning to total Subscription ARR, Q4’s result of $994 million represents a 24% year-over-year increase, $4 million above the high-end of our guidance range, driven by new subscription customer growth and high renewal rates, in both our cloud and self-managed products. We added over $192 million in net new Subscription ARR versus the prior year. Subscription ARR is now approximately 66% of total ARR compared to 59% in the prior year. We also saw growth in our average Subscription ARR per customer in the fourth quarter. It grew to approximately $263,000, a 19% increase year-over-year on an active base of roughly 3,780 subscription customers, which is an increase of 152 subscription ARR customers on a year-over-year basis. Q4 Subscription net retention rate was 111%, down 1% sequentially. Beginning next quarter, we intend to disclose our cloud-only net retention rate as an additional indicator to measure our performance as we execute our cloud-only consumption-driven strategy. While we will not add this disclosure to our quarterly reporting until Q1 of fiscal 2023, I would note that our Cloud net retention rate was several percentage points higher than subscription NRR in Q4. Lastly, maintenance ARR finished in line with expectations, down 6% year-over-year at $523 million, with a strong renewal rate of 96%, up one percentage point year-over-year. For the full-year, foreign exchange negatively impacted maintenance ARR by approximately $12 million on a year-over-year basis. As a reminder, we have intentionally reduced perpetual license sales to an insignificant amount in favor of subscription offerings. This has naturally resulted in a gradual decline in maintenance ARR since we are not adding new maintenance customers each period. Turning to revenue, GAAP total revenues were $399 million in the fourth quarter, down 2% year-over-year, which was in line with our October guidance. Foreign exchange negatively impacted total revenues by approximately $16 million in the fourth quarter on a year-over-year basis, in line with October expectations. For the full-year, foreign exchange negatively impacted total revenues by approximately $48 million on a year-over-year basis. Subscription revenue increased approximately 4% versus Q4 last year to $238 million. Subscription revenue represented 60% of total revenue compared to 56% a year-ago. One reminder regarding our subscription revenue: as our mix of new sales shifts from self-managed subscriptions to cloud subscriptions, we recognize less GAAP revenue up-front at the time of signing each deal and more GAAP revenue ratably over the life of the subscription contract. For this reason, our GAAP revenue growth is lower than our ARR growth in quarters where our mix of new sales and renewals shifts to more cloud sales, as was the case this quarter. Our quarterly subscription renewal rate was 93%, up two percentage points from a year-ago. Our continued strong renewal rates reflect our software's mission-critical nature and outstanding customer support. Maintenance and professional services revenue were in-line with expectations at $156 million, representing 39% of total revenue in Q4. Stand-alone maintenance revenue represented 32% of total revenue. Implementation, consulting, and education revenues make up the remainder of this category, representing 7% of total revenue. Turning to the geographic distribution of our business in Q4, U.S. revenue grew 6% year-over-year to $262 million, representing 66% of total revenues. International revenue was down 14% year-over-year to $137 million, representing 34% of total revenues. Using exchange rates from Q4 last year, international revenue would have been approximately $16 million greater in the quarter, which would have represented an international revenue decline of 4% year-over-year. As we have emphasized, consumption based IPU pricing is a core part of our strategy. We are pleased to report that approximately 56% of Q4 cloud new bookings were IPU-based consumption deals. As of Q4, IPUs represented 38% of total Cloud ARR, up five percentage points sequentially. As Amit mentioned, we will release a new flexible IPU consumption pricing model later this quarter, and we are shifting our sales efforts to focus more on consumption-based engagements. As a result, we expect IPU adoption to continue to increase during the course of 2023. Now I would like to move on to our profitability metrics. Please note that I will discuss non-GAAP results unless otherwise stated. In Q4, our gross margin was 82%. We are pleased to have maintained a stable 80-plus percent gross margin throughout the year, even as our mix shifts to the cloud. Operating income was approximately $114 million for the quarter, exceeding the high-end of our October guidance range due to better-than-expected gross margins and reduced operating expenses. Operating margin was 28.5%, a five percentage point increase year-over-year. Adjusted EBITDA was $118 million, and net income was $69 million, a 17% and 27% increase year-over-year, respectively. Net income per diluted share was $0.24 based on approximately 287 million outstanding diluted shares. The basic share count was approximately 283 million shares. Q4 unlevered free cash flow, after-tax, was approximately $92 million, slightly below expectations even though we exceeded non-GAAP operating income guidance. This was primarily related to a greater-than-expected foreign exchange impact on certain working capital items, higher cash taxes, and higher cash commissions than we expected going into the quarter. We would have delivered unlevered free cash flow near the midpoint of our guidance range if not for these factors. We ended the fourth quarter in a strong cash position with cash plus short-term investments of $716 million. Net debt was $1.14 billion, and our trailing twelve months of adjusted EBITDA was $372 million. This resulted in a net leverage ratio of 3.1x. We expect the business to naturally de-lever to approximately 2.4x by the end of 2023 and then to approximately 2x by the end of 2024. Now, as I turn to guidance for 2023, let me give you some context regarding how we think about this year. First, a few comments about our revenue and ARR guidance. We feel it is prudent to be somewhat cautious with our topline expectations in 2023, given the continued uncertain macro environment and our transition to a cloud-only, consumption-driven sales model. From what we can see today, the overall demand environment appears restrained, but generally healthy for our industry-leading cloud products. And more than three-quarters of our new business pipeline is made up of cloud opportunities. However, as many other tech companies have also noted, deal cycles are elongated and deals face more budget scrutiny. Bottom line: deals are getting done, and our pipeline is strong, but we feel it is prudent to expect some headwinds during the year. We believe our focus on a cloud-only model will have tremendous long-term benefits in terms of growth and profitability. Our laser focus on cloud new business going forward will likely result in a decline in net new self-managed ARR in 2023. This is a direct consequence of our strategy, and we are convinced that moving crisply and decisively to a cloud-only model will create the most long-term value for Informatica. One more note with respect to our revenue and ARR guidance. Full-year 2022 saw considerable foreign exchange volatility, which had a material impact on our results. When forecasting our business, we assume constant FX rates for the year based on the rates at the start of the planning period. For reference purposes, we have included a table in the earnings press release with our expectations for FX impact on revenue and ARR in 2023. The second point I would like to emphasize regarding our 2023 guidance is our focus on balanced growth and profitability. One of the benefits of our cloud-only, consumption-driven strategy is the ability to streamline our go-to-market, customer support, and product development efforts significantly. As a result, in 2023, we expect more operating leverage in the business. The improved efficiencies of our cloud-only consumption model will begin to be seen this year and are reflected in the full-year non-GAAP operating income and unlevered free cash flow guidance. Furthermore, we expect this improved operating leverage to continue in 2024 and beyond, keeping us on the path to meeting our long-term non-GAAP operating income margin targets of 36% to 39% of total revenues. As you know, we announced a reduction in force last month to better align our cost structure with the efficiencies we expect to achieve with our new strategy. We estimate non-recurring charges of approximately $25 million to $35 million in Q1, primarily related to cash expenditures for employee transition, notice period and severance payments, and employee benefits. We estimate this cost savings benefit of these actions to be approximately $50 million in FY2023, which we have factored into our guidance. Third, and finally, let me discuss our expectations for P&L tax rates. We reported 2022 non-GAAP net income at a non-GAAP tax rate of 23% and we expect that rate to continue for fiscal 2023. Looking at fiscal 2024 and beyond, we expect a long-term steady-state non-GAAP tax rate of 24%, which reflects where we expect cash taxes to eventually settle based on our structure and geographic distribution of operational activity. Cash taxes are expected to be higher in 2023 than in 2022 by approximately $30 million due to higher U.S. and foreign taxes on our higher taxable income, lower tax credit utilization, and an $11 million U.S. federal tax refund in 2022 that will not recur in 2023. Taking all this into account, we are establishing the following guidance for the full-year ending December 31, 2023. Note that all growth rates refer to the mid-point of the guidance range, where applicable. We expect GAAP total revenues to be in the range of $1.57 billion to $1.59 billion, representing approximately 5% year-over-year growth. As mentioned above, ASC 606 on-premise software accounting can have a significant impact on our reported GAAP revenues, driven by the mix of on-premise versus cloud business in the period. In 2022, our subscription net new ARR mix was about 70% cloud and 30% self-managed. In 2023, we forecast the cloud portion of the mix to increase further, resulting in less upfront on-prem revenue recognition. If we had carried the same mix of 70% cloud and 30% self-managed net new into our 2023 guidance assumptions, we would have forecast approximately $80 million in additional FY2023 GAAP revenue. We expect total ARR to be in the range of $1.585 billion to $1.615 billion, representing approximately 5% year-over-year growth. We expect Subscription ARR to be in the range of $1.098 billion to $1.118 billion, representing approximately 11% year-over-year growth. We expect Cloud ARR to be in the range of $604 million to $614 million, representing approximately 35% year-over-year growth. As I discussed a few minutes ago, our guidance calls for a net reduction in self-managed ARR in FY2023, which is a direct consequence of our cloud-only strategy. We expect non-GAAP operating income to be in the range of $400 million to $420 million, representing approximately 17% year-over-year growth. And we expect unlevered free cash flow after-tax to be in the range of $340 million to $360 million, representing approximately 21% year-over-year growth. Our guidance for the first quarter ending March 31, 2023, is as follows, we expect GAAP total revenues to be $352 million to $362 million, representing approximately a 1% year-over-year decrease. We expect Subscription ARR to be in the range of $1.005 billion to $1.015 billion, representing approximately 19% year-over-year growth. We expect Cloud ARR to be in the range of $462 million to $468 million, representing approximately 35% year-over-year growth. And we expect non-GAAP operating income to be in the range of $74 million to $84 million, representing approximately a 5% year-over-year decrease. For modeling purposes, for the first quarter of 2023, we expect unlevered free cash flow after-tax to be in the range of $75 million to $95 million. For the first quarter of 2023, we expect weighted-average shares outstanding to be approximately 285 million shares and diluted weighted-average shares outstanding to be approximately 288 million shares. For the full-year 2023, we expect basic weighted-average shares outstanding to be approximately 289 million shares and diluted weighted-average shares outstanding to be approximately 298 million shares. Before closing, I’d like to share how excited I am about the opportunities ahead for Informatica. I have only been on board for about a month, but in these four short weeks, I’ve had the opportunity to see up close the strength of our cloud products, the quality of our installed base and brand, and our unmatched direct and partner go-to-market capabilities. I expect fiscal 2023 to be a pivotal year for Informatica, and I am thrilled to have the opportunity to be a part of the team. Great. Thank you very much. Hello, Amit, and welcome Mike. We all look forward to working with you. Maybe a question for you, Mike, to start. You've come from a really successful company over to Informatica, and I was hoping you can talk about what specifically attracted you here? And perhaps, the low-hanging fruit that you see and any change in philosophy that you bring with you? Hi, Brad. Thanks for the question. Well, as I started to get to know Informatica in the months leading to my move, I was very attracted by the sector that the company serves. It's a $40 billion to $50 billion TAM that's growing in the mid-teens or better. And Informatica is the clear leader in the space with a set of product capabilities delivered on the segment-only truly cloud data platform, and the company has a tremendous installed base of existing customers who are happy with the product, loyal product and willing and anxious to buy more as more product capabilities emerging and their needs emerge. And then they have a go-to-market capability that's really unmatched. The direct sales force is very experienced and capable and the indirect partner sales, which go through global systems integrators, VARs and cloud service providers leads to a go-to-market engine that is really tremendous. You combine all that with what is an operating model that turns out to have a lot of operating leverage in it. And in fact, if I'm going to try to compare what I expected to find in terms of what I found coming in, it's there where – I've been – expectations have been exceeded the most that this is a business that as it grows is going to deliver balanced profitability with that growth. And operating leverage, as we get more efficiency out of go-to-market and R&D, as we continue to grow the business at scale with the simplified, highly focused cloud-only, consumption-driven strategy. So I've been really happy to confirm all of the things that attracted me to the company now that I'm here and frankly, have been pleasantly surprised in a good way about what I found to be the financial model and its potential for delivering increased profitability as we grow. Mike, that's really great to hear. Thank you for taking the time to explain that. Amit, maybe just one follow-up for you. All the cloud migration commentary and cloud ARR results are really encouraging and speaks to the value of IDMC. But if we look at overall workload migrations to the cloud across the industry, what we hear from the CSPs, they've been slowing materially. We can just see that if we look at Amazon's results last quarter. So other than the use case in that you're feeding high-value AI-related apps, is there anything else that you would share with us to think about in just reconciling what we're seeing more broadly across different types of workloads out there? Thanks. Great question, Brad. So I think if you look at two things, obviously, majority of our cloud ARR growth, which obviously was great, comes from net new workloads, not migration. I'm going to talk about a second. And to be kind of, if you look at where customers are, each part of the stack looks differently. But the part of the stack we are in, the data stack is pretty much every digital transformation is a data transformation. And what we are benefiting from is not only the best-of-breed capabilities for that platform. And obviously, I talked about the CLAIRE AI now really feeding not just intelligence, but automation. So when I talk to customers productivity, having a platform that can simplify things for them, managing not only getting the best technology, but at reducing that risk and price leverage that they can bring it all on the platform. Those are all the things that are feeding into them. And the other one is that, look, we partner with everybody. Switzerland of data really comes handy. So customers choose best-of-breed or whether they want to go to one CSP and another data provider, but we are the only one that can glue all of them. All of those things create a nice snowball effect. Migrations, as you saw – look, I've said very clearly, all of last year, we're doing a lot of hard work behind the scenes to increase the velocity of that one and create a curve that has a higher gradient than what we have seen so far. We went from two-point something to now 3.6, expect more to happen. You've done the hard work of training departments. They are the ones who basically want to drive all the implementation through and also add deal discovery through. I fully expect that to continue to bear fruit over the course of this year. As I said, Q4, while everything was going down, very promising what we saw in migration. So that is an area that I do expect continued velocity increase and the gradient to get better than before. Great. Thanks for taking my question guys. I'd offer my congrats to you as well, Mike. Looking forward to working with you. Amit, following up on your comments to the last question. As you go along on cloud this year, I was wondering if you could talk, I guess, more about your overall go-to-market strategy. And I guess I'm really wondering like how does sales reps – how will they be incentivized this year? And you mentioned that there could be a stepped up focus on converting maintenance to cloud. Just maybe if you want you could double-click on that as well. So two things over here, again, and I'll keep migration second and overall. Look, as we shared last year that we were in a hybrid product world, hybrid use case world, our reps had a hybrid [indiscernible]. They were selling cloud with a higher multiplier than self-managed, but we were chasing both. What we've done is for majority of our countries for all net new business, our teams have pivoted towards just cloud. So that's the quota they carry that's the [indiscernible] they have. Sure, certain parts of the world and certain areas like U.S. public sector that is self-managed because cloud has still has some inhibitor over there and we kept those teams compensated appropriately, but that's a much, much, much smaller percentage of the overall part of the new business that we are going after than cloud. So pretty much our teams are similarly – they're not now confused been both cloud and self-manage and a pick and choose. It's just cloud and our products are all on the same cloud platform. They're putting that in front of our customer. They're running at scale so on and so forth. So very clear, cloud code or cloud com, very similar focus, you just run and that's the only thing you have. That creates focus and simplicity and operational efficiency that we talked about. I didn't say that migrations will become a much bigger part of the business. I still keep saying, majority of our business is going to grow through net new workloads. I did say that, yes, we are the hard work we put behind the scenes on partners ramping will give us more fruit over the course of the year for migrations to growth. We fully expect and are focused on driving more migrations, but as we've said, Matt, and you’ve said the new business, just look at the velocity with which it continues to grow, and I'm really impressed with that. And last but not the least is, look, when customers settle on the platform, and a lot of our customers who may be potential migration customers, but they are running new workloads on IDMC, they will naturally get to the migration workload. We want to make sure we capture any workload on IDMC, we can get the migration later because it's a very sticky business that we saw. This is Alan [indiscernible] on for Alex Zukin. Thank you for taking the question. I appreciate that color on the migration activity that – and how you're basically thinking about it for the full fiscal 2023 guide. Is there any way to kind of quantify maybe again, both how you're thinking about the amount of migration activity that's going to come within the net new cloud ARR guide that's kind of implying high-teens growth. And just overall, in this macro environment, what's giving you that confidence to continue seeing such robust growth on the cloud side? Thanks. So first of all, as I said, we continue to see that digital transformation efforts at every customer are run through the lens of data management. I've talked to hundreds of customers across the globe, and even in a macro environment, which is not necessarily – which still has headwinds out there, we talked about that. Customers know that, hey, look, I got to get at some point to transform our business and the only way I’ll do it is through having a better understanding of my customer or my supplier or having data covenants as I democratize all of them are data management use cases through the single platform, IDMC, that has all the services. What we saw coming out of Q4 demonstrated that, and that's what our conversations pipeline creation remains healthy. We continue to see deal cycles remain elongated, but the health of use cases help the pipeline gives us all of the comfort on everything is going to the lens of cloud. So hence, basically – and we've been talking about that all of last year that basically through that lens, we are pivoting towards the cloud-only mode. For all net new, we're not giving up on our maintenance base, renewal base. We have great best-in-class renewal rates and we continue to service those customers, and over the course of time, migrate them to cloud. On migration, pretty much 90% plus of our business comes from new workloads. So we feel pretty good about that. Migration is an area, where I said many times, we're going to continue to scale more, but majority of our growth has come from and will continue to come from new workloads as we scale our migrations. Hi. Thank you very much. Glad to hear the details here, Amit. Curious if you can expand upon the end of the quarter activity with respect to new deals and how you saw the close of the quarter and have things change with respect to the tone of net new business in the month of January. And then as you step back and look at the cloud transition, what is incrementally new by way of professional services, risk of implementation or the timing of implementation or product functionality that why you have the intent to move forward with the cloud, how should the customer propensity be any different? And Mike, I look forward to working with you. Congratulations. Yes, Kash. So Kash, look at this way, the net new growth of ARR in 2022 was 70% cloud. So the momentum has been shifting towards cloud in a significant pace with the course of 2022. In fact, if I go back a year-ago, literally, we actually – in my – that February earnings call, we put more focus on cloud roadmap and cloud partnerships. We, in fact, did a bunch of that change that has borne the fruit over the course of this year. So momentum is towards cloud. Our products have scaled up on that platform. We have many new innovative features and pretty much as a digital transformation efforts are all cloud-centric. I've not seen a customer who wants to do on-prem anymore. Pretty much everybody wants to go to the cloud. They will want us to help them go to the cloud. So you can see the net new business growth. Now Q4 had great tailwinds, and look, we don't see any – we don't see a material change in the macro yet. So we were prudent in how we are thinking about this year. You heard my guide to what we saw this year. So we obviously – while we grew a lot more over the course of cloud ARR last year, we were being thoughtful on what it could be for the full-year. And hence, we gave the guide for 35% cloud ARR growth. We feel good about where the cloud business is, and cloud also, Kash, as you know, given cloud does not have a lot of old on-prem the complexity of implementation, customers can get going very quickly. Our customer success model is to drive technical and business value very quickly. So the time to value that cycle has been compressed. So customers get quick value, and like I talked about some productivity increases through AI. So customers benefit from that in the world of cloud and that's what gets them even more excited to pick up on cloud workloads. Okay, thank you. Hey, Amit, hey, Mike. Thanks for taking the questions. I wanted to ask you a question on Flex IPU. I guess from a push-pull perspective, was this something customers were asking for? And maybe how should we be thinking about this new pricing model? Any changes does it create your revenue visibility? And also any rev rec considerations we should be thinking about with the Flex IPU pricing model? Thanks, guys. So from the demand point of view, Koji, in fact, IPUs have been a stellar success. I think, Mike mentioned in the call, 54% of our IPU new bookings are – new bookings on cloud are IPU-based, and we see great traction. The simplicity of IPUs is what customers love. And in that vein, we also talk to customers that customers who want many different ways to consume IPU. So Flex IPU is nothing else but an additive thing to give customers more flexibility to transact with us. It does not have any material changes to what we are running in our go-to-market models. Again, remember, if we want to give customers more and more and more flexibility to consume IPUs, we know, given our renewal rates, customers adopt. They use. They basically become consumers for life of our platform. So it's in that spirit. And of course, we've been hearing customers on, but different use cases also then we want different things. One use case, they want regular IPUs and for a small seasonal use case they may want Flex IPUs. So it's managing those and sometimes we serve across an enterprise in many business units. It's managing a pretty large enterprise in the way in which we thought about this, we feel good about it. I think we'll see how the year goes with that. And Koji, just an add to that. To super simplify the difference in the model from existing IPUs to Flex IPU, there's a lot to it. But from a financial standpoint, basically think of it as a monthly bucket versus a yearly bucket. Customers are buying a yearly bucket that they can use any time during the year as opposed to monthly user lose it. For that reason, it doesn't change the revenue recognition. It continues to be fully ratable and doesn't introduce any more usage volatility than you would otherwise see in the IP-based model. Hey, guys. This is Noah Herman on for Pinjalim. Thanks for taking our questions. Can you maybe just provide some of the assumptions around the ARR guidance? And just any other incremental commentary on macro would be helpful to included in those assumptions? Thanks. I can give the macro and Mike can add to the guidance. Look, I think we said very clearly. We fully still see a macro where there are – that is special. There are headwinds. And I think – not a lot has changed from December 31 to whatever the date is today. So I think we've been very thoughtful about our customers are still in an environment, they are being thoughtful, careful. Deal cycles are remain elongated. I create remain remains pretty good, but I think we have to just be thoughtful and careful about that. So with that, we basically put one lens to our guidance. Second is, we – you heard from us, we are very clear in the cloud-only model. That's the part of the business is growing. That's where we wanted to go. We have been working hard towards it. We are absolutely very okay for the sake of focus, growth and all the right long-term tailwinds to a cloud model, which has higher NRR, higher cross-sell, upsell, the higher operational leverage model to give up on some self-managed deals on the side here and there if we had to. I'd rather have a very focused team driving the right long-term model opportunities. So those are all the things that we took in terms of how we thought about what we think the year could be like. And then I'll have Mike add to that as to our guidance do more so on it. Sure. Maybe I can give a little bit of color around the various components. So starting with cloud ARR, that's a 35% growth guidance. That's a number that's well supported by our pipeline, and we think appropriately reflects the environment that we talked about that we expect to be more or less the same as it has been over the last couple of quarters. Self-managed ARR is down 8% at the midpoint of our guide for the year. And as I said, that's a direct consequence of our strategy to focus all of our go-to-market efforts in all of our material new product enhancements on cloud-only products in 2023, and we expect that to pay even more dividends in 2024. Maintenance is all a renewal game, and the renewal rate in Q4 was 96. We think that was a really outstanding opportunity. We're not expecting that to recur through the full-year. We're planning on a renewal rate and maintenance that's consistent with the 94% or so rate we've seen over time. And then in terms of renewal of our subscription cloud and self-managed products, again, we forecast a rate that's very consistent with the 93% that you saw in Q4, and you've seen in quarters past. I hope that helps. Great. Thank you. Congrats, Mike, on joining Informatica. I just really have, I guess, a few clarifications. I know there's a revenue uplift when maintenance customers convert to cloud, but I'm wondering if you expect the same ARR uplift if a self-managed customer converts to cloud. And then I appreciate the beat on the operating income, despite missing revenue estimates, but I'm wondering why the sales and marketing was down 20% year-over-year in Q4? If that's – if there's something abnormal in there? Thanks. So let me start with the ARR impact of a conversion from self-managed to cloud. There absolutely is an uplift because when you move from self-managed to cloud, Informatica takes responsibility for owning and running and monitoring the infrastructure. We do all the patching, the security bug fixes and all that sort of stuff. So there's a lot more value delivered to the customer for a cloud solution to the same use case versus a self-managed or on-prem solution. That multiple is not as consistent and statistically predictable as it is for the maintenance conversions because it depends a lot upon what capabilities they're converting to and often cases, there's more stuff that they're buying because of the advanced capabilities of the platform versus their existing solution, but yes, there is an uplift. And in terms of the ARR impact of that, we only record in total ARR the net increase. Now you would see a decrease in subscription – sorry, in self-managed ARR and an increase in cloud, but on a net basis, you'd only see the increase over the existing base. Sorry, operator, I apologize. That was a two-part question, I neglected to answer the second part. The reduction in sales and marketing expense year-over-year in Q4 was the impact of commissions and how those commissions end up hitting the P&L based upon the mix of cloud sales versus self-managed sales and the different ways in which we capitalize those commissions versus expense then in the period when the deal is closed. The exceedance of our guidance and the exceedance of our expectations was in the cloud segment, and for cloud commissions, we pay the same amount more or less to account executive for the deal, but for P&L purposes for GAAP, we capitalized that ratably over five years. And so we see less expense in the period. So that was the reason – that was the primary reason for the difference. Hey. Thank you for taking the question. I'd also say, welcome, Mike, and I look forward to working with you. I'd like to ask with the broader cloud ecosystem, so perhaps for Amit here. Just with the amount of integration that you're offering and just focus on going cloud-only and cloud-first sales, how would you describe the backdrop of demand for data in the cloud? And perhaps, some of your strategic partnerships with Snowflake, Databricks, et cetera, and some of the recent launches you had like the data connector with BigQuery and how all of this plays into overall cloud ARR? Yes. I think that – look, if you look at the market demand, as I said, pretty much all of the big partners work with are cloud. You look at the demand, the new ARR growth that we have cloud. Pretty much all of digital transformation that's happening in the cloud. So we – and all the work we've done in the year has been to accelerate our cloud roadmap, so we can fulfill more of the demand. And you can see more and more over the course of the year, we could fulfill more of the demand in the context of cloud. Our whole platform is ready. The demand is there in cloud. So as we walk into this year, we're going to fulfill that demand pretty much all this cloud. As I said, barring some exceptions of some areas like U.S. public sector could be the case or some parkland geographies where they may still want some self-managed because cloud is not necessarily what they're going to do. But that's going to be a much smaller component. That's the demand side. That's how the pipeline is delicately created. That's what customers are asking us, and we are basically ready to fulfill it. Hi, thank you. I have a question for Amit. If you were forced to do a rank order, which products and solutions on IDMC do you expect to drive the most incremental growth this year? So for instance, I believe MDM was the last product to become fully multi-tenant, right? So maybe it's MDM. We also keep thinking maybe the 360 use cases. Maybe CDGC. And the second part is, with this cloud-only model, are certain IDMC products better positioned for expansion relative to how your customers were consuming – relative to how self-managed customers specifically were consuming them? Thank you. Howard, don't make me choose my kids. That's a harsh question. So I think I've said that many times and I’ll repeat that. Look, that's never the way we ever look at it. Because when we talk to a customer, and I said that like there are many use cases, but pretty much that's the beauty of the platform. I'll pick an example of take MDM, you said, right? So customer is implementing a customer experience project, and basically, that project becomes MDMs led. But to implement that hosting, they need the front-end MDM application. They need the core ETL to basically bring data from many places. They need data quality to make sure that the right quality of the data goes into this operational MDM through which they make a decision. And by the way, if we want after that, that MDM to be an operational use case, but also some other people to get data from their analytically to do what-if analysis, they want to put some governance on top. So when we talk to a customer in the context of a use case, we basically may begin with one use case, but it very quickly morphs into using many capabilities. So the whole platform gets used even what may be MDM led. In another case, it could be an analytics project with Snowflake, where ETL, quality governance has been used. So that's why we never look at one product over the other, we always look at it serve the use case. We have all the capabilities to make it very easy for a customer to do it in the most cost-efficient way, risk-efficient way with the best capabilities. Yes. Thank you very much. So your international revenue growth ex-FX declined from 7% in Q3, positive to negative 4% in Q4. Just talk about some of the geographic trends you're seeing. And you also have the 7% headcount reduction announced in January, just can you talk about how much of that was international versus domestic? Thank you. Yes. Look, I think we don't disclose as to whatever. Look, our – when we reduced our headcount, it was pretty relatively spread, and we wanted to make sure that we take out the right things where we had duplicative layers or the things that didn't mix. It was slowing us down from a cloud-only business. But of course, we are pretty well distributed across the globe. So whether it's the Americas or Europe or to be honest, India, where we have a pretty large presence. So it is pretty distributed. In terms of demand, look, we haven't seen anything in particular that is one area stronger than the other or one area necessarily much weaker than the other. We did not have much exposure to Russia in any way in that area as we've said that before. So that didn't really impact us much. We don't have a whole lot of exposure to China. So we don't have a whole lot of impact over there. We pretty much serve the large economies of the world, and I think all of them are facing the same kind of headwinds. It's a very unique one, right, inflation and all that stuff is hitting all of the large economies. So we're seeing healthy pipe grade in all of them quite evenly. And because they are also very well distributed across all verticals, and we kind of serve more mission-critical workloads, we were never into when the market went up with, let's say, serving crypto workloads or some other, we never did any of that stuff. So we see a pretty well balanced, same kind of headwinds, same kind of tailwinds across our big markets. And Shelby, just to remind you, international is only about one-third of our business, and a quarter is only 25% of the year. So you get to be a smaller number that frankly is just subject to quarter-to-quarter variability that doesn't necessarily represent a trend. I think that's how to interpret Q4 international. Hey, thank you so much for taking my question. Could I just double-click on the cloud-only strategy? And I guess, I mean exactly what does cloud-only mean in practice? So like as sales compensation changed as a result of the cloud-only strategy, have product development dollars changed as a result of the cloud-only strategy? Just a bit more color to kind of see how this will translate into the business. Absolutely. Yes, all of it has changed. Cloud-only once again, as I said, for all our new organic growth, we are leading with cloud pretty much, barring a few exceptions, I keep saying here and there, the U.S. public sector and things of that nature and that also will move to cloud very, very quickly. In that context, we do not have most of our large regions have moved to a cloud-only code account model. We are basically giving our reps not necessarily any confusion to choose one over the other. They only have cloud, so they only lead with cloud. They only sell cloud. They're entire code on cloud, and they get compensation at cloud. Pretty simple. Same way our entire product development has pivoted to cloud. We've finished the cloud putting everything there, but there's so much more to do over there. So all majority of our innovation is coming in the context of cloud, IDMC, the platform over there. Now what it is not? We have a very, very, very great set of customers who run mission-critical workloads on the products they use on us. You've seen our renewal rates didn't – haven't budged ever over the course of time. In fact, last year, we thought in a tough macro maintenance, renew rates may go down slightly and we went back and increased it because we didn't see any movement in that area. Same thing is for self-managed. We fully are going to keep helping our customers manage those workloads like we have done, and we know how to do it very, very well to basically make sure they get all the fixes. We have a support team and all that stuff to make sure that area continues to remain healthy from a renewal rate point of view. And of course, we're going to now help customers migrate to the cloud, and that's an area where I said, while we are in the early innings, we want to increase the velocity of that fund. But what cloud-only is that we basically want all the net new business to come primarily from cloud, and it's very clear, focused with no dilution of energy between one thing or the other. Thanks so much. Maybe I'll direct this to Mike. If we could just talk about the trajectory of the revenue growth rate throughout calendar 2023. Obviously, you've guided to negative one in Q1, but positive five for the full-year. So you clearly are anticipating a pretty meaningful growth acceleration in the second half. Some of that might just be mechanical. FX turns your way, easier compares. Is that mostly it? Or if there's something a little bit more nuanced in the model that's resulting in that? Or if you're taking a more optimistic view of the spending environment in the second half, I'd love to unpack that a little bit. Much appreciate it. Yes. Thanks for the question, Karl. It's a good one. And I guess I'll start my answer with the reminder that revenue for a mixed model company like ourselves in the software business is really hard to unpack from quarter-to-quarter because of the mix shifts, because of the acceleration from ASC 606 and so forth. But that being said, the linearity that we're planning in the year is many different from what we've seen in past years. We typically see one-third or more of our business closed in the fourth quarter, and there's kind of a linear slope down to the first quarter, which is the slowest quarter of the year. Nothing has changed in what we expect in fiscal 2023. With respect to the first quarter, yes, there's some mix change in that. And yes, there's an FX impact in that. If you look back at FX rates in the first part of last year versus this year. While they've come back a little bit in our favor, i.e., the dollars little weaker than it was in June, July, it's still stronger than it was in January. So it's those two effects and nothing structural that should make you think differently about ARR growth and ARR linearity and seasonality as the year goes on, which is really the best way to look at our business and what we're actually delivering in each quarter and each year. Thanks for the question and welcome aboard, Michael. I wanted to direct the question that you appreciate it kind of hearing about your reasons on why you joined Informatica and the opportunities. Just as you think about the efficiency opportunities that you talked to, I was wondering if you could expand on that. Obviously, you're guiding to a pretty healthy amount of margin expansion for FY2023. A lot of that is probably coming from the restructuring, but how do you just think about the timeframe to reaching Informatica's long-term targets? And are there specific areas that you've identified in terms of low-hanging fruit that maybe could accelerate that path faster than what the company had targeted? Thank you. Yes. Thanks for the question, Tyler. I'm not going to put a specific date on the long-term margin targets. They feel reasonable and achievable to me over the long-term. But sorry, I won't volunteer anything more specific than that. With respect to the nearer term operating leverage opportunities, if you look at the roughly 2.5 percentage points of operating margin expansion that we're guiding to in 2023 versus 2022, it's about two-thirds, one-third improvement sales and marketing as a percent of revenue and R&D as a percent of revenue. Maybe three quarters, one quarter. We want to keep investing in the products. We want to keep innovation coming, but frankly, with the simplified cloud-only strategy, we can do more with less in R&D. It's not going to be less literally, it's going to be more dollars, but we could be more efficient. Sales and marketing improves even more than that as we focus the sales force and focus the compensation in the way that Amit described. And so, again, probably 75% of the efficiency improvement this year is going to be in sales and marketing as a percent of revenue. Looking beyond that, that's sort of a waiting between the two is probably about right over the medium to long-term in terms of where the efficiency is going to come from as we scale and recognized leverage. Some will come from G&A, of course, too. We'll absolutely grow G&A at a slower rate than we grow revenue. So there will be some operating leverage that will be achieved there. But overall, I'm confident that we can continue to deliver operating margin improvement year-over-year for a good long time. Hey, Amit and Mike. Thanks for squeezing me in. Considering cloud migrations for maintenance, you're less than 4% install base. I was wondering, how the company plans to accelerate the migration from cloud – to cloud for maintenance? And is the internal expectation more linear progress or can we expect an inflection? Thank you. It's a great question. Look, I think two things that you always have to remember that our customers are running mission-critical workloads with the existing on-prem implementations and one has to be as thoughtful as you think about migrations because you – basically, as I said, some insurance companies are closing their books on power sector. So you just have to be very thoughtful as you take them to the other side and make sure the business runs the same way. We absolutely are committed to increasing the velocity of migrations, and I think there are many other things. So one of them is that we wanted to scale our partners. We had to prove out the playbook so that we can give it to the partners and partners are being trained and enabled. So that's one area they spent a lot of energy last year and I’m feeling very good about it as we exit Q4. There are other things that as a team we are focused on. We'll share with you as we go along over the course of the year. It's not lost in us. That's a great opportunity, great value-creating opportunity and we want to do all the things that are right by us and the customer to make this happen and get that value for Informatica. Thank you. That concludes our time of question-and-answer. I would now like to pass the conference over to the management team for closing remarks. Thank you, operator. Well, look, first of all, thank you very much for taking the time today. As I welcome Mike again. Obviously, lots of question that I know you will get a chance to talk to them over the course of time and get to know him better. I'm very excited about the cloud-only consumption-driven strategy. I think it sets us up to the final chapter of the company to be the cloud-only company and to be candid. We are unique in some ways to having done eight business model transition before. You see how we took down license to almost zero, and where we are successfully now going to the migration to – or movement to the cloud model, and I'm very excited about that, given the installed base, the innovation and the customer centricity we have. Obviously, I look forward to sharing more over the course of this year. One opportunity, which a lot of you leverage last year is, Informatica World. It's our annual user conference run by customers, majority of the sessions are customers. I'd invite all of you to come to Informatica World again this year. It's going to be in Vegas again earlier in May. Reach out to Victoria, and she can get you connected. But I look forward to seeing you over there and most likely having you see our innovation and talk to our customers. Thank you, once again.

EarningCall_292

Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to Goodyear's Fourth Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After some opening remarks, there will be a question-and-answer session. [Operator Instructions]. Today on the call, we have Rich Kramer, Goodyear's Chairman and Chief Executive Officer; Christina Zamarro, Chief Financial Officer and Darren Wells, Chief Administrative Officer.. During this call, Goodyear, we'll refer to forward-looking statements and non-GAAP financial measures. Forward-looking statements involve risks, assumptions and uncertainties that could cause actual results to differ materially from those forward-looking statements. For more information on the most significant factors that could affect future results, please refer to the important disclosures section of Goodyear's fourth quarter 2022 Investors letter and their filings with the SEC, which can be found on their website at investor.goodyear.com, where a replay of this call will also be available. A reconciliation of the non-GAAP financial measures that may be discussed on today's call to the comparable GAAP measures is also included in the investor letter. Great Thanks, Ashley. And good morning, everyone. Thanks for joining us today. We released our fourth quarter Investor Letter after the market closed yesterday that we received very good feedback from investors on both our letter and our Q&A call format following our third quarter release. So as we did last quarter, we use this time again to focus solely on your questions. Now, just before opening the line. I want to acknowledge as you've heard earlier that both Christina and Darren are joining me on the call today. As you saw with the announcement in December, Christina became our Chief Financial Officer as of January one, replacing Darren who moved into a new role of Chief Administrative Officer. Congratulations to both of them and again they're joining me here. I'm excited to continue to partner with both of them in their new roles. And given the transition, Darren is joining us on the call today, but Christina and I will take the lead in responding to your questions on these calls as we go forward. Good morning. Thank you so much for the questions and agree with the feedback on the call format. So very much in favor of it. Great. First question, maybe I think last year, around the same time, I think you had helped us out with sort of like framing sort of a base case scenario for what could happen to free cash flow for you guys for the full year ahead under certain conditions. So will we be able to go into this discussion for 2023. Obviously, appreciate all that in this slide. Just curious knowing all you know, what this request will look like for you? Sure. So Emmanuel. Hi, this is Christina. And let me start by saying thank you for the comments on the Investor Letter. And I have to send out thanks to our teams, this has been a great push by our Investor Relations Team, FPNA our controlling teams, all the put that together. And again, we've received really great feedback on that. As far as free cash flow in 2023. And if you look through the drivers, we've laid out as part of our letter, and if you were to take the assumption, and so just stay with me on the assumption, if you were to take the assumption that our EBIT was going to be flat in 2023 with our EBIT in 2022, which was about $1.1 billion. You should get to a level of free cash flow in the range of about $400 billion. And that's just reflecting the year-over-year improvement in working capital. Emmanuel, what I'd add to that is, it's not that we're targeting flat earnings. Our goal is to improve earnings. And after a really tough setup in the first quarter, as you read in the letter, the trajectory should improve meaningfully as we move to the remainder of the year. In the second quarter, our goal is for segment operating income to approach 2022's levels, with volume stabilizing and given in lower year-over-year raw material cost increases that we're expecting in the second quarter. Assuming a relatively stable economic outlook, then we would begin to see the benefits in the second half of higher volume on either comparables, strong growth in Asia-Pacific driven by a recovery in China and lower inflation levels that we're expecting in the first half of the year. We would also expect the benefits from our recent cost actions that we've announced. And then of course, at current spot prices, tailwinds and our raw material cost. Historically, this has been the time in the cycle where we've seen growth in earnings and growth in our margins as well. Okay, that's, that's helpful. And then I guess, following up on some of the pieces of the fruit, I guess of the free cash flow guidance. I think CapEx was gathered at $1 billion for the 2023. This compares to maybe a $1.2 billion $1.3 billion framework that you discussed previously, in terms of the investments you need to make in gross. What is enabling you to sort of like keep it around the $1 billion? And is that roughly sort of like, just maintenance CapEx? Are you cutting back at, I guess, where are you cutting back? Yeah. Good question Emmanuel. And so what I will tell you is, as we went through 2022, we just scale back our plans for capital expenditures, just given the outlook for the global macroeconomic environment. As we look at 2023, we expect to continue to invest in the Americas and in Asia-Pacific, although investment levels in EMEA will decline, just given the current macroeconomic outlook there. We continue to allocate capital to high return projects that will improve our overall competitiveness over time. Yeah, Emmanuel, I'll just jump in and echo Christina's points. I think we take a lot of time to go through those capital plans. And we've worked through a lot of cycles and I think you can count on us to adjust CapEx to the end environment we're in. And then when we do that we really don't shortchange ourselves, excuse me on what we see as long-term growth projects that we have to do. So we were comfortable with what we spend. And I would just tell you, even if you see things like things that we did at CES around intelligent tire and around sustainable tire. There are projects, growth projects, industry leading sort of technological projects that we're going to continue to move forward within the capacity of the spend that we have. And we feel comfortable of knowing how to do that. Okay. Yeah, I appreciate the color. And then just very finally, I guess, since you're mentioning the environment, can you maybe just provide a little bit your perspective on some of the drivers of this market, demand weakness that seems to be across every region, every major region, I guess. What is driving this? How will you see that potentially evolve through 2023 on the demand side? And then any implications for how to think about pricing? Yeah, I think a lot there. Maybe I'll just start with the Americas. We did see a weaker market in the fourth quarter and we see a little bit of slowdown coming into Q1. We reacted not only to the Americas, but Europe as well, as you saw on our Investor Letter by taking production down with that focus on making sure we don't have excess inventory, a bit of a slowing market, and to focus on cash as Christina went through. But as Emmanuel, as I think about the Americas going forward, you also saw in our letter, we saw that our channel inventories are up about 10%. But what I would tell you is that's pretty healthy. I mean our distributors are really rebuilding their inventory, we didn't see any buy ahead, so I'd say in anticipation of any price reductions or anything like that. It's a pretty healthy place and I would say in-line with the expectations of where the market is going in '23. So we feel pretty good about North America. A little slow to start, but I think we have a stronger second half coming, a little slow to start, because we're bringing some of those costs on the balance sheet of unobserved inventory into the first quarter as well. But we feel pretty good about the demand. Picture, sell out was about flat in the fourth quarter, and year-over-year in the fourth quarter. And we don't see any big changes going into the year. Europe, I think, a little bit different story. Obviously, a bit tougher there. I would take a step back and say we feel really good about the initiatives, we've put in place in Europe. Aligned distribution is working. In the quarter, we got volume, we got price mix ahead of raw materials, again, and we had share gains in a down market across the board for I think the 11th or 12th quarter in a row. So, things are working in Europe. We also as you know, took a lot of actions there to get our costs in line. I would say we feel really good about those things. But obviously, in Europe, we've seen big energy inflation in Q4 driven by the war. And we saw in anticipation of these high energy costs, really sort of the reduced consumer demand out there, as we saw really weak markets in the consumer replacement business, particularly in November and December, where we saw a consumer base thinking about big energy bills, and the channel sort of slowing down on wanting to buy more inventory. So Europe is a different case. We know that's going to continue for a little bit into 2023. First half especially second half again, as Christina said will be better. And we're taking the appropriate actions to make sure we don't build that excess inventory and make sure we focus on cash and continue to look at more cost areas. And remember in Europe, we've done a lot in terms of restructuring our footprint head and full value, so we did in UK in Belgium. We've restructured a business in South Africa and we did some restructuring to some sort of add volume and get some more efficiencies in France. So we'll continue down that path. And then in Asia, and we'll particularly focus on China here. Tough right now, because of COVID. But we really see that reversing and we see that reversing in our favor in two areas. One is the OE business which was strong in the fourth quarter and will continue to be. We've doubled our win rate in OEs in 2022 to about 70%. And we have a higher mix into EVs a high EV win rate a high luxury SUV in truck, win rate as well with the domestic OEMs or Chinese OEMs. That's higher profitability and will create good pull in the replacement market. And as COVID, sort of as we get through COVID, if I can say that's going to happen toward the second half, we see a big stronger pull and it makes up in replacement as well. And to get ready for that we continue to invest in distribution in the key markets in China and in India, as well. So, so overall, look, we got to get through Q1 first half if you will, as we see some of this tumultuousness. But beyond that, we do see some upside and feel relatively good. Good morning. Two quick questions. First, are you seeing anything that would indicate anything other than stable pricing as you're entering this week this year just in the context of the weak demand? And can you clarify your expectations for the other tire-related businesses, has looked a bit soft in the fourth quarter? Sure. Rod, from how we're looking, I guess, I'll say price mix and how we're looking at the raw material environment that's obviously related to that. You know that sort of the essence of your question is the earnings pressure and margin compression we've seen over the last quarters because of these escalating raw materials. That's true for Goodyear, true for the industry as well, and we need to recover that. I would tell you, our momentum has been very good. Our teams across all our businesses offset all the raw material headwinds with price and mix. And in two of the businesses in Europe not being one of them, we also offset some of the other cost increases we had as well. So the team has done a really good job. Now as Christina mentioned as well, we see this potential decrease for raw materials. And I would tell you, our plan is to capture the benefits of those raw materials and see that in margin improvements as we continue to capture our value proposition out in the marketplace. And I think, Rod, you know this well, having been with us so long, historically, in a period of declining raw materials, we're able to grow margins, we're able to drop through those benefits into the -- into our earnings. And I'd say we see that as still the plan and our way forward and what we're driving for. And also tell you what can help them, excuse me, is we also see the OE business coming back, which means they'll be a pull on the best capacity that the industry is making. And that's good for sort of a supply-demand equation out there as well as we think about how to manage the demand in the replacement market. And then finally, Rod, I'll just tell you, in terms of what we're seeing in the marketplace, we have not seen any decreased demand or trade down in our Tier 1 volumes at all. We've seen a little bit in Tier 2 moving toward the lower-tier brands. But I'll tell you, I'm not sure that's a trade down or a price issue as much as it is. All those sort of imported tires that were backordered and paid upfront in cash by the distribution, particularly in the U.S. I'm talking here that sort of hit the docks in the past quarters, that obviously drove the industry numbers. All that came, it came late, it was paid for. And so I think what you see is a lot of push of those tires to turn it back into cash. And I think that's a dynamic we're dealing with. But again, that doesn't really impact sort of our Tier 1 tires or the value proposition for those. So I hope that helps. Yeah. But I'll jump in on the non-tire business performance in the fourth quarter. That was principally driven by our chemical business, as you know, that's a pass-through margin business. And when they're buying Betadine at higher prices and then Betadine dropped in the fourth quarter pretty precipitously. That means they're adjusting their pricing real time in the market. So it's more of a timing issue. As I look to 2023, expecting good growth in these areas, really driven by our aviation business, seeing and expecting strength in volumes, strength in pricing and mix. And we're seeing that across the portfolio, especially given the reopening and demand pull out of China. Thanks for that. And just one more thing, if I can ask. Just taking a step back. Maybe you can just elaborate a little bit on what it will take to close the gap, obviously, on a mix-adjusted basis versus your peers? Presumably some of the capital spending that you were planning was aimed at doing that. And maybe you could just provide a little bit of color on what you're shooting for here in the next year or two years? Yeah. So I'll go ahead and start. I mean we talked a little bit with earlier on the call about the plans for CapEx for 2023 and a lot of that is influenced obviously by the European macroeconomic outlook. I have to say, over the last two to three years, we do feel that we've made significant progress on closing our conversion cost per tire gap versus our competitors. I would say two or three years ago, we had estimated that gap to be in and around $4 per tire. And today, we have said with the closure of a very high cost facility in Gaston in the U.S., a big restructuring in EMEA. And then, of course, you add a benefit in as much as many of our competitors had low-cost supply coming into Western Europe out of Russia. Put all those together, and we think our disadvantage right now is nearly half of what it would have been, say, two or three or four years ago. So we're feeling well positioned on a relative basis. That's not to say we're not going to do the work to move forward. And what I'll tell you is that the investments that we have in the plan we started last year and continuing in 2023 in the Americas, in Asia-Pacific are very high return projects and as much as they're more expansionary instead of greenfield type plants. That will help move our low cost percentage forward as part of our footprint and increase our overall competitors as we go. Thank you. Rich, I wanted to ask a big picture question about kind of the changes in the C-suite recently. Just love to get your perspective on the move with Darren into the more of the strategy centric elements of the business. What might we expect from you guys over the next couple of years? Like what are the areas where you think that change is going to have the biggest impact on the DNA of the organization? Well, I think the way I'd answer that, John, and the one thing I would say is we operate as a team. So I think that what makes -- what I'm proud of in leading the Goodyear team is that it's not reliant on one person. So whether Darren is in the CFO role or in a different role, helping us with strategy where Christina and Darren have worked together for so long, I think this was a really natural and elegant transition, if I can say. And I look to the leaders of our business units as well as our CTO, Chris Helsel. I think that when you look at what we're doing, it's the team that really is where the value is. I won't limit it to any individual person. But I will say from a strategic perspective, I think, one, I would highlight what Christina just talked about, which is to say that we are keenly focused that we have to get our cost structure continuingly in line, not only relative to competitors who also get better. But just the trends we see in the marketplace of. I always speak about transparency about price and availability of inventory which puts press your margin compression pressure on every business in every industry. We're keenly aware of that, and we need to make sure that our operations continue to get more efficient every day. That means what we do in our factories on conversion cost, it means where our factories are, we've taken footprint actions. You can count on us to continue to take more of those and then to make the high value-added return investments that we are going to do to help drive both cost structure and more efficiency in the products we make. So that will continue. And we're going to get -- we're going to continue to get I would say, Darren, I'll say creative on how we make sure that we do that. There's a lot of manufacturing capacity in the industry. And like we did with Cooper, we need to think about how we can use that capacity more wisely as we move ahead. Secondly, I think I always tell my team, we have to have the best products in the industry. So our product innovation engine has worked. We were high podium in every product category in Europe, including summer. We have the freshest product portfolio we've ever had in Asia and Latin America and in the U.S., and that's both in commercial and in consumer. We will continue to make sure that our innovation engine is working. We don't talk about it as much, but we don't talk about a lot of the things that are working as well as they are. So we will continue to do that. And I think what gets us most excited about this is the technological trends that are moving forward in our business. They're not revenue generating today, but the changes we're seeing in mobility, the changes from just making a, if you will, a dumb tire to an intelligent tire, that actually has a place on an intelligent vehicle, a connected tire that improves the safety and performance of vehicles. And it actually has a role that becomes part of those vehicles operating systems, both in terms of how it's integrated to the vehicle and the service element of it is something that gets us excited about where mobility is going and what the role of Goodyear and the tire is. That's something that we're -- we're thinking deeply about and I think we're making great progress on going forward. So there's a number of things that Darren will help us on as we go forward and do that. But again, I would take a step back. It's the basics and it's the technological trends that the industry is going, our ability to execute on both of those simultaneously is going to continue what separates us going forward. Thank you. That's super helpful. And just one other question I had just on distribution. It sounds like the Cooper and the Goodyear portfolios are starting to be maybe a little bit more connected in terms of dealer availability. We just love to get your thoughts in terms of access of super productive Goodyear dealers and vice versa. And are we at a point where maybe 1 plus 1 can start to equal 3? Or is it kind of going to continue to be somewhat separated in terms of how each go to market? So I actually think it's a little bit of both. And the reason I say that -- for instance, our retail stores now have Cooper product in it, and that is and has turned into in terms of the performance of those stores sort of a 1 plus 1 equals 3 in terms of how they're operating, how we're taking care of customers and the products that we're offering them. In the same respect, there are certain distribution elements of how Cooper goes to market, how they sell to distributors. And that process is one of the reasons that we wanted to combine Cooper with Goodyear. And they can do some of those things really well, and we are not going to touch those. We're going to make sure what they did really well and candidly, what they were better at than we are. We're going to keep the best of that, and we are, while we're integrating where it makes sense to do. So I think it's actually a little bit of both. And I would tell you, both the terms of the synergies, we're on the run rate synergies that we said we were going to get. And I think that the market side, we said we weren't going to do anything rash right out of the box. We haven't. And you'll see continued progress on how Goodyear and Cooper equate into the market together in 2023. So I think more to come on that, but I'm very happy with where we are. On the second quarter color of SOI approach a year ago levels potentially, what would be some of the key assumptions to get there? Correct me if I'm wrong here, but the second quarter, it should have a similar overhead absorption impact in the first quarter, and maybe that's $60 million to $70 million. And then from there, the three buckets -- key buckets as I see it would be unit volumes, price mix versus raws and then the non-raw materials inflation piece. Yeah, just any color on that would be super helpful. Yeah, sure. James, it's Christina. So I guess I would start by saying, in the second quarter, we see volumes stabilizing. And I would have -- and we have announced a 5% plus price increase in Europe consumer replacement beginning January 1. And so we expect Europe to begin to catch up to the increases in raw materials over the course of the first quarter and second quarter. Obviously, there's a very significant step down in raw material price increases from Q1 to Q2. And so that should be a benefit for us as well. Okay. And then just -- well, then how to how do you foresee the elevated channel inventories in Europe, I think a 30% above year ago levels. With the price increase and with replacement sell-in demand down for the industry, a mid-teens entering '23. Yeah, how do you see that unfolding? And do you -- catching up? Yeah. It's a great question, James. And the elevated channel inventory is actually all reflective of winter. And so what happened in the first quarter is, we see a shift from winter tire sell-in in the fourth quarter. In the first quarter, we shipped into a summer tire sell-in season. There, the inventory in this channel is much more balanced and even healthy. What I would tell you is that the energy prices in Europe have also abated significantly since the third and fourth quarters as well. And so expecting that to support consumers out over the course of the first and second quarters. And there are no further questions at this time, and this will conclude today's Goodyear fourth quarter 2022 earnings call. You may disconnect your line at this time, and have a wonderful day.

EarningCall_293

Good afternoon. Thank you for attending today's Universal Corporation Third Quarter Fiscal Year 2023 Earnings Call. My name is Meghan, and I'll be your moderator for today's call. [Operator Instructions] George Freeman, our Chairman, President and CEO; Airton Hentschke, our Chief Operating Officer; and Johan Kroner, our Chief Financial Officer, are here with me today and will join me in answering questions after these brief remarks. This call is being webcast live and will be available on our website and on telephone taped replay. It will remain on our website through May 8, 2023. Other than a replay, we have not authorized and disclaim responsibility for any recording, replay or distribution of any transcription of this call. This call is copyrighted and may not be used without our permission. Before I begin to discuss our results, I caution you that we will be making forward-looking statements that are based on our current knowledge and some assumptions about the future and are representative as of today only. Actual results could differ materially from projected or estimated results, and we assume no obligation to update any forward-looking statements. For information on some of the factors that can affect our estimates, I urge you to read our 10-K for the year ended March 31, 2022, as well as our Form 10-Q for the quarter ended December 31, 2022. Such risks and uncertainties include, but are not limited to, the ongoing COVID-19 pandemic, customer-mandated timing of shipments, weather conditions, political and economic environment, government regulation and taxation, changes in exchange rates and interest rates, industry consolidation and evolution and changes in market structure or resources. Finally, some of the information I have for you today is based on unaudited allocations and is subject to reclassification. In an effort to provide useful information to investors, our comments today may include non-GAAP financial measures. For details on these measures, including reconciliations to the most comparable GAAP measures, please refer to our current earnings press release. We are extremely pleased with our results driven by strong tobacco shipments in the nine months and quarter ended December 31, 2022, compared to the same periods in fiscal year 2022. Tobacco shipments are generally moving smoothly, and we are not seeing logistical constraints that we saw in the prior fiscal year. Our Ingredients Operations segment also continued to positively contribute to and diversify our results in the nine months and quarter ended December 31, 2022. There continues to be significant demand for leaf tobacco with all types of leaf tobacco currently in an undersupplied position. Short burley tobacco crops in Africa, largely due to weather conditions have contributed to the lower leaf tobacco supply. As of December 31, 2022, our uncommitted inventory levels stood at less than 7% of our tobacco inventory, an exceptionally low level. Although it is still early, we are forecasting larger crops in several key tobacco origins in fiscal year 2024. In our Ingredients Operations segment, we recently have been experiencing some softening of demand for some of our ingredients products, which we believe is temporary and largely due to customers adjusting their inventory levels. Some of our ingredients customers have been carrying higher inventory levels because of supply chain uncertainties. Increased costs, particularly selling, general and administrative expenses, including costs related to the expansion of sales and product development resources and deferred compensation costs from acquisitions reduced our results for our Ingredients Operations segment in the quarter and 9 months ended December 31, 2022. We remain excited about the long-term outlook for our ingredients businesses and continue to make significant capital investments to enhance and increase the capabilities of our plant-based ingredients platform. We are ahead of achieving some of the earlier identified operational synergies across the platform and making considerable progress on our vision for this segment. As announced on February 1, 2023, we have appointed a new director with extensive experience in the ingredients and value-added supplier space to our corporate Board of Directors to assist us as we continue to promote and expand this business. Turning to the results. Net income for the nine months ended December 31, 2022, was $70.3 million or $2.82 per diluted share compared with $60.8 million or $2.44 per diluted share for the nine months ended December 31, 2021. Excluding certain nonrecurring items detailed in today's earnings release, net income and diluted earnings per share increased by $1.1 million and $0.04, respectively, for the nine months ended December 31, 2022, compared to the nine months ended December 31, 2021. Adjusted operating income, also detailed in today's earnings release, of $128.7 million increased by $12.2 million for the nine months ended December 31, 2022, compared to adjusted operating income of $116.5 million for the nine months ended December 31, 2021. Net income for the quarter ended December 31, 2022, was $41.7 million or $1.67 per diluted share compared with $34.9 million or $1.40 per diluted share for the quarter ended December 31, 2021. Excluding certain nonrecurring items detailed in today's earnings release, net income and diluted earnings per share decreased by $3.1 million and $0.13, respectively, for the quarter ended December 31, 2022, compared to the quarter ended December 31, 2021. Adjusted operating income, also detailed in today's earnings release, of $77.5 million increased by $2.7 million for the third quarter of fiscal year 2023 compared to adjusted operating income of $74.9 million for the third quarter of fiscal year 2022. Consolidated revenues increased by $419.2 million to $1.9 billion for the nine months ended December 31, 2022, compared to the same period in fiscal year 2022, on higher tobacco sales volumes and prices, as well as the addition of the business acquired in October 2021 in the Ingredients Operations segment. For the quarter ended December 31, 2022, consolidated revenues were $795 million, an increase of $142.4 million compared to $652.6 million for the quarter ended December 31, 2021, on higher tobacco sales volumes and prices. Turning to the segment detail. Tobacco Operations. Operating income for the Tobacco Operations segment increased by $13.4 million to $119 million and by $7.3 million to $77.1 million, respectively, for the nine months and quarter ended December 31, 2022, compared to the same periods in the prior fiscal year. Tobacco Operations segment results improved primarily due to large shipments of both carryover and current crop tobacco. While sales volumes were higher in the Tobacco Operations segment in the nine months and quarter ended December 31, 2022, compared to the same periods in the prior fiscal year, margins were lower due to sales mix and sales of tobaccos that were written down in prior quarters. Tobacco shipments from Brazil of both carryover and current crops were up significantly in the nine months and quarter ended December 31, 2022, compared to the same periods in the previous fiscal year. In Africa, despite some lower burley tobacco crop sizes, Tobacco sales volumes were up due to earlier shipment timing in the nine months and quarter ended December 31, 2022, compared to the same periods in fiscal year 2022. Results for our oriental tobacco joint venture were down in the nine months and quarter ended December 31, 2022, compared to the same periods in the prior fiscal year, on lower sales volumes and unfavorable foreign currency comparisons. Selling, general and administrative expenses for the Tobacco Operations segment were higher in the nine months ended December 31, 2022, compared to the nine months ended December 31, 2021, primarily due to unfavorable foreign currency comparisons, higher provisions to suppliers and higher compensation costs. For the quarter ended December 31, 2022, selling, general and administrative expenses for the Tobacco Operations segment were higher compared to the quarter ended December 31, 2021, largely due to higher compensation costs and larger provisions to suppliers in part due to lower crop yields, partially offset by favorable foreign exchange comparisons. Moving to the Ingredients Operations. Operating income for the Ingredients Operations segment was $9.9 million for the nine months ended December 31, 2022, compared to $10.6 million for the nine months ended December 31, 2021, as benefits from increased sales, better margins and the inclusion of the October 2021 purchase of Shank's Extract, LLC were offset by increased costs, mainly higher selling, general and administrative expenses. Operating income for the segment was $0.8 million for the quarter ended December 31, 2022, compared to $3.5 million for the quarter ended December 31, 2021, on lower sales, particularly lower sales of extracts and higher costs. Selling, general and administrative expenses for the segment increased in the nine months and quarter ended December 31, 2022, compared to the same periods in the prior fiscal year, largely on higher compensation costs including final deferred compensation costs from acquisitions as well as costs related to the expansion of sales and product development capabilities of our plant-based ingredients platform. In Other Items, we successfully refinanced and expanded our bank credit facility in the quarter ended December 31, 2022, positioning us to meet our future financial needs. In line with our previous expectations, we also reduced our outstanding borrowings considerably in the three months ended December 31, 2022, as we moved beyond our peak working capital requirements for fiscal year 2023. Also, our fiscal year 2022 Sustainability Report was published in December 2022 and is available on our website, www.universalcorp.com. Sustainability is an essential pillar of our business at Universal. We are committed to disclosing our operational activities as well as our sustainability performance in a consistent and transparent manner. We are excited about our sustainability achievements and the new and updated information and disclosures contained in our 2022 Sustainability Report. I want to start with the ingredients segment and the slowdown in sales. And I think Candace, you just said it was mainly due to extracts, but I wanted to walk through the different segments and see if anything else is going on. Begin with FruitSmart. Is there any kind of slowdown in the end market for the use of those derivatives and beverages? No. Ann, really where we're seeing -- it is Johan. Where we're seeing it really is because the uncertainty there in COVID and everything, a bunch of customers just have additional inventory that they're just trying to sell off right now, and that's where the slowdown is, and we believe it's temporary. Okay. Because it seems to me the end market for specialty ingredients is very strong, growing strong double digits. So, is that -- are you also seeing reduced inventory there? I thought the pull-through from that segment was very strong. Again, depending on what products you're talking about, you're partially right but in all products, it's down a little bit. But again, we truly believe that it's temporary at this point in time. We saw it through the quarter, there's a bit of an uptick, but we just have to see what the rest of the quarter will do and the rest of the year. That remains to be seen. But it looks really positive. We're doing -- we're making some significant investments, we received quite a bit of upside. So, we're really excited about that, but we're incurring some additional costs as well in order to get that all up to speed. So, it looks good. Margins are holding up nicely. We just have to see what the sales do throughout the year. Okay. And then, in terms of SG&A, for the whole company, I never know how to think about that. It was about $70 million, slightly under that in this quarter. Do I take that and run that into fiscal '24, or how -- some of that seemed to have some of these compensation expenses and maybe Shank's payments and different factors that maybe should flow out. I don't know how do I think about that number for fiscal '24? Well, as always, there's lots of variables in there. Exchange rates, comp costs are certainly up, inflationary things that are going on. So, at the moment, we're in the ballpark. We're always looking for efficiencies and things we can do. But on the other hand, again, like I said before, only ingredients side, we're ramping up some hiring and everything. So that will increase in the amount of it. But right now, where we're at, looks about [Technical Difficulty] Is there another question, Meghan? Maybe we can move along if she can get back in or dial back in, we can take an extra moment for her. If you have someone else, we can... There are no further questions registered. [Operator Instructions] Okay. Our next question comes from the line of Chris Reynolds with Neuberger Berman. Good afternoon. Congratulations on the good quarter. I wanted to ask you just a general question about global tobacco consumption. And it seems like it continues to be pressured because of trends towards smoking less and then combustibles and then sort of general economic conditions being weak. That doesn't appear to be showing up in your numbers though. And I'm just wondering if you can give some commentary about sort of how you view the tobacco segment. You've always been fairly conservative with your guidance for growth, but maybe if you could just give an update on how you view global industry consumption trends this year? Yes. Chris, it's different from market to market, of course. I mean, if you separate the U.S. and the Americas, of course, Europe and Asia. We see different dynamics in different markets. But overall, we still see a very positive consumption out there, which our major customers reported numbers. And we're very positive about the combustible side. At the same time, as we all know, there are new products in these new generation products, whether it's heat-not-burn and vaping products out there, but we remain positive about the consumption of combustible cigarettes. A question, you made a reference in I think the script that there were some indications of crops for fiscal year '24, were looking favorable. Can you add a little color on that? And then, maybe step on to that, what that might mean in terms of pricing? And I guess I'm also asking what that would mean for your inventory levels going forward and sort of on a comparison basis because I think maybe part of the reason inventories are elevated is pricing. So what's the crop outlook or if there's any color to add on that and how does that fit in, please? Certainly, Bruce. What we are seeing in the key markets, especially where we operate, we see increased crop sizes there. And that's positive because we play an important role in these key markets as well where we promote tobacco production with our pharma base out there. What we have seen in terms of cost, of course, these inflationary costs and fertilizer costs from -- that hitting this crop, we do see increase on tobacco prices, in prices to the farmer. And that is different, again, in every market. So -- but we remain very positive about the demand, as you have seen there. Our uncommitted inventory is in our lowest level for many, many years. It's about below 7% right now. We like to have some additional uncommitted inventory because we don't want to lose any opportunity or any request that our customers have there. So looking into this 2023 crop cycle, we remain positive. In some areas, the crop sizes are confirmed. In some other areas, they're still developing, like Africa and some other areas, they have not been even started the growing process, so. But we remain positive about the increased crop sizes and so Universal is well positioned for that as well. Great. And if I could -- maybe a little bit further. So big picture, stepping back, we've had a couple of years of transport issues and the like. And I think I'm right in saying that your customers, your end customers can have lots of inventory, long cycle life. But would it be unfair to say that there's sort of clear sailing here, and do you have an indication that they would want to make up for a couple of years' worth of shipping problems and the like? So if there's a structural tailwind for you in terms of your customers wanting to rebuild inventories to where they might have been? Would that be fair, or how would you describe that? No. We don't see that, and each customer has its own policies on inventory on their durations. What we have seen is that cost of transport and logistics has come substantially down. And again, the demand seems to be strong. So, we don't see adjustments -- big adjustments in their duration policy, no. I don't know if you all talked about the refinance bank credit facility, but have you fixed that rate, or is that a variable floating rate on that new facility? We fixed some of it, Ann. Based on where the current rates are and not knowing where the Fed is going with this whole thing, we decided to fix some of it and just wait to see if we do more in the future. But... Yes. Again, rates are going up, depending on working capital and all of the borrowings that we require, we certainly have some -- of the old hedges were in place, we have some positive there that might offset, but yes, the rates are up certainly and our borrowings certainly were up during the year. Right. And how should I think of the margin progression for the tobacco segment in fiscal '24 versus fiscal '23? Margin was a little bit less than I was looking for this quarter, I think, due to mix, maybe some carryover, you said you wrote down some tobacco. So, I'm not sure how to think about tobacco margin over the next, say, 12 to 18 months for this segment. It's too early for that, Ann. Brazil just started and hopefully that market remains where it is, and it doesn't go into the situation where it was last year. But if we get the crops and everything, there certainly is a strong demand, as Airton pointed out. So, we believe it looks all positive. But again, it's really early. The African crops are in the ground and we'll have to see. Hopefully, whether we'll continue to cooperate there. And in some areas, we don't have it even in the ground yet. So we'll have to determine what volumes are out there and everything. And hopefully, we can do what we need to do and get the margins that we require. But yes, certainly, this year, we had some of the mix and some of those written down inventories that we moved in the last nine months. Ann, the worldwide unsold flue-cured and burley stocks are at $47 million at 12/31, which is down $2 million from the June rate level. Okay. And then with your inventory, you were just saying your inventory level for Universal at 7%. That is low given that you usually keep a little reserve for customers. So, can you walk me through kind of the thought process behind that? It just wasn't there, Ann. We fully agree with you. Airton just pointed out on one of the other questions that we prefer to have a little bit more because we certainly like to be able to offer tobacco to customers, and we have very little at the moment. And so, we're trying to get the crops up where we can and it looks all positive, certainly for the 2023 crop. But like I said, some of them are not even in the ground yet, but we're certainly working on that. If the weather cooperates and all that, then we will certainly get some additional volume that we will -- because again, demand is strong at the moment. No. We're giving the -- for the next 12 months, we're between $70 million and $80 million and again, that's because we're looking at to make some significant investments in the ingredients platform to enhance the capabilities that we have. No. We have not put out a synergy number. We're talking about operational synergies there where we're going across the platform, hiring some R&D people and some sales folks, which, again, that's where you have the addition to some of the SG&A cost. But we need to do that to be able to do all these things that we have in mind with the platform. Okay, great. And then the last thing is I'm just bracing for a volatile year in the tobacco landscape for your customers with potential standards being set for reducing nicotine and maybe menthol ban later in the year in California. California's well-banning sale of menthol, smokable products went into effect beginning of '23. I guess, how are you working with customers, how you position Universal? And what is the transition to a heat-not-burn or smoke-free world and what could be a volatile combustible environment. I just like an update kind of on your thoughts here on assets from time to time and I'm just curious. Yes, we remain positive about the combustible markets overall. And of course, as stated in previous quarters that we operate also in the heat-not-burn market with our sheet operations there in Europe and our AmeriNic, the liquid nicotine still continues to developing, but it's not material for us today. But we do see opportunities for Universal within all these segments. What is also very strong there is on the cigar -- the cigar business. And we do see increased demand for wrappers and binders for that segment of the market, which we are also working hard to increase production there. So -- but we remain positive about this market. And in addition, just keep in mind, right, the U.S. is -- from a cigarette consumption standpoint, it's less than 5% worldwide edge China. So very important customer certainly here in the U.S. for us, but just keep that in mind when they are starting to talk about this and still what's going to happen with regard to legal, lawsuits type of things, we just don't have insight into that. There are currently no further questions registered. [Operator Instructions] There are no additional questions waiting at this time. I do apologize. That's okay. Sorry, I didn't mean to jump in on you. Just was going to say, thanks to the folks listening in, and we appreciate your time as usual. We look forward to talking to you in the quarter. Bye-bye. That concludes the Universal Corporation third quarter fiscal year 2023 earnings call. Thank you for your participation. Have a wonderful rest of your day.

EarningCall_294

Good morning, ladies and gentlemen. And welcome to the Atmos Energy Corporation Fiscal 2023 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session [Operator Instructions]. This call is being recorded on Wednesday, February 08, 2023. And I would now like to turn the conference over to Dan Meziere, Vice President of Investor Relations and Treasurer. Please go ahead, sir. Thank you, Michell. Good morning, everyone. And thank you for joining our fiscal 2023 first quarter earnings call. With me today are Kevin Akers, President and Chief Executive Officer; and Chris Forsythe, Senior Vice President and Chief Financial Officer. Our earnings release and conference call slide presentation, which we will reference in our prepared remarks, are available at atmosenergy.com under the Investor Relations tab. As we review these financial results and discuss future expectations, please keep in mind that some of our discussion might contain forward-looking statements within the meaning of the Securities Act and the Securities Exchange Act. Our forward looking statements and projections could differ materially from actual results. The factors that could cause such material differences are outlined on Slide 24 and more fully described in our SEC filings. Thank you, Dan, and good morning, everyone. We appreciate you joining us and your interest in Atmos Energy today. I want to begin today's call by thanking everyone of our 4,800 Atmos Energy employees across all of our eight states with their exceptional effort and dedication to serving our customers under very challenging weather conditions during winter storms Elliott and Mara. Thank you for all that you do for our customers and our communities every day. You are truly the heart and soul of Atmos Energy. Our first quarter results reflect that effort, dedication and focus as we continued modernizing our natural gas distribution, transmission and storage systems on our journey to be the safest provider of natural gas services. Yesterday, we reported fiscal 2023 first quarter net income of $272 million or $1.91 per diluted share, and we reaffirmed our fiscal 2023 earnings per share guidance in the range of $5.90 to $6.10. Our Atmos Pipeline, Texas division achieved several project milestones during the first quarter. Our APT team completed filling the Cushing gas requirements at the Bethel 1B cavern and working gas is currently being injected and debriding operations continue with a targeted completion date of April of this year. This third cavern provides additional support to APTs operations, as well as the local distribution companies behind APT systems and adds over 6 Bcf of new working gas capacity. [Technical Difficulty] we completed the final portion of our 137 mile, 36 inch Line X integrity replacement project, as well as completed Phase 2 of our three phase line S2 project. Line S2 brings supply from the Haynesville and Cotton Valley shale plays to the east side of the growing Dallas Fort Worth metroplex. The second phase will place 17 miles of 14 inch pipeline with 36 inch pipeline. The final phase of this project is anticipated to be in service late calendar 2024. These projects enhance the safety, reliability, versatility and supply diversification of our system and support the continued growth we are seeing in the local distribution companies behind APT system. According to the Texas Workforce Commission, the state continued a 14 month streak of record employment in December and added 650,000 jobs for the 12 months ending December. This strong employment trend continues to drive the growth in our Mid Tex and West Texas divisions where approximately 47,000 of our nearly 64,000 new customers were added for the same 12 months ending December period. Additionally, industrial demand for natural gas in our service territory remains strong. During the first quarter, we added 12 new industrial customers with an anticipated annual load of approximately 9 Bcf once they're fully operational. The largest of these new industrial customers is anticipated to use nearly 6 Bcf annually. Our procurement team continues to do an excellent job sourcing the materials needed to support our capital investment as we continue modernizing our natural gas distribution, transmission and storage systems. We also maintain about six months of inventory for our distribution and transmission needs. And as we said before, we have ordered all of our anticipated steel pipe needs for FY 2023. Our customer advocacy team and customer support agents continue their outreach efforts to energy assistant agencies into our customers during the first quarter. Through their work, the team helped nearly 17,000 customers receive over $6 million in funding assistance. As a reminder, during fiscal 2022, our energy assistance teams helped nearly 67,000 customers receive approximately 34 million of funding to help with their monthly bill. As you'll hear from Chris today, our fiscal 2023 financing costs are known. We have hedged a significant portion of our financing needs beyond fiscal year 2023, and our liquidity and balance sheet remains strong. Atmos energy is well positioned to continue delivering safe, reliable, efficient and abundant natural gas to homes, businesses and industries to fuel our energy needs now and in the future. Thank you, Kevin, and thank you everyone for joining us this morning. As Kevin mentioned, our fiscal ‘23 first quarter net income was $272 million or $1.91 per diluted share. Consolidated operating income increased to $321 million or 16% in the first quarter. Our first quarter performance largely reflects positive rate outcomes driven by system modernization spending, continued customer growth in our distribution segment, partial offset by higher O&M spending in both of our segments. Slide 5 summarizes the key performance drivers for each of our operating segments. Rate increases in both of our operating segments driven by increased safety and reliability spending totaled $79 million. Residential customer growth and increased industrial load increased operating income by an additional $5.5 million, and we saw a $5 million increase in APT’s [three] system business due to water spreads driven by maintenance and some of the key takeaway pipelines in the Permian during the quarter. Consolidated O&M expense increased $26 million, driven by planned higher in line inspection spending in APT, higher spending for third party damage prevention activities on our distribution system and increased employee and other administrative costs. Consolidated capital spending increased 16% to $111 million to $796 million with 88% dedicated to improve the safety and reliability of our system. This increase primary reflects higher spending at APT, the project that Kevin discussed just a few minutes ago. We continue to execute our annual regulatory filing strategy. To date, we have implemented $115 million in annualized regulatory outcomes and we currently have about $36 million in progress. Slides 19 through 23 summarize those outcomes, and Slide 16 outlines our planned filings for the reminder of the fiscal year. During the quarter, we completed over $1 billion of long term debt and equity financing, highlighted by the $800 million long term debt financing we completed in October 2022 and $200 million of settled equity forward agreements. As of December 31st, we have approximately $755 million of net proceeds available under existing forward sales arrangements that will fully satisfy our anticipated fiscal '23 equity needs and a significant portion of our anticipated fiscal '24 needs. Finally to mitigate interest rate risk associated with our anticipated long term debt financing needs beyond fiscal '23, we currently have about $1.35 billion in forward starting interest rate swaps to effectively set a portion of treasury component of our total cost of financing at rates ranging from 1.8% to 2.2%. All of this gives us a clear line of sight into our anticipated financing costs of fiscal '23 and a portion of our costs beyond fiscal '23 Our equity capitalization as of December 31st, excluding the $2.2 billion of winter storm financing was 60%. Additionally, we finished the quarter with approximately $3.4 billion of liquidity. Additional details for financing activities as well as our financial profile can be found on Slides 7 through 10. Turning now to securitization. In Texas, the Texas Public Financing Authority and the Bond Review Board continue to work diligently to determine the best outcome for customers with respect to securitization. Additionally, in January, the Texas legislature signaled intent to provide funding to gas and other costs incurred during winter storm Uri that were deemed prudently incurred by the Texas Railroad Commission in November 2021. We are encouraged with these developments and continue to support their efforts. However, we do not anticipate receiving securitization funds for interim winter storm financing matures on March 9th. We currently anticipate refinancing this debt through a combination of the syndicated bank term loan and utilization of our existing credit facilities and cash to minimize the cost of the customer while providing maximum flexibility to repay this debt once the securitization process is completed. Additionally, pursuant to an order issued by the Railroad Commission, we have deferred all carrying costs associated with the interim refinancing effective September 1st, and currently intend to defer carrying costs associated with the existing financing and new interim financing until the securitization process is complete. In Kansas, we received our financing order from the Kansas Corporation Commission in October 2022, and we are progressing well to securitize the approximately $90 million in gas and other costs incurred during winter storm Uri. We anticipate completing the securitization process this fiscal year. In closing, we are off to a good start to the fiscal year. The execution of our operational, financial and regulatory plans in the first fiscal quarter positions us well to achieve our fiscal '23 earnings per share guidance in the range of $5.90 to $6.10. Details surrounding our fiscal '23 guidance can be found on Slides 12 and 13. I just wanted to ask on just the recent move in gas prices. Can you kind of just talk about how that's affecting your financial plan or your hedging strategies at all here? Clearly, it should help with bill headroom as well. But maybe you can just give us some more color on what the recent move means? Yes, I'll start a little bit on the supply side and then let Chris pick up on the hedging side, Nick. Yes, we continue to see still good strong rate number [Technical Difficulty] $2 range in Waha and below $2 at Katy. So the forward look, particularly even out of the Waha area and the [indiscernible] area being in the $2 to $3 handle certainly look good on a go forward basis. As you've heard us say before, our storage positions helped us with some of that hedge early on. I think we were all in storage at an average weight cost of $5.48. So I think we're well positioned for the remainder of this year. The forward curves continue to look good at this point as we move into the summer and fall of next year. And the supply continues to look good out there from the major producing basin. So Chris, anything else to add? Just a couple of things, Nick. First off from a financing perspective, the $800 million long erm debt that we issued in October satisfies our anticipated long term debt financing needs. And as I've also already mentioned equity we got that priced for the remainder of the fiscal year. And you understand the math on the equity given where we are and in terms of what our financing needs over the next five years. Additionally, we do have full access to our credit facilities today, the operating credit facility, which supports our commercial paper program, a $1.5 billion program. We had no short term debt as of December 31st, so we had the ample liquidity there to support operations as well as gas supply. And then finally, just commenting on hedging to kind of follow from Kevin's point, our gas supply team kind of sets that hedging program in advance of the winter heating season. And between the combination of storage that Kevin alluded to, in the hedging programs, we had just under 50% of the cost locked in for this winter heating season. So to the extent that gas prices moderate for the other, say 50% or so, that should have a positive impact on the customer bill. And Chris, I know that you're already fully priced on '23 kind of equity needs here. How should we kind of think about '24 and being opportunistic about further derisking the financial plan? Yes, of the $755 million, as I mentioned, Nick, that satisfies all of our needs and a substantial portion of our needs -- all of our needs for '23 and a substantial portion of our needs for fiscal '24. So the ATM program continues to work very well for us. We'll continue to utilize that to kind of just layer in additional pricing, if you will, on the equity needs for '24 with an eye towards just being opportunistic on pricing. Could you comment on the investigation by the Railroad Commission into the -- some of the service challenges that your system experienced during the winter weather in December? And just any initiatives or actions that you're pursuing on the back of that experience? As you know, our team worked very hard going into this winter storm have prepared themselves, have prepared the system. But as the storm moved in we did have approximately 2,300 customers in a limited area of our service territory that experienced some service interruptions out of the 2.1 million, 2.2 million residential and commercial customers that we serve here in Texas. We have been working with the commission to provide them additional information and work with them as they wrap up their investigation, which we hope will occur here very soon. And then I was wondering, could you elaborate a bit just on the plans for refinancing some of the floating rate notes that are coming due related to winter storm Uri costs? And just is there an EPS impact that you might anticipate from having to refinance those just sort of waiting for the securitization process to get completed here? The short answer is no. As I mentioned in our prepared remarks, we've got planned hybrid securitization that will be -- a term loan, a syndicated term loan that we anticipate executing here in the next few weeks as well as utilizing some of our credit facilities and cash. And with the regulatory asset order that the rail commission has granted, we are deferring all of those financing costs right now into that regulatory asset until securitization is complete. And then we'll address that with the commission the appropriate recovery of those costs. Maybe you can just talk to us about, broadly speaking, how O&M is tracking relative to your expectations so far this year. Are you seeing any let up in pressures? I'm just curious on that, your thoughts there. Yes, I'll start and then Chris can jump in. As you heard in Chris' remarks, most of the O&M that we've experienced in the first quarter is what we thought we would see. It's in the range that we've already laid out there. And what I mean by that is that with the growth that we talked about, we certainly -- both on our side and in our jurisdictions have driven increased from a line locating perspective. That economic growth certainly drove new routes, new commercial businesses, new roads, new infrastructure, which drives up locating expenses. As a matter of fact, our Texas number of load case is up almost 10% this quarter-over-quarter last year. And then in addition, as you heard on some of the projects that I mentioned, we had some additional in line inspection work that we needed to pull forward on the APT side and some additional pigging activity that we slowed during the COVID period, but wanted to pick that work back up. So all things we anticipated kind of occurring during the quarter but saw a lot more line locating expense just given the growth that we're experiencing. Chris, anything additional? I think that's spot on, Kevin. And I would just to add that from an inflation perspective, the inflation we're experiencing that we're seeing, it's still well within the planning parameters that we outlined in our fiscal '23 guidance and our five year plan on an overall basis. And maybe if I could just follow up with sort of -- and apologies if I missed it, but you got a couple large projects that have either wrapped up or nearing completion. Can you maybe just talk about kind of what's next in the queue from a larger project standpoint as you look at across your system? Well, those projects that I mentioned, Line X was an integrity project, which fortifies that line that comes out of Waha and runs west to east into Dallas and then the S2 is another integrity and capacity project to bring in additional supply from the east. So we'll continue to monitor our system, continue to monitor that growth. We still have, as I mentioned, complete that -- or the Bethel cavern 1B project, that will take us probably into 2026 to get all three caverns back in service at the same time. And just as a reminder, that's not only a capacity and need for the growth behind our systems, it's also an integrity project per rules at the commission where we have to do our integrity work on those caverns over 15 years. So we'll continue to look at our storage. We'll continue to look at the larger pipe infrastructure and see where that may need increasing or fortification as we move forward. I just wanted to follow up on the earlier discussion around the gas price dynamics. Curious for your thoughts on the duration of Waha weakness. We see a probability that in Waha gas prices remain depressed until Matterhorn enter service in mid-'24. Any thoughts around the duration here and impact to customer bills relative to your outlook last quarter? Again, our team continues to stay close with the producers out there, midstream processors to keep it handle on, as you said, as well as new projects that are coming online. But I think the other thing that we'll continue to work on is the tie-in to some of those lines, that's the other opportunity, I think, for us as those projects continue to build coming out of Waha and head east that gives us an opportunity to get additional tests or to bring in additional supply into our areas as well. So all good signs, as you say, on the forward look. Right now, we believe these prices and the conversations we're holding, numbers look really good as you head into [Novi] March upcoming. So right now, I don't see things changing in the short run, at least the information we're getting out there. And then as we continue through this winter period, pulling on storage and get ready to inject for next season, the pricing looks really good there. As I said before, some in the $2 range or so. So that should have a very positive impact for our bills for next year. Most of my questions were asked already, but I just want to follow up on one. In terms of the Mid Tex DAR proceeding. Can you provide an update around that regulatory activity? So we made that filing, the DAR filing in mid-January. We're just now beginning to work through the early discovery process, and we anticipate implementing new rates under the DAR filing by the end of the fiscal year. There are no further questions at this time. So I will turn the conference back to Dan Meziere for any closing remarks. We appreciate your interest in Atmos Energy, and thank you again for joining us. A recording of this call is available for replay on our Web site through March 31, 2023. Have a great day. Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.

EarningCall_295

Good morning, everyone, and thank you for participating in today's conference call to discuss Reservoir Media's Financial Results for the Third Quarter of Fiscal Year 2023 ended December 31, 2022. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to turn the call over to Ms. Jackie Marcus with the Alpha IR Group, who will review our agenda today and the company's forward-looking statements. Jackie? Thank you, operator. Good morning, everyone, and thank you for participating in today's earnings conference call. Reservoir Media issued a press release with the results for its third quarter of fiscal year 2023 ended December 31, 2022, earlier this morning. If you did not receive a copy of our earnings press release, you may access it from the Investor Relations section of our website at investors.reservoir-media.com. With me on today's call are Golnar Khosrowshahi, Founder and Chief Executive Officer; and Jim Heindlmeyer, Chief Financial Officer. As a reminder, this call is being simultaneously webcast and will be recorded and archived on the Investor Relations section of our website. Before I turn the call over to Golnar and Jim, I'd like to note that today's discussion will contain forward-looking statements that reflect the current views of Reservoir Media about our business, financial performance and future events and as such, involve certain risks and uncertainties. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs and projections will result or be achieved. Please refer to our earnings press release and our filings with the Securities and Exchange Commission for more information on the specific risk, uncertainties and other factors that could cause our actual results to differ materially from our expectations, beliefs and projections described in today's discussion. Any forward-looking statements that we make on this call or in our earnings press release are as of today, and we undertake no obligation to update these statements as a result of new information or future events, except to the extent required by applicable law. In addition to financial results presented in accordance with generally accepted accounting principles, we plan to present during this call certain financial measures that do not conform to U.S. GAAP if we believe they are useful to investors or if we believe they will help investors to better understand our performance or business trends. Reconciliations of these non-GAAP financial measures to the nearest comparable GAAP measures are included in our earnings press release. Through the first three quarters of the fiscal year, we are very pleased with the performance of our business as we continue to report strong growth numbers fueled by healthy organic growth as well as the continued execution of deals across musical genres. Since we last spoke in November, we've had some exciting developments at Reservoir, such as announcing that De La Soul's highly anticipated renowned back catalog is officially coming to streaming platforms globally for the first time ever on March 3 with two singles already released in January and February and expanding our roster and presence in the Middle East and India. These examples really underscore the breadth and scope of our business and the kinds of value-building opportunities we are uniquely positioned to pursue as we grow. I want to take a moment to acknowledge our roster of songwriters, artists and partners whose talent was on full display at The Grammy Awards this past Sunday, where our roster contributed to an impressive 30 nominations, including Record, Song and Album of the Year, taking home seven awards, including Best Contemporary Instrumental Album for Snarky Puppies' Empire Central; Best Immersive Audio Album for Stewart Copeland and Ricky Kej's Divine Tides; and Best Rock Album for Ozzy Osborne's Patient Number 9, featuring 11 co-write by Reservoir songwriter, Ali Tamposi. We could not be prouder of these tremendous talents. For the third quarter, on the financial side, we delivered top line growth of 16%, of which 7% was organic. As a result of the improvement to the top line, we enhanced our margin profile as both OIBDA and adjusted EBITDA margins expanded versus the prior year. On balance, we did experience some pressures on net income as a result of onetime noncash tax and debt extinguishment charges, which Jim will discuss as part of his deeper financial discussion. We are also raising guidance for the second consecutive quarter, reflecting the strength and momentum of our business as we close out our fiscal year. Before turning to that, I'd like to take a few minutes to discuss what trends we're seeing in the music industry and how we are poised to benefit from these opportunities. It is without question that music is an integral part of our daily lives. With the historic growth from digital consumption and record-setting revenues from live performance, our team is hard at work ensuring our artists and creators' work is licensed and monetized across all mediums. Our unique value enhancement offerings allow us to attract some of the world's most prolific and iconic artists, which ultimately improves the durability of our business. As I mentioned on our last call, we have been closely following the recent Copyright Royalty Board, or CRB 4 settlement. The CRB officially accepted the proposed settlement on December 30, 2022. While the CRB 4 settlement occurred in August of 2022, this official acceptance put a stamp on the negotiation and legal process between the parties. This marks a critical moment for the music industry with the headline digital streaming royalty rate increasing to 15.15% for 2023 and incrementally increasing to 15.35% through 2027, which will be the highest royalty rate in history. We commend all parties involved with special thanks to the NMPA and their CEO, David Israelite, for leading the charge and making this possible. The official acceptance of the rate increase is a testament to the progressive work being done within the industry to ensure fair compensation for songwriters and publishers. Turning to our business. Our team has been busy adding award-winning creators across genres to our portfolio. I'd like to walk you through some of the notable additions this quarter. As I mentioned, we couldn't be more excited to be bringing the legendary Grammy-winning hip-hop trio De La Soul's back catalog to streaming platforms everywhere starting March 3. The first two singles, The Magic Number and Eye Know, were released in January and February this year, respectively, distributed by Reservoir-owned Chrysalis Records. We are honored to partner with De La Soul on this long-awaited release, and are looking forward to consumers having ease of access to their music through streaming services as well as cultivating a whole new audience of De La Soul listeners. We also signed a new publishing deal for all future works with award-winning songwriter and producer, Leroy Clampitt. Leroy has been part of many successful projects, including co-writing Justin Bieber's hit song, Company. He is one of the most in-demand pop writer producers, and we are delighted to be his publishing home. We are also thrilled that Rock & Roll and Grammy Hall of Fame inductee, Dion, signed a new publishing deal with Reservoir for his entire catalog as well as all future works. Dion has been topping the charts for decades with hits such as Runaround Sue, The Wanderer and Ruby Baby. Dion is a rock-and-roll pioneer, and we are honored to work with him. On the international front, Maltese rock band, Red Electric, joined the roster this quarter, recognized as one of Malta's biggest bands, securing three number one singles in 2022. They are prime to now take their music to the wider world. We also expanded our roster and presence in India with the acquisition of the publishing catalog and future works for Indian rappers, MC Altaf and D'Evil, along with producers, Stunnah Beatz. These signings built upon our established partnership with Indian rap Superstar DIVINE's Gully Gang. We look forward to further growing and partnering with these artists across the globe. We continue to be highly active and forward-looking as we invest time and resources into growing and diversifying our roster of artists. Our pipeline is robust at nearly $2.3 billion in total value for prospective deals. Over the years, we have implemented a rigorous process for analyzing transactions, and we will continue to take a disciplined approach to assessing opportunities in the market to ensure that the capital that we deploy meets our internal requirements for ROI and is accretive to our margin profile. With that, I'd like to turn the call over to Jim to discuss our financial results for the quarter in greater detail. Our third fiscal quarter financial results demonstrate the durability of our business model as we achieved double-digit top line growth for the sixth consecutive quarter since becoming public despite facing broader economic headwinds. We were particularly pleased with our organic growth this quarter as our team continues to find opportunities to extract value from the marketplace to better serve our roster of artists. As Golnar mentioned, our margin profile improved during the quarter as we expanded both OIBDA and adjusted EBITDA on an absolute dollar basis as well as on a margin basis. While we're happy with our continued strength in the top line and operating margins, we did experience pressure on the bottom line due to elevated costs during the quarter, which I'll walk through momentarily. As it relates to business development activity, we executed on many deals during the quarter, some of which Golnar touched on in her remarks, that further diversify and insulate our portfolio. Now turning to our financials. In the third fiscal quarter, we recorded $29.9 million in revenue, which represented a 16% increase from the third quarter of fiscal 2022, inclusive of acquisitions. Of the 16% top line growth, 7% of that was organic. The primary driver of the revenue increase year-over-year was our Music Publishing segment. While it's a smaller portion of our revenue segmentation, I'd also like to note that our management business saw a significant increase during the quarter, which was primarily due to strong touring and merchandise revenue with the resurgence in live performances versus the same period last year. Looking at operating expenses. Our overall cost of revenue increased 3% from the third quarter of fiscal 2022. Additionally, our depreciation and amortization costs increased year-over-year due to our continued catalog acquisitions. Company administration expenses increased by 19% from the prior year, mainly driven by increases in administrative expenses related to our growing management business and, to a lesser extent, increases in the Music Publishing segment. Despite elevated operating costs in the period, we were able to report significant growth for both OIBDA and adjusted EBITDA. For the third quarter, OIBDA increased 33% to $10.1 million, while adjusted EBITDA grew 24% to $10.9 million, both compared to the third fiscal quarter of 2022. As we said before, the inherent operating leverage is built into our business and is further demonstrated by the fact that revenues have generally outpaced operating costs during our time as a public company, and we expect this to continue over the long term. Our interest expense was approximately $4.1 million for the quarter compared to $2.5 million in the same period last year. The increase was a result of higher debt related to acquiring assets and an increase in LIBOR. Net loss for the third quarter of fiscal 2023 came in at $4.1 million. This resulted in diluted loss per share for the quarter of $0.07 compared to earnings of $0.02 per share for the third quarter of fiscal 2022. The loss during the quarter was primarily due to a onetime noncash loss on early extinguishment of debt related to our amended credit facility, we also had a onetime noncash tax expense related to the estimated impact on deferred tax liabilities due to the higher U.K. tax rate that will become effective in April 2023. Lastly, our weighted average diluted outstanding share count is 64.4 million. Turning to our segment breakdown for the quarter. Let's look at Music Publishing first. Music Publishing generated revenue of $20.2 million in the third fiscal quarter, which was a 14% improvement from this time last year and was largely driven by our Digital, Performance and Sync revenue streams. Within the segment, Digital revenue grew 29% year-over-year to $10.7 million and represents more than half of the Music Publishing revenue in the quarter. Performance and Sync revenue streams recorded 28% and 51% top line growth, respectively. The increase in Music Publishing revenue was partially offset by declines in other Music Publishing revenue because the same period last year included revenues attributed to the Dubai Expo event. Our Recorded Music segment moderately grew by 1% during the quarter to $7.6 million with improvement from Digital and Neighboring Rights revenues, which grew 17% and 43%, respectively. Strong performance in Digital revenue came from our recent acquisitions of Recorded Music catalogs and a growing demand for streaming services. For context on the quarter, the declines in Physical and Sync revenues, which are more susceptible to quarter-over-quarter fluctuations, nearly offset the growth in Digital and Neighboring Rights. Before diving into the balance sheet, I'd like to highlight that in December, we amended our credit agreement, which expanded our facility and favorably modified the terms of the agreement. This shows the strong relationships that we have with our banking partners and the value of our predictable and recurring revenue streams. Let's move now to the balance sheet. At quarter end, our credit facility was at roughly $298.8 million. We closed the quarter with total liquidity of $168.2 million, comprised of $17 million of cash on hand and $151.2 million available under our revolver, which gives us the capital to fund our strategic objectives. In terms of total debt, we ended the quarter at $292.2 million, which was net of $6.7 million of deferred financing costs. And thus, we maintained $275.2 million of net debt. That compares to net debt of $252 million as of March 31, 2022. Lastly, I'd like to reiterate that over half of our outstanding debt is hedged at a very attractive interest rate, which has and will in the future, limit our exposure to rising interest rates in the coming year. Moving to our outlook for fiscal 2023. We are increasing our revenue guidance range to $120 million to $122 million and our adjusted EBITDA guidance range to $46 million to $47 million for the full fiscal year. This represents growth of 12% on revenue and 13% on adjusted EBITDA at the midpoint for both guidance metrics versus fiscal 2022. Before I close, I'd like to take a minute to talk through the timing of payments and the effect that has on quarterly revenue. As discussed on previous calls, many of our larger international revenue streams pay on a semiannual basis in the quarters ending September and March. As a result, our second and fourth quarters have historically been higher than the first and third quarters, with Q4 typically being our highest revenue-producing quarter. Over the past 18 months, we have been working to improve the accrual process for these semiannual sources, and we've made great progress in this area. Going forward, we expect the quarters to have less significant volatility related to the timing of payments, but we may have softer quarterly comps in Q4. Having said that, our strong growth remains clear in our fiscal year-over-year numbers. As we enter the last quarter of fiscal 2023, we're pleased with our progress and excited about the future for Reservoir and remain focused on achieving our strategic objectives. We will continue to evaluate potential acquisitions to expand our portfolio of assets, which is considered in our full year guidance. As shown this quarter, we have a durable business that is growing steadily on the top line and margins are improving. We feel that we are in a healthy position with our capital structure with the newly amended and extended credit facility, and we remain optimistic for what the future holds. As we head into the fourth quarter, we are encouraged by what we have seen from our business thus far. While the macroeconomic landscape has presented some challenges, we have stayed disciplined and focused on our operations and strategic goals, which allows us to effectively navigate through times of uncertainty. We will continue to benefit from the overall momentum in and evolution of the music industry and build out our roster through selectively deploying capital for deals that strategically fit our business model. In closing, we are approaching the last quarter of the fiscal year with confidence as we are well positioned to finish the year strong and continue to achieve our financial targets. Thanks. And congrats on the quarter. I'm curious if you could talk about how the rising interest rate environment has impacted either -- so the deal pipeline overall or the competitive landscape, where you look at that deal pipeline. So curious if private equity is sort of changing, how they're reacting in the space, most particularly. Thanks. So as far as the first part goes, the pipeline remains robust. I believe that we reported on a pipeline of $2.1 billion last quarter and right now, we have a pipeline of about $2.3 billion. So we're not really seeing any change there. We're also seeing deals of significant size close, most recently being the Justin Bieber catalog. Any contraction on pricing evidence is anecdotal, and we don't have sort of consistent data on that front. Although [technical difficulty] one's got to believe that the cost of capital will declare some type of contraction there. And certainly, we can be patient with that. But I would say today, there remains to be significant capital in this industry, significant interest and several players who continue to be acquisitive. Thanks. Then can you talk a little bit about maybe just generally the factors you think that contributed to the De La Soul partnership? It seems like that will be one where you'd be going up against people with pretty meaningfully larger resources to win. So why do you think that came in your direction? So that came about as a result of the Tommy Boy acquisition, which was completed about 18 months ago. And that was a part of that catalog, and we always had the intention of achieving this goal of bringing their music to streaming platforms, and we had worked on that for about 1.5 years. So happy to be here. All right. And then, just from a broad perspective, with the settlements achieved with the CRBs, when do you think that starts to flow into the P&L? I don't think it hits all at once or I think it sort of flows in over a period of time. Can you talk about sort of the impact you see on that? Thanks. Yes, Rich. So on the CRB, there's really two components, right? So we talked last quarter about the impact of the CRB 3 rates, and remember, those are the rates that are applicable to 2018 to 2022. And we made an accrual for the estimated impact of those increasing rates. We expect that, that piece will be settled sometime next summer. The DSPs have six months from the time that those rates are published in the Federal Register to do their calculations of the retroactive true-ups. And we expect that, that will hit, like I said, next summer, and we will adjust our estimates once we have real clarity around those final figures. Then we move to the CRB 4 settlement. And as Golnar mentioned, we are very pleased that people came together and the CRB affirmed that settlement, which relates to rates for the period 2023 to 2027. And we expect that those rates will be reflected in the reporting that we start to receive in April for the January earnings period. And obviously, that will be reflected in our ongoing earnings on a quarterly basis starting this quarter. Thank you. One moment for next question. Our next question will come from the line of Dan Day from B. Riley. Your line is open. Yes. Good morning, guys. Appreciate you taking the questions. Just first for me on the admin expense line. You talked about that being elevated in the quarter, maybe just some more detail around that. It looks like it's annualizing around $30 million a year or so for fiscal '23. Just -- is that the right number for that line moving forward? Obviously, there's sort of wage inflation stuff that would drive it up. But just going forward, are there any hiring initiatives or anything along those lines that might cause that to have a step change up or down? Just curious on that. Yes. I think that number is really a pretty decent number for you to use on an annualized basis. Obviously, for the quarter, one of the things that we called out that led to that 19% increase in total administrative expenses is on our expanding artist management business, where we were very happy with the results that we were able to achieve. In the quarter, you a saw a significant growth on the top line. And that led to some increases in the administrative expenses for that business. I would say, putting that aside, we have very modest increases in the rest of the business. Got it. And maybe just along that vein, I mean, the other revenue, which I think is this artist management revenue that you're referring to, like this was like $1 million a year or total in the past couple of years, and it was over $2 million in the quarter. Just wondering like how sustainable or sticky that is. Like is this $8 million, $10 million a year revenue line? And it was just depressed because of no live performances during the pandemic? Or was there something in the quarter that it was unusually high? Well, I think that you should not look at the quarter and assume that, that is the run rate on a quarterly basis going forward. But certainly, we were -- what we're seeing in this quarter is the monetization of the return to touring that has been happening over the past six, nine months and especially relative to the period last year. It takes a little while for that to catch up and to flow through to us, but we are seeing very healthy touring and merch revenue for the artists that we represent. And we're very happy to be seeing that in that segment of our business, which remains a fairly small part of our business, but it's an area that we're very happy to see that level of growth happening. Great. And last one for me and I'll turn it over. So it seems pretty likely based on some of the commentary coming out of the guys from Spotify that we're probably going to get a U.S. rate hike at some point in 2023. Just wondering internally if you've done any work to quantify the potential impact on digital streaming revenue for you based on the magnitude of any rate hikes there? And if so, if there's anything you can share, would be appreciated. Thanks. That is the work that we do. We can't really comment obviously on what the future holds as far as a domestic rate hike. The way we think about this is that it's essentially a [technical difficulty] and our share of that increases. But at this time, we don't have numbers that we would disclose around any kind of assumptions around our domestic rate hike. Hi everyone. Thanks for taking my question. And congratulations on another strong quarter. It seems like you're making a lot of investments in emerging markets in addition to PopArabia, more recently some bigger investments in India. Can you talk a little bit more about how big an opportunity India is both in terms of content creation from Indian artists and then as well as actual consumption of media within India? So I think that from a volume standpoint, it's certainly that we are making investments in the emerging markets. I wouldn't think about these investments as being significant -- as significant as others that you know about from a dollar standpoint. And obviously, we're very interested in continuing those investments through PopArabia and growing the business there. Based on really what the forecasted growth in these emerging markets is, and I don't have sort of isolated numbers around India in front of me, but we are looking at growth that is predicted north of 40%. The only markets that actually share that kind of predicted growth are the Latin American and Middle Eastern markets. So we are very keen on continuing to invest in existing content in this region as well as investing in our roster, building on the JV we have with DIVINE's Gully Gang and just really having access to content in this region, which could position us as being a very significant rights holder within the next 18 months or so. Okay. That's very helpful, Golnar. Thank you. And then just as a housekeeping, with the CRB 4 settlement and the new rates set to take effect here in 2023, I mean, should we think about that as being effectively the royalty rate that is baked into your Q4 guidance for the first three months of 2023? Yes, certainly. These rates take effect January 1. So for our fourth quarter, our revenue related to U.S. digital streaming on the mechanical side will be reflective of those rates. So yes, that aspect of it is baked into our numbers. Thank you. And I'm not showing any further questions in the queue. I'd like to turn the call back over to Golnar Khosrowshahi for any closing remarks. Thank you, Operator. Our performance in the third quarter is indicative of both the strength of our team at Reservoir and the quality of assets that we have assembled. I thank you so much for joining us this morning. We look forward to updating you on our progress on our next call. Thank you.

EarningCall_296

Good morning, and thank you for joining us for the Jack Henry Second Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I’ll now like to turn the conference over to Mr. Vance Sherard, Vice President of Investor Relations. Please go ahead. Good morning and thank you for joining us for the Jack Henry Fiscal 2023 Second Quarter Earnings Call. Joining me on the call today is David Foss, Board Chair and CEO; Mimi Carsley, CFO and Treasurer; and Greg Adelson, President and COO. After these opening remarks, I will turn the call over to Dave for his thoughts about the state of our business, financial and sales performance for the quarter, industry comments and other key initiatives. After Dave concludes his comments, Mimi will provide additional commentary regarding the financial results and fiscal year guidance included in the press release issued yesterday that is available from the Investor Relations section of the Jack Henry website. We will then open the lines for Q&A. As a reminder, this call includes certain forward-looking statements, including remarks or responses to questions concerning future expectations, events, objectives, strategies, trends or results. Like any statement about the future, these are subject to multiple factors that could cause actual results or events to differ materially from those which we anticipate due to multiple risks and uncertainties. The company undertakes no obligation to update or revise these statements. For a summary of these risk factors and additional information, please refer to yesterday's press release and the sections in our 10-K entitled Risk Factors and Forward-Looking Statements. On this call, we will discuss certain non-GAAP financial measures including non-GAAP revenue and non-GAAP operating income. The reconciliations for non-GAAP financial measures are in yesterday's press release. I will now turn the call over to Dave. Thank you, Vance. And good morning, everyone. Today, we're pleased to report another strong quarter of revenue and operating income growth. As always, I'd like to begin today by thanking our associates for all the hard work and commitment that went into producing those results for our second quarter. For Q2 of fiscal 2023, total revenue increased 2% for the quarter, and increased 6% on a non-GAAP basis. This variance was primarily due to a reduction in deconversion revenue, which I'll detail in a few minutes. Turning to the segments, we again had a solid quarter in the core segment of our business. Revenue was flat for the quarter but increased by 6% on a non-GAAP basis. Our payments segment also performed well posting a 3% increase in revenue this quarter and a 6% increase on a non-GAAP basis. We had a very strong quarter on our complementary solutions businesses with a 4% increase in revenue this quarter, and an 8% increase on a non-GAAP basis. Yesterday's press release included revised guidance which Mimi will outline in her comments. One of the key drivers behind this change in guidance was the actual and forecasted reduction in deconversion revenue for the year. As we disclosed yesterday, deconversion fees are down $20 million year-to-date. And this was the primary driver of the variance in GAAP versus non-GAAP revenue and operating income performance for Q2. As a reminder, we receive deconversion revenue when one of our clients is acquired by another institution and is required to pay us a fee to terminate their contract prior to the end date. I normally referenced this as the revenue you don't want to see because it indicates we've lost a client to M&A. This lack of consolidation by financial institutions is also impacting our services revenue associated with convert and merge activities. Because of the impacts to bank stocks and valuations, M&A is down overall in the banking space, and the experts in the industry don't see any significant rebound for at least a couple of quarters. Of course consolidation is outside of Jack Henry's control and we normally update guidance for deconversion revenue as we become aware of pending M&A activity. The other primary item impacting our guidance is the recent change in consumer spending behavior. Due to economic conditions, consumer card usage is slowing and transactions are shifting from debit to credit. Our card processing business is significantly weighted to debit processing. So we are revising guidance to reflect what we believe to be a temporary economic trend. As I've said many times in the past, our financial model is very resistant to significant swings resulting from changes in the overall economy. But we're not completely bulletproof. Despite the external factors, our primary businesses remain strong and continue to perform very well. As I mentioned in the press release, our sales teams again had an outstanding quarter with a number of notable wins. In fact, Q2 set a new quarterly sales record for Jack Henry breaking the record we set in the June quarter last year. In the second quarter, we inked 12 competitive core takeaways, and an additional 15 deals to move existing in-house core clients to our private cloud environment. December 30, was a particularly memorable day for us to Jack Henry as we signed the three core takeaways of multibillion dollar financial institutions on the same day. We continue to see good success with our new card processing solution, signing 12 new card processing clients this quarter. We also continue to see great success signing clients to our Banno digital suite with 36 new contracts in Q2. Speaking of our digital suite, our Banno business solution is scheduled to go into general release next quarter. We already have 18 institutions live in early adopter status with the feedback being extremely positive from those users. We have 308 clients under contract for the solution, and we're positioned to bring them into full production at a very rapid pace once we achieve general availability. We are also continuing to implement new financial institution clients on the retail Banno platform at a similar pace to recent quarters. At the end of Q2, we surpassed 8.8 million registered users on the platform, and Banno continues to hold one of the highest consumer ratings in the App Store. Normally in January, I share with you the results of bank spending survey projections from the publications we follow closely. Unfortunately, this year, none of those major publications provided forward looking projections around the topic of expected tech spending in the banking segment. I have received a number of smaller surveys, and we conducted our own informal survey at a banking CEO roundtable last month with the results being all relatively consistent. The average increase appears to be settling at around 7% for calendar 2023, with the most popular range being a 5% to 10% increase. I'll continue to watch for firm objective data and we'll share as it becomes available. As you may have noticed last month, we took a major step forward with our environmental efforts by signing a commitment letter indicating our intention to set science-based climate targets with the Science Based Targets Initiative or SBTI. Science Based Targets are aligned with the level of decarbonization necessary to meet the goals of the Paris agreement to limit global warming to 1.5 degrees Celsius above pre industrial levels. Jack Henry will pursue validation for near term greenhouse gas emissions reduction targets through SBTI. This commitment follows extensive analysis and discussion and is supported by our low carbon transition plan which outlines several mitigation tactics to reduce our greenhouse gas emissions. More information regarding this plan will be disclosed in our next sustainability report, which will be released on March 31 through the investor site on Jack henry.com. As you will recall, it was on this call last year that we announced our new technology monetization strategy. We developed this multiyear strategy to help us deliver the public cloud native capabilities to Community and Regional financial institutions, allowing them to innovate, compete and meet the evolving needs of their account holders. We are continuing to make great progress on the strategies four main objectives. First, we're redefining the core processing system by unbundling services that traditionally would be in the core and building them as standalone modules on the public cloud. In September, we announced plans to build these services on the Google Cloud. And we've been testing our wire processing and authorization management services modules on the Google Cloud since that time. We currently have six clients live in early adopter status with domestic wires, and plan to offer general availability for this solution in July. We expect to launch the international wire solution for early adopters in April and expect that module to be generally available late in the fourth calendar quarter this year. Second, we're working to provide multiple data integration options utilizing our open philosophy and technology. Our newest offering in this area is real time data streaming, simultaneous, constant streaming of necessary data to all systems on the platform. We're currently in beta with real time data streaming, which is essential to support real time payments and fraud detection. We expect this functionality to go into live production later in this calendar year. Delivering industry leading capabilities across a single next generation platform is the third objective. Banno was a key element in this part of the strategy. But we're working on several other additional solutions to build upon this commitment. As an example, in September, we added Payrailz, a public cloud native digital payments platform to our suite of payment solutions. Additionally, this summer we're launching Financial Crimes defender, our next-gen Financial Crimes platform with enhanced capabilities, including machine learning, and artificial intelligence. This new fraud solution has been built entirely on our public cloud native platform. The last step in the strategy is to move from acting as a core processor to offering a full banking ecosystem. This includes our own capabilities, plus access to leading fintechs through a single platform that prioritizes openness, agility, speed, and optionality. A year ago, I announced that we had more than 850 FinTech providers in our ecosystem, today is closer to 950 and the number continues to grow. We're also the only platform provider that has relationships with all four major financial data aggregators, Finicity, Plaid, Yodlee, and Akoya. Through these companies, financial institutions can give account holders a complete financial picture in a safe secure manner that eliminates screen scraping. We've seen strong interest in this strategy from both prospects and customers. Anecdotally, I can tell you that we are currently in conversations with a number of prospects, who have indicated that the technology modernization strategy I just described is the primary driver for them to engage with Jack Henry to help develop their technology strategy for the future. Community and Regional financial institutions are the lifeblood of mainstream America. Many of them, however, are at a crossroads. The personal service and experience they are known for is being disrupted by technology as nontraditional financial service providers have entered the market. And the way people bank has fundamentally changed especially for the younger generation. As a well-rounded financial technology company, Jack Henry is in a unique position to provide modern technology and services to help community and regional financial institutions capitalize on this opportunity and strengthen connections with their account holders. The key takeaway is that while we're successfully meeting the needs of our clients today, as shown by our performance results, we're also preparing them for the future. We're pleased with the progress we've made on this exciting strategy. And we'll share more updates at our Investor Day in May. As we began the second half of our fiscal year, our sales pipeline is very robust, and we continue to be optimistic about the strength of our technology solutions, our ability to deliver outstanding service to our clients, our ability to expand the client relationships, the spending environment, and our long-term prospects for success. Thanks, Dave. Good morning, everyone. As highlighted by Dave’s comments, Jack Henry had a successful second quarter and I will discuss the details driving those results. Total revenue is up 2% for the quarter on a GAAP basis and solidly up 6% on a non-GAAP basis. Fiscal year-to-date, GAAP revenue was up 5% and non-GAAP revenue increased 7%. So let's jump into the details. on a GAAP basis services and support revenue decreased 2% in the second quarter, but increased 3% year-to-date. Services and support were negatively impacted as deconversion revenue decreased $21 million for the quarter, $20 million year-to-date. This is consistent with the broader market lack of acquisition activity in our space. We now anticipate approximately $15 million in deconversion revenue this fiscal year. However, forecasting deconversion revenue remains challenging given the limited advance notice and the general uncertain nature of M&A. Our private and public cloud offerings showed robust growth this quarter, growing 11% and 10% year-to-date. Product delivery and services decreased 26% in the quarter, impacted by lower deconversion fees and convert merge activity offset by slightly higher implementation related revenue. As a reminder, user group conference related to a major customer conference shifted into Q1 this year contributing to the year-over-year Q2 revenue decline. Year-to-date, product delivery and services revenue decreased 11% influenced by similar drivers as the quarter. On a non-GAAP basis, services and support revenue grew 6% for the quarter, and 7% year-to-date, which serves to highlight our consistently fundamental business stress. Processing revenue increased 9% on a GAAP basis for both the quarter and year-to-date. On a non-GAAP basis, the growth was 7% for the quarter, and 8% year-to-date, the increases were largely driven by higher card volumes, despite a slight increase in the rate of growth. Additionally, digital revenue continues to show rapid growth led by robust demand for Banno Digital platforms. Now turning to cost, cost of revenue was up 8% for both the quarter and year-to-date. Quarterly drivers included increased card processing costs consistent with card revenue growth, higher personnel costs, and amortization expense. These drivers are consistent across our year-to-date results. Research and development expense increased 22% for the quarter, mostly due to higher personnel costs and licensing fee. Year-to-date, these expenses increased 23% based on the same factors. SG&A was 2% driven by increases in personnel, travel, professional services, partly offset by the gain on sale of assets. Year-to-date, the increase was 7% influenced by similar drivers. The quarter and the remainder of the year benefit from disciplined focus and actions involving facility rationalization, headcount and travel control, procurement wins and other expense management. These collective efforts help to offset inflationary pressures and mitigate lower revenue. As we previously mentioned, some compensation and travel related cost increases result from the lower cost comparisons from our first half of fiscal 2022. Due to previously mentioned management rigor on cost controls, we concluded Q2 with strong operational results. Despite net income declining 16% primarily due to deep lower deconversion fees and increased interest expense, the quarter saw a fully diluted earnings per share of $1.10. Our GAAP and non-GAAP results for the quarter and year-to-date are consistent with internal expectations and set us up for a strong finish to fiscal year ‘23. As a reminder, for transparency, the impact from the gain on the sale of assets, including this quarter sale of an Albuquerque property, yielding a $1.2 million gain to Payrailz acquisition and deconversion fees are shown as part of non-GAAP adjustments in the press release. Turning our attention to cash flow. Operating cash flow was $191 million for the year-to-date down from $197 million for the same period last year, essentially due to lower deconversion revenue. Total R&D investment remain slightly elevated, which should normalize by next fiscal year. Free cash flow which is operating cash flow less CapEx and cap software less proceeds from the sale of assets was $119 million. We remain committed to maintaining ample operating liquidity, reinvesting for growth, evaluating financially sound strategic acquisitions, paying dividends, and opportunistically repurchasing our stock. This consistent dedication to value creation resulted in a trailing 12 month return on invested capital of 21.4%. Focusing ahead, let me discuss updated guidance. The press release included revised GAAP and non-GAAP full year guidance. The GAAP guidance remains inclusive of Payrailz acquisition, gain on asset sales and deconversion fees. We expect the trends impacting Q2 results to continue for the remainder of the fiscal year impacting both GAAP and non-GAAP results. Most significantly, assuming minimal industry consolidation, deconversion fees will likely remain muted at approximately $15 million for the fiscal year, representing a $20 million decrease from our previous guidance. Second, languishing bank M&A related consolidation negatively impacted our outlook for our convert merge services revenue for the fiscal year. As a reminder, this revenue is driven by our clients acquiring and implementing Jack Henry solutions at their newly purchased institution. Finally, in line with announced payment network activity, we're experiencing a slower rate of growth and anticipated for debit transaction volumes in our card processing business, primarily driven by a combination of lower consumer spending and the spending shift to credit card. As a reminder, card processing is approximately 22% of our total revenue. And as Dave highlighted more heavily weighted to debit card business. As a result of these impacts, GAAP revenue growth for fiscal ‘23 is now expected to be 5.4% to 5.8%. Guidance for non-GAAP revenue growth is now 7% to 7.3%. Outlook full year GAAP operating margin is now approximately 22.9%, which is negatively impacted by the expected lower deconversion fees and is inclusive of the impact from both gain on sale of assets and the Payrailz acquisition. Full year non-GAAP operating margin guidance due to strong management expense control is now expected to deliver slightly margin improvement for the fiscal year compared to previous guidance of flat to slightly down. The management team remains focused on returning to margin expansion in fiscal ‘24. Full year GAAP EPS guidance is now a range of $4.79 to $4.83. The midpoint of $4.81 is an $0.11 decrease from previous guidance, even though those lower deconversion fees drive the $0.20 reduction. The headwind caused by lower deconversion fees is mitigated by the team's collaborative and disciplined cost control, gain on sale of assets and lower net income. We expect the remainder of fiscal year ‘23 quarterly non-GAAP revenue growth momentum to deliver increases in both in the third and fourth quarters to achieve our revised full year guidance targets. We anticipate similar growth patterns for non-GAAP operating margin delivering the revised increased full year guidance. So in closing, we delivered another quarter of strong operational and fiscal result and remain solidly optimistic about the success of our business model. We thank all of our investors for their continued confidence in Jack Henry. Keith, will you please open the call for questions. Hi, thank you for taking my question. I guess the first question on just the non-GAAP revenue weakness, it seems like most of that is basically related to the payment segment with more shift from debit to credit spending. Any changes anticipated in any other segments based on what you were thinking before? And then Dave, just for you. Any update on macro, I know you're sort of still seeing good momentum in new client signs. But has anything changed in the quarter in terms of bank decision making for new deals? Whether it's taking more time to close deals or the size of deals that you were seeing just any update there would be super helpful. I'll take the second part first, Vasu, and then I'll turn it over Mimi. As far as the overall macroenvironment, I would say things are continuing to look very strong. Our pipeline, I just mentioned in my prepared remarks that we set another sales record in Q2 which I was not expecting, given the huge performance we saw in Q4, the June quarter last year. So to set another overall sales performance record was a surprise to me. But the environment is very strong, the pipeline is larger than it's ever been. I would say that on the core side of the business, we are trending larger. So I highlighted, we assigned three-multibillion-dollar institutions on December 30th alone, core takeaways December 30th. And I think the if you look at the core side of the business, the accounts that we're currently involved in are definitely trending larger, bigger institutions coming to Jack Henry looking to make a change. I certainly believe part of that is driven by the technology modernization strategy. They're looking for that partner that will really help them modernize. But I think the other driver for that is just the reputation Jack Henry has for delivering great technology and great service. So I would characterize the overall environment for us as far as sales is very strong right now. And as I said in my prepared remarks, although we don't have any of the big surveys that I can quote, because nobody has published results. I have a whole bunch of more anecdotal bits of feedback and that CEO roundtable that I hosted two weeks ago in Phoenix, and they're the kind of average spend increase for calendar ‘23 and this is them knowing that their budgets are in place for ’23 already. So it's them quoting to me what they have planned, the average was around 7%, as far as an expected spend increase. And by the way, this CEO forum that I hosted was not just Jack Henry core customers. This was a variety of CEOs from a variety of, who are running a variety of different solutions. So that would be my comment on the overall and I'll turn it over Mimi, to answer your first part of your question. Thanks, Vasu, for the question. I would say on a non-GAAP revenue change. Yes, I think you're right in terms of predominantly is around card which is based on that we were optimistic in terms of now the slowing consumer is a little bit slower than we anticipated. And so I think that's led to a modest deceleration of growth, but still an attractive growth rate, I would call out. And so it's predominantly around cards. I think that's important to emphasize that our growth rate year-over-year is for the payments business is very strong. Now we've backed off a little bit because what's happening in consumer behavior, but we should not lose sight of the fact that the payments business is up significantly year-over-year as far as overall growth. That's super helpful. And if I may ask the follow up on Banno, I know, there are a number of new players out there that are trying to sell digital banking and to bank some of them who might be your core customers. But I was just curious, when you go to sell Banno, and it's a competitive deal, like what sort of win rate do you see typically, for your product? And then have you started to sell Banno outside of your core base of clients already? And if not, what's the roadmap for that? Yes, so I don't think, Vasu, I can quote you accurately on what our win rate is. And I think pretty much every deal where we're selling digital banking is a competitive deal. So I couldn't quote you an accurate percentage as far as what our win rate. Win rate is, I just know it's very high because Banno has this outstanding reputation. As far as selling outside the base, so, we're from a technology point of view, we're prepared to do that right now. It's a strategy point of view that has kind of prompted us to back off a little bit. And I think I talked about this on a previous call. We see opportunities outside the base, as I said, from a technical point of view, ready to deliver outside the base. But we have learned that for some of our competitors are selling into their base, they perceive to be a real positive a real win, because it gives them a better solution overall. And so we're weighing the opportunity for us to sell Banno versus the potential negative for us in selling the core side. If a competitor says, oh, my gosh, wait, we finally abandoned in our base now. So our customers won't be as likely to leave us on the core side of the business. That's not necessarily a good thing for Jack Henry. So we're being very strategic about how we position this and which core basis we go after. And I'd rather err on the side of making sure the strategy is right. And rather than just chasing after a few dollars that might damage us long term from a strategic point of view. Thank you. Good morning. Dave, given you completed the transition of processing over the first data, which used in their back end for debit and credit card processing, are you able to leverage their capability at all to build out your credit card processing capacity to offset some of the shift from a debit to credit? Yes, certainly, we're able to use that platform. And we already have customers in production on the credit side and customers that we've signed. But as I've highlighted and others settings it's not a matter of going to a customer and saying, hey, we have credit, now you want to sign up, they have if they're in the credit space, they already have an agreement with somebody. And so normally they need to allow that agreement to anniversary all step to buy the contract out. The other thing that I've been pretty transparent about on these calls, is we've been building up our expertise in the credit space. Credit is a different business from debit. We needed to literally hire people to sell, hire people to service, that side of the business. And so we've been building up that capability overtime. So it's combination of those things that has been kind of a slow roll for us as far as being in the credit space. But as far as being positioned today to offer credit when a customer is ready to get into the credit space. We have the programs, we have a sales organization, we have the technical abilities to deliver. And so it's a matter of us finding those customers and converting them. Understood. And then on the tech modernization strategy, do you have specific timelines to roll out some of the key initial modules to clients? Yes, we do. And so and we publish that for our clients, we have a roadmap out on our customer portal so our clients can go and see what the roadmap looks like. And so we're being very transparent with our clients and with prospects. Initially, I had hoped to publish that for everybody to see. But we've realized that, again, competitors are very, very eager to see what Jack Henry's doing. They're trying to figure out how to compete with a strategy. And so we backed off on being quite that transparent. But we're being very transparent with our existing customers, and with prospects who are looking at tech modernization to help define their strategy for the future. We don't have access to the client portal, I mean, can you kind of share in any broad brushstrokes, what we should be expecting in terms of rollout of tech modernization strategy? Yes, I'll, so I'm going to turn it over to Greg here. Just to give you a couple of highlights, again, we're not going to go into great detail at this point. But Greg can give you a couple of highlights of what to expect. And I will point out that in the, my prepared remarks here, I highlighted the fact that we have some of these things rolling out. We have our domestic wire solution coming into full production here in just a couple of months. We have our international wire solution coming into full production later this year. So I've already highlighted a few of those things. But I'll turn it over to Greg for a little more color. Yes, there's a few other things we're doing. So we basically have planned out for the next three years. So we have various targets that we've assessed, but things around authorization management is a big one. Dave actually mentioned that as some of the testing that we're doing already, in the Google Cloud, that's a big one, there's a lot of components that we're doing with real time to help us with some solutions that we're going to look to roll out over the next 18 months or so that we're not prepared to talk about publicly, but components of that. And then, of course, a lot of the other key modules, General Ledger itself, other components that will be done. But each of those is already bracketed by year for what we plan to get done over the next three years. Got it. And just finally, the three big core wins, you signed on December 30. Dave. What were the key to those wins, like what particular capability drove those wins? And how big were those banks? Were they above $10 billion in assets? None of them were above $10 billion. My recollection is they were mostly been a three-ish range. three to five, somewhere in there. And I'm not, I'm just doing that off top my head, but somewhere in that range for those customers. And I think it's the same story that you've heard from us time and time again, Dave. It's a combination of great technology, a great reputation for service, a very focused strategy. So if you come to do business with Jack Henry, you know which core side we're going to be supporting for the go forward. There's no question about what our strategy is regarding core. So I think it's all those things rolled together, plus, this reputation we have for openness. And today, most banks and credit unions want to connect to FinTech solutions, and they want a partner who embraces that idea of open connectivity. And so you roll all those things together. It's the same things that we've been talking about for a long time. Those are the primary drivers for us in these wins. Hey, good morning. Dave in the past, we've talked about maybe the backlog in the business. I know you don't report that. But the one way I know you kind of look at revenue and your ability to kind of projected backlog of installed teams and seems as though you've been winning a lot. If you kind of look at that metric, over the next maybe 12-18 months, is that still look very good and give you confidence from a revenue standpoint? Yes, we actually have a report card that I look at every month, that shows the number of we refer to as a slot. So the number of conversion slots, the number of conversions that we're prepared to do in any given quarter. And it shows how many of those slots are already booked, how many of them are being held, because there's a deal that's in process where a customer has said, hey, I want to convert to nine months as opposed to 18 months, and then how many are open. And our backlog on the core side is well into the next fiscal year as far as those slots being held. Now, once in a while when I say things like that people will say, well, hey, you ought to just go hire more people and speed that up. The thing you have to remember is this isn't about hiring more people. And we can do a conversion in a month. Conversion when you're doing an entire core conversion. Normally you plan for 12 months and that's not because Jack Henry so slow, we can't do it any faster. It's because there is so much to be absorbed on the customer side. They're trying to run the bank or credit union and at that same time, they're learning all new systems and all new processes and they are validating data to be converted, and it's just a very large, massive project. And so we manage our backlog really well, I think our conversion team has managed the backlog well. We do a similar exercise for every other product that we have. The core backlog is the one that normally gets a lot of attention. But every product we have, we have that exercise and that reporting. And so we can staff up and staff down as we need to, generally fairly easily certainly, there are some roles that are very specialized and you can't simply move people from one group and not to another based on demand. But generally, we can do that pretty easily and manage our backlog effectively. And then just one of the issues that you always hear banks talk about especially maybe community banks and credit unions is having to deal with fraud, whether it's fraud related to P2P payments, or fraud related to their ATM business or checking accounts. And I'm wondering from Jack Henry's perspective, how you might be able to help your customers and how that might help Jack Henry in terms of selling products. Yes, Kartik, this is Greg, I'll take that one. So a couple things. So even in the Payrailz acquisition, we have a fraud module that we're actually rolling out with our open loop P2P. So again, it provides an extra layer of fraud protection for that, actually, there's a unlike sale which is it revocable and a couple of the other faster payment solutions, there's an option as when the receiver gets it to designate how they want to receive the payment. And as part of that process, we have an extra kind of fraud layer there. The other thing as Dave mentioned our Financial Crimes Defender products, that one is going to be specifically tailored for the opportunity to help with both sell fraud, and other Faster Payments fraud, because it's got real time components to it. And so those will be two things. We're actually in beta right now, with the Financial Crimes Defender product, and it is getting significantly, really good fanfare from our clients in the beta process. So we're pretty excited. But those are just two of several other things. We actually have a committee here at Jack Henry, that we kind of aggregate all of our kind of defense projects, fraud products. And we have a team that is looking to kind of consolidate some of that and drive the right strategy for our customers. Hey, good morning, guys. Mimi, just on the updated EPS guide. It looks like the better margin on a non-GAAP basis kind of offset a little bit weaker revenue. And then the deconversion fees looks like it'd be about $0.20 hit EPS, but you only took down the midpoint by $0.11. So just curious that our tax rate or anything goes in line or anything else that drives that kind of smaller EPS asset. Yes, thanks for the question. JD, you're right, in terms of the deconversion revenue driving about $0.20. If it were to stand on its own. A couple of things, one, to just follow on to my prepared remarks. The disciplined focus on expense controls, and the second half is driving part of that upside. Additionally, we are seeing because of the higher interest rates, we are seeing some positivity from an interest income perspective, that's helping as well. And then on a GAAP basis, you have the Albuquerque sale, as well. So that's just not a lot of changes on the tax rate. But just between management control, and a little bit of interest rate savings. So I would say that’s a primary driver of that change. I'm glad you call that out, JD, because I think the as Mimi just detailed, there are several things in there. But the primary driver of that difference between the $0.20 and the $0.11 is management expense control. We have a team here who has really dug in to make sure that we're doing the right things on the expense side. And so if it were just for the slowdown and deconversion revenue, we'd see a $0.20 hit, but the team has really put in the extra effort to make sure that we're doing the right things here. And I think that's a significant call out for the management team at Jack Henry. Okay, thanks. And then the second half implied guide is a little very modest step up implies growth a little over 7%. Any callouts, Mimi, 3Q versus 4Q, should be relatively consistent. Just trying to think about cadence of revenue growth in the back half of the year. Yes, it's a good question, JD. I mean, I would say in similar to our comments last quarter, that the first half is slower and we see a pickup as the year goes on, both from a revenue with Q2 expect it to have been our lowest quarter and growing as the year continues. So I wouldn't say that there's a dramatic difference between 3Q and Q4, but just a second half favorability versus first half. Okay, thanks. And then, Dave, on the debit card revenue, I think I was called out. It's about 22% of revenue. Can you help us think about what's an account on file fee versus per transaction? Just trying to understand it, if macro slows further, it gets better how sensitive that card business is to spending levels? Yes, that type of detail is not something that we've disclosed. I think the best way for us to, for you all to track what's happening in our business is just the overall macroenvironment kind of falling what's happening in the overall macro environment. This is not unique to Jack Henry, this is what's happening overall, it's consistent with what's been reported by the major card vendors of MasterCard and Visa. And I think that's the best way to kind of anticipate what's happening at Jack Henry, what's happening overall in the industry, because we follow the industry when it comes to things like debit volume, and any kind of shift between debit and credit. Okay, let's take one last one in here, free cash flow conversion, trailing 12 months is down a little bit relative to history for Jack, somewhere in the 80s versus the 100% or so target. Any false there on timing, do you still comfortable with getting back to 100% for the full year for free cash flow conversion? Yes, I think you're right, JD, in terms to look at it on a longer cycle, I wouldn't recommend looking at on a quarter but rather on a year-to-date. And so on a Q1 because of the timing of Q1versus Q2, year-to-date, this year, we're about $119 million versus prior year $96 million. That's with asset sales without pretty comparable, if you wouldn't adjust for deconversion revenue, we'd be pretty comparable on a six-month basis. So I think all-in-all, I think not a lot to kind of call out for the second half there. I think trends will kind of continue to normalize. Hi, good morning, this has been Ben Bargo on Ken. Thank you for taking my questions. So firstly, I wanted to ask about Payrailz. It looks like the asset generate about $2.5 million of revenue in the second quarter. And you're guiding to $12 million for the year. So I would love to get an update on the performance in the quarter. And kind of what drives the assumption behind the implies step up into second half. Yes, so from a sales perspective, we're starting to really see some nice wins, a little bit slower than we had hoped to kind of start out the first few months, but we're starting to pick that up. We're also through the integration efforts that we've been doing, we're able to sell some separate modules. So some of those components that we bought from Payrailz, we can actually sell into our existing iPay business. So the open loop P2P that we mentioned the A to A components and even the fraud module, we're able to sell. So we're starting to get that geared up, we're completing some integration. So we're pretty bullish that we're going to have an opportunity to continue to sell into the iPay space as well as what we have in the prospect list for the Payrailz customers pre acquisition and post. Got it. That makes sense. And secondly, just as we think about your guidance, how should we expect the update targets to really flow through the segment results in 3Q and 4Q? Is it expected to spread out evenly? Or where are you expecting the biggest impact relative to the prior guide? I can take that one, Ben. So I would say year-to-date trends that we've seen core being about six driven mostly by cloud strength, payments up about 7% growth and complementary about 8%, for the full year and that's on a non-GAAP basis, for the full year, we're seeing some consistency in those trends. So I would say particularly around core and payments consistently full year versus kind of year-to-date. And on complementary, I think growing slightly in the second half to kind of land us up a little bit there. So that's kind of the direction I would call out. Good morning. This is a D J Kulkarni filling in Karina Kumar. Thanks for taking my question. I guess to start it. I appreciate the details on the tech modern strategy but can you touch on how this is progressing and particularly if there are any notable developments on this front within the payments business since the acquisition of Payrailz? And then I have a follow up. So Payrailz is part of the strategy. The idea was that by acquiring Payrailz, we acquire a public cloud native bill pay and overall payments platform that does P2P account to account and business to business payments. And so acquiring Payrailz was to kind of fill that need for a public cloud native payments platform. Our choices were to essentially rewrite iPay and add functionality to iPay, or go acquire something that was already public cloud native and integrated into the solution. So as Greg just highlighted Payrailz is up and running, integration work is being completed, but not much left to do as far as integrating into the rest of solution in the public cloud environment that we've created. So it's progressing beautifully, as far as I'm concerned, from a technology point of view. Great. That's very helpful. And for my follow up, you mentioned Jack Henry began leaning more on CPI Escalators last year, as inflation climbed to kind of record levels. Now there's expectations of inflation to moderate in 2023, could you just walk us through how this could impact Jack, Henry's business, if at all? Well, at this point, we're continuing to implement CPI Escalator. So I stressed two calls ago, I think that's not a one and done thing at Jack Henry, we don't do that at one time. And then we're done doing that, as contracts come up for renewal, those CPI Escalators are implemented for those customers. And we're continuing to do that. So until we see some significant change in the overall economy, we are going to continue to implement those changes to the level that we think is appropriate and that our customers are expecting, we'll continue to implement CPI Escalators. We just did another batch last week. And so this is not something that we're kind of evaluating as a point in time that we're going to stop or that we're going to do something different. We're continuing to do the activities that we've been doing. And we'll do that until we see some change in the overall economy that warrants a change in our practice. The only add on I would say there is it's quite early from a fiscal ‘24. We haven't even started it budget cycle planning. So in terms of being able to indicate utilization, and for next year, I think it's premature. I would say we're not reliant on that as a core strategy of our growth though. Hey, good morning. Thank you so much, Dave, Mimi. Wanted to get your perspective a little bit on the prospect for vendor consolidation in the current environment. I guess I'm wondering if I'm a bank or credit union today, I'm using Jack Henry for core processing, but in past have elected to do best-of-breed software from other lending partners. Am I looking to consolidate those activities in some form or fashion? And how does that give you, what does that do for your sales and sales cycle, et cetera? If that is doing. Yes, that's a really interesting topic, James. And I could probably talk for about two hours on this one, I won't, but I could. So what's happening right now. So there are a couple of competing forces here when it comes to talking about that. First off, you have a real desire among banks and credit unions to continue to look for best-of-breed solutions. It's why we have so many best-of-breed products in the Jack Henry product family, it was the whole basis for the ProfitStars initiative that we ran until we just changed our branding here, we still have all those solutions, we still have that strategy, we still have a salesforce that only calls on customers outside the Jack Henry core base. That is still a wonderful business for Jack Henry, because there are those customers who demand and expect best-of-breed solutions to connect into their core. At the same time, you have regulators that are pushing pretty hard on those same customers to say you shouldn't be trying to manage so many vendors, you're introducing more risk into your environment, if you have so many different vendor partnerships. And so part of our strategy has been we can do both, we can be the best-of-breed provider for somebody who's not running a Jack Henry core. They limit the number of vendors they work with by working with Jack Henry on non-core solutions because we have such a broad suite of non-core solutions. So we are a positive in that sense to those vendors or for those customers who are looking to do best-of-breed but limit the number of vendors that they're working with. But again, there is this real push because of the disruptive factors or disruptive forces that are happening in the banking space in general. There is this real push among bankers to find those FinTech solutions, those best-of-breed solutions to offer to their clients. And so it's that balancing act, but it's something that we've been watching for quite some time. I feel strongly that Jack Henry is really well positioned to serve both ends of that spectrum. And is part of the reason why we continue to look for some of those best-of-breed solutions to acquire, like Payrailz, so that we can continue to be a force among those customers looking for best-of-breed. Got it. And I wanted to ask also, I guess, a more specific product related question. And that's related to FedNow, given how close you are to FedNow, as I was hoping you could give us an idea of the general readiness and implementation capabilities that the regional community banks that you work with, have to implement that and start to use FedNow. And I guess on a high level, what's your take on the timeline on how JHA PayCenter is positioned to accommodate the roll out? Thanks. Hey, James, this is Greg, I'll take that one. So a couple of things. So one, we are positioned to be the first processor live starting in July. So we've been working with the Fed for over two years directly on kind of preparedness for that. So we will be launching it looks like somewhere between 25 and 30 institutions will be part of our initial launch. So the interest level with the community institutions is very high. Part of the reason why is that the clearing house is owned by the larger banks. And so there's always been a little bit of a of a concern about doing business with the larger banks, but with the Fed, the smaller community banks are very excited about this specially about some of the use cases that are being talked about. So, in short, it just as a reminder, we have about 60% of the clearing house institutions, or Jack Henry institutions today, if you look at the who's live with about 60% are Jack Henry. So we will be the first processor going live with the FedNow product in the summer. Good morning. Thanks for taking the question. I know credits a small percentage of your overall business today. But can you talk about the agent program that you guys launched in January? And how meaningful that could be? Yes, this, Greg, I'll take that one as well. So we did just launch it, we have three customers that are in some type of pilot with us right now since we just got it going. But what we really believe is going to happen is that the smaller community institutions that were had credit programs or wanted to be part of credit programs, they didn't have the staffing or expertise to handle the full-service solution. So just like Dave mentioned that we were gearing up, and we brought in people to help us with it, they didn't have the resources as well. So we really believe the agent program is going to be a nice opportunity for more folks to take advantage of a credit offering. And the way we position the solution set is that at some point in time, if they would like to actually move to a full-service solution, we will let them take that portfolio with them. So that's also pretty advantageous. So again, more to come on that. But we do believe that this -- there'll be more uptake in the agent program, then maybe, especially in the smaller community, institution space. Great, very helpful. And then just a follow up on Payrailz. It's a little bit slower than initially expected. But do you still anticipating it to be accretive next year that dilution going away? Yes, we're still working through that. But yes, I mean, we're working through everything we can do related on the sales side, making sure that the sales engine is going to the point that we need it to. And as long as that happens, we feel very confident about that. Yes. Hey, guys, thank you. And I guess first of all the non-GAAP revenue. I know you took down the year by $20 million to $25 million. And you walk through that, but EBIT, you mentioned too is still non-GAAP EBIT, still stable, meaning you're taking the $20 million to $25 million of cost out -- with cost controls. I guess I'm wondering where are you taking costs out and then is that sustainable into next year? Or will some of that just flux back up as you grow into next year? So, Dave, I think that's a great question. I think it's a combination of factors. I think the discipline focus, as Dave mentioned, previously, we look on every headcount renewal, every ask on it like a roll by roll. There are some more postponing, there's some work just kind of eliminating completely some may dribble back in next year, we're making kind of mindful choices, travels and other example where we are just kind of being disciplined about the amount of travel. But that may not be a structural kind of long term. So I suspect some of that might come back. But then there's other factors, including performance management, and other things that are -- that will help us this year. This is great. I'll add one piece, we have a very strong focus on process automation here. Not only tools, but just in people. So about 25% of our staff is really certified in some level of what we call caught in the classroom. And so as part of that, we've been driving a lot of operational savings, and some of the headcount reductions as part of our initiatives to be better automated, and various things that we do. So that's also another contributing factor. And that's something that will go on forever at Jack Henry. David, I think the key point there is that what Greg just highlighted, that isn't a one and done exercise, that's something we're trying to ensure is embedded in our culture going forward. We'll continue to look for those opportunities. Got you, thank you. And maybe just a follow up, I know Payrailz, I know the year is supposed to be $12 million and Q2 was like $2.6 million or something. But the rest of your needs to be $4.2 million per quarter to get to the full year. And I'm wondering why does it step up from $2.6 million up to $4.2 million per quarter the rest of the years or something seasonal et cetera? Yes, there are a couple of decent sized deals out there that we're working on. And feeling pretty good about. So that's part of it. And again, it's also getting these add on solutions, what we call add on solutions to the iPay business, and moving those on. And that's really where a lot of that is baked. Hey, guys. Hey, everybody. Thank you for taking my question. So could you just talk about the demand for and forgive me, I missed the beginning of the call. Can you just talk about the demand for Jack Henry core and the sentiment around the tech modernization and uptake of interest in your conversations with potential new and existing clients versus conversation, say six months ago? Yes, so it's becoming a significant part of many of the conversations. So I highlighted the beginning of the call Dominick, that we signed 12 new core deals in the quarter, it was a significant call out that I made, there was three of them were multibillion dollar institutions that all signed on December 30th. So December 30th was kind of a fun day around here. But the other thing that I've talked about already on the call is the fact that we have larger institutions, I think overall demand is moving larger. And I think some of that is definitely being driven by the technology modernization story. So we have, it's become a part of most conversations with core prospects is not necessarily part of the conversation with people who are not looking to bring their core to Jack Henry, but for core prospects, it certainly is part of the conversation, usually. And we are trending up as far as the size of customers that are coming to Jack Henry wanting to talk about tech modernization, because they've been looking for that company that will help them develop a strategy in the future that gets them to the public cloud. And it's a more, I think, rational strategy about how you do the core side of the business, and tie in FinTech solutions, complementary solutions into that experience for their customers. So conversations have been great. I personally have been involved in a lot of them, because as I’ve stressed before when it's a larger institution, and the CEO wants to be in the conversation. I am normally involved in those and it's pretty fun right now. Right, great. And I actually had one of a really large card provider admit to me that they just can't keep up with the investment that's being provided to modernize these tech stacks, with you and some of your largest peers. So they made a switch to do so. If I just think about the complementary growth and the kind of how it slowed a little bit and then other comments around the second half and also deconversion fee expectations. Do you think that some of that would suggest that there is some level of tech spend retrenching at some of the FIs versus previously as they kind of look at the macro-outlook and try on to the cash that they have. Do you think that's fair? Well, so what I talked about in the early part of the call is we don't have any of the major surveys that I can quote to you this year, but I have a number of smaller surveys with smaller sample sizes. And then I hosted the CEO roundtable discussion just two weeks ago. And these were CEOs of larger institutions. Jack Henry core and not. So it was a variety of CEOs and kind of the overall feel. And these are people who have their budgets in place now for 2023. So they weren't speculating. They were sharing with me real numbers that they planned for 2023. The kind of the average settled in at around 7%, their expected increase for 2023. And that's in line with what we're seeing in the sales organization. The sales pipeline is very robust, larger than it's ever been. So I don't see any slowdown or any kind of pullback when it comes to the commitment that folks in our space have on continuing to spend in the technology area. Great. Sorry, I missed that commentary. Maybe just one last one. Have you seen the pace about just from that further -- beginning comment I made about a large FI outsourcing? Are you seeing more higher pace of outsourcing than you have in the past versus, say, like six months ago with client willingness to outsource their tech capabilities? That's speeding up, or do you think it's fairly stable in the last few years, the willingness? Yes, I'd say it's pretty stable. I've described it before as a religious conversation. When you talk to a bank or credit union, they either believe in being in-house with either everything or some things, or they believe in outsourcing, and they just have this kind of ingrained belief. And normally it requires some driver that has nothing to do with Jack Henry to get them to talk about outsourcing. So it might be that they've lost somebody in their tech group that they were very dependent on and now and they can't hire a replacement. It might be that the regulators are giving them, pressuring them because they're trying to do things themselves that they maybe shouldn't be doing themselves. It might be a change in leadership at the institution. And the new CEO comes in and says, I don't know why you guys are doing this yourselves. We really ought to be outsourcing this. So it's some kind of driver normally that's external to Jack Henry. That prompts them to bring their business into an outsourced environment. And I don't think anything has changed in that regard in the past six months, or even in the past six years. Thank you. And this concludes our question-and-answer session. I now would like to turn the conference back over to management for any closing comments. Thank you, Keith. We have additional investor engagement opportunities for management participation at multiple investor conferences and non-deal roadshows over the next month. Additionally, please save the date, as our annual Investor Day will be held in Denver, Colorado, on the afternoon of Monday, May 15. If you are interested in attending in person, please contact me for additional details. Otherwise, we hope you join us via the webcast. We are pleased with the results from our operations and remain enthusiastic and focused on our future. We thank all Jack Henry Associates for their efforts that produce these results. Thank you for joining us today. And Keith, will you please provide the replay number? Yes. Thank you. The replay number for today's call is 877-⁠344-⁠7529 and the access code is 4711955. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.

EarningCall_297

Good day, and thank you for standing by. Welcome to the First Quarter 2023 ESCO Technologies Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded. And now I would like to hand the conference over to our first speaker today, Kate Lowrey, Vice President of Investor Relations. Kate, you now have the floor. Thank you. Statements made during this call, which are not strictly historical are forward-looking statements within the meaning of the safe harbor provisions of the federal securities laws. These statements are based on current expectations and assumptions, and actual results may differ materially from those projected in the forward-looking statements. Due to risks and uncertainties that exist in the company's operations and business environment, including, but not limited to, the risk factors referenced in the company's press release issued today, which will be included as an exhibit to the company's Form 8-K to be filed. We undertake no duty to update or revise any forward-looking statements, except as may be required by applicable laws or regulations. In addition, during this call, the company may discuss some non-GAAP financial measures in describing the company's operating results. A reconciliation of these measures to the most comparable GAAP measures can be found in the press release issued today and found on the company's website at www.escotechnologies.com under the link Investor Relations. Thanks, Kate. Thanks, everyone, for joining today's call. It's really great to be on the call for the first time as CEO, here at ESCO. Our year is off to a great start, and I'm excited to talk about the financial results. But before that, I'd like to say a few words on the transition to my new role. Overall, the process has gone very smoothly. I've been able to relocate here to St. Louis with my family, and we love it here. We've really hit the ground running as the new calendar year got started. And I've had a chance to go out and visit every subsidiary at least once and a few couple more than ones. So it's been a pretty busy start to the year, but an exciting one for me personally, and I'm really energized to be in the new role. Vic and ESCO's Board of Directors continue to be very supportive of me and the role. And we just finished up a set of board meetings last week, where we were able to take the directors out to visit the factories at a few of our subsidiary sites. The business has a lot of really cool things going on, and we have some really neat capabilities there. It was fun to allow the board of directors to kind of get a close-up look at that. So I want to thank the board, and I want to thank Vic for their ongoing support of me and of ESCO. Their dedication continues to be crucial to our overall success. So with that, let me pivot it over to the quarterly results. We had a really great start to fiscal 2023 with all 3 of our business segments posting nice increases in both sales and earnings. Across the company, we continue to see favorable dynamics in the markets that we serve. We have really strong businesses that are serving very healthy end markets. So our outlook really remains positive. So having said that, we still see some challenges. All of us have seen headlines indicating improvements in supply chain conditions. And while we've seen some relief on the raw material side, availability of skilled labor continues to be a significant challenge. Due to the technical nature of ESCO's product portfolio, the labor shortage continues to be a drag on our overall growth, particularly at our A&D and Utility Solutions Group. Our operating leadership in each of those businesses is managing through the challenges effectively as they have been for the past year or so. But it's important to understand that we continue to face a pretty difficult environment. The good news is that the underlying demand for our products and services continues to be very strong. Our first quarter ending backlog of $718 million represents an increase of more than 12% compared to the prior year first quarter. So Chris will get into some of the financial details in a few minutes, but I did want to offer some top-level commentary about each of the business segments. Let's start with Aerospace &Defense, where we had another great quarter. Sales increased by 18% and adjusted EBIT dollars were up by over 25%. It's been exciting to engage with these businesses since taking my new role. And there's a lot of exciting things that are happening across the platform. The commercial aerospace business continues to see robust demand environment, while Navy and space business are really working on some important programs. These businesses are newer to me, but we're really fortunate to have strong management teams with deep knowledge about those industries, and they're really showing me the ropes as I get used to the new role. Also, as you probably saw in the press release, we did close on an acquisition for this group on February 1. CMT Materials will now be part of our globe business, which is based in the Boston area. We're excited to welcome CMT and their employees to the ESCO family. They bring with them exciting technologies and capabilities which will strengthen our naval offerings and provide ESCO exposure to some anticipated growth in the unmanned submersible vehicle market as it matures. Next is the Utility Group, where we had a strong quarter. Revenue growth was nearly 12% and adjusted EBIT margins expanded from 21.8% to 22.7%. The core utility business continues to be solid as our customer base invests in their infrastructure, and we can continue to see backlogs grow. On the renewable side, the growth continues to exceed expectations. As most of you know, 2021 and '22 were both 20% plus years of growth for NRG, but the growth story remains intact as we look forward. NRG has certainly benefited from a strong market, but I'm particularly pleased by the results from new product developments and utility scale solar. I mentioned before, the component supply issues have been -- have improved a bit compared to prior year, but shortages do impact our operations, and this has been pretty noticeable overall on the utility side. Our teams are aggressively addressing the issue. We are making some progress, but we expect that to take another quarter or so to resolve. Lastly, let's touch on the Test business, where we had a nice quarter of sales growth and EBIT margin expansion. Q1 sales were up by 19% and EBIT was up over 35%. So a really good quarter for the Test business. As you saw in the press release, orders did decline in the Test segment compared to the first quarter of the prior year. Overall, we think the outlook here is still positive. And you should remember that we had outlined lower growth expectations for Test, and we gave our initial guidance back in November. For Q1 in particular, we had some exceptionally high orders in the prior year related to power filters as well as Test and measurement products in the U.S. and China. That activity did not repeat during Q1 of this year. And so our orders came in as expected. So to summarize across the overall business, it really is a great start for ESCO this year. We're on a good path as we look forward to achieve the guidance that we gave you back in November. All 3 businesses delivered nicely and our backlog position really positions us well for the balance of 2023. Everyone can follow along on the chart presentation. We'll start on Page 3, where we have the overall financial highlights. As Bryan mentioned, we had a great quarter, and this chart illustrates that very well. Sales were up over 16%. Adjusted EBIT up over 31% and adjusted EPS was up over 30%. Another strong growth quarter for ESCO. Orders growth in the quarter was 2%. We will get into those details in a moment, but we did see good growth in 2 of our 3 business segments on the orders line. Overall, the order trends have remained robust, and our December '22 backlog of $718 million is a record and demonstrates the strength of the overall business. Next on Chart 4, we'll get into the segment results, starting with Aerospace &Defense. Solid performance continues here with sales up 18% and adjusted EBIT up 25% and margins expanded by nearly a full point to 15.3%. The ongoing commercial aerospace recovery led to sales growth as we saw increases of 30% from this market. Beyond that, we still saw good growth from other parts of the business with Defense& Aerospace, Navy and Space, all up more than 10%. Orders were also good with growth of 8%, driven by Navy and commercial Aerospace strength. The next business is on Chart 5, Utility Solutions Group, where we also had a very strong start to the year. Sales growth was 12% with high levels of activity from the electric utility customer base and explosive growth from the renewables business. Adjusted EBIT margins were up 0.9 points as we did see favorable leverage on the sales increase. Orders were very strong in the quarter with growth of 21%. The core utility space delivered order growth of 18% and saw strength on a global basis. The renewables business continued to deliver exceptional growth at 35%. Backlogs at $137 million are elevated in part due to supply chain challenges mentioned by Bryan previously. The final segment we'll talk about is Test, on the next chart. Another strong quarter for this group, with sales up 19% and EBIT up 36%. Really nice margin expansion here as we saw solid leverage on the volume increases. Orders did drop by 24% during the quarter. You see on the chart that we had more than $20 million of large bookings last year for power filters and project activity that did not repeat in this year's first quarter. Overall, the book-to-bill in Q1 of fiscal '23 was still at 1.0, and the orders were in line with projections at the beginning of the quarter. So we still feel good about the '23 outlook for the Test business. The next chart, Chart 7, is our first quarter cash flow highlights. Operating cash flow declined by almost $11 million during the first quarter. Working capital was unfavorable in the quarter with inventory and accounts payable, driving an unfavorable impact compared to last year's first quarter. Capital spending was down just over $9 million in the quarter compared to last year, and acquisition spending dropped by nearly $16 million as there were no deals closed in Q1 this year and last year had the NEco acquisition in the A&D Group. On share repurchases, we completed just over $4 million in this quarter compared to $10 million in the prior year quarter. Chart 8 is our guidance. The full year outlook does remain intact. We did take out the lower end of the range. You'll recall that the prior guidance was $3.45 to $3.60 per share on an adjusted basis. We have tightened that up to $3.50 to $3.60 per share in the current outlook. For the second quarter, we expect a range of $0.68 to $0.74 per share on an adjusted basis. The outlook for the second quarter reflects a somewhat lower forecast in the Test business as they manage ongoing disruptions in China due to COVID policies. We view this as a timing issue. And as mentioned above, we see the Test forecast for the full year is still intact. Thanks, Chris. I touched on a lot of my thoughts earlier, but I do have a couple more comments before we move to Q&A. You saw the numbers from Chris. So obviously, a great start to the year for ESCO with strong financial performance. This is really a great company. We're operating in healthy end markets and serving some really great customers. So, I want to take a moment to just thank all of our employees across the company. As I mentioned before, I've had a chance to visit all of our subsidiary locations since taking over, and everybody's really been welcoming I really appreciate that. But more importantly, everybody has been really busy, and they're working really hard. We're growing, and we're managing a number of challenges that could put a lot of strain on people, and I'm really grateful for their dedication and for their efforts. So I wanted to start on the revenue outlook. Just comparing the guidance that you gave last quarter and then the quarter you just reported. If I just go through the segments, for A&D, I think it was 10% to 13% year-on-year, USG 5% to 7%, Test 3% to 5%. Those were kind of the ranges you gave us last quarter. And each of the 3 segments you blew away above the high end of the range in the first fiscal quarter. So is there some cause for a big deceleration in growth as you go through this year? Or are those ranges potentially biased higher after what you just reported in the first quarter. Yes, Tommy, I would say -- this is Chris. I would say that we're probably biased towards the higher end of the ranges. I wouldn't say we would redo the ranges I would say you're absolutely right. We kind of expected the growth to be a little bit more front-end centered as we came into the year with our backlog position. Certainly, Q1 was a little better than we planned. But it's consistent with our overall plan that we're still going to get growth for the balance of the year, but the growth will moderate from those first quarter levels. And is that moderation more just timing of backlog or comps? Or is there something underlying that you anticipate to decelerate as you go through the year? Yes. I would say really more just comps. If you look at last year, again, our growth was a little lower in the first half, and then we had really strong double-digit growth on an organic and reported basis last year in the third and fourth quarter. So you just come into tougher comps. We still have, as you know, high levels of backlog and a good outlook. But it's hard to get those big double-digit growth when you got comps like that coming in this year. Yes. Understood. I wanted to pivot to commercial aero, where you reported a I think it led the segment. And I'm just curious what inning it feels like we're in, in this recovery, strong several good quarters together in a row here, you're going to start lapping over those. Does it still feel like early innings? Or any context you could provide would be helpful. Yes. I would say honestly, Tommy, it's a little hard to say what we would say is that we feel like the recovery still has legs. As far as what inning we're in, if you look out a couple of years at kind of industry projections, they still have pretty robust double-digit growth expectations just kind of in the build rates. If you look at kind of single-aisle dual aisle type forecast. The industry is still struggling to kind of ramp up throughout '22 and now in '23, the build rates aren't quite where the OEMs want them. And so all that tells us that we should still see some pretty good runway in front of us. And again, it's hard for me to say what inning. I don't know if we're in the middle of the game yet. I'd say we're maybe not to the middle of the game yet, but we've got -- we do feel pretty good that the outlook is still pretty robust there. Yes. I think the innings thing is throwing us off. I think we feel pretty good about the overall growth, Tommy. Each of the major OEMs are ramping up I think there's some question as to how quickly and how effectively they're going to be able to ramp up because the commercial aerospace, there's still a fair amount of supply chain disruption across the board. And so they're struggling to get back to where they want to be, but there's certainly underlying strength in the overall segment. [Operator Instructions] I'm showing no further questions at this time. I'd like to turn the call back over to management for any closing remarks. I start thinking I'd be in the back of the queue. So I either jump in front of someone or we can just have a conversation with the 4 of us today, but... Okay. While I'll just ask the one follow-up, I was going to wait until the end of the call for. But just on cash flow, and Chris, you called out some of the headwinds in the first quarter. And I appreciate you don't provide specific guidance on this issue. But is there any even qualitative or even better quantitative way you could frame the progression there? Or what kind of conversion might be reasonable to expect for the year? Just anything to help us model would be helpful. Yes. You're right. I mean, we don't really give firm guidance there. What I would say is that we are typically seasonally low. Q1 is always the low point for us. This quarter, no doubt that will be the case for this year as well. We look at the free cash flow conversion for the full year. I think we're trying to drive that into the 80%, 90% range, Tommy, to get quantitative on you. That's maybe a little below where we've been through the last couple of years, but we've had cash can kind of come in chunks a little bit. So -- and we are investing a little bit in capital right now as well. So that counts against that ratio, but that's -- hopefully, that kind of tells you where we're driving towards. I was curious what gives you the confidence that Test will come back going forward? I know there's been some disruption in China. Are you getting indications to your customers [indiscernible] come back and make it into the year? I know sometimes there's a timing issue there. Just give us a little more color on that. Yes, we still feel pretty good about where the Test business is. We are going to have -- we have forecast that the second quarter is going to be adversely affected by the COVID stuff that's going on in China right now. We do have several parts of the business are continuing to do quite well in terms of the underlying market demand. We have a huge backlog there that we're working through. And so that gives us a high level of confidence about our ability to deliver the financials for the year. Okay. Great. Could you give us a little more color on CMT, just what kind of growth rates has had that the margins that are underlying it and kind of the synergies that you're expecting out of that business as you fold them into the sub business? Yes. So CMT is a small business. We're not going to expect that, that's going to have a meaningful impact in FY '23. But it's a business that has exposure to some really interesting technologies that we think are really emerging for the Navy. And so we do expect that over the 2- to 5-year time frame, that we're going to see substantial growth in that overall business. Margins today are modest, but we are going to be integrating it into our globe production facility. So we'll be able to take some costs out and really improve margins going forward. Well, so we have a pipeline. I don't think I have anything that's imminent for you, but we are constantly working on those things, and we're developing additional opportunities as we speak. Okay. I was wondering if you could talk a little bit more about the constraints that you're facing, both from a supply and labor perspective. Number one, which one is actually the bigger issue for you right now? Is it still supply, or do you see that improving and maybe we come to issue going forward? And kind of if there's anything you can do at this moment to address that? Yes. I think the bigger issue right now for us is the labor shortage. And that affects us at a couple of different levels. Not only does it affect us directly, but also affects all of our suppliers. So things like outside processing, pieces like that, where they're struggling to get ramped back up to the full speed. We do have a couple of places with some discrete electronic components that are starting to cause some growth issues. So we're able to kind of maintain our original plans, but we're having a hard time scaling up to some demand that were -- some increased demand we're seeing in the marketplace in a couple of places. But we think that's going to resolve itself in 2 or 3 months. But listen, it's still challenging and every day is a new adventure when it comes to supply chain. Okay. Got it. Bryan, one last one for you. Just there has been [indiscernible] for about a month now. And just wondering what high level thoughts you have about the direction of the company and kind of what you may be thinking about changing I know we've spoken before about that, but if those costs evolve, I'd love to hear kind of what opportunities you should... Well, I won't be announcing any major strategic adjustments today. But I -- first of all, listen, I think we're in a great place. As I've said in my comments, this is a really nice business with great exposure to some growing end markets. The biggest thing, I think that we will be changing is trying to improve the amount of collaboration and interaction between the subsidiaries. So that's something that's already begun. We will be doing a kind of a strategic overall review over the next 3 months. That's our kind of our normal strategic planning process occurs in April. And so we're making a few changes to some of the criteria that we're asking our subsidiaries to look at to kind of open up the aperture just a little bit in terms of things that we would consider both in terms of organic and inorganic activity. And so I don't have anything specific to announce, and I probably wouldn't if I did. But we're definitely going to make a few changes that we think are going to put us in a better position to kind of grow the business and expand our margins. Got it. If I could sneak one more in there, Chris. I don't know if you answered this before, I was trying to get in the queue. But any thoughts on [indiscernible] cash flow and kind of when you might see that moving positive for you. Yes. Yes. We did talk about that a little bit, Jon. I think obviously, Q1 is kind of typically our seasonal low point. We saw that again this year. We're driving kind of that full year free cash flow conversion, hopefully, in the 80%, 90% range. That's kind of what we've targeted for the full year. Predicated a little bit on capital continuing to increase a little bit this year. We've got some programs. We're trying to invest in for capacity in our facilities and stuff around corporation. So that's driving the capital a little higher this year, but that's kind of the framework we're driving towards this year. [Operator Instructions] I'm showing no further questions at this time. I'd like to turn the call back over to management for any closing remarks. Well, listen, everybody, thanks a lot for participating in the call today. We're pretty excited about the direction we're heading in. We've had a good quarter, and we think we're going to have a good year. So we'll talk to you next time. Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.

EarningCall_298

Good day and thank you for standing by. Welcome to the Brookfield Asset Management 2022 Q4 Conference Call and Webcast. [Operator Instructions] Please be advised that today’s conference is being recorded. It is now my pleasure to introduce Managing Partner, Branding and Communications, Suzanne Fleming. Thank you, operator and good morning everyone. Welcome to Brookfield Asset Management’s first earnings call. On the call today are Bruce Flatt, our Chief Executive Officer; Connor Teskey, President of Brookfield Asset Management; and Bahir Manios, our Chief Financial Officer. Bruce will start the call today with opening remarks, followed by Connor who will talk about some of the themes we are focused on, and finally Bahir will discuss financial and operating results for the business. After our formal comments, we will turn the call over to the operator and take analyst questions. In order to accommodate all those who want to ask questions, we ask that you refrain from asking more than two questions at one time. If you have additional questions, please rejoin the queue and we will be happy to take any additional questions at the end, if time permits. I’d like to remind you that in today’s comments including in responding to questions and in discussing new initiatives in our financial and operating performance, we may make forward-looking statements, including forward-looking statements within the meaning of applicable Canadian and U.S. securities laws. These statements reflect predictions of future events and trends and do not relate to historic events. They are subject to known and unknown risks and future events and results may differ materially from such statements. For further information on these risks and their potential impacts on our company, please see our filings with the securities regulators in Canada and the U.S. and the information available on our website. Thank you, Suzanne. Welcome to everyone on the call and welcome to the new Brookfield Asset Management. This is our first earnings call since we completed the distribution and listing of 25% of the asset management business in December, which is now trading under the symbol, BAM. 2022 was a record year for our business. We raised $93 billion of capital. Our fee-related earnings increased by 25%. And our assets under management currently stand at nearly $800 billion. Bahir Manios will go through our operating and fundraising performance in more detail in his remarks. The global macro environment in the past year was characterized by several key dynamics, driving market uncertainty and volatility, namely elevated levels of inflation and corresponding interest rate increases. Although inflation appears to have peaked in most countries, it is possible that certain structural dynamics prove harder to abate, such as the effects of deglobalization, energy security and a tight supply of skilled labor. This may result in continued near-term volatility and downward pressure on corporate earnings, which have cyclical exposure. However, at the same time, the recent reopening of markets in Asia has increased both supply and demand for goods and services on a global scale, also providing a boost to the world economy. This uncertainty also resulted in volatility within the public markets, which in many ways underscored the value of a highly diversified portfolio with exposure to alternative investments. Our business proved its resiliency over the past year. Connor Teskey will speak more about what our strategies are focused on today. But at a high level, we have aligned our business around the dominant global secular trends of digitization, deglobalization and decarbonization that we believe will require trillions of dollars in investment over the next decades. These trends will be extremely beneficial for our market leading infrastructure renewables and transition strategies. As a reminder, we own one of the largest portfolios of inflation protected assets in the world. Our underlying businesses are essential in nature and therefore continue to generate stable and growing cash flows throughout cycles. These assets are highly cash generative with high margins and are largely inflation protected, hence are very attractive to investors through market cycles. These factors combined with our focus on investing in high-quality assets and proactive asset management, have continued to strong performance in our underlying businesses despite broader market uncertainty. In addition, we expect the current economic climate will highlight the preeminence of our credit platform. Having one of the most sophisticated credit managers as part of our franchise diversifies our business makes us better investors and ensures that we can raise and successfully deploy capital at all points in an economic cycle. Lastly, I wanted to underscore that while the stock is new in the form of a standalone public company, our asset management business has been 25 years in the making. And this business has been vesting our own capital for over a century. This heritage and long track record provides the foundation for our next phase of growth. Our scale track record over a long period of time is extremely valuable. It means that we are a beneficiary of the capital flows and are increasingly gravitating to the largest multi-asset class managers in a period of our industry consolidation. Our business is positioned around the leading secular global drivers of capital across renewable power, transition infrastructure, real estate and credit. We believe every day – we speak every day to the world’s largest institutions and the people that oversee the allocation of these pools of capital. These are the strategies they are highly focused on in this current environment. We have $175 billion of capital across the broader Brookfield organization. This is our own discretionary permanent capital that can be invested along with the funds of Brookfield Asset Management. This is one of the benefits of the broader Brookfield structure and is unrivaled in the industry. Our business is highly diversified. This enables the business to continue growing and keep deploying capital through economic cycles. Each one of the business groups is highly specialized and setup to find opportunities in markets like we are seeing today. And finally, we take an immense amount of pride in the relationships we have built with our global group of more than 2000 clients. Delivering superior investment performance for our clients is extremely important. Equally as important though is consistently providing them with the highest level of service and constantly innovating to meet their needs. Thank you for your continued support. And I will pass it over to Connor to talk about our themes for investing and a little bit about what we are currently focused on. Thank you, Bruce and good morning everyone. As Bruce noted, the broader markets remain more volatile. However, dislocation in financial markets has historically created some of the most attractive risk adjusted investment opportunities for those investors who have dry powder to put to work. With approximately $90 billion of undrawn capital across our funds, it is shaping up to be a very interesting and active year from an investment perspective across the business. On today’s call, we want to focus on some of the themes we are seeing within both the renewables and transition platform and also the private credit sector. These are segments that will benefit from immense secular tailwinds and our market leading franchises are well-positioned to take advantage of the large and growing opportunity that is in front of us. We will start off by discussing our transition strategy centered around the theme of decarbonization. In 2021, we closed a $15 billion fund called the Brookfield Global Transition Fund or BGTF which today is the largest fund globally that is focused on decarbonization and the transition to net zero. This fund took our transition franchise from 0 to $15 billion in just 18 months. And this is a space which represents a great opportunity to create long-term value for BAM. Thanks to significant macro tailwinds for the strategy and strong initial deployment that we have seen within the fund. We expect this business to scale to over $200 billion within the next 10 years. One of the reasons our investors have chosen to invest with us is because they recognize that in order to be a successful investor in decarbonization, it is essential to not only have access to capital, but to have deep operating expertise and market knowledge, particularly in power markets and renewables, both of which Brookfield has a proven track record in. Through Brookfield Renewable, we have one of the largest – we are one of the largest investors in renewable power. We have almost $75 billion of assets under management and 135,000 megawatts of capacity in either operations or development stages around the world. That places Brookfield Renewable among the largest renewables companies globally, but the only one that is diversified across all major regions and all major clean energy technologies. We cannot underscore enough that having a capability in renewables is a critical prerequisite to success in transition investing. BGTF will make investments into emission reduction and emission avoidance projects worldwide. Transition investing provides us an opportunity to make a positive impact without taking any discounts on financial returns. We are focused on investing in high-quality businesses and proven technologies, where we have strong cash flow visibility and downside protection and where we are able to exercise our significant control or influence to generate value under our ownership. In terms of focus, our investment strategy is unique in that we are willing to go where the emissions are. We will look to invest in and alongside some of the world’s hardest to abate, but critical sectors such as power, industrials, transport and energy. We want to provide a couple of examples to highlight the opportunity. In the power space, we are looking for opportunities where we can buy businesses that may have existing thermal generation with the goal to help them decarbonize. Our strategy will be to rationalize and convert some of that existing thermal capacity, while simultaneously leveraging our access to capital and development expertise to build out new renewables to provide clean power generation going forward. In the industrial sector, we are seeing opportunities to partner with the largest corporates from around the world to provide capital at scale and expertise to transition their businesses to proven low carbon products and solutions that they will require to support their own net zero goals. Due to the large investment opportunity, which we estimate to be $150 trillion between now and 2050, we believe that BGTF will be just the first in a series of funds within the transition space. Given our pace of deployment, we expect that we will be back in the market in the near-term with our next fund. Further, we don’t expect our transition activities to stop at BGTF. We will look to continue to expand our product offerings as you have seen us do with other Brookfield verticals potentially through the launch of perpetual entities, credit funds and products specifically dedicated to our private wealth channel. We are also seeing increased opportunities to leverage our industry leading decarbonization expertise to make more educated investments into a wider set of opportunities across the entire Brookfield ecosystem such as in infrastructure, private equity and real estate. Switching gears to private credit. Private credit is a sector that has been growing in importance since the global financial crisis, but more recently is playing a critical role for borrowers. Traditional sources of capital from the leveraged finance and bank markets are less accessible compared to a year ago. The outflows of capital in the leveraged finance market reflect concerns related to higher interest rates and the prospects of a recession in certain markets. Even though there is less debt available, the need for capital remains highly resilient. Many industries like renewables and telecoms are continuing to grow quickly. Debt maturity walls cannot be ignored. And mergers and acquisitions continue, even if at a slightly slower pace. Therein lies the opportunity for us to play an even more valuable role as a one-stop shop with not only different types of equity capital, but also different forms of private credit to address the financing objectives of borrowers. Brookfield’s private credit businesses, including its real estate and infrastructure mezzanine debt platforms, its special investment platform within our private equity group and Oaktree have been filling a void created by the current market disruption while also achieving favorable market terms and structures. Brookfield’s strong track record of investing in real estate, infrastructure and private equity provides a deep understanding and our global reach and deep network of relationships translates this into attractive financing opportunities. Especially in this environment, Brookfield’s flexible capital and ability to underwrite large investments, while offering speed and certainty of funding is a meaningful competitive advantage and highlights our importance as a key partner to borrowers. Private capital can deliver attractive risk-adjusted returns. Generally, investors benefit from lower default and higher recovery rates due to the thorough due diligence process and greater lender protections that derisk investments. As such, more investors are investing in private credit strategies. And we have seen this through the success we have had in raising capital for private credit funds across our verticals, including our Real Estate Finance Fund, our Infrastructure Debt Fund, and our Special Investment Fund that can provide the full envelope of capital solutions for corporates across all sectors. That concludes my remarks for today. We will now pass it on to Bahir to discuss our operating and financial results. Great. Thank you, Connor and good morning everyone. As this is our first quarter reporting to you on our financial results as a standalone company, I wanted to just take a minute to explain the basis of our presentation. Brookfield Asset Management, which we often refer to as our asset management business is owned 25% by the public via Brookfield Asset Management Limited, which trades on the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol BAM, or BAM with the remaining 75% being owned by Brookfield Corporation. My remarks today will be focused on the results for Brookfield Asset Management at 100% – on a100% basis, which we believe is the most relevant way to describe our financial and operating performance going forward. I wanted to cover off three things on today’s call. First, I will touch on our financial results for the fourth quarter and for the 12 months ended December 31, 2022. Second, I will provide an operations update focused on our fundraising efforts and end off by providing an outlook for the business and an overview of the key investment highlights for Brookfield Asset Management. So starting off on results, I am pleased to report this morning that our robust fourth quarter capped off an exceptional year for our business. We delivered strong financial results and exceeded a number of our fundraising targets that we set out for ourselves at the start of the year. This was all during a challenging economic backdrop and really showcases the resilience and fundamental strength of our business. Fee-related earnings or FRE increased 26% before performance fees compared to the prior year, finishing the year with $2.1 billion or $1.29 on a per share basis. This was driven by an increase of 20% in our fee revenues over the year, which benefited from capital raised and deployed within our flagship strategies, growth in our perpetual strategies and capital deployed across our business. We also experienced a 200 basis point increase in our margins compared to the prior year as our teams showed discipline managing their cost structures and also we saw scale coming into play. Our margins for the year were 58%, which we expect to maintain in 2023 and onwards. Distributable earnings increased by 21% in 2022 before performance fees to all almost $2.1 billion or $1.28 per share, driven by the strong growth in FRE, which was partially offset by higher taxes for the year. In the fourth quarter, FRE was $576 million or $0.35 per share and our distributable earnings were $569 million or $0.35 per share. Excluding performance fees recorded in the prior year, that are typically lumpy in nature. Our results were up 26% at the FRE level and 23% on a DE basis. Fueling this growth was an increase of 19% in base management fees, combined with some margin expansion, as discussed previously. On the operations front, we had a good quarter on the fundraising side. We raised a total of $14 billion of capital in the period capping off a record year as Bruce touched on earlier. We closed the year with $418 billion of fee-bearing capital, which increased by 15% compared to the prior year. In total, we raised $93 billion of capital this year, which is 30% higher than last year, resulting in a record year for our business. We were very pleased to see that the capital raise this year was spread out very well across many of our strategies showcasing the great diversification that we have. Our flagship funds raised a total of $37 billion of capital benefiting from a record first close of $20 billion for our fifth infrastructure fund and a strong first close of $8.5 billion for our sixth private equity fund. We raised $11 billion from a number of our closed end credit funds namely our infrastructure debt fund and Oaktree’s life sciences lending and special situations funds. We also saw an increase in the assets that we managed for our insurance solutions business increased by $23 billion for the year. And finally, a total of $12 billion was raised across our various perpetual strategies, most significant contributor being our Infrastructure Super-Core strategy. Looking ahead, we believe that the combination of developing global economic headwinds and ongoing public market volatility is creating a ripe environment for opportunistic investing and bodes well for several fund launches in 2023. Notably, we plan to commence fundraising for our fifth flagship real estate fund, our second special investments fund and our second transition fund, all in the first half of 2023. We also continued to build out our private wealth channel. Having recently launched our infrastructure income fund, we have been encouraged by the early indications we have received thus far. In addition and while not material to our overall portfolio, our non-traded REIT saw net positive inflows in the fourth quarter. Turning to the outlook, with respect to fee-related earnings, we are forecasting for yet another significant step up in our results for the few years ahead. Our growth for the next 2 years is quite visible and is expected to be driven by: first, significant contribution from the latest vintages of our flagship funds that we have either started fundraising for or ones that we expect to launch in the first half of 2023; second, growth that we should continue to see from the continued expansion of our various perpetual strategies, most notably our Super-Core Infrastructure strategy that has been very successful to-date and where demand from investors continues to be strong; third, a significant step up in our credit business, where we expect to have a record year of fundraising in addition to growth fueled by our growing insurance solutions business. All-in-all, despite the volatility in the markets, we entered 2023 from a position of strength and have a great deal of confidence for the future of this business. And it’s with this strong business backdrop we designed the new BAM Security to provide investors with direct access to our leading global asset management business. As a reminder, the new Brookfield Asset Management has the following key attributes. First, a cash flow stream that’s extremely resilient. Most of our $418 billion of fee-bearing capital is invested in long-term private funds that have perpetual or over 10-year life. Second, distributable earnings that are almost entirely made up of our stable and annuity-like fee-related earnings, making our cash flow generation profile simple to understand, stable and easy to predict. An asset-light balance sheet that is exceptionally strong with no debt and cash and financial assets of over $3 billion. And finally, an expectation to return the vast majority of the cash that we generate in this business to our shareholders via dividends, and when it makes sense, stock buybacks. We believe the combination of these characteristics generates an excellent long-term investment for shareholders. This security should provide us with added additional optionality for acquisitions should the right opportunities present themselves. And lastly, before I conclude my remarks for the day, we are pleased to report that on the back of these excellent financial results, solid balance sheet and the strong outlook for the business, the board of Brookfield Asset Management Limited, declared a quarterly dividend of $0.32 per share payable on March 31, 2023 to shareholders of record as of the close of business on February 28, 2023. That wraps up our prepared remarks for this morning. Thank you for joining the call. We appreciate the interest and we will open it up now for questions. Operator? You mentioned in the letter that the alternative space is undergoing a period of consolidation and clearly fundraising has become more difficult for some. So I was wondering if you could give some color on the level of consolidation activity that took place last year, what you are expecting to see in 2023 and comment on BAM’s appetite to potentially add to its platform through M&A? Sure, Cherilyn, it’s Connor. I will take that one. In terms of consolidation within the space, the place where we are seeing this most obviously is we are increasingly seeing large institutional LPs looking to concentrate their capital amongst a smaller number of managers, but those managers who can offer them a greater diversity of products. And we certainly feel that we have been the beneficiary of that in the last 12 to 24 months as we have rounded out our portfolio increasingly, not only with our flagships, but also our complementary products, whether they be our debt products, our perpetual funds, and increasingly funds that cater to the private wealth channel. We do expect this to continue in the coming years. And perhaps this is one of the reasons why we have such a robust and positive outlook for fundraising in 2023 when we know that there are some pockets of weakness for other market participants. Maybe just turning to the second part of your question around appetite for M&A, obviously, with the spin out, we now have a currency that we could use for inorganic growth. And these are opportunities that we are going to continuously monitor and review in the market. But similar to how we have in the past, we intend to be very, very selective when we want to enter into a new space, it is always a build versus buy decision for us and which can we do more creatively. And from there, a potential partner or a potential target for inorganic growth needs to be scalable and needs to add something to our platform that we don’t already have. So, we will continue to monitor the market and we will look for those opportunities, but we do expect to be selective going forward. Okay, that’s helpful. My second question relates to the transition fund where I think the relatively rapid pace of deployment has surprised investors to some degree. So thank you for the added detail on that. Maybe you could go a bit further and just give us some color on the composition of that portfolio across the various buckets that you outlined in your prepared remarks and where those various buckets sit relative to each other on the risk return spectrum? Certainly. So, as it pertains to the transition strategy and BGTF1, what we would say is that the product launch was very successful, but perhaps what was even more successful was just the number of very attractive opportunities that came our way. As we were the market leader with the largest pool of capital focused on these types of de-carbonization opportunities. And when we look at that portfolio today, it was invested amongst great themes that were thrilled to have deployed capital into, there’s a large component of that portfolio that is focused on U.S. renewable power developers that are benefiting from the IRA today, there’s the acquisition of Westinghouse, which is benefiting from the significant tailwinds for nuclear. And we’ve also put together a very, very attractive portfolio of new de-carbonization solutions, whether it be carbon capture, battery storage, or recycling. It’s that confidence that – sorry, it’s that execution and the number of opportunities that we’ve seen that gives us confidence that we will be back in the market for the next vintage of that fund sooner rather than later. And then to your question around, what other complementary products will we look to add? We’re going to start by looking to get the next version of the flagship out into the market, but from there, we would expect that over time, we will be able to offer the full suite of complementary products similar to what we’ve done in our infrastructure, and real estate businesses. We think this theme is well positioned for both credit and a perpetual strategy, but those will come in future years. Hi, good morning. Thanks for taking the question and congrats on that spin off. Maybe we could start with real estate. There are two sort of broader questions I was hoping to drill into one on the opportunistic side and one on the core side. So it’s – as you pointed out, you have deployed a lot of capital out of Fund IV pretty rapidly and highlighted you will be back in the market with Fund V later this year. Real estate market is still quite uncertain, lots of skeptics out there obviously on the direction of travel there. So what’s the pitch to your LPs today on why to commit to opportunistic real estate in current environment? And as we look back at the track record, there hasn’t been a ton of capital return from private to do so. To what extent could that be a hurdle, as you are kind of thinking about sizing up the next one? And then I’ll – my follow-up will be on the core side. Bruce, if there’s anything you’d like to add, at that point all at hand to you. In terms of the pitch on opportunistic real estate, we would say it’s pretty simple. Our real estate business, which is one of our longest running franchises has traditionally found the best opportunities and done its best investments in uncertain environments like the ones that we are entering into. So the fact that maybe the direction of travel is a little bit uncertain to use your words is actually the opportunity that is created for this vehicle, and we do think will provide a number of very, very attractive risk adjusted return opportunities. This said in another way we think the market dynamics actually play to our strengths. When it comes to monetization, I think there’s – you’re highlighting a dynamic in real estate, but it’s an important dynamic, I would say across all of our strategies, which is because we have continued to scale our flagship funds and expect to continue to do so going forward. The assets that we are selling out of predecessor funds in the total quantum of investments that we need to sell out of those funds, is actually very modest compared to the new funds that we are raising in the capital we are putting to work. That is why we have such conviction about the future growth in our fee related earnings, but the other point we would highlight is while there is some market uncertainty that is making some asset classes a little bit more difficult to monetize across our real estate or infrastructure or renewable funds, we truly own best in class assets and best in class businesses. And those are the assets that we are seeing more robustly hold their value in this market, and are more easy to monetize. So we do expect next year to be an active year, both on the investment side and the monetization side. Bruce, anything you would add? Bruce’s good. Okay, Alex, your follow-up? Great. Thanks. And the follow-up is on core, both real estate but also broadly, you guys have been very successful raising in super core infra. Historically, core real estate has been a nice contributor as well. So as you think about the opportunity set, and again, kind of the pitch on core to clients in light of higher interest rates. How does that proposition sort of change, right, because in many ways, core has been viewed as a fixed income replacement tool, with higher interest rates, obviously, is more yield sort of available in liquid credit markets. So to what extent is that present a hurdle to core as a franchise and both real estate and infra? And as you think about monetizing some of those opportunities, we’ve seen a number of your peers have a fee related performance, kind of revenue component to core product, is that something that we should be thinking about at some point of time for Brookfield as well, either in real estate or infra? Thanks. Sure. So perhaps I’ll start with the first part of that question just around the core strategies. The current environment and in particular, I would say, not necessarily the rise of interest rates, because that can be readily priced in into new acquisitions to ensure that we’re still delivering very attractive risk adjusted returns, but simply the volatility around interest rates, that may cause some short-term ebbs and flows in interest in core products. But I would say those short-term ebbs and flows are being dramatically overwhelmed by take, for example, in infrastructure, the huge amount of capital that is looking to enhance their exposure to the highly de-risk, highly regulated, highly contracted, high quality infrastructure assets base. So while there have been some uncertainty around interest rates, we expect that product, particularly on the infrastructure side to continue to grow very, very rapidly, we’re continuing to see strong inflows into that fund. And on the real estate side, it’s more or less the same story. Our core products are spread around the world across different regions, we have some that target institutions, we have some that target the private wealth channel, but even across those our real estate product that targeted the private wealth channel did have net inflows in Q4. So we are continuing to see demand and just being selective and reacting to what different clients are looking for. And they continue to show consistent demand for this type of product. In terms of the comments about a performance type fee, we continue to be very thoughtful and prudent around how we structure these products recognizing that it often is a different type of investor base, one focused on a much longer return horizon or retail investors. And therefore, we are seeing what is happening in the market and taking that into account, but I wouldn’t suggest that we intend to adjust any of our performance fee structures in the near-term. Hi, good morning. So on the fundraising side, you and a number of your larger peers have talked about the improving fundraising environment in your Q4 comments. I know it’s hard to generalize just for the broader industry, but and you’ve consistently talked about of not having fundraising issues yourself, but just wondering what you might attribute to the change in tone overall, around an improved fundraising environment? Certainly, without being too redundant, we do really focus on two major things. One is, there is continues to be an increasing allocation towards alternatives. Alternative and real assets with their, cash generative downside protected attributes, but also their ability to provide attractive equity upside, they probably look increasingly more attractive after periods of public market volatility, particularly the ones we’ve seen over the last 3 or 4 years. So there does continue to be significant inflows into the alternative and real asset sectors, but then perhaps more particular to ourselves, we do feel that we are very fortunate to have leading global franchises in the sub segment of real assets that are seeing the greatest capital inflows. And in particular, that’s the three of infrastructure, transition and credit. Those asset classes and those products perform exceptionally well in volatile markets. And I think more robust outlooks around those segments are probably what is buoying the sector more broadly. Okay. That’s helpful. And just my second question, which is in light of the Brookfield Reinsurance acquisition announcement this morning of Argo, and with what higher rates that we have got right now, are you finding more opportunities to kind of scale up that reinsurance business and therefore help grow the FRE at them? Jeff, thanks for the question. And it probably creates an opportunity to highlight something that’s really important here. That acquisition was done by Brookfield Corporation. So, Brookfield Asset Management, this entity really has nothing to do with that transaction or the invested capital related to it. However, we do expect to be the beneficiary over the long-term, because we would expect to get more asset management products and asset management revenues from managing the capital within BAM reinsurance over time. So, we did not do that deal. We did not make that investment. But we do expect to be the beneficiary as that business scales up, as we grow our insurance solutions business and generate asset management fees from that. Hi. Good morning and thank you for taking the questions. First, real estate, it looks like there were inflows of about $11 billion this quarter driving a big step up in fee bearing capital. Based on your comments in the call, it doesn’t seem like it was a ginormous final close for BSREP IV. So, where are the assets being raised, or where were they raised this quarter. And then on real estate, there was also a $4.22 billion increase to fee bearing capital in a bucket called other, what is that? And are the fees commensurate with sort of the average of the asset class? Hi Ken, it’s Bahir. Thanks for your question. Predominantly, most of that relates to Brookfield Corporation capital, that we are now managing. And now given the spin off, happened Brookfield Asset Management, which in the past hadn’t charged fees on those funds, will be charging fees on a go forward basis on those strategies. So, from a fee-bearing capital perspective, it made it into the numbers. The transaction closed in December. The income pickup was very, very minor, so you didn’t see that in the earnings, but that will be a contributor to our results on a go forward basis. Okay. Great. Thank you. And then maybe for Bruce, the more richly valued BAM stock price would seem to afford more opportunities to acquire more investment capabilities. And BAM did announce the acquisition of DWS’ secondaries business last week. In terms of Brookfield’s capital management priorities, where do you put M&A in for 2023? And how do you see the opportunities in an environment for private markets M&A this year? Thanks. Look, I would say the following. First is that we – this company BAM is in a very, very good spot. It has – we have exceptional businesses, they are growing fast. And we have really good assets. To be able to do M&A, it means that you are selling something of what we own today and buying something of something else, because we have a small amount of cash. And of course, we can do transactions like we just did, which take modest amounts of cash. But if it’s anything larger, means you are selling part of your business to buy something else. So, it needs to hit a very high test. And Connor stated a few parts earlier, which is they need to be additive to the overall franchise, they have to be best-in-class, they have to be scalable and they have to be something that we don’t do today or can build ourselves. And if one of those comes along, we would be thrilled to be able to add it to the franchise. But we don’t have any expectations of something happening in 2023. I guess just following up on the acquisition question there. So, you did acquire the DWS’ secondaries business last week? What are your aspirations for the growth of that secondaries – of your secondaries business? And how would you characterize the strategy and your thoughts on really gaining more scale in that business? Certainly, so we are excited about the secondary space more broadly, and have been adding secondaries capabilities across previously, real estate and infrastructure. And now we have added it to private equity. And the fundamentals for the space are very attractive, because all you need to do is look at the historic inflows into alternatives, 5 years, 7 years, 10 years back, and that is proving to be what is the secondaries market today on a laggard basis. And given the strong growth we have seen over the last decade, we see a large and growing market for secondaries that we now feel that we are well positioned to take advantage of. In terms of what we intend to do in leveraging those capabilities. This is where I would say Brookfield’s access to capital, and its ability to think of unique and flexible transaction structures to benefit its counterparties can be very additive. And given our deep knowledge of a lot of the segments where the secondaries opportunities sit, we often actually have knowledge of the underlying assets or underlying capability, or – sorry, underlying assets or underlying companies that are subject to these traits. So, we do think this is a space that we are well positioned to take advantage of, and we can be a leader in. But in terms of the types of different products and solutions, we would expect to be able to offer all of them, but primarily focused on GP solutions to start. Okay. Great. And then just changing gears to credit. So, we saw that there was $6 billion of outflows from the credit and solutions business. Can you just touch on those key drivers? And then when you – as you talked about the private credit opportunity, clearly BAM strengths and Globality certainly put you in a good position to continue to benefit from secular growth there. But as you look across the platform, is there any areas where you see opportunities, whitespace opportunities to continue to invest? And is there any potential for inorganic growth to kind of help you continue to take advantage of that secular growth? Sure. So, a couple of things to unpack there. When it comes to the outflows on the credit and insurance solutions side those were largely in our public securities, and some of our more liquid credit strategies, and is not unusual to see outflows when there is market downdraft like we saw in Q4. What I would say is we are already beginning to see a bounce back in that activity. And given Oaktree’s preeminent position in that market, they usually are the beneficiary of seeing those inflows come back faster than anyone else. As Bahir mentioned, over 80% of our capital is in perpetual or long-term committed funds. So, this isn’t a particularly material part of our business. When it comes to the private credit opportunity, obviously, for our businesses such as Oaktree or our BSI product within our private equity platform, they can really look to replace some of the void that is existing in leverage loan markets. That perhaps is obvious. What might not be obvious, which is a very big market for us on the credit side is, we do essentially see almost every major transaction across the spaces of real estate infrastructure, renewables and transition. And in some of those cases, we aren’t the winning bidder. But even if we can’t be the winning bidder on the equity side, we know the asset well, we know the process, we were engaged in it, and we can be a credit provider to the eventual buyer, given our knowledge of the underlying asset. And I do think that’s where the benefits of the broader Brookfield ecosystem will play out, as we will be able to be large investors in credit amongst the real asset space, where we are traditionally known as an equity investor. And Mike, it’s Bahir and maybe if I can just add to Connor’s comments. As our insurance business continues to scale further, that’s going to be a big contributor to the growth of the liquid credit strategies going forward, because approximately 25%, or a third of our total assets that we manage, for the insurance business, get deployed in those liquid strategy. That’s quite a meaningful number today, and that will only continue to get bigger in the future as we continue to scale our insurance business. Hope that helps. Hi. Good morning. In the market, there has been a lot of focus on the high net worth retail channel these days. I understand your exposure is quite low today in relation to your peers. And it was interesting to hear the net positive flows into your BREIT, which is contrary to what we are seeing most of your peers. Can you just remind us how much of your $418 billion of fee-bearing capital would entail kind of retail product today? And where that figure is projected to grow in your 5-year forecast kind of said at your Investor Day? Sure. So, perhaps, well, Bahir gets the number on just the breakdown of the fee-bearing capital that’s in REIT, the high net worth channel. A couple of comments, Mario, just given you asked the question. It’s important to note that not only did we see inflows into our private wealth channel, on real estate, our non-traded REIT in Q4, we also saw it in January as well. And I think the point to highlight there is specifically because of the structure of these products, and because of who the end client was, we wanted to be very, very thoughtful and very careful in not only how we presented the product to the market, but the rate at which we have scaled it. And we are proud of what we have done to this point. We think it gives us a great platform to continue to grow going forward. The other point that we think important to highlight is it’s not just real estate we did launch a BII, which is our Brookfield Infrastructure Income Fund, which is a very similar product to a non-traded REIT, but instead, focused on the infrastructure asset class. And given our leadership in the sector, we do think that this could be a very large strategy for us over time, and one where we can show considerable leadership. As it pertains to the exact breakdown of the fee-bearing capital, Bahir, I will turn it to you. Thanks Connor. Yes. So, Mario, it’s a bit less than $3 billion, and that’s predominantly in our non-traded REIT. In addition to a strategic credit fund that we also sell through that channel that that is sponsored by Oaktree, that channel does also provide assistance selling some of our long-term private funds. But with respect – so they are quite busy doing a whole bunch of things for the franchise. But with respect to the retail, semi-liquid products, it’s in that range of about $2 billion to $3 billion. And as Connor noted in his remarks, we got our first contribution from our infrastructure equity strategy. So, we are excited by that. And we are off to a great start. And I think that is going to be a great strategy going forward. Got it. Okay. And then just perhaps, you have laid out some very impressive 5-year growth targets to capital and fee-related earnings going forward. How much of that, I can’t recall how much of that would be comprised of the expected growth in this channel going forward? Hi, Mario. Yes. So, it’s Bahir again. So, we do expect this channel to be a larger contributor to our fundraising initiatives over the next 5 years than what it is today. But in the context of our overall, I think at our Investor Day, we set out a plan to grow our fee-bearing capital to almost a $1 trillion in the next 5 years. And in the context of that number, the retail products, while getting larger, will be a very small component to that overall plan. It makes sense. Okay. And my second question just relates to the successor BGTF fund. If we go back over time, and when we look at gifts, best rep, BCP. Number two fund, as always been at least twice as large as the number one fund. Now granted, BGTF is much bigger than the inaugural funds across the other platforms that I highlighted. But I am not asking for kind of specific numbers. But given the acquisition environment, the amount of appetite with LPs, is it fair to say that the successor fund could be kind of your largest fund to-date, including the existing infrastructure that’s in fundraising today? Sure, Mario. So, perhaps we will answer that two ways. One, there is, without question, we think the opportunity for the next BGTF fund to be meaningfully larger than the initial fund. There is no question and that would certainly be our ambition. And then secondly, we do think transition does have a number of the attributes similar to our infrastructure product that does lend it to being one of the largest strategies that we can offer to our clients. Just simply the scope of investment that is needed across both the infrastructure space as well as the transition space, they do really lend themselves to very large investments and therefore very large funds. So, we do see a lot of similarities in the potential of those two platforms. Thank you. Two quickies hopefully here. One for Bahir, you mentioned the margin at around I think 58% benefiting from scale. Why would it not continue to grind higher from here? Hi Sohrab. So, look, we are very pleased with our margins. They increased by – as I noted in my remarks by 200 basis points compared to the prior year. I think we have been investing a lot in our growth in prior years. So, we have come a long way and that’s why you are seeing our margins tick up. And we are still guiding to that our targets that we have laid out before of 60% margins on the Brookfield’s managed funds, lower-30s in Oaktree. And we would expect over time those margins to continue to go up, but we are constantly investing in the business and adding resources. And I would say just to be conservative, we would guide you to the numbers that – or the range that we have continued to give over the past little while. And we think at that range of 58% or so, it’s a pretty good assumption going forward. Okay. That’s very helpful. And then just Connor, lots of talk about the plans for fundraising in the coming year, which is excellent. How important though, is it to monetize? In other words, what I am trying to understand is, is there net new dollars that funders are allocating, or are they essentially waiting for monetization proceeds to then reality to the alternative space? Thank you. Certainly, in – perhaps the context to answer that question is from the Brookfield’s context, which is the nature of the continued scaling of the funds that we are offering to our clients is, we have been attracting net new dollars for a decade now, because each of our flagship funds keeps continuing to scale across all our strategies on a meaningful basis. So, the dollars that we are monetizing are greatly outsized by the dollars that we are attracting. Monetizations are very important to our business. We remain focused on them. We remain focused on delivering that full cycle value to our clients. But I would say our ambitions and our expectations around fundraising both next year and beyond, are not highly predicated on specific monetizations in order to unlock that upside. Okay. Thanks for the question. Is there any early feedback that you might be able to share from your conversations with LPs around the launch of fundraising for the next iteration of the opportunistic credit fund? I realize it’s early days, but just if you could update us on your read, regarding the general appetite and demand for that capability, that would be great. Certainly, so this is the type of market where that fund goes to work and delivers its best returns. Historically, Oaktree has outperformed when there is call it scarcity in credit markets and when there is volatility in things like interest rates. So, we do expect the demand to be significant. Obviously, that product has scaled significantly in recent years since we completed the partnership with Oaktree. And we would say the market backdrop is very constructive for that fundraise in 2023. Thank you. I will now hand the call back over to Managing Partner, Branding and Communications, Suzanne Fleming for any closing remarks.

EarningCall_299

Good day, and thank you for standing by. Welcome to the Aegon Fourth Quarter 2022 Results Conference Call. At this time all participants’ are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jan Willem Weidema, Head of Investor Relations. Please go ahead. Thank you, operator, and good morning, everyone. Thank you for joining this conference call on Aegon's Fourth Quarter 2022 Results. Before we start, we would like to ask you to review our disclaimer on forward-looking statements, which you can find at the back of the presentation. With me today are Aegon's CEO, Lard Friese; and CFO, Matt Rider, who will take you through the results for the fourth quarter and the progress we are making in the transformation of Aegon. After that, we will continue with our Q&A. Thank you, Jan Willem, and good morning, everyone. We appreciate that you're joining us on today's call. I want to start by running you through our achievements on slide number two. The fourth quarter closes out a year in which we accelerated our transformation and the execution of our strategy. During the quarter, we announced a transaction to combine our Dutch businesses with a.s.r., which was a historic milestone for the company. We are very pleased that we have received broad-based support from our shareholders for this transaction at our AGM in January, and we continue to be on track to close the transaction in the second half of this year. Despite challenging market circumstances, we also made significant progress in further strengthening our balance sheet and in improving our operating performance. At the 2020 Capital Markets Day, we launched our operational improvement plan with more than 1,100 initiatives, together with ambitious, but realistic savings and growth targets. The success of this program is evidenced by the fact that the benefit to our operating results has exceeded our target one-year ahead of schedule. This year's commercial results underscore the importance of offering a broad range of products to our customers. For example, as a result of the uncertain macroeconomic environment, we saw outflows in Asset Management and in the U.K. retail channel. In the U.S. Workplace Solutions, we experienced net outflows as a consequence of the departure of one large customer. But at the same time, many of our strategic assets are performing well. Our life insurance sales increased in our growth markets and in the U.S., where individual solutions achieved the highest level of quarterly new life sales in the last five years. Furthermore, the Workplace business in the U.K. recorded the highest level of net deposits in the past four years, demonstrating the improvements we are making to our U.K. franchise. As a result of the progress we have made, both strategically and financially, we will propose a final dividend for 2022 of EUR0.12 per common share at our Annual General Meeting. This brings the full-year dividend to EUR0.23 per common share, compared with a EUR0.17 dividend over 2021. Furthermore, we are announcing a new EUR200 million share buyback program for the first-half of 2023, which underscores our disciplined capital management and commitment to return surplus capital to our shareholders. Slide three highlights the success of our operational improvement plan since its launch at the 2020 Capital Markets Day. We have now fully implemented almost 1,200 initiatives. This is more than we set out to do, and we continue to implement more. The plan was not only aimed at improving the operating performance and propositions to our customers, but also has fundamentally changed the way we work at Aegon. For example, we have embedded a continuous focus on efficiency and operational execution in the organization, with accountability clearly assigned, more granular planning, and real-time tracking. The increased operational rhythm has created a culture of transparency and a focus on developing talent to meet future challenges. On slide number four, we show the financial results of the operational improvement plan. When we launched this program, we targeted an operating result uplift of EUR550 million by the end of 2023. As of year-end 2022, the operational improvement plan has resulted in an operating result uplift of EUR627 million, outperforming our expectations and one-year earlier than expected. Growth initiatives contributed EUR262 million to the operating results. This is well above our target and required approximately EUR60 million less of additional expenses than we originally envisaged. Compared with the base year 2019, we recorded a benefit from the expense savings initiatives of EUR366 million or 92% of the savings targeted for 2023. Now if you combine this with a lower-than-expected spending on growth initiatives, the operational improvement plan has actually led to a net reduction in addressable expenses of EUR280 million, compared with a target of EUR250 million communicated at the Capital Markets Day in 2020. Given the overall success of the program and in light of upcoming changes to the group's structure and reporting, due to this transaction with a.s.r., we have decided to close out the reporting on the operational improvement program. Now it goes without saying that improving efficiency and driving commercial momentum remains key focus areas for us going forward. Moving to slide five, we'll zoom in on the progress of our U.S. strategic assets. As you know, in Individual Solutions, we have the ambition to regain a top five position in selected life products over the coming years. And as you can see, commercial momentum remains strong in this segment. New life sales increased by 20% in 2022, compared with 2021, and have accelerated during the course of the year. This was supported by the World Financial Group, or WFG as an acronym, distribution channel, where the number of licensed life agents grew 20%, compared with 2021 and now stands at a record high of over 62,000 agents in North America. In addition, our market share in this WFG channel has increased from 59% in the fourth quarter of 2021 to 67% this last quarter on the back of improvements made to our customer service experience and continued competitiveness of our products. We recently launched a new indexed universal life product specifically designed for the brokerage channel, which complements our current product that is successfully marketed through the WFG channel. In the Retirement business, Transamerica aims to compete as a top five player in new middle-market sales. Written sales were at $7.9 billion in 2022. This reflects the difficult market circumstances with lower equity markets and higher interest rates negatively impacting planned assets. Net outflows for the middle-market segment were driven by one single large multiple employer plan exit and would have been positive for the year, excluding this discontinuance, driven by strong written sales in previous periods. Turning to slide six for the highlights of the performance of our U.K. and Dutch strategic assets. So let me start with the U.K. On balance sheet, it was a positive year for the platform business. On the one hand, the workplace channel generated the highest level of net deposits on record in 2022. On the other hand, the retail channel recorded outflows on the back of weak investor sentiment in line with what we have seen across the industry. Over the year 2022, net deposits on the platform contributed positively to revenues, but were more than offset by the anticipated gradual runoff of the traditional product portfolio. Despite the unfavorable impact of adverse markets on assets under administration, we were able to keep the efficiency of the platform stable, because of the steps we have taken to reduce expenses. Now moving on to the Netherlands. Here we clearly see signs that the housing market is cooling down, leading to lower mortgage sales. Nevertheless, the mortgages portfolio continues to grow and now amounts to almost EUR63 billion. Our workplace business and bank continued to show consistent growth, thanks to the commitment of our Dutch employees, who remain dedicated to deliver a high level of service to our customers in the run-up to the transaction with a.s.r. So let's jump in on Asset Management and the Growth Markets on slide number seven. The challenging market conditions negatively impacted our Asset Management activities in 2022. Now despite the difficult economic conditions in China, our Chinese Asset Management joint venture, AIFMC, delivered another year of net deposits. Third-party net deposits in strategic partnerships amounted to EUR3.6 billion. These were more than offset by third-party net outflows in Global Platforms of EUR3.8 billion as our customers freed up liquidity in a rising interest rate environment. The operating results from strategic partnership decreased by 29%, primarily driven by lower performance fees for AIFMC from elevated levels in 2021. In our Growth Markets, we continue to invest in profitable growth. New life sales from these markets increased by 15% to EUR248 million in 2022, mostly as a result of business growth in Brazil. Summarizing on slide number eight. We remain focused on executing our strategic agenda and continue to maintain a high pace in transforming Aegon. We are closing out the reporting on the successful operational improvement plan. Expense savings initiatives have contributed EUR366 million to our operating results in 2022. Operating capital generation was solid at EUR1.5 billion in 2022, above the outlook that we provided a year ago, despite difficult market circumstances. Free cash flow amounts to EUR780 million in 2022. In the last two years combined, we achieved EUR1.5 billion of free cash flow. This means that we have delivered one year early on our cumulative free cash flow target of EUR1.4 billion to EUR1.6 billion for the period 2021 to 2023. Our gross financial leverage is in line with the target we set ourselves two years ago, and we intend to further reduce our leverage by up to EUR700 million using part of the cash proceeds from the ASR transaction. Our proposal for the final dividend brings the total dividend over 2022 to EUR0.23. And for the full-year ’23, we target a step up to EUR0.30 per share, well above the level we targeted at the 2020 Capital Markets Day. In addition, we are announcing a new share buyback program of EUR200 million after having just completed last year's EUR300 million buyback program. On top of this, we still intend to return EUR1.5 billion of the cash proceeds to shareholders once the a.s.r. transaction has closed. This is testimony of our commitment to offer attractive shareholder returns. And finally, before I hand over to Matt, I kindly want to invite you to our Capital Markets Day on June 22 in London, where we will provide an update on our strategy and targets. The focus of the event will be on our U.S. activities and our path to creating value through profitable growth and active management of the in-force business. Thank you, Lard, and good morning, everyone. Let me start with an overview of our financial performance over the last year on slide 11. The operating result for the year was stable at EUR1.9 billion. The result was supported by expense savings, benefits from growth initiatives, improved claims experience, and strengthening of the U.S. dollar. This was offset by lower fees due to adverse market movements and outflows in variable annuities and asset management. Operating capital generation before holding funding and operating expenses amounted to EUR1.5 billion for 2022. The increase compared with the previous year reflects similar drivers of the operating result and the benefit from higher interest rates in the Netherlands. Cash capital at the holding increased to EUR1.6 billion at the end of 2022, supported by EUR780 million of free cash flow for the year. Our gross financial leverage amounted to EUR5.6 billion or EUR5.4 billion based on a euro-U.S. dollar exchange rate of $1.20, which is the rate at which we set our deleveraging target in 2020. This means that we remain within our target range. Despite volatile markets, we maintained strong capital ratios with each of our three main units remaining above their respective operating levels. This underscores the effectiveness of the actions we have taken over the past few years to improve our risk profile and to reduce the volatility of our capital position. Transamerica, in particular, has taken several actions to strengthen its capital position and increase the predictability of its U.S. RBC ratio. This includes setting up a voluntary reserve for variable annuities, achieving additional long-term care rate increases, and freeing up capital by reinsuring the legacy Universal Life portfolio of Transamerica Life Bermuda, our Asian high net worth business. Furthermore, the dynamic hedging program, which we expanded in 2021 to include all variable annuity guarantees, continued to perform well in difficult markets during 2022. Let me now turn to Aegon's quarterly performance, starting with the operating result on slide 12. In the fourth quarter, the operating result came in at EUR488 million, up by 4%, compared with the fourth quarter in 2021. The operating result in the U.S. increased by 26% or 14% on a constant currency basis to EUR233 million. This was partly due to improved mortality claims experienced in life. Unfavorable mortality claims experienced in the quarter amounted to EUR13 million, a significant reduction from the EUR83 million of unfavorable experience we saw in the fourth quarter of 2021 as the impact from COVID subsided. Morbidity claims experienced continued favorable relative to our expectations and contributed EUR16 million in the fourth quarter of 2022. In addition, the result of the Americas benefited from recognizing the result from TLB for the second half of 2022, following the reinsurance transaction between TLB and Transamerica that commenced retrospectively on July 1. There's a commensurate offset in the International segment. In the Netherlands, the 13% increase in the operating result was driven by our online bank, Knab, and our Workplace Solutions business supported by higher interest rates and a non-life reserve release. The operating result of the U.K. increased by 3%. Lower addressable expenses driven by expense savings initiatives more than offset a decline in fee revenues as a result of unfavorable market developments and the runoff of the traditional product portfolio. When adjusting for the impact from the reinsurance transaction between TLB and Transamerica, Aegon International increased its operating result driven by improved claims experience and business growth in Brazil. Finally, the operating result of Asset Management decreased by 35%, driven by lower fees in both global platforms and strategic partnerships. This is a result of lower asset balances due to adverse market conditions and outflows in the global platforms. Let's move to slide 13, where we show that the net loss for the quarter totaled EUR2.4 billion. Non-operating items totaled a loss of EUR445 million, mainly driven by realized losses on investments in the Americas. This was primarily from the sale of bonds at the beginning of the fourth quarter to maintain a robust liquidity position consistent with Aegon's strict liquidity framework and adjustments to Transamerica’s interest rate risk profile following the increase in interest rates. Other charges amounted to EUR2 billion. This was mainly driven by an impairment loss of EUR1.8 billion that was triggered by the classification of Aegon in Netherlands as held for sale as a result of the transaction with a.s.r. This represents the majority of the previously announced expected reduction in equity as a result of the transaction. Finally, the income tax position was impacted by a previously announced onetime tax charge related to the anticipated settlement of a tax position in connection with the transaction with a.s.r. It also reflects the fact that impairment loss I just mentioned is not tax deductible. On slide 14, I want to walk you through the capital positions of our main units, all of which ended the quarter above their respective operating levels. The U.S. RBC ratio increased by 24 percentage points over the quarter to 428%. The main positive impacts were from previously announced management actions. Following the internal reinsurance transaction, Transamerica is now able to recognize its equity and TLB as available capital for solvency purposes. This more than offset the impact from setting up the voluntary reserve for variable annuities. Additional one-time items include a negative impact from industry-wide updates to required capital for mortality risk. Market movements had a positive impact, driven by higher equity markets and interest rates during the quarter. The Solvency II ratio of the Dutch Life unit increased to 210%, due to a positive impact from model and assumption changes, which included the favorable impact of a higher factor applied when calculating the loss absorbing capacity of deferred taxes. Market movements had a negative impact, mostly from lower real estate revaluations. The Solvency ratio of Scottish Equitable, our main legal entity in the U.K., decreased by 10 percentage points to 169%, mostly driven by model and assumption changes, remittances and market movements. On slide 16, you can see that cash capital at the holding increased to EUR1.6 billion during the quarter, which is above the top end of the operating range. This allows us to announce a new share buyback program today of EUR200 million. In the fourth quarter of 2022, we returned EUR240 million of capital to shareholders through dividends and the third tranche of the share buyback program announced in March of last year. Free cash flow for the quarter was EUR318 million, consisting of remittances from the U.S., the U.K., and our international activities. The proceeds from the sale of our stake in the joint venture with Liberbank also contributed positively. Remittances from the Netherlands were not included in cash capital at the holding following the transaction with a.s.r. Slide 16 summarizes the great strides we have made in recent months in maximizing the value of our financial assets. In the fourth quarter, we continued our track record of successfully hedging the targeted risks embedded in our Variable Annuity guarantees, achieving a 96% hedge effectiveness. In long-term care, our primary management actions are rate increase programs. We have obtained regulatory approvals for additional rate increases worth $21 million. The total value of approvals achieved since the start of the program now stands at $471 million, exceeding the increased target of $450 million worth of rate increases. We will continue to work with state regulators to get pending and future actuarially justified rate increases approved. The Dutch Life business again paid a quarterly remittance of EUR50 million. TLB's reinsurance transaction with Transamerica freed up capital and strengthened Transamerica's capital position. Disciplined capital management enabled TLB to contribute EUR57 million to the free cash flow of the holding in the fourth quarter. On slide 17, I want to go into some of the reporting consequences of the transaction with a.s.r. First, we continue to expect the transaction to be closed in the second half of this year. Ahead of the closing, we intend to simplify the reporting of Aegon the Netherlands in the context of our group reporting. Beginning with reporting over 2023, the results of our Dutch business will be reported as non-operating results for both IFRS segment reporting and capital generation. Remittances from the Netherlands will not be reported as free cash flow and will not be reflected in cash capital at the holding. We will reflect these as part of the EUR2.2 billion net proceeds at the closing of the transaction. After closing, Aegon's strategic shareholding in a.s.r. will be accounted for at the net asset value of a.s.r. We will include dividends received from a.s.r. in our free cash flow. Obviously, Aegon will cease to report operational and performance metrics for the former Aegon the Netherlands operations. The transaction also has consequences for our reporting cycle. a.s.r. does not currently disclose quarterly financial results. As we need to include the net asset value of our strategic shareholding in a.s.r. into our results, Aegon will adjust its reporting cycle, so that we will provide trading updates for the first and third quarters. These trading updates will focus on key performance metrics. The half year and full-year disclosures will encompass the full comprehensive set of IFRS financials and performance metrics. Furthermore, we will also shift our reporting date to around a week later than a.s.r. to allow for inclusion of our share in the net asset value of a.s.r in our results. This new reporting cycle will start effective immediately, meaning that the first quarter 2023 results will be communicated in the form of a trading update on May 17. Before handing it back to Lard, I want to close out with an outlook for 2023 on slide 18. Let me start with the operating capital generation. We expect at least EUR1 billion operating capital generation from our units outside the Netherlands in 2023. This reflects an expected increase in new business strain as we aim to profitably grow our U.S. business. Free cash flow will exclude remittances from Aegon the Netherlands, but will include the interim dividend that we expect to receive from a.s.r. in 2023. On this basis, we expect free cash flow to amount to around EUR600 million for 2023. Over time, our free cash flow per share is expected to benefit from the planned reduction of our share count and an increase in dividends from a.s.r., as synergies from the combination emerge. In addition, our funding costs will decrease as we reduce our gross financial leverage. As a reminder, we are targeting a dividend over 2023 of EUR0.30 per share, EUR0.05 more than we communicated at the 2020 Capital Markets Day, which is an attestation to the strength of the strategy of the company. Finally, we have decided to transition to a cash-only dividend as of the final dividend 2022. This has several benefits for our company including the fact that it removes the need to buy back shares to neutralize the dilutive effect of the stock dividend. It also provides more room to execute the planned share buyback in relation to the transaction with a.s.r. Thanks, Matt. In summary, on slide number 20, we have significantly accelerated our strategy execution. And equally important, we have delivered on our financial commitments in 2022. Looking forward, we remain fully focused on executing our strategy. We are continuing to improve the performance of our company. We are investing in profitable growth by introducing new products and expanding our distribution footprint. We are remaining disciplined in our capital and risk management. And we are continuing to provide attractive returns to our stockholders. Therefore, I'm confident in delivering on our financial and strategic commitments for the year 2023 and beyond. But as a whole, I'm very proud of all our colleagues who work hard every day to make our strategy a success and to continue to support our customers' needs. I would now like to open the call for your questions. Please limit yourself to two questions per person. Operator, please be so kind to open the Q&A session. Thank you. [Operator Instructions] We will now go to our first question. One moment, please. And your first question comes from the line of Andrew Baker from Citi. Please go ahead. Your line is open. Hi, thank you for taking my questions. So the first is just on the new capital generation guidance the -- at least EUR1 billion. Can you just give us some insight into what you're assuming for new business strain and how that compares to 2022? And then are you assuming anything for mortality within that? And then -- is there anything else worth highlighting in terms of material items that you are assuming within that EUR1 billion number? And then secondly, can you just give us a sense of where you are now relating to your top five aspirations in the Retirement Plans sales, as well as those selected individual life sales that you've highlighted? And then how much additional new business strain would you expect above and beyond the 2023 level to get to those market positions and over what time frame you would expect that to sort of work its way through? Thank you. Yes. With respect to the new business strain, all we've really said is that we include an increased level relative to where we ended up in 2022. But I think where you see it -- you saw an increased additive new business strain during the course of the year. So you can think about sort of the fourth quarter number as being a reasonable number. As far as mortality is concerned, I would say, if you combine the mortality and the morbidity together, you're looking at about a neutral effect. So we've had pluses and minuses in the past due to mortality and morbidity. We're thinking about a neutral effect for 2023. Yes. Well, I mean I think that we're doing well on our top five positions. However, I would say that we are going to -- I think you asked this question more in conjunction with if we increase those, what is new business strain going to do for 2023 and beyond? I think there, we're going to do a capital markets update in the second quarter of 2023, and we can update you further there. Thank you. We’ll now go to our next question. And your next question comes from the line of David Barma from Bank of America. Please go ahead. Your line is open. Good morning. Thank you for taking my questions. The first one is on the dividend. So you guide for, in conjunction with the free cash flow guidance of EUR600 million, including the a.s.r. final dividend in there, you'd be closer to EUR700 million. And your ‘23 targeted dividend cost will be somewhere nearly EUR200 million less than that. So how should we think about the difference between the two figures? And secondly, on Asset Management. So naturally, it was quite pressured and market movements didn't help last year. What's your outlook for flows so far in the year? And can you remind us what sort of uplift earnings we should expect from the different actions you've been taking on cost, asset diversification, the streamlining of the different platforms, et cetera? Thank you. Yes. Thank you very much, Dave. Let me take the Asset Management questions, and then half of that to Matt, can you take the free cash flow and dividend question. So on Asset Management, I think in line with what you've been seeing in the wider industry, the fact that both interest rates have been shooting up, reducing values of bonds and corresponding fees, obviously, that's one thing. And secondly, having equity markets going down. That entire market backdrop has not been helpful for, let's say, the Asset Management business in the last year. When it comes to the Global Platforms, and you look at the third-party net outflows, this is mainly also because our clients freed up liquidity as a result of all this volatility. However, it was offset positively by AIFMC, which is our Chinese Asset Management joint venture, which was able to bring in EUR3.6 billion of positive net deposits over the entire year. That could not completely offset the loss that we had in the Global Platforms in the third-party business, but it was something that came quite close. Over the total year, the Global Platforms lost a net deposit of EUR3.8 billion, while our Chinese joint venture came in with EUR3.6 billion. So it could not completely offset it, but it was pretty close. And that's that. Of course, we're -- depending on the market backdrop this year, we will see how the Asset Management flows and Asset Management business will continue. The start of the year, if you look at the markets, they've been better, but at the same time, it's early days. So I think it's far too early to call the market on this. What we are doing to improve the Asset Management business structurally is a couple of things. First of all, we are implementing a new technology platform to support our overall Asset Management business. This is a very comprehensive change that we are implementing. We have worked on that for the last couple of years, and we aim to finalize that in the course of this year. After which we expect it to be far more efficient and will reduce costs after we've implemented that Aladdin technology fully. So that will help to improve structurally the Asset Management margins. At the same time, we aim to push through, obviously, in the chosen investment strategies. And I also want to remind you that in the context of the a.s.r. transaction, we've been able to strengthen the Asset Management business by becoming a strategic partner of the combined company, especially in particular, investment categories like illiquid assets, et cetera, which as we announced at that time, were accretive and are accretive to the overall Asset Management business. So 2022, it was a difficult year against a very difficult market backdrop. 2023, early days, markets are better now, but let's see how it goes. More importantly, what we have in our control, we are implementing to improve efficiency, reduce expenses, and make sure that we improve the margins. And at the same time, we're pushing through with more commercial activity on selected strategies. Yes. So on the free cash flow, I want to do this as a basic overview. And if you have detailed questions, then you can come back to IR on this one. But in general, what we're telegraphing for 2023 is EUR600 million free cash flow that includes the interim dividend of a.s.r. So that gets you to about the EUR600 million. And then starting with about a 2 billion share count, slightly under that, take into account, when you do your math, the fact that we've now announced a share buyback of EUR200 million, and we do intend to accomplish the EUR1.5 billion share buyback over the period of 2023. And I think when you do that math, then we're about -- maybe we're paying out about EUR500 million, and we're getting at about EUR600 million. So there is only about a EUR100 million gap. And I think that's kind of a normal sort of payout ratio. Thank you. We’ll now go to our next questions. And your next question comes from the line of Michael Huttner from Berenberg. Please go ahead. Your line is open. Thank you very much and well done for achieving in ‘22, what you set out for ‘23. I had two questions, please. One is you just said, and -- but I have a kind of close interest in this, that the EUR1.5 billion buyback you aim to achieve during 2023. I wonder if you can give a little bit more insight on that. And if you were to do it just as normal buyback, I think you'd be accounting, if you did it just in six months, for like, I don't know, 25% or 30% of daily volumes. I just wonder if you can give a little bit more and your thinking here? And then on the U.S. business, which seems to be doing really well with the 428% RBC ratio and your talk of new business strain, basically investing in growth. There is, and on not very solid ground, I think a negative outlook by Moody’s, and I just wondered whether you can kind of comment on that given what looks like actually a very strong business with the TLB boosting capital, et cetera. So on the -- just on the buyback program, the intention would be to start the EUR1.5 billion share buyback program pretty much as soon as we complete the transaction. At this point, we're thinking that the vast majority is going to be done by share buybacks. And that will take a period of time. I don't think we've disclosed exactly how long we think it would take. It will be under a year, but as quickly as we can possibly do it. Obviously, given the daily trading volumes, that's how we'll try to manage it. So you are right, in the U.S. business, we see a high Solvency ratio. We see the businesses, I would say, particularly the Life business is doing exceptionally well. So all the rating agencies like to have that good commercial activity there. What has happened is that when we announced the a.s.r. transaction, we've been put on sort of negative watch by the rating agencies. And they will do their work on this. But even in the event if indeed we were downgraded, it would not mean anything for our commercial activities or frankly, our business. I thought it was quite interesting on the day that we announced the a.s.r. transaction, we were sort of immediately put on negative watch. And then what happened to the value of our hybrids and debt, it just went up. So the rating agencies have their process. They will ultimately take us to committee. They will work through it. But even if we were downgraded as a consequence of this transaction, it does not mean much to us commercially. Thank you. We’ll now go to our next question. And your next question comes from the line of Nasib Ahmed from UBS. Please go ahead. Your line is open. Thank you. Good morning. And thanks for taking my questions. So first one on the U.S. In the OCG, the quarter-on-quarter OCG sell, but even on earnings, if you even exclude the TLB allocation of EUR55 million, the earnings improved. So what is the difference there, may be new business strain? And I guess related to that, the investment into the U.S. to get to top five, is that all coming from Transamerica? Or do you expect some of that to come from the holdco? And then, I guess, second question is on the two strategic assets, well three assets, the U.K., U.S. and Asset Management. Can you talk about what kind of learnings you can apply from the U.S. to U.K. and vice versa? And how you think you are kind of the best owners of both assets at the same time and whether the Asset Management plays into that as well? Thanks. Yes. So let me take the last one, and then Matt if you can thereafter do the first two questions for Nasib. So thanks, Nasib. Yes. First on the learnings, so the interesting thing is that, in the U.S., in the U.K., but also our long history in the Netherlands, we have been running Workplace Solutions and Retirement Plan businesses for a very long time. And it's quite interesting to see what you can learn from the various geographies and the various markets that you operate. Now quite frankly, it starts with the realization that there's a lot of local differences, tax treatments of those retirement plans and also local preferences and local different legislations. So there's a lot that is different in these markets, but there's also a lot that is very similar that you can indeed learn from each other. First of all, in the U.S., in the Workplace Solutions business, we have -- and you can see that actually in the numbers, we're seeing that the average margin per participant is increasing because the advice center that we have built up and manage advising, which we actively reach out to plan participants and help them plan for the decisions and, for instance, consolidation of pension buildups that they have in various pension plans. I mean that has -- that is a practice that is very successfully built and implemented in the U.S., and we're learning from that. And within the rules and regulations around that in the U.K., we are implementing similar activities. That's one example of it. The other one is that in Asset Management, in all our products, if you look at across the footprint, we have roughly, your minimum looking at year now, roughly EUR900 billion at this moment, roughly EUR900 billion of assets that are flowing through our products, because our products are basically, to a large extent, asset accumulation products, be it pension plans or be it individual products, annuity products, et cetera. So we manage with our asset manager a piece of that. And then we have other asset managers, who are external managers, who are catering for the choice for our clients, because we want our clients to have a full and comprehensive choice. Now this creates two opportunities. First of all, it creates the opportunity to increase the share that our asset manager can build over time of that pie as a whole. That's number one. And number two, it also underscores how important it is both to have an asset management capability that is strong. We can be all things to all people with our asset managers. So we will always work with a collection of other asset managers as well on the platform. But for our own asset manager, it is making sure that we not only keep the space, but also try to expand that over time. And at the same time, it demonstrates how important it is that the Asset Management capability is something that we have in one of our core activities. So, Nasib, thank you. So on the first one on the OCG quarter-over-quarter relative to the operating result, there are a couple of pieces, but they're pretty simple. So the first is that we saw poor mortality experience, let's say, on the IFRS side, on the operating result, but it was a bit worse on the operating capital generation side, frankly, just due to the reserving mechanics under the two bases. The second one is that we did see -- so new business strain is obviously a component of operating capital generation. And you'll probably see that it has picked up in the fourth quarter, which we like it to do, of course, because we are writing profitable new business, and that's why I think we've done a very good job there during the course of the quarter and the full-year. With respect to that, the need of the U.S. to fund, let's say, the need of the U.S. for holding company cash to be injected. So with a Solvency ratio of 428%, first of all, they're in very good shape. And it's nice to have buffers that we have in the holding company. It is always a good reminder that we are still in restructuring mode. At the group level, we want to maintain our cash at the top end of the range. And to the extent that there are in-force management actions that we would want to do in the U.S., then we have a buffer that is sitting there in the holding company. So strictly speaking, we don't necessarily need it to fund growth. But we'll give you more insight into this when we do the Capital Markets Day in the second quarter of this year. Thank you. We will now take our final question for today. Sorry, the last but one question for today comes from the line of Steven Haywood from HSBC. Please go ahead. Your line is open. Good morning. Thank you. One question, one clarification here. The model and assumption changes that have occurred in your Solvency II ratios in both the Netherlands and the U.K., can you give a bit more detail on these, whether they are company-specific or industry-specific as well? And then a clarification, my line went a bit fuzzy when you were talking about the EUR1.5 billion capital return. Can you say what time scale this is done over? Thank you. So on the first one, the model and assumption changes, they're really company specific. We talk about our annual review of all assumptions that are -- especially the most important ones, including expense, mortality, longevity, and the like. So these are ordinary course of business. We do these assumption updates every year, and we run them through the fourth quarter for the Solvency II countries. On the EUR1.5 billion return of capital. Again, as I mentioned before, it's going to be vast majority of it through share buybacks. We will start immediately after we close the transaction. We'll get it done as quickly as possible. It will be under a year to get it done. Depending on daily trading volumes, we get it done as quickly as we can. Thank you. We will now go to our last question for today. And the question comes from the line of Robin van den Broek from Mediobanca. Please go ahead. Your line is open. Yes. Good morning. Thank you for taking my question. Just one clarification question. I think you mentioned in your answer to the EUR1.5 billion return, you'll be paying up EUR500 million and you're getting in EUR600 million. Here, the EUR600 million only includes the interim dividend of a.s.r. So I guess if we look for -- and you mentioned that, that is a normal payout ratio. So I was just wondering if we move towards 2024, is there an automatic ticker basically on the dividend, when also the final dividend of a.s.r. will be included in the free cash flow for 2024. So that's my first question. And the second question is more on the like-for-like OCG run rate. I'm not sure whether that has been addressed, because my line of cut off during the call. But can you maybe make a comparison on the run rate on a like-for-like basis within your guidance? Thank you. Robin, sorry to hear that you had problems with the connection at a certain point. So we will help you. So Matt, can you take both? Yes. So with respect to 2024, we're effectively giving you a guidance for 2023. And I think when we get to our Capital Markets Day in the second quarter, we'll give you more updated guidance on the out periods, but I think we will leave it for them to give new targets at that point. With respect to the OCG run rate, I guess, if you want to do it on a -- let's say, we do it on the fourth quarter. So we did overall EUR370 million in OCG for the fourth quarter. There are some puts and takes. So if you sort of -- if you add back the poor mortality and, let's say, the poor mortality experience primarily, and then you sort of make adjustments for some of the good guys that we got during the course of the quarter, including some onetime releases in the U.S., and then the U.K., also in international, that gets you to a clean number of EUR350 million. So if you look forward to the guidance, you think about EUR350 million as a clean number. Now take out what we did in the Netherlands during the fourth quarter, which was about EUR100 million. So now you're at EUR250 million times 4, gets you to about EUR1 billion. And yes, there are some other currency movements and various things you can talk to IR about. But in general, you get to -- that's a clean number. Thank you very much. This concludes today's Q&A session. On behalf of Lard and Matt, I want to thank you for the lively interaction. Should you have any remaining questions, please do get in touch with us in Investor Relations, we're here to help. Have a good day, and thank you for your participation in today's call.