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Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Kforce Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Good afternoon. This call contains certain statements that are forward-looking. These statements are based upon current assumptions and expectations and are subject to risks and uncertainties. Actual results may vary materially from the factors listed in Kforce's public filings and other reports and filings with the Securities and Exchange Commission. We cannot undertake any duty to update any forward-looking statements. You can find additional information about our results in our earnings release and our SEC filings. In addition, we have published our prepared remarks within the Investor Relations portion of our On this call, we will discuss certain non-GAAP items. The non-GAAP financial measures provided should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with GAAP. They are included as additional clarifying items to aid investors in further understanding the impact these items and events have on the financial results. Our earnings press release provides the reconciliation of differences between GAAP and non-GAAP financial measures. Let me begin by offering some commentary about the current operating environment, which is informed by our internal metrics and discussions with clients and our associates. As we have mentioned on prior earnings calls, we experienced unprecedented demand in our technology business beginning in 2021 and continuing largely for the first half of 2022 driven by our clients’ acceleration of their digital spend and transformation efforts geared towards employee engagement in a more remote-centric environment and their customer experiences. The unprecedented demand fueled the two-year growth rate in our Technology business of approximately 44%, which yet again significantly exceeded the market benchmarks. We had previously noted a slowdown in demand during the second half of the year and more recently have seen a higher level of project scrutiny being exercised by our clients given the macroeconomic uncertainty. However, technology spend on critical technology initiatives We continue to have an unwavering belief and expectation that the long-term secular drivers of demand in technology spend are more present than ever, irrespective of how the economic environment plays out. The strength of the secular drivers of demand in technology accelerated coming out of the Great Recession by advancements in mobility, big data, cloud, and the rapid expansion of consumer facing technology initiatives. The pandemic has only accelerated the strategic imperative for all businesses to further digitize their business to enhance consumer and employee experiences. Technology is not optional and is core to all business strategies regardless of industry and we don’t see that changing. While our business is not immune from the impacts of economic turbulence, trends during periods of economic softness suggest that technology spend is increasingly resilient and less correlated than other areas where companies utilize flexible talent. This is informed by our performance in the Great Recession where our technology business was down approximately 7% versus general staffing market declines of roughly 25% to 30% and the 2020 pandemic where our technology business was virtually flat in comparison to the general staffing market which experienced 10% to 15% declines. We also believe that our focus on organic growth for the last 15 years and the divestiture of non-core businesses has dramatically sharpened our focus and contributed to our sustained success. It has also resulted in a clean balance sheet with virtually no debt and allowed us to return a tremendous amount of capital to our shareholders. Today’s announcement of a 20% increase in our dividend, the fifth increase in four years, and an increase in our share repurchase authorization is further evidence of our confidence in our business and intention in prioritizing return of capital going forward. We have significantly improved our profitability levels as evidenced by the nearly 300 basis points increase in operating margins since 2016. This has been accomplished while also reducing our concentration of cyclically sensitive Direct Hire revenues to less than 3% of revenues in the fourth quarter of 2022 versus 7.5% immediately preceding the Great Recession and 19.4% preceding the dot com recession. The quality of our business and revenue stream continues to improve. To that point, 2022 was an extremely successful year for Kforce. We met the financial objectives we outlined at the beginning of the year, despite the softening in demand we began to experience in the second half of 2022. We grew revenues in our Technology business by 18% on top of more than 22% growth in 2021. In addition, we further improved our profitability by 20% in 2022 over 2021 levels. Strategically, we advanced our integrated sales strategy to further integrate our managed teams and project solutions capability within our Technology business. We advanced the repositioning of our FA business toward more highly skilled positions. Our team made significant progress on the multi-year effort to transform our back office. And we fully transitioned to a hybrid work environment across all our markets and opened our new state-of-the-art headquarters in Tampa. Our Office Occasional work environment provides our people with maximum flexibility and choice in designing their workdays that is grounded in our trust in them and supported by technology. This has resulted in improved retention of our associates and positions Kforce as a destination for top talent. Kforce is proud to be certified as a Great Place to Work, which distinguishes Kforce as one of the best companies to work for in the country. As we look ahead to 2023, we will continue to make the necessary investments in our business to further advance our integrated sales strategy and the transformation of our back office to sustain our long-term growth ambitions and attain double digit operating margins. We have built a solid foundation at Kforce and are partnering with world-class companies to solve complex problems and help them transform their businesses. There is simply no other market we would want to be focused in other than the domestic technology talent solutions space. In a macro sense, the near-term is uncertain, but our path forward couldn’t be clearer, and we will remain consistent with the principles under which we have been operating so successfully. We have a solid, highly tenured team in place with the expectation of continuing to capture additional market share and are prepared for the long-term and whatever the near-term environment may bring. We have a long track record of expanding our market share, I am thankful for the tireless efforts of all Kforcers', from our incredible leadership team, our sales and delivery associates to our revenue enablement teams and our Executive Leadership team who have been together through multiple economic cycles. I could not be prouder of what this team has achieved in executing our strategy over many years. Kye Mitchell, our Chief Operations Officer, will now give greater insights into our performance and recent operating trends. Dave Kelly, Kforce’s Chief Financial Officer will then provide additional detail on our financial results as well as our future financial expectations. Overall revenues grew slightly more than 2% year-over-year in the fourth quarter. Our Technology business, which continues to be the primary driver of our success, performed slightly ahead of our expectations with year-over-year growth of nearly 8% in the fourth quarter and 18% growth for the full year of 2022. Our technology business now has an annual run rate of $1.5 billion and represents approximately 90% of our total revenues. We believe our strong, consistent outperformance of the market over many years has resulted from our execution and dedicated focus in the domestic technology market. As Joe mentioned in his commentary, our recent operating trends and activity levels have experienced a degree of softening as clients appear to be more cautious given the uncertain macro-economic environment. This trend began in the second half of 2022 and has continued into the new year. Sales cycles are becoming longer due to extended interview processes and more scrutiny around budgets. Year-end assignment attrition was also slightly higher compared to the last few years. However, our clients continue to pursue essential technology projects, even as they become cautious due to the economic uncertainty. Overall average bill rates in Technology continued to improve with 1.7% sequential growth to approximately $90 per hour. While the pace of bill rate growth may moderate in the near-term, we expect that the continued scarcity of highly skilled Further, as our portfolio of managed teams and solutions engagements continues to grow, we would expect average bill rates to expand along with improved revenue visibility and margins. Critical technology initiatives continue with our clients in areas of cloud, digital, UI/UX, data analytics, project, and program management. Conversations with our clients suggest that they will continue to prioritize significant technology investments to remain competitive regardless of the economic environment. Many of our engagements are multi-year initiatives that we expect to continue despite any changes in the macroeconomic environment. Clients continue to look to us to provide managed teams and project solutions engagements. Our integrated sales strategy allows our people to leverage their long-term relationships in this space as we seek to solve our clients’ challenges. Clients are looking for us to continue to move up the value chain providing more complex solutions. We feel an integrated strategy allows us to leverage our existing sales, recruiters Our year-over-year growth was driven by a diverse set of industries. Sequentially, we are still seeing broad-based demand, but with some select softening. We have not yet seen any particular industry vertical as a whole experience acute reductions in demand. This remains true through the first month of 2023. We have a very diverse client portfolio of large, market-leading customers that are prioritizing technology spend, which we believe will be a positive catalyst to our long-term, sustainable, above-market growth. While we may be susceptible to short-term disruption with specific clients or industry-specific dynamics, we expect our diversification and concentration in world-class companies to serve our shareholders well over the long-term. We expect first quarter revenues in our Technology business to grow in the low to mid-single digits year-over-year and decline in the mid-single digits sequentially, which contemplates the softness we experienced at the beginning of the year Our overall FA business declined 26.4% year-over-year, which reflects the continued runoff of business we are no longer pursuing due to our repositioning efforts. Sequentially, our FA business experienced 4.7% growth primarily due to a short-term project in support of Hurricane Ian recovery efforts with a strategic client. This project essentially ended in late January. We expect revenues to decline in the low to mid-teens sequentially and year-over-year to be down in the mid-20% range. We continue to support our FA business and improve its alignment with our Technology business. Evidence of this progress is that our average bill rate in FA, excluding the Hurricane Ian project, in the fourth quarter of 2022 is $51 compared to $37 in the As Joe mentioned, direct hire comprises less than 3% of total revenues. We made the intentional decision to curtail investment to grow our direct hire business due to the volatility we typically see in this revenue stream in uncertain economic times. Our expectations for direct hire are for continued declines in the first quarter. We are pleased that we are not reliant on this business to make significant contributions to our growth and profitability. We believe the scalability of a flexible model is the best foundation for predictable, sustainable and profitable growth. The investments we continue to make in our strategic priorities along with process improvements to increase productivity levels in our associate population provides capacity to continue to grow. While capacity exists, we have continued to make targeted investments in associate headcount to drive sustainable growth. This investment is predominantly in our managed teams and project solutions capabilities within our Technology business as we evolve to meet customer requests and grow share. We have supported and retained our best people and we have made significant changes to give our employees flexibility and choice in our office-occasional work environment. As mentioned last quarter, Kforce has earned Glassdoor's OpenCompany Designation, which recognizes employers that proactively promote and embrace workplace transparency through sharing workplace culture, being responsive to all reviews, and sharing our updates related to diversity, equity and inclusion efforts along with our ESG priorities. I am grateful for the trust our clients, consultants and candidates have in Kforce. I would like to thank our amazing people who helped our fourth quarter results and impressive 2022 performance. They are the backbone of our success. We are pleased with our performance in 2022 as full year revenues of approximately $1.71 billion increased nearly 8% year-over-year, led again by market share gains in our Technology business. GAAP earnings per share were $3.68. Normalized for impairment charges related to our joint venture, adjusted earnings per share of $4.25 improved approximately 20% year-over-year. Fourth quarter revenues of $419.7 million grew 2.3% year-over-year and adjusted earnings per share were $0.93. Overall gross margins decreased 70 basis points year-over-year and 50 basis points sequentially to 28.5% in the fourth quarter principally due to a lower mix of direct hire revenue. Flex margins of 26.1% in our Technology business, which met our expectations in the fourth quarter, increased 10 basis points sequentially and declined 30 basis points year-over-year. For the full year 2022, Flex margins in Technology of 26.4% were unchanged from 2021 levels. Top technology talent remains scarce, and we have seen consistent wage increases over many years. We have had good success passing through these increases to our clients due to the critical work our consultants perform. This has led to relative stability in the margin profile of our Technology business throughout economic expansions and declines, which is our expectation as we move forward. Flex margins in our FA business declined 210 basis points sequentially as a result of a short-term lower margin project associated with Hurricane Ian relief. As we look forward to Q1, we expect spreads in our Technology business to be stable with fourth quarter levels, though overall Technology Flex margins will be lower due to seasonal payroll tax resets. Overall gross margins are also expected to decline due to lower direct hire revenues. While we believe that clients may be slightly more price sensitive in the current macro environment, we believe our nearly 90% concentration in technology provides relative margin stability over the long term due to the desire by our clients to increasingly engage us for projects critical to their ongoing success. We also expect that business in the managed teams and project solutions space should remain resilient in this environment, and those initiatives bring higher margins to the overall portfolio. Overall SG&A expenses, as adjusted for the impairment charges, as a percentage of revenue decreased by 90 basis points year-over-year, which is predominately driven by lower performance-based compensation, as it was elevated in 2021 due to extraordinary growth levels. We have a high degree of variable compensation within our plans, which creates operating leverage as growth slows. We have also been successful at driving greater cost efficiencies from our real estate portfolio given our office-occasional model, which has allowed us to reduce overall square footage by approximately 40%. As leases expire, we will continue to transition to the new office footprint, which will lead to further declines in real estate costs. We expect SG&A expenses as a percentage of revenue to increase sequentially due to the annual payroll tax reset in the first quarter. Our fourth quarter operating margin, as adjusted for the impairment charges, was 6.2% and improved 20 basis points over the fourth quarter of 2021 as a result of the reduction in SG&A expense. Our effective tax rate in the fourth quarter was 23.1%, which was higher than we anticipated because of a lower tax benefit on the vesting of restricted stock and other year-end tax adjustments. Operating cash flows were $12.7 million and, as expected, were negatively impacted by the final settlement of $20 million related to payroll taxes previously deferred under the CARES Act. We generated $141 million in EBITDA in 2022, which represents an increase of 11.4% year-over-year. Operating cash flows were $90.8 million for 2022. When adjusted for cash outflows in 2022 related to the settlement of our terminated pension plan and the deferred payroll taxes, operating cash flows would have been approximately $130 million. We returned slightly in excess of 100% of operating cash flows in 2022 to our shareholders through $24 million in dividends and nearly $68 million in open market repurchases. Our return on invested capital was approximately 46% in the fourth quarter. As Joe mentioned, our Board of Directors approved a 20% increase to our dividend to $1.44 per share and increased our share repurchase authorization to $100 million. Since we initiated our dividend in 2014, we have now increased it 360%. The current dividend yield is 2.6%. In addition, since 2007, we have reduced our weighted average shares outstanding from 42.3 million to 20.5 million, or slightly more than 50%. All in, we have returned in excess of $830 million in capital to our shareholders since 2007, which has represented approximately 75% of the cash we generated, while significantly expanding our business. The increase in our dividend and share repurchase authorization demonstrates both our financial flexibility due to the strength of our balance sheet and our With respect to guidance, the first quarter has 64 billing days, which is three additional days than the fourth quarter of 2022 and the same as the first quarter of 2022. We expect Q1 revenues to be in the range of $406 million to $414 million and earnings per share to be between $0.78 and $0.86. First quarter earnings per share is impacted by approximately $0.15 due to seasonal impacts of annual payroll tax resets. Our guidance does not consider the potential impact of unusual or nonrecurring items that may occur. Our performance has put us in an excellent position to continue to make incremental investments in our business even in an uncertain environment. These include selective additions in our managed teams and project solutions capability and continued investments in our back-office transformation efforts. We believe these ongoing investments will benefit our shareholders in the long-term and are important drivers to our attainment of double-digit operating margins. Overall, we believe our strategy has put us in an exceptional place and we are fully prepared for the various economic possibilities that may lie ahead. On behalf of our entire management team, I’d like to extend a sincere thank you to our teams for their efforts. Hi, good afternoon and thanks for taking my question. Wondering if you can provide a little bit more color in terms of what you're seeing with regards to the clients on the IT Flex side? You mentioned that for the most part, the impacts are relatively moderate by vertical, but can you talk a little bit about which verticals, I know there is no drastic impacts, but any sort of like changes that you're seeing just on the margin of certain verticals, which ones are the strongest, which ones are showing a little bit more of the macro uncertainty? You know, this is Kye Mitchell. We didn't see a lot of significant client-wide trends. Most of it has been very much pruning by select clients, there's nothing to indicate that any industry or any particular client is down significantly is system [indiscernible] sluggish being out of the gate. We've seen in the last couple of weeks front-end indicators picked back up, job orders for instance is one that we look at, but nothing that would indicate anything industry wide or client-specific, it's just more pruning after a busy couple of years. Got it. And then with regards to the pricing, you kind of give us an indication with regards to how we should think about the bill rates, do you think that continues over the course of the year in terms of just slightly more moderate increases in terms of the bill rates or are there any chances that we could end up seeing bill rates decline if the environment becomes a little bit more challenging? Mark, this is Dave Kelly. So in terms of bill rates, I think obviously we've seen some pretty significant increases over the last couple of years, but very much stability in margins, flexible margins themselves. I would say generally speaking, we've been saying this from quite some time, we expect ongoing stability in margins in terms of bill rates, if you kind of look at times if there is a slowdown, you see pretty stable bill rates, if there is anything, it's been relatively minor. So again, I think as it relates to both margins and bill rates, you're going to -- you're going to see a pretty stable picture based on what we're seeing today. Great. And then question for Joe and Kye, I know it's only been less than a month since chat GPT emerged. But there's clearly, there's a lot of buzz around AI, which there has been buzz around AI before, but this is really making it even more obvious. I'm wondering if you can talk a little bit about your early impressions with regards to the opportunities for Kforce to leverage -- the opportunities that they're going to come there specifically with regards to either practices that you might unfold or what you may end up doing with regards to increasing the efficiencies on the SG&A side? That's a great question Mark. It kind of takes me back and obviously, I'm sure you've seen what's going on with Google as well. So we have the AI arms race going on and it takes me back to 2018 with a great book that one of our probably the most strategic client recommended to be, called AI superpowers, if you haven't read that book, I strongly recommend it because I mean you could see all these things coming and evolving. We sit here and we look at all these technology innovations as opportunistic on both fronts. One, we've applied a lot of different technologies internally that has allowed us to continue to drive productivity. So from that standpoint, great opportunity to further drive greater efficiencies in a lot of what we do inside our firm, applying whether it's chat technology and or various other artificial intelligence type technologies, from a opportunity standpoint as well on the client front, one of the things I love about what we do for a living is we are not dependent on any particular technology any particular industry. Any particular type of methodologies that are evolving as time goes on a kind of takes me back to when I first got into this business right, everything was assembler and COBOL, and then as co-generation came that became about it was going to impact our business, and it didn't actually enhance the business. This is just I mean this is going to this is a constant evolution. So will it change, how that happens over time as it continues to evolve, there's no question it well, but then that's going to create needs in other areas in terms of the overall what it takes to really deploy as well as create technology and then drive change management with technology within organizations, I don't know, Kye, if you have anything else that you wanted to add? So that market, it's really opportunity on both fronts, in terms of it will create new business opportunities. I think it's just too early to tell on that front and then obviously internal opportunities in terms of how we can deploy and apply things. And then one last one, just on the SG&A side, you've already rationalized your real estate footprint. How much more should we expect over the course of this year? So, Mark as far as the real estate footprint, and obviously, we've been talking about obfuscation and deploying that across the country. Actually, we reduced our real estate footprint by about 40% but we still probably got about three years to annualize the leases that currently exist. And as we do that, we plan to deploy that same type of footprint across the country. So we've got some time to go there. So I think there's opportunity there for us and we're always looking at opportunity as it relates to other areas, right, I mentioned on my remarks, and we've been pretty consistent in investing in our business over the years, right. We've talked at length about the improvements we've seen in productivity because of the front office tools, our CRM and TRM tools. We're currently in the process that we started last year, we're looking at the reengineering of all of our back office tools, which although, it's going to take a little bit of time will be another big leg up. So as it relates to the business, as we grow, obviously, we get the benefits of scale, we expect continued productivity improvements that will help from an SG&A standpoint in the front of the house and we expect to overlay that over time with back-office improvements as well. So we think there is a fair run rate as we grow, to continue to increase operating margins. We've said in the past, double-digit operating margins are that which we should expect, we still expect that to be the case. Hi, this is Sam for Tim. Thanks for taking the questions here. I guess to start we've seen a lot of announcements about headcount reductions recently, particularly across the tech industry, but then payrolls came out last week and were much stronger than expected. How would you characterize the tightness of the IT labor market right now relative to last quarter, is it easy or pretty much steady state? In regards to candidate supply, we've been in a very candidate constrained environment for well over a decade and frankly that has changed and likely will change in the current environment, it does appear that some of the largest companies may have over hired and as I mentioned, are doing a little bit of pruning over the last few months and I think that you're seeing selective pruning in those investments There might be a bit of incremental supply the clients are still being really selective and in our hiring process and we don't see that impacting any future expectation for what that candidate supply looks like, I think it's going to continue to be a tight one. And I think also, we're seeing some folks looking to go into the office, again, which is probably a little bit of any pressure off through those candidates that are there out there. So scene overall, it's very similar to what it has been and I don't expect to see a lot of change there. So, Kye, let me add. Sam, just to kind of as a reminder, our technology footprint is pretty high at the value chain right. We talk about things like cloud, application modernization, data analytics, digital transformation and our average bill rate is $90-an-hour, as you might expect, do you think about what that means from a payroll perspective. Kye mentioned scarce talent, four years, right, the world has not produced enough of those skill sets and that is still the case, so a big driver to the expectation of continued scarcity in the areas that we play. That's very helpful. Appreciate the color there. You touched on this in your prepared remarks, but can you maybe expand a little bit more about client behavior in this environment, what you're hearing from clients these days from both the demand side as well as client behavior on the process side and have they given any indication on how they're thinking about their own staffing needs in the months ahead here? As we mentioned, I think there's more scrutiny on budget that what we've seen in the last two years, it's not anything unusual to prior cycles, but that there is more scrutiny around that. However, clients are very much committed to continuing in the areas of strategic investments. For example, cloud, digital transformation. If they're doing a cloud project, they're not going to stop migrating to the cloud. So we believe we're very well positioned strategically in the right areas where clients are continuing to invest. We've seen some good wins as we come into the first of the year, we had a recent win with a health care company to help them in their cloud migration. We had a recent win with the customer to help them create new tools that help improve employee productivity. So I think the space, we're playing in we continue to see clients investments there. Yes, I would add, as Kye mentioned clients still funding critical projects that have been true historically right. I'll just remind you during the Great Recession, technology critical spend was far more robust than other industries and other disciplines within the staffing and just recently in the pandemic our technology revenues actually were flat. When we had obviously a significant decline. So kind of a reflection of what we're seeing and that is on top of obviously, significant growth in technology prior to that and then subsequent to that. So a lot of resilience in the technology revenue stream here regardless of the climate. Thank you. Wanted to ask you about managed teams and project solutions, can you give us some color there along basic dimensions either size kind of margin profile, if not specifics, maybe juxtapose it and compare it with existing businesses. You talk about project nature, maybe description of what kind of things you take on versus things you won't, any kind of things that will help us get a better overall understanding of what you're doing, where you're going with that would be helpful. Thanks. Yes, thanks Tobey relative, relative to that solution set that we're bringing to market, right, we've taken a little alternative approach to maybe what you hear from some of our direct competitors in the marketplace because we view that this is integrated into who we are, with our technology focus DNA and how we can leverage all of our capabilities within Kforce through our integrated sales strategy, because that's really what unlocks the value here. And so I think we stated in the past you know, our margin profile is roughly 400 basis points higher when we do this type of work, because of the additional value that we're bringing and moving up that value chain and the further we go up the chain, the more that margin expansion on average, we've been roughly about 400 basis points. In terms of the footprint that we're after I mean had articulated the key areas and part of the reason why we focus on the areas that we do cloud data and various other ones because they play off of each other, because often when a client is working and has an initiative going on with cloud, well that's going to also drive their data needs so based upon when we get engaged it allows us to get honed in on these different areas and teach them at the different phases of an overall macro project. And from a duration standpoint, our efforts in this area is typically over a longer duration than that average roughly 10 contract that we spoke about. So we see some of these projects are multi-year, but on average they're going to be of a greater duration. Yes, Tobey we see -- as Joe said, we see longer duration. We do see clients in areas we're spending continue to look for everything from solutions through managed teams. Managed teams is something we're a lot of demand for people to want to have to go to the various different staff providers. They want somebody within the game to bring on a whole pot or on a whole team. And when you reference margins, is that at the GP level? Or is that sort of more at the bottom line level? Yes, Tobey, the answer here is really both, right? So we're sitting here at a higher gross margin profile. As you'd expect, right, as we deliver more at that mine, it translates. So it's an important business for us. Okay. Perfect. Where do you see Flex gross margins trending in the quarter? If you -- if we look at the model, Flex gross margins on a year-over-year basis did start to contract a little bit. And I'm just trying to reconcile that because I don't know whether managed teams and other things muddy the waters and in the way that we can sort of extracted and draw conclusions from those kind of numbers. Thanks. Yes, I think a couple of things. So if I look at full year margins, they're actually in Technology is where we're focused they were flat. Yes, they were down in a very minor way as I think about the spreads to that business, that's unchanged, right? So as I've mentioned, as I look sequentially, obviously, we get impacted by payroll taxes in the first quarter. But I think the buzzword here is really stability. We're not looking for any significant change from where we're at. And we're not seeing anything that suggests that we should do otherwise. Okay. And then I'm curious, you touched on this in another question, but I'm going to ask you different. When you plan for recessions and you think about how the business will perform, we have, I guess, three examples in the last 20-some years. You've got the tech bubble, the Great Recession in 2020. They all have peculiarities, different depths. Which ones do you use to inform your planning for the business? And are there any adjustments you'd make because we often hear from investors that 2020 was unique and for IT, maybe unique in that the pandemic encouraged some spending on IT that a normal recession absent a pandemic may not. Thanks. Yes, it's a great question. And as you all know, because you've been around the space for a while. No two are the same and they all react differently. And I think we're in probably one of the more unique environments, this will be -- well, if recession truly ever gets coined, right? And I think this has been the most telegraphed recessionary period in history. So if it ultimately plays out that way, I would say what's really so significantly different this time around is just the overall labor market. We've seen labor markets are impacted. By the way, they're never impacted it severely, especially in the high skilled areas as what one believes, although the last two recessions have been impacted or I should say, if I look at the financial crisis and we look at what happened during the pandemic, those probably had more labor impact than any of the other prior recessions, if you go back over the course of the last 50 years. But this one, when you just look at -- when you look at the amount of jobs and then you look at the available pool of talent. They say, if this were to contract even rather extensively. I mean, you're still going to have one-plus job per person in the marketplace. And as you all know, when we're sitting here focused on technology, which has always been an outlier in terms of supply/demand, we feel very good about those fronts. So we have a very flexible and elastic model that has natural throttles within it. We have a variable cost structure. So as things -- if things were to get tight and there were to be revenue impacts, even although we really didn't experience any of that during the pandemic and it was phenomenal during the financial crisis, our business naturally readjust because of -- we have a lot of leverage comp plans and those types of things. So we feel great in the spot that we're sitting here with virtually no debt, a pristine balance sheet. We've been very prudent about how we've staffed coming out of the pandemic. So we haven't over-hired. We hire based upon need. So I mean, we feel we're in a real place of strength right now, and we view no different than where we were blessed to be when we went through the pandemic. We operated from a position of strength throughout the pandemic, and if things were to get tight, we're going to operate from a position of strength and play for the other side and really position ourselves. So I guess those would be the key things that we look at as we prepare for any difficulty or trying time is how are we set up and how are we positioned to operate? And I've been here for 35 years now, and been through four different cycles, and we've never been stronger or better positioned than we are today, no matter what comes around the corner. So Tobey, let me amplify a point that Joe made in terms of managing through various cycles, right? He had mentioned we just increased our dividend. We just increased the authorization on our buyback. In good times and bad, we generate a significant amount of cash. I think in excess of $130 million, certainly in operating cash flows this coming year. And so we have been very consistent how we've thought about the use of that cash. I don't have any expectation that that's going to change either. So this is the last piece kind of about how we think about managing the business. Okay. If I kind of just double-click on my question. When you look back at 2020, do you think that there were unique features to the pandemic that contributed to IT's resilience that if we have a sort of a similar contoured economic contraction without unique pandemic features, would the business and industry perform differently? Yes. I think coming out, I think the pandemic was a big wake-up call for many organizations that were slow in getting after digitizing their business, looking at how they were leveraging data, moving their businesses to the cloud. I think that was a huge wake-up call for all businesses. So there is no question that, that created an acceleration of investment in technology. However, what it also did is it actually -- it moved forward the adoption of technology by years. I mean, I can sit here and say exactly how many years but I look at us at Kforce and I look at how we're deploying and leveraging technologies that we already had, that we were having trouble getting traction with but now has fully embraced whether it be teams or various other tools that we've implemented. So that acceleration, there's no question. It created an excess of demand, right? And you have to delink some of these head reduction that you hear in the marketplace in comparison to what technology really has done. So everybody is having to do these things, digitize their business, move to the cloud, figure out how they monetize and leverage data to be more competitive. So it is not an option to invest in these areas. So we see the need continuing on in these areas irrespective of what economic backdrop. I mean, I think if it was a tougher economic climate, we do see some car pack and certain technology initiatives, absolutely. But these mission-critical imperative skill areas and projects that companies have to work on, they have to do this or they're putting their business at risk from a competitive long-term sustainability standpoint. So I'd say that's what's really different. I mean, we are in more of what I would consider a normal operating environment versus those couple of years post pandemic, where everybody was scrambling but normal is a pretty healthy environment to be as well is the way that we look at it. Thank you. Have you seen a change at all in the competitive landscape maybe since you're seeing a little bit of softening. Has there been any change? There's been a slight softening as we said in our opening comments, we did see a little bit higher than usual attrition numbers at the end of the year. And I think the way the holiday fell to it just pushed everything out a little bit. So was sluggish coming out of it, we have seen, like I mentioned, partake in the last couple of weeks, we've seen that front-end indicators pick back up. It will be interesting too, with clients seeing the latest BLS numbers and everything. I think a lot of it was clients is taking longer to scrutinize and wondering where the macroeconomic is going, but I think there's some positive indicators now for them. Yes. So what we're seeing from a competitive landscape standpoint is with the larger players that we compete with, things have remained pretty constant. Probably the biggest place that we've seen some competitive dynamics is when we look at the local operators and the smaller players in the space, they are feeling a little bit of pressure. And by the way, this is typically what we see as the cycles evolve and the environment becomes a little bit more difficult, right? They're typically more single company dependent. And as you look at defaults going up on credit and those types of things, they don't have a lot of room to play with nor do they have really strong balance sheet. So I suspect if things were to be tougher throughout the course of 2023. What's going to happen is our competitive landscape is going to shrink, mobile operator or regional operator standpoint, which just provides us more market share opportunity. And that's why historically, if you go back and look at Kforce's performance, we always come out on the back end of the stronger than where we went in, and I don't foresee this being any different irrespective of how the market plays out this year. And then you've talked about obviously the sales cycle lengthening a little bit, and we're coming off some pretty tough comparisons where things really were really good. If you compare that to pre-pandemic levels, how would that compare rather than the last kind of two years that were really strong. Just comparing it to previous to pandemic before there was this big surge in demand? Hi, good evening. So I wanted to first really do appreciate the update as far as the return of capital to shareholders. Certainly, that's substantial in terms like this. So it's certainly nice to see. But I was wondering if this is sort of, I guess, maybe just trying to sort of look at this as a slightly different vantage. But I was kind of curious as to whether or not the things that you're seeing with your bullishness on the company as well as what you're seeing with clients, I was sort of curious as to how much that's actually changed from when we last -- from your last call in the third quarter. I mean was there -- is there anything that you've seen in that time frame that's necessarily sort of changed your outlook, bullishness, bearishness or any signposts that you think have necessarily been altered over the last few months? Yes. I would say we've been bullish for quite some time now. I mean, I think the pandemic, while it was a heretic experience to go through, I think it's forever changed Kforce, and I think it changed the trust within Kforce, and I think it also has changed our ability to move quickly, adjust rapidly because our teams had to learn and how to deal with so much change management over those periods of time that I think we are a very different organization than we were in the early part of 2020 prior to going into that. And that really excites me because when I look at what our team has been able to accomplish over the course of the last three years, in the face of some of the most emotionally and mentally challenging situations that probably anybody in the business world has ever faced, I'm just blown away with our teams have accomplished and where we are today with our Office Occasional model with real technology applied, with real cultural shift taking place and then just how we've also elevated our game with our end clients. So no, I mean, nothing has changed since we spoke to you back end of October of last year. We've been on this attitude for quite some time. We are playing offense, and we are going to continue to play offense and why is that? Because we can and we have the right team to do it. Excellent. I was wondering if you could talk a little bit about if -- with some of your engagements with clients, has there been much of an impact or benefit from either increased or installed M&A activity or business transitions that you're seeing? Or is that fairly similar to what we saw? So we know obviously, a lot of M&A sort of dried up last year. I was sort of curious as to whether or not any of that was driving changes or the way they were looking at things? Thank you. No. We haven't seen any significant impacts from that. Clients are pretty much business as usual. As you know, we haven't done any M&A in many, many years. We have a couple of clients but there are -- our largest client makes up only 5% of revenue. We have a couple of clients right now that we're benefiting from them going through some M&A activity, but it's really not an impact on what we're seeing. We have no further questions at this time. I'll hand the call back over to Joe Liberatore for any closing remarks. Well, thank you for your interest and support of Kforce. I'd like to say thank you to every Kforcer for your extraordinary efforts and to our consultants and our clients for your trust in Kforce and partnering with you and allowing us the privilege to serve you. We look forward to talking to you again after our first quarter of 2023.

EarningCall_401

Good day and thank you for standing by. And welcome to the Cantaloupe Second Quarter 2023 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, [Dara Dierks] (ph), Investor Relations. Please go ahead. Thank you and good afternoon, everyone. Welcome to the Cantaloupe Second Quarter Earnings Conference Call. With me on the call this afternoon is Ravi Venkatesan, Chief Executive Officer; and Scott Stewart, Chief Financial Officer. Before we begin today’s call, I would like to remind you that all statements included in this call, other than the statements of historical facts are forward-looking in nature. Actual results could differ materially from those contemplated by the forward-looking statements because of certain factors, including, but not limited to, business, financial market and economic conditions. A detailed discussion of the risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in our filings with the SEC and in the press release issued earlier today. Listeners are cautioned to not place undue reliance on any such forward-looking statements, which reflect management’s views only as of the date they are made. Cantaloupe undertakes no obligation to update any forward-looking statements whether because of new information, future events or otherwise. This call will also include a discussion of certain non-GAAP financial measures that we believe are useful for, among other things, evaluating Cantaloupe's operating results. These non-GAAP financial measures are supplemental to, and not substitute for GAAP financial measures, such as net income or loss. Details of these non-GAAP financial measures, a presentation of the most directly comparable GAAP financial measures and a reconciliation between these non-GAAP financial measures, as well as the most comparable GAAP financial measures can be found in our press release issued this afternoon, which has been posted on our Investor Relations section of our website at www.cantaloupe.com. Thank you, Dara. Good afternoon and thank you for joining us today. I'm pleased to report solid financial and business results from the second quarter of our fiscal year 2023. This was my first quarter as CEO and we made a lot of progress on strategic initiatives, which are led by our vision to become the global market leader, providing technology that powers self-service commerce. We successfully closed on the acquisition of Three Square Market in December positioning us to accelerate Cantaloupe's presents in the high growth micro market industry, while also immediately expanding Cantaloupe's international footprint for a full suite of self-service technology products. We held our first Investor Day at NASDAQ, which was well attended. During this session investors and analysts were able to meet our executive team. Listen to key customers and here our vision and strategy. We also shared a long-term financial outlook for the company and onetime KPIs that demonstrate the opportunity we see ahead of us. Our focus continues to be on accelerating the high margin subscription revenue growth. We were successful in doing this by scaling the Cantaloupe program and selling subscriptions including seed software, device management and remote price change. As a reminder, our Cantaloupe ONE platform is the only bundled subscription offering in the market that enabled self-service operators to eliminate upfront capital expenditures. We continue to see strong interest from our growing small and medium business customers, given the light capital nature of this offering. We also reported strong financial results for Q2. We reported a record in total revenue of $61.3 million, up 20% over last year's second quarter. We reported a record in transaction revenue, which grew by 21% year-over-year and a record in subscription revenue, which grew by 15% year-over-year. While we anticipated an acceleration of subscription revenue in the second half of the fiscal year, we've been pleased with the strong subscription revenue growth trends in the first half as well. We continue to expect subscription growth to ramp throughout the year, resulting in growth in the high-teens for the full-year. Equipment revenue growth was strong as well, up 25% year-over-year. While the 4G and EMV upgrade cycle is largely behind us, there are some delayed installations due to labor shortages. We are pleased to have helped many of our clients through their upgrade cycle. Active customers totaled 26,335 at the end of the second quarter, up 24% year-over-year, compared with the second quarter of last year. We added 1,300 new customers in the quarter primarily among small and medium businesses, driven by the appeal of our Cantaloupe ONE offering. Active devices grew 3% year-over-year. And importantly, our adjusted EBITDA for the quarter was $3.9 million, a 61% increase year-on-year compared to the second quarter of the prior year. Now to move to a few additional business highlights from this quarter. While we're still early in the integration of Three Square Market, we are pleased with the progress thus far integrating business functions such as sales, marketing, HR and finance. Our priority is to achieve the revenue synergy opportunity we saw with the acquisition and we have already posted a number of early wins including, automatic sales -- automatic vending sales who is located in Michigan. We've reached an agreement to replace a portion of their competitor units with Three Square Market and they've committed to growing their future market locations with Cantaloupe. [Adam More] (ph), President of Automatic Vending Sales stated. We chose Three Square Market because of their feature-rich platform, which was comparable to our previous provider and the attractive fee structure that allows us to see a higher profitability on our markets. Our transition installing the Three Square Market kiosk has been seamless for both my team and my customers, and we look-forward to continuing to grow with Cantaloupe in the future. The reception among existing catalog customers has also been exceedingly positive about the combined company offerings. For example, Cantaloupe customer Madison Coffee and Vending is transitioning their micro-market business from a competitor to Three Square. Lastly, SGM Grid Service, a Sweden based Three Square Market customer successfully installed multiple new markets and are continuing to scale their footprint with us. We also continue to see strong organic growth in other areas of our business. CC vending, one of the largest independent refreshment services companies in the Metro New York area and long-time Seed customer entered into a strategic long term agreement with Cantaloupe to upgrade all of their non EMV devices and also signed-up for remote price change for their vending fleet. Additionally, they added 24 more Yoke kiosk to expand their micro markets services at one of the largest financial institutions in the city. Crickler vending, a canteen franchisee in the New York State area and former Cantaloupe cashless customer who had switched to a competitor in 2017 has signed an agreement to migrate half of their machines back to Cantaloupe cashless devices and move fully onto the Seed platform. This includes all of our core Seed products like Seed Pro, office, markets and delivery. We continue to see strong demand for upsells. As you might have seen from recent release, we completed a significant project to onboard Buffalo Rock, a Pepsi bottler will now you Seed to manage the 9,000 vending machines. We also expanded our agreement to support Sodexo’s InReach convenience business with both our hardware and software solutions. This includes the rollout of Seed across 18 branches. Pepsi Florence also known as Pee Dee foods, a large Pepsi bottler and canteen franchisee in the Southeast, who is a fully deployed Cantaloupe customer expanded their Seed services by adding remote price change. And lastly, Coke [indiscernible] a large Coca-Cola bottler upgraded their non EMV devices to ePort engage, our latest interactive device. In November, we held Cantaloupe University where we hosted 150 of our customers and partners in a two day summit and discuss some of the latest innovations and upcoming products that we will release in calendar year 2023. We also conducted in-depth Seed ePort and micro-market training. The event was very well received and validated that our pipeline of innovations continues to resonate with our customers and be highly relevant to their businesses. As we move into the second half of our fiscal year, we remain focused on the four initiatives that we outlined at our Investor Day. One, increased market share in core verticals that we operate in within North-America; Two, international expansion, leading with enterprise software. We are already positioned well for this with our acquisition of Three Square Market; Three, extend revenue per connection through our add-on services, such as the more price change AI-powered merchandising and more; Four, continued expansion into adjacent verticals such as EV charging, entertainment, gaming and smart retail. We are focused on continuously strengthening the executive team and to that end, I would like to officially welcome Anna Novoseletsky as our new Chief Legal and Compliance Officer, who will also serve as General Counsel and Corporate Secretary. Anna has already been an excellent addition to our leadership team bringing even more focus towards international expansion and valuable legal experience of reviewing regulatory needs as we continue to expand and scale. Thanks, Ravi. As Ravi stated our 2Q 2023 revenue was $61.3 million, up 20% year-over-year. As a reminder, we had 30 days of Three Square Market in our 2Q numbers. Revenue growth excluding Three Square Markets would have been 17% for the quarter. Our combined transaction subscription revenue grew 19% to $48.9 million, which was driven by accelerating subscription growth from Cantaloupe ONE and higher average transaction ticket sizes. Our equipment revenue was $12.4 million, an increase of 25% compared to Q2 FY 2022. Total gross margin for the quarter was 30.1%, down from 31.3% in the same quarter last year, driven by slightly lower gross margin on transaction fees due to a shift in card mix and the associated processing fees. Gross margin on equipment improved slightly to negative 2.3% from negative 2.8% in prior year. We look forward to driving to positive margins in Q3 and Q4 for equipment as we move past the 4G and EMV upgrade cycles. Total operating expenses in the second-quarter of 2023 were $19.4 million compared to $16.3 million in Q2 FY 2022. The increase was mainly driven by integration and acquisition expenses of $2.8 million encouraged as part of our Three Square Markets acquisition. Net loss applicable to common shares for the second quarter was $573,000 or a loss of $0.01 per share, compared to a net loss of $468,000 or $0.01 per share in the prior-period. Adjusted EBITDA was $3.9 million in the second quarter compared to $2.4 million in the prior year period. A few notes on our balance sheet and liquidity since last quarter. We ended the second-quarter with cash and cash equivalents of $28.1 million. This was down $23.7 million from our cash balance of $50.8 million at the end of the first quarter. Roughly half of the decrease, $11.9 million, was directly attributable to the acquisition of Three Square Markets. The remaining decrease of $10.8 million was split between $6 million of net cash used upon operating activities and $4.5 million for capital expenditures. Going forward, we are focused on lowering our inventory and AR balances as we collect on large equipment purchases made during the upgrade cycle. This decrease in inventory and AR is expected to generate positive cash flow from operating activities in the third and fourth quarter of 2023. Now turning to 2023 guidance, we are reiterating our guidance for the fiscal year that we provided on December 12, 2022 at our Investor Day. This guidance includes the impact of the Three Square Markets acquisition. As a reminder, our guidance calls for total revenue to be between $240 million and $250 million, total US GAAP net income to be between a net loss of $2 million and net income of $3 million and adjusted EBITDA to be between $12 million and $17 million. We expect the combination of transaction to subscription revenue to be between $200 million and $210 million, representing growth of 18% to 24%. To expand further, we expect transaction revenue growth to be in the low to mid 20s and subscription revenue growth to be in the high-teens to low 20s. We expect equipment revenue growth to be between 10% and 15%. Good afternoon, and thanks for taking the question. Can you talk about your expectations between your customer base, whether it's enterprise mid-market or small businesses as we look into calendar 2023 with the uncertain macro-environment? Great. It's a really good question. This is Ravi. We see the food and beverage side of our business, in particular, be very resilient to macroeconomic headwinds. And in fact, one of the unique trends in our businesses as more-and-more small businesses start businesses in micro markets and vending that's driving interest in and demand for our products and services. So, so far we are actually seeing it be a positive, not a negative in terms of the macroeconomic environment. Great. Very helpful. Just a quick follow-up on the prospects for Cantaloupe ONE in this year, can you talk about kind of your expectations? Thanks a lot. Yeah, I'll give you a little bit color and then also ask Scott to add to it. The Cantaloupe ONE product has been very well received, particularly by small and medium businesses. Enterprises that are large continue to prefer a model where they purchase equipment and depreciate it. But small businesses, absolutely love the idea of not having to put upfront capital and derisking themselves from any kind of product obsolescence. So Scott, why don’t you add some color financially as well. Yes. So overall, we are seeing great growth with Cantaloupe ONE program, we're seeing it not just in the small businesses, but also in the mid-market as well. So we're starting to put a lot of effort and focus in that mid-market. Overall, that's one of the largest drivers that we have for our subscription revenue growth over this past quarter and we see that continuing into third and fourth quarter. Thank you. One moment for our next question. And our next question comes from Gary Prestopino with Barrington Research. Your line is open. Hey. Good afternoon Ravi, and Scott. A couple of questions. First of all, Scott, do you have the transaction number, the number of transactions and the growth in absolute transaction. Yeah, sure. So year-over-year the number of transactions increased by 3%. When you look at the total dollar volume of transactions, that increased by 17%. So the dollar value of transactions is growing faster than the overall transactions themselves. I'll give you a little detail behind that. So last year, our average ticket size was $2.12, this quarter we’re at $3.40. Until we're starting to see a lot of growth within an average ticket price, that's driven partially by overall inflation, the large part of it, but also what we're seeing too is that, when you look at more and more move into the self-service commerce you're seeing higher ticket prices or high higher-ticket items, for instance, we have kiosk machines within airports to their vending headphones and charging forward. So we're starting to see the shift to self-service commerce at higher ticket value items. And even within food and beverage, it's more expensive [indiscernible] drinks versus a can of soda, right? So there is a shift in the products as well. Okay, great. And then, was there any impact. I know you mentioned that the margins on subscription and transaction fees were down. It looks like over 100 basis-points. You did mention some card mix there, but was there also an impact from the acquisition that impacted the margins even though it was only a month in in terms of revenue contribution. No, we really -- there wasn't. When you look at overall, the transaction revenue being our largest revenue line-item, the impact of the acquisition for 30 days has a very, very little impact on it. I'm sorry, go ahead. I was just going to say, it truly is just the mix of the cards. I mean, the pricing overall is fairly complex when you look at it, but it is just the mix of the card brands. So it gets a lot more complex than that. So it could be credit versus debit, it can’t be American Express versus Discover. There's different pricing depending on the issuing bank. So lot of factors go into it. Okay, that's leasing up to 20. And then could you maybe go into what you're doing to integrate the sales forces for the acquisition with your legacy sales force in the micro-market? Yeah, so the sales area is the one that we integrated first and the approach that we've had and Jeff Dumbrell, our Chief Revenue Officer has done an outstanding job of this using his playbook from the VeriFone days. It's a model where the salespeople have major and minor specializations. So if you're a salesperson that's an expert in selling micro markets and him from the Three Square world we've now cross-train them on the Seed Markets and the other products and they can lead with the micro market sale, but then they bring in the other products and then they also bring in an additional sales person when needed with deeper specialization and sort of do core selling if you will, and it works the other way around also. So a Cantaloupe sales person that might have deep expertise in the software side, but is now gaining expertise on the micro-market site would bring in a former Three Square salesperson with deeper expertise to core sales and deliver the right solution for the customer. So in a certain sense this is -- this has pushed us into a more sophisticated solutions selling model versus selling widgets, which was, card readers and, telemeters and the more elementary software. So this has been a more sophisticated sale and Jeff has led that transformation of the sales force very well. And then the last question I have is, it just -- it looks like the active devices sequentially were flat, is that correct? And what would account for that if they are flat? Yeah, so overall quarter-over quarter we’re up 3%, but when you look sequentially, it is flat sequentially. Lot of that is as we're rounding out the EMV 4G upgrade cycle, we're putting a lot of our effort over the past six months has been finishing that out and making sure that we don't have any churn as we do that. As we look to third quarter and fourth quarter, a lot of the focus now is going into new sales. Thank you. One moment for your next question. And our next question is from George Sutton with Craig-Hallum. Your line is open. Hey guys, this is James Rush on for George. Congrats on the quarter and on the. Success you're seeing with Three Square Markets early-on. And so sort of on the topic of micro markets, I guess some industry data out there sort of imply that micro-market can do 10 times to 20 times annual sales of a vending machine. Could you sort of talk about how that translates into your unit economics on a per device basis between vending and micro markets, like what kind of [indiscernible] could you see per device for micro market versus vending. I think those numbers are absolutely right on the money, James, in the sense, there are cases where we actually see operators replace a vending machine or two in a location and then go to a micro-market type of model. And you're right, it does go 10 times and it's driven by a lot of different factors. For us the benefits are, we see a direct benefit on the transactional revenue where those increased sales attract better economics for us in processing the transactions. And we also see a big left when it comes to the Seed software product, which for the micro-market is priced approximately four times to five times per location than the vending side of the equivalent product if you will. So, we see a benefit on both of those, the transaction and the subscription line item when a micro market is deployed. Well. I think you pretty much covered it. Overall, again, go back to the higher-ticket prices and micro markets, you see a lot more because people are buying [indiscernible] as opposed to [indiscernible]. Yeah, that makes sense. And then, I guess, how would you sort of describe the appetite of operators you've spoken to for adding new devices, now that we've gone through the upgrade cycle like our operators sitting there with funded budget just ready to pull the trigger in the next few quarters and order a bunch of new devices or would you expect operators to sort of methodically deploy capital and add new devices at a pretty even pace through the rest of the year. I think we're going to see a more even paced. The demand actually is higher and there is a -- I would almost say there has been some starvation because all of their budgets have been consumed with EMV and the 4G upgrade cycle. However, we are seeing operators be cautious based on the macroeconomic environment in terms of how fast they go into rolling out new locations and there is also the lagging factor of -- yes, 70%, 80% people have come back to offices, but they've come back three days a week and sort of five days a week, and some locations have still not come back and there is still that remote work factor which is making operators hesitate in rolling out new locations very aggressively. So I think we're going to see a gentler and a more even pace of new rollouts. Got you. And then just one follow-up to that, I guess, if I could. Sort of on the return to the office trend, I guess, are there still some locations today that are below pre pandemic levels? And if so, could you sort of speak to like what percentage that may be of your active devices? Yes, so as I said, in -- so there are two dimensions to that question. One is, how many locations simply haven't come back, right, from a pre pandemic to post pandemic comparison. I'd say, there is about 15% in that bucket. And then the second part of that question is, for locations that have come back, what are we seeing in terms of depressed or less volumes than before, we're actually not seeing that, for most part they have crossed the pre pandemic levels, but it may not be because people have come back five days to work in the office, but it's more because the ticket sizes -- prices have gone up and they are just maybe buying more premium products and the product mix has shifted. So there are other factors that have compensated and hence the sales per location have exceeded pre pandemic levels already. Super. Thanks very much. Yeah, congrats on the strong results there, strong EBITDA. You mentioned a couple remote price change wins, I believe when you went through the customer wins in the quarter. I guess just how prevalent is the interest in remote price change? Is it a sizable part of kind of upsells and new logos you're seeing out there at this point. It's very exciting and if anything, I think the only thing that's holding us back from accelerating it is that in some cases there are upgrades to the software that are running that -- an operator has running on their machines and things like that. Sometimes it's plug-and-play and sometimes they have to upgrade software components within their infrastructure before they roll it out, but we continue to see very strong up take from this product and a strong ramp-up of it. Great. And then on Cantaloupe ONE, it sounds like that was an important contributor to the new customer adds, again. I guess, can you give us some ballpark of how many customers are using Cantaloupe ONE at this point or number of active devices or something like that? Sure. So right now we're seeing approximately 15,000 seats on Cantaloupe ONE and we've been adding them at a rate of about 5,000 per quarter. Okay. And then just last one on operating expense. I mean, when you think about operating expense for the March quarter. Should we just kind of layer in two more months of Three Square Market or are there some other areas that you can kind of trim expenses. Yes, so overall when you look at the operating expense. I would say first quarter we had a lot of one-time events. So it's not a good indicator of the run-rate for it. The second quarter is a little bit better of an indicator, but we have also made some cost-savings as well to help decrease it. And then we always in the third-quarter we true-up our sales tax reserve, which last year was around $2 million in savings. We expect it to be around the same this year. Thank you, operator. So in summary, this was a solid quarter for us with strong revenue growth and a clear pathway to improved profitability. I'm excited about getting past the 4G and EMV upgrade cycles, completing the acquisition of Three Square Market and also early traction in Latin-America and EMEA and look-forward to executing on the strategy that we articulated as part of our Investor Day in December and unlocking significant value. Thank you for your interest in attending this earnings call.

EarningCall_402

Good afternoon. My name is Hannah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Carlisle Companies Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, we will conduct a question-and-answer session. I would now like to turn the call over to Mr. Jim Giannakouros, Carlisle's Vice President of Investor Relations. Jim, please go ahead. Thank you. Good afternoon, everyone, and welcome to Carlisle's fourth quarter 2022 earnings conference call. We released our fourth quarter financial results after the market closed today, and you can find both our press release and earnings call slide presentation in the Investor Relations section of our website, carlisle.com. On the call with me today are Chris Koch, Chair, President and Chief Executive Officer; Kevin Zdimal, our Chief Financial Officer; and Dave Smith, Carlisle's Vice President of Sustainability. Today's call will begin with Chris giving an update on our progress in achieving our strategic plan, Vision 2025, highlights of our fourth quarter and full year results and a discussion of our current business outlook. With our recently announced commitment to achieving Net-Zero emissions by 2050, Dave will elaborate on our commitment to this pledge and provide a general update on our sustainability progress. And Kevin will discuss additional financial details and our outlook for 2023. Following our prepared remarks, we will open up the line for questions. But before we begin, please refer to Slide 2 of our presentation, where we note that comments today will include forward-looking statements based on current expectations. Actual results could differ materially from these statements due to a number of risks and uncertainties, which are discussed in our press release and SEC filings. As Carlisle provides non-GAAP financial information, we've provided reconciliations between GAAP and non-GAAP measures in our press release and in the appendix of our presentation materials, which are available on our website. Thank you, Jim. Good afternoon, everyone, and thank you for joining us on our fourth quarter 2022 earnings call. Please turn to Slide 3. Let me begin my commentary by complementing the entire Carlisle team on the sales and earnings records set in the fourth quarter and the full year of 2022. 2022 truly was an exceptional year. In addition to delivering record fourth quarter sales of $1.5 billion, we also delivered record annual sales of $6.6 billion, surpassing both the $5 billion and $6 billion marks in sales for the first time in Carlisle's 105-year history. We further delivered a record adjusted diluted EPS of $3.92 in the quarter, an increase of 34% year-over-year. 2022 also marked a key milestone in our Vision 2025 journey as we delivered $17.58 of GAAP EPS for the year, exceeding our primary Vision 2025 goal of generating $15 of GAAP EPS for our shareholders. Exceeding this goal three years early is a testament to the hard work and dedication of all of Carlisle's employees and to their commitment to the work of Vision 2025. These record results are even more remarkable given the extremely challenging operating environment of the past few years. Of the many challenges we faced over this period, I would say navigating the COVID pandemic was the most unexpected challenge. For so many people, the pandemic was a traumatic experience in their lives from a health and welfare, social and economic perspective. I'm grateful for the significant actions Carlisle employees took to keep us all as safe as possible while navigating COVID in their personal life as well. In addition, we also experienced significant supply chain disruptions and inflationary environment and labor and material shortages. Our record results would not have been possible without the clarity of mission that Vision 2025 has provided us since its launch in 2018, and the unwavering commitment of our teams. Guided by Vision 2025, our teams remained unified and stayed the course for the past five years, diligently overcoming the challenges we faced. Please turn to Slide 4. Our record results continue to demonstrate that Vision 2025 has been the right strategy for Carlisle. In addition to our world-class teams and proven business model, we've benefited from a strong balance sheet, an excellent cash flow generation to provide both financial and strategic flexibility to execute and achieve our ambitious goals. A significant portion of our success has been driven by the multiyear process of reshaping our portfolio to pivot from a diversified industrial products company to a higher returning building products portfolio of businesses. This transformation sets the stage for a more focused, simplified and better understood path for future sustainable value creation at Carlisle. The pillars of Vision 2025 remain core to our strategy going forward. These include: first, drive mid-single-digit organic revenue growth. In the fourth quarter, we delivered 6.6% organic revenue growth, which helped drive organic growth of 29% for the full year 2022. Notably, all four segments contributed to this growth. Second, utilize the Carlisle Operating System, or COS, to drive continuous improvement. We use COS to consistently drive efficiencies and enhance operating leverage. For the full year 2022, adjusted EBITDA margin expanded nicely and COS contributed to that. We continue to target COS savings of 1% to 2% of annual sales. Third, build scale with synergistic accretive acquisitions. Under Vision 2025, we have streamlined and optimized our portfolio through acquisitions and divestitures to build scale in our highest returning building products businesses and to broaden our suite of energy-efficient solutions. Through 2022, we have invested over $3 billion in accretive acquisitions. And fourth, a returns-focused capital allocation strategy that includes deploying over $3 billion into capital expenditures, share repurchases and dividends. Since the launch of Vision 2025, we have invested over $3 billion into these areas of capital allocation, also three years ahead of our original plan. In 2022, we made capital investments of over $184 million into our businesses to drive innovation, increase operational efficiencies and enhance the Carlisle experience. We also returned over $500 million to shareholders with share repurchases totaling $400 million and $134 million paid in dividends in 2022. And of course, none of this would be possible without continuing to invest in and develop exceptional talent. Through the accelerated execution of Vision 2025, Carlisle has built a solid foundation, leveraging a diversified workplace, decentralized management style, entrepreneurial spirit and a culture of continuous improvement, which will continue to guide our value creation journey in 2023 and beyond. Turning to Slide 5. I'd like to highlight some of the many accomplishments in the fourth quarter. First, collectively, our building products segment now constituting over 80% of Carlisle total sales delivered record fourth quarter sales and adjusted EBITDA. Second, we are pleased with the ongoing integration efforts at our newest segment, CWT. The team continues to effectively capture the projected synergies from the Henry acquisition of $30 million, while focusing on delivering excellent customer service in a challenging environment. This commitment to our channel partners and customers was recognized when Henry was awarded to Home Depot's Building Materials Vendor of the Year Award in October. Third, we continued the introduction of our innovative labor-saving 16-foot TPO product to the market, which is manufactured on the industry's latest and most technologically advanced TPO line in Carlisle, Pennsylvania. As a reminder, we began shipping this product in the third quarter of 2022. Additionally, construction of our state-of-the-art polyiso facility in Sikeston, Missouri is on track for completion in the second quarter and on track to achieve LEED Platinum certification, the highest level of commercial building energy-efficient standards. Fourth, pricing remained and continues to be positive across all segments as we continue to demonstrate our value to our customers. Fifth, supply chain and material availability returned to a more normal state. This return to normal has enabled our channel partners to settle back into more of a historical buying cadence. And finally, global aerospace markets continue their recovery, driving strong sales and backlogs at CIT and increased profitability on the back of the significant restructuring actions taken by the CIT team over the past few years. And with that, I'll turn it over to Dave Smith, our Vice President of Sustainability, for an update on our ESG progress. Dave? Thanks, Chris, and good afternoon, everyone. Please turn to Slide 6. I'd like to begin by reiterating that Carlisle has had a century-long legacy of responsible stewardship and stakeholder focus, all driven by our core cultural value of continuous improvement. We believe that creating a more sustainable environment is also productive for our shareholders. As an organization, Carlisle is committed to being a responsible environmental stakeholder with our three pillars of environmental sustainability. First, develop energy-efficient products and solutions to reduce the greenhouse gas, or GHG emissions, from building operations and help lower operating costs for our customers. In 2022, Carlisle sold $3.5 billion of LEED certified products and solutions, up from $2.5 billion in 2021. Second, reduced material weights going into landfills. Our history of recycling began in the 1920s when we incorporated scrap rubber into our inner-tube production. Today, we continue that tradition by upcycling polyiso waste into water filtration products. Carlisle has had a century long commitment to reduce material waste and continually improve our processes to deliver shareholder value while improving the environment for the communities in which we operate. And third, a focus on lowering the GHG emissions of our operations and manufacturing processes with the implementation of enhanced energy conservation measures such as converting our factory forklift fleet from propane to electric. During the fourth quarter of 2022, Carlisle probably took a significant step to achieving Net-Zero GHG emissions in our value chain by 2050. To accomplish this Net-Zero state, we proposed near-term GHG reduction targets through the science-based targets initiative. The site-based targets initiative is an independent body based in the U.K. that works in conjunction with United Nations to help guide companies to establish emission reductions initiatives using science-based targets. Our near-term 2030 GHG reduction targets are: first, to reduce scope 1 and scope 2 emissions by 38%; and second, reduce scope 3 GHG emissions by 48% per pound produced. While our focus on emissions, waste reduction and sustainable products are a key part of our sustainability efforts, we also made a significant commitment to the social component of our ESG progress. On October 17, 2022, we proudly announced a special stock option grant to all eligible U.S. employees and a cash award to all eligible employees outside the U.S. These awards are designed to allow all Carlisle employees to participate in Carlisle's success as stakeholders. Previous grants issued in 2009 and 2018, generated significant returns for our employees based in no small part on their contribution to increasing shareholder value. Additionally, our path to zero program, which represents Carlisle's commitment to creating the safest possible work environment, continues to be a source of pride for our organization. In 2022, Carlisle's OSHA Incident Rate was a remarkable 0.67, significantly below the industry average of over 3 and that represents a 69% decline in workplace incidents since 2014. And with that, I'll turn it over to Kevin to provide additional financial details as well as our 2023 outlook. Kevin? Thank you, Dave. Before turning to segment results, let's turn to our overall 2022 fourth quarter results on Slide 7. The fourth quarter played out much as we anticipated and communicated on our last earnings call. As Chris mentioned, the Carlisle team delivered a very strong fourth quarter despite the many challenges we faced. Fourth quarter revenues increased 6.6% organically, driven primarily by positive pricing across all segments. Fourth quarter adjusted EBITDA margin improved 280 basis points, driven by efficiencies gained through COS and our ability to price to value. Revenues, adjusted EBITDA and EPS were all fourth quarter records for Carlisle. For segment highlights, please turn to Slide 8. CCM delivered revenues of $800 million, up 3% organically. This performance was driven by positive price more than offsetting year-over-year volume declines given current normalization of buying patterns by our customers in severe weather in December in much of the U.S. Adjusted EBITDA margin of 28.5%, a record performance in the fourth quarter by our CCM team was driven by price and COS and partially offset by raw material and labor inflation unfavorable mix and a reduction in volume. Moving to Slide 9. Sales at Carlisle Weatherproofing Technologies increased 5.5% organically. This growth was achieved despite ongoing supply constraints and softness in residential demand. Adjusted EBITDA margin was 12.8%. The team continues to focus on the integration of Henry, the $30 million of stated synergies from the acquisition and rolling out COS throughout CWT to drive greater efficiencies in our operations. Moving to Slide 10. CIT revenue increased 22% organically in the fourth quarter of 2022 with balanced growth in our commercial aerospace and medical technology platforms. We continue to see domestic travel approach pre-pandemic levels, strong backlogs and growth in our medical new product pipeline. As a result, CIT is well positioned for continued revenue growth and EBITDA margin expansion in 2023. Turning to CFT on Slide 11. CFT generated organic revenue growth of 11.3%, driven by positive pricing and favorable volume, partially offset by a 7% year-over-year foreign exchange headwind. Adjusted EBITDA margin expanded more than 400 basis points to 22.1%, driven by favorable volume, price and efficiencies gained from COS. Slides 12 and 13 provide details of our record fourth quarter consolidated results for revenue and adjusted EPS. Moving to Slides 14 and 15. Carlisle ended the fourth quarter of 2022 with $400 million of cash on hand and $1 billion availability under our revolving credit facility. We generated cash flow from continuing operations of $418 million, bringing our full year 2022 total to $1 billion. Turning to Slide 16. We have our 2023 financial outlook. Despite a challenging first quarter, we expect to deliver another record year in 2023 with full year consolidated revenue up low single digits. The first quarter will be a challenge as a result of tough comps for CCM, the weather disruptions that we have already seen as well as the continued normalization of buying patterns in the channel. Residential exposure represents a significant headwind for CWT in 2023, also weighing on our consolidated revenue growth outlook. While smaller contributors to consolidated results, healthy backlogs in both CIT and CFT give us confidence in their ability to each grow revenue high-single digits in 2023. Given our focus on disciplined pricing, operational efficiency and managing costs through our continuous improvement efforts, we expect consolidated adjusted EBITDA margins to expand 100 basis points year-over-year. In November, we gave a preliminary view of 2023, stating we expect to drive adjusted EPS growth this year. With non-residential re-roofing demand remaining strong, continued pricing discipline and an unending focus on manufacturing efficiencies, we reiterate this view and are driving towards another record year for Carlisle. Thanks, Kevin. In closing, I once again would like to express my thanks and appreciation for the hard work and perseverance of all of Carlisle’s employees. The accomplishments the team has achieved since the launch of Vision 2025 are remarkable and were done under some of the most challenging conditions industry has faced in over a decade. I think we can all look back on 2022 and be proud of an outstanding year. As we move through 2023 and with Vision 2025 objectives well ingrained throughout Carlisle, I am optimistic for the year ahead. We will take actions to navigate this complex operating environment, deliver the Carlisle experience to our customers, drive earnings growth for our shareholders and strive to deliver another record year. There’s been a lot of focus, I think understandably so on whether CCM’s Q4 volume compression, simply the normalization of order patterns and channel reset are indicative of underlying demand destruction. And it sounds like some of the channel recalibration is continuing into the first quarter. That in mind, I think it would be helpful if you walked us through how orders phased through Q4, what you’re seeing in Q1 relative to the Q4 rates and where you see Q1 revenue shaking out relative to the Q4 level? All right, Bryan. That’s – there’s a lot in there. So let me just first say that we do see some of the inventory normalization going into Q1 when we had originally thought it would probably be down by the end of the year. Some of that has to do with weather. Some of that has to do with economic impact to interest rates and things like that. But overall, as we go into the year, we still see commercial roofing strong. We think it’s going to be a good year in 2023. We do have some comps in Q1 that are, I would say, fairly large, but nothing really happening there on the demand side. Re-roofing continues to be strong. I think some modulation, I think in the future, maybe on new construction. But we’ve been out talking to a lot of contractors, a lot of distributors. We do see, for sure, it’s real, this inventory normalization. We see it continuing. I think people have hinted that. But the underlying demand is still good. And I’ll turn it to Jim, just to give you a little more granularity on the demand and the order. Yes. So an extension of what we saw and what we communicated all through 4Q, Bryan, we’re seeing just because we are in our seasonally softest period that the channel or recalibration of inventory levels, et cetera, has taken us through the winter months, right? And so you could see an extension of those trends certainly through most of 1Q. And then that should probably take you to normal – approaching normal seasonal patterns that you would typically see as 1Q being our seasonally softest period. Okay. I appreciate the color. And I guess just to follow-up on that and level set. So if we take our stab at where in the low-single digit range, CCM revenue picks out for the year, you’re saying that it’s fair to assume more of a normalized seasonal pattern to revenue with significant step up Q2, Q3? Right. This is Kevin. And yes, on that piece of the revenue throughout the year, we don’t break it down too much by quarter, but we would say that our first quarter typically is about 20% of our full year revenue for CCM. This year based on our low-single digit guide, we would say our Q1 would be high teens as a percent of the total year. Okay. That’s helpful. And I think about segment margin for the year, you have the 100 basis point consolidated margin expansion guide. That seems to necessitate that core CCM is higher year-on-year. How should we think about the other platforms? You have pretty good momentum, CIT, CFT. You’ve spoken to expansion there. Can you quantify that further or add a bit more detail? And in terms of CCM and CWT, am I correct that, of course, CCM should be higher year-on-year? And how should we think of the volume versus synergy and COS-based offset with CWT. Yes. We don’t get into too much on the segments. I’m breaking down exactly what the components are at the margin. But I would say, so we have said that overall consolidated will be up 100 basis points on margin, and we do see all four segments having year-over-year improvement in margin. So each of – so CCM to your point, definitely, we are seeing margin improvement, we’re expecting margin improvement year-over-year. Maybe just on the pricing side, I think there’s just some anxiousness among investors that this kind of normalization period that the industry is working through is going to create some sort of, I guess, pricing competition. So maybe if you could just talk to kind of what you’ve seen as you’ve gone through the fourth quarter around price realization or at least the stiffness the price? And then how you expect – what you kind of see to fall already in the first quarter? Yes, Tim, we – pricing is remaining firm. I think we talked about it at your conference. We continue to see great stability in the industry, people pricing to value, no degradation. We talked about, I think earlier about how the price increases that we put in the latter half of 2022 would continue on into 2023 and be accretive in 2023, and we’re seeing that happen just as we expected, no real deviation there. There have been some – hence, yes, we know from people hints – but questions from people, but we’re really not seeing it. Fourth quarter was consistent on what we expect at the price, no degradation going into the year, we don’t see that. And we really don’t see any motivation coming from either contractors or distributors to participate in that. There’s still a premium on delivery. We still have labor constraints. And so as we go into 2023, we would expect pricing to be accretive and to have a gain based upon that lapping of the price increases that we put later in 2022, so nothing’s changed. Okay. Okay. That’s good. And then I guess, just from a raw material standpoint, I mean is there a way just conceptualize kind of what you’re seeing in the raw material basket from a price standpoint and kind of what may be embedded in the total company target of 100 basis points expansion. Yes. And the raw materials, as we look at it throughout the year, early in the year, first quarter, we’re not going to see much of the benefit, but as we get into the summer months, we expect to have some tailwinds there on the raw material costs and throughout the balance of the year. Okay. And then the last one for me, just on Henry. So if sales are down double digits, how do we think about the EBITDA margin I guess CWT? But how do we think about the EBITDA margin in CWT? What’s kind of the core decremental I guess, on those volume declines? And then what are – are there any potential offsets? Yes. The margins – incremental, decremental margins are right around 30%. And again, we expect to see year-over-year margin improvement in this segment, despite, as you said, the doubt-digit decline in revenue. Hi, thanks. I just want to follow-up on point you make with respect to expecting some modulation in new commercial construction. I was just wondering if you could maybe speak to that a little bit more, maybe speak to backlogs or any conversations that you might be having with your customers with respect to the timing of that? Yes. We still see, I think 2023 as a strong year. There may be a little modulation in new. We did have a really strong, I would say, bias to new construction when we were in 2022 and coming out of COVID, Garik. And I think what’s happening is we’re seeing the re-roofing pickup as a larger part of the sales in 2023. We would have expected that. I think Jim may have indicated that in previous quarters how as that may modulate a little bit re-roofing would pick up because of the backlog there. And I think we’ve shared our charts with you about how we see re-roofing playing out over the next five years to seven years. So as we came out of COVID and the delay on new construction there, I think new picked up. And obviously, it’s easier, I think, to delay re-roofing a little bit than it is to delay a new project that it was under way and COVID experienced delays due to the governmental restrictions on the job sites and things that were happening back then. So still see a positive year, still see a good scenario for new. And then I think really what starts to happen is as we get through 2023, we’re going to have to look at what happens from the Fed, what happens with other things in the economy on a macro level to really start wondering if it’s going to have a dramatic change into 2024. Now through that whole thing, we still see underlying demand is positive for re-roofing and other things. So yes, 2023 should still remain good. Okay. Great. Want to follow-up just on the mix impact in CCM and CWT in the fourth quarter, and how you anticipate mix to evolve in 2023, if at all? Well, we don’t normally get to that granularity on the call around mix. I would say when we look at CCM across the Board, EPDM, TPO, PVC, polyiso, really, with the exception of the last year where we’ve seen the raw material availability and then the supply availability and some different ordering patterns. For the most part, they’ve been very stable. EPDM has been a steady low-single digit grower. TPO continues to be a product that gains momentum. And obviously, polyiso with the ESG and efficiencies that are becoming now regulations and people wanting to higher our values on their roof. We’re seeing yes, polyiso continues as it has through the years to gain as a percentage of the job site. We’re still putting on maybe a square of TPO. But underneath that, we could be now putting on two, three, four layers of polyiso, and I think that will continue to gain momentum. And then on the PVC side, our team has done a great job on PVC. We think it’s a nice product. It’s been relatively new to Carlisle. A few years ago, we opened up our plant in Greenville. And so polyiso or PVC has continued to gain some market share and had, again, good growth in the fourth quarter and in 2022 overall. So I don’t really think the mix will change much. When you look at our metals business, it’s pretty consistent there. Petersen and Drexel, the two acquisitions continue to grow at an expected rate and remain about the same percentage. CWT gets a little bit different because the businesses get a little bit smaller, but we continue to see nice improvement with Henry. They continue to have pretty good success in the retail channels and R&R. We think R&R should pick up in 2023. And then spray foam to the Accella acquisition that had a few years ago, it was a little bit lower mix, but we’ve done some nice things there with that group to continue to drive, I would say, market or above rates, and there were some – I think when we did that deal, we were talking about 8% as a market growth rate there, and so they continue to grow. But then you get into some smaller businesses. And as you saw with the public announcement on [indiscernible] side of our rubber business, we did exit that. And so obviously, that changes a little bit of the mix, but it’s not much. So try to give you some granularity there. But overall, mix pretty much stays the same that for the company and hopefully, that helps you. Thanks very much. I was wondering if you can talk a little bit about CCM in terms of the low-single digit revenue there for 2023. You’ve talked about pricing in terms of still getting some benefit there. So given the impact on volume here in 1Q with inventory and such, are you essentially assuming sort of some slight benefit from pricing volumes flat to down or slightly there? Is that the way to think about it? Dan, I think we don’t want to – obviously, we don’t like to share too much because of competition. But just try to give you a little color. I think if we look at that number, we’d split it. We’d probably say the low-single digits. We take half in price and half in volume. So that could fluctuate a little bit. I happen to think that we’re seeing a little bit better start to the year. So could see a little bit more volume. But I think it’s a good place to just say split it 50-50. And also – this is Jim, just that I mean, 1Q, obviously, is our toughest comp. We have our easiest comp in 4Q, right? And so that that will tend to balance out your model, Dan, to get into the low-singles on average for the year. Great. And then, I guess, second thing, in terms of repurchase activity increasing there in the fourth quarter, how do you think about that in terms of planning for 2023? Should we expect more ones to get past these short-term challenges in 1Q? No. I think we’ve been pretty consistent about our allocation of capital, especially into share repurchases. And we still tend to look at our intrinsic value, and then we do some work around that to see where we end up and then we compare it to other places where you can allocate capital. And I’d say we should be in that same level for 2023 that we were for 2022. When you look at the year as a whole, obviously, it’s going to maybe vary by quarter, but I think what we did in 2022 is probably a good starting point for what we’ll do in 2023. Thanks for taking my questions. So just following up on the CWT margin commentary. Just given the volume declines, can you just walk us through the offset that way you expand margins for the full year? Yes. We – as far as – I mean, the biggest one will be price cost. As you look at that one, we’re seeing that to be a benefit in our business for 2023 at CWT, and that’s been historically, what we’ve seen in other cycles like this as you look back, whether it was financial crisis or back-end early 2000s, very similar that we didn’t own the business at the time, the Henry business, but that’s – they saw similar to what we saw in our core roofing business with those being tailwinds. Yes. Saree, I would also say, Chris here, that COS, we buy an organization, especially the magnitude of Henry, and we roll COS out. It typically tends to be very well received. And I think Frank Ready and the team at Henry have embraced COS. And so we think we’ve got some upside there because they’re in the early innings of that lean sigma rollout, so that should help. And then obviously, we are applying – with a longer-term view that Carlisle has, we’re applying a little bit more focus on automation and capital investment in our factories, so we should get some efficiency there. And then we also had some portfolio action in there, and we talked about that rubber business, which actually was taking away from margin in 2022. And with that out of the mix, that will boost that margin up. So when you look at those things altogether, it gives us quite a few vectors to work on and also see some nice returns. Great. And then you had a competitor announce who was buying DuralastI believe today. Can you just talk about any impact to the competitive environment as they continue to make acquisitions in the space? Yes. It’s for us, it’s an interesting situation. I believe they bought Malarkey earlier, and that’s a residential shingle organization doesn’t affect us too much. I mean I can’t really think that impacts our commercial roofing business or CWT business. And now this acquisition of Duralast, great company. We know Duralast very well. They have a great product, but they’re really not a competitor to us in our commercial roofing space. They really deal, I would say, in a kind of a smaller square foot size and maybe in some different segments that we compete in. So that’s a great business, great family business. And so they’ll – I’m sure they’ll do well with that. But the impact on it should be minimal. I think going forward, we would obviously – they’re stated they want to grow in North America. And obviously, Carlisle wants to grow in North America, and we’re acquisitive, and they want to be acquisitive. So I would imagine we will run into that team again as assets come up on the horizon. Yes, good afternoon everybody. I guess, I just want to go back to CCM. And fourth quarter, I think a normal seasonality there as being kind of down 15% sequentially versus the third quarter. You were down kind of 2 times that. It looks like there was obviously more than seasonality here. Kevin referenced the snowstorms in the U.S. Maybe for starters, can you just quantify the impact to some of these other things beyond seasonality might have had there and help us break this down a little bit? Right. The biggest piece, I mean, the weather was there, but it’s also just how we’ve talked about it in the last earnings call and this one, there’s normalization of the buying patterns that what we had throughout 2022, folks were on allocation and being on allocation. People are buying what they could get their hands on. And they basically bought ahead in the first part of 2022. And that was really the biggest reason why in the fourth quarter as customers brought inventory levels down that impacted that piece. So we would not say 2022 was a normal year of seasonality. We think even bright and to go back pre-COVID and look at how those years broke out as far as quarter-by-quarter, like you’re looking to do from Q3 to Q4 because as we get back to normal, a lot of that will be in play, and you can look at it that way. I pointed out what Q1 would be not normal this year. But then once we get to Q2 and the balance of the year, we think that will be more normal. And as a result of what happened in 2022, the fourth quarter is going to be an easy comp for 2023. No, I was just going to ask, do you think excluding that sort of the reconciliation of the pre-buy and the weather that you were closer to that kind of 15% down sequential pattern that would be sort of the typical seasonality, I’m just trying to quantify some of this. Yes, David, I’m going to jump in here just because I think what Kevin said is important, and I just want to make sure we recognize. We look at what CCM organic growth was probably prior to 2020, which was in COVID hit, right, Feb 2020, I’d say, or March of 2020. We’ve been tracking to that mid-to-high single digits, and it had been going there. And I think we’ve always said new construction in the two, three, four and reroofing in the four, five, six or something like that seven. And it held pretty much there, and I’m talking organic. In 2020, we were down 7.5% and then we were up almost 22% and then 22% up 37% in organic growth. So I think when we look at those numbers, we kind of know if the long-term trend in these underlying fundamentals, which are super strong and have been very consistent with CCM for a long time, are going to kind of repeat themselves. There had to be some, I guess, reversion to the mean. And I think that’s what was working it out in Q4. And I think that’s why Kevin made that statement of what’s normal. And I don’t really know that we’re going to be able to pick apart with what I just told you and make any real sense of it because when you think how many contractors and distributors that we interface with and you think of what the variability might be in each region, and in each location with what they could carry on inventory and how quick they’re going to get out of that. It just gets super complicated. So I know that doesn’t help you, but I think what Jim and Kevin are trying to say is just as we move into 2023, we’re getting back to that pre-COVID cadence, it’s a strong cadence. It’s got great growth on the underlying demand with leverage. And really, just – I just think as we come out of that, we just have to take it what these three years has been, which is just a very much an anomaly. And I think when you at the team did to manage through it, great job. But trying to parse that apart, I don’t think we can do it. Yes. Okay. I appreciate that. Thanks, Chris. Just as a follow-up. I guess, within the guidance, you’ve got Sykes in ramping here in the second quarter. Is that going to be a temporary drag to the P&L? And if so, how should we phase that over the quarters in our models? Yes. No, it shouldn’t be relative to how we set expectations both for top line and for the margin progression for this year, David. I will say, though, just given the correction that’s taken place in the marketplace, our ability to produce if we think that the demand is going to be as strong as – if the demand is as strong as we believe it will be, our ability to service that demand only increases in the spring summer selling season with that facility fired up. So we see it more as an opportunity, not something that you should be modeling or hindering your margin progression with firing up. And David, I think Jim brings up an interesting point, which is the timing of this inventory, let’s call it, correction or normalization is going to be interesting. Usually, back in pre-2020, we’d see an inventory load into distribution in the April – March, April time frame as we began the bulk of the North American construction season. And if we think about this inventory normalization probably wrapping up in the first quarter. You have to ask yourself the question, well, that might mean that there is going to be less inventory in the channel going into the construction season where the high demand is there. And if we’re right, which we – from every indication we have, this is going to be another good year in the commercial roofing space, then you think we start to think about how there might be some pressure for product and around availability, which obviously at Carlisle with Sikeston, with the new 16-foot TPO line and this kind of stuff, we think we’re prepared to flex with that. But that does have some implications for pricing, for sure, that creates a very nice support for the pricing question asked earlier. So again, early days, Q1 really never tells us in certainly January much about how the whole year is going to go. But at this point, things do look positive. Hey, everybody. Maybe just starting with CCM and CWT, just kind of what you’re thinking in terms of end market demand across the various verticals like commercial reroofing, new commercial roofing demand in the new res and residential R&R? Yes. I mean I’ll start with the high level, Adam, as far as new resi. I mean, when you split – I’ll start with CWT, right, each exposure, repair and remodel and new in both res and non-res, each about a quarter of the exposure there. Obviously, on the new residential side, we have to think that 20% to 30% down is a potential. The backdrop for demand in that end market. On the repair and remodel, obviously, we have a mix of discretionary and non-discretionary. So it shouldn’t be that bad at all. It should be potentially flat to maybe slightly down – excuse me. And then on the commercial side, I would think just think low single digits both on the new and repair remodel, commercial, we think is going to be a strong end market for us. So that’s the CWT basket, if you will. For CCM, hard to have that discussion without pointing out that 70% of what we sell CCM is reroofing. And that demand, we think we have tailwinds not only for 2023, but certainly for the next decade. Got it. Okay. Thank you. And then just maybe the step-up in CapEx, what’s kind of driving that? Is it just timing? Or is there something across some of the businesses that we’re investing. Certainly, with Sykes then coming on in 2023, that will be a big piece of it. And outside of that, as you say, just really a normal step up with growth of our business and continuing to invest organically into our businesses. That’s been our highest ROIC type investments. Hey, Thank you. So I guess, I don’t know, like a lot has been asked, but – so just looking at the segment outlook, right? I want to figure that the assumptions around CCM would have been closed or probably the single-digit range. And maybe following up on, I believe it was Dan, who asked this question about the first quarter. I mean, based on the guidance for CCM, it pretty clearly implies that the first quarter is down. And with regard to, I guess, the growth being half price at volume, how does the, I guess, significant amount of pricing that was put through over the past year, not carry over more than what is implied? Yes, it’s going to be on the volume side. Certainly, the price will carry over into the first quarter and throughout the year, but the volume is a bigger challenge, and that’s a few different pieces. One, the weather in the fourth quarter actually impacts the first quarter because the inventory didn’t get out of the channel as we got to the end of 2022, we were expecting that to be out and not be an issue going into 2023, but weather slowed that down, so that’s going to impact the first quarter. And then also with the weather in January, that’s impacted volume in the first quarter for CCM as well as CWT. CWT actually benefited from some of the rain and some of that piece in California. That’s been a pickup there. But sticking with CCM, the other piece that we discussed earlier in the call is the year-over-year comp is a challenge because 2022 was a much higher first quarter than the historical trend that we’ve been talking about. Okay. Thank you. And then maybe just one more, just a follow-up on the Duralast, so which would no doubt has been – I think a home for Carlisle synergistically. But regardless of the competitive landscape, you certainly know the company and presumably did the due diligence on it. So I guess, what do you think about the prices being paid by wholesome? Well, the first thing we talk about can extract the value and every decision, every company, they have to make the decision for their company. I don’t know what their synergies were or how they’re going to integrate, how much they’re going to integrate, whether they keep the team alone, whether they seek to get that or whether they even bring in things like pricing. So I can’t really comment on whether the pricing is good or not. I mean they’ll have to decide that, and we’ll see that in their numbers like we would at Carlisle. But what’s good for, I think, the industry is it’s demonstrating that the companies in this space, certainly Carlisle, you can see our margins some are private may have been undervalued in the last few years. And it’s a very good space, North America to be in with good underlying demand. The ESG trends are positive for all of us. We have great products that many can be recycled and just a great contribution. We’ve got the IRA act that came out in the Biden administration. We’ve got reshoring. And I think the price is being paid for things like Firestone to Malarkey and now Duralast reflect a lot of confidence by people in this framework for the next five to 10 years. And I think that’s good for Carlisle. I think that’s also good for our investors. It sends a really good signal about that. And I think you can look at multiples then and say are the public traded companies trading at those kind of multiples. And if not, they’re probably trading at a discount based upon what we see in the market. So I think overall, yes, it’s good for all of us. Thank you, Mr. Joyner. There are no additional questions waiting at this time. So I will turn the call over to the management team for any further remarks. Well, thanks, Hannah. This does conclude our fourth quarter 2022 earnings call. I appreciate everyone for the questions. Thanks for your participation, and we look forward to speaking with you on our next earnings call. Thanks.

EarningCall_403

Good afternoon everyone and welcome to our conference call, during which we will discuss our operational and financial highlights for the fourth quarter of 2022. With me today are Harold Goddijn, our CEO; and Taco Titulaer, our CFO. We will start today's call with Harold, who will discuss the key operational developments followed by a more detailed look at the financial results and outlook from Taco. We will then take your questions. As usual, I would like to point out that Safe Harbor applies. Thank you very much, Freek, and welcome ladies and gentlemen. Thank you for joining us today. I will discuss the operational highlights in the quarter and give an overview of our strategic priorities. We recorded robust growth in revenue in the fourth quarter. Enterprise performance in line with expectation and automotive showed strong growth. The automotive business showed an outperformance versus the car production volumes in our core markets, as it has throughout the year. Our automotive performance portfolio is gaining strength and has enabled us to win major contracts in 2022. Order intake was at a record high and resulted in an automotive backlog of €2.4 billion at the end of the year. Our new Maps Platform is maturing and in line with expectations with first customer shipments expects to happen in Q2 this year. We announced a new Maps Platform during our capital markets day in November. That platform allows for standardization and integration of new data sources, and a new way of working, which will lead to richer and fresher Maps that are more efficient to produce. And to encourage the industry to standardize on our new Maps Platform, we have decided to open source, the base road network and the specifications of the Maps. This will over time allow for frictionless data exchange and wider availability of data for further integration in our proprietary Maps products and into our services. We have joined forces with Amazon, Meta and Microsoft to advance these initiatives and market reception so far has been encouraging. We aspire to further grow our market share in automotive based on the superior Maps product, a strong portfolio of services and a large number of cars sending signals to our servers. Electrification, new safety legislation and ongoing progress in others and automated driving will provide us a fair opportunity. We expect our new Maps to be an important driver of growth outside of automotive over the midterm. We will offer significant improvements in quality and richness, which will enable us to extend our success in the automotive market through the most broad variety of customers. Especially in the enterprise segment, we expect positive effects from standardization and our open source initiative. We are confident that we have a solid foundation in place and aim for continuous top line growth and further optimization of our processes. Taco will elaborate further on this after going over the financial highlights of the quarter and the full year. Thank you, Harold. I’ll provide some comments on the 2022 financials and also discuss the outlook. We will then proceed to the Q&A. In the fourth quarter we reported group revenue of €139 million, that’s 21% higher than the same quarter last year. Location Technology revenue increased by 30% to €118 million. Let me go through the revenue business-by-business. We reported automotive IFRS revenue of €77 million in the quarter, representing a 64% year-on-year. This increase was partly the result of the evolution of our automotive products. From a predominantly onboard offering, including updates to a combination of API based updates and services, and an initial onboard map. The evolution led to a change in the timing of IFRS revenue recognition, improving reported revenue this quarter. Automobile operational revenue increased by 16% year-on-year to €82 million. This marks an outperformance compared with car production trends in our core markets being Europe and North America. In our core markets, car production growth was roughly 10%. Our outperformance resulted for market share gains and further increased in take rates. Enterprise revenue decreased by 7% year-on-year to €40 million. The decline was anticipated and related to some contract renewals, reflecting decreased usage and those with lower contract values. Lastly, consumer revenue decreased by 13% year-on-year to €21 million. Our gross margin was 87% in the fourth quarter compared with 82% in the same quarter last year. The improvement in our gross margin is the result of a higher proportional software and content revenue in our total revenue mix. Operating expenses were €125 million, a decrease of €4 million compared with the same quarter last year. This decrease resulted from lower personnel expenses in our Map units. Before moving to the outlook, let me reflect on our full year results. We will report a Group revenue of €536 million for the year, a 6% increase compared to 2021. Location technology revenue increased by 11% to €436 million, while consumer business declined by 11%. In addition, automotive operational revenue grew 11% year-on-year, outperforming the growth of car production in our core markets of 7%. Free cash flow was negatively impacted by the working capital movements at the end of the year. For the full year free cash flow was an outflow of €29 million. Lastly, our net cash position was €304 million at the end of the year. Having discussed the results for 2022, let me take a more forward looking perspective. I’ll start with our automotive backlog and then move on to our 2023 outlook and our 2025 ambition. As we've already announced at our Capital Markets Day last November, our automotive backlog increased strongly in 2022, resulting from a record order intake during the year. At year end, our automotive backlog was approximately €2.4 billion, up from €1.9 billion at the end of 2021. Our automotive backlog is some of the expected IFRS revenue from all awarded deals. As such, the backlog decreases on revenues recognized and increases when the new views are awarded. It also increases or decreases when customers revised their forecast for car production volumes. To provide additional transparency on automotive revenue expectations, we give an indication of how the backlog will materialize in revenues over time. Most of the reports automotive revenue for 2023 will read outcome the current backlog. Reported revenue for the late years will be based on a combination of new deals and our backlog. We’ll provide an update on our backlog annually with our full year results. Our backlog supports our outlook and ambition for the coming years, presented on the next slides. For 2023 we expect top line growth to continue with Group revenue between €540 million and €580 million. A strong increase in automotive revenue is expected to offset the declines in both our consumer and enterprise business. In addition, we envision our enterprise businesses to show growth again from Q4, 2023 onwards. The Location Technology revenue is expected to be between €455 million and €485 million in 2023. This includes a positive impact from the evolution of our automotive products and related change in revenue recognition of around €40 million. In terms of free cash flow, we increased our cash flow guidance from breakeven to between zero and plus-5% of our group revenue for 2023. We should note here that our free cash flow guidance excludes the charges related to the restructuring we announced in June of 2022. Of the €26 million restructuring charge, we paid €12 million in 2022 and expect to pay the remainder fully this year. This brings me to our ambition for 2025 as presented on the next slide. We reiterate our midterm location technology revenue ambition of €600 million in 2025. This ambition is based on our strong automotive backlog and significant opportunities in enterprise. The new Maps Platform that we introduced at the Capital Markets Day will bring significant improvements for our customers. This change in automotive revenue recognition resulting from the evolution of our products will also have an impact on 2024 and 2025 revenues, though the impact in 2025 is expected to be minimal. Lastly, it is important to note that we want to realize our growth ambition in a profitable way and revenue growth, we will lead – as revenue growth will lead to operating leverage. The ambition is to generate free cash flow of 10% of group revenue by 2025. Thank you. [Operator Instructions]. Thank you. We’ll now take our first question, please stand by. This is from the line of Marc Hesselink from ING. Please go ahead. All right, thank you. First, on your comment that the first feedback is encouraging on the new Maps Platform, could you maybe tell a bit more like what are the clients saying, and maybe split it a bit between automotive and enterprise, and then link to that to the enterprise? I mean, that's probably the area where you can most quickly actually win business. Any expectations on that, on when such things can fall? Thanks. Yeah. So Marc, yeah. So we had a good moment to test the temperature and take temperature off. Our direction of course was at CS, the Computer Show in Las Vega, and I've been working in Florida for four days. Massive interest in what we're trying to do. Trying to understand the implications for our customers' business and the industry with overall overwhelmingly positive reactions, varying from if that make sense to what can I – should I become a member with you, and how do I do that and that kind of thing. And I think it's important also for clarity in the market that there is a standard emerging. I think that is what customers have been waiting for, maybe even if they didn't know it, because the adoption of the location service platform is costly and – costly, enterprising, you don't want to be locked in, if you can avoid it. And I think this initiative will fly, I think the expectations are high, and I do believe it will lead to multiple products and a more efficient way to get there. And the reactions I got for my customers as well will show in that line. So very encouraging indeed. People want to have sample, sample data and so on and so forth. Not only from enterprise segment. I have to say also the interest from the automotive to more conservative part perhaps of our customer portfolio showed a keen interest to understand what the implications are and will be, can be for their own business, and their own data strategy, including data strategies for automated driving. So, I was pleased with these facts. We will start shipping to limited number of customers in Q2, on your Map, that’s great. We will have some customer facing applications up and running in the first half of this year where we can show the whole stack, including the services, the Maps and how it all comes together. So it feels like there is momentum, there's tail wind, we've dedicated to capture that as we're going on sales and marketing side as well, in order to capitalize on the momentum that we're seeing in the market place. Okay. Then the second question is actually on automotive. So you've been outperforming the automotive production in your markets in, I think the full year 2022 and especially in the fourth quarter. But if I look to the guidance for next year, it seems more that you're guiding towards being somewhere in line if I look to operational revenue, in line with those forecast. But I do assume that stake rates will continue to go up and you're also probably still going to take some share, so what's behind that? Sorry, 2023. To be clear, ’23. If I do the calculations a bit and operational revenue, it seems that you're guiding something like mid to a little bit higher growth, automotive, and that seems a bit close to the car production expectations. Well, actually last year you clear – instead of ‘22 you clearly outperform that. So what's – is it just being a bit conservative this early in the year or are there reasons why you should not outperform in ’23. No, I think we will do better. It's always a bit of a discussion, which view we have for EU and North America. But on the data we rely on, we see a 7% increase in combined markets and we ourselves think that operational revenue can grow between 10% to 15%, so we continue to see that growth. So the data that we're looking at for a like-for-like shows 7% increase in car production volumes, and that it will depend on which countries you include and don't include. Okay, thanks. Then final question is actually on the competitive dynamics. You also mentioned CS. I think your competitor here also launched a new platform over there. It seems like, a bit like yeah, your previous platform and the transactional Map building platform. But what's your view on that? Did they make a step change in the quality of their product and is that is that changing the dynamics of it for you? We find it really hard to read that announcement to be honest. I don't have as you think. We’ll only know by the second half of next year, before those products that are built on the platform will come to market. And so it's really hard for me to comment on what was going on there and what the expected results of the investments were going to be, I can't say. Thank you. We’ll now take our next question. Please stand by. From the line of Emmanuel Carlier from Van Lanschot Kempen. Please go ahead. Yes hi! Good afternoon all. Thanks for taking my questions. I missed the first five minutes of the call, so I hope my questions have not been answered yet in that part. But the first question I have is on consumer. So, if I look at the guidance, then the midpoint of the guidance used to be € 75 million revenues in 2023 and now with the upgraded guidance it is €90 million. So what has made you more positive? Well yes, it's quite simple is that we were quite conservative going into Q4. Q4 was solid, and that also gave us the basis to be more optimistic for the current year. Do you now expect that this product line going forward will drop rather at the 10% level per annum instead of the 10% to 15% or is it just 2023, which is a kind of one-off? Yes, okay. And then the second question is also on the guidance. So within location revenues you have a €40 million tailwind from the accounting change and you have a €20 million headwind from FX. But could you give a bit more disclosure on the assumptions on FX? Is it based on the FX rate of yesterday at the close, and do you have any hedging? So, it is basis on lines for 30 [ph]. 30 is also a situation where we were at during Q3. Then enterprise is roughly 75% and automotive is 35 I would say. That is dual denominated. We don't do very – we don't do a little hedging, no. Well, that is - that has evolved over time. In the past we performed a lot of hedging. The reality is that those contracts tend to be very expensive as well and so the benefit over the longer term are not that large. Okay. Okay. And then finally a question on free cash flow. So, the free cash flow was softer than expected in Q4, although I guess you had pretty good visibility. So, it looks a little bit like nothing has really changed in terms of free cash flow, but that you have a little bit of a shift from lower free cash flow in 2022 related to working cash flow. So a lower inflow and that inflow will not come in 2023. So all-in-all it looks like the consumer is just a little bit better, offsetting the negative impact of FX, and on free cash flow. If you combine 2022 and 2023, the outlook is actually really unchanged. Is that a correct summary? Well, I would say there are three factors playing a role here. One is indeed that as you can see in our balance sheet, in our press release, the level of prepayments have gone up to a level that we haven't seen normally at the end of the year. So normally it's €25 million, it's now roughly €36 million. That is just we see some opportunities for vendors that give us discount if we pay all at once and we pursue those opportunities. The same with payments. Our commitments to vendors that is historically low. So indeed, those two trends will benefit the cash flow generation in 2023. On the other hand, the fact that the dollar is weaker than already it is assumed will not benefit our cash generation, because we are long in the dollar. So a weaker dollar net-net does not have a positive effect on our cash flow. But if you compare the October situation with the January situation, we are tighter with spend and cost control, and that's also resulting in more cash generation for this year. What is making you more confident on the cost structure? Is that because you could negotiate with your workers' lower salary increases or is it more because it… [Cross Talk]. I wouldn't qualify it that way. I think the salary increases that we are seeing this year are higher than what we ever seen before. So no, it is more third-party spend and overall headcount. It's not salary related for sure. And with respect to the salaries, what I have often read in the Netherlands is that in order to have a more smooth impact on the earnings, you kind of – if you have 10% inflation through the kind of mechanism where maybe the salaries of the employees go up by 5% for example this year and the other 5% will be realized next year. Is that something that is having, that is taking place at TomTom as well? I'm not at a liberty to comment on the structures that we have agreed or want to give our employees at this point. Thank you. We'll now take our next question, please standby. This is from the line of Tim Versteeg from ABN AMRO. Please go ahead. Okay, okay, thank you. I have a question more according to the statements about the automotive segment. Can you say something about the competitive landscape and the development in market share there? Yes. So yes, it's not so easy. This is not a fast moving business market share. You know the drill about long lead times and long times, and what we see is that, let's say in the traditional competitive landscape, it looks like we are coming out as the winner, specifically the number of companies that are active and the full stack is shrinking. And we have a strong portfolio. We have a lot of customers so we can spend. Also we continue to improve the quality of our products. There's investments of course to keep up to date. Also the new generation of electrical vehicles. That's a demanding exercise to get drivers of electric vehicles, all the information they need and we get a little signal back from our clients. So from the cars that we are equipping with software, we also get location. It's all normalized of course and we get other data. We get sensor observation, sensor data, which in turn help us to improve our products. So this is kind of a flywheel that we have seen turning, that helped us to gain important position in traffic information that seems to happen now also in the navigation stack, so I think that's good. We will see positive impacts from a better Maps product that will hit the market this year. Customers are excited about that. I think we are – you know our brand reputation has also improved as a result of the announcements that we've made and the wins we've been able to lock in. So that's a good situation, but also in a market that is kind of trying to figure out how exactly to be successful in software. So there’s still moving parts, but the partnerships we are forging now gives us good insights in what customer requirements are, how they will develop. So we feel that we're well informed, close to where the action is taking place; solid foundation in terms of current products and more to come. So it's really ours to mess it up I think. Thank you. [Operator Instructions]. We'll now take our next question, please stand by. This is from the line of Harry Blakelock [ph] from UBS. Please go ahead. Hi there! Good afternoon. Thanks for taking the questions. So the first is just on the backlog growth that you saw last year. Are you able to provide some detail on whether that's market growth or kind of share gains as well? Just any color that you can give there would be great? It is both. So, we have seen new logos in this list that we haven't been supplying before. So I would qualify that as a potential market or potential future market share gains, but there are also some extensions, so the most notable one is Stellantis. It is a combination of both, and to add to that, there is also an increase of take rate. So the assumptions that underline this order intake run with way higher take rates than what we've seen before. Got it. Thank you. And then the second one is just on enterprise revenue. And you mentioned you expect growth in Q4 of this year. I wonder whether you could elaborate a bit on what's driving that timing? How much visibility you have? Is it contract renewals or new revenues from the Maps Platform starting to come through? Any color would be great. Well, that is just smart accounting, but there is a major contract that reduced their spend as of Q4 last year that will affect the P&L for four quarters in a row. And that effect will wear out as of Q4 this year. The underlying revenue enterprise excluding this contract is increasing. So if you take out the effect, then enterprise is growing, and that will happen as of Q4, 2023. Since there are no further questions, I'd like to thank you all for joining us this afternoon. Operator, you may now close the call.

EarningCall_404

Please standby. Good day. And welcome to the PJT Partners Full Year and Fourth Quarter 2022 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Sharon Pearson, Head of Investor Relations. Please go ahead. Good morning. And welcome to the PJT Partners full year and fourth quarter 2022 earnings conference call. I am Sharon Pearson, Head of Investor Relations at PJT Partners and joining me today is Paul Taubman, our Chairman and Chief Executive Officer; and Helen Meates, our Chief Financial Officer. Before I turn the call over to Paul, I want to point out that during the course of this conference call, we may make a number of forward-looking statements. These forward-looking statements are subject to various risks and uncertainties, and there are important factors that could cause actual outcomes to differ materially from those indicated in these statements. We believe that these factors are described in the Risk Factors section contained in PJT Partners’ 2021 Form 10-K, which is available on our website at pjtpartners.com. And I want to remind you that the company assumes no duty to update any forward-looking statements. The presentation we make today also contains non-GAAP financial measures, which we believe are meaningful in evaluating the company’s performance. The detailed disclosures on these non-GAAP metrics and their GAAP reconciliations, you should refer to the financial data contained within the press release we issued this morning also available on our website. Thank you, Sharon, and thank all of you for joining us. This morning we reported 2022 full year revenues of $1.026 billion, adjusted pre-tax income of $221 million and adjusted EPS of $3.92 per share. We are pleased with how we navigated 2022 challenging market environment, with total revenues up 3% from year ago levels. As PJT Park Hill again delivered record performance, our Restructuring revenues grew meaningfully and our Strategic Advisory business performed well on a relative basis, down significantly less than the declines in global M&A and capital markets activity would suggest. Our 2022 cadence of face-to-face client meetings and engagement return closer to pre-COVID levels, which not only help build new relationships, but strengthen existing ones. While this significant ramp in spending on travel and events drove our aggregate non-comp expense 19% higher. Our non-comp expenditures, excluding these categories grew low-single digits. Partner headcount was up 8% and total headcount was up 9% for the year, as we continue to attract highly talented professionals to our firm. We remain focused on managing share dilution resulting from these investments in talent, ending the year with a fully diluted share count below year ago levels. All in all, we are pleased with how we navigated 2022’s myriad of challenges. Thank you, Paul. Good morning. Beginning with revenues. For the full year 2022, total revenues were $1.026 billion, up 3% year-over-year, with increases in Restructuring and PJT Park Hill more than offsetting declines in Strategic Advisory revenues. For the fourth quarter, total revenues were $280 million, down 11% year-over-year. Significant revenue growth and Restructuring was more than offset by year-over-year revenue declines in PJT Park Hill and Strategic Advisory. With lower corporate capital raises during the fourth quarter, the principal driver of the decline in placement revenues in the quarter. Total revenues that met the criteria to be pulled forward in the quarter were less than $8 million, compared with approximately $12 million in the same period last year. Turning to expenses. Consistent with prior quarters, we presented the expenses with certain non-GAAP adjustments, these adjustments are more fully described in our 8-K. First, adjusted compensation expense. Full year adjusted compensation expense was $657 million, up 5% year-over-year with a compensation ratio of 64.1%, up from 63% in 2021. We will communicate our accrual for compensation expense for 2023 when we report our first quarter results. Turning to adjusted non-compensation expense. Total adjusted non-compensation expense was $148 million for the full year 2022 and $38 million for the fourth quarter. As a percentage of revenues, our adjusted non-comp expense was 14.4% for the full year 2022 and 13.7% for the fourth quarter. For 2022, the majority of the year-over-year increase in non-comp expense was due to increased travel and related expense. Our non-comp expense, excluding travel and related grew 6% in 2022. Looking ahead, we expect our travel and related expense to increase in 2023, reflecting more normalized levels of travel, increased headcount and higher travel costs. With our full year run rate for 2023, more consistent with the fourth quarter run rate in 2022. Away from travel and related expense we expect our non-comp expense to grow in the in aggregate in the mid-to-high single digits year-over-year, driven primarily by higher professional fees and a modest expansion of our office space. Turning to adjusted pre-tax income. We reported adjusted pre-tax income of $221 million for the full year 2022, down 9% and $61 million for the fourth quarter, down 24% year-over-year. Our adjusted pre-tax margin was 21.5% for the full year and 21.9% in the fourth quarter. The provision for taxes, as with prior years, we have presented our results as the full partnership units have been converted to shares and that our income was taxed at a corporate tax rate. Our effective tax rate for the full year was 26%, up slightly from the 25.8% estimated rate that we applied for the first nine months of the year. In 2023, we would expect our effective tax rate to be in line with 2022 and we will refine our view at the end of the first quarter. Our adjusted converted earnings was $3.92 per share for the full year, compared with $4.44 in 2021 and $1.08 in the fourth quarter, compared with $1.52 in 2021. The share count for the year ended 2022, our weighted average share count was 41.7 million shares, down 2% year-over-year, and during the year, we repurchased the equivalent of approximately 2.2 million shares primarily through open market repurchases. On the balance sheet, we ended the year with $223 million in cash, cash equivalents and short-term investments and $355 million in net working capital and we have no funded debt outstanding. And finally, the Board has approved a dividend of $0.25 per share. The dividend will be paid on March 22, 2023, to Class A common shareholders of record as of March 8th. Thank you, Helen. Beginning with PJT Park Hill. As the year progressed, the fundraising environment for alternative investments became significantly more challenging. Sharply lower public market valuations left many investors overextended on their alternatives allocations, which in turn reduced the quantum of capital available for new commitments. This denominator effect, coupled with the frenetic pace at which capital was called in 2021 made for a difficult fundraising environment. Even with this backdrop, revenues grew modestly year-over-year as PJT Park Hill delivered another record year. Our close relationships with capital allocators and our best-in-class distribution capabilities enabled us to represent the highest quality managers with in demand investment strategies. Turning to Strategic Advisory. In 2022, a sharp downturn in equity markets, greater economic and geopolitical uncertainty, and slowing global growth all adversely impacted the pace of strategic activity. The 425 basis points in Fed tightening across seven consecutive rate hikes, represented the largest and sharpest annual rate increases in more than 40 years. significantly impacting valuations and rolling financial markets. Announced global M&A volumes were down roughly 25% for the first half of the year and nearly 50% for the second half of the year, as the impact of these rate hikes and continued political and economic uncertainties further weighed on markets. While we were not immune to these market dynamics, we performed well on a relative basis, with full year Strategic Advisory revenues down only modestly, notwithstanding the dramatic decline in industry-wide volumes. Our shareholder engagement practice continued to evidence strong momentum as these dislocated markets resulted in increased client engagement on shareholder advisory, strategic IR and shareholder activism topics. This strength offset the considerable drop-off in our corporate placement revenues, particularly in the fourth quarter. We continue to invest, adding talent across industries, product capabilities and geographies, including the opening of a Paris office this past year. Strategic Advisory headcount grew 10% and Strategic Advisory partner count grew 18% year-over-year. In Restructuring, in 2022, the headwinds that dampened M&A activity became tailwinds for Restructuring and liability management activity. A combination of sharply higher financing costs, dislocated capital markets and more challenging operating fundamentals pressured an increasing number of highly leveraged companies. We experienced an uptick in liability management mandates, as companies work to restructure debts and create additional liquidity run rate -- runway. Overall, our Restructuring revenues increased in 2022 and we ranked number one in announced U.S. and Global Restructurings. As we look ahead, while 2023 is shaping up to be another choppy year, our firm remains well positioned to navigate these uncertain times. In PJT Park Hill, we expect the environment for alternatives fundraising to remain challenging as investors remain highly selective with many fundraises expected to be smaller in size and take longer to close. PJT Park Hill’s 2023 revenues are forecast to be around 2022’s record results, even though Q1 revenues could well be down $30 million to $40 million, given the expected timing of 2023 closings. In M&A, the environment while improving is still not particularly favorable for deal making. While the recent snapback in equity valuations and the first green shoots of a reopening in the IPO market, are promising harbingers for M&A activity, the low level of global M&A announcements in recent months may well continue for some significant part of 2023. In contrast, we expect our Restructuring activity levels to remain elevated for the extended period of time. For 2023, we expect significant growth in our Restructuring revenues beginning in the second quarter. Any headwinds we face in Strategic Advisory in 2023 will be more than offset by tailwinds in Restructuring. Looking beyond 2023, we remain highly confident in the intermediate and long-term outlook for our Strategic Advisory business as we benefit from the significant investments we have made, which expand our client reach and increase our market share. As before, we remain confident in our growth prospects. I guess I just want to start on where you left off Paul on the outlook. So piecing it all together, it sounds like there’s still an expectation right now for some level of revenue growth in 2023. Is there any way to maybe parse out a little bit around what you are seeing in Restructuring and the order of magnitude of acceleration? It doesn’t feel like we are back to pandemic era stress yet, but have been building maybe in that direction. So just wanted to get a little more context around what you are seeing there? Sure. Well, the reality is that, we have been living in abnormal times as it relates to distress. So 2020 was aberrationally extreme in the level of distress and we are not seeing anything remotely like 2020 levels. The flip side is 2021 and 2022 were equally aberrational the other way, given risk on appetite, near zero interest rates and abilities for even the most highly leveraged companies to secure financing and to manage their debt stack. And I think where we are headed is to a more normal, normal and I think there are two things that I look at, which frame that. The first is default rates the last two years were in the 1%, 1.5% rate, which is meaningfully below what the long-term default rate average is. Even if you strip out the extreme peaks of global financial crisis and COVID and the likes. So simply getting back to a more normal environment creates significant momentum in the Restructuring business. The second is that the quantum of debt outstanding and the liabilities potentially to be managed in some way, shape or form are meaningfully greater today than they were five years ago. And then here’s the most important point, while companies have done a very good job in moving out their maturities, the reality is that we are sitting here today with less runway for most companies that they have had in more than a decade. And by that, I mean, if you just look at how much debt is likely to mature in the next few years, so that number is at levels that we haven’t seen since 2009, 2010. So I think there’s an opportunity for just in a more normal operating environment for there to be significantly more Restructuring and liability management activity. And then, finally, just given how much debt was issued with relatively light covenants, the opportunity to be creative in managing liabilities for companies. I think there are more degrees of freedom now than there were historically. So, as a result, we see a lot of runway for a long period of time without having to be doom and gloom. Okay. Terrific. Thanks, Paul. And just a follow-up on Strategic Advisory, I just love to maybe discuss the visibility that you feel like you have heading into this year just in terms of that outlook. It feels like it’s harder to have conviction in the outlook maybe more than normal just in the current environment. And so just trying to kind of think about the framing here, I appreciate announcements have been relatively light over the last few months and so that’s going to feed into the first quarter or two of this year. But at the same time, it sounds like maybe conditions have improved a bit in recent months, but it’s way too early to say it’s sustainable, especially with all the macro uncertainty. So I’d love to just maybe kind of think through the Strategic Advisory comments and maybe what could make things turn out better this year and maybe where it could get south as well? Yeah. This is probably a year where there is less visibility on how things will shake out and historically has been the case. And I think part of that is, as the marketplace heals, you need certain conditions to present themselves and we are certainly getting there. I view what has transpired in the first five weeks of the year as necessary but not sufficient for a return to a higher level of deal making. And therefore, the good news is we are seeing those conditions fall into place and we are starting to check them off and that gives us a reasonable degree of confidence that it’s just simply a matter of not if, but when during the year that you start to see that. But when you try and figure out when do you get lift off, is it a week from now, a month from now, three months from now, and then just given the extended periods of time for transactions to ultimately close and how much of that hits in 2023, it’s just a cloudy crystal ball as it relates to Strategic Advisory this year. But if I step back just a little bit, I can see much more clearly just given the client engagement that we have, the revenue opportunities, the opportunity to bring the entire firm together. We are a far more advanced organization today than we were two years or three years ago, and at the right time, that will all work through. Where I do have clarity is because those headwinds, which may lean on Strategic Advisory in the near-term, serve to elevate Restructuring in the near-term. If I think about it as a pair trade, I am quite confident that we will be net beneficiaries of this uncertainty, and then as I get a little bit further out, I have greater clarity in where we can take the business next. Got it. Perfect. Just to clarify there, Paul, and then I will hop back in the queue. So when you talk about kind of the engagement with clients and the momentum because again, we see the deal announcements, but we don’t get to see a lot of the behind the scenes kind of new client wins and even some time mandates way before announcement. Like any kind of either qualification or quantification around that type of momentum that you are seeing and maybe how that’s progressed over the last couple of years, just that’s kind of behind the scenes that we don’t see as well? Thank you. Sure. I will just -- I will give you a few highlights. One of which is, we continue to build out our geographic presence and we continue to build out our industry presence. So we are now at a point where we have had enough success and we have a critical mass that we opened an office in Paris and I think that follows what have been very considerable successes in France and across all of Europe. Our European business continues to build out. It continues to establish its brand and its presence, and as we have more industry colleagues who can help and as we leverage the fact that we have a differentiated culture, we are doing more and more on a cross-border transatlantic way that really wasn’t available for the taking a few years ago. The second is, the way in which we have integrated our Camberview capabilities into Strategic Advisory and where we are from shareholder engagement, strategic IR, activist defense and the like, and how wrapped in that is and the opportunities and the boardrooms that we are present in, as well as the commercial opportunities for the firm. And then the third is, just as we have continued to build out our holistic capital markets advisory business, the ability to be much more present as it relates to direct lending initiatives, to be working more closely with Restructuring to deal with companies that are not yet ripe for traditional Restructuring but benefit greatly from the capabilities. I think those are just a handful of examples where we are touching more clients, far more clients and these are an elevated revenue potentials. The only thing that I cannot control is just how quickly the macro environment sort of shifts into gear and then it becomes very much a micro story, which is client by client, what’s the cadence of their of their reengagement and then how quickly does some of these mandates translate into revenues. But it’s all being built and we are very comfortable with where we are at this point and we love the fact that we have this diverse but highly integrated group of businesses, which continually present more opportunities for us. And I guess one last thing I’d address is, we have gotten increasingly better at integrating the Park Hill sponsor relationships into our broader sponsor coverage and that becomes another opportunity where we are more present and better able to commercialize some of these relationships. I just wanted to start with a little bit more on the M&A backdrop. The differences between the dialogues with sponsors and strategics, and how your expectations have changed or what your expectations are for how the mix of M&A should evolve in 2023 and 2024? Well, look, I was always taught that trees don’t grow to the sky and the notion that financial sponsors would just be all things at all times and M&A dialogues. I just -- I am not sure that was the right extrapolation from where we have been over the last few years. I think there’s no doubt that financial sponsors as they continue to accumulate assets, as they continue to move into broad and broader reach of strategies, as they look at traditional buyouts as well as minority investments, venture and the like, they are going to become an increasingly important part of the ecosystem. But that doesn’t mean that it all becomes all about sponsors all the time and I think there’s no doubt that in a risk-on world where capital was incredibly plentiful, where rates were at historic lows and where LPs we are very comfortable pushing a lot more dollars into alternatives that you saw a meaningful spike up. I think what we are just seeing now is a little bit more of a regression to the mean where this is an opportunity for corporates to take advantage of the fact that the capital deployment that’s coming from sponsors has slowed and it slowed for a few reasons, one of which is, as the fundraising environment becomes more difficult, sponsors are appropriately more conservative in capital deployment, that’s a macro trend. And then at the micro level, when it’s harder to secure committed financing or where the committed financing is available, but far more costly, it just makes it more difficult to be everywhere in strategic dialogues. And I think that there’s a recognition in corporate boardrooms that at least in the near-term while the playing field may not have tilted to strategics, it’s at least leveled. It’s high level or tilted a bit their way and I suspect that you will see with the increasing pickup in activity in to be more corporate-led than sponsor-led. But, ultimately, this all gets back into equilibrium and sponsors will be and has been an incredibly important part of the ecosystem, but I am not sure it’s going to be the dominant part of the ecosystem. That’s incredibly helpful, Paul. I just want to touch on one other one, which is you are obviously very focused on investing in new talent. So maybe if you could just touch on how the hiring backdrop has evolved versus earlier in the year, whether you are seeing better opportunities to bring in top talent, and then just sort of what your hiring aspirations are for 2023 and whether that could impact the comp ratio trajectory at all for the coming year? Yeah. So we have been consistent that the years 2020 and 2021 were difficult recruiting years but for very different reasons. In 2020, it is hard to recruit when everyone is locked down and it’s a virtual world and there are bigger issues as you have got a global health crisis and the like, trying to find the next platform to be an investment banker is not necessarily highest on the list. And I have said consistently that the best way for us to continue to recruit at a very aggressive clip is to return to a more normal cadence of face-to-face engagement and the like, we are there. And that’s been incredibly helpful and you have seen that our hiring has ramped from there. The second issue was in 2021 with everyone so busy and with such activity in strategic world, it was hard for individuals to lead their clients at large and to make a shift, and as a result, we also said that we needed the world to calm down a little bit. I think in 2022 and 2023, where we are in a lower velocity environment, where a number of larger banks are creating a less attractive opportunities for their best talent and where we can engage face-to-face. That’s the perfect recipe for us to attract talent and we are seeing that in the number of incomings and we are seeing it in the quality of candidates that are appearing before us and our conversion rates are higher. So I think this is a much better recruiting environment for us and we are going to take advantage of all of that. Now as far as how that flows through the comp ratio and the like, it’s very hard to see until you get further into the year, understand what’s the actual pace of onboarding, as well as what’s the revenue profile for the firm in 2023. The headline is -- thank you. The headline is, I love this environment. This is like a perfect recruiting environment for us. Good morning. Just I wanted to follow up on the comp ratio. Based on your comments on the current environment, your expectations for revenues to grow in 2023 is encouraging. However, given we have already seen some pressures on the comp ratio this year despite revenue growth and your headcount is up 9%. I was hoping you could speak to your confidence in your ability to hold the line on comp next year? Look, we have always thought that as we get further and further into the build-out that we will be able to demonstrate meaningful compensation leverage, but that we are not going to resist making investments, which are the right thing for the long-term, if there’s a little bit of short-term turbulence. So if you give me a wider birth of two year to three years, I kind of know the direction of travel. If you ask me in any given year, does it stay flat? Does it come down? Does it bump up a little bit? There’s just so much information we need to have [Audio Gap] and I do not want to be deterred from that. We have always said that we don’t add just to hit a recruiting target, and therefore, in some years, if we don’t see the talent, we are going to be light on additions. And in other years, we have an abundance of opportunity, we will lean in a little bit more. I think it’s too early in this year to know exactly where that’s all going to land. And as I said, I think we have a differentiated platform that enables us to navigate these turbulent times better than most, and therefore, that should be an advantage for us, and we will just sort of play it out. But one thing I think everyone appreciates we have incredible regard for creating shareholder value, we are big owners in this firm and we are always going to do the thing that creates the most value over the longer term. even if it creates a bit of noise back and forth. But sitting here today, I have no reason to believe 2023 is going to be aberrational one way or the other, and hopefully, we will be able to continue to show progress on all dimensions. That’s great color. Thanks for that. And then I guess for my follow-up, in your remarks, you noted that our Restructuring prospects have continued to improve and it seems like you have had greater success than some of your peers in winning these mandates so far. Just wanted to get a sense as to what you feel is driving that relative shrink versus peers so far or in this past year and do you feel like you are better positioned for an environment where mandates are more coming on the debtor side due to the higher level of covenant [ph] loans outstanding? That’s a great question. Look, it’s a highly competitive environment and we compete against very formidable firms, and there’s always a cadence of mandates that you win and mandates that go elsewhere. So everything is not always a straight line up into the right. Having said that, we have had impediments in competing against others that each year those constraints melt away and it really boils down to two. If we have a smaller advisory footprint and if we are competitive in fewer industry verticals, it means that the heads up or the front-end sales force is less able to present opportunities to our Restructuring colleagues than if it was further built out. So every year that we build out and we are in more geographies, have more presence, have more industry domain expertise, have more corporate relationships, that gets us better aligned with the competitive set, and therefore, we are able to leverage that. And then the second is as we continue to build out our sponsor capabilities, we are picking up more and more liability management opportunities for sponsors as well. So it’s just all part and parcel of the of the methodical build-out of the firm. And as the Strategic Advisory business gets bigger, more formidable, more present, it becomes a greater additive to the Restructuring franchise. And I think that’s the macro trend you are seeing, but as far as any given quarter, what mandates travel to us or elsewhere, I try not to get too caught up in that, because there’s always noise in the very short-term. You have got to look over the longer term, but there’s no doubt we have been pleased with our performance on both a relative and an absolute basis. Paul, a number of your peers have talked about engagement levels still remaining high in the advisory -- Strategic Advisory side, just not being able to pull the trigger, given the financing markets. One thing you haven’t really talked about is sort of that aspect of Strategic Advisory, you have talked in the past about backlog, engagements and sort of pre-announcement type thoughts. Can you kind of give us a sense of what you are seeing on the Strategic Advisory side and are you seeing that same level of engagement just not seeing triggers get pulled up? Yeah. It’s a great question. It’s complicated just because the way this world has unfolded. So I would say the following. If you started last year, strategic engagement and interest was red hot and as the market cooled engagement levels did not waver. And in some respects, it was -- the crisis of confidence was on the investor side, not in corporate boardrooms and we saw our engagement levels at record levels for most of the year. I think it’s got to the end of the year, some of these transactions just were not viewed to be actionable in the near-term. And I think clients, they suspended sort of working on some of these things, because while they still had every interest in pursuing them, they were deemed to not be actionable. So the mandate count, if you will, that were active sort of receded it a bit. What’s happened is in the first five weeks of the year, I think, there’s a clear recognition that things that were maybe put on the hold pile are now coming back. So we are seeing a lot of that, just because it’s been so fluid and so volatile and the sentiment moved sharply negative from Thanksgiving to the end of the year and it started to inflect to the positive. I haven’t talked about it as much, because I don’t really want to make too much of either the downturn in the last six weeks of 2022 or the pickup in the first five weeks of 2023. I think it’s still muddied. But the reality is, if you step way back, the corporate needs for transition and transformation are as great today as they have ever been and when you think about what really drives M&A activity, you can run all the correlations, you can do all the analysis, the single biggest correlation is equity valuations. And given the start to the year that is a very healthy sign and I suspect that if we can maintain some of these levels for a bit, you are going to start to see a lot more of the hold pile come back into the active or red hot pile. Okay. That’s helpful. And maybe for Helen, just to make sure I heard correctly, it seemed like you guys had a few large transactions closed in early January, but I think your pull forward comment was $8 million, is that correct? Okay. And Paul, do you have any -- you commented on the Restructuring business sort of a second quarter event. You talked about Park Hill being starting off week and getting better. But how do we think about any visibility on the Strategic Advisory into the beginning of the year and how is the case… It’s -- honestly, it’s hard -- it’s really hard to tell. I mean that’s just the one where I have the least confidence, particularly trying to talk about how it’s going to be quarter-to-quarter other than sort of state the obvious, which is, if you think about last year, last year started down, but respectively down and then inflected further. My gut is that this will look sort of as the mirror image of that, which is soft but building and I think that probably is a good read across to how I would expect our business to be. I just don’t have the same precision, because the world is more unsettled for M&A than it’s been. And when we are in a recovery phase, trying to pick the exact recovery, when you were at a stasis, when you are in like a regular cadence of activity, it’s easy to sort of see it. But when you are either seeing it turn down or turn up, trying to see how that matches to revenue recognition is a little bit more challenging. But I had to say, all of the… It should be, if you ask me to go to Las Vegas and put a bet, I’d say second half is a lot stronger than the first half. So just one on Park Hill. I am just curious on the environment there. Very clear on the fourth quarter impacts. But you did say 2022 was a record year for the overall Park Hill business, which given the place for GP [ph] performance, I think, it would suggest a strong level of secondaries activity. So with this in mind, I am just kind of curious on the environment as we start 2023 on this front kind of the impact specific to a New Year on the side of the businesses, GPs and LPs kind of reset? And then kind of just secondarily on the other side on placement revenues, I didn’t hear your comment on placement revenues to be down $30 million to $40 million or is that to come in at $40 million in the first quarter? So, first of all, I’d just get back to placement. We did highlight the fact that corporate placements were down significantly in Q4. So you can attribute that decline to Pack Hill. So when we say Park Hill was up year-over-year, it was up in both secondary and in the primary business. So that would be the first thing. And then, secondly, just looking at Q1, given the timing of what we see coming in Park Hill, we see it being down significantly year-over-year, last year was a record Q1 for Park Hill. So that would be down $30 million to $40 million year-over-year. Understood. Understood. And then one of your competitors also cited kind of a strong year in 2022 as it relates to shareholder activism that persisted from the 2021 level. So just kind of curious on what you are seeing with respect to Camberview, what you saw in the year and kind of how we should kind of consider the environment for that business as we enter 2023 as well? Yeah. I think as I was mentioning in my remarks, turbulent environments play well for shareholder engagement, right? You have companies with dislocated share prices who may look for help on strategic IR to better position their story with investors to try and figure out how to get the right investors in. They may be vulnerable to an activist taking a position or creating a distraction for the company. So all of that creates a more productive environment for shareholder engagement. When times are good, it’s probably less top of mind than when you are dealing with the dislocated equity market. So I think just as our Restructuring business benefits from a more challenging environment. I think it also has a read across to our shareholder engagement initiatives. Okay. Great. And then last one for me, buybacks are relatively light in the quarter. So just given the M&A advisory outlook and kind of some of the uncertainty there, is it fair to think that there’s a general sense of conservatism as it relates to the buyback, I guess, near-term? Just wanted to think about that outlook over the course of the early parts of this year? Yeah. I just -- probably just the opposite. We said at beginning of last year that we were going to deliberately front-end load our share buybacks for the year and we were very clear that we were going to manage the dilution. We reduced the share count for the year, we increased our balance sheet strength and our view was if we are going to retire the shares, we would rather do it early in the year rather than wait until late in the year and that’s exactly what we did. And while I don’t think we have a committed cadence to what we are going to do in 2023. We intend to be very forward-leaning in buying back stock, and all else equal our bias has been, if we are going to do it, it will probably do more in the first half of the year than the second half of the year, as simple as that. Well, once again, I want to thank everyone for joining us on this morning’s call and we very much appreciate the dialogue and the interest in our firm and we look forward to speaking with you when we report first quarter results in the spring. Thank you.

EarningCall_405

Thank you all for standing by and welcome to the Yum China Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] Thank you, Zari. Hello everyone. Thank you for joining Yum China's fourth quarter 2022 Earnings Conference Call. On today's call are our CEO, Ms. Joey Wat; and our CFO, Mr. Andy Yeung. Before we get started, I'd like to remind you that our earnings call and investor materials contain forward-looking statements, which are subject to future events and uncertainties. Our actual results may differ materially from these statements -- from these forward-looking statements. All forward-looking statements should be considered in conjunction with the cautionary statement in our earnings release and the risk factors included in our filings with the SEC. This call also includes certain non-GAAP financial measures. You should carefully consider the comparable GAAP measures. Reconciliation of non-GAAP and GAAP measures is included in our earnings release. Today's call includes three sections. Joey will talk about our journey in the past three years and discuss fourth quarter performance. Andy will then cover the financial performance and outlook in greater detail. Finally, we will open the call to questions. You can find the webcast of this call and a PowerPoint presentation, which contains operational and financial highlights on our IR website. Finally, we plan to host our 2023 Investor Day in Shanghai through September. We look forward to sharing more details about this event with you in due course. Thank you, Michelle. I want to wish everyone joining us today a happy and healthy Chinse New Year. Before looking at the fourth quarter and full year, I would like to reflect upon our journey these past three years with COVID, some of our key learnings and how we have grown. First, I'm incredibly grateful to the entire Yum China team for their agility, creativity, and tenacity during this difficult time. Together, we became a more resilient, nimble business, better positioned for long-term growth. During the past three years, we quickly pivoted when buying traffic came after pressure. Delivery doubled from just 20% sales mix in 2019 to 39% in 2022. Our hybrid delivery model and dedicated riders enable us to capture the increase in demand. Combined with takeaway, off-premise sales reached almost two-thirds in the fourth quarter of 2022. Digital ordering also rocketed from 55% of sales in 2019 to now 89%. That's over $20 billion in digital sales in three years. We maintained our rapid growth. Our store portfolio expanded by nearly 40%, a total of 3,800 net new stores. KFC and Pizza Hut stores maintained a healthy payback of two to three years, respectively. The first year profitability of new stores also improved. Strong new store performance was driven by our flexible store model. We optimized store size and secured more favorable lease terms. For new stores opened in 2022, more than half were in smaller formats. Such flexibility allow us to continue to increase density in higher-tier cities, which is particularly useful and helpful for delivery and capture white space in lower-tier cities. We enhanced the coverage and agility of our world-class supply chain to support business growth. We expand from 29 to 33 logistics centers for better self-sufficiency in each province. During expanded lockdowns, we add rail and sea freight to move our inventory apart from our traditional trucks. Our store inventory visibility system allows real-time sales forecasting and smart inventory replenishment. These capabilities help mitigate severe disruption even during a lockdown and minimize wastage. [Technical Difficulty] also supported product innovation by securing supply at scale. Apart from our classic offerings, we launched over 500 new or upgraded menu items last year from regional offers to national launches. We invest in digital and automation to improve operating transparency and efficiency. For example, we are rolling out smart order system, [Foreign Language] at KFC. The AI-powered system more accurately predict demand and recommend food preparation plan to minimize stock outs and wastage, and also reduce waiting time for customers. It also enhances customer experience by reducing wait time and providing real-time order update. And recently, we added a robotic service at one-third of our Pizza Hut restaurants, [Foreign Language] freeing our crews to serve customers. We remain profitable each and every quarter since the beginning of the pandemic in 2020. By rebasing cost structure and implementing austerity measures, we cushion shocks created by the volatile market situation. In the past three years, we were able to generate US$1.9 billion in free cash flow and returned over US$1 billion to shareholders. Notably, I'm proud to say we did this while also protecting the jobs of our employees. We have had no staff layoff since the pandemic began. Looking back over this period, we see opportunities to improve our ability to operate in good times and bad times. Looking forward, our anti-fragile operations will enable us to shine and drive long-term growth in China. Now let me provide some highlights for the fourth quarter and full year. 2022 was built with unprecedented challenges. In just 12 months, we managed sporadic COVID outbreaks, entire city lockdowns, nationwide infection and the certain lifting of COVID-related restrictions. In October and November, COVID infection quickly evolved into major regional outbreaks, leading to tightened COVID-related measures. In December, as China entered a new phase of COVID response, we face brand new challenges. With surging infection rates, a significant portion of our employees and riders became infected, resulting in a labor shortage. Thousands of our stores were temporarily closed or only provided limited services. Many residents also opt to stay home to avoid infection or recover from symptoms. Buying traffic fell sharply. During this time, as always, the health and safety of our employees and customers remain our top priority. We moved quickly and support our employees with the relief medicines and antigen test kits. We mandate daily testing for all crews and riders to minimize infections, and we organize informative health talk and a consultation hotline for our employees. At the same time, we took immediate steps to address the labor shortage. We simplified the menu, shortened operating hours and optimized labor shifts. We reallocated crew resources among stores, prioritizing stores with stronger demand, and we adjusted delivery operations, encourage customers to pick up orders and promote packaged food products. I'm thankful for our team's nimble actions and amazing execution. Even in this challenging quarter, we delivered substantial year-over-year restaurant margin expansion despite lower sales. This was achieved by our extensive scenario planning, operational efficiency improvement, cost rebasing initiatives and temporary relief. We were also able to open a record 538 net new stores in the fourth quarter or 1,159 net new stores in the full year. Let's move on to the brand. By brand, KFC and Pizza Hut continue to introduce delicious food and exciting campaigns to delight our customers. At KFC, new categories grew with solid momentum. Juicy whole chicken, [Foreign Language] and beef burger, [Foreign Language], doubled in sales in 2022. Combined, we generate around 5% of KFC sales mix in the fourth quarter, nearly equal to our Original Recipe chicken. We continued to introduce more flavors in these categories, such as the Spicy Whole Chicken, [Foreign Language], launched during Chinese New Year. Following the success of Pokemon Psyduck in quarter two, [Foreign Language], our toys in the fourth quarter also generated huge social buzz. These include Fancy Chicken, [Foreign Language], and Fluffy Chicken Popcorn, [Foreign Language] both were originally designed as pet toys or toys for your pet, but quickly became very popular with all customers and drove traffic. At Pizza Hut, pizza sales grew nicely for the year, reaching almost 40% of sales. We sold over 100 million pizzas in 2022, that's nearly seven pizzas per second. Apart from our signature pan-tossed and crispy pizzas, we have added stuffed-crust pizzas. Customers can choose fillings like double cheese, sausage and meat floss, Rousong. These new launches encourage the trade up and lift effective price. We continue to offer stunning value for money. Our signature value campaign at KFC, Crazy Thursday, [Foreign Language], attract excellent traffic, generating over 50% more sales on Thursdays compared with other weekdays. Sunday, Buy More Save More [Foreign Language] continues to spur weekend sales. Customers love the option to make the math and the sizable discount. At Pizza Hut, we brought back the wildly popular two pizza for CNY 59 promotion in November. The amazing value drove great traffic and sales uplift. New retail packaged foods provide us flexibility during lockdown and when we were short of staff. In 2022, packaged food sales grew 90% and reached nearly CNY 900 million. We continue to broaden our offerings, adding some of the classics such as our egg tart and Popcorn Chicken [Foreign Language] Now moving on to our emerging brands. We have solid management teams and strategies in place. While it will take time to fine-tune and test the business model, we are making solid -- Lavazza continues to execute its four-pillar strategy, which includes brand building, menu innovation, digital and delivery, and store development. Throughout the year, we introduced new coffers flavors such as orange buffalo latte with buffalo milk, [Foreign Language]. We also introduced sweet and savory food that would pair well with coffee, such as Cube Cornetto, which is a fluffy, [Foreign Language]. Loyalty members more than double to 1 million in 2022, continue -- contributing to over 40% of sales. We enhanced operational efficiency and optimize new store designs, lowering upfront investment. Although COVID disruptions have delayed store openings, Lavazza reached 85 stores by the end of quarter four. Taco Bell doubled its store count in 2022 to 91 stores. We continue to localize the menu for Chinese customers. For example, a crispy one-time taco, [Foreign Language], use duck and a one-time wrapper in place of a tortilla. Why not? We also continue to improve the value proposition, customer experience and unit economics. Little Sheep and Huang Ji Huang were expectedly impact by COVID due to their dine-in focus. We used 2022 to refine their business models and strengthen fundamentals from menu, marketing, store models, supply chain to digital initiatives. Huang Ji Huang also continued to generate operating profit. To wrap up, with a new chapter opening in 2023, we are excited to see positive momentum in the Chinese New Year season. We took decisive action to ensure operational efficiency and capture sales. At KFC, we broadband our signature Golden Bucket, [Foreign Language], which is a holiday favorite. At Pizza Hut, we introduced a holiday-themed pizza with wagyu beef and seafood. It's called [Foreign Language], which is inspired by a popular game. It's gratifying to see how our delicious food play an important part in our customers' celebration during the holiday. Yet COVID remains a reality, and many challenges still lay ahead, including cautious consumer spending through the holiday. While we anticipate the road to recovery will be gradual and uneven, I'm optimistic that brighter days are ahead. We will continue to execute our proven RGM strategy, which stand for resiliency, growth, and strategic mode, to capture the growth opportunity and deliver shareholder value. Thank you, Joey and belated Happy Chinese New Year to everyone. Let me share with you our fourth quarter performance. As Joey mentioned, we faced an extremely fluid and challenging fourth quarter as there were substantial changes in COVID conditions and related policies. In late November, due to rising infections and strict COVID-related health measures, the number of stores that were either temporarily closed or offer only takeaway and delivery services, reached a peak of over 4,300 stores. In December, we faced a different situation where most of the COVID measures were lifted. Due to labor shortage, we had to temporarily close or provide limited services at over 1,300 stores on average. In such a vital environment, we took quickly action to capture off-premise demand. Furthermore, we controlled costs, limited wastage, and enhanced product despite lower sales. Our team did a wonderful job improving restaurant margins by almost three percentage points despite very difficult circumstances. Let us now go through the financials. Unless noted otherwise, all percentage changes are before the effect of foreign exchange. Foreign exchange had a negative impact of approximately 11% in the quarter. Fourth quarter total revenue declined 9% year-over-year in reported currency to $2.1 billion. In constant currency, total revenues grew 2%. The contribution of new units and the consolidation of Hangzhou KFC were partially offset by same-store sales decline and temporary store closures. System sales and same-store sales both declined 4% year-over-year. By brand, KFC same-store sales were 97% of the prior year's level, with same-store traffic at 84%. Ticket average grew 16% due to the rise in delivery mix, which has a higher ticket average than dine-in. Pizza Hut same-store sales were 92% of prior year level. Same-store traffic was at 98%. Ticket average was at 95%, driven by lower ticket average of delivery orders and smaller party sites due to the pandemic. Restaurant margin was 10.4%, 290 basis points higher than the prior year. The year-over-year increase was mainly driven by labor productivity, operational efficiency and temporary relief. These were partially offset by the sales leveraging impact, which includes temporary store closures, as well as higher rider costs due to high delivery volume. We also faced inflationary headwinds in commodity and labor costs. Our team worked hard to protect margins during the fourth quarter, which is seasonally slow in terms of sales and profits. Let me go through the key items and highlight the actions we took. Cost of sales was 31.9%, 60 basis points lower than prior year. We kept commodity inflation relatively modest by strategically locking in prices and innovating the menu. We also carefully planned promotional activities and reduced wastage. Cost of labor was 28.8%, 90 basis points higher than prior year. This was mainly due to increased rider cost from higher delivery sales mix, low single-digit wage inflation and sales leveraging. This was partially offset by better labor productivities and temporary relief of $14 million. Occupancy and other was 28.9%, 220 basis points lower than prior year despite sales deleveraging. This was mainly due to lower rental expense and other cost-saving initiatives. Rental expense, as a percentage of sales, benefited from rental relief of $12 million, strong portfolio optimization and more favorable lease terms. G&A expenses increased 2% year-over-year, mainly due to increased compensations and benefit expenses, as well as the consolidation of Hangzhou KFC. The increase was partially offset by cost control initiatives. Operating profit was $41 million compared to $633 million in year period. In the fourth quarter of 2021, we recorded a non-cash gain of $618 million from the remeasurement of our previously held equity interest in Hangzhou KFC. By excluding the remeasurement gain, adjusted operating profit increased 189% year-over-year from $60 million to $40 million. The net contribution from Hangzhou KFC’s consolidation was 12% of operating profits in the quarter. We included the last quarter of amortization of intangible assets acquired, which was roughly $15 million. Effective tax rate was 29.9%, 480 basis points higher than prior year, due to lower pre-tax income and Hangzhou KFC consolidation. Prior to consolidations, the equity income from JVs was not subject to tax, resulting in a lower tax rate. Net income was $53 million. Adjusted net income was $52 million. Excluding the $4 million mark-to-market net gain on our equity investment in Meituan in the quarter and the $9 million net loss in the prior year period, adjusted net income grew 154%. Due to the diluted EPS and adjusted EPS were at $0.13, the mark-to-market gain in Meituan increased value EPS by $0.01. In December, we acquired an additional 20% stake in Suzhou KFC JV for approximately $115 million. This increased our total ownership in the JV from 72% to 92%. For the full year 2022, we generated free cash flow of $734 million. We returned roughly $668 million to shareholders in cash dividends and share repurchases. Cash, cash and short-term investments was $3.2 billion, down from $4 billion in the third quarter. The reduction in cash and short-term investments was mainly due to the reclassification of around $600 million from short-term investments to long-term time deposits. We invested in long-term bank deposits to benefit from better interest rates. Let's now turn to our outlook for 2023. In January, most of the temporary closed stores resumed normal services. Our same-store sales from the comparable Chinese New Year holiday season were up mid single-digits year-over-year, but remained below the compared level. Same-store sales benefited from pent-up demand as the relaxation of COVID policy coincided with the Chinese New Year holiday. However, the real test will be the sales trajectory after the holiday, as we face more cautious customer spending and macroeconomic uncertainties. Looking ahead, we are encouraged by the new COVID policy. The future indeed looks bright. But we must keep a level head and recognize that uncertainties and challenges still lie ahead. Our country has shown that further outbreaks in the emergence of new COVID variants will pass after COVID restrictions are lifted. We also face macroeconomic headwinds such as elevated commodity and wage inflation as well as softening global economic conditions. These factors may impact our operations and consumer spending in China. Now at the risk of sounding like a broken record, we continue to expect recovery to take time and be non-linear and uneven. For 2023, our top priority is to drive steps. At the same time, we will remain agile. One of the lessons we learned in the recent years is the importance of planning and preparing for a wide range of scenario, both to capitalize on growth opportunities and to mitigate risks when needed. On store development, we are targeting to open 1,100 to 1,300 new stores. We expect capital expenditure of $700 million to $900 million to support organic growth remodeling, digital, supply chain and other infrastructure development. As always, the quality of growth is what matters to us the most, not just the quantity. So we will continue our systematic and disciplined approach to investment and growth. Finally, we remain committed to returning capital to shareholders. The Board has approved to raise the cash dividend from $0.12 per share to $0.13 per share. This is supported by our healthy balance sheet and strong cash flow. Thanks, Andy. We'll now open the call for questions. In order to give more people to chance to ask questions, please limit your questions to one at a time. Sari, please start the Q&A. Thank you. Good morning to you. My question is on the new stores that you've built since COVID began. You've built a significant amount of new stores over the last three years, over 3,700 of these new stores. And I know the payback on these stores are still very strong despite operating in a pandemic, which is incredibly impressive. But Andy, can you talk about where the sales productivity and the margins on this class of stores that have been built since COVID where it currently stands relative to the rest of the asset base, so we can kind of understand how to think about the model moving forward? Thank you, Brian. If we look at our store opening for the past three years, as Joey has mentioned, we have been opening almost – increased our store count by almost 40%, right? And – but nevertheless, I think if you look at the new store performance, the payback period were very consistent, very good. For KFC, it's about three years for – sorry, for KFC, it's about two years and for Pizza Hut, it's about two to three years. And Pizza Hut is – the reason why it's two to three years, because if you go a satellite or model, which is the new model that we have, the performance on par with KFC, which is about two years. And then obviously, there's more standard models, their payback period is a little bit longer. And if you look at overall for this year and last year, the new store that we opened, their unit economics continue to perform very well. If we look at the store that opened recently, they're – the breakeven – most of them are breakeven within three months of time even with this very challenging environment. So if you look at our new store portfolio, the difference with the existing store is that over the past couple of years, we did increase penetration in lower KFCs, where is the white space. And then we also increase density in the urban area, especially with smaller model, satellite model or KFC smaller model. We need to cater to consumers' demand for convenience and delivery and takeaway services. The new store January are smaller. So the throughput, the sales throughput, generally, are less than their existing portfolio, roughly about two-third of the sales competitive portfolio average. Now the probability of those new stores are better. As we mentioned, we have lower step-up investment for the small store. If you look at it properly, we probably spent about $2.5 million for our new store opening. And then now like we are spending on average about RMB 2 million and then for the small model, it's close to RMB 1.5 million. And so – and then also, we have obviously improved the efficiencies throughout this pandemic. As you look at the restaurant margin, for example, last year – in 2022, despite the fair market environment throughout the year and sales leveraging, we managed to improve restaurant margins, especially at KFC. So -- so I think we're pretty confident that we have the right format and resources to grow our store network at a healthy pace and also maintain a very robust payback for our investment. Brian, I'll just to add some color to your question. The theme here of the aggressive new store openings is resiliency because while we emphasize how many stores we have opened in the last three years, how many -- 3,700 net new store, but actually 4,800 growth new -- growth store. At the same time, what we did not talk about but also important how many stores we have retired. So when we open the more productive new store, we, at the same time, retire the less productive assets. And thus, the quality of our assets for Yum China has improved in the last three years. So just have a bit of highlight here. For the new store we open right now, we are talking about 90% of the stores have -- the new store have flexible rent, which make us more resilient. And we talk about lower CapEx even more, if you think about our CapEx, roughly 40-60. 40% is equipment, which we can move around; 60% in some cost. So the reduction of the CapEx in terms of some cost is even more than just the total reduction of the CapEx. And the size is smaller. So the productivity of the new store is better actually. And the location of the stores matter, too, because they're both in higher tier city and lower tier city, it's about 40-60 spread, too. So for lower-tier city, 60% new stores are -- they're very, very effective in entering new cities. For KFC, 2022, we actually entered 200 new cities. And these are white space. And you can imagine, it's a pretty good market to grow. For higher-tier cities, our focus is on filling the gap or the distance between the stores to increase the density of our store in high-tier city, which is incredibly important if you think about our focus on our delivery business. So I hope that gives you some flavor about the new stores in terms of the quality and in terms of the resiliency for that business. Thank you. Thank you, Joey and Andy. Happy Chinese New Year. So before I raise my question, I'd like to highlight three things, if I may. First, out of the 12 quarters during the pandemic period, for five quarters, we actually reported restaurant margins better than the pre-pandemic level. And despite the fact that for the four quarters, we have seen stores like mid- to high single-digit same-store sales decline versus 2019. Whereas for Q3 last year, we actually saw more than 10% same-store sales decline over the same period in 2019. Apart from the one-time cost relief, we have significantly rebased our cost structure and innovative store formats, as Joey and Andy just elaborated on. And meanwhile, we also consolidate Hangzhou and Suzhou KFC in the past three years. Supposedly, this portion of business carries higher margins than the group average. So I think the market, in general, would expect pretty meaningful margin -- expect recovery of expansion going forward when sales start to recover. And for point number two, I also noted that our priority this year is to drive sales. But meanwhile, the market generally believes that the company is very good at balancing top line and margins. And point number three, just now, we also highlight that we will be planning for multiple scenarios in a very fluid situation. So after highlighting all these three points, now let's come to my question. Sorry if it's a bit long. So I understand the situation is very fluid, but let's assume that for 2023, our macro environment is kind of okay so that the momentum could be similar to that of second half of 2020 and first half of 2021, so that we might see some pretty okay same-store recovery, but may not be fully back to the 2019 level. And under that scenario, is it fair to say that we can actually bring our restaurant margin to a level largely similar to 2019 or even a bit higher than that. So that's my question. Thank you. Hi, Chen Luo. Thank you for the summary and also a summary takeaway and also know the question about restaurant market potential. As we have always said, like, when there's same-store sales decline, generally, that will put pressure on restaurant margins, overall margins. But when there is recovery on sales, we also expect some optional leverage, too. Now, obviously, as you mentioned, we are quite encouraged by the relaxation of the COVID policy, I think, which will give us a little bit more certainty, a little bit more certainty about the business environment and our operations and then also the Chinese New Year trading period. So, in general, I think we are cautiously optimistic. The reason we mentioned a couple in terms of the market conditions and also the COVID still being a reality is really, the reality is that we need to keep a level head. I think, if you look at the operational improvement, labor portal improvement, and then some of this margin improvement, as we mentioned before, which we expect most of them or some of them would continue. As we have mentioned, we did a lot of work to be based in our cost structure over the past few years. And so, if you think about some of our labor structure, our restaurant management versus crew, custom versus all that, and then also, if you think about, as we mentioned, the rental expenses, where we also got some favorable lease term, et cetera, I think those will carry forward. Now, obviously, over the past couple of years, because the COVID situation and the fourth quarter this year, too, right? So in the fourth quarter alone, we received about $26 million of rental relief and other type of relief. And then, for the full year, we received about $86 million in total. So those are likely to go away. As you mentioned, if things become more normalized, and so that would also have an impact. The other one is that we're looking in the commodity prices and labor inflation. I think, obviously, for the past year, because of the COVID and also the overall economic condition, that have been lately modern in China in 2022. Cost of sales, smaller price inflation was about low single-digits and same for our labor cost inflation. Now, we feel -- if you look at the -- small prices, for example, for chicken prices have been rising since the second half last year. And so we do expect probably low single-digit price inflation next year, at least in the first half this year, in 2023. And then we also expect cost of labor inflation to return to more normal pace. As we mentioned, low single-digit is not the normal. Mid to high single-digit is the norm. So, we expect that to gradually return to a more normal pace of inflationary pressure there. So, that's how we generally look at the sort of like the margins and the cost environment as we move in 2023. And thank you. Let me add some color here. The way that the management think about all these core costs and margins is as follows. If you look at our numbers historically, cost of sales and cost of labor, going forward, even in 2023, I think for your modeling purpose, we can expect cost of sales, of course, of labor. We -- our management team will try to keep it relatively stable if we could because we have to manage inflation for cost of sales. But at the same time, it won't be too low either. For 2022, it's about 38%. If you go all the way back to 2016, when we start -- get listed, it's also about 29%, 30%. But the big delta is Pizza Hut. Actually, Pizza Hut, at that time -- right now, Pizza Hut is on 31.5%. At that time, Pizza Hut was only 26%. And that was a proper because when the cost of sales too low means the value for money is not good enough for customers, and that's very dangerous. So, our goal is to keep it relatively stable. Cost of labor, the fact is it just keeps increasing. And our job is to manage it at a reasonable level. But we have to pay our staff at a competitive price -- competitive wages. Otherwise, we won't get good staff. The area that, over the years, which we have improved quite a bit, I would say, is occupancy and other operating expenses such as rents and, A&P depreciation, amortization, et cetera, et cetera. So, 2022 is 28.6% and 2016 is 34.2%, a massive 5.6% delta. Now, that shows management team's consistency and focus on reducing the rent, which is always the right thing to do, I would like to believe, and also depreciation, which is from reduced CapEx. So, that has been our focus. But when we -- and that's true for both KFC and Pizza Hut, by the way, 5% to 6% improvement for both brands over these many years. However, one thing I would like to emphasize again and again, when we save all this money, we don't just -- that is flow through to the margin. We always, always, always pass on some savings back to the customer. That's the way that we build long-term business. So I hope that helps you to think about management focus for the margin and various key costs items… Yes. Yes. Thank you. Thank you. That's very helpful. By the way, your [indiscernible] toy is really cute. And also, I'm very amazed by the newly launched [indiscernible] type of products. So I'm looking forward to have a thought on that, yes? Good morning. Hi, Joey, Andy. Happy New Year, [Foreign Language]. I have a long-term question. We had appreciated the great rundown of Joey's opening remarks, showing us the journey over the past three years, how you build your identity and also keep the growth in the long-term target. So my question is, in the past three years, your agility is very visible, which will protect your margin, will capture the digital and delivery. But when China reopens, the market will be more dynamic. I just want to get a sense that whether Joey and team will be more offensive or a little bit aggressive than before in terms of demand activation, because you always do stay ahead of competition. You stay ahead of competition to reserve your cost and protect margin during the bad time. Will you be a little bit offensive in market share gains looking for upon China reopening? Thank you/ Thank you, Xiaopo. I think I would like to address the narrative that whether in the past three years, whether we have been offensive or defensive. I think we have been very offensive in the last three years, if you consider what we just talked about earlier with the price question. We have expanded the footprint by as much as 40% within three years. So our view is we shall take advantage of the crisis and adversity. And I think we did. So we -- when we look forward from 2023 and beyond, I think we'll continue our pace, which have been rather aggressive, I would say. But the focus is to -- the focus and priority is to drive sales, focus on delicious food, new product, value, exciting campaign, while at the same time, continue our disciplined approach to capture more growth. As we have been using about the last three years, our biggest constraint actually was on the sales side due to disruptions of the pandemic. So going forward, we will focus even more on driving sales, and then continue the disciplined approach, which includes accelerating store growth, Andy talked about targeting 1,100 to 1,300 net new stores in 2023. Secondly, optimize the store format, because there's still a lot to be done. We have done, I think, a pretty decent job with KFC and Pizza Hut. But let's not forget, in the last three years, the smaller brands actually had more challenging time to test, to try their store format, their sales, the different system piece of store models, and we are certainly looking forward to the -- a bit more supportive environment for the smaller brands to grow. And third, to invest, to strengthen our strategic moat in terms of supply chain, digital, et cetera. So I hope that gives you a sense about our focus. Our focus is still on resiliency, growth and strategic move in our anti-fragile operations, which have improved in the past three years, will continue with strong focus on sales. Thank you. Let me add another point, which is when we look at our store network expansion, I think we have been very disciplined all through -- since the spin off, right? And so we're very consistent about that. Within that very consistent approach, very -- and disciplined approach is building a mechanism to accelerate growth, when the unit economics perform well, and decelerate when the unit economics is not performing as well. As we mentioned before, if you think about us, when times are better and we saw format right and performing really well, the store manager themselves or the market manager themselves will propose more store and then more store will be approved by our model and vice-versa. And so this is a case example. If you look at Pizza Hut, Pizza Hut before pandemic, it was a rejuvenation program. And you see the store unit economic at that time, new store unit economic at the time was partially constraint. And, therefore, you see limited net new store growth for Pizza Hut. And then with the success of the satellite store model, you see a pretty significant acceleration for the store development there. And so I think our model and our approach is -- while it's disciplined and systematic, it also reflects very much the current economic conditions and our unit economics, which will accelerate and decelerate according to unit store performance. Thank you, Xiaopo. Hi, Joey, Andy. Thanks for taking my question. So my question is about the promotion activities and the competition landscape. We know in the past few years, the smaller players have been squeezed out significantly, and this actually benefit our business. So going forward, in the new reopening world, how should we think about the competitive landscape changes? And also, on the other side, we know the consumption power has been pretty challenging these days. So what is your strategy to drive traffic back leveraging those promotion activities? Thank you. Sure. Hi, Michelle. For the competitive landscape, I'm happy to report that I think we have been doing quite all right. I mean, from 2019 to 2022, the overall market in our business has dropped by mid-single-digits. But Yum China, ourselves, we hold up there. So, that means our market share has increased a little bit. So, I think we have done something right. Going forward, regarding your question of promotion and sales momentum, we always look at the promotion, product, operation all in a holistic view. How to drive sales? Well, the focus of driving sales, we always prioritize traffic and then ticket average, and we want kind of both. So, how to get both? We will have the -- a series of initiatives that form the promotion and sales strategy. We always have fantastic product because it's really not very healthy just to only focus on promotion without amazing products. So, product comes first. Therefore, even during the three years, pandemic, every year, we are still able to launch about 500 new products with or without the help of traditional marketing because we have now over 430 million members. We can always market the new products to our members. And then with the new product, we have really effective promotions. And that's now becoming more effective over time because we have less promotion campaign, but more effective promotion campaign. And for example, as I mentioned earlier, in the first part of the call, Crazy Thursday, amazing. But it took four years to make -- to produce -- or to come to amazing Crazy Thursday promotion. And that worked really well for work days. But for weekend, our business has been quite challenging because reduced selectivity in the last three years. So, for 2022, we pushed [Foreign Language] Buy More Save More for KFC. And then for Pizza Hut, that is like the value promotion for the two pizza for RMB59. So, fewer but more effective promotion that drives sales, but that also protect margin for our shareholders. Now, you think about -- you probably have the hidden question here is about price increase. It is also within our plan, but we do it, hopefully, in a clever way. We expand the range of price. We have lower entry price point product, and we also have some very high-end products to please the customer who will want to treat themselves. Our favorite example is the wagyu beef burger for KFC, which is always a very interesting idea for traditional KFC lovers. So, with the combination of multiple initiatives, we hopefully can both drive traffic, maintain the margin and also produce the sales for our shareholders. Thank you. Thank you. Hi, Joey. Hi, Andy. A couple of questions here. First now, regarding the company's exposure, that 5% same-store sales growth -- sorry, mid-single-digit same-store sales growth during Chinese New Year. Would you share with us, like, how -- is it, like, more or less similar for both KFC and Pizza Hut? And how does it differ in terms of the pace of recovery? What we should be expecting? And then also, if we take a look at, like, both brands, we have an increase of the delivery business versus year 2019. So how would it change when we have the reopening? Will we see more stabilization on this part? Yes. Thank you. Hi, Anne. For the Chinese New Year same-store sales, the mid-single-digit number, KFC did better, slightly better than Pizza Hut, because of the transportation hub stores performed very well. As we mentioned in the earnings release this morning, it's even better than the government statistics. So that helps a lot. And in terms of the regional difference. And all regions performed quite well across all regions, and lower tier cities performed better, actually. But I have to mention is, we need to be prudent to look at the number, because this year, Chinese New Year is very early. So the comparison is rather difficult. We shall look at the Chinese New Year number, including January and February. So that will -- that picture would be more complete. And in terms of delivery business, the increase is good between 2019 to 2022, it moved from 20% to 40% for Yum China. However, I would also like to mention that, as the management look at this business, we also look at off-premise business as a whole, because delivery business is still outperformed -- still outperformed compared to dine-in. But the question is, where’s the ceiling? I mean, I would just like to highlight the off-premise sales right now for our business is about two-third, which I mentioned earlier. And that's incredibly important in our analysis, because it's about the resiliency of our business. That is something the management team has worked very hard to achieve. And that's also the reason why we have done okay in the last three years, because when the off-premise business is as high as two-third, they help protect the business. Think about with our breakeven sales. That's how we think about it. What's the breakeven sales for our business? It's right now, you can work out the number, is -- we only need less than 80% of the sales or same-store sales to breakeven, to achieve breakeven. That means even during the pandemic when a significant portion of our store was shut, we can still achieve breakeven sales, because that sales transfer from dine-in to delivery and off-premise even during the lockdown. So that's the way that we look at the business, and I hope you would -- you guys will also look at the business in this way as well. And that 20% increase, therefore, from 2019 to 2022 is incredibly important. If I mention one more point is, if you look at our number during quarter four 2022, KFC did better than Pizza Hut. One reason is KFC's is off-premise business. It's much higher than Pizza Hut. So protect the downside much better. Thank you, Anne. Thank you, Joey and Andy, for your explanation of the situation. Just a very quick follow-on question, because that's exactly what Joey just mentioned, that KFC versus Pizza Hut recovery pace. Given this current still volatile situation and meanwhile, we are seeing an improvement in off-premise traffic. So like for Jan and Feb and even for 2023, are we seeing -- like, is it fair that we can expect the KFC's momentum in terms of the pickup trend will be stronger than Pizza Hut? And, especially, how this delivery portion may be normalized down a bit versus last year. How does that, kind of, impact our forecast for same-store sales growth? I believe traffic will offset some downward pressure on ticket size for KFC and obviously situation for Pizza Hut. So, basically, how do we picture these dynamics in the next couple of months and also 2023? Thank you. For KFC and Pizza Hut, they are very different business in a way, right? One is clear result, very clear result. And the other one has a very big portion in dine-in and casual dining, which is very, very unique. So they will be different. And we talked quite a lot about the KFC already, so I'm going to focus on Pizza Hut in response to your question, Lillian. Pizza Hut will start the turnaround back to 2017. And our focus has been, drive the traffic first and then drive the sales. Once we get the sales under control, we move on to make it more profitable, sales first, profit later. I presume you can still remember. But after we get the product under control, then we work on the store expansion and resiliency. So for this year, 2022, let's not forget, Pizza Hut opened a lot of stores this year. This is the record opening store year for Pizza Hut. Over 300 stores. That's -- well, at least we are very happy about it. So I hope the shareholders are happy about it, too. So what is mix for Pizza Hut is, open more stores by increasing the scale. But one very important topic for Pizza Hut going forward is their resiliency. And I think, as I mentioned earlier, in the last question from Anne, right now, KFC's resilience is slightly better than Pizza Hut. And therefore, our focus on Pizza Hut going forward is more store and better resiliency. How to do better resiliently? The satellite store. Other than all the operational improvement will continue the satellite store. The satellite store is fabulous. I mean, right now, between the satellite store and the other smaller store, we have about 20% of the portfolio, about 600 stores in this category, satellite stores 60. So these are very low investment store, but with very good sales positivity. And the payback is key is for the satellite store. For total new store for Pizza Hut, this takes us three years. Two-year payback. Well, after 30-some years of Pizza Hut business, this is the best payback store model for Pizza Hut. So you can imagine, we're going to open more of these. When we open more of the satellite store, a smaller store, you can also imagine the delivery business will also benefit as well. So I think I hope – I hope that you can see our focus for the business is very clear. We know what we are doing, and we do it in our own pace. It's like running a marathon. At the beginning, it takes some time. But once we are at certain speed, we'll run it at a certain speed because we can. Thank you. Thank you, Joey and Andy, and congrats for another resilient quarter. So I have one question, which is more about the whole picture. So regarding the recovery of Chinese consumption, we find that, the recent recovery even, after the Chinese New Year, of the shopping more traffic and restaurant sales is really good in some cities, like maybe Chengdu, Chongqing, Changsha, but I'm not sure if it's common situation nationwide. So since we have extensive layout in most regions and most city tiers, what is our opinion? I wonder will there remain different for recovery among regions and city tiers in the future? Thank you. Sijie, thank you. As I mentioned earlier, the Chinese New Year recovery is encouraging. The momentum is good. And we also saw good recovery across the region. And in particular, in some Tier 2 city like Changzhou, or Jinan or Jinhua because Pizza Hut is a tourist destination for domestic traveling. So they benefit from the CNY. And then our lower-tier city also benefit because people have not been able to go home for three years. So we're happy to see that. But our caution is on post-Chinese New Year trading because while all this happy improvements are happening, we are also cautious that the value for money, the quarter spending is also happening. So, therefore, while we are happy to see the traffic coming back, we still focus a lot on value promotion to get our customers through the door. Going forward, our focus right now is look at the post-Chinese New Year trading, because particularly when they are concerned about economy and macro situation, the customer spending post-state holiday might be cautious. And that's not only specific to Chinese. I spent 10 years in UK, and I think that consumer behavior is consistent across all countries or everywhere. It's just natural human behavior. So, therefore, we have that cautious optimistic preparation towards January and February trading as the holistic trading period itself just January. Thank you, Sijie. Yeah, Sijie. And I just want to add a little bit to Joey's comments. I think in general, we are very encouraged, obviously, by the new cold coffee and then also the Chinese New Year trading period. And so we are optimistic for the year. I think things are looking brighter. But I think what we're trying to say is that we do not take sales or grow for granted. We believe that like steel, there's going to be uncertainty and change ahead, and we're going to work hard to drive that sales growth and then be disciplined about our store expansion. And so as the whole thing would say, we plan for the best and prepare for the worst. And so let's have been in the last couple of years strategy, and we'll continue that. So quite for different scenario. Thank you, Sijie. Thank you. Good morning Joey and Andy. My question is on supply chain, which is very important to our business, both during COVID and post-COVID, but largely ignored by market some time. So we noticed that we have made a very strong inventory due to carbon footprint on Scope 3 that may apply to our supply chain as well. So just wondering, does that mean we make some changes in regard to our supply chain choice, or we may make some investment to our substantial partners to achieve our goal, and how that's going to affect our business going forward? Thank you. Hi, Ethan, thank you for your questions. In terms of supply chain, I think, obviously, it continues to be a very important advantage for us. And it's very important to our long-term sustainable growth. And so for supply chain, we will -- in the next couple of years, we'll continue our -- as we mentioned in the previous Investor Day, we will step up investments in supply chain and other infrastructure. Obviously, we'll be expanding our footprint in terms of our store for our supply chain centers and then also including automation, but also investment to reduce carbon footprint, as you mentioned. Now, obviously, it's very important for us to work with our supplier base, our supplier base, our supplier partner to what you will recall. I think if you look at the climate change initiative, it's still relatively new. We are running it. We have plan for it, and we have submitted the -- day targeting initiative for our plan. We are committed to achieving net zero emission by 2050. And so that's a commitment that not only require us internally to make investment and improve our operations, but also work very closely with our supplier. And then in the future, we will also work very closely with our consumer, too, to make a sustainable environment to require everyone's involvement. So it's not that we would necessarily change, but we will work together and all the study and encourage our supplier base to also work toward that goal with us as well. And so that's how generally we think about our supply chain initiative versus the ESG initiatives, especially climate change. Last two points to add is. One is when we talk about investment in supply chain responding to ESG, some people naturally think that, oh, that means margin impact, that means additional investments. I have to emphasize that in Yum China's philosophy, that means that the investment must have a desired payback. It does not mean that we just justify the additional investment, because it's the right thing to do. It has to be the right thing to do now in the future, it has to be sustainable for the business as well. So one example is we invest in little measurement meters in the store to measure the usage of energy. Well, the original -- the little cute equipment is very expensive. It does not justify our payback because our overall, if you think about store economics, two years, three years, well, we have to towards that direction. So what did our teams do? We worked with the suppliers of that little cute equipment, get rid of the bells and whistles. So it's very affordable. And we install them in our stores. And the saving is enough to justify the investment. So the payback is still protected. So that's one discipline. And we also share whatever we learn with our supplier to help them. So that's point one. Point two is supply chain. I'm personally very excited about this area, and my team is very, very passionate about it, too, because there are some really fun and exciting innovations happening in the last few years here. And I can share one with you. During the Shanghai lockdown, during the Shanghai lockdown, we have one warehouse. Well, we have 33 logistic centers to supply the chicken to different province. We have one warehouse to supply the package, the paper bulk, the bags, et cetera, for our stores. But that warehouse, what happened, was in Shanghai. And Shanghai was completely lockdown. And that is the serious business, right? How can we keep our stores open without the packaging paper, the wrapping paper? Well, our team, which is a brilliant team, when we are faced with such challenges, we came up with even more brilliant solution. That's when we start to build a logistics site in the most nearby port within a week, and we start to ship this packaging material through sea freight. One direction went to the north, to Tianjin, and then distribute from Tianjin to cover the entire northern part of China. One went down to Guangzhou, it covers the southern part of China. Well, what happened to the middle part of China there? Well, the railway. The railway can stop everywhere without the problem of lockdown. So some part of these packaging materials get on the train and went to Chengdu and Wuhan, everywhere. And we are okay. So now you can imagine, in the past, when we opened a logistics center, we look at the trucks, now we look at the trucks, the rail and the sea freight, everything. I love it. I think that's the way that we shall do our business in the past few years and going forward. It's fun. Thank you. Hi. Hello, Joey and Andy. Thank you so much for the details sharing and resiliency at last year. So the question I would like to ask is about your new store target. And I'm just wondering, if you guys think your new target is a bit too conservative, because, obviously, you guys have done really well last year on opening more than 1,100 stores last year with COVID. And without COVID, do you think the numbers could be a bit more higher this year? And also, since your CapEx spend last year is much lower than your previous expectations, and then perhaps the per store CapEx, it's much lower now. And also the level of rent is still lower than the pre-COVID level. And why should we take more advantage of that? And also, do you mind breaking down the number of store openings for the smaller brands like Lavazza and Taco Bell as well. Yes. Thank you. Hi, Rob. Thank you for your questions about our new store opening target. So I just want to echo a little bit about our previous comments, which is, for last year, we opened more than 1,800 stores. The more than 1,100 store is the net new store that was increased. As Joey mentioned, obviously, we're very disciplined, and our new store performance are very good. So we have been opening new stores quite aggressively, even during the pandemic period. We also aggressively optimize and improve our portfolio of brand and also our store network. And so, that's why you see the net number is 1,100 plus for last year. Now this year -- and as we have mentioned before, obviously, the target that we set out is 1,100 to 1,300 new stores this year. But I would emphasize that for our company, the quality of growth is more important than the quantity of growth. And when -- so we generally do not give like a quantitative, like, big pay or number to our staff and say, hey, this year, you're going to open x thousands of stores. That's not the way we do it. We do it in a very disciplined way, right? What we look at is like what's a reasonable sort of range of new store. And then -- but ultimately, how many stores will be open is really depend on the market conditions, right, the unit economics. As I mentioned, when the store economics, they perform really well, the market is booming, be sure our market manager, they will be promoting store opening and propose more stores for opening. And the unit economic is good, more store will be approved. And so there will be acceleration of matter that build our process. But our process is not based on a person's or a particular point of view, it is really based on a consistent, disciplined approach that reflects both the market conditions and also the business economics. So, we feel confident that if things are doing really, really well, I'm sure like we are confident that our store manager and they will make a right decision and we'll see very healthy, very strong our network expansion. As we mentioned before, and this year, our focus is on driving sales growth. This is really important because the sales, not only in kind of topline, but also in the margin. The biggest driver for margin is really sales. And then when we talk about other cost factors. So, the reason will be our focus, and I'm good confident that if we have -- you look at the number for the last few years, I think we have to outperform the overall market in terms of the restaurant industry, and we're confident that we will be able to do it in the long haul. Red [ph], I have one point to add. Analytically or from analyst point of view, the CapEx, the rent, the sales, all these are important factors to open stores. But operationally, what is not mentioned enough, the most important factor actually is how many good store managers do we have. And good store managers take some time to train, two to three years. And for us, we don't apologize for their focus because even in our culture, we emphasize on our GM number one. Our store managers are the most important people in our organization. So, in order to ensure quality of growth, as Andy mentioned, we need to put all these things under control, the CapEx, the rent, the operation, the sales. But the most important job for me and my management team is we make sure we have good store managers to run the store. Thank you. In terms of by brand, I think like, obviously, KFC remain the largest brand for small opening and you've seen Pizza Hut have accelerated to opening, as Joey mentioned, a record number in probably recent years with a number of years, even before pandemic. And then you -- we are continuing to see very robust expansion for Lavazza, right after now is more than 80, 85 store already growing very rapidly. And you think about it compared to last year as multiple store increase. And then Taco Bell also happen to increase the -- expression. In terms of the Chinese new business, we'll work right closely with our franchisees. We will like to see the network increase by 2023 for the Chinese business, both which include our ship and module. Thank you. Thanks, Sari. Thank you all for joining the call today. We look forward to speaking with you on the next earnings call. If you have further questions, please reach out through the contact information in our earnings release, and all have a great day. Thank you.

EarningCall_406

Good afternoon, and welcome to the Werner Enterprises Fourth Quarter and Annual 2022 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. The speakers for today will be Derek Leathers, Chairman President and CEO; John Steele, CFO; and Chris Neil, Senior Vice President of Pricing and Strategic Planning. [Operator Instructions] Please note, this event is being recorded. Earlier today, we issued our earnings release with our fourth quarter and annual results. The release and a supplemental presentation are available on the Investors section of our website at werner.com. Today's webcast is being recorded and will be available for replay later this evening. Please see the disclosure statement on Slide 2 of the presentation as well as the disclaimers in our earnings release related to forward-looking statements. Today's remarks contain a forward-looking statements that may involve risks, uncertainties and other factors that could cause actual results to differ materially. The company reports results using non-GAAP measures, which we believe provides additional information for investors to help facilitate the comparison of past and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation. Thank you, Chris, and good afternoon. 2022 was another successful year at Werner. Revenues ex fuel grew by double-digit percentages in both TTS and logistics, and we also set a new record for adjusted earnings per share. My sincere thanks go out to the talented Warner team who remain resolutely committed to our values by providing superior safety and service to our customers. As we look back on the fourth quarter, freight in our large Dedicated fleet was steady and performed well. One-Way Truckload and Logistics were challenged by a seasonally weaker-than-normal freight market in contrast to the very strong conditions a year ago. We expect that the 2023 freight market will be challenging in the first half and then gradually begin to show improvement in the second half as capacity exits the market and retail inventory resets to normalized levels. Over the last several years, we intentionally built a power business model that performs well in both strong and challenging freight markets. Our large and durable Dedicated fleet, our diversified One-Way Truckload fleet and our growing Logistics segment provide us with a resilient portfolio of complementary services and industry verticals. This business model, coupled with our seasoned leadership team, who averages 26 years of Werner experience gives us confidence in our ability to weather any economic environment and positions Werner for success. Now let's move to Slide 3. Werner is one of the nation's five largest truckload carriers, safely delivering over 3 million miles each business day with an experienced an increasingly diverse workforce of professional drivers. During 2022, we are proud to achieve the lowest DOT preventable accident rate per million miles in the last 10 years, a testament to our continued focus on improving safety and service across our fleet. During the quarter, our strong balance sheet provided the flexibility to add two stellar companies to the Werner family, Premier truckload carrier Baylor Trucking and the Elite freight brokerage and dedicated carrier ReedTMS. Werner is a growing logistics provider with an annual revenue run rate exceeding $1 billion with a large and growing base of over 70,000 qualified carriers in a pool of 30,000 trailers. This large trailer pool in our growing domestic and cross-border Mexico power-only capabilities provide Werner customers with additional solutions and flexibility to effectively manage their supply chain in rapidly changing market conditions. Let's move to Slide 4 for a summary of our fourth quarter and full year financial highlights. In the fourth quarter, revenues increased 13% to $861 million. Adjusted EPS decreased 13% to $0.99. Adjusted TTS operating margin for the quarter was 15.8%. For the year, revenues increased 20% to $3.3 billion. Adjusted EPS rose 7% to a record $3.70. Adjusted TTS operating margin for the year was 15.1%. Dedicated freight demand in the fourth quarter was solid and steady. The normal seasonal freight spike for certain Dedicated retail customers didn't occur this year given the increasingly challenging macro environment and relatively muted consumer spending. Fourth quarter freight was seasonally soft in One-Way Truckload and Logistics with fewer project surge and peak opportunities compared to the record high levels a year ago. On October 1, we acquired Baylor, a high-performing truckload carrier based in Mylan, Indiana with 200 trucks. Baylor is a 75-year-old company with outstanding leadership, elite drivers and impeccable customer service. The first week of November, we acquired ReedTMS Logistics, a rapidly growing Tampa-based trade broker and dedicated carrier with a skilled and knowledgeable leadership team. ReedTMS has a 26-year history of developing and expanding long-term customer relationships, supported by a large and growing carrier network with two-thirds of their revenue coming from the stable food and beverage verticals, including a heavy focus on temperature-controlled freight. We are very pleased to retain the strong management teams and talented associates of Baylor and ReedTMS. Both companies maintain culture similar to ours, with an intense focus on superior safety and service. Our implementation team is rapidly integrating these businesses with ours to capitalize on the synergies and mutual learnings between our companies. Together, our durable dedicated fleet, which includes 63% of TTS trucks and our growing logistics business account for 69% of fourth quarter revenues and is expected to exceed 70% in 2023. Next on Slide 6, I would like to discuss Werner Drive. Last August, we introduced Drive, which is the next evolution of our business strategy that delivers our future. Drive incorporates sustainability, capital allocation and outcome-oriented approach to operations, innovation and a culture that supports and values our team members. Our intentionally designed durable portfolio of asset and asset life solutions serves a diversified client base of industry-leading customers with an emphasis on the transport of necessity-based goods. We relentlessly focused on our results with the company culture immersed safety and service. Since 2019, we have received 27 unique customer Carrier of the Year awards. Werner has committed to innovation through our investment in technology and our Werner EDGE cloud-based platform, which is improving the experience of our customers, drivers, non-drivers, carriers and suppliers. Our core values of safety, service and integrity are based on an unwavering commitment to inclusion, community, innovation and leadership. And we embrace ESG and specifically our impact on the environment due to continuous exploration and development of alternative fuels and equipment, executing on our aggressive carbon reduction plan and expanding partnerships through Werner Blue, our company-wide sustainability initiative. Next on Slide 7 is our revenue snapshot. For the year, revenues were $3.3 billion was 74% in TTS and 24% in Logistics. Baylor and ReedTMS added $71 million of revenues to fourth quarter and the year. Including these acquisitions, we forecast Logistics revenues in 2023 will grow to over 30% of the total. 3/4 of our revenue base this past year came from retail and food and beverage with customers winning in their verticals. We intentionally focus on growing companies that ship recurring and repeatable consumer essential products who have rigorous on-time delivery requirements. We ended the quarter with 8,600 trucks, up 3% for the year or 260. In the fourth quarter, we held our TTS fleet size flat to adapt to the changing freight market. We intend to limit TTS fleet growth until we see signs of freight improvement, which we expect in the second half of the year. Turning to Slide 8 and the consolidated fourth quarter results. Revenues grew 13% due to 5% growth in average trucks, 1% higher revenues per truck, a $41 million increase in fuel surcharges and logistics revenues growth of $29 million, which includes eight weeks of the acquired ReedTMS business. A seasonally soft freight market in fourth quarter compared to a seasonally strong market a year ago was a significant headwind. Despite this freight challenge, strong dedicated performance limited the adjusted operating income declined to 11%. Thank you, Derek. On Slide 9 are the fourth quarter TTS results. TTS revenues increased 13% and adjusted operating income decreased 8%. Sequentially, TTS adjusted operating income increased 9% quarter-over-quarter. TTS adjusted operating margin declined 240 basis points year-over-year compared to last year's record fourth quarter operating margin. Our adjusted operating expenses per mile net of fuel increased 6.6% compared to our TTS rate per mile net of fuel of 3.5%. The largest per mile operating expense increases were supplies and maintenance at 18% and insurance and claims at 53%, while driver pay increased 4%. During fourth quarter, we incurred $11 million higher insurance and claims expense or an unusual charge of $0.13 a share and $8.5 million lower workers' compensation in salaries, wages and benefits expense or an unusual benefit of $0.10 a share. For insurance and claims, a limited number of prior year incidents have developed beyond what we had expected. For workers' compensation, prior year claims are developing lower than what we previously experienced. Over the longer term, we expect our accident per million miles performance will improve our insurance and claims experience. While we can't ignore the increasing trend of nuclear verdicts and settlements we expect our 2023 insurance and claims expense to moderate from 2022. In fourth quarter, we sold more tractors and trailers at a lower average gain per unit. Gains on sales of revenue equipment were $22.5 million and we had a gain on sale of property of $3.4 million. As we expect small carriers to exit in greater numbers in 2023, we anticipate the used truck and trailer market will weaken. We expect our gains on sales of equipment in 2023 will moderate from record highs in 2022. For 2023, we expect annual equipment gains in the range of $30 million to $50 million. In an effort to partially offset the headwind of lower equipment gains in a more challenging freight market, we are implementing company-wide measures to reduce controllable expenses. Now let's move to fourth quarter TTS fleet metrics for Dedicated and One-Way Truckload on Slide 10. Dedicated revenues net of fuel increased 9%. Average trucks increased 4%. Revenue per truck increased 5%. One-way Truckload revenues net of fuel increased 2% as average trucks increased 7% from the Baylor acquisition. Miles per truck declined 5% and rate per mile increased slightly despite far fewer peak and transactional pricing opportunities. We expect One-way Truckload miles per truck will flatten out on a year-over-year basis in 2023, and we expect a gradually improving pricing environment during the second half. Moving to Werner Logistics on Slide 11. In the fourth quarter, Logistics revenues grew 15% due to eight weeks of ReedTMS, offset by less peak and transactional freight opportunities. Truckload Logistics revenues, including ReedTMS, increased 20%, driven by a 34% increase in shipments, partially offset by an 11% decrease in revenues per shipment caused by fewer premium pricing opportunities. Despite the challenging freight market, Logistics shipments, excluding ReedTMS, were flat year-over-year and down 5% sequentially. Contract shipments increased 89% year-over-year and 62% sequentially with the addition of ReedTMS. Transactional shipments were up 2%. Contractual mix versus transactional was 55% in fourth quarter. Intermodal revenues declined 23%, supported by a 3% increase in revenues per shipment, offset by a 25% decline in shipments. And Final Mile revenues increased $14 million. In total, Logistics achieved adjusted operating income of $8 million with a 3.8% adjusted operating margin, down $3.9 million year-over-year and an improvement from third quarter of $2.4 million or an 80 basis point sequential increase. Next, on Slide 12, let me spend a moment on our innovation. Our IT team accomplished a great deal this past year as we continue to adapt to a dynamic supply chain through our enterprise-wide technology transformation. A few of the notable achievements include: we completed the first phase of our Cloud-First, Cloud Now implementation of mastery in December with the conversion of our Werner Truckload Logistics brokerage business to our EDGE TMS platform. We successfully expanded the deployment of Workday across human capital management and accounting applications. We strengthened our data and system security with Zero Trust security practices. And we continue to invest in and pilot new technologies to reduce our carbon footprint, including hydrogen fuel cells and EVs. We continue to live and build on our values in 2022. I'm on Slide 13. As evidence of our commitment to safety, in 2022, we achieved the lowest DOT preventable accident rate per million miles in the last 10 years and the lowest work injury rate in the last 17 years. Over the last two years, we significantly strengthened and diversified the leadership of our Board as we carefully selected five new board members with unique backgrounds and skill sets. This has resulted in a more diverse board that bolsters our expertise in transportation and logistics, finance and sustainability, leading to a wider variety of perspectives. On Slide 14, we continue to make progress and receive recognition on our ESG journey. In 2022, we were recognized as the top Company for Women to work for by Women and Trucking, a top food chain provider by Food Chain Digest and a top green fleet by heavy-duty trucking. We are focused on creating a safe and inclusive culture for our associates while operating efficiently to reduce our impact on the environment. On Slide 15, we ended the year at a strong financial position with net debt of $587 million and equity of over $1.4 billion. Approximately one-third of our debt is fixed rate and two-thirds is variable rate. In December, we finalized a new $1.075 billion five-year unsecured syndicated credit facility with six banks to expand our credit capacity and extend most of our debt maturities out to 2027. Following the acquisitions of Baylor and ReedTMS, our net debt-to-EBITDA ended the year at 1 within our long-term range goal of 0.5 to 1. On Slide 16 is a summary of our cash flow from operations, net capital expenditures and free cash flow over the past five years. Expanded operating margins and less variable net CapEx resulted in significant free cash flow generation. In 2022, we had net CapEx of $318 million and generated free cash flow of $131 million. Turning to Slide 17 and our capital allocation framework. Our first capital priority continues to be reinvesting in our fleet. We are investing in the latest fleet and equipment technology and we are growing and modernizing our terminal and driver school network. In 2023, we expect to slightly lower the average age of our truck fleet. Turning to acquisitions. We will remain disciplined in our approach by evaluating candidates against our strategic filters. In 2023, our focus is the integration, synergy implementation and cross-selling opportunities for our recent acquisitions. We will also continue to enhance shareholder value through dividends and share repurchases, while maintaining a strong and flexible financial position. Thank you, John. Moving to Slide 18. Here, you see that over the last 18 months, we executed on four additive and accretive acquisitions, ECM, Nets, Baylor and ReedTMS. All four strengthened the durability of the Werner portfolio and expanded our capabilities. Our growing and diverse business provides additional solutions for the increasingly complex needs of our customers. Today, we have been successfully integrating these companies into the Werner portfolio and our synergy implementation process is running ahead of schedule. Next on Slide 19 is a review of our performance compared to our 2022 guidance as well as the introduction of our 2023 guidance metrics. For the year, our truck fleet increased 3%, primarily in Dedicated. For 2023, we plan to keep the fleet flattish in the first half with plans in the second half to grow primarily in Dedicated in the range of 1% to 4%. In 2023, we are planning net CapEx of $350 million to $400 million. For revenue equipment, most of this CapEx is to refresh our existing fleet with a small share to fund fleet growth in the second half. Dedicated revenue per truck increased 5% in the fourth quarter as we had far fewer projects and surge opportunities this year compared to last. For the year, Dedicated revenue per truck increased 7.6%. Noting the freight market outlook and tougher comps, in 2023, we expect Dedicated revenue per truck to increase in a range of 0% to 3%. One-way Truckload revenues per total mile for the fourth quarter increased slightly, just above our guidance range. In the first half of 2023 in a challenging freight market with more difficult comps, we expect one-way rates to decline year-over-year in the range of 3% to 6%. Our full year income tax rate was 24.4%. In 2023, we expect our tax rate to be in the range of 24% to 25%. The average age of our truck and trailer fleet in fourth quarter was 2.3 and 5.0, respectively. For 2023, with increased CapEx, we expect to slightly lower the age of our truck fleet. One-way Truckload freight demand in January was softer than the strong freight market a year ago. Next, let's move to Slide 20 and discuss our view of the market this year and our modeling assumptions. Over the last several years, we carefully designed and prepared our business to outperform in a slowing economy. The last two quarters, we've adapted the retail inventory rightsizing as consumer demand moderated and supply chain bottlenecks began to ease. Over 60% of our trucks are in our durable dedicated fleet and one-third of that business is with large and successful discount retailers that are gaining share as consumers are becoming more value-conscious for their household spending. With the acquisition of ReedTMS, our mix of revenues increased for contractual food and beverage shipments, which complements the seasonality of our existing logistics business. For our TTS segment, spot rate is less than 5% of our revenues. Small truckload carriers are being whipsawed by 35% lower spot rates while also dealing with much higher operating costs for drivers, equipment, fuel, maintenance and capital. As the year plays out and there's a large shortfall between spot rates and carrier operating costs, we expect carrier failures will increase. This trend has already started. FMCSA data shows that truck deactivations exceeded truck activations for every one of the last 19 weeks with net deactivations of 53,000 trucks over this period. We expect interest expense this year will be $20 million higher than last year, due principally to the higher interest rates as well as maintaining a higher debt level. We anticipate that OEM new truck and trailer production will show modest improvements in 2023. Before opening up for Q&A, I want to give a brief update on two executive transitions. First, as of December 31, Marty Norlen stepped down as COO to assume a new role focused on fostering and developing strong relationships with some of our largest customers. Eric Downing became COO in January following his outstanding leadership of our Dedicated fleet since 2016. During the last seven years, Eric and his team grew our Dedicated fleet by 50%, while nearly doubling revenue. I want to thank Marty for his continued hard work and loyalty at Warner, and I'm excited to work alongside Eric to grow our business. Second, as you know, John Steele will be retiring as CFO and has been flexible with his end date as we continue our search for his successor. The search process is going well, and we look forward to providing an update when appropriate. Thanks, guys. Good afternoon. I guess I wanted to start maybe on some thoughts around the sort of way to think about earnings power as we go into 2023. So I think your guideline, both the gains as well as insurance, potentially providing somewhat meaningful of a headwind to EPS. And I wanted to maybe get a sense of how you think you can offset that with core results. Obviously, the Dedicated business looks like it's more stable. One-Way Truckload is going to be more volatile. So I just want to get a sense of as you start to think about some of those headwinds that you've outlined to EPS, what you think you can do with the core business to potentially offset? Yes, Chris, this is Derek. Thanks for the question. And good afternoon. Yes, you're right. There are some headwinds as we start and go into the year, we wanted to be clear about them, and that's why we included them in the opening remarks. When you think about the gain at the midrange, it's a $40 million type head range or headwind at the midpoint of the range. We know interest expense is going to be more significant. At the same time, we've got the benefit of the integration that's ongoing with both Reed and Baylor. Those integrations are going well. We feel good about that. We believe that the very successful trends that have been going on within our DOT accident preventable frequency is going to lead to an opportunity to at least moderate insurance and then take some of the noise out of that line. We've also been pretty clear internally on the need for us to go out and not just look for synergies relative to the integration efforts, but also around the building. And so we've launched an internal effort several months ago, actually, to prep for what we knew was coming, and we're going to continue to chip away at trying to neutralize those headwinds. It's going to be a work in progress. We also obviously have pretty clearly signaled, we think it's a year that's going to be made up of two halves. And the second half has opportunity to -- for us to continue to improve those results. Lastly, I'll just tell you that one of the upsides, I know people don't like increased CapEx ranges. But as we've seen OEMs start to kind of be able to get through some of the bottlenecks they've been faced with, we're encouraged by early returns in terms of equipment receipts as well as the quality of that equipment and specifically the impact we think it can have on the maintenance line. Okay. That's helpful. I appreciate that color. And I guess maybe a follow-up, you guys have been helpful in terms of giving us some sense of the sequential earnings power of the company. This has been a unique fourth quarter with sort of less project business than we would normally have seen. So -- any thoughts on sort of normal seasonality as you cross over into the first quarter? Should we see the typical step down in earnings power that you normally see? Or would it potentially be a little bit more muted given what was going on or sort of the weakness that you saw in the fourth quarter? Yes. So that's a little tougher to put a finger on. But clearly, fourth quarter was muted. You're right. But obviously, mostly as it relates to comparing to some very outsized comps in the prior couple of years, driven by COVID and supply chain disruptions. We still had some activity in the fourth quarter on the Pecan project side. It's just not nearly what we thought it would have been in a normal year. That sets up for possibly a little more muted drop. But realistically, the market we're in today is still a tough market. One-Way is holding up, I would say, better at this point than I would have expected. if you -- the same call it existed 60 days ago. But make no mistake, it's tough out there. I think if you look historically, that drop off first -- fourth quarter to first quarter is somewhere around 24%. And I would tell you that this year, we're going to work our tails off to make it be less than that perhaps. But I certainly expect it's going to be somewhere in that 20%-plus range. Afternoon, gentlemen. I wanted to touch a little bit on your outlook. You seem to think the market is going to moderate a little bit and then gradually recover. Can you put some meat on that and talk a little bit about what your retail customers are telling you about inventories and how long they expect to work through? Yes. Sure, Jason. Thanks for the question. Look, retail inventories are tough because holistically, there are still issues out there and there are still people rightsizing their inventories, that's a fact. But we've been very intentional about who we do business with. We've talked about it for years about being more of a rifle shot versus a shotgun when we go out and pursue new business and try to pursue those we want to grow with. And those better ran more successful retailers, especially folks that work in that discount retail space. They've got through the not whole predominantly. So -- as we talk to those folks, they're in the latter innings. I would say the network overall across all customers is not necessarily in the latter, but it's certainly middle to late innings. And so we're encouraged by the opportunity to work for that to burn off. We couple that and probably we're more bullish on what we track and some of the things we've built to track internally on deactivations. If you look at deactivations over that 19-week period, and you talk about 50,000 -- 53,000 net deactivations, that's a big number. And that's only gaining steam. And not only is it 19 consecutive weeks, I think it's 35 or 37 in total have been negative. And there's nothing that on the horizon that leads me to believe that, that doesn't accelerate as we move forward from here. So -- you put all that together, we still assume a relatively muted economic backdrop and all the modeling we're doing. So we're not banking on some sudden rebound in the economy. And we think the back half setup is for us to get back to a world of inventory replenishment, peak freight movements, et cetera, in the back half, all of which will support our portfolio well based on the type of business we do and the people that we do it with. Hey thanks. Afternoon, guys. Derek, if I look, length of haul is down, I don't know, almost 30% from a couple of years ago, deadheads up a couple of hundred basis points. Is this just the mix of the acquisitions? Or is there something else going on here? And I guess, ultimately, I'm trying to figure out like what -- how is this impacting your rate per mile, your utilization? And ultimately, is this a good thing or a bad thing for margins and earnings this mix shift? Yes, Scott, great question. I'll attempt to be as clear as I can here. I think it's a mix of several items, right? So acquisitions certainly play a role, in nearly every case, the acquired company was operating in a more regional footprint with shorter length of haul. And as you continue to blend that in, it's going to bring it down. I think the ongoing forward deployment of inventories and the ongoing growth of sort of the smaller regional DC model is going to continue to impact that. I think the ongoing, although much lesser now conversion opportunities for intermodal where longer length of haul stuff goes more by train plays a role. Another one that I think is probably a little more pertinent to Werner than others is our very large Mexico franchise and some of the -- in all of the robust COVID freight activity, one place that was impacted negatively was really cross-border during that time frame because you had two different governments with disparate approaches to COVID and you had openings and closures seemingly twice a day in some cases, but certainly multiple times a week. And that's long length of haul freight that really kind of went the other direction. So, I tell you that because as we look at it and we look forward, we think that the bulk of that length of haul erosion is behind us, and we think that moderates. I'm not yet prepared to say it gets longer again, but Mexico early returns so far in the last few months, we've seen the growth come back there. The early innings of nearshoring is real. Net direct investment was up $30 billion, I believe, last year already, and we think that number continues to rise. And so those loads tend to have longer length haul profile. And so I think you'll end up in our network with kind of a tale 2 cities. Some of the expedited in Mexico cross-border will be longer and longer. We will have a longer profile, I should say, and then an increased focus on regional, and our regional footprint is going to be something that's going to be ongoing as we continue to engineer more time at home and lifestyle jobs for drivers with high service requirements. Scott, I'll add one thing to that. Consistent with our expectation that our One-Way Truckload length of haul will begin to flatten out. We also think that our miles per truck in One-way Truckload will flatten out going forward as well. Okay. So this has been a headwind to utilization probably a tailwind to rates, I guess. The second question, you talked about insurance and maintenance. Any way to just sort of put some numbers around how big of a tailwind that could be this year? And then what does that mean with puts and takes for the OR? [ph] do we think we stay within the long-term guidance on operating ratio? I'll take the guidance one and then John probably waiting with some specifics. But yes, the answer is yes. We've established that guidance. We've that guidance. I want to encourage everybody to remember that, that's annual guidance. And so we believe as we look into 2023 with all the puts and takes, we can stay within that guidance as we go forward. Insurance is moderating. We believe we're very encouraged by the most important thing, which is having less accidents and especially having less serious ones. With new trucks coming in, we think there's opportunities and parts availability, I would actually probably put in front of new trucks coming in for maintenance to be less disruptive. Yes. So for insurance and claims, it was a $44 million insurance and claims quarter, $11 million of that was the year-end charge as we went through the actuarial process at the end of the year. So adjusting for that, that puts it down to $33 million. While we'd like to be back at that $25 million quarter level we were in the past, that's probably unlikely with the growth in the fleet and with the environment that we operate in. But we'd like to be closer to the $30 million a quarter range depending on how our experience on severity of claims plays out. On the maintenance side, our maintenance costs were up 18%. That has been gradually coming down on a year-over-year basis as the supply chain improves. We expect that as we move throughout the year, that increases in maintenance costs will move into the single digits. Okay. Great. Good afternoon and thank you for taking my question. So I guess, Derek, you referenced stable Dedicated demand in the fourth quarter. Would just be curious if maybe you could talk about the Dedicated pipeline more broadly as you go into 2023? And are you seeing some of your Dedicated customers looking to either push trucks back or want more trucks kind of in a one-off or onesie, twosie kind of way? Just any kind of color around that and the broader pipeline would be helpful. Yes, Jack. So, good afternoon. And when we think about Dedicated, first off, the pipeline remains strong in Dedicated right now. We're -- that will be tempered somewhat with the reality that in certain Dedicated fleets, you might see some shrinkage just due to their business being under duress. We know that there are certain businesses that are going to be more impacted by the economic backdrop than others. And so there'll be some offset to what that pipeline is able to bring to fruition. We're also going to be pretty disciplined. Dedicated is hard to do business with very high service expectations. We know what it costs to do that. And so we're going to stay disciplined relative to price. Our customers have been supportive thus far. And so it's hard to dictate exactly where that fleet goes over the next, call it, quarter or two. We've guided to kind of flat because we know there are some puts and takes. Right now, I'm encouraged by the conversations we're having. I'm also encouraged that the one-third of that Dedicated book of business is actually set up on index. It's indexed business. So the rate noise on some of that will be less. And we'll have the ability to focus on the two-thirds where there could be activity. You put all that into the blender, and here's what I would say. I think we're a premier dedicated player. I think the service we provide for our customers is second to none. And I think they understand that. We also understand they're under a lot of pressure, and so there's going to be some interesting conversations to be had. But most -- I guess, in closing, I would say I'm encouraged by the pipeline. I'm encouraged by the ongoing bid activities in Dedicated. And I'm probably most encouraged by the fact that we've been able to test the model relative to not letting designated fleet into our Dedicated business and therefore, having the kind of hemorrhaging that may have happened in past cycles where the business was not set up with a true dedicated construct. Okay. No, that's very helpful. I appreciate that. And then I guess maybe for a longer-term question, Derek, if I go back to, I think, last year in the fourth quarter call, you outlined a plan to grow Werner's revenue by 10% a year on a CAGR basis for the next five years. We're now a year into it. You had a good revenue year in 2022, partially driven by M&A. Could you maybe update us on that longer-term vision for the company? And do you feel like you're on schedule, ahead of schedule, as you sort of think about those longer-term plans? Sure. I mean, clearly, at this point, we're ahead of schedule based on what we -- that the two years that have played out since we first started having that conversation. We're encouraged on the revenue front. We want to continue to always keep an eye on the bottom line because I've always said that it's not going to be an or proposition that's an and. We need to grow and, maintain our discipline relative to margins and expectations around performance. But right now, we're ahead of that schedule. We also indicated at the time, and I'll reiterate today, there's going to be years that don't fall into that 10%-plus type revenue growth because you've got to be smart and disciplined and kind of read the market that you're in. This year, obviously, expectations at this point, just doing the math on the recent acquisitions, we've got a really good head start to that 10%-plus number, but we're going to have our eye this year on cost control, synergies through the implementation that's through the integration probably most importantly, product and portfolio enhancement through these additive acquisitions that we've done and continuing our larger strategy of just building out yet another layer of defense for some of the economic ups and downs and then proving it out. Look, at the end of the day, what matters is what's on the scoreboard. And you don't get credit for first downs. We've got a lot of those, but I'm looking forward to working our way through this downturn, so we can show what this company is capable of. Great. Good afternoon. Hey Derek, hey John. Can you -- maybe your thoughts on acquisitions? Your leverage is at the top end of your target, but typically, in a downturn, you kind of want to maybe take more opportunities. You just swallowed the four over the last two years as you highlighted. So can you be more aggressive in this market? Do you calm down if we're in a slowdown in and step back, maybe just talk about your thoughts and then how discussions are going? Yes. So there's obviously going to be a lot of opportunity out there over the next 12 months. There's a lot of folks looking for an exit, lot of its demographic based as much as anything. But what we've stated even in the prepared remarks, our focus right now because of doing 4 in 18 months, because of the early returns being as positive as they are on those 4, and because in each case, I think we've learned, we've gotten better and we've set ourselves up for even further success in the future. I want to see these things integrated. I want to see them all functioning as one. I want to make sure that our cross-selling capabilities are where they need to be. We just came out of our annual sales meeting that I was personally in attendance at, and meeting with all of the sales teams from each of the organizations. And I think we've made large strides to what this looks like going forward. But there's work to be done. So that's -- I guess my way of saying there's nothing is off the table. We're not -- we've got room with the credit facility to be able to do more. We've got an open mind to look at opportunities as they become available. But in the meantime, our focus will be on integration on synergies and on execution. Thanks, Derek. And then maybe just a little bit -- we've heard a lot of shifting in contracts, right? Everything used to be a yearlong when you talk contracts. I know your dedicated business, a little bit different multi-year, but if the retailers are now talking less than one year, what is your thoughts on the pricing paradigm in that market given your kind of mid-single-digit downtick on One-Way and slowing and Dedicated. What -- how does that change the market dynamics in this environment? Yes, great question. The -- first off, I just want to point out the guidance we gave on One-Way is a first half guidance. So we believe it will end up being a tale of two halves, and we're just not comfortable yet talking about the second half, so I think that's important. As it relates to people going to shorter bid durations right now, I mean, normally, under almost every cycle, I can recall and every time frame, we're always pushing for stability in our network over any short-term type pricing. But if somebody wants to price short right now, we're going to be all ears. I mean, we'll have that conversation because we have conviction that is things turning quicker than people realize. And I'd rather not be settle with that price for 12 months if 6 months will do. So we'll be open-minded. We'll have those dialogues, and we'll figure it out. We're also going to hold people accountable just like they held us accountable and should hold us accountable to the agreements we made during COVID. The same thing is true now. If we have agreements in place, we're going to look for that to hold up, and we'll have those dialogues. And lastly, I'll just point to something you mentioned in the question. So I know you know, but 63% of our businesses in TTS -- and TTS is in that dedicated arena, and that is almost entirely made up of long-term contracts. But you did talk about decelerating pricing even on the Dedicated write-down, I guess, flattish, right, in terms of your pricing now? Flat to up 3% and that's comping up against 7.6% that we achieved for revenue per truck increases in Dedicated in 2022. Yes. I mean, not to be cheeky, but look, it is raining out there. Dedicated is a free darn good raincoat, but it's still raining. So we're going to have to perform. We're going to have to execute in Dedicated, and we're going to have to ask for what we feel is fair and appropriate. But it's not going to be in the first half, the rate environment that we've seen over the last couple of years, and we hope to outperform that. But you know us, we're going to be conservative with our guidance, and we're going to try to make sure that what we put out there is achievable and exceed it where we can. Good afternoon. I know you've talked a bit about rates, but I wanted to see if you could offer just a thought on what we end up with in terms of the bid season and truckload contract rates. It seems like the comment in the first half down 3% to 6% is maybe not exactly what you think the rates could be. I mean, I guess if you think of the timing being that the contracts get implemented and partially 2Q more in 3Q, do we also expect that the rates would be down more in second half than that 3 to 6. So just, I guess, some commentary on kind of how to think about contract rates relative to the guidance? Yes, sure. So first, let's talk about what that cadence looks like. You really got kind of 60% of the revenues are done in the first two quarters, then 20% and 20% thereafter in Q3 and Q4. We've got a decent feel for Q1 implementations, and those are progressing. At this point, even just this point in Q1, our mindset is already starting to shift relative to how we think about rating business based on when we believe the turn is happening and the recent acceleration of some of these the deactivations we've been speaking of. So, we're giving first half guidance. We think spot rates gone about as low as it can go, and it's well below people's operating cost. We're fortunate that less than 5% of our revenues are in the spot market. But we think that flush happens quicker than maybe it has in past cycles. So I mean that's more color and context maybe than an exact answer. But certainly, I'm encouraged. Lastly, I'll just tell you the comps in the first half are significantly tougher than the comps in the second half just based on how 2022 played out. So, that's as much the issue as really anything. And when we're talking about bid season, Tom, we're talking about the 39% of our revenues in TTS that's One-Way Truckload. The biggest share of it is in Dedicated, and we think that's going to be positive, up 0% to 3% in revenue per truck per [indiscernible]. Yes. I mean that makes sense, and I understand that. I guess maybe one follow-up on this topic, I think generally, people are kind of thinking high single-digit decline in contract rates, irregular route truckload. Are you more optimistic than that? You think it's better? And then I guess in terms of the kind of quicker tightening, do you think maybe this really tightens meaningfully in second half or it's more just like kind of a gradual improvement? Well, I don't know that I'm more optimistic because that sounds an awful lot like hoping. We put guidance out based on analyzing it. And we talked for several quarters about our One-Way network being more engineered than ever before, we've talked about LTAs being part of our One-Way network at a larger percentage than ever before. And so I'm not trying to review what others may be saying about what may or may not happen in their networks. I just feel strongly that in our network, based on both bids completed, LTAs in place and ongoing engineering within that One-Way network that our ability to perform where we've guided to is at this point what we feel will take place. Okay. Great. Yes. I mean, I think it's quite clear that you've positioned the portfolio to be resilient, which is great. So, thank you for the time. Hey, great. Thanks and good afternoon. Hey, Derek, hey, John, hi, Chris. There's been a couple of comments on the cost side, and it sounds like that there's some opportunity and some things that can help and also some headwinds. I'm just curious, Derek, if you've got a comment on driver pay being one of your biggest cost buckets I know that that's moved up substantially in the last couple of years. Is that something that moderates into '23? And then how do we think about maybe, I think, John, you shared that total operating expense in the fourth quarter was maybe up 6% or so. Does that -- what sort of run rate are you expecting in '23 on the total side for all the buckets? Thanks. Yes. So I'll have John take the second part of that. But on the driver pay question, yes, we think there's going to be moderation. That market is still going to be tough. We're still going to hold our expectations high, and only hire the best of the best. That does come at a premium cost. But nonetheless, in that market, the pressure has moderated some. We also remind you, especially on the One-Way side, pay is reflection of both pay rate and miles. And so as we've endured the last couple of years and some of the disruptions that were going on and you saw miles degrading, you had to make that up at times with the pay rate. As we start to stabilize miles and start to see some of that congestion or disruption, if you will, evaporate, it provides us an opportunity for our drivers to still be paid very well, still make a very good living and actually have less disruption in their life as well. And so all those things factored in, yes, that's a line that we envision moderating this year compared to what you've seen over the past couple of years as we continue to focus on other items. Look holistically, there's still a lot of pressure. Trucks, trailers, tires, fuel, most likely and a moderating driver wage, but still not going down, clearly, are all going to put pressures on the P&L. So our job is to go find every other line item in there that we think we can extract savings from and then execute on it. At the same time, it's going to be having those tough conversations with our customers about what we need to have sustainable pricing to be able to support their future growth and their needs. Those customers aren't -- that aren't growing or are struggling. Obviously, that conversation has a different tone. That's why we try to align ourselves with folks that at what they do. And Todd, the year-over-year increase in driver pay has tracked from quarter-to-quarter throughout '22. First quarter was up 15%, second quarter up 15%. Third quarter up 9%. Fourth quarter, up 4%. So, the year-over-year increase is moderating and the cost, while it's not flat, it's moving to lower single digits. We expect it will stay in the low single digits as we move forward in 2023. Okay. Good. That helps. And maybe just for a quick follow-up. On the logistics side, with kind of the change in the portfolio and the acquisitions, the margins in the last two years on a full year basis have kind of been in the mid-single-digit range. Is that kind of the right longer-term range, not looking for 2023 guidance but just kind of a general range to think about the logistics margins at this point? Or is there something that makes the margin stronger or weaker for any reason? Thanks. Sure. I mean, first off, I'll point out logistics is now greater than 30% of revenues, and we have eyes to growing that at an outsized pace over the more incumbent book of business and Dedicated in One-Way. So, I think you see that becoming a larger portion over time. We're super excited about how the integration is going ReedTMS and the opportunities that stand in front of us. That integration in particular, especially as it relates to the real productivity gains and system enhancements when you bring people together on one platform is a back half of '23 initiative. It takes a while to get there. We operate predominantly in different verticals today with different customer makeup. They do very well, but we are actively working toward that integration date. So, at this point, I'm not looking to change any kind of guidance on mid-single-digit logistics expectations. But we will certainly be updating as we get further along in that integration as to what we think that potential could look like when you get all the freight into one network with one central kind of visibility platform. Thank you. Good evening. Derek, you mentioned Mexico earlier, and it sounds like the nearshoring somatic is starting to gain some momentum again. Can you just give a little bit more insight as to the trends you're seeing there from a volume perspective? And then also from pricing, how does that compare relative to some of the trends you're seeing in the U.S. and from a competitive landscape as well? Yes, sure, Jon. I mean, first off, yes, it's early innings, but we are seeing sort of the refutable proof that nearshoring is taking place. Obviously, it starts with expansion of existing plants and facilities because that's easier to do than to build new plants and facilities, although those are also starting to come out of the ground. I think it plays out over many years, not just a couple of quarters. So, this is not a short-term thing, but we are reaping benefits as we speak from the increased activity to and from Mexico. Our franchise is one of the strongest, if not the strongest that exists on the southern border. Our sales team is very tenured and high quality, and we are seeing volumes picking up there. That's higher priced freight with longer length of haul that has lots of positives for our drivers. So, we love it kind of all the way across the board. As it relates to longer term, what-- how the magnitude of that, I think it's too early to tell, but we're certainly encouraged by what we see at this point. Okay. Great. Thanks. And then just a clarification, trying to match up the $30 million to $50 million of expected gains this year with the 1% to 4% total TTS truck growth from the beginning of the year to end of the year. Should we think about those ranges as kind of overlapping? So, if you have only $30 million of gains, you're going to grow the fleet 4% and if it's $50 million, 1%. And I guess really the reason I'm asking is if the used truck market really does continue to roll over, is there a chance that you either would have to not grow the fleet or contract the fleet on a net basis to get to that range or that, range of gains comes in lower than the $30 million to $50 million? Yes. So that's a tougher one to predict. I think there's -- if someone was to ask what's the most speculative or what's the most difficult to pin down aspect of the assumptions that we put forth, it would be gains. But I think a way to think about it is we think 1% to 4% based on pipeline alone is pretty realistic and that's likely to happen sort of regardless. What will happen relative to the game line -- what the game line will dictate is how much work we get done on refreshing the fleet. If we can continue to move equipment and move it at a high velocity, then we will get on with the business of lowering our fleet age more quickly. If that used market were to roll over and we felt like that rollover was short term enough that we might let that refreshing of the fleet take a little longer, then we'd go that route. But I think sort of regardless of what happens in the used market, we've got too strong of a pipeline to not see some back half growth, specifically in Dedicated at this point. And the gains and gain per unit -- I should be more specific, the game per unit will dictate how aggressively we can refresh the fleet this year. We do want to bring the fleet age down. That is something that is important, but we're not going to do it at all cost. Good afternoon. Derek, you've made a lot of comments on the contract market, which I imagine you anticipated coming into this call. We've heard from some of your peers that the focus on trailer capacity is maybe changing the shape of the cycle with rates generally not falling as much for large carriers, at least those with large bases of trailers. How do you assess that with regards to your One-Way segment? Could the focus on trailer capacity help those asset-based discussions such that rates maybe don't fall as much as they otherwise would have? Yes. I certainly think that trailer pools and the efficiencies that are incumbent with those that have large trailer pools and a robust power-only offering like we do are better positioned through downturns to be able to have more rational conversations because there's less folks that can replace you. You can't replace the efficiencies we bring with a blended solution of our assets in power only, with a large trailer pool presence, with a non-asset broker. You can't really do it with somebody that's asset only that doesn't have the ability to assign lanes based on differentiated strengths, meaning we'll take the stuff that works on our assets, the broker carrier that may be better at particular lanes takes those lanes. And so, trailer pools and the inherent efficiencies that come with them are a competitive advantage. Even within our power-only solution as an example, they predominantly play within the contract market. Very little of that is even done in the spot market. And so, it gives those partner carriers better opportunities to build the future around stable rate levels and stable experiences. So, I think both for the carriers that do business with us, the customers that participate in this product offering and for our shareholders, it truly is a win. That is also relatively speaking, in the early innings. So, all early returns are positive. We're excited about it. We're growing it very rapidly. But I think there's a lot of runway ahead of us. Yes, Bert. Excuse me, Bert. We've had five straight quarters of sequential growth in our power-only business, and that's during a period of time when the freight market is moderating. So, there's some real staying power with power only. Yes. No, that's great. Maybe just a follow-up then on the logistics side. How does growth in that platform play out from here? In '22, as you noted, John, you're expanding the presence of power only, and that's been a success. And then you acquired ReedTMS and that significantly grew your top line footprint. As we progress maybe a longer-term question, we progress through the decade, what's the vision for that platform? Is it to be trailer centric? Is it to be a digital automated broker? Is it all of the above? Yes. So, as we go -- first off, giving guidance out a decade is tough to do. But clearly, power only is something that's gaining traction at a pace that's unique compared to traditional brokerage. And so, we do anticipate that, will grow at a faster pace. The majority of what we do in brokerage is still traditional brokerage and yet power only is quickly making that gap up. I think over time, the simple reality from a product offering standpoint is that power only is tough to compete with. It's very difficult to recreate that in a traditional brokerage format. I think as we brought Reed into the Werner family, even they were very excited about having that opportunity to complement the exceptional sales force and the customer relationships that they have, coupled with, obviously, our ability to add trailing capacity at rates that would have been difficult to do for them as a stand-alone. So, I'm encouraged by it. I'm not going to try to predict a 10-year out percentage or ratio at this point, but I think it's going to be a larger and larger player. Just to clarify, Derek, I meant more like what is your strategic vision for the logistics, I wasn't looking for long-term guidance or anything like that. But I think you answered that. Thanks Derek, thanks John. Good afternoon. Thanks for taking my question guys. Maybe just two quick follow-ups on Dedicated. Looking at the revenue per truck per week and I said it's off a tough comp from last year, but 0% to 3% seems like it's going to be tough to exceed, inflation this year when you talk about driver pay as part of that. So maybe you can elaborate that a little bit. Is there ability to go back, it seems like you might be having some conversations to possibly move that up. Is this something we should look at more in a multiyear period, one strongly offset by a bit weaker one. Maybe you can offer some thoughts around that. Yes, Brian. So, the multiyear approach is certainly one lens that I think does matter. When you're coming off of some of the comps over the last couple of years and we were able to shore up driver pay and other things at a rate that a, the market would support, but b, we felt it was appropriate for our drivers. It is certainly -- that line item will moderate as we look into 2023. The other reality of dedicated agreements that we have in place is the driver pay is always set aside as a stand-alone item. So, if we see pressure there, we feel as though the market has tightened sometime during the course of the year relative to driver availability, there's always the opportunity in Dedicated to go back and have that conversation. It's not as easy as just asking and getting it, of course, but that it will be a data-driven analytical discussion. 0% to 3% growth has a lot to do also with a year ago. There was a lot of project-type work or incremental trucks on many of these Dedicated accounts. So, you've got a base contract and then you have incremental trucks that are playing a role. This year, you've got a base contract and you might have some incremental shrinkage in that same fleet just based on their shipping volumes. And so, you got to put all that into the mix. The comps are probably one of the toughest things about that 0% to 3%, not looking as impressive as you might have hoped for. The last thing I'll point out is Dedicated revenue per truck per week has grown eight out of the last nine years. And I think that really covers multiple different swings in the market. then it really kind of gives you a better insight to just how stable that business can be. If and only if you executing. So, we always start and end with that concept, we've got to be absolutely best-in-class on our execution, and we are. And so, when we look back at 2022, over the course of the entire year for all of those trucks operating in Dedicated, and you look across the entire fleet, that fleet operated north of 99% on time throughout the entirety of the year. And that's something that I think I want to thank all of our folks once again for making possible. All right. Thanks, Derek. John, just a quick one for you then on the cost side. You mentioned going after some controllable costs. I don't know if you can elaborate on that. I know you've got a few things on maintenance, it sounds like parts could be a big deal even more so than the -- getting the new trucks in place, which obviously have a knock-on effect on maintenance and other line items. But maybe you can elaborate a little bit on where you have line of sight to that's controllable over the next year, you're looking to deliver on? Thank you. Yes. Thank you, Brian. Yes, we definitely have a cost focus across the entire business, and we're realizing savings in several categories such as driver hiring and advertising, lower driver guaranteed pay synergies related to the acquisitions that we've done, actually, all four acquisitions. And then IT savings implement our Cloud-First Cloud Now strategy that are helping with both efficiencies and productivity, and we're taking aggressive actions to improve our cost structure. We know we have a big headwind with the reduction in gains in '23 compared to '22, but we're confident that we can make a meaningful dent in that with the cost improvements that I just elaborated on. This concludes our question-and-answer session. I'll now turn the call back over to Mr. Derek Leathers, who will provide closing comments. Please go ahead. I just want to thank you for joining us today on the call. We're proud of our results in 2022 and encouraged by the durability of our business as we enter a weaker setup, at least in the first half of '23. Dedicated is going to remain the lead horse on our wagon, but One-Way and Logistics now surpassing $1 billion in freight with increased customer and industry diversity is exciting. I believe this year will be a story told in two halves. Our capacity is already exiting. Inventories are coming into balance. And while there remains macro uncertainties, the one thing I feel strongly about is this, strong well-capitalized carriers, focused on operational execution will have an opportunity to shine, and we look forward to that challenge.

EarningCall_407

Good morning everybody, and welcome to the AudioCodes' 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 the presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Roger Chuchen, Vice President of Investor Relations. Sir, you may begin. Thank you, Jenny. Hosting the call today are Shabtai Adlersberg, President and Chief Executive Officer; Niran Baruch, Vice President of Finance and Chief Financial Officer; and Dmitry Netis, Chief Strategy Officer and Head of Corporate Development. Before we begin, I'd like to remind you that the information provided during this call may contain forward-looking statements relating to AudioCodes' business outlook, future economic performance, product introductions, plans, and objectives related thereto and statements concerning assumptions made or expectations as to any future events, conditions, performance, or other matters or forward-looking statements as the term is defined under US Federal Securities Law. Forward-looking statements are subject to various risks and uncertainties and other factors that could cause actual results to differ materially from those stated in such statements. These risks uncertainties, and factors include, but are not limited to, the effect of global economic conditions in general and conditions in AudioCodes' industry and target markets, in particular, shifts in supply and demand market acceptance of new products and the demand of existing products, the impact of competitive products and pricing on AudioCodes and its customers, products and markets; timely product and technology developments, upgrades, and the ability to manage changes in market conditions as needed, possible need for additional financing, the ability to satisfy covenants in the company's loan agreements, possible disruptions from acquisitions, the ability of AudioCodes to successfully integrate the products and operations of acquired companies into AudioCodes business; possible adverse impact of the COVID-19 pandemic on our business and results of operations, and other factors detailed in AudioCodes' filings with the U.S. Securities and Exchange Commission. AudioCodes assumes no obligation to update this information. In addition, during the call, AudioCodes will refer to non-GAAP net income and net income per share. AudioCodes has provided a full reconciliation of the non-GAAP net income and net income per share to net income and net income per share according to GAAP in the press release that is posted on its website. Before I turn the call over to management, I'd like to remind everyone that this call is being recorded. An archived webcast will be made available on the Investor Relations section of the company's website at the conclusion of the call. Thank you, Roger. Good morning and good afternoon, everybody. I would like to welcome all to our fourth quarter 2022 conference call. With me this morning is Niran Baruch, Chief Financial Officer and Vice-president of Finance of AudioCodes. Niran will start off by presenting a financial overview of the quarter. I will then review the business highlights and summary for the quarter and the year and discuss strengths and developments in our industry and business. We will then turn it into the Q&A session. Niran? Thank you, Shabtai, and hello, everyone. As usual, on today's call, we will be referring to both GAAP and non-GAAP financial results. The earnings press release that we issued earlier this morning contains a reconciliation of the supplemental non-GAAP financial information that I will be discussing on this call. Revenues for the fourth quarter were $17.7 million, an increase of 6.9% over the $66.1 million reported in the fourth quarter of last year. Full year 2022 revenues were $275.1 million, an increase of 10.5% over the $248.9 million reported in 2021. Services revenues for the fourth quarter were $28.6 million, up 17.2% over the year ago period. Service revenues in the fourth quarter accounted for 40.5% of total revenues. On an annual basis, service revenues increased by 18.1% compared to the previous year. The amount of deferred revenues as of December 31st, 2022 was $79.4 million, up from $76.5 million as of December 31st, 2021. Revenues by geographical region for the quarter were split as follows; North America 47%; EMEA 35%; Asia-Pacific 14%; and Central and Latin America 4%. Our top 15 customers represented an aggregate of 57% of our revenues in the fourth quarter, of which 42%was attributed to our 10 largest distributors. GAAP results are as follows; hross margin for the quarter was 65.3% compared to 67.2% in Q4 2021. Operating income for the quarter was $8.3 million or 11.8% of revenues compared to $9.3 million or 14% of revenues in Q4 2021. Full year 2022 operating income was $31.3 million compared to operating income of $39.5 million in 2021. Net income for the quarter was $7.5 million or $0.23 per diluted shares compared to $7.3 million or $0.22 per diluted share for Q4 2021. Full year 2022 net income was $28.5 million or $0.88 per diluted share compared to $33.8 million or $1 per diluted share in 2021. Non-GAAP results are as follows; non-GAAP gross margin for the quarter was 65.8% compared to 67.6% in Q4 2021. Non-GAAP operating income for the fourth quarter was $12.5 million or17.7% of revenues compared to $13.5 million or 20.4% of revenues in Q4 2021. Full year 2022 non-GAAP operating income was $47.2 million compared to operating income of $53.8 million in 2021. Non-GAAP net income for the fourth quarter was $11.9 million or $0.36 per diluted shares compared to $13.4 million or $0.39 per diluted share in Q4 2021. Full year 2022 non-GAAP net income was $45 million or $1.35 per diluted share compared to $51.8 million or $1.50 per diluted share in 2021. At the end of December 2022 cash, cash equivalents, bank deposits, financial investments, and marketable securities totaled $124.3 million. Net cash provided by operating activity was $0.4 million for the fourth quarter of 2022 and $8.3 million for the full year of 2022. Days sale outstanding as of December 31st, 2022 were 90 days. During the quarter, we acquired 145,000 of our ordinary shares for a total consideration of approximately $2.9 million. In January 2023, we received court approval in Israel to purchase up to an aggregate amount of $25 million of additional ordinary shares. The court approval also permits us to declare a dividend of any part of this amount. The approval is valid through July 4th, 2023. Earlier this morning, we also declared a cash dividend of $0.18 per share. The aggregate amount of the dividend is approximately $5.7 million. The dividend will be paid on March 7th, 2023 to all of our shareholders of record at the close of the trading of February 21st, 2023. Regarding headcount, on the heels of the addition of 112 position in 2021, 84 in the nine months ended September 30th, 2022, there was no increase of full-time employees in the fourth quarter of 2022. We ended 2022 with 966 employees. Our guidance for the full year 2023 is as follows; we expect revenues in the range of $286 million to $300 million and non-GAAP diluted net income per share of $1.35 to $1.50. Thank you, Niran. Before I start my formal remarks, I would like to remind everyone that in conjunction with our earnings release this morning, we have posted on our Investor Relations website an earnings supplement deck. I would like to start off by providing a recap of 2022. We entered the year with cautious optimism as we continue to leverage the multiyear secular growth trends within the UC and CX segments that have fueled our business for several years now. We successfully executed according to plan, having delivered a 10.5% revenue growth in 2022 within the range of our guidance. I would like also to note that with the late increased focus on enterprise AI and in view of our investment in the VoiceAI business since early 2018, we see another major growth driver for our business in coming years. Our primary growth engines during the year were Microsoft business, which ended up growing 18% year-over-year, with Microsoft Teams up 30% year-over-year. Zoom business grew above 50% year-over-year. CX business up 3% year-over-year. Excluding lumpy OEM revenue, where we have lowered priority already a year ago on the OEM segment. CX direct enterprise customers grew 13% year-over-year. VoiceAI opportunities and activities grew over 15% year-over-year. Despite the macro uncertainty we faced in the second half of the year, we believe long-term secular growth drivers remain intact. AudioCodes is well-positioned to capitalize on the defense technology such as digital transformation to the cloud within our core UC and CX markets and vendor consolidation favoring our primary partners namely Microsoft, Genesis, and Zoom. We further believe that our unique blend of strong profitability and balance sheet relative to our UC/CX peers afford us the flexibility to continue investment in core strategic areas for our business, enabling us to leap-frog competition when the macro storm subsides. On the operations front, we are pleased to have delivered improved non-GAAP gross and operating margins in the first quarter, helped by easing supply chain pressures. Based on current trend of floor pressuring the supply chain, operating margin should continue improving entering2023. This trend, coupled with better FX hedging throughout 2023 and continued prudent allocation of investments, gives us increasing confidence to deliver on our commitment to drive improved operating leverage and profitability in 2023. Now, shifting into some of the fourth quarter first quarter results. Stated in our press release earlier this morning, we saw continued momentum in both the UC and the CX market. Key driver of fourth quarter 2022 came from Microsoft-related business, which was up quarterly 12% year-over-year, a deceleration from prior quarters, as we saw longer sales cycles. Same Zoom on the other hand, grew about 50% year-over-year and in the quarter, although albeit from a lower base. As it relates to Live for Teams managed services, we ended the year with $31 million in ARR, achieved the target that we have laid out at the beginning of the year to reach over $30 million growth. Our execution of our strategic priority of migrating traditional CapEx to OpEx is working well with total contract value growing above 25% quarter-over-quarter. We ended the year with sort of contract value for our live subscription exceeding 100 million, up from 90 million in last quarter, providing us with increased level of revenues and visibility. We expect strong momentum to continue in the live services in 2023. Our CX segment grew sequentially as expected, which was still down 7% for prior year period, owing largely to the lumpiness from our OEM customer. As stated earlier, we have shifted our focus away from the OEM business and now focus largely on direct enterprise accounts. Direct enterprise CX business grew 13% in the quarter. Importantly, we continue to see a strong pipeline of opportunities in live CX, which couples to our advanced SBC solutions is our strong managed services delivery. We now enjoy close alignment with contact center accounts, planning migration from on-prem implementation to cloud solution deployments. Additive to a growth in the quarter in this area was the ongoing strength in our service provider CPE market, which is related to the carrier all-IP transformation and PSN shutdown projects. Our service provider business CPE grew for the third consecutive quarter and was up 12% year-over-year, and we continue to see a healthy pipeline in this segment in 2023. Shifting gears to margins and EPS discussion. We are pleased to see a snapback in non-GAAP gross margins to 65.8% in the quarter, up from 63.2% in the previous quarter. The increase was influenced by two primary factors. First, easing supply chain costs. We incurred $500,000 of our accompanying cost in fourth quarter, which compares to $1.2 million spent in the third quarter. Lower supply chain costs throughout the prior quarter accounted for roughly half of the sequential improvement in our non-GAAP gross margin. Second, product mix accounted for the balance of the sequential gross margin improvement with our percentage of sales coming from product or managed services. Full year 2022 non-GAAP gross margin came in at 65.4% versus 69% in 2021 with 160 basis points of the change related to the supply chain inefficiencies and the balance of the product mix. Also, fourth quarter 2022 was the first quarter in 2022 where we enjoyed higher US dollar/Israeli shekel conversion rate compared to the year ago quarter as a result of our hedge activity. We expect this favorable hedge ratio to persist in 2023. Higher gross margin and tight OpEx management translated to sequential improvement in non-GAAP operating margin to 17.7%, up from 15.5% in the third quarter. Compared to the year ago period, which was 20% operating margin, the margin difference can be explained primarily by change in gross margin and, to a lesser extent, higher OpEx growth rising from our hiring activity in 2022. Headcount, we ended fourth quarter with headcount of 966 employees, down slightly from 969 employees in the third quarter. OpEx ended upgrowing 9% in the fourth quarter, capping on our investment in 2003 in view of the worsening global economy, headcount is expected to grow at a very minimal -- moderate rate in 2023. Main driver for incremental hiring is our continued investment in enterprise VoiceAI. VoiceAI will go to that topic in a few slides. Now, getting back to the outlook provided earlier. So, given the global economy business outlook for 2023, our guidance as provided earlier is as follows; our guidance for the full year would be a revenue range of $286 million to $300 million that's about 4% to 9% growth. And non-GAAP diluted net income per share, $1.35 to $1.50, which is growth from 2022. As for the first quarter, we believe we will see growth year-over-year, albeit lower than the range anticipated for the full year 2023, which is roughly 4% to 9%. Also, I would like to mention that while December 2022 was sort of weak when compared to the October and November 2022 period, January 2023 was fairly normal or even stronger and on par with the November 2022 activity. Now, diving into our core business engines. Let's go first to Microsoft. Microsoft business delivered 12% growth in the fourth quarter, making up over 50% of our business now. Teams grew over 15% year-over-year in the quarter, while growing more than 30% for the full year. Skype for business declined roughly 10% year-over-year and is now accounting for less than 10% of our quarterly Microsoft business. We had another strong quarter for Microsoft Teams account additions. We added 279 accounts, versus 229 accounts in the year ago period, which speaks to the ongoing healthy adoption of Teams in our growing pipeline. For the full year, we achieved $145 million of revenue at the high end of our guidance. The business grew18% in the year, we expect another year of growth in 2023 from our Microsoft business, albeit at a more moderate pace than in 2022, given the macroeconomic uncertainty and longer sales cycles as we've been discussing. The long-term opportunity has not changed, given Microsoft's priority to shift a growing percentage of their 280 million monthly active teams users on to E5 licenses, which includes Teams' license for PSTN. Microsoft recently disclosed in July 2022 since PSTN and users reaching over 12 million and more recently in January 2023, adding 5 million more users, implying only low-digit growth penetration and suggesting a significant multiyear runway ahead. Recently [ph], our market share within Microsoft ecosystem remains strong and is well above 50%. Then our most important activity these days in the Microsoft space is the development of Live Cloud. Live Cloud is [Indiscernible] voice platform, which provides SBC direct routing. On top of that, it adds value-add services, such as recording conversational IVR, device management, analytics and management and in all digital cloud portal. Live Cloud facilitates the on warding of midsize and small businesses accounts into teams to service providers in a very efficient way and can be used for Microsoft Operator Connect and facilitates faster and very efficient onboarding. By the end of the fourth quarter of 2022, the three-year total contract value of Live Cloud reached a level of 10 million, more than tripling the year ago total contract value. Now to CX, we saw wealthy [ph] customer activity during the quarter in the customer experience market. On a quarterly basis, the whole activity declined 6.5%. However, more important to us, contact center direct accounts for enterprise grew 13%. This is where we focus our efforts. For the full year and excluding declining OEM revenue, which we will focus less going forward, our direct enterprise CX business grew 13%. We have already introduced our entry-level Microsoft Teams native conversational AI first contact center application for the CX market and plan to significantly expand this effort in 2023. Overall, voice applications grew above 15% year-over-year. Looking out to 2023, we see growing adoption of new products and services launched during the past 12 months, and we expect them to boost revenue growth. Among them, I'll count Live CX, WebRTC, Click-to-Call application, VoiceAI Connect, Conversational IVR, and Recording Solution, among them, SmartTap and MeetingInsights. Talking about what's happening in the space. We've seen the transition from on-prem to cloud moving ahead, but with pains. Talking about some of the leading manufacturing of vendors in this field. Looking on Genesys and Avaya both vendors, customers are nervous about the future and the new migration path from the on-prem solution they currently use to the cloud. And we know and we have seen several of them looking for a trusted partner that can execute this migration and solve their complexity. We definitely there to enjoy that opportunity, take advantage of it. Recent announcements from Genesys to discontinue Genesys Engage made a lot of their customers unhappy. And for us, that is definitely a feel for us to invest. Same goes for a certain number of Avaya customers with their on-prem solution. Now, to VoiceAI. So, we have seen lately increased focus on enterprise AI. First was the announcement in November of ChatGPT by OpenAI and then the MarketSoft [ph] investment in Open AI. Yesterday, Google announced Bard, the latest entry into the field of advanced chatbots for search. In fact, we see increased activity on all fronts in cognitive services, including in the areas of virtual agents, intelligent assistant, conversational IVR, and more. I'm glad to say that VoiceAI was a key investment area for us in 2022, an area where we started back in January 2018. We're glad to see growing global awareness to embedding AI technologies into the CX and enterprise applications. Obviously, we intend to keep growing investment in VoiceAI this year will now start to bear fruits. In 2022, we saw an increase of more than 15% in the VoiceAI business, and we expect this activity to grow by more than 70% in 2023 and keep growing at similar rates in the years beyond. In the VoiceAI Connect area, we grew above 70% in bookings and registered growth of more than 100% in new opportunities created. In our compliance recording business, we saw growth of about 15% in both booking and invoicing. Our Meeting Insights application for Teams was deployed earlier in 2002, has got warm reception in the market, already handling around 250 meetings a day and a few thousands meetings every month. We now have a list of new customers that are joining and see the value in recording, transcribing, and creating a vocal interaction repository for the organization. This is an area where we're going to focus in a big way going forward. Lastly, [Indiscernible] our virtual agent technology is handling close to 100,000 calls a day in our medical AI routing services. More to come. Now I'd like to focus on one very important point, which is we believe that these days, we are among a very few. I would count less than one hand of players who can provide technology and contribution from two different fields. One is the voice over IP networking area and the other one is the conversational AI technology area. Very few companies have got two. Yes, it's great to have those very advanced cognitive services deployed in the cloud, but at the end of the day, enterprise customers need fully working solution that they take care of everything that's needed in order to implement a solution. Let me give you one such project which exemplifies exactly our advantage. We have a project that was implemented was the Red Cross in Israel and is now working more than a year. Actually, I'll give you some details. This is a service. This is emergency 911 call to Red Cross. In 2018 -- I'm sorry, in 2019, they have handled more than 2 million calls a year. These days and basically at the end of 2020, they have handled more than 8 million, huge growth. They grew from like 50 agents to like 400 agents instead of a call coming in every 15 seconds, a call is coming in every four seconds. So, that means more than 10,000 calls a day. Now, we have implemented for them a very sophisticated solution that allows treatment of incoming calls to the contact center. And in order to implement that basically, every call this coming in is rooted to various places, including recording, including two real-time speech-to-text transcription and then operating kind of bots to basically have insight from that call. So, to build such a system, I'll read to you the list of technological solution that we are employing in order to provide the full solution. So, we've used our SBCs and gateways for connectivity. We've used our smart app for recording. We have used our VoiceAI Connect in order to convert telephony media into cognitive services. We have developed and deployed speech to tax technology, text to speech. We have employed management of our One Voice Operations sales management, and then on top of that, we have applied analytics. Now, that gives you an idea about the complexity of those projects coming to happen and the need basically to master both voice over IP networking and conversational AI solution. And I think in that area, we'll definitely excel. And I think that really gives you a taste for the potential we have on our end going forward. Hi, thanks for taking questions. This is [Indiscernible] on for Ryan MacWilliams. Just quickly, how has macro impacted AudioCodes at this point? I know you've highlighted some uncertainty this year and what expectations do you have for the year in 2023? What is baked into your guidance? Are you seeing any differences in your deal pipeline? And then if I could, how should we think about potential operating margin improvement for 2023? And maybe what margin levers could you improvement from here? Thanks. Sure. Okay. So, I'd like to take it from the point where if I remind all of us, the revenue level we achieved in each of the course of 2022. So, the first two quarters ended up growing 12.8% and 12.9%. In the third quarter, we grew 10%. In the fourth quarter, we grew 6.9%. I think that tells you the story of the global economy. That basically tells us that our growth has been decelerated and going forward, with the outlook provided by other players in the field like Microsoft and a few more companies. It is obvious that the growth in 2003 will be below 10%. Now it all depends on how 2023 will develop. We'll know better assuming in a few months. But still, I need to say that we're very encouraged by the fact that January started very nicely. Another area from which we can take numbers is Microsoft. So, within the Microsoft space, we've been able to grow in each of the first three quarters by 18% to 20%. In the fourth quarter, we grew only 12%, think that gives us kind of a measure as to what to expect from Microsoft. Still, we do believe that we are very dominant in that area to not see much competition. And as I've mentioned earlier, our big investment, definitely in the platform, the Live Cloud platform, which should automate many of the functions needed to deploy voice in the Teams' front environment that should help bring up more customers. So, all-in-all, if I had to bet, I'll bet on a 10% to 15% growth in 2023. Now, to operating margin, we believe that comparing to 2022, there are two areas where we will improve definitely. One is now the cost of components will come down. So, we expect about $4 million of higher profit in 2023 simply because we will not secure those excessive costs. So, $4 million for that. Another $2 million will come from better conversion rate of the US dollar versus the Israeli shekel. So, all-in-all, I think we're seeing a good improvement in that. Add to it the fact that we intend to keep growing in income, as I've mentioned, between 4% to 9%, but still have a heavy end on expenses. We try to cap them, we will add a few positions just to enhance the VoiceAI and conversational AI area, but we do not expect that to be a major part. So, all-in-all, we see those three areas as factors affecting better operating margin. Hi, great. Thanks for taking my questions. I wanted to follow-up maybe in a similar vein. As I think about the Microsoft revenue specifically and Teams, could you maybe help us understand what the linearity in the December quarter looked like? How are customer trends? Was Teams' revenue up or down from the third quarter and dollar levels? Just help us maybe understand what the trend looked like through the quarter and what the final number look like? Yes. So December was a bit unique, but one can understand why. The first two months in the quarter were good and strong, actually November represented the largest revenue created in that month. However, usually, in the fourth quarter, our sales force is focused substantially more closing deals rather than generating new ones. So, I think that, that has affected our ability to generate more new opportunities in December. Niran, can you add to that? Yes, sure. In terms of your question about the dollar, Q4 versus the Q3, total Microsoft grew by 10% quarter-over-quarter to a level of approximately $41 million out of it, Microsoft Teams is about 90% of this amount. Okay. Great. Thank you. And then as I think about the guidance on the -- I know you touched on margins Shabtai, but how should we think about balancing growth being maybe slower than expected in 2023 versus growth investments? Or do you feel like the company is at -- I know headcount didn't grow in the fourth quarter, but just how should we think about maybe the investment framework? Or is there a possibility that maybe you'll pull back on OpEx or cut expenses to make sure that there is additional margin leverage in 2023? With regard to OpEx, we ended the fourth quarter at a level of $24 million just compared to the third quarter of 2022, where we been had $32.6 million. Going forward, we believe, although we had $34 million, this amount will be increased over the next quarter to a level of $34 million to $35 million because as Shabtai said, we will continue to invest at this stage. So, if you need to model it, I would take an average $35 million for 2023, its [indiscernible]. Thank you very much. Your next question is coming from Greg Burns of Sidoti & Company. Greg, your line is live. Thanks. So, just to follow-up again on the leverage for next year. So, just looking at the guidance, there's not much earnings leverage, so it's about low single or mid-single-digit revenue growth, mid-single-digit EPS growth. So, is the expectation here that margins build throughout the year? Do you have an expectation of where margins will be at the end of the year versus at the beginning of the year? Yes. So, first, with regard to the gross margin, we ended 2022 at 65.4%. Our long-term target is 67% to 70%. I would assume, and this is our estimation for the model estimation that we will be at the low end of this long-term target or even less, I would take 66% of gross margin. OpEx, I told you we will be somewhere at 35% on average. All-in-all, with regards to operating margin, we ended 2022 at 17.1%. Even if we will be at the low end of our revenues, which is $286 million, we believe that the operating margin should be at 17% at this level, and that's how we come to the $1.35 low EPS guidance. So, all-in-all, for 2023, we will be somewhere between 17% to 19% of operating margin. As Shabtai said, at the first quarter, we will be at the low end of this range and during the second half of 2023, we believe we will be at the high end. Okay. And then the mix of Microsoft sales between kind of the CapEx model and the new live model, how has that been trending? Are you seeing more customers gravitate towards live? Most of the revenues also at the Teams and actually total logic got revenues is CapEx deals. With regards to the fourth quarter, if we see the Teams -- the Live Teams versus the CapEx deals, it's about one-third Live and two-third CapEx deals. And the kind of the trajectory of that mix? Is it moving more towards Live? Or is it just kind of, I guess, staying at those ranges? Let me just add -- Greg, just let me add that on a year-by-year basis, Live Teams grew 35%, while CapEx Teams grew only 8.9%. So, the trend is definitely to the Live Teams. Thank you very much. Your next question is coming from Ryan Koontz of Needham & Company. Ryan, your line is live. Thanks for the question. I want to ask about CX and certainly understand the OEM decline there. And I want to understand what sort of market motions and partners you have there to shore up that growth? It seems that the CCaaS, the cloud-based contact center players, whether it's nice in Contact or Five9 have some pretty durable growth. And how do you attach yourselves to those sorts of companies a little closer? And what's the competitive landscape there? How do you view your share, I guess, in the cloud contact center is, I guess, the big question? Thanks. Sure. Well, regarding OEM, this is really an old business related mainly to 911 services and NexGen 911, so that is declining. Those are the majority is SBC sales. And so that is coming down. As far as contact center is concerned, I mean we all know about the trend of moving from on-prem to cloud. However, one needs to realize that it's pretty complex to do that large company may take four to five years just to implement that transition. Now, you need to understand that within that period of time, one needs to implement and operate two different solutions at the same time, that provides a lot of complexity. Also the fact that you need to deploy new technologies such as WebRTC and Managed SBC. And on top of that, there's disruption coming from. So, think about the disruption coming from call automation and self-service. Once the vendors, such as Genesys announced end of develop for the on-prem solution. It means that those customers with hundreds and thousands of agents really lack this type of solution, right? Because the vendor will not offer them. Obviously, we've got an opportunity in this area. So, mainly focusing on the migration from the on-prem solution to the cloud for a vendor that moves to a different vendor, cloud environment and the application of self-service solution, all that represents big opportunities for us. And we definitely see momentum in this sale. All right. Great. Thanks for that color. And on the Zoom front, it sounds like those trends remain very strong. How would you view your share in the Zoom kind of enterprise environment? Is it relatively high today? And is that becoming a bigger growth driver for the company? Yes. So, yes, we enjoyed a good year regarding Zoom business, which grew more than 50%. Still, when comparing the Zoom business in the enterprise to Microsoft Teams business, it is relatively smaller. So, yes, we do anticipate we have a lot of going on in terms of cooperation and supporting new deployments of new Zoom is coming out with a service for service providers similar to the Microsoft Operator Connect. We are embedded in that. They look for adding resilience to their branch -- to the branch offices in their solution. We are involved in there. We are for them, some of our more advanced IP phone and meeting room solution. So, yes, we do support Zoom. But all-in-all, it is still fairly smaller part of our business. Thank you. Okay, we appear to have reached the end of our question-and-answer session. I'll now hand the call back over to management for any closing remarks. Thank you, operator. I would like to thank everyone who attended our conference call today. With continued good business momentum in the fourth quarter of 2022 and strong underlying market trends in our industry entering 2023. We believe we are on track to grow this year, definitely fairly excited about the role of AI in the enterprise in this year and coming years. So, we look forward to your participation in our next quarterly conference call. Thank you, all. Have a nice day. Thank you, everybody. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.

EarningCall_408

Good morning, everyone, and welcome to Deciphera Pharmaceuticals Fourth Quarter and Full Year 2022 Financial 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, Jen Larson, Senior Vice President of Finance and Investor Relations. Please go ahead. Thank you, operator. Welcome, and thank you for joining us today to discuss Deciphera's fourth quarter and full year 2022 financial results. I'm Jen Larson, Senior Vice President of Finance and Investor Relations. With me this morning to discuss the financial results and provide general corporate update are Steve Hoerter, President and Chief Executive Officer; Dan Martin, Chief Commercial Officer; Matt Sherman, Chief Medical Officer; Margarida Duarte, Head of International; and Tucker Kelly, Chief Financial Officer. Before we begin, I would like to remind you that any statements we make on this call that are not historical facts are forward-looking statements reflecting the current beliefs and expectations of management made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements made during this conference call include our expectations for our preclinical and clinical programs, our commercialization of QINLOCK and 2023 guidance. Forward-looking statements made on this call involve substantial risks and uncertainties that could cause actual results to differ materially from those expressed or implied by the forward-looking statements and we cannot assure you that our expectations will be achieved. Such risks and uncertainties include those set forth in our most recent annual report on Form 10-K as well as our other SEC filings. We assume no obligation to update or revise any forward-looking statements. Following this call, a replay will be available on the company's website, www.deciphera.com. Thank you, and good morning, everyone. Thank you for joining us today as we provide an update from the fourth quarter and full year 2022, review our financial results and provide additional context on our strategic outlook and planned corporate milestones for 2023. 2022 was a year of exceptional execution for Deciphera. Global QINLOCK product revenue grew 44% compared to 2021, driven by very strong performance in the U.S. as well as launches outside of the U.S. QINLOCK is now approved for fourth-line gastrointestinal stromal tumor, or GIST, in 12 jurisdictions around the world. Last month, we outlined our key strategic priorities for the year, which will enable Deciphera to continue its evolution towards being a fully integrated company with multiple approved medicines and capabilities ranging from international commercialization to early-stage discovery, all powered by our proprietary switch-control kinase inhibitor platform. These priorities include expanding the market potential for QINLOCK into earlier lines of GIST by initiating the INSIGHT Pivotal Phase 3 Study of QINLOCK versus Sunitinib in second-line GIST patients with mutations in KIT Exon 11 and 17/18 in the second half of 2023. If successful, we believe the INSIGHT study has the potential to change practice in second-line KIT driven GIST and to double the U.S. revenues for QINLOCK. We were very pleased that the circulating tumor DNA, or ctDNA data, from our Phase 3 INTRIGUE study of QINLOCK in second-line GIST was selected for presentation at the ASCO Plenary Series Session a few weeks ago. Matt Sherman, our Chief Medical Officer, will review the data later in the call and outline our plans for the new Phase 3 INSIGHT study. As we begin enrollment in the new Phase 3 INSIGHT study for QINLOCK, we also expect to readout another pivotal trial, the Phase 3 MOTION study of vimseltinib, our highly selective switch-control kinase inhibitor of CSF1 receptor in patients with tenosynovial giant cell tumor, or TGCT, in the fourth quarter of this year. We have been very pleased with the pace of enrollment and are excited to announce today that we now expect to complete enrollment in the MOTION study in the first quarter and report top-line data in Q4 of this year. For DCC-3116, our first-in-class inhibitor of the ULK1/2 kinases designed to inhibit autophagy, we expect to present updated data from the single-agent dose escalation portion of the Phase 1/2 study and initial combination data in the second half of 2023. Finally, we were very pleased to announce a clinical trial collaboration and supply agreement with Pfizer for a new combination dose escalation study of DCC-3116 and encorafenib and cetuximab in colorectal cancer that we plan to initiate in the second half of this year. We look forward to presenting the preclinical data supporting this new combination cohort in the first half of this year, along with additional new preclinical data for DCC-3116. We continue to complement these commercial and clinical stage advancements with investment in our research pipeline. Our discovery platform continues to drive new growth opportunities with potential first-in-class or best-in-class precision oncology agents, including DCC-3084, our newly nominated pan-RAF clinical development candidate for which we expect to present preclinical data in the first half of this year and to file an investigational new drug application in the second half of the year. DCC-3084 was discovered using the same proprietary switch-control kinase inhibitor platform that has brought us QINLOCK, vimseltinib and 3116, and we look forward to quickly advancing this program to the clinic. In addition, we plan to debut a new development candidate from our proprietary discovery engine in the coming months as well as preclinical data from other research programs our team has been working on. Matt Sherman, our Chief Medical Officer, will provide more detail about upcoming milestones for our pipeline programs on today's call. Dan Martin, our Chief Commercial Officer, will then share insights on the U.S. commercial performance for the quarter and Margarida Duarte, our Head of International, will provide an update on QINLOCK's ongoing fourth line launch in Europe, which has sustained its strong momentum throughout 2022. We'll end with Tucker Kelly, our Chief Financial Officer, who will review highlights from the fourth quarter and full year 2022 financial results and the recent highly successful follow-on equity offering that will allow us to continue to execute on our goals. Thanks, Steve. We are thrilled with the progress we have made across our clinical and preclinical pipeline in 2022 and already in the first few weeks of this year. As Steve mentioned, it was our privilege to present additional ctDNA data from the INTRIGUE Phase 3 study at QINLOCK at the ASCO Plenary Session last month, which we believe represents a potential practice-changing event in the treatment of second line KIT-driven GIST. The results strongly support our planned INSIGHT study and the potential to expand QINLOCK's label which, if approved, will allow physicians for the first time to optimize treatment for patients in the second-line setting based on the mutational profile to improve outcomes over the current standard of care. In the ctDNA analysis for patients with KIT Exon 11 and 17/18 mutations, QINLOCK showed a striking benefit compared to sunitinib across all efficacy measures, beginning with a 44% confirmed objective response rate with all patients on QINLOCK achieving either a partial response or stable disease. In contrast, there were no objective responses in the sunitinib arm. Similarly, QINLOCK demonstrated a greatly improved PFS with a median of 14.2 months compared to only 1.5 months for sunitinib. In fact, half of the patients receiving sunitinib had progressed or died by their first restaging scan at six weeks. This resulted in a hazard ratio of 0.22, meaning that treatment with QINLOCK resulted in a 78% reduction in the risk of disease progression or death. We also saw a strong trend for overall survival in favor of QINLOCK in the subgroup of patients. The OS results are based on an updated data cut as of September 2022 and showed that the QINLOCK arm still had not reached the median while patients randomized to sunitinib had an overall survival of 17.5 months. This resulted in a hazard ratio of 0.34 or a 66% reduction in the risk of death. And the landmark analysis showed that the number of patients alive at 30 months on QINLOCK was estimated to be nearly twice that of patients randomized to sunitinib. QINLOCK was generally well tolerated and the subgroups' safety and tolerability profile was consistent with the primary analysis of the INTRIGUE study. For patients with mutations in KIT Exon 11 and 17/18, fewer patients in the QINLOCK arm experienced grade 3, 4 treatment-emergent adverse events compared to sunitinib. Based on the INTRIGUE ctDNA data and regulatory input, we plan to initiate INSIGHT, a new pivotal Phase 3 study of QINLOCK versus sunitinib in this group of second-line GIST patients. If positive, we believe the results of the INSIGHT study will support as an expanded label for QINLOCK in select second-line GIST patients and transform how physicians treat these patients. Moving from one pivotal Phase 3 program to another, I now want to talk about vimseltinib, which we believe will become the second approved product from our proprietary switch-control kinase inhibitor platform. We are strongly encouraged by the compelling clinical data we have generated to date supporting the potential of vimseltinib to be the standard of care treatment for patients with TGCT non-amenable to surgery. We began enrolling patients in the Phase 3 MOTION study in early 2022, and I'm very pleased to announce today that we now anticipate completing enrollment this quarter, enabling us to readout the top-line results in the fourth quarter of this year. We also expect to present updated data from the Phase 1/2 study of vimseltinib in the second half of this year that will focus on longer-term safety and efficacy and provide additional support for the clinical and commercial opportunity for vimseltinib. Turning now to DCC-3116. We were excited to announce our first clinical trial collaboration and supply agreement for the program a few weeks ago. Under the agreement, Pfizer will supply encorafenib at no cost as part of the new dose escalation combination evaluating 3116 with encorafenib and cetuximab in patients with colorectal cancer. Additionally, we plan to present updated data from the single-agent dose escalation cohorts and initial data from the combination dose escalation cohorts of the Phase 1/2 study and initiate one and more expansion cohorts in the second half of this year in combination with the MEK inhibitors, trametinib or binimetinib or the KRASG12C inhibitor sotorasib. We remain optimistic about the potential for DCC-3116 to broadly impact the treatment of cancer as a first-in-class autophagy inhibitor based on the strong preclinical in vitro and in vivo data we have generated showing additive or synergistic activity in combination with multiple agents targeting the RTK, RAS and MAP kinase pathways. Finally, the next program slated to enter the clinic is DCC-3084, our pan-RAF inhibitor for which we expect to submit an IND in the second half of this year. We plan on presenting in vitro and in vivo data in the coming months demonstrating its preclinical profile as a potent and selective inhibitor of BRAF/CRAF-kinases with optimized pharmaceutical properties for potential development in both single agent and combination opportunities, as well as data from additional undisclosed research programs and look forward to the expected nomination of our newest development candidate. I’ll now turn the call over to Dan Martin, our Chief Commercial Officer, to provide an update on the U.S. commercial efforts. Dan? Thanks, Matt. In 2022, we continued to execute on our commercial goals for QINLOCK in the U.S., further reinforcing its status as the clear standard of care in fourth-line GIST, irrespective of mutational profile while continuing to expand our prescriber footprint. U.S. net product revenue was 25.6 million in Q4. And for the full year 2022, QINLOCK sales grew to 97.2 million, representing an increase of about 20% over 2021. Approximately half of this growth came from increased demand volume with the remainder coming from net price growth and a lower percentage of patients receiving free drug under our patient assistance program or PAP. The higher demand volume seen in 2022 was driven principally by an increasing average duration of therapy as the real world persistency curve continues to mature and more fully reflects the impact of patients who received prolonged clinical benefit from QINLOCK. Specifically, we estimate that the average duration of therapy in 2022 grew to approximately seven months. We expect the average duration of therapy to continue to increase gradually over time and could ultimately reach as high as eight to eight and a half months. As expected, the percentage of patients receiving free drug under our PAP program increased in the fourth quarter versus the prior quarter. Consistent with what we saw in Q4 of 2021, the PAP percentage was slightly above the high end of our estimated annual range of 20% to 30%. This PAP seasonality is common and is driven by patient affordability challenges that tend to increase as the year progresses due to the Medicare Part D drug benefit design. The development and approval of QINLOCK for fourth-line GIST addressed a major unmet medical need and fundamentally changed the treatment paradigm in advanced GIST. Based on the compelling data from the ctDNA analysis of INTRIGUE, we are eager to start the INSIGHT study and we believe to prove for this new indication, QINLOCK has a potential to advance the GIST treatment paradigm yet again. This time in the second-line setting based on mutational profile, we believe that if we are successful in expanding the label with a second line KIT exon 11 plus 17 or 18 indication that it would double the QINLOCK peak revenue potential to 350 million to 400 million in the U.S. alone. Turning to vimseltinib. With the readout of the Phase 3 MOTION study fast approaching, the commercial team continues to prepare for a potential approval and launch. We remain highly encouraged by the market opportunity in TGCT where we have estimated a total adjustable market of $850 million in the U.S. With a potentially best-in-class product profile, we believe vimseltinib is uniquely positioned to address the high unmet medical need within TGCT and given the approximately 90% overlap among GIST and TGCT prescribers. We believe vimseltinib will be an excellent addition to our commercial business and that QINLOCK and vimseltinib together have the potential to generate in excess of $1 billion in global peak revenue. I will now turn the call over to Margarida Duarte, our Head of International to discuss the progress of our QINLOCK launch in Europe. Margarida? Thanks, Dan. We are very proud of the strengths and sustained momentum of QINLOCK’s European market entry. 2022 was a key year that solved very successful execution in two critical markets. Our launch in Germany and the post-approval paid access program in France. It was also a year in which we made significant progress towards market access in other major European markets. With the submission of the reimbursement application to NICE for access in England and in Wales and to AIFA for access in Italy. And the initiation of the market access process in Spain. For the full year 2022, international net product sales were 28.3 million, up significantly from 5.9 million in 2021. These strong results reflect QINLOCK’s best-in-class clinical profile in fourth-line GIST and the significant unmet need. And I’m very proud of the team’s super execution of our launch strategy that enabled such exceptional performance. Our fourth quarter international net product revenue of 7.3 million was driven primarily by continued growth in demand in Germany and in France. However, net product revenue for the fourth quarter did include a one-time reserve for QINLOCK’s product sales in Germany. It would change in Germany law effective as of November 2022, shortening the free pricing period retroactively to six months from 12 months. In Germany, our team is in the last stages of the price negotiations. And although we are not yet in a position to disclose the details, we remain confident that our final negotiated price will reflect the high value that QINLOCK brings to patients and payers in Germany. We also continue to advance our access discussions with NICE as well as with the authorities in Italy and Spain and look forward to sharing update on future calls. Turning to rest of the world. We were pleased to see that the National Reimbursement Drug List released by China’s National Healthcare Security Administration was recently updated to include QINLOCK, which will provide access to QINLOCK for many more patients in China for our partner Zai Lab. In 2022, we recognized 8.5 million in collaboration revenue and our agreement with Zai and look forward to their continued strong commercial execution in Greater China. In addition, we are excited to announce that we recently received approvals for QINLOCK in New Zealand, Israel, and Macau, increasing the number of jurisdictions around the world to 12 in which QINLOCK is approved for fourth-line GIST. I will not turn the call over to Tucker Kelly, our Chief Financial Officer, to review the fourth quarter and full year financial results and recent financing. Tucker? Thanks, Margarida. Total revenue for the fourth quarter was 36.3 million, which included 32.9 million in net product revenue QINLOCK and 3.4 million in collaboration revenue. With a full year, total revenue grew 39% to 134 million including net product sales of 125.5 million in collaboration revenue of 8.5 million. Cost of sales in the fourth quarter was 3.2 million, including 0.7 million in cost of net product revenue and 2.5 million in cost of collaboration revenue. For the full year, cost of sales was 8.8 million, including 2.7 million in cost of net product revenue and 6.1 million in cost of collaboration revenue. In 2021, total cost of sales was 2.9 million of which 1.6 million was cost of collaboration revenue, and 1.3 million was cost of net product revenue. In the third quarter of 2022, we completed the sale of zero cost inventories that had been expensed as R&D prior to FDA approval in 2020. In Q4, total operating expenses were 83.5 million compared to operating expenses of 112.6 million in the same period in 2021. For the full year 2022, total operating expenses were 316.8 million, a decrease of approximately 20% compared to operating expenses of 396.2 million in 2021. Research and development expenses in the fourth quarter of 2022 were 48.1 million compared to 74.9 million for the same period in 2021. In 2022, R&D expenses were 187.8 million compared to 257 million in 2021. Selling, general, and administrative expenses in the fourth quarter were 32.2 million compared to 37.2 million in Q4 of 2021. For the full year, SG&A was 120.2 million compared to 136.3 million in 2021. We ended the year with cash, cash equivalents and marketable securities of approximately 339 million. In January of this year, we raised an additional 134.7 million in net proceeds through a very successful public offering that further strengthened our financial position and extended our cash runway into 2026. The strong support we received from both existing and new investors in the offering will allow us to increase shareholder value as we strive to become a company with multiple approved products. Thank you, Tucker. The outstanding progress we’ve made at Deciphera over the past year, along with our plan 2023 milestones puts us firmly on the path to becoming a company with multiple approved products around the world. As we near enrollment completion and prepare to announce top line results from our Phase 3 MOTION study, we look forward to also initiating our Phase 3 INSIGHT study later this year. We are proud to leverage our proprietary switch-control kinase inhibitor platform and deep pipeline to make a difference for people living with cancer. Good morning everyone. Thank you for taking my question. Just a couple of questions. First, for INSIGHT, with the idea of combining QINLOCK with – considered for the pivotal trial. Second, you're able to refine the timeline for enrollment completion for MOTION from first half 2023 to 1Q 2023? What can you attribute this acceleration to? And then for DCC-3116, while results from the dose escalation combination study are not expected until second half, what should investors expect with initial data? And specifically, should there be an expectation for antitumor activity? Thank you. Yes, hi. Good morning, Daniel. Thanks for joining and thanks for the three questions. So let me take those in order. First, you broke up on the first part of your question with respect to INSIGHT. I believe it was related to a combination. Can you just repeat that for me? Operator… Sure. I guess the question was, was the idea of combining QINLOCK would considered as one arm of the pivotal study? I see. Okay. Thanks for that question. So I'll take the question on INSIGHT and on MOTION, then ask Matt just to speak to 3116 and expectations here in the second half for the combination dose escalation data. So first, Daniel, with respect to INSIGHT, the data that we presented at the ASCO Plenary Series Session just last month and we, of course, disclosed at the beginning of the year, we view as being very, very clear, very compelling in terms of the activity of QINLOCK in this group of patients relative to Sutent. So no, as a result, we did not consider adding a third arm to the study looking at a combination because we don't believe that a combination with Sutent in particular, would add additional activity in the selected group of patients. With respect to MOTION, we were very pleased as we announced today that we'll be reaching full enrollment in the MOTION study in quarter one instead of quarter, the first half of this year, still reporting out in quarter four of this year. And the enrollment in the study, as we've been telegraphing over the course of the last six to nine months, we've been really pleased with the pace of enrollment how enthusiastic investigators and patients are to enroll in the study. And it's really that enthusiasm and the pace of enrollment that allowed us to enroll the study faster than we previously anticipated and is going to allow us to get to full enrollment here in this first quarter. So we look forward to reporting out the study in quarter four of this year. Matt, do you want to speak to the 3116 question? Yes, hi. Daniel, it's Matt. So yes, in regards to the 3116 program, as you know, at ESMO last year, we were able to present the monotherapy dose escalation data and we're very pleased with the results showing that we had good dose proportional PK, that we had a very good safety profile and also we're able to inhibit the target of autophagy in patients treated with 3116. So as we announced earlier as well, taking that forward in the combination escalation cohorts with 2 MEK inhibitors, binimetinib and trametinib, as well as the KRASG12C inhibitor sotorasib. So as we've announced, we'll expect to have an update on the combination cohorts in the second half of this year and our expectation there will be to continue to show the PK as well as the safety profile of the drug. And in terms of efficacy, certainly, it is designed as dose escalation in small cohorts of patients, but, of course, if there is a signal of efficacy, we'd be very pleased to have that information for updating in the second half later this year. Okay. Got it. One last question. With multiple KRAS inhibitors in development actually and on the market as you continue development of 3116, is there an opportunity for you to select the best fit partner as you advance into late-stage development? Yes. Thanks for the question, Daniel, with respect to KRASG12C inhibitors. And you're right there are a variety of agents now, two approved in the U.S. And what we're – as we've reported previously, the effect that we see with 3116 addressing autophagy is an escape when used in combination with the KRASG12C inhibitor is not specific to an individual KRASG12C inhibitor. It's certainly a class effect. It's a mechanistic effect that we see. So we've seen that and reported that preclinically, both with sotorasib, but also with at adagrasib. So there would be an opportunity going forward for us to consider additional KRASG12C combinations as we think about the ideal partner for a potential 3116 KRASG12C inhibitor combination. Please stand by for our next question. Our next question comes from Michael Schmidt with Guggenheim. Your line is now open. Hi, good morning. Thanks for taking our question. This is Paul on for Michael. One from us on recruitment for the INSIGHT study. So your analysis sort of suggests that only a portion of GIST patients have detectable KIT mutations through ctDNA and there is some discussion at the ASCO Plenary about just as a relatively low ctDNA shedding cancer. So I just wanted to get your expectations on the speed of recruitment of patients for this target mutation population at INSIGHT once that study kicks off later this year and whether you anticipate any sort of challenges in that aspect? And then secondly, on 3116, maybe just provide some color on what drove your decision to combine with encorafenib and cetuximab and where you see that potential for the combination in colorectal cancer? Thank you. Yes, hi. Good morning, Paul. It's Steve. So I'll take the INSIGHT question that you posed and then ask Matt to speak to the 3116, encorafenib and cetuximab combination. So first, with respect to INSIGHT and enrollment in that study, we've now demonstrated very clearly the capability to enroll these large randomized studies in GIST globally. So we have a clear capability in terms of getting these studies up and running and enrolling them rapidly. With respect to patients with the specific mutation that we'll be looking for patients who don't shed ctDNA, this is a very similar fraction in GIST versus other solid tumors. So we don't see that as being a differentiating factor. And with a simple blood-based diagnostic with a rapid turnaround time of 5 to 10 days, we don't see that as being a barrier at all. In fact, we see it as being an advantage to enrolling in the study. And then lastly, I would just offer that what we continue to hear from investigators and from thought leaders is a considerable amount of enthusiasm given the data that's now been reported at ASCO for the potential of QINLOCK in the selected group of patients, and I think that's going to serve as a real tailwind in terms of not only getting sites up and running, but also getting patients enrolled on study. Matt? Yes. Hi, Paul. It's Matt. So yes, in regards to our plan to initiate a cohort of 3116 in combination with encorafenib and cetuximab, we're obviously very excited overall with the preclinical data we've generated to date showing that we can inhibit multiple nodes along the RTK, RAS and MAP kinase pathway in combination with 3116 and show an additive or even a synergistic combination effect on tumor killing. So as we've initiated a number of these combination cohorts now looking at the unmet medical need in treating advanced-stage colorectal cancer and while cetuximab and encorafenib have activities demonstrated in the BEACON study a number of years ago, that was somewhat limited activity with an objective response rate of approximately 20% and the PFS of about 4 months. So they're showing a lot of headroom for improvement in treating these patients and recognizing this might be a huge opportunity for 3116 and colorectal cancer. Please stand by for our next question. Our next question comes from Tyler Van Buren with Cowen. Your line is now open. Great, thank you. Good morning guys. I had a couple for you. The first is can you help us understand what the magnitude of the one-time reserve for QINLOCK sales in Germany was and elaborate more on your expectations for the cadence of ex-U.S. sales throughout the year? And the second is for vim in TGCT, you've presented an extensive claims analysis, but what other data points give you confidence in this market, given that patients are so diffused throughout the country and not necessarily concentrated in centers of excellence? Yes, good morning, Tyler. Thanks for the set of questions. I'll ask Tucker to comment first on the reserve in Germany. Margarida, perhaps you can then comment on what you see as the cadence in terms of the commercial business across Europe. And then, Dan, why don't you take the final question with respect to vimseltinib claims analysis and the confidence we have and the size of the opportunity. Tucker? Sure, Tyler. So we haven't quantified the amount of the reserve in Germany that we took in the fourth quarter. But just to remind folks, what happened is that the German authorities in November changed the law. It used to be that you had a 12-month period of free pricing and that got shortened to six months effective retroactively based on the law change in November. So in the fourth quarter, we took a reserve based on the net sales that we had booked at our free pricing price in the third quarter. And then in the fourth quarter, the sales in Germany were booked at an estimate because we're still not at our final price in Germany, but an estimate of where we think we may end up with the German authorities on pricing. So we haven't quantified it, but it certainly was a larger number in the quarter that we wanted to make sure people understood that as they looked at the quarter-over-quarter change in international product sales. Okay. I will take the second one. Thanks, Tyler, for the question. So I would say that the cadence for the rest of the year in Europe will come from two key strategic drivers. The first one is to continue to successfully drive price and reimbursement in the countries where we don't have yet access, so that we can launch in new markets in the future; And the second one, I would say, is to continue to successfully execute on our launch strategy and continue to raise awareness to drive demand and to expand the prescriber base. And I would also offer to and – say that I'm extremely pleased with the success that we are seeing so far and with the strong demand that we continue to see. And Tyler, this is Dan Martin. I'll take your question on what gives us confidence in the TGCT market. I think what gives us confidence is several factors. First, you mentioned the claims analysis that we've presented on. That was just a component of our overall analysis of the opportunity. We actually conducted a couple of different methodologies, all of which gave very similar answers. We conducted a more typical sort of literature-based epi build up and totally separately, we conducted the claims analysis, and both resulted in a really similar findings in terms of the overall patient journey for TGCT as well as the size of the addressable opportunity. We – as it relates to the claims data, the 1,300 to 1,400 patients that we have noted as being the incident Rx-treated patients in the U.S. in this data set, we've always viewed that as really a floor of the opportunity and one that gives us real confidence because this is an analysis that doesn't provide indicators of patients, it actually sees the patients. And so we can see these patients being treated in the data, which gives us great confidence. Lastly, I would just note that one of the things that we get asked is our view of sort of products used in the space and market share, and we've presented the findings from the claims database there as well showing that only about 15% of the patients received pexidartinib in this data set. And that enables us to sort of triangulate or crosswalk back to the opportunity that we've laid out. So across multiple different views of the market we land in very similar places which gives us great confidence that the opportunity is there. Lastly, I'll just note that diffuse markets with patients being spread between both academic and community settings as a bit of a specialty of ours. We've developed real capability and being successful in that space because that's very much the description of GIST. GIST is very similar in that way. And frankly, one more point is that we know that the overlap between GIST and TGCT is really high. So for all these reasons, we have great confidence that the market is there and that we're uniquely positioned to be successful. Please stand by for our next question. Our next question comes from Eun Yang with Jefferies. Your line is now open. Thank you. I have actually a few questions. First, you mentioned that in 2022, the treatment duration for QINLOCK was 7 months and expect that to increase to 8.5 months. What's driving the increase in the treatment of duration? And do you expect to achieve 8 to 8.5 months of this year? Second question is on the NCCN guidelines. I don't know, it's something – I understand it is something that we cannot predict. But you have submitted your data for second-line INTRIGUE data. But in light of the subgroup analysis in Exon 11, 17 and 18 patient population, do you expect the NCCN decision could be on that subgroup? Thank you. Yes. Hi, good morning. Eun. Thanks for the great questions. So I'll take the second question first with respect to NCCN, and then I'll ask Dan to cover off on the treatment duration for QINLOCK that we see in the real-world experience in the U.S. market. So first for NCCN, you're exactly right, Eun. It's not something that we can predict in terms of whether the NCCN is going to update the guidelines when that might occur or what might be reflected in the guideline update. We were excited to present the data from the subgroup as part of the ASCO Plenary Series Session just last month, very compelling data in this group of patients with QINLOCK. So we're excited about that. I think the field is very excited about it as you will have seen from the presentation and the discussion at the ASCO session at the end of January. And so we await as you do any potential updates to the guidelines, difficult for us to predict in what shape or form or timing that might be in. So we'll stay tuned for that and see if there are any updates. Dan? Yes. Thanks, Eun, for the question regarding average duration of therapy. It’s a really important dynamic that was key in driving the really solid growth that we saw year-over-year. As I noted in my remarks – prepared remarks, we demonstrated about 20% growth year-over-year with 97 million in the U.S. in 2022. And that was driven by a number of factors, but importantly by volume growth. And the volume growth was driven principally by this increasing average duration of therapy that we see. And the driver for that is really just a maturing of the real world persistency curve, or said another way maturing of the real world sort of prevalent treated pool that now more fully reflects patients who have had extended and prolonged benefit from QINLOCK which just pulls the average duration of therapy up now beyond the median PFS that we saw in the INVICTUS study. And that’s really important because we expect that to continue to be a gradual growth driver over time. We had noted – we expect that could potentially reach eight to eight and a half months, and there’s a number of proof points for that which I could certainly go into, but we feel confident that ultimately eight to eight and a half month average duration of therapy is very achievable. However, we have noted that’s a gradual phenomenon. That’s a gradual trend that we will expect to see develop over time. So it’s hard to predict exactly what timetable that will develop in, but that’s why we underscored, we see that as a peak average duration of therapy. And we don’t expect that to be something that changes dramatically quarter-to-quarter, so likely something that we will share additional color on sort of as warranted over time. Yes. So a question on the INSIGHT trial. So based on the sub-group analysis that you’ve done from the INTRIGUE. It looks like you may need to screen about 400 patients to 500 patients. So question number one is how long do you think it would take to enroll about 54 patients? And secondly, in the currently in practice, is this a mutational analysis after imatinib done routinely? Thank you. Yes, Eun. Thanks for the two questions. Good questions. So I’ll take both of those. So first with respect to the INSIGHT study, you’re right. Our sites will need to screen patients for eligibility for enrollment in this study. We – from our experience with INTRIGUE, which we ran as a large global study, multiple sites, we have the capability of course, and have demonstrated the capability to run these large studies to open multiple sites and to find patients for enrollment. At the site level of course, we know that physicians will be using an easy liquid diagnostics or a liquid biopsy where they simply draw blood and there’s a five to 10 day turnaround time to identify patients. And furthermore, sites will know generally the primary mutation status for their patients already from their time of diagnosis. So we would expect that physicians would really be interested in looking at their primary exon 11 patients, of course, and understanding what their secondary mutation profile as they consider them for enrollment in the study. So we have a lot of confidence based on our demonstrated capabilities in this area of running these sorts of studies. And we’re looking forward to getting INSIGHT up and running at the end of this year. Now with respect to practice within the U.S. or globally even there isn’t a need – hasn’t been a need up until now for physicians to consider looking at the emergence of secondary mutations post imatinib treatment. But what we know from other analogs, whether it’s looking at lung cancer or other solid tumors, is that these sorts of liquid biopsies, these blood-based diagnostics see very good adoption. As I noted, these are easy to run. It’s simply a tube of blood that’s sent off to a lab with a five to 10 day turnaround time. So we don’t expect, especially given the nature of the data that we’ve now presented with QINLOCK in this group of patients. We don’t expect adoption of a diagnostic to be a barrier to use at all. In fact, we think there’ll be a considerable amount of enthusiasm among physicians and patients to understand what their secondary mutation status is. So they’ll know whether QINLOCK could be an option for them in the second-line setting. Please stand by for our next question. Our next question comes from Chris Raymond with Piper Sandler. Your line is now open. Thanks and good morning. This is Nicole Gabreski on for Chris. Thanks for taking the questions. Maybe just two from us. One, just in terms of using ctDNA as a potential companion diagnostic for patient identification. I guess, can you talk about how that would be integrated if the subset analysis data is included early in NCCN guidelines maybe versus if you get regulatory approval in the second line KIT exon 11, 17, 18 setting. Are there any differences just in the setup? I guess we’re trying to understand if it’s important to have a cleared or approved companion diagnostic in the setting? And then maybe second just around vimseltinib, going back to your ESMO presentation last year, I know that you guys were highlighting that responses deep and over time, but ORR at the 25-week time point for vimseltinib match the pexidartinib label. And we understand that the safety profile will be the key differentiator, allowing patients to stay on therapy longer. But I guess how will that be effectively captured within the Phase 3 MOTION study and how does that translate into a potential label? Good questions, Nicole. Thanks for those. So let me take first the ctDNA question. And then I’ll ask Matt just to comment on the MOTION study and the data we’ve presented last year at ESMO and touched on the data we’re collecting as part of MOTION that would then inform a label and the profile of the drug in a commercial setting upon a potential approval. But first for the ctDNA data in just today, and I think your question Nicole was in the present day environment, even absent of regulatory approval for QINLOCK and this patient population, what could physicians do in practice? We know that of course, these source of blood-based panels are already available. So from companies like Foundation Medicine, Guardant Health and the like. And so physicians today, if they were so inclined, could draw a tube of blood and send it off to Foundation or to Guardant for analysis. And these panels today will pick up the secondary mutations seen in just patients and report back on that. So physicians, if they so chose – to do so, they could run that analysis and then make treatment decisions which would be off-label today. So this isn’t something that we can or would promote to. But physicians could then make treatment decisions and they would have to work with the patient’s insurance provider to obtain coverage for that off-label use. But I guess my point is just that these diagnostics are available today for physicians who are interested in understanding the secondary mutation status for their patients. Matt, do you want to comment then on vimseltinib in MOTION? Yes, good morning, Nicole. So, yes, as you know for the 25-week endpoint in the vimseltinib, TGCT study, we had a 38% response rate, which was similar to what was reported for the ENLIVEN, pexidartinib [ph] study and then they’re labeled. But also as we also know, these patients continue on therapy for longer than six months and can have a response beyond that. And we reported for the Phase 1 dose escalation cohorts who were on study the longest a 69% overall response rate in the TGCT patients in the Phase 1/2 study. And in terms of a label, it’s also you can – it’s also noted that ENLIVEN’s label or pexidartinib label based ENLIVEN study also shows their overall response rate in the open label portion of the study. And that’s 61% in the current label for pexidartinib. So we could expect that our label for vimseltinib may contain some longer-term follow up and a higher overall response rate. Please stand by for our next question. Our next question comes from Brad Canino with Stifel. Your line is now open. Good morning and thank you. Steve, maybe a follow-up on your previous comments. I guess I want to know, based on the KOL and physician feedback to the subgroup analysis, do you expect the material enough proportion of practices to adopt a second line ctDNA guided treatment paradigm in the next few years to impact QINLOCK sales? And then a second question with the top line readout for vimseltinib slated for 4Q. When you think about the degree of data that you would include in the package to the FDA is successful, can you add any comments about how long you expect it to take to reach an NDA filing? Thank you. Yes, thanks, Brad. Two good questions. So with respect to expectations around taking the data that we’ve presented at ASCO and that being translated or changing practice today it’s an uncertainty. So of course we can’t promote to that use. We don’t have extensive market research that tells us whether physicians will adopt the use of the drug on an off-label basis. What we’ve seen so far in our experience is that use has been for QINLOCK has been generally within our approved label. So we’ll continue to monitor and understand how physicians, if they choose to change practice, how that practice changes over time. But we don’t have any information at the moment with respect to what changes might occur. Clearly having a label in the second line setting in this patient population is what will ultimately allow us to drive share and drive utilization. And that is one of the reasons that we’ve decided to conduct the INSIGHT study and seek a label in the second line is to be able to promote to that use upon approval. Your second question, I think Brad was related to vimseltinib and our announcement this morning that we expect to complete enrollment in the first quarter of this year and read out the study in Q4. And your question was around the timing for a potential NDA. So it’s really premature for us to share our thoughts around what the timing could be for an NDA post top line readout. What I can say is that our team has demonstrated with – certainly with QINLOCK and our fourth line label, our ability to quickly move from topline data readout to get a filing in. This will be no different. And when we have a readout of the study of the topline results, I’m sure we’ll be in a position of that time to offer some additional color around what the timing could be for a potential filing in the U.S. and filings outside of the U.S. Great. Thank you. Thanks for taking my questions. Just from NCCN guidelines for GIST, are you looking to gain guideline inclusion for exon 11, 17, 18? Yes. Thanks for the question, Peter with respect to NCCN. So we’re going to continue to monitor what NCCN decides to do with respect to any guideline update, and that will guide our decision about any future submissions of data. So that’s the approach that we plan on taking with respect to NCCN going forward. Got you. Does – I mean, does the exon 11, 17, 18 data plus various other mutations, doesn’t that make the NCCN guideline changes the second line will come as [ph] difficult for them to make that judgment call? Yes, I think what we’ve learned Peter from the analysis is that there’s a level of complexity and nuance I think to the data. I mean, certainly the 11, 17, 18 population, the result is very clear in terms of QINLOCK – the benefit of QINLOCK versus sunitinib. And we have this group of patients in whom ctDNA is not detectable where we see on the forest plot. The hazard ratio for PFS is virtually in the center of that forest plot. So I think it’s unclear at the moment what NCCN might choose to do. We know that physicians generally are interested in having more options available to treat their patients. We don’t think that this situation with just is any different. So we would expect that will be of interest to physicians on the panel as they think about providing options to patients going forward. Got you. Thank you. And then just on China, just kind of the size of the opportunity how we should think about pricing and kind of how you think it could help revenues over the next couple of years, whether it’s 2023 or 2024? Absolutely. Thank you. Thanks for the question, Peter. So we review this listing very positively as it’ll increase affordability and access for Chinese patients moving forward. So we do expect this to be a key contributor of volume growth over time how quickly that happens we do not have a lot of details yet. But all in all, we view these extremely positively. I show no further questions at this time. I would now like to turn the conference back to Steve Hoerter for closing remarks. Great. Thank you, Michelle. Thanks to all of you for joining us on today’s call. Thank you for your continued support of the work that we’re doing here at Deciphera. We look forward to keeping you updated on our progress for the balance of this year, and hope you have a great rest of your day.

EarningCall_409

Good morning and welcome to the nVent Electric Fourth Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded. Thank you, and welcome to nVent's fourth quarter 2022 earnings call. On the call with me are Beth Wozniak, our Chief Executive Officer; and Sara Zawoyski, our Chief Financial Officer. We will provide details on our fourth quarter and full-year performance, an outlook for the first quarter and full-year 2023. Before we begin, I will remind you that any statements made about the company's anticipated financial results are forward-looking statements subject to future risks and uncertainties. Such as the risks outlined in today's press release and nVent's filings with the Securities and Exchange Commission. Forward-looking statements are made as of today and the company undertakes no obligation to update publicly such statements to reflect subsequent events or circumstances. Actual results could differ materially from anticipated results. Today's webcast is accompanied by a presentation which you can find in the Investors section of nVent's website. References to non-GAAP financials are reconciled in the appendix of the presentation. We'll have time for questions after prepared remarks. I also want to add, that we look forward to hosting our next investor day, the morning of Tuesday, March 7 in New York City. Thank you, Tony, and good morning everyone. It's great to be with you today to share our fourth quarter and full year results. 2022 was a record year for nVent with the fourth quarter marking our seventh consecutive quarter of double-digit organic growth. Our nVent team delivered exceptional results by serving our customers responding to strong demand and overcoming supply chain challenges. We successfully executed on our strategy, focusing on high growth verticals, new products, global expansion and acquisitions. As a result, full year sales grew an impressive 18% with adjusted EPS of 22%. This was another year of outstanding performance and value creation, and we're well positioned to do it again in 2023. Slide four, summarizes our Q4 and full year performance. Fourth quarter sales were up 15% organically with broad-based growth across all segments and verticals. Segment income grew an impressive 31% year-over-year with return on sales of 290 basis points. Adjusted EPS grew 32%, and we generated $180 million of free cash flow, up 77% Our fourth quarter results were terrific. Looking at our key verticals, all grew in the quarter. Industrial led the way up low double-digits with broad-based growth. Infrastructure had strong double-digit growth led by data solutions and power utilities. Energy performed well, up strong double-digits. And finally, commercial and residential grew mid single-digits driven by North America. Turning to organic sales by geography, we continue to see broad-based growth in North America, up strong double-digits. Europe grew in all segments, up high single-digits. developing regions declined primarily due to COVID-related impacts in China. Lastly, orders in Q4 were flat year-over-year. Recall a year ago we had 37% orders growth, a tough comparisons. Also, as we discussed in our Q3 earnings call, we expected orders to moderate as distributors returned to seasonal destocking. Overall, our customer demand and distributors sell through remain strong. Orders in January have since increased and we continue to have a robust backlog. For the full year, we had record sales of $2.9 billion, an increase of 20% organically and segment income also grew 20%. Adjusted EPS was up 22% on top of 31% in 2021. For the full year, we generated over $350 million of free cash flow. Let me share a few more highlights. First, we launched 59 new products and our new product vitality is now 20%. New products contributed approximately three points to our sales growth. Second, with our focus on high growth verticals, infrastructure is now approaching 25% of our sales, up from low teens at spit. Infrastructure includes data solutions, power utilities, renewables and e-mobility to name a few. All of these sub verticals are growing rapidly, and we continue to expand our portfolio and solutions in these areas. For example, data solutions now represents $375 million in sales, and grew over 35% in 2022. Lastly, we have added more than $300 million in annual sales from acquisitions since then. And in 2022, sales growth from acquisitions exceeded overall nVent growth. While we did not complete any new acquisitions in 2022, we remain disciplined in our approach and built a very healthy pipeline of opportunities. We've had success when we acquire companies that have differentiated products and solutions that extend our position in high growth verticals. We've been able to rapidly scale them through our distribution channels, global reach and footprint. This approach has led to higher growth and we believe fantastic returns for our shareholders. We're well-positioned with ample capacity to execute on M&A in 2023. Looking at the macro trends, we expect electrification, sustainability, and digitalization to continue to accelerate. We anticipate the investments from the Infrastructure Bill and Inflation Reduction Act will drive demand for our products and solutions. On verticals, we expect industrials to see continued growth with investments in automation and supply chain resiliency. Infrastructure will benefit from investments with the electrification trends in power utilities, renewables and e-mobility. We expect continued strong growth with our portfolio and liquid cooling for data centers, given the energy efficiency benefits. Overall, commercial is expected to slow. However, the need for more labor saving solutions will drive demand for our products as well as growth in power and data infrastructure. Residential is expected to be soft, but represents less than 5% of our portfolio. In energy, we expect to see continued growth with MRO, and projects supported by decarbonization with LNG, clean fuels and carbon capture. While supply chains remain challenging, we do expect them to gradually improve. We also expect an inflationary environment. We have shown we are able to manage price cost positive. We are confident we can continue to perform. Overall, I am proud of our nVent team and the record results we delivered in 2022. We continue to change the growth profile of the company focusing on higher growth verticals tied to longer-term secular trends. We believe 2023 will be another year of strong growth and value creation. I will now turn the call over to Sara for some details on our results as well as our 2023 outlook. Sara, please go ahead. Thank you, Beth. I'm pleased to share another quarter of great execution with double-digit sales growth, strong return on sales expansion, double-digit EPS growth and robust free cash flow. Let's begin on slide five with our fourth quarter results. Sales of $742 million were up 11% compared to last year, or 15%. organically. Overall, sales grew across all segments and verticals. volumes were up modestly compared to last year, and price added 15 points to growth. Foreign exchange was a four-point headwind. Fourth quarter segment income was $144 million, up 31% with strong incrementals of 47%. Return on sales was 19.4%, up 290 basis points year-over-year. Better price cost and sequential productivity improvements drove the strong outperformance versus our expectations. Price contributions more than offset the impact from inflation of roughly $40 million and continued supply chain inefficiencies. In addition, we continue to make investments in R&D, digital and sales and marketing for growth and productivity. Q4 adjusted EPS with $0.66, up 32% and above the high end of our guidance range. On cash, we delivered significant working capital improvements in the quarter, resulting in $180 million of free cash flow, up 77% year-over-year. Now, please turn to slide six for discussion of our fourth quarter segment performance, where you will see continued sales strength across all three businesses. Starting with enclosures, sales of $376 million increased 17% organically with both price and volume contributing. Sales growth was broad-based across all verticals led by industrial. Infrastructure also grew nicely with data solutions up approximately 30%. Geographically North America led followed by Europe. Enclosures fourth quarter segment income was $72 million, up 67% return. Return on sales of 19.2%, increased an impressive 620 basis points year-over-year, driven by strong execution and catching up on price cost. For the full year, ROS expanded 80 basis points to 17%. Moving to electrical and fastening. Sales of $194 million increased 16% organically with strong price contribution, while volume was down slightly. Sales growth was led by infrastructure with power utilities up over 50%. Geographically, all regions grew led by North America. Electrical and fastening segment income was $53 million, up 18%. Return on sales was 27.5%, up 120 basis points compared to last year on solid execution and price costs. This marks the fourth consecutive year of ROS expansion for electrical and fastening. Turning to thermal management. Sales of $172 million grew 9% organically, with both volume and price contributing. All verticals grew led by industrial with particular strength in chemical. Geographically, North America lead with MRO and large projects, while Europe grew modestly impacted by Russia and commercial resi headwinds. Thermal management segment income of $44 million was up 1%. Return on sales of 25.7% was down to 70 basis points year-over-year. This decline was due to higher project sales mix and R&D investments. Now turn to slide seven for recap of our full year 2022 results. We ended the year with record sales of $2.9 billion, up 18% or 20% organically. Segment income grew 20% to $524 million, and return on sales expanded 30 basis points to 18%. Adjusted EPS for the full year was $2.40, up 22%. And free cash flow was $351 million, up 5% with 87% conversion of adjusted net income. A few call outs for the year. First, volume contributed six points to sales growth. Second, all segments grew organic sales, double-digits and expanded margins. Third, we have consistently demonstrated our ability to manage price cost. This is a testament to the strength of our portfolio and the solutions we provide to our customers. And lastly, acquisitions added two points to sales. In summary 2022 was an outstanding year. On slide eight titled balance sheet and cash flow, you will see we exited the year with $298 million of cash on hand and $600 million available on our revolver. Our balance sheet and financial position have never been stronger. Turning to slide nine, we continue to prioritize growth and execute a balanced disciplined approach to capital allocation. In 2022, we returned $183 million to shareholders, including a competitive dividend and share repurchases of $66 million. We exited with a net debt to adjusted EBIT ratio of 1.4 times. We believe we have ample capacity and strong cash flows to execute on our growth strategy, including M&A and deliver attractive shareholder returns. Moving to slide 10, our 2023 outlook. We expect organic sales growth in the range of 4% to 6%. This assumes low single digit volume growth, and roughly three points of price. While we expect sales growth and positive price each quarter, growth is expected to be stronger in the first half given a robust backlog and pricing carryover. This also reflects macroeconomic uncertainties. Our outlook for full year adjusted EPS is $2.51 to $2.61, which represents growth of 5% to 9%. A few important items to note. First, we expect price plus productivity to more than offset persistent inflation. Second, we anticipate stronger year-over-year margin performance in the first half given comparisons, and favorable price cost. And third, we will continue to invest in new products, digital and capacity for growth. Lastly, we expect free cash flow conversion of approximately 95%. This reflects higher CapEx investments in constrained areas. We continue to expect strong underlying working capital improvements. A few 2023 below the line item assumptions we'd like to call out include higher net interest expense of approximately $40 million due to higher rates on our variable rate debt, a tax rate range of 18% to 18.5% and shares of approximately 168 million. Additionally, we anticipate corporate costs of approximately $95 million and CapEx of $55 million to $60 million. Moving to slide 11 and our first quarter outlook. We expect organic sales growth in the range of 5% to 7%. We anticipate another quarter of strong margin performance. For earnings per share, we expect adjusted EPS in the range of $0.56 to $0.58 up 12% to 16% year-over-year. In closing, our team delivered another year of outstanding results in 2022. And I believe we are well-positioned for another strong year. Thank you, Sara. Turning to slide 12, I want to spend a few moments recognizing the great work of our nVent team. Over the course of the year, our ability to respond to strong demand and overcome supply chain challenges was appreciated by our customers. While, we still have a few challenging areas, our distributor partners placed us in the top performing suppliers when it came to delivery and quality. As you can see on the slide, we're highlighting a few of the many recognitions we received for our commitment and partnership to our customer success. These recognitions weren't just about product delivery, these extended to innovation and safety, performance measures we value in nVent. Another area of recognition is our EFG performance. EFG is at the center of our strategy as we build a more electrified and sustainable world. We've made significant progress in our sustainability commitments. For the second consecutive year, we were again awarded a Silver Sustainability Rating from Ecovadis. Our overall score improved placing us in the top 9% of companies assessed in our industry, and the 85th percentile of all companies assessed. Key to our success is our focus on our people and culture, which we believe to be a differentiator. We have made inclusion and diversity a priority for us to create a great workplace. I'm very proud that our board of directors is 70% diverse, and we were recognized by 50-50 women on boards. Also, we are certified as a best place to work. Our people are our priority and strength. And we are committed to building a culture of inclusion that allows every employee to thrive and contribute to our success. Turning to slide 13, I look forward to our upcoming Investor Day next month, and sharing how nVent is building a more sustainable and electrified world. Wrapping up on slide 14, 2022 was another year of outstanding performance for nVent delivering differentiated value for our customers and shareholders. We are well-positioned with the electrification of everything, sustainability and digitalization trends. And we expect 2023 to be another strong year of financial performance. Our future is bright. Thank you. We will now begin the question and answer session. [Operator Instructions] We ask that you please limit yourself to one question and one follow up. If you have additional questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. And the first question will be from Jeff Sprague from Vertical Research. Please go ahead. Hey, just a couple - good morning. The price numbers obviously just continuing to jump off the page. Just thinking about the bridge. But I think in 2022, right, you said price offset all inflation. And I think for 2023, you said price plus productivity offsets inflation. I just wonder if you could put a finer point on that. Do you actually need to dip into productivity to fight inflation in 2023? It seems like in 2022, you actually were able to drop that productivity to the bottom line through some nice margin enhancement? Yes, I think, let me start with 2022. And 2022, price needed to offset inflation as well as some of the negative productivity we saw, just due to the supply chain inefficiencies. So in essence, it took us -- cost us more to service our customers with the robust demand we were seeing and a strong volume growth. And so, as we walk in and 2023, we would expect price to offset cost. And we would expect productivity to turn to a positive. And that's going to be more gradual in the context of throughout the year. And really what's going to help me to that is just that supply chain improvement. But we've talked about this in our last call, we're really focusing on those supply chain investments to help remove some of those areas that we've constrained in, as well as focus on productivity and the factories that provide that productivity improvement over the course of 2023. And maybe just a little bit of color on what you're seeing in the channel. There was certainly some concern exiting Q3 that may be, we'd have some drawdown or distributors rebalancing, and the like, it doesn't look like that happened to material degree, but maybe address that and kind of the health of the channel, as you look into the beginning of the year here? Yes. As we had discussed on our Q3 call, we expected to see some return to normal seasonal destocking. And I would say we did see that. As we progress through the quarter, we certainly saw a drop up in orders. However, what we did see was strong demand and sell-through from our distribution partners. So they were resetting some of their inventory levels. Now, as we turn to this year and January, we've seen those orders increase. And so I think there was some management of that inventory level, if you like, but they still are sharing with us that they've got good backlogs, good demand. And so, we believe we're going to see that pick up here as we go through 2023. Hi. This is Bastion [ph] filling in for Nigel. So obviously, the 2023 fill on and 2022 price contribution was about 14%. And then my question is for 2023 price contribution expectation, do you expect any pockets of price kickbacks? And then maybe if you could touch on what you see on price realization on orders? Well, let me just start by talking about price. Our view is it's still an inflationary environment. There's still supply chain challenges, there's inflated labor, energy costs, et cetera. And so, as we stated, an inflationary environment, so our aim is to hold our price. However, it's not at the same level as we were last year, as s Sara shared with your assumption as we go forward. Yes. Maybe just one point to add to that, in terms of kind of that stickiness. I do think it is reflecting our ability to deliver and our ability to innovate for our customers. And then, maybe I'll just expand a moment on the inflationary environment to give a bit of a color on that piece of it. Something to keep in mind is if you look at our total cost structure, that's roughly $2.3 billion. That's COGS as well as all of our operating expenses. And so, metals specifically are less than 20% of that overall cost structure. So while we are seeing some easing on the inflationary side, as it relates to metals, we're seeing inflation and everything else. So as Beth alluded to, you've got components, you've got electrical electronics, labor, logistics, energy, professional services, that is where we're seeing that inflationary pressure. And so, like we've consistently demonstrated in 2021, in 2022, we're going to consistently and keep front footed and manage that price cost equation going into 2023. Great. Thank you. And then, my fourth question would be, how should we think about the sustainability of enclosure margin, since 4Q is typically weak margin quarter for enclosure? Would you expect the full year to be above the 19%, 20% range? No. So one of the things we commented on is if you look at the quarters, how we progressed with enclosures, that was our segment that had the most challenges in terms of demand and supply chain inefficiencies. And so, it was very -- whether it was labor shortages, whether it was freight, et cetera. So to some extent, we had some inefficiencies, we improve that towards the backhand -- back end of the year and some ketchup on price cost. We would expect to return to the more normal margin profile that we've shown over the last several years. And so, we don't expect that margin to be at that level going into Q1. So, I'll ask hopefully, the last pricing question. And I'm just going to take a little different -- a little bit of a different angle here. So you did over $300 million in pricing in 2022. There's got to be some good carryover pricing that comes into 2023. And it also kind of sounds like, because you believe the backdrop is going to be inflationary, there is some likelihood that you'll put additional pricing increases through. So can you maybe just comment on the carryover pricing and whether you plan to put additional pricing through in 2023? Yes. As we said in our prepared remarks there, Joe, I mean, that three points of price, that's part of that 4% to 6%, organic growth, much of that is really carryover, as well as things that are already announced. And that's reflective of the inflationary environment that we see today. But as the year progresses, we're going to continue to manage that price cost equation as we've done in years past. Okay, great. That's super helpful. And then just thinking through the volumes, right, your demand backdrop still sounds like it's very good. Most of our companies have yet to see very much money from the infrastructure bill. And yet, you're calling for volumes to be, maybe up low single-digits. So help me square that. And then if you could provide any color on whether you're starting to see any benefit from the infrastructure bill, that'd be helpful? I think there still remains a lot of macro uncertainty, right. And so, that's reflected in how we put our guide together. When it comes to both the infrastructure bill and the inflation reduction act, most of the infrastructure bill, some of that funding, it's very -- it's moving through the states, and it's allocated for roads and bridges and transportation and water and broadband and ports and airports, as you know. And we look at all that and say, okay, here's where our enclosures are EFS business where we're positioned, where we could expect to see some growth. But I think that in particular is going to be more towards the back half and it'll be multi-years as we see those investments flow. Maybe could be a point for EFS and enclosures as we start to see those funds flow. When it comes to the it's the Inflation Reduction Act, some of that is going to start to drive demand in areas where we have like renewables and solar and some areas where we're working on e-mobility. But I think more -- that's more to come and towards the back half of this year as we currently see it. Just -- good morning. Just wanted to look at the operating margins a little bit more. So I think you've guided those may be up about sort of 50, 60 bps for the year. Just wanted to check that that's roughly the right range. And then trying to understand sort of on a segment basis, how are we thinking about that? Just after the fourth quarter, you had very different sort of year-on-year margins by segment. Are we seeing a bigger increase, maybe in thermal and then enclosures is more flattish. Any color around that, please? Yes. I would start by saying kind of that ballpark, margin, if you kind of just back into that from a segment income perspective, it's in the ballpark, Julian. And then from a color perspective by segment, I would say a couple things. First, we're confident in the year that next year is going to be or this year, right 2023 is going to be another year of margin expansion. Yes, that's going to come from the contribution from volume, but also positive price cost productivity. We also expect margin year-over-year performance to be stronger than the first half versus the second half. And that's really twofold. It's one just given, our comparisons of a year ago. We're lapping here in the first set half, some of that negative productivity and just high cost to serve, right, from a supply chain perspective. But also, we're carrying forward, as you saw in Q4, some stronger price cost. So, if you look at that from a segment perspective, we continue to expect really the largest expansion from enclosures, building off of that 17% ROS that they exited the year with in 2022. So again, expecting that price cost to benefit enclosures here in Q1 in the first half, and continue to expect to see gradual improvement from a productivity standpoint. I would also say that we expect to see margin expansion, both in enclosures and thermal management, just left so. I mean, EFS has had tremendous margin expansion over the last four years, we said, right? And then with thermal management, still expect margin expansion just a bit more modest given some of the mix pressures as projects really come back on board here and grow strongly. Thanks very much, Sara. And just trying to looking at, say, slide seven. So you've got that very helpful segment income bridge on the lower left. And just to focus on the sort of price and net productivity buckets for a second, when we're thinking about 2023. You've got a sort of a $40 million odd spread between price versus net productivity in 2022. Just trying to understand sort of how do we think about that in 2023 in light of your comments around kind of productivity becoming a tailwind, but maybe the price cost spread narrows as we go through the year and investments, I don't think you called out yet? Yes. So I think you've colored it in rather well, Julian. I mean, I think in terms of a price cost perspective, we do expect price to offset inflation, but to a narrower degree than what we saw in 2022, and some of that, again, was catch up, right, in terms of quarters past. And then productivity, while productivity embedded in that $290 million headwind, if you will, that was negative $65 million, with a balance of that being inflation. So we do expect that productivity to improve sequentially through the year. So not right at the gates here in Q1, but we continue to see good gradual improvement for supply chain, even from Q3 to Q4. We expect that to continue into Q1 and continue through the course of the year. So we see that a little bit more weighted towards productivity than price cost, but both contributing positively to that bar in 2023. Sara, I was hoping you just take us through some of the dynamics in free cash flow, really strong finish to the year. How much was working capital at play? Did you take down buffer inventory? I know you referenced some of that for the 2023 free cash flow guide, but just take us through that, the working capital improvements, what happens to buffer inventory from here? Yes. So we were really pleased with our free cash flow and working capital performance in Q4. And if you look at Q2 to Q3, that inventory was flat, even while sales grew. And then from Q3 to Q4, we did take down some of that inventory. And it really was reflective of some of the supply chain improvements we were seeing. So as we saw some a lead times come down, we were able to tighten up our own inventory. But still, I would say, it's very surgical. But there's -- yes, there are still some areas that we're not or where we want to be in our service levels, and know that we've got to make some of the some of those investments. So, we're pleased with the progress we made during Q4. We know that there's continued progress we can make as that supply chain improves, but we're going to continue to take a very surgical approach to it to make sure that we're also investing in those areas that we need to that are constrained or that have more challenging lead times. That's helpful. And then for Beth. Can we get some more color on the data center solutions business. You are significantly outgrowing the market there. Can you give us a sense of how much of that is being driven by enclosures versus liquid cooling? When we look at that growth, I would say, in data solutions into two areas. One its our liquid cooling solutions. And when we do sell those off, and we're selling those with racks and enclosures and fastening solutions, but we've talked about this before where liquid cooling is a more efficient way -- energy efficient way of cooling data centers, and with data centers, and chips getting hotter, it's really the direction that we're seeing across all data center applications. So significant growth from liquid cooling. The other area, I would comment on where we saw growth is from our power distribution units. So as we think about how our growth outlook here, it really is all of what we do, but led predominantly by liquid cooling and our power distribution units. And that pulls through the rest of our enclosures and fastening solutions. I just wanted to go back to the Enclosure margin. So very good in the quarter. I think Beth you said, that you would not expect that to repeat. So, I'm just wondering, if there were any aberrations or why that steps back? I know maybe there's some seasonality, dynamics, et cetera. But just wondering on the sustainability there? Yes. This is Sara. Maybe I'll build upon what Beth said. I mean, in the quarter, right, from a Q4 perspective, some of that price was really catching up from the early part of the year. So Q1 and Q2 were cost exceeded price. And so, when we looked at Q4 stand alone, excellent, impressive return on sales. As you well know, usually, we have sort of a seasonal downtick in ROS, but that was very strong sort of quarter-to-quarter sequentially. So as we look at, maybe I'll put in the context of the full year, we exited the year at 17% return on sales for enclosures. And we expect that from a full year perspective. And so, we would expect to build upon that and see the strongest margin expansion heading into 2023. And we would expect that first half sort of year-on-year margin expansion to be the strongest in comparison to the full year based on that price cost carryover. So we do expect some nice margin performance here in quarter one year-over-year from a margin perspective. Okay. So it's really, you had a big price cost catch up, and maybe that gap is a little bit smaller going forward? Okay. And then, just back on data solutions. I appreciate the outgrowth and color there. Just maybe give us your view on outlook there for 2023. It seems like there's a lot in the backlog, but some kind of emerging concerns, just around data center, and particularly, some of the hyperscale guys kind of cutting people and cutting back a little bit. And just wondering, if that's showing up at all in the demand trends or order rates? Thanks. The way we look at that is, our backlog is strong there. And because we're seeing this technology conversion to liquid cooling, which actually reduces operating expenses, we're seeing demand for these types of solutions increase in despite of that backdrop of or everything else going on. So it's a more efficient way. It's a technology shift. And so that conversion, and we think is going to continue to extend across multiple data center applications, both new and retrofit. So that's why we're seeing such strong demand and expect that to continue. Okay. And then, just on that front. Would you say, your data solutions business is kind of running above that three points. outgrowth, or would you say that's more broad based? I think you said that the new products contributed three points to outgrowth. So I'm just wondering how much? Is that lean towards data solutions? Or is it more broad based? Well, I would say that the three points about growth is broad based across EFS and thermal, but for enclosures significantly, it's both on the power distribution side and the data center cooling that we're seeing that higher than three points of growth from those in products. Hey, I'm good morning. Well, terrific, really great execution. I have a couple of questions myself, and I was just wondering, one of the things we've been hearing this earnings season is, with the supply chain getting a little bit better, deliveries, outbound deliveries, that time shrinking, that there's sort of this natural tendency for the customer to not necessarily order that much, because their order was kind of already in your backlog, right? So, could you talk about maybe with the orders being flat in the fourth quarter, kind of how you'd parse that out between sort of improvement in on-time delivery from both you and supply chain, let's say versus some destock, and versus the whole comp versus demand dynamic? Well, Scott, I would say it's both of those things. So, what we saw occur in Q4 was that some of our distributors were looking at their inventory levels and doing some destocking. And so hence, that reduced our order rates, and I made the comment that our sell through was still very strong. And now, as we've progressed in 2023, order rates have picked up again in January. But I do think, remember, we were seeing crazy order rates in Q4 of just 2021. We had 37% orders growth. So, at that point, we were definitely saying, our customers and our partners, placing more orders on us to give us visibility to demand so we could respond. So I think we're seeing that, that as supply chains improved, they're not placing those orders, six months out to give us visibility. And so we're seeing it more balanced. But having said that, sell-through is good, orders have picked up. And so, I think that's just part of the gradual supply chain improvements that we're seeing. Yep. Thank you for that. On the new products, that was a really big number. And I'm just wondering what the 3% looks like in 2023, if you could hazard a guess there. And I assume, I don't want to assume anything. How much -- how do you sort of handicap pricing as a contributor within new price, so it's not just the volume number? Yes, we don't really -- the way we think about new products. When we launch new products, we're always looking to see that they're providing outsized value, right? So they're reducing labor, or they're driving energy efficiency or better operational performance. So therefore, we launched new products with a higher margin expectation, because of the value that we're creating. So that's how we think about it versus pricing, right. So it's -- there's a whole way that we look at value. And I would say, as we go into, or as we're in 2023, we always look to launch at least 50 new products. We look to launch them with faster cycle time, improved margins, we always want to get at least one point of growth. And, but I think, we're going to continue to strive to have great differentiated products were like this year, if we can drive higher volume and growth from them, we will. Yes. My question would be about your R&D spend, and maybe your think has -- the thinking about that going forward. So, this was a record year for your R&D spend, up towards 25% or so. And I thought it was interesting that each quarter, the four quarters of 2022 had the highest -- four highest quarterly spends on R&D. So, I don't know. To me, it seems like, I am wondering if maybe there's been an evolution and you're thinking in some direction about the goals were the priorities within your R&D spend. And I'm wondering if maybe there's an increasing, or if you could highlight the collaborative nature of your R&D spend currently? In other words, how many projects are done, let's say, directly with particular customers in mind or in collaboration with those customers? Thank you. All right. Well, we've always stated that we were going -- our intent was to always increase our R&D spend, because we thought as a percent of sales when we spot it was on the low end. And we have made those increases, but our top line has grown so well. And we've also had such impact, right, which has been terrific. So I think the major changes for us in how we've driven R&D to realize such great results is that it's a very collaborative approach. It starts with us understanding the market needs. In some cases, it may be a specific customer, but we tried to think of a developing platform products that can serve multiple customers in a particular application. And then between our marketing and technology folks, and our supply chain folks, we work through the development process. And we've really done a great job to reduce our cycle times every year by 20% to 30%. That's velocity, right? It's productivity. And then, we've also improved the launch process. So that when we launch a new product, we have way of getting it positioned more quickly through our distribution partners, we've got inventory, we've got digital collateral, right, you just can't launch a product without having the digital product information available. And it's all of those things that I believe have allowed us to have such a greater impact. And, we'll continue to invest there as we see great returns. Okay. Thank you for that. Next question I had was maybe just about your projected capital spending for 2023. There is a little bit of a bump there. But I recall, Sara, at least a couple of points calling out constraints that needed to be addressed. And I'm just wondering if you wouldn't mind qualitatively, maybe just calling out the top couple of areas where discretionary capital will be spent in 2023 to maybe alleviate some of those constraints or alternatively to exploit some opportunities that you see. What's the highest priorities for you the discretionary portion of your capital spending? Thanks. Maybe I'll start by saying, we've talked about our data center solutions and our liquid cooling is growing so significantly. So we need to make further investments to expand our manufacturing capability for that particular product line. And that also involves us having some expansion within Mexico, where we need to add an additional plant to our campus or extended campus to be able to have the capacity for some of these high growth areas and high growth verticals. Yes. So maybe just a couple of things to add to that. I mean, our CapEx really is focused on new products, digital transformation, high growth verticals. So that's consistent going into 2023 here. I think that uptick is really those things that just Beth just alluded to. We believe our supply chain is in a position of strength for us here in 2022, in terms of enabling us to deliver for our customers and do it very, very well. But we are capacity constrained in some areas. And so, some of this reflects building out existing capacity. But building that out in Mexico, particularly in our enclosures, addressing some of these bottlenecks that we're seeing. It's also increasing our investments in automation, as well as modernizing some of what we have in our factory to really allow for better output and frankly, more efficient output as well as we go forward. Okay. Thank you for that. And then just last question, about the new products. You started out a couple years ago, Beth, I think with a target of 50 new products. And I noticed the number in this year was 59. So, I can't resist asking is going forward will 60 be the new 50 as far as the hurdle rate for new product introductions? Thank you. Yes. Well, just to answer that, we always want to have 50. And it depends on the types of products, whether they're brand new platforms, whether in our fastening business, we tend to have more types of fasteners, which are faster or smaller projects. So it really just depends. But I think what we're striving for as at least 50 new products a year, reducing that cycle time, higher margins, and then having at least driving a point of growth, if not more. Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Beth Wozniak for any closing remarks. Thank you for joining us this morning. We're proud of our strong finish to a terrific year. I believe we are changing the growth profile of nVent. I'm grateful for the outstanding work of our team to support our customers and execute on our growth strategy. Thanks again for joining us. This concludes the call.

EarningCall_410

Thank you for standing by, and welcome to the Freshworks Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Joon Huh, Vice President of Investor Relations. Please go ahead, sir. Thank you. Good afternoon, and welcome to Freshworks Fourth Quarter and Full Year 2022 Earnings Conference Call. Joining me today are Girish Mathrubootham, Freshworks' Chief Executive Officer; Dennis Woodside, Freshworks' President; and Tyler Sloat, Freshworks' Chief Financial Officer. The primary purpose of today's call is to provide you with information regarding our fourth quarter and full year 2022 performance and our financial outlook for our first quarter and full year 2023. Some of our discussion and responses to your questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on Freshworks' current expectations and estimates about its business and industry, including our financial outlook, macroeconomic uncertainties, management's beliefs and certain other assumptions made by the company, all of which are subject to change. These statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from those projected in the forward-looking statements. For a discussion of the material risks and other important factors that could affect our results, please refer to today's earnings release, our most recently filed Form 10-Q and our other periodic filings with the SEC. Freshworks assumes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this presentation, except as required by law. During the course of today's call, we will refer to certain non-GAAP financial measures. Reconciliations between GAAP and non-GAAP financial measures are included in our earnings release, which is available on our Investor Relations website at ir.freshworks.com. I encourage you to visit our Investor Relations site to access our earnings release, periodic SEC reports, a replay of today's call or to learn more about Freshworks. And with that, let me turn it over to Girish. Thank you, Joon, and welcome, everyone. Thank you for joining us today on Freshworks' earnings call covering our fourth quarter and full year 2022. Overall, we executed well in the quarter. We exceeded expectations across our operating results for total revenue, non-GAAP operating income and free cash flow. We capped off a strong finish to the year with $133.2 million in quarterly revenue as we surpassed $500 million in annual recurring revenue. In this environment, as companies are seeking greater value for their IT spend, we are seeing the Freshworks' value proposition resonates more than ever. In Q4, we added approximately 1,800 new customers to our growing base and ended up with more than 63,400 total customers, including the San Francisco 49ers, Finchoice, Mahindra, Supara, St. Marche, and Yulu Bikes. I'm incredibly proud of how we grew the business. We also improved our non-GAAP operating margin by 8 percentage points in Q4 on a year-over-year basis, and we generated positive free cash flow of $4 million in the quarter. Our approach during this recent period of macroeconomic uncertainty, was to focus on driving our growth through 4 key strategies. We believe these 4 business drivers will continue to move us forward in 2023. First is our continued focus on product innovation. In 2022, we expanded our unified CRM platform to include Freshchat. We launched this service for business teams to extend first service beyond IT. And we made our bots smarter across our CX, IT and broader CRM products to help businesses engage their customers faster. Second, we saw results from our focus on larger customers, which is driving most of our growth. Today, nearly 60% of our business comes from mid-market and larger companies, with many of our Q4 deals starting with Freshservice. The third business driver is expansion. Despite the challenging macro economy, customers expanded through agent additions, cross-sells and upgrades into larger deployments. In Q4, our net dollar retention was 110% on a constant currency basis. And finally, our focus on operating efficiency. We generated positive cash flow in Q4 and improved our non-GAAP operating margin. We plan to build on this momentum and improve our efficiency in the years ahead. During today's call, Dennis, Tyler and I will go deeper on these 4 business drivers and how they played a role in our Q4 results and how we see them contributing going forward. Starting with our product innovation. We continue to make improvements last year across our IT, CX and broader CRM solution. New business increased as companies chose Freshworks products as credible alternatives to expensive and bloated software. This is really important in the current environment that businesses want to control IT spend without sacrificing powerful functionality in mission-critical applications. In fact, positive reviews from our customers this quarter earned us TrustRadius Awards for Best Value for the Price and Best Feature Set. It is those two reasons why we believe Freshservice continues to grow and gain traction in the mid-market. Takes Swire Coca-Cola, for example. Swire is one of the world's largest Coca-Cola bottling partners in the U.S. and Asia, and it chose Freshworks for the breadth of our features, fast deployment and lower cost of ownership. Swire brought on Freshworks because they were looking for a platform that was comprehensive enough to support their complex needs while reducing their ITSM spend. Additionally, last quarter, we launched Freshservice for business , and in the past 3 months, we have seen strong early success. As businesses eliminate siloed support and service management platform, other departments like HR and finance are able to use Freshservice to build a more modern and consolidated employee experience. New customers like Coherent Corporation, a semiconductor company with over 23,000 employees, chose Freshservice over a large incumbent, thanks to our integration and the ability to scale across IT and . In our CX business, we continue to enhance Freshchat and Freshdesk products, with a focus on customer self-service and agent experience. In Freshdesk, we added new integrations with multiple telephony partners. Enterprises can now bring their own telephony solution into Freshdesk to create a comprehensive omnichannel customer service solution. In Freshchat, we introduced simpler ways to build bots. In Q4, we added more bot languages and industry-specific bot templates, extending the reach of our products to global markets. In Q4 alone, Freshchat powered hundreds of millions of bot conversations. With the rise of modern messaging apps, companies have rapidly shifted to engaging with customers over conversational messaging channels. We are active -- an active lifestyle brand in the U.S., Canada and Australia, started with Freshdesk and later bought Freshchat to handle repetitive support requests like returns and order status more efficiently by automating responses across e-mail, chat and calls via reduced resolution time by several levels. Turning to our broader CRM solutions in sales and marketing. We improved analytics and reporting. We launched a new revenue attribution capability to help marketers better understand the sales impact of their cross-channel marketing campaigns. We also added integration to analyze sales costs to scale the effectiveness of their customer conversation. I'm super proud of our product innovation in 2022 and our dedication to building new capabilities that can deliver value to our customers through a challenging macro environment. As we look ahead at our product priorities for this year, we will continue to differentiate Freshservice as a comprehensive IT service, IT operations and enterprise service management solutions. In CX, we will continue to deliver on the promise of an omnichannel customer support experience with self-service automation, conversational experience and ticketing. And finally, we'll continue to build a unified CRM with an out-of-the-box customer data platform and AIML insight. I'll now turn it over to Dennis to talk about what we are seeing in the market, how larger customers are driving our business growth and how customers are expanding on our products. Thank you, Girish, and hello, everyone. Thanks for joining us today. I'm 5 months in at Freshworks, and I'm excited by the progress we're making in the business. We closed the year on a high note, beating our financial estimates and improving our operating efficiency. In a tougher market environment, we improved our execution to drive the highest new business quarter ever. We saw increased competition for many of our deals, and yet we still improved our win rates for our CX and ITSM products. This was especially true for our larger deals in the field, with Freshservice leading the way as a scalable and cost-effective solution that is delivering incredible value to our customers. G talked about our first of 4 business drivers: product innovation. I'll cover the next 2, our success with mid-market and enterprise customers and our expansion motion. I'll start with our enhanced focus on mid-market and enterprise customers. Over the last 18 months, we have made substantial investments in people and tools to expand our go-to-market motions. We believe those investments, which are now reflected in our cost base, are paying off in higher win rates participation in more deals and the expansion of our mid-market and enterprise business. In 2022, our new business wins increased, with companies spending more than $50,000 in ARR. And in Q4, this customer cohort grew 35% year-over-year and now represents 44% of our business. While our business was historically more in SMB, our revenue base has shifted over the years towards more mid-market and enterprise customers. Today, nearly 60% of our business is coming from mid-market companies, those with 251 to 5,000 employees, and enterprise customers with more than 5,000 employees. That's because our cost-effective yet powerful products are delivering real value fast. They can scale to serve thousands of agents and millions of customer and employee interactions. These benefits resonate with companies of all sizes, especially in the current economy. The days of selecting a vendor only based on market share or brand name awareness are over. Customers want rapid impact and lasting value at a reasonable cost and Freshworks delivers. That's why Freshservice was chosen by Carrefour Belgium, a subsidiary of the eighth largest retailer in the world. Their team of 300 IT professionals now have a more simplified and nimble approach to IT service management to support more than 11,000 employees. While legacy incumbents are focused on the 2,000 largest companies in the world, Freshworks has the opportunity to serve hundreds of thousands of others who are dissatisfied or underserved by bloated and expensive software. We provide midsized organizations like Databricks, TaylorMade and Georgetown University with a better choice, powerful yet cost-effective solutions. Turning to expansion, I'm pleased to say that despite the macro conditions, our customers are still expanding through seat additions, cross-sells and upgrades. In Q4, net dollar retention was 110% in constant currency as the overall churn rate for our business remained in the high teens. We see better retention rates in our mid-market and enterprise customers, which helps our overall net dollar retention. While seat additions continue to drive the vast majority of our expansion today, we expect cross-sell to be a bigger contributor to our growth over time. The percent of customers using more than one product remained relatively the same as the prior quarter at 24%, with just a slight increase in Q4. We are implementing specific initiatives to create more bundling and cross-sell opportunities for our go-to-market team this year. Take Addison Lee, for example. The British private hire cab and courier company started as a Freshservice customer in 2015 and in 2022, added on Freshsales and Freshdesk. They believe their previous CRM system from a large incumbent caused low agent productivity and did not deliver sufficient value. Our Freshsales Suite was selected to replace the older CRM for our modern intuitive UI built for the end user. Looking at our customer cohort of over $50,000 in ARR, we added a net 191 customers in Q4. While this customer number benefited from FX movement and new deals in the quarter, the biggest driver continued to be expansion as customers increased their spend on our products and especially for the ITSM market. An example is iCore, a managed services provider with more than 35,000 employees in 10 countries. As part of iCore's digital transformation strategy, the company expanded the use of Freshservice and Freshdesk spots to its IT, HR and finance teams to immediately answer questions before transferring to a technology team member. The platform enables iCore team members to focus on more complex tasks and creates a better experience for both employees and customers. To me, it's customers like the ones you heard about today that validate my decision to join Freshworks. I believe we have the opportunity to build a large, impactful company that can serve hundreds of thousands of businesses over time. By focusing on the 4 business drivers of product innovation, mid-market and enterprise customers, expansion and efficiency, we believe we can grow well beyond our current levels. I'm excited about the progress we've made to better align our go-to-market teams and the many opportunities ahead of us. Thanks, Dennis. Looking back on our Q4 and full-year 2022 performance, I'm pleased with our ability to drive operational efficiencies in the business. Starting last year, we knew that 2022 would be a big investment year, building out our go-to-market teams, investing in product development and taking on a full year of G&A public company costs. What we didn't know was how the macro economy would play out and how that would impact the overall market for our products. During the year of a slowing demand environment, negative FX movements and pressure on small businesses, we still beat the high end of our 2022 estimates for revenue that we laid out one year ago by $3 million. More significantly, we effectively managed our costs throughout the year to beat the high end of our 2022 estimates for non-GAAP operating income by over $26 million. We believe we have a durable business model and we're improving our operational efficiency as we drive business growth. In Q4, we had another quarter of increased efficiency, with revenue beating expectations, non-GAAP operating loss outperformed expectations by $6.5 million in the quarter. We improved our non-GAAP operating margin year-over-year, and our business inflected to generate positive free cash flow of $4 million and non-GAAP EPS of $0.01 in the quarter. As I normally do, I'll review our Q4 financial results, provide background on key metrics and close with our expectations for the first quarter and full year 2023. I will also include constant currency comparisons to provide a better view of our business fundamentals. Most of our discussion will be focused on non-GAAP financial results, which exclude the impact of stock-based compensation expenses, payroll taxes on employee stock transactions, amortization of acquired intangibles and other adjustments. Starting with the income statement. Revenue grew 30%, adjusting for constant currency, or 26% as reported, to $133.2 million. Although the FX trend for the dollar against the euro and pound reversed in Q4, we continued to see the trailing negative impact to revenue resulting from FX movements earlier in the year. As Dennis mentioned, we had a strong quarter of new business driven by Freshservice, while expansion continued to see pressure from the effects of the broader economic slowdown. Smaller customers continue to feel the pressure as churn rates increased slightly for the SMB segment, leading to slower growth. Overall, churn for the company remained relatively stable, ticking up less than 100 basis points in the quarter. As a whole, we have made good improvements to our gross churn rates over the past several years. In Q3 and Q4, we were able to keep gross churn relatively stable, but do see potential risk of churn increasing slightly, going into 2023. Moving to margins. Our non-GAAP gross margins were roughly similar to Q3, rounding up to 83% for the quarter. We continued to achieve strong non-GAAP gross margins with over 82% for the full year as we scale the business. In Q4, non-GAAP operating margins improved 8 percentage points year-over-year to negative 2%, driven mostly by lower R&D and G&A costs as a percentage of revenue. Specifically for G&A, expenses in the prior year included nonrecurring litigation settlement costs that were not included in the most recent quarter. On a quarter-over-quarter basis, we had a very small improvement to non-GAAP operating margins as we largely maintained our run rate cost base in matching the business growth. Similar to Q3, we had a onetime type benefit of approximately $4 million related to the reversal of accrued expenses from earlier in the year. Our revenue outperformance, combined with an improving cost base, led to a non-GAAP operating loss of $2.8 million in Q4. I'm pleased with our ability to control costs in the current market environment and expect to drive more operating leverage as we go forward. Turning to our operating metrics. Net dollar retention was 110% on a constant currency basis or 108% as reported and was largely in line with our commentary from the prior quarter. As expected, we saw expansion slow down in the quarter, reflective of the overall mac economic trend. Looking ahead, as we expect the broader trend to continue, we estimate Q1 2023 constant currency net dollar retention to be 107% and holding FX rates constant, reported net dollar retention to be 105%. In terms of our customer metrics, customers contributing more than $5,000 in ARR grew 20% to 17,722 customers in the quarter and now represents 87% of our ARR. On a constant currency basis, this customer cohort grew 21% year-over-year. For larger customers contributing more than $50,000 in ARR, this customer count grew 35% to 1,908 and ticked up to represent 44% of our ARR. Adjusting for constant currency, this customer cohort grew at 38%. Lastly, we ended the quarter with a total customer count of more than 63,400, and our average revenue per account continued to increase. Moving to our billings, balance sheet and cash, in Q4, calculated billings grew 21% to $147.8 million and holding constant currency over the past year, calculated billings grew 25%. The other factor impacting the growth rate was billings duration mix of negative 4%. Adjusting for this, the normalized calculated billings growth was approximately 29% in Q4. Looking ahead to Q1 of 2023, our preliminary estimate for calculated billings growth is 20% on a constant currency basis or 17% as reported basis on current FX rates. For the full year 2023, we expect calculated billings growth to be similar to our expected revenue growth for the year, of approximately 17%. Turning to our balance sheet and cash items. We maintained a steady cash balance as we ended the quarter with cash and marketable securities of approximately $1.1 billion. In Q4, we generated $4 million of free cash flow, coming in ahead of our estimates. Looking back on the full year, we outperformed our initial free cash flow estimate of negative $25 million by more than $10 million in 2022, despite a tougher economic environment, further demonstrating our ability to drive efficiencies in the business. We continue to net settle vested equity amounts and used at nearly $16 million under financing activities for Q4. For the full year, we used approximately $167 million for the net settlement of nearly 9.8 million shares. As a reminder, this financing activity is excluded from free cash flow. We plan to continue net settle invested equity amounts, resulting in quarterly cash usage of approximately $17 million at current stock price levels. As we look forward to 2023, we expect to generate approximately $10 million of free cash flow for the year, with approximately $3 million in Q1. We have some seasonality in spend throughout the year, so we anticipate Q2 and Q3 will be near breakeven and the remainder of the free cash flow expected in Q4. With positive free cash flow now coming from the business, no debt and a strong balance sheet, we believe we are well positioned to drive sustained growth into the future. Turning to our share count for Q4. We had approximately 324 million shares outstanding on a fully diluted basis as of December 31, 2022. The fully diluted calculation consists of 289 million shares outstanding, approximately 32 million related to RSU and PRCs and 3 million shares related to outstanding options. For the first quarter of 2023, we expect revenue to be in the range of $133 million to $135 million, growing 16% to 18% year-over-year. Adjusting for constant currency, this reflects growth of 19% to 21% year-over-year. Non-GAAP loss from operations to be in the range of negative $9 million to negative $7 million, and non-GAAP net loss per share to be in the range of negative $0.03 to negative $0.01, assuming weighted average shares outstanding of approximately 290.2 million shares. For the full year 2023, we expect revenue to be in the range of $575 million to $590 million, growing 15% to 18% year-over-year. Adjusting for constant currency, this reflects growth of 16% to 19% year-over-year. Non-GAAP loss from operations to be in a range of negative $14 million to negative $6 million and non-GAAP net income or loss per share to be in the range of negative $0.01 to positive $0.03, assuming weighted average shares outstanding of approximately 293.8 million. We want to provide our best views of the business as we see it today. And in a changing market environment, it can be tough. So a couple of areas and assumptions to call out. First, on FX. The weaker dollar trend in Q4 created a slight benefit to revenue and billings metrics compared to the prior quarter. But on a year-over-year comparison, we still saw a negative impact. These estimates are based on FX rates as of February 3, 2023. So any future FX moves are not factored in. We started to hedge a small portion of our INR-based expenses in January 2023 and expect the impact of the hedging program to increase throughout the year, which will improve the predictability for operating expenses, moving forward. Second, on profitability. I'm pleased that we delivered on our commitment to reach positive free cash flow by Q4 last year. Now as we head into 2023, we're driving additional efficiencies to show quarter-over-quarter improvement throughout the year. As such, we expect non-GAAP operating loss to improve to negative $6 million in Q2, near breakeven in Q3, and then turn positive by Q4. And we plan to maintain sustained profitability in the years ahead. Let me close by saying I'm pleased with our execution in the quarter. Our ability to operate efficiently over the past year highlighted the durability and resiliency of our business. Our view is that we're well positioned to execute through a changing market environment in the near term, and we remain bullish on our long-term opportunities. And with that, let us take your questions. Operator? Great. And congratulations. I have two, if that's okay. The first one is on the macro, which is just last quarter, you guys were talking a lot about companies reducing their growth forecast and headcount need. While your tone seems so much better now, did the macro -- I mean, I hate to even say this, but did the selling environment for you guys improve in some way in Q4? . Pat, this is Tyler. I'll start the answer because -- is this the first part? Or do you want to ask the second question as well? Yes. And the second part is just -- I think it would be great to have Dennis. I mean, obviously, he's on the Board to ServiceNow and he's in the Dropbox in Google, why you take this job? Let's throw that out there. Well, let me start on the macro. Look, we had a really good quarter, especially on new business, right? And we called that out and that felt strong, which I just think is a testament to our products and the value that they can bring to customers, even in tough markets. The place that we continue to see pressure was on expansion. And that macro is still playing there, right? And that the expansion motion did slow down throughout the year, but we talked about that throughout the year. We expect to continue to see that for a while. But on the new business side, yes, we are upbeat because we're optimistic because we had a good quarter on the business. But I'll hand it over to Dennis. Yes, just some commentary on the new business front. So I think over the last 18 months, we've made substantial investment in the products themselves. So if you think about our ITSM product, we announced enhancements that allow us to fulfill ITOM requirements in the second half of last year. We rolled out an ESM product. So we're able to address broader and broader needs of larger customers. And really, this is just a continuation of a trend and a set of investments that have taken place over the last 12 months or so that really are starting to pay off in terms of those new business wins. We are seeing better win rates, competitive win rates in Q4 than we did in Q3, both for Freshdesk and for Freshservice. And we're getting involved in more deals. So we're -- companies are looking to us when they're evaluating better solutions, solutions with lower total cost of ownership, everybody is looking for value. So we're getting more swings and we're hitting the ball more often. And I think that really started to show in Q4. In terms of why I joined, I see an opportunity to build a company that does serve every business in the world. Every business in the world has a need for the products that we currently build, we can serve companies, employees and customers equally well. And I think the vision that G has laid out and the products that he's built around creating a seemless, easy-to-use, easy-to-implement set of business software is super compelling. So that's why I joined. Tyler, I would love to hear about maybe how we should think about net retention as we move through this year. And just on your full-year guide, how does this contemplate the macro? And have you guys thought of a scenario where should things get worse from the economic perspective, plans to get to breakeven faster from here? Yes. You bet, Ryan. So net dollar retention, to start off with, we did say something on the call there that we do expect that to decrease a little bit. The net dollar retention churn, there's two sides of that coin. We've been pretty open that we have made really good progress on gross churn over the last couple of years in Q3 and Q4 of this past year. The churn kind of remains stable and just essentially stayed flat, which -- churn includes downsell for us. So that was a good thing. Our goal right now is to try to keep it there because I do think that's going to see some additional pressure. The expansion motion, you guys know, our biggest form of upsell is agent addition. And we started to see that kind of after Q1, we talked about it last year, and we saw it throughout the year. And we expect to continue to see pressure on that, and that is what's driving the net dollar retention down. And we said it could come down in Q2 -- in Q1. It could come down a little bit after that in Q2, but obviously, we're going to work as hard as we can to normalize that. In terms of our guidance, we've built in everything that we see. And we're trying to call it as we see it. And we have -- we do expect that expansion motion to see some pressure. We are looking at other ways that we can expand with our customers, specifically like a Freshservice for teams, our new ESM application, we're really excited about that. And obviously, we're going to continue to lean in on new business, which was really good in Q4. Great. And just a follow-up on Patrick's question. The customer adds above 5000 ARR appeared strong in the quarter. Just given what you mentioned on headwinds, the seat expansion, was the strength in these adds was probably from net new customers or perhaps maybe customers renewing larger with upsells or upgrading the plans just like the piece of part, the there? Yes. We talked about the 50,000 that, that actually the biggest adds to the 50,000 were in expansion -- and that actually helps the 5000 as well, but the 50,000 I think was helped a little bit more. . We also -- there's a little bit of FX on both sides, but yes, also driven by new customer lands, which we had -- we really had a really strong new business quarter in Q4. And obviously, we're going to continue to lean in on that. But customers are still expanding. Net dollar retention was still -- it came down slightly, but it was still good. And even though there's pressure there, we do have customers who are growing on us. And that was the #1 reason for the greater than 50 and also helped the greater than 5. I wanted to take it on the guidance a bit. Basically trying to understand if you added billings growth of about 29%, if I heard that correctly, adjusted. And the guidance is, I think, about 17.5% revenue growth next year. I'm trying to think, would you go -- are you expecting kind of a step down in macro from here? When I look at the additions to revenue, I think, in 2023 versus what you had in 2022 with something like a 33% decline, it seems pretty conservative. I mean, would you go as far to say, it is derisked at this point? Like how should we think about the guidance? Yes. Again -- Pinjalim, this is Tyler. Again, on guidance in general, we are trying to call it as we see it. And that -- what we've done is we've taken into account that we expect to see continued pressure on the expansion motion and as our biggest form of upsell is agent addition. And when we look at that, the Q1 calculated billings, just said, 17% and 20% on a constant currency. And then obviously, if we see any adjustments like the 4% you mentioned that we talked about in Q4, I will add that at the end of the quarter to provide more color. But in general, we're calling as we see it. I can't say it's completely derisked because I don't know how long the macro conditions are going to hold. I think there's upside. If companies go back to growing, we would clearly expect to take advantage of that growth with them. But if things get worse, we could actually see pressure there as well. Understood. And one for Girish, we recently hosted one of your partners, and he seemed pretty bold up on ITSM, and you're seeing good traction on the ITSM side. It seems like you're taking share. How do you see that the position of Freshservice at this point in the market? Maybe talk about it with respect to Atlassian seems like entering the market as well. And how should kind of investors think of that business -- sustainable growth of that business minus any macro? So Pinjalim, from a Freshservice business standpoint, let me talk to you about the competitive landscape and our positioning and strength. So clearly, we know that ITSM is a huge market. And from a TAM standpoint, now we expanded into ITSM, ITOM as well as enterprise service management, so there's no doubt on how big the market is. . Now Freshservice is today the most credible alternative to ServiceNow in the industry. And we are seeing that come into play, especially in mid-market and enterprise companies, specifically in this environment where businesses are scrutinizing their spend very clearly, like every dollar of IT spend. So we are actually competing against and winning against ServiceNow, and we have also replaced ServiceNow anecdotally, even in the last quarter, multiple times. So that is on the enterprise side, where there is ServiceNow. Now before I comment on Atlassian, you should also understand that there is a ton of legacy out there like BMC Remedy and [indiscernible]. So we actually -- Mahindra, one of the largest conglomerates in India, moved off of a large legacy incumbent in 2022. So specifically with Atlassian, we are seeing them in some of the lower end of the mid-market deals. But we win -- Freshservice wins purely based on the fact that we are built from the ground up as a full-blown ITSM and ITOM solution, whereas Atlassian, I think, has made around 4 acquisitions, and they're trying to stitch together a unified product experience. I think our customers choose us because of the unified product experience. So you mentioned it was the highest new business ever in this quarter. I think you talked about for some customers, they were expanding. I think you called out the ITSM side. Tyler, I think you mentioned some stable retention. The question is, I'm wondering, what portion of overall bookings would you say came from newer expansion versus renewal in this quarter? And maybe for the new business, can you give us a sense of the duration of those deals? Yes. Rich, I'll take that. We don't break out the new versus expansion in terms of core, but we did have one of our best new business quarters ever. And we did say that where it's coming from Freshservice, it's still smaller than Freshdesk from an ARR perspective, but it continued its trend to be the biggest ARR contributor in the quarter, which it has been for the last couple of quarters, and is growing faster than Freshdesk. . On a duration perspective, we've got about, let's call it, 60% of our business roughly, those aren't exact, that are on annual contracts. And that there was no big change on that. Now what does happen is that the bookings mix can change, based on the expansion motion, right, because it depends on where you are within the contract on expansion and how much that billings would look like. But in terms of the new business, there wasn't any significant change. There has been this steady change of moving more to annual over the last couple of years. Okay. Great. Yes, that makes sense. And then maybe one last one here for you, Dennis. I was wondering if you can talk a little bit about your vision for unlocking multiline of business selling. I know you guys disclosed multiproduct, but multiline of business is kind of where I'm kind of zeroing in here. Maybe what do you still need to stand up or mobilize to ignite this even further? Yes, thanks for the question. Well, first of all, I would just say that it's happening, right? One of the examples that we talked about was Addison Lee. Addison Lee distantly originally was a Freshservice customer for a couple of years, satisfied with the product. We were serving their IT department, and they decided they're not satisfied with their existing CRM, large incumbents, they're not getting value out of it, very expensive to continue to maintain. And so they look to us. And so that kind of situation we're seeing across the pitch. iCore, it was another account that was an expansion from Freshservice into Freshdesk. So it's happening right now. I think the focus has been very much on new business. But as we kind of continue to scale up and we continue to have success with these larger accounts, iCore is a company with 35,000 employees. There's lots of opportunities for ESM and for other product expansion there, we're going to be leaning into that motion much more. But like I said, so far, a lot of the emphasis has been on new business, and we're getting natural kind of product cross-sell, we call it persona cross-sell. That's going to become an increasingly important part of our business, going forward, and a big opportunity for us.. Congrats strong quarter. So I just wanted to hit on the net adds. Obviously, I think it was better than what we were expecting. Is there any commonality in terms of the geo, where you guys are having more success or -- I actually love to understand to maybe what you guys are displacing in terms of what you're picking up from net new? I know it's different by product segment, but any color there would be helpful. This is Dennis. So on net adds overall by geo, for Q4, we saw a pretty good performance across the board. Our North America business was actually a little bit stronger than the rest of the world than Europe and Asia PAC. But our European business performed well. We were pretty satisfied with kind of each of the geographic units. So I wouldn't say there's any specific trends geographically that is driving the business. In terms of who we're displacing, customers come to us with a wide variety of current IT footprints and situations. In some cases, we're displacing very much kind of old on-prem systems, think of BMC, that where the product, this is not scaling to what the customer needs, and they are looking to make a change. In other cases, we are displacing the likes of Zendesk or ServiceNow or Service Cloud, where the customer is no longer satisfied with the overall value proposition, especially in the current economy. And they're looking for much better value. They're looking for a simpler product that they can deploy quickly and get fast time to value, and they're looking for a product that doesn't require them to have a number of consultants or specialists on staff just to maintain the product and make sure it does what it's supposed to be doing. So it's -- there's not -- I wouldn't say there's one competitor. I wouldn't say there's one situation. It's really a fairly wide range of situations that's driving our growth. And maybe a follow-up. I'm curious if you've seen any changes in the pricing environment over the last 90 days and maybe anything that you guys have seen so far in 2023? Yes. So this is Dennis. We haven't seen any major change in pricing. I would say, the second half of last year on the Freshdesk side, the service clouds of the world and Zendesk have been very aggressive on pricing. But that was true in Q3 and really continued into Q4. I wouldn't say there's any discernible trends on the ITSM side to note. You mentioned earlier just the better win rates. So I wanted to get a little bit more color if you're seeing any particular improvement at the low end versus the high end or if it's broad-based. I know you guys have been doubling down on functionality. And then second, just kind of within those competitive conversations. In your conversations, is there any bit more of a lean towards just the product functionality versus price being the incremental driver that tilts the deals you win? Great. Dennis, I'll take that one. The trends that we're seeing on win rates are broad-based. So it's not confined to any one segment or any one product, both our Freshdesk and Freshservice products. And Q4 saw higher win rates than Q3. That said, for mid-market and enterprise -- the mid-market and enterprise segment, our win rates improved at a higher rate. So we saw meaningful improvement there. Now in terms of why are -- why is that happening? Well, most of the customers that we're talking to now, one of the number one things on their mind is value, either total cost of ownership. They're looking at -- they need a business case. And part of that equation is what is the cost to implement the products, what is the timeline for implementation? How fast can we get the value? And what's the ongoing maintenance cost to get the functionality out of the products that they need? And in many cases, we are superior on all 3 dimensions. Now from a product functionality standpoint, if you were to wind back the clock 12 or 18 months, we've done a lot in the last 12 months, 18 months to be able to compete on a feature-by-feature basis with the likes of a Zendesk or Service Cloud or ServiceNow. And the product functionality has gotten better. The robustness has gotten better. Product is scaling incredibly well. We support thousands of agents, millions of customer interactions across our customer base. All of those investments that we've made over the last 12 or 18 months are paying off, and that really is helping drive those win rates up. So we think it's quite promising for the future and for where our buyers are going. We think the product we have is the right product, the right strategy for where the market is today, and that's a big opportunity for us. Sorry. Elizabeth, I just wanted to add on just -- this is Girish. So on the product functional basis, so it's important to note that if you take CX, for example, Freshdesk and Freshchat together offers the most comprehensive omnichannel customer service solution today, covering the whole spectrum of automational service, automational bot as well as conversational agent experience on modern messaging channels, combined with ticketing, right? If you take a Freshservice, like we have a unified single product across ITSM and ITOM and ESM, which is Freshservice for Business team. So I think that is the value that we're talking about, really, customers not having to buy 4 or 5 different tools and struggle with integrating all of that. So that is the superior product value, where everything is built organically in one platform. Great. And then just following up, you mentioned just now the conversational kind of bots and the seamless kind of one platform. Earlier this week, there was the announcement just around the Meta kind of Messenger integration and bots. And there was a good amount of buzz in that in the market post that announcement. So just wanted to get a little bit more color from you on the opportunity around that function and feature set, do you see that add new customers or accelerate revenue per customer? Kind of how are we thinking about those capabilities, more specifically, that what recently announced? Sure. I'll take that. So first of all, let me clarify by saying that our partnership with Facebook and Meta goes a long way since 2011, where we were the first -- Freshdesk was the first help desk to integrate Facebook Messenger when they introduced that. So the recent announcement that we did was more calling out some of the customers' usage of this. And we know that conversational has really been picking up in the last few years. And like the messenger apps under the Meta portfolio, like which is Whatsapp or Instagram or Facebook Messenger, so there are more than 1 billion messages every month that businesses are sending over these channels. And so this announcement was specifically to call out some of the customer wins that we have with our conversational product and -- showcasing how we are powering those conversational customer support experiences, specifically for B2C companies. So I just wanted to call out that it is -- our partnership with Meta, like it's not a new one, and it's been ongoing. And so this is more to showcase some of our customer work. I have a couple. First is on kind of sales process as you look at calendar '23 here. We all know what's happening with the macro last year and into this year. But as you look at your sales processes and overall go-to-market strategies, outside of maybe just leaning into something like ITSM that's selling a little bit better, is there anything that you're changing in those processes that would be noteworthy to try to effectively maybe get some of these new customers over the line faster? Scott, it's Dennis here. So yes, there are a number of things that we're doing. I think, before I get to the sales specific ones, I would just go back to the product side. A number of the features that and big enhancements that we launched in the second half of last year, we're really getting traction with now and into Q4, things like ITOM, things like ESM and the enhancements on the conversational side to Freshdesk that G referred to. So a lot of it is, "Hey, we've got products that really are well suited to the market." In terms of the field side, one of the -- a couple of the adjustments that we've made has been -- have been to focus on bigger deals and focus more squarely in the mid-market. So I would say, this is just an enhancement to the strategy that we've been pursuing for the last year or so. One of the things we did was we shifted our field team to focus on accounts with employees from 500 to 5,000 employees as the ideal customer profile. And in the past, the field team would focus from 250 to 500. We can serve those 250 to 500 employee companies very well and more efficiently through our operations through inbound. Many of them -- most of them are coming to us anyway through a response to a marketing message or coming to our website and signing up for a trial. So that was one pretty meaningful change. Another change, we've created a set of product specialists to focus on Freshchat and Freshsales in particular. Both of those products are fairly complex. The competitive set is complex. So we feel the specialization on the sales side is really important. And we think that, that will result in continued improvement in win rate for those products. And in general, the field team is pretty jazzed up about kind of what the product set looks like, the competitive positioning and kind of where we are in the market. So we're excited about this year, and I think we're going to see quite a few opportunities. Got it. Very helpful there. And then from a follow-up perspective, Tyler, as you look at your guidance to start fiscal '23 here, have you changed it at all with regards to what you're seeing in the macro compared to maybe a year ago? I know you talked about you're trying to call it as you see it right now. But as you think about that general philosophy, just curious to know if there's anything different about it? There's no change in philosophy, Scott, I mean like trying to take everything into account that we know. A year ago, we did not know the impact of kind of macro, right? We did not expect the expansion motion to slow down the way it did throughout the year. And so now, it's kind of the opposite. We actually expect it to continue to be tough for a while, and we've built that in. And we'll see how it goes throughout the year. And obviously, we're going to do our best to find other ways to grow with customers. But in terms of the philosophy itself, there is no big change. This is Luv Sodha on for Brent Thill. Just wanted to ask one for Girish. On ESM, could you maybe -- to categorize that opportunity, could you maybe give us an attach rate to core Freshservice? How should we think about the opportunity within the installed base that you already have? So if you really think about Freshservice for Business Teams, one of the things I would like to tell you is even before the launch, we knew that almost 4,000-plus customers of Freshservice were actually using it outside of IT, like in departments like HR facilities, legal and finance. So I think that gave us the real product validation that we needed to create the new module to kind of price it separately, give the workspaces that are required. So we actually think there is tremendous opportunity to go into all of the existing customer base and actually encourage them to use Freshservice inside those other themes. And also, the Freshservice for Business Teams is actually priced lower than an IT agent, so we think it will be attractive for that. So that is an expansion motion play, which we will be taking on to take this to existing customers. Having said that, we also have multiple new lands where we are landing in multiple departments, not just IT. So I think both of this will allow us to extend Freshservice for Business Teams into multiple departments within the company. Got it. And then one quick follow-up for Dennis. In terms of the go-to-market organization is, I know last quarter, obviously, Patty was appointed as the interim CRO. Any other changes, I guess, in terms of the organization itself? And do you feel like you have all the resources you need to execute this year? Yes. So first of all, Patty has done an amazing job taking on the CRO role. And a number of the changes that I described earlier around, the focus on 500 to 5,000 employee companies, crisping the team's focus on larger deals, winning larger deals, some upskilling that's going on across the organization, that all is being driven by Patty and all very positive. And I think it's incremental changes from where we were, but it's really meeting the customers where they are coming to us. And as I've said earlier, as our product market fit is becoming much more apparent to the market, that's creating a lot of opportunity for us to move up. So we're very pleased with where things are in the go-to-market side right now. Maybe I could just follow up on Luv's question there around the broader ESM strategy. I mean, how much attention do you think investors should be putting on that today? Like if we fast-forward, could ESM be ultimately a bigger opportunity than core IT? Like how are you thinking about sizing the two relative opportunities within the Freshservice portfolio? So I think right now, it is still early days for us. So -- and also we are landing ESM through IT departments, side. We are not actually starting a go-to-market motion where we're trying to sell this to HR teams or finance teams. So I think in that sense, we are -- our go-to-market is go to IT and then focus on organizations where IT is helping HR, legal and finance teams to do that. So I don't expect ESM to be much bigger than IT in the short or in the coming, say, short term. So I would still say that we will land with IT and then expand into other or maybe and into multiple departments. Yes. Yes. Okay. Okay. That makes sense. And then, Tyler, on the sales and marketing side, how much of your spend is variable versus fixed? And I'm really getting at kind of that inbound side, which I think is largely driven by digital marketing spend. Like how much flexing up and down can you do there to control margins? And where are you on that spectrum today? Yes. We don't think of it as flexing up and down. We do look at the digital marketing spend, we plan it out, and then we do we do kind of change it if we're seeing big changes in auction rates or conversions. And -- but it's not one that we're using as a margin lever necessarily because it does feed one whole side of the business, right, which is that kind of that SMB that lower than 250, a lot of that is fed by digital marketing spend. And outside of that, that's a variable component. And for the SMB, it's the biggest kind of cost on the flip side for the field and where most of our business is coming from now, which is that field business, which is kind of the greater than 500, the variable component there is commissions, but it's all headcount, right? And that's mainly headcount driven. It is important to note that we spent a lot of kind of end of '21 and a lot of last year building out that field presence. And we have -- we think we have a lot of those piece parts in place right now. We still are hiring quota-bearing reps, where we think we need them. But we have built out a lot of that already. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Joon Huh for any further remarks. Great. Thanks, everybody, for joining us today. If you have any other questions, please feel free to call or e-mail. We look forward to catching up with you throughout the quarter. Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

EarningCall_411

Good morning, ladies and gentlemen. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals' Fiscal First Quarter 2023 Earnings Call. Today's call is being recorded and 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]. And I will now turn the call over to Brent Collins, Vice President of Investor Relations. You may begin. Thank you, operator. Good morning. And welcome to the Compass Minerals’ fiscal 2023 first quarter earnings conference call. Today, we will discuss our recent results and update our outlook for fiscal 2023. We will begin with prepared remarks from our President and CEO, Kevin Crutchfield; and our CFO, Lorin Crenshaw. Joining in for the question-and-answer portion of the call will be George Schuller, our Chief Operations Officer; Jamie Standen, our Chief Commercial Officer; Chris Yandell, our Head of Lithium; and Ryan Bartlett, Senior Vice President, Lithium Commercial & Technology. Before we get started, I will remind everyone that our remarks we make today reflect financial and operational outlook as of today's date, February 08, 2023. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company's actual results to differ materially. A discussion of these risks can be found in our SEC filings, located online at investors.compassminerals.com. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these items in our earnings release or in our presentation, both of which are also available online. The results in our earnings release issued yesterday and presented during this call reflect only the continuing operations of the business other than amounts pertaining to the condensed consolidated statements of cash flows or unless noted otherwise. Thank you, Brent. Good morning, everyone. And thank you for joining us today on our call. We continue to make strides in our efforts to reposition Compass Minerals for accelerated growth, reduce winter weather dependency and create sustainable value for our shareholders by expanding our essental minerals portfolio into the adjacent markets of battery grade lithium and next generation fire retardants. As communicated on our last quarterly call, we entered 2023 focused on achieving six strategic goals. I'll take just a few minutes to provide a status update on each of those areas, and I'll comment in on the quarter before turning the call over to Lauren to discuss our financial performance in more detail. Our first area of focus continues to be the safety and wellbeing of our employees. Last year was an outstanding year for safety performance across our operations. In fiscal ‘23, we intend to build on that strong performance and our continued drive towards zero harm across each of our facilities. We acknowledge that achieving zero harm or no reportable injuries across our entire platform will be a challenge in the complex operating environments that we operate in. However, in several of our sites, we've already proven it's possible and we owe it to our employees and their families to strive for that goal every day so the employees go home to their families in the same condition as they left. The next goal we outlined in some detail on our last call is our aim to restore the profitability of our salt business to levels we have demonstrated in the past. As many of you know, inflationary pressures created a significant headwind in 2022 that had a direct impact on our salt segment EBITDA per ton. In an effort to mitigate those challenges and more effectively leverage our expansive salt depot logistics network, we approach the 2023 winter bidding season with a disciplined pricing strategy and a focus on winning sales commitments in markets that are geographically advantageous for us and relatively efficient to serve. The results of this strategy were evident in our financial performance this quarter with salt segment EBITDA up 7% year over year to just over $17. Our goal is to continue to make progress on EBITDA per ton and get back to the levels that we've enjoyed historically. We've made strides in that direction during the quarter and expect to make continued progress toward that goal through the balance of the year despite facing some headwinds on the cost front that we'll discuss more in a moment. With our plant nutrition segment, we're deep in the process of honing and executing strategies to improve the reliability and sustainability of our SOP production. As indicated on our last earnings call, SOP production volumes are expected to be flat in fiscal ‘23 as the 2022 evaporation season was impacted by less than favorable weather conditions, in turn, reducing the potassium levels deposited in our solar evaporation ponds. We continue to believe, however, that the steps we're taking now should enable improved production levels at our Ogden site over time. We'll provide relevant updates on our progress towards this objective throughout the year. I'll touch on our outlook for the plant nutrition segment in a moment. But I think it's important to note that the decline in the first quarter sales volumes was driven by lower demand, not production challenges. In fact, we were and continue to be prepared to service average customer demand if and when it improves. On the lithium front, our goal this year is to achieve several commercial and project related milestones on our roadmap to advance Phase 1 of our lithium development in Ogden. A key milestone we expect to reach by mid-year is to have a more robust capital cost estimate for Phase 1. In September, we shared an FEL-1 level engineering estimate. The next major milestone for this project is to complete an FEL-2 level estimate by the end of March, also known as a prefeasibility study or PFS. Later this calendar year, we expect to have completed an FEL-3 engineering estimate, also known as definitive feasibility study or DFS. Each of the progressions along the FEL stage gate are expected to increase the level of engineering, tighten the accuracy of the capital spin and mitigate operational risks. Finally, we continue to make progress on our commercial scale DLE unit. Consistent with our prior plans, we expect commissioning and operations to begin in early calendar 2024. With respect to our other growth initiative, namely our minority ownership interest in Fortress, North America, we were very pleased by the December announcement of a major milestone when the Fortress team received notice that their two primary aerial fire retardants, liquid concentrate and dry powder had officially been added to the US Forest Service qualified product list or QPL. This is an extraordinary achievement as Fortress is the first new fire retardant company in over 20 years to accomplish such a listing, and it comes as a result of a six year development effort in order to meet and exceed the US Forest Service rigorous testing criteria within such categories as environmental effects and toxicity to aquatic and mammalian species, corrosion on a variety of aircraft metals, burn retardation efficacy and other qualifiers in the form of long term storability, acceptable viscosity, pumpability and finally, the completion of a live wildfire operation field evaluation. Building upon this positive momentum heading into the 2023 wildfire season, the next step is for Fortress to be awarded an initial tranche of air tanker bases by the US Forest Service. We're optimistic that such awards will occur ahead of the fire season this year. But in order to be conservative, we've not factored in the associated financial results of such an award into our outlook. We stand ready to continue supporting Fortress in their efforts to ramp up the full commercialization of their products with a focus on gaining measurable market share within this approximately $300 million revenue addressable market, not to mention a profit pool in excess of $90 million currently served by a single market participant. The recent QPL listing was a major hurdle to clear on our path to providing a magnesium chloride-based product that is more environmentally friendly and has a greater efficacy than the existing diammonium phosphate-based product that is dominated the market for decades. You'll recall that we increased our strategic investment in Fortress last year and currently own approximately 45% of the company. We believe Fortress has a bright future and we look forward to the business gaining market traction in the coming months. Lastly, our final strategic objective hitting into fiscal ‘23 was to enhance our financial standing and overall credit profile. We took a meaningful step in that direction this past October when we closed on a gross $252 million strategic equity investment by Koch Minerals & Trading, LLC. In addition to funding the first two years of our Phase 1 lithium development that investment by Koch also allowed us to strengthen our balance sheet by paying down some debt during the quarter. We expect to build on this momentum through the restoration of the salt segment's profitability, which should result in additional deleveraging as our EBITDA rises. So for long term, we continue executing on our plan and are pleased with the progress being made. Unfortunately, in the shorter term, we continue to experience challenges placing negative pressure on our quarterly profitability. As a casing point, our first quarter results reflected a mixed bag in terms of business trends. Year-over-year, we saw an improvement in select financial measures with consolidated revenue increasing 6% to $352 million, consolidated operating earnings up 37% and consolidated adjusted EBITDA around $62 million, up 6%. We had a decent start to the winter deicing season with snow events in the first quarter in line with historical averages and significantly above last year's historically weak number of snow events. This supported higher salt sales volumes, which combined with a 12% year-over-year price increase in highway deicing that we realized resulted in stronger salt performance. Within the plant nutrition segment, although pricing during the period held relatively firm at historically high levels, demand was deeply disappointing and well below our expectations, driven by exceptionally dry weather conditions that discouraged fertilizer application in our largest markets in the Western US and customers deferring purchases in anticipation of the market softening. Ironically, weather conditions in California abruptly shifted from drought conditions during the first fiscal quarter ending in December to epic flooding in January, the beginning of our second fiscal quarter seemingly overnight. As a result, our visibility related to near term SOP demand is currently speculative at best, as it's not clear if growers will apply at historical levels. Aside from the demand variability I just described, there is also elevated uncertainty from a global perspective to what degree both MOP and macro fertilizer pricing dynamics may amplify this pressure, resulting in the need to recalibrate our plant nutrition segment profitability outlook for the year. Despite the challenges we are encountering as the fertilizer market enters a new phase of its cycle, at a higher level, nothing we see suggest a change in the long run through the cycle earnings power of our plant nutrition business. Our salt business is delivering year over year improvement and our growth initiatives are advancing positively as we work to unlock the embedded value within our company. As I consider this start to our fiscal year, it's clear we’ve got a lot of work to do, both strategically and operationally to navigate these near term challenges. As we do so, our focus remains on delivering on our 2023 strategic goals, controlling what we can control and continuing to take steps toward creating value for our stakeholders over the long term. We will also address the challenges being caused by cost pressures across the business by executing on opportunities to reduce our cost structure where appropriate. Size of the price is large as measured by the combined intrinsic value of our salt, plant nutrition, lithium and next generation fire retardant businesses and we remain confident in our plan and our ability to realize that value overtime. Thank you, Kevin. On a consolidated basis, revenue was $352 million for the first quarter up 6% year-over-year. Consolidated operating earnings rose to $27.9 million, up 37% while adjusted EBITDA from continuing operations was $61.8 million, up 6% year-over-year. Beginning with our salt segment, salt revenue totaled $308 million for the quarter, up 12% year-over-year, driven by 10% higher price and 2% growth in sales volumes. The highway deicing business experienced 12 % higher pricing year over year to just shy of $66 per ton and sales volume growth of 3% year over year. Delivering growth in sales volumes reflects a relatively strong result when you consider that our team deliberately took 9% fewer sales commitments as part of our value over volume commercial bidding strategies last year. A key driver of the positive volume development was weather, which improved year over year. We experienced solid winter activity on average across our markets but lower than projected sales to commitment ratios in certain key areas such as Detroit, Milwaukee and Chicago, where we have relatively heavy commitment levels. These areas experience somewhat mild weather and relatively low quality events during the quarter. Across the 11 representative cities we've discussed in the past, 43 snow events were reported during the quarter, up 48% year over year and in line with the 10 year average. Within our C&I business, volumes declined 2% year over year, driven primarily by the timing of water care sales and slightly weaker consumer deicing demand, while price rose 9% to approximately $190 per ton. Higher fuel and logistics expenses drove per unit distribution costs 14% higher compared to last year. Operating costs were higher by 6% year over year to approximately $45 per ton reflecting the 2022 inflationary environment embedded in the cost of goods sold of our highway deicing salt now being sold out of inventory. Overall, this translated into higher operating earnings and EBITDA for the salt segment with operating earnings rising 20% year over year to $47.1 million and EBITDA rising 10% to $61 million. As Kevin discussed earlier, a strategic objective of ours this year is to restore the profitability of the salt segment back to levels that we've historically realized. We made progress on that goal this quarter and continue to see a path towards achieving profitability in the range of $19 to $20 of EBITDA per ton, assuming normalized winter occurs the rest of the second quarter with the second half higher than the first, reflecting the fact that our higher margin per ton C&I business makes up a greater percentage of our revenue in the second half than it does in the first. Turning to our plant nutrition segment. Grower purchasing behavior had an adverse impact on sales volumes resulting in weak revenue for the quarter, more than offsetting higher sales price. Specifically, revenue declined 24% to $41.6 million, driven by 46% decline in sales volumes. We believe there were two significant dynamics in play here, deflation and drought conditions across our primary served markets. Regarding deflation, during the quarter, buyers appear to defer purchases on the expectation that fertilizer prices would continue to come down from the recent highs we have seen over the past year. In our experience, during deflationary environments, especially early in the application season, it's not uncommon for customers to wait as long as possible to buy, displaying real time purchasing characteristics, more or less, and we believe this dynamic was in play during the quarter. Regarding the second driver of lower volume, drought conditions, our major markets for our premium SOP product are on the west coast, which broadly speaking, experienced exceptionally dry weather during the quarter. We believe this caused farmers to defer purchases as they typically want to apply fertilizer when there is sufficient moisture available to efficiently deliver SOP into the soil. Distribution costs increased 19% year-over-year on a per ton basis due to higher fuel rates and fewer sales volumes to absorb fixed rail fleet costs. Similarly, operating costs were up 26% year-over-year due primarily to the inflationary environment over the last year. From a profitability perspective, plant nutrition EBITDA came in at $19.3 million, up 5% year-over-year, despite lower sales volumes and higher product costs on strong pricing, which rose 40% to roughly $924 per ton. In terms of cash flow, the most notable event during the quarter was closing the previously announced investment by Koch Minerals & Trading of $241 million net of fees. We’ve earmarked approximately $200 million of the net proceeds towards funding the first two years of spending related to Phase 1 of our lithium development. Additionally, this transaction allowed us to reduce debt and puts a meaningful amount of cash on the balance sheet, both of which improve our leverage profile as reflected by net debt declining by approximately 24% to $686 million. Turning to our outlook for the rest of the year, beginning with salt. On our last earnings call, we shared a modified approach to providing EBITDA guidance for salt, shifting away from assuming normal winter weather at the beginning of each year. Instead, we're now providing a range of potential earnings outcomes that consider various winter weather scenarios with EBITDA projected to range from a low of $175 million in the event of a mild winter to a high of $275 million in the event of a strong winter, and between $215 million and $255 million in between. With that middle range reflected profitability levels in the event we experience snow events and sales to commitment ratios in our core markets in line with long range historical trends. The range shown for the salt segment remains unchanged. However, four months into the year, we now believe results are more likely to come in below the midpoint of the 2023 range for sales volume, revenue and EBITDA. The factors shifting profitability below the midpoint relate to volume and costs. From a volume perspective, in aggregate, across our core markets, the first quarter was decent weather wise, as I indicated earlier. But sales to commitment ratios in certain of our core US north markets, Milwaukee, Chicago and Detroit, where we have a disproportionate book of commitments, were below trend, translating into an EBITDA drag versus normalized levels. We had 42 snow events in our core markets in January, which is in line with the 10 year average. It's worth pointing out, however, that while this deicing season has tracked with the 10 year average for snow events, those have generally been what we would describe internally as lower quality snow events. Snow events that are clustered into a short time period are not as impactful as the same number of events spaced out over a longer period. Furthermore, high accumulations can actually discourage salt application. An example of this was the series of winter storms that hit the Buffalo area earlier in the season. Furthermore, snow events surrounded by periods of warm weather are considered lower quality when compared to events surrounded by cold weather. So far this season, the snow events that we've experienced have been followed by relatively warmer weather. As we look at the deicing season to-date, snow events in aggregate have been normal. But we would characterize this year's snow events, particularly within the US markets where we have somewhat outsized commitments, as relatively lower quality overall. These year-to-date trends, weather wise, are contributing to earnings power for salt trending below the midpoint of the 2023 range. We also see salt trending below the midpoint of the 2023 range due to slightly higher cost trends year-to-date. We’ve experienced higher natural gas costs in 2023 related to the supply and demand dynamics impacting the regional gas pipeline serving our Ogden facility. Extremely cold weather drove a surge in demand from energy producers, draining already low regional inventory levels. Prices have now stabilized in the region. While our hedging program for Ogden has historically been highly effective in reducing the volatility of natural gas costs, the dynamic in play temporarily rendered our hedges ineffective. We have since recalibrated our hedges to protect us in the event a similar episode presents itself in the future. Our full year outlook for Plant Nutrition from an EBITDA perspective is lower and wider versus our prior guidance. Our current view of profitability outcomes ranges from $30 million to $60 million of EBITDA compared to our prior range of $55 million to $70 million. Investors should interpret this widening as reflecting higher uncertainty and lower visibility than we had heading into the year. Given this reality, we developed several scenarios to inform our range. The lower end of the range reflects the prospect of volumes tracking well below the five year average for this segment, while simultaneously pricing declines in the second half to levels approaching the 10 year average for this business. The midpoint of the range reflects a scenario where volumes are roughly three quarters of the five year average for this business, while second half SOP pricing tracks near the average price we experienced in fiscal 2022. The higher end of the range reflects a scenario where our western markets bounce back quickly, volume lines, and global MOP and SOP pricing trends reverse themselves due to supply demand dynamics, resulting in MOP pricing bottoming near current levels, then rising the second half of the year. Against this fluid and uncertain backdrop, we are preparing for each of these scenarios while maintaining a focus on agility and controlling what we can control. Cost wise, per unit production cost for the balance of the year in plant nutrition will be higher than expected due in part to the same increase in natural gas cost at Ogden I described earlier. Our solar evaporation pond complex in Utah produces salt, SOP and mag chloride. Therefore, higher production costs there impact the profitability of both the salt and plant nutrition businesses. Turning to our CapEx guidance. In line with our lowered overall profitability outlook, we have lowered our spending plans by $10 million at the midpoint to the $165 million to $220 million range. Notably, our expected spending on Lithium is unchanged from our prior estimate of $75 million to $120 million to be funded by proceeds from the recent Koch transaction. However, sustaining CapEx has been lowered by $10 million at the midpoint to a new range of between $90 million and $100 million. As far as the mix of CapEx spending by quarter, we expect the cadence of lithium spending to be very second half weighted with approximately 80% occurring in the second half, while sustaining CapEx is expected to show a pattern split roughly one third first half and two thirds second half. Kevin already outlined the positive news regarding two of Fortress' products achieving QPL status. However, I want to reiterate that we have no positive EBITDA contribution from Fortress baked into our outlook. We assume Fortress is a drag on our result this year profit wise, but are working closely with Fortress to assist them in their efforts to be prepared to fully capitalize on their recent success upon receiving their first base allocation, which could occur this wildfire season. Finally, as a reminder, whereas in the past we issued two snow reports a year, one in January and one in April, we will no longer issue standalone snow reports as press releases, but we will continue to provide perspective as we have today as part of our first and second quarter earnings calls. I have a couple of questions on the salt business and then maybe I'd like to follow up with a general question about the Great Salt Lake. But I was hoping you might provide a little bit of color on the comment in the press release regarding sales to commitment ratios. It's a term that I haven't heard too often in the past, and just want to make sure I'm not missing something. But I guess there's always been minimum and maximum volume commitments in your contracts. And there have been periods where the March -- the June quarter has seen some makeup volumes where the volumes are unusually low. So could you just talk about how your tracking of the sales to commitment ratios is impacting your commentary earlier about how the entire winter deicing season might play out? So David, when we say sales to commitment ratio, we're talking about when we go out and bid all of our commitments over the history of time, we expect average weather to deliver a certain percentage of those commitments. So in some of our northern markets, it tends to be a higher sales to commitment ratio. In some of our southern markets, it can be lower. So it can be 95% in some northern markets and average can be lower in southern markets, where there's less snowfall, less activity, so you can have averages that are 75% or 80%. And so when we talk about how we're tracking toward our historical sales to commit more ratio, that's what we're talking about. So thus far this season, while the winter weather snow events in the 11 cities was right on average and because of the quality of some of the events and so our actual sales to commitments have been lower than the historical average. So it varies across the network. In the Lake Superior area, it's been actually quite strong. They've seen a lot of snow up north in the upper Peninsula of Michigan, upper portions and eastern portions of Minnesota. We've also seen strong sales to commitments in some of our southern markets on the southern Miss actually and the western Ohio. But when you look at Michigan, when you look at Northern Illinois and our eastern markets, they've experienced lower than historical sales to commitments thus far this season. Does that help? Yes, I think so. So, it's kind of within that upper band and lower band, and where it falls there -- upper band and lower band to the volume commitments and how that plays out… But separate from the minimums and maximums concept, this is just really purely trying to explain and talk about how above or below we are from a historical basis. And then one other question probably for Jamie. But this has to do with maybe spot versus contract pricing for the deicing salt business. So in the past during very heavy snowfall or high quality snow event type number seasons, the call or the ability to kind of supplement the contract volumes has given you some pricing flexibility, let's say. With the volatile cost situation, could you -- is it a fair question to ask if your expectations are like that the spot sales, however active they maybe are going to be priced above your typical contract volumes or might the spot fall -- the spot price for incremental volumes fall below, what the contractual commitment delivered price is? Given the circumstances you should expect them to -- thus far, because winter hasn't been robust, because we haven't outsold our commitments or gotten into fully delivering under our contracts, once you fully deliver under your contracts, spot prices come after that point. So we haven't seen weather to really drive that. What we have done though in our contractual negotiations through last summer, in both municipality state bidding process as well as our commercial negotiations, we've captured or recaptured inflationary pressures through our pricing actions, which you'll see as this winter continues to unfold and is embedded in the 12% bid season price improvement that we were able to achieve, which includes both commercial activity, commercial customers, commitments as well as the bid commitments that we do annually. Let me add a little bit of color to Jamie's comments as well. I mean, to the extent that you experienced a season where you sold through the upper end of your committed level, which is typically 120% of the initial arrangement, that would imply that you're having a pretty tough winter from a -- or a good winter from our perspective. And thus, you could fully expect spot prices to be in excess of contract price. I think, it would just stand to reason and what fair market value for those, that next ton would be above that, I think, it would be speculative. But I think it's easy to say or safe to say that it would exceed the contract price. And your ability to earn margin on that incrementals, given that fixed cost absorption is already taken care of, it’s much more powerful than under contract scenario. Thank you for that color. And I agree, usually, it's a question when the snowfall is quite strong. I was thinking of it a little bit more this time just related to the cost -- the volatile cost elements. But thank you for all the color. Last question would be kind of a general question. Really kind of about the Great Salt Lake. So I am tapping in a little bit to the national headlines. But the Governor of Utah recently issued an executive order kind of involving berm heights and other complicated things, but maybe to direct more water into parts of the Great Salt Lake. And I know time is limited here. But I was just wondering if you could take a couple of minutes and maybe just sketch out the broad strokes of what seems to be a high priority issue for the Governor there involving the management of the Great Salt Lake? And if you wouldn't mind, what is your base case and what might be a best case, worst case scenario from Compass Minerals’ perspective on that? Thanks for bringing that up. We obviously would use the Governor's executive order. And it probably wouldn't come as any surprise to you that we have worked closely along with the government agencies in Utah as it relates to the executive order and what will ultimately become the berm management plan. We have been an active operator out there for 50 years and working proactively with both the DNR and the DEQ as it relates to this berm management plan. So again, that's kind of point number one, unanswered questions yet until the berm management plan is decided upon it gets put in place. The second point I would make is based on what we know right now, we expect a temporary short term raising of the berm height to have a de minimis impact on our operations in 2023, and that's largely a function of the above average rainfall that we’ve experienced out there over the last few months. And additionally, the snow pack that the Governor referenced in his executive order is kind of running above average. So we would expect a very efficient spring runoff. So that's kind of point two. We don't expect any de minimis impact in 2023. And then the third point I'd make is we will continue to work very closely with regulatory authorities out in Utah as it relates to the development of this berm management plan. But as a public company, we have stakeholders that have interests that we will protect up to and including the pursuit of legal action, if necessary. We certainly wouldn't expected that to happen and certainly hope that that doesn't happen. But we certainly reserve all of our rights in that regard to predict our mineral and water rights interest out in the Great Salt Lake, which are very valuable. Hopefully that gives you some background. Thank you for that question. Kevin, just on highway deicing pricing in the quarter, up 12%. Why was it below the 15% you have, I guess, contracted in for the full year? I think, maybe Jamie could add a little color. But I think part of that is a function of just timing… Yes, I'll jump in here, Kevin. There's always customer mix. When we complete our bid season, we analyze the average price across the entire portfolio. If we get stronger weather or weaker weather in a region that happens to have higher prices or lower prices that will manifest itself as a variance from our bid season expected pricing outcome. And just on the EBITDA guidance for salt below the half, below -- and I guess below the midpoint of range, but given where we are today in the winter and given the long term forecast. Is there a potential for this to be a mild winter and EBITDA close to the bottom end of that range you've articulated? So we shared today, David, is that based on the winter to date, I would say through January due to the sales to commitment dynamic that Jamie referenced, we believe will be below that midpoint, which is 235. The balance of the winter is before us. And like I always say in terms of the bell curve, there's no reason for us to believe that it won't be a normal winter for February and March. And so we could very well fall closer to the right side of that page than the left. It just depends on how the winter transpires. Jamie, anything… That's exactly right. We've got 10, 12 weeks of winter left. And it seems like, if history is any indication that seasons are a little delayed, and I'm not projecting that it's going to be a strong remaining part of the season, but it seems like events progress as well into March and sometimes even April. So I would say that we've got 10, 12 weeks of winter left, which will drive where we fall on that bell curve, David. This is Joseph on for Joel. Just first, in terms of Fortress, is this still going to be a negative $5 million EBITDA contribution for fiscal 2023? And also, what would a reasonable contribution range look like for fiscal 2024 and what would've to happen to reach the high and low ends of that range? As our base case heading into this year on the order of magnitude of that $5 million is what we've got baked in. And the extent to which that improves is a function of the timing of when Fortress receives its first base allocation. And so to the extent that that happens this side of the wildfire season and we're able to execute then you could see that drag, I would say, diminish. As you think about the future, I go back and say, we think the overall profit pool here is in that $90 million to $100 million range. And so -- and as much as it is our objective to get a very substantial portion of this market, whether it’d be 30%, 40%, 50%, you can do the math on the implications of that on our EBITDA, which is pretty substantial. And so we won't speculate about base allocations and our success, but the size of the prize is pretty significant. And then could you also please just explain what's going on with the higher tax rate this year and what would a normalized tax rate look like for 2024? So in terms of taxes, our tax rate is higher despite our profitability being lower. And that's a result of really our earnings mix. If you think about our guidance today or our outlook today, we're really not taking down salt very much. And a lot of that profitability happens in Canada where we have some of our higher tax rates. What we're taking down largely is plant nutrition, which a lot of that profitability occurs in the United States where we project that we'll have losses in the United States, and as a result, we won't be able to take those losses as a deduction. And so that's why the numerator there is sticky and despite the profitability going down. And so on a normalized basis, from a cash tax perspective, I would say something in that 25% range is a good number to use from a cash flow perspective on a normalized basis. And then one more if I can. Just seeing that GM is now willing to pay upfront in terms of pre and payment and equity stakes and US lithium assets, does that make Compass want to reassess its current MOUs or does the DLE process need to be proven out a little bit more before the company could pursue some upfront capital? So just seeing that GM is now willing to pay upfront for prepayments and equity stakes in US lithium assets, does that make Compass want to reassess its current MOUs or does the DLE process just need to be proven out a little bit more? I mean, I think the bottom line around that investment is that's quite compelling news, and I think it's just a testament to how much people want North American sourced lithium in the future. And it's a testament that one of the iconic car brands in the US is willing to write a check of that size. But as it relates to our, I'll take agreements. I mean, we're certainly open to various structures. We have one that's in the bag already with LGES that we've talked about, and we continue to prosecute the second one with another iconic car brand here in the US, and would hope to have that resolved in the next few weeks. But I think the agreements that we are working on, and Ryan and Chris are in the room, they could add some additional color. But I think we're pleased with our agreements the way they're structured and the potential profit pool that that'll create for us in the future. Would you want to add anything to that, Ryan? Yes, I can add to that just a little bit, Joseph. So I think as Lauren has iterated before, offtake -- prepaid offtake agreement type of arrangement isn't necessarily off of the table for Compass. But we do believe that it's important for us to prove out the DLE technology with this commercial scale unit, which we think gives us a more attractive, let's say, cost of capital as opposed to giving that upfront when perhaps the potential investor may perceive higher risk in the project due to DLE. So as Kevin said, we're open to any form of arrangement. But we feel it's prudent for us to make the -- hit the next milestones before we would engage in a prepaid offtake. So if you're able to, I just kind of wanted to reset the stage a bit as we get ready for the FEL-2. The FEL-1 had very wide confidence ranges, I think it was like plus or minus 30% across everything. But if we were to just look at your modeling on things like reagents and absorbent polymers. Are you able to maybe just speak to your relative level of confidence in those values versus other parts of the engineering and design, or just if the FEL-1 is simply mandated to have that confidence range kind of regardless of what the reality might be? So you are correct. The FEL-1 had a wide range. It was a minus 30% to a plus 40%. And if you recall kind of middle of that range was the $262 million. So if you look at that plus 40%, you get somewhere at around $367 million with regards to overall CapEx. Typically, what you see is projects do increase from an FEL-1 to an FEL-2. Part of that is just the engineering aspect and the refining of the process, and that's kind of answers the question as well around the OpEx. So in the FEL-1, you are around 2%, 3% engineering and you are looking at utilization of reagents. As you should progress to an FEL-2, you get more defined, and you find things in that process that you have to take care of through product specifications and you have to put unit equipment in to do that. So we expect that the cost per ton of reagent probably stays about the same, maybe a little bit more due to inflationary aspects, which we would also expect to impact the overall FEL-2. I think if you recall, the FEL-1 was done in that early 2022 timeframe. And so the full year of inflationary aspects did not hit in that cost estimate, which we expect to manifest in the FEL-2. Does that answer your question, Vincent? I guess maybe what I was getting at a little bit more specifically is on the utilization from a volume perspective, when it comes to unit costs. You mentioned that there is -- it sounds like there is maybe a little bit of CapEx creep from FEL-1 to FEL-2. But do you see something similar on the engineering around the reagent use, or is it [Multiple Speakers] very much down to what they find and we’ll just have to wait for the report? I think it's better to wait for the report. But what I would say is, what we expect is to see probably a different utilization, but not materially different than what we announced in that field. And then if we're thinking about Fortress, now that we are getting a bit closer to revenues here or earnings. Can you just talk about the relevance of the tankers that are used in fire suppression, what kind of influence they could have on the adoption of your product if they had concerns or consternations over change over time between your product and Perimeter’s products or mixing trace amounts of one product with the other? Is there just kind of a gray area in the whole process, I was hoping you could speak to their influence? So comingling is what you're referring to when you perhaps have an aircraft that's going from one base to another and would be using our product after having used Perimeter’s product, there are standard protocols around how to rinse the tank, how to prevent any issues. I first like to mention the Fortress products have passed with flying colors, any corrosion testing. So that's a non-issue. When you have some comingling, you end up with some residue in a tank. So it's simply a rinse process and a reload. So we don't view it as an issue. We think it's very, very manageable by base operations for tankers coming into competitor bases and competitor tankers coming into Fortress basis. So very manageable. And we're on the QPL and we've passed all the tests, so it should not be an issue. I'm just trying to figure out the higher production costs the nat gas in Ogden. You’ve kind of made it sound like that was spike that's kind of over now, but it seemed like that is factored into the lower guidance for both segments for the full year. And I know obviously it impacted the quarter, but is it going to -- is that -- are those higher production costs going to continue through the year or is there something else that's creeping up in production that I didn't understand, or maybe I just misunderstood it completely? No, that was a relatively temporary sort of episode, but it will flow through our cost as inventory is sold. And because our Ogden asset produces products that benefit both our C&I business as well as our plant nutrition business, you'll see commentary regarding natural gas costs for both businesses. I would say it's probably 80% skewed towards plant nutrition in terms of the dynamic, but you'll see that flow through as our inventory turns. And that episode is now behind us and we also have hedges that we expect to provider us with good protection. And then salt, highway deicing salt. It seems like -- I thought when I was looking at some of the data that -- the snow was particularly heavy in areas like in both like Toronto and Montreal and what Montreal might have had record snows in January. Are those markets smaller for you nowadays, or was it a sales commitment levels issue there? Or -- I remember that in the past, I think they might have had some longer term contracts. So have their pricing not caught up to maybe where you would want it to be, is that why we're not seeing an impact from I think, the snow that Canada's getting? No, I would say, in Ontario, snow, year to date, has been, been pretty average. In Quebec, it's actually been a little bit below average, that's an area where typically has strong weather. You've noted that it was particularly good. There were a good couple of weeks in January for sure. But you have to look at the entire portfolio and the mix of weather across all of it. So that's always going to cause some volatility. Like I said, it was particularly strong year to date in the southern -- along the Mississippi generally, the western Ohio, even the Tennessee River. So our southern markets have had a bit more weather than normal. And so those sales commitments are higher. Canada, in general, is pretty close to average, a little bit below with Ontario kind of right on average sales commitments. And then just turning to Fortress for a sec also. You characterized the profit market or the profit potential there, the whole market's 90 to 100. Is that including -- I know you'll be selling mag chloride to them. Is there -- does that include sort of that estimate of the market including what you could do sell or the profits you would get from selling more mag chloride, or will you not be selling more mag chloride, you're just redirecting it from another customers? No, we have mag chloride capacity at Ogden, so it would be supplemental or incremental to that. And I don't want you to read too much into the profit pool, because you're talking about a competitor's margins, et cetera. So don't imply that our cost structure would be the same as our competitors. So we're just trying to provide sort of a scope of the size of the price in terms of revenues, gallons and what the profit pool is. But I think when you look at our cost structure relative to our competitors, we would expect our profit margins to be pretty healthy as well. Just specifically about the mag chloride though, like if you were to get half the market, I mean, is that a significant amount of mag chloride you're selling relative to what you sell now? I don't know what the sort of volumes are. I mean, at half, if we were to achieve half market share, it represents less than 10% of the mag chloride that were currently produced at Ogden. So it's not difficult for us to be able to handle that kind incremental capacity. And there are no further questions at this time. So I will now turn the call back to Mr. Kevin Crutchfield for any additional or closing remarks. We appreciate everyone's interest in Compass Minerals. We look forward to keeping you updated, and please don't hesitate to reach out to Brent in the interim if you have questions. Thank you so much for attending today.

EarningCall_412

Hello, everyone, and welcome to Lesaka’s Fiscal Second Quarter 2023 Earnings Webcast and Conference Call. My name is Rob Fink, and I'm part of the newly appointed IR team here in the U.S. As we get started, I just wanted to remind everyone that this webcast is being recorded and the presentation can be accessed through the webcast link, as well as by dialing into the Zoom conference call dial-in numbers provided. Management will address any questions you may have at the end of the presentation. To ask a question, you must be logged into the webcast and you can use the raise your hand button on the bottom of your screen to indicate your interest in participating in a Q&A session. If you have joined via the Zoom teleconference line, you cannot ask a question live, but we would encourage you to reach out to the IR team if you have questions following the completion of this call. The webcast link Zoom conference call dial-in numbers, as well as the earnings press release, and supplementary investor presentation are available on Lesaka’s Investor Relations website at ir.lesakatech.com. Additionally, Lesaka filed its Form 10-Q after the U.S. market closed yesterday, Tuesday, February 7, 2023, which is also available on the Investor Relations website. As a reminder, during this call, management will be making forward-looking statements, and I ask you to look at the cautionary language contained in Lesaka’s Form 10-Q regarding the risks and uncertainties associated with forward-looking statements. Also, as a domestic filer in the United States, Lesaka reports result in U.S. dollars under U.S. GAAP. However, it is important to note that the company's operational currency is South African Rand and as such management analyses their performance in South African Rand. In this presentation, we will discuss results in South African Rand, which is non-GAAP. Doing so assist investors understanding the underlying trends in the business. As you know, the company's results can significantly be affected by currency fluctuations between the U.S. dollar and the South African Rand. Take a quick look at today's agenda. Chris Meyer, Group CEO of Lesaka will begin today's call with performance highlights for the second quarter of fiscal year 2023 and review Lesaka’s progress against its key strategic objectives. Steve Heilbron, CEO, Connect & Head of the Merchant Division will provide an update on the Merchant Division, which has produced just stellar set of results this quarter. Lincoln Mali, CEO of Lesaka, South Africa, will then provide an update on the Consumer Division, which has passed the key milestone this quarter. And then Naeem Kola, Group CFO, will present an overview of Lesaka’s financial performance for the three months ended December 31, 2022. Chris will then conclude the results presentation with a discussion on Lesaka’s outlook before opening the call for Q&A, where we welcome any questions, you may have. Thank you, Rob. Good morning, good afternoon, and welcome to our second quarter 2023 earnings webcast and conference call. Our FY ‘23 Q2 results represent a significant milestone for Lesaka in a number of ways. Our performance this quarter provides clear evidence of the successful turnaround in our Consumer division, which has delivered its first adjusted EBITDA profitable quarter in years. At the same time, the strong outperformance in our Merchant division is testament to the robust growth fundamentals underpinning the Connect acquisition and the overall momentum we are seeing in our Merchant division. The Merchant division has delivered an excellent set of results this quarter, topping our guidance and showing growth of 19%, compared to a quarter ago being FY ‘23 Q1. This has been driven by the Connect Group, which has become the cornerstone of our Merchant division as we rapidly expand our merchant customer base in Southern Africa. The Merchant division is at the forefront of our mission of providing financial inclusion through our full service offering across cash and digital serving the use of both, while also facilitating the shift towards digital that is taking place. We are seeing this play out in a number of areas. For example, in our card acceptance business where we've seen card payments through our merchants in the informal sector, more than double, compared to a year ago. And also, in terms of the growth in our credit offering to MSMEs, including Capital Connect and Kazang Pay Advance, where we've advanced ZAR22 million this quarter, an increase of 16%, compared to a quarter ago being FY ‘23 Q1. The Merchant division has performed ahead of our expectations. The growth drivers and secular trends underpinning financial inclusion, cash management and digitization for MSMEs are clear. We therefore believe the conditions for continued growth remain firmly intact. So, turning to the performance of the Consumer division. We are very pleased to be able to deliver the first adjusted EBITDA positive quarter for the Consumer division in years. The Consumer division delivered segment adjusted EBITDA of ZAR10.1 million for Q2 FY 2023, compared to a segment adjusted EBITDA loss of ZAR23.9 million for Q1 FY 2023. This is a watershed moment for the business. And in reflecting on the work of the last 18-months where we have been very clear on how we plan to return the Consumer division to profitability; we view the set of results as testament to the successful implementation of a rigorous plan that was based on the complete transformation and optimization of our branch and distribution footprint and driven by a mission of delivering financial inclusion to our customers across South Africa. Consumer division has been fundamentally transformed, and we have built a strong and stable foundation to grow our customer base and deepen our product offering. We will achieve our growth objectives through a combination of: Firstly, shifting our points of presence to where our customers want to be, which is in retailers. Secondly, by improving the customer journey through digitization and streamlining our processes. And thirdly, by further enhancing our value proposition as we shift our product and pricing proposition to recognize and reward our most loyal customer base. Lincoln will provide more detail on these focus areas later in our presentation. And, so the third area I would like to highlight is how our improved operating performance has also meant we are generating positive cash flow in the business and have been able to further optimize Lesaka’s capital structure. Our banking partners have agreed to further extend the group's lending facilities on more favourable terms, increasing flexibility, adding further liquidity and providing greater capacity to fund growth. For FY 2023 Q2, we saw ZAR60 million of cash generated from operations and we ended the quarter with ZAR722 million in unrestricted cash, compared to ZAR543 million a quarter ago. We continue to focus on reducing our net debt to EBITDA ratio, in step with the growth of the business, and with our net debt to EBITDA ratio reducing to 3.3 times from 5.9 times in FY ‘23 Q1. And Naeem will address this in greater detail later in the presentation. So given the momentum in our Merchant division and the strong foundation for growth in the Consumer division, we are reaffirming our guidance which we provided for FY ’23. We believe the growth drivers remain intact and we are confident the momentum will continue. In September 2022, we provided further earnings guidance for the first time since the transformation and repositioning of Lesaka began. Our guidance was for group revenue to be in the range of ZAR2 billion to ZAR2.3 billion for FY ‘23 Q2. We are pleased to be able to report revenue of ZAR2.4 billion, which exceeds the upper end of our guidance. Revenue growth was driven predominantly by the stellar performance in the Merchant division, primarily the Connect Group. We also guided for group adjusted EBITDA to be in the range of ZAR116 million to ZAR123 million for Q2 FY 2023. And we have delivered ZAR130 million in group adjusted EBITDA for the quarter, which surpassed the upper end of the guidance provided by 6%. This represents a significant turnaround on the loss of ZAR84 million recorded in Q2 FY 2022. Our performance specifically in the Consumer division and also across the group were supported by well controlled costs, including our group cost line. Lesaka is a full service fintech platform, serving the needs of consumers and merchants, and we are also facilitating the secular shift to digital that is currently taking place. We are increasing our points of presence across our ecosystem in the form of branches, retailer pay points, ATMs, satellite kiosks and merchant devices, and these increased to more than 72,000 by quarter end. Building momentum in our footprint raises our standing as a player of scale in the market and creates growth opportunities across our ecosystem. Our Q2 FY 2023 results demonstrate that we have set a solid foundation for growth in this market and we are very excited about this. And with that, I will hand over to Steve to discuss the performance and opportunities in the Merchant division. And as a leadership team, we are very pleased that Steve has extended his contract with Lesaka for the next three years, continuing in his current role as Head of the Merchant Division and also taking on additional responsibilities at a group level. Lesaka certainly stands to benefit from his continued involvement. Thanks, Chris. At the outset, let me say that I'm very happy to have extended and broaden the scope of my activities within the group and I'm excited to work with you and the leadership team as we continue to optimize both revenue opportunities and cost synergies across our dual sided ecosystem. Focusing on our Q2 FY ‘23 performance in the Merchant division, as Chris has mentioned, the Merchant division outperformed expectations and guidance this quarter, driven largely by a very strong performance of the Connect Group of businesses. The Merchant segment compared to Q1 has grown Q2 revenues by 12% to ZAR2.1 billion and adjusted EBITDA by 19% to ZAR160 million. The transformative impact of the Connect acquisition is evident, when compared to revenues and adjusted EBITDA of ZAR223 million and ZAR15 million respectively in FY ‘22 Q2. We have achieved growth across all products with standout performances in our Kazang VAS and Kazang Pay business units, as well as notable performance in both Merchant credit businesses, Capital Connect and Kazang Pay Advance. Focusing on the key activity drivers of revenue and EBITDA, the following lead indicators are highlighted: Kazang VAS throughput for the quarter of ZAR6.8 billion is up 40% year-on-year and up 17% for Q2 and Q1 for FY ’23. This is supported by solid growth in the onboarding of new merchants with circa 7,500 merchants being added in Q2, up 13% on Q1. The Kazang Merchant Estate closed Q2 at 64,500 merchants, this is up 47% year-on-year. Our business development team continues to focus on adding to the bouquet of products, vended by our merchants from the e-wallets, as well as broadening the added value solutions targeted at solving for our merchant’s pain points. In our card acquiring businesses, Card Connect and Kazang Pay throughput for the quarter of ZAR3.1 billion is, up 106% year-on-year and up 35% for Q2 on Q1 for FY ‘23. This performance is almost entirely attributable to the incredible growth achieved by our Kazang Pay solution. This is evidence by the onboarding of circa 6,700 merchants in Q2, up 24% on Q1. The combined Card Connect and Kazang Pay Merchants Estate closed Q2 at 34,400 merchants versus up 129% year-on-year. The Cash Connect business throughput for the quarter of ZAR29.5 billion is up 9% year-on-year and up 7% for Q2 on Q1 for FY ‘23. The Merchant Estate closed Q2 at circa 4,300 volts, this is up 11% year-on-year. As mentioned at our last results presentation, we have integrated the ATM business into Cash Connect. This has served to enhance our focus on the ATM business as a standalone ATM acquiring unit with a heightened focus on achieving scale and efficiencies. We continue innovating in the cash recycling space with the imminent rollout of our new ATM recyclers. This is still in pilot phase with proof-of-concept testing in a selection of our merchant clients. Lincoln will touch on this a little more later. In our Merchant Credit businesses, Capital Connect and Kazang Pay Advance. Credit dispersed for the quarter of ZAR262 million, is up 71% year-on-year. We have become a key provider of capital to the Vital MSME Merchant segment and have grown the receivable book from ZAR178 million to ZAR380 million, representing a 79% growth year-on-year. We are experiencing great momentum in Kazang Pay Advance and Capital Connect evidenced by strong uptake from our merchants. We are excited about the opportunities in the Merchant division and are encouraged by our ability to scale our product sets within the respective target market. The integration of Connect Group into Lesaka serves in broadening the Merchant divisions reach into the informal market, which thanks to benefit from enhanced inclusion from an underserved customer base. This broadens consumer access to a range of services, as well as supporting the journey to an increasingly digitized world. As evidenced by the numbers presented, we continue to see strong demand and have achieved excellent growth in the onboarding of many new merchants, as well as increased usage of our solutions by our existing merchants for the quarter and year-to-date. Both consumer and merchant clients benefit from a more secure, convenient and efficient ecosystem enabled by our proprietary technology. Supplier payments in our Kazang VAS business continue to grow and are becoming a larger composition of the Kazang VAS throughput. This slide shows an example of our strategic partnership initiatives, which continue to drive growth. This proposition supports customer acquisition by providing more value for our merchants. To illustrate the point, this image represents multiple points of value for our merchant customers and thus our business as a merchant can accept card payments from these customers at this time using Kazang Pay. The merchant can also sell a range of VAS products to their customers using the same device for cash or card tender. And using the same platform, the merchant can settle stock purchases like VAT, Clover, Coca-Cola, SAB, and others directly from their e-wallet, reducing reliance on and the risk of holding onto cash for payments. It has scanning a unique supplier QR code when stock is delivered. This offering is quick and efficient for merchant and allows them to pay suppliers at their own convenience, reducing the need to hold cash, lowering transport costs, as well as the time taken to execute supplier payments. Now to our EasyPay business, where as expected, we continue to see a decrease in VAS throughput for prepaid electricity. This is due to the impact of load shedding and important to emphasize that it's not due to a loss of customers. VAS throughput for prepaid airtime grew 4% year-on-year. In our EasyPay bill payments business, we are connecting approximately 650 billers through payment infrastructure. Revenue earned is on our transaction fee basis. Bill payment transaction volumes declined by 5%. We continue to reposition our EasyPay business by prioritizing commercial revenue streams in relation to existing and new clients. In [Indiscernible], our point-of-sale payment device business revenue generated from the sale of point-of-sale devices can be lumpy given the seasonality of bulk sales. As disclosed in our Q1 results, we have reflected a 12-month rolling average as a more meaningful metric in tracking the performance of this business. The rolling average for Q2 FY ‘23 was 9,763 devices sold, an increase of over 100% on a year-on-year comparison. Rented devices have continued a steady growth trajectory at 9 % year-on-year. In conclusion then, this has been a stellar period for the Merchant division. We are excited about the growth prospects and opportunities to derive more value from synergies across Lesaka, especially as we expand our footprint and deepen into the informal market. We continue to focus on opportunities to deliver services that are of tangible value to our merchant base. We have an excellent merchant team in place with a proven track record, who continue executing against strategy and innovating in an underserved market. Lastly, but not least, thank you to all the people in the business for an incredible quarter. I would like now to hand over to Lincoln, CEO of Southern Africa to discuss the performance of the Consumer division. Thank you, Steven. It is so pleasing to see the growth and profitability coming out of the Merchant division and the progress we've made on the integration. Moving on to Consumer division, the last 18-months have been a very busy time for everyone. As we said, how to transform it, and return it to profitability and position for growth. I'm extremely proud of the Lesaka team and specifically all the staff in our Consumer division in achieving our first EBITDA profitable quarter in years. It was a critical milestone in our journey as it removes the drain on financial and human resources and allows us to focus on growth. We are pleased to report a ZAR10 million segment EBITDA profit for the Consumer division in quarter two, which was slightly under our guidance, but a vast improvement from a year ago when we reported a consumer segment EBITDA loss of ZAR67 million. We marginally missed the guidance for Consumer segment EBITDA, due to a lower growth in our Easy Pay loan business that we had forecast. But we were encouraged by strong December growth, which has continued into January 2023. We do not need to change our guidance for the full-year and are confident we are on track to deliver. Over the past four quarters, I've been speaking about the three levers we have used to retain the Consumer division to profitability, which are cost optimization, increasing our ARPU through cross-selling and growing active EPE account numbers. This result achieved was primarily through the first two levers. Under Project Spring, we committed to annual cost savings of approximately ZAR350 million in the Consumer division. Through the rightsizing and rationalizing of our infrastructure and staff complementing the consumer business, we've achieved ZAR222 million already in the first half of 2023. Our ARPU for our permanent client base has increased to ZAR74 from ZAR71 in quarter one and ZAR69 in quarter two of last year. We implemented our strategy to focus on product and efficient distribution channels, upgrading technology platforms, training staff, and we're still pulling hard on this lever. As we enhance our cross-selling initiatives, and spend more time in front of our customers, we expect the upward ARPU trend to continue. The combined effect of the first two levers have got us to a point where we now have a strong and stable base from which we can grow our consumer division. Lesaka is all about financial inclusion and offering affordable financial services to undersized consumers. Our products are specifically designed with permanent social grant recipients in mind, where we have an opportunity to build deeper relationships through lending and insurance. We do have products for people, who receive temporary grants. But we don't offer the same breadth of service as permanent grant recipients. In the consumer market, approximately 19 million social grants are paid to 12 million grant recipients every month. Of which approximately 7 million grants are paid by Post Bank of South Africa. These numbers exclude the temporary SRD grants, which were instituted during COVID, which have recently been extended to the end of 2024. Social grant form an integral part of South Africa's lives. And for many, it is the only source of income to support their families. Approximately 90% of grant recipients in South Africa currently receive their grant and withdraw it all in one transaction and two to transact in cash. Further, only 20% of grant recipients have access to regulated insurance and lending products. Turning to the third lever, which is growing our active EPE account numbers. We ended quarter two with 1.2 million active EPE bank account customers of which just over 1 million at our target permanent grant recipients. For the first time, we are separately reporting on our core permanent grant customer base from the more temporary SRD customer base. As of the end of December 2022, we increased our overall customer base by 18%. Within this result, the permanent grant account base grew by 4% on a net basis, which maintained our market share. Whilst this was slightly below what we had hoped for, it must be seen in the light of us going through a complete restructuring and cultural reset in the consumer division, particularly in the sales team and an entirely new national and provincial leadership. And a focus on cost optimization and cross-sell initiatives. As a reminder, we continue to apply a rigorous approach in our measurement criteria for an active account. We only classify an account as active, if we have charged a monthly account fee during that specific month. We have identified actions and strategies to now leverage off our firm base and improve our EPE growth. These include, firstly, enhanced distribution model where we're moving away from branches and now have stuffed kiosks and ATMs and retailers, where our customer base has more convenient access and longer trading hours. Secondly, marketing initiatives and incentives encouraging account openings and switching to Easy Pay. Thirdly, easing the friction in the onboarding of new clients with technology interventions, opposed incurring travel costs and specifically having to be in a branch to open an account. I mentioned in quarter one of our 2023 financial year, that Easy Pay loans, our lending product had grown at a slower rate than expected. I'm pleased that we have seen a recovery in this quarter with 18% growth in the number of loans originated. In terms of our book size, we have grown 13% year-on-year. We're encouraged by the positive results coming through already and continued momentum on loan growth in January 2023. Again, it is pleasing to see our loss ratio at less than 4% per year. Our customers place a high value in these loans to get them through difficult months and having the facility available to them leads to a good repayment experience. Our Easy Pay insurance product continued to outperform our expectations in quarter two, growing 15% to approximately 294,000 active insurance policies. It is encouraging that this new business is of good quality with a high premium collection rate of approximately 98% being maintained. Our move to more retail focused distribution strategy is paying off. Our presence in the retail stores where our customer base shops has provided Easy Pay much more visibility and convenience for our customers with longer trading hours and easy access to our ATMs. We've seen an 18% increase in transactions per ATM, compared to three months ago, with a strong increase in other bank customers also using our ATM network now. We are continuing to implement our retail focused distribution strategy and our initiatives we're exploring with Kazang will further accelerate and expand our retail presence. We see great potential in the mutual benefits for retailers and our consumers in terms of convenience and buying power for our own ecosystem. We continue to develop our strong relationship with SASSA through proactive engagement at a local, provincial and national level. We've also made good progress on building relationships with our various key stakeholders, including Grindrod Bank and representative from its new owner, African Bank, who acquired 100% of Grindrod in May 2022. As highlighted by Chris earlier, the consumer division has been fundamentally transformed, and we've built a strong and stable base to grow our customer base and deepen our product offering. We’re well positioned for growth and in doing so continue to focus on establishing point of presence for our customers that are convenient and cost effective to access. We also strive to further improve the customer journey through digitization and further enhancing our value proposition, including plans that will reward and grow our loyal customer base. Thank you, Lincoln. I'm very excited to take you through the financial performance for quarter two 2023. Before I do that, as a reminder Lesaka as a domestic fighter in the United States will report results in U.S. dollars and the U.S. GAAP. However, our operational currency is South African rand, and as such, we analyze our performance in South African rand. In this presentation, we will discuss our results in South African rand, which is non-GAAP. This assists investors understanding the underlying trends of our business. As you know, our results can be significantly affected by the currency fluctuations between the U.S. dollar and South African rand. Additionally, Q2 20 23, similarly to Q1 2023, includes pre-existing Lesaka and Connect Group for the full quarter, compared to Q2 20 22 that only includes a pre-existing Lesaka business. And thus, FY ‘23 Q2 versus FY ‘22 Q2 is not meaningful comparison as Connect was not included in FY ‘22 Q2. However, FY ‘23 Q1 has Connect included for the full quarter and that is a useful sequential quarter comparison to focus on, demonstrating performance and growth rate for the quarter. I will now turn to the financial performance overview. As you have just heard, Lesaka is making significant progress in the transformation journey. And this is coming through in our improved financial performance and a strengthened financial position across the group. We are building on the momentum that started four quarters ago for both in Merchant and the Consumer division and we have also made great strides to improve our capital structure positioning us to support our growth plans. We achieved a consolidated group revenue of ZAR2.4 billion for the quarter, compared to ZAR479 million in Q2 2022. This exceeded the upper end of our guidance in rands. This significant uplift in revenue was mainly related to the revenue for Connect Group being consolidated for the full quarter Q2 2023. Revenue increased by 11% from ZAR2.1 billion in fiscal Q1 2023.We delivered a group adjusted EBITDA of ZAR130 million, compared to the group adjusted EBITDA loss of ZAR84 million in Q2, 2022 and an EBITDA profit of ZAR72 million in Q1 2023. This is an 81% improvement in EBITDA from Q1 2023 to Q2 2023, validating the transformation of the Consumer division to a segment adjusted EBITDA profit and continued strong growth and robustness in our Merchant division. Operating income before amortization of acquired assets is ZAR29 million, as compared to operating loss of ZAR13 million in Q1 2023. This is directly related to the positive performance of the Consumer division and the significant performance of the Merchant division. In addition, the operating loss after acquired asset amortization improved by ZAR42 million to a loss of ZAR38 million for the quarter. Fundamental earnings per share showed similar trend of positive turnaround, compared to the prior quarter. This is indicative of the positive EBITDA contribution from the acquisition of Connect Group, which has continued to exceed expectations, as well as the turnaround of the Consumer division. We generated ZAR60 million operating cash flow in the quarter, another significant landmark in the Lesaka Group being cash flow generating. I will now turn to the group income statement. Looking at the group income statement, we achieved a consolidated group revenue of ZAR2.4 billion for the quarter, compared to ZAR2.1 billion in Q1 2023, representing a growth of 11%. In USD, consolidated revenue was $136 million for the quarter, compared to $125 million in Q1 2023, representing a growth of 9%. Operating loss for the quarter is ZAR38 million, an improvement of ZAR42 million, as compared to the previous quarter and fundamental loss per share is ZAR0.22, compared to ZAR1.36 in Q1 2023, a significant movement quarter-on-quarter. Looking at our segments, Q2 2023 reflected a positive performance across both business divisions, validating our efforts to transform the business to deliver growth and strong profitability. Operating income before amortization of acquired intangible assets closed at ZAR29 million, as compared to a loss in Q1 2023 of ZAR13 million, a significant turnaround in three months. Consolidated revenue for the quarter was ZAR2.4 billion, 11% growth, compared to Q1 2023 attributed to a strong performance across the merchant business especially in the VES, card acquiring and merchant capital products as highlighted earlier by Steve. In addition, we recorded ZAR97 million in revenue from the POS devices sold to [Indiscernible] in the quarter. As previously highlighted, this business is often quite lumpy between quarters due to the nature of the underlying client order book. In the Consumer division, revenue growth has been mainly driven by the transactional and insurance products. We achieved a group adjusted EBITDA of ZAR130 million, as compared to ZAR72 million in Q1 2023, an uplift of 81% quarter-on-quarter. The group adjusted EBITDA of ZAR130 million for the quarter was above the upper end of guidance for the quarter in rands. Group costs of ZAR40 million were consistent for guidance. The Merchant division, including Connect Group, continues its strong performance trajectory and achieved a revenue of ZAR2.1 billion in the segment adjusted EBITDA of ZAR160 million. The performance for the quarter includes [ZAR22] (ph) million EBITDA from the sale of POS devices in the quarter that is lumpy and in line with expectations. We do not see this continuing the rest of the quarters for fiscal 2023. While the segment adjusted EBITDA profit in the Consumer division is an important landmark in our journey that we embarked on in Q2, 2022, where we are now reaping the benefits of a successful turnaround strategy. Including the cost savings realized from the rightsizing consumer division, we delivered a segment adjusted EBITDA of ZAR10 million in the quarter, as compared to a segment adjusted EBITDA loss of ZAR24 million in Q1 2023. This is a ZAR34 million positive turnaround. Stock-based compensation charges increased in the quarter, compared to Q1 2023, mainly due to a one-off award of ZAR23 million issued to secure a longer-term contract with a key senior executive. Our further spend on how this will normalize going forward. At the Group adjusted EBITDA level, the impact of the turnaround continues to be evident and significant. We have turned around the group performance from an adjusted EBITDA loss of ZAR84 million in Q2 2022 to an adjusted EBITDA profit ZAR130 million in the current quarter, a ZAR215 million turnaround over 12-months. This performance is evidence of the significant transformation, the group achieved through the acquisition of Connect Group and the cost rightsizing and restructuring in the consumer division. Turning to our cash flow and capital structure, you will note that we have made further progress in creating a stable and long-term capital structure for Lesaka, as well as generated a positive operating cash flow. Our operational cash flow before working capital and loan book funding generated ZAR53 million in the quarter. Improving from negative ZAR7 million in Q1 2023. From a cash flow perspective, we continue to make improvements with stable and well managed working capital requirements and a reduced reliance on cash reserves to fund operations and customer loan book growth. Cash available in the quarter increased from ZAR541 million to ZAR722 million. Net debt to EBITDA ratio on an annualized basis has improved to 3.3 times, as compared to 5.9 times in Q1 2022. Working capital funding requirements are stable and we do not require significant changes to support growth. We do experience peaks and troughs, which arise when taking advantage of bulk order discounts in our VAS business. We expect future loan book funding to be largely self-funded along with the banking facilities that are sized appropriately and therefore we do not envisage loan book growth to be a constraint on our cash flow. Our capital expenditure in Q2 FY 2023 amounted to ZAR70 million of this ZAR64 million or 91% related to growth capital expenditure and ZAR6 million, 9% related to maintenance capital expenditure. Capital expenditure in the business is mainly driven by growth in the merchant business. This growth CapEx is mainly in the form of point-of-sale terminals in the VES and Card Acquiring business, as well as the manufacturing of vaults in the Cash Connect business. In both these businesses, this growth CapEx is highly cash generative with short payback periods. I will now move on to analyze the stock-based compensation charges. Stock-based compensation is a critical part of the overall compensation proposition that enables Lesaka to attract the best talent to execute on the transformation strategy. To enable a better understanding of the stock-based compensation charge, we have divided this cost into three categories: namely executive sign on, Connect Group acquisition awards and long-term incentive plans. The long-term incentive of plane awards are indicative of the continued run rate cost, whereas review the sign on awards in the Connect acquisition awards as largely one-off in nature incurred at the beginning of the transformation journey. The increase in stock-based compensation costs between fiscal 2022 and 2023 is mainly due to fiscal ‘22 only, includes part year charge whereas fiscal 2023 includes a full-year charge, as well as a ZAR23 million one-off for senior executive to secure a long-term commitment. We estimate that in the medium term, once the effect of sign-ons and the Connect acquisition amortized that annual stock-based compensation charges should be in the range of ZAR60 million to ZAR70 million per annum. This would imply that the stock-based compensation charge should trend towards a single-digit percent of group adjusted EBITDA as benchmark to market norms. Overall, Q2 20 23 is evident of the efforts we implemented in fiscal 2022 and we are now reaping the positive results. Our continued focus on the strategic initiatives is progressing well and we are optimistic about delivering on positive performance for the remainder of the year. Turning to the outlook for Lesaka. We wanted to provide you with guidance on the near-term performance of the Group. And although we report results in U.S. dollars under U.S. GAAP, our operational currency is in South African rand and we analyze our performance in South African rand. And as such, we believe that providing guidance in rand is more useful. I'm very pleased to reaffirm our prior guidance provided for financial year 2023. Our outlook for group revenue is between ZAR8.7 billion and ZAR9.3 billion for the 12-months ending 30 June 2023. Merchant segment adjusted EBITDA between ZAR550 million and ZAR565 million. Consumer segment adjusted EBITDA between ZAR95 million and ZAR110 million. And adjusted for group costs, which we expect to be between ZAR165 million and ZAR150 million. This implies an adjusted group EBITDA of between ZAR480 million and ZAR525 million for FY 2023. For Q3 FY ‘23, our outlook for group revenue is between ZAR2.5 billion and ZAR2.8 billion for the three months ending March 31, 2023. And we expect Merchant segment adjusted EBITDA between ZAR140 million and ZAR145 million. Consumer segment adjusted EBITDA between ZAR40 million and ZAR45 million and group costs between ZAR45 million and ZAR40 million for Q3 FY 2023, which taken together means group adjusted EBITDA of between ZAR135 million and ZAR150 million for Q3 FY 2023. It is important to note that the Merchant segment adjusted EBITDA of ZAR160 million for FY 2023 Q2 included ZAR22.1 million relating to point-of-sale devices in our NUETS business. And this is not forecasted to repeat in FY ‘23, Q3 or Q4 given the lumpy nature of bulk sales in this business. And in addition, seasonal trends indicate that our Q2 is usually a slightly stronger quarter, due to higher -than-average transaction volumes in December. Looking forward, we expect the Connect Group to continue to maintain its strong growth trajectory in line with historical trends. And so taken together, we believe that should current trends continue, there is potential upside. And we will reevaluate this position in a few months’ time when we report Lesaka’s Q3 2023 results. Before I conclude, I want to give special thanks to Alex Smith, the Group's Chief Accounting Officer. In January 2023, we announced that Alex would be leaving Lesaka to pursue other opportunities outside the group. The past 18-months have been a time of significant transformation for Lesaka and Alex has played a key role in Lesaka’s growth journey and its transition from Net 1 to Lesaka. Prior to my appointment, Alex was Interim Group CEO for every year and served as the Group Chief Financial Officer for more than four years. And I would like to thank Alex for his valuable contribution to the company. So in conclusion, this past quarter represents a real milestone for Lesaka. Our results be a testament to the progress made since the transformation began. And we will continue building on the momentum created across the business to drive growth, including by realizing the benefits and synergies of our unique dual sided ecosystem. We believe there is tremendous scope for both our merchant and consumer divisions to grow and scale in their respective target markets in their own right, supported by the self -reinforcing business model we are building as part of Lesaka’s unique value proposition. Thanks, Chris. The Q&A session will now begin. [Operator Instructions] We're going to take a minute to build the queue. And while we do, we're going to read two questions that were submitted by [Indiscernible] of Anchor Securities. Chris, Spin wants to know what the impact of load shedding has been on the business and specifically in the Merchant division? Yes, sure. Thanks, Chris. I think the reality is we delivered a very strong set of results despite the load shedding. So the question really is, how much worse could it actually get? Now, we believe as we move into Q3, we have a strong momentum and our business has been stress tested with, you know, -- from Stage 3 to Stage 6 and at times even Stage 8. So the numbers speak for themselves. Great. Spin’s second question is about guidance. And he wants to know given the strong performance and guidance beat in the second quarter, why your outlook is being reaffirmed and not raised. Chris, can you unpack your thoughts on the full-year outlook and overview your expectations for growth in the second half of the fiscal year? Sure. So we decided to leave our guidance unchanged. As I explained, we exceeded guidance in the Merchant business last quarter. The Merchant business grew by 19%. And I think there are two things within those numbers to think about. One is, we saw a large bulk order in our NUETS business, plus the bulk device business, which had around a ZAR22 million net impact on EBITDA. That's a lumpy business, a lumpy order cycle, when you look at it quarter-on-quarter, you need to look at it over a while longer period. So sort of taking that out of the picture firstly is important. And secondly, December, and for us is a big math. We see increased volumes across the business seasonally as an expectation. So again, we want to effect in any type of thinking. So we believe that the -- as I've said, the growth drivers that underpin our business remain intact. And most importantly, we believe that the growth trajectory that we've seen, particularly within the Connect Group, and we expect that to continue into the future. So if -- we'll look at it again in a few months’ time when we present Q3. And if necessary, if the conditions and the momentum are continuing in the way they are, we might look at it at that point in terms of revising that. But for now, we wish to remain and reaffirm. Great. Thank you. And Chris, just so you know, there may be a little issue with your mic, so I'm going to give tech a minute to address it. And while I do, we did have a question from David Garrity of GCA. How does Lesaka recognize revenue from hardware terminal sales? Contemporaneously or over an expected period of use? Hope you can hear me. And hopefully my previous answer came through, if you need me to repeat it or that I'm happy to. But just picking up on the question regarding revenue recognition on that, I'll pass it to -- I’ll ask Naeem and maybe just do that. Is that's okay. Yes. Thanks, Chris. So just to understand the question, if we are referring to the hardware terminal sales that we sell to our NUETS business, these are sales that we do to customers and ownership of these terminals are taken over by the customer. So we recognize our revenue on the time of delivery, and the way that is treated from an accounting perspective is that on the time of sale, because the risk is transferred and we do not have any underlying ownership. We recognize the revenue as a gross number in our income statement and the related inventory that is sold is then recognized on our cost of sales. Hi, guys. Thanks again and congrats on the quarter. Just a few questions from me. They're somewhat related. You know, maybe first Naeem or Lincoln to you. Could you provide some rough commentary on how much working capital before the loan book funding, you'd expect to invest per year and how much that's to maintain the business versus growing it? Second, you know, I guess, how should we think about usage of cash going forwards? And third, you know, Naeem now that you've extended the lending facilities, are there any other levers to continue to optimize capital structure, reduce debt repayments, reduce interest expense? And I guess what's the new maturity on the debt? Thanks. Thanks, Frank. So I'm going to put those questions to Naeem to respond to and just maybe help you that he can deal with it. I think the first question was around our working capital requirements in the business. And our requirements to invest in working for growth. Yes. So look, I think, Frank, from a working capital perspective, it's quite important to understand that the majority of our working capital is really in our VES and the Card Acquiring business. If you look at our cash management business, as well as the business related to the consumer. The working capital requirements are not that significant, because we receive the funds from the customer upfront. So those are held on a wallet. If I look at the current facilities, you will see as well that as we highlighted between quarters, we can have quite a swing in terms of the working capital requirements in the Kazang business depending on when the month end or when the quarter end. And that is managed through adequate facilities that we have in the moment in terms of cash, as well as an overdraft facility. We do also take advantage of opportunities where we can earn higher margins, specifically on our value-added services business in terms of airtime and electricity. And in those circumstances, we would fund upfront, and that's then specifically through cash reserve. So I think we do those only in circumstances where we can earn a higher margin and it's a cost-effective way of increasing the margin in the business. In terms of going forward, we do not envisage a significant increase in working capital requirements. We are experiencing quite a significant growth in our Card Acquiring business. But the capital requirements in terms of working capital are well managed and within our facilities that we would be able to do in our overdraft. So I think that our longer-term view in terms of working capital is that we don't believe there is a significant increase anticipated. Yes, sure. Look, I think for us, firstly, we’re super excited about the fact that we've been able to renegotiate a position with our bankers. Number one, over the last six to nine months, it's very indicative of the confidence that the bank is already seeing in the performance. And the extension of the facility to three years taking us up to 31st December 2025 gives us the ability to really focus on making the right, kind of, decisions in terms of capital management. And in addition to that the potential upsizing of that facility that will help us fund our loan book growth mainly on the consumer side of the business. So that is quite a significant change for us. In terms of levers, as we've highlighted in a number of our presentations, the focus for us in the business is really the consumer and the merchant business in South Africa. We have the non-core investments such as MobiKwik and [Indiscernible]. And we will be looking at means and ways to exit those positions in a responsible way. And that would result in quite a significant cash inflow for us to manage. In addition to that, I think we would be also looking at the right time in the market in terms of adjusting the structure of our capital position. Yes. Hi, thank you for taking my question. I wanted to ask maybe, perhaps, directed towards Lincoln. If you can talk a little bit about the consumer division, you know, talk about the lower transaction, the ATM transaction fees and the higher insurance fees? And also, what's happening in the ARPU? And how you are able to push it up? And what should we see that going forward in terms of the traction in the conversion of the accounts? First of all, thank you so much. I think firstly, I want to say how pleased we are with the turnaround of the consumer business. I think that we've spoken over the last few months about the work we've done to get our staff to understand the importance of cross-selling. And all of that work is starting to come through. You're starting to see more of our clients taking our insurance business and our sort of insurance products and our lending products. Those two things how to drive our ARPU. As long as we've got quality clients and those clients are able to take more of our lending products, and our insurance products, we want to see that ARPU increasing. And we think that if we maintain that, you'll start to see some upside on that ARPU even further. So we're quite confident on the trajectory of our ARPU as we improve our business, as we improve our cross-sell to our existing clients. So we've been quite pleased with how our customers have responded on the lending side and the insurance side. Yes. You know, on the ATM transaction fees, they were lower. And was that because of the reduction in the infrastructure? I know that the ATMs have become far more efficient. And productive? Yes. So what I like -- let me comment on just a macro point around it, ATMs in the business and then we can talk about some of the macro movements quarter-on-quarter as well. I think that according to your highlights is we've taken the 18 states down from around 1,500 devices, you know, just over year ago to around 880 at the moment. And approximately 60% of those are now in retailers. Previously, all of them were in our branches. And what we are seeing is a significant increase in volumes on those ATMs what we would call, [Indiscernible] transactions, which means other banks, the clients of other banks using our ATM. So you know, with the and state that it's essentially hard. We are seeing and we're protecting our volumes, and in fact growing [Indiscernible] and then that really is coming from a much more efficient, you know, per ATM activity than what we saw previously. So I think very happy with the, you know, with the strategy that we -- that's playing out on the ATMs are in terms of driving productivity and super good device. Yes. Thank you. And then just a question on Connect. Just wanted to understand how was it better than initial expectations when Connect was acquired? Has it -- has Connect surprised you in any particular segment, and it surprised you positively? So, you know, I think on the whole -- the Connect Group, you know, for us has delivered, let's say exactly what was laid out in terms of the vision and the opportunity for the business. And as seamlessly integrating to Lesaka. So, you know, we believe it's, you know, a successful transaction in every way. You know, areas where it's outperformed would be, for example, you know, in the Card Acquiring in the Card Payment space, we had forecast around volumes and growth in that business and have been exceeded. And that's positive upside. So that's been a big positive. We've seen growth in the -- in our merchant numbers ahead of our business cases. So in terms of rollouts of VAS devices, that has been ahead of our original expectations. So it's usually positive. But I think what it's saying to us is it's just underlying -- underlining, rather, you know, the market opportunity, particularly in the informal space. And we've spoken about the fact that 1.4 million informal merchants out there as a target addressable market, we've got something like, you know, 65,000 devices. We've spoken about the fact that 4% of their rebates of merchants in the informal space can accept card payments. You know, we've seen our volumes double. Our current pipeline is doubled over the last six months in the informal space. So those themes are, you know, are well understood or have been identified, and I think of the secular themes that drive the Connect Group. Maybe the pace of growth has been a little bit more than we built into our original plans. Great. Our next question were submitted by Judge [Indiscernible] of Cloud Penny Partners. His first question is for Steve. Steve, you have a stellar growth rate in the Merchant division, even quarter-on-quarter. And we expect this type of momentum on a quarterly basis going forward? So maybe just circle back quickly to, you know, the earlier question raised around load shedding and maybe, you know, what I want to remind everybody about is retailers in this country, particularly in the MSME sector and more broadly, if you look at the last three years, we've had COVID, we've had in the Kaizen area. We had significant flooding. We've had riots. And of course, now we've got this perpetual load shedding. So the business -- the merchants have been stress tested. I think one of the things that we'll have to watch in -- as we go into Q3 is the perpetual nature of this has some form of exhaustive effect on the retail merchant. So we produced a very good set of results as you can see in Q2. Our momentum going into Q3, we are through January, we have very strong momentum and that has continued. But perhaps some of that slowdown, which we may see, in some of those areas relating to load shedding are offset by some of the innovation that sits within the business. And Chris touched on it already. So as I've mentioned before, Kazang Pay was a spin-off of Kazang. And our Kazang Pay advance is a spin-off of Kazang Pay. And some of these ideas and businesses, which we were pregnant with, including our supplier payments businesses, and our capital connect business are starting now to see much stronger momentum than we initially anticipated. So I think whilst we -- so I think the answer is we have a well-balanced offering. We are solving and having a lot of fun solving for the pain points of our merchants. And the business is underpinned with very good momentum. So I think Chris, we've given guidance for Q3. And I think we're relatively confident that, that is -- it's solid and if anything, probably -- potentially a little bit conservative. Great. Another question from Judd and this is for Lincoln. Congrats returning the consumer division to profitability. How should we look at the growth outlook of the consumer division over the medium term? Would you say that you now have fixed the cost structure in place to drive operating leverage from here? How do you think about the long-term stable margins in the consumer business? I think that if you look at the guidance that Chris has given, we can now see that this business is stable. That this business now is planned for growth and that all the cost initiatives that we've taken we will now reap those benefits. And then all of the work we've done in preparing our clients for new propositions, we will now be able to kind of build on that. And I think that in terms of the guidance, you now will have a business that is growing profitably quarter-on-quarter to be in line with the guidance. So we've done a lot on the cost in terms of the bulk of what we need to do. But obviously, there are still some tweaks that we need to do. But on the own, I think that those phases of firefighting are gone, we now can start to think about what are the innovative things that we can do with our clients, what value propositions can offer them and what can we do to compete with other players in the market. So that's how we look at the future from the consumer division. Well, great. Thanks. We're running short on time, but we do have three more questions that I'd like run through before we close-up, has there been a notable increase in SASSA beneficiaries after the major glitches experienced with Post Bank since November 2022? How do you guys -- have you guys’ plan set up aggressive acquisition of customers currently served by Post Bank? Yes. We have great plans around that. We are actively encouraging customers to join us. We are also making sure that we have more presence in terms of marketing. Telling people what we offer and what alternative we have. But what we're trying to think about going forward is not just the mistakes of the Post Bank or challenges that they have, but to work on our value proposition and make sure that our value proposition is quite competitive and enticing for customers to join us. And those are some of the things that we're working on. What can we put in the table that makes customers excited to join us regardless of the challenges that SASSA and them are facing. Great. Thank you. This next question is for Steve. Steve, there are a couple of players in the merchant credit provision space such as retail capital, habitat, who have been in the space longer. Have large data set provided by Yoko and others or large balance sheets? How do you plan to differentiate yourselves from them? So let me at the outset, let me say I'm just so impressed with some of our young folk in the business who just perpetually innovate and bring good solutions to the market. So if we look at the Capital Connect business, I mean, the differentiator in that space is hassle free credit. Between the time of applying and it's all preloaded, our customers can have credit approved and money in their account within a few minutes. So I think that in itself is a major differentiator. Remember, we are well positioned in that business. We process close to ZAR10 million a month through our vaulting infrastructure. And we process close to -- if you look at Q2, well Q2 and in fact December, we did about ZAR1.3 -- just under ZAR1.3 billion in our card processing business. All of that data is attached to an algorithm, which allows us to -- allow our retailers to take advantage of an opportunity when it knocks. Now, there's an old saying opportunity doesn't knock at whispers. And if you're an entrepreneur, you've got to take advantage of it immediately. So the intrinsic advantage we have is really the speed and our ability to turn that round within minutes. So the conventional approach, which is I need management accounts, audited accounts, a credit committee and will revert within a few days is not a model that really is appropriate for the type of retailers that we're dealing with. And then, of course, on the back of that, we continue to innovate in terms of added-value beyond simply the speed to market. Well, great. And guys, we're at our last question. And this is another question for David Garrity, and it's for Chris. Chris, do you have an authorization to repurchase shares in the market -- in the open market? If so, what is the size of the repurchase facility? What are your plans there to exercise the authorization if any? Thank you for the question. Yes, we do have a capacity or a facility rather to repurchase shares in the market. And I'll confirm the exact size for you or flatten out of the numbers with me here. But yes, the business does have that authority or ability to repurchase. I think the broader question around share buybacks, for us, as I've said before, our focus has been around stabilizing the business. It's been about -- on the consumer side and it's been about integrating the Connect acquisition and focusing on delivering the growth journey that you've been hearing about here today. So as our first quarter have actually generating cash in the business at an operational level, we feel we've turned a real milestone. And our focus continues to be to reduce that debt to EBITDA ratio on a net debt basis. As we said, a net debt to EBITDA, we're now at 3.3 times. We'd like to see that come down a little bit more. So all of these things are sort of immediate focus areas around cash and our resources in the business. And we believe we are producing and delivering a business that has excellent returns to shareholders, return on your capital. And we'd hope to start to see that coming through and continue to coming through in the quarters ahead. So yes, we'll monitor the situation. We'll continue to focus on where we are and we're very alive to this question, we get it quite a lot. Well, Chris, everyone, thank you for your time. Thank you everybody for joining us today. We've run out of time. That concludes the call. I would encourage any investors who didn't get a chance to ask a question or have more questions to reach out to the IR team, we are here 24/7. Thank you.

EarningCall_413

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the DuPont Fourth Quarter 2022 Earnings Conference Call. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Chris Mecray, Vice President, Investor Relations. You may begin your conference. Good morning and thank you for joining us for DuPont’s fourth quarter and full year 2022 financial results conference call. Joining me today are Ed Breen, Chief Executive Officer; and Lori Koch, Chief Financial Officer. We have prepared slides to supplement our remarks, which are posted on DuPont’s website under the Investor Relations tab and through the webcast link. Please read the forward-looking statement disclaimer contained in the slides. During this call, we will make forward-looking statements regarding our expectations or predictions about the future. Because these statements are based on current assumptions and factors that involve risks and uncertainties, our actual performance and results may differ materially from our forward-looking statements. Our Form 10-K, as updated by our current and periodic reports, includes detailed discussion of principal risks and uncertainties which may cause such differences. Unless otherwise specified, all historical financial measures presented today exclude significant items. We will also refer to non-GAAP measures. A reconciliation to the most directly comparable GAAP financial measures included in our press release and has been posted to DuPont’s Investor Relations website. Good morning and thank you for joining our fourth quarter and full year 2022 financial review. We posted strong quarterly top and bottom line results in line with our previously communicated guidance in an uneven global economy. Fourth quarter revenue included a 5% organic growth versus the year ago period, strong volume in water and auto adhesives, as well as ongoing strength in industrial end markets such as healthcare and aerospace, helped mitigate volume declines in consumer electronics end markets and softening conditions in North American construction markets. Strong pricing growth in the quarter reflects actions taken largely prior to the fourth quarter to offset persistent inflationary pressures in raw materials, logistics and energy. We sold over $800 million in year-over-year inflation headwinds for full year 2022. We delivered year-over-year operating EBITDA growth in the fourth quarter despite a slight volume decline, currency headwinds and the impact of portfolio divestitures. We also saw a margin improvement of 120 basis points, demonstrating solid operational execution and focus on items we can control within the highly diverse end markets where we participate. The closing of the M&M sale was a milestone event in the fourth quarter and our last contemplated large-scale divestiture. The transaction further transforms our portfolio to concentrate in more stable, secular, higher growth and higher margin end markets. As you can see on Slide 4, our transformation actions have significantly strengthened our balance sheet, increased our financial flexibility and positioned the company to continue to generate shareholder value through disciplined capital allocation. Following the M&M sale, we acted quickly in accelerating return of capital to shareholders. We authorized a new $5 billion share repurchase program in November and launched an accelerated share repurchase transaction for $3.25 billion of common stock, allowing the retirement of about 39 million common shares in the fourth quarter. We anticipate completing this ASR in the third quarter of 2023 and plan to execute share repurchases under the planned remaining authorization as soon as we can. In the quarter, we also retired $2.5 billion of long-term debt, which is due to mature in November 2023 and reduced our commercial paper balance to zero as of year end. The long-term debt retirement reduced refinancing risk and generated pre-tax annualized interest expense savings of approximately $100 million. We also announced today an increase in our quarterly dividend of $0.36 per share or a 9% increase versus last year. Going forward, we continue to target a dividend payout ratio of between 35% and 45% and expect to increase our dividend annually alongside earnings growth. In total, we deployed more than $7.5 billion of capital in 2022 through significant share repurchases, deleveraging and dividend payments, which reflects our overall balanced capital allocation strategy. We exited the year in a favorable balance sheet and liquidity position and we look to further allocate excess capital over time to max on value creation through both opportunistic M&A and incremental share repurchases. Our M&A focus remains on targets that fit within our growth pillars and are aligned with key secular growth trends that we have highlighted. Further, our disciplined approach to portfolio management will ensure that DuPont focuses on growing businesses where we are the best strategic owner. Regarding the Delrin sale process, we continue to advance our internal work required to divest the business. We are being prudent with the deal process to ensure suitable market conditions and still expect to have a completed sale in 2023. Finally, we also continue to invest internally in innovation and incremental operating capacity to fuel and support our organic growth. In 2023, we expect to allocate CapEx at about 5% of sales as we wrap up some larger scale projects this year and we target R&D spending at about 4% of sales on a consolidated basis longer term, investing differentially within our business lines based on growth potential. Turning to Slide 5 before I hand it over to Lori, I want to thank our teams who remain focused on operational execution in a difficult environment, which allowed us to produce solid revenue and earnings growth this fish year. I also want to thank our teams for their continued efforts made during 2022 in transforming our portfolio. We are excited about the longer term growth potential of our business in its newly constituted form, centered around the secular high-growth pillars of electronics, water, protection, industrial technologies and next-generation automotive. Our end market mix is notably tilted towards electronics at about one-third of our portfolio. Within electronics, we have a key presence in consumer-based end markets, namely chips, films, displays and printed circuit board materials used in smartphones, PCs and tablets. The bulk of our remaining electronics exposure is in areas such as data centers and telecommunications as well as industrial and automotive applications, primarily consumables used in the semiconductor chip manufacturing process. Despite short-term volume pressure, we are pleased with our electronics market position and confident this exposure will help generate strong growth over time. Our presence in electronics is enviable, with higher margins versus the company average and a solid competitive position across the key products we supply. Likewise, our water business at 12% of our portfolio operates in markets that are expected to grow mid to high single-digits, driven by the global response to concerns such as water scarcity and circularity. Additionally, our participation in the auto market at about 13% of sales is much more connected to high-growth advanced technologies, enabling long-term secular trends like hybrid and electric vehicles for items such as battery applications. A solid portion of our auto exposure is aligned to EVs, which are growing at a significant pace. Given these and our equally strong market positions in many other end markets, including within our protection and industrial technologies pillars, we believe that our financial results over time will bear out the view that the new DuPont will grow and generate returns on par with the best industrial assets in the public markets. In response to near-term short-cycle end market slowing expected in the first half of 2023, we have been doing scenario planning for some time now and are proactively taking actions within our control to minimize volume impacts on margins. As a result, we expect to be able to show the resiliency of the new DuPont portfolio this year. I look forward to providing you with updates as we progress through 2023. Thanks, Ed and good morning. The quality of our portfolio was highlighted this quarter as strong top line results across the majority of our business lines offset weaker conditions in consumer electronics and construction. The global economy remains challenging, but our team’s focus on execution drove solid fourth quarter earnings growth and operating EBITDA margin expansion against the prior year period. Turning to our financial highlights on Slide 6, fourth quarter net sales of $3.1 billion decreased 4% as reported and increased 5% on an organic basis versus the year ago period. Global currency volatility resulted in a 5% headwind from U.S. dollar strength against key currencies, most notably the yen, yuan and euro. We also saw a 4% portfolio headwind driven by the impact of non-core divestitures. Breaking down the 5% organic sales growth, 7% pricing gains were partially offset by 2% volume declines. Continued strength in water solutions and over 20% volume gains in auto adhesives were more than offset by further softening in smartphones and personal computing within interconnect solutions, a slowdown in semiconductor and construction market, as well as continued lower year-over-year volume from Tyvek protective garments within safety solutions. As we exited the year, we saw lower volumes in areas we have highlighted with total December organic sales up 2% year-over-year, including down high single-digits in China, driven by acceleration of COVID disruptions and low single-digit organic sales growth in the U.S. and Canada due to muted demand in construction and destocking by customers. From an earnings perspective, operating EBITDA of $758 million increased 1% versus the year ago period despite currency headwinds and the impact of portfolio. Organic earnings growth was driven by pricing and disciplined cost control, which more than offset inflationary cost pressure and lower volumes, including the impact of production rates. Operating EBITDA margin during the quarter of 24.4% increased 120 basis points versus the year ago period. Adjusted EPS in the quarter of $0.89 per share increased 16%, which I will detail shortly. Cash used in operations during the quarter of $126 million, less capital expenditures of $185 million and transaction-related adjustments totaling $213 million resulted in a free cash outflow of $98 million. The transaction-related adjustments consist of $163 million termination fee related to the intended Rogers acquisition, with the remainder from a tax prepayment for the M&M divestiture. Further headwinds to free cash flow during the quarter included transaction costs related to closing the M&M deal of about $200 million and an approximately $100 million cash outflow related to prepaid accounts payable in advance of the M&M deal closing, which was subsequently reimbursed to us at closing and reported as an inflow within investing activities. I call out these items to provide visibility into our underlying cash flow performance. Additionally, free cash flow included a working capital benefit during the quarter of about $120 million related to inventory reductions resulting both from our productivity efforts and from our decision to slow production in certain lines of business given the lower volume environment. Turning to Slide 7, adjusted EPS for the quarter of $0.89 per share increased 16% compared to $0.77 per share in the year ago period. The strong EPS growth came primarily from below-the-line items as organic earnings from our ongoing businesses were mostly offset by the absence of earnings from non-core divestitures as well as currency headwinds. Ongoing share repurchase continues to drive earnings per share growth, providing a $0.07 benefit to adjusted EPS. Lower net interest expense provided a $0.05 benefit to adjusted EPS, driven by both interest income resulting from additional cash on hand from the M&M divestiture and also lower interest expense resulting from the pay-down of $2.5 billion of senior notes during the quarter. Our tax rate for the quarter was 22.2%, up notably from 18.6% in the year ago period, resulting in a $0.06 tax headwind to adjusted EPS driven primarily by geographic mix of earnings and currency. Our full year base tax rate for 2022 was 23.2% and our 2023 outlook assumes a base tax rate in the range of 23% to 24%. Turning to Slide 8. Just to note a few metrics on a full year basis, net sales of $13 billion in 2022 increased 4% for the full year. On an organic basis, full year sales increased 8% due to a 7% increase in price and a 1% increase in volume. W&T and E&I delivered organic sales growth of 11% and 5% respectively and net sales in all four regions increased organically. Further, we delivered high single-digits or better organic sales growth in 5 of our 6 lines of business as well as in the retained businesses within corporate led by auto adhesives. Interconnect Solutions was the only business line down organically due to the slowdown in smartphones and personal computing since last summer. Full year operating EBITDA of $3.26 billion increased 3% due primarily to volume gains as pricing gains were mostly offset by continued pressure associated with higher raw material, logistics and energy costs. Operating EBITDA margin was flat at 25.1%, inclusive of price cost headwind of about 150 basis points. Full year adjusted EPS of $3.41 per share increased 12% versus 2021. The increase was driven by a lower share count from share repurchases, higher segment earnings and lower net interest expense, which was partially offset by a higher tax rate. Cash flow from operations for the year of $588 million, less capital expenditures of $743 million and transaction-related adjustments totaling $328 million for items that I mentioned earlier, resulted in free cash flow for the year of $173 million. Full year discrete headwinds included in free cash flow totaled about $650 million, which mainly reflect transaction costs. Turning to segment results, beginning with E&I on Slide 9. E&I fourth quarter net sales decreased 8% as organic sales declined 2%, along with currency and portfolio headwinds of 5% and 1% respectively. The organic sales decline reflects a 5% decrease in volumes, partially offset by a 3% increase in average price. The organic sales decrease for E&I was led by a 10% decline in Interconnect Solutions driven by volume linked with further weakening in smartphone, PC and tablet demand, along with channel inventory destocking and the negative impact of COVID-related disruptions in China. In Semiconductor Technologies, lower volumes resulted from reduced semi fab utilization rates due to weaker end market demand along with channel inventory destocking. End market weakness was seen mainly in smartphones and personal computing. In Industrial Solutions, volumes were muted as lower demand in consumer printing and weakness in LED silicones for conventional lighting in China more than offset ongoing strength in broad-based industrial end markets, including Best Bell product lines in aerospace and for applications in healthcare markets. Operating EBITDA for E&I of $407 million decreased 4% in the quarter as volume declines were partially offset by disciplined cost control with operating EBITDA margin up 150 basis points from the year ago period. For the full year, E&I net sales of $5.9 billion increased 7% versus 2021, up 5% on an organic basis as the portfolio benefit from last year’s Laird acquisition was partially offset by currency headwinds. Organic sales growth for the year of 5% consisted of a 3% increase in volume and a 2% increase in price. From a line of business view, organic sales growth was led by Semi Tech, up low double-digits and Industrial Solutions up high single-digits, partially offset by mid single-digit declines in Interconnect Solutions related to weakness in smartphones and personal computing end markets during the second half of 2022. Full year operating EBITDA of $1.8 billion increased 4% as volume gains, a full year of earnings associated with the Laird acquisition and higher pricing more than offset inflationary cost pressure and weaker mix in interconnect. Turning to Slide 10, W&P fourth quarter net sales increased 6% as organic sales growth of 12% was partially offset by a 6% currency headwind. Organic growth reflects broad-based pricing actions taken across the segment to offset cost inflation as WP volumes were flat. Organic sales growth was led by Water Solutions, which increased over 20% on strong global demand for water technologies, led by reverse osmosis membrane as well as capacity increases and pricing gains. Water continues to be an area of consistent strength with long-term top line growth expectations in the mid to high single digits. Sales for Safety Solutions were up high single digits on an organic basis as pricing actions were somewhat offset by lower Tyvek volumes given the demand shift from garments to other applications and the resulting impact of line changeovers on production efficiency. Excluding the year-over-year garment headwind, total W&P volumes increased approximately 2% in the quarter. In Shelter Solutions, sales were up high single digits on an organic basis as pricing gains were partially offset by volume declines primarily in North America construction. Operating EBITDA for W&P of $360 million increased 11% as pricing actions and disciplined cost control more than offset inflationary cost pressures and currency headwinds with operating EBITDA margin up 100 basis points from the year ago period. For the full year, W&P net sales of $6 billion increased 7% versus 2021 as organic growth of 11%, partially offset by a 4% currency headwind. Organic sales growth for the year consisted of a 12% increase in price, slightly offset by a 1% volume decline. Excluding the year-over-year garment headwinds, total W&P volumes increased 2% for the year. From a line of business view, organic sales growth was driven by mid-teens growth in Shelter Solutions, low teens growth in Water Solutions and high single-digit growth in Safety Solutions. Full year operating EBITDA of $1.4 billion increased 3% as higher pricing and disciplined cost more than offset inflationary cost pressure as well as currency headwinds. I’ll close with a few comments on our financial outlook and guidance for 2023 on Slide 11. We expect solid top line growth trends to continue into 2023 in businesses such as water and auto adhesives as well as stable demand across diversified industrial end markets, including aerospace and healthcare. We do, however, anticipate lower volumes during the first half of 2023 in consumer electronics and semiconductors, resulting from decreased consumer spending, inventory destocking and COVID-related impacts in China, largely within E&I. We also expect ongoing softness in construction end markets within W&T during 2023. For the first quarter of 2023, we anticipate continued weakness in these consumer-driven short-cycle end markets, resulting in a first quarter net sales expectation of about $2.9 billion or down mid-single digits on an organic basis versus the year ago period. As 2023 progresses, we assume stabilization of consumer electronics demand, normalization of customer inventory levels and improved China demand to drive sequential quarterly improvement in operating results, most notably in the second half of the year. Within the Interconnect Solutions business, where the printed circuit board market has been down since mid-2022. We anticipate that channel destocking and customer production rates begin to improve during the second quarter. Within semiconductor technologies, fab utilization rates are also expected to bottom during the first half of this year and improve around midyear. As a result of these assumptions, coupled with expectation of improvement in China across our product lines, we expect full year 2023 net sales to be between $12.3 billion and $12.9 billion. In response to the expected lower volume environment, we are focused on minimizing decremental margin impacts. To achieve this, we are focused on the operational levers within our control, including appropriate actions to increase productivity at our plant sites, reduce discretionary spending and realization of savings enabled by cost actions initiated during the fourth quarter. For first quarter 2023, we expect operating EBITDA of about $710 million. For full year 2023, we expect operating EBITDA to be between $3 billion and $3.3 billion, expecting to hold full year operating EBITDA margin flat at the midpoint of the ranges provided compared to last year. These same midpoints imply a decremental margin of 27% for the full year despite a mixed headwind resulting from volume pressure in our higher-margin business, mainly semi. Our first quarter adjusted EPS expectation of about $0.80 per share and full year adjusted EPS guidance range of between $3.50 and $4 per share assumes continued growth from below-the-line benefits related to a lower share count and lower interest expense. The midpoint of our full year adjusted EPS guidance implies growth of 10% versus last year, driven by these benefits from our ongoing capital allocation strategy. With that, we are pleased to take your questions, let me turn it back to the operator to open the Q&A. Let’s – if you don’t mind, I’d love to get a little bit more color on the inventory levels. When you think about, I mean, two different businesses really with the interconnect and the semiconductor side. But how high did inventories get? Meaning kind of how above normal were they? And where would you characterize them today versus where perhaps they were maybe a quarter ago? Yes. So on ICS, as Lori just mentioned, Scott, that started its downturn actually middle of 2022. So that’s been going through a downturn. It’s obviously lower demand. And a lot of that lower demand, by the way, is China related lower demand because of COVID and lockdowns and all that. And so we have talked to our 10 largest PCP customers mainly in China, and it looks like they are going to begin their ramp in the second quarter. We’re thinking more in the middle of the second quarter. And maybe to give you a couple of numbers behind it, their PCB fabs usually run in the high 70% utilization rate. They have been – they are all a little bit different, but they have been running kind of between 40% and 60% and they expect the second half of the second quarter to be kind of up to 60% to 65% and then ramp up from there. So that’s what we’re getting granularly on the ground. And of course, smartphones are supposed to pick up in 2023 from last year. And remember, the smartphones in China were down 20% last year. So it was just a big down. I mean nobody – none of the consumers were shopping. So I think just China coming back on its own from kind of this artificial COVID thing alone is going to help with demand. And remember, we’re high on electronics in that market in general. So I think we will see a boost there. And then if we’re right with our customers on the PCB side, we will start seeing that in the middle of the second quarter. And then on the semi side, I think that’s pretty public knowledge. But those fabs were all running high, kind of 95%. They are now running in the low 80s. Now remember, a lot of that is destocking going on. Most of the chip guys are saying the biggest down quarter is the first quarter. We think it’s the first and second quarter. So in our planning, as Lori mentioned, that’s what we planned that we start seeing our ramp towards the end of the second quarter. And if you look at the MSI data, it’s kind of minus 10 and then minus 12 versus the second quarter, and then it improves and gets actually positive in the fourth quarter. And then, of course, we will – our demand will happen slightly before that MSI number. So I think we – the way we laid it out, we’re sequencing it properly. And by the way, maybe just to give you the rest of the landscape the way we put ‘23 together. We plan that the construction markets will be down all of 2023. And then pretty much every other business, we have all the industrial businesses will be stable in 2023 and the water business will grow mid to high single digits. So that’s kind of a lay of the land of how we put it together. Yes. If I can just add to, we referenced the market research inventory index for semi to get an understanding of what inventory exists in the channel. And right now, usually, it says it kind of goes into surplus mode when the inventory index is above 1.2. We’re looking to be in that – butting up against the 1.2 as we close the first quarter. And the second quarter to our earlier point is the peak where it gets a little bit higher than 1.2, and then it starts to come back down. For reference, back at the last semi downturn in the late 2018, 2019 downstream, it was much higher. So it doesn’t feel like we have the same dynamics going on at what we had back then. But it does feel like there is more in the channel than where we were definitely last year at this time, we were kind of at a below one level with respect to the inventory index. So just looking at the guide, I think you guys have like $0.60 or something like that of tailwinds off of the 340 base kind of gets to just above $4. The low end of the range at 350 just seems like what’s embedded in the low end of that 350 range? I feel like the math gets us to something a little bit higher, at least at the low end? Yes. So the low end on both the top and bottom line really assumes not much improvement coming out of Q1. So a little bit mainly driven by seasonality, but not a lot of recovery in the end markets that we had spoke about. So it is more on the pessimistic side. We believe a lot of indicators that we’re seeing and the conversations that we’re having with our customers would suggest that wouldn’t come to fruition, but we wanted to bucket it on the low end just to be cautious. I mean, Steve, it would be more a global recession scenario. So we’re just bracketing it. But I would point you to the midpoint of our guidance is we’re obviously trying to zero in at. Yes, that’s where we are anyway. I saw some news on an employment contract. I got a lot going on this morning. But can you just maybe give us a little bit of color there for you? Yes, Steve. So I had a contract in place, I think it was a 3-year contract that ends at the end of this calendar year. And a question I get pretty frequently from investors is that your retirement date because that’s when your contract expires. So the Board and I wanted to take that off the table. I’m going to continue employment after the end of the year. And I don’t need a contract anymore because some of the stipulations were back in from the DowDuPont days. And so I’m just an at-will employee, but excited to continue after the end of the year. Thank you, and good morning, everyone. You guys had really strong pricing in 2022, obviously, to get after that $800 million of inflation. How do we think about that price cost relationship in ‘23? Presumably, there’ll be parts of your business that will hopefully see some deflation, and then maybe wages and stuff are still a headwind. But how should we be thinking about carryover pricing into ‘23? And how you’ll manage pricing where you might see some deflation? Yes. So we haven’t seen any positive impact yet in our numbers, but I would expect on the logistics and freight side, maybe we will start to see something towards the end of the second quarter there. We’ve baked very little into our 2023 business plan for any benefit from price cost A. little bit is in the second half of the year. But not much when we start to see it, we will highlight it obviously and look at our forecast again. But I mean, obviously, it looks like some of these roles are going to start to come down here and again, see some benefit from the extreme freight rates in the middle of last year. But again, we’ve baked very little of that in so far. Yes. And from a price – carryover price perspective, we do see a little bit in Q1 in the low single-digit range and then it pretty well waned as we lap. The significance of the price increases that we drove happened in Q1 of last year. So you’ll pretty well lap that in the first quarter. Okay. And then, Lori, just a follow-up, do you have a sort of rough guide for free cash flow conversion for ‘23? I mean it’s very clear there was a lot of moving parts and noise in the ‘22 number. But how are you thinking about ‘23 at this point? Yes. Obviously, 2022, as you had mentioned, was noisy with the transaction cost, coupled also with the supply chain environment that caused us to hold more inventory than what we normally would. So we don’t see that repeating. Obviously, on the transaction side from that perspective and the working capital situation should get better. So we should target to be at that 90% conversion range that we target for the full company. So you can use kind of the midpoint of guide that we had provided and a calculated into a number, making sure that you contemplate that roughly $150 million to $200 million in transaction costs that are primarily associated with some straggling carryover from the M&M separation and then the Delrin Divestiture. We did start to bring inventory down in the fourth quarter. So we’re going to start hopefully trending here. Now the supply chains are kind of moving back to sort of normal. Great. Thank you so much. You posted pretty solid results, water, protection, specifically in water and safety. Can you just go over some of the guide framework you hit on a lot on E&I? Can you get on some of the guide framework as it pertains to W&P and just speak about kind of what’s driving that and as well as the sustainability as we think throughout ‘23 and even into ‘24? Thank you so much. Yes. From an organic basis, we will continue to see strength within water. So we had really nice performance in the water segment in general in 2022 with organic sales up kind of high single digits, and we would expect a similar performance this year. The one end market that will be weak for us, as Ed had mentioned, is Shelter. So in the first quarter, we do see Shelter down kind of in the mid-teens, that will moderate as you go – as you go through the year, is down into the mid-single digits potentially on a full year basis. But we don’t see a full recovery in shelter within the 2023 timeframe. And then generally, in safety, those are industrial end markets for the most part, minus maybe a little bit of destocking that’s happening at some of the big distributors that should generally perform in line with industrial production on a full year basis. Yes. And on the Shelter side, remember, there is seasonality in that business. So the first quarter is usually the lowest that we’ve planned kind of a recession scenario for construction throughout the whole year, but then you will get some seasonality lift as you’re in the middle of the year, just naturally off of a tougher bottom, but. Got it. That’s very helpful. And then you also hit on some remarks regarding just the Delrin timing and just how do we think about that? Do you have anything else that you’d be comfortable adding at this time in terms of just the process, where you stand, your confidence level versus a few quarters ago? That would be very helpful. Thank you so much. Yes. So we’ve done all the clean room work that’s all set. We’ve been doing some education on the business externally. If I had to kind of guess at this point, I think we’re going to launch more formally at the end of this quarter that we’re now in. We think the markets are better than they were in the fourth quarter. There is probably strategic and private equity interest. So that’s why we are being careful on the timing. And so my gut is we will launch around them. And the business looks like it’s having a pretty decent first quarter as we can see it right now. So I think that the timing might be good there. And we should be able to wrap up a deal fairly quickly in that business. So it’s not that complicated. So that’s why we made the comment that we should be able to close that, obviously, in 2023. First, I just wanted to go back and talk about the expected cadence for full year earnings. It sounds like kind of reading between the lines, you’re indicating late in 2Q things start to pick up, inflect in electronics and some input deflation. So should we model a pickup really starting in the second quarter? Or does the recovery begin more notably in the third quarter in your view? You’ll get some lift in the second quarter, and I would say, predominantly because of China coming back kind of online, if I should say it that way. So I would model – we’ve given you the first quarter. I would model some sequential improvement, but the bulk of it would be the third and fourth quarter. And again, it lays out. We think the middle of the second quarter, the ICS business start, the fab start ramping up. So most of that benefit, you’ll see third and fourth quarter, a little bit in the second quarter. And then we don’t – we’re not planning on semi picking up until the third quarter. Maybe it will happen in the middle of the second quarter, but somewhere in that ZIP code. And so you get a little bit of China uplift, maybe a little on ICS. But again, planning mostly third quarter for that. Maybe a little in semi. But again, planning more third quarter for that. So I think you can kind of build that out. to get to kind of maybe our midpoint that we’ve guided to for the year. Great. That’s super helpful. And then quickly, just a second question just on M&A. we have seen a few transactions start to pick up a bit as of late. Can you just talk about are you seeing some of the potential acquisition size? Yes. We are looking at a couple of things we have been interested in. Of my – my gut is we will do a bolt-on acquisition this year, but that’s not a given. We are in no rush. We want to get it at the right price. So, we will see. But we are definitely looking and zero in on a couple of things. But I will put them more on the bolt-on size, from a spend category, and it would clearly be in one of our growth pillars where we have the expertise. And what we really want to do is pick up innovation and R&D and technologies in core areas to build out a couple of the platforms. Thank you and good morning everyone. In E&I, you are discussing several new products launched in both interconnect and semiconductor technologies. So, I wonder how are your customers looking at adoption of new technologies, things like new nodes for your fab customers, is it getting pushed out or there is policy interaction on that? No. I mean, the interaction still remain very robust and they are a key portion of our delivery of top line growth, especially within semi. So, we would still expect that 200 basis points to 300 basis point outperformance versus the end markets and the discussions are still very frequent and common for us to be able to continue to drive that relationship. Yes. I mean – and let’s keep in mind that when the semi thing picks up for the second half of the year on the next decade looks pretty incredible for the semi business. You see all the announcements on the fabs. Almost all of these fabs are the denser small or high end chips. And that’s why we, as Lori just mentioned, we get the 200 basis point to 300 basis point overgrowth from the market is because we get to participate more and more on the advanced node side. So, the – we are going to have a couple of soft quarters here, but the outlook over the next decade is pretty incredible in this space. So, we stay very much up on the R&D, and we are very close to the top semiconductor customers doing design and work with them. Yes. Hi. Thanks for taking my question. Just your guidance doesn’t appear to really factor in any further buybacks beyond the ASR you have ongoing. I was just wondering if you could talk about your willingness to either deploy that additional $2 billion on top of the ASR immediately following. How you are thinking about when that plays into your framework? Yes. So, the guide does contemplate starting potentially another ASR when this was one is completed like the beginning of the fourth quarter. So, our guidance that we provided for EPS has a reduction in the full year versus the first quarter outlook, and that reflects getting started on that second tranche of $2 billion that we have remaining on the authorization. But we also have the ability to still purchase over the top on the existing ASR should we feel it prudent. So, we have some volume that we can purchase as needed while the current ASR is open. Generally, you try to keep your volume under 15% of daily purchases, so that you don’t work against yourself and our current contracts on the ASR allow us to do a little bit over the top. Josh, as a reminder, Page 16 of our slide deck has some additional modeling guidance, including share count, but don’t miss the fact that we took quite a few shares out in the fourth quarter associated with the ASR that was enacted in mid-November. So, you may have been missing that effect in the fourth quarter and then the guide for ‘23 on the year-over-year. No. Got it. I appreciate that. And just Ed, I guess a follow-up on the contract you have in place to keep going beyond this year. I guess it’s become a bigger question for investors around long-term transition planning. So, I guess where would you say you and the Board are in terms of thinking about kind of the next step for DuPont, maybe it’s multiple years out, but where are we in that process? Yes. The Board is well aware of internal candidates being developed and continuing to go through their career. So, we – the Board is clearly aware of who internally is an option for the next CEO role. But we are also not at that point, but we do discuss it regularly in the development plans for the internal candidates. So, I will just leave it at that. Thank you. Ed, you didn’t mention the U.S.-China trade technology restrictions, including the new Huawei controls. Is that an immaterial issue for DuPont? Yes, it’s 50 – John, the reason we didn’t – I know we mentioned it last quarter, but it’s about $50 million to $60 million of revenue. So, it’s not that significant, though. But we did bake that obviously into our forecasting that we did. And so whether you can take that as – you can extract that down to EBITDA, it’s not that big in the scheme of things. But that’s definitely in place, yes. Yes. And that’s on that Ed said on the direct Huawei exposure, there is really not much there. So, we don’t have exposure there. Yes. John, it’s scheduled in June of this year. And we have ongoing conversations for a settlement. By the way, I think having a – the judge appointed a mediator, I think that was around the time we did last earnings call, if I remember. And I would say that’s very helpful to the process. So, I will leave it there. Thanks for taking my question. Just kind of understanding kind of the back half cadence and you will be exiting the year on. So, if you think about the guidance you offered, does it look like maybe the back half is kind of at a run rate basis, maybe at the upper end or maybe at the middle end of the range, say, Q3, Q4 averaging close to $1 or – and what is it going to take to really get to that kind of level of earnings power? Is it mainly a macro recovery, or are there other levers within your control that you can leverage? Thanks. Yes. So, you are pretty well spot on the second half EPS trajectory, and it really is all impingent upon the pace of the recovery in the end markets that we highlighted. So, seeing the semi destock and the demand return, seeing the smartphone and consumer electronics destock stop and the demand return. And then obviously, the continued China reopening will have a positive impact on our business. So, that impacted us in December and it will impact us on Q1 as they continue their reopening. But remember, we have got 20% of our sales into China. So, a nice opportunity as they continue to recover from the full COVID lockdown. So, it’s really that the shift between the first half and the second half is really all from the top line and expected to recover… Yes. And you get, sorry Chris, you do get a nice lift in margins and it benefits from mix in part. I mean as E&I comes back, remember, you have got a nice margin lift. So, you are kind of in the mid-24s on a margin in the first half and then you are up in the low to mid-25s in the second half, again benefiting from that mix and the timing of that E&I rebound from first half to second half. So, you end up averaging. The overall margins for the year end up being relatively flat, but there is a nice lift on a run rate basis when you are in the second half there. And just as a follow-up then, if you look at ‘24, you will be facing easier comps, especially in the first half in E&I. Do we return kind of to a double-digit EPS growth rate in ‘24? Again, would you be inclined to increase the repurchase activity to reach that level if needed? Thanks. Yes. I mean I think it’s a little early to start looking at ‘24. Obviously, this should – we have got nice EPS growth from the capital allocation decisions that we have made, and we will see that carry into 2024 as well because the second piece of the existing authorization really won’t be put in place until the fourth quarter. So, you won’t get the full benefit on a full year basis from that. But yes, in a normal environment, we should drive really nice top and bottom line growth. We have got end markets that would suggest in total, you would be in that mid-single digit range on the top line if they perform in a normal macro perspective. And then I think we have proven that we do a really nice job of driving margin improvement and leverage across the P&L. So, we wouldn’t see any material change there from that dynamic. Hi. Good morning Ed and team. This is Bhavesh Lodaya for John. In your guide, you have a cautious outlook on the construction end markets pretty much throughout the year. Is there a way to quantify what the year-over-year EBITDA impact is from the downturn? And then I realize it’s early, but when do you expect to get more clarity on a potential trajectory of recovery there? Yes. So, for the Shelter segment, it’s about 13% of sales. And we had mentioned on a full year basis, we would expect that to be down mid-single digits. And we have sized the EBITDA margin profile of shelter as below the W&P segment average. So, I think we have given you several data points there that you can back into what we believe the EBITDA headwind will be to W&P and the total company from shelter in 2023. You highlighted cost control measures initiated during the fourth quarter and those clearly helped from the margin perspective. Is there a way to quantify the benefit? And do you need to do more of these in 2023, or maybe what’s built into your guide around these? Yes. So, we took costs out in the fourth quarter. We opened a restructuring program. And under the restructuring program, we took about a $60 million charge. And a lot of that was to get after the stranded costs that we saw coming out of the completion of the M&M divestiture, and there also were some actions in the business is able to drive productivity. So, we have got further room under the restructuring program if we would need it to be able to continue to drive margin and the decremental margin that we target. As of now, there is really nothing planned or baked into the guide incrementally, but we have the flexibility as we need to. Hey. Good morning guys. Nice end of the quarter. Nice end of the year. In terms of your outlook for construction, I mean are you hearing from your customers now that their backlogs are really weak at the end of the second half, or is it just more planning for difficult environment that with high interest rates and such? Yes. It’s just the planning at this point. And by the way, not to get overly optimistic, I heard a couple of homebuilders during this last quarter, actually reported numbers that were kind of nicely better than were expected with decent backlog, actually. So, I think it’s mixed out there. I think certain regions of the country, if you look at the detail, are doing better, in construction, some of the Southeast and Southwest areas. But having said that, again, we are also in a deleveraging mode here right now. And remember, some of our construction materials go into big box for do-it-yourself stuff and there is clearly destocking going on there. So, that part of it will end. But we have just planned look with interest rates where they are at the macro on the shelter business right now, just assume the whole year stays at about the level it’s at. And Lori mentioned the percentages. So, I think it’s just prudent planning on our part. Got it. And then for E&I, it does seem like you need some volume growth in the second half to hit the midpoint. How much of that is from new products and some of your innovation that you have done and maybe wins on new nodes and memory? Well, let me just give you, overall, our new products are – that have been launched in the last few years or like 30% of our sales. So, we track that very, very closely. We are constantly bringing out new versions, I would say, of our technology all the time. And that’s what keeps us ahead of the pack on, for instance, the advanced nodes in semi. And as – so it’s constantly happened. But I wouldn’t say that it’s not going to have a material effect on where our revenue ends up. That’s just a month-by-month that happens. Yes. I think I mean back to the outperformance that we highlighted. So, currently the full year MSI expectations are in the down mid-single digit range, obviously vary dramatically by the quarters with the first quarter starting at it, down kind of low-double digits. But our expectations opposite that full year down low-single digit MSI number or down mid-single digit MSI number would be to be down low-single digits. So, we would still expect that outperformance by the innovation engine that we have that allows us to be able to be more exposed to the high-end nodes and continuing to build relationships with those customers. And that, again, that low mid-single digits for MSI is very negative in the first quarter and build during the year, and it gets positive in the back half of the year, which we believe that also having talked to our semi customers. Thank you. Ed and Laurie, how should we think of – in E&I, how should we think about incremental margins in the back half of the year? Yes. We would expect in the back half of the year, the overall EBITDA margins to be more in that 31%-ish range that we would expect from the E&I perspective. So, they will be a little bit muted in the first half and we would expect a return from the EBITDA margin profile in the second half. A little higher, yes, mid-30s, maybe upper-30s incremental margins. They shouldn’t be too different than the – obviously, the gross margin you would see within the E&I segment. I mean I think if you see a little bit of deflation that would drive earnings higher, we had mentioned in 2022 and the current expectation for 2023 is, there is about a 100 basis point headwind from net price cost. We haven’t baked any material benefit in from that perspective. So, that would be one tailwind that would help to drive the EBITDA margins higher. And then the other would just come within E&I mix enrichment. So, the quicker recovery in summary, that’s obviously our highest margin segment. So, that would help as well to drive the E&I margins. Thank you so much for squeezing me in under wire. I appreciate the granularity on China, your expectation that you are going to see a pickup by the mid-second quarter. But just curious, what are you seeing here real time post Chinese New Year in terms of economic activity there? Yes. I mean obviously, we can see January is also a little hard to see through given the timing of Lunar New Year. So, this year, it was full in January, last year full in February, so it makes it a little bit different from a year-over-year comp perspective. But the reopening is definitely happening. Right now, I think the benefit of the reopening is more on the essential side. So, spend is more towards those essential needs, and we would need it to obviously tend over to the discretionary needs that we would expect to see as you get further into the first half. But definitely, the lockdown appears to be well behind them and they are returning to some form of normalcy. Very helpful. And if I could stick to the geographic theme, your year-over-year volume declines in Europe moderated from the third quarter here in the fourth quarter. So, I am just curious as to what are you seeing on the ground in that part of the world and what your expectations are for ‘23 over in Europe? Yes. So, Europe does feel a little bit better as they get the concerns around the access to energy behind them. And obviously, the energy rates or it’s a tailwind for everybody. So, you have seen a really material pullback in the European natural gas rates. And so we are cautiously optimistic on Europe and the continued benefit there. For a full year basis, we are still generally flat for overall volumes in Europe. We will see how that trends as the year plays out. I think – is a big part of how that plays out because of water [ph] in Europe is fairly significant. And this ends our question-and-answer session. Mr. Chris Mecray, I will turn the call back over to you for some final closing comments. Yes. Thanks everybody for joining our call. We appreciate your participation and for your reference, and a transcript will be posted on our website. This does conclude our call. Thank you.

EarningCall_414

Before we begin, I’d like to read the following Safe Harbor statement. Today’s discussion includes forward-looking statements. These statements reflect the company’s current views with respect to future events. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including those discussed under the heading, Risk Factors and elsewhere in the company’s annual report on Form 20-F that may cause actual results, performance or achievements to be materially different, and any future results, performance or achievements anticipated or implied by these forward-looking statements. The company does not undertake to update any forward-looking statements to reflect future events or circumstances. As in prior quarters, the results reported today will be analyzed both on a GAAP and non-GAAP basis. While mentioning EBITDA, we will be referring to adjusted EBITDA. We have provided a detailed reconciliation of non-GAAP measures to their comparable GAAP measures in our earnings release, which is available on our website which has also been filed on Form 6-K. Hosting the call today are Doron Gerstel, Perion’s Chief Executive Officer, and Maoz Sigron, Perion’s Chief Financial Officer, and Tal Jacobson, General Manager of CodeFuel and Perion’s Chief Executive Officer effective August 1, 2023. Yes, greetings. I hope everyone is well. I’m very glad to have the opportunity to be with you all once again. Together with me on the call is Maoz Sigron, our CFO; Tal, GM of CodeFuel; and, as said, as of August 1 replacing me as CEO of Perion. Tal will introduce himself and we will talk about the transition plan in-depth towards the end of our call. And now to business. By now, you’ve all seen the numbers. I will briefly review them in the context you’ve seen before, so you have an apples-to-apples comparison. After that, I’ll get into the theme of our call today, Perion’s execution model. So for the revenue side, we are showing a 30% year-over-year growth in 2022 that demonstrates once again that we are able to follow the trends in media spending, for example, consumer awareness of privacy and the increase of viewers that watch live sports events on their smart TVs, leading to huge demand for high impact live CTV. We also responded to the trends regarding MetaMedia [ph] and advertiser preference towards direct response via search-related advertising. These are all reflected in our performance. What’s more, these shifts are likely to increase, not decrease in velocity, therefore the ability to react becomes mandatory to continue to outperform the industry. You should remember this important factor when we talk about our execution model. From an EBITDA standpoint, our ability to increase our media margin despite the pressure on advertising inventory due to macroeconomic environment reinforces the value of our high impact ad units and highlights the effectiveness of our central control system, Intelligent HUB, at optimizing demand and supply. These factors are behind our amazing year-over-year EBITDA growth of 90% in 2022. And finally, I want to bring back our Rule of 4 slide. To remind you, this principle says as software companies combine revenue growth rate and profit margin should equal or exceed 40%. Q4 was another quarter following seven consecutive ones where we achieved the Rule of 4, actually 54% on the Rule of 4, performance which belongs to the most respected and high value software companies. Now I would like to share with you our execution model that has guided Perion’s thinking in my time at the company. It’s the explore and exploit model. You can also think of it as innovate and improve model. I’m sharing this because I keep getting asked the basic question, how does Perion do it? In fact, how does Perion manage to deliver quarter after quarter, year after year of growth no matter what the economic conditions, in the midst of a pandemic, supply chain disruption, and decades-high inflation. The simple answer is our conviction that the ability to successfully execute if the core of our success. It is fundamental. To demonstrate how this works in practice, let’s look behind the scenes because the more you now about how we approach strategy and execution, the better you’ll be able to understand the sustainability and predictability of our business and to assess our growth. The image shows the full concept. It’s composed of two parts. The exploit grid contains our mature solution which constantly needs to be improved in terms of growth and sustainability alongside our innovation engine, which empowers us to explore and invent new growth initiatives in the explore group. Our numbers are proof of the effectiveness of this model. In 2022, our explore initiative generated $64 million in revenue and $26 million in media margin, while in 2023 our expectation is to double the revenue to $110 million and generate $45 million in margin. For our exploit solution, we visualize our portfolio in two vectors: growth and sustainability. We extend our moat to protect us from any disruption in the marketplace. We build and measure KPIs to continually assess the progress we are making to reach higher profitability and greater sustainability. With that as context, I’ve chosen a few highly relevant examples to demonstrate our model. First one that I choose is our video solution. Our video platform is one of our main growth drivers, increasing in 2022 by 129% compared to 2021. That represents 43% of display advertising revenue. We’ve also seen an average increase in three important metrics. Revenue per video platform publisher grew by 106%. We experienced a 69% year-over-year increase in the number of publishers that are using our video platform - 76, up from 45 in Q4 last year; and finally, a 78% year-over-year increase in revenue from retained video platform, in other words, our publishers are spending more and more on our platform. Now I’ll move to SORT, our privacy-first cookieless solution, which is another very interesting example of our explore solution. It’s growing maturity demonstrates the journey I talked about earlier, how a 2021 explore initiative moved into exploit grid in 2022. The results in Q4 are powerful. Ad campaigns using SORT represented $26 million, up 82% quarter-over-quarter, reaching 21% of advertising revenue. The number of SORT customers increased by 36%, 76 new SORT customers, overall 191 customers using SORT. On average deal size, that’s the most important factor, using SORT increased by 33% to $107,500. So when customers are using SORT, they feel comfortable and safe to spend more because that’s what consumers like. And last but certainly not least, SORT delivered a 1.33% CPR, almost three times the Google benchmark of 0.46. And let me repeat, this is without cookies. With that success of SORT as an in-house service, we are working extensively, that’s an explore effort, to offer SORT as a service to other companies that are interested in offering a privacy-first solution that performs better than other targeting tactics. Last on the exploit side is direct response, or what we call the search advertising. Our portfolio and healthy direct response solution via search advertising continues to be one of our most profitable and sustainable exploit solutions. The business is driven by two levers: increasing the number of publishers and aggregate number of monetized number of searches we transfer, mainly to Microsoft Bing. That number is robust and impressive. We are reporting today 22 million average of daily - I repeat, daily search that is going through us in Q4 2022, an increase of 26% year-over-year. This number is growing every day and I can tell you that this quarter, actually, the first five weeks of the quarter, we are seeing 25 million searches, daily searches or average daily searches. Let me quickly point out again that direct response is one of the three pillars of our diversification strategy. As cost sensitive advertisers move to ad search, we are there. With that, we will move to the explore grid. When it comes to our innovation engine, we will continue to explore many different ideas. We recognize that the profit potential of any one of them will be unclear at the outset. That’s how explore operates - we have assigned a dedicated team and budget to design, test and scale explore innovations. They investigate the value proposition, market [indiscernible] synergies with our existing product and business models. Only after all these are assessed as positive, then an innovation initiative makes it to the top right-hand corner as tested business idea with substantial profit potential. This enables us to focus on innovation and disruption, ensuring that we stay ahead of the curve and not be blindsided as our industry rapidly changes. The best example that I can take at this point from the CTV is the live CTV. CTV is another broad explore opportunity that excites us. Specifically, we found a very sizeable sub-segment of live CTV within sport events. According to Nielsen, sports broadcasting reached the most CTV users and, hear me out, 94 of the 100 most watched telecasts on TV in 2022. Commercializing this live sports CTV requires unique technology that is a huge challenge as ad insertion cannot be planned ahead of time in terms of timing and, more importantly, in terms of format, and needs to be executed on the run. As an example here is how Dr. Pepper used our live CTV platform to reach U.S. viewers watching college football. It’s a rare win-win-win - the viewer gets to continue watching their sports content without interruption, the advertiser maximizes attention which might have been lost during the commercial break, and the publisher retains viewers, they don’t change the channel or jump to a different app. This means more revenue for everyone. Next example on the explore is retail. The growth of retail media is also dramatic. These huge players, from CVS to The Home Depot to Macy’s, are building retail networks. It is another true explore opportunity for Perion. Retail media has become the fourth largest advertising medium with ad spend forecast to reach $121 billion globally in 2023 - that’s a 10% increase from last year. Growth of retail media is positioned to do for the 2020s what search powered digital advertising did for the 2000s and what social media did for the 2010s. Perion is uniquely positioned to take advantage of this new wave. We are working with the largest retailers, such as Albertson’s, and during the first year after establishing our retail division, we generated $22.3 million in revenue and expect to deliver $30 million in revenue in 2023. Last but not least, an earnings call without ChatGPT is not a true earnings call, so I will refer to it especially after yesterday’s meeting at [indiscernible]. The advertising industry is on the cusp of a major transformation as advances in generative AI are set to revolutionize the way brands reach and engage with their target audience. This capability has the potential to dramatically streamline the advertising production process and open up new avenues for creative expression. With regard to search, our expectation is that ChatGPT will revolutionize Bing search capabilities by providing more advanced and intuitive search experiences for its users, better meeting their needs and expectations. We believe that such superior search results will increase advertiser spending and as a result, we expect to see a very positive impact on our search business. Microsoft Bing currently is only 3% of the global search market. If the new Bing search with ChatGPT sparks even modest share gains, Microsoft can do very well in the business. As their CFO, Amy Hood said yesterday, every percentage point of share it gains in search equals roughly $2 billion in additional advertising revenue, and as a strategic partner of Microsoft Bing, I’m sure we will be benefiting from this increase. Let me also point out that ChatGPT, which is the number one technology story of the year, fits beautifully in our exploit-explore framework. In parallel, we will develop new exploratory applications of what AI can accomplish in our technology stack. Going forward, it’s also important to point out that the relationships between exploit and explore is dynamic. As Schumpeter pointed out in his famous theory of creative disruption, new ideas are continually destroying and replacing the old. That’s why continued exploration is the lifeblood of any business and that’s why failure is not be feared. You cannot explore without making mistakes, and we’ve made our share. This is why, for example, we shut down [indiscernible], a privacy web browser. Thank you Doron. Good afternoon and good morning to those of you joining us from the U.S. I am happy to be here today to present continuing strong results for Perion for the fourth quarter and full year of 2022. Perion continues to outperform the ad tech industry, consistently improving our results during the last two years despite the global macroeconomic challenges and market volatility. Perion’s diversified business model, technology differentiation and innovation-focused approach continued to enable us to navigate our way through a challenging market, resulting in excellent performance. Let’s look at the key financial achievements for 2022, reflecting the strength of our business model and our ability to execute our strategy. Revenue grew by 34% to a record of over $640 million. Adjusted EBITDA of $132.4 million, another record, 90% year-over-year growth. Non-GAAP net income of nearly $120 million doubled year-over-year. Non-GAAP diluted earnings per share increased by 57% to $2.47. We continue to demonstrate our ability to generate cash with operating cash flow jumping 72% year-over-year to $122.1 million. I would like to share with you one additional and meaningful financial KPI that in my opinion reflects the strength of Perion’s performance over time. The revenue and EBITDA LTM show our ability to consistently execute our business strategy. During the last 10 quarters, the average quarter-over-quarter growth of revenue LTM was 9% and EBITDA LTM was 17%. The financial metrics clearly reflect our strong results over time and Perion’s robust, sustainable and predictable business model. Our ability to grow our revenue while continuously improving profitability quarter over quarter is most impressive and shows long term execution in a volatile environment. I would like to take this opportunity to talk a bit about our inorganic efforts and more specifically about the Vidazoo acquisition. The Vidazoo acquisition in October of 2021 is a great demonstration of how we approach and execute our M&A strategy. Our M&A strategy includes the following: being profitable and accretive from day one; second, a solid growth prospective; third, strong synergies with Perion organic business; fourth, strong market position; and last but not least, a broad and build model one-third cash and two-thirds [indiscernible]. In Vidazoo, we found a company that had a product we were missing in our offering. We wanted to enhance our high impact and video offering, having an end-to-end solution for publishers, eliminating all existing intermediaries, and Vidazoo is the answer. Vidazoo was accretive since day one and had a clear growth trajectory. Their ability to attract new publishers and gain more traffic from existing ones helped them to grow faster than our expectations, but more importantly, we identified clear synergies with our existing businesses. Our ability to expose all Perion assets to Vidazoo and use Vidazoo as a delivered video solution and introduce the video platform to Perion’s publisher network created significant synergy dollars during 2022, and more to come in the next years. The revenue CAGR between 2020 and 2022 was 101% and the EBITDA CAGR for the same period was 118%. Vidazoo is growing their business dramatically while improving their profitability, which is exactly aligned with Perion DNA. Based on Vidazoo 2022 EBITDA and the total consideration of $93.5 million, the Vidazoo multiple is 4.5 compared with Perion 2022 multiple of 8.5. Now let’s move to the key financial achievements of Q4 2022. Revenue for the fourth quarter was $209.7 million, reflecting 33% year-over-year growth. Adjusted EBITDA of $48.2 million increased by 67% year-over-year. GAAP net income was $38.7 million, representing 119% year-over-year growth, the highest quarterly net income ever. Non-GAAP diluted earnings per share was $0.90, reflecting 45% year-over-year growth. Let’s turn to the next slide to discuss our results in more detail. The revenue of the fourth quarter of 2022 was $209.7 million, an increase of 33% year-over-year, reflecting a strong continued three-year CAGR of 33%. The revenue of the full year 2022 was $640.3 million, an increase of 34% year-over-year, reflecting a strong continued three-year CAGR of 40%. Fourth quarter display advertising revenue increased by 24% year-over-year to $123.8 million, 59% of total revenue. This was driven primarily by the continuous market adoption of our holistic video platform the solution, the increase in SORT revenue, and growth of our CTV business. Video revenue increased by 33% year-over-year, representing 42% of display advertising revenue compared with 39% in Q4 2021. The number of video platform publishers increased by 79% year-over-year from 42 to 75. The revenue from retained video platform publishers increased by 78% year-over-year. Our CTV business continued to gain traction, growing by 42% year-over-year, representing 10% of the total display advertising revenue. Our innovative cookieless targeting SORT solution is being adopted more and more by the market in light of consumer growing awareness and increasing [indiscernible] pressure on companies to protect consumer privacy. The number of SORT customers rose to 191 this quarter, a 36% increase quarter-over-quarter. SORT customer revenue increased by 82% during that period, now representing 21% of display advertising revenue versus 17% in the previous quarter. Fourth quarter search advertising revenue increased by 49% year-over-year to $85.9 million, driven by a growing trend of advertising favoring our high intent direct response advertising. The year-over-year increase in revenue was driven by a 13% increase in RPM and a 26% increase in the number of average daily searches. The results demonstrate our strategic diversification business model of our two main revenue streams. The fourth quarter display advertising revenue accounted for 59% of total revenue compared with 63% in 2021, with search advertising representing 41% of revenue compared with 37% in 2021. On an annual basis, display advertising revenue accounted for 56% of the total revenue compared with 55% in 2021. We continue to expand into the fast-growing segments of video, CTV and retail business. Our sales business continues to grow as we benefit from the current shift to direct response search advertising. Our media margin continued to show year-over-year improvement. Revenue excluding TAC was $87.7 million or 42% of revenue compared with 41% of revenue in the fourth quarter of 2021. The Intelligent HUB that we have developed and several other processes and automation leverage data and buying power to control and improve the overall media buying system. This has resulted in better selling and buying power, translating into a continuous improvement in media margin. We take great pride in our ability to implement efficiency measures and progress in our day-to-day operations. Each and every efficiency measure shows a continuous improvement over the last three years. Our opex plus COGS in 2022 accounted for 23% of revenue compared with 28% in 2021 and 33% in 2020. At the same time, EBITDA per FTE has risen from $78,000 in 2020 to over $300,000 in 2022. This impressive achievement reflects the execution of our business strategy and the disciplined manner we run our operation. Over the past few years, we have invested in innovation and automation, creating the infrastructure that allows incremental top and bottom line growth on a lower cost basis. We have improved our budget control and are consistently looking for new efficiency initiatives. This shows how our efficiency and cost control measures, coupled with focused growth in high margin business, translates into impressive bottom line growth. Fourth quarter adjusted EBITDA was $48.2 million, reflecting 67% year-over-year growth. Adjusted EBITDA margin was 23% compared with 18% last year, while adjusted EBITDA to revenue excluding TAC increased from 45% in the fourth quarter of 2021 to 55% in the fourth quarter of 2022. Full year adjusted EBITDA was $132.4 million, up 90% year-over-year and with a three-year CAGR of 101%. 2022 EBITDA margin was 21% compared with 15% last year. 2022 EBITDA excluding TAC margin significantly increased to 49% compared with 37% last year. On a CAGR basis, fourth quarter net income was $38.7 million or $0.79 per diluted share, an increase of 119% compared with $17.7 million or $0.44 per diluted share in the fourth quarter of 2021. For the full year, our GAAP net income was $99.2 million or $0.06 per diluted share, an increase of 156% compared with $38.7 million or $0.02 per diluted share in 2021. On a non-GAAP basis, fourth quarter net income was $44.7 million or $0.19 per diluted share, an increase of 77% compared with $25.3 million or $0.62 per diluted share in the fourth quarter of 2021. For the full year, non-GAAP net income was $119.8 million or $2.47 per diluted share, double the $60 million or $1.57 per diluted share in 2021. We continue to demonstrate our solid ability to generate cash. Fourth quarter operating cash flow was $38.2 million compared with $28.8 million in the fourth quarter of 2021, reflecting 32% year-over-year growth. For the full year, cash from operations amounted to $122.1 million, up 72% year-over-year. As of December 31, 2022, our cash, cash equivalents, and short term deposits amounted to nearly $430 million, up $40 million on previous quarter and $108 million since December 31, 2021. Our strong cash generating ability and the accumulated $430 million in cash provides us with a valuable resource to execute both organic and inorganic growth opportunities. Given our strong performance and our sustainable and predictable business model, we expect the solid business momentum to carry on in 2023. With our visibility into the year, we are today publishing our guidance for 2023: revenue between $720 million to $740 million and adjusted EBITDA between $149 million to $153 million. Thank you Maoz. At this point, I’d like to elaborate on what we shared earlier today, that I am stepping down as CEO. I joined Perion as CEO in 2017, almost six years ago - actually, it was April 2, 2017. The board recruited me to turn the business around. They recognized that I had had a career of doing just that, so I was no stranger to cleaning up messes, but this was quite a big one. The challenge in front of me was to fix the capital structure, build our competitive advantage and moat, strengthen our technology, and enhance operational efficiency. Only by doing those things, all of them, not one of them, would growth be restored. I’m proudest of the fact that we have reached a point where we outperform our industry and demonstrate continuous growth and high profitability even during the most volatile economy, including the worst pandemic that we’ve seen in decades. We’ve accomplished this by creating an execution model that is positioned to benefit from wherever ad spending flows across the three pillars of our industry. That’s why we are on the only one of 52 ad tech and market publicly traded companies who saw share price growth in 2022. We have become a true technology leader with innovations like SORT, which has won awards. We have made smart and strategic acquisitions which have enabled us to enter into new categories and created organizational synergies. We have attracted world-class brands, strengthened our relationship with Microsoft Bing, and have built a culture that is committed and creative, and we did all that with agility, speed and resourcefulness. With all that behind us and Perion is now well past the turnaround point, I felt it was the right time to move forward with the succession plan. It was clear for me to recommend Tal as my successor to the board. I recruited Tal from SimilarWeb in 2018 to drive the turnaround at CodeFuel and to position our search business for accelerated growth. Tal is a visionary entrepreneur but also has great expertise as an operator. Under his leadership, CodeFuel, our search advertising [indiscernible] reorganized, modernized its technology infrastructure, and further developed our strong and mutually beneficial partnership with Microsoft Bing. What’s more, CodeFuel technology has played an important role in the development of Perion’s Intelligent Hub. Tal was instrumental in making that happen. As many of you have followed us and seen the growth of our search and direct response business are aware, the performance has been superb. As GM, Tal drove that. In addition, Tal has been by my side as a key member of the executive team involved in all important strategic discussions, including M&As. This broad immersion in current business beyond CodeFuel gave the opportunity to collaborate with other business units. He knows them, understands them, and works well with them. The next six months will be a transition period, and I’ll invest enough time to ensure that when Tal assumes the CEO role, it will go very smoothly. Of course, I will remain on the board of Perion and so be very involved in the future of the company. Yes, thank you Doron. It’s an honor to be named as Perion’s next CEO, and I look forward to continuing with the collaboration with Doron in the next six months as we work through the transition. I want to thank the board of directors for their confidence in me. I’m excited about the opportunities before us and ready for the challenges. For those who don’t know me, I joined Perion in 2018 as the General Manager of CodeFuel. My task was to transform the search business, which was in a period of decline, into a sustainable, profitable growing business. By solidifying our key relationship with Microsoft Advertising, investing in technology, and focusing on quality, we achieved just that. Today, our search advertising business enjoys a robust relationship with Microsoft Advertising. Just one year ago, we were named Microsoft Advertising’s Global Supply Partner of the Year. This is aligned with what Perion stands for: an innovator, a leader in technology, and a differentiator in the entire ad tech market. Over the past six years, Doron led a momentum restructuring, pivoting the strategy and developing and leading the team that together established Perion as a true innovator. I’ve had the pleasure of working closely with Doron and I look forward to continuing our work together from the board seat that Doron is going to continue with us. I believe we have only scratched the surface of the opportunities we are facing, including search, retail and CTV. We are positioned to address all key facets of digital advertising, delivering high impact solutions for brands at every step of the consumer decision journey. We have proven our ability to identify shifts in ad spending, delivering the right solution at the right time. This is evident in our market leadership, our expanding margins, our growing share, and our overall financial performance. The future of Perion is bright. First, Doron, mazel tov on your tenure and what you’ve been able to do at the company. I think the market is concerned with maybe the timing of your leaving, given that the results speak for themselves yet the stock appears to be down. Is there anything you’re seeing, kind of--just in the short term, what are you seeing in the business, perhaps, as far as out as you can see? That’s question one, just maybe try to help the market ease itself. The second, as you think about retail media, are these contractual relationships? Obviously you’re seeing really nice growth, but you’re competing against some pretty big companies who are trying to become platform plays with retail media, so just talk about the contractual nature of retail media. And then last, just on ChatGPT and what Microsoft is doing, is your initial take that for Perion specifically, you will benefit if they’re able to bring more advertisers onto Bing, it drives up CPCs and ultimately you benefit from that? Obviously, very early with this whole AI-driven search, but just any thoughts there. Thank you. Yes, thank you Jason. I will start with the easy one, which is the ChatGPT, because the flow is as follows when it comes to our business. First, it all has to do with consumers. We believe that this technology first and foremost will attract more consumers that will use Bing, and as I mentioned before, it’s all about how many are using the technology. I think the Microsoft CFO said that each one point is $2 billion. And while you have more that are using the Bing search, advertisers are aligning with it because it’s all about scale. If advertisers are aligning in what way, they want to spend more - that’s one, so they put more ads into this platform compared to other platforms that exist, and the second, they’re willing to bid more, so we are expecting that two things will happen. One, we will have more in terms of searches, and right now, you’ve seen the numbers and we’re expecting them to grow. The other thing is if advertisers would be willing to spend more because we believe that the demand will be higher, it will increase the RPM. So with those two factors by itself, and I’m not here talking about any kind of technology cooperation or something that we’re able to do this, only by that, I have no doubt that we will benefit from I think what Microsoft Bing is doing, and it’s all about giving a fight to Google and become more dominant from the 3% market share that they have today, so that’s clear. As far as what I’ve seen in 2023, so first of all, you know us by now very well, we are very conservative and we are mostly conservative when it comes to the first time that we provide guidance for the year, happen to be in this call. Having said, we’re not seeing any slowdown in this quarter. We are five weeks into the quarter. And if I’m trying to compare this quarter to the last quarter--to the first quarter of 2022, I think, we are in very, very good shape. As I mentioned, there are some other areas where we are changing our business model - you know, always on, I mentioned it on the last call, with our retail customer, which gives us a better way to predict our business, so all in all, on one hand we are conservative, on the other hand, we are very optimistic as far as our ability to once again deliver the growth and the profitability as we did in the last three years or so. So the retail media is very interesting. We still define it as an explore business, even though the appetite is really big for 2023. I mentioned $30 million - this is our target versus the $22 million that we did this year, but I think what is more important is the quality of the revenue of retail media, because if we’re talking about sustainability and predictability, I think that’s the great example, because what is always on? Always on is a type of contractual business where an advertiser, in this case retailers are in a way commit for spending along the year, and it’s not aligned to a certain campaign. So for us, for our modeling, these dollars that are considered to be retail dollars are worth more than dollars that are coming from campaigns that we are questioning their sustainability. Fantastic, sorry about that. Okay, so Doron, let’s start with you. Jason drilled down on ChatGPT as it relate to Bing and Microsoft’s comments yesterday. I want to pivot your insight and ask you about--you said that you thought ChatGPT and this generative AI could really streamline the production process for ad tech. So I want to step out of search and go to the other part of your business, and could you give us your early thoughts on how you think ChatGPT impacts the advertising part of your business over the next two years, excluding the search business? And then second for you, Doron, I’d like to do CTV. You said it was 10% -- you guys said it was 10% of this by advertising. How big and how fast can that get? Do you think over the next year or two, will you continue to project growth in your mind of that 42% or do you see it slowing? And then three, Maoz, are you kidding me,like, I get that you guys are conservative, but how do you go from growing total revenue at 33% in both the fourth quarter and the full year to 14%? Like, what’s falling off the cliff, because it’s not search, so what is falling off a cliff that--the deceleration it has? Those are my three questions. Thanks. Yes. So first, the ChatGPT, so other than the search, the most, let’s say, obvious, trivial one that we are very much around it, it has to do with reducing all creative work, content work, everything that has to do with rendering video and putting a lot of AI. I mentioned in one of our calls, the technology of dynamic creative optimization, the DCO, that is going, I think, to be a commodity, everyone is going to use it. The idea is very much to be as personalized as possible what you are targeting, no matter if this is performance or awareness campaign. This is going to be, I think, the first--very much the first phase of using the ChatGPT internally. The minor factor is reducing the labor costs that associate with this development. I think the main benefit will be our ability to deliver greater value, greater return on ad spend to our advertiser because the personalization is going to get a huge boost. That’s the trivial. But if you’re looking about it in a way beyond that, one of the most important things, it has to do with the modeling and our ability, and that’s a very interesting thing. We are sitting in a goldmine with the HUB. I mentioned the fact that we’re creating the technology that’s able to capture signal from all over - you know, the channels, if it’s the supply and the demand, and things like that. That’s a huge boost into our model. We are already looking about how we’re able to upload the huge amount of data and what is the result that we’re getting back. That’s going to be a huge step forward in the way that we’re able to optimize demand and supply, and most importantly to bid smartly against our competitor. The HUB is going to be the main beneficiary, even though it’s quite challenging - we talk about a huge amount of data. We’re still not sure what is the pricing model of this type of AI start-up. Currently, it’s not that cheap to upload all the data and developing here a model, and we are looking about it when price will go down or it will be other opportunity for us, doing it in a most economic way. But that’s something that we as a company see it as the next phase of using ChatGPT in our--internally. In terms of live CTV and CTV in general, which was your next question, so you know better than anyone else that these CTV things got commoditized, and we are always looking about the growth and we’re looking about the profitability, and this regards the gross margin. The reason that we are trying to develop all kinds of products into niches, and currently there is a reason where I mentioned live CTV within the CTV, we need to step away from the competition, we need to step away from the commoditization that is happening on CTV, and keep a very, very high margin. The outlook on CTV will be on margin, more on the growth because I think that there is a great opportunity to get high margin. The other area that we are focusing from CTV standpoint has to do with the convergence of CTV and retail, which is very interesting. We are having some advanced discussions with our retailers, you know, customers, how the two definitely can work together, retail media and CTV. We are going to launch soon one of the most impressive campaigns that we are working on it right now. To summarize, I think that it’s the time to break CTV into verticals in order for us to dominate those verticals.’ I must say that in the last years, we’re really using the same model. This is the same model that helped us to meet guidance in the last three years. We are implementing the same model, and this is where we are now. We did 40% revenue and 40% EBITDA growth for 2023. We’re feeling very comfortable with these numbers and we will keep the same model. The model is the same. Yes, the times change, the market is changing, we are taking all that we know on the model, but this is how we did it and this is how we will do it moving forward. Hi, thanks for taking my questions. Another one on ChatGPT, if I could. Is there potentially a risk that Bing could decline to renew the agreement, maybe not this current agreement or even the next agreement, but if Bing is able to fundamentally transform the search marketplace and gain significant share on an organic basis, is there a risk that Bing maybe no longer needs partnerships to help drive traffic to Bing, because they’re already doing enough, and I guess what would the contingency plans be there? Then second on SORT, I guess, what does kind of the, quote-unquote, sales cycle look like for SORT? We’re seeing obviously great expansion in that product, but how does it actually get into advertisers’ plans from awareness to implementation? Thank you. As far as ChatGPT, and we’re having a very close conversation with the guys, I definitely see no risk. The other way around - first of all, they are $10 billion into technology, I’m sure that someone, I don’t know, put them in ROI plan how they’re able to get this back, and the only way to get back is to increase their market share. The only way to get this back is that they will increase revenue and they will rely more on partners like CodeFuel to drive more searches, underline quality searches that they’re able to monetize and very much generating a healthy business for advertisers. I think that this risk diminishes by the fact that they doubled down on Bing in terms of their strategy, simple as that. Now to your question about SORT, so surprisingly the sales cycle with SORT has, as I said, two phases. In phase one, advertisers are a bit concerned and they said, okay, what is the--there is no free lunch here, in other words, when we are adopting SORT, are we compromising on results, in other words CTR. So when they started the campaigns using SORT, it’s always and always being done in an AB fashion, where some of the campaign is SORT, using SORT alongside of using cookies. That’s 100% of the cases. Now, once they’re doing their initial campaign, sometimes it’s even more than one, I must say, because markets are quite skeptical - how the hell are you able not using cookies and yet outperform the cookies, or using cookies? That seems for them a bit of a miracle. That’s why there is an experiment here, that’s why it takes a bit long for us to take 100% of their campaign. But once they reach this level where they--it’s clear for them that we’re able to deliver and they are not compromising on performance, what happens here is that they increase their spend, and that’s what we show them the average deal size, significant growth of average deal size because of that. They gain confidence in the technology and for them, it’s definitely doing more CTR-wise. In the end, listen to their consumer. On previous calls, I talked about the ESG and the movement, it’s very much aligned with what advertisers believe is the right things to do for their consumer. Not to go back to the ChatGPT question one more time, I just want to make sure I’m fully grasping how that benefits you guys. I think if the consumer starts to think that Bing is a better place to search versus Google and they go directly to Bing, that would make sense, but I guess, how does that manifest itself in the pre-emptive search product that you guys have? I’m having a hard time wrapping my head around it, so apologies for making you repeat yourself a bit there. Then second just on the retail media business, two quick ones. Is that entirely in the Undertone segment today, and then with iHUB, do you expect to be a part of the supply side as well? Thank you. Yes, thank you. You know, first on the ChatGPT, but I think we need to take a step back, so how are we able to enjoy and monetize and what we’re doing regardless. Bing’s big policy is to rely on a very limited amount of partners which they certify. We are one of them, we’re not the only one but it’s a handful of partners - that’s Bing policy. Now what they ask for each partner is to deal with hundreds of publishers, and the way--and they’re expecting from the partners as well as from us that we will screen all searches and we will deliver only quality searches, because quality means searches with high intent, otherwise Bing, as you know--Bing is charging the advertiser once they click on an ad on any given search ad page or search results page. Now, what is a quality searcher? Quality searcher is the one that clicks and actually has true intent to buy or true intent to visit this website. What is a non-quality is bots and everything here which is not having an intent. That’s why in--what Bing is expecting for us to increase the number of quality searches, and the way for us to translate it is working with more and more publishers and more and more quality publishers, improve at the same time our quality infrastructure, and able to screen and deliver only those searches that we believe that they are quality searches. That’s first and foremost. Now what is going to happen here is the fact is that while they enhance or improve the consumer interaction with their search, it will be more and more partners that will offer the search capability, more partners that we need to certify, more partners that will go through us, as a result more searches, and we are expecting that the number of 22 million of average daily searches will increase. If this will increase, it has a direct correlation to our ability to generate revenue. Now in terms of retail media, at this point retail media is only from Undertone. Undertone is developing, it’s an explore initiative. Undertone established a whole division, which is a retail-slash-commerce division at this point. We have dedicated sales people, dedicated R&D as we are doing it. It’s a dedicated budget for this initiative. Currently under Undertone, we are expecting to leverage this relationship with the brands and basically expand it to other business units in Perion. I wanted to ask about the growth for 2023, where we’ve got the 14% on the top line. I’m wondering, underlying that, what’s the implied growth rate for the two segments, the display growth and the search growth? Definitely when we are arriving to the different model, we’re expecting advertising to grow more than the search. We are more conservative around search, but it’s--it’s [indiscernible] the 40%, but we are again not so far between the two. I will say that the search is more close to the 10% and the rest is going to the advertising, which is close to 20%. Okay, and why is that, because in Q4, we did--and I assume these are organic comps, but the Q4 search was up, what, 49% and display was up 24%? We did a great progress also during Q4 with adding the new publisher to the network. As I mentioned before, we’re building the model based on where we are now and taking it further, and based on where we are now with the seasonality and just the normal growth, this is our assumption for 2023. Okay, and then Tal, congratulations not only on the pending promotion here but also the great work that you did in modernizing CodeFuel. Just curious to know your role in the Microsoft relationship. Are you kind of the point person when it comes to the contract renewal with Microsoft? Yes, so first of all, thank you, I really appreciate that; and yes, I’m the main contact with Microsoft, with the entire executives at Microsoft Advertising, have been for the past few years. I negotiated the last agreement and obviously I’ll negotiate the next agreement, so yes. Two questions from me. One, how are you viewing the competitive dynamic? Are you seeing your competitors in the marketplace trying to adopt similar models to the iHUB and SORT? Then secondly, SORT as a service, is that currently available? If not, when will it be available and what kind of opportunity do you see that becoming over the long run? Thanks. SORT as a service is an explore initiative, of course not to reveal. We’re getting a lot of requests to definitely externalize this service that is done internally. We want to make sure first that SORT works, and if SORT works for us and it works for the 191 customers that are using SORT, and we are able to demonstrate that no one needs to compromise on their results, vice versa, then we feel comfortable externalizing it to publishers, to other DSPs, and we are, let’s say at this point, quite advanced in this effort. The moment we will go live, or GL as we like to say internally, we definitely will share with you. We are expecting that this will happen hopefully in the first half of 2023. From a competitive standpoint, the HUB that it’s using is an internal product. I don’t know what others are doing. It’s not the secret sauce, the question is what you are doing with the HUB. We have one advantage, and the advantage that we have, that I don’t know if our customer has, is the great and huge amount of signals that we’re getting from our direct response or search advertisers--sorry, search users, consumers that are searching. That’s a goldmine. If you compare this to the other signal that we have from both sides of the open web, from the supply and the demand, you are getting into a very, let’s say a great model that’s able to provide us an insight and, based on that, we are building all our modeling because data drives those models. We keep investing huge amounts of R&D resources into it and we are trying to believe that that’s creating us a greater and deeper moat from our customer. Definitely the media margin and our EBITDA margin, if you’re looking at it, EBITDA as a ratio for revenue ex-TAC, we are demonstrating the advantages of the HUB. It’s not proprietary for sure, but we are--we believe that there is a way to go for us and we are getting quite a dividend for this investment. Thank you. We’re showing no additional questions in queue at this time. I’d like to turn the floor back over to Mr. Gerstel for closing comments. Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.

EarningCall_415

Good morning, ladies and gentlemen, and welcome to the Intact Financial Corporation Q4 2022 Results Conference Call. At this time all lines 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 February 08, 2023. Thank you, Surbhi. Good morning, everyone, and thank you for joining the call today. A link to our live webcast and published information for this call is posted on our website at intactfc.com under the Investors tab. As usual, before we start, please refer to Slide 2 for cautionary language regarding the use of forward-looking statements, which form part of this morning's remarks, and Slide 3 for a note on the use of non-GAAP financial measures and important notes on adjustments, terms and definitions used in this presentation. With me today, we have our CEO, Charles Brindamour; our CFO, Louis Marcotte; Patrick Barbeau, Executive Vice President and Chief Operating Officer; Darren Godfrey, Executive Vice President, Global Specialty Lines; and Ken Anderson, Executive Vice President and CFO, UK&I. We will begin with prepared remarks followed by Q&A. Thanks, Shubha. Good morning everyone, and thank you for joining us today. 2022 was an important year in Intact's journey. This was the first full year following completion of the landmark RSA acquisition and we made big strides towards fully integrating the acquired business. At the same time, we maintain our focus on performance with solid results despite elevated catastrophe losses and inflation pressures. We delivered net operating income per share of $3.34 for the fourth quarter and $11.88 for the full year. Excluding strategic exits, premium growth was 5% in the quarter, a point higher than in Q3, a sign of momentum building as markets are firm or firming across most lines of business. For the full year, premiums increased 23%, primarily on the back of the RSA acquisition. The overall combined ratio for both the quarter and the full year was solid at 91.5%. This reflected strong performance across commercial and specialty lines in all regions and first lines in Canada. Together with robust investment and distribution income, this drove mid-teens operating return on equity and ROE in 2022. And I expect the full year outperformance to be well in excess of our objective to outperform by 500 basis points of ROE. Our results are a testament to the resilience of our business. We move into 2023 with positive top and bottom line momentum and a strong balance sheet. This enables us again to raise our quarterly dividend by $0.10, the 18th consecutive annual increase. Let me now provide a bit of color on the results and outlook by line of business starting right here in Canada. In personal property, this business continues to demonstrate great resilience in the phase of increasingly frequent and severe weather events. The combined ratio was 76.9% in the quarter, 90.1% for the full year, and as averaged sub-90 over the last five and now 10 years. Weather and sharply higher reinsurance costs are driving hard market conditions. We expect rate increases to remain in the high single digit range and keep pace with loss cost trends. In personal auto, premiums grew 2% year-over-year, a 3 point improvement compared with the third quarter. The top line momentum was a function of both our early rate actions as well as firming market conditions. Retention levels were strong and the pressure on new business volume moderated. We expect that our competitive position will further improve as the market continues to reflect inflation in its pricing. Our underwriting discipline resulted in a combined ratio of 95.8% in the quarter. This included nearly 1.5 points of adverse seasonal weather as well as one point of non-recurring loss adjustment expenses. The favorable impact from prior years was solid at 7 point, slightly above what we expected, but as I've mentioned before, prudence from the past is paying off, but the current accident year is also prudent. So we continue to look at both current and prior years combined when we assess the performance of this segment. There are a number of reasons why we're comfortable with our sub-95 guidance. From a cost perspective, inflation pressures are easing. The increase in claim severity was 11%, 2 points lower than in Q3. We expect that deceleration to continue in the coming months. Then on the frequency front, the number of accident continues to be benign relative to pre-pandemic levels, even though it was up from the prior year. Our run rate assumes frequency will gradually increase in the coming months, and finally, written rates and insured values increased by close to 9 points in aggregate by December, while only 5 points has been earned in Q4. So when I look at our starting point and integrate these observations, I feel strongly about our sub-95 trajectory and obviously we're comfortable growing in this environment. In commercial lines, premiums increased 7% in 2022, excluding the impact of the RSA acquisition. Growth continues to be supported by our rate actions in hard market conditions. The combined ratio is solid at 87.9%, reflecting our profitability actions over time. Looking at the industry, we see hard market conditions continuing given rising reinsurance costs, elevated CAT losses and inflation pressures. Our business remains well positioned to deliver a sustainable low-90s or better performance. Moving now to our UK&I business, the combined ratio was 104 in the quarter and 97 for the full year. In personal lines, premium decreased by a modest 3% in Q4 after adjusting for the sale of our Middle Eastern business. The decrease primarily reflects our continued pricing discipline in a competitive market. The full year combined ratio of 106.2% included 6 points of CATs more than anticipated, as well as increased subsidence claims following a very dry summer. Adjusted for elevated weather related losses, the run rate performance of this business remains in the high 90s despite inflation pressures. Market conditions have started to firm. We expect this to continue in 2023 supporting further rate increases. In commercial lines in that region, underlying premium growth was 9% in the quarter after adjusting for business exits. We continue to benefit from hard market conditions, which are supporting high single-digit rate increases. The full year combined ratio of 90.4% reflected the underlying strength of the platform and prevailing market conditions. We expect to operate this business in the low 90s over the next 12 months. Despite challenges in the fourth quarter, our UK&I business remains on solid footing overall. At closing, we indicated that it would take approximately two years to fully evaluate our propositions across the UK&I portfolio and take the action necessary to drive outperformance. And while that timeline remains, we've already taken significant steps by exiting over $500 million of business with a combined ratio above 110%. The earnings power of that business is clearly improving. Our U.S. commercial business delivered premium growth of 18% in 2022, excluding the impact of exhibit lines. This was driven by the Highland acquisition, strong growth and high performing businesses and rate increases in hard market conditions across most lines. The full year combined ratio was strong at 88.2% reflecting our continued profitability actions. The business continues to perform very well with rates tracking ahead of loss cost trends. We're well positioned to deliver sustainable low-90s performance or better in the U.S. Turning to our strategic initiatives, the RSA integration remains very much on track. In Canada, policy conversion is progressing well and retention is tracking in light with RSA's historical experience. On the digital front, our mobile app saw over 4.5 million visits by customers in the fourth quarter. More than half of all online transactions are now completed via our mobile app, which is driving greater UBI uptake and digital engagement. And finally, we continued to enhance our AI capabilities during the year. The Intact Data Lab team has grown to over 500 professionals, underscoring our ambition to be the leading AI shop in the insurance world. To date, the lab has delivered nearly 300 models that have in aggregate yielded almost 100 million of run rate underwriting benefits. As I said at the outset, 2022 was an important year for Intact. We made excellent progress in integrating RSA in advancing our strategy and the performance was strong despite heavy headwinds. This is thanks to the strength and dedication of our people. At Intact, we're very focused on making sure we have the very best people. We're working hard to ensure they're proud of what they do and feel like they're part of the winning team. And again, this year our efforts are recognized as were named a best employer in Canada for the seventh consecutive year, and in the U.S. now for the fourth year running. Our sites are now furling on 2023 and beyond. The business overall is operating at a low 90s combined ratio and the outlook for investment and distribution income is strong. We're well positioned to deliver again this year on our objectives to grow net operating income per share by 10% annually over time and to outperform the industry ROE by 500 basis points every year. Thanks, Charles, and good morning everyone. While 2022 was the first full year in a largely post-COVID world, our industry has nevertheless been faced with a number of other challenges. Inflation and severe weather chief amongst them, but there was also tight labor markets and capital markets volatility. In that context, I'm pleased to report solid results for both the quarter and the full year. The overall combined ratio for Q4 was 91.5% despite inflationary pressures and challenging weather conditions in Canada and the UK. Our Canadian and U.S. businesses delivered sub-90 combined ratios and investment and distribution earnings were strong. On a full year basis, the combined ratio was solid at 91.6% further underscoring the strength and resilience of our platform. CAT losses in the quarter were $167 million driven largely by windstorms in Canada and severe winter weather in the UK. This figure is higher than the $143 million estimate we announced in early January, reflecting a number of late claims notifications and higher costs per claim than expected in respect of the UK freeze event. This takes total CAT losses for the year to $826 million, above our $600 million expectation. With these results in mind, we are increasing our annual CAT guidance to $700 million. We expect approximately 70% of losses to occur in Canada and approximately 25% in the UK&I. Within Canada, approximately two thirds of losses are expected in personal lines. The increase to our guidance is driven by a combination of growth in inflation, higher CAT losses and the impact of reinsurance renewals. We expect the overall earnings impact to be offset by rate actions, much of which we have put through last year in anticipation of higher reinsurance costs. Favorable prior year development was healthy at 3.8% for both the quarter and the full year, largely in line with expectations. Net investment income increased by 27% in the quarter, reflecting higher yields and higher turnover. For 2023, we expect investment income to be approximately $1.1 billion as we continue to take advantage of current market rates. Distribution income was $93 million in the quarter, taking annual earnings to $437 million. This is a 21% increase over last year reflecting accretive acquisitions, organic growth and a solid contribution from OnSide. Looking ahead to 2023, we expect to grow distribution earnings by at least 10%. Now let's turn to our underwriting results starting with Canada. In personal auto, the combined ratio increased by 8.3 points compared to a low 87.5% last year. Severity increased as expected given inflationary pressures, but these pressures have eased a bit compared to Q3. Frequency increased year-over-year by almost 5 points. This was due to more driving compared to a partially locked down quarter last year, as well as worse and normal weather. Prior year development was strong in the quarter at around 7 points, reflecting our reserving prudence over the years. While this is slightly higher than expected, we expect prior year development to remain strong as we continue to reserve cautiously. Finally, we are seeing the positive impact of our written rates as they are starting to earn through. The impact will increase further in 2023 with earned rates accelerating from mid to high single digits as they catch up to current written rate levels. With inflation decelerating, we expect that positive impact on results going forward. Our guidance remains sub-95 for this business keeping in mind there will be normal seasonality in the results, particularly in Q1. In Personal Property, another solid quarter with a 76.9% combined ratio, 2.6 points better than last year due to lower CAT losses. The underlying loss ratio increased in the quarter by 3.9 points compared to a benign Q4 2021, primarily driven by higher large losses. In commercial lines, the combined ratio was solid at 89% despite 6 points of CATs in the quarter, which mainly reflected further development of losses from Hurricane Fiona. Both specialty lines and regular commercial lines contributed to a strong underlying result. Favorable prior year development was healthy at 3.4%, though 3 points lower than last year, reflecting the lumpy nature of large claims development. The overall expense ratio in Canada was 29.7%, around a point lower than last year due to lower variable commissions. General expenses were up in the quarter largely due to timing of expenses between quarters and higher variable compensation tied to outperformance. Turning now to the UK&I. In Personal Lines, the results include over 20 points of CAT losses, which is 19 points more than expected. Almost all of these losses related to prolonged sub-zero temperatures in December, which resulted in burst pipes in thousands of homes across the UK. In addition, there were a number of non-CAT large losses and inflationary pressures continued to weigh on both motor and home. In commercial lines, the combined ratio was a solid 92.8% driven by the continued strong performance of our regions and specialty businesses. At 90.4 for the full year and with market conditions remaining favorable, this business is well positioned for profitable growth. In our U.S. segment, the combined ratio was strong at 85.1% with the underlying loss ratio improved by 7.2 points. Thanks to our profitability actions and favorable market conditions. Growth in this business is skewed towards our highest performance – performing lines, which tells me that we have been successful at managing the business mix. I’m encouraged by what this means for this business going forward and our ability to deliver a sustainable low-90s or better combined ratio. Looking at our Global Specialty Lines, business in aggregate, premiums grew by 12% over the year to $5.5 billion, while delivering a combined ratio of 86.2%. Our U.S. business is not the only one to perform well. Specialty lines in Canada and UK delivered combined ratios in the 80s. In 2022, all driven by our continuous effort on profitable growth and outperformance supported by good market conditions. With regards to the RSA integration, we estimate annual synergies to have hit a run rate of $260 million and we remain well on track to achieve our revised target of at least $350 million by mid-2024. We also recorded an additional $58 million of tax recoveries this quarter in the UK, which drove a reduction in the effective tax rate. The gain is driven by a more positive outlook on profitability in the UK from both underwriting and investment income. This outlook allows us to recognize more tax loss recoveries from the pool of unrecognized losses, which have been accumulated over time by RSA. There are north of $3 billion of such losses in the off balance sheet in the UK and Ireland as at December 31. We have not reported these recoveries as run rate synergies given their lumpy nature, but they are part of the value created by the acquisition. We are certainly aiming to capture more of these losses in the future. With regards to value creation over the full year, RSA contributed 16% accretion to NOIPS and we’re confident of this rising to 20% by 2024. Overall, the IRR for the transaction remains over 20%. Moving now to the balance sheet where our financial position continues to be strong, despite the macroeconomic environment. We closed a quarter with total capital margin of $2.4 billion and a debt-to-total capital ratio of 21%. Book value per share grew 2% quarter-over-quarter as solid earnings and gains in our investment portfolio more than offset large mark-to-market losses in our UK pension plans. Given our outlook on earnings growth and the strength of our balance sheet, we once again raised our dividends this time 10%, which represents a 10-year CAGR of 10%. We are also renewing our share buyback program in February on the same terms as the existing program. While this extends our flexibility to purchase additional shares, we will continue to be disciplined in this regard. As we wrap up another successful year in a challenging environment, we are already laser focused on making 2023 even better, including a smooth transition to IFRS 17. While this will bring a number of changes to our key reporting metrics, these are mostly geography changes within our results, and as such will have no significant impact – no significant impact on our net operating earnings over time. I encourage you to refer to our MD&A, which hopefully provides a helpful summary. Overall, as we look forward to 2023, there is much to be positive about. We start the year in a strong position despite recent headwinds. Our earnings resilience is evident and our balance sheet is strong. With the platform we have in place a clear roadmap and an opportunistic mindset. I’m confident we will continue to outperform over the next year and beyond. Thank you, Louis. In order to give everyone a chance to participate in the Q&A, we would ask you to kindly limit yourselves to two questions per person, and of course if there’s time at the end, you can certainly re-queue for follow-ups. So Surbhi, we are ready to take questions now. Thank you. So just want to make sure I hear you correctly on personal auto, and I don’t think your message has changed that much. But the way I’m sort of thinking about 2023 is, slowing claims inflation as you’ve talked about, and then accelerating premiums earned and maybe sort of a net benefit of something like two points to four points, and then with higher than normal PYD release higher than your forward guidance on PYD, maybe being a drag of two points to three points next year. So if I think about that as very simple math, that basically gets me to a 2023 combined ratio that’s roughly flat versus 2022. Like am I missing anything there? Is that kind of what your guidance is pointing to broadly? I think your read is good. Paul, and I think that’s a good way to unpack, the trajectory of personal automobile or guidance has not changed. It is sub-95. I’ll ask Patrick to give you some color maybe on some of the elements that that you have laid out. But I think directionally I would agree with how you analyze that. Go ahead, Patrick. Yes, I agree totally. The – if I look at the 95.8% combined ratio of Q4, there was, as we said about two and a half points between weather seasonality, and the one-time adjustment on expenses. The PYD was slightly higher than expected, but that’s and yes, as we said earlier, that we don’t look in isolation. We had a prudent reserving approach since the beginning of the pandemic because of uncertainty and we continue to do so, because there is still uncertainty around where the inflation will go exactly. We’ve seen very good signs of reduction in inflation from the 13% in Q3 to 11% in Q4, and the drivers of that reduction are as we expected. So on car parts, on market values, we see these and this is slowing down. So overall, I think the your analysis is very much aligned. Two, maybe nuances I would bring is, if you look at the full year, I don’t – I’m not sure that we expect the PYD to go down by two points to three points next year necessarily even continue to reserve prudently in the correct. On the other end though, our pricing assumptions assumes that there would also be a bit of an increase in frequency year-over-year given there was a ramp up in the earlier part of the year and our pricing assumes that it will continue to migrate towards normal even if over the past three quarters it was very flat. Overall these two are the slight nuances, but overall very much aligned with on [indiscernible]. Yes, yes, I think PYD not too far off. I guess from what we’re seeing here to date in my mind, provided frequency in the past does not start the deteriorating obviously, but they’re actually right Paul, thanks for the question. Good read. Okay, thank you for that. And then second question is related to the UK&I business, and I guess the Personal Lines, in particular, 121 combined ratio for the quarter 106 for the year, I think even it’s in your commentary of exclude CAT losses is still kind of generating a below target combined ratio. Is there anything structurally related to the regulatory pricing reforms or otherwise that would prevent you from rectifying that situation? Bring it down more into the target zone, and if no, maybe you can give us some more specifics on what exactly the action plan is to produce a better combined ratio in UK personal lines. And I’m talking, I guess I’m talking mostly, I just want to be specific on the property side more than more than auto. Okay. Good question, Paul. I think if you strip excessive CAT, you’re in the upper 90s and personal lines, if I put all personal lines together, that’s not good enough. Obviously our work is not done. And I’d point to three areas of improvement. One is rates, so rates are going through the system. Two, very important pricing and risk selection sophistication, and three, making sure we’re playing in the right part of the market. And there our work is certainly not done on these elements. And as I’ve mentioned, within 24 months of closing, we’ll finalize where the footprint is, but we’re not done. Ken, who is in the UK can give you additional perspective. Yes, no very much aligned with that, the 2023 overall combined at 106% as you say, there’s about six points of elevated CATs in there. There’s also about two points of subsidence planes in the home market. So just for those two, you are indeed in that upper-90s zone. And we continue to hold the line on rates to deal with the inflation. The market in the early part of 2022 was slow to move. We’ve started to see some signs in the fourth quarter of rates ticking up, but we think there’s more rates needed in the market in 2023, that’s clear. We’re put – we’re certainly pushing that that may bring pressure on units and with the cost base that we have. So all in that upper-90s zone is kind of the zone of performance that we see in the near term. And then the actions that Charles mentioned are indeed the ones that are being pushed, put tilting that portfolio towards the direct and away from the partnerships where the economic zone stack up the pricing sophistication bringing some of the Intact capabilities and deploying them in the UK market. And then also, in terms of technology and increasing the digital and technology footprints on the home and pet business in particular in the latter part of 2023. Thanks Ken. And I think an element of your question, Paul was are there regulatory constraints to bring improvement in the portfolio? And I would say UK market is really tough, but one thing that is good in my mind is, you can turn on a dime when it comes to pricing either in the amount of price you’re taking or in terms of risk selection. The UK trust, competitive behavior, in fact, more so than the Canadian regulatory system. So when it comes to pricing risk selection, no barriers to improvement. Hi, good morning. I just wanted to clarify, I think it was Ken’s comment, because my question was going to be like in the UK personal line space, like what would be a success or what would be good results in terms of combined ratio for 2023? And if I heard it right from Ken’s comment, it sounded like upper-90s in the near term is kind of the goal. Is that correct or did I get that incorrect? Well, upper-90s is not the goal. I think upper-90s is what you can expect to see in 2023, because pricing risk selection takes some time. Some of the work we’re doing in claims will take some time and we’re not going to run upper-90s business in the UK personal lines absolutely not. But in 2023, we’re in the second year of the integration. That’s maybe what one can expect given inflation, given the state of the market. And absolutely the commitment to mid-90s performance in the mid to longer term is very much the aim. But the 2023 at that loop I was speaking. Right, okay. Now that’s what I was talking was the 2023, not your actual more medium term goal. And my second question was just going back on auto in terms of the claims inflation from Louis comments, the improvement Q4 versus Q3 was that the rate of inflation was coming down or are you actually seeing some of the actual claims costs actually net-net reducing? And then also is there any comment on are those same trends playing out so far in Q1? Yes, Geoff, as we mentioned, in prior quarters, if I break it down, there’s 40% of the cost that’s coming from liability and injuries, 30% on car repairs, and 30% on total losses including debt on injuries and liability no change from prior quarters. We see no inflation year-on-year on that. So that’s no change between Q3 and Q4. On a repairable losses the car parts themselves have been flat between Q3 and Q4, but they’ve been more available. So, we’ve seen a little bit of easing on the pressure on rental costs or repairable. But no increase between Q3 and Q4 parts, which is an improvement from the trends we were saying before. On the total losses, the market value has flattened as well. The curve, the indices or the index of market value, which is the main driver of the cost in total losses is also flat between Q3 and Q4 with slight reduction in the last two months. So that’s very aligned with what we’ve seen in the U.S. and because the domain [ph] in turn now is higher when we compare the year-on-year, that has created about five points reduction in the inflation rate in Q4 versus Q3. And that’s the main cause of the reduction. These two items, when you look at availability of parts, the car parts, prices themselves being flat and the index of market value starting to slow down are good signs that this will continue in the same direction coming quarters. And I think Patrick, Geoff was trying to figure out what happened in Q1 without a chance to take a look at January, even though it’s a few days fresh. Good morning. Sorry about this, but I’m going to stick with personal auto for my first question, and I guess, loss cost trends is outpacing earned rate and you saw that last year. Is this something that’s going to reverse in Q1? Is that the message that I heard or is this something that’s more back half of 2023? And then just to clarify what I think of a sub-95% combined ratio, you talk about seasonally adjusted and I get Q1 is going to be higher and Q2 is going to be lower, but there’s no other adjustments when we think of sub-95%. So when I think of like the 95.8% that you’ve recorded this quarter, like that’s the number we should be looking to be sub-95% and that includes probably your reserve developments and whatnot? Just get some clarity on that as well. So this quarter, so Q4 is a higher seasonality quarter. I think we’ve pointed out that A, there seasonality and B, there was even more winter than what the seasonality we would’ve expected. Assume so you have right there point and half, there Q1 is a high seasonal quarter, so we need to keep that in mind. Our guidance is indeed a run rate x seasonality type guidance. I’ll let Patrick comment on loss cost, because there’s an element in your question though that is what you assume when you price as well. But go ahead Patrick. Yes, so loss cost and premium, maybe I could cover the two, because that’s what we see crossing past a little bit right now when we look at the coming quarter. So on the loss cost side the frequency was flat for three quarters in a row compared to prior year because Q4 in 2021, as we pointed out was still a bit lockdown. There is a year-on-year increase of about five points, but it hasn’t moved for three quarters. We expect in our pricing that that might continue to or start to migrate closer to pre-pandemic. That’s one of the thing in loss cost. So on the other end though, the inflation from 13 to 11, we expect that will continue to go down at about that pace for a few quarters. On the premium side, return rates were in around 5% of the middle of the year. It peaked at 9% in December, only five of it is earned. And if you look at the next two quarters, it’ll be earned at the 7% rate level in Q1 and get to the high teens by the summer. So you see these loss cost trends crossing with the rates starting to be higher in the coming quarters than the actual loss cost trends. So it seems like that cross is going to happen about mid-year. So this is like the back half of the year is when we should see earned premium outpacing loss cost trends. Is that, am I reading that rightly? Yes, but the expectation if you strip seasonality is that this business is running now sub 95 to mid-year, okay? There will be gradual improvement as you describe, as those two lines crossed. But keep in mind that from a pricing adequacy point of view and from a pricing point of view, the frequency we’re seeing is actually lower than what we’re pricing for and lower than what we’re reserving for. You put all that together and you get to our guidance. So sub 95 throughout [indiscernible]. But clearly a different combined ratio pattern in the second half than in the first half, because those two lines will cross sometimes. Okay. And then just listening to discussion on the UK personal property market, if I go back many, many years, and I don’t know the dates. But I mean, Canadian personal property was an issue back in the day and it took you, I forget, let’s say it took you five years to go through the pricing segmentation to really kind of fix that business. Is that like – is that what we should be expecting for the UK personal line business? Is this like a five-year fix? Or is this something that I know 2023 can’t, it doesn’t sound like we’re going to see drastic improvement. But is this something in 2024, 2025 where you do expect that to hit the midpoint of that? Or is it a longer tail… Yes, I think, so, Doug, if I think about personal property, because it’s a very good example in my mind. This was a major revamp of what we did. I’ll take you back 10 years ago where we changed the product. We changed the pricing algorithm. We changed the claims supply chain management and how we manage claims invested in prevention. And that took a few years indeed. But when I look at it in retrospective, I look at the last 10 years combined ratio in personal prop 89.9. If I exclude 2022, 11 years, 90% combined, five years 87% combined with volatility with CATs. So when you do a major overall, it takes some time, but it pays off like it’s not just superficial fixing here and there in the UK, because I think there’s heavy lifting we’re doing at the moment. The piece that is quite different from when we improved home insurance is we didn’t change the footprint of home insurance. We changed what we did pretty much for all Canadians at all levels of the value prop. In the UK, we have not concluded that we want to play in all the segments where we are today. And that’s the bit that can move the needle a bit faster than changing rates, algorithm, technology, et cetera. That being said, it’ll take some time and that’s why to the earlier question, the guidance is upper 90s for 2023, but that’s not how we measure success. Ken, anything you want to add. I think the point around the distribution channel, and the – going in the direct business, you’re much more in control of your overall combined ratio outcome versus in the partnership side of the business, which is the majority currently of the PL business that we have. You’re less in control of the combined ratio. That tilt will take a bit of time. Good point. We have a number of partnerships some of them we’ve exited. Others were in the process of negotiations where we’re not happy with the economics that can take some time to run. But otherwise I think our perspective is upper 90s this year, sub 95 over time. Lots of work left to be done in the coming months. Good morning. Sticking with the UK and I just for a moment, a lot of discussion around the combined ratios. But was looking at even when you strip out the Middle East divestiture, volumes are down on the UK and personal side of the equation and I get that you’re trying to right size the business that going through. But with all of the factors that you’re putting into play for the combined ratio, should we expect volumes to continue to trend down in 2023, particularly if you’re renegotiating some of these partnerships? Or should we actually see an inflection point at some point in 2023 or 2024 or later? Yes, well indeed, the pressure on top line in 2022, has been driven by yes, the exit, but also the rate that we have been pushing ahead of the market. The market has been slow to respond on rates and therefore as a top line pressure has been there. As we move into 2023, I would say overall mid-single digit growth is the zone for personal lines. But again, we will maintain the discipline and a lot of the outcome will be determined by how the market and what the market pushes in terms of rate. Yes, I think, it’s a good thing that it is a small portion of the IFC business because in the context of the work we’re doing to improve PL now we’re not really looking at the top line. I’ll be very clear, it’s all about improving the bottom line and the market does whatever it wants, we have some work to do there and could be mid-single digit. But if the market doesn’t move, it’ll be less than that because we’ll lose some more units. And that’s just the way it’ll be. Understood. Thank you. And my follow on if I may, Louis, in terms of distribution income guidance 10% that you expect to do better then, but when we take a look at the growth that we’ve seen over last a little while, it’s been hovering 20% or above this. The dropdown in the guidance, I know 2022 benefited from acquisitions, but should we infer from this that capital deployment opportunities and distribution are starting to slow? Or are you just being overly cautious and we could see well above 10% if you’re actually able to execute on some opportunities? So, no, I wouldn’t say there’s a slowdown here. The way we drive our guidance is really built on what’s – I will say in bank at the time we give the guidance. So if there is additional M&A that comes out during the year, and we were certainly willing to deploy capital for that it would be additional. So we end up higher, because the market is still very good and we think there’s going to be more opportunities coming, but the guidance doesn’t take – doesn’t go for potential transactions in the future. It really is based on what we have already signed. And then the rest is upside to the guidance. But just to be clear, the market is still very good and we’re certainly willing to deploy more capital in that space, no doubt. Yes, thanks very much and good morning. Question with respect to the increase in the CAT guide. Does it reflect in – you don’t necessarily cede a lot of business? I think you retained like in the high 90s and some of the lines in mid to high 90s and others. So is this increase in CAT guide, just say a reflection of, hey, we got 2022 wrong, we guided a 600 and it was over 800, so we’re just going to change the guidance now just because of the way weather is for 2023? Or have you actually changed your approach to reinsurance? Are you retaining anymore? And is that driving this change in the CAT guide? Yes, so a few items here on this front. So on the January 1 renewals, which are part of the explanation why we increased our CAT guidance. The – we were successful at retaining or securing the CAT capacity we needed. The costs are higher. We had anticipated that and started pricing for it last year. So the impact as I mentioned earlier is fairly neutral on the earnings. But the cost of it and the fact that we increased retention in the three countries we operate in is actually will drive a bit more CAT losses that drive part of that 100 million. So there’s three elements, as I said in earlier, the fact that we’ve grown more premiums and there’s inflation. That’s about a third of it. A third is the renewals, the impact of the renewals. And the last part is the increased CAT losses we’ve seen historically. So those are the three buckets that drove the 100 million increase. And then our view here is this was largely anticipated and has been priced in already, therefore, the impact on earnings is the minimus. You are right to say that we don’t cede very much. The overall CAT program is a small single digit, low-single digit portion [ph] of net earned premium. And the impact here is I would count it in basis points overall. So I hope that’s helpful. Yes. I mean, you haven’t really changed your guidance for top line growth in commercial lines quarter-over-quarter yet there is an increase in the CATs and you’re saying you’re pricing for it. So I would’ve expected your top line for expectation for commercial to have changed now that you’re trying to price in these higher reinsurance costs, at least on a quarter-over-quarter basis. Or is it just, or am I just being too cute here? No, no, no. You’re not being too cute, but I’ll tell you what the story is. So first it’s a good opportunity I think to recognize the foresight of the reinsurance team, whom after the July renewal said, okay guys, we need to get ready for a step up in cost and an increase in retention. And we said, let’s do it. So this notion that we would face a hard reinsurance renewal on January 1 was identified months ago by [indiscernible] who runs reinsurance. And that was very much baked in our thought process as we built our action plans for 2023 and our pricing plans. And as a result, the guidance we’ve given in the past couple of quarters anticipated a hard reinsurance renewal cycle was a bit more expensive than what we anticipated, but nothing meaningful. And then in the 100 million, per se, the increase in retention, which is primarily at the bottom of the Canadian program, is worth about 35 million. So a third of the 100 million is increase in retention. Okay, thanks. And just a quick one with respect to the deferred tax asset move, it seems to reflect your outlook for improving performance in UK and international. And I’m assuming that this change in the DTA would’ve looked past two years. Now you talk about having two years to fully evaluate your business in the UK&I, so what does the move in the deferred tax assets say with respect to your two-year timeframe to fully evaluate this business? Very good question. So the outlook is more positive and you’ll understand, we were comparing to a year ago, essentially when we made our first well, of course our RSA business was already doing a DTA, but this is really the first year afterwards where we have our own outlook and we have a bit more credibility in terms of the results, and that allowed us to recognize more tax loss recoveries. The estimate is based on a five-year projection, and with the fact that our underwriting is improving, the investment income is improving and we have more credibility. We were able to increase the DTA asset. If there were changes to the structure going forward, we would have to adjust. So it gets a bit tricky as to what the impact of those changes would be on the taxable income. But we would reflect them as soon as they are known and we’d adjust accordingly. But at this point, it’s sort of a, I’ll call it a going concern plan five years out with what our best expectations of earnings both on underwriting and investment income driving it. So I think, if I boil it down to two things really, one is the guidance from a combined ratio point of view hasn’t changed much, but I think when people look at our ability to generate that in earnings, it’s gone up. Therefore, the DTA recognition takes that into account. Second one, which is not related to the guidance we’ve given, which is combined ratio driven in nature as the investment income potential, put those two things together and that’s how you are right there, Tom. Well, the two-year timeframe is the strategic discussion Charles talked about earlier. On the tax front, it’s really a five-year out. And again, I said it doesn’t take into account, I will say potential changes to the structure. It would be – it’s a really, as we are today, looking forward with the improvements we expect to make. Good morning. Louis, if we could stick with you on your investment income guidance, the $1.1 billion is actually a little less than what the Q4 annualized would be. I know it’s marginally less. But given the new money yield, I think you said a 4.5% is a fair bit higher than your book yield. Why are you not building in some improvement in the overall realized yield over the next 12 months because it would appear that you’re not in your $1.1 billion guidance? So the first, if you try to run to use a run rate, you’re right, it’s a bit shy because 279 of Q4 probably has 10 million to 15 million of I would call lumpy might recur, but it’s more lumpy and therefore difficult to put in a fixed run rate. But otherwise that’s about the only amount, and that’s why it’s a bit shy of it. Then our estimate for next year is based on current rates where the book stands today, and then the turnover with a normal turnover next year. If the turnover accelerates, we could generate more. If yields go up more, we can generate more, but we’re on a book yield as we are today, plus normal turnover going into the future. You would and we’ve put some of that in the estimate, but it’s not a huge at that base, it’s not a very big. Keep in mind, we’ve traded quite a bit in Q4 already, and so the amount we can turn over next year on a normal basis has a more limited impact. Okay. That’s helpful. Charles, maybe we could go back to the UK for a moment. You made – you and Ken make the comment that it kind of depends on what the market will give you that competitors were slow to react to rate. When you look at the competitive landscape, you look at the individual competitors that you face in the UK personal lines, is there could we make an argument that some of those competitors, or maybe a majority of those competitors have lower return expectations than Intact does? And as a consequence, you’re always going to compete against firms that really don’t need the same or have the same required hurdles that Intact does. Is that statement; is there some truth to that statement? There is some truth to that statement, Mario. However it’s important to understand that we’re not all operating the same way. You could make that argument in Canada. There are people, many people in the market that have lower expectations than we do yet, we beat them from both the top and bottom line point of view. Why? Because we price and select differently and we have a better supply chain. We’re not in that position in the UK. And therefore I don’t have the same confidence we can do that in the UK. That’s why we’re still trying to figure out where we have a real shot at winning. But certainly, when I say a, you need to figure out if you can outperform, and b, you need to figure out if outperforming generates enough return to justify leaving capital there. And to that question, and maybe that’s where you’re headed. It’s not clear to me that the answer to that second question, even with outperformance, you can make enough money in all parts of the market, and that’s why we’re not done finalizing the footprint. Yes, that’s kind of where I was going. If you’ve got competitors that have lower return expectations and Intact is not the 800-pound gorilla there, then it almost seems like you’re pushing against the string. It’s not an area where you can deliver the outperformance. You need to be there. That’s essentially where I was going with that. It isn’t that the more logical conclusion? I think, it’s not that straightforward, but logically speaking I think it’s fair. I’d say, Mario, that in commercial lines, we’re in very strong position and we have to keep in mind that in home we’re number three. And so are we in pet, it’s either number two or number three. So definitely not the 800-pound gorilla. And I’m not sure we’re actually ensuring gorillas in pet, but we some degree of scale. I think our question mark on those two segments is what Ken refer to it’s how they’re being distributed. That’s the piece where we hesitate the most at this stage. Ken, why don’t you provide color? Well, in addition, I guess then what that leaves; I guess then is the motor business. That’s where clearly the scale is more challenging. And given the cost base and, we’re remaining disciplined on pricing. And I think the bigger – the bigger question mark on the motor, definitely I think the scale, yes. Number three position in home and pest is, it’s not number one, it’s not the same as Canada, but it is a reasonably scaled position if you can tilt to a more direct offering in terms of distribution. Thanks. I apologize for going back to personal auto here, but I’m wondering if you could provide an update on the ability to push through rates and personal auto, just in light of the Alberta government freezing rates at the end of 2023. Is that something other provinces are looking at? Or do you think you can continue to push through higher rates if say inflation comes in higher-than-expected or frequency rises more than expected? Well, thanks for the question. I’m glad you bring up personal auto again, because we love that business and we have a very strong track record there, so we don’t mind talking about it. In general, regulators have been quite rational. I mean, if you have a good case for why there’s cost pressure you can price for it. And in fact, there are some markets our biggest market, in fact, you don’t even have to ask for permission actually to price for inflation. So it hasn’t been an issue. It has not had a negative impact of any substance on performance over time. And frankly, because the cost pressure now is on short tail lines and not on long tail lines, it’s much easier to demonstrate why rate needs to move, and in aggregate, we think that regulators get that and it’s easy to demonstrate. And that’s why in 2022, we were able to pretty much bake in nine points to cover inflation. Patrick, maybe you want to give a bit of color on Alberta and so on. Well, similar to the rest of the country, were very proactive early on in 2022 in taking rates. So, we’re starting the year of, in 2023 in good positions, including in Alberta. The new policy of a rate freeze is ill-advised in our view and will do nothing really to address the core issues that are putting pressure on rates for Albertans. If anything, it may make us significant harm as the industry will be temporarily left behind on reflecting inflation in the right. So while the freeze is meaningful for the Alberta market in the context of Intact, the solution is slightly different, because first we need to be clear, we’ll take the necessary actions to protect the profitability position in the province, and that might include the appetite regarding new business and our renewals, and at a minimum the amount of future marketing investments. But second, we’ve taken rates in advance of the market. We have good rate momentum in there that that’s only 17% of our Canadian PA portfolio, or 5% overall of IFC. So it doesn’t have an impact on our outlook for the next 12 months and sub-95 combined ratio guidance. That being said, we reiterate the fact that while it might be attractive politically, this is not very good for Albertans and for sure, our team stands ready to engage with the government on better ways to improve in the long-term the availability and affordability for insurance in Alberta. Bottom line, I think regulators are rational. The need for rates at the industry level is clear and easy to prove, and so not concerned by regulators’ ability to deal with that. Alberta, it’s political, it’s a real bad call. I think within six months you’ll have capacity issues in that market, and I think other provinces understand that when you artificially try to do stuff like that, there’s a blowback that comes back and, that might very well be the case in Alberta. So, we’re, I think, in good position in relative terms and feel good, about our ability to price for inflation. And the nine points we’ve talked about is baked in already. Okay, that’s helpful. And then my second question, I want to come back to Mario’s line of questioning on the investment income. Are you guys building in expectations for rate cuts later in 2023, which could limit market based yields? Because I think Louis, if I heard you correctly, there’s $10 million to $15 million in lumpy revenues, but even excluding that with normal asset growth, I could still easily get over $1.1 billion. So any thoughts there would be helpful? So, we have not booked any rate cuts clearly. So yes, there are, I think we’re, it’s a prudent guidance, but not based on rate cuts plan or expected rate cuts next year at all. Thank you. Good afternoon. Just a quick clarification on the call made earlier for personal auto, including the seasonal impact, do you expect that combined ratio to be sub-95? I understand that correctly? Nope. I think we’re saying sub-95 is what we would expect, quarter after quarter after a quarter, except that you need to take into account seasonality. So Q1 for instance, there’s a few points of seasonality. Normally if you go back in time, you see that it’s a very clear pattern that is, that needs to be taken into account. What we’re saying is that the run rate per quarter as we sit here today is sub-95 and should improve over time. Okay, got it. That’s helpful. So my first question was on favorable PYD, when I look at your guidance it looks like you’re expecting a favorable impact on the IFRS 17 on the PYD metric, and you’re also guiding for PYD to be in the 2% to 4% range over the medium term. So, I think the midpoint of that guidance 3%, that’s actually, lower than your favorable PYD of 3.8% in 2022. So would it be fair to expect favorable PYD to decline in subsequent quarters and trend lower? Is that the way to think about it? We, why don’t you share your perspective. So, I think I’ll try to bucket in two here. The IFRS impact second, first, our expectations. So historically the guideline has been between one and three but we did expect it to be stronger in the short-term given the prudence we had baked in throughout the currently COVID periods. So, I think that’s still true, and it’s, you’re seeing it in the actual results with the strength of PYD, so that on an even basis, I think will extend at least in the next 12 months. Then because of IFRS 17, I will summarize the impact to that we can see today is roughly between one points or two points of favorable impact to the PYD. So I would sort of take them apart stronger than or in the short term, higher than expected or higher end of the range. And then I would add between one points and two points for the IFRS 17 conversion. Okay, got it. That’s helpful. And the second question was on, again, circling back to market based yield. When I look at the increase quarter-over-quarter of 50 basis points increase, even if you strip out the $15 million or so and the lumpy items, based on a reinvestment yield that you know at 4.5%, about 4% of your portfolio turns over a quarter, that would imply that your market base yield should have been only maybe 10 basis points higher relative to the last quarter. So are there any other items that are driving that variance as it trading related or something else that enhanced your market based yield this quarter? So market based yield has a denominator that moves with market volatility, and therefore it’s a harder one to pin down, frankly. The yields, the book yields have gone up, because we trade and we secure a higher yield, but then you’ve got the offset and the bond themselves, the bond value themselves. That’s why we don’t use the that yield for guidance. We give the hard number to take away sort of the market volatility impact on the book and the market based yield that comes out of it. So, we view the market based yield as the result of two things increasing the interest on the assets we own, and then the volatility of the assets values themselves and the outcome is what we report on. But from a guidance point of view, we prefer to give the hard number it’s our best estimate of where investment income will end next year as we stand today. And we try to not to reinvent. People are challenging on the run rate given the Q4 numbers, and that’s why we’re saying there’s probably 10, 15 of lumpiness in there. So, I wouldn’t extrapolate strictly on the actual number. That’s our best guess at today, where we stand based on current yields and where our book has been converted to two current rates. Hey guys. I guess same kind of question. Just in terms of the trading impact on the investment income, looks like there was quite a bit of trading in Q4. What capacity do you have left to continue to execute trades? What kind of trades are these that are helping to really reduce the interest revenue specifically? So, we’re careful here with the impact of the trading. What you’re seeing on the realized gains and losses in the non-operating section. So, we have to be a bit careful here. Our expectation right now is to go somewhat back to normal trading next year. And if there are opportunities where there’s a trade that makes sense and doesn’t get wiped out by the realization of their loss on the non-operating earnings, we would do those trades, but you’re right, we took the opportunity as markets move and rates move, quite frankly. I think the investment team sees more opportunities and therefore are much more active to trade. And this is what has happened. I will say second half of this year very, very active and you’ve seen it in Q4. So, today I sit here, what we look at in 2023 as normal turnover. Maybe there will be opportunities and that will be positive tailwind to the current guidance. But not more than that. Okay. Got it. And the second one, just in terms of the Highland Insurance acquisition in specialty lines, just wondering if you can comment on the success of that acquisition, how much it’s contributing to U.S. commercial, but also how is it contributing to the distribution income as well? I guess it hits both sides. Yes, absolutely. Obviously, it’s a transaction as, that we made last year, we came online in terms of underwriting capacity in Q4. These are very highly specialized niche appetite that they have at Highlands, and that’s very much part of the recipe when we look at from an MD&A [ph] and from an acquisition strategy standpoint. Just a reminder though that we did not purchase any reserves or any unknown premiums. So this obviously is earning out from dollar one. Obviously, as you can see in the MD&A, there was an impact in a favorable impact, obviously in the growth in the U.S. in Q4 that will very much obviously continue out into 2023. Performance to date, obviously it’s still very, very early, but it’s very much in line with expectations and we’ll have a positive impact on the overall performance in the U.S. We’re keeping roughly 21% of the capacity out of that operation. Obviously supported by both some other direct insurers, but also some reinsurers as well. Absolutely. So in the quarter, Highland was actually of the 22% rise was about 2%, 3% of the 2022 was driven by Highland. So it’s a pretty significant portion of the growth in the earnings. It’s 2% year-to-date, which is half a year for Highland. So it has a meaningful impact on the distribution income from, for the distribution earnings. Thanks everyone for joining us today. Following the call, a telephone replay will be available for one week, and the webcast will be archived on our website for one year. A transcript will also be available on our website in the financial reports and filing section. Our 2023 first quarter and full year results are scheduled to be re released after market closed on Wednesday, May 10th with the earnings call starting at 11:00 a.m. Eastern time on Thursday, May 11th. Thank you again, and this concludes our call for today. Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we ask that to please disconnect your lines.

EarningCall_416

Before we begin, I would like to remind you that this conference call may contain forward-looking statements with respect to the future performance and financial conditions of Civista Bancshares, Inc. that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release, also available on the company's website, contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures. This call will be recorded and made available on Civista Bancshares website at www.civb.com. At the conclusion of Mr. Shaffer's remarks today, he and the Civista management team will take any questions that you may have. Now I will turn the call over to Mr. Shaffer. Please go ahead, sir. Good afternoon. This is Dennis Shaffer, President and CEO of Civista Bancshares, and I would like to thank you for joining us for our fourth quarter 2022 earnings call. I'm joined today by Rich Dutton, SVP of the company and Chief Operating Officer of the bank; Charles Parcher, SVP of the company and Chief Lending Officer of the bank; and other members of our executive team. Let me start by noting several significant accomplishments or transactions that occurred during the fourth quarter. This morning, we reported earnings for the fourth quarter 2022 of $12.1 million or $0.77 per diluted share, which represents a 5% increase over the prior year's fourth quarter. Our full year results were net income of $39.4 million or $2.60 per diluted share for the year ended December 31, 2022, which is consistent with our prior year net income of $40.5 million. During the year, we completed 2 acquisitions, expanded in Central Ohio had record organic loan growth and achieved near-record profits. I want to take this opportunity to thank all of our employees for their commitment to the organization and for their good work in helping us achieve these accomplishments. Our return on average assets was 1.41% for the quarter and 1.21% for the year, while our return on average equity was 16.09% for the quarter and 12.47% for the year. If we adjust for the $2.9 million in nonrecurring expenses associated with the acquisition of Comunibanc Corp, which closed on July 1 and the $814,000 in nonrecurring expenses associated with the acquisition of Vision Financial Group Inc., which closed on October 1, our earnings per share would have been $0.88 for the fourth quarter and $2.80 for the year. During the quarter, loans and leases grew by $218.3 million or an annualized growth rate of 37.5%. Excluding loans and leases from our BFG acquisition, which occurred during the quarter, net loans grew by $150.9 million or an annualized rate of 25.7%. While we are pleased with VFG's contribution, it was our strong loan growth that drove our quarterly earnings. Excluding the addition of loans and leases that came to us through Comunibanc and Vision Financial and adding back the repayment of $46 million in PPP loans, we experienced $356.8 million in organic loan growth for the year, which is an annual growth rate of 18.3%. Our net interest margin expanded by 11 basis points compared to the linked quarter and by 72 basis points when compared to the prior year quarter. For the year, our net interest margin expanded 28 basis points when compared to the previous year to 3.75%. This is a reflection of our strong core deposit franchise and the disciplined approach we take in managing our deposit rates. In early October, we announced and closed on the acquisition of Vision Financial Group, a small equipment leasing and finance company based in Pittsburgh, Pennsylvania that originates leases and loans nationally. Small equipment leasing represents a new line of business for us. We were looking for other revenue sources to help diversify our income and leasing, which is a natural extension of our lending products, will help us do that. Also in October, we successfully completed the system conversions of Comunibanc and now have them operating on our legacy systems, which will allow us to offer our standard suite of products to customers in Northwest Ohio and the Toledo MSA. Now let's turn our attention to our performance for the quarter and for the year. Net interest income increased $2.1 million or 7% over the linked quarter and $9.2 million or 39.6% over the same quarter in the prior year. Our net interest income for the year increased $14.8 million or 15.5% compared to 2021. The increase was primarily the result of strong organic loan growth across our footprint, a rising interest rate environment, our disciplined approach to managing deposit rates and the addition of Comunibanc Corp and Vision Financial in the latter half of the year. Our net interest margin was 4.14% for the quarter and 3.75% for the year. Both measures reflect expansion over the comparable 2021 period. Similarly, our margin expanded by 11 basis points over the linked quarter from 4.03% to 4.14%. Our yield on earning assets increased by 118 basis points compared to the prior year quarter and by 51 basis points over the linked quarter as our team originated new loans and existing loans on our books continue to reprice at higher rates. Our yield on earning assets for 2022 grew by 43 basis points compared to the same period in 2021, even though our 2021 loan yields were augmented by the accretion of $11.5 million in PPP interest and fees. Funding costs for the linked quarter increased by 41 basis points, while our year-over-year funding cost increased by 15 basis points. We have always and continue to negotiate rates with our large depositors. We are starting to feel some deposit rate pressure in mid-December to remain competitive, we increased our offering rates on higher pure money market accounts and select time deposits in conjunction with the Fed's most recent move. Our noninterest income remained solid, increasing $4.3 million over the linked quarter. While the quarter included $3.9 million in revenue from our leasing company, we also experienced increases in virtually every noninterest income category over our linked quarter as we continue to focus on diversifying and strengthening our noninterest income stream. If we back out the impact of the $1.8 million gain on the sale of our visa B stock that occurred in the second quarter of 2021, our noninterest income for the year of $29.1 million was comparable to that of the previous year, as the increases in service charges and leasing revenue offset declines in our gain on sale of mortgage loans. Service charges continue to be a strong contributor, increasing $185,000 compared to the linked quarter and $1.2 million over 2021. Noninterest expenses increased $4.2 million or 18.4% in comparison to the linked quarter. The increase was primarily the result of $637,000 in nonrecurring expenses associated with the acquisition of Vision Financial Group and $1.5 million in nonrecurring expenses associated with the conversion of Comunibanc systems and severance payments to former Comunibanc employees during the quarter. Excluding these onetime expenses, noninterest expenses would have increased by 8.8%, primarily on additional compensation expense related to our new employees. Noninterest expense increased $12.8 million or 16.5% year-over-year as the $3.7 million prior year balance sheet restructuring costs were replaced by increases in compensation expense, occupancy expense, software maintenance expense, professional fees and other nonrecurring expenses related to our Comunibanc and Vision Financial Group transactions. Excluding nonrecurring expenses, noninterest expenses for the year would have increased by 11.7%, primarily on additional compensation and occupancy expenses related to our new employees and additional facilities. Total expenses related to Comunibanc and Vision Financial transactions were in line with expectations and totaled $3.8 million for the year. Our efficiency ratio was 63.2% and 64% year-to-date. If we had adjusted for onetime deal costs, our efficiency ratio for each of those periods would have been 58.2% and 61.4% respectively. Turning to the balance sheet. Year-to-date, our total loans increased by $548.8 million, which includes the addition of $167.5 million of loans from Comunibanc, $67.5 million in loans and leases from Vision Financial Group and a $42.6 million repayment in PPP loans. Excluding the Comunibanc, Vision Financial Group and PPP loans, our loan portfolio grew by $356.8 million or on an annualized basis of 18.3%. Making the same adjustments for our fourth quarter organic loan growth was $158.6 million or 29.2% on an annualized basis. This growth was attributable to strong commercial loan demand in virtually every one of our markets. Along with our strong year-to-date loan production, we continue to have commercial construction projects at various stages of completion. Our unfound construction lines remain near record high, and we were $162 million at December 31, 2022. While we believe the higher interest rate environment will inevitably slow the economy and loan growth, we believe our loan portfolio will grow at a mid-single-digit rate for at least the first half of 2023. On the funding side, we reported $203.3 million increase in total deposits from year-end 2021 to 2022 with increases in every deposit category, except interest-bearing demand accounts as customers migrated into higher-yielding deposit accounts. If we were to exclude the deposits accounts acquired from Comunibanc, total deposits would have been unchanged from year-end 2021 to 2022, although we would have seen a similar migration from interest-bearing demand and savings accounts into higher-yielding time deposits. We continue to focus on attracting noninterest-bearing demand accounts, which made up 34.2% of our total deposits at year-end. These accounts are primarily made up of operating accounts of our business and municipal customers. We continue to believe our deposit franchise is one of Civista's most valuable characteristics and contribute significantly to our peer-leading net interest margin and profitability. Despite the uncertainties associated with the economy, we have not seen any deterioration in our customers' financial positions across our footprint. In fact, year-end classified loan levels have improved and are below precoded levels. While we did make the $752,000 provision during the quarter, it was solely attributable to growth in our loan and lease portfolio rather than economic stress. In addition, we realized $118,000 in net recoveries during the year. The ratio of our allowance for loan losses to loans at year-end declined slightly from December 2021 from 1.33% to 1.12% as did our allowance for loan losses to nonperforming loans, which was 261.45% at December 31, 2022 compared to 496.10% at the end of 2021. I would note that if we include the credit mark of $5.4 million associated with Comunibanc loans and Vision Financial Group leases, our ratio of allowance for loan losses to loans would have been 1.33% at the end of the year. As we look forward to the adoption of CECL in the first quarter of 2023, and we anticipate increasing our allowance for credit losses by $3.3 million and recording a liability for unfunded commitments of $3.4 million. These initial entries will not impact earnings as they will be recorded through equity. While longer-term interest rates have moderated, the higher interest rate environment continues to put pressure on bond portfolios. Although unrealized losses in our securities portfolio begin to moderate in the fourth quarter, we did experience a $67.4 million decline in other comprehensive income from December 31, 2021 to December 31, 2022, related to unrealized losses in our investment portfolio. As a result, we ended the quarter with tangible common equity ratio of 5.91% compared to 9.25% at December 31, 2021. Despite this decline, our Tier 1 leverage ratio at December 31 was 8.92% and remains well above what is deemed well capitalized for regulatory purposes. Civista continues to create capital through earnings, and our overall goal remains to have adequate capital to support organic growth and potential acquisitions. Two important parts of our capital management strategy continue to be the payment of dividends and share repurchases. We continue to believe our stock is a value. While we did slow the pace of repurchases during the fourth quarter, we did repurchase 7,205 shares of common stock for $152,400 at an average price of $21.15 per share. For the year, we repurchased $742,000 and and 15 shares at an average price of $22.58 per share. This represents 5% of our shares that were outstanding at December 31, 2021. We have an authorization of approximately $6.1 million remaining in our current repurchase program. As you know, we added Vision Financial Group, a small equipment leasing and finance companies to Civista in October. We have retained our management team and are well on our way to integrating them into our organization. Vision originated $40.6 million in leases and loans during the fourth quarter at a weighted average yield of 9.2%, and we have budgeted them to originate $164.5 million in leases and loans during 2023. In summary, we are pleased with another quarter and year of excellent earnings, exceptional loan growth and solid credit quality. I would like to say again that none of this would be possible without the efforts of our team. So this is fortunate to have people who care about our shareholders, our customers, our communities and each other. Despite the uncertain fee surrounding interest rates in the greater economy as well as the inflationary pressures we are all facing, we remain optimistic. Businesses and consumers across our footprint continue to have strong balance sheets, our loan pipelines remain solid, and we have successfully integrated Comunibanc and Vision Financial Group into the Civista family. Thank you for your attention this afternoon, and now we'll be happy to address any questions that you may have. Maybe you talked about mid-single-digit loan growth. Could you maybe discuss your deposit strategy or just overall funding strategy if the industry continues to experience an outflow of deposits. I think we're a little bit unique in that we have our tax program in that first half of the year. So we try to manage to that as well. We will see an influx of deposits that we'll be able to use -- although they go in and out, those balances are so big. They roll it. So big we'll be able to use some of that to kind of pay down borrowings that we have. So we kind of manage our deposits to that. We continue to believe we do have a pretty strong core deposit franchise. Those noninterest accounts. We do think that there will be funds moving out of those accounts and migrating into higher-yielding money markets or CDs that we have. But we do think we have a loyal deposit base that necessarily doesn't need -- we don't need to necessarily pay the highest rate, we do think our deposit beta for the year was virtually nothing. We were about 11 basis points in that fourth quarter. So we do think the deposit beta is going to move quicker than in 2023. So we will have to get a little bit more aggressive in our deposit pricing, but we still don't think we have to be the highest paying bank there to retain deposits. We want to be competitive and offer fair rates to our clients. But again, we think that we have the strong core deposit base. And I think that's really going to be the telling sign for banks as we move forward, you're going to really see which banks have strong core deposits and which banks do not. So that's kind of how we're headed, but we will probably have to be a little bit more aggressive here in '23 than we were in '22. And then as a follow-up, the leasing or lease revenue and residual income of $2.3 million. I had my notes from last quarter that there was some residual income booked at the end of the deal. So I'm maybe asking, what do you see more normal? Is that a normal run rate going forward? Or was there some incremental gains in the fourth quarter given that the deal closed? So Terry, this is Rich. And certainly, net lease revenue and the residual piece of it makes it kind of lumpy. But I don't know that we're leasing experts enough yet to tell you that the fourth quarter was different than what we expect going forward. I think I would use that as typical until we tell you otherwise. I think it looked pretty reasonable from what we have heard from our newest members of the team and what we've seen. Yes. I would say, Terry, I mean under normal leasing production. Fourth quarter is usually a little higher quarter than first or second quarter. It usually kind of gets back end load a little bit. So I guess, as Rich said, we'll give you a little more guidance as we kind of go along here. As we look at that mid-single-digit loan growth target, a good portion of that is the lease originations. Are you still planning to keep a good portion of those on balance sheet? Just kind of can you walk through the mid-single-digit loan growth mix in 2020 -- in the early half, I guess it's only first half of the year. What are kind of the expectations there? I guess as we kind of did the forecasting for the year, I would tell you the mid-single-digit growth rate was really for what I would call the bank -- the bank loan portfolio. And then we're going to layer on top of that. I think our projection was, I think, roughly $165 million of production on the leasing side. We've kind of modeled it out right now. And we to say we're going to hold about half and sell about half into the marketplace. Obviously, as we look at our funding throughout the year, we'll probably move that one way or the other a little bit. But bottom line is that's kind of how we got to model out. With kind of the pricing changes at the end of December in the deposit portfolio, what are kind of our expectations of that has the beta changed at all? Like what are you kind of targeting going forward? Any kind of firm guidance on that end? Well, beta will definitely change. I think as I alluded to my comments, I think to get a little bit more aggressive there. Rich got a guidance there for us is... Well, I mean I think our deposit beta for the fourth quarter was, what, 11 basis points. And I think what we've modeled going forward is probably more like, I think, I want to say in 12 basis points Again, I think we've kind of lagged and will continue to lag, but I think the velocity of increases in our deposit rates is going to pick up. But again, I think first half of the year, you're going to see our margin continue to expand, and it kind of depends on what the Fed does on the back half of the year. But I don't see it compressing. It will expand to a point and probably hang out there until the bid makes a big move up or down. Well, we keep watching the -- I think the kind of the slope of this interest rate curve, it's gotten a little bit more inverted. So I think you'll see us -- I think probably other banks trying to -- on the lending side push their loan yields up, push their spreads up more. I think they were keeping pace with the velocity of the interest rate increases. And I think you'll see that more normalize a little bit in '23. At least for us, we're going to try to push our own spreads and lease spreads up as we go into '23 as well. As you kind of get some of your normal seasonal inflows in deposits in the first half of the year, how much of the borrowings can pay back? Are you targeting to kind of get back to 3, 4Q levels? Like how quickly? Well, I mean, I guess you never know, but over the last 2 or 3 years, I would tell you that our average deposits from the tax program in the first quarter have been right around and [indiscernible] $240 million, $250 million, and that's been pretty steady each in the last 2 or 3 years. So we could pay back starting sometime the week of February 20, when we'll see that money start to flow in, and we have a bunch more in the beginning. But again, over the whole quarter, if you averaged it, it's about $240 million is what we anticipate. Yes. fungible. I mean we'll borrow overnight at the end of the year, what $390 million, I think, is what we work. So again, that's what it's for. On for Mike Perito. I want to talk about the loan growth guidance real quick for mid-single digits. It seems like that's a little bit of a deceleration from the recent momentum you guys have had on an organic basis. Is there some conservatism in there just kind of given the economic uncertainty? And like the economy holds up, is there some upside? Yes. There might be, Tim, this is Chuck. We -- we've been normally -- if you look backwards somewhere between mid- to high single digit shop. Last year, obviously, we had a fantastic year. Our pipelines are down a touch as compared where they were going into the fourth quarter. We know we've got a couple of large payoffs coming, one on a completed project and then one of our larger companies is sold and will be paying off here in the first quarter. So we might be a little bit conservative. I mean the pipelines aren't bad by stretching main say they're relatively solid. We just don't see quite the same momentum right now going into the first quarter. And to be honest with what we're seeing more than anything is more, I would tell you, larger deals, but less deals. I think the people that have a lot of capital still out in the marketplace, we're still doing deals, putting more money into their deals to make them work based on the cap rates of the day and the interest rates are today. But we don't see the same number -- the smaller demand has fallen back a little bit. And what about like geography-wise, can you talk about maybe the Columbus and Toledo area? And I know you're probably trying to look to hire some new lenders and those spots. Can you give us some update on how that's been. I would tell you, as we look backwards, Cleveland was our biggest -- our largest growing market last year. But Cleveland, Cincinnati, Columbus were all really good markets for us. I would tell you in Columbus, we do a lot more trading of dollars, so we do a little bit more development lending down there. So we're finishing deals. They get paid off. We do the next deal. A lot of activity down there where we're keeping a lot more stuff on the books in Cleveland and Cincinnati. They've been very good. Toledo, we're just starting to really kind of ramp up a little bit, we lost an employee over there through the community bank piece. And just yesterday actually hired 2 people just to start in that marketplace going forward, one of them, a 28-year person from Huntington and the other one, a 12-plus-year person from State Bank. So we really feel like we've upgraded our talent over there and upgraded really our potential marketplace. I'm going to be spending a little bit more time over there in the first quarter now that we're getting kind of past the vision financial piece of that as well. So we're looking to ramp Toledo up here in 2023 for sure. And we think we have opportunity really. And just as we mentioned in our comments, I think we've had growth throughout our footprint. Cleveland has been a little bit unique in the fact that they probably had a little bit more M&A unrest. When you look back over the last 5 years, you had the Huntington FirstMerit deal, the Huntington TCF, you had Cortland that was playing in that market a little bit. Farmers bought them. So they've had a little bit more unrest, which has created opportunity for us. In Columbus, you've got just tremendous growth going on down there with what Intel and Amazon and others are going in the area. Cincinnati is a consolidating market when you look at the community banks. So we think we have -- you can make tremendous inroads there. And then Toledo, as Chuck was talking about, and that's an area that's Chuck most of his banking career was in that Toledo market. So we know the businesses. We know the bankers, we have contacts. So we think we have tremendous opportunity in all of those markets to continue to make inroads. Can we move to expenses just real quick. Do you guys are kind of looking at the core run rate here, and you should be getting some more community bank cost saves, like as we're exiting 2023, is like $24 million, $24.5 million of quarterly run rate, is that kind of like a reasonable expectation, I guess, the cost saves offset by some inflationary expenses and investment. We would love to hit that number. I think if you back out the onetime stuff or fourth quarter noninterest expense is about $25.1 million I think what we're seeing for the first quarter of next year is 26.4% is kind of what we're forecasting because we'll have more payroll kind of expenses attached to that in the first quarter. Second quarter next year, we'll have our merit increases, and we're looking at probably a $27.1 million second quarter noninterest expense. And that, I think, barring any significant changes in terms of emissions or whatnot would be a number that ideas to run out for the rest of the year. Just a couple of housecleaning questions for me. On the margin that you posted this quarter, how much yield accretion was baked into that number? And how should we look at it in '23? So purchase accounting in the fourth quarter was about 6 basis points of that. So without that, it would have been 6 basis points lower. And actually for the year, it was the same number, just kind of work out that way. And I would think going forward, that's as good a number as to use for the next 3, 4 quarters anyway. I mean it might a basis point one way or the other, but I think that's -- everything is in. And then on the credit quality front, I did notice a bit of an uptick on your nonperformers linked quarter. What was driving that? This is Paul. Nothing significant. We have one hotel that has been shut down, not necessarily for covet reasons, but because of some mechanical issues. And the sponsor has been covering them and then finally stop paying. So that's a big chunk of it. Again, you get remember, we brought HCB in as we've shifted some of the culture in terms of the consumer portfolio, some of that stuff has fallen in there. By and mine, I don't consider that a trend. It's just more fluctuation as far as what we're dealing with. Just wanted to follow up with the question on capital management. Will the capital impact from CECL? Will that be phased in over 3 years? And then just what are your thoughts here on building capital over the next few quarters? Well, Paul can correct me, but it will be baked in over 3 years. It will immediately happen in this first quarter. So Paul's nodding. So that like the right answer. And then I think we -- as we move forward, we're growing our capital. Our earnings, we have strong earnings. We're going to continue to be there. We're going to be very mindful of how we handle share repurchases and things like that. You'll notice that we've really pulled back on that in the fourth quarter. And so I think we're just continuing to be mindful there as we move forward. Our capital levels are pretty strong. We do want to -- we think the TCE was really kind of flat that fourth quarter. We had the acquisition in there that impacted it some as well. So we think that, that will continue to start going the other direction here for us in the '23. And maybe since I've got you, and this is the platform to ask the question. You acquired a bank, integrated it. You are off, you hit the ground running with the leasing company deal. So I guess my question is, what are your thoughts on nonbank or bank M&A in 2023 for your company? Well, I think we obviously will continue to explore that. We want to continue to grow if it's the right deal for us and we can do it in a profitable manner that benefits our shareholders and we get employees and customers. We want to try to do that. There are some greater challenges right now when you do an M&A deal with all the AOCI adjustments that we have to look at in the marks that you have to give the credit portfolio, but it doesn't scare us away. We think we've been very successful in doing M&A deals. We think we integrate these pretty well. So we're going to continue to be actively looking and pursuing other deals. We want to get to a certain size because we think we continue to get more we become more efficient as a company. So we'll continue to have dialogue. And if the right deal comes along and it's the right fit for our company, we'll pursue that. Thank you. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks. Thank you. In closing, I just want to thank everyone for listening and thank those that participated in the call. Again, we are very pleased with the results of our fourth quarter and for the year, a very, very strong year for us. And while 2023 on would be another year full of new challenges. We look forward to meeting those challenges and to talking to all of you again here in a few months to share our first quarter results. So thank you for your time today. Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful evening.

EarningCall_417

Good day and welcome to today’s USANA Health Sciences Fourth Quarter Earnings Conference Call. This meeting is being recorded. At this time, I’d like to hand the call over to Andrew Masuda. Please go ahead, sir. Thank you and good morning, everyone. We appreciate you joining us to review our fourth quarter and year end results. Today’s conference call is being broadcast live via webcast and can be accessed directly from our website at ir.usana.com. Shortly following the call, a replay will be available on our website. As a reminder, during the course of this conference call, management will make forward-looking statements regarding future events or the future financial performance of our company. Those statements involve risks and uncertainties that could cause actual results to differ perhaps materially from the results projected in such forward-looking statements. Examples of these statements include those regarding our strategies and outlook for fiscal year 2023 as well as uncertainty related to the impact of the COVID-19 pandemic to our business, operations and financial results. We caution you that these statements should be considered in conjunction with disclosures, including specific risk factors and financial data contained in our most recent filings with the SEC. I am joined by our CEO and Chairman of the Board, Kevin Guest; our President, Jim Brown; our Chief Financial Officer, Doug Hekking as well as other executives. Yesterday, after the market closed, we announced our fourth quarter and fiscal 2022 results and posted our management commentary document on the company’s website. Thank you, Andrew and good morning everyone. We appreciate you joining us. USANA reported fourth quarter and fiscal 2022 results that were largely in line with our preliminary results announced on January 5. Fiscal 2022 presented a challenging operating environment for USANA. As with many companies, global inflationary pressure continued to negatively impact our materials and supply chain costs as well as our consumers’ purchasing behavior across several key markets. In particular, the operating environment in Mainland China continues to be difficult to navigate. During the final two weeks of fiscal 2022, we saw an increase in demand for certain of our products following the Chinese government’s unexpected easing of its COVID-19 policy. While we are encouraged by this increase in demand, it is still too early to forecast long-term consumer demand in this critical market, particularly given the seasonality we experienced during the Chinese New Year holiday, which recently ended. That said, we anticipate that we will begin to see more normalized – a more normalized operating environment in China during 2023 and remain confident in our long-term growth opportunity in this key market. Notwithstanding the challenges we have seen in China and many of our other markets, USANA’s business has remained financially and operationally strong and is strategically positioned for future growth. Importantly, the company’s focus on health and wellness has never been more relevant as consumers around the world are more focused on their well-being now more than ever. We made progress throughout the year on several strategic initiatives, including various digital commerce initiatives to support our business, new market expansion, the launch of our affiliate program in select markets and the completion of 2 acquisitions. As we begin 2023, our top priority remains generating long-term sustainable growth in active customers. While our associates did well in adjusting to a virtual selling environment, it’s become more and more evident that in-person meetings and events are an invaluable catalyst to building relationships and generating excitement and positive momentum in our business. Consequently, one of our key priorities this year is to return to live sales meetings and events where possible. We have planned events in South Korea and Macau, China in the first half of the year with attendance at each event expected to be very strong, particularly given the absence of these events over the last several years. Additional strategies for this year include offering new incentive opportunities for our sales force increasing our readiness for new market expansion, growing the two companies we acquired in 2022 and evaluating additional acquisition opportunities. I’d like to now turn the call over to USANA’s President, Jim Brown, for his comments on our key 2023 operational strategies. Thank you, Kevin and good morning everyone. Although generating customer engagement and growth is our top priority in 2023, we are also focused on cost and margin management. In particular, we will concentrate on strategically managing inventory, adjusting our sales promotion strategy to emphasize more local and regional offerings and fewer global offerings, implementing price adjustments to mitigate our increased cost structure and the current operating environment and capturing other operational efficiencies throughout our worldwide business. As a reminder, we made a strategic decision 2 years ago to build inventory levels to mitigate supply chain and stock out risks. As the supply chain has become more stabilized, the risk in this regard is lower, and we have meaningfully reduced inventory. We will, however, continue to closely manage and monitor our inventory to ensure we’re able to deliver the best possible customer experience in a cost efficient manner. In closing, we are optimistic that the successful execution of all of our strategies will allow us to build sequentially on our fourth quarter results in 2023 and position USANA to return to year-over-year growth in 2024. Yes. Hello. Good morning. So I was wondering if – so the – obviously, the China sales in the fourth quarter performance was a lot better than we had projected originally. And you talked about the pickup in the last couple of weeks. Can you talk about what you are seeing more recently? Like has the pickups continued? And specifically, can you say anything about like how January was in terms of the performance there in China? Yes. Linda, this is Doug. And so obviously, with what we saw at the end of the year was really kind of in response to the complete change in really COVID policy in the market. And so we saw those two weeks pick up. We saw a little bit of that trickle. But we are just coming out of Chinese New Year and it’s kind of what we had in our remarks that we just – we are waiting to go back and see how this normalize and kind of what that level is. We are obviously optimistic with the market and we think them shifting forward. The opening of the market is positive, but it does create some transitionary adjustments that we will have to make and our consumers will have to make in the market. So we are still trying to evaluate what that looks like. Yes, you said it great there, Doug. December was very strong with the change in the COVID policy and we saw that demand go into January. But as Doug mentioned, Chinese New Year hit at the end of January. And every year, there is always a slowing that’s associated with that. And similarly, we saw that same slowing. So time will tell as we come out of Chinese New Year and into February and March to see what demand is going to normalize out. Okay. And then I guess when I just look at the results, again, versus what I was expecting, I guess the Southeast Asian piece that was quite a bit worse there. Can you just kind of talk about – I mean are there both COVID impacts still going on, coupled with just macro business or is that just specific stuff with your business that’s going on in Malaysia and Philippines, I guess I’d be interested in? Thanks. Yes. Let me start that off and I have Jim and Kevin maybe comment on top is, within that area, obviously, in Southeast Asia, COVID has hit us particularly hard. I think Philippines and Malaysia are kind of key examples of that. The other issue playing into the performance both sequentially and year-over-year in the fourth quarter in that region, is that we didn’t – we were not promotion-heavy. It was an atypical quarter for us with the level of promotional activity and it was a choice by us just relative to all the things that have been kind of pushed and encouraged and incented. And it was just a choice by us. And so what we think going forward and what we are hearing from the leadership in the market, maybe Jim talk about that, is pretty positive. I mean we started really traveling again into the third and fourth quarters of last year and the leadership in the markets from the events that we went at are excited and planning on really starting off the new year growing, and that’s why we’re so positive on this year. But just like Doug said, usually in the fourth quarter, it’s a little slower we didn’t have as many promotions planned by us. We were very promotional heavy the first part of the year because of COVID, and we kind of wanted to bring that down to a more normalized run rate. Okay. And then when – you talked about in the – just the gross margin performance in the quarter. You mentioned an inventory valuation negative impact in the quarter. Is that kind of a one-time thing in nature or do you think that will continue or just can you give a little more color on that? Yes. And it was both the quarter and the year. I mean I think the year, just from carrying more inventory, it creates some exposure, some risk and just making those decisions. And so we’ve dealt with that some of that risk as far as making adjustments to inventory where necessary. But we think, and you heard in Jim’s prepared remarks, that a lot of the instability of the supply chain and how we’re having to react has definitely stabilized, and it bodes well going forward. The operations team under Walter Noot’s direction has really done a great job really managing the inventory. And so I think we’re in a good spot now. And I think we will see a little bit less, I guess, friction costs relative to that strategy. Okay. Let’s see. I guess in my model, I had that actually, you made good progress. I think the inventory was $67 million in the third quarter. What was the inventory at the end of the year? It was about flat. And I would remind you that we made a small accounting change in the third quarter. We have a small piece, about $3 million, that we have in long-term. And so you’d probably have to layer that up to have to be comparable to past years. I think with the change in strategy during the COVID period, we’ve looked at that a little bit different and kind of worked with our accounts to be on the same page there, but there is about $3 million in long-term, there and so you’re about flat. So you’re really – the number is about that 70%, 71% range. And we’re peaking out about pretty close to $100 million in inventory. So we think this is meaningful progress. And the group has done a great job adapting a relatively short period of time. Okay. Thank you. And then – so you’ve talked about this affiliate – before I go on to that, can I just ask, in terms of the outlook for 2023, I mean do you have any projection as to like if the working capital line will be a positive or negative influence on cash flow? Just because of some of the spin-up and some of the timing of the payments, we definitely saw bolstered operating cash flows in the fourth quarter. And so you’ll see that drag just as it kind of corresponds. And a lot of that is because a lot of inventory came, and sales really pretty robust at the end of the year. And so you had some time where we generated revenue but hadn’t actually paid commissions. There is a little bit of a delay between when we generate sales to pay the commissions. We have accrued liabilities there. But I think it will be a little bit of a drag, but that really is kind of the isolated event that would cause that. Okay. And then just in terms of the outlook for 2023, I mean you’re still kind of figuring in some inflationary cost pressures. Is there any way of quantifying like those pressures like in millions of dollars that you’re figuring in for 2023? Yes. I mean I think we’ve just seen overall, as we’ve gone back and have positions that have left come on board, they are coming in at a much higher rate. We’ve had to go back and address many of the key areas, I think, particularly in the production environment and select positions outside of their materials, probably the biggest from just the overall framework of our P&L in mark – China obviously has a little bit different because they are doing all their sourcing locally and into production locally. The rest of the world, we’ve probably seen in that 5% to 8% pressure on change in material costs. And like I said, as we get a little bit more stabilization, we think there is some opportunity to negotiate and look for alternative sourcing as well. But we’re definitely proactive there. I think stability and kind of executing and having the stuff to run our businesses is first priority, though. Okay. And just along those lines, can you remind us what your price – excuse me, what your pricing strategy has been and what you took in 2022 and then maybe what you might plan for 2023 on the pricing front? Yes. We’re still rolling out 2023. So I’ll probably hold off now. I think what we’ve done in the last several years is we’ve probably definitely operated below where the inflationary pressures were, just having some unknown out there and when it would come back. And so we’re definitely looking for price adjustments that would reflect some of the current cost pressures that we’re seeing and trying to do. Obviously, we want to do as little as possible. Just in the environment in the direction from Kevin and Jim is just really being thoughtful and we’re working with the local sales leadership in each of the markets to arrive at that. But it will be probably a clip above. And we’ve been in that 2% range the last couple of years, and it will probably be a little bit above there. Okay. Thank you. And then finally, on the – you have talked about this affiliate program. Can you just talk about kind of how you’re approaching that rollout and what the pace is? And is it just a matter of going country by country and rolling it out or region by region? Like kind of what’s the general plan with that? Yes, sure. We actually rolled out the affiliate program for the Americas in November. It was considered a soft launch, and then we had a full launch just a few weeks ago in January. We’re going to look at that over the next few months to make a determination of where we’re going to roll it out. We have plans to do it. It’s mostly going to be country by country, not regions. And it’s going to be the countries that we also – we see affiliate programs. And we know we’re getting feedback from the field that they want a simpler way to earn with a faster way to earn, and that’s how we will approach it. And we will go through 2023, some in the second half and then into 2024. We’re ready for it. But again, we want to see how it’s working and then you see if we need to make any adjustments to the program itself before we roll it out completely. Okay. Thank you. That makes sense. I guess, I will leave it there and then take the rest offline. Thank you. Hi, thanks for taking my question. Just a couple of questions here. I guess on the Americas and Europe. I’m curious just your thoughts on the active customer count, where you see that going this year. And any drivers you have to kind of reverse the declines there? And then also just wanted to get your thoughts on how you’re expecting promotional activity to play out this year. I know it was lower last quarter. Are you expecting that to continue into this year? This is Kevin. Thank you, Susan. Just to talk about the Americas and Europe. One of the key strategies behind our affiliate launch is to attract a different demographic, meaning a younger demographic who is navigating themselves very openly to a direct sales model. maybe not so much a traditional model. And so as we become more relevant in that space, we expect to support and expect to see our active customer counts increase in these markets and so the key strategies behind the affiliate program and launching it here in the U.S. especially is precisely that. The attraction of a different demographic that may be more open to receiving, as Jim said, pay quicker in a simple and easy way to receive a commission in a new marketplace. And so we’re optimistic as it relates to the United States. We have a very, very strong base – in the U.S., we have a very strong customer base that has many of whom have been with us for many, many years. And so we’re going to build upon that base but also really focus on some new customers and approaching them in a new way. And so as it relates to our promotional activities were definitely, as compared to Q4 especially, going to increase that. And we have later in the year an event that is specifically for the U.S. Canada, Mexico and Europe event that we will hold targeted specifically at these groups, where we will again launch some new opportunities and, again, communicate with them face-to-face versus being virtual. So – and then there was one last part of the question, Doug. Susan, I did – there was one other part of the question I can’t remember. Yes. No, I think it was just on the active customers and the promotional activity, which was very helpful. But also, I wanted to ask about just capital allocation. Curious what your thoughts are for this year in terms of the puts and takes between share repurchases. And then I think you mentioned in your remarks, M&A, potential acquisitions that you guys still potentially looking to seek out there? And then along those lines, how are you thinking about something that would be complementary to the business? Thanks. Yes. So let me go reverse just a little bit and just kind of put a little bit more color on your prior question that Kevin responded to. One of the things we did during this last year, I think particularly in the markets that have launched, now with affiliate is we ran a test program during the year. And the way we ran that program kind of created a pretty heavy lift in our PCs for the short period of time. And so as that program expired and stuff, you have definitely seen that reflect in our customer accounts. So, we are really looking to build sequentially from the base that we report in the fourth quarter in that region as we run these programs and just to kind of put a little bit of context and color there. And then as far as capital allocation, it’s very similar to what we have done in the past, but there is definitely a heightened focus on business development and looking at some inorganic opportunities, and so we will continue to do that. I think with the two acquisitions we made last year, we are pleased we are making progress. We have some very high hopes and expectations of these companies. And it’s a good time right now to deploy some of our capital in this area and be pretty assertive there when things make sense. And so some of your question is, what type of structure, I mean we would look at vertical. We definitely look at complementary. We are definitely looking to go back and learn in some areas that we are not actively participating in from our business. And so we think there is a variety of options out there that we think will be very additive to the organization as we move forward there. And share repurchase, we had $83 million outstanding. And so we haven’t really commented on specifics there. But just as a note, that’s what’s currently authorized with the Board. The conversations and the gap between buyer and seller have definitely been more palatable than they were a year ago or 2 years ago. But it’s still always an argument, making sure that we see value and how we see the future of that organization. It’s always a bit of a struggle, but it’s definitely more palatable than it has been the last couple of years. Hi. Thank you for taking my questions. And can you give me a little bit of color on some of the products that are really selling well? Where do you see opportunity? Like, for example, during the winter, are you doing exceptionally well, let’s say, in immune boost products? And also, what going forward, new key growth areas are you targeting? Yes. I mean when you have mentioned it, right, the last couple of weeks of China, and we said it before, we are a little bit higher in volume and demand than expected. And that goes back to the COVID environment where they opened up. So, products that are immunity or overall health, we saw a pickup on that, and we saw multiple times the normal amount. So, that’s backed off a little bit when we look at the China New Year, and we are going to decide and see where it’s going after that. So, we are excited about it, but kind of hesitant to see what it’s going to do throughout the year. And then on new products, and we have talked before, one of the big things that we do is we launch new products and usually around one of our big events, and we talked about them. We have two in Asia Pacific or one in Asia Pacific or one in China beginning of this year. And then we have another event in August for the Americas, and that’s where we would roll out more new products at that point in time. And for us, we are looking at innovation. We are looking at delivery methods and the science that’s out there to make us – or help us make those decisions. And then Ivan, you had asked about some of these other areas. And hopefully, you picked up in our release that we are a little bit more forward on the talking of international markets. And maybe Jim, just high level comment, I know we can’t talk about the market, but rough timing to some of these other stuff. Yes. So, for the new market, again, we have a plan on when we will announce that and it would be at one of our major events. And we are looking at probably the fourth quarter for a launch of the new market. We have been doing work literally the last 1.5 years to get prepared. When we do this, you have to go in and register, find the right people to run the market. And we have been very successful, excited about the talent that we brought on for that market. So, we will see it. It won’t have a huge impact on this year, and we will look at a bigger impact in ‘24, but that’s creates excitement through the field. They like that opportunity throughout the company to move forward. And we are excited about the announcement. We just – we are just not ready to announce it right now. And then what products are your associate sellers saying they are seeing the strongest demand for? And also, what are they – like feedback from their customers? Are they getting that things they are looking for? Yes. I think it’s at least with us, Ivan, it’s a fairly common theme. I think obviously, in the heightened COVID period, as Jim commented on, we have seen really a high demand for products that are designed to support immune function. We saw that as we first entered COVID and saw the spike in volume. And we think – and you have commented several times in conversations we have had that people are more engaged and interested in their health. But in general, overall health and well-being, they are exercising more. They are taking a more holistic approach to their health, and supplementation is a big part of that. And so we have seen stuff has been fairly consistent. We are always getting different feedback on new product offerings, and we are trying to continue to go back and formulate that and really respond. But we are definitely – we have got our ear to the pavement and listen to what the consumers are telling us. Yes. And another area of focus for us is the affiliate program. We talked about that. That’s a new way to earn as well as to introduce products. So, we are looking at products that fit that model really well, where an influencer and affiliate could talk about them and show them and their price in that realm to be effective with that program. So, you will see some products this year come out that are specifically designed for that affiliate program. Then one last question, I mean, sadly, if we weren’t in the pandemic of COVID, we would be focusing on the pandemic of diabetes, which is just going to continue to get worse unless people to address many of the dietary issues. So, what type of opportunity do you see there? Are you working on that? And then also the other area of sleep seems to be – sleep supplements in that area, there seems to be a lot of demand. And that all comes together with sleep and wellness as well as being managed by diet, the same thing with diabetes can also – diet is a key part of managing that. Can you give some thought or comment on that? Yes. Ivan, this is Kevin. I couldn’t agree with you more on the epidemic from a diabetes perspective and other health challenges, which underscores the relevance of our company and what we are talking about and offering. We have spoken for many years about the glycemic index and about how maintaining a more consistent glycemic score, meaning not spiking or allowing large dips to happen in your blood sugar levels, will help in many ways with symptoms and/or onset diabetes and other things related to that. And so as you look at many of our products and our foods-related products, we do take into account and look at the glycemic index and try and maintain through our nutritional drinks as well as our foods a healthy glucose level throughout the day. And we – our Nutrimeal Drink is especially good for that. On top of all the nutrients that it’s supplying, very, very consistent in helping us maintain a low index on the glycemic index. We do have some other foods type products that were – that are in development that I think will further help in that category. Again, holistic health is really a focus of ours, and diabetes is one of those that is at the top of the list. And then I can’t emphasize – and you are aware of this as well, but a couple of things that are most important as it relates to diabetes are exercise outside of what we are putting in our mouth, exercise. And then you bring up sleep. Sleep is so critical to the health of our bodies. And we have a great sleep product that we actually, just a couple of days ago, talked about how we can enhance and reformulate and be involved in sleep. We also have a calming product to help people calm down in the evening so that they are in a state of rest and sleep. And then again, we are encouraging the mental side of things for people to do those things which will help. One of the things I encourage every time I speak is the notion of meditation and the notion of mentally being calm so that our bodies will be willing to accept the rest of the sleep we have at night. And so that’s a fairly long answer to your question, but I think your question is so critical to the health of our country and the world that it can’t be understated. And I would make a little bit more color. We have seen this in the Healthy China 2030 initiative, and the government is really thinking companies should be far more proactive here. And what Jim has really pushed us towards this, we have made some pretty meaningful investments in our foods facility, and we will really have a good base that we can go back and build off as we introduce some of these new products and really build out that line. [Operator Instructions] As there are no further questions in the phone queue, that concludes today’s Q&A session. And now I would like to hand the call back over to Andrew Masuda for any additional or closing remarks. Over to you, sir. Thank you everyone for your questions and for your participation on today’s conference call. If you have any remaining questions, please feel free to contact Investor Relations at 801-954-7210.

EarningCall_418

Good morning, ladies and gentlemen and welcome to Siemens Energy's 2023 First Quarter Conference Call. As a reminder, this call is being recorded. Before we begin, I would like to draw your attention to the safe harbor statement on Page 2 of the Siemens Energy presentation. The conference call may include forward-looking statements. These statements are based on the company's current expectations and certain assumptions and are, therefore, subject to certain risks and uncertainties. At this time, I would like to turn the call over to your host today, Mr. Michael Hagmann, Head of Investor Relations. Please go ahead, sir. Thank you, Eugenia. A warm welcome from my side to everybody. Because of the AGM, we are a little bit earlier than usual. So the documents were out at 06:30 on the website. Here with me is Christian Bruch, our CEO; and Maria Ferraro, our CFO. We will have a short presentation, as always, it will take, hopefully, a little bit less than 30 minutes. And thereafter, we have about 30 minutes for Q&A. Because of the AGM, we have to finish on time. But of course, the IR team will be ready to answer your questions. Yes, good morning, everybody, also from my side. Thank you very much for joining Maria and myself for an early quarter 1, 2023 conference call. And we had at Siemens Energy, a very busy start into the fiscal year. We booked record orders of €12.7 billion, reflecting a rise of nearly 50% year-over-year and we delivered also 16% revenue growth. At the end of the quarter, our order backlog stood at nearly €99 billion which marks another record. And on an underlying basis, our profitability improved material at Gas Services and Grid Technologies. Transformation of industries manage the turnaround, as you can see from the more detailed numbers. However, because of the warranty-related charges at Siemens Gamesa, our profit before special items for Siemens Energy was materially worse than a year ago and that is without any question disappointing. Notwithstanding the charges at Siemens Gamesa, Jochen Eickholt and his team are making progress in improving the setup of the company and also really stabilizing the operations. And also in addition to Siemens Gamesa now the cash tender offer has been completed as intended. The EGM decided on the delisting of the company and Siemens Gamesa shares will cease trading on the Spanish Stock Exchange by the end of today. We published also our sustainability report in December and I'm glad to say that we continue to make progress towards our ESG targets. And let me provide you with further insights to that in a couple of minutes. The operating environment continues to improve. The need for energy security is driving investments. You see it, as I said, in the first quarter for us, in particular, in Grid Technologies and a gas services. In the U.S., the inflation reduction accelerates infrastructure investments. And obviously, since last week, we are heavily discussing the EU Green Deal industrial plan for the net zero age which was published on first of February. 2023 which aims to simplify, accelerate and align incentives in the EU and also really on the member state level. The operating environment in the wind industry is still challenging. So not only Siemens Gamesa is loss-making but the same is true for our major competitors. However, we are seeing a shift in boundry [ph] conditions which results on the one hand, in rising ASP and on the other hand, also in improved terms and conditions in the underlying contracts which we now conclude. Due to the charges at SGRE, we had to adjust our outlook for fiscal year 2023. We lowered our margin expectations and now expect the group profit margin for Siemens Energy of 1% to 3%. This compares to 2% to 4% before. I would like just to highlight, obviously, if you compare it at a midterm midpoint -- sorry, at the midpoint, this is a cut by roughly 100 basis points. and it's less than the mathematical impact of the change at Siemens Gamesa on our group margin which means, obviously, the rest of the business is doing better than expected and this is obviously a good space for the future. I would also like to highlight that we now expect positive cash flow for the group for the full year. And our change of view reflects the fact that yet again, we expect very solid cash conversion at gas services and core technologies in particular. Let me move to Siemens Gamesa and what I as Chairman of Siemens Gamesa see happening on the ground. Jochen and his team are making progress. The underlying performance at Siemens Gamesa was in line with our expectations. And I'm particularly pleased to see that we see a positive development when it comes to the 5x. During the quarter, manufacturing volumes were up. The same is true for installations and project delivery times improved miss the optimization program within SGRE is an implementation and the new organization is running as of first of January. However, the charge of SGRE is obviously disappointing. It originates in the installed fleet and reflects elevated failure rates due to failing components. As of today, €472 million is the best estimate of the cost to replace these components. And the process will take now several years. Keep in mind, this is a running fleet which then over the next years to come has to be maintained. And during that time, Jochen and the team have the chance, together with the supplier, to mitigate these costs. So that could be a potential positive contribution from that. Let me now share with you what will happen after the delisting. Immediately, with the delisting Seven Board members will leave the Board of SGRE. This means the Board will consist of 3 people, Jochen Eickholt as the CEO; Anton Staiger [ph] from the legal side; and myself as a Chairman. And Siemens Gamesa itself as an entity will have very limited external reporting requirements. We are talking about a dramatic simplification of the governance structure and this means that Jochen and his team can really focus 100% on solving the operational problems and to achieve the all-important turnaround and we will all obviously will support Jochen and his team in achieving this. In parallel, we are aligning the functions in order to realize the first synergies, for example, in procurement and logistics. We are deliberately not touching the operations itself in order not to jeopardize the progress Siemens Gamesa is making by implementing Mistral [ph]. Mistral [ph] remains the underlying key program to drive forward and to stabilize the company. once we attain 100% ownership of Siemens Gamesa, we will have a more integrated organization and realize the synergies. Keep in mind, we set 3 years after full integration is what we target in terms of implementation of the synergies. Let me, like always, move to 3 highlights out of the quarter. Underlining once again, obviously, our structure in terms of driving electrification or driving energy efficiency and Transformation of Industry. We have the competence to support really entire energy infrastructures. And in that regard, we, I have to say, extended the collaboration also with the Iran government. We have been active in Iraq over the past years already in terms of repairs and refurbishment of existing infrastructure. The second phase now very much focuses on new build infrastructure using flare gases or voice flare gases, building renewables in total between conventional and renewable production around adding 6 gigawatts to the system. Over the next 5 years and also extending grid infrastructure. And this is something which will also help the Iraq to prosper going forward. We had a world scale award from Amprion which underlines also our role in the build-out of the renewable infrastructure. The award was to a consortium between us and the Spanish company Dragados for a contract to connect several wind farms in the North Sea, then to the shore and supply the total capacity of around 4 gigawatts, so enough electricity to supply 4 million people. And the project will involve 2 gigawatt converter stations and combines also service business with it. Just before Christmas, production started at Haru Oni plant in Chile. This is a project we introduced before. This is a good example for combining different technologies, what we have to produce green molecules. In this regard, it's green in fuel which can power mobility, obviously, produced from wind power. And obviously, here, the intention is now to demonstrate the practicality and then extend in the second phase, the overall production capacity of the plant. As you know, at Siemens Energy, we have put ESG at the center of our strategy and we are developing Siemens Energy alongside our ESG framework. Our goal is to be a leader within the energy industry when it comes to sustainability, corporate governance and social topics. And in the report which we just issued, we documented our progress on our targets. You can see that we are on a good path to reach our goals, even so we really need to continue with our efforts. It will be a continued push also from my side. But let me start to flag up certain key points. First of all, with the emissions. Last year, we could reduce our greenhouse gas emissions by 21% compared to the previous year. which means 50% compared to the baseline year 2019. And with that, we have already exceeded our original target which was 46% reduction by 2025. Scope 3 emission account for more than 99% of Siemens Energy's total greenhouse gas emissions and represent the most significant challenge to climate neutrality. Here, we reduced our emissions by 12% versus the baseline and 300 basis points compared to 2021. At Siemens Energy, 90% of the electricity we consume stems from renewables. And as of the end of this year, we want to be at 100%. So this is another KPI where we are ahead of our original target of 84%. At the end of fiscal year '22, 22% of our leadership positions were held by women. And I'm pleased that with the new organization, we already in this year, exceed our original target of 25% by 5 in the leadership position. So we're making good progress also on our diversity end. And I'm also pleased it's not just gender, it's also really a very international representation and our leadership team. I firmly also believe in a safe working environment and our initiatives to reduce accidents such as our Zero Harm Day which was just completed recently, are extremely important to get this safety-focused culture into the company. We did make progress on our total recordable injury rates. They went down from 2.47% to 2.17%. Still some work to be done but the trend is absolutely positive and good. Thank you, Christian. Good morning, everyone and a very warm welcome also from my side. I'm very pleased to share with you our Q1 financial results for the group and for the very first time, our new reporting segmentation. Now with transparency on our business areas, Gas Services, Grid Technologies and Transformation of Industry therefore, as promised, much more transparency this quarter. So let me start by giving you a quick overview on where we stand regarding the voluntary cash tender offer and the related financing structure before I go through Q1. So as Christian mentioned, at the SGRE EGM on January 25, shareholders approved the delisting and we subsequently filed for the delisting of the shares from the stock exchange and with the Spanish National Securities Market Commission or the CNMV. As a result of this, a standing purchase orders for shares of SGRE commenced on December 23 and is scheduled to end today, the 7th of February at market close. This means the shares will cease trading today. Given this occurs, the official and definitive delisting is expected to happen around the tenth of February. Now just to recap, during the acceptance period from November 8 to December 13, approximately 175 million shares worth €3.2 billion were tendered. This equated to an ownership stake for us of 92.72%, of course, up from our 67.1%. Since then, as part of the standing purchase order, another 30.8 million shares were tendered until the end of January worth roughly €550 million. This increased our stake to 97.2% and therefore, the total cash consideration to approximately €3.7 billion. As we are still within the standing purchase order to tender time frame, I don't know how many shares exactly will be render -- or tender today rather to know the exact stake and therefore, the exact funding requirement. As of yesterday night, our stake stood at 97.6%. So going back to the end of Q1, the transaction value of €3.4 billion, of course, was financed as follows: We have the €1.15 billion cash that was pledged and deposited with the CNMV at the end of Q3. We have the €960 million proceeds from the mandatory convertible bond. This was also deposited with the CNMV in October of last year. And of course, the remainder has been financed approximately €1.3 billion via the bridge facility that's in place. This is all fully reflected in our net debt position at the end of Q1. This is described, of course, also on Slide 12. I'd like to reconfirm our clear intention to raise another max €1.5 billion of the transaction value via equity or equity-like instruments, to finance the bridge facility, of course, because Siemens Energy is and remains committed to a solid investment-grade rating. The financing of the transaction, how it's composed including our intention to raise up to €2.5 billion in total equity or equity-like instruments is designed to maintain and support this key objective. To maintain maximum flexibility, we seek authorization for a 10% conditional capital which will allow us to do a cattle increase without preemption rights later at today's AGM. Just to reiterate, regarding the equity component of this transaction. Number one, we continue to have a very good solid cash flow performance and we have a strong balance sheet. Number two, the transaction continues to be fully financed and secured. Number three, we have flexibility in sourcing the equity component for this transaction with various options which remain open and available to us. And we are looking to do this as quickly as possible, of course, as always, subject to market conditions. Now let's get on to Q1, please, on Page 10, starting with an overview of the SE Group. As Christian mentioned, SE level of orders was outstanding and better than expected. And I think this really truly reflects the favorable demand pattern and the confirmation of our customers that they believe that we have the right portfolio to support them in their energy transition journeys. Comparable growth was 49.2% despite a high basis of comparison. This resulted in orders for the quarter of €12.7 billion, the highest ever quarterly order intake of Siemens Energy. Order backlog of just shy of €99 billion marks a record despite negative currency translation effects of close to €4 billion. Of course, this is providing us with a solid foundation to deliver the growth and the margin improvements that we're striving for. I'll get into that a bit later. Revenue for the group came in at €7.1 billion. This is a 16% increase on a comparable basis, with all segments contributing to this growth. Nominal service growth was slightly higher, plus 19% than the new unit growth at 18% but -- and also contributing to a positive mix on the top line. As Chris mentioned, 16% revenue growth is a great achievement and again, across all businesses, even though we did have a weak basis of comparison. Book-to-bill Siemens Energy is strong at 1.8 for the quarter and 1.42 for the 12-month rolling period. Profit before special items amounted to negative €282 million or minus 4%. In Q1 of last year, it was negative 69%. This is, of course, due to the losses at SGRE and the charges of €472 million. I would like to highlight that we had a solid start. Gas Services and Grid Technology reported sharp improvements year-over-year in their profit before special items and Transformation of Industry delivered a turnaround. I'll get to that in a moment. Free cash flow pretax negative at €58 million, more or less at prior year level but this was better than we had expected. This is supported by advanced payments from our customers, reflecting the strong order development. Cash performance was particularly strong in Gas Services which generated free cash flow pretax of €359 million and Grid Technologies which generated free cash flow pretax of €361 million. Given this strong dynamic and strong start, we now have a more favorable view on our net working capital movement in fiscal year '23. Therefore, we've adjusted our free cash flow guidance upwards and expect free cash flow for the group to be positive in fiscal year '23. Now let's go to the next slide, please and take a look at the much promised order backlog transparency and where we stand at the end of Q1. As we've reiterated in the past, the order backlog is so important for us because it's growing strongly, even with our ongoing selectivity in place and we do really adhere to that. It provides us with visibility on revenue well beyond a 12-month time frame and of course, it reinforces and creates a strong business foundation. A strong book-to-bill feeds into our order book, the order book grew by another 13% over the last 12 months. This is increases across all businesses. During the quarter, we generated €7.1 billion and another €22 billion is already contracted or in-house for fiscal year '23. In other words, 90% plus of our fiscal year '23 revenue is already secured in our backlog. What you can see on this chart is the resilience and essentially stickiness, if you will, of our service backlog which is based on long-term service business. This is true for all our business areas but particularly for Gas Services. Today, €54 billion, as you can see here on the slide, of the group's total order backlog is service. This has multiyear duration. This is high margin and resilient. I'm also happy to confirm because it's not only about quantity but I always say it's also about the quality that the margin profile in our backlog continues to progress and support our margin targets accordingly. Next slide, please. I'd like to take you through the group's cash bridge. Here, clearly, it reflects the funding of the CTO of €3.4 billion, as mentioned earlier, at the end of our first quarter. Looking at our cash and cash equivalents, that stands at €5.4 billion. This is €510 million lower than at the end of fiscal year '22, mainly driven by the cash transfer of the €960 million proceeds of our mandatory convertible bond, as I mentioned earlier, to the CNMV in October, before, of course, it was sitting in our account and that was, of course, to be used as part of the December settlement. We have €5.5 billion of financial debt. This is up from €3.2 billion at the end of the fourth quarter, of which €2.4 billion is long term. The increase is driven by the fact that we drew on the bridge loan in the amount of €1.6 billion to fund the CTO and the increased short-term debt at SGRE. During the quarter, SE's provision for pensions and similar obligations decreased slightly from €570 million at the end of last fiscal year to €545 million at the end of Q1. This was largely driven by FX improvements. Taking into account pensions, we have an adjusted net debt position of €660 million. The fact that we are now in a net debt position is, of course, as a result of the funding of the cash tender offer. Looking at our liquidity position. As of the end of Q1, we have total availability -- sorry, total available liquidity, rather, of just shy of €11 billion and we have around €5.4 billion in cash and cash equivalents, as mentioned and €5.1 billion of undrawn credit lines. So now let's take a look, please, at the business areas, our new transparency, starting with Gas Services. So quick remark on the KPIs you see here, a very strong quarter for gas services across all KPIs, well done. The overall gas market remains solid. In the first quarter, we booked €3.8 billion. This exceeds the high level of prior year by 22.3% comparable. The substantial order growth which is important, it was driven by large orders but in various geographies, special note from the U.S. and Brazil and a continued strong development in our service business. Book-to-bill stood at 1.47% and the order backlog after Q1, €41 billion. In the first quarter, we booked 14 gas turbines greater than 10 megawatts. They are of 7 large gas turbines and 7 industrial gas turbines in the range of between 10 and 100 megawatts. Q1 is characterized by a strong gas market for GT greater than 10 megawatts and SE reached a market share of 25% accordingly. Revenue grew substantially by just shy of 22%, albeit versus a lower prior year base and came in at €2.6 billion, mainly driven by a very strong service business this quarter and obviously then a positive mix. Profit before special items came in substantially better at €318 million, reflecting a 12.4% margin. This is approximately 390 bps greater than prior year. This is a combination and as a result of a combination of higher revenue and that higher service contribution which gives you a positive mix this quarter. And of course, strong execution and I think that needs to be noted. It's operational excellence here as well as an improved cost structure. Moving on to our Grid Technologies business. Here, as mentioned by Christian and also by myself driving this outstanding order development in our Grid Technologies business. The overall market environment for Grid Technology remains very positive. Orders more than triple and rose to €6.3 billion. This development was driven by the large grid connection orders, as mentioned by Christian earlier and we're seeing strong demand in Europe for a while but this quarter, we're also seeing strong demand in other geographies, such as the United States. Book-to-bill was €3.96 million [ph] with backlog rising to €18.7 billion. Revenue grew significantly just shy of 19% year-over-year on a comparable basis, supported by the strong order backlog and order intake, of course, in the prior fiscal year. Growth was mainly driven by expected increases in the product ad solutions business. Profit before special items came in at a strong €110 million or a margin of 6.9%. This also implies quite an improvement, almost 310 bps versus last year. This increase mainly results from higher revenue and a strong focus on project executions. Also, you may recall last year, during the prior year quarter, we had mentioned that, particularly in this business, we had supply chain constraints and negative impacts related to higher material and logistic costs which impacted the short-cycle business of transmission. On the next slide, let's take a look at TI or Transformation of Industries. At the Capital Market Day, we clearly said that within or comprised within TI, you have the independently managed businesses or IMBs. You have sustainable energy systems and electrification, automation, digitalization. Those were areas to focus not only on profit but more on growth. Industrial steam turbines and generators and compression, of course, will focus on turnaround and profitability. And this is clearly reflected in our Q1 figures as TI did deliver a turnaround with margin improvements across all businesses. Looking at orders, 17% decrease. This is because of a high basis of comparison, particularly in the compression business, where we booked a handful of large projects in Q1 of last year, not repeated. On the other hand, though, we see substantial order growth in EAD and we booked €64 million worth of orders at SCS. So underlying orders continue to progress positively. Revenue grew significantly by 13% year-over-year on a comparable basis with all 4 IMBs or independently managed businesses showing double-digit growth. We have strong growth in services, plus 24% and in new units at 13%. This also, though, contributes this quarter to a positive mix in the top line and, of course, in profits. So looking at profit, it continued the positive trend that we saw in the prior fiscal year which, again, confirming that all the hard work and all those measures that were put in place are starting to bear fruit. We're starting to see the beginning of the turnaround. Profit before special items came in at €57 million. This reflects a margin of 5.7%. This compares to a loss of €23 million in Q1 of prior year, so thereby implying an improvement of 840 bps versus last year. Again, this increase was not by accident. This was based on progress, real hard work across all businesses, of course, higher revenue, improved business mix and a higher service share and those underlying operational improvements all contributed to this outcome. From a biggest business perspective, rather, the biggest improvement came from our turnaround cases within compression and industrial steam. So with that, maybe very quickly to sum up our achievements in our first quarter of this fiscal year '23. First of all, I hope the increased transparency in our new reporting structure is helpful. I really enjoyed. I think you give some views into our businesses where our opportunities where are some of our challenges. No doubt, we had strong orders and revenue growth, better-than-expected cash flow, strong underlying operational improvements at all 3 BAs, GS GT and TI. That gives us the confidence that we are on the right trajectory towards our full year assumptions for all BAs. Nevertheless, due to the aforementioned charges at SGRE, we did have to adjust our outlook for fiscal year '23, as Christian mentioned and let me just quickly highlight this on the next page. Just to focus on what has changed. So we now expect Siemens Energy's Group profit before special items to be between 1% and 3%, previously 2% to 4%. And accordingly, a net loss of Siemens Energy Group on prior year's reported level. We previously had foreseen a sharp reduction of the net loss this year. Due to better-than-expected cash flow development in the recent quarter, we now expect free cash flow pretax for fiscal year 2023 to be positive. This was previously a negative range of low to mid-triple-digit million. And of course, we reconfirm our revenue guidance and outlook for this year. So with that, I hand over to Christian. Thank you very much. He will explain our key priorities in the current financial year and some final remarks. Thank you. Thank you very much, Maria. And very briefly from my side, let me conclude with the key priorities which have not changed from what I said at the end of the fiscal year 2022. Because of the charge at Siemens Gamesa, we now expect lower margin, as Maria pointed out in her presentation but we will make sure that we remain on track to reach the underlying targets we have set. And we will obviously work hard on the revised positive cash flow targets what we have given. We will leverage our new operating model which went live beginning of this fiscal year. It is 1 of our 5 key levers to create value. And from the beginning of the year, we strive really to leverage these key advantages which means the organization is leaner, more agile, more transparent, as also Maria has pointed out and we'll continue to drive the underlying performance improvement over the quarters to come. And in this regards, obviously, we will continue to use that. The turnaround at SGRE is key to our vision. That is not a question and we are fully committed to this in terms of really achieving the turnaround. This will be also a lot of my personal attention this year. And the fourth element, we will capitalize on the opportunities that come with the government initiatives. You have seen a glimpse of it already in the first quarter. We see now the European program coming there in addition with the other programs in other regions of the world. So there is plentiful of opportunities in the energy transition which we want to capture. Thank you, Christian and Maria. We now enter the Q&A. We have just shy of 30 minutes. We need to absolutely stick to the timeline because of the AGM. [Operator Instructions] The first 3 questions will come from or first 3 speakers will be Vivek, Supriya and Akash. So with that, operator, please open the line for Vivek. Thank you. A question for Maria, please. After the strong order intake in Q1 -- your contract liabilities are now greater than the sum of contract assets and inventories. So what are your updated thoughts over the next few years for how you expect those items to develop going forward? And would it be fair to assume, given the long-dated nature of the grid contract that any normalization in prepayments might take quite a long time? Thank you, Vivek, for the question. Of course, the fact that our strong top line continues to develop. We're very happy about that. Hence, that continues to support our strong belief that free cash flow will continue. You're absolutely right. The dynamics on our balance sheet is, as you've mentioned, in this case, for this quarter is the first time our contract liabilities exceed our contract assets and our inventories and that is expected because, of course, we need to now deliver on this very large order backlog that we have. Do we expect that dynamic to change in the short term? No. We expect that to continue into the midterm, let's say and long term. This is underpinning our business plans and also underpins our business -- our target -- our midterm targets that we've already described. At that point -- at this point in time, I think one other thing that I'd like to mention regarding the balance sheet is, if you recall last year, we talked a lot about our operating net working capital and our asset management initiatives. Of course, as we execute, we start to see some of the impacts that we have in those areas on our balance sheet, 2 things. One is, we have an increase in inventories. This was in part due to things like safety stock as well in the past fiscal year. This is something that we're looking at and going to determine what the right flight level is coming forward into the next quarters. Also regarding accounts receivable, we do have some seasonality, if you'd like, in Q1 but this is something as well that we will maintain and keep a very keen eye on in the next quarters to come. Yes. I had a question around Siemens Gamesa, given that you shared the potential synergies between -- once you get sort of control of the business. I wanted to understand how would that work when -- if you don't have 100% ownership yet, is there sort of technically certain things you can or cannot do? Or have you reached, let's say, the squeeze-out threshold, so you still would then get the 100% ownership? And also on the midterm outlook for Siemens Gamesa, do you think that if the issues are still contained within the quarter, the original business plan of breakeven in '24 and positive margins in '25 still hold true? Thank you, Supriya, for the question. In terms of the synergies without 100% ownership, yes, we can do a couple of things and we are in preparation of doing so. So the delisting is a key milestone for doing that. One of the first synergies is actually reducing the Board members significantly. We go from [indiscernible] make the governance much more straightforward and simpler. This is what we immediately can do. We also align corporate functions already and we can do it. We have to use a little bit of different mechanism because legally, the entity of Siemens Gamesa going to be an independent legal entity but there's a lot where we can obviously harmonize approaches and really make use of these type of elements that will be in the area of IT or let it be in the area of cybersecurity or HR and this is what we're going to do. This will not deliver the 100% of the synergies but it can deliver a fair amount. We are working through this but this is definitely our intention to immediately implement more or less with the course of today already certain measures in terms of simplifying things. That said, with regard to the squeeze-out question. For the squeeze-out level, the level in December was relevant. And we have not achieved a formal squeeze-out level. We now have to do, obviously, a stocktaking on the remaining shareholders, obviously, between December and as of today, we continued to buy shares. So our share in Siemens Gamesa today is higher what we communicated in December. But we'll now have to see on what are the next steps to a potential 100% ownership and this will be clarified over the next weeks to come. In terms of the midterm level outlook, let me put it a little bit into perspective. First of all, the charges which we have seen in quarter 1, let's say, by and large, with the majority resulting from the service business. And this is the installed fleet with the increased failure rates. Where I do see really stabilization and good progress is really on all the operations in terms of factories on how they operate and quality cost and so forth. So I do see stabilization there by Jochen and his team. And in this regard, I'm confident with the midterm outlook into the business. That said, we have included in quarter 1 all elements and charges that we see as of today with the information as of today. What you never know, is there anything coming around the corner going forward? We have seen surprises in the past and this is why I would be careful to say, could there be anything in additional future? Yes, or no. It's something we have to see. But what I'm seeing is 2 things. I see a better, much better handle on the operations and the other thing is much better terms and conditions in the contracts we take on board. And this gives me obviously the confidence that we are on a good track. At the same time, we have -- and Jochen has underlined in his call, we have not yet given an outlook on '24 or so. We're saying we're investigating this. Keep in mind that some of the charges we have taken also would imply that we have to consider what is our suppliers contributing potentially and can there be a positive contribution? And this is all what we have to work through over the next weeks and months to come. So in this regard, there is no dedicated guidance for '24 on that business but there's a midterm positivity, I would call it, in terms of the outlook on this. But we will obviously keep you updated throughout the year on how our views on the business continues. My question is on Transformation of Industry. And here, margin improvement that you have reported in both industrial turbine business and the compression subsegment. Can you please elaborate on both of the subsegments, what are the underlying drivers for the significant margin improvement? And can we also talk about sustainability of this margin rebound in the coming quarters? Thank you, Akash, for this question. First of all, the 2 big contributors, as Maria pointed out, our compression and steam. And that is really largely driven by what we call the accelerated impact program and all the measures which have been done in the past years to optimize the footprint, to get the cost structures in place. And I have to say the team has done a fantastic job and they are ahead of their plan. But it obviously shows operational improvements which are there to last. That is my expectation. And if I look on the backlog and the book-to-bill above 1, this all gives me the comfort that the business is absolutely on the right track and these are the big contributors in the margin improvement. Keep in mind that what we call sustainable energy systems is still a business where we invest money into. So as a business, it is losing money. It is obviously an investment into the future if it is around hydrogen. And this obviously does -- you have to see in the overall balance. And the EAD business is, let's say, a little bit smaller also doing good but also, I think, with some potential in terms of improvement. But the big 2 contributors, compression and steam and I'm pleased with what I'm seeing there. The next 3 people in the queue are Gael de-Bray, Andre Kukhnin and Will Mackie. And Gael, if you would please go ahead with your question. And congratulations, really on the outstanding commercial performance this quarter. On this, could you talk a bit more about the remaining pipeline for the former gas and power segment for the rest of the year? Do you still expect to bag large ticket items in the next few quarters? Or would you rather anticipate some kind of normalization in the order pattern towards maybe the previous quarterly run rate we've been used to between €5 billion and €6 billion? Yes. First of all, when we discussed at end of last year in terms of our expectation in 2023, keep in mind, Gas Services was a super order intake in 2022. And we said 2023 is going to be lower. I still believe it will be lower than 2022. We are -- will probably be above what we have set ourselves as a target because the order pipeline looks still good. If you look across the industry, quarter 1, it was a particularly strong quarter which is actually unusual in the gas services. But it shows the market demand and there is potential also for further good order intake in the next quarters to come. However, we -- as Maria said, we're going to be selective in what we take on. We obviously have to balance also delivery times, load in our factories. We are excellent loaded. And obviously, we will be selective and not chase each and every order to make sure there is a good margin profile in the backlog. So in one line, better than budgeted but I would still expect it below 2023 in terms of order intake -- sorry, 2022, then in order intake. I mean Q1 was also exceptionally strong in terms of both growth and margins for your 3 divisions, excluding Gamesa. They are now clearly above the targeted ranges for the full year. So first, did it come as a big surprise to you too and why? And second, if we assume that you reach the upper end of your objectives, for gas and power in 2023, it would still imply a clear deceleration in growth and lower margins in the next 9 months compared to Q1. So can you help us understand a bit better why that should be the case? Yes. I would start and Maria, if you would like to add, please jump in. First of all, I mean, quarter 1 was particularly strong, right? And in some areas in the margin as well as in the order intake. I would not multiply it by 4 and get to the year and in all areas. That's very clear. But it's a deliberate choice. I think the market itself underlying particularly in certain areas like where technology is extremely strong. Keep in mind also the way on how revenue is generated at that business is different than in other parts because some of them are very long running projects. But I expect it to even out. We obviously gave our guidance in terms of revenue, still as expected. And also in this regard, I do expect that we are in an order -- book-to-bill on the level of 1 or above in the different areas. So that is what is driving me at the moment. And Maria, anything to add from your side in terms of margin? Yes. No. Thank you. I fully agree Q1, as I mentioned earlier, had a positive service mix across the board which allowed for, let's say, a stronger or very good and solid start which we will take, by the way for, this fiscal year. But you know we do have volatility and Q2 tends to be a little slower. And then, of course, then we have a bit of a ramp-up as we get to the fiscal year, Gael, just to provide a little bit of color. So I completely compare with what Christian said, don't take Q1 and multiply it by 4, for sure not. Do we see some positive momentum? Yes. And hence, why we said and we're able to confirm now in Q1 that our business areas will remain within their guidance ranges of profit. I just wanted to run through the multiple streams of kind of cost savings and self-help programs that are being undertaken. Just to understand what we've got in store for 2023 and then also for 2024. I understand there is the remainder of the kind of old gas and power program that I think is supposed to deliver €300 million for this year. So if you could talk about that and whether there's anything less than '24 and the cadence of synergies from SGRE integration. Should we expect anything for this year? And is it going to be more kind of '24, '25 weighted. And then I think there was also a program for hierarchy reduction, reduction of managerial positions, I think, of about 1,500 head count which I think we estimate around €300 million is that yielding any savings this year? How should we think about it for 2024 as well? If we could just have that kind of summed up, that would be great. And if I may, just a quick follow-up on the up to €1.5 billion equity raise as it is kind of raising some questions to give it on a parent in the market. Can I just check on the size of that up to 1.5%, the final size of it, will that be determined purely by the function of how much SGRE you own at that period? Or would you take into account other factors such as your own cash generation which has obviously been better than expected given the guidance change? And therefore, can we think about up to €1.5 billion as maybe conceivably €1 billion rather than €1.5 billion in that kind of ballpark? I'll take both questions. So first of all, thank you for the question on where we stand with our cost-out programs. If you recall last year, we actually had a very strong let's say, momentum in our cost-out programs. Again, you see this now coming to fruition with the underlying operational improvements Also, as you can see in Q1 and this is what we expect, as Christian said, to be sustainable. This year, we foresee the additional, if you'd like, last piece on the AIP program of approximately €300 million in 2023 to come. And this is something that, at this point in time, we also confirm. And of course, there's more to come in 2024 and '25, as we continue to -- this is an ongoing process for us. It's nothing that we say, okay, we have our €800 million and we're done. That's not at all the case. And of course, there will be continuing that real cost focus and cost consciousness as we get into '24 and '25. Regarding the equity raise. So as mentioned, as of last night, we now stand at 97.6%. So only 2.4% of the shares outstanding. And so as a result, your assumption of is this equated to how much we will at the end of the day have in terms of ownership of the shares percentage? Yes. I think it's really important to remember that we had said that this is a €4 billion transaction in its entirety. Of course, the funding secured for that, of which €2 billion, €2.5 billion in total would be equity and equity like. And hence, we did the mandatory convertible bond already for the €960 million. So therefore, we still have €1.5 million -- €1 billion rather of equity to come. And that's why I reiterate Andre, it's very important. So thank you for asking that question. We are committed to that because, of course, this then underpins our balance sheet which is then commensurate with a company that has an investment-grade rating. So that's our underlying objective. I think it's a little bit too early to say because we are just about in terms of balancing synergies and dis-synergies. Obviously, we will keep you updated. As I said, some of it I expect to be relatively straightforward as a reduction in the Board members. But in terms of also putting a feeling for a corridor to that, I would ask for some time. Definitely, as I said, we can do certain things relatively fast and which then could have potentially an impact in '24, particularly if it comes to elements like procurement but we will keep you updated on that. And next question comes from Will Mackie. As we are running up against the time line, if you could stick please to 1 question, Will, thank you. My question relates to the European Green Deal industrial plan only really put forward yesterday but with some prior fact sheets. Could you share with us your initial interpretation of how the plan can reach across your businesses to provide either support or proactive financial benefits to either growth drivers or cost benefits across the business in Europe for you? Yes. Thanks, Will for this question. We still have to a little bit see on how much this details out but it addresses a couple of things where I do believe we can benefit from one. It underlines necessity to manufacture also in Europe and to support the manufacturing industry place in Europe which is obviously us, in particular, obviously, we have been hammering in the past months on the struggles in the wind business and that different bonding conditions are required. I do believe this act can contribute to that but we will have to see it. The other thing is really also all the innovations which we drive, where a lot of activities are in Europe. And it's relatively broad yet. I mean, it cuts across heat pumps, electrification, general things, storage and a lot of the activities we are doing. So I would expect also support on that end in terms of building up and developing and financing new type of technologies and that could be another element. First and foremost, I think what I would hope through the act is a better -- long-term predictability of the growth in this market and obviously shorter approval time. So it's not just money. It's really in terms of getting projects on the ground. And I hope that this drives these initiatives. There's one element which I'm a little bit missing still in the act and we will continue to advocate for this which is the electrical grid which I think is still underestimated how much has to be done which is a super opportunity also on our side. And in that regard, I do believe it will help us this act. But we also -- I have to say, the proof of the pudding is at the end how it is implemented and in what time on it can be executed. This is where, in the past, the European regulations were not always the most simple and easy ones which is hopefully different this time. Could you just -- thinking about the very useful breakdown of your orders, can you talk maybe about the potential for short cycle? What is the scope maybe in fiscal '23 for shorter cycle in-for-out orders? Are you effectively closed for order intake for fiscal '23? And just to understand, maybe historically, I mean how much of your business is short cycle? Yes. Thank you very much for the question. I mean it's particular obviously, where do we see short cycle business? One thing is obviously on GT, there is, what we call product business which is very, very strong at the moment also in addition to the HVDC business. And the other part is the transactional type of service business which also has been a very good quarter. And we also, with the funds which are available in the industry, we remain, obviously, they are positive also on the short cycle business. Anything to add, Maria? Yes. Maybe, Sean, just to add to that, I think it goes back to what I mentioned about our order backlog and what's already secured in terms of revenue for the year. So I said it's just over 90% of our revenue is already in hand for this fiscal year. So not closed per se, or not but it looks -- obviously, we have very good visibility with our order backlog on that short cycle. And I think it is important to reiterate that the business of service has a long-term service element to it. But as Christian just mentioned, also has a short term, what we call transactional book and bill business. And that's exactly what we do see also continuing to be quite strong quarter-over-quarter. Thank you for the question. I may, very cheekily just ask a follow-on around the service. I mean, how many years forward are you booking service, just thinking of visibility post-'25? Yes. So the -- like the average duration in our service backlog is around 12 to 13 years. So hence, why you see such a large portion of our backlog in the greater than 25 years onward allocated to service. On -- just wanted to get your thoughts on good technologies in terms of the -- we can clearly see the profitability improvement. Is that an indication that sort of operations are back to normal in terms of the supply chain challenges and raw material inflation impact that we've seen last year? I mean last year, it was mainly impacted by closed on our factories, Cedar [ph] factories which we had, in particular, in China. This is back to normal. This is stabilized. And in this regard, this is something where now the margin is where we expected it in terms of the trajectory. Last year was the outlier but this is on track. And so far, we are positive on the margin trend in -- on the GT side. Thank you and thanks, everybody, for the questions. We will not today be available for many questions afterwards. But you can, of course, try to reach us via e-mail. We'll try to answer the questions. Otherwise, we are available tomorrow to answer questions. Maybe 1 or 2 closing remarks from Christian. So first of all, thank you very much for joining our call. And as we laid out, right, it has been a quarter of high lights and low lights, However, what I really like -- what I really enjoy to see is this good alignment with the energy transition. You mentioned the programs which are coming now to fruition which is all going in the right direction. So in this regard, stay us -- let's say, stay close to us. We will keep you updated and help us to build the energy transition successfully. So stay healthy. See you soon. Thank you very much for your time. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. A recording of this conference call will be available on the Investor Relations section of the Siemens Energy website, the website address is www.siemens-energy.com/investor Relations.

EarningCall_419

Welcome to the Varonis Systems, Inc. Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce to you, Tim Perz with Investor Relations. Thank you, Tim. You may begin. Thank you, operator. Good afternoon. Thank you for joining us today to review Varonis' fourth quarter and full year 2022 financial results. With me on the call today are Yaki Faitelson, Chief Executive Officer; and Guy Melamed, Chief Financial Officer and Chief Operating Officer of Varonis. After preliminary remarks, we will open the call to a question-and-answer session. During this call, we may make statements related to our business that would be considered forward-looking statements under federal securities laws, including projections of our future operating results for our first quarter and full year ending December 31, 2023. Due to a number of factors, actual results may differ materially from those set forth in such statements. These factors are set forth in the earnings press release that we issued today under the section captions, forward-looking statements. And these and other important risk factors are described more fully in our reports filed with the Securities and Exchange Commission. We encourage all investors to read our SEC filings. These statements reflect our views only as of today and should not be relied upon as representing our views of any -- as of any subsequent date. Varonis expressly disclaims any application or undertaking to release publicly any updates or revisions to any forward-looking statements made herein. Additionally, non-GAAP financial measures will be discussed on this conference call. A reconciliation for the most directly comparable GAAP financial measures is also available in our fourth quarter 2022 earnings press release and investor presentation, which can be found at www.varonis.com in the Investor Relations section. Lastly, please note that a webcast of today's call is available on our website in the Investor Relations section. Thanks, Tim, and good afternoon, everyone. Thank you for joining us to discuss our fourth quarter and full year 2022 performance. I would also like to provide an update on our new SaaS offering and updated outlook. We are at a very exciting time in our story as we introduce Varonis SaaS to the world nearly 100 days ago. Varonis SaaS is a big milestone for us is the first version of Data Advantage, the birth of our company. At the same time, there is a lot of uncertainty in the world, whether it is inflation, raising interest rates, growing layoff announcements or just general economic slowing. In the midst of all of this uncertainty, one thing is certain, whatever will happen in the world, people with eat, sleep and create data and that data needs to be protected. Turning to our fourth quarter results. It is still very early, but the initial reception to our new SaaS platform was encouraging and that business performs better than we expected, though of a very small sample size. At the same time, the slowing macro environment continued to impact our customers. Our fourth quarter ARR came in above the high end of our guidance range we provided you last quarter. Although our reported growth remains below the goals we had at the start of the year. Guy will review the quarterly results and our outlook in more detail, but the initial performance of Varonis SaaS gives us additional confidence in our ability to weather this current economic environment and emerge from this transition with healthy growth and profitability on our path to achieving $1 billion in ARR. Now I would like to take a step back and take a moment to remind you of the importance of what we do. Data is the most valuable assets for any company, second only to its people. If you have data, someone wants it. Everything depends on it, but data is completely out of control. Companies who don't know what data they have or where it is, employees have too much access to weigh too much data on too many systems. This is a problem for every organization today, regardless of size, industry or geographic location. When we started, we needed to evangelize the problem. Today, everyone knows that data security is important, but without Varonis, the struggle to locate their sensitive data, see who has access to it and safely lock down without disrupting their business. Securing data continue to get harder as massive on-prem and cloud repository growth. In the past few years of hybrid work, cloud and remote device usage exploded and together expanded their attack purpose by order of magnitude, whether it is APT, cyber criminals or home insider. There will always be a vulnerable system somewhere in this massive attack surface, and all it takes is one compromised user of machine to inflict significant amount damage, while the main attacker views will change, their end target, data, is always the same. You can replace an endpoint, you can rebuild an infrastructure, but once attacker gets to the data, it is all over. You can't enrich data. This is why data protection is the most important security problem to solve. With SaaS, we reduced the customer effort needed to solve this problem with significant automation that is built into the software. Although there are many benefits customers get from our SaaS platform, I would like to outline the top three. First and most important, customers are much better protected with much less effort. Varonis has much more automation to find and lock down exposures that come from over sharing, unneeded access and misconfiguration. We have more visibility into usage and behavior on all data stores that matter the most, which enhances our ability to detect and respond to attack. With our enhanced visibility, we now offer proactive incident response for SaaS customers, providing another layer of protection, again, reducing customer effort, continual automatic updates enable customers to stay in front of new and evolving threats and regulation and all of this is delivered faster. Second, SaaS is easier to deploy and has significantly lower infrastructure costs and should result in quicker time to value. And third, SaaS is easier to maintain and upgrade, which saves our customers time and headcount, two of the scarce resources for any season. I would like to spend another moment diving deeper into our proactive incident response, which is a key differentiator for Varonis SaaS offering. As part of the growing SaaS subscriptions, customers get air cover from our world-class incident response team who proactively watch suspicious activity, investigate alerts and notify customers of potential incidents. This will reduce the pressure on customer security team and improve their ability to stop threats and the ability to provide this across our entire SaaS customer base make the service orders of magnitude more power. On top of these critical benefits, we are making it easier to consume Varonis as we are doubling down on the bundling strategy we introduced at the beginning of last year. We have seen great reception from customers who received Varonis platform protection upfront and former sales force who benefit from a simpler pricing discussions, both in the initial deal and the revenues. The new strategy is a win-win for our customers and our company. Our customers receive more value from our platform in the initial deal. For our sales force, it is an easier story to tell our customers know that Varonis protect their largest and most important data store and application. They know the business outcomes that Varonis help them achieve, this is what matters to our customers and why we are doubling down on our platform selling approach. Our updated packaging ensure that customers receive an autonomous data security platform that will help them achieve their business outcomes on day one. Now that I have provided you with an update of how we are making it easier for customers to see value on the Varonis platform, let me review some of the benefits that we should realize through our SaaS offering. First, we expect SaaS will result in a shorter sales cycle, risk assessments, the core of our go-to-market motion are expected to be quicker and easier to deploy because customer infrastructure requirements are greatly reduced. Along this, our updated product packaging should help simplify the pricing discussion, which we also think will result in shorter sales cycles. Second, our new customer launch be largely driven by platform selling approach and a 25% to 30% pricing uplift, which is justified by the product's lower total cost of ownership as compared to our on-premise subscription offering. We expect that quicker time to value and improved customer satisfaction will lead to greater customer lifetime value and even better renewal rates in these larger initiatives. And SaaS help us to innovate faster and support our customers more easily, which we expect to benefit our margin profile as we scale. Before I turn the call to Guy, I want to briefly discuss the capital of key customer wins from Q4 with illustration. A global packaging company over 4,000 employees became a Varonis customer this quarter. This organization wanted to improve its ability to detect and respond to threats on sensitive data and intellectual property and comply with GDPR and CCPA privacy requirements. This deal was originally an OPS deal that was switched to a SaaS deal during the fourth quarter because of infrastructure and resource cost savings we could realize. The purchase packages to protect Windows, Microsoft 365 and Active Directory and we're already in discussions to supplement the fretting capabilities with edge and to protect the exchange online and Box environment. At the same time, our existing customer base continue to serve as a key growth driver. A couple of weeks ago, a health care organization, originally a customer will purchase a double-digit number of perpetual and OPS licenses upgraded to our SaaS platforms and will protect its hybrid window environment is the power of Varonis SaaS. This renewal was a win-win for the customer and Varonis. The customer will benefits from greater automation and will reduce its total cost of ownership due to lower infrastructure costs. We will recognize an uplift in ARR as a result of the conversion. We are excited by the initial reception of the Varonis SaaS and look forward to sharing how we see this driving our doable growth in the coming years at our Investor Day on March 14. Finally, I would like to thank our team for their tireless efforts this past year, and we are excited to make this transition a success in 2023. With that, let me turn the call over to Guy. Guy? Thanks, Yaki. Good afternoon, everyone. In addition to providing more color on our fourth quarter performance and updating our 2023 full year outlook, I plan to focus my time today on the initial progress of our SaaS transition, and update to our views of how the macro environment is affecting our customers. Let's start with the early signs we're seeing from our new SaaS rollout. As Yaki mentioned, while it's still very early in the transition, the behavior we're seeing from our customers and our sales force during the fourth quarter gives us increased confidence in our anticipated trajectory of this transition as compared to when we first made the announcement nearly 100 days ago. Regarding the macro environment, we did see a deterioration, but it was slightly more benign than what we assumed in our guidance. Despite the softening of the macro environment, our fourth quarter results came in above the top end of the guidance on both ARR and the bottom line. We ended the year with ARR of $465.1 million, up 20% year-over-year or 24% adjusting for FX and Russia. In the fourth quarter, we were approximately free cash flow breakeven, which was up from negative $6 million last year, reflecting the inherent operating leverage in the business model and the measures we took to manage our expenses. In the fourth quarter, SaaS as a whole performed better than we expected and represented approximately 10% of new business and upsell ARR. For the year, we sold approximately $3.5 million of DA Cloud, which was slightly below our expectations, but we believe the number was impacted by the announcement of our new SaaS product as reps gravitated towards selling Varonis SaaS once we introduce the product. It's still very early stages, but we are very pleased with the behavior seen in the fourth quarter which leaves us cautiously optimistic about our 2023 outlook. Now I'd like to elaborate on what we saw in the fourth quarter from a macro perspective. As we assumed in our Q4 guidance, economic cost, continued to negatively impact our European business and worsening of the macro environment began to impact our North America business as well. Across the board, we saw additional deal scrutiny and longer sales cycles. Some of the deals that slipped in Q4 have since closed, but we expect deal cycles to continue to lengthen as a result of the ongoing additional budgetary scrutiny. Despite this, our pipeline continues to build as the deals that have slipped were not lost to competition and remain in the pipeline. In spite of the uncertainty in the economy and widely publicized focus on optimizing cloud spend, we continue to see healthy new customer interest and engagement from our existing customers. As of December 31, 2022, 78% of our customers with 500 or more employees purchased four or more licenses, up from 73% a year ago and 63% two years ago. 50% of those customers purchased six or more licenses, up from 41% last year and 30% two years ago. Due to the SaaS packaging changes that Yaki discussed earlier, this will be the last quarter that we provide these metrics. We plan to introduce new KPIs to help you better understand the trends in our business at our Investor Day next month. Lastly, our dollar-based net retention rate for subscription customers was 115% ABM this 2022 or 117% adjusting for FX and Russia. Turning now to our fourth quarter results in more detail. Before I get into the numbers, I'd like to take a moment to remind you of the importance of ARR. You've heard me talk about ARR as the leading metric for the past six quarters. We talked about this because we saw this with the direction that the company was moving. And going forward, this metric will only become even more important. During the transition period, the shift of our business from term licenses where approximately 80% of the deal value is recognized upfront to a SaaS model with fully ratable revenue will make our income statement metric less indicative of the health of the business than they have been in the past. Throughout this transition period, ARR and free cash flow will be our and your north stars because they are not impacted by the speed of the transition. To help you better understand the differences in accounting treatment for SaaS versus on-prem subscription deals, we've included a slide in our investor presentation. Now on to the numbers. Q4 total revenues were $142.6 million, up 13% year-over-year or 17% adjusting for FX and Russia. During the quarter, as compared to the same quarter last year, we had approximately a 2% headwind to our year-over-year revenue growth rate as a result of having increased SaaS sales in our booking mix, which are recognized fully ratable versus the upfront recognition of our on-prem subscription products. Subscription revenues were $116.7 million, and maintenance and services revenues were $25.9 million, as our renewal rates, again, were over 90%. When looking at our reported maintenance and services growth rate on a year-over-year basis, I'd like to call out three headwinds, which impact the comparability: a, FX was a 200 basis point headwind; b, the exit of our Russia business was another 200 basis points in headwind; and c, the conversion of perpetual maintenance to on-prem subscription was 100 basis points, for a total of approximately 500 basis points. In North America, revenues grew 17% to $104.3 million or 73% of total revenue, reflecting a slowdown in the economy in the region and a headwind from the SaaS mix, too. In EMEA, revenues grew 1% to $34.4 million or 24% of total revenue. Adjusting for FX and Russia, growth was 16%. The rest of world revenues grew 19% to $3.9 million or 3% of total revenue. Moving down the income statement. I'll be discussing non-GAAP results going forward. Gross profit for the fourth quarter was $128.3 million, representing a gross margin of 89.9% compared to 89.6% in the fourth quarter of 2021. Operating expenses in the fourth quarter totaled $102.3 million. As a result, fourth quarter operating income was $26 million or an operating margin of 18.2%, this compares to operating income of $22.4 million or an operating margin of 17.7% in the same period last year. After accounting for the 50 basis points headwind in related to our shekel hedging program, the expansion was 100 basis points. During the quarter, as compared to the same quarter last year, we had approximately a 1.5% headwind to our operating margin as a result of having increased SaaS sales in our booking mix, which are recognized fully ratable versus the upfront recognition of our on-prem subscription products. During the quarter, we had financial income of approximately $5.2 million, driven by interest income on our cash and short term investments. Net income for the fourth quarter of 2022 was $26.1 million or income of $0.21 per diluted share compared to net income of $18.5 million or income of $0.16 per diluted share for the fourth quarter of 2021. This is based on 126 million and 118.6 million diluted shares outstanding for Q4 2022 and Q4 2021, respectively. As of December 31, 2022, we had $732.5 million in cash, cash equivalents, marketable securities and short-term deposits. For the 12 months ended December 31, 2022, we generated $11.9 million of cash from operations compared to $7.2 million generated in the same period last year. CapEx for 2022 was $11.4 million compared to $10.5 million last year. Free cash flow improved from negative $3.3 million in 2021 to $0.5 million in 2022, despite an approximate $4 million headwind from the Tax Cuts and Jobs Act capitalization of R&D provisions. During the fourth quarter, we repurchased 2.9 million shares at an average purchase price of $19.37, and we have $43.6 million remaining on our share repurchase authorization. We ended the year with approximately 2,150 employees, a decrease from the third quarter, which reflects the 5% headcount reduction measures taken, which were completed in the fourth quarter. I will now briefly recap our full year 2022 results. Total revenues grew 21% to $473.6 million or 25% adjusting for FX and Russia. Our full year operating margin was 6.2% compared to 6.5% for 2021. After adjusting for the 200 basis points headwind on from our Shekel hedging program, the expansion was 170 basis points. Turning to our guidance in more detail. From a macro perspective, we are factoring in a continued worsening of the economic conditions across the board, which assumes four quarters of softness in both EMEA and North America -- versus 2 to 2.5 and one quarter, respectively, in 2022. This also continues to factor in additional budgetary scrutiny, longer sales cycles and an increase in unemployment expectations among a worsening of other economic conditions. From a SaaS transition standpoint, we are factoring in a six-month ramp-up period, which began in early January when the new sales comp plan was introduced. Our guidance also assumes increased sales force turnover in the first half of the year, lower sales productivity as our sales force gains comfort in selling the new product as well as longer sales cycles as on-prem subscription deals in the pipeline may convert to SaaS. These assumptions will primarily impact the first and second quarters and are based on learnings from our last transition. While all of these factors create a level of uncertainty, this is already contemplated in our guidance. Before I get into the numbers, our first quarter and full year guidance now assumes a 15% SaaS mix of new business and upsell ARR, up from 5% previously. This reflects the encouraging initial reception from our customers and our sales force to our new SaaS product in the fourth quarter. We have a two-phase approach to the transition. In Phase 1, which we just initiated, we are focused on selling SaaS to new customers, and this metric will help you gauge the success of this initiative. Phase 2, which is converting our base of existing customers to SaaS will come later on. But if an existing customer wants the benefit of our SaaS earlier, we will, of course, work with them as we always do. To be clear, the SaaS mix calculation is SaaS new business and upsell ARR divided by total new business and upsell ARR. For example, if we had a renewal of $100,000 that converts to SaaS at $150,000, then we would only include the incremental $50,000 of upsell in the numerator and the nominator of the SaaS mix calculation. Now turning to our guidance. For the first quarter of 2023, we expect total revenues of $106 million to $108 million, representing growth of 10% to 12%, non-GAAP operating loss of negative $7 million to negative $6 million and non-GAAP net loss per basic and diluted share in the range of negative $0.05 to negative $0.04. This assumes 108.5 million basic and diluted shares outstanding. For the full year of 2023, we expect ARR of $513 million to $523 million, representing year-over-year growth of 10% to 12%. Free cash flow of $20 million to $25 million, which includes the $6 million to $8 million headwind related to the TCJA capitalization of R&D provisions. Total revenues of $519 million to $529 million, representing growth of 10% to 12%. Non-GAAP operating income of $36 million to $41 million and non-GAAP net income per diluted share in the range of $0.33 to $0.35. This assumes 127.3 million diluted shares outstanding and CapEx is expected to be $8 million to $10 million. In summary, we remain laser-focused on execution on our SaaS transition and thoughtfully managing our business for long-term growth under any economic condition which, in turn, will unlock significant value for all Varonis stakeholders. Thanks for joining us today. I look forward to seeing you all in person at our Investor Day on March 14 in New York. Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Matt Hedberg with RBC Capital Markets. Please proceed with your question. Yeah. Thank you. This is Matt Johnson [ph] on for Matt. And congratulations, guys, on the quarter in this macro, especially on that fast transition. I guess, Guy, you made a comment about your guidance that you're using some of the insights you learned from your subscription transition. And I think just given the rapid pace and success of that subscription transition, it might be helpful for us to hear a little more about what you're seeing that's the same and maybe what's different in these early stages in the SaaS transition based on your conversations with customers and with your sales force? That's a great question. I think when we look at the introduction of the SaaS offering that we really only introduced 100 days ago, the feedback that we're receiving from both our customers and our sales team is very positive. With that said, it's very, very early in the transition. So there's a lot of lessons that we've taken from the previous transition. And that's why when we build the guidance, we factored in some deterioration in the macroeconomic environment, and we factored a lot of kind of longer sales cycles and more deal scrutiny. But from the SaaS perspective, we factored in a six-month ramp-up period. And that really just started in January when we introduced the new comp plan. But on top of that, we also kind of assumed increased sales force turnover in the first half of the year, lower sales productivity as our sales force gains comfort in selling the new product. And on top of that, we also assume that our sales teams are going to try and convert some of the deals that are in the pipe as on-prem subscription and try and convert them to SaaS. All of these assumptions are baked into our guidance, and the expectation is that they will impact us mostly in the first six months of the year. But I can tell you that overall, the feedback that we've received has been extremely positive. Thank you. And the next question comes from the line of Hamza Fodderwala with Morgan Stanley. Please proceed with your question. Hi, guys. Good evening. Thanks for taking my question. Just a couple of quick clarifying questions. It seems like EMEA, the growth rate there on a constant currency basis was pretty consistent with what you saw in Q3. Is it fair to say that region came in a little bit better than you expected? And then Guy, you talked about doubling down on the bundle strategy. Can you talk a little bit about how you're thinking about discounting into '23 to drive that SaaS adoption? Are we thinking about those maybe going up a bit to get that SaaS adoption upfront -- or are they more or less staying the same versus a year ago? Thank you. Overall, the adoption in Europe was what we expected. And regarding the bundles, it's just all about the value. With the bundles customers get just a lot of automation, which just works extremely well with our SaaS strategy. The SaaS is still in the early innings. And we need to see how it will evolve. But so far, the initial reaction is very, very encouraging.. Matt, and just to touch on the actual percentages, EMEA revenue was at 1% in Q4. And yes, as you mentioned, when we factor in the FX, the effect of the FX and the exit of the Russia business, when you kind of look at it on a constant currency basis, excluding Russia, we were at 16%. With that said, we definitely saw kind of the macroeconomic environment in Europe with longer sales cycles and more deal scrutiny, and we definitely saw that in Q4 as well as in Q3. And when we look at the 2023 guidance, we baked in kind of continued deterioration from this point kind of for the rest of the year. And the fact that we're ramping up kind of the SaaS transition and taking that into consideration as well. Okay. Great. Hey, guys. Thanks for taking my question here. Yaki, maybe I'll direct it to you. So a lot of fun stuff here with SaaS just in the early days, but I was wondering if you could just share some of the early customer feedback that you've gotten? You went through some of them, but I'm curious -- our customer is buying this because it's easier to support, right, because Varonis is hosting it, or is it because Varonis Cloud maybe covers more applications or something else? And again, understanding that it's still very early. What do you think the main selling points have been early on from a customer perspective? The main selling part without a doubt are the outcomes. It's a complete game changer regarding the outcomes. We have -- when we built it, we had a rule and we said 10% of the effort, 10 time more value. And we managed to fulfill the vision end-to-end. When you are coming, it's very easy to install. But then the ability to classify data automatically and understand what data is critical and overexposed. And now with 365 the Varonis robot is doing the right sizing of the permissions completely automatically that we see all the abnormal behavior in our cloud. And proactively, we are doing it for the customers. Customers, Saket, can realize massive value we're doing nothing. It's completely, completely automatic. Having said that, also the overall time to value, you are coming no hardware requirements. So yes, there is a lot of data on-prem and it's going to just -- you need a collector. So this setup is a fraction of the time and everything that's related to our ability to also to find attacks that are closer to the data set early in the Quarter chain works extremely well. So just we're able to fulfill that vision. We are very, very excited from everything we've seen on the outcomes, the automation, the stability, our ability to serve problems definitely so far many very encouraging signs. Thank you. [Operator Instructions] Our next question comes from the line of Fatima Boolani with Citi. Please proceed with your question. Hi, good evening. Thank you for taking my questions. Guy, this one is for you. You talked about introducing a new compensation program and sales incentives to drive selling behavior around the SaaS platform. I'm curious, does that mean that you've completely deemphasized and more or less created these incentives around selling term business? I mean are you sunsetting that entire program entirely to shift 100% to SaaS selling. Any clarification there would be great. I'd appreciate it. Thank you. Fatima, it's a great question. When we build kind of the comp plan we try and align it to what the company is trying to do from a strategic perspective. So we worked a lot on trying to align them. And when you think about where the company is going, it kind of goes back to the color that we gave about Phase 1 and Phase 2, having kind of Phase 1 targeting new customers and trying to sell them SaaS. So building the comp plan is really kind of a -- it's a combination of an art and a science. We try to align having our reps focused on selling SaaS to new customers. And if they do that, there's a lot of character. Obviously, we want to see how this progresses and we'll give more color as we go along. But the whole concept of the comp plan is to align where we want the company to go and that's focusing on that Phase 1 selling SaaS to new customers. Thank you. And thank you for taking my question. I guess this is for both of you guys. Yaki, you talked about that the SaaS is really selling bundles to the platform. And I'm just curious if you can share -- I know it's early, but share how it's like-for-like, what you're selling on-prem with the SaaS solution that would justify a 25% to 75% uplift in price? I think that's on a lot of people's minds with regard to how that transition actually works. I think that's even unrelated to the bundle, it's very easy for us to justify because this is the total cost of ownership on prem. And we built a very sophisticated and coherent calculator, and we can show it to the customer. So far, the understanding very well. In terms of buying the bundle, it's easy for the customer because at the end of the day, they want automation. If you take a step back, in security, there is an end means to an end. The end is always data. The issue is that data protection is very hard. And once you provide a lot of automation, you're really taking the bottleneck out of the process. And the only way to get automation is really to buy all the bundles. And with the bundles, the licenses, it's 1 plus 1 equals 5 many times. So in most cases, it works very well. Total cost of ownership a lot of -- and just a lot of automation. This provides very good ROI. Everybody understand that they need to protect data. So, so far, we see that the offering is very compelling. And just to touch on the bundling, like Yaki said, we're basically doubling down on the success that we saw with the on-prem subscription bundling. So customers, they'll see more value in the initial deal, and they'll buy more over time, which really increases the initial deal size, but also the retention metrics and the customer lifetime value. But it also helps our sales force because really, it's a simpler discussion both on the initial deal and on the renewals as well. So we're not trying to sell 40 different products. We're trying to sell the outcomes. We're trying to sell the Varonis platform and that really both helps our customers and helps our sales force. The discussion is about just about the value and then you can represent it with one SKU and not to start and say, this is a license and that is a license people trying to solve problems, and this is what we are going to do. Hey great. Thank you. Good evening. Thank you for taking the question. Maybe my one question for Yaki, if you will. -- it sounds like guidance is kind of on the conservative side if you're modeling it kind of incremental deterioration and conversations with CIOs that we're having indicate kind of more back half-weighted seasonality is they're taking a cautious approach to spending this year. Could you help us understand what your conversations with customers are like with regard to spending intentions for the year? It sounds like your backlog is building quite nicely. And how to think about how they might be prioritizing data security within this, I guess, stratification of security spending that they have, what does that fall on the priority scale? And are you just assuming deferrals into the back half of the year and then deterioration on top of that? Or what might your outlook be for like better-than-expected spending environment in the second half as it relates to customer conversations that you're having? Most of the customer security efforts -- the objective is to protect the digital assets. And now we have this technological platform with the SaaS to be completely automatically. So you're trying to solve something that is hard. Many times, they will postpone it. And what we see now is the SaaS, but still early stages. But we see that it's much easier for us to get budgets, to show value and customers don't need to put a lot of effort. So we believe that with time when the sales force will know how to sell it in the right way, the customer will understand it, we really reduced so much friction in every -- in every step in the sales motion and in the value journey of our customers. So this is very exciting. The other thing that we sold historically is that many times, at hard times organizational setting and really analyzing and scrutinizing where they need to put the dollars, and we always benefit from it because you want to protect data. And in this environment, after COVID, it's very hard for almost -- very easy for almost every organization, very easy to understand where the critical data and what we need to do with it. So where you have cynical data with a lot of collaboration, all the right directory services. So today, we can say, yes, on almost all the automation and the support almost all the critical data repositories on-prem and in the cloud. So I think that over time, we believe that there are -- there is a high probability that more and more budget will come towards us because this is the problem that customers are trying to solve. And if you can do it automatically, it just should be a top priority for most of them. I see many customers, and I can tell you that data protection, protecting their digital assets is a top priority for almost every organization out there. I also believe that with time, you will see that it's a strong secular plan and many other security line items are more cyclical than that. So data is going and going in many repositories and this is what bad actors want. If it's APTs, insider Ransomware attack, this is the objective to gave data. And once customers will get the data, it's all over. You can't enrich data. So we are just in the right place and we have the right technology to do it almost effortlessly for the customers. Thank you. And our next question comes from the line of Roger Boyd with UBS Securities. Please proceed with your question. Great. Thank you for taking my question. And congrats on the quarter. Guy, you talked about sales force attention maybe drifting to the Varonis SaaS offering over Data Advantage Cloud in the quarter. Just curious, like what sort of synergies are there for Advantage Cloud to be sold now that Varonis SaaS has been launched? Is there a broader bundling opportunity there? And maybe as you think about the 15% SaaS mix for calendar '23, how should we think about DA Cloud versus for SaaS contributing there? Thanks. Well, I'll try and address the sub questions within the question. First of all, we increased the SaaS mix from 5% 100 days ago to 15%. Going forward, we're going to talk about SaaS sales as a whole. We definitely see reps and our account managers trying to sell to customers, both Varonis SaaS and the DA Cloud. I've talked a lot about the fact that the DA Cloud takes time from an adoption perspective. And we've seen that in the past with other licenses where until it takes some time, and we saw that with the Office 365 where it took some time and then it started becoming a major contributor. We feel very positive about the DA cloud being a tailwind for us in the years ahead. I think when you look at kind of the synergies there, the fact that we protect data wherever it resides, is a great advantage, and we can enter into new customers that had applications that we couldn't support before and now we can support them. And that combined with the Varonis SaaS, that gives a significant value to our customers that Yaki talked about before. And also, if you look at what we are supporting, it's very easy to understand what is the adoption of the SaaS applications, and the cloud data repository, you see that it's something that almost every organization has. So what is happening today is that Varonis is really protecting data. And we want to protect critical data wherever you have it with all the access all the data flows that users are doing in applications, APIs and to do it automatically. So we believe that the whole platform it's something that almost in every organization. Thank you. [Operator Instructions] Our next question comes from the line of Shaul Eyal with Cowen & Company. Please proceed with your question. Thank you, hi. Good afternoon, guys. Congrats on the SaaS, on the rapid progress. Are you seeing similar SaaS buying behavior between U.S. and EMEA? Or is SaaS, for some reason, more pronounced in the U.S.? Hi, Shaul. So in I4, we did it only, in terms of the Varonis SaaS, we've done it only in the U.S. We open it now for EMEA and the pipeline is encouraging. And so we will give you more details as this progressing. But in general, we just see that it's just a non in terms of the objections, I don't have time, I don't have hardware or don't have people. We really eliminated all the major objections. So if you have clinical data and you want to protect it, the way to do it is to use our platform. Hey, guys. Appreciate the question. I just wanted to follow up on DA Cloud since I think that's such an important growth vector for you guys. Guy, you mentioned that it takes time. You specifically mentioned the office product. What is it that takes time? Is it a product feature issue? Is it an awareness issue? Is it a sales comfortability issue? Just kind of curious if you could provide a little more detail on that. I see. I see. In terms of the DA cloud, we just wanted to make sure that the product is very mature, and we have all the feature set. And if you can see all the releases we have done in the fourth quarter, they are tremendous. In each one of the reuse cases, threat detection and response, data protection. We have a lot of configuration management there and also -- and also classification. Once you have everything, it's also -- it takes some time that the sales force knows how to sell it, and we have done it. What Guy mentioned is that in the fourth quarter, when you have Varonis SaaS, when you always -- when you release something like that and you're introducing SaaS there is some kind of friction. This is why we told you that every time you're doing something major like that, it takes us just two quarters to get our ducks in a row, if you will. But DA Cloud is -- we believe that it's a tremendous growth engine for us. It's -- you have a lot of data in this repository very complex permission structure, a lot of configuration also, a lot of the API connectivity. These are tremendous platforms that introduce a lot of -- introduced a lot of risks and our very unique intellectual property works very well there. And we believe that DA Cloud is a massive opportunity for the company moving forward. And we have done all the right things in terms of development, enablement to make sure that we can realize great gains from this platform in the future. And our next question comes from the line of Rob Owens with Piper Sandler. Please proceed with your question. Please proceed with your question. Thanks for taking my questions. Just curious on the road map for the SaaS solution. And are you currently at feature parity with on-prem and what's to come down the pike in the near term? Thanks. Thanks for the question. So, we are not in complete feature parity, but they are starting the SaaS, some stuff that are much more advanced than on-prem, somethings in the on-prem -- we need to be in parity. We are moving very, very fast with the cloud. It's a fit to 70%-80% of the Varonis on-prem customer, and it's a fit for every new customer we get to parity. We also have many new advancements in this platform, so we really prioritize. The other thing, the beauty of the cloud is we can see the usage. You can see how the stuff that we are doing affecting our customers, and we can prioritize if we can prioritize effectively. Great. Thanks for taking my question. So maybe for Guy. Just -- it seems like you're obviously seeing pretty significant early traction in the SaaS platform. And so you upped kind of your sales mix or ARR mix from 5 to 15. And assuming that, that price lift sticks of 25 to 30, I think you effectively reiterated ARR for this year relative to what you talked about before. Wouldn't that be up an uplift or a tailwind to overall ARR if, in fact, you're seeing a higher mix of SaaS ARR that's higher priced? Chad. Yeah, like you're saying, we definitely saw a lot of great traction with the SaaS introduction, which gave us the confidence to increase the SaaS mix from 5% to 15%. With that said, we're very early in this transition. And that's why when you look at kind of the ARR number, when you look at the overall number, it didn't move much. We did increase it slightly, but it didn't move much. This is because we're at the beginning of the year. We wanted to start -- we talked about kind of the six-month ramp-up time that we factored in. But we feel very good about the SaaS offering. And over the last 100 days, we gained a lot of great feedback for both our customers and our sales force. Thank you. I just had a question on the SaaS mix also. So I think you generated -- or excuse me, 10% of the new business from SaaS in Q4. And then you said 15% in Q1 and 15% for the year. So I'm wondering why wouldn't the mix continue to increase throughout the year as more sales reps get ramped up and et cetera. So just wondering why it's staying flat at 15% after Q1. 100 days ago, it was a 5% mix and we get again, like I said before, we gained a lot of confidence. But again, we're very early in this process, and we do expect some friction that will happen in the first six months of the transition, which is already baked in the guidance. We will obviously update everyone as we progress through this transition, and we'll give more color as we see kind of the pipeline build. But because we're so early in this transition, we moved it up from 5% to 15%, and we want to start with this. And then we'll update and give -- we'll be as transparent as possible throughout the transition and give metrics that can allow everyone to see the progress and the progression within the transition. Hey, good evening. Great to hear about the SaaS progress. And thanks for taking my question. One for Yaki and a quick follow-up for Guy. So Yaki, you mentioned about the slowing macro continue to impact customers continued worsening of conditions across the board, both EMEA and crawling into North America. Just comparing with your commentary last quarter, you cited of course, EMEA revenues, but there was also some weakness in the U.S. Federal trends? Can you comment on the on the U.S. federal trends, is it trending above your expectations now or in line? I mean just a quick comment. And then very quickly on the operating margins. You mentioned about 1.5% headwind -- just wanted to know the breakdown between hosting and support costs versus the sales incentive structure related headwinds? Thank you. We are building a very healthy pipeline in the federal market. This sector in general has a lot of critical data that they need to protect and many did actives that want the data. If you want to protect this massive data stores in new solutions like ours, and we believe that we can do very well in the federal market. And when you have an economic slowdown, it's usually impacting IT spend. But again, if you have critical data, someone wants it, it's just essential for every business. So we believe that we tease can weather any economic slowdown very effectively. In terms of the margins, one of the things that we've talked a lot about -- and you've probably heard me talk about ARR being the leading indicator for the last six quarters. We wanted to make sure that everyone understands that when we're shifting our business from term license where we recognize approximately 80% of the deal's value upfront to a SaaS model with kind of a fully ratable revenue. It will make our income statement metric less indicative of the health of the business than it's been in the past. So the headwind that we're talking about is obviously impacted the most by the way revenue is recognized between the two models. And that's why we said that throughout the transition, ARR and free cash flow will be our north stars because they're not impacted by the speed of the transition. So obviously, as we announced at our Investor Day, happening on March 14, we'll give more color, we'll give more color not just on the headwinds, but we'll give color on KPIs and we'll try and be as transparent as possible to allow analysts and investors to work with us during this transition. Thank you. [Operator Instructions] Our next question comes from the line of Joshua Tilton with Wolfe Research. Please proceed with your question. Great. Just one quick one for me. I think we all walked away from the last earnings call with a message that the 4Q guidance and the initial 2023 guidance was derisked that you guys kind of only be 5%. I know there's no real change to the growth outlook for 2023. I guess is the message still the same? Should we walk away into feeling that you guys have tended to derisk the growth outlook for 2023? That's hard -- the line is very hard to hear, but I think I understood the question of whether we feel more confident about our guidance and have we still factored in macroeconomic uncertainties. And if that's the question. The answer is basically yes to both. We feel more confident about where we are today versus where we were 100 days ago. The reception of the SaaS offering has been extremely positive. I thought we talked about that both from our customers and our sales force. With that said, when we look at the guidance for 2023, we did bake in additional worsening of the economic conditions across the board. We assumed softness in EMEA and North America. We assumed budgetary scrutiny, longer sales cycles, basically worsening of the economic conditions. So we feel better about the business. But as we guide today for 2023, we wanted to account for both macroeconomic deterioration and some of the friction that might occur with the introduction of the SaaS offering, and that would ramp up time of basically six months. Yeah, thanks for taking the question. Can you just talk a little bit about the linearity that you saw through the quarter? It sounds like things may be eroded. So did the end of the quarter slow? And then you also talked about some turnover in the sales organization. Can you comment on what kind of turnover are you expecting in the sales organization? So the quarter actually behaved very similar in terms of seasonality. We didn't see any abnormal behavior when we look at kind of the seasonality, where similar to other software enterprise businesses, we do have a large component of the business come in the last couple of weeks of every quarter. So we didn't see any major trends there. In terms of the turnover, I can tell you that the reception of the SaaS offering, as we've mentioned several times on this call has been extremely positive. But some of the lessons that we've taken from kind of the move from perpetual to on-prem is some increased turnover, which we baked into our guidance and factor that in. So that's kind of the way we thought about it. But as of now, everything is kind of going in line with our expectations. Yes. Thank you very much. So I want to delve into the 13-point deceleration in North America growth, from 30% to 17%. How much of that was the SaaS headwind? Can you talk about like the different trends you saw between the large customers and smaller customers? And finally, did you see in January or February, early February, this month, a noticeable pickup in North American business versus the end of last year? Now when we gave guidance last quarter, we said that we expected to see some spillover from the macroeconomic conditions in EMEA to North America with some increased deal scrutiny and longer sales cycles in the region. And that was in line with our expectations. So the results kind of that we saw in Q4 were kind of in line with how we saw it when we guided last quarter. There was about 300 basis points of headwind from the SaaS mix shift that impacted our North America reported revenue in Q4. And in terms of January and February, February has only just started. But I could tell you, we gave guidance. We feel good with the guidance that we have provided, and we'll update as we kind of progress and we'll give some color on the SaaS transition during our Investor Day on March 14. At this time, there are no further questions. Now I'd like to turn the floor back over to Tim Perz for any closing comments. Thanks for joining us today. We look forward to seeing you all at our Investor Day on March 14 in New York. This concludes today's teleconference. You may now disconnect your end at this time. Thank you for your participation. And have a great day.

EarningCall_420

Good afternoon. Welcome to the Penske Automotive Group Fourth Quarter 2022 Earnings Conference Call. Today's call is being recorded and will be available for replay approximately 1 hour after completion through February 15, 2022, on the company's website under the Investors tab at www.penskeautomotive.com. I will now introduce Anthony Pordon, the company's Executive Vice President of Investor Relations and Corporate Development. Sir, please go ahead. Thank you, Allan. Good afternoon, everyone, and thank you for joining us today. A press release detailing Penske Automotive Group's record fourth quarter and record full year 2022 financial results was issued this morning and is posted on our website, along with the presentation designed to assist you in understanding the company's results. As always, I'm available by e-mail or by phone for any follow-up questions you may have. Joining me for today's call are Roger Penske, our Chair and Chief Executive Officer; Shelley Hulgrave, EVP and Chief Financial Officer; and Tony Facione, Vice President and Corporate Controller. Our discussion today may include forward-looking statements about our operations, earnings potential, outlook, future events, growth plans, liquidity and and the assessment of business conditions. We may also discuss certain non-GAAP financial measures, such as earnings before interest, taxes, depreciation and amortization or EBITDA, our leverage ratio and free cash flow. We have prominently presented the comparable GAAP measures and have reconciled the non-GAAP measures in this morning's press release and investor presentation, which are available on our website to the most directly comparable GAAP measures. Our actual results may vary because of risks and uncertainties outlined in today's press release, which may cause the actual results to differ materially from expectations. I direct you to our SEC filings, including our Form 10-K and previously filed Form 10-Q, for additional discussion and factors that could cause results to differ materially. All right. Thank you, Tony. Good afternoon, everyone, and thank you for joining us today. 2022 was a record year for PAG, and was driven by our diversification, certainly, our premium brand mix and our capital allocation. During 2022, we increased our revenue by 9% to almost $28 billion. We increased our earnings before taxes 16% to $1.9 billion. We increased our income from continuing operations by 16% to $1.4 billion, and we grew our earnings per share by 25% to $18.55. We completed acquisitions representing approximately $1.3 billion in expected annualized revenue. And during the year, we repurchased 8.2 million shares or 11% of our shares outstanding at the beginning of the year. We returned $1 billion to shareholders through dividends and stock repurchases. Now let me turn to the fourth quarter. I'm pleased to report record revenue and earnings per share, which was driven by our diversified business model. Revenue increased 11% to $7 billion. Earnings per share increased 6% to $4.21. Excluding FX, revenue increased 17% to $7.4 billion, and earnings per share increased 8% to $4.30. Again, during the fourth quarter, we repurchased approximately 2.5 million shares of stock for $284 million. Looking at our retail automotive operations, and this is on a same-store basis, Q4 '22 versus Q4 '21, our new units increased 11%. Demand for new vehicles remain strong and vehicle availability is improving. However, we do expect supply constraints to remain during 2023 for most of the brands in the premium side that we represent. We continue to take forward orders. In fact, in the U.K., our forward order bank is 23% higher than it was at the same time last year, representing 31,800 units or GBP 100 million of forward gross profit. Used units declined 4%, largely due to the challenges in acquiring affordable inventory to meet our customer expectations. Variable gross profit remains strong and higher than historical levels. When compared to Q4 last year, verbal gross profit declined 11% to $740. However, excluding FX variable growth only declined 7%. If you really look at that on a sequential basis, excluding FX, variable gross profit per unit only declined $33. Our service and parts revenue increased 6%. However, when excluding FX, service and parts revenue increased 11%, driven by increases in customer pay, warranty and our closing repair business. Looking at CarShop. During 2022, CarShop unit sales increased 12% to 71,242 units. Revenue increased 16% to $1.7 billion. However, our variable gross profit per unit declined 19% to 21 0 8 as vehicle acquisition prices, reconditioning costs and logistics continue to impact customer affordability and certainly our profitability. We continue to focus on vehicle sourcing and cost improvement programs to improve CarShop profitability. CarShop self-sourced 73% of its inventory in the U.S. and only 37% in the U.K. Let me now turn to our retail truck business. As you know, our Premier Truck Dealership business represents 39 locations in North America, and a very important part of our diversification. In 2022, this business generated $3.5 billion in revenue and contributed $215 million in earnings before taxes and had a return on sales of 6%. New commercial truck demand remains very solid as being driven by replacement demand associated with supply constraints over the last several years. During the fourth quarter, our unit sales increased 28% to 5,704. Same-store unit sales increased 22% to 5,287 units. We outperformed the Class A market in the fourth quarter, growing our sales by 36% compared to the market, which increased 30%. Total revenue increased 40% to $1 billion and gross profit increased 16% to $138 million. Our same-store revenue increased 33%, including a 16% increase in our service and parts business. Service and parts represented 65% of our total gross profit and covered 128% of our fixed cost. EBT increased 14% in the quarter to $51 million, and approximately 75% of our new unit sales are Class 8 commercial trucks. In fact, when I look at 2023, our entire allocation is sold out. The Class 8 truck market remains strong, with retail sales of over 309,000 units in 2022. And as we look at the forecast for North American sales, for 2023, is 294,000 and the backlog today sits 244,000 units would represent 10 months of sales. Turning to Penske Transportation Solutions, our leasing, rental and logistics business. PAG owns 28% of PTS, which provides us with equity income, cash distributions and cash tax savings. PTS currently manages a fleet of over 414,000 units, and the goal is increasing it to 500,000 by 2025. PTS produced a record fourth quarter. Revenue increased 13% to $3.3 billion on the strength of its long-term contracts and commercial revenue. Profit increase in percent to a record of $344 million. As a result, our fourth quarter equity earnings increased 9% to $99.4 million. And year-to-date, we've received $357 million in cash distributions. For the entire year, PTS earnings before taxes were $1.7 billion. We expect the current business environment for lease. Our maintenance, our commercial rental and logistics will remain strong in 2023 as we expect to continue increasing the size of our PTS fleet. Thank you, Roger. Good afternoon, everyone. As Roger indicated, we had another strong quarter, driven by our diversification and our commitment to maintain operational efficiencies achieved through cost reductions beginning in 2020 as well as automation and other efficiencies gained through AI. SG&A to gross profit was 68.9% in the fourth quarter compared to 67.1% in the fourth quarter last year, and remains 1,020 basis points below the fourth quarter of 2019 prior to the pandemic. As we look to the future, we expect the ratio of SG&A to gross profit to be in the low 70s. Year-to-date, we generated $2.1 billion in EBITDA, representing an increase of 14% when compared to the same period of last year. Cash flow from operations was $1.5 billion and our free cash flow was approximately $1.3 billion, after deducting net capital expenditures. In 2022, we completed acquisitions and new open points, representing approximately $1.3 billion in annual revenue, consisting of 9 retail automotive franchises, 2 open points and 4 commercial truck dealership. For the full year, we repurchased 8.2 million shares of stock for $887 million, which represents 11% of the shares that were outstanding at the beginning of 2022. In addition to share repurchases, we returned $154 million in dividends to our shareholders, and most recently increased the dividend by 7% to $0.61 per share, reflecting our strong fourth quarter performance. In total, we returned $1.04 billion to shareholders, representing 75% of our net income. In 2022, we spent $228 million on net CapEx and an additional $42 million on land acquisitions for future growth. As you can see, our capital allocation strategy includes disciplined acquisitions, investments for future growth and shareholder return. Total inventory was $3.5 billion, which is approximately $400 million higher than December 31, 2021. Floorplan debt increased $442 million and is at $3 billion. We had a 25-day supply of new vehicles, including 18 days in the U.S. and 37 days in the U.K. Days supply of new vehicles for premium was 28 and volume foreign was 13. Used vehicle inventory had a 53-day supply. At the end of December, our long-term debt was $1.6 billion, representing an increase of $148 million when compared to December 31 of last year. 35% of our debt is fixed. The average interest rate on our total fixed rate debt is 3.8%, which we have secured for an average remaining term of 5.7 years. Debt to total capitalization was 28% and leverage sits at 0.8x at the end of December. We have the ability to flex our leverage to 4x, leaving us plenty of opportunities to grow our business through acquisitions and to continue returning capital to shareholders. In conclusion, our balance sheet is in great shape. At December 31, we had $107 million in cash and over $1.1 billion in liquidity and we remain confident in our ability to manage through any macro challenges that may lie ahead. Shelley, thanks. We are committed to implementing operational efficiencies that we believe will lead to lower cost structure as we go forward. One of our key efficiency initiatives is leveraging artificial intelligence. We continue to test and implement AI solutions on both the service and sales side of our business. The AI allows us to automate tasks like answering customer inquiries and setting service and sales appointments. That allows our employees to be more efficient, provide quality support after hours. In the fourth quarter, 37,000 of our online service appointments in the U.S. were created using AI and total online BDC appointments increased 10% to over 520,000. We continue to integrate digital solutions to automate and streamline processes to ensure consistency, our compliance and quality control, while pursuing digital sales through our preferred purchase program, our OEM digital programs and our proprietary website in the U.K. In Q4, digital sales represented 5% of our total unit sales. We also focus on reputation management, and we are proud to congratulate 126 of our dealerships for being recognized as top dealers by CARFAX. I'd like to talk about some management changes that happened just recently. As of -- effective January 1 of this year, Greg Penske has been named Vice Chairman of the Board. Greg Penske brings extensive automotive retail industry experience, has relationships with automotive partners and has familiarity with all of the company's operations. Rich Shearing, formerly the President of Premier Truck, will oversee Penske Automotive Group's North American operations, including its automotive and commercial truck dealerships. Randall Seymore, formerly the Executive Vice President, Global Operations for Commercial Trucks and Power Systems, will oversee Penske Automotive Group's international operations in the U.K., Europe, Japan and Australia. These new [Indiscernible] will work in tandem both with me and Rob Kurnik, our President, and our executive leadership team, while building further depth to ensure that we have the best leadership in place to remain the leading transportation service company in the world. In closing, our results continue to demonstrate the benefit of our diversification across the retail automotive and commercial truck industries, our cost control and a disciplined capital allocation strategy. I continue to remain confident in our business model. Roger, Shelley and the team, congrats on the quarter. And congrats everybody on the promotion. I want to start on the demand side. New vehicle demand has clearly hung in there on the automotive side, despite price increases, rate increases, and I think a volatile backdrop. So can you discuss what you're seeing from your core customer today? And how do you think consumer demand shapes up as you progress through this year on the automotive side? Well, let's talk about our business, which obviously is diversified. But point number one is on the vehicle side, we're premium luxury. So we see the demand on new vehicle is consistent and strong. And we're turning our inventory very quickly, as we talked about earlier here today. And our prefilled inventory, both in the U.S. is 40% to 50%. And I mentioned earlier in my remarks that 23% forward sold orders. That's up from last year of almost over 100 billion -- 1 million pounds is certainly positive for us as we go into this first and second quarter. I think that lease penetration is down significantly due to -- certainly, when we look at residual support and also some of the support we get from the finance companies. And when you look at it in real numbers, 55% of our premium was leasing prior to maybe the last 12 to 18 months. And our overall, from a Penske perspective, was 34%. We're down to 11%. So we really haven't seen the premium OEMs get back into the market at this point. And I think, at this time, we're going to have to wait and see. But those customers are stickier. We want those used cars coming back. So to me, that's going to be something we'll look at as we go forward. But I think the premium customer right now, affordability hasn't hit them, obviously, even with higher interest rates. But what's driving our margins and our success, again, certainly is supply. And when you think about what we're getting, they're building the best cars they have with the highest margins for not only the factory, the OEM, but also for us. And I think that growth continues to be strong, and I think when you look at our inventory, it's way below our historical levels, which you can see that based on looking at our numbers. When you even think about Toyota and the Vayant Florent is only 6 days. So again, low inventories, OEMs building the right product for us in the premium side, I think bodes well for us as we look over the next couple of quarters. Great. And then I wanted to shift over to the SG&A side. If -- but you just said new GPU is going to stay stronger. How are you and the team thinking about maybe SG&A margin as a percent of growth for 2023? Are there still operational changes? I think at the end of your comments you talked about AI and some smarter task automation. Can you help quantify what the potential cost savings are? So any help kind of thinking about the outlook on expenses there. Well, let's look at SG&A. When you look at the fourth quarter, our SG&A went up probably 100 basis points from before. And really, that was indicated really due from the standpoint that we had more compensation in the U.K. from the standpoint of our people. We had a onetime benefit for cost of living, which would hurt us. And most likely, an impact here in the U.S. was the fact that our loaner car vehicle maintenance was up significantly due to the fact that we have more loaner cars in fleet and we can't turn them today as we did in the past because we don't have the availability. So I think those are the points that were key for us on SG&A as far as the lift. Now when I go forward, and we look at it, I think we got to look at -- really got to look at 2 components. Number one, what's the growth from the standpoint of our growth? And I think looking today, we were 3,200 in 2019. We were 6,700 in 2022. And I looked at the numbers for January, we're at 6,600. So I think we've got a nice glide slope on our -- certainly on our growth. But to me, when I look at our SG&A, if we took 2,000 off the gross profit, say, during the year, just as a number, our SG&A would go from roughly 69% to 72% from a gross profit standpoint in our SG&A. So I think what we're doing is looking at how we can reduce labor force in many cases, using AI. Many of these people that were taking inbound calls, can be put into other jobs within the company or they can move on. And we're seeing the customer satisfaction go up, the ability to schedule work and the way we want to more seasonally and also based on the days availability has been much better, plus we've got the benefit of putting filling our jobs at times that we wouldn't be able to do before. And again, I think that will help us with automation, will all help us in our absorption because we'll get more work through our shop, which maybe will offset lower margins with higher unit sales but also higher parts and service gross profit. First question on Slide 15. There's a couple of slides around that are also very helpful. But if we focus on this one, -- you can clearly see that units in total we're up 13%. They actually trended fairly well through the course of the year. With the short supply and sort of the lack of availability coming from automakers, can you just maybe just talk about how you were able to, on the new vehicle side, actually get these vehicles to drive that kind of an increase? Because it is far and above what we saw in the industry at large. Well, I think that, number one, we had the benefit of the U.K. Because they were locked that probably had less availability in '21. So we had a bigger lift, certainly in the in the premium luxury side. And over there, where 91% of our mix is premium luxury. I would say that drove quite a bit of it. And again, we are running with [Indiscernible] low day supply and to me, that was probably when you look at the mix between U.S. and international, that probably would help that number. Okay. That's helpful. And maybe staying over in the U.K. for a second. I mean the CarShop U.K. self-sourcing, 37% is far lower than what you're doing in the U.S. I'm just curious, is there an opportunity over time? Or is there something structurally in that market that's going to keep that much lower than what we'd see in the 70% to 80% range in the U.S.? Well, we made a structural change, John. You talked about efficiencies and the businesses talking to each other. In Europe, OEMs do not like you to have non-OEM vehicles on the lot is used. So if I'm a Porsche dealer, they don't want to see a Mercedes-Benz. So what we've done is taken all the non-vehicles in each dealership, which are not proprietary. And what we're doing there, we're putting them on to [Indiscernible] and giving those vehicles, the CarShop, which has made a big difference. We're looking somewhere between 250 and 400 cars a week, which will help us build that self-purchased vehicles from us rather than having to go out into the auctions. And I think that at the moment, most of the fleets are selling their cars themselves. So we don't have the opportunity to pick those up as we normally -- where we have these bigger buys. And basically, when you look at the OEMs who used to buy 300, 400, 500, maybe even 600 cars at a time from the OEMs and now they don't have those to buy. So we're somewhat restructuring that, which is going to help our margin, also help our availability. We had a -- we had a very good month. We did over 5,000 new units in the month of January at good margins. So I think we're starting to see a pickup in margin and also the internal process for giving us the fleet we need to sell. Okay. And then that's helpful. And then just lastly for you or Shelley. I mean whether you're a bull or bear on estimates for 2023, you're still going to have a high-class problem of reallocating a significant amount of free cash flow. So if we look at what happened in 2022, it was kind of spread across buybacks, acquisitions and obviously the dividend. But as we think about what your priorities are in 2023, could you just kind of remind us or even give us a fresh view where you think the excess cash will go? Sure, John. I can take that. We had about $1.5 billion in cash flow from operations. We've talked before, we typically start with about a 50-50 split of return to shareholders versus growth. That was certainly planted a bit more 2/3 return to shareholders this year, 1/3 in growth. But that was not insignificant by any means. So from a growth standpoint, we typically target 5% growth acquisitions, 5% growth organically. When you exclude FX, we certainly got there over the year. So we're happy from that standpoint. [Indiscernible] was just a bit larger. And so given the prices of our acquisition and the multiples compared to our multiple in the market, we took a very proactive stance on share repurchases and shareholder returns. So that was about $1 billion of that $1.5 billion. Michelle, I guess we should assume that it remains kind of dynamic -- the target is 50-50, but if it's tilted towards your stock being a lot cheaper than those acquisitions, that will be the direction you'll lean in even in 2023. Is that a fair statement? John was really seen from an acquisition standpoint, the things that we're interested in are certainly high priced at the moment. So we're going to be very selective. And the one good thing about our diversification is not all retail auto, U.S., it's international plus our truck business. And we have opportunities in all those areas. And I think what we'll do is pick the ones we think we get the best returns as we go forward. I guess, first, just on -- continuing on the acquisition topic. I know there's opportunities you said all throughout the business, which is great. But like what variables would probably make you or perhaps there aren't really any variables. It's just how reasonable is the seller. What variables would make you choose to do the deal on the truck side versus the light vehicle side or vice versa? Well, I think there's no question. As we look at the truck side, the multiples have been less than they are on the auto side, point number one. Point number two, the CapEx requirements, i.e., tile, furniture, et cetera, we don't have that on the truck side. So to me, the CapEx requirements are significantly less when you're talking about typically buying a U.S. dealership. So -- and also, if it's contiguous, if we can go into a market where we already have scale, we have infrastructure in place that we can take out certain admin costs which help us and gives us the returns we want. But we typically would say in the premium/luxury side here in the U.S. in volume foreign, which is primarily tilted to our Toyota and Honda business. And of course, internationally, we think that 91% market share we have today are mixed, we would stay in that lane from the standpoint of international. And on the truck side, we're committed to Freightliner across all markets and even in Australia with Western Star. And they want us to grow. We have a framework agreement where we're nowhere near the top of that framework agreement from the standpoint of total market share. So I would say we'll continue to look at Freightliner opportunities. Okay. And then shifting over to light vehicle used. Just curious, when you look at, say, at the franchise stores, a used vehicle customer versus a CarShop customer. I think affordability is probably an issue in both channels, but are you seeing perhaps the franchise customers perhaps a bit wealthier and not as hit by the affordability issue? Or is it just really bad across the board? Well, I guess, affordability for sure. In the CarShop model, I think we're $4,000 to $5,000 to $6,000 more than that typical customer is paying 12 to 18 months ago. So that's had some limiting factor for us to be able to source vehicles, recondition them, pay for logistics and be market share on a price for the customer. So putting that aside, I go to the OEM business. And we've been -- had a luxury over the years, number one, because of the leasing penetration. We've had a lot of leased cars coming back that we bought from the OEMs, which filled our leasing and used car opportunities across the premium brands. And also within that mix is our loaner car. Today, we have 6,000 loaner cars in our premium luxury fleets today. If you go back to last year or so, we would turn those probably every 60 or 90 days. And today, we're turning those 6 to 9 months. So basically, when you look at that, that's limiting us maybe the 10,000 to 12,000 units for the premium side. So we're not going to struggle, but I would say this that we want that young used car, it's a good lease car. It's a good way to get the people into the brand. And of course, as we grow this, it grows our parts and service business. So I think those are dynamics we're looking at today. Right. And just last question. I know basically, you don't have any Ford representation right now. But in the future, would you be interested in one of their model EV stores with the direct-to-consumer type approach? No inventory? We really haven't looked at that. I think that the mix that we have today on the premium luxury side, volume foreign probably is the direction. I wouldn't say that we wouldn't take a look it. These are going to be opportunities as they have maybe truck dealerships and other things that become separate franchise. You're starting to see that kind of noise in the marketplace. We certainly would look -- is there an opportunity for us. We do have a Ford parts distribution business as part of PAG that operates out of Tulsa, Oklahoma, which is a parts operation, which has been very successful for us with Ford. All right. Great. Just first question on PTS. Again, a pretty strong quarter here in the fourth quarter. Can you help us think about 2023? Maybe from a year-over-year standpoint, any parts of the business that you expect to get worse or better in 2023? And how should we think about your revenue picture there? And then maybe, on the expense side, things like wage inflation. I know you mentioned some of the debt refinancing, and then maybe the gain on sale. How should we think about all those buckets for 2023 for PTS? And any color or guidance there would be helpful. And I have a follow-up. Okay. Let me take a shot at these. I think number one, when you talk about gain on sale, we had $500 million in gain on sale in 2022. That was about 22,000 units. Our forecast for 2023 is 27,000. Obviously, because the mix, we'll have a lower gain on sale. The good news is that we did 3,200 units in January. We had $50 million again. Now I wouldn't write that down in straight line, but at least shows that the market is still there for our used vehicles that are coming out. But I think we'll have a deterioration on the gain on sale probably somewhere around $100 million. If we look at it today, just looking out at pricing and mix as we go into the rest of the year. Looking at interest costs. I think I've talked about that before. We did a bond here, $750 million here in the last 10 days. That was 400 basis points higher than we had 2 years ago for the same $750 million. So we're probably going to see $100 million more of interest costs that we'll have through our financing in our bond portfolio. We are investment grade. But again, we're going with the market at this point. From an overall standpoint, our maintenance costs will be up for one reason, some because we're growing the business, but also because we have 71,000 units on order. And many of these units are replacement units for customers, and many of those units are running high mileage, and we need to get them out of the fleet. So we're going to have the opportunity, hopefully, to get them out here as we go forward. But I think it's important that -- we also look at maintaining our employee and our employee base. There's pressure on mechanics, on wages, certainly, and in hours of working. So these will drive some higher cost. But overall, we've got a very strong business going into next year, with the growth in our truck leasing or contract maintenance. And when I look at our utilization of our truck business and rental side in PTS, if you looked at January, we were at 86% on our tractors. Remember, we have 70,000 units on rent every day, 86% of our tractors are on rental and 82% of our midrange -- and when you think about that, because the size of our fleet, the quality of our fleet, I think that we have those customers coming to us. And because of the size of our leasing fleet, 50% of the revenue we get in rental comes from our lease customers. So again, with a number of units on order to 70,000, we expect those to come in. So we'll have more gain on sale opportunity. On the other hand, it will help drive some maintenance costs down, but I still think we'll see some creep on maintenance during the year. Got it. Got it. That’s helpful. And maybe on parts and services, how are you thinking about growth in that segment for this year? Strong mid-single digit plus range in the fourth quarter. I believe U.S. was more like 9%, 10%. Do you expect that kind of trend to continue here into 2023? Maybe if you could help us across the different buckets like warranty, customer pay or body shop. Any color there would be helpful. I think we’re seeing a catch-up by miles driven. Remember, we’ve had people sitting with their cars and people not working, not going into work. And our GM is asking come in for 3 days. So we’re going to see more demand. But when you look at our parts and service growth, after excluding FX, we were up 11%, certainly in the fourth quarter. And we see that continuing. It’s been very strong in U.K. also. So we expect a nice increase as we go forward in Q1 and Q2, at least as far as we can see right now. And again, it’s going to be labor rate efficiency that we get. From the standpoint, our ELR effective labor rate, we’ve been able to increase that across the board in all of our locations, really generally not only internationally, but also domestically, about $7 last year. And we would expect less discounts and hopefully grow that ELR that’s the effective labor rate that we charge the customer, which will drive more gross profit. Body Shop business is up. Warranty was down, but now we’re starting to see warranty creep back up again. I can’t tell you exactly why, but we’re seeing some spike in warranty. All right. Thank you, and welcome, everybody coming to the call today. And we'll see you at the end of next quarter. All the best. Bye-bye. Ladies and gentlemen, that will conclude your conference call for today. Thank you for your participation and for using AT&T Event Teleconferencing. You may now disconnect.

EarningCall_421

Good afternoon, everyone, and welcome to our Q4 2022 Conference Call. We finished the year with good continued momentum and also solid results. But 2022 is not only a year of significantly improved performance, it's also been a year when we have shed some very significant strategic milestones and important steps in shaping a more technology and solutions focused business and a stronger than ever offering to our clients. We are on a good path as a company. I'm glad to present the Q4 results today together with our CFO, Andreas. And if we go on then to the results, on a group level we have good momentum across all parts of the business and increased the organic sales growth to 9% in the quarter. Technology & Solutions growth, together with high price increases are the two main drivers. And our growth in North America, I want to highlight increased to 5%, strong momentum across the North American business, and also then the previously announced contract expansion will positively impact the growth in Q1, 2023. We had double-digit organic growth in Solutions & Technology also when excluding the positive contribution from Stanley Security and Technology & Solutions now represent 42% of our total sales. The operating margin increased to 6.5%, thanks to Stanley Security and good development in the legacy business. The Stanley Security business improved as a result of pricing recovery, cost control and leverage and initial execution on the value creation plan. And importantly, we have maintained a positive price wage balance, but the labor scarcity is an ongoing challenge, especially in Europe. Operating cash flow in the quarter was solid at 83%, and we have reduced the net debt-to-EBITDA ratio to 3.7 at year-end. So in summary, we are delivering on our plan. Looking at the dividend, our Board has proposed a dividend of SEK3.45 for 2022. And with that, let us shift to the performance in the different segments. And as I mentioned, our momentum is really improving in North America. During the first half of the year, we faced top line headwinds related to terminations of some large, low-margin contracts and comparatives that also included COVID related extra sales. But that is now behind us, and we have good momentum going into 2023. Good commercial activity with healthy new sales together with price increases contributed to strong growth in our garden business. And looking at the technology installations business, that also improved in Q4, but there is still some negative impact related to components and labor shortages. But we now have a really strong Technology & Solutions offering to our clients, and when you look at Technology & Solutions, this now represents 31% of total sales in North America. And the profitability development is continuously very strong. And we set a new record with 8.1% operating margin in North America in the quarter. The main driver of the improvement is the technology business with strong contribution from Stanley Security, as well as good development in the legacy technology business. And the integration work that we are doing together with our colleagues from Stanley is progressing at a solid pace. So we are currently ahead of plan in terms of synergy realization in the North American technology business. A very strong performance in our Pinkerton business also contributed to the positive margin development. The Guardian business development was good with positive impact from active portfolio management and increase in value realization from the transformation investments, but with some negative impact related to year end reconciliations. But to conclude, looking at the momentum on a top-line perspective, it's really good in North America now. And I just want to highlight as well, terrific work done by the team, record level margin for the first time above 8%. And if we shift then to Europe, where we also had a historically high organic sales growth of 11% and we have been successful with high price increases to offset wage inflation. This is a major driver of the growth, but obviously also some impact from the inflationary environment in Turkey. Our European team is doing a very good job working with our clients to address their technology and solutions needs. And the investments that we have done here in recent years in terms of leadership, solution support, technical support has resulted in strong double-digit solutions growth in the quarter and also the full year. So we're actively shifting the business mix and Technology & Solutions now represent 35% of total sales in the division. But due to labor shortages, we do have to decline work in a few markets in Europe and that obviously has an impact as well on profitability. So when you're looking at the margin in Europe, we had a similar margin compared with the same period last year. Stanley Security, active portfolio management and solutions are contributing positively to the margin. And we've had good progress balancing historically high wage increases with price increases in key markets such as Germany, but having said that, various effects related to the labor shortage negatively impacted the margin in Europe such as higher costs for subcontracting, reduced capacity for high-margin extra sales. Looking at absenteeism or sickness. It's still at an elevated level like the fourth quarter in 2021 and we have not seen a significant improvement in terms of the labor availability in the quarter. So when you look at the totality from a profitability standpoint and how we ended the year, we are not satisfied with the profit performance in Europe at the end of 2022. It’s important then to highlight a few of the actions that we are taking under our European leadership to improve. And first of all, given the labor scarcity, we are now increasing the margin requirements also for new contracts, while also working actively to terminate or renegotiate low-margin contracts in order for us to be able to focus our employees on clients prepared to pay for the value that we deliver. And as part of this strategy, integrated security solutions where we're combining people and technology is an important lever. And here, we have seen an increased momentum in 2022 in terms of how we're working with clients and also converting significantly more clients to integrated solutions, which is very important. The acquisition of Stanley is, of course, an important part to strengthen the integrated solutions offer. And here, we're now increasing the speed of the important integration work to be done in the coming months and quarters in our technology business in Europe. Moving then to Ibero-America where we recorded 17% organic sales growth in the quarter. The inflation-driven increase in Argentina is the main driver of the high growth number. Spain continued at a good pace with 4% organic sales growth, but the growth was somewhat impacted by active portfolio management. So that essentially means that we're terminating contracts that are not economically sustainable or in line with our profitability requirements. Our team is driving solid focus and momentum with Technology & Solutions, and these sales now represent 31% of total sales in the quarter. And if we shift then to the profitability, our team delivered a stable margin of 6.3% and continued improvement with a margin of 6% on a full year basis. Spain and Portugal are the main drivers, looking at the quarter, but also the full year with year-on-year improvements also coming in Peru, where we have been driving significant turnaround efforts over the last two years. The operating conditions in Argentina remain challenging. So all-in-all, when I look at this, solid performance and improvement by our Ibero-America team in 2022. And with that, handing over to you, Andreas, for some more details related to the financials and then I will make a few comments also related to the strategic journey before we open up for the Q&A. Thank you, Magnus, and hello, everyone. As always, we start by having a look at our income statement. So as Mangnus mentioned, we have a strong top line growth with 9% organic sales growth in the quarter, and our operating margin was 6.5%, where the Stanley acquisition was a strong contributor to the result. Stanley sales was approximately SEK 4.4 billion in the quarter and SEK 7.7 billion year-to-date, with continued mid-single-digit organic growth. Year-to-date, North America represents close to 65% of Stanley sales and Europe around 35%. And from a profitability point of view, Stanley supported the margin positively in both segments, while the North American business had higher margins than in Europe. The difference in profitability increased in the fourth quarter after we had strong synergy takeout and development in North America. If we then have a look at the items below operating results. Here, the amortization of acquisition-related intangibles was SEK 155 million in the quarter, now with the full quarterly effect for the first time from the Stanley acquisition and as we have said earlier, we have allocated approximately SEK 5.5 billion to intangibles in the Stanley PPA and we expect to have an annual amortization rate of around SEK 375 million per year going forward. Looking then at items affecting comparability. Here, we had SEK 312 million of cost in the fourth quarter, SEK 158 million of this is related to the Stanley acquisition and SEK 154 million is related to the ongoing European and Ibero-America transformation programs. And as usual, I will come back with more details here shortly. If we then move to the financial net. Here, the cost was SEK 336 million in the quarter. And the main reason for the material increase compared to last year is the financing of the Stanley acquisition, where we had SEK 243 million of costs in Q4 related to the bridge financing in place. And remember here, that in Q3, we did not have a full quarter of cost in. Of the SEK 243 million, SEK 16 million is related to the bridge to equity and this bridge was fully repaid in October after the finalization of the rights issue. So there will be no further cost here going into 2023. The remaining SEK 226 million related to Stanley is then the cost for the bridge to debt. If we then look at the finance net, excluding the Stanley bridge cost, this was then SEK 93 million in Q4, around SEK 10 million higher than last year. However, we do see an underlying increase in interest cost of around SEK 50 million, with the net amount between the SEK 10 million and SEK 50 million mainly is related to positive impact from IAS 29 hyperinflation in Turkey and Argentina. Going into the first quarter of 2023, we estimate the finance net to be in the range of SEK 400 million to SEK 450 million. While this is, of course, also subject to movement in interest currencies and so on. Moving on then and having a look at our tax. Here, the forecasted full year tax rate was 27.2% in Q3. And as you can see, we are coming in quite a bit lower at SEK 24.6 million. The main reason here is that we have won several old tax cases in Spain from 2006 and 2007 related to the Niscayah spin-off and acquisition interest rate deductions. This means we can now reverse provisions of around SEK 150 million, which impacts the tax rate positively 2.6% on a full year basis. Note that these reversals are non-cash and non-recurring although the wins are, of course, important as it reduces our potential financial exposure. And this then explains the main difference between the forecast and the full year tax rate, and there is more information around these cases also in the report. Before moving on, I just want to remind everyone, as we did in Q3 as well, that the number of shares we used for calculating earnings per shares are adjusted for the bonus element of the rights issue in line with IAS 33 and then here, you also find more information on Page 22 in the report. If we then move on to the next slide, where we have some more information related to the different programs under items affecting comparability. Here, as you know, we closed down three programs at the end of 2021 and the two remaining ones are the transformation program in Europe and Ibero-America and the acquisition-related costs related to Stanley. Looking first at the European and Ibero-America transformation programs, here we had SEK 154 million of cost in Q4 and for the full year, the number was around SEK 630 million, which is in line with our estimate we gave in the third quarter. The Ibero-America program is running well on track, and so is most of the activities in the European transformation program related to accelerating the Technology and Solutions business and driving cost efficiencies by professionalizing our approach to procurement. We are temporarily executing with a somewhat lower pace right now related to the core EFP platform activities that we are running and we do that to ensure we calibrate the program with the Stanley integration to ensure that we maximize the benefit realization and cost efficiency. Since the program start, we have invested SEK 942 million in IAC, and the remaining amount of the program is around SEK 700 million. In line with the original amount announced when we also consider the accounting changes related to cloud computing that we communicated earlier as well. Moving on to the IAC related to the Stanley transaction. Here, we announced total cost of approximately US$ 135 million, and the integration progress is progressing well with a good start of the value creation and synergy takeout in North America, where we are also ahead of plans. Here now in the fourth quarter, we had SEK 158 million of cost. And what is coming in so far is mainly transaction costs and costs related to the synergy takeout. Since the announcement, we have spent SEK 516 million in this program, and we estimate the 2023 spend to be in the range of SEK 500 million to SEK 600 million. All in all, looking at the full year on the left-hand side, we have a total of around SEK 1.1 billion of IAC in the operating income after amortization from these two programs. Then we have the cost related to the equity bridge and the positive impact from the Spanish tax cases. They are not reported on the IAC line in the income statement, but in the financial net and tax line. However, given the non-recurring nature of these items, they are then adjusted when we report our EPS, excluding items affecting comparability, as should then be seen as IAC when looking at net income. If we then move on to the next slide, where we have an overview of the FX impact. Here, we had a material positive impact in our income statement from FX, although it was less than in the third quarter due to a weakening US dollar throughout the fourth quarter. The US dollar appreciated 16% year-on-year and the euro 9%. And the total FX impact on sales was 11% in Q4, mainly then driven by the US dollar development, but also depreciating euro. Looking at the operating results. The FX impact was slightly higher at 12% due to the higher profitability we have in the North American business, and the impact was even a bit higher looking at EPS, mainly due to the impact from IAS 29 hyperinflation. The EPS real change, excluding items affecting comparability was minus 5% in the quarter, with negative impact from the adjusted number of shares from IAS 33. On a constant share basis, the real change, excluding IAC was 20% in the quarter. And this is derived from the re-change on operating income in the quarter being strong at 28%, positively impacted by the Stanley contribution, while the increase of amortization of intangibles and financial net impacted negatively leading them to the 20%. If we then move on and then go to cash flow. As you know, this is a prioritized area for us as we have said before, due to the increased macroeconomic uncertainty and also as we have a strong focus on deleverage our balance sheet after the standard transaction. So after a strong third quarter, we also delivered solid operating cash flow now in the fourth quarter of 83% or SEK 2.1 billion. If we go into some details here, first, looking at CapEx. Here, we spent around SEK 1 billion in the quarter, an increase of around SEK 150 million compared to last year. And we continue to see an increase in our investments into solution contracts, which confirms the positive momentum in the high-margin solutions business. And we also saw investments into our existing transformation programs according to plan. The CapEx to sales was 2.7% in Q4, and we are coming in below 3% for the full year, as we have also previously guided on. And this includes Stanley and IFRS 16 as well. The strong price-driven growth we have seen throughout the year and in the fourth quarter had a negative impact on the account receivables, both in Q4 and for the full year. However, this was also compensated by good DSO development and good working capital management in the fourth quarter, where our focus on cash flow is paying off and also support cash generation well. I should also say that, there are no major payroll timing related cash flow impacts in Q4 nor for the full year. However, as highlighted in the previous quarters, we have now in Q4, paid out close to SEK 700 million of the corona-related timing relief measures we benefited from in 2020 in North America. This has a material impact when you compare Q4 to Q4 last year, but it has no significant impact when comparing the full year, as we did on similar payment in Q3 2021. Important to say is that this was the final payment we have to do. So we have no further C-19 related payments remaining, which will also cater for a stronger cash generation into 2023. Free cash flow is coming in at SEK 1.2 billion, where increased interest costs, increased taxable earnings and some reduced tax losses carried forward, had a negative impact on the cash flow from the financial net and taxes. Year-to-date, we are at SEK 3.4 billion of free cash flow, after a strong second half of the year. All in all, we are reasonably satisfied with the cash flow for the year where we delivered 71% operating cash flow in an inflationary environment. Adjusted for the SEK 700 million corona-related, payment in the U.S., we are at 80% cash flow, which is at the upper end of our cash flow target. And cash flow will continue to be in focus throughout 2023 to ensure we see solid deleveraging. But you should also remember, that we have some seasonality in the cash flow with the first half year is a bit weaker than the second half. We then move on and have a look at our net debt. Our net debt throughout the year has increased around SEK 26 billion, ending at SEK 40.5 billion in December. And the main reason for the increase is, of course, the Stanley acquisition, which is impacting the net debt to SEK 32 billion. We initially financed the acquisition fully with debt throughout our bridge facility and have since partly refinanced that via the rights issue of SEK 9.5 billion in October, as you know. Outside the acquisition financing, the net debt was also negatively impacted by the annual dividend that we paid out in the second quarter, SEK 1.2 billion of spend related to items affecting comparability. A material SEK 2.5 billion translation impact due to major currency movements over the year, although, I should say, that it was actually now reduced in the fourth quarter. And approximately SEK 1.3 billion related to IFRS 16 lease liabilities where most of this is related to Stanley. And finally, we have a positive impact from the free cash flow generation of SEK 3.4 billion for the year. If we then look at the net debt to EBITDA, the reported number was 4.0 times in the quarter. However, as we also mentioned in Q3, this is not taking into account the full 12 months EBITDA from Stanley. So more relevant is to look at this on an adjusted basis, taking this into account and the ratio is then 3.7%. Here, we saw solid deleverage from 4.0 that we reported in Q3. And as you know, we have said that we will be below our target of 3% in 2024. So here, we are also on a good track. If we further adjust for the items affecting comparability, the ratio is 3.3 times. And this also gives a good indication of the deleverage effect we will see after the IAC programs are being finalized. If we then move on and have finally then a look at our financial position and debt maturity chart. And here, as you know, we have a solid financial position today. None of our facilities have any financial covenants and the liquidity position was continued strong in the fourth quarter at SEK 6.3 billion. We also have our RCF of more than €1 billion in place until 2027, and it is fully undrawn as per the end of the year. If we then look at the bridge facilities in place related to the acquisition of Stanley, as you already know, we have successfully completed our SEK 9.6 billion rights issue in October and fully paid down that part of the bridge, which was approximately $915 million. This left us with the remaining $2.4 billion bridge to debt facility where the maturity is in July 2024. $2.4 billion was also the balance at the end of the year. However, in the beginning of this year, we have refinanced a major part of the facility. We first did a $75 million private placement for six years, taking effect in the beginning of the year. Then as you have seen, we have since quarter end also signed a long-term term loan with nine of our relationship banks. The term loan is four years where we, together with the banks can decide to extend one more year and the facility amount is €1.1 billion. As I mentioned before, we have decided to go for a mix of different debt instruments in our takeout to make sure we get this cost-effective funding as possible, and we feel we have achieved a good competitive terms in this term loan. Another important point just to highlight here as well is that the term loan can be refinanced in advance of maturity, which is another benefit of this facility as it gives us good flexibility if the market terms would move on in a good direction going forward. The remaining amount of the bridge to debt facility after these takeouts is now around $1.15 billion. Given we have now taken out a major part of the bridge, we are in a good position here moving forward for the remaining takeout, and you can expect further activity to close most of the bridge out in 2023. Going then to rating and rating-wise, there is no change in the quarter, and we, of course, remain with our commitment to remain investment-grade. And as I have emphasized earlier, we have a strong focus on cash flow and to deleverage our balance sheet going forward. Many thanks, Andreas. So, let us now shift the perspective a little bit beyond 2022. And here, I just wanted to share a few reflections and comments regarding the journey that we are on. And if you're going a few months back, we announced new targets in August with our ambition to reflect what the future Securitas will look like. And here, we're really focusing on two main financial targets. First one to emphasize the shift in revenue and margin mix with an ambition to grow Technology & Solutions with 8% to 10% per year. And with the Stanley acquisition, we are accelerating this shift. We are differentiating and strengthening our value proposition and I will provide also some client feedback in a few minutes to illustrate a little more what this actually means. And with the sharp solutions and technology profile of the company, we've also shared the target to reach 8% operating margin by the end of 2025 and the longer term double-digits operating margin ambition. And when you're looking at the development and the results in 2022, we feel confident that we are on the right path with healthy Technology & Solutions momentum as well as the real step-up in terms of the margin profile of the company. And together with the team, we're working with a clear focus in four main areas to deliver on our ambition. And the first area here, taking the lead within Technology. So, we're joining forces with Stanley, we're building a very strong local and global technology capability. And as commented earlier, the integration and value creation work is progressing according to plan, but we have a lot of important work still ahead of us during 2023. The transformation programs and digitalization are fundamentally important to sharpen our guarding services for our clients and for our employees. And to enhance value, we have a very strong focus on quality over quantity. So that means, profitability over volume, and we are changing our incentive systems as well, across the organization to align with our strategy. And with what we have as well, the strongest people and technology offering, we're also uniquely positioned to deliver integrated solutions to our clients, and that's obviously the third category when you look at this illustration of the picture here. And with this as well, and I was going to talk more about that in detail today, also an incredibly strong platform to drive innovation, where we have now millions of connected sites that we are serving our clients with. And when you look at these four focus areas and our strategic ambition, it's all based on our view in terms of what it will take to be the winner in the security services industry in the future. And I think some of you have heard me talk about this now for quite a while. These three circles, but I come back to them because they are fundamentally important to shaping our view in terms of why we believe that Securitas is now really becoming a unique company with a stronger offering to the clients than anyone else is able to offer. And these three main capabilities then. First one, it's about presence. So our leading presence that we have with our people, security and safety focused. Second one is connected technology. And there, as you know, we have a significantly larger footprint now more than doubled our business and also capability and competence together with Stanley in the technology space. And obviously, the more presence you have, the stronger the capability in terms of technology, you're also really well positioned to leverage data in an intelligent way. And the ability to leverage the combination of these capabilities to deliver the strongest integrated solutions to our clients. So what are then the clients saying? Well, let me just share some feedback, that we have received from our clients in the last six months. And we are proud to count many of the world's most recognized brands as our clients. And many of these brands are looking at Securitas as their main security partner today and for the future. And since we closed the Stanley acquisition, we've had a lot of interaction with local, as well as with global clients. And some of the perspectives that you can see here, I really just wanted to share. Because when you look at this from a client perspective, ensuring a resilient operation is becoming increasingly challenging for many of our clients, and as anticipated, the combination with standard security is very well received. Because when you look at this context, an increase in the complex future, they are looking for a high-quality partner that is capable of delivering solutions that address their needs. And we can see an increasing need, leveraging the presence, leveraging the technology capabilities of Securitas. And we're also now driving digitization and digitalization across the operations, together with our clients to generate better insights and also to innovate more with the data that we're generating. So when you look at commercial perspective, because this is obviously also important once we are doing the integration work, et cetera, to unlock also the opportunity in terms of commercial synergies, as we are going forward. And here, it's still obviously early days, but we have already now won back some business and expanded some contracts. Thanks to the strength of our combined capabilities. And our team is doing really good work stepping up the interaction with a number of clients, and the pipeline is looking really strong. And when I say that, that is obviously then very much reflecting as well what we have done on the guarding side. There is significant opportunity now in the technology space, but also to leverage this to more integrated solutions. And delivering on our commitment is always the first priority. We are facing this work in line with our capabilities. But based on the progress in the first six months since the close, I feel really good about the opportunities ahead when we can drive the commercial synergies at scale. So I hope that is useful just to give some further flavor. But if we are then looking to sum up the results presentation here, we are executing on the strategy. It is generating results, 39% increase of the operating result and a 6.5% margin in the fourth quarter. Momentum and growth, Technology and Solutions, maintaining a positive price wage balance in an inflationary environment are two things that we have been able to successfully do. And from a strategic perspective, 2022 has been a year of significant milestones. Obviously, the main one being the acquisition of STANLEY Security and now joining forces to create an incredibly strong company, which is more Technology and Solutions oriented going forward. But we've also demonstrated our leadership in the industry by being the first major company to commit to the science-based target initiative. And we've driven solid progress in terms of digitalization, modernizing our systems and applications and while these are multiyear investments, they are now firmly starting to generate a positive impact by enhancing our client value proposition and profitability. And then obviously, just to reiterate that as well, when I looking back at 2022, I announced our new financial targets a few months ago with the performance and the progress in 2022, we are confident that we are on the right path. So I think with that, happy to open up the Q&A session. Hi. This is Anvesh from Morgan Stanley. I have three questions, please. First, if you can give a bit more color around the price volume split and the hyperinflation impact on your total organic growth that would be great? Second, you talked about some changes that you're implementing in Europe to improve the margins. I mean, when do we expect the benefits to start flowing through? And also, have you already finalized some contracts that you're looking to exit and therefore, any sort of guide around the impact on the organic growth? And then finally, just around the refinancing and the interest cost. If you can give any color around the rates at which you are refinancing the debt, that would be great. Or I mean, the 400 million to 450 million of interest cost guidance that you've given for Q1, I mean does that include some benefit of the hyperinflation as well. And therefore, the underlying sort of run rate is probably even higher at this stage. So any comments around that would be really useful? Thank you, Anvesh. So maybe just to start on price volume, it is, as you have noted, a higher increase when you're looking at the growth rate. If I start from a business perspective, most important is solutions and technology where volume growth is fairly significant, looking at North America and Europe. And when I referenced 15% organic sales growth in Technology & Solutions, a significant part of that is volume and then obviously, still a very meaningful part is also price increase. So I think that is important in terms of -- okay, the areas that we focus on in terms of driving the strategy, how are there performing? Looking then obviously, price increases are very significant -- is the main driver of the growth. And -- and that is nothing negative. I mean, we enjoy and we like to be able to pay our people. It is important to attract and retain quality people in terms of protecting the quality offering from Securitas. Looking at the inflationary, out of the total organic sales growth, I would say, a bit less than one-third approximately. In terms of the – all the inflation impact we’re looking at Argentina and Turkey, specifically. But then the -- another major part is price increase related. And there, obviously, if you then ask the question, okay, how does it then look? Solutions and Technology, very positive, strong volume, strong price increase -- looking at the Guardian business, that is more stable from a volume perspective. And that's a simple consequence of the fact that we're continuously stepping up and increasing our requirements on new business that we are taking in but we also work actively with portfolio management to make sure that we can, if we cannot improve pricing on underperforming contracts. If we cannot convert them and increase the price, then we would terminate those contracts. And I think that is just really responsible management especially given the tight labor markets that we're facing. And that -- I would also say, coming to your second question is the main point. The labor market is really, really tight in Europe still. We haven't seen that much relief, even though you're looking and listening to a lot of news about the pending recession, et cetera, general availability of people is still limited in Europe. And that is the reason that we also then -- having to say no to quite a lot of business, having to say no to quite a lot of extra sales, which is typically a higher margin profile. But if you look at what we are doing in terms of improving, it is really about stepping up an increase in the requirements in terms of what business we are taking on at which type of price levels, is actively working with portfolio management, but then it's also continuing to really drive conversion and sales of integrated solutions. And because that is the best solution as well from a client perspective when they say that what we have a problem in terms of accepting the price increase as well, we can always optimize the security equation when we are integrating technology and people offering into an integrated solution. So I would say also the main points. And there, well, if that's going to cost us some of the growth in Europe in terms of on-site Guarding yes, that might be the case. But we also have really good commercial activity. We have good margins on the business that we are bringing in. So I think that is also a situation that we feel fairly comfortable with, but it is important that we take a really disciplined approach in terms of pricing. And I think that is the only sensible way to drive the business but also to make sure that we are recovering from a Q4, which from a profitability standpoint in Europe was not satisfactory. Andreas, do you want to comment on the interest cost of the last question. Yes. I can give a little bit more flavor on the pricing cost there as well as Magnus said around one-third is related then to Turkey and Argentina with the hyperinflation cuts. That's actually a bit less than in previous quarters, given that we see now good growth in the North American business, but we also have continued price increases also in Europe as well. So, going down from that perspective due to those reasons. And then to give you some more flavor, given the question will likely come here as well, it is if you look at Europe, it is also approximately one-third there. And if you look at the Iberia America division, it's around two-third impact from Argentina there. So if we then go to the refinancing, there is the guidance on the total financial net is between SEK 400 million to SEK 450 million, correct on that. And then I think I referenced in the previous quarters as well to give you some guidance also on the cost base here that we have our euro bond, for example, 2028, trading in the secondary market. And I think that is a good sort of reference when you want to get a feel of what kind of interest rates that we are paying. And as an example there, that one is right now on a yield of 4.7% the 2028 bond that we have outstanding, which is implying a margin of 180 basis points. Just to give you a flavor and the benchmark, but you also need to remember, of course, that we have a significant portion of our debt also in USD, where, of course, you need -- you, of course, need to use the US LIBOR rates as a base rather than the European LIBOR rates as well. So I think if you take that on, you will be able to get a good grasp here and a good benchmark. Just sort of to clarify on that. So SEK 400 million to SEK 450 million that you're guiding for Q1, does that have some hyperinflation expected benefit? And therefore, just trying to get a sense of where the underlying interest cost on a quarterly basis is? And then obviously, you can multiply before to get the annual run rate? Fully understand that. I mean, we haven't broken out the exact assumptions that we are doing, but the SEK 400 million to SEK 450 million is all included financial net what we expect to come in. And our financial net is including DIS impact as well, but we're not breaking out the specific assumption around that. Yes. Hi. This is Johan at Kepler Cheuvreux. Just a question on this active portfolio management, obviously, you have a growth target for the technology side, but not for the traditional guarding business. Can you sort of indicate what sort of sales impact this active portfolio management had in the quarter? I noticed I think your retention rates overall, was sort of down 1 percentage point or so. Is that a fair assumption to look at when you consider the sort of your active portfolio management where you are not successfully hiking prices or moving it to an integrated solution? Thank you. Thank you, Johan. Well, the important thing here is this is something that we have been putting increasing emphasis on over the last year and 1.5 years, correctly pointed out. If you look at North America a year ago, I mean there, we obviously terminated some large low-margin contracts. We are through that. We are also improving consistently the margin despite some of that kind of negative leverage from a top line perspective. So from my perspective, it just proves that the strategy is the right one. If you're looking on the totality, there is some impact, it's not very substantial, I would say. But we do have a very active and important dialogue going on in all the key markets with our clients in terms of the positioning. And that positioning, it's typically three potential outcomes to be clear about that, that we increased the price to a sustainable level that we convert to an integrated solution, which is always better for the clients because we address their needs in a more customized way. And if that -- if one or two fails, I mean, then we would terminate those contracts. And the good thing now is that we have good visibility. There is really strong alignment as well, what we have done in terms of incentive systems, et cetera, that we're also extending as of 1st of January this year within countries down to area and branch level, just to make sure that everyone is driving in the same direction. And I think that when you look at that within this environment, it is responsible thing for us to do that. So yes, some impact on the client retention, but nothing which is alarming. I think this is just important work. And then I just want to highlight as well. When I look at the commercial activity and the new sales, the business we are winning, it is more volume and it's at higher margins than in previous years on average. And I think that is also important proof that clients value the differentiated proposition that we bring. And that is where we then put a lot of the emphasis as well if you're looking at the new business and how we are driving growth, but still really good profitability development in the coming years. Excellent. Thank you very much. Just some minor details here. Coming back to the guidance on financial net. You obviously had some refinance during the quarter, and sometimes that includes some extra temporary costs. Is that the case, including in this SEK 400 million to SEK 450 million as well? No, there is no non-recurring costs, so to say, assumption in that. I think the first SEK 400 million to SEK 450 million is on a fairly, how should you say, run rate basis there. Excellent. And then finally, just to remind us a little bit now with Stanley part of your number. Should we think about different seasonality in terms of margins over the year in North America and Europe? Yeah. I think we are going into kind of a new run rate. So that is something that we will comment more on that. We will also provide more transparency in terms of performance in terms of Technology Solutions in the first half -- or starting in the first half of 2023. So I won't really call that out. And I think what is important as well is that, we've also had related -- I mean, number one, sales in terms of technology have been strong. So order entry has been strong, very record high back order, but we've also then had component shortages, which has also meant that we haven't been able to complete quite a lot of the work. So I wouldn't read too much into this when you're looking at the numbers, but generally speaking, the integration work is going well. Client feedback is really, really positive, as I mentioned before, in terms of the capability that we are building and we're entering 2023 also with a strong order book on that side. So I think there are more to follow in 2023 as we are finalizing the integration and then also creating clean run rates throughout the year. Hi and congratulations on a good quarter four report. I have two questions. First, have you seen any improvements in the job market in Europe so far in 2023? Thank you, Stefan. Taking the question immediately. There hasn't been much improvement. And I know I mentioned that also after the end of Q3, because we're following quite closely as well in the market, where do we stand. There is still significant shortage, maybe some relief in some areas, but nothing that to emphasize too much. So I think in that environment, the most important thing that we need to do is ask to them, say, okay, we need to manage regardless of that situation. And there, obviously, the price wage balance that we are really succeeding within 2022 is important, but also important focus area going forward. Okay. Perfect. And then my second question is regarding the reconciliations you mentioned in Q4 and that it impacted margins. Can you specify if it was a loss, or, yeah, give any more flavor on that? Yeah, we can say these are normal reconciliation here and in the business. So it has an impact. It's not the major impact, and it's mainly related to employee related items, et cetera, for year-end. So we mentioned it, because it has an impact, but it's not major. Hey, good afternoon guys. Just a couple from me as well. One thing I want you to dig into a similar question, I think you had at the 3Q numbers. But if we look at the underlying margins, so we strip out the assumed benefits of Stanley synergies FX contract. It looks like there's not a great deal of underlying margin improvement in the core business actually saw a slight decline on my estimates. And this comes despite the stated positive impact of price wage balance and a strong tech growth. I guess, there's 2 questions. First of all, is my math are correct. And then secondly, how do we think about the trend from here? Do you -- would you expect to see some underlying improvement as we move forward? Thank you. Yeah. So when you're looking at that -- thank you, Allen. Correctly stated, I think if you're looking at the full year, definitely improvement on a full year basis if you're excluding the impact from Stanley. So, yeah, referencing the underlying margin. In Q4, a couple of different effects basically. And if you look at North America progressing in a good way with the net positive underlying development, and hence, also some of my earlier comments in terms of strong performance. That is offset by a weaker Q4 from a profitability standpoint in Europe. And then if you're looking at the Ibero-America, I mean their underlying -- and there is no Stanley impact. I mean, that margin is stable when you look at Q4, but clear positive progression during 2022. And we, obviously, don't give guidance, but we have been very clear in terms of the shape for the future security of the new securitas that we are shaping. And they're obviously important improvement part of the plan in what -- you could call the business also excluding Stanley in 2023, 2024 and 2025. Okay. Thank you. And then just on the synergies, I think, you commented that they're running slightly ahead of plan. Is there any way you can maybe provide indication or quantify the kind of run rate versus the SEK 50 million [indiscernible] target that you had just to help us with our map and the phasing over the next 12 months? That is something we will bring along here into the next year. We were not doing that this quarter. We just want to make sure, we get good traction initially on the synergy takeout here, get everything with the integration in order. So we have not provided the number there. But we should say, I mean what we have said is that we see that we will execute most of the synergies over 2023 – 2024 and in light of that, we feel we actually have better progress in North America than the plan. And one of the main reasons for that is because we had quite a long time, as you remember, between signing and closing. So we really came off the closing came in rolling and managed to execute on the cost synergies in a really good way in North America. Still more work to be done, but positive here at the end of the year in terms of synergies. Okay. And then just a follow-up question just on -- I think you talked about obviously strategically assessing the footprint and business mix to further sharpen the performance and positioning. What do we read into that? Is that just this kind of portfolio rationalization, getting rid of some of the lower-margin contracts, or should we think about this as more around further restructuring or even divestments within the business is that kind of sharpening performance and the positioning comment in there? Yes. So important here, if you're looking at the last couple of years, I mean, we have done quite a lot to make sure that we are sharpening the business. And some of those are, kind of, investments like driving digitization, for example, really strengthening the business. We've also divested 13 markets that were, kind of, the yes, you can call them non-strategic from a global client perspective, typically -- lower margin profile and where we also felt that it's difficult to make a really meaningful impact in terms of driving the strategy. So that statement, I mean, this is what we are working on continuously is to make sure, and we've done that for the last couple of years. We continue to do that for the coming years as well to make sure that all the business that we have is really in line with the strategy that is going to support the journey with the Technology and Solutions growth, but also then our operating margin profile to get to 8% by 2025. Thank you. And then very final question. Just the price wage balance has obviously been pretty positive all year for you guys, as you highlight. As we think about 2023, do we think about that price wage balance has been continued positive, stable? Is this as good as it gets basically is what I'm saying? How do we think about planning for next year because as I think about inflation coming down as well? Yes. So we have many years and many quarters of successful track record. I think, I mean that, as you know, is fundamentally important for our type of business. That ambition has not changed. It's fundamentally important that we do that. We've also changed quite actively how we are working with price wage balance. So take much more of what we call a dynamic price wage approach where it's not only kind of waiting for some type of an annual cycle of cadence, but doing it when it is required to protect the quality of our services and to ensure that we can pay our people well, but also defend reasonable margins. So that ambition doesn't change. Obviously, the picture when you're looking at where we are 12 months to 18 months, there was very significant wage inflation in North America. When you're looking at Europe, it's kind of lagging behind that, but it's also more of a CLA influenced market. They collect labor agreements, et cetera then have a significantly bigger impact. There, we had a high double double-digit increase is 14%, 15%. In Germany, for example, in October last year that we have successfully handled. Beginning of this year, we're looking at Netherlands is one other market where there is similar type of increases that we are now currently managing. So I think the simple answer here is that here, we just have to be agile and nimble also as we go forward. If you're looking at the job data that came out in the US last week, for example, I mean, there was more than 0.5 million new jobs in the US labor market, which took a lot of people by surprise. I think we have kept on saying that, we see a fairly hot labor market. So, maybe not as big of a surprise to us, what's important there, obviously, from our perspective, is that we can also start to see and maybe because some of the more negative news are coming out that there is also tendencies from our perspective of increased increases in the participation in the labor market. So there is a number of these different factors, but I think the ambition for us, we always have to balance – and we have also then – when you look at the inflationary environment, there is also a number of other indirect cost drivers. So when we look at price and total production costs also beyond wage – it is also important that we are creating a positive balance here so that we can also cover some of those other kind of cost pressures that we are facing in this type of environment. And so I think this one, Allen being one month into 2023 is as important of a focus area today as it's been over the last 6, 12, 18 months. Hi. Good afternoon. Just a couple from me, if I may. Firstly, on the dividend, that was down year-on-year and split into two segments. Can you kind of talk us through the thinking, therefore, for both the reduction below your long-term target and for the split? And then secondly, a bit more niche, just in Spain, where growth was 4%. You talked about portfolio management. What was if you stripped out that portfolio management or the underlying growth rates in Spain, please? Yeah. Thank you, Andy. And so when you look at the dividend, it is a few percent below our range that we have between 50% and 60% of net income. There is nothing dramatic in that. I mean, it's why a few percent below. Well, we do have, as Andreas highlighted, important financing commitments that we need to drive over 2023 in terms of the bridge financing that we have in place until the summer of 2024. So we felt that, this is a responsible approach. Obviously, in absolute terms, it's a very significant increase. But there is no change. I mean, the range that we have between 50% and 60%. There is a very strong commitment to that from our Board and also from myself and the management team, but we felt that it's a prudent approach in these circumstances and also given some of the important work that we have ahead of us over the next six, 12 months. And then looking at Spain, yes, we made a reference because, we have there also terminated some lower-margin business. And yes, we would only highlight it, if there is some impact. So low single digits, maybe around one or something like that, I don't know the exact number, but I think it was in that type of a range. But once again, it's the only responsible thing to do. Labor market decides. We're winning quite a lot of new business, and we need to make sure we allocate our effort, our people to business which is sound from a profitability standpoint. I think, if I can just add on related to the dividend, just important, of course, to adjust for the rights issue as well when you look at the dividend compared to last year there as well, one comment. And there was also this comment about paying out two times. And this is something that is getting more and more common in the Swedish markets. I mean for those of you outside while you know this is even more common there. But it's been a trend -- and it's -- so we decided now to make it for two times. Also, the main reason is to align it with our cash flow generation and our cash management cycle as well, where we have a stronger second year, half year cash flow as well. So, that will be the key reason for that. We normally don't do anything for the short term only, I would say, but of course, that's a Board decision every year. So -- but yes, I think -- so that will be a reasonable assumption, I think. Sorry. Yes. Hi. Three questions for me, starting with the interest rate one. I'm just trying to see if I'm misunderstanding. But you had an attractive interest rate in the bridge down that ran until July 2024. Why is it that you would not secure financing that would start from after that day rather than refinance a part of the bridge loan, starting from January already? It's -- that one is fairly easy. It is because, of course, this is also related to our liquidity position. And also, of course, our rating as well, as this step becomes current after 12 months, instead of long term as well. So that -- and that impacts our liquidity ratios. And if you get too close to it as well, of course, you have an increased risk if the market would not be there either. So it's a risk perspective on it. That is also why we're not taking out everything. At the same time, now we only do part, but it's also to make sure we have good liquidity also going forward. Those would be the two key ratios, the two key reasons. And that's why where we're also finding a balance here with this staggered takeout as well throughout the year. All right. That makes sense. And the remaining part of the bridge loan, if you refinance that, I assume, it would also lead to immediate changes to the interest rate rather than from July 2024. Great. And just one last one. Regarding the -- with the new labor union negotiated wages around European countries starting to kick in H1, do you still feel you're ahead of the curve in terms of price hikes today? Yes. So we are -- I mean, we're not commenting on the current quarter. But like we said, I mean, we have done a solid job in 2022. The ambition is to continue that in '23. This is a high area of focus for us. We have a number of markets that referenced Germany [ph] from October, 14%, 15% type of range on average in way to increase Netherlands, similar numbers right now Belgium when I look at indexation, et cetera, taking kind of a 12 to 18 month perspective going back probably approaching similar numbers. So, there is a number of markets, and that is something that it remains a very important focus area. The ambition, very important is to balance, but also ideally to try to create some positive net between those two as well, because we also have other production costs that are impacting the results in this inflationary environment. going back to the financing. You mentioned that there's a mix of terms within the refinance portion of the bridge loan. But could you please clarify how much of the refinance loan is fixed versus floating. And then as you look to refinance the remaining portion of the bridge loan, how are you thinking about fixed versus floating there, if we are kind of at the peak of the rate hiking cycle. Thanks. Yes. I think we -- overall here, when it comes to fixed floating, I mean we have a policy to have a mix of both in place, and we are within those – we are within those policies as well without getting into exact details there. So we normally have a mix of that. That's something we plan to continue as well. And when it comes -- I think your first question is related to what is the assumption there in the Q1 financial net forecast in terms of fixed floating, I mean we are within our policies where we have a mix. I think that's the best I can say without giving more details there. I think I -- please let me know if I misunderstood the first question there. No. I mean, I guess it just would be given that how elevated the leverage is at this point just would be quite helpful to get some understanding of the sensitivities as kind of interest rates either move higher or lower from here? Yes. But the best guidance that I can give here is that it's a mix of both right now in the portfolio of debt that we are having here, as we're speaking. So it's not tilted – it's not tilted 100% in any direction, I would say, without getting into further details. Thank you. Some questions on STANLEY. Maybe if you could give us some more color on the underlying performance, maybe from a geographical perspective now. I know you alluded to – to meet single growth and margins maybe trending up a bit, but could you maybe give us some flavor on where we are with at to year-over-year or sequential, but also going into, I guess, 2023 now, if there are a lot of upside in the first half year, maybe given how painful the first half was last year. I'll start of on that question. Thank you. Yes. Thank you, Victor. I mean if you are going back to the first half of 2022, and that was obviously a period when we didn't own STANLEY Security, there was really a weakness. And those matters in North America have been addressed in terms of the price increase mechanism and also then having up-to-date pricing in terms of all the hardware and the software in the pricing model because that's kind of been flowing through the business after they initiate the strong actions in the second quarter. A few general comments. I mean, the mid single-digits, that is valid. That's a little bit what we are seeing. Similar type of picture in North America and Europe from a growth perspective. When you're looking at North America, that has a higher operating margin profile going in. So I mean that's something that we have seen when we acquired, when we closed the business compared to Europe. Europe is a little bit more mixed profitability in terms of different markets. And not intended to go into specifics here, but there are a few markets in Europe that are low-performing and those markets, we are now actively working over the next three, six months, essentially in terms of the next phase of the integration work. To make sure that we're integrating successfully, we're building a stable platform and then leveraging this platform focused team a leadership to start to drive those improvements. And the good thing here is that we are -- some of that work is going to take a bit of time. But when we do that, it also means that we are greatly enhancing capability competence and also then securing critical mass in a number of the key Western European markets. So that is an important focus area. If you asked the question then, which you might ask next, okay, why is the profitability higher in North America than in Europe? Well, on the Stanley side, there is a certain argument, which is just related to scale. So there is a really good scale even more so now with the combination that we are driving through the integration work, so I think that, that is clearly an important one. But then I should also highlight, I mean, we closed the transaction with more than six months ago now and we have leadership mostly in place, priorities are clear, integration plans, et cetera. And we are building this to create something really, really strong for the mid and the long-term. And we have done that. And I know we referenced also some previous cases before Stanley we look at Spain, for example, where we had a similar situation of two relatively low-performing technology businesses that we acquired one of them, and then we started to create something really strong. So I think the playbook in terms of what we're going to do that is clear to us. It's more now a matter of really driving that work over the next three, six months or the coming first three, six months, but then also through 2023. I hope that gives some understanding, but that's pretty much as much detail as we can provide at this point in time. But generally speaking, when you look at the totality, we as but with differences between the different geographies. Fair enough. Thank you, Magnus. Maybe on a related question there. You mentioned your European transformation program how you've sort of put it on a bit of a pause. But how should we think maybe combined Stanley but also stand-alone in 2023. Should we also put this on a pause and a hold until going into maybe 2024, given what you see right now, or will there be benefits coming outside of the scope of Stanley here as well, so can you give some pieces on that transformation progress? Yeah. There is not really any significant change in terms of our communication that we did three months ago. Looking at -- and for everyone or everyone's benefit on the call here, we decided deliberately to pause some of the integration work to cater for the Stanley integration because that is really a high priority, and it's also to avoid us doing work twice in terms of system integration modernization, which is an important part. That work with our integration and value creation work, we are assessing and concluding fairly soon in terms of what's the sequence going to be of that work when we have more news to share there, we will do that. But this is obviously about being fiscally responsible as well with the work and also making sure that we are aligning resources in a sensible way. What I would highlight as well is that when we talk about the European transformation program, one significant part of that is not only the modernization to modern systems to support the business to operate at a different level. It's also very much the shift in the revenue mix. And there we have good momentum when looking at solutions and technology growth. Stood up a focused solutions organization team and leaders that are working on now driving that type of conversion and the growth of the Solutions business. And there, Europe have done a really good job. If I look at the last 12 months in terms of really building that for the benefit of the clients, but also for the benefit of Securitas. So, there is different aspects. We will share more details once we have come a little bit further along. But doing that in a responsible manner is very, very important because we're building all of this to really have strong platforms and really strong delivery capabilities in the years to come. Yes. Good afternoon Magnus and Andreas. Lots of good answers already to most of my questions, but one that I would like to hear your thinking about a little more. Looking at customer retention, how -- do you see technology really driving that as well? So, most of the downside we have seen in that number of late has really been related to Guarding? Yes. So, I mean, those retention numbers, they are based, Karl-Johan, on the portfolio. So, the kind of the going in portfolio that we would have in a specific period. Portfolio work that is -- the vast majority of that is on-site guarding, some mobile guarding portfolio. So, that is more relating to those numbers. When I look at the Technology part of the business, like I highlighted in the presentation, we're having a lot of really good discussions now with clients in terms of how we can partner and do more on the Technology side. I've had a couple of meetings as late as last week with a few of our key global clients, and that is now an area where I would say that if anything, it's going to help retention because we're becoming strategically even more relevant in terms of a partner on the entire security equation and the services that we bring to them. So, I think over time, it's going to have a very positive impact. But when you look at the retention, I mean, this is nothing that we are that concerned about. Most important, we need to be really disciplined. I think that's the own responsible way to manage the business at this point in time, tight labor markets, the inflationary environment. And that's -- and it's not only that we are pushing price increases on our clients, we also offer them always an option with integrated solutions. And I think therein lies a lot of the strength as well and that also enables us to be firm. So that is clearly priority number one for us when you're looking at client retention and once again, also really healthy new sales coming in. Couldn't agree with you more. Just looking at Stanley Security as well. I guess now you have probably been in renegotiation kind of discussion with a big part of their client base. Have you say managed to resign and retain the kind of base there looking at the larger clients that you were looking for? Yes. There hasn't been much movement on that. I think there is rather -- if I were to portray a little bit, what does that discussion look like? Well, it's essentially that all the clients are seeing with this. First of all, for standard security perspective, they are now at the center. So in the sweet spot of the Securitas strategy going forward. I mean the colleagues who've joined us. And I think that is fundamentally important because that also I mean, all the clients know that when we are doing this, we are building and driving this for the long-term. So we become really focused, very solid partner, but with significant advantage also in terms of the scale of the competence and the capability that we're building up So I think that, that is really a big part of the kind of the feedback that there is more, okay. Let us now discuss what this means for us and what we can do going forward. And here, like I mentioned earlier, we have a growing and really attractive pipeline when I look at the technology-related part of the business as well. And I mean I say that related to global clients, but there obviously as well. And those discussions are more actively part of myself. But -- that is also the feedback that we are picking up locally as well, is that there is really, really a positive response from our clients in terms of us making this investment because -- they know -- they all know the importance of technology. And I think everyone is also looking to have a really credible partner locally or be it on a global level. I get the feeling that you have, say, what you can call, derisk the portfolio or something like that. Is that what you would feel as well because I guess these problems normally turned up early and a big integration process. And I mean Stanley Security have -- if you look at the business also before being owned by Securitas really starting to build and to drive better stability in the business. So I don't think there's been anything that has been really burning. But obviously, when there is a change like this, it's also a good reason and a trigger also to look at the relationships. And this has been overall a very, very positive engagement when I listen to our colleagues who are leading this business or in this business locally or in some of our global client teams. So I think it's rather a situation of a lot of positive anticipation in terms of what are the things that we are able to do as we go forward. And that is just a clear validation of how strategically good. It is an important for Securitas for the mid and the long term that we are now joining forces and really building this incredible technology capability in a solution which is undoubtedly much, much more dependent on technology for the overall security solution. Karl-Johan [ph], we haven't seen anything negative when it comes to retendering of Stanley work since the closing. We have not seen any such tendencies whatsoever. And I just want to highlight as well, I mean, it's not any big key dependence on your large clients, neither in that business as well. So it's also a very broad portfolio of clients. So I hope that also gives some further color to your question here. Thanks. Good. And very good extra color. Very good extra color. I need to try this one well with you, Andreas. So, obviously, you're going to give us the new split on profitability here coming into Q1. But if you look at development during 2022, have you seen a positive kind of development in all the business lines? Are you looking at profit margin development? That's the one that we are going to come back to in the first quarter, but it was a good attempt. I think, we'll wait with that. But, overall, I mean, Technology & Solutions, very good growth, as Magnus said before. And then, I mean, there is -- I mean, as Magnus is saying as well, on the garden side of things, I mean, there we have some challenges overall when it comes to shortage and so on impacting our business, which would mostly be then on the garden side of things to give you a bit of flavor. Technology & Solutions overall, going well sort of from both sides there, both the sort of organic growth side and on the margin side. And I guess from the guarding side the positive price of wage cost balances that helped you during this year as well there? Hi, there. Sorry, I got one more follow-up. And, obviously, the technology part of the portfolio is growing quite strongly. And then if you sort of look in the disclosures in the in prospectus, the working capital of Stanley is around 18% of its revenue, which is very, very high compared to your legacy business. So, first of all, why it is so high for Stanley, the working capital requirement? And then going forward, how are you thinking about the working capital and the free cash flow development given the dynamic? Good. I think I can also reference back to the Investor Day here where we went through this in some detail and where our targets, including Stanley, is remaining to have a 70% to 80% cash flow generation as we've had before as well. So that answers your final piece, where Stanley will also be able to have strong cash flows. When you look at this business, does it require more working capital than the Garden business, overall, yes. And I think we said around 15% to 20% of net working capital throughout the Investor Day. Important in this business is that 40% of the Technology business is recurring revenue business. And this has a different net working capital profile compared to the other 60%. This is normally a highly profitable part of the business, where you also invoice the clients earlier or even in advance. So that 40% recurring business is normally also very cash generative as well. And then you have the other 60% of the business, which is more -- is then the installation piece of the business. And that is basically a project-based business, where the key to good working capital management is really solid project management that you're making sure in your contracts that you have the right to build as often as possible throughout the cycle of the contract, not only at the very end and that you manage inventory as well. So all-in-all, that installation business has a bit higher net working capital requirement than the RMR business. And the totality would be around the 15%, 20%, as we said here in -- throughout the Investor Day. Having that said, on the CapEx side, important to say there as well, low CapEx business very similar to our own sort of CapEx profile, as a business as well. And here I can recommend to, go back to the Investor Day for some more detail. So low CapEx, a bit high net working capital, we should be able to generate good cash flow also from the Stanley business going forward. And I should say as well, we have really good best practices here on the technology side that we also together with the Stanley team now are working on implementing on the working capital side going forward. Hi. It's Sylvia Barker from JPMorgan. I appreciate the time is running quite late, so maybe just three quick follow-ups. One on the margin impact of Stanley, could you give us a basis point impact benefit in North America and in Europe in Q4? Secondly, on wage growth, what was your wage inflation at the group level in 2022? And what do you think that will be as a percentage year-on-year number in 2023? And then finally, out of the 15% growth in technology, how much is conversion from guarding contracts? Thank you. Thank you. So thank you, Sylvia. We don't break out the numbers, but there is a clear positive contribution from Stanley Security in North America to the positive development that we had in the quarter, but also as I highlighted earlier, positive underlying business also when excluding that positive impact. The question on wage, can you just repeat that, please? Was that a question in terms of our general outlook, in terms of wage increases? Was that the right understanding? Yeah, I would just be interested, I guess, what was the level that or what was the percentage change year-on-year that you have from kind of wage increases in 2022? And then what's your expectation for 2023, just at the group level? Yeah. So it's a bit difficult to kind of estimate that. And -- but what I would broadly say, based on what we have seen over the last 12, 18 months, we had significantly higher because of more dynamic wage adjustments in North America 12, 18 months ago. So that's kind of what we carried into 2022. And then we continue there to also drive price wage balance throughout the year in 2022. That continues in 2023, but when we're looking at the end of 2022 at a kind of a lower pace because most of those adjustments had already been made. In Europe, when you look at that timing, I mean, there it's been more significant towards the back end of 2022 and there, obviously, Germany very significant, because for us as well, that's very important. It's our largest market in Europe. And then we have a few others. I referenced Netherlands, now at the beginning of 2023. But then it is a bit of a mixed picture, but I think those ones, today, they are the highest that we have seen. And that's then due to legislative changes and other factors there in the bargaining agreements that you see those extremely high increases of 14%, 15%. A lot of other meaningfully large markets and maybe more in the kind of the mid single-digits type of range. But that is something that we are continuously watching. Most important for us is just that we are really, really agile. So when there is a significant change that is something that we are then actively addressing. So I hope that gives a flavor, Sylvia, to where we are. And then on the last question, I think you asked in terms of solutions conversion. Conversions are healthy. It is a very significant part in terms of the solutions growth. So when we are converting typically services with one -- or client contracts with one service provider such as on-site guarding. That is a significant driver. But we are also with an enhanced technology offering starting to bring more and more packaged and really attractive technology solutions to our clients. And they're also seeing more clients. I mentioned Puma, for example, in one of the reference cases we shared externally where we are then also bringing more standardized technology solutions to our clients as kind of a new client relationship and business, helping them and addressing their needs. But the beauty there is that those would always also be connected to our SoC for monitoring, but also then with other guarding related services such as call-out, for example, as part of our mobile guarding business. So that share, I expect and I would also really like to see growing over time, because they were really leveraging our increasing strength in terms of technology. There are no more questions at this time. So I hand the conference back to the President and CEO, Magnus Ahlqvist for any closing comments. Yes. I think we are running full time here. So I just wanted to say, thank you for your interest. We are in a really, really promising journey. It's a solid result overall. When I look at Q4, very clear progress throughout the year. So looking forward to continued interaction and taking on 2023, which is now the full focus creating the new Securitas. So many thanks to all of you for dialing in.

EarningCall_422

Good afternoon. Thank you for attending today's A10 Networks’ Fourth Quarter and Full-Year 20 22 Earnings Conference Call. My name is Tamiya, and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] Thank you, operator, and thank you all for joining us today. This call is being recorded and may be accessed for at least 90-days via the A10 Networks’ website at A10networks.com. Hosting the call today are Dhrupad Trivedi, A10's President and CEO and CFO, Brian Becker. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued with a press release announcing its fourth quarter and full-year 2022 financial results. Additionally, A10 published a presentation and supplemental trended financial statements. You may access the press release, presentation and trended financial statements on the Investor Relations section of the company's website. During the course of today's call, management will be making forward-looking statements including statements regarding projections for future operating results, including potential revenue growth, industry and customer trends, capital allocation strategy, supply chain constraints, expectations, company's positioning and repurchase and dividend programs along with its market share. These statements are based on current expectations and beliefs as of today February 7, 2023. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond the company's control such as the potential impact of COVID-19 on the business and operations that could cause actual results to differ materially and you should not rely on them as predictions for future events. A10 does not intend to update information contained in the forward-looking statements, whether as a result of new information, future events or otherwise unless required by law. For a more detailed description of these risks and uncertainties, please refer to the company's most recent 10-K. Please note with the exception of revenue, financial measures discussed today are on a non-GAAP basis and have been adjusted to exclude certain charges. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for results prepared in accordance with GAAP and may be different from non-GAAP financial measures presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and on the trended quarterly financial statements posted on the company's website. Thank you all, and thank you all for joining us today. This was another record year for A10 with top and bottom-line performance that validates A10's solid position in the marketplace and the earning power of our business. We continue to deliver revenue growth that exceeds the growth rate of the industry as we gain market share with best-in-class proprietary solutions. With strong gross margin and rigorous expense management, our bottom line grew faster than our top line and we utilized our robust cash generation to invest in technology for future growth and return capital to shareholders. Our management team has delivered consistent financial and operational results in spite of macro challenges. This is a testament to our team, our focus on execution and our loyal global customer base that continues to embrace our solutions. The part of our business related to cybersecurity and revenue generating solutions for customers is increasingly durable, while we navigate increased volatility in areas of our business related to modernization. Our focus on critical network infrastructure and security solutions continues to drive our growth. Even when CapEx investments are moderated due to economy or interest rates, our solutions are prioritized. This is evident in the 14% product revenue growth in the quarter and the fact that we delivered strong growth in key regions such as the Americas and Asia Pacific. On a trailing 12-month basis, our product revenue is up 17%. As we have said in the past, and evidenced by performance in the fourth quarter, we are not reliant on any single geographic region and in fact, we are generating growth on a constant currency basis in nearly every region of the world where we operate. We have done our best to build a risk mitigated business model, which we believe is largely insulated from volatility in any specific region, product category or customer type. This diversification is evident in our top customers. Looking at 10% customers by quarter, only three companies appeared on that list in 2022. In fact 22 different customers contributed revenue that could then in our top 10 at least once. I'd like to highlight two wins that demonstrate A10's successful land and expand commercial strategy. Rooted in our ability to capture market share through our technical superiority and performance criteria in head-to-head testing for critical customer needs. We were able to displace a competitive security incumbent in Japan with our DDoS protection solution. Having a long-proven track record with the customer with our ADC and CGN solutions, a cloud service provider in Japan chose our DDoS protection to protect the environment, while providing significant zero-day automated protection, which was a differentiator for the sale. We discussed last quarter a deal with one of world’s top digital advertising platform company. As a reminder, this customer had an urgent need to rapidly upgrade their infrastructure in order to support added features and enhanced functionality, including efficient and rapid infrastructure build up. As a result, our high throughput, low latency solution was chosen to help ensure the customers’ existing revenue streams, while expanding their ability to generate new revenue streams. These expansion orders are a reflection of our ability to continue growing with our large installed base, representing the most significant durable opportunity for continued growth. Diversification does not make us immune from economic challenge, but we believe we are positioned to navigate these situations better than our peers. Like many, we are seeing extended cycles. In addition, while many of our peers are reporting results, that compared to low growth periods last year, our team has continued to deliver several quarters consecutively robust growth. Most importantly, we are increasingly confident in our ability to achieve our profitability targets. Our EPS performance in the fourth quarter is also due in part to our ability to react quickly to increased volatility by managing expenses and allocating resources to ensure consistent and predictable profitability. Our differentiation and technical strength enables us to maintain non-GAAP gross margins exceeding 80% for the full year, this was 80.3%. In addition, we are effectively allocating our operating expenses, while continuing to invest in the business especially in our technology. In the fourth quarter, our operating expenses increased 7.7%, compared to prior year and for the full-year our operating expenses increased by $13.2 million or 9.1%, against a 12.1% revenue growth. The result is accelerating profitability and EPS growth. Our adjusted EBITDA was a record $22.3 million for the fourth quarter and $75.1 million for the year. A10 earning power is clear. During 2022, we returned more than $95 million to shareholders in the form of cash dividend and stock repurchases and ended the year with nearly $151 million in cash and no debt. This is approximately $2 in cash per share. We continue to manage and maintain a [Indiscernible] balance sheet. We also continue to maintain a disciplined, flexible and opportunistic capital allocation strategy. Today, our Board approved a quarterly dividend of $0.06 per share. We enter 2023 expecting full-year revenue growth that outpaces our peer set, while still delivering on our profitability goals in terms of adjusted EBITDA and EPS. With that, I'd like to turn the call over to Brian for a detailed review of the quarter and the year. Brian? Thank you, Dhrupad. Fourth quarter revenue was a record $77.6 million, up 9.9% year-over-year. Product revenue for the quarter was $49.6 million, representing [63.9%] (ph) of total revenue, up 13.5% year-over-year. Services revenue, which includes maintenance and support revenue, was $28.1 million or 36.1% of total revenue. Moving to our revenue from a geographic standpoint. Revenue from North America was $41.2 million, up 21.8%. On a constant currency basis, revenue in Japan increased approximately 8% year-over-year in Q4. As you can see on our balance sheet, our deferred revenue was $127 million as of December 31, 2022, up 45 year-over-year. On a constant currency basis, deferred revenue would have increased 8% year-over-year. This is a result of the geographic mix and the alignment with our global growth targets. For the exception of revenue, all of the metrics discussed on this call on a non-GAAP basis unless otherwise stated. A full reconciliation of GAAP to non-GAAP results are provided in our press release and on our website. Gross margin in the fourth quarter was 80.3%. As Dhrupad mentioned, we believe we successfully mitigated the impact of industry-wide global supply chain constraints and input cost increases during Q4. We reported $19.8 million in non-GAAP operating income, a record result, up 13%, compared with $17.6 million in the year ago quarter. Adjusted EBITDA was $22.3 million for the quarter, also a record reflecting 28.7% of revenue. Non-GAAP net income for the quarter was up 12% year-over-year to $18.4 million or $0.24 on a per share basis. From net income of $16.4 million or $0.20 per share in the fourth quarter last year. Diluted weighted shares used for computing non-GAAP EPS for the fourth quarter were approximately 75.4 million shares, compared to 80.3 million shares in the year ago quarter. On a GAAP basis, net income for the quarter was $18 million or $0.24 per share, compared with net income of $10.7 million or $0.13 per share in the year ago quarter. Turning to the full-year results. Revenue was a record $280.3 million, up 12.1% year-over-year. Product revenue for the year was $173.2 million, representing 61.8% of total revenue. Services revenue, which includes maintenance and support revenue was $107.1 million or 38.2% of total revenue. Non-GAAP gross margin for the year was 80.3%. We reported $67 million in non-GAAP operating income, compared to $54 million last year. Adjusted EBITDA was $75.1 million for the year, compared to $62.4 million last year. Non-GAAP net income for the year was $57.7 million or $0.74 on a per share basis, compared to net income of $50.1 million or $0.63 per share last year. With Q3 2022 non-GAAP EPS of $0.20 and Q4 2022 non-GAAP EPS of $0.24. A10 generated $0.44 of non-GAAP EPS in the second half of 2022, up from $0.37 in the second half of 2021. Non-GAAP EPS exceeded consensus in all fourth quarters of 2022. Full-year 2022 non-GAAP EPS was $0.74 versus $0.63 last year. Excluding the non-recurring income tax benefit of $65.4 million, which represented approximately $0.82 on a per share basis for non-GAAP. On a GAAP basis, net income for the year was $46.9 million or $0.60 per share, compared with net income of $94.9 million or $1.19 per share last year. Turning to the balance sheet, as of December 31, 2022, we had $151 million in total cash and cash equivalents, compared to $185 million at the end of 2021. During the year, we repurchased 6.1 million shares at an average price of $13.01 for a total of $79.3 million and repaid $15.9 million in cash dividends. We continue to carry no debt. The Board has approved a quarterly cash dividend of $0.06 per share to be paid on March 1, 2023, the shareholders on record as of February 17, 2023. As Dhrupad mentioned, we expect full-year 2023 revenue growth to be faster than our peer set average and that we will deliver on our profitability targets. Thank you, Brian. A10 is a diversified differentiated company with significant earnings power. Our revenue growth outpaces that of our market. Revenue growth also significantly exceeds expense growth, leading to acceleration of EBITDA, net income and cash flow. We continue to navigate economic headwinds and supply chain constraints. Our highly differentiated technical platform combined with our ability to achieve diversification in all aspects of our business has mitigated these impacts on our business, enabling us to deliver consistent performance. Our solutions are exceedingly well aligned with durable secular catalysts, which results in sustainable performance. I'm excited about A10's future and want to thank all our investors customers and employees for their support. Absolutely. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Hamed Khorsand with BWS Financial. You may proceed. Hi. So first off, I just wanted to get a good understanding of what are you seeing as far as these extended cycles that is causing you deviate from actually providing a target range for revenue beyond just the commentary? Yes. No, good question, Hamed. So I think what we -- I would say, are seeing varies a little bit by regions, right? So as you can see in the numbers, we have seen improvement in the backdrop and the macro environment certainly in Asia, Japan and a little bit in Europe as well. I think where we are seeing that extended cycle probably is most specifically applicable to North America customers, who continue to remain a little bit concerned whether it's due to economy, interest rate, CapEx cost and are not canceling any project or planned investments, but we are seeing them be less visible than we are used to see, right? So I would say that's how I would characterize it. As we -- they still a plan to do that, but what is extending the cycle is there's a little bit more extra process and little bit more, kind of, concern around moving faster if you will. So I think that's probably the most specific connection point. Are you seeing increased competition that's creating some of this hesitation on customers' end? Are you seeing pricing pressure as well? Yes. So good question, so it's not pricing pressure per se, and I think our customers typically look at us from a total cost of ownership perspective and I think economically we are pretty well aligned and compelling for them. We are not necessarily also seeing a change in the competitive landscape, because in many of these cases, right, we don't typically go after SMB segment, which has a lot of qualified suppliers, who are constantly adjusting share position. In many of our cases, the customer spends six to nine months plus integrating us into their operating system then their procedures and so forth. So I think that's not necessarily what is changing that pattern. It's more around they have CapEx buying cycles that can fluctuate on timing and their own risk perception and we are seeing companies doing layoffs and trimming their cost position to be more conservative, right? So it's more to do with navigating through that uncertain period. It's certainly we are not seeing any increase in losses or any of those items. You were able to post revenue at least from my perspective that was a little bit higher than what I was projecting. So when did you see this slowdown or extended cycles developing for you? Yes. So I think we started seeing it probably towards the end of December going into January period. And I would say that's why I was connecting it more so to North America customer base more than anything else. And I think that's a little bit coincident with quite a lot of company's trimming position, calling inflation, calling interest rate concerns and so forth. So I think it's -- we haven't had to do anything along those lines, but obviously a lot of our peers and larger companies have make those adjustments typically end of December or in January time frame. Hi. This is [Stefan Gill] (ph) in for Anja Soderstrom. My first question is how much of the expenses are within your control? And how does that affect your ability like to control your margins? Yes. So I think, you know, if you look at the last 10 or 12 quarters of our business, we are able to flex our cost structure where the expense growth or OpEx growth is always lower than the top line growth. So even when the revenue growth is lower, OpEx growth is even lower. And I think that has what has enabled us to deliver consistently expanding EBITDA margin, right? And if you think of the variables, our gross margin is pretty stable. And so we take actions to make sure we are offsetting costs and price. But beyond that, on the OpEx perspective, we remain flexible and plan full around being able to accommodate that level of revenue mediation, right? So, obviously, we cannot switch completely on and off, but we build in lot of levers to our operating cost, whether it's in R&D, sales and marketing or G&A, that enables us to flex it [Indiscernible]. Alright. Thank you. And my second question is have you seen any changes in your customers decision-making process given the uncertain macro environment? Yes. So I think what we are seeing is that typical clear cycle in terms of the behavior change. If there is a little bit more scrutiny or investment, if you will, and I think it's difficult. I mean, that, you know, a little bit longer, the signature sign of other than maybe instead of five people being involved in that purchasing loop, it's now seven, right? And so I think we certainly see in terms of being cautious before they commit to spending. But as I was saying before where -- so where it's related to deep modernizing their digital infrastructure. They are may be more cautious, where it's related to -- we are helping them generate more on new type of revenue. Obviously, they are moving as fast as before, right? So I think, I would say -- part of the business that is more related to just modernization and transforming their IT. That's probably what is being scrutinized the most Yes. No good question, Stefan. So as we mentioned before, we continue to evaluate opportunities and there's all kinds that come across the wire, we are pretty well understood in the industry in terms of what is our strict profile what we are looking for. But we look for two factors: One, is does it accelerate our growth in terms of our strategic areas of growth. And second is, right, can we make the financials work consistent with our business model and long-term goals as well? So We continue to evaluate it, but our primary focus is investing in the business for organic growth first, and we'll be opportunistic if there are opportunities to do anything inorganic [Indiscernible]. Hey, guys. Thanks for letting us ask a couple of questions. So first, I guess, if you guys could provide any additional color, I understand that given a number for revenue growth next year, but just some maybe seasonality or linearity through the year. I would suspect maybe the first half is going to be even softer than it typically is and you talked about kind of a six-month sales process to some customers. So do you have pretty good visibility in the first half and just maybe lacking visibility in the second half? Is that some of the uncertainty around that provided number? Yes. Good question, Tyler, and then I'll jump in and then Brian can add to that, So I think you are right, because the dynamic we are seeing is more around customer deferral of spending versus competitive loss. That's why even in our own pipeline and funnel, what we see is certainly, maybe seasonality being stronger. And our normal seasonality is 48%, 52%, but we think based on the pipeline movement we see that some of these larger deals. We certainly think that it looks like some of it will differ into the later part of the year, right? So I think -- so we think net revenue wise, we understand kind of where we look for the year, but we certainly see shift where things move. And it's a committed project. We wanted no competition, right? It’s purely a deployment decision, but we are certainly seeing that moving a little bit more to the back half than the front end. We can -- Brian, I don't know anything you want to add to that? Yes. I mean, we typically see a 52%, 48%mix being 48% first half, 52% second half. I think what we're seeing is some similar behavior that we saw in 2021 and there was a lot of uncertainty, a lot of closures from the pandemic. I think not related to closures, but related more to FX and interest rates. We're seeing it's just a similar pattern or it's a little slower outlook for the year than I think we saw this past year 2022. Similar to 2021, but we don't think we're seeing a loss of the opportunities. It's just simply a timing issue. I appreciate that color. That's very helpful. And then last, I just wanted to give you as an opportunity. You announced a security breach internally. Just want to give you an opportunity to comment on that? I think you said it was internal, it wasn't your products, it wasn't with customers, just any other color you'd like to give there? Sure. Sure. Yes. So I think that is a good point, Tyler, and I think obviously the first point is as a company that is involved with customers and doing security, we felt it appropriate to be transparent and open with our investors, customers and employees. And what as we said, right, what we do know is, like many, many other companies, we had some kind of a cyber incident and we use external experts and this was obviously not subsequent to end of the year. And so we use experts and what we know based on all of that analysis is this is not related to any of the products or solutions that our customers use for security, it was related to more of something within our corporate IT infrastructure. And so we launched the investigation, engaged experts and advisers. And, obviously, we are working with the right authorities. But, you know, we felt it also critical to inform in a transparent way all of our stakeholders as we navigate this, right? So the issue as far as we understand is contained, but we obviously are going to learn to continue to strengthen our own security posture, while we engage our customers deeply to more things for them. But this was not connected at all with any of our products that they use. Thank you. There are no further questions waiting at this time. I will now pass it back to Dhrupad for closing remarks.

EarningCall_423

Good morning everyone. And welcome to the Edgewell’s First Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] At this time, I would like to turn the floor over to Chris Gough, Vice President of Investor Relations. Sir you may begin. With me this morning are Rod Little, our President and Chief Executive Officer; and Dan Sullivan, our Chief Financial Officer. Rod will kick off the call then hand it over to Dan to discuss our results and update to the full year 2023 outlook before we transition to Q&A. This call is being recorded and will be available for replay via our website, www.edgewell.com. During the call, we may make statements about our expectations for future plans and performance. This might include future sales, earnings, advertising, promotional spending, product launches, savings and costs related to restructurings, changes to our working capital metrics, currency fluctuations, commodity costs, category value, feature plans for return of capital to shareholders, and more. Any such statements are forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to future events, plans or prospects. These statements are based on assumptions and are subject to various risks and uncertainties, including those described under the caption Risk Factors in our Annual Report on Form 10-K for the year ended September 30, 2022, as may be amended in our quarterly reports on Form 10-Q, which is on file with the SEC. These risks may cause our actual results to be materially different from those expressed or implied by our forward-looking statements. We do not assume any obligation to update or revise any of these forward-looking statements to reflect new events or circumstances except as required by law. During this call, we will refer to certain non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. The reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is shown in our press release issued earlier today, which is available at the Investor Relations section of our website. Management believes these non-GAAP measures provide investors with valuable information on the underlying trends of our business. This was a good start to the fiscal year with organic growth in line with our expectations and marking our seventh consecutive quarter of year-over-year organic growth. And despite significant currency headwinds and persistent cost inflation, we delivered strong bottom line results that reflected good commercial execution and highlights the underlying structural improvements we've made across our business. As we discussed last quarter, there are four key components for success in fiscal 2023. First, delivering continued organic sales growth, enabled by better brand resonance and stronger presence on show. Second, strengthening our gross margins leading to rate accretion for the full year. Third, making meaningful investments behind our brands. And finally, continuing to execute on our productivity and efficiency initiatives. We made good progress against each of these elements this quarter, a testament to the hard work and dedication of our teams, all of which reinforces the confidence we have in our business going forward. Organic net sales growth was broad-based and in line with our expectations. Price execution has been solid across our business and we continue to see elasticities in line with our modeling and below historic levels. Our international market growth was strong and delivered through both volume and price gains, reflecting a strong start to the sun season and continued strength in Women's Shave. And the Billie brand continues to outperform with clear momentum for its national retail launch that is just now beginning. In fact, with three strong brands including Intuition and Hydro Silk, Edgewell is now the market leader in women's systems at Walmart. Feminine Care grew 12% with both price and volume gains benefiting from continued heightened demand in the category and our improved in-stock position. These results led to further progress in market shares across our business. In North America, we've broadly held share in aggregate across our portfolio. And in key international markets like Germany, we saw noticeable market share gains, both of which included strong performance in our leading Women's Shave business. This broad-based organic growth across categories and geographies along with stabilized market share results in key markets is further evidence of our healthy top line and offers clear proof points of our ability to deliver sustainable growth for this business. Dan will take you through the details, but I'd like to call out the progress we made on gross margin in the quarter, essentially fully offsetting inflationary headwinds through the realization of price actions and the ongoing execution of our productivity initiatives. So, while the operating environment remains highly challenging, we are on track to deliver margin accretion in the second half and for the full fiscal year. Importantly, we also remained in investment mode with AMP spend of over 11% of net sales, excluding our custom brand's private label shave business. Our focus was on early season sun execution internationally, strengthening our digital activation and e-commerce presence and supporting innovation and new products, including our Barber's Style launch across Europe and grooming product expansion in the United States for the Edge and Cremo brands, a growing top line, strengthening gross margin profile and a demonstrated focus on cost reduction, all enable a sustained ability to invest in our brands and we are seeing the return from our investments. Lastly, we continue to simplify our business and deliver meaningful gross cost reduction across both cost of goods sold and G&A. And we expect this will continue as we move through the year. We are operating in a challenging, volatile and uncertain marketplace. Inflationary and foreign exchange pressures remain significant headwinds to our business. The labor market remains tight with the potential to again complicate manufacturing and distribution efforts and perhaps most importantly, there are some initial signs of weakening consumer sentiment in the face of likely economic challenges ahead. We therefore need to be cautious as we consider the balance of the year, act with urgency and continue to focus on controlling the controllables. Our brands are healthier and better represented on shelf than at any point since we began as an independent company. The early read on distribution outcomes for 2023 is very encouraging. Supply chain service levels improved in the quarter and we've taken the necessary steps to ensure good execution, particularly related to the upcoming U.S. Sun season. Consumer centric innovation and new product development is playing an increasingly important role in our portfolio. With the acquired brand building capabilities of the Cremo and Billie teams now benefiting our broader portfolio. With the progress we made this quarter, we are confident that we are taking the right actions to deliver sustained value creation over the long-term and we are well positioned to deliver our previous outlook for the fiscal year. And now I'd like to ask Dan to take you through our first quarter results and to also provide additional details on our outlook for fiscal 2023. Dan? Thanks, Rod. Good morning everyone. As Rod mentioned, operational and commercial execution in the quarter was strong. We delivered organic growth as expected and the quarter provided a solid foundation for fiscal 2023, giving us confidence in our ability to deliver full year results in line with our previous outlook. For the quarter, organic net sales grew 3% with broad based growth across categories and geographies. International market growth was noteworthy, driven by both price and volume gains and reflective of strong early season Sun Care performance. In this challenging operating environment, we've remained focused on execution. Commercially, we've now mostly finalized our price and shelf set discussions with our retail partners with strong outcomes on both fronts. In the quarter, price gains contributed approximately 4.5% to organic growth. And price elasticities were in line with our expectations. As Rod alluded to earlier, we're also very pleased with the initial shelf set outcomes across not only the U.S., but key international markets as well, with solid results both in level and quality of distribution for our brands. Operationally, supply chain performance strengthened as well, delivering both improved service levels and strong productivity savings. In fact, the combination of both our pricing and productivity efforts underpin the structural strengthening of our gross margin profile, delivering about 500 basis points of tailwinds in the quarter and essentially fully mitigating year-over-year inflationary pressures. And finally, we saw lower G&A costs in the quarter. In part due to our accelerated efforts to simplify ways of working, reduce complexity and drive productivity across the business. As we'll discuss shortly, we anticipate that these heightened savings will help strengthen our operating profit margin and help serve as an important offset to higher than expected below the line cost, enabling us to maintain our constant currency outlook for the year. Despite the significant inflation and currency headwinds, we delivered adjusted EPS of $0.31 an adjusted EBITDA of $64 million in the quarter, both above expectations. Now let me give you some insight into what we saw across our business in the quarter. In North America the consumer remained resilient and we continued to see underlying category growth in Wet Shave, Grooming, Sun Care and FEM Care. Pricing drove organic growth and elasticities were healthy and below historical norms. Promotional levels remained fairly consistent to last quarter and still below year ago. So overall, we were pleased with the revenue dynamics across categories and we will be vigilant in evaluating this environment as we progress through the year. In international markets we are seeing improving category health in many markets, especially in key Sun Care markets within Oceana and Latin America. As travel and leisure continue to return to pre-pandemic levels. However, in Japan and China wet shave consumption trends remain negative reflecting forward related closures. Finally, while a dollar softened in the quarter providing an immediate boost to our full year net sales outlook due to translational currency gains. The in-year benefit from easing currency headwinds related to transactional FX is less pronounced as these benefits are trapped in inventory until released. Now let me turn to the detailed results for the quarter. As mentioned, organic net sales increased 3% as 2.5% price gains were offset by volume declines of approximately 1.5%. International organic net sales increased nearly 6% with price and volume gains. While in North America organic net sales increased 1.2% as almost 5% growth from increased pricing was partially offset by lower volumes. Wet shave organic net sales decreased 1.9% inclusive of an estimated 210 basis point headwind from cycling last year's men's Hydro relaunch in Japan. Wet shave organic sales in North America declined mid-single digits driven by volume declines in part a reflection of heightened inventory management across certain U.S. retailers. Wet shave organic net sales in international markets were essentially flat despite cycling the aforementioned Hydro relaunch in Japan. We saw a notable performance in Germany with healthy organic growth and market share gains largely as a result of our strong women's portfolio in drug. And our branded shave in dispo businesses across LatAm performed well. In U.S. razors and blades consumption increased 2% in the quarter, while our market share in aggregate declined 60 basis points, which was in line with 52-week trends. The Billie Brand continued to deliver strong results at Walmart and served as the catalyst for our broad market share gains across women's wet shave. As Rob mentioned in the quarter, we began to execute the national retail launch for the brand with product now in-store in certain drug and grocery retailers, and the rollout is scaling in the current quarter. Sun and skincare organic net sales increased 10% driven by strong global sun care results. International sun care sales increased over 68% as a return to travel and leisure activity drove demand recovery led by key markets in Latin America and Oceana. December marked our strongest sun care month in Australia since pre-COVID and the sun category continued to grow at over 30% in Mexico. In the U.S. the sun care category grew nearly 11% for the quarter as competitive products returned to shell following last year's recalls our Sun Care brands predictably lost share in the quarter. Men's grooming organic net sales increased just over 4% led by strong Cremo growth. FEM Care organic net sales increased 12%, driven by higher pricing and improved product availability on shelf. Growth was delivered across Playtex Sport, Carefree and Stayfree brands. Our portfolio saw over 8% consumption growth and our share was effectively flat in both the quarter and latest 52-week period. Now, moving down the P&L. Gross margin on an adjusted basis decreased 150 basis points or 20 basis points at constant currency as strong price gains and productivity savings essentially offset a 500 basis point headwind from higher commodity, labor and transportation related costs. A&P expense was 9.8% of net sales. Excluding the favorable impact of currency, A&P would've increased almost $2 million and about 20 basis points in rate of sale compared to the prior year. Adjusted SG&A increased 90 basis points versus last year as the benefits of operational efficiency programs, good cost discipline, favorable currency and operational leverage were more than offset by higher compensation expense and the impact of the Billie acquisition, including amortization costs. Adjusted operating income was $36.7 million compared to $46.7 million last year, a decline of 21% or 2% at constant currency. GAAP diluted net earnings per share were $0.23 compared to $0.20 in the first quarter of fiscal 2022, and adjusted earnings per share were $0.31 compared to $0.42 in the prior year period, including an estimated $0.05 negative impact from currency and $0.02 favorable impact from share repurchases. Adjusted EBITDA was $63.9 million compared to $69.7 million in the prior year, inclusive of an estimated $3.6 million unfavorable impact from currency. Net cash used in operating activities for the quarter with $86 million compared to $79 million in the same period last year. We ended the quarter with $184 million in cash on hand, access to the $164 million undrawn portion of our credit facility and a net debt leverage ratio of about 4 times. In the quarter our share repurchases totaled over $15 million. In addition, we continued our quarterly dividend payout and declared another cash dividend of $0.15 per share for the first quarter. In total, we've returned over $23 million to shareholders during the quarter. Now turning to our outlook for fiscal 2023. As Rod mentioned earlier, the operational fundamentals of our business are strong and we are confident that the strategic choices and actions taken over the past several years have put us in a better position to drive sustained growth. Additionally, we are executing well on the levers that we can control, driving increased productivity and efficiency across the business, thoughtfully executing price increases across the globe, incrementally investing in our brands, and importantly improving supply chain service levels and on-shelf product availability for our customers. Before speaking to the specific elements of our outlook, I'd like to offer two broad comments. First, we are operating in a challenging volatile environment. Inflationary and currency pressures remain elevated. The labor market continues to be highly constrained, COVID reopening and APAC remains choppy and there are meaningful unknowns with respect to the future state and overall sentiment of the consumer. Second, in the face of this environment, our constant currency outlook for the year is unchanged despite higher than expected below the line costs most notably interest and pension costs. Good cost control across all aspects of overheads will offset these expected increases and serve as a catalyst for slightly better operating margins than previously contemplated. For the fiscal year, net sales are now expected to increase between 2% and 4% with the change versus our previous outlook due entirely to lower form currency translation headwinds than originally contemplated. We still anticipate organic net sales growth to be 3% to 5%. Our outlook for gross margin is also unchanged. As we continue to anticipate about 30 basis points of year-over-year rate accretion with declines in the first half of the year driven by continued inflation and negative currency, partly mitigated by price realization and productivity savings. There is also no change to our view on inflationary headwinds and pricing and productivity offsets for the year, and we expect the Q2 gross margin profile to be similar to Q1. Adjusted operating profit margin is now expected to increase slightly on a full year basis, mostly results of increased realized cost savings across the business. The impact of currency on operating profit is now expected to be an approximate $26 million headwind, an $8 million improvement over our prior outlook. Below OP, interest expense is now anticipated to be approximately $79 million, an increase of $5 million over our previous outlook and other income is now expected to show combined income of approximately $1 million as compared to $11 million income in our prior outlook reflecting higher pension costs and lower hedge gains. Adjusted EBITDA is still expected to be in the range of $320 million to $335 million. On a constant currency basis adjusted EBITDA growth at the midpoint of the range would still be approximately 8%. Adjusted EPS is still anticipated to be in the range of $2.30 to $2.50 inclusive of approximately $0.45 per share of currency headwinds. Constant currency adjusted EPS growth at the midpoint of the range would still be approximately 12%. In terms of phasing, we now expect the organic sales rate in half one to be slightly higher than half two as we expect to shift in Sun Care shipments into Q2 and we now expect to generate just over a quarter of our full year EPS in half one. For more information, related to our fiscal 2023 outlook I would refer you to the press release that we issued earlier this morning. So a lot of moving parts between bottom line getting worse and some areas perhaps a bit better, top line margins; but do you have a sense perhaps of where you think you're going to be landing within this, this earnings outlook range for the year? Yes. Hey Chris, good morning. It's Dan. Look, I think you're right, there are some moving parts, OP will get better versus our original outlook, and that will help offset some of the below the line challenges that we see around less hedge benefit, higher interest expense, higher pension. So if you put all of that together not all of those below the line headwinds affect EBITDA, right? So I think mathematically you can certainly say that the OP flow through is helpful and mathematically points you towards the higher end of the EBITDA range. I think that's just – that's just math. I think look, we're one quarter in very good quarter lined up the way we thought it would, and so we'll stick to the range right now, but to acknowledge the point I think mathematically you would point to the high-end. And then on EPS, I think you don't have some of that mathematical challenge. I think you can, you can stick at the midpoint. Okay. All right. It sounds good. And just from a phasing standpoint, you talked about some shift of sun into the front half of the year. Obviously international seems to be delivering on recovery. So how much of that shift is occurring in your international versus your U.S. business? And then can you perhaps just comment on, on your market share in the U.S., we're seeing a lot of noise just with some players recovering and we're hearing headlines around some recalls. Just maybe contextualize how you feel about U.S. share in addition to talking about where this – where this shift seems to be occurring? Sure. I'll take the first part; I'll hand it to Rod on the share point. In terms of the shift that's a specifically a U.S. comment. We're just seeing order flow on initial sun care phasing more into 2Q than we had originally thought. And sort of you're challenged with that every year in terms of when that phasing will happen. What I would say though, and your point I think underpins this, we saw tremendously strong sun performance across our international business. We've seen Mexico now growing 30% to 35% as a category. We've seen Oceana now open up and we had our biggest month since pre-COVID in December. So we're quite bullish on Sun outside of the U.S. it's about 25% of our sun business but that's not what drove what our anticipated shift in Q2, it's purely a U.S. comment. Rod? Yes. And Chris on the second piece on the U.S. sun question, we're feeling really good about the upcoming season and what we have line of sight to as we've built share the last couple of years. We've gone to the leadership position with Banana Boat last year as the number one brand in the U.S. and off of that retailers have rewarded us with better distribution outcomes, more distribution, higher quality across the board. And so we, we feel really good about the season that's set up and to come. And in terms of, of recall and safety, what you're calling out, we took another lot, one final lot of Hair & Scalp as a recall. It was actually part of an action last summer in benzene, and the good news is there's nothing to recall. There's no product there. Our products are safe. We're always going to lean in on safety and make sure that people can have confidence when they pick Banana Boat and Hawaiian Tropic. And on the early season share REITs you are seeing, it's more around everyday sun. If you think about the time of the year we're in, those everyday Sun Care brands are the ones that, that win and grow share in this period of the year. You'll start to see that moderate as we get into the balance of the year. And the other thing that just keep in mind because it is a little complicated as competitors come back on shelf to a certain extent from supply chain issues of their own that we didn't have in past periods. You'll just naturally see math show that share move a little differently than it has in in the past couple of years, but I think we're confident in our business and that we have a good year in front of us. Hi. Thanks for having the quarter. Thanks for taking my question. I wanted to ask about Billie, I'm just curious if there's any early color on the sell through and the new retail partners? And then I'm curious how much of that already occurred in first quarter and expectations of how much will benefit second quarter? And then last, if you guys have talked about the margin profile of Billie versus the rest of wet shaved before in the past, or if you could give any color on that? Thanks. I'll just, yes, I'll just say a couple of things about Billie bigger picture and then let Dan give a little more detail. We're very, very happy with where Billie the brand is, the team that's built the brand the way it's been built is resonating with consumers and we're off to a very good start with Walmart year one. As you know, when you grow share and you grow the category that becomes a very portable story. And so the expansion is underway now I think we did better than I think we expected in terms of retailers wanting the brand and wanting the brand quickly. So that's happening as we speak. The DTC portion of Billie performed very well in the first quarter actually outperformed what we were expecting. And so we continue to believe we've got a very healthy omnichannel brand in front of us that has lots of legs to go in many, many more places. Yeah. So in terms of the phasing of the national retail launch, there was a bit in Q1, but it was quite limited to drug and grocery. And even in grocery small amounts, I think the lion share of the launch and therefore the pipeline is Q2 and beyond. And you'll see that now as we roll out in broader grocery, broader drug and of course mass; so that's to come. And then to the question Susan, on margin profile, I think I'm comfortable saying largely at Edgewell family levels but there's a lot beneath that comment, right? Because it will depend on mix DTC versus retail and then within the Billie portfolio will largely depend on which category and which product is driving the growth. But in principle pretty comparable to Edgewell family margins. Great. Yes. The merchandising looks good in the stores. I was wondering too just on the men's business, I know you rolled it out further Edge and Cremo in the U.S. curious how that's going and if there's any plans for further expansion in the U.S. because it still looks pretty small out there. And then I'm just curious on the men's grooming if it performed well both in the U.S. and then North America. I think you said Edge and Cremo did perform well? Yes, on the men's shave piece of it we were a flat share in the quarter just finished. And that's primarily shipman's and so we held share there in what was a growing category. I think we actually felt good about that outcome as there was some destocking that, that happened in the quarter as well that we think is more one-time in nature at a couple of retailers. The Cremo rollout as you suggested is just getting started. The product is fantastic. It's a natural extension category wise to the grooming line and we think sets up to give us a better shave portfolio in men's for the future and so it's early days there but initial read is good. And then grooming more generally continues to be just a fantastic category. Double-digit growth rates continue in the category. We've got big ambition for our own business in that category this year and I would expect that will be one of our growth leaders as we get throughout the year. Great. Thank you. Good morning everyone. Two questions if I could, just first kind of pulling on the organic growth guidance for the year in the 3% to 5% and not asking you to be redundant, but it looks like grooming perhaps a bit light Sun Care, also a really good start. FEM Care was better by Geography. International stronger than the U.S. so far. I don't recall if it was Rod or Dan, you mentioned you saw some signs of weaker consumer sentiment, but you sound quite good on the spring shelf space resets. So just kind of reading your tone, it sounds like you're probably a little bit more optimistic within that range versus when you started the year, but not to put words in your mouth, but as you kind of pulled this all together, I'm just kind of curious how the shape of your organic sales growth guidance may or may not have changed since the initial guide. And maybe you could just comment on that and then I have a quick follow up for Dan on FX? Yes. Hey Kevin its Dan. Good morning. So look, we still feel confident with the range. We did acknowledge given some of the Sun Care poll that you'll probably flight a bit more into half one than we had originally contemplated. But that's really a one half, two phase. As we think about the categories, look, they're structurally healthy, they're growing, there is price that's come into the categories, which we've obviously participated in as well. And I think this quarter certainly reinforces our confidence and our confidence to execute as well. You heard Rod talk about distribution outcomes, he specifically mentioned Sun, there is other really good news as well, particularly in Women's Shave here in the U.S. and shave more broadly in certain international markets. So, I don't know that I would try to quantify where we are in that range. We're confident and as the categories remain healthy, we feel really good about where we are. I do think back to the point you made though, there is quite a bit of price here hitting the consumer. And while we have not seen elasticities at historical levels if and when the consumer comes under added pressure, I think, you can also expect that to, to evolve. So, we're going to be thoughtful on that and react accordingly if that's the environment we're in. But as of right now, I think, 3% to 5% based on the drivers Rod and I have been talking about feels like the right place to be and I think Q1 reinforces that. Got it. Dan, the follow-up is just on FX and the impact on operating profit relative to the top line. So sort of said differently, your initial guidance implied a certain FX multiplier, if you will, and with your updated guidance, one would expect more favorability on that flow through to earnings than we saw in your update. I think in your prepared remarks you mentioned some of this was sort of tied up in inventory. Can you just help us sort of understand the profit impact that you are guiding to now from, from FX relative to the to the top line update? Yes, absolutely. It's a good question, Kevin. It's a complicated topic. So, happy to unpack it. I think first of all, we have to remember there are multiple drivers to this FX equation, right? You have translational gains and losses, it's felt immediately. The best example of that you can see in our new net sales outlook for the year. I think that's pretty straightforward. Equally you have hedge gains and losses which sit below the line that are also felt immediately, but tend to work in opposite direction as the benefit of your hedge is somewhat diluted. I think those are pretty straightforward. I think where it gets a bit more complicated is in the transactional FX, which is sort of capturing all things supply chain, all the moving parts on the cost side, where in fact, a weaker dollar is hurtful and all the moving parts on inventory in our commercial businesses like Japan, where obviously it's helpful. The challenge here though is timing, right? And the transactional FX doesn't get released until the product gets sold. And so, if you take an average of four to five months of inventory, I think, it's reasonable to say that we hadn't yet felt all of the pressures of the rising dollar against the yen and therefore it's going to take time to realize the benefits as the currency has moved now 8%, 9% since our guide. So there is a lot of moving parts in there with timing being the big piece. For us, honestly, we know it's difficult to model, we understand that it's difficult on all aspects, but that's why we continue to point to constant currency and that's why we give that outlook as a real clear benchmark of operational performance. And here as we've mentioned, the constant currency outlook is unchanged. Hey, just kind of follow-up on what's changed since initial guidance in November primarily on kind of that 500 basis point gross margin headwind, from cost, supply chain, other things, has that seen an ease or do you see some ease in some of those costs and supply chain as we move through the year? I understand you are not changing guidance for that, but just I don’t know if you're seeing any thawing out there or room for optimism as we move into the spring? Yes, good morning, Bill. Certainly we're seeing easing and I'll talk about it. I think it's important to note that's what was contemplated in our outlook, right. And so even if you just look at the math, we have 700 basis points of year-over-year inflationary headwinds in Q4, 500 basis points in Q1 and remodeling 350 for the year. So, yes, there is easing but that's not incremental to our outlook. That isn't essentially how we've modeled it. We've been pretty close to the pin now, three, four quarters in a row. Where we're seeing it, I think, is largely showing up in a couple of ways. One, you're certainly seeing easing in natural gas and oil, which has a downstream effect on many commodity baskets, including resin and we've seen real stability across the baskets which is helpful. I think two, inland distribution has eased and we've seen that. Now diesel rates are still meaningfully above a year ago, but again, sequentially improving. So I think what all of this tells us is the cost side of our equation is playing out largely as we modeled it so far and certainly for the last two, three quarters, which gives us confidence to the full year margin profile of accretion for the full year. Bill I would just build on that. We have a quarter in line of sight to the pricing and cost productivity plans that we had envisioned when we built the plan and put our guidance out there and we're achieving all of that. And so by nature, I think, it builds confidence when things you had projected you would do, you've now actually done, it makes the outcome more certain. And so I think we feel good on the pricing revenue line as well. Got it. And kind of follow-up to that, what's your anticipation of kind of the promotional environment as we move, probably not this quarter, but into the back half as cost for everyone start to come down and retailers are looking for more promotions? I know it's a different for different categories, but any thoughts there? Are you expecting promos to come back in a big way or in a more normalized way as we enter the back half? Thanks. Yes, it's hard. It's obviously hard to predict that Bill based on where the consumer goes and the overall macro factors, but what we're seeing right now is the consumer has been resilient, the categories are operating very predictably, promotion rates, for example, are lower in many areas than they were a year ago. There is rational behavior happening here. And again, I think it's just – there is more certainty today despite it still being a very uncertain environment then there was a year ago. And so we don't expect it to become more promotional. If it does, we are ready for that and we'll adjust accordingly. And I would say that's contemplated within the guide. Hi, this is Devin Weinstein on for Olivia. I appreciate you taking our questions. Wanted to ask a little bit more about Billie if we could. First I guess another way to ask about the current quarter the actual performance versus your outlook implies around additional $1 million or so inorganic revenue versus what you guys were expecting. So I was curious what specifically drove that surprise? First, your initial outlook. And then also want to ask a little bit about you reporting or the shift in your reporting now including Billie sales in Sun and Skin. Just wanted to us, I mean, that would suggest that there's either an acceleration in the X razors [ph] business or perhaps you guys are focusing more so there. So I just want to ask about your plans around the business X razors and then longer term, if you could give us an idea of how you're thinking about the organic sales algo for Billie and what gives you confidence around that kind of number? Yes, good morning Dan. On the first question around organics in the quarter versus inorganics, there has been no change in our thinking in what we built when we developed the outlook, quite honestly, it's a bit clunky. You've got two months of inorganic and one month of organic, and depending what shift when it's being recognized as one or the other. I wouldn't view that as any fundamental shift in the business. I think the broader point you're making though on Billie is exactly how we see the brand and what made it so attractive when we bought it a little over a year ago, which is it's clear right to move into adjacent categories. And that which started as a shave brand absolutely has the right and the runway to become a women's lifestyle brand. That's what we saw when we looked at buying it. And that's absolutely what the team is committed to building Billie. So you're starting to see that migration now, it's not as pronounced in 2023 because we're more focused on the pure retail expansion, but you will absolutely see a slightly broader assortment in 2023, which lends your point on skincare like products and then much bigger gains, much broader offering as we look to 2024 and beyond. Thank you, I appreciate that. And if I could just follow-up with one more quick one, just in regards to your guys increased outlook on the operating margin I just wanted to get an idea if you continue to recognize improved productivity versus outlook today, or perhaps cost alleviate versus where you're seeing them today? How you balance further investment into your brands versus more direct flow through on EPS? Thank you. Yes, sure. Good question. Look, we saw overhead favorability in the quarter. And as we said in the prepared remarks most of the A&P favorability was simply phasing and probably half of the G&A was phasing. The other half is structural. And I think what it points to is we've been pretty intentional in our focus around driving costs out of the business. Obviously majority of it done in COGS, the G&A has always been a portion of that. And in fact, in our current outlook – in our original outlook, we'd estimated about $13 million of cost takeout in G&A. We're going to beat that. And again, some of that came from Q1, but it also comes from line of sight to pulling forward a lot of the work the teams have been doing here around productivity and efficiency of spend. And I would say A&P falls under this as well. We're always going to look at the quality of the spend at the efficiency of the execution, how is non-working dollars playing for us versus working. So nothing is off the table. But it's just really good cost hygiene that this business has done for quite some time and will continue to do. And you pull all that together, it gives us more confidence towards a bigger delivery in 2023, which helps offset the below line noise. [Operator Instructions] And at this time I’m showing no additional questions, I'd like to turn the floor back over to Rod Little for any closing remarks. And ladies and gentlemen, with that we'll end today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

EarningCall_424

Welcome to OneMain Financial Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. Hosting the call today from OneMain is Peter Poillon, Head of Investor Relations. Today's call is being recorded. At this time, all participants have been placed in a listen-only mode, and the floor will be open for your questions, following the presentation. [Operator Instructions] Thank you, Gretchen. Good morning, everyone, and thank you for joining us. Let me begin by directing you to page 2 of the fourth quarter 2022 investor presentation, which contains important disclosures concerning forward-looking statements and the use of non-GAAP measures. The presentation can be found in the Investor Relations section of our website. Our discussion today will contain certain forward-looking statements reflecting management's current beliefs about the company's future, financial performance and business prospects and these forward-looking statements are subject to inherent risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth in our earnings press release. We caution you not to place undue reliance on forward-looking statements. If you may be listening to this via replay at some point after today, we remind you that the remarks made herein are as of today February 7th and have not been updated subsequent to this call. Our call this morning will include formal remarks from Doug Shulman, our Chairman and Chief Executive Officer; and Micah Conrad our Chief Financial Officer. After the conclusion of our formal remarks, we will conduct a question-and-answer session. Thanks, Pete, and good morning everyone. Thank you for joining us today. I'd like to start today's call by providing a brief overview of some of our accomplishments in 2022. And then I'll cover our performance for the fourth quarter, the current credit and macroeconomic environment and discuss our key strategic initiatives. As you all know inflation started to impact delinquency levels for many non-prime consumers in the second quarter. We demonstrated our agility by quickly pivoting our credit posture and operations. On credit, we significantly tightened our credit box over the summer and our new originations are performing as expected. Operationally, we pivoted more of our team to collections and to supporting customers who are having difficulty making ends meet. The result is that for the last two quarters, we have seen stabilization of our credit results. Despite a significantly tightened credit box through much of the year, we originated $13.9 billion of loans and served over 2.6 million customers in 2022. This highlights our commitment to serving hard-working Americans in good times and in bad and also underscores the strength of our balance sheet. We had plenty of access to funding even in a very difficult year in the capital markets and in the bond markets in particular. We made significant progress in 2022 building out our credit card and new secured lending distribution channels, both of which will drive significant growth in the year ahead. And through this very difficult environment, we generated almost $1.1 billion of capital demonstrating the incredible business model we have built over the years. We also made significant progress in our ongoing commitment to be a socially responsible company, highly focused on our customers, communities and employees. We rolled out Trim, our money saving and financial wellness platform to all of our customers in 2022, as we continue to help our customers improve their financial well-being. We launched Credit Worthy by OneMain in thousands of high schools across the country. We issued a first of its kind social ABS fund, highlighting our mission to helping hard-working Americans make progress to a better future. And we made a $50 million deposit commitment to support minority depository institutions and military veterans. Last week, we were informed that OneMain has been included in MorningStar's Sustainalytics Top Rated ESG Companies List for 2023, ranking in the top 10% of rated companies in the Diversified Financials Industry category. OneMain was also named to America's 100 Most Loved Workplaces for 2022 by Newsweek. Together, these accolades showcase our deep commitment to our team members who serve our customers so well every day and to the communities in which we work. Now let me provide a brief overview of the quarter. We had capital generation of $233 million in the quarter and demand for loan products remained strong. Originations totaled $3.5 billion in the quarter. Even with the significant tightening actions, we took earlier this year. Considering our more conservative underwriting posture, we're really pleased with the volume of originations, as well as the overall credit quality. Our 6% year-over-year receivables growth was supported by our expanded products and distribution channels. Our 30 to 89 delinquency levels finished the quarter at 3.07%. This is in line with normal seasonal trends. We are optimistic about this continued stabilization and credit performance, following our quick pivots last year. Net charge-offs in the quarter were 6.9%, also within our expectations and were aided by good performance in our later stage collections and strong post charge-off recoveries. Regarding the macroeconomic environment as well as the non-prime consumer, we're encouraged by the continued strong employment numbers. However, elevated levels of inflation are impacting consumers, particularly those at the lower end of the credit spectrum. We remain highly focused on supporting our customers, especially those most pressured by inflation. We have several advantages that allow us to better serve our customers and set us apart from the competition. They include our community-based branch network that keeps us close to our customers, so we can work with each of them based on their own individual circumstances. Our long history serving the non-prime consumer through economic cycles, and this includes our proprietary data as well as our strong credit and data science teams and models. And we have an incredibly strong balance sheet, which we positioned with a long liquidity runway and staggered maturities exactly for times like this. The data that we analyze shows that we are performing quite well in comparison to other nonprime lenders. And you can see that illustrated on Slide 10 of our presentation. We continue to have a very conservative underwriting posture. Today we are only making loans that will meet our return hurdles even if the macroeconomic environment worsens. Notwithstanding, our current conservative credit box, we expect to continue to grow our balance sheet in the year ahead. We expect growth in 2023 to continue to come from higher credit quality customers along with growth from credit card and new distribution channels. To better illustrate the point on improved credit quality, I'll point out that our top two risk grades those with the best credit quality and lowest risk customers make up about 60% of our new customer originations today versus just 37% in mid-2021. Let me now spend a few minutes on strategic initiatives. Our top focus is managing our credit and balance sheet through this complex macroeconomic environment. But we also continue to focus on strategic initiatives that will fuel growth and profitability over the medium and long-term. We continue to close about half of our loans outside of a branch, engaging customers through our mobile application, website, text, screen share, phone and more. We also have advanced our mobile and two-way tech strategies and now have the ability to digitally engage with customers in collections, payments and servicing. We are confident that our omni-channel strategy leveraging the best of digital phone and in-person interactions will advance our competitive position. On new products, we continue to make excellent progress in our digital-first BrightWay credit card. During the holiday season, we saw customers regularly reach for our card to spend on holiday purchases. We're now seeing many of our early customers hitting on-time payment milestones at which point they can choose to lower their APR or increase their credit line. The overwhelming majority of our customers are engaging directly through our mobile app. We continue to closely analyze the performance of our cards across a number of metrics like spend volume, balance build, revolve rates and most importantly credit. Even as we maintain a conservative credit posture, we see a lot of opportunity to grow our card portfolio. At year-end, we had approximately 135,000 card customers and $107 million of card receivables. We're going to continue to scale this business in profitable segments, and we remain confident that our credit card business will drive meaningful growth with excellent returns in the future. This year as we scale the credit card business, it will have a mild drag on capital generation before expecting it to turn positive in 2024. In 2025 and beyond, we expect the business will be quite profitable and begin meaningfully contributing to our capital generation growth. We also continue to see excellent results from our efforts to expand distribution channels in our secured lending business, which grew to nearly $400 million of receivables in 2022. Let me end by touching on capital allocation. Our top priority is always investment in our business; first to underwrite high-quality loans that meet our return hurdles; and second, continued investment in the initiatives that will drive excellent capital generation growth in the future. We will also continue to return capital to shareholders. This morning, we announced an increase to our quarterly dividend by more than 5% to $1 or $4 annually. This translates to a yield of approximately 9% at our current share price. Even in a difficult economic environment, our business has strong capital generation and we are committed to a healthy dividend level. During the fourth quarter we repurchased 1.6 million shares bringing the full year repurchase to $7.2 million or about 5.5% of shares outstanding at the beginning of the year. With that, let me turn the call over to Micah to take you through the financial results of the fourth quarter. Thanks, Doug and good morning, everyone. Our conservative underwriting costs here combined with a company-wide focus on supporting our customer results is helping to deliver strong financial results. Fourth quarter net income was $180 million or $48 per diluted share down from $2.02 per diluted share in the fourth quarter of 2021. C&I adjusted net income was $191 million or $1.56 per diluted share down from $2.38 per diluted share in the prior year quarter. Both variances reflect an increase in provision expense from the stimulus-driven historic lows we experienced in 2021. Capital generation was strong at $233 million in the fourth quarter and came in at $1.70 billion for the full year. Managed receivables reached $20.8 billion up $1.1 billion or 6% from a year ago. Interest income was $1.1 billion flat to the prior year quarter as higher average receivables were offset by lower portfolio yield. Yield in the fourth quarter was 22.3% down 100 basis points year-over-year reflecting higher 90-plus delinquency and the impacts of payment assistance we are providing to customers where needed. We expect first quarter 2023 yield to be around the same level as 90-plus generally reaches normal seasonal highs in February. We then expect to see a gradual improvement during the year as 90-plus seasonally declines to its natural low in the summer and the impacts of our credit tightening begin to show through. Pricing on new originations remains above 2021 levels as we continue to monitor the competitive environment and opportunistically take positive actions to offset the impact of a tighter credit box. We expect that current pricing will support portfolio yield in the future as new originations become a bigger part of our portfolio and the current macroeconomic impacts subside over time. Interest expense was $230 million in the quarter, down $3 million or 1% versus the prior year. Interest expense, as a percentage of average receivables, was 4.6% this quarter, down from 4.9% a year ago, a result of the proactive actions we've taken to manage our funding profile over the last several years. As you know, we've been extending and staggering our maturities and therefore current higher issuance rates did not meaningfully impact 2022 interest expense. Looking forward, we estimate that about 90% of our average debt for 2023 is already on the books at fixed rates. And if you want to look a little further out to 2024, it's about 80%. This is what gives us confidence in projecting very modest increases to interest expense ahead. Other revenue was $168 million in the fourth quarter, up $7 million or 4% from the prior year quarter. The increase was primarily associated with higher yields on our $2 billion investment portfolio. Provision expense was $404 million, including current period net charge-offs of $348 million and a $56 million increase to our allowance. About half of the allowance build was from growth in receivables, with the remainder reflecting a modest increase in our reserve ratio to 11.6% as we remain cautious about the macroeconomic environment. Policyholder benefits and claims expense for the quarter was $34 million, down from $50 million in the fourth quarter of 2021. The reduction was driven by adjustments to our claims reserves due to lower loss experience. We anticipate claims expense to return to more normal levels over the coming quarters. Originations were $3.5 billion in the fourth quarter, down from $3.8 billion in the fourth quarter of 2021, primarily a result of our tighter underwriting posture. Managed receivables grew $300 million sequentially on the strength of solid consumer demand, a positive competitive environment and continued growth from credit cards and new distribution channel partnerships. Please note, managed receivables of $20.8 billion includes $766 million of receivables sold through our forward flow arrangements and $107 million of credit card balances. As Doug mentioned we continue to see positive results from our credit card rollout and we expect card receivables to be between $400 million and $500 million by the end of 2023. While this rollout will create a small drag on capital generation this year, we anticipate capital generation will turn positive late this year or in early 2024. And as you know, CECL requires maintenance of lifetime loss reserves and so you should expect to see us building reserves as we scale the business. Let's turn to our credit trends, highlighted on slide nine. 30 to 89 delinquency was 3.07% in the fourth quarter, up from 2.81% in the third quarter. Since we first reported an elevated level of 30 to 89 delinquency in the second quarter of 2022, performance has generally followed expected seasonal patterns. From second to fourth quarter, 30 to 89 delinquency increased 34 basis points this year, as compared to approximately 30 basis points in 2018 and 2019. If seasonal patterns continue, we should see improved performance in the first quarter, as payments typically increase during the tax refund season. Our January 30 to 89 results were in line with these seasonal patterns, declining a few basis points from December levels. Loan net charge-offs were $344 million or 6.9% for the quarter. Full year net charge-offs came in at the low-end of our guidance at 6.1%. Net charge-offs continue to be supported by strong recoveries which were 1.2% of average receivables in the quarter. Recoveries remain above pre-pandemic levels of approximately 0.9%, driven by a strategic investment to bring this activity in-house combined with opportunistic sales. I wanted to draw your attention to slide 11, of our deck. As you know we've been gradually tightening our credit box since late 2021. However the most significant adjustment we've made over the last year was in early August 2022. On the left side of the page, we show an estimate of how we expect receivables concentration to change over the coming quarters, between loans originated pre-tightening and those originated post tightening. On the right side of the page, we show the performance of those post tightening vintages for which we have at least three months of data. As you can see the vintages are performing in line with pre-pandemic levels and these vintages are expected to have more influence in our portfolio results as we get into the back half of this year. We anticipate that by year-end 2023 approximately 70% of our book will be from loans originated since that major August tightening. Turning to slide 12, fourth quarter operating expenses were $367 million, up 5% year-over-year. Full year operating expense was $1.4 billion and operating leverage for the year was 7.1%, down from 7.3% in 2021 and down from 7.5% in 2019. Slide 13 looks at our expense trends over the last few years, and our expectation for the year ahead. You will see on this slide that we've maintained core expense within a very tight range over the past four years with 2022 expense coming in below 2019 levels. That is despite, mid-teens growth in average receivables over the same period. In 2023, we expect core expenses to grow very modestly, in the 2% to 3% range. We also plan to invest an additional $50 million for growth, mainly in cards and distribution channels as we continue to scale those businesses. With that said, we expect an operating expense ratio that is very much in line with what you've come to expect from us, about 7.1% in 2023. That's flat to 2022 and down from historic levels. Let's now turn to slide 14 for an update on our balance sheet and funding. Funding markets remain quite challenged in the fourth quarter, and it is during these times that a strong balance sheet and a mature sophisticated funding program like ours is a significant advantage. In December, we completed an $800 million ABS issuance with an average coupon of 6%. We once again we saw strong support from returning investors, while also attracting some new investors to our program. Despite the market challenges, 2022 was overall a very productive year for OneMain. We raised $3 billion of market funding with an average coupon of about 5%, including issuing a first-of-its-kind social ABS in April. We continue to enhance our already strong liquidity profile adding $400 million to our committed bank capacity which totaled $7.4 billion at year-end. We renewed seven secured lines during the year and we added three banks to our unsecured corporate revolver which now totals $1.25 billion. I'm also pleased to say that in December we renewed our inaugural loan sale partnership through the end of 2023. We did so at the same level of purchases $75 million per quarter and at similar economics to our original agreement. This agreement demonstrates the confidence our partners have in OneMain. Rounding out the balance sheet our net leverage remained within range at 5.5 times down from 5.6 times in 3Q. On slide 16, we've provided some expectations for 2023. Please note these estimates assume a relatively stable macroeconomic environment. And should the environment change, we will update our expectations accordingly. We expect managed receivables to grow in the low to mid-single-digits. This assumes we maintain our current credit box for all products and see continued growth in our distribution channel partnerships and our credit card. Loan net charge-offs for the year are expected to be 7% to 7.5% and we expect to see normal seasonal patterns resume. We anticipate first half charge-offs to be above the full year range with second half expected to be below. First half losses are typically seasonally higher and will reflect the elevated delinquency we saw in the second half of 2022. We expect charge-offs to improve in the second half, in line with normal seasonal trends and as our current underwriting becomes a bigger part of our receivables. And as I discussed earlier, we expect operating leverage to be roughly flat to 2022 at approximately 7.1%. Thanks Micah. The 2022 accomplishments that I highlighted at the beginning of this call demonstrates our ability to thrive in any market environment. As we look ahead, we feel really good about how our business is positioned. We're actively managing our underwriting and have seen credit performance stabilize over the last two quarters and the business we are booking today is performing in line with expectations. Our balance sheet, which we positioned with a long liquidity runway just for difficult markets like today, allows us to book all of the good business that we see and the foundation we are saying with our strategic initiatives including credit card and new distribution channels will drive capital generation growth whenever we merge out of this uncertain environment. We will remain alert and agile as the economic picture evolves and are prepared to adjust our credit box to drive the best possible results for our shareholders. Finally, I just want to take a moment to thank all of our OneMain team members who come to work every day to make a difference for our customers, our communities, and our shareholders. Yes. Thanks, Doug and Micah and Doug, I appreciate that comment at the end about being prepared to adjust the credit box. Maybe could you just talk a little bit about – obviously, your guidance you'd like it to be to some degree on the conservative side. When you think about the environments, what you talked about in terms of your advantages in funding and some of the tightening that you're seeing kind of above you, what are the sorts of things that might happen to make that -- your growth better, or in fact kind of less good than would be in that guide range? Yes. No, thanks, Moshe. We still have quite, an uncertain economic picture. I think which everybody knows. It's a tricky environment to operate in. Unemployment has been a real bright spot, but inflation is still impacting our customers. And as you mentioned Moshe, we're seeing in our recent vintages since we tightened our credit box they're performing very good. Our basic operating principle is, we want to be careful stewards of our shareholders' capital. And so right now, we may have a tighter box than needed. But given the uncertainty in the environment, we're being quite careful. So, if we have room in our current box we talked about it before for unemployment to tick up, meaning, we've already incorporated in the business we're underwriting to both the stress we saw in our book in 2022, plus deterioration in the macro environment. And so said another way, the business we're booking today are going to meet our return hurdles even if we see some stress. And so, if we see continued stabilization, if we see a few more months of the new vintages we're booking, performing as expected. If we see some of the clouds lift from the economic environment it feels a little less uncertain, we could open up our box, then we could have growth above where we said. But if there's a sudden quick move in unemployment and things go south in the economy, we could tighten up our box. And so, it's a very difficult year to give guidance because of the uncertainty. What we're doing is, being very careful with our balance sheet, being very careful with our underwriting and making sure we are investing for the future growth of the company whenever things become less uncertain. Great. And thanks for that. And certainly appreciate all of those difficulties. Given what you had mentioned that the levels of unemployment, but the bigger factor on your customers being the increase in inflation. Are there any signs of kind of that -- the inflation in goods kind of decelerating relative to the inflation in wages in your specific customer base? And if so, how do you think that will impact you over the course of 2023? Very hard to pinpoint like the exact movements in inflation and goods versus services. Obviously, deceleration of inflation in goods, means people have more disposable income because things cost less, but deceleration in services can also mean less income. And so – it's very hard to pinpoint in the short-term exactly in our customer base. What I will tell you is and you can see from our delinquency trends, things have stabilized. We saw a spike in delinquency in the second quarter of 2022. The last couple of quarters we've seen good stabilization and our new originations albeit with a tighter credit box are performing spot on where we thought they would. And so if inflation keeps stabilizing and going down and unemployment stays low, I think we'll be in very good shape. But again, we got to just keep an eye on it. It will play itself out. Good morning. Thanks for taking my question. First question Doug and Micah the – and maybe taking a step back and just kind of looking at the path to normalization here. If we look at what's already happened, we've had kind of two tightenings with underwriting and then the customer maybe hasn't – we haven't officially gone through a recession yet but we've already have the impact of inflation. So maybe taking time out of the equation since we're still in a certain environment, but could you maybe describe and play out how OneMain kind of goes through normalization and what you're looking for before you feel comfortable? Thank you. Yes. Vince, this is Micah. I'll take that one. I think Doug touched on this a little bit just in terms of watching the macroeconomic environment really paying attention to what's going on in unemployment and inflation print, certainly that influences our views. And we also look at it on a state basis. So we're looking at the macroeconomic environment in Texas versus Florida, et cetera. And all of that influences our credit appetite. I think ultimately what we're looking for is to continue to see a little bit more of these vintages. And we showed you a little bit on that page of recent vintages are performing. We're very, very pleased with that. We're also engaging in a little bit of testing in loans that don't necessarily meet our underwriting criteria but we want to keep our finger on the pulse of what's going on with some risk rates that we may not be underwriting in volume today, but we still want to sort of look at leaning into those. And I think, for us we've got some different actions nowadays than we had a few years ago. We've got a small dollar loan that gives us a lever to kind of move back in with a smaller loan value going out than our typical $7,000, $8,000 loan. We've also got the credit card. So I think a lot of different options there. But as Doug mentioned, still kind of maintaining that pretty conservative posture. We'll see how the year plays out and we'll adjust accordingly. Okay. Thank you for that. And then a follow-up specifically on cards. So nice to see that business starting to ramp up. The – as kind of putting that alongside with your discussion about maybe still being conservative with the overall business, can you talk about how you feel comfortable growing with card in 2023? And do the metrics, when we think about card versus the rest of your business? Are those metrics much different when we think about say the reserve ratio or yields? Thank you. Yes. No thanks, Vincent. Look we – a couple of years ago, when we told you we were going to roll out cards, we said we were going to be very deliberate and methodical. So, over a year ago, so in late-2021, we put over 60,000 cards out, which we called test cells. And so we had two different types of cards that had different economics, so it could take different amount of risk. We had different risk profiles. We said that we had some higher credit and lower credit in there. And we pushed the edges, because this was going to get us data about the cards and how the cards performed. And then we went through a number of different channels, branch channel, direct mail, affiliates and usually how you acquire a customer give her. We then let those 60-plus thousand cards season and last summer, we picked the most profitable sales that were performing the best to start to build our book. And just a reminder, this is -- the non-prime credit card market is a $400 billion market and we've got $100 million of cards that we think will get up to $400 million or $500 million. So there's a lot of room for us to book very profitable business. Just like with our loans, we've taken the actual performance of cards and that performance was during a period of high inflation, and then we put a stress factor on top of that. So we've assumed -- in addition to what we saw with performance, we assumed losses as if there were a recession, and we're only booking customers now that would still be profitable and meet our hurdles with the performance we saw plus with extra loss. So, said another way, the business we're growing right now is very conservative and we have a high degree of confidence that these will be profitable customers. We also every month risk score every card customer. And so we have the ability to manage credit lines. And obviously, we have the ability to either book more cards or less cards, as we continue to monitor performance. Your second part of your question, once we get to scale, we're going through the scale period right now where we're having to build up servicing infrastructure and we have cost of acquisition of those customers. It takes a little while for balances to build. And so, there's less capital generation at the beginning right when you book a card than there is right when you book a loan customer. So, we're in the proverbial J curve, but we gave you a sense of how we would move through that J curve. Once we get through that J curve, we expect the cards the profitability to be very similar to our loans. And so, it's a great complementary business for OneMain. Good morning. Thanks for taking my questions. You previously guided to capital generation or return on receivables. And I understand you're not doing that now, but maybe you can help us understand some of the components that would make -- some help -- give an idea of where capital generation could come in for 2023, just given some of the headwinds from the card side as you grow that portfolio combined with asset yields coming down a bit just because of lower -- I mean, higher interest rates and tightening of underwriting standards. Thank you. Yes, Kevin. This is Micah. I'll take that one. I mean as Doug mentioned, there is – it's pretty tricky in this environment to give full year forecast. We've kind of given you the receivables growth as we mentioned we feel that's pretty resilient, unless we see a major significant or a rapid change in the environment. Obviously, the losses we got it to the 7% to 7.5%. Again, I think it's – this is a matter of having a relatively stable outlook. So our losses the range that we've given you gives some room for unemployment to pick up a bit. And as you know, we have a 180-day charge-off period. So in order for that really to impact losses, it would have to happen pretty quickly generally in the first half of the year to really move the needle on that. In terms of yield, a little bit in my prepared remarks yield also impacted by the macro environment and a level of 90-plus receivables. So, certainly, giving you a little bit of sense for that without calling out a specific full year number. We do expect loan yield to be right around fourth quarter levels in the first quarter. And then sort of as we get through the balance of the year we expect some of the 90-plus levels to just subside because of normal seasonal patterns, but also as our front book or these post August originations start to take a little bit bigger hold in the receivables book. So that should give us a little bit of runway and upside on yield. I think on interest expense, again, just mentioning generally in the prepared remarks, the way we've staggered our maturities. It just takes a lot to move interest expense quite a bit in one year. So interest expense in 2021, was around 5%, 5.1%; in 2022 4.6%; pretty likely we'll be somewhere in the middle of that in 2023. And so I think that should give you some sense for how to build the interest expense piece of that. And we've given you also the expenses at about 7.1% OpEx ratio. So – that's for the most part, the lion's share of our capital generation. I think, we've seen some year-end improvements in our policyholder benefits and claims line, some reserve adjustments we expect those to normalize back to levels around 45 to 50 a quarter. And I think, when you add all that up, we would expect to see capital generation lower than what we experienced in 2022. But with kind of some runway at the end of the year we think that can pretty much snap back in 2024 back to those levels. And that's kind of where we are. Great. Yeah. You touched on some macro factors there where the net charge-off would be closer to the high end with a little bit higher unemployment. Could you help us understand what macro factors you apply within your guidance assumptions for 7% to 7.5% net charge-offs? And then what are you seeing within your customer base? You touched on some stress within the non-prime consumer just given the inflationary outlook but maybe just a little more color on your macro assumptions to get to the net charge-off guide? Yeah. So let me touch on the customer first. As we talked about in, I think numerous forums we obviously saw a pretty rapid increase in 30 to 89 delinquency in the second quarter, when it increased about 50 basis points from the first. And then since then we've seen relative stability. And what I mean by that is we've seen seasonal patterns kind of emerge, where we went from second quarter to fourth quarter up about 30 basis points or so this year, 30 to 89 and it was pretty similar to 2018 and 2019. So we've seen some nice stability there. Certainly inflation is still impacting our consumers, but we feel pretty good about where things stand. I mentioned also in January, we saw a little bit of a seasonal downtick in January 30 to 89. And tech season is coming. So we hope that's going to be really accretive and helpful for our consumer. That's influencing some of what we're thinking about in our loss guide, bottom end 7%; top end 7.5%. I would say on the top end is an environment that's pretty consistent with what we’re -- in what we're assuming in our reserve numbers which is an unemployment rate somewhere in the 4.5% to 5% range, obviously, unemployment in the low threes now and pretty supportive for the time being. So those are kind of the guardrails. And keep in mind, also, with our charge-off policy, again, without any really impacts to the back end and what's happening in those 90, 120 and 150-plus receivables. In order to have a really dramatic move, I think in the back half of the year on losses, you'd have to see something in the early-stage delinquency happening pretty quickly. And that's hard to foresee right now, given the employment prints and the claims numbers that we're seeing. My first question is on the credit card. I wanted to get some thoughts on that impact of that CFPB proposal on late fees. How does that impact the pace of the loan balance launch over the next few years? I was wondering, if you perhaps emphasize BrightWay+ over the BrightWay considering that overhang -- and then that aside how do you balance this growth opportunity with the rolling out like nonprime credit card ahead of an expected recession? And I know, it's mostly a test portfolio at this point, but I couldn't help noticing that the delinquencies for credit cards are already 14.5% as of Q3. Just wanted some thoughts. Thanks. Yes. Michael, thank you. Let me take those in order. The CFPB credit card fee proposal, we've got the advantage that we're just rolling out a new product. So we are not wed to any of the economic levers. We have a lot of levers in the credit card including pricing. So, we're going to monitor it and see how it rolls -- see what happens with that fee proposal. And obviously, we'll abide by whatever -- wherever it lands. But we don't feel at this point that, it really affects our outlook or it doesn't affect us being excited about the product. Our real focus is we have this unique value proposition in the market of reciprocity, where as a customer pays on time, we will share in economics and either increase the line or decrease the APR. And our real focus is access to credit for the nonprime customer and have a great product in the market that works for them and obviously economically works for us. And so, we're watching the proposal, but we feel like we've got plenty of room to make sure the economics work, as well as the value proposition works. I tried in my -- in the previous question to emphasize that, while we are now rolling out in some specific segments, we are rolling out in segments that the credit card will meet our return hurdles, even if we move into a mild recession. And so said another way, we're assuming from the test sells, a certain credit performance and we put stress on top of that for our decision criteria for credit cards. Right now, we're not seeing that stress occur. So our credit cards are exceeding our return hurdles. But if employment ticks up, we go into a recession, the business we're booking today and the business that we predicted, we would book today – or the growth that we told you we thought we'd have this year is going to be profitable growth even, if we see some deterioration in the macro economy. Yeah. Let me just add to that on the delinquency, Michael. Yeah. You quoted the 13% or so. Keep in mind, as we mentioned that's got a lot of these credit cards in it that we would not book, to think it's more than half of the portfolio at year-end, and that's got delinquency levels that are call it twice what we're thinking about originating going forward. So we do expect that to roll down. It's just a function of really that test environment. Okay. Okay. That's great. Second follow-up question is on funding. Can you maybe talk about some of your plans to raise debt in 2023? I know, it's partially opportunistic, but what would you consider a base case scenario for secured and unsecured funding this year? And would you be okay raising on secured debt in the 8% plus range? Yeah. It's a good question. I think as everything with us you should expect us to be opportunistic. We're going to go in the markets that we think are most accretive for us. We did a good amount of ABS issuance in 2022. As you know, we were leaning heavily into the unsecured markets in the prior two years. We – I think – I think we're comfortable, if all we need to do is issue ABS in 2023. Obviously, the unsecured markets have rallied a lot over the last several weeks. And they're starting to look a little bit more interesting to us. I think the balance of are complex is in the 7s, so 8 it's a little bit above that. We – we'd like to see that stick around for a little bit, but I think it's starting to become interesting to us. We tend – even with all the ABS issuance, we've done we're still at 51% secured mix on the debt side at the end of fourth quarter. So – we've got a lot of flexibility. We also have the unique advantage of having $7.4 billion of committed bank lines. So, it gives us a lot of flexibility, and I think we'll just be opportunistic this year and see where we go. Thanks, guys for taking my question. Most of them have been asked. Wanted to talk a little bit – a question that comes up for us in the current environment with cost funds ticking up a little bit given rates. How much pricing power do you have? And specifically, what I'm interested in is that as you high-grade your portfolio in terms of credit quality, are you able to do that in this environment and not compromise pricing? So, is there a distortion that we're seeing in terms of yields? Rick, this is Micah. So I think a couple of embedded questions there. We do have some pricing leverage within certain segments of our current business, particularly within the higher credit quality and the secured segments. When we sort of restrict the credit box or tighten a bit what we end up doing is remixing towards a higher credit quality customer. And therefore that tends to have some pressure on the APR because those customers are definitely – there's more offers there. We're giving a little bit of a risk-based pricing and so that does impact APR. But over the course of the last year, we – just because of the competitive environment, we have been able to make some positive influence on price in certain spots. And most of that is in that higher credit quality segment. So I would go the opposite of the question which is we've actually increased price in some of those better credit quality segment and we're still getting a lot more volume in that area. And I think it's because competition has tightened pricing dramatically not because – I guess more because of the underpricing potentially in 2021 period. And so – we've always had price discipline. We're always testing in those markets. We feel good about the business we're getting there and we've been able to increase price a little bit accordingly. Got it. No that actually clearly misstated the question because that was exactly what I was trying to understand. And when you think about it now and that pricing power that you have in that segment and the remixing of the portfolio do you think on a net basis you get to a the same risk-adjusted margin or do you get to a slightly lower risk-adjusted margin but with lower volatility and definitionally less risk? Yes. I mean we certainly haven't changed any of the expectations on our sort of at the margin minimum risk – minimum return hurdles. So I would say generally speaking, we're going to get to a very similar outcome on ROR, return on receivables. We just have potentially less price for less – for lower losses and we end up kind of in the same place as the bottom line. How are you, guys? The receivables growth first of all, Micah is that – just remind me is that – when you're saying mid-single-digit receivables growth is that comparing average receivables in 2023 versus 2022? And then given that it appears that the card component will be a reasonable component of overall growth, is there anything from a seasonal perspective that will change given the ramp of cards relative to the normal installment book? Yes, that's a good question. I think the straight answer on receivables is that is the end-of-period managed receivables that we publish. So it will include credit card. It also includes those loans that we are selling through our loan flow agreements. It is not an average calculation. On the in terms of the growth, if you say low to mid-single digits, if I sort of benchmark that at $0.5 billion to $1 billion, we've called out we expect credit card to be 400 to 500 at year-end coming off of 100 base. So we'll call that $300 million to $400 million of that growth with the other $200 million to $600 million coming from the loan book. And that will be a combination of our core loans, which as we've talked about have had -- the current credit box is pretty conservative. We tightened dramatically in August of last year. So our receivables reflect having that current credit box for the full year of 2023. It also includes some continued growth in our distribution channels. I would think in terms of normal seasonal patterns, the credit card probably skewed a little bit more towards the second half as we continue to be very conservative there, get comfortable with performance. We will expect to see more growth in the second half than in the first on the card. And then I think in the core loan book, we expect normal seasonal patterns to emerge where typically we have trouble in terms of growing in the first quarter because of tax season. It's also very accretive to payments and delinquency. But we do tend to not grow in the first quarter and then we reemerge into that growth pattern from second third and fourth. That's not what we see it playing out. Obviously still a lot to be determined. But that's kind of my view as for now. Hi, good morning. Thanks for squeezing me in here. Just one question. I wanted to follow-up on some comments you made on the prior quarter's call and this relates to some of Rick's questions. You had noted I think last quarter that -- you had noticed quite a bit of competition pulling back. It manifested in their marketing spend and it could have either been credit driven or lack of ability access on their part. But can you provide a little more of an update on competitively what you're seeing if any of those dynamics have reversed course, or if you're still seeing as you define your primary -- your prime competitors whether it's still an attractive customer acquisition landscape, notwithstanding, your conservatism on loan growth? Yeah. I mean, I think the answer is yes. We think it's a good competitive environment for us. We been through cycles like this as a company. And specifically we built this balance sheet where in good times; we're not doing just-in-time funding. And so we're spending more money than competitors for insurance to have our long liquidity runway, diversified funding program. It's in times like this that it pays off because we're building our business for the long run. And so the capital markets remain -- it's a difficult capital markets environment, probably a little better now than it was in the fall. And so some of the competition that couldn't get any access to funding in the summer when delinquencies ticked up across the whole non-prime landscape, probably can get access to funding. So I think that's stabilizing some. And so I think some competitors we've seen come back into the market with access to capital. With that said, it's still very tight. It's very expensive. It's more expensive for a lot of our competitors getting funding than for us. And so we've got advantages around pricing. We've got advantages -- we can book every loan that we see as attractive and meets our hurdles. So net-net, even with our more conservative credit box, we're still seeing very healthy demand coming into our products. I think, some of it is the capital markets, some of it is competitors have had to pull back more, either because of lack of equity funding or debt funding. And we think a lot of it is the investments we've been making in the last several years, in our digital, in our product innovation, in our customer experience. And so, the brand we built over time people trust and they come to us and they want to do business with us. So we like our competitive positioning. We don't take it for granted. We need to earn our customers' business and their trust every day. And so, we're going to stay focused on that within our risk appetite. Got it. Very helpful. And then, just one quick follow-up, a clarification, I guess, from Micah. Did I hear you suggest in terms of degree of conservatism that existing reserve levels are effectively, if not contemplating, set at what is the higher end of your loss guidance this year? That if we come in at kind of the lower end of that 7%, 7.5% range, we'd likely see the ALL come down as well? Yes. That's exactly right. I think, with respect to the first point, David, I think, we've assumed 4.5% to 5% unemployment rate in the reserves. That kind of puts them at an 11.6% reserve ratio versus pre-COVID when we first truck CECL in January 2020 at 10.7%, so almost a full point above that. I think the reduction in the reserve ratio will really be a function of what the future looks like, as we're always kind of pushing forward every quarter. And so, we could come in at the lower end of the charge-off range. And if the world doesn't look great going forward we could still have those reserves in place. So that's really something to watch out for as you think through where the year transpires. Hey, everybody. Thanks for joining the call today. If you have follow-up, obviously, reach out to our team. I hope everyone has a good day and we look forward to continuing to talk about the business with all of you over the next several weeks months and next quarter. So thanks for joining. Thank you. This does conclude today's OneMain financial fourth quarter and full year 2022 earnings conference call. Please disconnect your lines at this time and have a wonderful day.

EarningCall_425

Welcome to the Adient First Quarter Fiscal Year 2023 Earnings Call. [Operator Instructions] Today's conference is being recorded. If have any objections, you may disconnect at this time. Thank you, Danielle. Good morning, and thank you for joining us as we review Adient's results for Q1 fiscal 2023. The press release and presentation slides for our call today have been posted to the Investors section of our website at adient.com. This morning, I'm joined by Doug Del Grosso, Adient's President and Chief Executive Officer; Jerome Dorlack, Executive Vice President and Chief Financial Officer. On today's call, Doug will provide an update on the business, followed by Jerome, who will review our Q1 financial results and outlook for the remainder of fiscal '23. After our prepared remarks, we will open the call to your questions. Before I turn the call over to Doug and Jerome, there are a few items I'd like to cover. First, today's conference call will include forward-looking statements. These statements are based on the environment as we see it today and therefore, involve risks and uncertainties. I would caution you that our actual results could differ materially from these forward-looking statements made on the call. Please refer to Slide 2 of the presentation for our complete safe harbor statement. In addition to the financial results presented on a GAAP basis, we will be discussing non-GAAP information that we believe is useful in evaluating the company's operating performance. Reconciliations for these non-GAAP measures to the closest GAAP equivalent can be found in the appendix of our full earnings release. This concludes my comments. Great. Thanks, Mark. Good morning. Thank you to our investors, prospective investors and analysts joining the call this morning as we review our first quarter results for fiscal 2023. Turning to Slide 4, let me begin with a few comments related to the quarter. As expected, heading into fiscal 2023, the overall operating environment appears to be trending in a positive direction. However, I'd still characterize the environment in Q1 as choppy with certain external influences trending favorably and other influences appearing stubbornly persistent placing downward pressure on the industry. With regard to the positives, it was encouraging to see softening steel, energy and freight costs, FX movements also trended favorably. While these metrics signaled, we're moving in the right direction, other challenges such as the resurgence of COVID-19 in China, elevated labor costs, tight labor availability and tightening [Central Bank] monetary policies continue to cloud the outlook. Visibility remains murky. That said, unbalance the many puts and takes resulted in a quarter generally in line with our internal expectations. Adding its key financial metrics for the quarter can be seen on the right hand side of the slide. Revenue for the quarter, which totaled $3.7 billion was up $219 million compared to last year's first quarter. Adjusted EBITDA for the quarter totaled $12 million up $66 million. Adient ended the quarter with a strong cash balance and total liquidity of $900 million and $1.9 billion respectively. In addition to Q1 fiscal '23 improved year-on-year financial results, Adient continues to execute actions within its control to position the company for sustained financial success. These actions include but are not limited to the team intense focus on launch execution, cost and operational improvement and customer profitability management. Winning new business across the various regions, customers and platforms which over time are expected to strengthen our leading market position not to mention support improved margins and earnings. The team is also executing actions to provide value add to Adient's stakeholders every day. Whether that's our customers, suppliers or employees, these efforts have been validated repeatedly with numerous industry and customer recognition awards including most recently Automotive News Champion of Diversity Award Top Employer 2023 Certification by the top employer institute for Adient EMEA. And recognition in China from FAW-VW for our quality performance. Finally, adding continues to make progress at building a sustainable future, the details of our many ongoing ESG initiatives as well as our fiscal year 2022 accomplishments are included in the company's recently published Sustainability Report. Turning to Slide 5 and commenting further on the topic. The 2022 Sustainability Report highlights among other things how Adient is reducing its Scope 1 and Scope 2 absolute greenhouse gas emissions which as shown on the lower right hand side of the slide are down 25% compared with our baseline year for fiscal 2019. Implementing innovative seat solutions, including materials and processes in our metals, plastic, foam, trim and complete seat products that promote a circular economy and helps Adient's customers meet their ESG goals. Enforcing policies and practices that protect human rights in accordance with the UN Global Compact, and encouraging our suppliers to adopt similar business practices. And advancing diversity equity and inclusion through employee training opportunities inclusive hiring and employment development processes and employee led business resource groups. In fact, recognizing a diverse and inclusive workforce environment has been part of Adient for years. For more than two decades, the company has been involved in successful diverse joint ventures with Detroit-based Bridgewater Interiors. We are particularly proud that this forward thinking unique joint venture has stood the test of time and continues to grow and remains viable venture for our customers. One additional milestone to mention during Q1 fiscal year '23, the science based target initiatives validated Adient's near term greenhouse gas emissions reduction targets, affirming Adient has established a clear pathway to achieving its emission reduction goals. We realize reaching the company's full potential cannot be achieved without firmly integrating sustainability into our core Adient's operation in order to become the foremost sustainable automotive supplier. We've included a link to the full report please take a few minutes to see the progress we've made in our sustainability journey and the commitments we intended to deliver in the future. Turning to Slides 6 and 7, now let's take a look at the business wins and launch performance. As you can see, Slide 6 highlights a few Adient recent wins. Adient continues to successfully navigate the choppy operating environment and related commercial discussions by winning new and replacement business. Programs highlighted represent a good mix of wins across ICE in various levels of EV, powertrains, new entrants and legacy customers, as well as deepening levels of vertical integration including complete seat, foam, trim and metals. One of the programs highlighted is the recently awarded Toyota Rav4 replacement business in China. Also, worth noting NIO's new Alps vehicle platform was awarded to Adient, strengthening the company's position with a growing Chinese domestic OEMs. Alps is NIO's latest sub-brand, marking an entrance into the mass market outside of the premium/luxury space. One final highlight to mention. As noted in the call-out box to the right, Adient is pleased to provide a complete seat or components to all three 2023 North American Car and Truck of the Year winners Acura Integra, Ford F-150 Lightning and KIA EV6. Looking to Slide 7, as we typically do we've highlighted several critical launches that are complete in process or scheduled to begin in the near term. I'm happy to report that launch is currently underway are progressing in line with our expectations. The launches and platform shown not only impact Adient's just in time facilities but span across our network of foam, trim and metals facilities. The team continues to focus process discipline around launch readiness has driven a very high level of performance, especially considering the launch load and complexity of launches that are planned for the year. We have no intention of letting up. Before turning the call over to Jerome and turning to Slide 8, let me continue with a few comments related to the current environment and how it's evolved over the past few months. If you recall entering fiscal year '23, Adient expected the overall operating environment to improve in '23 versus '22. That expectation has not changed based on what's transpired in our first quarter. That said, certain of the underlying assumptions around variance influences that were expected to have a significant impact in Adient's 23 results have shifted. As you can see on the slide, we laid out certain positive and negative influence that we navigated entering the year. Many of the positives include -- many of the positive influence remain intact such as Adient's self-help initiatives, the benefits from the balance in, balance out of new programs, the impact of ply chain disruptions, which are still placing downward pressure on the industry, but trending in the right direction. Commercial settlements with our customers, which encompass a variety of transactional items, including recovery of inflationary costs continue to be successfully negotiated. I would note that as certain inflationary pressures soften, the absolute level of recovery is needed to achieve our '23 earnings commitment will be reduced, which is good news, think of that as de risking our plan. Lastly, although we continue to forecast a year-on-year tailwind from increased vehicle production, the magnitude of benefits have moderated given the recent revisions to production forecasts. In China, for example, S&P recently lowered the forecast by approximately 500,000 units in the March quarter versus third December forecast. Given Adient's September 30 fiscal end, the expected recovery, which is largely recalendarized into December quarter, will benefit our fiscal year '24, not fiscal year '23. On the right hand side of the slide, just a few comments that we are seeing and expecting from the three key markets. In the Americas, we continue to monitor potential softening of consumer demand primarily driven by rising interest rates which ultimately impacts affordability. That said, our customers have not signaled through their production forecast to us that this is the case. We believe inventory rebuild combined with the likely increase in sales initiatives should support the current vehicle build assumptions for the remainder of fiscal '23. In China, we're monitoring return to work, absenteeism post lunar New Year's given the potential resurgence of COVID. At this time, absentee remains very low. Most of our facilities now have either low single-digit of cases or no cases at all and we're managing them as normal absenteeism. Although vehicle production was revised down in our fiscal second quarter, as I just mentioned, we believe solid economic growth and the absence of COVID restrictions will support improved production beginning in the back half of the year. For Europe, the outlook remains bleak. Lacking positive catalysts for the near-term and long-term in fact, based on S&P forecast vehicle production is not expected to return to pre-COVID levels in the foreseeable future. With that as a backdrop, the team is working on plans to improve the company's operating and financial performance in the region, assuming production remains at these depressed levels. Actions will be broad-based encompassing our operations above plant costs, future capital spending, et cetera. I'll provide additional details as the plan takes shape. Bottom line, we're focusing on executing our strategy, which we're confident will drive earnings, margin and cash flow growth in '23 and beyond. With that, I'll turn the call over to Jerome. To take us through Adient's first quarter 2023 financial performance and provide our current thoughts on what to expect as we progress through the remainder of fiscal '23. Let's jump into the financials on Slide 10. Adhering to our typical format, the pages formatted with our reported results on the left and our adjusted results on the right side. We will focus our commentary on the adjusted results which exclude special items that we view as either one-time in nature or otherwise skew important trends and underlying performance. For the quarter, the biggest drivers of the difference between our reported results and our adjusted results relate to purchasing, accounting, amortization, restructuring and impairment costs and a pension mark-to-market as we settled certain pension plans in the Americas segment and recorded a curtailment settlement loss. Details of the adjustment for the quarter are in the appendix of the presentation. High level for the quarter sales were approximately $3.7 billion up about 6% compared to our first quarter results last year. Improving vehicle production in the Americas combined with favorable customer mix in China were the primary drivers of the year-over-year increase. Adjusted EBITDA for the quarter was $212 million up $66 million year-on-year. The increase is primarily attributed to the benefits associated with higher volume and mix, improved business performance and commercial recoveries. These benefits were partially offset by the impact of increased business operating costs and the negative impact of currency movements between the two periods. I'll expand on these key drivers in just a minute. Finally, at the bottom line, Adient reported an adjusted net income of $33 million or $0.34 per share. Let's break down the first quarter results in more detail. I'll cover the next few slides rather quickly as the detail for the results are included on the slides and this should ensure we have adequate amount of time set aside for the Q&A portion of the call. Starting with revenue on Slide 11, we reported consolidated sales of approximately $3.7 billion an increase of $219 million compared with Q1, FY '22. The primary driver of the year-over-year increase was higher volume and pricing call it $430 million including about $15 million of higher commodity recoveries. The negative impact of FX movement between the two periods impacted the quarter by $211 million focusing on the table on the right hand side of the slide. Adient's consolidated sales for the Americas and China significantly outpaced production. Americas' growth over market was primarily driven by outperformance on key platforms that we're launching in last year's first quarter, such as the Nissan Pathfinder, Infiniti QX60 and Toyota Tundra, plus the benefit of increased commercial recoveries. In China, Adient strong customer, mix that supported our growth over market specifically our business with Beijing Benz, GAMC and NIO. In Asia outside of China, the story is similar to the Americas where last year's volumes were depressed due to program launches and our customer mix was disproportionately impacted by chip shortages. Europe's modest underperformance was in line with internal expectations, primarily reflecting our decision a few years back to walk away from certain unprofitable business in the region. With regards to Adient's unconsolidated seating revenue year-over-year results were down about 9% adjusted for FX. In China where a large majority of Adient's unconsolidated sales are derived resurgence of COVID had a significant impact to certain of our customers' production schedules, namely FAW and FCW. Partially offsetting the lower unconsolidated sales in China was improved volume and sales at our unconsolidated - JVs in the Americas and EMEA. Moving to Slide 12, we've provided a bridge of adjusted EBITDA to show the performance of our segments between periods. The bucket labeled corporate represents central costs that are not allocated back to the operations such as executive office, communications, corporate finance and legal. Big picture adjusted EBITDA was $212 million in the current quarter versus $146 million reported a year ago. The primary drivers of the year-on-year comparison are detailed on the page and are consistent with what we expected heading into the quarter. Positive influences included $59 million associated with increased volume and mix. Improved business performance also benefited the quarter by $24 million. Looking deeper within that bucket, the biggest positive driver was improved net material margin of $59 million. In addition, improved launch ops waste and tooling performance provided a $5 million benefit. Partial offsets within business performance were utility and wage inflation, which negatively impacted the quarter by $27 million. Freight was also a headwind, call it $13 million. Outside of business performance, Adient's SG&A costs were $11 million lower year-on-year. Primarily driven by the temporary compensation related savings and one-time benefits associated with minor asset sales, specifically certain minor footprint changes. The compensation related savings should not be included in the forward run rate as certain benefits such as the 401(k) match in the Americas were reinstated in January of 2023. Headwinds impacting the year-on-year comparison included higher net commodity prices call it $18 million, the majority of which impacted our EMEA segment. The negative impact of, currency movements between the two periods call it $7 million. Although we expect FX to be a headwind for the quarter and full year, recent currency movements suggest FX will have less of a negative impact on Adient's 2023 result versus our expectations at the beginning of the fiscal year. I'll have additional commentary on what to expect for the remainder of the year in just a few minutes. And finally, given the lower volume and sales at our unconsolidated JVs, and to a lesser extent, Adient's restructured pricing agreement announced last quarter within our Keiper JV equity income was lower year-over-year by $ 3 million all in all a quarter very much in line with our internal expectations driven from the continued strong execution and performance of our global team. Similar to past quarters, we've provided a detailed segment performance slides in the appendix of the presentation. High level, for the Americas, several positive factors drove the year-on-year increase and included improved volume and mix, improved business performance driven by increased net material margin, which was aided by commercial recoveries and to a lesser extent the restructured pricing agreement at our Keiper JV. Other movements within business performance included the benefits associated with launch, ops waste and tooling performance, not to mention a slight tailwind related to improving operating environment, which resulted and lower inefficiencies versus a year ago. Increased freight was a partial offset to these business performance benefits. Lower SG&A costs primarily driven by compensation-related savings also contributed to the year-on-year improvement. In EMEA, the year-over-year comparison was influenced by several factors such as improved SG&A performance, which included the one-time benefit of minor real estate asset sales, increased equity income resulting from improved volumes at our unconsolidated JVs and a modest improvement from volume and mix. More than offsetting these benefits were headwinds related to increased commodity costs and lower business performance. Within business performance, utility and wage inflation combined with non -- combined with increased non-ocean freight weighed on the quarter. Partial offsets included higher net material margin, aided by commercial recoveries and benefits associated with improved launch ops waste and tooling. In Asia, the benefit of higher volumes and mix that are consolidated entities combined with improved business performance were partially offset by unfavorable FX movements. Equity income was also lower as our unconsolidated JVs were impacted by the broadly reduced volumes in China. Let me now shift to our cash, liquidity and capital structure on Slides 13 and 14. Starting with cash on slide 13. Adjusted free cash flow defined as operating cash flow, less CapEx was an outflow of $17 million. This compares to an outflow of $74 million last year's first quarter. The year-on-year improvement and positive outcome was hard fought, especially considering the choppy operating environment and normal seasonality pattern of Adient's cash flow. The primary drivers of the year-on-year improvement included a higher level of consolidated earnings underpinned by improved volumes and an incrementally improving operating environment, coupled with lower levels of cash interest which was in line with internal expectations given our successful deleveraging efforts. Partial offsets included typical month-to-month working capital movements, the timing and level of commercial settlements and VAT deferrals and payments and planned increases in engineering spend to support our growth in customer launch activity. One last point is called out on the Slide. Adient continues to utilize factoring programs as a low-cost source of liquidity. At December 31, 2022, we had $181 million of factored receivables versus $218 million at last year's first quarter end. Flipping to Slide 14. As noted on the right hand of the slide, we ended the quarter with about $1.9 billion in total liquidity, comprised of cash on hand of $901 million and $971 million of undrawn capacity under Adient's revolving line of credit. Adient's debt and net debt position totaled about $2.6 billion and $1.7 billion respectively at December 31, 2022. The modest increase in gross debt compared with September 30, 2022, was driven by the recent appreciation of the euro and its direct impact on Adient's 2024, 3.5% Euro notes. Speaking of the 3.5% Euro notes, although those notes mature in August of 2024, they become current in August of this year. The team continues to monitor the credit markets and we'll look to refinance those at an appropriate time obviously driven by market conditions, which have improved in early 2023 compared with late 2022. One last point before moving on and as noted on the slide, Adient continues to forecast free cash generation of about $200 million in FY 2023, underpinned by the Company's solid operational execution and intense focus on cash management and earnings growth. Given our significant deleveraging over the past few years combined with our expected earnings and cash generation in FY23, Adient remained solidly on track to achieve its target leverage ratio of between 1.5 times to 2 times net debt to adjusted EBITDA. With that, let's flip to slide 15 and review our outlook for the remainder of fiscal FY23. As Doug mentioned, the overall operating environment remains choppy with certain external influences trending favorably and other influences appearing stubbornly persistent placing downward pressure on the industry. We are successfully navigating through the various obstacles and continue to expect the operating environment will be much improved in the latter part of 2023 versus the choppy conditions that exist today. That said, the pacing of the improvement is likely to be more back-end weighted versus the gradual improvement we expected when we gave the -- our original guidance back in November. Changes to vehicle production schedules predominantly in China, which have been re-calendarized out of the current March quarter is the primary driver. With that as a backdrop, based on Adient's first quarter results and current market conditions, including revised production forecast and FX assumptions for the year, we currently forecast the following. Adient's consolidated sales to land at about $15 billion, up from our prior forecast of $14.7 billion. The increase is primarily driven by revised FX assumptions in particular to the euro which has appreciated from about 1.02 in November when we provided our original guide to around 1.08 today. For adjusted EBITDA, we continue to forecast at approximately $850 million. That said, the composition between consolidated earnings and equity income has been revised. Given the lower level of production forecast at certain of our unconsolidated JVs, equity income is revised down to about $70 million versus the November guide of $90 million. That said, Adient's consolidated EBITDA is now forecast to be about $780 million, that would imply an EBITDA margin excluding equity income of about 5.2%, consistent with our earlier guide and a 100 basis point improvement above fiscal 2022. Important to note the re-calendarization of production in China out of the current quarter and its significant impact on equity income and to a lesser extent consolidated results in China given our favorable customer mix, we expect Adient's Q2 EBITDA to fall short of the 212 Q1 result just announced today, largely driven by the drop in equity income which is forecast at less than $10 million in Q2 versus the $27 million for the quarter just completed. This would now represent the trough in fiscal 2023 earnings. Moving on, interest expense is still expected at about $160 million given our expected debt and cash balances as well as interest rate expectations, cash taxes, thanks to various tax planning initiatives continues to be forecast at around $90 million. CapEx largely based on customer launch schedules is forecast at $300 million, no change from the November guide. And finally, our improved earnings combined with our reduced calls for cash, such as the benefits associated with our deleveraging and relatively flat cash taxes are expected to underpin free cash generation of about $200 million. Again, no change from November. Good morning, everybody. Just maybe wanted to clarify something. First, your original guidance for 2023 -- fiscal '23 included around $180 million of commodity and other headwinds and you had offset that with $50 million to $70 million of recoveries and little bit over $100 million of performance. It sounds like that $180 million is -- that headwind is lower now was hoping you might be able to give us a little bit of color on that. And just more broadly, as some of these headwinds are shifting from commodity to things like labor and energy, can you give us some thoughts on how the recovery discussions may be evolving? Yes, maybe I'll take the second part of it first and then we'll go back to the specifics. I would say, Rod, when we change what the issues are labor in energy versus material, it is a different conversation with our customers. It's -- let's say a recovery that they're not necessarily a custom to discussing because we've never had this spike in inflationary pressure in those two areas. And so it's very different than steel economics, which is part of our dialog even at the inflated levels, we've been experiencing in the recent years. That said, I would say the discussions are going well and we're making good progress and we still have a lot of work to do to get those issues completely resolved. But we were upfront early with our customers. We went in with a tremendous amount of clarity on the issues and what the customer said. I'd say tend to engage and discuss those issues we've made good progress in -- but as I said, we still have some work to do and some customers are a little bit more stubborn on the issue. Yes. And then to your first question, Rod. In terms of the -- what we see in terms of cost that are in the system, I'll just talk '22 what we seeing in -- sorry '23. Let's call it $200 million of costs that are in between net [ecomm] and other sticky costs that are there and bouncing up $100 million of recoveries, I think those recoveries move between whether it's any kind of recovery or another commercial recovery that we see. I think ocean freight, we see improving, we see energy improving. I think what you have to be careful although is ocean freight we see improving maybe back to '20 levels but energy costs I think getting back beyond '22 levels yet. We don't see it getting back to '21 levels and we don't see things like labor improving -- labor is there, labor is not going to trend backwards. And so, to Doug's point, we need to redouble some of our efforts with those recovery discussions with our customers. And so while maybe Energy softening, there's other costs that are coming into the system that we need to go back after from that standpoint. So it's really a basket of goods discussion with the customer. Is that help to answer your questions? That is helpful. Maybe just, Jerome, asking it a little bit of a different way, just to help us get a high-level view back in 2022, you had given us some color on like that $675 million of EBITDA reflected it was $400 million of volume, headwind and $100 million is sticky cost and $100 million of temporary costs. It sounds like you're saying that on the cost side that $200 million is being offset by about $100 million and you still have -- you will have another $100 million to go as you look out to 2024. Is that the right way to interpret that? Okay. And then just lastly, the conversion on volume and price still a bit under 14% below historical levels, is that -- is there anything that's unusual just relative to launches or anything else? Because I thought that the margins on some of these new launches would be higher just given the complexity that you're absorbing. Yes, I think in an ideal operating environment, I think that'd be correct. But we're still far from ideal and so we still have a lot of stop-start that's occurring within our production environment. We're not running at what I would call optimize the efficiencies because of the stop start nature. I mean, if you look at even China in what would have been our Q1 with the COVID impacts that we saw, especially in the North. And then those trickled down to the south of the country, a lot of stop-start. In Europe, with certain of our customers still a lot of disruption. And then, even in the months of October and November, December was better, but in October and November, we were still kind of in that low '80s schedule attainment with a lot of our customers. December was a better month. And so still, it's just not a normal operating environment that would allow us to convert and flow through at 16% to 18% leverage on volume like we have normally. I think, on top of that, when you think about it from a mix standpoint and the impact China's having, that's a bit of a negative for us. So as that volume improves that contribution margin should improve as well. Great. Thanks for taking my questions. Just to follow up on that, I just want to make sure I got the key drivers. You're holding full-year guidance, but it sounds like sticky costs are up around $20 million, JV incomes down $20 million and that's offset by $540 million and higher recoveries than you're expecting. Any other factors we should be thinking about from the change from last quarter? No. I mean, I think that's probably fair from that stand point, Colin. I think the biggest driver is really looking at kind of the equity income piece of it. And what's happening in China with employee income and the re-calendarization of the volume portion of it is the larger piece of that. Okay. And you bring up, China. So one of the surprises I think in the quarter is your Asia margins are actually extremely good. Anything unusual going on in this quarter, that's not sustained because actually lockdowns in calendar Q4 would have actually kind of messed with the margins in that segment. And yet, they seem to hold on pretty well? Yes, no, there were certain one-time commercial settlements in the quarter. And our own internal operations that -- will not repeat. And that's really what drove the margin within the quarter within our China operation. That in top of Asia is China and all of our other Asian business, which has not been impacted by COVID. Has not done a year-over-year basis been disrupted like it was a year ago last. We're on the plus side of launches, roll-in, rollout has been favorable in that albeit on a smaller revenue base. That's helped to offset some of the China impact. Got it. And just lastly, you mentioned in the comments about potential more Europe restructuring actions. Would that be reflected in the current guidance or if you take additional actions and save costs, that would be sort of upside to the outlook? Yes, it would be incremental to the current guidance. And so, we're in the midst of that right now. If you look back two, three years ago, we took on a fairly significant amount of, I think it was some $200 million of restructuring, anticipating a revenue level in the region that's really not recovered to that level. So as we kind of recalibrate and reset, we're trying to assess whether there's additional actions that need to be taken. There'll be more to come on that if we decide that's the direction we want to move in. Good morning, guys. I just wanted to follow-up on the volatility and schedules that Rod touched on, I think you guys were getting to a little bit. I mean, even at the beginning of this year in January, it sounds like there's fits and starts and volatility already. It doesn't seem like it's something that's going to ease anytime soon. How should we think about what the actual cost of that volatility was? I mean, you guys were kind of talking about flow through being depressed at 14% on volume and mix. Maybe it should be closer to 18% is it that four points on flow through kind of the way to think about it or is there a dollar number in the quarter and for FY 2022 you could give us so we can think about how to walk off what something might be more normal? Yes, I think that 400 basis points seems a little high to me. I think we'd have to circle back if we're really going to pinpoint a number for you on that. I would suggest though that we do see volume improving from just a start, start standpoint. I think it depends on where your baseline is that you want to measure that from. But the schedules we're seeing from our customer are far stronger. There's far less disruptions that we've experienced. I'll say a year ago, nine months ago. There was a time that we were building to about 70% of what the customer was releasing to us on a regular basis. And I think that number is, much higher now probably above 85%. I mean, if you think about kind of sequentially as we go throughout the year, kind of quarter-over-quarter to put in what we expect from improvement. It certainly isn't anything like 400 basis points. When we think about kind of the March as we go forward, we've always said it's you know a 100 from a 100 basis points from volume, a 100 basis points from kind of performance and then 100 basis points of what I call kind of balance in, balance out management of our key programs. So in that, 100 basis points of what I'd call performance is where you'd see some of this premium and inefficiency coming out. And so it's not 400 to be in that 100 basis points bucket, a subset of it. Okay all right, that's helpful. And then just second, I mean, I know this is kind of a morbid a weird question, but it does sound like you're through the worst of the COVID wave in your plants. We've heard that from - other suppliers in the industry. So as we go forward, I mean, obviously there is, economic concerns in China. But as far as the COVID disruption, do you think you're clear the worst of it at the moment on the reopening? I think that would be a bit optimistic, just based on the fact that we've just returned from Lunar New Year. All the early indications are positive. We were very concerned whether we were going to get the return to work that we had planned for a worse case. It was far better. The employee center plants appear to be healthy. So there's some indication that perhaps the virus has kind of burned through if you will, and we're more dealing with natural immunities. But we'll never claim to be COVID expert. And if you look at mutations and could there be another wave. We've all seen that it's pretty unpredictable virus. So we're taking a lot of precautionary measures talking to the team there. They're relatively optimistic life seems back to normal. Those are all really encouraging signs. But I think we're kind of more on the - let's wait and see how this plays over the coming weeks and months before we get over our skis on it. Yes, that's fair statement. Lastly, can you just talk about new business wins and how they're going sort of versus history and how we should think about the book business building and also just kind of remind us if we're truly through all the less economic contracts from days ago when we're actually working into more - sort of large majority of portfolio being more normalized contracts though, new business wins and where we are sort of weighted, sort of average of uneconomic to rework contracts? Yes, we're really - the reworker contracts it's really kind of building out some of the ugly contracts that we had in place. And there's a tail on that. It gets smaller as time goes on. With regard to new business wins, we feel very good about where we're at our new business wins. We've been able to push back on commercial issues and support that with really outstanding performance with our customers. And such that we can have thoughtful discussions on where we go and kind of have a reasonable expectation on recoveries and not at the expense of the backlog. With regard to the wins, not all customers are created equal and the ones new business that we want to win with the customers that are near and dear to us. We've been extremely successful with. And again, we clearly will walk away from business that we think financially doesn't make sense even if it's replacement business. We've done that in the past. We think that's been the smart move for us. We'll continue to do that in the future. And then when we look at China, I think what's difficult to predict when you start to build your backlog is really what the mix of that business is going to look like in the future with all the new entrants. We're excited about the wins that we have there. But we have to be really thoughtful where we invest our capital with those customers as we think that that will be a pretty dynamic market over the course of the next five, 10 years. But I feel great about where we're at, new business wins. I think we're making the right decisions. We're not trying to measure success solely on market share. We are really focused on return on invested capital to make sure that the business, we win we will get the recovery from an investment standpoint. Thank you very much. Maybe to start picking up from where you just left it off on the business win, so for this year, you have incorporated in guidance something like six points of gross above market, which just impressive, but also fairly unprecedented. Can you really talk about again what the drivers are for this? And then how do you think about that metric on a go forward basis? Is some of the traction you're getting on new business sort of able to push up your growth of a market framework on a go forward basis or is it mostly as it was and this year is more of a one-off? Yes. In terms of this year Emmanuel, what's really driving that is like - I'd say two factors, one in China and I think we've referenced this on the Q4 call from last year. There are several programs that are rolling on this year that -- I'd say it's just a schedule or a factor of when those programs are rolling on with some several select customers mainly NIO, Xiaopeng and Daimler in that region Mercedes that are significantly benefiting us and it's very positive customer mix for us. And so, I wouldn't build that into your terminal rate. And then also within the Americas, we referenced it on today's call, we have the full benefit of the tender launch, we have the S650 program for the Mustang, sorry that's rolling on. That was a conquest win for us. And then we have the full benefit of the Sequoia which is rolling on which is also a conquest win for us. And so, it's really more of a factor this year the timing of those programs and when they cycle in. I think, so I wouldn't build the 6% and I think what we've talked about though, what's more important what we really look at is kind of the quality of the wins. And so what's important when you look at the Sequoia as an example, it's a full value chain for us. So it's the jet, it's the trim, it's the foam and the metals as they full reuse from the Tacoma and the Tundra front row. The Mustang is the jet, it's the trim and it's almost all of the foam on that vehicle. The programs in China were a full-service supplier, so jet, trim, foam and the kits were almost designed responsible entirely for the NIO and the Xiaopeng. And so when we talk about growth, I think some of what you guys have put that prior where it's at market or at CAGR is what's critical, but more important is really full vertical integration on those platforms. Every dollar of revenue, and we've said this before, every dollar of topline revenue isn't equal. It's really what's underneath that dollar of topline revenue. And do we have the jet for the topline but then we also have the trim and the foam that's below it, and that's what we really like to focus on in there. Doug, I don't know if you have anything else to add. But does that help to answer your question on that 6%, Emmanuel? Perfect. Yes, thanks for putting a finer point on this. And then the second question is on the cost side. So obviously, you have some higher aspirations for margins and I wanted to know, can you maybe just quantify as of sort of the end of 2023 if you achieve your guidance, what would be leftovers in terms of cost inefficiencies whether it's volume related or efficiencies that you're trying to get out of the operations. What -- how would you quantify sort of like the bucket of cost opportunity from here? I think it goes back to what John asked earlier, a little bit manual how we view it. If we look at our long-term goal for this business and where we think this business can run at circa 8%, 8.5%. It really breaks down to a third or third or third to bridge the gap between where we exit '23 and where we want to get to with a third of the gap coming from volume. So getting back to kind of the normalized LVS build level, the third of that GAAP closure comes from volume. A third of it comes from closing out the remaining, what I would call, sticky costs that are left in the business, whether that is labor, GAAP closure or ocean freight, returning back, the energy returning back, the other transient costs in the business over the road-freight. If that doesn't come back then it moves into the last third of the bucket, which is then business performance and us going and getting it either through balance in balance out or just commercial might, and us retrenching that through our commercial negotiations with our customers. And it really does break down when we do our internal target setting to really a third, a third, a third in between those buckets. And from there, you can say, okay, when does the industry get back to kind of a $90 million build, that's when the first third comes back? And if you look at ocean freight and some of the over-the-road freight where some of the indices are returning to, you can kind of and say when the other third comes back and then our balance and balance out be in the last third or commercial recoveries. And I think I asked you that last quarter, but I guess some of these buckets at least sort of like two out of the three seem to be sort of essentially anticipating a progression for the industry and for the macro environment, which sort of like may or may not happen quickly. Is there an opportunity for you to sort of like to accelerate this, resize the business for a smaller industry or is your longer-term views in a more optimistic on the industry and therefore you should maintain sort of like your structure and your cost base the way it is now? Well, that's -- I think when I think about it, I look at two of the regions. And I think we're relatively comfortable or confident in our cost structure that exists today. So I think of Asia and the Americas. And so we kind of risk profile that, we don't believe there's further actions. The one area as we indicated is what the recovery looks like in Europe and whether that's going to dictate that. We accelerate actions in that region to change our breakeven profile there and the corresponding cost associated with doing that and that's what we're in the midst of assessing right now. I think what we've also demonstrated that is -- that as some of the volume -- non-volume related cost persist. I think, we've demonstrated that, we know how to go and settle that with our customers in a relatively short period of time. So either, the cost dissipates what -- to a certain degree, what we've been experiencing with energy costs in Europe, which means we don't have to go and recover that. So results itself or where it remains in place then the conversation changes with the customer and that these are structural costs that were originally envisioned in our business and they have to be addressed. Good morning, everyone. Evan Silverberg on behalf of Adam Jonas. Looking at the supply disruption being seen at the OE customers outside the COVID, are there any key issues, your customers are highlighting. I think the one issue that they continue to highlight to us is there is some residual electronics more semiconductor-related that impact them and then the, probably the biggest issue is supply chain labor and that's everywhere for different reasons in China. I think that's a bit of the concern on the recovery there is as you go through the supply chain will labor be an issue there as workers return to work. Similarly in Europe, as we kind of recalibrate labor cost there and labor availability, particularly in Eastern Europe that can be disruptive to the supply chain as well as in the U.S. Semiconductors, clearly there is an improved level of performance there. Labor is still a bit of a wildcard. And it's just how it manifests itself within the supply chain and not only the Tier 1 but Tier 2 and Tier 3. Thanks for that. Obviously, you guys are a step removed from the semi-issue, but is there any color you can provide on whether the OEs are saying it's a specific type of semiconductor that short or whether it's across the board? Thank you. It's more the feedback we get, it's across the board. And no sooner to that they think they have one issue solved and another issue arises that they didn't quite completely comprehend. Great. Thanks, Evan. And Danielle, it looks like we're at the bottom of the hour. So, this will conclude the call today. If you have additional questions or any follow-up questions, Eric and I will be available. Just feel free to reach out and we'll talk soon. Thanks again for participating.

EarningCall_426

I would now like to turn the conference over to Mr. Yan Jin, Senior Vice President, Investor Relations. Please go ahead. Good morning, everyone. Thank you all for joining us for Eaton's Fourth Quarter 2022 Earning Call. With me today are Craig Arnold, our Chairman and CEO; and Tom Okray, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Craig, then we will turn it over to Tom, who will highlight the company's performance in the fourth quarter. As we have done on our past calls, we will be taking questions at the end of Craig's closing commentary. The press release and the presentation we'll go through today have been posted on our website. This presentation includes adjusted earnings per share, adjusted free cash flow and other non-GAAP measures. They're reconciled in the appendix. A webcast of this call is accessible on our website and will be available for replay. I would like to remind you that our comments today will include statements related to the expected future results of the company and are therefore forward-looking statements. Our actual results may differ materially from our forecasted projections due to a wide range of risks and uncertainties that are described in our earning release and the presentation. Thanks, Yan. We'll begin with the highlights of the quarter on Page 3. And I'll start by noting that we again delivered very strong results in the quarter and record performance for the year. We generated adjusted EPS of $2.06 for the quarter and $7.57 for the year, both all-time records in each period. Our Q4 adjusted EPS was up 20% from prior year. Our sales were $5.4 billion, up 15% organically and for the second quarter in a row with particular strength in utility, industrial, commercial institution, data center markets for electrical and commercial aerospace, vehicle and eMobility markets on the industrial side. And we continue to post strong margins. Q4 margins of 20.8% were up 150 basis points from prior year, near the high end of our guidance range. And incremental margins were 33% in the quarter. For the full year, we delivered record segment margins of 20.2%, up 130 basis points from prior year. And as noted here, orders continue to remain very strong. On a rolling 12-month basis, Electrical orders were up 25% and Aerospace orders increased 24%, which led, quite frankly, to record backlogs as well, up 68% in Electrical and up 21% in Aerospace. Now lastly, in what was an otherwise challenging year, we generated record free cash flow in the quarter with adjusted free cash flow up 41%. And our free cash flow as a percentage of sales was 18.1% in the quarter. While improved cash flow in the second half of the year, it wasn't enough to really achieve the full year cash flow targets. As we indicated, we continue to prioritize supporting higher organic growth, winning new orders and protecting our customers, which all contributed to higher levels of working capital. But we still have work to do and with a focus on those areas that don't impact revenue growth. On Page 4, I summarize our performance highlights for last year. Overall, I'd say, in a challenging operating environment, our team delivered strong financial results. And as noted here, we exceeded three of our four key financial metrics. First, for organic revenue, we posted 13% growth, which was actually more than 60% above our original guidance at the midpoint. Throughout '22, we raised our organic revenue growth in all segments, and the team delivered on the organic growth expectations that we set. It's worth noting that our largest business, Electrical Americas, delivered 16% organic growth, 2x the midpoint of our original guidance. Second, I'd note that we continue to demonstrate our ability to drive profitable growth with record margins of 20.2% in 2022, which was 10 basis points above our original guidance at the midpoint. Third, adjusted EPS of $7.57 was $0.07 higher than the midpoint of our original guidance. And I'd note that we fully offset the impact of some $500 million of unfavorable currency or roughly $0.20 a share. Lastly, I'd note that we did miss our free cash flow guidance for the year. Most of this miss went into working capital to support higher levels of sales and orders and the record backlogs. But I'd say here, once again, I know we can do better. As you might expect, supply chain disruptions and our decision to prioritize protecting customers with higher inventory played a major role in this inventory growth over the year. But overall, I'd say it was a good year despite a year filled with inflation, labor shortages, supply chain disruptions and FX headwinds, and the team delivered record financial results and we go into 2023 with positive momentum. So turning to Page 5. I hope at this point, you would agree that 2022 wasn't an exceptional year but just another year of delivering what we promised. And that it reflects the fundamental changes that we've made to the company over the last decade. We are a very different company today than we were 10 years ago. We've embraced the realities of a changing world and a necessity for us to change as well. We're now in attractive growth-oriented end markets, and we have a proven formula for how we run the company better through the Eaton Business System. With this transformation, we've become a stronger company that has delivered higher growth, higher margins and better earnings consistency. And we continue to be a good steward of your capital. The end result is the new Eaton where some 90% of our profits now come from Electrical and Aerospace businesses. But once again, when I'm done, we'll continue to apply our operational model, our strategic framework and our potential criteria, and we'd expect to continue to maximize value to all of our stakeholders. And as you can see on Page 6, what this transformation has delivered to our shareholders. As you would expect, our strong results have translated into very strong financial results. And for the sake of comparison, we charted total shareholder returns for 3, 5 and 7 years. And we've compared our results with the S&P 500, the medium of our peer group and the XLI Industrial Index. And in every case, Eaton has significantly outperformed our benchmarks. And as I'll explain in the next few slides, we do believe our best days are still in front of us. Turning to Page 7. Our transformation into a global intelligent power management company has positioned Eaton at the center of some of -- what we think are some of the most important trends that we'll see in our lifetime. The most significant being climate change and all the downstream implications that it brings. As we all know, climate change is driving the need to transition from fossil fuels to renewables, and increased regulations are driving the demand for new solutions. These solutions will require tremendous investments in renewables and grid infrastructure for both new and existing buildings. This trend is also closely coupled to need to electrify the economy. Cars, trucks, planes, buildings are all requiring more electrical content. And as we move away from fossil fuels, this allows us to take advantage of renewables. And digitalization is providing us access to data and insights that are allowing us to be more connected, more productive and more efficient than ever. It's also, by the way, creating a need for more data centers, an important end market for Eaton. Additive to these trends, we're also on the front end of an aerospace recovery cycle that will drive growth in both our commercial and military markets. I don't know about you, but I can tell you, I don't -- I can't think of a company with a better set of market dynamics than Eaton. And while we're not ready to change our long-term growth goals, I'd be surprised if we didn't exceed our previously announced targets of 5% to 8% annual growth. Next, on Page 8, we highlight how these megatrends are supported by unprecedented government stimulus spending really around the world. In fact, these programs will have a direct impact on the growth rate of more than half of our end markets. And in the U.S. alone, the Infrastructure Act from 2021 and the Inflation Reduction Act from 2022 will fund some $450 billion of grid modernization and other climate-related programs. And of particular importance to Eaton is the $88 billion that are set aside for power grid updates and EV charging networks and incentives. In Europe, the EU recovery plan recovers -- provides, excuse me, $244 billion of green energy transition, which member states are now working on implementing. And in China, the government has set clear goals to lower carbon emissions. They've laid out plans to strengthen their grid by 2025, including investments in more wind and solar. China also continues to lead the world in the adoption of electric vehicles. But even if you exclude China, we still estimate that between the U.S. and EU programs will expand Eaton's addressable market by some $11 billion to $14 billion over the next 5 years. And I'd say this is just another powerful tailwind that supports our confidence in the growth outlook of the company. Thanks, Craig. On Page 9, I'll begin with highlighting a few key points regarding our Q4 results. Revenue was up 12% with organic growth of 15%, partially offset by a 4% foreign exchange headwind and a 1% favorable net impact from acquisitions. This outcome illustrates our focus of prioritizing growth in our customers. With total revenue growth of 12%, we posted solid operating leverage. Operating profit grew 21% and adjusted EPS grew 20%. Further, excluding the $0.05 impact from foreign exchange, growth in adjusted EPS would have been 23%. All in, strong organic growth and margins enabled us to report all-time record adjusted earnings of $825 million and adjusted EPS of $2.06, which was above our guidance midpoint. Lastly, I'd like to note that we continue to raise the bar with our Q4 records for both segment operating margin and segment operating profit. Moving on to the next chart, we summarized strong financial performance for our Electrical Americas business. For yet another quarter, we have set all-time records for sales, operating profit and margin. Further, we've also set all-time records for these metrics for the full year. Organic sales growth accelerated from 18% in Q3 to 20% in Q4 with robust growth in every end market and particular strength in utility, data center and commercial and institutional markets. Operating margin of 23.7% was up 450 basis points versus prior year, benefiting from higher volumes. In addition, incremental margins were quite strong at 47%. We continue to manage price effectively to more than offset inflationary pressures. Further, it should be noted that Electrical Americas outperformed their original 2020 guidance by 100 basis points. Orders in backlog continued to be very strong. On a rolling 12-month basis, orders were up 34%, which remains at a high level with strong growth across the board and particular strength in data center, utility and industrial markets. Backlog ended the year up 87% versus prior year and increased sequentially from Q3. In addition to the robust trends and orders in backlog, our major project negotiations pipeline in Q4 was up nearly 100% versus prior year from especially strong growth in manufacturing, data center, industrial and utility end markets. Overall, Electrical Americas had a strong quarter to round out a very good year and continues to be well positioned as we start 2023. Moving to Page 11, we show results for our Electrical Global segment, which produced another strong quarter, including records for Q4 and full year records for sales, operating profit and margins. Organic growth was up 8%, which was entirely offset by headwinds from foreign exchange of 7% and divestiture of 1%. With respect to organic growth, we saw strength in utility, industrial and data center end markets. On a regional basis, we posted high single-digit organic growth in IEMEA and mid-single-digit organic growth in APAC. Operating margin of 18.7% was down 80 basis points versus prior year, primarily due to foreign exchange headwinds. We continue to see good order intake. Orders were up 11% on a rolling 12-month basis with strength in data center and commercial and institutional markets. Backlog growth of 17% also remains strong. Before moving to our industrial businesses, I'd like to briefly recap the combined Electrical segments. For Q4, we posted organic growth of 15%, incremental margins of 44% and operating margin of 21.8%, which was 250 basis points of year-over-year margin improvement. For the full year, our Electrical segments grew 15% organically, generated 33% incremental margin, increased margin 140 basis points, posted 25% rolling 12 months order growth and increased backlog 68%. We are confident that we're well positioned for continued growth with strong margins in our overall Electrical business. The next chart recaps our Aerospace segment. We posted all-time record sales and operating profit for both the quarter and on a full year basis. Organic growth accelerated to 11% with a 4% headwind from foreign exchange. This growth was driven by strength in commercial markets with commercial aftermarket up 35% and commercial OEM up more than 20%. Relative to profit, operating margin was strong at 24.5%. And it's worth noting that Aerospace outperformed their original 2020 guidance by 100 basis points. Order growth and backlog are very encouraging. On a rolling 12-month basis, order acceleration continued, up 24% compared to 22% in Q3 and 19% in Q2 with strength across all end markets. Similar to Q3, we saw especially strong growth in military OEM orders, up 80% in the quarter, which positions us well for growth in 2023 and confirms our expectations for increased defense spending, including breakout performance in 2024. Year-over-year backlog increased from 17% in Q3 to up 21% in Q4. Moving on to our Vehicle segment on Page 13. Vehicle had strong revenue growth in the second half of the year. In Q4, revenue was up 16% with 18% organic growth and 2% unfavorable foreign exchange. This coming off 19% organic growth in Q3. We saw growth across all markets with particular strength in North America and South America light vehicle. We also saw double-digit growth in APAC. Operating margins came in at 15.2% with unfavorability to prior year, primarily due to manufacturing inefficiencies. As expected, we were able to completely offset the impact of inflation with pricing in Q4. We also secured wins in new and sustainable technologies, such as EV gearing and transmissions, with a large and growing opportunity pipeline. On Page 14, we show results for our eMobility business. We generated very strong growth in the quarter. Revenue was up 58%, including 17% from organic growth and 44% from the acquisition of Royal Power, partially offset by 3% negative foreign exchange. Margin improved 780 basis points versus prior year driven by higher volumes and the impact from Royal Power. We remain encouraged by the growth prospects of the eMobility segment. Since 2018, we've won $1.4 billion of mature year revenues in this business, including a recent $400 million win for power protection and distribution units with a European customer. This is a major new program win in both U.S. and European markets with production starting in 2024. This win demonstrates Eaton's ability to leverage our capabilities across our entire portfolio, including core technology in both electrical and industrial businesses. We partnered with our customer to electrify their mobile platform with solutions, including Breaktor and Bussmann fuses. We also leverage our extensive vehicle expertise and added content from our Royal Power acquisition. Overall, we continue to make progress toward our long-term goal to create a $2 billion to $4 billion business with 15% margins by 2030. We are now on track to exceed our expectation to deliver $1.2 billion of revenue and 11% margin by 2025. Moving to Page 15. I'm going to unpack a theme that Craig mentioned at the top of the call related to our strategic investments in working capital to support strong orders and backlog, which enables accelerated organic growth. Overall, in spite of supporting surging orders and backlog, we are driving working capital improvements. To illustrate the trend, I'll provide a couple of examples. Net working capital to orders and inventory as a percentage of backlog. Focusing on the left side of the chart, the average value of our Electrical and Aerospace quarterly orders in 2022 was more than 20% higher than 2021 and 33% more than 2019. However, to support these increasing orders, we have only slightly increased the absolute value of our working capital. The result is shown in the graph on the left side of the page. Our ratio of net working capital at year-end to trailing 12-month orders has stepped down significantly from 2019 to 2022. Moving to the right side of the chart. Another way to look at working capital efficiency is comparing backlog growth to inventory growth. At the end of 2022, our Electrical and Aerospace backlog reached approximately $11 billion, which is up almost 160% since the end of 2019. However, to support this much larger backlog, inventory for our Electrical and Aerospace businesses has only increased by 38% since 2019. The graph on the right side of the slide highlights the significant improvement since 2019. Our inventory as a percentage of backlog has been roughly cut in half from the end of 2019 to the end of 2022. We are supporting a much larger backlog with a smaller percentage of inventory. In summary, we have prudently prioritized taking care of our customers and capturing growth, which has required investments in working capital and has impacted free cash flow metrics in the short term. That said, we are managing working capital more efficiently. The 2023 guidance on Page 16 shows that we are well positioned for another strong year of financial performance. Our organic growth guidance for 2023 is a range of 7% to 9% with particular strength in Electrical Americas and Aerospace with organic growth rates of 8% to 10%. eMobility is also a standout with 35% organic growth guidance at the midpoint tied to the ramp of new programs. These organic growth rates correspond to our end-market growth assumptions that we provided on our Q3 earnings call and that Craig will update in a few slides. The end-market growth, combined with increased backlog, provides tremendous visibility and confidence in our 2023 outlook. For segment margins, our guidance range of 20.7% and 21.1% is a 70-basis points improvement at the midpoint from our 2022 all-time record margin of 20.2%. In addition to projecting strong organic growth for 2023, we're also growing margins and continue to invest in future organic growth. Moving to Page 17. We have the balance of our guidance for 2023 and Q1. I'll touch on some highlights. For 2023, we are guiding adjusted EPS in the range of $8.04 to $8.44, which has a midpoint of $8.24 is 9% growth over 2022. We expect continued foreign exchange headwinds, which we estimate between $100 million and $200 million adverse. For operating cash flow, our guidance of $3.2 billion to $3.6 billion is a 34% increase at the midpoint over 2022. The key drivers here are a combination of higher earnings and improved working capital, particularly lower inventory levels as supply chains normalize. While our plan includes significant improvement in free cash flow during 2023, I'll note that we anticipate due to higher interest expense and CapEx in Q1 as well as timing-related headwinds such as taxes that free cash flow in Q1 will be relatively flat year-over-year. For share repurchases, we anticipate a range of $300 million to $600 million. Moving to Q1. For Q1, we are guiding organic growth of 8% to 10%, segment margins between 19.5% and 19.9%, and adjusted EPS in a range of $1.72 to $1.82. Thanks, Tom. Turning to Page 18, we provide a look at our current market assumptions for the year. This chart has been updated from what we shared in our Q3 earnings call, but we really don't see any material changes here. I'll remind you that we do expect a mild recession in 2023. But given the secular growth trends that we've talked about, our strong orders and healthy backlog, we would expect to see growth in most of our end markets with six of our end markets representing some 70% of the company up nicely. And these markets are also, by the way, supported by a very strong negotiation pipeline. Of note, we now expect even stronger growth within our commercial and institutional segment given the relatively strong orders growth in the quarter and the continued strength in Dodge nonresidential construction contracts. The only down market is expected to be residential, which only accounts for 8% of our revenue. In total, we're encouraged to report that 85% of our markets are expected to see positive growth in 2023. And lastly, let me close on Page 19 just with a few summary comments. First, I'd say our thesis for Eaton as a changed company has continued to pay even better than we expected. Second, the growth trends, the right investments have delivered better top line growth, and we continue to run the company better. We delivered 13% organic growth with record orders and backlog. And despite supply chain challenges, an inflationary environment and significant FX headwinds, 2022 was a year of record profits, record margins, record adjusted earnings and adjusted EPS. And I'm particularly encouraged by our 20% increase in adjusted EPS growth in Q4, which I see as a positive indicator for 2023. So despite the macro concerns, we expect 2023 to be another very strong year. And the company is on track and likely ahead of schedule for delivering our 2025 goals for revenue, margins, free cash flow and adjusted EPS. Thanks, Craig. [Operator Instructions]. Thanks in advance for your cooperation. With that, I will turn it over to the operator to give you guys the guidance. So still very strong trends in -- especially in Electrical Americas. I'm just curious, we are seeing a divergence, especially on backlog between Americas and Global. Is that primarily macro in your opinion? Or do you think there's more secular tailwinds hitting in the Americas with all the similar money coming through? And any details on the front log of projects in the Americas would be very helpful. Yes. No, we're very pleased, obviously, with the growth that we're seeing in both our global business as well as in the Americas business, but the Americas business is clearly performing extremely well. And I think -- if you think about some of the things that we talked about, Nigel, whether it's this stimulus spending where the U.S. is really pumping fairly significant dollars into markets that are really important for us, you think about some of these large projects and let's call it, reshoring that's taking place in the U.S. market, that's certainly strengthening the U.S. business as well. So I do think there's a lot of macros today that are strong for the company across the board that are just, I'd say, intensified when you think about what's going on in the U.S. market right now. So the secular trends are everywhere. We talk about energy transition, electrification. It's taking place across the world. And I just think the U.S., because of this increased focus on infrastructure reindustrialization, is seeing an additional boost above some of the other regions of the world. Okay. I'm not sure if there's any particular projects you'd call out or when you call out on the front log. But my follow-up question is probably for Tom. The $70 million of corporate expenses in 2023. Maybe you could just break that out between true corporate's interest and pension. Yes. Thanks, Nigel. Most of that is going to be in interest expense and pension with interest expense even being greater than pension. And I would caution that there's a lot of moving parts on both of those, what's going to happen to interest rate, what's going to happen to the shape of the yield curve, discount rates, those types of things. But as we're projecting it now, the headwinds are really related to interest expense and pension with interest expense being the dominant one. So Craig, you mentioned kind of planning for a mild recession and guidance. Can you maybe put that in the context of backlog conversion? And maybe specifically, I think data center and commercial construction, you're starting to hear a little bit more in the way of cyclical concerns. Obviously, the orders are so strong. But how would you think of how much backlog ideally you'd be converting, if any, this year in the context of that recession outlook? Yes. I appreciate the question, Josh. And we've obviously spent a lot of time internally trying to sort that one through ourselves. And I would tell you that orders have just stayed so strong in general. It's really tough to really put a finger on how much of this very large backlog that we'll be able to convert. It certainly will depend upon what happens during the course of 2023. And I can just tell you what's actually baked into our forecast for the year is relatively modest reductions in backlog, if at all. Because at this point, it looks like these markets, driven by the secular growth trends that we talked about, are going to stay stronger for even longer than what we anticipated. And so at this point, we'll have to wait and see. But if we end up with perhaps a little bit of a respite here in terms of some of the order intake or some of the supply chain challenges, we'll be able to convert more, and that could be upside on the revenue side. But at this point, we're not anticipating that we're going to be burning a lot of backlogs. Got it. That's helpful. Then just a follow-up. Really appreciate kind of the TAM expansion color that you gave from some of the stimulus. I know not a lot of folks have taken a stab at that. I remember from the Analyst Day correctly, I think you sized the TAM for Eaton before that -- in kind of the high $50s billion. Does this mean that we kind of take this extra $11 billion to $14 billion divided by 5, because it's over 5 years and you have sort of 4% uplift to growth like -- or is this an apples and oranges kind of discussion? Just any context how the TAM increase relates to kind of the growth uptick would be helpful. I think your simple logic there is the right logic that based upon this stimulus spending, these are essentially incremental dollars that we would expect to be going into these end markets, which will increase the size of the TAM in our served market. And so I think your kind of high-level assumption is the right working assumption to have. And obviously, there'll be lots of discussions around how it plays out and over what period of time do these investments play out. Is it 3 years, 5 years? I mean, what's the time frame? I think it will be the more difficult call to make, but it absolutely increases the size of the market. Yes. And just to add a little bit more color on that, I mean going back to the prepared remarks, if you look at our major project U.S. pipeline, many of the end markets quarter-over-quarter are up over 100%. And that's also translating to order volume even higher than that. So we're just seeing some good tailwinds on these major projects. Yes. Just to build on Tom's point, as I think everybody's aware, we obviously have sales and orders, but we also look at negotiations and our negotiation pipeline. And as Tom mentioned, the negotiation pipeline being up more than 100%. And I'd say that is supported by the other data point that I talked about, which is essentially nonresidential construction contracts, which are also up quite dramatically through, once again, the fourth quarter. So we continue to see very good strength in these underlying markets, especially in the Americas. So the first question, I guess, we've been getting incoming calls on data centers. And just if you can talk as to how much visibility do you have where you are in terms of capacity for '23? Do you have any left? And the new one we're getting was all the focus on ChatGPT, right? Are you getting any inquiries sort of related to AI and more computing sort of required to do that? And if you have any conversations related today at the interest of that topic. Yes. We -- as you can imagine, we anticipated this question because we too are reading some of the conflicting headlines in terms of what's going on in the data center market. And then as we talked about, our data center business continues to be very strong. And what you talked about, Josh, in the context of AI and these other various technology platforms that continue to be rolled out. That's just, once again, generating the need for more data, more processing and ultimately more data centers. And I know there's a little bit of a cause for some concern given what some of the hyperscale guys did with respect to their own outlook. But I can tell you that for us, the data center market continues to be very strong. And even the hyperscale guys are still talking about mid-teens kind of growth over the next 3 to 4 years. And so those are very strong numbers. And we haven't talked about autonomous driving and expansion of 5G. And every device that we make today and that is made by every company continues to get more intelligent, driving a greater need for data and processing. And so we think the data center market is going to be a great market for quite a number of years to come, and it's supported by our order intake and our negotiations. To your question specifically on capacity, at this point, we really don't have a lot of spare capacity. We're making investments to expand our capacity. But at this point, we have lots of visibility into the data center market, and it feels good. Oops, sorry, Andrew. I would also point out that this isn't only an America's phenomenon. We're seeing strong order growth across the entire globe. And just a follow-up question. And at both stimulus, I think, related to IRA but also what's happening with LNG in Europe, what's the latest out of Crouse-Hinds? Because I think it is exposed to all these trends. And also have -- does Crouse-Hinds benefit from any decarbonization efforts, hydrogen, carbon sequestration? Just as I said, just maybe talk a little bit about what you're seeing in Crouse-Hinds. Yes. Appreciate the question. The first thing I'll just maybe give the team a little bit of a news announcement that we've changed the name. What was formerly known as Crouse-Hinds and B-Line is now we're calling it our global energy infrastructure business, so GEIS. And so just if you hear us talk about GEIS, that's the formerly known Crouse-Hinds and B-Line business. And I'd say absolutely, I mean, as the name implies, anything that has to do with energy infrastructure is a real positive for our GEIS business. And we would expect that, that business continues to perform well as we continue to see investments in energy. And certainly, as we look at hydrogen and other new greener forms of energy, all of the infrastructure that's required to support those investments will be very positive for our GEIS business as well. Yes. I mean, for example, if you look at trailing 12-month orders in GEIS and utilities, they were close to 30%, very strong. Craig, maybe just start off, could you provide a little bit more color on what you're seeing in commercial and institutional that made you sort of bump that market outlook up? Yes. And I'd say, once again, the very minimum, we saw very strong order intake in Q4. But also, we talked a little bit what's going on generally in nonres construction. And we look at the commercial negotiate nonres commercial contracts, construction contracts, just really posting pretty significant numbers in the fourth quarter. And so we thought that, that market would be positive. But given the activity level, our negotiations in that segment as well as what's going on more broadly in the industry and some of the macro data, it caused us to be even more positive on that market. And so it's, I'd say, a good news story. We'll wait and see how it plays out in total. But certainly, the data that we saw in the fourth quarter was definitely more positive than what we anticipated. Okay. Great. And then I know it's early for this question. But Tom, since you brought it up, I think you mentioned something about breakout performance in 2024. Not sure if that was sort of military aero-specific. But just can you expand on that a little bit? Yes. No, it is a little early, but I walked into it and I mentioned it in the prepared remarks. We're just seeing significant order growth in military OEM. And we've been waiting to see that just given what's happening in the world. And now it's starting to come through in all of our order metrics, whether it's trailing 12 months or Q4 year-over-year or even sequentially, up very, very high numbers. And given the lead times in that business, it will certainly support the growth assumption that we have baked in for 2023. But we do expect that 2024 will be a really strong year. And it comes back to the way Craig started out the presentation of what these megatrends. And maybe we'll have pockets of weakness here and there, but the portfolio is so sound that -- we've also got the aero megatrend with pent-up demand. We've got military that's growing. We have pent-up demand with vehicles. So we're really not susceptible to any one small thing that's going to knock us down. It's a very robust portfolio. I was wondering if we could just drill into Global Electrical a little bit more, just the quarter itself and then the outlook. Could you possibly elaborate a little bit more on what happened in the margins in the quarter? And I guess the perspective of my question is, it was a pretty sizable sequential step-down in margins on similar revenues, and it looked like similar FX to me sequentially. Maybe I'm wrong there. But is there something else going on with mix or some other factor in the margins in the quarter? And then I was wondering if you could also just address the top line outlook in Global. The 4% to 6% is somewhat moderating. Just maybe a little color on the underlying demand trends you're seeing there or if anything is going on in the channels. Yes. Thanks, Jeff. Let me start out with talking about the Americas margins. I mean the story is really when you look at it compared to Electrical... Yes. No -- oh, yes. We have 20% in the Americas volume growth. We had 8% in Electrical Global. So there's the real disparity going on there. And if you look closer into Global as well, we had some transactional FX issue, not necessarily translational but transactional, where we still have dollar-denominated costs. And with the dollar weakening, that hurt us there. So that was part of also the compare and the hurting of the margins on Electrical Global. And on the growth side of the equation, I'd say that we're looking at kind of mid-single-digit growth in our Global business. And I'd say in the face of what we're saying today is likely typical recession, we think mid-single-digit growth is the right kind of place to kind of be thinking about that business. Now once again, if the world turns out to be a little happier than what we're anticipating and on the margin, I would say that I think we're all feeling a little better today about 2023 than we were maybe a month ago. And we have seen even in the European market, on a relative basis, some strengthening. Those numbers could be better. But at this point, given our current assumptions, we think mid-single-digit growth for our Global business is the right place to kind of be thinking about it. And the other one I would say just on the margin that could be slightly better than what we're currently thinking is what's happening today in China. Nobody anticipated COVID running through China as quickly as it did. It had an impact in Q4 for sure. Part of maybe the inefficiency challenges we had in Global was the fact that we had some unanticipated disruptions coming out of Asia, coming out of China, specifically around COVID. But at this juncture, they're through it, and they got through it much quicker than anyone imagined. And we think on the margin, China and Asia could be stronger than what we anticipated. Right. Yes. Thanks for the assist, Craig. Yes, coming back to the margin question, in addition to transactional FX, Jeff, we also saw weakness in China opening up. So APAC was weaker than we had expected. Great. And then just as a follow-up. Can you just -- sorry if you said it, I missed it. But I know you're not going to give us price. But when I look at the margin bridge for next year, what does that kind of assume for the price/cost gap there? I assume there is some lift. Maybe you could give us a little perspective on what you're expecting. Yes. We're not going to break it out specifically as per our policy. What I will say is that we expect to continue to effectively manage price/cost. It's something we really focus on, and we expect to manage it effectively. And the only thing I would add to what Tom is that I would not anticipate it would be accretive to margins, right? So clearly, there's still inflation that we have in the business. We are more than offsetting inflation. But in terms of how it's impacting the margins in the business, I would not expect that it would be accretive to margins. That's really a function of what we're doing to drive improvements in efficiencies as well as the volume lift that we're getting from the company overall. Maybe just starting with channel inventory levels, Craig. Have definitely heard some concern about distributors maybe having a little bit of excess inventory or inventory building. What are you guys seeing in your channels within Electrical? Yes. I'd say -- in aggregate, Nicole, I would say that we've not seen that nor have we heard that from our big channel partners in aggregate. Today, if you look at -- once again, if you think about our order intake, our growth in backlog and you throw that up against -- Tom did a great job of laying out what it's meant in the context of our own inventory. And while we're building inventory, we're actually increasing our efficiency as it relates to a forward view of revenue. And I think that would be true for many of our distributors as well given the strength in the underlying market, certainly in the Americas. I would say that if you take a look at Europe specifically, while we're still seeing growth in our own orders in Europe, there has been a little bit of a slowdown in Europe. And while still growth, we have seen a little bit of a slowdown and a bit of an inventory adjustment that's taking place with some of our European distributors. And I think -- China, I think, will be going in the other direction as that market comes through COVID and begin to grow again. So very slightly regionally in aggregate. I'd say no inventory destocking to speak of at all. Regionally, a little bit of destocking in Europe with the U.S., and perhaps Asia market is still a little bit tight. Yes. Just to punch a specific number Nicole, I gave some numbers on the one chart, but our average quarterly orders in 2022 versus 2020 are up 55%, very big number. Got it. And I guess, looking at the guidance for the first quarter, you got organic decelerating to the 8% to 10% range versus 15% in 4Q. I guess, can you just talk through some of the segment-level drivers there? And is that mostly a function of just tougher comps? Yes. The revenue guide for Q1 versus Q4, I'd just say, one, we're anniversarying bigger numbers in Q1 last year. So certainly, it's the anniversary effect of it. We certainly have gotten quite a bit of price during the course of 2022 to offset inflation. So on a relative basis, you don't maybe have as much lift on a quarter-over-quarter basis in price. And I'd say those are really the two. And then there's this whole question around recession and how that's going to impact confidence in the outlook. And so lots of uncertainty. If you think about our growth for the year, Q1 is very much aligned at 9% at the midpoint with our growth for the year. And we'll see how the year unfolds, but those are primarily the reasons. Guys, you've been a little quiet on the M&A side since the Royal Power deal, which is fine, but there wasn't really anything in your slides on kind of target buybacks or anything where you're prioritizing capital allocation for '23. Can you comment on that, please? Yes. Sure, Scott. Yes, nothing really in the prepared remarks because we're staying the course with our same capital allocation tenets. Obviously, first, we're prioritizing organic growth, which we think is so important, especially with all the megatrends and secular tailwinds that we're right in the middle of. We're going to pay a competitive dividend as well. It's important to our investors. Having said that, we continue to be in the market and look for good acquisitions. We're also -- if you noted, we're also shrinking the tail in terms of divestitures. We had a small one that we did in the quarter. So we're actively doing that. And then in terms of buying back shares, this year, we did about $290 million. We guided $300 million to $600 million, and we'll be optimistic -- I mean, opportunistic there as appropriate. But it really hasn't changed. We're in the market. We're always looking. And yes, staying the course on our capital allocation tenets. And if I can just emphasize the point that Tom made is that we have just a lot of organic growth opportunities out there more than ever in terms of the history of the company. And so as we think about growing the enterprise, we don't need to go out and do acquisitions to grow the enterprise. There's plenty of organic growth opportunities in front of us that we're investing to support. And -- but we'll continue to be opportunistic. If we see something that helps us strategically, maybe geographically -- one of the things that you've seen us do over the course of the last 12 months is we've really, I'd say, shored up our strategic position in China. We've entered into a number of joint ventures, and that's really the way we're trying to play the China card right now given some of the risks and uncertainties. But we entered into a number of really interesting joint ventures with local companies who have a strong position in the local market. We've taken a minority position. We will basically sell those products in markets outside of China, but they really do fill some really key product gaps in emerging markets in low-cost countries. And so yes, we've done some things on the JV side that I think shore up our position where we've had gaps, but there are just so many organic growth opportunities out there that we're pursuing. That really is the priority. Yes. And just to punctuate that, Scott, with a number. If you look at our backlog for Electrical and Aerospace back at the end of Q4 in '19, it was roughly a little over $4 billion. And as we said in the prepared remarks, we're at $11 billion now. So there's a lot of food on the table. Just wanted to understand on that cash flow guide. I think it's at the midpoint guided up about $900 million year-on-year. Net income is about $300 million, I think, of increase. So that sort of the delta of $600 million there. Is that sort of just the $500 million miss from '22? I'm assuming you capture it in '23. Is that how we should think about it? And maybe on the working capital point, is it all inventory kind of shouldering that delta? Or is receivables or payables doing anything interesting? Yes. Thanks, Julian. Just a slight nuance in terms of how you characterized it, I mean, while we did miss -- if we go back to that one chart, if we were able to foretell the future perfectly in terms of the order growth in the backlog, we might have guided a different number there. But coming back to the bridge from '22 to '23, in addition to the impact of higher income, it's going to be working capital performance. As we noted in our prepared remarks, we can do a lot better there. It's primarily inventory, but I would tell you it's not just inventory. We think we can do better on DSO and collections. We think we can do better on DPO as well. I think we've got a great continuous improvement focus in this area. We know we're not where we want to be. As we said, we invested prudently, but we can do a lot better, and we will do better this year in terms of net working capital. That's clear. And just my quick follow-up, you talked about the first quarter sort of organic sales segment a little bit. Maybe on the margins. So I think you're calling for the segment margin to drop sequentially about 1 point from fourth quarter into first quarter. Are we assuming kind of every segment has that similar drop and then sort of builds from there through the year? Anything to call out on that front, the sort of margins as we start the year and then move on by segment? Yes. I don't think there's anything particular to call out. I mean I would take you to our full year guide where we're taking margins and we're growing them 70 bps overall. And we've got margin growth in every single segment. Our EPS cadence is going to match our historical cadence of 45-55 to first half and second half. So I don't think there's anything specific to read into Q1. Other than the volume piece, Julian. As you know, there's certain cyclicality that we have in our various businesses. And that's generally the reason why the margins generally drop between Q4 and Q1. And to the extent that we have more cyclicality in one business or the other, you could see a slightly different play-through by segment, but that's really the primary issue. Yes. And that's a good point, Craig. I think we see that in terms of our aero segment where we go down in Electrical and Electrical Americas as well, too. The quarterly cadence of the organic sales growth, the 9% we discussed in the first quarter, the way you're thinking about the rest of the year, is it all just sort of at the same kind of 7.5% level? I'm just trying to get a sense in particular about some markets where there's a little more concern about a slowdown in the back half then maybe other areas that could be accelerating. So can you first confirm, is that sort of how you think of the cadence? Yes. I think that's a fair way to think about the cadence. I mean, I think the great news for us is we're sitting on very large backlogs. And so to the extent that we had a little bit of an air pocket at some place, we can live off of our backlog for a very long time before it would actually impact our revenues. And so I think as we think about the year, we still think it's a year where we're constrained, where -- but for labor constraints, capacity constraints, supply constraints, those numbers would be bigger than what we're currently forecasting. And so I do think a similar pattern of growth is a good placeholder for now in terms of the way you should think about the year. And within Vehicle, the thought of auto sort of later in the year and truck later in the year, the interplay there? And a similar question on Electrical Global. Europe so far is proving a bit resilient, how to think about China and Europe in the back half of the year? Just those two interplays in those two divisions. I'll leave it at that. As I mentioned in my commentary, I think we're incrementally more optimistic on China. They came through COVID much quicker than what we anticipated. And the Zero COVID policy went away overnight, it felt like. And we're starting to see the Chinese government kind of reignite the economy over there. And so I think as the year builds, we think that we -- that China, and therefore, Asia continues to strengthen. It has a relatively better second half than the first half. I think Europe is a little bit more difficult of a call to make. Europe, as you noted, has continued to hang in there and be better than what we anticipated for most of 2022. And we're incrementally, I'd say, sitting here today more positive on 2023. So difficult to really call whether or not we're going to see a different first half versus the second half in Europe. We're kind of planning for steady as she goes and more of a balanced view with respect to the year-over-year growth. Craig, I wanted to follow up on your comment in the prepared remarks that you would be surprised if the company does not beat the 5% to 8% annual growth targets laid out at the Investor Day. Does this just reflect the fact that the company is running so far ahead of these targets? Or do you think forward growth to continue to top this range through 2025? Yes. I think, one, to your point, we are certainly running ahead. I mean, if you take a look at, assuming the 2023 guidance is a good number, we've been running around 10% top line growth against the 5% to 8% target. So well ahead on growth. And quite frankly, we've become incrementally more positive on some of these secular growth trends. I think if you take a look at stimulus spending, that number has been topped up since we laid those goals out more than a year ago. I think today, if you think about climate change and some of the investments that are going into grid resiliency -- and so as we sit here today, I would tell you that the secular growth trends that we spent a lot of time talking about, we've become even incrementally more positive on what the longer-term implications are of these secular growth trends. Now that may not play out completely between now and 2025. I think there's going to be some capacity constraints in the industry, and we're already experiencing some of those. That could be a gating factor. But that just gives us a much longer runway on the back end of this thing in terms of what's going to happen with these markets over the long term. Yes. I appreciate that. It certainly feels like it's showing through with the orders and the pipeline. But then kind of on that, obviously, global orders have decelerated. It sounds like the company is decently optimistic on the rate of change and certainly in China. It sounds like maybe even Europe as well. With that, could we actually see global orders reaccelerate in 2023 just given those two economies maybe starting to move in the right direction? Yes. I mean, I think it's -- when you say reaccelerate. I think it's a question of relative numbers. We had a very strong year for the most part, a very, very strong first half of the year in our Global business. And we're still anticipating growth, but we are anticipating the rate of growth will have slowed from what we saw in 2022. A lot of that tied to this assumption around a global recession that could hit Europe perhaps more impactfully than it maybe would in other regions of the world. And so it could -- there's a possibility that we could see a reacceleration. That's not our base assumption. We assume that we're going to still see growth but growth at a slower rate. Yes. Let me just punch some numbers on Global because we talked a lot about Americas, but just to punch a few numbers. For trailing 12-month orders in our Global segment, we have high double digit in commercial and institution. We're over 20% in residential, and data centers is doing significantly well. I mean utility is up high single digits. So very strong growth also in Global, not to the extent of Americas but still very sporty. I wanted to come back to Electrical. So the incremental margins reported 44% in the fourth quarter. You're only guiding about 30% for the year. I'm just curious why Q4 would not be more reflective of an undisturbed result with supply chains resolving and price catching up. So curious if there's something else through the course of '23 or just conservatism. Yes. I mean that's the same discussion I'm having with my operating leaders. Why isn't Q4 44% the new normal? And I'd say that, as you can imagine, in every quarter, there's always a number of things that can go positively in your direction and things that could go against you. And we just had a very strong quarter of execution and good mix in our Americas business in Q4 that drove those incrementals to be well above where they would normally run. We do think from a planning standpoint, especially given some of the investments that we need to continue to make to support this growth in R&D and an customer capture initiatives, that we think 30% is the right planning number to have. And as you think about the business on a go-forward basis and very much consistent with where we've been historically. I'll just end on 30% is good for planning. But we take the coaching, and we don't want to disappoint the Chairman. So we'll work hard to beat that. And just one last follow-up. Where are we in this pricing cycle? I mean, is there more to do here? Have you made announcements for this year? And then maybe any context for what you're embedding for the price component of the 7% to 9% growth this year? Yes. Certainly, price will be a contributor to the growth for 2023. It obviously contributes at a much lower rate than it's contributed in 2022. And yes, there is some more to do. We are, in fact, expecting to see positive price over the course of the year. We -- today, commodities have certainly slowed their rate of ascent. In some cases, we treat it a little bit, but they're back up again. You see copper is back up again. And the big challenge right now we're finding is really on the labor front. Labor inflation is certainly coming through the system. And so clearly, we still have work to do on the price front, and it's baked into the guidance that we laid out, but it will certainly be at a much lower rate than what we experienced over the course of 2022. And most of what you're seeing in those growth numbers are volume. We have reached to the end of our call and do appreciate everybody's questions. As always, and I will be available to address your follow-up questions. Thank you for joining us today. Have a great day, guys. Thank you. And that does conclude our conference for today. Thank you for your participation and for using AT&T Teleconference Service. You may now disconnect.

EarningCall_427

Ladies and gentlemen, thank you for standing by. Welcome to the First Capital REIT Q4 2022 Results Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. [Operator Instructions] Thank you, and good afternoon everyone. In discussing our financial and operating performance and in responding to your questions during today's call, we may make forward-looking statements. These statements are based on our current estimates and assumptions, many of which are beyond our control and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. A summary of these underlying assumptions, risks and uncertainties is contained in our various securities filings, including our MD&A for the year ended December 31st, 2022, and our current AIF, which are available on SEDAR and our website. These statements are made as of today's date and except as required by securities law, we undertake no obligation to publicly update or revise any such statements. During today's call, we will also be referencing certain financial measures that are non-IFRS measures. These do not have standardized meanings prescribed by IFRS and should not be construed as alternatives to net income or cash flow from operating activities determined in accordance with IFRS. Management provides these measures as a complement to IFRS measures to aid in assessing the REIT's performance. These non-IFRS measures are further defined and discussed in our MD&A, which should be read in conjunction with this call. Thank you very much, Alison. Good afternoon, everyone. And thank you for joining us today for our year-end earnings conference call. In addition to Alison, with me today are several members of the FCR team including Neil Downey and Jordi Robins, who you will hear from shortly. I'll start with First Capital's announcement yesterday as part of the Board's ongoing strategic approach to refreshment and plan Chair succession process. Bernie McDonell, who was given over 15 years of service to First Capital is retiring. Bernie has contributed so much to this company and I'd like to personally thank him for his many contributions, but also for his leadership and stewardship, initiating, and throughout the transition process. Paul Douglas, who is retiring from his role as Group Head of Canadian Business Banking at TD Bank Group, and who has been an Independent Trustee on our Board since 2019 is our new Chair. Joining the Board is Ira Gluskin. Both Paul and Ira have tremendous experience in both the capital markets and the real estate industry, which will be of great value to First Capital. I know all of us on the FCR team are excited to leverage their respective experience. Consistent with this approach, the Board will continue, as it always has, with ongoing Board renewal and enhancement. This is an exciting time for First Capital and despite the challenges caused by macro-economic factors, First Capital's efforts to surface value have been working, which is a fitting segue into our quarterly and annual results. 2022 was a year of progress for FCR. Operationally, the impact of the pandemic proved to be behind us. Once again, our operating metrics and property level performance in Q4 were both very solid. Year started out with continued stability, but that shortly changed by the end of Q1 with inflation and consequently interest rates rising rapidly. This created a lot of volatility in the capital markets across our sector, from which we were not immune. We stayed focused on our portfolio and the important strategy work that was underway and plan. In May, we announced an NCIB in order for the REIT to take advantage of the major disconnect between the intrinsic value of FCR for NAV and our unit price. To the benefit of all unit holders, we acquired and cancelled 6.2 million trust units in 2022, for just over $94 million, resulting in a weighted average cost per unit of $15.14. This capital was funded entirely from retained operating cash flow and property dispositions. In September, we followed through on our promise to unitholders and announced the full restoration of our distribution. This was planned for nearly two years and fulfils the pledge we made to unit holders in early 2021. The decision to restore the distribution was straightforward as we outlined last quarter. Most importantly, given our tax profile, we had virtually no flexibility other than to restore the distribution without compromising our REIT status. I'd like to reiterate, once again, that the restored distribution is fully covered by our operating cash flow, after deducting all maintenance CapEx, all leasing CapEx, all revenue sustaining CapEx, and even revenue enhancing CapEx. From a capital allocation perspective, this is very important, because it allows for 100% of disposition proceeds under our plan to be allocated to several potential options, which I will discuss shortly. But the distribution is not one of them, given our operating cash flow fully covers it. For several years now, including throughout 2022, our team has worked hard to advance our very deep density pipeline. As a result of this work, passion, expertise and sweat equity, we now have an abundance of low or no yielding assets that are primed for either development or monetization. So far, we have rezoned over 8.6 million square feet of space, with another nine million square feet that is currently underway, and many of Canada's most desirable neighborhoods. While these types of assets have and are expected to continue contributing to NAV growth, the cumulative impact of this sizable development pipeline has created a drag on EBITDA and FFO, while also adversely impacting our debt metrics. As a public company, striking the right balance is a key. Given the success of our value, creating strategies in these types of assets, our portfolio composition today is overweight long term development opportunities for a public company. Following months of work last year by management and the board on how best to unlock the value we've created over the past few years, we announced the details of our enhanced capital allocation and portfolio optimization plan toward the end of the third quarter. Executing this plan ensures that our capital is allocated in ways that drive the most value for unit holders over the short, medium and long term. It will also rebalance FCRs portfolio to a higher proportion of income producing assets that contribute to key metrics such as EBITDA and FFO. And it will further strengthen our balance sheet, which remains a very important element of our plan that our board and management team are fully committed to. Earlier I noted that our operating cash flow more than covers our distribution. Therefore, the entire $1 billion of monetizations will be allocated to a variety of other uses. Specifically, at least $400 million will be used to repay outstanding debt. This will have a positive impact on our debt metrics, especially debt to EBITA, given the relatively minimal EBITA we will be selling under this plan. But the transaction's completed in Q4. We have already seen the initial impact of this in our quarterly results, with debt to EBITDA improving by 70 basis points from Q3 to 10.2 times, while at the same time meaningfully growing FFO per unit. This is exactly the combination that our plan is designed to deliver. Roughly another $400 million dollars is anticipated to be invested in value enhancing development assets over the next two years. That is accumulative numbers. The remainder will be allocated in the most optimal and impactful means, which will be assessed and determined as our sales progress. Options include further debt reduction, NCIB purchases, opportunistic real estate investments consistent with our strategy, and other opportunities that we identify. Our plan remains on track. In addition to King High Line, just before your end, we also closed on a partial interest in our Young and Roselawn development site. In 2022, we closed on a total of $277 million of dispositions at an average premium to IFRS NAV equal to 15%. We are keenly aware of the high quality nature of our portfolio today. We also know that there continues to be capital seeking investment in great assets. Consequently, we expect and required stronger premium pricing for the assets we are selling. We have a track record of achieving this through various cycles and events, including through more challenging times, such as the past few years. Between 2020 through 2020, a time period which captures both the pandemic and rising interest rates, we sold $874 million of properties at an average premium to IFRS NAV equal to 17%. Now, the current market is most constructive for smaller transactions versus very large ones, which is where we are currently focused and works well for our plan. It's important to balance transparency to unitholders, while ensuring we retain as much leverage as possible with prospective purchasers as we negotiate transactions. So in that regard, it's not prudent for us to provide the full list of properties that comprise our plan. We do look forward to providing additional disclosure as appropriate, but to give some color of the initial billion dollar pool, following the two sales in Q4, we have 28 assets remaining that have an average value of roughly $30 million. Most are development sites, none are multi-tenant grocery-anchored centers, and no sale, or even the aggregate of the billion dollar pool materially changes the composition of our primarily grocery-anchored portfolio, nor our long term growth trajectory. But they are expected to meaningfully impact the key metrics, our plan is designed to deliver. We continue to make good progress with several properties under conditional agreement, several under negotiation and others that are being ready, which are primed for sale. We look forward to reporting on these in the future as they progress. Now Neil will walk through the details of the quarter but to summarize the quality of our portfolio and the strategic decisions we have made really came through in our fourth quarter results. Same property NOI growth, lease renewal lifts and FFO per unit growth were all very solid. Importantly, we achieved this while also improving our debt to EBITDA. A powerful combination of FFO per unit growth while at the same time improving debt to EBITDA is a key objective of our plan. Leasing was solid once again, with a million square feet of leasing across 231 transactions have very healthy rent increases. This contributed to our average in place net rental rate nearly breaching $23 per square foot, setting another all time high for the 26th quarter in a row. Dori will provide a more detailed update on our investment activity. But needless to say, we've been busy with some amazing work done by Dori’s team, which we expect will continue to positively impact NAV as we execute. Growth 2022, we continue to advance our ESG priorities, further embedding environmental, social and governance principles into our business and culture. But first and update on our carbon reduction planning. Rooting and practical plans today but focused on the future our 2030 greenhouse gas emissions reduction target of 46% has been approved by the science based target initiative with our longer term goal of reaching net zero by 2050. To reach these ambitious goals FCR is actively working on asset level greenhouse gas reduction plans that include operational efficiencies, retrofit initiatives, tenant engagement, and renewable energy generation, among other things. We know that getting to net zero cannot be done in isolation. We need collaboration in partnership with our national tenants and industry peers to achieve our common goal of net zero. To that end, in November, we hosted an inaugural collaboration for Climate Action Forum for solutions focused discussion and planning around decarbonization of retail building in Canada. We intend to continue to engage with foreign participants on this important ongoing initiative. As part of our corporate accountabilities last year, we encourage our employees to volunteer at least one day towards a charity that matters to them. We set a target of 75% participation. Thanks to the passion of our team to support the communities where we operate, we exceeded that target with 82% participation. In addition to our volunteering efforts, the FCR thriving neighborhood foundation team raised close to $200,000 in support of kids helpful. I would like to personally thank our employees, our Board members and our corporate friends who continue to support our foundation. When I look back over 2022, we have made significant progress on our ED&I initiatives and our ESG roadmap. And we look forward to providing more updates on ESG in the future. But in the meantime, please visit the ESG section of our website for regular updates. So, overall, a very busy year and fourth quarter with healthy operating metrics, solid earnings growth and a stronger balance sheet. Before I pass it over to Neil, I'll comment on the special meeting requisition. For the last few months, as we always do, we have engaged closely with many of our unitholders. We believe now more than ever, that the optimization plan is the right path forward. First Capital has a credible and executable plan that delivers enhanced earnings growth, while at the same time strengthening our balance sheet. Management and the Board unanimously support this plan and are excited to continue executing it and delivering its benefits to unitholders. I firmly agree with our new chair and every member of our Board that we have the right plan at the right time with the right team to continue to execute it. Thanks, Adam, and good afternoon to all of our call participants. As is customary with my prepared remarks today, I will refer to our quarterly conference called presentation, which is available on our website at fcr.ca. From my perspective, the three themes within First Capital's Q4 results are; number one, leasing remains strong. Secondly, the REITs financial results continue their solid underlying growth trends. And thirdly, First Capital continues to make significant progress in improving key leverage metrics, including a step function decrease in Q4 debt-to-EBITDA and this leverage reduction has been achieved while also growing underlying FFO per unit and maintaining very strong liquidity. Now let's review some of the details behind the results starting with slide 6. At the bottom line, Q4 2022 funds from operations of $80.5 million increased by 32% from $60.8 million in the fourth quarter of 2021. Aided by a lower unit count related to our unit repurchase programmed, fourth quarter FFO per unit increased 36% to $0.37. This compares to $0.28 per unit in the fourth quarter of 2021. Collectively FCRs other gains, losses and expenses or OGLE for short often drive variability in the reported FFO and the Q4 results were no exception. As shown in the bottom of slide six, Q4 FFO included other aggregate gains of $12.7 million versus other losses and expenses of $3.6 million in the prior period. This roughly $16 million swing year-over-year in OGLE equated to almost $0.08 per unit. The large gain recognized in the fourth quarter of 2022 relates to our sale of the 50% non-managing interest in the residential component of King High Line. When we placed long-term fixed rate financing on the property, we had an in the money interest rate hedge. This was solely to the benefit of FCR. Once FCR no longer owned the property, the accounting rules are such that we were required to take all of this benefit into net income, and by extension FFO. So prior to OGLE, Q4 FFO totaled $67.8 million, representing an increase of 5% from the prior year. On a per unit basis, this measure of FFO equated to $ 0.32 in the fourth quarter of this year, an increase of 8% over a similarly derived $0.29 per unit in the fourth quarter of 2021. In providing some additional context with respect to the Q4 results, let's walk from top to bottom through the FFO statements. So returning to the top of slide six. Q4 net operating income of $112.1 million increased by 5% from $106.6 million in the prior year. Here too there are several points of notes. Firstly, Q4 results included $3.6 million of termination receipts, versus essentially nil in the prior year. These settlements related to several tenants that closed their doors during the depths of the COVID lock downs back in 2020. Moreover, Q4 2022 bad debt expense was actually a recovery of $2.1 million. This reflects strong collections in 2022. And progress with and increased confidence in certain tenants that had acute operating challenges through the mandated closures of 2020 and 2021. On a year-over-year basis, higher base rents from new and renewal leasing, net leases lost contributed $2.2 million to NOI growth. [indiscernible] against these drivers were several adjustments related to current and prior year CAM and tax recoveries that adversely impacted Q4 NOI by $1.4 million. And finally, lost income related to disposition activity, reduced Q4 net operating income by $2 million relative to the fourth quarter of 2021. So reflecting on some of the elements of fourth quarter NOI, specifically, the lease termination receipts, the bad debt recovery, the CAM and tax adjustments, it certainly feels like a force theme inherent in the results as we've now authored the final and closing chapter on the COVID pandemic story. Q4 same property NOI increased by $8.1 million, equating to a strong 8.3% year-over-year growth rate. This growth was primarily driven by higher lease termination receipts, lower bad debt and higher base rents. Excluding the bad debt expense at lease termination fees, Q4 same property NOI growth was 0.8%. Now adjusting for the change in some of the CAM and tax amounts that I mentioned a moment ago, we estimate that a normalized Q4 same property NOI growth rate ex-bad debt at lease termination fees was about 2.5% to the positive. On a sequential basis, Q4 NOI was $2.6 million, or 2% higher than that earned in Q3. There were a number of factors behind the improvement. First, we'd have the higher lease termination receipts and lower bad debt expense contributing $5.9 million to growth. Higher base rental income contributed $1.1 million. Adjustments related to current and prior year cam and tax recoveries adversely impacted Q4 NOI by $2.3 million, reflecting seasonality and variable revenue contributions were $1.4 million lower in the fourth quarter relative to Q3. And finally, the impact of loss NOI related to net disposition activity was $700,000. Turning to interest and other income of $5.8 million, this was an increase of 39% year-over-year, an increase of 19% from Q3 of 2022. In each case, the increase was primarily due to higher average interest rates on mortgages and loans receivable. At December 31, FCR's, mortgages and loans receivables totaled $174 million. And these investments carried a weighted average interest rate of 6.9%. Comparatively, the mortgages and loans receivable book was $240 million at September 30 and $237 million at December 31 last year. We expect Q1 2023 interest income to decline to approximately $2.7 million from $3.8 million in the fourth quarter. This is due to loan repayments. For added color, our partners in our 2150 Lake Shore Boulevard West development project repaid a $50 million loan in December. The loan receivable and the timing of the repayment were all in accordance with the terms of their initial investment in the project, which occurred in September 2021. Also repaid during the fourth quarter were approximately $25 million of other loans, in mid January of this year, our 2150 Lake Shore partners provided the early repayment of their remaining $50 million loan. This was ahead of the September 2026 maturity date. While the early repayment will cause a small earnings drag, perhaps an FFO impact of close to $0.01 per unit annualized. The very clear and significant benefits to FCR are a further bolstering of the reach liquidity position and further advancements on debt reduction in the New Year. Turning to G&A and corporate expenses here too, there are several items of notes in the fourth quarter results. Corporate expenses charged to FFO were $10 million in Q4 of 2022. This was an increase of $900,000 or 8% from the third quarter, and an increase of $2.7 million or 38% from the expenses in the fourth quarter of 2021. Expenses of note incurred in the fourth quarter of last year, included $1.4 million of legal and advisory costs related to addressing activist activities. We also incurred an additional $500,000 of legal expenses related to a property sale or property transaction that occurred all the way back in 2014. Unexpectedly this situation went to trial. Now notably, in January of this year, the judge fully awarded in FCRs favor. Unfortunately, being under Quebec jurisdiction, there was no provision for recoveries of costs available to FCR. Hopefully, our transparency on these matters aid in your understanding of the underlying corporate expense trends. Moving to slide 7, you can see FCRs full year 2022 and comparative 2021 results. Now with today's call and prior calls, we've essentially covered the detail behind all four quarters. Well, there's a few puts and takes within each of the annual results, the big picture is clear. Firstly, leasing velocity and rent growth had been strong and occupancy steady. Secondly, through last year in particular, we continue to actively manage FCRs capital through a variety of initiatives, including asset monetizations that prices have exceeded IFRS values on average. We allocate a portion of these funds towards debt repayments, a portion towards value accretive units repurchases, will also continuing to invest in growing the business through development and selective acquisitions. So as a result of these activities and accomplishments, total FFO increased by 5% in 2022 to $263 million, on a per unit basis growth was 6%. Excluding OGLE items, 2022 FFO was $261 million, an increase of 10% year-over-year. FFO per unit, also excluding OGLE reached $1.20 per units in 2022, up 11% year-over-year. And so FCRs is full year 2022 results were strong on many accounts. Moving to our fourth quarter operating performance metrics on slide 9. The portfolio rounded out the fourth quarter was an occupancy of 95.8%. This was consistent with the 95.7% reported in Q3 and a modest 30 basis point decline year-over-year. During the fourth quarter, we had 157,000 square feet of tenant possessions set against 122,000 square feet of tenants closures. Moving to slide 10, we turn to the subject of leasing velocity. On this front, Q4 volume and spreads were strong. Renewal leasing volumes were 711,000 square feet in the fourth quarter, 28% higher than the renewals in Q3, and 57% above the 452,000 square feet of renewal leasing in Q4 of 2021. Fourth quarter renewal leases were affected an average rent increase of 9.9%, when measuring the first year renewal rent of $25.45 per square foot, relative to a rent of $23.16 per square foot in the final year of the expiring lease. On the platform basis, Q4 new and renewal leasing was 1 million square feet in the fourth quarter, and for the year as a whole it was 3.6 million square feet. Over the past five years, this volume was only out done back in 2018 when FCR leased 4 million square feet across the platform. Also, as referenced on slide 10 are average in place, net rental rate per square foot reached $22.95 at December 31st. FCRs in-place rent continues to make new highs. Net rent growth during the fourth quarter was $0.15 per square foot. And on the year-over-year basis growth was $0.53 per square foot or 2.4%. Rent escalations and renewal lifts provided more than 85% of the growth in 2022 net rent per square foot with the impact of new tenant openings, net of closures accounting for the balance. Slides 11 and 12 provide distribution payout ratio metrics on an FFO, AFFO and ACFO basis. These are largely for informational purposes to provide indications as to how we view and measure the cash generation and sustaining capital expenditure requirements of the business. For calendar 2022, FCR’s total sustaining capital expenditures, including leasing costs totaled approximately $38 million. Over time, we generally expect to incur $30 million to $40 million annually for sustaining CapEx. And similar to last year, we currently have a plan for 2023 to be at the upper end of that range. Advancing to Slide 13, the REIT net asset value per unit at December 31, was $23.48. This is virtually unchanged through the fourth quarter, and it was $0.78 per unit, or 3%. lower relative to December of 2021. During the fourth quarter retained FFO was roughly equivalent to the very small net fair value loss on investment properties. On the subject of property valuations, during the fourth quarter more than 100 individual properties were subject to cash flow updates, yield changes, or a combination of both. And to give a bit of color, assets with more than $3 billion of total fair value were subjected to upward valuations aggregating $55 million. Assets with more than $5 billion of total fair value were subjected to aggregate downward revisions, totaling $80 million. Substantially all of the net fair value adjustments related to income properties, while the very modest $7 million fair value loss related to density and development sites. On the portfolio basis FCR’s stabilized cap rates increased to 5.2% at December 31 from 5.1% to September 30. Providing an update on capital deployment, as summarized on Slide 14, we invested $43 million into development, leasing and residential development and other CapEx during the fourth quarter. Most of this capital was invested into assets located in Toronto, Montreal and Vancouver. For 2022 in its entirety, we invested $162 million into the property portfolio, including $103 million into development expenditures, and residential development. Over the course of the year, FCR also invested $62 million into complementary and strategic property acquisitions, while roughly $95 million was allocated to repurchase 6.2 million trust units at a weighted average price that was 36% below the year end net asset value per units. Anticipating that the question might otherwise be asked, as we look forward this year, we currently anticipate development related capital expenditures to increase to a range of $200 million to $225 million. All other capital expenditures, including sustaining, revenue enhancing and recoverable CapEx are at currently anticipated to be in the range of $70 million to $80 million for 2023. Turning to slide 15, we've summarized key financing activities. During the fourth quarter alone, we reduced total net debt by $252 million. This includes the repayment of our $250 million Series P unsecured debentures in early December, as well as the purchasers assumption of the $80 million share of the mortgage on the residential component of King High Line. We also secured a new $100 million term loan that we've swapped it to a fixed interest rate of 5.0% for a four year term. On slide 16 of the presentation, you'll see a summary of some of FCRs debt metrics. These metrics are strong, and on several key fronts, they posted significant improvements. As at December 31, the REITs net debt to total assets ratio was 44.0%. This is consistent with the Q4 2021 metric and 140 basis points lower than the 45.4% at the end of the third quarter. Notably FCRs net debt to EBITDA ratio declined to 10.2 times, a marked improvement from 11.2 times one year ago, and 10.9 times at September 30. At December 31, General corporate liquidity was 654 million. In addition, several of the REITs development projects are funded by dedicated construction facilities. Since year end, we funded a $234 million of 10 year mortgages carrying a weighted average interest rate of 5.35%. These mortgages are secured against the portfolio of six shopping centres located in Alberta. The net proceeds have allowed for the full repayment of amounts outstanding other under FCRA $800 million of revolving credit facilities. And they've reduced floating rate debt exposure to approximately 5% from 10% formerly, and of course, they've also both bolstered pro forma liquidity to approximately $900 million, again, excluding amounts that are available on our construction facilities. We believe these are all very strong financial metrics. This concludes my prepared remarks for the afternoon. And I'll now turn the call to Jordan Robins, FCR's Chief Operating Officer provide some commentary on property investments, operations and development. Thanks, Neil, and good afternoon. Our high quality grocery anchored portfolio continues to perform. As you've heard, we finished 2022 strong the very positive fourth quarter. As we reflect both on the quarter and the year, we're pleased with the advancements we made with our entitlement ladder, our active development program, our enhanced capital allocation plan, and of course, our active leasing program. Our annual leasing volume and the associated growth in renewal rates is a gauge of how our business is tracking. Based on our performance in 2022, we have good reason for optimism. This past year we leased 3.6 million square feet on a platform wide basis. For context. This annual total is greater than our 2017 through 2019 three year pre-pandemic average. Over 1 million square feet of this leasing volume was completed in Q4 that 3.6 million square feet is made up of over 600,000 square feet of new deals, and 3 million square feet of renewals the most we've completed since 2018. Lift on these renewals in the quarter at our share was 9.9%. 3.6 million square feet of leasing volume does not include our 1.4 million square foot leasing pipeline, representing new and renewal lease agreements committed or under negotiation where the tenant is not yet in possession. This pipeline is a window into the future and as it converts we expect it will have a positive impact on occupancy and FFO. We're seeing strong tenant demand primarily from grocery stores, dollar stores, full service, sit down restaurants, discount food stores like Bulk Barn, off-price retailers like TJX, health & wellness QSR, and pet retailers. In 2022, we finalized leases and successfully delivered possession to a number of new and notable tenants that we are confident will have a meaningful impact upon the FCR Neighbourhoods in which they operate. To name a few, these tenants include a 30,000 square foot are cellos urban market grocery store at our Aquavista, Bayside property in Toronto, and a 20,000 square foot Petsmart at Clairfield Commons in Guelph. We also delivered to Dollarama 32,000 square feet of space located at Mount Royal Village in Calgary, 3080 Yonge in Toronto, and at Maple Grove Center in Oakville. We made great progress in Oakville with respect to luxury brands as well. This past quarter we gave possession of a 14,000 square foot space to a renowned soon to be announced retailer who chose Oakville as their first location in the country. Their possession follows on the heels of our recently opened 7,000 square foot Balenciaga deal, who we had also brought to the market in 2021. Balenciaga first took their space as a pop up and shortly thereafter agreed to execute a long-term lease based on their initial success and the long-term commitments we had secured with the other luxury brand co-tenants in the neighborhood. Recognizing the constraint on supply for new space in light of rising construction costs, national tenants have become quite active driving demand for larger space in particular. For example, in 2022, we made significant progress releasing the former Walmart stores at Fairview in St. Catharines, Cedarbrae in Toronto, and Stanley Park in Kitchener. In all three locations, Walmart was paying single-digit gross rents. We are in the process of replacing these low gross rent deals with leases with new tenants, all of whom will pay double-digit net rent. The releasing we've done will not only reposition these centers, improve the tenant mix and the associated consumer draw. It will also serve to reduce the common area costs for the balance of the tenants, increase the NOI and the value of each of these assets. Our investment team had a very busy quarter capping off what was a very solid year with gross disposition proceeds of $277 million. The total proceeds represented a 15% premium to our IFRS NAV. In Q4, as part of our $1 billion enhanced capital allocation and portfolio optimization plan, we realized $179 million in gross proceeds from sales. This includes $149 million from the sale of our remaining 50% interest in our King High Line residential property. During the quarter, we also closed on the sale of a 25% interest in our Yonge and Roselawn development site in Toronto. The project is approved as a mixed use retail and multi-family property with a total of 548 residential rental units and approximately 65,000 square feet of retail space. We sold this interest to Woodward, a highly regarded institutional investor for approximately $30 million, plus the assumption of their pro rata share of the development costs. We retain the role of co-development manager. While we did have offers to buy 100% interest in this property from condominium developers for a significantly higher price, we will realize more value developing and owning this zone, shovel ready mixed use project with 65,000 square feet of retail space as purpose built rental. We do this as an extraordinary development an extraordinary neighborhood, which has been designated as an urban centre in Toronto. Our partner Woodbourne is like minded and collectively we are driven to build one of the best, most energy and carbon efficient purpose built rental properties in Toronto. It was a quieter quarter and year for acquisitions. Notwithstanding, in 2022, we did still manage to close an approximately $60 million are principally tuck-in assets that form part of a larger assemblies that Avenue Lawrence in Toronto, at Blue Room Spadina in Toronto, and on Montgomery at Yonge and Eglinton in Toronto. As at December 31, 2022, we've submitted for entitlements on over 16.7 million square feet of incremental density, representing 69% of our 24.1 million square foot pipeline. Today, over 8.6 million square feet of this pipeline is now entitled. We expected another 3 million square feet of this pipeline should be entitled by year end. For context, this to be approved density includes amongst other assets, 385,000 square feet of incremental density at York Mills and Leslie in Toronto, and 540,000 square feet of incremental density at Staples Lougheed and Burnaby BC. The remaining 6 million square feet of these entitlement submissions that we've made are currently with staff at various municipalities and will be approved in 2024 and 2025. As set out under disclosures, only 7 million square feet of our 24.1 million square foot pipeline is carried on our balance sheet at approximately $72 per square foot. With this in mind, there will no doubt be meaningful NAB road as properties like those which I've referenced. And those other properties in the queue including for example, Avenue and Lawrence, 221 Sterling, 332 Bloor and Yonge and Montgomery, all located in Toronto are approved. As I mentioned our last call, even after the sale of the density contemplated in our enhanced capital allocation and portfolio optimization plan, we still expect to possess over 17 million square feet of incremental density in our residual pipeline, resulting in a very substantial long term growth profile. This past quarter, we continue to advance our active developments as well. Starting first with our high rise program. The structure of 200 Esplanade in North Vancouver is now complete. With 97% of the costs awarded, we are on budget and on schedule for late 2023 delivery. Here in Toronto, the P1 level is being completed at Edenbridge, our 209 unit condominium development located on our Humber Town shopping centre lands. 95% of the costs have been awarded and 88% of the units at Edenbridge are now sold. Shoring and excavation at 400 King Street West, our 460,000 square foot retail and residential condominium development in Toronto is now well underway. 97% of the units there have been sold and we are holding back the sale of the final units until the project is closer to completion. Next week shoring and excavation will commence at our 138 Yorkville development site. Sales for this exclusive project will commence in the second half of 2023. In 2022, we also made tremendous progress with our remerchandising program at Cedarbrae in Toronto, the extensive renovation to the former Walmart store is well underway and on schedule for delivery in the second half of 2023. Their departure had presented us with the opportunity to both renovate and retenant their former premises and create a comprehensive plan for the centre. The former Walmart space is being redemised into a variety of larger format, exterior facing and interior units. As part of this merchandising plan, we're constructing a new facade and a new point of access to and from the renovated centre. We will also relocate several tenants from 3434 Laurens, our property located across the road into the former Walmart premises. In addition to increasing traffic to the centre, relocating these tenants from across the street, will serve to remove the related lease encumbrances at 3434 Laurens, and provide us with the ability to initiate its redevelopment upon receipt of the related entitlements. At Stanley Park in Kitchener, Ontario demolition of the former Walmart is now complete. And we have just commenced our pad preparation. We expect to give Canadian Tire possession of their path in the spring of 2023. So they can begin the construction of their new store with a planned opening in the first half of 2024, where the pace of inflation for material and labor has slowed, we've remained fixated on protecting our projects from cost escalations. With this in mind, we've awarded 100% of the trade contracts at both Stanley Park and Cedarbrae. As I mentioned, we've also awarded between 80% to 90% of the associated contracts and fixed a large portion of our costs for our high rise program. In summary, 2022 was a solid year, capped off by a very solid quarter in Q4. It was highlighted by strong quarter-over-quarter metrics, including same property NOI growth, leasing volume and leasing spreads. In Q4, we also continued to advance our entitlement program, our active development program and our enhanced capital allocation plan. Certainly, thank you. We will not take questions from the telephone lines. [Operator Instructions] The first question is from Sam Damiani with TD Securities. Please go ahead. Thanks. Good afternoon. First question just on occupancy. You've talked a lot about the leasing, robust environment that we're in. Yet the – the face occupancy rate of the portfolio still about 100 basis points below pre-pandemic averages. I guess we got some Walmart's are still underway. But what would be other key reasons why are holding back that occupancy rate from ratcheting back up closer to 97%? Hey, Sam, it's Neil. It principally relates to large format, retailers that we've talked about in the past, i.e. Walmart. And in fact, we anticipate that that will largely be the case again, for 2023. We do have a 40 to 50 basis point occupancy headwind but as you've alluded to, I think in one of your reports, a Walmart that's departing mid year this year. And so you know, I would say that is in a nutshell, the principal reason for the stability and the occupancy. And without providing specific guidance, we have a general expectation of a similar occupancy rate as we progress through this year. Okay. That's helpful. Second quick question for me. Just on King High Line, this hopefully the last time we talked about it, but just on the on the sale. How do you think about that property’s NOI growth prospects over the medium and longer term? Particularly in relation to the remaining portfolio that FCR has? And how do you think about the sale pricing at $925 a foot compared to replacement cost or other recent market transactions? Just wondering, how that sale might compare to other assets? You're thinking about selling over the next couple of years? Thank you. Yeah. So as you know, Sam, when we press released the transaction, it was $149 million sale. And at the time, we indicated that was a yield equal to 2.9% on income in place, or run rate income. And I guess, maybe to flush that out a little bit for you. The actual NOI on our share of that asset was $4 million last year. So that's about a, probably a 2.6% yield, if you take 2022, actual NOI relative to the sale price. We concur with you that, it's a very high quality asset. And, I think in terms of you leading me here in the questioning, we concur that we'll have a good growth profile. Our internal budgets would have that asset at our share, and NOI number that would be approaching $5 million. If we look, say three years out, so a million dollars of growth. But that's from a 2.6% starting yield. So yes, the growth in the asset looks good, but it was a very low yielding asset. We achieved what we view as being a premium pricing, we did indicate the sale price was a premium to our IFRS net asset value. And importantly, we were able to redeploy that capital immediately and creatively in a way that also in the eyes of, I believe many of our equity investors reduces the leverage by a significant degree in our business. So we think we achieved a lot with the transaction. Hi, good afternoon, and thanks for taking the question. I just want to focus on the optimization plan, and specifically the targeted 1 billion of dispositions for the next couple of years of which almost 200 has been completed. Another 200 is presumably held for sale, can you just kind of walk through what the key factors are, that will dictate kind of the pace of that disposition activity? Yeah. Thank you very much Mario. So there's a few factors that are going to determine the pace and it will be spread out over the two year timeframe that we laid out. Some of the factors are how prime the asset is for sale. So we're on the cusp of, achieving zoning on some of them. And so we don't want to prematurely sell those and have zoning risk priced into the – into the sale price. Another factor that will dictate the pace of the sales is our tax profile. So, we -- something that's important for us to manage as well. And so those are some of the key factors. Okay. And then just maybe a clarification point, Adam, from your prepared remarks earlier about expecting previous, stronger premium pricing in relation to the dispositions, is that expectation relative to the bids that you received to date, relative to IFRS values, just wanted to maybe get a bit more color in terms of what you meant by expecting stronger, premium pricing? Yeah, well, what I mean is, when you have an active sales program, how you approach it, and how you're thinking about it, I think is quite important. And so while we're motivated to achieve the objectives we've laid out, by no means does that result in our views of being flexible on price, or fire selling the assets. And I touched on where the pockets of strength are today in the market. And it's not a perfect market, it really is. But we've said before, it's constructive enough to achieve what we're going to achieve. But the assets we sold from 2019 and the two or three years following that were geared to a very different objective, which is enhancing the quality of the portfolio and where we sit today, this is an exceptional portfolio. And, and so the assets we're selling are great, and great assets in this country should command very strong pricing. And so that's our mentality and our expectation as we pursue sales. So hopefully, that's enough color to give you what you're looking for. Thanks. Hi, everyone. Just maybe coming back to the disposition program. What are you seeing in terms of the types of buyers for both? Whether it's income producing or land or densely occurring environment? Just curious if you're seeing any perhaps changes relative to perhaps the second half of last year? Well, the one common theme that we're seeing across virtually every buyer that we're dealing with, which has been the case for quite some time now, so I wouldn't call it a change. But the common theme is we're dealing almost exclusively with private capital. And it ranges from very high net worth, family businesses and portfolios to private equity. But the common thread is its private capital versus are some of the other forms. Okay. And then just thinking about, I guess, the overall strategic plan, and I think you highlighted if I recall, 4%, FFO CAGR from -- on a three year basis 2021 to 2024. And I think you've also excluded the other gains and losses. There's obviously some additional factors this year, but is that within the range of the growth that you see perhaps for this year, or can you share just in terms of your thinking for 2023? Hi, Pammi, it’s as Neil, as you know, we gave an objective of greater than the $20 of FFO per unit, not by this year, but rather by next. We do not give specific guidance in terms of what our annual FFO objectives are. I think, as you can appreciate some of the challenges to earnings growth in the current environment do relate to interest rates and the fact that we and I go out went on a limb here, probably every other REIT Canada face refinancing costs that are higher, not lower. And there is some general G&A pressure as it relates to salary and wages growth. So, we've given you an indication as to how we see our operating FFO at about $1.20 for last year. And we think you can work down to a Q4 sort of run rate. So, from that, I would say that there are definitely some challenges, but we still expect our FFO per unit off of those numbers to be better in 2023 versus 2022. Thank you and good afternoon, everyone. Just Firstly, when we were looking at leasing activity through the lens of an upcoming recession, is there any segment of the tenant mix where you're witnessing a change in sentiment that may cause any concern? Hi. Thank you very much for the question. And just getting right to the point, no, we're absolutely not seeing that. And if you look historically, through previous recessions, and you look at first capitals, key operating metrics, whether it be same property NOI growth, lease renewal list, occupancy, you simply cannot see the recession or correlate to the recession. And, we've said this many times before. We're not a barometer for all things, retail. We operate in a very specific sub sector of retail, both in location, and, very importantly, to the nature of your question, the way we merchandise, our assets. And so, grocery stores, medical facilities, coffee shops, restaurants, discount retailers, through the likes of winners, etcetera, daycare facilities, pharmacies and through recessions, we see consumer habits changing, but they just simply don't flow through to FCR and the business that we do with our tenants. Okay, great. And, lastly, just focusing on the disposition pipeline again; and thank you for sharing your thoughts on the buyer pool. But I'm just wondering, as you go through the process of dispositions, how much of that activity is being determined by, say, the bid-ask spread, versus, where financing rates tend to stabilize at the end of it? Is that something that's been discussed a lot as you undergo through the process? Yes, look, there's -- the reality is, there's a lot of factors at play that are impacting the market dynamics. But, I think, what underpins the program and the success we've had thus far and all the signals that we're seeing on the ground that indicate we will continue to have success is that, a lot of what we're selling is residential density. We're all very familiar with the shortage of housing in literally every major Canadian city, that's where we're located. Our sites are typically within the best locations, when you look at amenities, population density, access to transit, and all the other things that make neighborhoods great neighborhoods. And so, there are a lot of businesses out there and investors out there that are positioning their capital to continue building the housing that we clearly need across the board. So the government’s very focused on it. And I think that's the fundamental element that's underpinning the success that we've had so far. Just over the last couple years, you've highlighted a couple of Walmart exits. I just wondering is that something strategic on your end that you want to merchandise away from discount or something in the relationship or just that -- they're opening a new box across the street. I have no idea; can you give a little color there? Well, yes, absolutely, we can give you the color. We don't have many left. The decisions on the Walmarts that have vacated have been Walmart's decisions. In some cases, we've played a role where they need a food restriction and we can potentially facilitate that. We've declined to facilitate that. The issue for us with Walmart is it's a very tough tenant to earn a return on, because the nature of their leases are very in their favor with respect to qualitative elements like what you can do with the balance of your Senator, whether it be no bills, or use exclusivities. And financially, the leases are real tough, right? They're typically very long-term leases, often 99 year leases when you include their options. And the toughest part about them is most typically, their net rent is flat throughout that entire time period. So, their real effect of rent declines every year. And they don't pay the same level of operating costs that typical tenants do. And so that burden either gets borne on the landlord or inflated in terms of what the rest of the tenants pay to bridge that. So, it's a very tough tenant for us to make money on. Now, we wouldn't want them all back at one time, because as you've seen, the repurposing exercise has been fruitful and profitable and increased value. But it does result in a fairly lengthy period of cash flow interruption. And so getting them back on a staggered basis works, but our issue, like wonderful retailer, but very tough to make money on from our perspective, given our model. Okay. And then with 200 Esplanade coming close to fruition here, just wondering what kind of development yield you expect to have on that project and where you're thinking about apartment rents that you're going to be going out at, when you start to market the building? Yes, I'll touch on the first part, and then Jordi can touch on the rental REIT part. So, -- and this is inherently the challenge for us with residential development, particularly in Vancouver, because the development yield on an unlevered basis starts with a four, which is less attractive to us. Our partner, who's a private developer, is a lot more excited about the development metrics on the day that the project is completed, because -- and we're cognizant of this too and obviously, this is the main reason why we went forward on the development. But the market tap rate forward is lower -- notably lower. And -- so the development profits, certainly the way the current pro forma continues to indicate is quite attractive. But the going in yields are -- it starts with a four. Yes, I thought its Jordi, sorry about that. Yes, I would suggest you we expect to get in the high floors. You know, the units are relatively, I'll say small. And the expectation is that they will lease up relatively quickly. It's a small -- a relatively small building and in an area that remains strategic for us. We have the centre adjacent to it and then there’s some additional overflow retail at the base as well. Okay. And then just lastly, on the Young and Roselawn transaction, and just -- like, you decided to do a partial stake here, which is great to raise a little cash for you, and you keep your interest in the project, which means, you'll be funding its development over time. I'm just wondering, like, when you look at like the disposition program ahead, how you're sort of thinking about, yes, that's one we want to stay in on and that's one we might exit entirely? Yes. That's a great question, Tal. And so the first thing we do is, we step back and we say, is this an impactful development that fits what we're trying to do and, and what are the returns look like on it? And then from there, like we've done in other larger projects that we've developed, we've said, is there a potential partner that not only brings capital, but brings in an expertise that improves the development capability of the team, reduces risk and increases the probability of success. And so when we look at the Young and Roselawn property, and Jordi touched on it in his prepared remarks that, we could have sold the land for more and exited the project. But, we do believe there's a lot of development profit that can be realized through the development, and we believe that Woodbourne brings an expertise and this is not our first partnership with Woodbourne. So we've got a good handle on their platform. But we do think they bring value to the table, while we're still the development manager working with them, and they also brought an institution from overseas that will disclose at a later date of their request that we also think can grow into a larger strategic partnership. That's certainly our desire. And that is also that institution’s desire. So, that's how we look at it. And then, you know, obviously, for ones that are less compelling for us, and what we're trying to do, those are the ones will exit entirely. Thank you, and good afternoon. Questions for Neil. You didn't go out on a limb with a debt refinancing. That's an absolute fact. What was the thought process when you looked at that stuff you did in Calgary to take 10 year term sort of the 535? Yes. Hi, Dean. A number of considerations. One, for sure is the fact and this has been pointed out by probably you and a few of your peers, the fact that our debt ladder has been shortening, and that's really been the natural process of us repaying debt as it comes due. And not being in the market originating new long-term debt, so that was certainly a factor. Secondly, these are great qualities, very stable, very solid cash flowing assets. So, given the cash flow that these assets threw off, they were capable of supporting a fairly high LTV by our financing standards anyways. So, the assets were financed at a mid-60% LTV. And so we got a nice loan amount, we got lots of term. And the overall blended rate in the low-fives worked very well for us. All right. And then, the sort of corollary to that is when you look at those debt financing costs, and they've increased some 100, whatever basis points year-over-year, how do you square that against cap rates that are flat or up 20 basis points, depending on who you would talk to? And you've been doing this for a while? What's your thought on that, sort of negative differential there? And how that could play out? Yeah. Well, look, we've seen this for quite some time now that cap rates and interest rates are far from perfectly correlated. And so certainly, the movement in rates relative to cap rate is one element. And, we've been, so far at least we've been at the forefront on property write-downs. 20 basis points may sound small, but it's over 4% of our asset value that we've written down. But what's countering that is, is where our rental rates, how is cash flow growing, the whole dynamic around increased replacement costs and what that should mean to rents over the next number of years? That's all -- that's a counter balanced that. And then, the reality is we're in neighborhoods, including in Calgary, where the population continues to grow at a very attractive rate with healthy household income, and very, very little new retail supply. So the retail square footage per capita in these neighborhoods continues to go in the right direction. And, we think that's part of the counterbalance, why cap rates have held in so well, and, but grocery anchored retail has proved its resiliency through the pandemic. And I think performed significantly better than most people would have expected in the early and mid part of 2020. So I think that those are probably some of the reasons but clearly we've seen for quite some time now that there is not a perfect correlation between interest rates and cap rates. Thank you. There are no further analyst questions at this time. This will conclude the question-and-answer session. So I will turn the call over to Adam. Okay. Thank you very much. Look, we apologize for running over in time, but clearly, we've got a lot going on. We wanted to make sure. We also got through all of the questions from analysts that cover. So Thank you very much, everyone for your participation and interest in First Capital. Have a wonderful afternoon. Thank you. The conference has now ended. Please disconnect your lines at this time. And we thank you for your participation.

EarningCall_428

Good afternoon, and welcome to A-Mark Precious Metals Conference Call for the Fiscal Second ended December 31, 2022. My name is John, and I will be your operator this afternoon. Before this call, A-Mark issued its results for the fiscal second quarter 2023 in a press release, which is available in the Investor Relations section of the company's website at www.amark.com. You can find a link to the Investor Relations section at the top of the home page. Joining us for today's call are A-Mark's CEO, Greg Roberts; President, Thor Gjerdrum; and CFO, Kathleen Simpson-Taylor. Following their remarks, we will open the call to your questions. Then before we conclude the call, I'll provide the necessary cautions regarding the forward-looking statements made by management during this call. I would like to remind everyone that this call is being recorded and will be made available for replay via a link available in the Investor Relations section of A-Mark website. Thank you, and good afternoon to everyone. Thank you again for joining our call today. As you can see from our earnings release, the second quarter represented another solid quarter for A-Mark with diluted EPS of $1.35 and EBITDA of nearly $49 million with a 6% quarterly return on equity. We generated these results, despite the subdued market conditions that we experienced during the latter half of the quarter, demonstrating the strength of our fully integrated business model. Our DTC segment continued to contribute significantly to our overall results, generating 57% of our consolidated gross profit for the quarter with 130 basis point increase in our DTC gross margin percentage, year-over-year. Our total DTC customer base grew 15% year-over-year, new DTC customers for the quarter grew 230% year-over-year, and active DTC customers for the quarter grew 30% year-over-year. Approximately 55% of the new customers were acquired from our BGASC asset purchased in October 2022. We are encouraged by the performance of the now fully integrated BGASC brand and the customer base that we acquired. Our DTC segment continues to grow and remains a key contributor to our overall business. We remain active in seeking opportunities to strategically enhance our business. As we announced last month, we purchased a 12% minority interest in Texas Precious Metals or TPM, a leading e- commerce precious metals retailer with a strong geographic presence in Texas. TPM has over 50,000 customers, and we look forward to supporting their growth through our four-year extension of our exclusive supplier agreement. Last week, we also entered into a definitive agreement to acquire a 25% minority interest in Atkinsons Bullion & Coins, a leading online retailer of precious metals, Bullion & Coins based in the United Kingdom. This investment transaction is expected to close in the first quarter of calendar ‘23 and will expand our international footprint outside of North America. Another key driver of our performance continues to be our minting business, which provides us with ongoing access to supply with production levels continuing at near record levels for the second quarter. Now, I'll turn it over to our CFO, Kathleen Simpson-Taylor to walk you through our financials in more detail. Then President, Thor Gjerdrum will discuss our operating metrics. Afterwards, I'll provide a further update on our business and growth strategy and take your questions. Kathleen? Thank you, Greg. And good afternoon, everyone. Our revenues for fiscal Q2 2023 increased 0.2% to $1.95 billion from $1.946 billion in Q2 of last year. The increase was due to an increase in silver ounces sold partially offset by a decrease in gold ounces sold and lower average selling prices of golden silver. The DTC segment contributed 23% of the consolidated revenue in fiscal Q2 2023 and 28% of the consolidated revenue in Q2 of last year. Revenue contributed by JMB represented 21% of the consolidated revenues for fiscal Q2 of 2023, compared to 25% in Q2 of last year. For the six-month period, our revenue decreased 3% to $3.85 billion from $3.96 billion in the same year ago period. The decrease was due to a decrease in gold ounces sold and lower average selling prices of gold and silver, partially offset by an increase in silver ounces sold. The DTC segment contributed 23% and 27% of the consolidated revenue for the six months ended December 31, 2022 and 2021, respectively. Revenue contributed by JMB represented 21% of the consolidated revenues for the six-month period ended December 31, 2022 compared to 24% in the same year ago period. Gross profit for fiscal Q2 2023 decreased 3% to $64 million or 3.28% of revenue from $65.9 million or 3.39% of revenue in Q2 of last year. The decrease in gross profit was due to lower gross profits earned from the wholesale sales and ancillary services and DTC segment. Gross profit contributed by the DTC segment represented 57% of the consolidated gross profit in fiscal Q2 2023 compared to 56% in the same year ago period. Gross profit contributed by JMB representing 51% of the consolidated gross profit in fiscal Q2 2023 compared to 45% in Q2 of last year. For the six-month period, gross profit increased 15% to $140.6 million or 3.65% of revenue from $121.9 million or 3.08% of revenue in the same year ago period. The gross profit increase was due to higher gross profits earned from the wholesale sales and ancillary services and DTC segment. Gross profit contributed by the DTC segment represented 56% of the consolidated gross profit in the six-month period ended December 31, 2022 compared to 55% in the same year ago period. Gross profit contributed by JMB represented 49% and 45% of consolidated gross profit for the six months ended December 31, 2022, and 2021, respectively. SG&A expenses for fiscal Q2, 2023, increased 11% to $20.8 million from $18.7 million in Q2 of last year. The increase was primarily due to an increase in compensation expense, including performance-based accrual of $1.5 million, higher advertising costs of $1.2 million, an increase in insurance costs of $0.8 million, and an increase in computer related expenses of $0.3 million, partially offset by lower consulting and professional fees of $1.7 million. For the six-month period, SG&A expenses increased 9% to $38.6 million from $35.4 million in the same year ago period. The increase was primarily due to an increase in compensation expense, including performance-based accruals of $2.5 million, higher advertising costs of $1.9 million and increase in computer related expenses of $0.4 million, an increase in insurance costs of $0.2 million, partially offset by lower consulting and professional fee of $2.3 million. Depreciation and amortization expense for fiscal Q2 2023 decreased 61% to $3.3 million from $8.3 million in Q2 of last year. The decrease was primarily due to a $5 million decrease in amortization of acquired intangibles related to JMB. For the six-month period, depreciation and amortization expense decreased 61% to $6.4 million from $16.5 million in the same year ago period. The decrease was primarily due to a $10.1 million decrease in amortization of acquired intangibles related to JMB. Interest income for fiscal Q2, 2023, decreased 5% to $5 million from $5.3 million in Q2 of last year. The aggregate decrease in interest income was primarily due to lower interest income earned by our secured lending segment offset by higher other finance products income. For the six-month period, interest income decreased 7% to $10.1 million from $10.8 million in the same year ago period. The aggregate decrease in interest income was primarily due to lower interest income earned by our secured lending segment and lower other finance products income. Interest expense for fiscal Q2, 2023 increased 34% to $7.2 million from $5.4 million in Q2 of last year. The increase was primarily driven by $1.2 million associated with the company's trading credit facility and the AMCF Notes, $0.7 million related to product financing arrangements, $0.2 million in interest associated with liabilities on borrowed metals, offset by a decrease of $0.2 million of loan servicing fees. For the six-month period, interest expense increased 23% to $13.4 million from $10.9 million in the same year ago period. The increase was primarily driven by $1.8 million associated with our trading credit facility and the AMCF Notes, including amortization of debt issuance costs, $0.8 million related to product financing arrangements, $0.3 million in interest associated with liabilities on borrowed metals. And this was offset by a decrease of $0.4 million of loan servicing fees. Earnings from equity method investments in Q2, 2023 increased 283% to $4.7 million from $1.2 million in the same year-ago quarter. The net increase was primarily due to our additional 40% ownership interest in Silver Gold Bull which acquired in June 2022. For the six-month period, earnings from equity method investments increased 171% to $7.3 million from $2.7 million in the same year ago period. The net increase was primarily due to our additional 40% ownership interest in Silver Gold Bull which we acquired in June 2020. Net income attributable to the company for the second quarter of fiscal 2023 totaled $33.5 million or $1.35 per diluted share. This compares to net income attributable to the company of $31.8 million or $1.30 per diluted share in Q2 of last year, as adjusted for the effect of two-for-one stock split in June 2022. Our diluted EPS for the fiscal second quarter of 2023 is based on weighted average diluted shares outstanding of $24.7 million compared with $24.4 million weighted average diluted shares outstanding during the second quarter of last year, as adjusted for the effect of the two-for-one stock split that occurred in June 2022. For the six-month period, net income attributable to the company totaled $78.6 million or $3.18 per diluted share, which compares to net income attributable to the company of $57.8 million or $2.39 per diluted share in the same year ago period as adjusted for the effect of the two-for-one stock split that occurred in June 2022. Our diluted EPS for the six-month period is based on weighted average diluted shares outstanding of $24.7 million compared with $24.2 million weighted average diluted shares outstanding during the same year ago period which has been at adjusted for the effect of the two-for-one stock split that occurred in June 2022. Adjusted net income before provision for income taxes, a non-GAAP financial measure, which excludes acquisition expenses, amortization, and depreciation for Q2 fiscal 2023 totaled $46.5 million, a decrease of 5% compared to $49 million in the same year ago quarter. Adjusted net income before provision for income taxes for the six-month period totaled $107.7 million, a 20% increase from $90.1 million in the same year ago period. EBITDA, a non-GAAP liquidity measure for Q2 fiscal 2023 totaled $48.7 million, a 1% decrease compared to $49.1 million in Q2 fiscal 2022. EBITDA for the six-month period totaled $110.9 million, a 23% increase compared to $90.1 million in the same year ago period. Turning to our balance sheet. At quarter end, we had $72.5 million of cash compared to $37.8 million at the end of last fiscal year. 2022. Our tangible net worth at the end of the quarter was $371.6 million, up from $321.6 million at the end of the prior fiscal year. Our AMCF Notes have a maturity date of December 15, 2023 and are now reported as a current liability of $94.5 million on our balance sheet. Finally, as we announced in a prior press release, A-Mark’s Board of Directors reaffirmed its previously announced regular quarterly cash dividend policy of $0.20 per common share, which the company paid in January. It is expected that the next quarterly dividend will be declared and paid in April 2023. The declaration of regular cash dividends in the future is subjected to the determination each quarter by the Board of Directors based on a number of factors, including the company's financial performance, available cash resources, cash requirements, and the alternative uses of cash and are applicable bank covenants. That completes my financial summary. Now I will turn the call over to Thor who will provide an update on our key operating metrics. Thor? Thank you, Kathleen. Looking at our key operating metrics for the second quarter of fiscal 2023. We sold 565,000 ounces of gold in Q2 fiscal 2023, which was down 10% from Q2 of last year, as well as the previous quarter. For the six-month period, we sold 1.2 million ounces of gold, which was down 8% from a year ago period. We sold 38.1 million ounces of silver in Q2 fiscal 2023 which was up 19% from Q2 of last year and up 6% from last quarter. For the six-month period we sold 74.1 million ounces of silver, which was up 23% from the same year ago period. The number of new customers in the DTC segment, which is defined as the number of customers that have registered or set up a new account, or made a purchase for the first time during the period was 131,200 in Q2 fiscal 2023 which is up 230% from Q2 of last year, and up 168% from last quarter. Approximately 55% of the new customers in Q2 fiscal 2023 were attributable to the acquired customer list of BGASC in October 2022. For the six-month period, the number of new customers in the DTC segment was 180,200, which is up 145% from 73,600 new customers in the same year ago period. Approximately 40% of the new customers in a six-month period were attributable to the acquired customer list of BGASC in October 2022. The number of total customers in the DTC segment at the end of the second quarter was approximately 2.2 million, which was a 50% increase in the prior year. The year-over-year increases in the customer base metrics were primarily due to organic growth of our JMB customer base, as well as the acquired customer list of BGASC in October of 2022. The DTC segment average order value which represents the average dollar value of third-party product orders excluding accumulation program orders delivered to DTC segment’s customers during Q2 fiscal 2023 was $2,389 which is up $16 from Q2 fiscal 2022. For the six-month period, our DTC average order value was $2,361, which is up $29 from the same year ago period. For the second fiscal quarter, our inventory turn ratio was 2.4, which is a 27% decrease from 3.3 in Q2 of last year. For the six-month period, our inventory turn ratio was 4.5, which was a 41% decrease from the six-month period of last year. Finally, the number of secured loans at the end of December totaled 1,049, a decrease of 3% from September 30, 2022, and a decrease of 56% from December 31, 2021. The dollar value of our loan portfolio at the end of December 2022 totaled $102.5 million, which is up 17% from the end of September, but down 19% from December 31, 2021. That concludes my prepared remarks. I'll now turn it over to Greg for closing remarks. Greg? Thank you, Kathleen and Thor. Our favorable results for the quarter demonstrate the benefits of our fully integrated business platform to generate positive results even in more modest market conditions. With the opportunity for outsized returns in periods of elevated demand and volatility. We've continued to face some macro headwinds to start the fiscal third quarter as we are currently experiencing a more subdued market environment. We continue to evaluate investment opportunities to expand our footprint both in the US and in international markets to further grow our business and create value for our shareholders. We are prioritizing opportunities which are synergistic for A-Mark and which are aligned with our business model. We remain very optimistic that our proven business model and integrated platform will allow us to realize growth and profitability over the long term. Operator? Great. So Greg, I had two questions. I'll go one at a time. When talking about the macro headwinds, how much of that is elevated prices for gold and silver? Is that partly it? Or is it more than that? And I appreciate any additional comments there. Sure. I think exactly what you said, I think the higher spot prices has caused some premium compression, as well as some softening in demand. I think November 3, gold was at $1,635 an ounce. It ended the year around 18 plus. And as of January 31, we were up to $1,930. So you had a fairly significant steady increase on the spot price and silver followed suit, without really any of the pullbacks that we see that generally generate volatility or generate increased demand. Now, we did see a Friday of last week, we did see a fairly significant drop in gold and silver. And we'll see how that plays out through February. But I think that we do, we have reached a point at this level in gold and silver that the markets really looking to see whether or not we're going to get a breakout to the upside, or whether we're going to get a pullback. And I think we had such extreme demand and conditions through our Q1 and through October and the first part of November of our Q2, that there was definitely, to be expected if spot prices rose without a pullback. We expected to see a little softening in demand. I also think the timing was a little bit, just there was a little bit of timing issue at the -- in December, where we had these circumstances. Plus we had the new United States Mint product coming online, the first of January so you had some supply coming into the market there as well as some of the other sovereign mints had product coming into the market in January. So I think the business is functioning great, everything is working. But I do think that we had a little bit of supply and demand imbalance in December in January. Great. And for my second and three questions, on the M&A front, can you do a quick compare and contrast on how you would describe your domestic strategy versus your international strategy? Given that you just did the hurry, you have plans to make an acquisition of a UK asset? Yes, I mean, I think, North America is where our markets are, we have the most, the biggest footprint in Canada and the United States. So I think we will continue to build our moat and look for acquisitions that are priced right, and where we believe the people, we're talking to, it'd be a good addition to our staff and business model ideas that we haven't possibly looked at before, but I don't think anything slows down in North America, I think that we're excited to get a little more insight into our first investment outside the US or outside of North America. And I think the Atkinsons deal, is something that we've been looking at, really for six to nine months, getting to know the partners getting to know the business, and then come into an agreement where we have made this purchase. And we also, as part of that have an option to go up to just under 50%. So I think we'll digest that, I think our marketing guys in the DTC segment will be taking a close look at Atkinsons and seeing what they know and how we can how we can meld those two together. And then, of course, we feel very strongly with the supplier agreement, that our access to inventory and access to products that Atkinsons hasn't been able to offer in the past, or at least not offer consistently. We hope that by moving some product over to the UK and giving them quicker access to product for their customers, we think that will be a nice opportunity for us to kind of get a feel for what that market is. And I think the principles that Atkinsons are very open to our help, and they're very much looking forward to seeing what we can do together. Great. The last question. So last quarter, you talked about your mint capacity. And you talked about your very significant increase, I think in silver ounces sold. But at a high level can you talk about your mint capacity today at SilverTowne and Sunshine Mint? Sure. I think both companies are -- have had a great start to the fiscal year, both quarters were very strong in both businesses. I think we've found ways to squeeze more production out of both facilities. And I think that everything is operating probably 90% to 100% of capacity right now, we regularly go through different product imbalances, and we shift production to items and products that we see demand shifts in, or in products that we build up supply of. We're currently still producing product through February, for the most part on orders that we took back in November and December. So we're trying to catch up and get as good as much product that we have orders on right now out to our customers. But I think that we'll keep a close eye on the, again, the supply and demand and the product mix. And we will keep an eye on our overall inventory and how that forward book is looking on product. Thank you very much operator and good afternoon, everyone. I also want to ask about the M&A strategy and specifically with the recent investment in the UK. Is that may be a sign that Europe is higher up on the priority list internationally or should we maybe not go that far? Thank you very much for your color. Yes, I mean any investment we make outside of the US, whether it be in Europe or in the UK, I think it comes with just a different set of challenges. I think that we need a good partner in those areas because the nuance of the business, although very similar, we're selling very much, very many of the same products. I think the nuance of the consumer, is something that A-Mark hasn't had exposure to the level of detail, we hope to see from the Atkinsons investment. And I do believe that the UK in particular as it relates to online e-commerce platforms is, there's a little bit less competition in my mind. And there's a few more players in North America. And I think that the businesses and the evolution of the businesses in the UK are probably a little bit behind what we see and what we are able to execute here in North America. So I think opportunity wise, it's a very big market. Certainly the UK is dominated by the Royal Mint. And the Royal Mint is a big player there. So although we're a big distributor of the Royal Mint, here in North America, we believe that the UK presence and the relationship with the Royal Mint has a lot of potential for us to continue to grow our business over there. So I think that's probably the players as well as, as I said that the sovereign mint is very interesting to us in the UK, it doesn't mean that we haven't looked at or we aren't looking at other opportunities in other places outside of North America. But I do believe that this was something that we identified, as I said, six to nine months ago, we knew we wanted to do it. And we did focus specifically on this target. Diligence in the partners diligence in the founders, the employees the model, and we came away as we signed the definitive agreement last week, we came away feeling that this was a good decision albeit a little slower process than maybe we had in the BGASC or the TPM investment earlier this year. We were -- we are very happy with the results and the deal we were able to cut and I think both sides feel there's a lot of opportunity in the UK. That's very helpful. Thank you for that color. And speaking of sovereign mints, I think you mentioned that there were a couple of new products that may have had an impact on premiums here earlier this year. Can you --did I hear that right? Can you elaborate on that? And is that something more seasonal or is it potentially structural that there's more supply? Thank you for your color on that. Sure. I don't know exactly what you're referring to. But I'll try to answer what I think the question is, we went through a period through our Q1 and the first part of Q2, a period of extreme supply constrained from the US Mint both in gold and silver. And I think I've talked about it before, we haven't, hadn't really seen supply constraint on the US Gold Eagles in quite some time and the silver constraints continued. So we did benefit from that in Q1. And we also benefited from that at the beginning of Q2 in October. I do believe that the higher premiums that we experienced in those periods were a direct result of a supply constraint. It does appear that as we move into Q3 and as we turn the calendar to 2023. And all the mints are now producing bullion dated 2023. We've absorbed a significant amount of new inventory from that date change. It's, we've been able to manage it, we've been able to digest it. We are set up very well I believe if we get back into a supply constraints situation, or if we have a demand increase. I think A-Mark and our DTC are very well positioned with plenty of inventory. It does appear from what I'm hearing that the US Mint as it relates to Silver Eagles in particular, at least through the first six months of ‘23 will continue to be on allocation. And I believe that will continue to limit the amount of Silver Eagles that are coming into the marketplace over the next six months. So we'll see how that plays out. We'll see how the demand matches up with that. But that's what we're hearing from the US Mint right now. Good afternoon, and thanks for taking my questions. First one here, you dived into a little bit, but please kind of just pick apart the 130-basis point gross margin expansion in the DTC business, so just kind of wondering if that was more just the market environment, or maybe improvements in the operating model. I think that I think for the most part, it had to do, again, with what I just discussed, which is we did see some extreme premium advantage to the model in Q1 and to start Q2, I think that is reflective of our ability to move a lot of metal, both at the wholesale level and at our DTC segment. And I think we enjoyed those -- that premium expansion for a while. And as I discussed, we've seen a little bit of compression or erosion of that premium in December and January, but I don't think there was anything specific within our model as it relates to expenses or anything else, I think it was pretty much driven by demand. And as I said, some significant supply chain and supply constraints at the sovereign mint level. Great, thanks for the color. My second one here, kind of shifting gears, the CFC loan book, I guess talk to the increase in the loan book, but also and notice simultaneously, there is a decline in loans outstanding, so can you just kind of talk to the demand you're seeing in the business, and then maybe any updates on the partnerships with the Collectibles Group would be great as well? Sure, I think that the loan book, as we've talked about many times in the past, the loan book tends to increase when you have rising prices, and we tend to have loans paid off, and we tend to lose loans, when you have sudden drops or significant drops in the spot price of metal, this would be on the bullion loans in particular. I think that on the numismatic loans and the sports card loans that we've started to invest in, it's not quite as volatile. And I think that the CFC loan book is going to have the ups and downs, I do believe also that we've seen a significant increase in higher cost of funds as it relates to our credit facility, with the rising rates over the last four to five months, and it's been, our cost of funds has gone up. And we will start to expand our or raise our interest rates to our borrowers. But generally, we saw in the last two quarters a little faster increase in our cost of funds than we did in our ability to charge more to the customers. I think we've also, as it relates to the CGC arrangement, that's, we are focused right now on trying to increase our book on the more collectible side of things, and the more numismatic or cards, as opposed to the straight bullion loans, which we have pulled back a little bit on over the last three to four months, and we see a little bit better margin potential in the collectible loan, so we're going to be focused on that. And we've seen some nice increase in that which is offset some of the drop on the bullion loans. Great, thanks. Hey, Greg, Kathleen and Thor. Thanks for taking the questions. I guess first if I could follow up on the subdued market conditions. How much of kind of those headwinds were from lack of volatility in the market do you think versus maybe that increase in supply that you talked about? Yes, I mean, I think, again, I do point to the rise in spot prices. And I think that is a significant issue. And we've always talked about how volatility is good for us. But when prices tend to rise, and there's uncertainty as to really what's causing it or where it's going, I think that's going to cause a little bit of pullback in demand. And I just think that it's natural. We had a pretty good run-on silver in particular, over the last year plus from about $18, up to about $25. So you also have some people taking profits. And we tend to have a little bit higher buybacks when spot prices are up. So that's going to affect the supply, you also have had a situation where we were very active, forward selling a lot of our Silver Towne and Sunshine product in September and October. And a lot of that product is now coming into the marketplace as we deliver it in January and February. And I think that not everybody in the marketplace, hedges their position like we do. So if you have wholesalers that may be bought product from us back September, October at lower spot prices, they're going to be selling that product back into the marketplace, when they take delivery of it. So I think there's a number of factors that are going into this, but I would say the higher spot prices are good are probably the number one issue. And then with that a little slowing in demand. And again, these are -- these things are very expected by us, we go through these periods all the time. And we believe that operationally, the business is handling it with our liquidity, all of our business, operations, logistics, everything is performing well. But we are in a volatile business. And we've experienced this before, but I do think as I said before the combination of December, slowed down a little bit, rising prices, more product coming into the marketplace in January, I think that has had effect. And throughout January, as I said, the price of gold and silver continued to pretty much head up and then stagnate in a pretty tight range until Friday when we saw a pullback and as in most cases, we did see a pickup in demand from our DTC segment on Friday and over the weekend and this morning, so putting it all together, it's hard for me to say exactly what one factor may be is more important than another. But to me, this is kind of how we operate here, we're used to have volatility. And as we've seen before and we said at all, we say it all the time, in great conditions we are able to have outsized returns, as well as do well when we have more subdued levels. So seems, everything seems pretty standard to me. Right, very helpful. And if I couldn't follow up, you already touched on this a little bit, but that new supply from the mint in January, have they've given any indications in terms of their plans for maybe minting production levels going forward in new products, any idea of that? I mean, the US Mint is not ever likely to give us specifics or details and, in many cases, I don't know that they even know what their production is going to be because there's so many factors that affect how many one-ounce Gold American Eagles and one ounce Silver Eagles they can produce. I can say that, part of the benefit we had in Q1 and into Q2. As I said before, for the first time, there was a significant lack of US American Gold Eagles one ounce and we got to a point where there were virtually no new fractional gold coins being made. And that did have a very positive effect on the premium and the demand for that product, was positively affected for us. They are now back on gold where you, there is no allocation and they have, they'll make as much gold as, as we can order. So that was a fairly major change, as we turned into January that gold went off allocation, and is available for immediate delivery. Now, as it relates to the Silver Eagles, , we've been through these periods for the last two years of pretty much constant allocation, where the demand continues, and has exceeded what they can make. And again, I feel like they sometimes aren't great at predicting what they can make, but from what we have heard throughout the next coming months, and probably six months, they will be on allocation on Silver Eagles at a number that we've been seen consistently now over the last 12 months, so I don't see any big increase on a monthly basis going forward. But the market did, they did have a fairly large production built up for the turn of the calendar. And in January, we saw about the number of coins that we were predicting on the silver side. And then that was absorbed by the marketplace. And again, now as I said it, it appears they're going to be back on a more regular allocation, kind of underperforming what they need. Okay, got it. That's helpful. And I know it's still early. But wanted to ask just how the performance, maybe of BGASC is trending relative to your expectations, and perhaps Texas Precious Metals as well. I know there's always a little uncertainty when you're changing hands and making a new investment. So if there's any colors you can share there, that'd be helpful. I mean, I would just really differentiate between the two, the first being that BGASC, we bought 100% of the platform. I think we our guys, our tech guys at JM Bullion really outperformed expectations, they were able to integrate the platform and transfer the platform to the JM Bullion site very quickly, with very little disruption to the customer facing experience. The BGASC, if you go on that site right now, it's running on the JM platform. And I really, I don't know that the customers of BGASC even saw any difference other than just a significant increase in product availability that we've been able to add to the site. As it relates to the performance after we close the deal, we've exceeded expectations, I think the number of larger orders has been welcomed by us. And probably we've seen some bigger orders that we weren't expecting. And I think that customer base, as we were hoping it does appear that it's it functions a little independently of our other DTC customers, and it does seem to have its own little echo system, which is what we were hoping to see. So very positive news out of BGASC. And then as it relates to Texas Precious Metals, it's a little different animal and we just took a 12% stake there, they're still really running the company, they're still making the decisions, we have a little closer relationship with them and a little more understanding on how we can help them by supplying a little bit more product, which will increase demand at the A-Mark wholesale level. And I think so far that's been going very well. I have a list of things that discussed with the management there about different ways that we might be able to help each other and, we'll be looking to act on those in the months ahead, but again, this is a very entry level, get to know you 12%. And we're not other than getting financials from them, we will be accounting for them on the cost basis accounting, so we won't be integrating the numbers and you won't be seeing the numbers in our other investment category. So I think they're different, but they both to us offer good opportunities and I think specifically as I mentioned, here we mentioned in the press release we're very interested and very curious about the Texas centric customer base of Texas Precious Metals and to see how that -- how to value that and how it functions and get to know the customers and get to know our new management partners as we move forward. Hi. I realize it's early. But can you glean anything from the cyber experience you've had in terms of how those customers react to either metal volatility or anything else? And what's the progress, if any, in terms of sort of becoming programmatic buyers every month? Yes. I think, we've brought on a couple of new people to focus on marketing for CyberMetals in the last quarter. We are seeing what we think is positive growth, there's no doubt in our mind that the customer -- the new customers coming into CyberMetals are more than likely going to be younger. And they're more than likely not to be existing JM customers, although we do get some crossover. So I do believe this platform is a different demo. And I think it is a great way for us to introduce CyberMetals to the physical metals, ownership that we have at JM. So I think we've seen that, certainly, we are promoting, and we, as we had talked about earlier, when we were developing this platform, we believe that people get in on a regular monthly or quarterly purchase plan where it's just automatic, we're seeing some positive feedback from customers there. And I think as would be expected with spot prices rising, as I discussed earlier, we have seen some redemptions and people actually trading metal back to us on the platform at a little bit higher level. So, again, it's going to be slow and steady. We feel good about our marketing plan and how we're going out there to find new customers. But to this point, I'm pleased with it. And I think it's the platform is behaving better than expected as it relates to functionality. We just need to find the sweet spot for , what we're paying for new customers and how we're attracting new customers to the platform. Thank you very much for taking my follow up question. When I looked at the operating metrics go down to silver ounces sold. So we saw an increase in silver ounces and a decrease in gold. And I have some intuition on why that is but would be great to get the explanation for that. Thank you very much. I think that there are ounces sold always I caveat it with there's a number of products that go into that. So I think that timing many times can affect that number. I think that you have to always remember that when we report or when we're looking internally at ounces sold, you not only have the wholesale ounces sold of fabricated product and the wholesale and the retail ounces sold DTC wise on fabricated product that also encompasses our sales to the US Mint and other mints, Silver Towne, Sunshine of big bars, 1000-ounce bars, and 100 ounce and 400-ounce gold bars. So depending on timing and demand, you can see those numbers vary. And you can see imbalance between gold and silver don't always go up and they don't always go down because you have demand side both at the wholesale and the industrial level as well as at the DTC level. So in looking at the numbers, I think you probably gold and the rising spot price certainly has, probably had a little bit effect on our gold ounces sold. Whereas silver, we continue to pump a lot of metal out of our private mints, as well as supply, the US Mint as they were gearing up to have their 2023 launch of the Silver Eagle. So that's pretty, it's a pretty high-altitude answer, but I don't see anything specific as to why we sold less gold than we sold more silver. Thank you very much for the color. Now I'll add a facetious comment if Congress doesn't come to an agreement on the debt ceiling and the US Mint set $1 trillion platinum coin, I think JM Bullion has recommended itself for the distribution. So, again. Best of luck. Well, we'll wait to see how all those things play out. We'll try, I’m try not to count on anything because in this business I've learned after 40 years, I just shouldn't get to settle on what I think's going to happen. I should just make sure I'm ready to react to whatever might happen. At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Roberts for his closing remarks. Thank you very much. I'd like to thank our many shareholders for joining the call today. Thank you for your interest and continued support. Many thanks to our employees for their dedication and commitment to A-Mark success. And we look forward to keeping you apprised of A-Mark’s further progress. Thank you very much for joining. Before we conclude today's call, I would like to provide A-Mark Safe Harbor statement that includes important cautions regarding forward-looking statements made during this call. During today's call, there were forward-looking statements made regarding future events, statements that relate A-Mark’s market future plans, objectives, expectations, performance, events, and the like are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934. Future events, risks and uncertainties individually or in the aggregate could cause actual results to differ materially from those expressed or implied in these statements. Factors that could cause actual results to differ include the following. The failure to execute the company's current strategy as planned, greater than anticipated costs incurred to execute this strategy. Changes in the current domestic and international political climate, increased competition for A-Mark’s higher margin services, which could depress pricing, the failure of the company's business model to respond to changes in the market environment as anticipated, general risk of doing business in the commodity markets, and other business, economic, financial and governmental risks as described in the company’s filing with the Securities and Exchange Commission. The words should, believe, estimate, expect, intent, anticipate, proceed, plan and similar expressions and variations thereof identify certain of such forward-looking statements which speak only as of the date on which they were made. Additionally, any statements related to future improved performance and estimates of revenues and earnings per share are forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements. Readers are cautioned to place undue reliance on these forward-looking statements. Finally, I’d like to remind everyone that recording of today’s call will be available for replay via link in the investor section of the company’s website. Thank you for joining us today for A-Mark’s earnings call. You may now disconnect.

EarningCall_429

Welcome to the Lundbeck Financial Statements for the full year 2022. [Operator Instructions] For the first part of this call, all participants are in a listen only mode. And afterwards, there'll be a question-and-answer session. [Operator Instructions] Today, I'm pleased to present Deborah Dunsire, President and CEO; Joerg Hornstein, Executive Vice President and CFO; and Johan Luthman, Executive Vice President of Research and Development. Hello, everyone, and welcome to the financial update for 2022 for Lundbeck. You see here one of our patients, the people who we serve every day, living with migraine. Next slide, please. The forward-looking statements, you've seen before, so I won't dwell on them because I'd far prefer to turn to the next slide and say we had an outstanding year at Lundbeck and achieved the highest ever revenue for the company in its history. Revenue was up 12%, and our strategic brands, which are really the engine driving that growth were up in aggregate 31%. Vyepti, the newest of the strategic brands grew 104% and the strategic brands are now approximately 67% of the total revenue. The growth came across all regions, and it's really gratifying to see the growth of the strategic brands and the momentum developing across all our regions. That, of course, drove profit growth higher, despite the fact that we've been investing behind the launches for nine countries for Vyepti with the EBITDA margin up 25%. The pipeline has made very strong progress, and Johan will be talking through that. Of course, key dates for us will be May 10 for the PDUFA date for our agitation in Alzheimer's disease, submission for Rexulti and April 27 for the two monthly version of Abilify Maintena. Very pleased to say we finished enrollment in both of our Phase II trials. So -- and there were a host of other achievements that Johan will touch on. Next slide, please. So you can see here the market is growing across the world. The U.S. is now 49% of the revenue in 2022, but strong growth coming from all our regions. And the strategic brands up 31% reported, 20% in local currencies. So yes, there were tailwinds, particularly from the dollar, but the underlying momentum in the business is extremely strong. Next slide, please. Vyepti, the newest of the strategic brands. You can see that on the left, the growth in U.S. demand vials and you see strengthening growth at the back end of the year. We achieved a 5.4% volume share within the prevention market. And this is really driven by the way the brand continues to perform for those heavily impacted patients. And we've seen key opinion leaders and patients speaking out about the effectiveness. We've been working with our sales force, and they are doing an outstanding job, and we are getting those new patient starts and showing that persistency, people who stay on Vyepti for second, third and fourth doses is going up. We've got a growing number of loyalists people who use Vyepti for their patients and describe its efficacy as transformative. And so, we see that continuing traction with the clinical efficacy messaging. You can also see in the middle chart, the beginnings of the growth of Vyepti outside of the U.S. as the markets that launched late in 2021 and through 2022 begin to contribute. And of course, we'll see that grow over time. Next slide, please. We have had strong adoption across the markets where we did launch nine countries in all in 2022. And then we've had significant penetration. UAE, which launched towards the end of 2021, a 13% volume market share, 6% in Switzerland within seven months and already in the third month, 1% in Germany. Canada launched late in the year and have had very strong uptake. The most recent launches in 2023 are France and the U.K. And in total, we've got about 15 launches planned during this year. So a lot of excitement as we roll this brand out globally. Next slide, please. Brintellix/Trintellix really has continued to grow, 13% in local currency. Japan, in its third year on the market, 10.1% value market share, which is outstanding, as we, together with our partner, Takeda, built this brand. And we can see a movement forward in the lines of therapy as we see physicians use Trintellix, like its profile and begin to move it earlier and earlier in their treatment paradigm. Europe had a particularly strong year as we've seen growth in that segment we've spoken about for a while, as patients have come back after COVID expressing the need for help with mental health challenges, they've seen their GPs, and we've seen GP prescribing pickup, particularly in Spain. We also had a great year in Canada, in China and Italy, the others of our key markets driving the growth. But really everywhere, we did see good growth. The U.S. anti-depressant market has taken longer to come back to pre-COVID levels, but it's just achieving that towards the end of 2022. And we, together with Takeda in the U.S., now have our field force fully in place. You know that there were some disruption during 2022 and beginning to drive new patient starts and seeing that overall demand growth coming back in Trintellix. Next slide, please. Rexulti had a very, very strong year in 2022 with demand rising significantly. That momentum really coming from the MDD market in the U.S. as physicians have used the adjunctive therapy together with their initial therapy as we've seen continued use of telemedicine and that willingness to add a therapy rather than change therapies. We've really got going with our Alzheimer's agitation launch preparations, which are progressing rapidly. Countries outside the U.S., Canada notably had great growth with a 30% year-on-year growth and a volume market share of 3.6%. And Brazil, a more recent launch, right in the midst of the pandemic, doubled sales with a volume market share at 1.9%. So Rexulti really continuing to perform for patients, particularly with major depressive disorder. Next slide, please. Abilify Maintena also continues to grow well with 16% in local currency. And we see the U.S., Spain and Canada being the strongest growth drivers for Abilify Maintena. Europe has also had a very strong year, exceeding 30% market share in several countries, including Italy, Switzerland, the U.K. and in a lot of key markets in Europe, we're seeing Abilify Maintena growing faster than the overall LAI market. The regulatory process for the two month formulation was initiated during the year and the PDUFA date set to April 27 for the U.S. and the review is progressing in Canada and Europe. Thank you, Deborah. We delivered exceptional revenue and profit growth for 2022. The plus 12% of reported revenue growth can be decomposed as follows: we're delivering an underlying organic growth rate of plus 7% due to the strong performance of our strategic brands; the strength of predominantly the U.S. dollar has led to a positive FX impact of plus 9% that has been backstopped by a negative hedging impact of minus 4%. Please keep in mind that the negative hedging effect of DKK640 million for the year is impacting EBITDA one-to-one. Our gross margin is 0.7 percentage points higher compared to 2021. Despite the provision for Vyepti inventory obsolescence in the amount of DKK228 million taken in Q4, which is an important topic to understand and that I will cover in more detail on the next slide. Adjusting the gross margin for this provision, it would be 5 percentage points higher for Q4 and 1.3 percentage points higher for the full year. SG&A costs grew plus 13% with an underlying organic growth rate of plus 5%. The increase is driven by higher promotion and sales costs predominantly for Vyepti, but also to an extent due to the return to pre-COVID activity levels that still impact our full year 2021 numbers in comparison. R&D cost declined by minus 2%, which was impacted by a year-over-year decline in activities for marketed products. Our core EBIT grows plus 18%, with an underlying organic growth rate of plus 17%. And our EBITDA grew plus 25% overall with an underlying organic growth rate of plus 25%. The positive EBITDA FX impact of plus 17% was fully offset, as mentioned earlier, by the negative hedging effect of minus 17%. Overall, we improved our EBITDA margin here from 22.8% to 25.6% for 2022. Next slide, please. Before we go into our reported numbers, allow me to provide you with more background on the shift of the antibody backbone of Vyepti. With the acquisition of Alder BioPharmaceuticals, Inc. in 2019, we inherited a fixed batch quantity supply agreement for five years with an external CMO that is effective up to June 30 of this year, producing Vyepti on the back of a pichia cell line. Shortly after closing the acquisition, we started a process on how we could potentially shift the antibody backbone of Vyepti from a pichia cell line to a CHO cell line. The CHO cell line itself is a more modern, higher yield and lower cost producer cell line. That transition is actually progressing well and especially with progress made towards the end of 2022, the likelihood of success transitioning to CHO has significantly increased. As a result, we have built a provision of DKK228 million in 2022 for inventory obsolescence for Vyepti based on pichia-based inventory on hand that has been recognized in cost of sales in Q4 2022. Further, we have reflected an additional provision in the amount of DKK300 million in our guidance for 2023. Next slide, please. Let's focus on our reported numbers. Our EBIT grew plus 42% overall with an underlying organic growth rate of plus 43%. The positive FX impact of plus 21% was more than offset by negative hedging impact of 22%. Overall, we improved our margin here from 12.3% to 15.6% in 2022. Our net financial expenses decreased for the year by minus 12%. The lower expenses are driven by a mix of lower net interest cost due to higher deposit rates and a gain from other financial assets. The lower expenses were partially offset by the fair value adjustment of the contingent consideration for EMA's approval of Vyepti, which amounted to DKK331 million in 2022 compared to DKK110 million in 2021. The effective tax rate has increased significantly, but as expected to 22.6% compared to last year's 16.6%. The increase is due to 2021 having been positively impacted by the recognition of tax credits, whereas 2022 is negatively impacted by the non-deductible CVR payment for EMA's approval of Vyepti mentioned before, which is partially offset by the Danish R&D incentive. The reported net profit corresponds to an EPS of DKK1.93 versus an EPS of DKK1.33 in 2021. Next slide, please. The cash flow from operating activities is landing at DKK4.1 billion in 2022 compared to DKK2.9 billion in 2021. This is, of course, a reflection of the stronger EBIT performance, partially benefited by adjustments for noncash items of around DKK1.6 billion deriving from higher amortization and depreciation in 2022 and a net change in other provisions of DKK0.3 billion. This is partially offset by a higher net change in working capital driven by higher receivables due to higher sales, net increases in inventory and timing of accruals for short-term liabilities. From the total CVR payment of DKK1.6 billion in Q1 2022, DKK0.5 billion are reflected in other changes in operating activities. The remaining DKK1.1 billion are reflected in the cash flow from investing activities. In case we would have not incurred the CVR payment, our free cash flow would amount to DKK3.2 billion, which would constitute an increase of more than 100%. The changes in the cash flow from financing activities are driven by loan repayments in 2021 and loans obtained in 2022. Our net debt position decreased to DKK2 billion, leading to a net debt-to-EBITDA ratio of 0.5 for the rolling four quarters, and we are making our planned progress on further deleveraging the company. Next slide, please. For the financial guidance for 2023, Lundbeck will focus on revenue performance and from first quarter 2023 onwards on adjusted EBITDA. This will provide an improved and more consistent assessment of the underlying business performance. The adjusted EBITDA information for comparative periods will be made available no later than May 10, 2023, when we realize our interim -- when we release our interim financial statements for the first three months of 2023. For this interim period, we provide EBITDA guidance. Our guidance for 2023 is as follows: we target revenues of DKK19.4 billion to DKK20 billion and an EBITDA of DKK4.8 billion to DKK5.2 billion. At the same time, allow me to put our guidance into the following context. The exchange rates from the end of November 2022 when we started our budgeting process from the basis for this guidance. We have set off energy inflation well in 2022, but merit and nonenergy-related inflation is impacting us significantly in this year. We will continue the rollout of Vyepti in around 15 additional markets this year. We plan to launch the two months version of Abilify Maintena and we plan to launch Rexulti in Alzheimer's agitation requiring significant launch spending together with our partner, Otsuka, in fully utilizing this blockbuster opportunity over the coming years. Last, an additional provision, as mentioned earlier, of approximately DKK300 million for Vyepti inventory obsolescence is reflected in the guidance for 2023. Next slide, please. Our midterm financial targets are based on organic development of our business, pointing towards a solid growth in both revenue and EBITDA. We foresee a continued double-digit growth for our strategic brands in aggregate, partially offset by slight erosion of sales of our mature brands, leading to a mid-single digit CAGR for our midterm revenue aspiration overall. We're planning for investments for Vyepti, Rexulti and AAD and the two months version of Abilify Maintena. Also, we see further investments in life-changing medicines. We foresee R&D costs to remain broadly stable from an absolute R&D spend perspective. This leads us to a midterm target for an EBITDA margin of around 30% to 32% to be reached in the next three to four years. Thanks a lot, Joerg. Let us turn page for the R&D update. During 2022, we had a very strong year for the R&D pipeline with several submissions and regulatory approvals among our key brands. In addition, we had a solid progression in our innovation pipeline. Of course, a major R&D event during the year was the read out of the brexpiprazole indication expansion trial in agitation in Alzheimer's disease dementia. A program that we're running together with our partner, Otsuka. I will get back to this program a bit more in the next slide. However, I'd like to highlight that the sNDA submission was done at the end of last year. And by the beginning of this year, we obtained information that the review will be under priority and an outcome is expected during the spring. The priority review means now an expected PDUFA date on May 10. The clinical and CMC development of the new aripiprazole two monthly ready-to-use RTU injectable formulation was completed during the spring of last year. Subsequently, during mid-2022, we and our partner, Otsuka, submitted for market authorization in the U.S., Canada and EU. The submission is based on an innovative development approach, including a large PK study providing a robust data demonstrating bridging to Abilify Maintena. The FDA decision for aripiprazole monthly -- two monthly RTU is expected, first, with a PDUFA date on April 27. That means that important regulatory decisions for two key brands are expected during the spring. The Vyepti regulatory path in 2022 included our course [indiscernible] on marketing authorization for European -- by the European Commission on January 21 -- 24, sorry. Subsequently, during the year, several additional market authorizations were obtained for Vyepti, including some Asian countries like Hong Kong. Indeed, overall, 2022 was an important year for the global rollout of Vyepti obtaining market authorization in 37 countries. Joerg covered earlier the program aiming to replace the current pichia-based manufacturing of Vyepti to a much higher yield show platform. Our critical relevance for the possibility [indiscernible] switch we completed a PK study during the year that demonstrated clinical comparability between the drug products generated from the two different manufacturing platforms. As you heard me report several times during the last years, we have had really great data generated in very supportive trials from Brintellix. That really clearly demonstrate the strong and unique profile of this product. Last year, we successfully concluded the brand's LCM program with a strong home run in a ROA-positive studies, such as the VIVRE study, a head-to-head study on vortioxetine versus desvenlafaxine in patients with major depressive disorder. We also concluded the VGOAL-J study showing real life effectiveness in Japan for MDD patients, study that was very well received by the [indiscernible] conference and MEMORY that showed reduced depressive symptoms and improved cognition performance in patients with MDD that have comorbid dementia. These set of studies nicely complements earlier reported studies such as complete study on emotional blunting and RECONNECT, which showed effects in patients with MDD and comorbid general anxiety disorder. So really nice wrapping up of that program. In our innovation pipeline, as Deborah mentioned, we progressed well on our both -- our two PoC studies, our two PoC studies achieving last patient included. I will come back to both of those programs in subsequent slides. Also during 2022, we managed to enter clinical development with two very exciting programs. One was early in the year with the start of the CD40 ligand inhibitor, 515 program we obtained from AprilBio. By that, we initiated our first ever step into development of an immunology mechanism of action molecule. This program offers a broad repertoire indication opportunities. Also, very late in the year, we managed to squeeze in initial clinical development with our ACTH antibody, 909 that has the potential to address various critical neurohormonal dysfunctions, even possibly into the psychiatry space. Finally, we saw a tremendous advancement in our early research pipeline with well over 10 programs of highly attractive target biologies initiated or progressing. Among those, I'd like to highlight that we now are addressing RNA as drug targets, utilizing small organic molecules. Next slide, please. As promised, I will now move over to some more details on the brexpiprazole program in agitation Alzheimer's disease. In the third Phase III trial called 213 that had a readout in end June last year, we explored a broader dose range 2 milligram to 3 milligram as requested by the FDA. That was a higher dose than in the two prior Phase III trials. The trial showed a very clear cut and highly significant effect versus placebo on the primary outcome measure, the Cohen-Mansfield Agitation Inventory and also on key secondary outcome measures, the clinical global impression subscale severity of illness. In addition, we saw effects on several other supportive measures. I'd like to remind you that there is yet no drug approved on the U.S. market to address behavior and psychological symptoms of dementia, of which agitation behaviors are critical. The medical need is substantial to address those symptoms, which are a common reason for the need to transition from home care to nursing care. And agitation remains a clinical challenging problem even under professional care. In the U.S., there is currently an estimated 6.5 million patients with AD, but those numbers are growing. Most of the AD patients experienced periods of agitation during the course of the disease, and over 30% of patients are prescribed antipsychotics off-label at some time point. Unfortunately, there are severe limitations in their use due to the tolerability issues primarily. It's, therefore, very comforting to see that brexpiprazole across the AD program has shown very good tolerability and safety reporting. This is in line with what we already know from the established on current label patient populations. The data from the 213 trial were very well received and presented at key conferences in major sessions during the year, such as AIC in the summer and CTAD at the end of the year. Next slide, please. I'm also happy to note that during the end of 2022, the brexpiprazole program on post-traumatic stress disorder, PTSD that is run entirely in the U.S., regained some momentum when the pandemic abated. Thus, the two ongoing trials of the program have been seeing some recovery of the randomization. After various interactions with the FDA, we have decided to keep the two trial analysis as they are with an accelerated path for completion. We're now looking forward to finally have a readout for brexpiprazole in PTSD during the second half of 2023. The unmet need in PTSD is also very high, with over 8 million people assumed to be affected in the U.S. And the condition is highly diagnosed, however. So the exact number is unknown. PTSD is sad enough growing societal burden and current approved therapies, the SSRIs provide inadequate treatment responses. The initiation of the two pivotal trials was based on findings from an exploratory PoC trial where the combination of brexpiprazole and sertraline showed an improvement on the primary endpoint, a clinician-administered PTSD scale, while neither brexpiprazole nor sertraline showed an effect versus placebo. The two ongoing Phase III trials are thus studying a flexible and fixed dose regimen of brex in combination with 150 milligram per day sertraline against either sertraline or placebo. Next slide, please. Yes, from our NME innovation pipeline, I'd like to start to provide some more details on 222, our anti-PACAP monoclonal antibody. The molecule is being evaluated in a migraine prevention trial in people that failed to respond to two to four prior treatments. The PoC trial, which we call HOPE, achieved last participant included by the end of 2022, and we can, therefore, look forward to a Phase II readout during this year. It is important to note that 222 binds the PACAP peptides, the ligands and not the various receptors that combine PACAP peptides. And that is also an IgG1 isotype antibody, meaning that the antibody is blocking upstream in the signaling cascade with an efficient clearing mechanism of PACAP. The blocking of PACAP signaling is an interesting approach given that it's differentiated from CGRP class of drugs and provide a different and broader set of biological effects. In this program, we have very recently obtained PK data bridge, which is a bridging study where we established the possibility to transition from the current IV formulation to subcu administration, if the program continues past PoC. In addition, I'd like to remind you that we have previously shown that 222 inhibits PACAP-induced acid adaptation, which is a proof of target engagement study. Next slide, please. 422 is a monoclonal antibody targeting an assumed pathological form of the alpha-synuclein protein and multiple system atrophy. 42 is a biomarker supported PoC -- is in a biomarker supported PoC trial that we call AMULET that has raised considerable interest from investigators and patients. With this tailwind, our team managed to do a great job in fast enrollment, finishing the randomization during last year. We are very much looking forward to the patients completing the up to 72-week treatment period to get a readout by next year from this innovative trial. A trial readout that is also supported by a natural progression study called TALISMAN, which lends the possibility to strengthen the placebo arm analysis. Next slide, please. So this is the status of our R&D pipeline. I mentioned most of the programs here, I'd like to highlight a few things, though. First, I'd like to highlight our cluster headache program on Vyepti, which is part of an indication expansion effort of that franchise. Cluster headache is, as you probably know, a very devastating headache disorder, a very intense one-sided frontal headache, which affects mainly men. Our main pathway is a randomized controlled trial called ALLEVIATE in episodic cluster headache. This is, I have to say, operationally a very challenging population to study given that the randomization is event driven. And therefore, it's hard to really predict time lines for the trial completion. I also like to draw your attention to our dual dopamine agonist 996. This program is progressing during the year towards completing Phase Ib that includes a dose escalation in Parkinson's patients. We have already some encouraging observations on its pharmacokinetics and safety, but also on eventual efficacy. Therefore, this might be an entrant into Phase II within a year's time. To summarize the activities during 2022, we saw really good achievements, much thanks to our transformed and streamlined R&D organization. We are now in a clinical development across all our four strategic biological cluster areas. We are also able to further apply our tactics are going to -- for the really best molecules, investing in programs with better understood pathophysiology and use stringent biomarker-driven development striving for the early and clear cut decision-making. We have seen a strong progress in both late LCM as well in the early -- as well as in the early and late mid-stage pipeline. This means that with our current brand support, innovative development pipeline assets reinforced with further clinical entrants from our exciting preclinical pipeline and hopefully match with careful additions from BD, we are in a good position moving forward. Next slide, please. Yes, to recap what key deliverables you can expect in 2023. We have the back-to-back almost PDUFA dates for AD of brex and of course, the aripiprazole two monthly RTU during the spring. We continue our strong efforts to progress geographical and indication expansion of Vyepti. Also, we have the exciting readout in Phase II, our HOPE PACAP trial. And finally, we have the eagerly awaited readout for brexpiprazole in PTSD during the year, the latter part of the year. Thanks, Johan. Important to comment that while we drive to bring new medicines to patients, we also have a clear focus on how we do that business and sustainability is integral to how we do everything at Lundbeck. So we have made continued progress towards our ambition of being net 0 by no later than 2050. We achieved our eighth consecutive year, achieving a carbon disclosure project leadership score. 100% of the electricity from our Lundbeck sites in Denmark is now covered by electricity produced in a solar plant, South in Denmark. And we reduced the emissions from all our sites by 29%. We updated our climate targets according to the new SBTi guidance and made progress on that low carbon transition plan. So I'm very proud of the progress that we have made as we think about our planet. Our business is about people, and we reach over 8 million people a day with our product -- the products in our portfolio, changing their health, their brain health for the better. We increased donations in low and middle income countries, and we also moved the agenda on diversity and inclusion forward, making sure that we are a neurodiverse workplace and that we enable neurodiverse people to be able to work effectively. We additionally made progress of the share of women in senior management, up from 31.5% to 33.8%. On the governance side, we are making progress around the world, making sure the selection of third parties and suppliers are based on good governance compliance and appropriate and ethical treatment of employees around the world. So next slide, please. When we go forward into 2023, we are building on an incredibly strong momentum coming out of 2022 with a great engine driving our strategic brands, being able to deliver a robust cash-generative business. As Joerg pointed out, we've got a very strong balance sheet. And so we have that capacity -- financial capacity for long-term growth. We remain focused on sustainability and everything that we do, and we're progressing towards CSRD readiness, which all of you are probably aware, is a big lift. Importantly, we're advancing the progress in our R&D pipeline, the molecules already in the house -- and you've seen that with our progression towards what we hope to have the approval of AAD and the two monthly Abilify. And it's exciting to see the pipeline maturing with that promising science coming through from our early-stage programs and from our internal research. There are a number of data readouts over the next 12 to 15 months. Of course, as Johan frequently points out, we build the business internally and externally, always bringing in ideas from the outside even into the earliest target discovery, but also when we do deals with other companies. You know that we're focused on niche or specialty neurology and psychiatry and rare diseases, and there has been somewhat of a renaissance in that area with new neuroscience companies forming approvals coming through in the area of neuroscience. We are focused in our external -- access to external innovation on how do we replace the product growth that we need into the mid- and late decade? And we also focus on expanding that early and mid-stage pipeline that will yield the growth on a continuous basis. Lundbeck is a strong and growing business and will remain so long into the future. And so we look forward to an exciting year in 2023. With that, I'll stop for all of us to take questions. And of course, Jacob Tolstrup, EVP of Commercial, is here with us to assist with all of your detailed questions. [Operator Instructions] The first question will be from the line of James Gordon from JPMorgan. Please go ahead. Your line now be unmuted. Hello. James Gordon for JPMorgan. A couple of quick questions, please. One was on pricing pressure and gross margins. I think it was a reference to pricing pressure in the release. So how much pricing pressure do you think we might see? Is that just in Europe? And what does that mean for the gross margin in the two or three year time period you talked about. Once we get past the rights impairment, is Lundbeck going to be an 80% plus gross margin company? The second one was also on guidance. Just I think the guidance doesn't include business development, the fact that you've given this long-term guidance, not including that, does that mean you're now not thinking that there would be big business development that might mean you don't get there? Or could we see that you're not doing quite so well on the EBITDA margin because you might need to leave room for a big step-up in R&D if you do some pipeline deals? And then just the final question was on Vyepti. The comment about the impairment on Vyepti inventory, which I think is just over DKK500 in total. Could we read it that the product is selling a little bit less than what orders are planned when they entered into that manufacturing agreement? And is there any risk that you might have to write down the value of order if the product is not doing what their original projections were? I think if you look in 2022, we thought of energy inflation quite well. We see an uptick specifically in 2023 from direct material, but also basically services across our business. We see these effects and expect these effects to be moderating going forward. I don't think we give specific guidance on the gross margin. I try to provide some transparency on the impact of Vyepti, but I believe the gross margin is contributing as well to achieve our overall profitability aspiration. And then you asked about the guidance not including BD. I think we are -- within our hands, we have a great business to drive forward, and we know what we need to do in internal R&D for the things that we know about. BD is something that we actively look for -- and we will do the right deals that come across at the time that they're available and makes sense for Lundbeck's shareholders. And it's for that reason that we don't try to create an envelope that includes all eventualities because we can't plan for that. So we want you to know what does this business organically deliver? And then I don't know whether you'd add anything, Joerg? Not on this one, but I would take the other one regarding the question on the Vyepti impairment and the sales forecast. I think it's fair to say that there are always different parameters that factor into how we build provisions for inventory. Sales volume, transition time lines, approval dates for transitioning to CHO, all of these are numerous of the factors we take into consideration. But I think I can only reiterate, we finished 2022 extremely strong, growing Vyepti 104%, and we also are intending to roll this out in more than 15 countries this year. I think it's important to say that the reason that this is coming now is because of a good thing. And that is that the level of certainty increased during the year as we found we would be able to scientifically we believe, transition to the CHO backbone. And for that reason, we know that this technology shift is potentially possible. Now of course, there's still a lot of unknowns, and we still have to go through all kinds of taking it through regulators, but it's that increased uncertainty that makes us consider this at this time. And it's also important to know that no single gram or ounce of Vyepti has been moved out. We'll continue to use this product into the future for as long as possible. Thank you, James. The next question will be from the line of Charles Pitman from Barclays. Please go ahead. Your line now be unmuted. Hi. Thank you very much for taking my question. Charles Pitman from Barclays. I have a couple of questions here. Just firstly, to Joerg, since becoming CFO in August, I was just wondering what takeaways you've got over the past, what, eight months you've been in the job now in terms of how the company is running and how you yourself plan to kind of make changes going forward. I think we've already seen some of that with the change in guidance? And then secondly, on Vyepti, currently, you say that it has a 5.4% prevention share of the migraine market. I was wondering if you could give us any details on how you expect that to develop going forward and what your strategy is for competing in the increasingly competitive anti-CGRP market as a large cap U.S. player and specifically how the launch of QULIPTA has impacted the Vyepti launch? Thank you. Charles, maybe I start. First of all, thank you very much for your question. two months passed by very quickly. And I'm incredibly proud, happy, honored and humbled to be CFO at Lundbeck. I've experienced a great management team, terrific collaboration, a strong competence across all levels. And I only have very positive impression so far. I think in terms of focus areas, I think there are a couple. We, of course, are very diligent and laser-sharp focused on costs. I think you've also seen especially a strong Q4 that demonstrates that. I think we are very focused on what exactly is needed for the two months Abilify Maintena version to be launched successfully, what we require to achieve the desired uptake in AAD and also to clear, have a very strong and detailed tracking of the individual business cases around the Vyepti rollouts. So these are probably some of the first impression and focus areas, but I'm sure over the next months, there will be numerous coming on top. Yes, absolutely. Thank you so much. Thank you, Joerg, for the great comments on your colleagues. So thank you. On Vyepti, a little bit mixed comment here. The 5.4% market share, I think, is quite impressive. And in that light, you have to look also on QULIPTA coming in at the same time. And QULIPTA has made a, I would say, rather significant impact in the market. So there's no doubt about that. What's important to notice around Vyepti is that we are the one that has also managed to keep and growing our market share during that entrance period. So the strategy continues to be the same going forward. We focus on severely impacted patients and also patients that are in risk of or having medication overuse headache. And that strategy seems to be working. And you've seen, I would say, accelerated growth, especially over the last three quarters in the U.S. And what we also see from our physicians that we survey is that we have increasingly a number of what we call loyalists. And the loyalist not only prescribe Vyepti for the target persistent patients, but also try to use Vyepti earlier in the line. So I think what you'll see over time is that Vyepti will continue to grow and also grow not only in the segment where we focus first, but also in the more episodic segment going forward. Thank you, Charles. The next question will be from the line of Jo Walton from Credit Suisse. Please go ahead. Your line now will be unmuted. Thank you. Just a few, please. You talked about your ambition now as a margin at the EBITDA level. And assuming that there isn't too much adjustment there because we know your core EBIT, so it's presumably core EBIT plus depreciation. That's taking us from around about 26% operating margin today to the 30% to 32% in, let's say, 2026. I wonder if you could just help us with your sort of fresh eyes from a finance director's point of view, where we should see the majority of that leverage come? You say that R&D is stable. Is that stable as a percentage of sales or stable as an absolute number? And if you could also, for the net interest charge and tax rate give us a little bit of help for modeling in the coming years. You had a positive net interest charge at the core level in the fourth quarter of the year. So some idea of what the net finance charge at the core level might be in 2023 would be helpful. You mentioned the onetime distortions on the tax. Presumably, the tax rate should go back on a sustainable level to roughly the level it was in 2021. Thank you. Okay. Well, let's start probably with the R&D question. The guidance we've given was not as a percentage of revenue, but from an absolute spend perspective. And the first comment here is that you've seen already in 2022 that we more or less kept R&D flat because we had less spend compared to the previous year in marketed products. We still have a significant spend in marketed products also in 2023. But already now, we can, at the same time, with the relief versus the history, invest more in innovation. I think that's the question on R&D. I think focus for the margin expansions is mostly around continuing the global rollout of Vyepti, keeping R&D expenses stable, seeing also a bit of, I would say, if we exclude the spend required for AD, a bit more of a normalization level on other SG&A-related investments. And we also predict continued strong growth in our strategic brands and hopefully, with the positive approval on AAD received the desired uplift as well. I think you had a question on core EBIT versus adjusted EBITDA. Like I said, in Q1, we will provide a reconciliation of comparative numbers for the history as well as the guidance on this KPI going forward. I would say, in generally, the category is very much aligned, but we probably are a bit more consistent here in terms of using less of materiality thresholds. You had a question on the tax rate. The tax guidance we give going forward is more around 22% to 24%. The main reason for the slightly higher guidance of the tax rate is basically a reduction of the R&D incentive in Denmark, which goes from 130% up to 22%, now down to 108%. That is driving the higher tax rate. And I think in terms of net finance, the guidance we give is roughly around DKK100 million. Thank you, Jo. The next question will be from the line of Keyur Parekh from Goldman Sachs. Please go ahead. Your line now will be unmuted. Thank you for taking questions. Two, please, if I may. One, what do you expect to be the main focus of the upcoming advisory committee for the AAD indication based on your conversations with the FDA so far, where do you expect that focus to be? And then separately, kind of coming back to Jo's question. If you're going to guide to and measure the business on adjusted EBITDA going forward, is there a reason you can't guide to that today? I mean you're kind of telling us you guided to an EBITDA margin for the year or long term. And you're telling us you're going to change the [indiscernible] guidance in three months' time. So I'm kind of just confused on why you can't give us adjusted EBITDA guidance today. Yes. Thanks a lot. Of course, I don't want to second guess so much what they're going to say because it's up to the FDA how they formulate the key questions to the AdCom Committee and what other questions that will come up. But there are some obvious ones that we can expect here and I can speculate a little bit about it. It will be the traditional ones, efficacy, clinical meaningfulness, the strength or the readout. And it's -- the primary readout is a scale that has not been used for approval. So there will be probably a little discussion around that efficacy data. If we look at the efficacy data we have, we have presented this at scientific meetings. We have very consistent effect across the different subitems of the corn Cohen-Mansfield scale. So it's a very, very robust readout across the different subcomponents of it, which is a good sign that it was -- the scale was not driven by one parameter sub parameter. We also have consistency across the trials, which is very important. So I'm pretty confident about the efficacy discussion. Obviously, there will always be some subgroup analysis they like to discuss. But I think the bigger conversation will probably be around the tolerability because this is really the key factor against the off label use of antipsychotics. And as you may be aware of, there's a black box warning for the use of neuroleptics there. And obviously, we have data that are remarkably strong here. I have to emphasize that across this program and from the previous use and other indications. So I think one could be a discussion. Is this an applicable black box warning across into this product, which has a little different mechanism of action. This is a partial dopamine agonist with rich pharmacology. So there could be a rationale to discuss with whether it's applicable. At least, we're looking forward to that tolerability discussion because we have that strong data. So those are the key questions I will -- I think, will emerge. But in terms of the medical impact, there is always some discussion about how important could the therapy like this be. I'm looking forward to that with great confidence because the medical need is enormous, and this is a key symptom as I outlined. So that aspect, I think, will be great to converse about. I'm actually looking forward to this outcome. If it happens, it can be always canceled, but since there's a new indication in the field, I think it would be great to have an outcome and discuss these things with regulators and other people in the group. I'm taking your question on the adjusted EBITDA. It is, in my opinion, good practice that if you introduce a new KPI, you make historical numbers available. And that is something we're currently looking at. And that's purely the only reason that we don't use it now. But I think as earlier said, the categories of adjusting are very similar to core EBIT. And please rest assured, we will always provide a full reconciliation and full transparency in case any adjustments would have been made. Thank you. Could I perhaps just sneak in a quick third one. On your -- on the studies for kind of PTSD, you're going to give us data from the two kind of Phase III trials, headline data second half of this year. Could I perhaps just check kind of where you are with the FDA on that end? Do you need both of them to be positive for you to be able to file? Or are you still planning to do the meta analysis. And if so, have you reached an agreement with the FDA on the [indiscernible] plan for that? Thank you. Yes. Thank you for that question. I guess it's for me. So I start. Yes, as you heard from us earlier, we have had some -- quite some discussions with FDA during the journey here. Obviously, we had an alignment before we went into this program. They expected the classical two studies, replication across two studies. That's a very traditional approach, particularly in the behavioral sort of psychiatric rasacatric indications. So we're not surprised about that. Some of the conversation we had was can we pull data. And I think they're really still very eager to see the prime analysis being across the two different studies. Relating to your question, if one misses and one hits, yes, it remains to be seen how the data looks across. But in this very, very high medical need area where there is no drug from this type of class approved, I think there is a really worthwhile having a conversation whatever data we get at unless it's flat negative. So any positive sign in a trial like this, you would like to discuss with the regulators. Obviously, we're hoping for the best that we have two clear cut studies, and there would really be no conversation about it. [Technical Difficulty] We have some technical issues. Please be patient. Sorry for the inconvenience. The next question will be from the line of Michael Novod from Nordea. Please go ahead. Your line now will be unmuted. Thank you very much. Three questions from my side. First of all, maybe you could detail a bit on sort of the sort of the step change in gross margin relating to Vyepti from changing the production method. I'm aware you can't give exact numbers, but just give a bit of feeling of what is actually the magnitude of improvement here? And then secondly, maybe, Jacob for you, what are sort of the top priors for the new head of the U.S. It's sort of not been discussed. You changed ahead of the U.S. business. Is it to sort of reinvigorate the Trintellix franchise together with Takeda, preparing for the launch of AAD. What are sort of the top priors for [indiscernible] in the U.S.? And then lastly, regarding firepower. So you've already been quoted for in media saying that you don't see any sort of big things perhaps coming up more in-licensing smaller bolt-ons. But if that's the case, and you are so highly cash generative, have you then considered to do a share buyback also in light of where your stock is trading for the time being? Maybe I'll start in the end and then we work our way up, Michael. First of all, thank you for your question. Share buyback is currently not something we have been contemplating or communicated to the market. We stick to our existing policy of a dividend payout of roughly 30% to 60%. So that is that topic. I think in terms of gross margin step change of Vyepti, we don't provide individual numbers. But what is, of course, fair to say and Johan can fill in here is, of course, a significant improvement in the yield. Yes. That's, of course, one of the key things, and it's substantial. It's many fold increase in yield, and that's really the secret of the sauce here. That's what we're aiming for. But you should also know the PK platform is actually quite frankly, becoming an obsolete platform. So it's really hard to get providers for the platform. So with the show, we buy ourselves also flexibility in terms of where we can manufacture. And that's very, very critical because the mainstream is CHO now. Back in the days, pichia was an attempt to get alternative platform, they didn't pay out when it came to yield. And the volume, as you saw that big container in that graph, you basically go down substantially in the volume you need in the reactor in the reactor size. Great. And then you've asked for the priorities for the U.S. Well, never in my career have I had two PDUFA dates within a matter of a couple of weeks of each other. So any time an organization is launching, there's a laser focus needed on making sure those launches are well prepared and really ready to roll. Additionally, of course, we're still in that growth phase for Vyepti. So there's a tremendous amount of work to be done in the U.S. organization. We have been working with our partner, Takeda. As you know, there was substantial realignment and restructuring of that Trintellix field force. We did some downsizing at the end of 2021. Takeda downsized very significantly given the Vyvanse expected patent expiry coming up now, I believe, in this first quarter. And that disruption lasted far longer during 2022. So we work very closely together with Takeda, making sure that we're aligned on our field force execution and aligned on our messaging around Trintellix. The profile of Trintellix, it's an extraordinary tool in addressing depression. And in a way that people are able to be at work. So I know that we can get great utilization. The market has significantly changed. And maybe, Jacob, you want to amplify on that? Yes. No, absolutely. So you can say, finally, we see the U.S. market coming back to growth rates and sort of resembles what we had before the pandemic. But it is clear that the rate of remote consultation by psychiatrists are still relatively high in the U.S. compared to see -- what we see elsewhere. We also see fewer patients that are being diagnosed and most of them are getting a first-line treatment and not progressing to a third and the fourth line. So whether this is related to sort of an understaffed situation in the U.S., that question still remains, but it's clear that the U.S. antidepressant market hasn't recovered, if you can say to what we knew of before the pandemic began, which is contrary to what we see outside of the U.S. Thank you, Michael. The next question will be from the line of Marc Goodman from SVB. Please go ahead. Your line now will be unmuted. Thanks. Yes. Thank you. So a couple of questions. First, the gross margin, the DKK300 million hit, is that going to be any one particular quarter? Or is that just spread across 2023? Second of all, the operating margin was supposed to be over 30%, I believe, next year previously, but now we're moving it to 30% to 32% in 2026. Is that accurate? And I'm just kind of curious just what has changed there? And then lastly, on the neurohormone, it seems to be a new area. I'm just curious, did the science lead you there? Is this a new area of focus? I think you said you were going to take it into psychiatry. So does that mean like depression. I'm just curious what you meant there. Thanks. Great. So I think the first two questions go to Joerg, but I'm going to start with Johan on the neurohormonal. Yes. Thank you for asking about this. Obviously, this is a program that just is going into man and being tested. So it's very, very early days, and we -- number one is we like to see that we deliver on the pharmacokinetics that we really need to fine-tune here. We like a very homeostatic sort of response on the ACTH levels. And of course, safety and tolerability that works fine. This is a very validated biology, which is an interesting way for us to work, really good sign where we like to be, where we can very, very early, have very clear-cut biomarker readouts that it's working. And obviously, here, one of the key things we like to see is an effect on different steroids cortisol levels, et cetera, in the blood. And we take it into Congenital Adrenal Hyperplasia as the first population. It's a mechanism of action, primarily pathway to see that the drug is delivering in a population where you really have pathological changes of the levels. Where we take this can be a multiple pathways. There are obvious indications here in the neurohormonal space, the hormonal space, Cushing's, Congenital Adrenal Hyperplasia is, of course, something we could contemplate. All these diseases come with CNS symptoms. So it's definitely within our frame, but it's on the outer limb of our frame, I could say, being a neuroscience company. But there's been a long, long story about the so-called HPA access and psychiatry. And you mentioned depression. People have tried this before. Our approach to this is that we're, again, going to be very strongly biomarker driven. We're going to look for populations where you have an abnormal HPA access using biomarkers to guide us, exactly which indications is still a discussion. We are early days, as I said, but they are way beyond depression where you can go with this. There are anxiety disorders, panic disorders, where it can take it. And I think just a reminder that this antibody came to us out of the Alder acquisition. So it's the third of the molecules coming out of that acquisition, Vyepti, our PACAP inhibitor, and ACTH. So you've great exploration of this biology, and it's early days, but it's great to be able to explore it. So Joerg, I'm going to hand over to you for the... You have two questions. I think phasing for the Vyepti provision, I consider this more of an event for H1 this year. In terms of specific guidance, the guidance we gave before was on EBIT. The guidance we give now is on EBITDA because we have a significant amount of amortization. And even the earlier question I got on gross margin, keep in mind, about one-third of our cost of sales are basically amortization of product rights and 50% are denominated in dollars. So you can see quite some swings here that somewhat cloud the underlying, let's say, strong operational performance we have. The EBITDA target or range we communicate for the midterm guidance rests on the, I would say, predominantly strengthen our strategic brands and also the aforementioned key significant launches we are undertaking. Thank you, Marc. The next question will be from the line of Michael Leuchten from UBS. Please go ahead. Your line now will be unmuted. Thank you for taking my questions. Could I please go back to the Vyepti inventory obsolescence? And two questions for that. One, why does it come in two provisions? Why not one? And then looking at the size of revenues that Vyepti has delivered so far, they decide that the provision is quite meaningful. So I guess it's not just inventory recalculations. What else is booked that makes the provision so large? And then a question about the guidance now that you're focusing on EBITDA. Does that have any implications on KPIs or management incentives going forward? Or is it just a different way of looking at the underlying performance of the business? I think the first question, why not one provision instead of two. Of course, we can only build provisions for inventory on hand. And I think, as I said earlier, the external CMO stops producing during the course of 2023. And that also is one of the reasons that only then we can basically build that provision. And the other question was on the... The size of the provision no, there's nothing else. This is purely a value for inventory we received from our CMO. I think the one comment, and we did mention this in the release, there was a fixed batch quantity supply agreement written by Alder. And then during the years, the yields even from pichia went up from what had been expected. So actually, there were two levels of, I'd say, growth in the size of that inventory. But it's very important to remember that the timing of bringing it in now is based on our increased certainty of being able to transition the backbone, and it's a financial provision, not an action on the drug. Coming back to your question on EBITDA guidance, does it change management incentives and the answer is not in 2023. That's it for today. We really appreciate your attendance. And it's great to be celebrating Lundbeck's highest revenue year ever and great performance in -- across our business. Thank you for joining us.

EarningCall_430

Good day, everyone, and welcome to the Amcor Half Year 2023 Results. Today's call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator instructions] In the interest of time, we would like to remind participants to limit your questions to one and rejoin the queue for any follow-ups. Thank you, operator, And thank you, everyone, for joining Amcor's Fiscal '23 first half earnings call. Joining today is Ron Delia, Chief Executive Officer; and Michael Casamento, Chief Financial Officer. Before I hand over, let me note a few items. On our website, amcor.com, under the Investors section, you'll find today's press release and presentation, which we'll discuss on the call. Please be aware that we'll also discuss non-GAAP financial measures and related reconciliations can be found in the press release and the presentation. Remarks will also include forward-looking statements that are based on management's current views and assumptions. The second slide in today's presentation with several factors that could cause future results to be different than current estimates. And reference can be made to Amcor's SEC filings, including our statements on Form 10-K and 10-Q for further details. Please note that during the question-and-answer session, we request that you limit yourself to a single question and one follow-up and then rejoin the queue if you have additional questions. Thanks, Tracey. And thanks, everyone, for joining Michael and myself today to discuss Amcor's first half financial results for fiscal 2023. We'll begin with some prepared remarks before opening for Q&A. And I'll start with Slide 3, which covers our first and most important value, safety. Safety is deeply embedded in Amcor's culture, and our management teams understand our collective responsibility to provide a safe and healthy working environment. Our dedication to eliminating injuries in the workplace continues to result in industry-leading metrics. In our first half, we improved further and made great progress with a 24% reduction in the number of injuries globally compared to last year. And 65% of our global sites have been injury-free for the past 12 months, with more than 30% injury-free for three years or more. Safety and a culture of caring for our people will always be our highest priority. Turning to our key messages for today on Slide 4. First, the business delivered a strong first half and second quarter despite ongoing challenges in the macroeconomic environment. Our teams are doing an excellent job driving value for customers while managing the many aspects of the business under their control. We've increased our focus on flexing costs as demand evolved, and we're proactively taking actions to drive further efficiency and productivity improvements while recovering general inflation and passing through higher raw material costs. The outcome was strong operating leverage, with an 8% increase in both EBIT and adjusted EPS in the first half on a comparable constant currency basis. Second, although not entirely immune in a weakening demand environment, our business remains resilient. 95% of our portfolio is exposed to consumer staples and health care end markets, which combined with our broad geographic footprint, positions us well through economic cycles. Our volume performance through the first half demonstrates that resilience and compares favorably to the mid-single-digit or higher declines reported by others in our value chain. Third, a solid first half, strong execution and a resilient portfolio gives us the confidence to reaffirm our guidance ranges for fiscal '23. We're confident in the ability of our teams to continue focusing on the controllables. However, we're also mindful that through the second quarter, the demand environment softened and became increasingly volatile. We expect this will continue in the near term. And as we enter the second half of the fiscal year, we're more cautious in relation to the demand outlook, and we currently expect to be toward the lower end of our EPS guidance range. And our final and most important key message is that we remain focused on executing against our strategy for long-term growth. The business generates significant annual cash flow, which allows us to invest in organic growth opportunities, pursue acquisitions, pay an attractive and growing dividend and regularly repurchase shares. We're confident in the strength of our underlying business, execution capabilities and capital allocation framework, all of which support our compelling investment case. Moving to a few financial highlights on Slide 5. First half reported net sales were up 6%, which includes approximately $670 million of price increases related to higher raw material costs. Excluding this impact, organic sales were up 2% on a constant currency basis, and volumes were 1% lower. Both the Flexibles and Rigid segments did an excellent job driving price and mix benefits, including recovering around $160 million of general inflation. We're making good progress on our commercial and strategic agenda and with our priority segments continuing to deliver high single-digit organic growth and several of our emerging markets businesses also growing at high single-digit rates in line with long-term trends. Positive price/mix performance more than offset modestly lower overall volumes, which reflected generally softer and more volatile demand as well as customer destocking in parts of the business. Operating leverage was strong as we continue to increase our focus on costs, and the business delivered an 8% increase in both adjusted EBIT and EPS for the first half. Looking at our December quarter financial performance. Reported net sales growth was 4% and 1% on an organic basis. Adjusted EBIT and EPS each grew 7%. So another solid quarter highlighting the benefits of geographic diversification and exposure to more defensive end markets even as we experienced softer demand. Through the first half, Amcor returned approximately $400 million of cash to shareholders through a combination of dividends and share repurchases. And today, we've increased our planned repurchases for fiscal '23 by up to $100 million. Our overall financial profile remains robust with return on average funds employed at 17%. We're pleased with our first half and our December quarter financial performance, and I'll now turn it over to Michael to cover more of the specifics. Thanks, Ron, and beginning with the Flexibles segment on Slide 6. The business performed well in the face of challenging macroeconomic conditions, executing to recover higher raw material costs, manage general inflation, improved cost performance and deliver solid mix benefits. Reported first half sales grew 5%, which included recovery of higher raw material costs of approximately $460 million, representing 9% of growth. Our teams continue to do an excellent job passing on increases in commodity costs. And as expected, the related price cost impact on earnings for the second quarter was modestly positive after being neutral in Q1. Excluding the raw material impact and negative currency movements, sales grew 3% for both the first half and December quarter, driven by favorable price mix benefits of 4%, partly offset by modestly lower volumes. As Ron mentioned, sales across our higher-value priority segments, which include health care, pet care and protein, remained strong, collectively growing at high single-digit rates through the first half and contributing to positive price/mix. We also continued to see strong growth in our businesses in India and Southeast Asia, particularly in health care and media end markets. This helped limit the impact of lower volumes in some business units across categories, including coffee, dairy, condiments, confectionery and home and personal care, where we have seen varying degrees of customer destocking or lower demand. Volumes were lower in China due to COVID-related lockdowns and in Latin America, where inflationary pressures unfavorably impacted demand in several countries. In terms of earnings for Flexibles, we again demonstrated strong operating leverage. Adjusted EBIT grew of 8% for the half reflects ongoing price mix benefits and favorable cost performance. Margins remained strong at 12.6% despite the 120-basis-point dilution related to increased sales dollars associated with passing through higher raw material costs. Turning to Rigid Packaging on Slide 7. The business built on its first quarter performance with another solid -- another quarter of solid earnings growth. First half sales increased by 12% on a reported basis, which included approximately $210 million or 13% of sales related to the pass-through of higher raw material costs. Organic sales declined by 1% for the half, reflecting 2% lower volumes, partly offset by a 1% price/mix benefit. Looking at the December quarter, overall volumes declined by 5%, with the beverage business in North America and Latin America impacted by lower consumer demand and customer destocking. In North America, first half beverage volumes were down 5%. This included hot fill container volumes, which increased 2% in the half but were down 2% in the December quarter, which was in line with market. Cold fills were lower in the half and quarter due to a combination of lower consumer demand and customer destocking. In Latin America, volumes were marginally higher for the first half with growth in Mexico and Argentina offset by lower volumes in Brazil. Consistent with what we saw in the Flexibles segment, the December quarter was unfavorably impacted by softer consumer demand in the region. The Specialty Containers business delivered good performance with solid volume growth from health care, dairy and nutrition end markets. And overall adjusted EBIT for the Rigid segment in the first half increased 7% on a comparable constant currency basis with our teams being able to adjust to evolving market conditions and improve operating cost performance. Moving to cash on the balance sheet on Slide 8, we had a strong sequential improvement in adjusted free cash flow, which came in at $338 million for the December quarter, in line with last year. For the half year, cash outflow of $61 million was lower than last year, largely reflecting the unfavorable impact on the working capital cycle related to higher levels of inventory and higher raw material costs. These impacts also make our cash flow seasonality, which is typically weighted to the second half of the year, more pronounced for fiscal '23. Our financial profile remains strong with leverage at 2.8x on a trailing 12-month EBITDA basis. This is in line with our expectations for this time of year given the seasonality of cash flows and the receipt of proceeds from the Russia business sale. We repurchased $40 million worth of shares in the December quarter and expect to repurchase up to $500 million in total through the 2023 fiscal year. Prior to turning to our outlook, I wanted to provide a few more comments about the completed sale of our Russian business. We received sale proceeds of $365 million, in addition to $65 million of cash which was repatriated upon completion. In terms of the use of total proceeds received, we expect to do three things. First, we will invest approximately $120 million in a range of cost-saving initiatives across the business to partly offset divested earnings. This is in addition to approximately $50 million of cash we allocated back in August for similar initiatives. Second, we plan to allocate up to $100 million for additional share repurchases. And finally, the balance is expected to be used to reduce net debt in proportion with divested EBITDA, maintaining our leverage ratio. Taking us to the outlook on Slide 9, we are maintaining our guidance range for adjusted EPS of $0.77 to $0.81 per share, assuming current foreign exchange rates prevail through the balance of the year. As Ron mentioned, while we are taking aggressive action now to flex the cost base across the business, we expect the environment will remain volatile in the near term. And entering the second half of the fiscal year, we are more cautious in relation to the demand outlook and currently expect to be towards the lower end of our EPS guidance range. Our earnings bridge on this slide lays out the elements underlying our expectations. We expect earnings growth of approximately 3% to 8% on a comparable constant currency basis to be comprised of approximately 5% to 10% growth from the underlying business and a benefit of approximately 2% from share repurchases. This will be partly offset by a negative impact of approximately 4% related to higher estimated interest and tax expense. Our effective tax rate for 2023 is expected to be lower than last year in the 18% to 19% range. However, the year-over-year benefit this provides is more than offset by higher interest expense. Now that we have clarity on the timing of the sale, we expect a negative impact of approximately 3% related to the divestiture of our three plants in Russia. In addition, the U.S. dollar has weakened since our last update, and we now expect a negative impact of approximately 4% from currency translation movements. We are also reaffirming our adjusted free cash flow range for the year of $1 billion to $1.1 billion, although likely towards the lower end of the range, as noted on last quarter's call. So in summary from me today, the business has delivered another solid result, and we remain focused on supporting our customers and taking actions to continue recovering inflation and flex the cost base. Balancing these priorities will leave our business well positioned as we navigate through higher-than-usual volatility in demand and macroeconomic challenges in the near term. Thank you, Michael. And in previous quarters, we've highlighted multiple drivers of organic growth, which you see on Slide 10, and include priority segments, emerging markets and innovation. Before we open the line to questions, I want to just take a few minutes to talk about one of our most important priority segments, which is health care. An overview of our global health care packaging business is shown on Slide 11. With more than $1.8 billion in annual sales in fiscal '22, our portfolio covers both Flexible and Rigid Packaging formats and is evenly split between medical device and pharmaceutical packaging. This is a truly global business with global customers and globally recognized products and technology platforms and it's one where we have scale in every region, including in emerging markets. This is not an easy market to enter because health care packaging is also highly complex with many functional demands, quality standards and regulatory requirements. This complexity provides ample opportunities to differentiate and add value through our industry-leading product innovation, material science and global regulatory capabilities and makes health care a strong contributor to Amcor's growth profile from both a volume and mix standpoint. It also supports strong collaboration with customers, leading to a book of business that tends to be more consistent over the medium and longer term. Moving to Slide 12. Globally, health care packaging is a substantial market with significant headroom and growing at mid-single-digit rates over time, and we're investing to capture more of that growth. As an example, in the December quarter, we localized thermoforming production in Europe at our medical packaging site in Sligo, Ireland. This is an exciting project that leverage the experience and technical know-how of our sites in Minnesota and Puerto Rico. As a result, our European business and customer base will now benefit from local access to a broader range of specialized health care packaging solutions. In another organic growth example, we opened a world-class dedicated health care greenfield plant in Singapore at the end of calendar 2021, enhancing our ability to serve the rapidly growing Asian market. M&A also plays a role in supplementing organic growth in this segment. A few weeks ago, when we announced the acquisition of Shanghai-based MDK, a leading provider of medical device packaging in the China market, this is a great acquisition that enhances our leading position in the broader Asia Pacific medical packaging market by adding product capabilities and a complementary customer base. Drilling down a little more on sustainability and moving on to Slide 13. Across all substrates and end markets, the sustainability of packaging solutions continues to be a critical consideration for customers, consumers and regulators. Our collective objective is to create a truly circular economy for the packaging industry. And the solution is responsible packaging, including package design, infrastructure development and consumer participation. In terms of package design, Amcor is well positioned as a leader in the industry. Today, nearly 100% of our rigid packaging and specialty cartons products and more than 80% of our flexibles products are designed to be recycled or have a recycle-ready alternative. This matters because as deadlines to meet previously established goals rapidly approach, customers are increasingly adopting more sustainable solutions. As an example, this quarter, Mars adopted AmFiber performance paper for part of their confectionery range in the Australian market, and Ferrero Rocher launched an AmFiber pilot in the European market. These two companies joined Nestle, who initiated a global transition to paper-based packaging for one of their core brands in 2022 and are now adding a pilot for the KitKat brand. We've also seen important progress in the development of the infrastructure and technology required to produce recycled materials. While the use of food-grade recycled PET is growing rapidly, including in our rigid packaging business, the ability to produce recycled content for and from flexible packaging will be a critical ingredient to creating circularity. Significant strides are being made in advanced recycling technologies, which enable use of recycled content and flexible packaging applications where mechanically recycled material may present regulatory or technical challenges. To meet ongoing demand for more recycled material and to support infrastructure and technology development, Amcor continues to increase our long-term off-take commitments. In December, we announced a five-year extension of our partnership with ExxonMobil to purchase certified circular polyethylene, giving us line of sight to significant quantities of recycled material that can be used in health care and food-grade packaging applications. We also recently announced a partnership with Licella to further explore an investment in one of Australia's first advanced recycling facilities. These agreements provide another point of differentiation and value, which can be applied across all end markets for customers like Mondelez, who've incorporated 30% advanced recycled material into their packaging for the Cadbury Dairy Milk brand in the U.K. and Australia. These capabilities also position Amcor to meet the sustainability goals we share with our customers and to contribute to a truly circular economy for the packaging industry. Turning to Slide 14. The opportunities and investments I've outlined today in our health care business, our innovation across a range of substrates and our increasing access to advanced recycled materials are just a few examples of the initiatives we have underway, giving us confidence that we have built and continue to build a strong foundation for growth and value creation. We don't expect to be immune to macroeconomic challenges, but we believe we're well positioned with a resilient portfolio and multiple drivers of growth, including cost productivity. Additionally, our consistently strong cash flow provides the ability to reinvest in the business, to pursue acquisitions, repurchase shares and grow the dividend, all of which positions us well to generate strong and consistent value for shareholders over the long term. And finally, in summary, on Slide 15, we've delivered a strong first half in a macroeconomic environment that remains challenging. We're more cautious on the demand environment entering the second half, but our portfolio leaves us well positioned. And most importantly, we remain focused on executing against our strategies for long-term growth. Ron, a lot of CPG companies and packagers have talked about a drop in December volumes, but kind of a meaningful improvement and maybe a strong start in January. Just wondering, have you seen this? Or did you see kind of December weakness continue into January? I'm just trying to square what sounds like maybe a weaker view on fiscal second half demand. And then maybe specifically, you talked about restocking and lower demand for Rigids. I'm just wondering where you think restocking stands now. Yes. Sure. Thanks for the questions, Anthony. Look, maybe I'll just back up a step and talk about the chronology of volumes that we saw through the second quarter. Very much a mixed picture in October and November, depending on the business and the geography, the story was relatively mixed. But across the business, our volumes were relatively flat in those two months. December, we definitely saw things softened. We had volumes across the group down mid-single digits. I think that's a function of softening demand but also destocking in a number of segments. We know that because customers took more shutdowns than normal and longer shutdowns than normal. As we worked our way into January, we did see some improvement. I'm not sure that we would call it a trend, but we definitely saw some improvement in January, albeit mixed. And so, the word I would use with regard to our outlook is cautious and it's caution around this demand outlook from here given the volatility, which really had swung quite considerably from month to month and almost week to week. I'd say that despite the improvements in January, we just remain cautious on the demand side of the equation. As it relates specifically to Rigids and destocking, I think it's clear there has been some destocking in that -- in the beverage segment in North America and also Latin America to a certain extent. We have also seen demand soft generally. If you look at the scanner data for the quarter, the market generally in North America for beverages was down mid-single digits. We also know that our mix is more exposed to the convenience channel. Convenience store sales were down even further than the broader market. So I think that our volume performance in Rigids through the quarter is a function of a softer market, probably some destocking and then offset by some business wins that we picked up, particularly in the hot fill side. So, that's the way we see it as it relates to volume. Okay. That's very helpful. And then just in the release, I think you talked about maintaining the full year EPS and free cash flow guide. In your comments, you said you could be at the lower end. Without putting too fine a point on it, is there any reason not to sort of formally lower the guidance range? Or are there may be circumstances that could get you maybe to the higher end of the guide? Is it just completely dependent on volumes? Or is there any way that we should think about getting to maybe the higher end or the lower end of the guide? Yes. Look, I think the primary reason for not changing the guidance is we have half year lap. We've got two quarters. We've got a relatively wide range when you consider that we've got two quarters left, and we've maintained the full width of the range. The swing factor really will be volumes. It really will come down to volume -- the volume outlook for the second half. I think we also feel pretty good about the execution capabilities of the business and the ability to continue to take cost out, which was a real highlight for us in the first half. We believe we'll continue to do that in the second half. But the swing factor will be volumes. And what could lead us to the high end of the range? We could have low single-digit volume growth. We could get out front of raw materials as they come off at a faster pace than we're assuming, and a weaker U.S. dollar would help as well. And the inverse would be true for the lower end of the range. I think it's also fair to say that at this point in the year. We have a wider range of demand outlook than we normally would or a wider range of possible scenarios for volume than we ordinarily would. Our view would be volumes could be anywhere from up a couple of points to down low single digits, and it's unusual for us to have a forecast that could include a decline in volumes. So for all those reasons, we've decided to express some caution here. But what we think with two quarters left and with some strong cost performance that will continue into the second half, we thought it was prudent to maintain the range at this stage. Just in terms of price and mix, so that's been a benefit for you over a sort of long period of time. We saw that continue in this half with a 4% benefit in flexibles and presumably health care, which you called out there, Ron, as sort of a key part of that. The question is sort of how you see that price mix profiling through the second half. I mean would it be fair to say that you're expecting slightly less price and mix benefit in the second half relative to the first? Yes, John, I can help you with that one. So you're right. We -- the teams have done a good job on price and getting out there ahead of inflation and recovering that. And you saw in the -- we commented in the half, we've recovered about $160 million in cost inflation during the period. But we also had really good mix benefits, particularly from the strong health care performance, particularly in the half where we saw a double-digit growth, which is above average growth for that part of the business and a bit of rebound versus the prior year. So as we look forward into the second half, there will still be the price/mix benefit there. But inflation is still there. We've got to recover that. And on the health care side, you -- comparatively, you're not going to see the same level of growth and, therefore, the mix benefit. So although we're still expecting that, we would say that it will be lower than what we saw in the first half. My question on -- for the call is on cost saves. Ron, you talked about aggressive actions. I forget exactly how you phrased it. But two, to obviously offset some of the headwinds that you're seeing, can you talk a bit further about what those actions are? Can you size them either in relation to, I don't know, the volume weakness that you're seeing or the ability to offset the dilution from Russia? And how can cost saves build into both calendar '23 and fiscal '24 to offset that further dilution you'll have from Russia, at least in the first half of the upcoming new year? Okay. Thanks, George. Look, let me respond to the question and Michael will respond to the question in two parts. I think the cost savings activities that we've been undertaking through the first half in the face of softer volumes and then there's, the offsets to the Russian, the divestment of the Russian earnings. So look, we got out front, I think, very proactively and fairly aggressively on cost in the first half. I mean, I think the way to think about it is we had really strong operating leverage with 2% organic sales growth, really flat to minus 1% on the volume line, and we had 8% EBIT growth. And if you think about the drivers of that EBIT growth, price and mix sort of offset and we recovered inflation. So -- and really, the profit growth was driven by cost-outs. And so where did the cost-outs come from? We did a really good job of flexing labor. We cut shifts. We reduced over time. Several hundred people are out of the business. There's a reasonably meaningful headcount reduction across the business. We've also pulled the procurement lever pretty hard and cut back on discretionary spending. And we got out front early on those actions given the volatility that we saw and just reading the tea leaves from discussions with customers on the demand environment. Those initiatives, those actions will continue into the second half, and they underpin the outlook that we've reaffirmed today. I think Russia is almost a separate topic, if you will. And just to level set, Michael can talk about some of the specifics. But we had a business in Russia with three plants that represented about 2% to 3% of our sales and roughly 4% to 5% of our EBIT in any given year. So essentially $80 million to $90 million of EBIT, which we've now divested, and we are resolute in trying to replace that EBIT as fast as we possibly can, and so with the proceeds exceeding our expectations, we generated a pretty healthy profit on the sale of the business as well. And then the proceeds of over $400 million, $430 million, as Michael alluded to, a bit ahead of our expectations, we think it's a good use of cash to reinvest in the business and take cost out, structural cost-out, to help offset the $80 million to $90 million of EBIT that we've divested. And Michael, maybe you can talk a bit more about the financial profile of what we're planning to do. Sure. Thanks, Ryan. Yes, I mean just following on from that, so we announced today we're going to use part of the proceeds to help divest -- to help offset the divested earnings, and we announced today around $120 million of cash will be put to work in cost-saving initiatives, things like footprint and SG&A and the like, and that's in addition to $50 million cash that we allocated back in August as well. So in total, about $170 million of cash is going to be invested in cost-out initiatives over the next kind of 12 to 18 months. And we'd expect to get kind of a 30% return on that at full run rate. But if you think about the timing of that, those initiatives are only starting. We'll start to work on those this financial year. So, there is no impact factored into -- no upside factored into the guidance range in FY '23. But certainly, we're expecting benefits from this program in FY '24 and then into FY '25. And if you think about that, bear in mind, in H1 in FY '24, we will have a headwind. These programs will kick in but weighted more to the back end of the year. So on that $170 million investment, if you call a 30% return, it's roughly a $50 million potential impact to offset the Russia earnings. I would say that 2/3 of that we think we can achieve in FY '24. So over the course of FY '24, we feel that we can pretty much minimize any headwind from the Russia earnings in the first half of FY '23, and then you'll get the full run rate as we head into FY '25. I might as well just continue on that last comment. Can you just talk about some of the specifics about how to achieve that 30% return, $50 million savings from those Russia cost-saving actions? What are you guys doing there? Yes. As Michael alluded to, Larry, we're going to close some plants. And as we think about it and take some overheads out, if we think about this environment that we're in with the demand backdrop being as uncertain as it is and the fact that we're also already increasing our CapEx to pursue growth, particularly in our priority segments, we feel like that's pretty well in trained. So then the next -- the fastest way to generate earnings to offset the divested earnings is through cost reduction, and cost reduction in a structural sense, which means optimizing the footprint. And it's a business that -- we've got 220 plants around the world. There are always opportunities to optimize further, and so that's largely what we'll do. And we will -- as I said, we also will reduce overheads in parts of the business as well to rightsize the cost structure. Okay. That's pretty clear. And one other thing that caught my attention is you guys repurchased only $40 million of stock in the first half and then the target for $500 million now for the full year. So I'm just wondering, was there anything that kind of gave you some hesitancy in the first half? I'm interested if on the M&A pipeline, if you guys might have been looking at something that caused some hesitancy. Well, look, Larry, I think ultimately, we started the buyback in Q2. We spent $40 million. If you think about the cash flows in the first half, we also invested in some M&A activities. So we acquired the plant in the Czech Republic. We spent a little more on APAC. And at the same time, we were managing the cash flow as we start to release some of the inventory that we built up on the back of supply chain constraints over the past 12 months. So, we started to see that come out of the system toward the end of quarter two, which gave us the ability to start to do the buyback. And then as we look forward into H2, we will start to see more -- as I mentioned in my comments, we'll see the cash flow more weighted to the second half, particularly as we start to get through the inventory and working capital impacts from that. In addition to that, you've got the proceeds from the Russia sale, which we're allocating $100 million to the buyback. So really, it was around the timing of the cash flow and just managing that through and we can get the buyback done in the second half as we've done in the past. So we feel like we can get the $500 million done. I just want to go back to the, Anthony's question on the caution, Ron, you referenced. Can you elaborate on whether this is a caution on any specific region between Europe and the U.S. and Latin America? Or is it just universal? I'm just trying to get a sense as to maybe some of the -- just the moderation of volumes that we're seeing is really a function of perhaps just catching up over the last year or so from previously depleted inventories, and now we're just approaching a more normalization phase and an adjustment related to that. Yes. Look, I don't think we know the answer to that is a short response to your question. The caution is based on the volatility that we've seen in demand patterns globally. Now if we look specifically in the second quarter, it's more segment-specific in North America and Europe. And then we had some geographies where things got even more volatile as we went through the quarter, in particular, Latin America, where we saw some destocking but also just, we think, some softer demand in light of the deteriorating macroeconomic environment in several countries down there. China would be another one where we saw demand soften considerably in the second quarter, really concurrent with COVID lockdowns. Now obviously, those are behind us, we'd expect the business to bounce back. But how strongly it bounces back is an open question. And look, as far as the drivers of volume in the quarter and even into January, how much is related to the consumer pushing back on prices that have been put through versus how much is destocking, it's just -- it's difficult to read. So generally speaking, there's been volatility across the business, and that adds up to a degree of caution on our part. Okay. Understood. And then just given the increase in interest rates, I mean, obviously, it's a big headwind between fiscal year '23 and fiscal year '22, just for everybody, really. How are we thinking differently, if at all, in terms of allocating cash flow towards buybacks versus debt paydown? Yes. Look, the interest rates where they are for us, the buyback still makes sense. It's EPS accretive. We have strong cash flows, and we regularly been doing buybacks, and we'll continue to do that where the interest rates are. It still makes sense from that perspective. Just interested on the impact of destocking, I know it's quite difficult to quantify. But can you estimate how much it contributed to the volume softness in both Flexibles and Rigids? Are you seeing any green shoots at this point in terms of the destocking cycle coming to an end? And just wondering what you're assuming in terms of destocking in your guidance. Look, Daniel, it's a difficult one to estimate. I mean I think you'd have to triangulate a few different data points. If you look at the scanner data and look at the results of other public companies that have reported, volumes were down considerably. And in light of those comparisons, our volume performance was actually good. But when we know anecdotally in certain segments, particularly in coffee, single-serve coffee in Europe, some of the dairy segments in the U.S. meat in Europe, we know in some of those places, including Beverage and the Rigid Packaging segment, that there was excess inventory in the system. And we know that because customers took shutdowns in a way that they haven't in the past, meaning longer shutdowns. So, it would be very hard to parse out the volume performance of the half. The volumes were down 1%. I think that probably compares favorably to the other external markers out there, but it would be really hard to parse that 1% in terms of what was destocking versus what is just a softening consumer environment given the price increases that have been put through in pretty much all segments and all regions. I guess I want to come back to this question on mix. And Ron, earlier, you alluded to maybe health care, which has been a strong growth driver moderating as we go into the back half of the year. Can you just maybe calibrate that a little bit more, just in the context of broadly cautious kind of volume outlook, kind of when you see the health care business settling out? And kind of help us think about how -- what happens into fiscal '24 as you start lapping some of the growth there. Well, health care has been a good grower for us over many, many years. And it's grown -- both the medical packaging side and the pharmaceutical packaging side have grown kind of mid-single digits globally, obviously a bit higher in the emerging markets, and that's been consistent over a long period of time. I think we saw extraordinary growth in the first half coming off of actually quite a strong fiscal '22 as well. A few drivers there that we think have been fueling that growth. Obviously, our market position is quite strong, and the innovation that we've been bringing to the market is quite strong, and we're investing behind that as we've highlighted today. I think there's -- to be clear, there's been some pent-up demand because some of the supply chain constraints that we've talked about and others have talked about really hit the health care segments for us in a pretty acute way. Those are unwinding, and some of that pent-up demand is being satisfied. And I think it's also not a secret that on the pharmaceutical side, there's been a relatively big cold and flu season. So those are some of the things that really fuel double-digit growth globally across both the medical device and pharmaceutical segments for us in the first half, and we believe that the business will continue to grow at healthy rates but will revert more towards long-term trends that we've seen over a long period of time in the kind of mid-single-digit range, and that would apply going into FY '24 as well. Okay. That's helpful. And if I can just squeeze another one. In the context of maybe on the food and consumer goods side, but slowing demand and some of destocking on the part of customers, have you seen their engagement on new products and new form factors for packaging change at all as bid activity or RFPs maybe that kind of activity different than 6 or 12 months ago? No. If anything, it's accelerating, particularly around the sustainability side, where many of the brand owners that we work closely with have the same commitments that we have and have made similar pledges around recyclability or recycled content. Those commitments are fast approaching and the dates are fast approaching. And if anything, we're seeing an acceleration in that dialogue, and we're seeing good take up. Some of the examples we cited today with our AmFiber performance paper platform, which is getting good take-up in the marketplace. We're seeing good early take-up of advanced recycled material and products that contained that off-take. And so look, I think at the moment, it's not slowed down at all. I think also brand owners are looking for ways to differentiate as they try to scratch out whatever growth they can. Ron, would you mind just talking about how the latest round of general price increases have been received by customers just given that lower demand outlook, particularly with those December volumes takes to notable turn down? I'd imagine it's getting even harder to recover inflation on costs, but I also note your comment on managing manufacturing capacity. So just interested on any views on pricing. Yes. Look, I mean we've been at it now for a while. We put about $670-odd million of price into the market in the quarter just to recover higher raw material costs, another $160 million or so to recover general inflation. It's certainly not getting easier, but we are passing it through, and we're recovering, and I think you can see that in the margins. The margins have expanded -- excluding the dilution effect of the raw material prices going through the top line, the margins have continued to expand and not shrink. And I think that's -- it should give some confidence that we are out there recovering. It doesn't mean that the conversations are getting easier. I think the consumers are probably starting to get a bit tired. Elasticities, if they haven't already are likely to increase. I think that's what we're hearing from most of our brand owners -- brand owner customers. But at this stage, we're still recovering, and we expect to continue to fully recover our inflationary costs in the second half. I appreciate taking the question. Just first one, just on the $120 million in cost takeout in SSG&A removal. Ron, can you comment on what regions you're looking at and whether there are any particular end markets that you're looking to restructure? And just quickly, on your Asian business, especially with China eliminating its color restrictions, have you seen any type of improvement recently in the volumes there? And was that a fact that you considered in your recent MDK acquisition? Maybe I'll address the second question first, and then Michael can come back on the $120 million. Look, it's relatively recent that China has reopened and then we went into the Chinese New Year in January. But we do expect that business to bounce back. More importantly, the China business has done an outstanding job managing costs. So despite the volume declines that ran alongside the COVID lockdowns, the business grew earnings in the first half, which was just an outstanding outcome. It's been a business for us that has grown at least mid- to high single digits over many years. What's really important in China is to be very focused in our participation strategies. Health care is a place we want to participate, and we want to go deeper in China. And we're doing that both organically, and we're doing that through M&A., and the MDK acquisition that we announced last month is a good example of that. It's a small business, one plant outside of Shanghai, complements very well, another medical packaging plant that we have near Shanghai as well. It brings us some complementary products that we didn't have local production of in China, and it also expands our book of business with a new set of customers. So we're pretty excited about that, and we think that's all part of the long-term secular growth that we've experienced and will continue to experience in China. On the $120 million, do you want to comment on where we are at that? Look at $120 million, I mean we see opportunities across the business. As Ron mentioned, there's under 220 plants around the globe. It's going to be focused on taking some plants out of the network and as well as SG&A opportunities to rightsize the business. So there is some focus in Europe. But generally speaking, we'll see opportunities across the globe. So that's to come. Michael, just a question for you. I was just wondering if you could talk through some of the fixed variable cost structures across both of the divisions. And just noting you did talk about some plants downtime, which is a little bit higher than expected. Can you just talk about how that's flowed through to some of the cost benefits in the half whether that will occur into the second half of the year if the volume environment remains weak? Yes. I think you got to think about it in the context of just our cost of goods and the breakup of the cost of goods where we focused on taking some of that cost out. Of our COGS, about 60% to 70% of it is the raw material. You then get into labor, which is around that 10% to 15% and then things like energy and freight. So where we really focused was around just managing the labor in the half, particularly flexing downtime to match our customers where they were down, managing the overtime to take that out as well. So we -- if anything, we've recovered inflation. We talked about that, the $160 million. But within the performance in the half, we absolutely took some cost-out. We haven't specified the exact amount. But to Ron's point earlier, there was a few hundred heads as well from a direct labor standpoint that came out as well as just generally managing and flexing that cost in line with the demand. Just curious, given the kind of customer elasticity that you've talked about, have you seen any shift in your customers' go-to-market strategies on pricing as volumes have started to decelerate? Any sign of increased promo activity that could drive volumes? And I understand it might be hard to give a general statement given your diversification within Flexibles. So I guess I'm most interested on hot fill and cold field beverages within rigid packaging, but any details would be appreciated. Yes, it's a good question. We have seen some shifts in the consumer and some of that driven by actions that the brand owners have taken. In the beverage space, and if we just focus on North America, some of these points would hold in Latin America as well, but in the beverage space in North America, when the consumer is under pressure, they tend to revert to multipacks and smaller unit sizes, right? And so if they're going to buy a soft drink, they're likely to buy it in a pack of 12, where the unit price is lower than buying it through the convenience store in the cold chain. So we have seen some of that. That's probably contributed to the softness, particularly on the cold fill side. I think we've seen some other examples in other segments in Europe in the coffee segment. We've definitely seen soft volumes in the more premium end than the single-serve system sales, and we've seen higher sales in the segments that are multi-serve. So think about capsules in a system versus ground coffee or instant coffee. The instant coffee is what's being pushed at the moment. So we are seeing a little bit of that sort of behavior. It's maybe just a different degree of emphasis across their product mix as they help the consumer through a high inflationary environment. Just a question for me. Just on coming at it a different way with regards to the outlook on the volumes and the demand environment. Can you sort of delve into what the order cycle actually looks like with the -- particularly the products around FMCG and the comments made by customers and how much visibility you've got on that order cycle? So obviously, your products get put into their production facility and then it sits on a shelf, and then they've got to sell it. So you get further visibility on what the customers are expecting. So have you got good visibility into the rest of the third quarter? Or can we see into the fourth quarter at this stage? The business is exposed really to consumer staples and fast-moving consumer goods and health care. And typically, we'll have visibility a few months out. Obviously, we have a long -- we have planning discussions with our customers over a longer period of time. But as you get near and near those discussions get more and more granular and you get more -- a greater degree of accuracy as you get closer, so I would say our degree of forecast visibility extends a few months. And that's about the extent of it. And right now, those forecasts are moving around quite a bit and have been now for the last few months. The volatility has increased and the variability in forecast has increased. I think on the positive side, to the extent that there is any destocking that's gone on in our value chains, we would expect that to work itself through reasonably quickly. And in a matter of a quarter or two, we should be through whatever destocking needs to occur. Ron, I just got a question on strategy. Your shareholder value accretion model has sort of been at the forefront of your strategy, very much the foundation of your strategy for a very long time now. I'm conscious of the fact though that TSRs really struggle to keep pace with the value-add in more recent years. And really, my question is around the sort of long-term numbers because you're about to lose the big benefit of Alcan in your 10-year numbers. And I was just wondering how we should think about that, how you think about it and whether the model is still appropriate. Yes. Look, it's a good question, Richard. We certainly believe the model is still appropriate. If you go back and look over a 10-year period post the Alcan acquisition, which is about 13 years ago now. The last 10 years, we've been well above from an intrinsic perspective, well above the 5% to the 10% to 15% sort of shareholder value creation model that we talk about. We still believe the business will generate low single-digit top line growth. It will convert that with operating leverage like we've seen in the first half. And then with the excess cash flows of the business, we're going to continue to acquire or buy back shares and continue to grow our dividends. So all up, we think the model still makes sense. It's held us in good stead, and we'll continue to do so going forward. Great. And just a quick one on Russia for Michael, if I may. Michael, it looks like you've booked, I think, off the top of my head, it's about $15 million of costs related to Russia below the line in the quarter. Can I just check whether that's correct? And secondly, what it might be? And thirdly, now you sold the business, there's no more to come below the line. So below the leverage we took a $215 million gain, obviously, on the sale transaction. And then there were some costs just in relation to transferring a business. Some of Ukraine costs still to just transfer equipment, et cetera, in that. As we look forward, you'll see the restructuring costs start to come through that will run through that line. But generally, the costs in relation to Russia are finished, yes. Just on CapEx. It looks like a larger CapEx quarter. The December quarter, it looks like it's about $94 million. Can you just remind us, I guess, what the expectations are for the full year? I think at the last result, it was $550 million to $600 million of CapEx was the expectation. So just an update on that one would be great and any reasons for the lighter investment period in the December quarter? Yes. Sure. In terms of the half, we're in around that $250 million. There's a bit of FX in there as well versus prior year. So versus prior year, we're running about 3%, 4% ahead. For the full year, the number of $550 million to $600 million still in the range of outcomes, we're likely to be kind of that 5% to 10% ahead of prior year. And we've got -- we continue to invest in the focus segments and the innovation platforms, which is where we've been focused on that investment. So no real change on the CapEx outlook, perhaps a little lower than where we were at three months ago, but pretty similar. And a follow-up, if I could, just around capital and the M&A strategy. Ron, if you wouldn't mind just reminding us of the M&A strategy as it is today? And has it changed at all over the last couple of years. I guess I asked just because more recent investments seem to be focused on sort of fiber paper-type smaller deals like pull back in the one in China. You seem to be becoming a bit more substrate-agnostic. But just an update really on your M&A strategy will be fantastic. Yes. Well, look, I mean we are substrate agnostic. That's been true of the Company throughout its history. And in fact, about 25% of what we do is either fiber or aluminum. But as far as M&A goes, no change, I mean we think there's going to be good bolt-on opportunities across the portfolio. I think you see some examples this year with this health care acquisition in China MDK. Michael referred earlier to a plant we bought in the Czech Republic earlier in the year to bolster our Eastern European footprint. So we think there'll be deals like that. I mean those are the deals that are out there because many of the companies in our space are small, and so we've got to be comfortable bolting on small businesses to our footprint. That will be part of the mix. And then where we can supplement the portfolio, we would like to do that, too. I mean, certainly, in the priority segments that we've nominated, we'd like to continue to grow, health care being the one we've talked more about today. In Rigids, obviously, the hot fill space is one that we have a strong position in. But outside of beverage, there are opportunities for us to continue to grow as well. So, there's a number of areas where we think the portfolio could be bolstered, but they'll be bolt-on opportunities across the Flexibles and Rigids segment. So, no change to note. Just wondering if you are able to give any insight into what the interest rate impacts could be in FY '24? And also with tax, I note that there was a lower rate in the period, but wondering what we should expect for the balance of FY '23 and what we should consider to be a more normalized rate. Look, I mean if you think about interest and tax, together this year from a full year guidance standpoint, we've called out. They're going to be a headwind of around 4%. And tax, we've called out, is going to be more in that 18% to 19% range. And that's really on the back of the mix of earnings and particularly where our interest expense is, which is in higher cost -- higher tax cost countries. But when you put that together with the interest increase, that's more than offset by the increase in interest, so for this year, 4%, we haven't called out any guidance for FY '24 at this stage. But obviously, in the first half, depending on where interest rates go, there could be some headwind, but we're yet to see where that ends up. So at this stage, I'll -- we'll come back to you on that one. Just a quick follow-up. Michael, just on the raw material side, you obviously saw a modest benefit there in the second quarter. I mean it looks like the raw mat indices have retraced a fair way. So the question is what have you baked into guidance because it looks like there should be a pretty material raw material benefit in that second half. Yes. Look, you're right. As we mentioned, we started to see some modest benefit in Q2 from raw materials as they've come down. Obviously, we're still holding higher inventories. So they're working their way through the system, which you're still going to see some impact from in Q3 as we work those down. We're expecting guidance -- raw materials right now, they're pretty benign across -- remembering, we will have a broad basket of materials across broad geographies. So when we see that pretty benign outlook for raw materials, so in Q3, we're again expecting some modest tailwind from the raw material side. Beyond that, it's really going to depend on what happens to the raw materials and how quickly we can get the inventory out of the system also linked to the demand environment, John, as well. So clearly, if demand improves, and we get stronger than -- we got stronger demand and then inventories will come down faster, you might get a little high tailwind. The opposite is true if the demand stays off -- if demand is softer, and we can't get the inventory out of the system as quickly then that will impact. But the guidance has a range of outcomes built into it, and that's all factored into the guidance range at this stage. Ladies and gentlemen, this concludes our question-and-answer session. I would now like to turn the call back over to Ron Delia for any closing remarks. Okay. Look, we would just like to thank everybody for their interest in Amcor, operator. We feel like we've had a very strong first half and we're looking forward to closing off another strong year for the Company for fiscal '23. So, we'll close the call there.

EarningCall_431

Good afternoon, and welcome to Diodes Incorporated Fourth Quarter and Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. At the conclusion of today’s conference call, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded today, Monday, February 6, 2023. I would now like to turn the call over to Leanne Sievers of Shelton Group Investor Relations. Leanne, please go ahead. Good afternoon, and welcome to Diodes fourth quarter 2022 financial results conference call. I am Leanne Sievers, President of Shelton Group, Diodes’ Investor Relations firm. Joining us today from Taiwan are Diodes’ Chairman, President and CEO, Dr. Keh-Shew Lu; Chief Financial Officer, Brett Whitmire; Senior Vice President of Worldwide Sales and Marketing, Emily Yang; Senior Vice President of Business Group, Gary Yu; and Director of Investor Relations, Gurmeet Dhaliwal. Before I turn the call over to Dr. Lu, I’d like to remind our listeners that the results announced today are preliminary as they are subject to the company finalizing its closing procedures and customary quarterly review by the company’s independent registered public accounting firm. As such, these results are unaudited and subject to revision until the company files its Form 10-K for its full fiscal year ended December 31, 2022. In addition, management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today, and therefore, we refer you to a more detailed discussion of the risks and uncertainties in the company’s filings with the Securities and Exchange Commission, including Forms 10-K and 10-Q. In addition, any projections of the company’s future performance represent management’s estimates as of today, February 6, 2023. Diodes assumes no obligation to update these projections in the future as market conditions may or may not change. except to the extent required by applicable law. Additionally, the company’s press release and management statements during this conference call will include discussions of certain measures and financial information in GAAP and non-GAAP terms. Included in the company’s press release and reconciliation of GAAP to non-GAAP items, which provide additional details. Also, throughout the company’s press release and management statements during this conference call, we refer to net income attributable to common stockholders as GAAP net income. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days in the Investor Relations section of Diodes website at www.diodes.com. And now, I will turn the call over to Diodes Chairman, President and CEO, Dr. Keh-Shew Lu. Dr. Lu, please go ahead. Thank you, Leanne. Welcome, everyone, and thank you for joining us today. I am pleased to report record performance in 2022, with revenue growth 10.8% over 2021. Even when considering the COVID-related dug down and the power outage throughout the year in China, as well as the global economic slowdown. In fact, the fourth quarter represented our ninth consecutive quarter of year-over-year growth. Additionally, our earning power and cash generation in 2022 were also significantly highlighted with gross margin expansion to 422 basis points to 41.3%, operating margin expanding 510 basis points to 20.4% and GAAP EPS increased 44% to $7.20 and non-GAAP EPS growing 42% to $7.36. We also achieved record cash flow for operating of $393 million. Underpinning the company’s noteworthy performance was continued strong growth in our automotive end market, which increased 40% over 2021 and reached 15% of product revenue for the year. We also continued to drive growth in our industrial end market through our ongoing content expansion efforts, which contributed to our industrial and automotive end market represent 42% of product revenue and exceeding our target model of 40%. The growth in those end markets combined with the ongoing increase of our Pericom products also contributed to our strong gross margin expansion throughout the year as part of our product mix improvement efforts. Reaching the $2 billion revenue level in 2022 was a significant and the meaningful achievement of the entire Diodes team. With the gross profit growing 23% to $827 million for the year, we have taken another giant step towards the next goal in our 2025 financial targets to achieve $1 billion in annual gross profit. I am very proud of our accomplishments and our ability consistently deliver both top line growth and significantly expand the earnings for our shareholders. With that, let me now turn the call over to Brett to discuss our fourth quarter and full year financial results and our first quarter 2023 guidance in more detail. Thanks, Dr. Lu, and good afternoon, everyone. Revenue for the fourth quarter 2022 was $496.2 million, increasing 3.3% from $480.2 million in the fourth quarter 2021 and down 4.8% from the $521.3 million in the third quarter 2022. Full year 2022 revenue grew to a record $2 billion, an increase of 10.8% over the $1.8 billion in 2021. Gross profit for the fourth quarter was $206.2 million or 41.6% of revenue, increasing from $190.7 million or 39.7% of revenue in the prior year quarter and down from $217.8 million or 41.8% of revenue in the prior quarter. For the full year, GAAP gross profit was a record $827.2 million, a 23.4% increase over 2021 and GAAP gross margin improved 420 basis points to a record 41.3%. GAAP operating expenses for the fourth quarter were $109.7 million or 22.1% of revenue and on a non-GAAP basis were $105.9 million or 21.3% of revenue, which excludes $3.8 million of amortization of acquisition-related intangible asset expenses. This compares to GAAP operating expenses in the fourth quarter 2021 of $104.7 million, or 21.8% of revenue and in the third quarter 2022 of $105.4 million or 20.2% of revenue. Non-GAAP operating expenses in the prior quarter were $101.3 million or 19.4% of revenue. Total other expense amounted to approximately $1.7 million for the quarter, consisting of $490,000 of other income, $2.9 million in interest expense, a $400,000 foreign currency loss and $1.1 million of interest income. Income before taxes and non-controlling interest in the fourth quarter 2022 was $94.8 million, compared to $108.8 million in the prior year quarter and $109.1 million in the previous quarter. Turning to income taxes. Our effective income tax rate for the fourth quarter was approximately 1.5%, which includes taxes related to non-GAAP items. On a non-GAAP basis, the tax rate for the fourth quarter was approximately 18.7%, and for the full year 2022, the non-GAAP tax rate was approximately 18.5%. GAAP net income for the fourth quarter 2022 was $92.1 million or $2 per diluted share, compared to $65.5 million or $1.43 per diluted share in the fourth quarter 2021 and $86.4 million or $1.88 per diluted share in the third quarter of 2022. For the full year 2022, GAAP net income was a record $331.3 million or a record $7.20 per diluted share, which was approximately 45% increase from the $228.8 million or $5 per diluted share in 2021. The share count used to compute GAAP diluted EPS for the fourth quarter 2022 was 46.1 million shares and 46 million shares for the full year. Non-GAAP adjusted net income in the fourth quarter was $79.6 million or $1.73 per diluted share, which excluded net of tax million of acquisition related intangible asset costs. This compares to $73.3 million or $1.60 per diluted share in the fourth quarter 2021 and $92.2 million or $2 per diluted share in the prior quarter. For the full year, non-GAAP adjusted net income was a record $339 million or a record $7.36 per diluted share, an increase of approximately 43% from the $237.2 million or $5.18 per diluted share in 2021. Excluding non-cash share-based compensation expense of net of tax for the fourth quarter and $28.7 million for the full year, both GAAP earnings per share and non-GAAP adjusted EPS would have increased by $0.16 per diluted share and $0.62 per diluted share, respectively. EBITDA for the fourth quarter was $129.6 million or 26.1% of revenue, compared to $139 million or 28.9% of revenue in the fourth quarter of 2021 and $141.9 million or 27.2% of revenue in the prior quarter. We had a gain on investment in the fourth quarter of 2021 that benefited EBITDA and in that quarter. For the full year, EBITDA improved 19.7% to a record $520.4 million or 26% of revenue, compared to $434.6 million or 24.1% of revenue in 2021. We have included in our earnings release a reconciliation of GAAP net income to non-GAAP adjusted net income and GAAP net income to EBITDA, which provides additional details. Cash flow generated from operations was $102.9 million for the fourth quarter and a record $392.5 million for 2022. Free cash flow was $39.1 million, which included $63.8 million for capital expenditures, and for the full year, free cash flow was $180.8 million, including $211.7 million for CapEx. Net cash flow was a negative $44.7 million, including the paydown of $114 million of total debt, and for the full year, net cash flow was a negative $25.7 million, which includes the net paydown of $112.3 million of total debt. Turning to the balance sheet. At the end of the fourth quarter, cash, cash equivalents, restricted cash plus short-term investments totaled approximately $348 million. Working capital was $729 million and total debt, including long-term and short-term was $186 million. In terms of inventory, at the end of the fourth quarter, total inventory days were approximately 117, as compared to 113 last quarter. Finished goods inventory days were 33, compared to 32 last quarter. Total inventory dollars decreased $14.5 million from the prior quarter to approximately $360.3 million. Total inventory in the quarter consisted of a $12.1 million decrease in finished goods, a $3.2 million decrease in raw materials and a $0.7 million increase in work in process. Capital expenditures on a cash basis were $63.8 million for the fourth quarter, and for the full year, approximately $211.7 million or 10.6% of revenue. Full year CapEx was higher than our target model due to targeted expansion of our JK wafer fab in Hsinchu Science Park in Taiwan. Without this investment, we would have been within our target model of 5% to 9% and we expect to remain in this range this year. Now turning to our outlook. For the first quarter of 2023, we expect revenue to be approximately $467 million plus or minus 3%. GAAP gross margin is expected to be 41.0% plus or minus 1%. Even with the revenue and loading decrease in the first quarter, we expect to maintain our gross margin effectively comparable to the last quarter and above our target model of 40%. Non-GAAP operating expenses, which are GAAP operating expenses adjusted for amortization of acquisition related intangible assets, are expected to be approximately 22.2% of revenue plus or minus 1%. We expect net interest expense to be approximately $2.5 million. Our income tax rate is expected to be 19% plus or minus 3% and shares used to calculate EPS for the first quarter are anticipated to be approximately $46.5 million. Not included in these non-GAAP estimates is amortization of $3.1 million after tax for previous acquisitions. Thank you, Brett, and good afternoon. As Dr. Lu and Brett mentioned, 2022 was a record year for Diodes across all financial metrics. Fourth quarter revenue was down 4.8% sequentially, which is above our midpoint of our guidance and slightly better than our typical seasonality. Looking more closely at the fourth quarter revenue POS was a record in Europe. Distributor inventory in terms of weeks increased quarter-over-quarter, which is higher than our normal defined -- normal range of 11 weeks to 14 weeks. This increase is due mainly to demand softness in China related to COVID and our anticipation of COVID recovery in Q2, as well as our anticipation of labor shortage around Chinese New Year. We position more product to minimize the potential impact and quick response once the market recovers. Overall demand and backlog remains stable across all regions, especially for automotive, industrial end markets. In terms of our end market, industrial represented 28% of Diodes product revenue, computing 23%, consumer 18%, communications 14% and our automotive end market reach a record product revenue. Our automotive and industrial end market combined totaled 45% of product revenue for the quarter, which is 5 percentage points above our 2025 target and about 40% for the fourth consecutive quarter. This further demonstrate Diodes’ ability to quickly adjust our capacity allocation from low-end PC consumer and smartphone segments to high demand end markets like automotive, industrial. Now let me review the end markets in greater detail. Our automotive market continued to be a highlight for both the quarter and the full year, setting revenue records for 10 consecutive quarter and growing 40% in 2022. Our consistent strong growth in this market can be contributed to our ongoing demand creation efforts, as well as market share gains across new and existing customers. Our design win momentum continues in our three application focused areas of connected driving; comfort, style and safety; and electrification. In connected driving, we continue to see increased interest for our USB type C ReDrivers, analog which is Diodes controllers, LDOs, DC/DC converters, Zener diodes and TVS in the real estate entertainment, ADAS, infotainment, smart cockpit, telematic and instrument cluster applications. We also saw increased designing for our video switches used in EP, DisplayPort and USB switches in telematic communication system by multiple customers. In comfort, style and safety, linear LED drivers and DC/DC converters were designed into next-generation LED lighting application. Our sensors business grew significantly driven by applications, including electronic steering, control lock, refueling covers, window lifters and water pumps. High-voltage switching Diodes and Zener Diodes also grew in the quarter, primarily in the air quality sensors and HVAC applications. Several of our SBR automotive products were designed into battery power electric vehicles and plug-in hybrid vehicles for automotive safety applications. We also secured a number of new design wins for USB charging controllers for in-vehicle USB charging devices. Lastly, in the electrification, our 32-bit IO expanders were designed into EV vehicles control unit and our TVS product designed into high-speed data line for in vitro display electric vehicles. Our production product also has strong growth in applications, including lean battery control, onboard diagnostic systems. Additionally, we ramped up our MOSFET product in multiple new applications across several different customers, while releasing a number of low voltage MOSFET product for the battery managed system and WiFi application. In our industrial market, revenue also set other record, representing the sixth consecutive quarter of growth. Our PCI Express 3.0 package switch continued to gain traction in industrial automation applications as they enable enhance the performance by connecting SoCs and CPUs to the endpoint. Additionally, our high-voltage industrial IoT devices experienced very strong demand for the smart electric meters. Similarly, our LED controllers stand up in the LED power supply for power industrial commercial LED lighting. And our industrial sensor business continued to gain traction in power tools, air conditions, DC motors and the washing machine applications. Additionally, we continue to secure design wins for our CIS product in AOI applications like battery film, PCB, wafer inspection and check scanners. Also our switching diodes, Zener diodes, fast recovery rectifier and LED drivers has been helping to support smart, efficient, green factory automation applications, including metering, industrial sensors, cameras, scanners, elevators and image processing equipment. Diodes SBR product also being widely used in Power over Ethernet, while MOSFET our traction in new power applications. In the computing market, despite the softness in low-end PC applications, our momentum for SBR, TVS, MOSFET and current monitoring product continued in the notebook and tablet designs. We secured numerous design wins for I3C switches, FM bus level shifters, analog switching, IO expanders and TVS in the cloud server protection application. Additionally, our EDP ReDrivers, EDP Max and 20-gigabit per second DP 2.0 ReDrivers are being adopted in the gaming notebooks and in graphic car applications. In the communication market, our USB type C audio switches, IO expanders, MOSFET and high effect [ph] switches continue to be designed into a series of smartphone devices, while our LED drivers were designed into mobile phone peripheral products, including wireless chargers. Also, our Schottky product was designed into 5G WiFi applications and we continue to see traction for our PCI Express clock buffers family in 5G CPE designs and TVS product in networking applications. Lastly, in the consumer market, we saw increased adoption of our 12-bit high-speed MOSFET embedded multimedia card modules and our current limit power switches continue to see solid demand from USB power applications in gaming consoles. Our 8.1 10-gigabit bidirectional retimers were also adopted in active cable applications and our TVS protection products USB switches, SBR CSP products and USB power delivery decoders were designed into security keys, sports cameras, next-generation television, wearables and portable, as well as war-mounted USB-C power socket application. In summary, Diodes achievement of record results in 2022 once again highlighted the ongoing success of our customer expansion initiatives, as well as our focus on product mix improvement towards higher margin products and end markets to drive increased profitability. Our significant expansion and growth in the automotive industrial end market is a direct result of the strategic actions. We look forward to further expanding our momentum and continue to progress in the coming year. Great. Thank you for taking my question. I am hoping you can review the channel inventory trends again. I think you mentioned it briefly in the prepared remarks, but I just want to -- I want to hear the clarification as to what happened in the channel in the quarter and what you expect will happen in the current quarter in distribution? Thank you. Hi, Will, this is Emily. Let me answer this question, right? So I did mention the channel inventory was up quarter-over-quarter. It is a little bit higher than our normal range at this moment. But with -- I mean, the main reason due to this change is actually a couple of things. We definitely see China softness during the COVID in the fourth quarter and then we also have an anticipation of recovery from some of the like 3Cs that we talked before, they started some of the channel inventory or inventory rebalancing for the last few quarters. So there’s anticipation of that recovery, as well as there’s a labor shortage during the Chinese New Year timeframe. So with all this dynamic situation combined, so we actually also strategically increased some of the channel inventory. So that way we can better support the customers last minute or demand change. Yeah. Sure. I think, automotive, we are still seeing a lot of strength overall. Also our pipeline continue to grow, our engagement continue to enrich. And if I just look at the whole year or quarter-over-quarter comparison, automotive is still a record quarter for us by the end of Q4, and if we look at the whole year, year-over-year growth still 40% plus, right? So that’s really, really exciting. And then for Industrial, I think, it’s a little bit mixed. There are certain end application softer than the others. We are also seeing some inventory rebalancing going on. But when we take everything together, I would say, still a really stable end market at this moment. And then computing, we talked about it, inventory rebalancing probably started beginning of Q3 last year, so we are still seeing softness going on, but we also, like I mentioned, there’s an anticipation of recovering, probably, in a quarter or two, right? Consumer, we are still seeing some softness, especially from the China market. And then on the communications side, on the smartphone, I think, still -- inventory rebalancing is still ongoing. But again, right, so once they get to a certain level, we do expect some recovery. It sounds like an ongoing -- it sounds like a similar trend in the coming quarter relative to what we have seen over the last quarter or two if we can, is that correct, we shouldn’t interpret any divergent performance or any pivot in Q1 relative to what we have seen in Q4? Yeah. So I would say, there’s no significant change from the end market point of view. But the key thing for us is continue to focus on our product mix improvement, right, continue to leverage our capacity to lower the support for the slow end market and focus supporting the strong demand end markets like automotive, as well as industrial applications, right? Hi. This is Joshua Buchalter on behalf of Matt. Congrats on the stellar results and thank you for taking my question. I wanted to follow up on Will’s question. So if I am understanding correctly, the channel is running above their typical 11-week to 14-week range and -- so I know you are taking factory loading down, but does that mean you are sort of comfortable running above the typical range for a little while in anticipation of the recovery, I just want to make sure I am understanding correctly? Thank you. Yeah. I think, Josh, I did mention a little bit earlier, right? There’s still a lot of dynamic situation going on with the labor shortage during the Chinese New Year, the softness due to the COVID, especially in China, as well as anticipation of some recovery probably around the Q2 quarter. So with all this combination of the situation, we are actually okay with the inventory channel inventory higher than our defined normal range. The other angle we look at is the quality of the inventory, right? So it’s not only about the number of weeks on the shelf, it is also the quality of the product on the shelf. So we actually feel very confident stand behind the numbers. Okay. Understood. Thank you. And I guess for my follow-up, I wanted to ask about gross margin. It’s down sort of only marginally despite two straight quarters of mid single-digit revenue declines and it sounds like it’s lower factory loadings as well. Can you walk through what’s driving so much resiliency in your gross margin line? Is it a mix shift between end markets or products, continued strength in the pricing environment, any color there would be super helpful? Thank you. Yeah. Definitely. It’s a really good question, right? So if you look at for the last few years, we really emphasize on two things. One is actually the total solution sales. The second thing is really product mix initiative or improvement overall, right? So we openly talk about automotive industrial is a key focus for us. And if you look at the results, right, I mentioned earlier, just on automotive, we achieved 40% year-over-year growth and then within the -- from 2013 to 2022, we combined the annual growth rate more than 30%. So definitely, it’s a great success and the consistency is actually definitely worth mentioning. I think with industrial, again, it’s actually our biggest segment by the end of Q4 is actually 28% of our total end market out of the products, right? So with the auto and industrial combined, based on the Q4 results, actually 45% of our total revenue, even with the whole year that actually represented 42%. So we openly talked about by the end of 2017, we provided a guidance for the segment is actually we want to achieve about 40%. As you can see, we have fourth quarter consistently above this target. So, again, this is a really good demonstration of the product mix improvement initiative. The other good example is actually Pericom product family, right? So we have been talking about the margin overall is really, really attractive, and again, we consistently deliver the growth of this market -- product segments, right? So with the combined, you can actually see even with the revenue guidance slightly down around seasonality for Q1, but our margin guidance 41% still significantly higher than our 2013 model that we established of 40%. So I hope you can actually see this is actually a really strong demonstration of our focus of product mix improvement. Of course, it coupled with our manufacturing efficiency, which is always the strength of the company. So I think with all combined together, we are actually confident that we are on the right track and right path towards our 2025 defined goal, which is $1 billion gross profit and $2.5 billion revenue model, right, so. [Operator Instructions] The next question comes from David Williams with The Benchmark Company. Please go ahead. David, your line is open. Once again, David, your line is open. Seeing no further questions in the queue, this concludes our question-and-answer session. I would like to turn the conference back over to Dr. Lu for any further closing remarks.

EarningCall_432

Good afternoon. Thank you for attending today's Alpha and Omega Semiconductor Fiscal Q2 2023 Earnings Call. My name is [Tamiya] [ph], and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions] Good afternoon, everyone, and welcome to Alpha and Omega Semiconductor's conference call to discuss fiscal 2023 second quarter financial results. I am Yujia Zhai, Investor Relations representative for AOS. With me today are Dr. Mike Chang, our CEO; Stephen Chang, our President; and Yifan Liang, our CFO. This call is being recorded and broadcast live over the web. A replay will be available for seven days following the call via the link in the Investor Relations section of our website. Our call will proceed as follows today. Mike will begin with strategic highlights. Then, Stephen will provide business updates and a detailed segment report. After that, Yifan will review the financial results and provide guidance for the March quarter. Finally, we will have the Q&A session. The earnings release was distributed over wire today, February 6, 2023, after the market close. The release is also posted on the company's website. Our earnings release and this presentation include non-GAAP financial measures. We use non-GAAP measures because we believe they provide useful information about our operating performance that should be considered by investors in conjunction with the GAAP measures. A reconciliation of these non-GAAP measures to comparable GAAP measures is included in the earnings release. We remind you that during this conference call, we will make certain forward-looking statements, including discussions of the business outlook and financial projections. These forward-looking statements are based on management's current expectations and involve risks and uncertainties that could cause our actual results to differ materially from such expectations. For a detailed description of these risks and uncertainties, please refer to our recent and subsequent filings with the SEC. We assume no obligations to update the information provided in today's call. Thank you, Yujia. Happy New Year everyone and welcome to today's call. It is good to speak with all of you again. Before I go over our results, I’d like to begin today by saying that I am proud to be speaking to you for the last time as the Chief Executive Officer of AOS. 22 years ago, I founded this company with a vision and a dream. While this vision never ends, today, we are one of the most successful and well-recognized fast-growing power semiconductor companies in the world. I am proud of all that we have accomplished together. It is with great confidence and pleasure that I now turn the Chief Executive position to Stephen, who has already demonstrated his leadership skills and business acumen since his appointment as AOS’ President two years ago, leading AOS to achieve record revenues and profitability. I want to thank each and every one of the AOS team for your dedication and hard work. It has been an honor to work alongside you and to see this company grow and thrive. Thank you all for the memories and the opportunities. We are in the midst of an incredible journey, and I am grateful for every moment that has led us to this point today. I will continue to be deeply involved in AOS as Executive Chairman and plan on focusing more on strategic matters such as key relationships with critical partners and customers of AOS and technology development essential to ensure sustained and long-term growth. Now, moving on to the results. Our fiscal Q2 results were below our expectations. Revenue was $188.8 million. Non-GAAP gross margin was 29.5%, and non-GAAP EPS was $0.67. Last quarter, we indicated that we expected an industry-wide inventory correction to impact us over the coming quarters, particularly in PCs and smartphones. However, the magnitude of this inventory correction for certain customers was larger than we expected. Inventory levels across many of the consumer markets that we serve remain high and our customers are working to bring supply chain inventory levels back into balance, as quickly as possible. As a result, we forecast March quarter revenue to be approximately $130 million, plus or minus $5 million. We expect to recover a good portion of the sequential decline in the June quarter and even more so in the second half of the year, especially with the re-opening of China. As we stated last quarter, our business is not immune to macro challenges and industry cycles. We have been through many of these cycles over the past 22 years and do not make decisions based on just a couple of quarters of data. Every cycle since the beginning of our industry has eventually ended and given way to a new leg of growth, and this one is no exception. We are confident that given our strong fundamentals, we are in the best position we have ever been to continue our growth momentum once this downturn is past us. Looking back on the year, calendar 2022 was one of the most successful years in our history, despite many challenges. We set records across almost every metric. Revenue was a record $794 million, up 9% year-over-year, and non-GAAP earnings per share was a record $4.16, up 5% year-over-year. Further, we closed the year with record Tier 1 customers and the market share across most product segments. In our two largest product segments, PC and Smartphones, we grew significantly faster than the market. This was due to our success in gaining market share, increasing BOM content, and deliberately improving our product mix towards more premium tier products. Further, gaming was an outstanding success for us in 2022. We won leading share with the Number 1 gaming console manufacturer and this business for us more than doubled year-over-year and is now a major revenue contributor for AOS and is expected to continue to grow even in a weakening consumer demand environment. These are just a few examples out of many achievements that demonstrate our fundamental strength, and the competitiveness of our products, and the [traction] [ph] that we have gained. Stephen will provide more details during his section of the call, but our business has never been stronger, which is why I am confident that our outlook is largely due to macro-economic factors rather than anything specific to fundamentals. As channel inventories are consumed and the broader economy recovers, we expect to see a rebound in revenue. In closing, demand for more and better power management is being driven by what we call “the electrification of everything.” We believe this tailwind is here to stay and we are in the best position we have ever been to continue to win in this market. We exited 2022 with a strong balance sheet, which enables us to navigate the current economic environment while keeping our eyes on achieving our $1billion annual revenue target in the next couple of years. Thank you. I will now turn the call over to our future CEO, Stephen for an update on our business and a detailed segment report. Stephen? Thank you, Mike, and good afternoon, everyone. Overall, I'm very pleased with the performance we achieved this past calendar year, and we delivered it while navigating a very challenging business environment with disruptions from China’s zero COVID restrictions, global supply chain constraints, and significant inflationary headwinds. Despite all of this, we achieved record revenues across all of our segments. Our calendar year 2022 Computing segment revenue increased 5.9% year-over-year to $332.6 million. Consumer grew 13.4% to $173.6 million. Communications increased 23.9% to $125.7 million, and our Power Supply and Industrial increased 7.8% to $155.5 million. These results were made possible by our record Tier 1 customer partnerships and market share, as well as a much more diversified total solutions product portfolio that’s serving a broader set of end markets, across consumer, commercial, and industrial use cases. While our near-term outlook and general market sentiment indicate a significantly weaker demand environment and inventory correction for 2023, we believe there are a couple factors that make us uniquely positioned to benefit on the other side: One, a good portion of the slowdown that we are experiencing is driven by our Tier 1 customers where we have leading share. However, our sockets and BOM content in their devices remain unchanged and our relationship with these customers are the best it has ever been. These customers are the leading device makers in their categories in the world and demand for their devices over time has only grown. This is why we are confident that this slowdown we are experiencing will be behind us as demand for these premium products are certain to come back once inventories are more normalized. Two, to strategically navigate the current environment, our focus will be on stabilizing spending where we can, while continuing R&D investments to drive market leadership and have leading products once the market returns. In addition, we are accelerating our development in new growth areas such as data center, infrastructure, industrial, and automotive applications. For example, we recently expanded our Silicon Carbide portfolio to include 650V and 750V Silicon Carbide MOSFETs for on-board car charging, traction inverters, and infrastructure applications. Our industrial, renewable energy, and automotive customers will now have a broader portfolio available to select the right solution that supports their wide range of product power levels at an even higher performance and efficiency level. Let me now cover our segment results and provide some guidance by segment for the next quarter. Starting with Computing. December quarter revenue was down 27.3% year-over-year and 28.4% sequentially and represented 33.8% of total revenue. Looking back on the year for our PC business more closely, our PC shipments grew in the first three quarters of the year, but demand dropped off rapidly in December quarter as our customers aggressively reduced inventories. Even with this significant drop, our full-year PC revenue was up 3%, compared to a 20% decline in PC units according to Digitimes. This was due to our success in gaining share, increasing BOM content, and deliberately improving our product mix towards more premium tier products. Based on our conversations with customers and latest demand forecasts, we expect some of our customers’ inventories will be depleted in the March quarter, and they anticipate resuming orders for the June quarter, which will help to recover some of the significant March quarter decline ahead of peak season. In December quarter, there were some notable areas of strength in our Computing segment, particularly data centers as this area showed significant growth year-over-year with the adoption of our high performance low and medium voltage MOSFETs by leading Cloud providers. In addition, graphics cards, and tablets continued to be strong. Looking ahead, in the March quarter, we expect total Computing segment revenue to be down about 30% sequentially as we actively work with our customers to right-size their inventory. Turning to the Consumer segment, December quarter revenue once again set records increasing 21.3% year-over-year and 4.2% sequentially and represented 25% of total revenue. These results were in-line with our expectations driven by record gaming volumes, which grew 222% year-over-year and 19.5% sequentially. Looking ahead, we anticipate our Consumer segment to decrease mid-single-digits sequentially driven by a seasonal slowdown in Gaming shipments after a very strong December quarter. Now, let’s discuss the Communications segment, which also set record quarterly revenue as it increased 38% year-over-year and 12.4% sequentially and represented 18.7% of total revenue. These results were significantly higher than our expectations due to stronger than anticipated shipments to the Number 1 U.S. smartphone customer, as well as to China. For the full-year 2022, Smartphone revenue grew 24% year-over-year, despite an estimated 11.6% decline in global smartphone shipments as estimated by Digitimes. Our growth was driven by share gains in the premium tier smartphone models. This is due to our ability to serve the high-end market with our high-performance battery protection products, as well as strong partnerships with our customers. In the March quarter, we expect this segment to face a steep correction of about 45% sequential decline as we help our customers normalize their inventory levels after two quarters of record shipments that didn’t fully sell-through to end consumers as a result of lower discretionary spending due to inflationary headwinds and China zero-COVID restrictions. Internally, we expect our smartphone business to start to recover in the June quarter in preparation for the September quarter peak season. China’s reopening is also a welcome development that should improve consumption. Now, let’s talk about our last segment, Power Supply and Industrial, which accounted for 21.8% of total revenue. This segment also set records with revenue up 9.3% year-over-year and up slightly sequentially. The increase was due to share gains in quick chargers at the leading U.S. phone maker and growth in PC power supplies and gaming adapters. For the March quarter, we anticipate this segment to decline around 30% sequentially, due to the inventory correction. In closing, while we are experiencing a temporary slowdown, inventory corrections and market cycles are ultimately healthy for our industry. Calendar 2022 was a record-breaking year for us, with record revenues, earnings, and leading market share with a record number of Tier 1 customers. We enter 2023 with many strengths: a growing product offering, cutting-edge R&D and promising technology roadmaps, diverse manufacturing capabilities, and strong relationships with strategic customers. As the newly appointed CEO, I am focused on leading AOS forward and am confident in our ability to continue growing at a faster rate than the overall market. We will maintain and execute our successful strategies while also investing in new growth areas such as data centers, automotive, infrastructure, and industrial. With that, I will now turn the call over to Yifan for a discussion of our fiscal second quarter financial results and our outlook for the next quarter. Thank you, Stephen. Good afternoon everyone and thank you for joining us. Revenue for the quarter was $188.8 million, down 9.5% sequentially and down 2.4% year-over-year. In terms of product mix, DMOS revenue was $137.6 million, down 4.8% sequentially and up 2.3% over last year. Power IC revenue was $50 million, down 19.8% from the prior quarter and down 10.1% from a year ago. Assembly service revenue was $1.2 million, as compared to $1.6 million last quarter and $3.3 million for the same quarter last year. Non-GAAP gross margin was 29.5%, compared to 35.4% in the prior quarter and 36.7% a year ago. The quarter-over-quarter decrease in non-GAAP gross margin was mainly driven by less favorable product mix and an increase in inventory reserve, reflecting the ongoing industrywide inventory correction. Non-GAAP operating expenses were $32.8 million, compared to $36.6 million for the prior quarter and $33.5 million last year. The quarter-over-quarter decrease was primarily due to lower variable compensation accruals this quarter. As such, non-GAAP quarterly EPS was $0.67 per share, compared to $1.20 last quarter and a year ago. Moving on to cash flow. GAAP operating cash flow was $0.3 million, which included $12.2 million repayments of customer deposits. By comparison, operating cash flow in the prior quarter was $36.7 million, which included $3.3 million net repayments of customer deposits. Operating cash flow a year ago was $50.8 million, which included $11.2 million net customer deposits. We expect to refund around $30 million customer deposits in calendar year 2023. Consolidated EBITDAS was $31.8 million, compared to $45.5 million last quarter and $46.7 million last year. Let me turn to our balance sheet. We completed the December quarter with a cash balance of $287.8 million, compared to $316.1 million at the end of last quarter. The cash balance a year ago was $269.3 million. Net trade receivables were reduced to $53.2 million, compared to $55.8 million at the end of the prior quarter. Days Sales Outstanding for both the December quarter and last quarter were 30 days. Net inventory was $163.8 million at quarter-end, slightly down sequentially from $164.9 million last quarter and up from $129.1 million last year. Average days in inventory were 109 days, compared to 106 days in the prior quarter. Finally, Property, Plant and Equipment was $351 million, up from $339.5 million last quarter. The fixed assets balance a year ago was $196.7 million. CapEx for the quarter was $28 million. We expect CapEx to drop to $20 million to $25 million level in the March quarter. Our Oregon fab expansion is expected to start to ramp in March 2023. Now, I would like to discuss March quarter guidance. We expect revenue to be approximately $130 million, plus or minus $5 million. Our guidance factors in the ongoing industry-wide inventory correction and the seasonality for the March quarter. GAAP gross margin to be 22.5%, plus or minus 1%. We anticipate non-GAAP gross margin to be 24.5%, plus or minus 1%. The quarter-over-quarter decrease mainly reflects the impact of the expected product mix changes and lower factory production absorption due to the current inventory correction. GAAP operating expenses to be in the range of $45.5 million, plus or minus $1 million. Non-GAAP operating expenses are expected to be in the range of $35.5 million, plus or minus $1 million. Interest expense to be approximately $1.2 million, and income tax expense to be in the range of $1.3 million to $1.5 million. Hey, good evening and thanks for taking the question. I guess, first off, Stephen, congrats on the transition, it’s great to hear and looking forward to hearing more from you there. Secondly, I guess, maybe if you could talk about the confidence that you have in the recovery for the revenues in June and I know you gave some color there and talked about a few things, but it sounds like you're expecting a much larger, kind of rebound in June. And I guess I'm just curious as to what's giving you that type of confidence? Sure. For us, we do think that there's a good chance that March quarter is a bottom and that we are seeing some signs of recovery for June. This is why we give guidance for that, but largely, it will also depend on the overall macro environment, but in general, in a normal seasonal year, we are tracking towards peak shipments in the September quarter for some of our end markets. We're still from a market share position still positioned for that. Even if you see the portion that’s seeing the more severe inventory correction, but what we find is that different customers have different levels of inventory and some of them are already starting to place some replenishment orders for the June quarter. So, this kind of indicates some stabilization even for the PC market. That's kind of the bigger impact. So, of course, we are closely working with our end customers not only in PC, but in other markets to right size their inventory levels. Okay. That's very helpful. Thank you for that. And then how much of the revenue guidance do you think and thinking about that rebound in June is related to maybe a recovery in China versus just more broad based demand recovery? That can help certainly. The opening of China will not only affect the consumer spending within China, but also impacts a lot of our global customers who also have a good portion of business being purchased by China consumers. So that can help too. And so, yes. Okay. All right, fantastic. And then Yifan one for you maybe, on the gross margin side. Just kind of curious if you could give us an idea of the volume versus mix impact there. And then where do you think this kind of stabilizes? I felt that margins would be maintained a little bit higher even in a more negative environment, but maybe just discuss some of the puts and takes there and what are the biggest headwinds that you think you're facing today and how those maybe recovered through the year? Sure. In the December quarter, I mean, margin got impacted primarily by the inventory correction. And I mean this bigger portion of it was because of the product mix. And to a smaller portion was because of inventory reserve increase, which is also tied to the inventory correction in the March quarter, especially. For the March quarter, yes, we are seeing some product mix and factory utilization because of the top line decline. So, we are also scaling back our production. So, I mean, both product mix and [utilization] [ph] basically contributed to the March quarter's margin changes. Yes. Thanks for taking the question. And just to start, Mike Chang, congratulations on all you accomplished while CEO, you built a great company. And Stephen will look forward to staying in touch with you on these calls and other events. Stephen, I wanted to go back to an earlier question and just maybe frame it a different way. If you looked at your [different end markets] [ph] and as you look out to the fiscal fourth quarter, calendar second quarter and if you were to rank them by confidence in which could rebound most materially from potential lows here in the March quarter, how would that ranking look, and any color around that would be helpful? Sure. I would also point to computing as the greatest potential to grow in that quarter. Again, we're not giving specific guidance, but this is a – that is a segment that we saw the most inventory correction and the level that that's at now is not – is definitely in the inventory correction territory. And we believe that as I mentioned that there are some signs of that already starting to recover for that fiscal fourth quarter. So, I think that segment itself has no more room to recover, but the other segments also have opportunity to grow too. We're still working towards the peak seasons for smartphones. And the fourth fiscal quarter will be usually the ramping time to prepare for that. And then the power supply also tends to follow after – follow along with the competing segment. A good portion of the business are the [PD adapters] [ph], and power supplies for computing. We also noted in our earnings release that we believe that gaming within consumer is seasonally low. So, there's expected to be recovery starting from the fiscal fourth quarter as well. Okay. So that was compute, [comps] [ph] ahead of product cycles, the PC part of industrial power and then other gaming part of consumer, did I get that right, Stephen? Yes. Okay, great. All right. So, moving on to a related question. Yifan, if we see a recovery in revenues maybe back towards, but not quite to levels that we saw in the fiscal second quarter, can gross margins move commensurately or will there be, kind of a delay just given the way things could flow through inventory? How quickly can a change in revenues translate into a change in gross margin? All right. Yes, I mean, we would expect some recovery in the gross margin line once we have top line recoveries. So, I mean – but the relationship right now is hard to say. I would say, I mean, depending on the product mix and the utilization also, which tied to the inventory, both our own inventory and channel inventory. So, by-and-large, I would expect that you had some recovery for the gross margin line. Got it. And are you – how is pricing holding up out there? I imagine relatively good at your Tier 1s because those are longer-term agreements, but are you seeing competitors now that foundry capacity availability is loosening up? Are you seeing some of your competitors get more aggressive with pricing? How should we think about the ASP dynamic over the course of this calendar year versus what you saw last year? Yes. I mean in the last couple of years, yes, it was pricing wise and it was favorable pricing environment. I mean, now we are in inventory correction mode. So, we would expect some ASP erosions [in the impact] [ph]. I would expect again for the calendar year 2023 [price erosion] [ph] that probably didn't back to normal or even worse than historical trend. Okay. And is normal a few percentage points or how should we think about normal levels since it's been 2 or 3 years since we have that? Yes. I mean, before – back to the years, before 2 to 3 years. And then I mean traditionally we'll be in the high-single-digit per year basis. But only for those same products and then I mean if you sell your same products year-over-year, yes, and we would expect some erosion there, price erosion there. The name of the game is and we rolled out new products and then we reset ASP and that's meant by providing more efficiency or more functionality than I mean, that's the R&D new products out for. Absolutely, yes. I think you have a history of getting about 100 new products out a year, which does exactly that resets the price point, so totally get that dynamic. Lastly, at least in my model, operating expense came in quite favorable versus what I expected. Is that mostly tactical belt tightening or are you doing anything structurally to reduce OpEx even as you push ahead with various product programs, including the things you talked about in automotive? OpEx for the December quarter, it was largely because of the variable compensation of [COGS] [ph], because certain guidance performance for the December quarter was not up there, so then we reduced an overall calendar year 2022 variable comp. Yes, good afternoon, and let me also add my congratulations to both Stephen and Mike in your newer changing roles. I guess the first question I have is in terms of the linearity in the quarter, as well as the performance in March quarter, you know it sounds like orders took kind of a pretty meaningful pause and kind of especially in the last month or two. Can you give us a sense of or just more color into how things shaped out as you move throughout the end of last year and into this year? And also, any update on it in terms of the churns business that you’ve done? What it was in prior quarters and where it might be the next few quarters? Thank you. Sure. Let me address the first part, and maybe Yifan can address the second part, but essentially we did see a further slowdown in the macro picture since the last time we talked on the earnings release. And this is coming mainly from PC and smartphones and both, kind of consumer type of products and tied to the overall inflation and reduce, kind of personal spending. And this adjustment was seen throughout the supply chain [indiscernible] through the OEM, ODMs. There was a more significant adjustment to the changing demand. So, the last few years, we were quite strong in demand in this overall industry. So, it will take some time for some of our customers to unwind from that and to right size their inventories. So, that's mainly affecting those particular areas in the end markets. I want to reiterate again that our products and our position and our customers are still strong. We're happy to have them forge stronger relationships with Tier 1 customers. And this is very important especially during this time to protect our share and, as well as very importantly getting us positioned for when the market rebounds or for their next versions of products. So, we have to deal with the overall industry slowdown, but our positions and our customers are still better than good work in previous years. Yes, Jeremy, regarding your question on current business. Yes, I mean, this current business right now is pretty dynamic and then I mean this is depending on backlog and market situation. Yes. And then we are pretty involved and then the dynamic and so we catch whatever than we can, but on the other hand and yet we do have production cycles there. And then I mean that's – if we happen to have inventory on hand, and then yes, we can serve, but the [indiscernible] the thing is that we cannot grab all the current business as we want. Thank you. That's very helpful. Maybe you find a bit more clarification. Maybe another way to ask the [churns] [ph] question would be to, you know ask how much of the backlog, how much of the outlook is currently in backlog and also, you know as we talked, as you mentioned a little bit about seeing a potential rebound in the June quarter, what your lead times are like? Are customers facing orders much further beyond that? And finally, on this topic, can you give us any clarity into how cancellations have changed or looked relative to the past couple of quarters? Thank you. Sure. And then, I mean the backlog, yes, in the December quarter, we did experience more backlog adjustment than a normal quarter and some push out [in cancellation] [ph] replacement. And then I mean a lot of the product mix changes and shuffling there. Overall backlog level decreased, reflecting the industry-wide inventory correction. Yes. And then I mean that's the thing. So, I mean, overall, yes, for the March quarter, our backlog already has been reflected in our guidance. For the June quarter, as Stephen just commented on, we saw some sign of recovery and some customers started placing some orders for the June quarter already. So, we'll see. Got it. Okay. And maybe if I could turn to, you know, touch back on the utilization. Can you give us where the utilization currently is now and where was last quarter? And also, what kind of flexibility you have in terms of switching capacity between your internal capacity and your foundry or and your JD partnership? Are there, you know, contracts or obligations that you may have to [indiscernible] on the supply side there or can you bring more [internalist] [ph] if needed? Thank you. Sure. Nationwide is, we have our own fab in Oregon. And I mean our priority is to utilize our internal fab first, yes. And that's where we developed most of our new products. So, naturally, I mean, right now the Oregon fab is still running at a pretty high level of utilization. Even for the portion, we expect to come online for the expansion in the month of March, we expect to start a ramp up Oregon fab. So, for the expansion portion, actually, yes, we actually – we have demand to portfolio. So, I mean, that's – right now, it's kind of a pretty dynamic in that. I mean, the product mix changing quite a bit. For the back-end, again, we do have some lower utilization. I mean, we also use joint venture and third-party foundries and subcontractors to – or do as much as we can load our own factory first, but sometimes it's pretty hard to switch between a quarter or two. So, this is kind of a pretty dynamic right now. Got it. Thank you. That's helpful. And I guess just turning to the balance sheet, how much can you give us – how much customer deposits you have remaining? I think from what I've understood, you have about 98 million in the September quarter. You repaid about 3 million of that in the prior quarter and 12 million of that this past December quarter. So, do I have that right, that there's about 80 million left in the customer deposits? Okay. And I guess how do you expect those deposits to be worked through? Was the repayment this time around? Is it as you fulfill some of the capacity arrangements or are they saying they don't need as much capacity? And kind of taking some of the deposit back? Is that is – can you just give us clarity in terms of the dynamic there? Yeah, those – typically those deposit earmarked with certain level of purchase. And then as I mentioned in the script, we expect about a $30 million in repayment in calendar year 2023. Got it. Okay. And on the internal inventories, do you have a – I know that [indiscernible] was a little bit up this quarter. Next quarter, inventory dollars are flat. These are the maturity to kind of get to the [1, maybe low 150s] [ph]. Do you have, kind of a target that you want to keep inventories at and where you're comfortable holding? Thanks. Well, right now [indiscernible] adjust according to the market situation. And I mean we expect a June quarter rebound to some level and then the peak season normally in second half of the year yet and we do need to balance out [Technical Difficulty] capacity can support the second half of the year. So, then we'll see that. I mean, largely it's probably maintain in that level, current level. This is Mike Chang. I do want to thank each one of you for your support and be with me through all these years thick and thin. I really appreciate that. [Recession gap] [ph] is not a good thing. Unfortunately, this [indiscernible]. And it comes and goes, and I'm sure it will end soon. The important thing which is, I believe or we believe is technology. That's long-term. In the last three years, AOS take advantage of the available cash, we gradually [keep-up] [ph] our R&D in both capability, as well as dynamic with a lot of good things or exciting things there and waiting to really shine. So, we are very, very confident for tomorrow. And thank you [indiscernible] for your support and wish you all the best. God bless.

EarningCall_433

Good day, and welcome to the EastGroup Properties, Fourth Quarter 2022 Earnings Conference Call and Webcast. 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 thanks for calling in for our fourth quarter 2022 conference call. As always, we appreciate your interest. Brent Wood, our CFO, is also on the call this morning and since we will make forward-looking statements, we ask that you listen to the following disclaimer. Please note, that our conference call today, will contain financial measures such as PNOI and FFO that are non-GAAP measures as defined in Regulation G. Please refer to our most recent financial supplement and to our earnings and Press Release, both available on the Investor page of our website, and to our periodic reports furnished or filed with the SEC for definitions and further information regarding our use of these non-GAAP financial measures and a reconciliation of them to our GAAP results. Please also note that some statements during this call are forward-looking statements as defined in and within the Safe Harbors under the Securities Act of 1933, the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements and the earnings press release, along with our remarks are made as of today and reflect our current views about the company’s plans, intentions, expectations, strategies and prospects based on the information currently available to the company and on assumptions it has made. We undertake no duty to update such statements or remarks whether as a result of new information, future or actual events or otherwise. Such statements involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially. Please see our SEC filings, included on our most recent Annual Report on Form 10-K for more details about these risks. Good morning. I’ll start by thanking our team for a strong quarter and year. They continue performing at a high level and capitalizing on opportunities in a fluid environment. Our fourth quarter results were strong and demonstrate the quality of our portfolio and the continued resiliency of the industrial markets. Some of the results produced include, funds from operations coming in above guidance over 12% for the quarter, and almost 15% for the year, well ahead of our initial forecast. This marks 39 consecutive quarters of higher FFO per share as compared to the prior year quarter, truly a long term trend. Our quarterly occupancy averaged 98.4%, up 110 basis points from fourth quarter 2021 and at year end, we're ahead of projections at 98.7% leased and 98.3% occupied. Quarterly releasing spreads were robust at approximately 49% GAAP and 34% cash. For the year, releasing spreads were also a record 39% and 25% GAAP and cash respectively. Cash, same store NOI reached 8.7% for the quarter and 8.9% for the year, and finally I’m happy to finish the quarter at a $1.82 per share in FFO and the year at $7 per share, up 14.9% from 2021’s record. Helping us achieve these results is thankfully having the most diversified rent role in our sector with our top 10 tenants fallen to 8.6% of rents. In summary, I’m proud of our 2022 results. Statistically, it was our best year on record, while the majority of the year was marked by economic uncertainty and capital market dislocation. We continue responding to the strength in the market and user demand for industrial product by focusing on value creation via raising rents and new development. I’m grateful we ended the year 98.7% least, with the rent growth more geographically widespread in 2022, creating our record results. Another indicator of the market strength was our average annual occupancy of 98%, setting another record. And as we've stated before, our developments are pulled by our market demand within our parks. Based on our read through, we're forecasting 2023 stocks of 330 million. In 2022, we delivered 19 developments, 18 of which are 100% leased. And even when including value add acquisitions, the weighted average return was 7.1%. Last year's successes aside, we continue to closely watch demand with the goal of a balanced fluid response pending what the economy allows. Given this capital market volatility, we are taking a measured approach towards new core investments. We're also carefully evaluating development sites given the level of demand and the longer time frame often required to place sites into production. Good morning. Our fourth quarter results reflect the terrific execution of our team, strong overall performance of our portfolio and the continued success of our time tested strategy. FFO per share for the fourth quarter exceeded the high end of our guidance range at $1.82 per share and compared to fourth quarter 2021 of $1.62 represented an increase of 12.3%. The outperformance continues to be driven by multiple factors, particularly rental rate growth and the successful pace of our development conversions. From a capital perspective, macroeconomic concerns have caused the stock market to decline, including our share price, and as a result we only issued 75.4 million of equity during the year apart from the Tulloch acquisition in June. Virtually all of that issuance occurred in the first quarter of 2022. We have been intentionally deleveraging the balance sheet over the past several years, placing ourselves in a position to pivot to debt proceeds for capital sourcing. During the fourth quarter, we closed on the private placement of two senior unsecured notes totaling a $150 million. One note for $75 million has an 11 year term and interest rate of 4.9% and the other $75 million node has a 12 year term and interest rate of 4.95%. In January 2023 we closed on a $100 million unsecured term loan with a seven year term and an effective fixed interest rate of 5.27%. Also of note, in January 2023, we successfully expanded the capacity of our unsecured bank credit facilities from $475 million to $675 million. We remain conservatively drawn on the revolver. This step was taken simply to provide additional capital flexibility in a volatile market. As a reminder, the company does not have any variable rate debt other than the revolver facilities, and our near term maturity schedule is light, with only 115 million scheduled to mature through July 2024. Although capital markets are fluid and rose in cost, our balance sheet remains flexible and strong with healthy financial metrics. Our debt to total market capitalization was 22.4%, annualized debt to EBITDA ratio is 5.1x, and our interest and fixed charge coverage ratio is at 8.8x. Looking forward, FFO guidance for the first quarter of 2023 is estimated to be in the range of $1.75 to $1.83 per share and $7.30 to $7.50 for the year. The 2023 FFO per share midpoint represents a 6% increase over 2022. Some of the notable assumptions that comprise our 2023 guidance include, an average occupancy midpoint of 97.2%, cash same property midpoint of 6%, bad debt of $2 million, $330 million in new development starts, common stock issuances of $100 million and issuing $350 million in unsecured debt, which will be offset by $115 debt repayment. In summary, we were very pleased with our record setting 2022 results. Thank you, EastGroup team members that are listening to the call. As we turn to page to 2023, we will continue to rely on our financial strength, the experience of our team and the quality and location of our portfolio to maintain our momentum. Thanks, Brent. As Brent said in closing, I’m proud of the results our team created, and we're carrying that momentum forward. Internally operations remain historically strong. That said, the capital markets and overall environment remain unstable, and will never fund to experience a couple thoughts that may prove helpful. First, the industrial market has been red hot the past few years. So some settling of the market we view is healthy for sustained positive environment. Secondly, this is leading to a marked decline and development starts. As a result, we expect construction costs to decline later in the year and a drop off in new supply. In the meantime, we'll work to maintain high occupancies while pushing rents, and longer term I remain excited for EastGroup's future. There are several long term positive secular trends occurring within the last mile shallow bay distribution space in Sunbelt markets that will play out over years, such as population migration, evolving logistics change, on shoring, near shoring, etc., which we are well position for. Good morning, everyone. Maybe Brent or Marshall, I just want to kind of go through some of your underlying assumptions in same store here, and as it filters into FFO. I guess you guys have the same store side are baking in a little bit of a deceleration, but it seems like, you guys have 50 to 75 basis points in there of a bad debt reserve, which you guys haven't really recognized much of in the past few years. But, could you go through some of the other puts and takes, maybe from what you're assuming from market rent growth or an embedded mark-to-market, at least on the 2023 role, and whether you know the occupancy fall off that you have, if you're starting to see the seasonal decline in 1Q or if this is really just a placeholder, but just in case given Marshall, you know your commentary about the uncertain macro environment. Hey, good morning, everyone. Good morning, Craig. Yeah, it's - I hate to call it a placeholder. We do as a reminder to build our budgets from the ground up. So we literally go with the guys in the feed space by space, on leases that are going to roll this year or vacancies, make those assumptions, roll that up. You know there's some tweaks made to that, but that did produce the 97.2% occupancy. It's more challenging than you might think to go through your portfolio and try to scrub it to a 98% number, just as you go space by space to 97.2% as you're looking at it individually it feels very full. But you know looking back a year ago, we did guide to a 97% flat occupancy and the same store about 5.6%. Of course, thankfully we were able to accomplish a 98% occupancy, which lifted same store to an 8.9% on a cash basis. So certainly, if occupancy were to beat and get back, maintain that 98% range, you know certainly we feel like we could equal more to last year. We just – you know in the front end of things, we just didn't, I guess you would say, stretch or pull that number from 97.2% to 98%. It's not specific to a large tenant or two. We probably didn't push overly hard on our rent assumptions during the year in terms of new and renewal activity, but - so, that's we hope there's upside. I’d point out too just to the group as well Craig that we make a lot of California add to our NOI last year, which we are excited about. I think that'll be a tailwind to future same store growth or just a reminder that, for example, that large Tulloch acquisition we made last summer, of our 7.6 million feet that we held in California at 12/31. There's 2.9 million feet of that or about 38% of that that's not in the ‘23 same store calculation. So again, that will make its way in once we have full calendar year comparisons for that part of the portfolio, but – so you know I would say as we typically do, the grid, the assumptions we give and provide, those are basically the assumptions that produced the midpoint, in this case the 740, which was right basically on consensus. Certainly we can do better than those which we hope to do then certainly there's upside there, but. Sure. Hey! Good morning, Craig. And I agree with Brent. I would say if it's helpful, and usually we've been, thankfully to the low side the last few years in a row, we've been projecting kind of a reversion to the mean in terms of bad debt and occupancy, and we've been wrong the last few years. So we have occupancy coming down. We've got bad debt. If we're heading into a recession this year, which many people think we do, going back to kind of a historical comp. Last year we were under 140,000 in bad debt, so we've been fortunate. I know we get questions about smaller tenants and credit. In the last couple of years, we've had very minimal bad debt thankfully, but we've got that budgeted in. So well again, I hope we get a chance to beat it during the year. Really this year our, I can say our occupancy and percent leased through yesterday is pretty similar to where we ended the year. Surrounding, call it 99% leased, 98% occupied, the team in the field is still pretty content, you know like I said robust, people out touring space, kicking tires all along the process from tourists to leases out and things like that. So we don't have any thankfully known - large known move outs this year or anything like that we're worried about, but we just keep thinking, okay, last year was a record high occupancy for the company that we may go down from that. But we've got pretty good - we've got good embedded rent growth. Thankfully last year we saw that expand in California. We've had strong releasing spreads, but Florida and Arizona were both north of 40% GAAP releasing spreads last year and that doesn't feel like it's slowing down, and then if I jump ahead 12 months, we really saw supply and especially shallow base supply stop when the capital markets got so unstable. So many merchant developers are on the side lines. So when we think as the supply pipelines kind of continue to drop each quarter, there's going to be a lack of new supply. So if we can hang on to this occupancy, you know hopefully a year from now or even more bullish assuming the economy and our tenants can just hang in there. So that's a lot of info for one question, but I hope that's helpful. It is. I just wanted to circle back, because I know you guys don't kind of come up with a portfolio market-to-market per se, but are you assuming at least in guidance on the roll up that the blended mark-to-markets on the cash and GAAP basis for ’23 expirations are pretty similar to ’22 or is there a delta one way or another? It's probably – you know we – the guys in the field as Brent mentioned, they'll budget each space. So if you said, what do you think, it feels like the mark-to-market, I'm expecting the last – this is on a GAAP basis. The last couple of years we've been low 30s and then high 30s. It feels like we'll continue. Assuming the economy just stays okay and doesn't retreat, that will match those numbers in terms of budgeting. They've probably budgeted a little bit light. We typically budgeted a little below where actual comes in. So they put the numbers on each suite. But I think in terms of our mark-to-market it was interesting, and I think that's more of the mix. We had a stronger fourth quarter than some of our peers, where they deteriorated and I think the market continues to move up. I’d even say for our peers, it was probably more of a mix of who had what leases and where they were in fourth quarter. It's a better measure over a longer period of time. But our mark-to-market is still solid, and it should look – I would expect ’23 to look similar to ’22 does in terms of our ability to push rent so far in the year. And then just turning to the development starts, you guys are flat year-over-year, and I know it’s an incremental build out of parks. I mean is – can you kind of break out how much of that may be Build-To-Suit because people are running out of space and need more versus maybe tenant inquiries that make you feel comfortable? I know at 98% occupied, you basically have zero inventory, but just you know as we think about risk mitigation, how that stacks up? Good question. I think maybe that's one difference from our peers. Almost all – we'll do a few Build-To-Suit or a pre-lease is probably more, but it's really all spec development. That said, if I use just Texas for example, just over a third of our development leasing is existing tenants. So whether it's tenants within the park or some buildings we have around the corner. So we're, as you mentioned at 99% leased we've always said, look, if we don't supply that space, and we do. A lot of the tenant retention we lose as we were able to accommodate someone's growth needs or have the right space in a quick enough time period. So an awful lot of that will go to tenants within our portfolio, but in terms of pre-leased buildings. At this point there's not many, although we've got a number of conversations, we've had more and more single tenant, single tenants take a multi-tenant building. So that's moved us more quickly through the park where some of them will come along and say, we'll take the entire building and then we're trying to move fairly quickly to the next building. The team in the field feels pretty strong about the 330 million. That was really where we felt coming out. But again, I hope that's a number. If the economy can stay okay, they would probably lower on rents than the market, and they are probably higher than the 330 million if we let them roll it off just on their own without kind of trying to throttle it back a little bit, and then some of our challenge right now is just the capital markets. So it's been a disconnect since second quarter last year. The market is so strong, but debt costs are higher and our stock prices moves around every time the Fed seems to meet or Chairman Powell speaks, our stock price jumps. So some of that challenge is probably more stress on Brent than it's been historically. And just on that point, I know I'm over the two question limit, but if your equity price is not where you want it to be, Brent, as you look out to the end of ‘23 or ‘24, kind of your pro forma run rate on EBITDA with mark-to-markets and development deliveries? How much could you fund purely with debt without moving your leverage ratio beyond where you guys are comfortable? We could fund you know what we need to do this year with debt and keep our debt to EBITDA in a very good manner, I'd say mid five or better and our goal has been throughout this to say we wanted it to always maintain a five handle and we really haven't pushed it on an annualized run rate basis. We haven't really pushed near that. But you know the equity has bounced back here recently, so if we could maintain that I think. You know we talk about debt and equity issuance in our guidance table, but I would say those are a couple of the most probably fluid numbers in the entire budget. And what I mean by that is we know we need capital and you begin the year and you plug something in. But the budget certainly won't dictate what we do when what we’ll do will be based on availability. And so, equity, our price is improved. So if we’re to maintain that, I could see us being much heavier on the equity issuance and lighter on the debt side. But to your point, if we had to go purely from a debt perspective, we could. You saw in the release, we added 200 million to our revolver capacity. We've always been a pretty light user of the revolver in terms of not maintaining a large balance, and we still want to keep that sort of prudent approach to keep plenty of dry powder so that we don't have to have any knee jerk reactions to market conditions, but that just gives us more leeway too. So yes, I feel long term interest rates for us in terms of long-term potential debt have – they are still high, but they've come down some from the peak. Like I said, equity is more attractive. So I'm more optimistic right now about our capital sourcing and the price of it than say three months ago. Hey! Good morning down there. You guys have a track record of always coming out with very conservative guidance. Marshall, over the past few years you've talked about reversion to historic just given the outperformance of the portfolio. And this sounds a lot like it, and given the interest rates, given the issues that we've seen, headlines with the economy, you have exposure to like housing markets like Phoenix, you have exposure to California. I mean you have exposure to a number of markets that conceivably would see some headwinds and yet nothing in your commentary and nothing on the credit that you've spoken about as far as tenant health indicates anything of a let up. So I’m just sort of curious, you know Brent, you mentioned that you do build the guidance space by space, and you're baking in that 80 bip decline, but nothing in what you guys have talked about really indicates that. So is it more just a cautionary element to the guidance of saying look, just given everything going on this year, we just feel this is prudent or are there actual tangible things that are causing you to consider the occupancy declines or that bad deck goes back to 2 million from only 140,000 last year. Thanks, Alex. Good question and I think it's more prudent, call it measured conservatism and I look – I hope in hindsight we are conservative. There's no specific tenant issues, move outs, bad debt, things like that, that are driving our assumptions, so much as I do get concerned about debt cost, wage cost, all of the things like that, and it's – I think EastGroup's balance sheet is in a good spot. But with 1,600 tenants, I do worry about the tenants’ ability to make it through maybe the second year of an economic doldrums or heading into a recession. So we keep waiting for signs and paranoid of signs for cracks in the economy. But thankfully to-date we've not seen it, but we're trying to be a little bit anticipatory if it comes and maybe it's a little bit, look I think at some point things, nothing specific, but hopefully it's prudent to be a little bit conservative and look, we’ll certainly get several chances each quarter during the course of the year to give you our update and again, we'll do our best. This is – we always kind of internally say we have our budgets and then we have our goals. So this was our budget and our goals to beat it. And then the second question is, as far as the supply picture, you said that you guys are being more cautious on how you think about new construction. And yet you also said that your competitors, presumably the merchant builders are pulling back, which is giving you more pricing power. So, I'm just trying to understand the two of those points. If your competitors are pulling back, wouldn't that make you feel more confident about investment in new starts? Or is it, again, your caution about the overall economy that independent of what your competitors on the development side are doing, you're nervous about committing new capital in the current environment. But at the same time, you are benefiting as your competitors pull back that it gives you more pricing power on your available space. Look maybe - I'll throw an element out. You're right, we feel good that our competitors, a lot of them are on the sidelines. We're seeing instances where someone's tied up the site, gotten zoning, permitting and they are not able to get the debt and/or equity to move forward and we've been able to get some repricing. We stepped into a couple of different situations in Texas. One in Austin last year where we bought out private companies that weren't able to perform at the end of their contract. So that's optimistic. That conservatism is, okay, when we do deliver these buildings, and thankfully for our product type, especially shallow bay, it's a little bit shorter, but it's still nine months out. What type of economy are we going to be delivering into, and since it's mostly you know almost all state development, a little more anxious about the tenants. Are people going to start renewing and just staying put rather than continuing expansion plans? So we feel good about supply. We're hoping demand is there, and with our cost and things like that, we've actually – you know, one of the things that I will say, there's a lot of different metrics on our dashboard and I know a lot of your peers focus on the cash, same store NOI which we do too, but we're continuing to push our development yields up. So this year, of that $330 million, we've got specific buildings and you're pushing last year what we rolled in, including value ads came in just north of the seven. We're probably a six, seven this year in terms of development. Hopefully with rents continuing to go up, we’ll be able to meet or exceed that, so I'm proud of our development yields and the kind of instrument NAV creation that creates. So we feel good about development and/or maybe some opportunities where we're saying things here and there and are probably seeing them more than really chasing them hard at this point where people's construction loans have come due and things. So there may be some – I think there'll be a lot of distress out there, but we don't need a lot. There's going to be some people that get caught on the bad side of the capital trades, where we can either pick up land sites or partial lease buildings in addition to our development pipeline this year, to create some value and FFO as well. Hi! Thanks. First question, I guess I just wanted to follow-up on that line of questioning a little bit as it relates to the company's cost of capital. Brent, you know the stocks off the bottom here, you know and your cost of capital has improved from where it was over the last several months. I mean how are you thinking about you know acquisitions today, and do you feel a little bit more optimistic about you know either, you know or both core investments or non-stabilized deals, and are you starting to see deal flow begin to pick up a little bit Yeah, you know more so and there are obviously daily talk in tandem. As he said, it's unusual to have this much volatility, particularly in our stock price we're not accustomed to it, especially when you basically put forth an historic record year from a positive standpoint, yet the equity side of it got cursed last year. So you know I think our sort of sideways guide on capital outlay via development or whatever else was more just a – we've got like a prudent, measured way to come out of the gate. But as you mentioned, if the equity price can hang in there and we can source capital that we feel is attractive and we can make a good spread from, which in today's market we feel good about that, that can change, you might say in a press conference these days, it seems like, but… So that's something that we talk in tandem. The guys in the field know to keep their eyes open for opportunities. If they can find them it’ll be like – we are pricing in that moment. We'd like to think there is upside to those numbers with – you know if we can match good cost of capital with good opportunities, then we’ll lean into it. But you know we didn't feel like coming out of the year just dialing in a bunch of opportunities, just kind of buttoned in and that type of thing. So I don’t know what that answers would be. We are working in concert, but yeah we feel good. You know things have rebounded. Price looks more attractive, more available to us, interest rates albeit higher than we were used to have come down. So you know it's a good start to the year and we feel optimistic to have those chances to use the capital. Okay, that's helpful. And then I guess my second question, on the lease up and under construction pipelines, just any additional comments there on sort of the pace of leasing, you know how that might compared to 2022 and just looking at those sort of pipelines for lease up and what's under construction. I mean, do you see potential for some additional conversions to take place ahead of schedule. You had a couple this quarter. You know maybe some that are slated for ’23, later in ‘23, you know a little bit earlier, and perhaps some of the ’24 is making their way into ‘23. No, good point. Now we were happy, you know out of the ones that rolled in last year and really we were 18 of 19, and one of those, the one that's – it's in the 80’s actually had some tenant issues, so it was – knock on wood, it was briefly at 100% and look, that's about it. It may actually be our only vacancy in Orlando is in the one that it’s a little bit shy right now. I hope so good – again, what's been interesting the last few years, we'll always design a multi-tenant building, but more and more frequently we'll have a single tenant take it and all of a sudden then it becomes a race to – for our construction guys, how fast can they deliver that building. So looking at what's under construction, there's a number of those I think that can move to 100%. Usually they are not you know the size of our buildings or projects thankfully, that we can move along fairly quickly. So I'm hoping some of those, which again could be upside to this year's budget, certainly will help next year. If we can get them deliver later this year with the tenants in toe, and that really we would have been a little better. In the fourth quarter I'm happy with how the year turned out, but hurricane Ian slowed down delivery of a couple of fully leased buildings in Fort Myers that we had last year. So yeah, we feel good, and the activity – I would say last year at this time it was, you know things were really red hot in terms of tenets moving and pretty rapidly worrying about finding space and things like that. And then probably about second quarter, always think of you know, it's kind of the light switch when amazon kind of said, hey, we overdid it on our space growth over the last couple of years slightly, that's when things have slowed down. So there's good steady activity, but it's not parabolic. I've heard some of the brokers use what it was kind of late ’21, early ‘22, where it just felt so frenzied. That also makes us so feel, we've all done it long enough, a little bit nervous. But anything that you know takes off like a rocket usually lands as gracefully as a rocket. So it feels like there's you know prospects for every space, but not five or six or where a tenant rep broker was telling me his job wasn't fun anymore, because you know every space had a handful of tenants lined up for it. So we feel good. We just need to convert the LOI’s and the signed leases, but we like the activity we've got in the pipeline. Great, thank you. My first question is a follow up on the prior discussion. Just to confirm, has there been any change in tenant demand or discussions year-to-date, let's say versus the second half of ‘22. Can you characterize I guess what you're seeing year-to-date? Good morning, Jeff. It feels pretty similar to what it – it took a little bit of a holiday pause was the way it was described, and that kind of had our antenna up thinking, okay, is this the start of the downturn, but the way it was described that when you think back, this holiday season was the first time people could – given COVID, could really travel to see family and take vacations and do things. So whether it was the tenants or the tenant rev brokers or their attorneys and things like that, things slowed down for a couple of weeks. The second half of December, maybe the first part of January, but it's picked right back up and tenant activity feels the same as it did say third and early fourth quarter last year. So we feel good and our numbers are really consistent with where we were to you know, knock on wood, late last year. So it doesn't – we're not seeing any slowdown and activity, thankfully. Great, thanks for confirming. And then on supply, I'm sorry if I missed this, but did you quantify or can you quantify the decrease you discussed. I think you said you expect to drop off in supplied later in the year. So I don't know if you have numbers on kind of second half twenty three verse you know second half of ‘22 or ’23 over ’22 and then anything on ‘24/’23 at this point. Yeah, well it’s not quiet – it’s not as specific as I'd like it to be, but maybe my description with the pipelines, the numbers you'll see are still pretty full by market. I mean, if you look at our major markets, Atlanta or Dallas, Phoenix, some of those. Typically if it's helpful, the numbers are big. What's tricky is it's still difficult to get electrical equipment, HJC units, stock equipment, that takes time. So what's in the pipeline moves more slowly than it did in pre-supply chain issues. But I think that will start coming down precipitously. The contractors are still busy, so we're seeing some leveling off of construction pricing, but for every one item that seems to drop in price, another one comes up like concrete, for example and I think the merchant developers have really been put on the sidelines. There are still things in the pipelines that what we're hearing from the contractors, they're busy, but they're not bidding new jobs as much looking ahead. So I think as things come out of the pipeline, they won't get replaced or won't get replaced. And I've heard numbers from, say, 30% to 40% drop off in those type -- that's kind of the numbers I'm hearing. I will say, I think everybody is – and you see it on acquisitions. Kind of the bid-ask spread has been price discovery and I think it makes sense if you, me and Brent were merchant developers, it would be hard to go build a building and know what our exit cap rate is. So that's put them on… One, it's more difficult, besides finding your debt and equity, and I'll complement Brent and his team for example for expanding our line of credit. But that was heavier lifting by far than it would have been earlier in the year and we heard the same from a number of REITs, that a number of banks were just – have been pencils down on real estate and pretty large banks as well. So that's tricky for us, but it's good news and that it is really putting things in their tracks and we've seen any number of projects, where people – the forward sales where someone would get a site zoned and permitted and you can flip it and make a really good return in the last few years. We've got a building built. We were buying. Our value ads were often unleashed building that were newly constructed, but we really got priced out of that market, because what we learned is another buyer could underwrite rents at whatever numbers they wanted and rents were going up 10% a year. So we were being too conservative on a lot of those bids, but all that stopped. So I think our product type is probably down 30% to 40% and will probably keep dropping each month from there. I think I expect that number to grow. I think a lot of people are nervous about the economy and if you can't get the debt and equity, it's going to really slow things down and the price discovery is still going on. We've looked at any number of packages that typically that it was on the market, they didn't get the pricing they wanted and they're looking at bringing it back out to market. So that's a story we keep hearing. Two, which just tells me the market that there's a disconnect on development pricing and there's a disconnect on pricing existing assets to a pretty good degree and at some point that will settle out, but it hasn't yet. Thanks and good morning. I just want to go back to some of your questions on development. So obviously you guys have an excellent track record on development over a number of years and I realize that where you're developing in your own industrial parts and some markets may not directly compete with the larger supply deliveries that might impact the large MSA. But my question is, if things slow down, how resilient do you think the demand for your specific new development might be relative to the larger market that might see much more increased supply in markets like Houston, Austin or Atlanta. And I mentioned those three, because that's where it looks like you have the land cost to do with the next round of development. Good morning Ki Bin and look, I won’t – it's self-serving, but I do think our demand will be more resilient and that ours is more consumer related. And by that, and you look at where our buildings are. We ideally like to be nearer; great access to the freeway system and near the end consumers, where the population is growing in Atlanta, East Valley of Phoenix or the residential is things like that. And the consumer may slow down, but that's also pretty sticky. So we're not moving goods from China to New York, for example, so much as getting train air conditioning units delivered around Dallas to Fort Worth and things like that. So I think it will be more resilient and then what I like about our model and I'll put it on me. Maybe I don't articulate well enough. I like that our yields are much higher than merchant developer yields and big box yields are higher than. And I also think our development risk is lower when we're -- it may be a spec building, but we -- we know how the last building that we built in the park lease top and then typically, we have some activity, whether it's our own tenants or just tenant rep brokers in the market to kind of start that new building. So we may not have a lease sign, but we have activity that we're delivering into. And then the flip side of that, if the economy does slow, it's pretty easy. It's not corporate that's saying go build a building, it's usually the team in the field calling me, saying, hey I’m out of inventory, and I’m about to run out of inventory. We need to build the next one. And if we know if Phase 3 in Charlotte didn't lease, for example, we know building the next two buildings in Phase 4 isn't the answer to solve Phase 3. So at any given time, we've stopped development, it really hit halls and markets until demand could catch up with our supplies. So we’ll go as fast as the market will let us and that's where we're kind of predicting the $330 million, and I hope we beat that number. The teams that are in the field feel good about those stocks. And I think, a good point I like – directionally I'd like to think, the consumer is going to be a little more sticky than supply chain movements and that's why we've always kind of avoided. Ports and people can make a lot of money on port related industrial, but that's pretty easy to shift over time as everyone has spent so much money and investment, modernizing their ports over the last few years all around the country. Okay. And any kind of broad commentary you can share on what you think cap rates are for good assets and good markets on stabilized assets and if the bid aspect has narrowed a bit here? It doesn't feel like it's narrowed. We're not seeing a lot of transactions. We haven't been actively in that market for several months. We've looked at things and what we're hearing from the brokers mainly is that, if you've got a long term, say single tenant asset, those cap rates, and you've heard all us, those have moved up the most and it makes sense. Those are the more bond like assets. So the most interest rate sensitive. But, if you've got a multi-tenant project and then everyone talks in terms of WALT price or weighted average lease term. So, if you've got below-market leases that are rolling fairly soon, you're probably still in the fours with those, you know pending the market may be threes in Southern Cal, low fours or high threes and then we heard of some cap rates in the fives in different markets, but you know it's one thing for us to hear brokers talk about those, and I know they're being sincere, but until we see some of those trade, and that's where it could get interesting. Look, if something – because there's this disconnect in the market and we can pick up a good asset or two and ideally add some value or add to our strategy in that market. I could see us taking some of our development capital and acquiring an asset or two. But with the drop-off in construction, we think we're expecting construction pricing to drop, but it will probably have to be the second half of the year, not the first half of the year. So, if we wait a quarter or four or five months to start a new development, I think there'll be a little bit of reward. Again, the demand may be, I don't want to miss the demand, but costs may work in our favor because everyone is on the sidelines. Hey Marshall! Good morning. I guess just going back to the demand side, I mean if you look at your markets or even from an regional standpoint, whether it's customer behavior, I mean are tenants taking a bit longer to make decisions or renew at this point. I know, so that the time frame had gone elongated I think when we talked, maybe [inaudible] time period. But has that started to stabilize at this point. Just wanted to kind think through that a little bit. Good morning Samir. Deals get through the pipeline, but you know you're right and maybe it speaks more to my own patients, but they do - tenants take a while. It feels like we get deals into the red zone and then getting them ramped up and maybe that's the attorneys and getting the TI pricing and all the I’s dotted and T’s crossed and the larger the tenant is, the slower that seems to take. And I get it, from there and the dollars are higher than they were several years ago. So, there's more, sometimes more layers of approval for people to sign off. But the good news is the output is still there, but it takes a little bit longer to get deals finalized. And then some of that which would make sense to me, I think if you're a tenant and you're not a little nervous about this economy, every headline you read will make you a little bit nervous. So, I don't think - unfortunately, I don't see that going away and I don't think there is a panic for missing space that people had maybe a year ago, although that could come back with supply dropping. Right. And I guess just for my second question, I mean it looks like you acquired more development land in the quarter. Is that where you see more of the opportunity today as we think about in 2023 or sort of the next 18 months versus maybe operating assets where pricing is a little bit uncertain right now? I would lean that way. And the ones we bought, a couple of them without violating the confidentiality, opportunities where people have things under contract and weren't able to perform. So we were able to pick up what we thought were attractive pricing. And so there are those opportunities out there. We've not picked up any existing assets or partially leased assets, although we've looked at a couple of opportunities and it's along the lines of someone. You know we'll build a part, one or two buildings at a time where someone may have built four to six buildings at once and their construction loan is coming due and the lender wants more equity. And we're hearing from banks that their roll off of their loans isn't what it was a year ago. So it's making their capital more precious and more expensive at the bank level too. So I think we have a chance to maybe pick up some acquisitions this year. We've seen it on land and been able to execute on it and I think that will probably be the case, but there may be, some people in a capital bind, and we're not wishing it on them, but if we can step in and help solve that problem for them with the bank and we get a good asset at the right price, I’m hopeful. We're seeing the opportunities, I hope we have the capital of ourselves and will be mindful of our own capital as we move through that. Hey! Good morning guys, thanks. Hey Marshall, just two quick questions. Any markets out there that you're not seeing a drop off in new construction starts? Hey Bill! Good morning. If it is, its tiny markets where the new construction has always been. We've got two or three assets in Jackson or New Orleans, where the entire city is below sea level and things like that. But really, I mean probably what you mean the major markets, the Houston, Dallas, Atlanta, Phoenix, Orlando, the merchant builders is one of our guys has said, and I've relayed this story. He was in a broker golf tournament and all the merchant developers said we'll be a lot better when we see it next year at this event and things like that. So, I think supply is dropping off especially in, at least what we view as competitive, because usually, it's a local regional developer partnering whether it Clarion or Heitman, KKR or someone like that, and that debt and equity has gotten a lot harder to come by and it's a lot harder to pencil your exit than it was a year ago. Yes, okay. The second question is on the margin, are you seeing your existing tenants were hesitant to make expansion space given some of the macro issues? It seems like the deals take longer. But no, we're still seeing a fair amount of expansions and a number of our proposals. It's not uncommon, it's a proposal to a logistics company and they're waiting to hear back on a contract, and if they get it, they're going to either leave the space or need more space. So the deal time on the tenant side takes a little bit, but we're still seeing fairly good expansions within our portfolio and that's what makes us feel good about the development. I love the idea of taking the tenant from park, from building three to kicking off building eight because their lease if it's a couple of years old, which is it is and that original building by now, it's 20% call it below market or whatever that number is, and we can hopefully backfill their space by the time we move them into the new building. So that's what the team's done a really nice job doing the last few years. It's just kind of moving that rubiks cube and that's one of our big sales pitches to tenants. As everybody is determined, they're going to outgrow their space when they move in. But we have an entire park and we'll be flexible and move you within the park, and can accommodate your growth needs. All right, thank you. Sorry to go back to guidance question again. Just regarding your occupancy and bad debt guidance, are there certain industries or markets where you're being a little bit more cautious on your assumption? Yes. This is Brent. Not particularly, I’d like I say, it's really a ground-up component. The bad debt is again more applied at the corporate level. It's not tenant specific or at the property level specifically. So again, those were sort of the culmination of what we put together, the bad debt number is more a reflection of the historical run rate of about 0.3% of our revenue. We've been well below that the last few years, and no reason to think that we could be below that again. I guess I would just put it onto the premise that you've got to start the year somewhere. And so that's where we are. We hope that that goes positive as the year progresses, but we'll see. As Marshall mentioned, 45 days or whatever we are into the year, it feels good. It feels as good as we did ending last year. So we're still not seeing any headwinds to the story and so we feel optimistic about the year. But, when you've got four quarters to go, you put the budget together, again, you just want to start in a measured, prudent manner and then let the year play out and go from there. Got it, that's good to know. And just one more, so it looks like the January job print on construction was a little bit better than expected. What are you guys seeing in terms of kind of the homebuilding sentiment or activity down in the Sunbelt? It does feel like. Hopefully, home buildings and industry, we worry - obviously, with mortgage rates going up and things like that, and we're in a lot of the in-migration markets, the Florida, Arizona, Texas, all of those. We're more optimistic that the homes are coming and then a lot of - a fair number of our tenants come with the large company relocation. So we see, and a lot of it is we've got the tenants moving out of California to Las Vegas to Arizona to Texas. We've picked up some suppliers to Tesla in Austin and in San Antonio and I'm sure there's homebuilding that follows that. So, we're bullish long term about, look, these markets, we've got good sites and they're only going to become more near and dear over time, and there's there are still companies and people that are relocating. It's just how fast, after COVID it picked up really quickly to Florida and Texas, and it may slow with homebuilding, but with maybe with the mortgage rates moderating and things like that. It feels pretty good that there's enough companies. That pace of relocations to Texas and in Carolinas and things like that feels pretty steady at this point. Hey guys! It’s Nick actually on for Dave. A question on following up on land. Where is like pricing today on some of the land parcels that you're seeing versus maybe at the peak in 2022. You heard kind of that asset prices could be down 20% to 30%, but land could be down as much as 50%. And do you guys see any opportunity there? Good morning! Good question. We've picked up some opportunities. And historically, we would say land prices are pretty sticky and maybe there's two different, at least two tow different types of land sellers where it's the long-term owner, you know we’ll get the farmer, they've owned it for a while and they intent to continue to own it. Where we've seen the opportunity is more someone else has come in tied up the land. They had a good price and they tied it up and usually that contract's got extended a time or two and they've got some money at risk and things like that or even instances where you're seeing some where people have ordered the steel and the electrical equipment and now they can't get the takeout that they want a debt or equity or a forward sale and that's where the pricing has come down. And you're probably right, because it had run up so much, some of that pricing has come down 25%, 30%. We were able to get some pretty good price reductions where the original person that tied it up still made a little bit of money, but they – that’s the tricky part, their timing window closed, and those land prices have moved backwards pretty quickly. And that's probably another thing that's keeping people on the sidelines for new development, a little bit as movement, if you're a merchant developer, movement and land prices and construction prices, you'd probably want to wait a little bit to see before you started a new project and hopefully that’s where we can step in and build some spec developments and get it least, especially if it's within our own tenant fee or the tenants across the street, while the markets are little unstable. That's helpful. And then maybe one quick question on just rents. When you're beginning renewal discussions, are you getting - seeing on the margin anymore pushback on like the rents from the existing tenant. No, thankfully. Our list of reasons when we track our move out, it's not that the rent was too high, and thankfully I think especially in a rising market like we've been in, 99% of our – even our renewals, if they have a tenant rep broker, so by the time they sit down with us, their own brokers educated them of okay, you can move and go through that cost, but you're going to be paying about the same rent. This is just where the market is and I appreciate that our rents are such a low component of their cost structure compared to their wages and transportation costs, that it's given us the ability to push rents. And I do emphasize with our tenants for their cost structure is going, whether it's energy costs, wages, rents going up, but knock on wood, so far we haven't gotten pushed back. Our move-outs aren't due to rent. It's more accommodating growth or consolidating locations or different kind of macro strategy reasons within the tenant more than your rents too high, because we're - hopefully if we're doing our job, we're at market or slightly above and can earn that premium. Apologies, I jumped on late, but just two quick ones. Just going back to the guidance question, I think the occupancy number sort of jumped out. Just trying to get a sense of what sort of conservatism is baked into that? What are you thinking about bad debt? What's actually driving that occupancy decline, that's in the guide? Yeah, good morning Ron. Just a recap on that, yes, basically again just a rollout that was based on space assumptions, and when you start looking at 80 basis points times a square footage, it's actually given our size, not that much square feet. But certainly makes you know an impact. If we can’t have, maintained 98% then certainly that's to the good. The bad debt again is more just a reserve, based on historical run rates, we've been well below that the last couple of years. You know I would remind everyone that your bad debt express potential does include straight line balances. So a lot of times we may have – I say, a lot of times we've there came to an occasion where you have a tenant, but suddenly files for Chapter 11 had some happen, and they are current on their rent. So you're not even aware that they were in that situation, but you may have a straight-line rent balance associated with that tenant that you have to reserve. So hopefully, those numbers prove to be conservative like we did last year. But, as I mentioned earlier, just you got to start the year somewhere, and we thought just with good measured approach in this environment would be a good way to start, and then we'll just see how the year unfolds. Great! And then my second one is you're talking to a lot of sort of tenants. Would love to hear your perspective of where we are in the inventory cycle. Do retailers have too much inventory? Have they gone through it? What are you sort of hearing from them on the ground? Thanks. Hearing is that – you know unlike before where it was probably a pretty scary shortage for inventory, it's built back and it's gotten better. Maybe there is some retailers that have too much inventory, but could be characterized as too much of the wrong inventory and things like that. But we still think that kind of restocking and safety stock of inventory, all of our tenants haven't been able to achieve that yet, but they’re closer to it than they were a year, 18 months ago. So I think inventory levels are picking back up, and that's got to be – you know it's hard to know sometimes exactly on our expansions. Is it that their business is better and/or probably the answer is, yes or is it that they'd like to carry a little more inventory. We've certainly seen a lot of activity from the third-party logistics companies. So it tells me people are outsourcing more and more to try to get that inventory. So I think it's better than it was, but there's still room to run on that front to get to where they feel like safety stock needs to be. And we still seem to hear in the news about shortages, something that the shortage of isn't that shocking in the news and more things to every week a new shortage on something. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Marshall Loeb for any closing remarks. Please go ahead, sir. Thank you. We certainly appreciate everybody's time and interest in EastGroup. We are available after the call. If we weren't able to get to your question or if anybody has any follow-up questions, and we look forward to seeing you soon as we dive into conference season next. Thank you.

EarningCall_434

Good afternoon. My name is Josh, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Inspire Medical Systems Fourth Quarter and Full Year 2022 Conference Call. All lines have been placed in mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I'll now hand the conference over to your first speaker, Ezgi Yagci, the Vice President of Investor Relations at Inspire. You may begin the conference. Thank you, Josh, and thank you all for participating in today's call. Joining me are Tim Herbert, President and Chief Executive Officer; and Rick Buchholz, Chief Financial Officer. Earlier today, we released financial results for the 3 and 12 months ended December 31, 2022. A copy of the press release is available on our website. On this call management will make forward-looking statements within the meaning of the Federal Securities Laws. All forward-looking statements, including without limitation, those relating to our operations, financial results and financial condition, investments in our business, continued effects of the COVID-19 pandemic, full year 2023 financial and operational outlook, and improvements in market access are based upon our current estimates and various assumptions. 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. Please see our filings with the Securities and Exchange Commission including our annual report on Form 10-K to be filed with the SEC by February 14 for a description of these risks and uncertainties. Inspire disclaims any intention or obligation, except as required by laws 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 and speaks only as of the live broadcast today, February 7, 2023. Thank you, Ezgi, and thanks everyone for joining our business update call for the fourth quarter and full year 2022. We are excited to report our first profitable quarter and a solid finish to a very strong year with significant progress across all elements of our business. As always, we first and foremost reiterate our commitment to patient outcomes and to ensure that each patient has the best possible experience with Inspire therapy. During today's call, we will highlight many accomplishments from 2022 that demonstrate our ongoing focus on the patient, including improvements and access to therapy, technology advancements and planned activities to broaden the population that can benefit from Inspire. We will also discuss our outlook for fiscal year 2023. We completed many important milestones in 2022, and there are now over 36,000 patients who have received Inspire therapy. During the year, we received FDA approval of full body MRI compatibility, and launched our silicone-based stimulation and sensing leads, along with a Bluetooth enabled patient remote. Further, we made significant progress with our digital platform including major updates to the Inspire SleepSync patient management system and the Inspire Sleep app. We also initiated a pilot of a digital scheduling tool, which we believe will significantly enhance patient access to care through our Advisor Care Program. In addition, we submitted important indication expansions to the FDA, including for the pediatric population with Down syndrome and for patients with a high Apnea Hypopnea Index. We raised over $240 million in cash, as noted previously, and in the fourth quarter, we achieved profitability for the first time, all of which gives us confidence as we enter 2023. With that, let's review our results. In the fourth quarter, we generated revenue of $137.9 million, representing a 76% increase compared to the fourth quarter of 2021. For the full year of 2022, revenue totaled $407.9 million, a 75% increase compared to full year 2021. Our growth continues to be driven by higher utilization at existing centers and supported by the activation of new centers. During the fourth quarter, we experienced challenges with our supply chain and as the demand for the silicone-based sensing and stimulation leads outpaced our ability to provide products due to issues with scaling the production bites. These challenges have been resolved and we are increasing our inventory levels. Despite these challenges, we were successful in providing product for all scheduled procedures in the fourth quarter. Historically, we have experienced seasonality in the first quarter due to the reset of high deductible health plans at the start of the year. While this remains the case, the first quarter of 2023 may see slightly less seasonality due to the supply chain issues in the fourth quarter. With that said, we expect full year revenue to be in the range of $560 million to $570 million up 37% to 40% increase compared to 2022. In the fourth quarter, we continue to increase our capacity by adding 61 new in planning centers, ending the year with a total of 905 centers. At the end of the fourth quarter, ambulatory surgical centers made of 23% of U.S. centers, and in 2023, we expect to continue to activate 52 to 56 centers per quarter. Regarding the U.S. sales team, we created 16 new sales territories in the fourth quarter, bringing our total to 225 territories. We are increasing our guidance in 2023 and expect to add 12 to 14 sales territories per quarter compared to 10 to 12 per quarter in 2022. In 2023, we will continue to scale our sales management and training teams to optimize our ongoing expansion and to focus on strong patient outcomes and center productivity. As such, we modified our incentive compensation for the field organization to focus on how your utilization at existing centers. We will continue to enhance our ability to connect interested patients with a qualified healthcare provider. Our outreach programs are very effective in generating interest in Inspire therapy, primarily through the inspiresleep.com website. For the full year of 2022, the number of visitors to our website surpassed 13 million, an increase of 86% year-over-year. And from these visits, we had over 78,000 physician contacts. Of note, these physician contacts represent the calls and emails to our Advisor Care Program or directly to a physician's office, and do not include referrals directly from a patient's healthcare provider. From a U.S. reimbursement perspective, the final rules for 2023 were published in November and came in generally as expected, providing a stable reimbursement outlook for healthcare providers. Moving on, our international business continues to make strides, growing 28% in the fourth quarter over the prior year over the prior year, despite ongoing headwinds from unfavorable exchange rates. During the quarter international revenue was less than 3% of global revenue, highlighting the significant growth in the U.S. market. There are many positives in our international business during the fourth quarter, including the strong performance in Germany, the Netherlands and Switzerland. For the more, following many years of working with the French authorities, we are in the final process to have Inspire listed on the French registry in early 2023 at reimbursement rates consistent with the rest of the world, and the team continues preparations for our commercial launch there. In Singapore, our flagship programs continue to perform at productivity levels consistent with U.S. centers. We also see momentum in Japan, with multiple [indiscernible] centers doing first procedures in the fourth quarter that have also completed or booked additional cases in the first quarter. In Hong Kong, we expect to complete our first procedures in February. And in Australia, we have read submitted for reimbursement and should have a determination later this year. Turning to R&D, we recently submitted our SleepSync physician programmer for FDA review. This new programmer connects with our next generation SleepSync Digital Health platform, which is a key step for providing remote patient programming. Longer term, we continue to work on the design of our fifth generation Inspire neurostimulator. The Inspire 5 device will eliminate the pressure sensing need and incorporate the sensor inside the neurostimulator using an accelerometer to measure respiration. We have finalized the design and we are conducting operational and production qualification. We are still targeting FDA and FDA approval in late 2023, but depending upon the FDA review cycle, this could move into early 2024. Finally, we continue to conduct research and clinical trials to increase the number of patients who can benefit from Inspire therapy. In the fourth quarter, we finished enrolling the first 300 patients in our PREDICTOR study, which is the first step to replacing the requirement for drug induced sleep apnea procedure with an office based measurement for patients with a BMI of less than 32 and continue to clap for initial readout of the data in 2023. In summary, we're experiencing significant momentum in all aspects of our business. We remain focused on patient outcomes and physician education to continue the adoption of our therapy. In 2023 and beyond, we will continue to increase utilization at our existing centers, while adding capacity by opening and training new centers. The ongoing expansion of our call center and investment in our DTC campaign support these initiatives, and we're seeing enhanced productivity from these efforts, which are driving our improved financial performance. Finally, the many R&D achievements in 2020 to highlight our commitment to improving patient outcomes and enhancing both the patients and health care providers experience within Inspire therapy. We remain extremely excited about our future prospects and are confident that we have the appropriate strategy in place to drive long-term stakeholder value. Thank you, Tim, and good afternoon everyone. Total revenue for the fourth quarter was $137.9 million, a 76% increase from the $78.4 million generated in the fourth quarter of 2021. U.S. revenue in the fourth quarter was $134.3 million, an increase of 78% from the $75.6 million in the prior year period. The growth in the U.S. reflects several factors including higher utilization and existing centers, the addition of new implanting centers expanded direct to consumer marketing and a higher number of territory managers. Revenue outside the U.S. increased to $3.6 million, which is a 28% increase year-over-year on a reported basis, while units sold outside the U.S. grew 43% year-over-year. The U.S. average selling price in the fourth quarter was 24,900, compared to 23,900 in the prior year period. The increase reflects our price uplift that began in May of 2022. We expect U.S. ASP to remain steady at the current level. The ASP outside the U.S. was 20,400 during the quarter, compared to 22,700 in the fourth quarter of 2021, which was driven by unfavorable exchange rates and a lower ASP for distributor sales in Asia. Gross margin in the fourth quarter was 83.9% compared to 85.8% in the prior year period, primarily due to higher costs of certain component parts and additional costs associated with the transition to our new silicone based leads partially offset by the price increase that began in the second quarter. Total operating expenses for the fourth quarter were $116.1 million, an increase of 68% as compared to $69.1 million in the fourth quarter of 2021. This planned increase was due to expansion of our sales organization, increased direct-to-consumer marketing programs, continued product development efforts and general corporate costs. The increase in operating expenses is reflective of our ongoing plan to drive continued long-term growth and to make investments in key areas of our business. Interest and dividend income totaled $3.4 million in the fourth quarter compared to 15,000 in the prior year period. This higher income was driven by higher interest rates on our increased cash balances. We had no interest expense in the fourth quarter have you paid off our outstanding debt in the third quarter of 2022. We are proud to announce our first profitable quarter in history and Inspire. Net income for the fourth quarter was $3.2 million, compared to a $2.4 million net loss in the prior year period. The diluted net income per share for the fourth quarter was $0.10, compared to the net loss per share of $0.09 in the fourth quarter of 2021. We have average number of diluted shares outstanding for the fourth quarter was $28.9 million. We expect Q1 weighted average shares outstanding to be approximately $29.1 million. During the fourth quarter, we generated $24 million in cash and we ended the year with cash and investments totaling 451 million. The strong cash position allows us to remain focused on executing our growth strategy of increasing procedure volumes at existing centers, while training and opening new implanting centers. For the full year 2022, revenue totaled $407.9 million, or a 75% increase over $233.4 million. U.S. revenue was $394.8 million or 79% year-over-year growth, while revenue outside the U.S. totaled $13 million, a 5% year-over-year growth despite foreign currency headwinds. Net loss for full year 2022, totaled $44.9 million compared to $42 million in 2021 with the net loss per share of a $1.60 for 2022 compared to a $1.54 in the prior year. Moving on to 2023 guidance, we expect full year revenue to be in the range of 560 million to 570 million, a 37% to 40% increase compared to 2022. Full year gross margin is expected to be in the range of 83% to 85%. As Tim previously noted, we expect to activate 52 to 56 new centers per quarter and establish 12 to 14 new sales territories per quarter in 2023. Given the prevalence of high deductible health plans, we have historically seen seasonality in our business. As Tim previously mentioned, we continue to expect revenue to step down sequentially in the first quarter of 2023, and will then increase throughout the year. In conclusion, our strong performance and business momentum provide us with confidence in our outlook as we enter 2023. Congrats on the profitability this quarter. And I think in the past you said, once you turn profitable, you wanted to stay profitable. So, I don't know if this is the start of that because looking at The Street has over $2 in loss for earnings next year. Should that be closer to flat to slightly positive? Hi, Travis, let me comment, first, and Rick kind of jumped in. I think as we know, we wanted to get your profitability. We know how important it is from a business standpoint. I think, moving forward, it's, it will continue to be a desire of the organization, but we also know that in Q1, we do see seasonality there. So, let me hand off to Rick there. Yes. So, we did demonstrate some improved leverage in Q4, and we also expect in Q1 that we would lose some leverage just due to our normal revenue seasonality. But we do intend to show improving operating leverage as we progress throughout the year. We're not changing our tone of profitability. We're going to continue to run our playbook, but it is important to understand that we do have a very disciplined approach in determining our spending and our investments across our business. And so for OpEx, so something maybe in the 30% range, is that a good starting point? And I'm curious if you would hold that if revenues come in higher than expected for the year, or if you would also kind of grow OpEx upside with revenue outside of the course of the year? And then the other follow-up was on the comment on Inspire 5, you mentioned, I think, move into early 2024. I don't know if there was a change or something that driven drove that comment, or if it was just more of a caveat? I'll start Travis. So as you know, we did demonstrate that the revenue did outpace operating expenses. In the fourth quarter, we're not going to guide on bottom line, which means also operating expenses at this time. And so, we're going to continue to make thoughtful discipline investments but we're really focused on driving that top line. As far as the Inspire 5, I think we continue with the program, the design is frozen, we are going through the operational testing, we're building up the quality units, and we're building redundancies. We have multiple manufacturers for that product, again, to protect for supply chain. So always a little bit of a challenge to work the schedule to get all the testing done and get the submission then, but though, we're still going to be pushing really hard to get the approval by the end of '23, but we can see it right into early '24 if the cycle is tight. Maybe starting with the guide, you're coming off a really good growth year. Your guidance, in terms of growth, is still a really healthy rate for 2023. But a pretty significant decline in growth rate versus 2022. And by my math, it kind of looks like center utilization might be flat to down in the implied guide for '23. So anything other than your usual conservatism here that we should be thinking about implied in the guidance, as we start the year? Yes, we want to be very consistent on how we put our guidance out there or how we look at the business at the beginning of the year. We already mentioned in the note that we want to continue to drive utilization actually improve, utilization at existing centers, in fact to the point of putting additional incentives in there for the sales team. So again, yes, we want to be careful putting guys early on, we like to position that the Company's in and really has been strong across the board with all of our milestones. And then while not a huge part of sales today, the international constant currency growth number in fourth quarter was really impressive. And a big step up from third quarter, it looks like. How should we think about the cadence of international throughout 2023? And can this be a starting to become a material contributor? Thanks. Thank you very much, Robbie. I think we're very excited about international and we're, we know it's just days away before getting confirmation from the French authorities that we will be listed on the registry as an accepted product fully reimbursed in France. And we're recruiting a country manager there's within France is going to have a good year. We think Belgium will follow that as well as the Netherlands is set up to have a strong year in 2023 and Germany and on top of that even the UK has started doing kids too. So, we like what's happening in Europe and the other side, Singapore, Hong Kong will be doing the first case in just a few weeks. And Japan is really starting to uptick a little bit. So I think it's going to be a measured success with the growth in international was keeping it's still hovering around the 3% mark as far as global revenue, and we're not going to take our foot off the pedal on the United States, we want to continue to grow utilization and really focus on the U.S. market as well. So, while I think you'll see continued growth internationally, our emphasis continues to be on the U.S. market. Maybe just to start wanted to ask about direct-to-consumer expense and realize there's no guidance on OpEx. But just to remind us kind of where 2022 DTC spend came in, and how investors should think about spend in '23 and then just longer term kind of direction where this could go? So, hey, Adam, it's Rick. So, we continue to make investments in DTC because very important for our pipeline. We talked about over 13 million visits to our website, and 78,000 physician contacts. And so it's a very important part of our business. In the fourth quarter, our DTC spend was about 21 million. That's relatively flat over the third quarter, but we're going to continue to increase that. Year-over-year in '22, we spent 74 million in 2022. And that was up by 55%, over '21, where we spent 48 million. We're going to continue to make those investments and grow our investments in DTC, but that growth will slow. There'll be less than 55%. But we're not given specific guidance around what that what might be right now. And then just for the follow-up. You guys give helpful color and guidance on new account ads. I'm curious, if you are able to share some color on in planning physicians per account. Are there metrics you can share there? And how do you think about those trends going forward? There's clearly a lot of demand for your product. So wondering, how you think about the importance of not just growing the account base, but also the number of docks, that existing centers? Absolutely, Adam. Great to hear from you, thank you. It continues to be a focus and it's one of the fastest ways to be able to increase capacity at an existing center is to add a surgeon. And so we'll continue with a focus on that we don't have specific metrics here, but it is one of the key methods to work with centers to either grab additional or time for the existing surgeons. But to also just train their partners to be able to have additional art time because we know the demand certainly is there. So, we'll continue to look forward and try to find some more specifics on that, but it is certainly a key factor in for our field team to be able to grow capacity. Thanks for taking the questions and congrats on another really great quarter of solid finish to the year. I wanted to maybe just start off on the 1Q seasonality comments in the context of the kind of the 4Q impact you called out on supply issues and maybe some deferral into the 1Q. Typically, you see, I think, last few years, about a 10% or low-teens percentage decline 4Q to 1Q. It sounds like you're suggesting that might be a little bit less than normal. So, A is that correct that the 10% or less of sequential decline or less than historical is a good way to think about it? Could you quantify what you think that supply push out procedure, demand push out might have been? Yes. Let's go back and talk a little bit about what we're talking about first. First, I think, we've always kind of talked about like a 12%, seasonality as we moved into Q1. But when we're talking about with these stimulation leads, we -- remember, we're in the third quarter when we transitioned from the polyurethane production line to the silicone production line. We built up safety stock polyurethane, then we had to stop and purge the line and get them back up and running. And we did that, but we have to be able to get up to volume. And then the process of scaling is when we ran to some of the challenges. So, we went to more of a just in time delivery to support cases and would be holding some powers, part level of orders or things like that. But we were able to fulfill, and closely track with schedule procedures to make sure that we had all those products ready to go. And for cases that get scheduled in January and part of the just in time system, some of those may ship in January. So, probably not a big number, but certainly wanted to bring awareness to that in that the seasonality still exists, but with the supply chain challenges, it might offset that a little bit, but the just to make everybody aware of that. But the good news is the inventories are growing and the production lines are scaling up. Okay, that's helpful, got it. So, it sounds pretty minor. Your normal seasonality is probably a good way to think about it. And then just on the account opportunity, I think, I think you're right under a 1,000 centers right now in planting centers. You've talked in the past about, I know it's very high level, but I think something to the tune order magnitude of 4,000 accounts in the U.S. that you could theoretically get. And I think you've also said there's 4,000 ASCs out there. Can you maybe just refresh our memory on kind of how you see that a 1,000 installed base progressing towards some account opportunity and what is the right account opportunity? Yes, good question. So yes, when we took that 4,000 and 4,000 got to a total of 8,000 and then we just assumed about a third of those centers would have a capability or would be doing Inspire and that put our target market at 2,400. And I think over the last couple quarters, we've been spending more time evaluating that, because we've been recognizing in smaller communities, physicians are setting up centers that don't require patients to take long drives into more of the larger city centers. So, I think we're going to continue to evaluate that. I think the number of centers that we can move to will far exceed the 2,400. And we've already demonstrated in some towns in Idaho, Montana, even in that well, Jackson, Wyoming, that there are very productive accounts in these smaller communities, and we can really leverage the community doctors to be able to offer Inspire and have more community-based care. So I think that story continues to evolve, and we will continue to increase the number of centers capable of treating patients with Inspire. I wanted to ask on the guidance and the new indications and label changes. Tim, what do you assuming for the timing down to AHI, BMI and any impact that you're assuming in the guidance? I think we're very optimistic with the pediatric population with Down syndrome. I think that we've been working closely with the FDA to answer questions that they have, they've come and done audit on the clinical data. So, we know that they're progressing under review as well. And so we're optimistic that that should happen in the first half of the year, which I think is really exciting. As far as the high AHI and the warrants for BMI, I think that also is progressing, we're working with the FDA again, and a little bit earlier stage, so that will take a little bit longer to be able to get that approval, but certainly confident that that's coming through. And it does have the proper designation to help accelerate the review at the FDA. So, we expect both of those in the near future and should have impact on the business. So we did try to kind of build that into the guide that we put forward. I think the, in both of those populations, it'll be a little bit of a slow uptick as we get awareness out there and to be able to incorporate that into the existing practices. The good news is a lot of the pediatric hospitals or the children's hospitals are affiliated with some of the larger institutions that already do inspire today. So we already have an Inspire present. So hopefully, that will streamline our ability to get those centers up and running on the pediatric front. So more to come on that we're very excited about that population that's near and dear to our heart, and will work in with the societies and in the parents of family groups to be able to build awareness of that. Just one follow-up on pediatric Down. Why do you think the uptake will be low there? They're relatively well or well organized community, if you will. I think the clinical need seems pretty, pretty high here. You've been working on this for a while. So why do you expect the uptake in that population to be slow? Thanks for taking the questions. I think we will be working on it for years, and you've seen the clinical studies and enrollment those studies and it's still a relatively small number of patients have we seen Inspire in that pediatric group. I think it's a new therapy, and a new option for the families and the doctors to be able to understand. So, I think this is going to be an educational process like any new indication or like any new therapy or in introducing Inspire into any new country. There's just always just a little bit of a slow adoption curve as people learn about to therapy and become comfortable with it and increase the prescription of the therapy. Maybe first with review, [indiscernible] in the quarter, I'm talking around 15 million I just don't have the cash flow statement, so maybe just your thoughts on around 15 million? And if so, I believe you guys would be EBITDA positive for full year '22. Maybe just provide your thoughts on how that would look or trend for full year '23? Yes. So, stock-based compensation was about 15 million. So in rough terms, John, we're about 18 million roughly in EBITDA positive for the fourth quarter. And so that stock based compensation expense has increased. Again, that will increase. We're also going to continue to make investments along our all facets of our business R&D, sales and marketing, and so on. And so with that, we expect that, we'll lose leverage in the first quarter with our seasonality but then gain that back as we progress throughout the year. But again, we're not providing any guidance on OpEx or bottom-line at this time. No, I got it. But I guess maybe just as a follow-up to that. If you're EBITDA positive or full year '22, which you just confirmed, and you expect leverage, not for 1Q, but over the course of '23. We can just sort of draw our own conclusions from there. Is that a fair statement? And then, Tim, just you talk to us, if you don't want on the ASCs a little bit. I think it came in again 23%, is that representative as a percent of the overall procedures? And maybe more importantly, how do you see this playing out and evolving over time. I think initially, you were excited about those potentially being higher utilization settings, the reimbursements improved there, you've got a good number or percentage commercial payers, to talk to us and how that can help act as an overall driver for utilization for Inspire longer term? I think it was continue to be excited about. And I think this maybe a little bit more of post-COVID phenomena where the hospitals are really active again. And so while we're still at 23%, we're still growing the number of ASCs. But we're growing the number hospitals as well and that's not too surprising. I do think the utilization impact that we're seeing is part of a factor of the ASCs is I think, right now we're running maybe 20% of our procedures are done in as ASC. Even though ASC make up 23% of the centers, what that means is they're taking more of their fair share of the procedure. So, that's really good to see the utilization growing in both, but particularly in ASCs. As we continue to progress, I think we'll continue to look for further sites of service. But as we know, the reimbursement in hospitals continues to be very, very strong, and our ability to garner all our time to take care of the patient continues to grow. And that is evidenced by the increased utilization across the board. So we're not taking our focus off as his but we continue to leverage all the hospitals that want to participate with Inspire as well. First topic, the comments on modifying incentive compensation for your field force to focus on higher utilization as existing centers. I guess, can you level that, is this a notable change? Is it a subtle change? What did the framework look like before what does it look like now, and I guess why make this change for 2023? Absolutely, well, first off, it's a important part of the compensation for the field and especially the territory managers, but the management team shares in the same compensation structure. So they're all very consistent. We have different groups of people. We have the area business managers, as you know, that focus on opening new centers, and the territory managers are responsible for cultivating the existing centers to increase utilization. In the past, we used to compensate more -- everybody gets their base comp, and of course they get the commissions based on implants and revenue and unit sold, but we have added components, in the past years, it's been based on what we call patients expecting therapy are more around patients in the prior authorization process. But as we continue to mature, it's important that we shift that from individual patient count to more utilization at site. So, we've kind of switched over the parameter starting this year to really focus more on the utilization site. So I think, we just presented it at the national sales meeting just a week ago, and team is very excited about the progress that they made last year, as well as the prospects moving forward. My second one, if I may leverage related question. You report SG&A in a consolidated line. I don't see a breakout in filings or the like of S&M versus G&A. I'm just curious as you assessed kind of a leverage that you're seeing in the model? Is there a variance worth calling out as to how your G&A spend is getting leveraged versus S&M? Just if you could frame up like, where G&A is as a portion of total, and is that getting materially better versus S&M? Or are they about trending the same? Any color there would be, great. Thank you so much. Hey Mike, it's Rick. So, we have demonstrated leverage across all those line items, R&D, G&A, and sales and marketing, as over the fourth quarter and throughout the year in 2022. Again, we're going to lose that in Q1 with seasonality. But even R&D, we're continuing to make investments. R&D was 19% of revenue in the third quarter. That was 15% in the fourth quarter. G&A is in that 10% to 12% range. And we expect to continue to be in the -- in that ballpark, in that range going forward. So cross all line on you. I want to follow up on the question about the shift in incentive comp. So the guidance for this year implies we add about as many sites in '23 as you did in '22. Just wanted to see like how you square that with where you're incentivizing your team to spend their time. Maybe we're reading too much into that comment, but it seems like that could mean fewer center ads this year. Well, I think, we left the guys consistent from '22 to '23, because we still have our training team and the area of business managers to be able to focus on adding new centers. And we're going to continue with that. We also previously talked about how the -- our growth has really been driven predominantly by increased utilization, same store sales versus the contribution from new centers. And I think, what we're kind of highlighting is we're going to continue down that pathway. And we want to keep focusing on growing utilization, because centers that are able to do more procedures, they can better outcomes. They're more proficient in the procedure and proficient on managing the patients, they're better at patient flow, they're better at submitting the proper codes to get proper reimbursement. So centers that have high utilization are just so much more efficient and have higher patient outcomes. So we're going to continue with that trend and continue having territory managers, ideally managed less centers that are doing higher utilization. Okay, that makes sense. And then 70,000, physician contacts driven by our DTC effort, it is very impressive, you treated about 16,000 patients last year, so one out of every five people who raise their hand, are actually getting an implant. Where are the stumbling blocks today that are causing patients to fall out of that funnel? And can you talk a little bit more about the digital scheduling tool you mentioned? And whether that's part of the solution for trying to improve that yield? Well, you want to talk about physician contacts. There's another sentence in there that talks about patients getting direct referrals from their own health care providers. That's not part of that number. And so, there's always a little bit of specificity on where exactly the patients come from, and is it truly one in five from the Advisor Care Program, but how many patients see the ad, they'll go to the website, there'll be educated. But rather than going through the Advisor Care Program, they will contact their own healthcare provider or their own sleep physician, saying, what do you think about the spiral will this work for me, and they actually will become a direct physician referral, and that not coming through from the Advisor Care Program. So that's really an important part of the business as well. So we have to continue to educate the physician. On the other side, we need to continue to improve the efficiency of the Advisor Care Program. And we do have a pilot out there right now to be able to log directly in to the scheduling at physician's office. So, when the Advisor Care Program, talks to a potential patient determines that excuse me, they're a good candidate that they can directly schedule in. So we have a handful of face up and active. And we're really looking to further expand that program earlier in the year. So, I think this might be a little bit early to ask, But I think investors are encouraged about the improvements with the Inspire 5 once that gets through approval. Do you think as it gets closer, like some physicians will wait for it to be approved where it might actually delay, start some implants? Great question. I don't think so. So we see this in the past with a new remote with Bluetooth with going to silicone leads going to Inspire 4 from the Inspire 2, now that's back in 2018. But we just don't see that slowdown once we have a patient flow and the patient could schedule was a standard pathway. Inspire 4 going 5, while it puts the something inside the can, it doesn't have a dramatic impact such as like when we go into future generations with adults 50 tact or with adults titration. So, we don't expect to see any kind of slowdown and we know that demand continues to be strong. And then follow-up just a PREDICTOR study with initial readout in 2023, I think you mentioned that an industry presentation earlier this year that there was some data published from another study? Can you comment on what that showed? And why that would be encouraging for the readout for PREDICTOR? Absolutely. So we finished the first 300 in '22. At the same time, Dr. Weiner is a physician in Arizona give him a shout out, because his paper was published several weeks ago with the first100 patients. And we're getting into data now from the first 300. Right now, it's in the quality stage, meaning that we get physician overreach of the data for quality control. So, we're right in that process, but we also noted there were patients with a higher BMI above 32. So we actually are entertaining the opportunity to continue that study and actually increase to maybe add another 300 patients go to 600 being able to widen the number of patients that we can treat with that. So very active program, we're in the process of getting into quality control on the first 300. And we're looking to just continue enrolling patients, because the data is we'd like what we see and we think that we might be able to treat even a higher BMI population. So you'll expect to expect us to say no, we're going to 600 patients in. So, Tim, forgive me, maybe I missed the new store, same store metrics provided. If I could ask specifically the 225 or so sites added last year? How many implants did they do for the full year? We don't have that specific numbers in front of those, but remember how we do new sites. And a new site is anybody who has opened up during the year. So any site that we opened in the fourth quarter, obviously they were only able to do their first cases. So, they do one or two cases in November, December. Anybody who opened up January 1 of 2022 is still in the same bucket of a new center. And they have the opportunity to reorder right and do additional patients to the year. So, some of those can be productive accounts by the time they get to the end of 2022. So, it's kind of the way that we established case centers, and we established them per year. So, yes, I don't really have the exact number of what percent of the cases were from the class of 2022. First, let's define account and account is a purchasing unit, right. That would be a hospital that borders product from us. That's what we call a center. A center can have several different accounts per se. So, there may be catch up back down to who's on the website, right. We don't have one center on a website. We could have multiple centers on there, right. The sleep practices could be on the website along with the planning surgeon website. So turnover, we don't have a whole lot of center turnover, those are purchasing units. But sometimes, they'll go on hold if the surgeon moves, but go ahead. I guess Tim, what I was really getting at just trying to get my arms around. You'll have 905 sites exiting FY '22. Great, but does 905 really imply that onboarding was, I don't know, pick a number, 1100, and then some bled out for the various reasons that you have mentioned on calls in the past, they didn't do implants. You'll kick them out the list and all that, and then you'll exit it at 905. So just kind of trying to understand what the turnover is? How many don't come so to speak? Very low, very, very low, and I don't think in the fourth quarter we really closed any sites. So what you see is additive and 905 is the active number of centers. And during COVID, we reported, I think once we closed 15 sites and every time we closed like 12. By the way, some of those sites have a surgeon move back in our back-end process. So, we have very, very low turnover of a site once they become active, now we want to continue to work with that site to be able to increase utilization. Doesn't mean a site if they're not productive or if they have too much of a backlog of patients that they're scheduling out too late, we'll remove them from the website. But the website and an active center are two independent functions. Thank you. This concludes the Q&A session for the conference. I'd now like to turn the call back to Tim for any closing remarks. Thank you, Josh, and thanks for all for joining the call today. As always, I'm grateful to the growing team of dedicated Inspire employees for their enthusiasm, hard work, and continued motivation to achieve successful and consistent patient outcomes. The Inspire team's commitment to patient remains unmatched and is the most important element to our success. I wish to thank all of our employees as well as the healthcare teams for their continued efforts, as we remain focused on further expanding our business in the U.S., Europe, and in Asia. All of you on the call, we appreciate your continued interest and supportive Inspire and look forward to providing you with further updates in the month ahead.

EarningCall_435

Ladies and gentlemen, thank you for standing by and welcome to Mattel's Fourth Quarter and Full Year 2022 Earnings Call. All lines are placed on a listen only mode to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Mr. David Zbojniewicz, Vice President of Investor Relations. Please go ahead sir. Thank you, operator and good afternoon everyone. Joining me today are Ynon Kreiz, Mattel’s Chairman and Chief Executive Officer; Richard Dickson, Mattel’s President and Chief Operating Officer; and Anthony DiSilvestro, Mattel’s Chief Financial Officer. As you know, this afternoon, we reported Mattel’s 2022 fourth quarter and full year financial results. We will begin today’s call with Ynon and Anthony providing commentary on our results, after which, we will provide some time for Ynon, Richard and Anthony to take questions. To help supplement our discussion today, we have provided you with a slide presentation. Our discussion, slide presentation, and earnings release may reference non-GAAP financial measures, including adjusted gross profit and adjusted gross margin; adjusted other selling and administrative expenses; adjusted operating income or loss and adjusted operating income or loss margin; adjusted earnings per share; adjusted tax rate; earnings before interest, taxes, depreciation, and amortization or EBITDA; adjusted EBITDA; free cash flow; free cash flow conversion; leverage ratio, net debt, and constant currency. In addition, we present changes in gross billings, a key performance indicator. Please note that we may refer to gross billings as billings in our presentation and that gross billings figures referenced on this call will be stated in constant currency unless stated otherwise. Our slide presentation can be viewed in sync with today’s call when you access it through the Investors section of our corporate website, corporate.mattel.com. The information required by Regulation G regarding non-GAAP financial measures as well as information regarding our key performance indicator is included in our earnings release and slide presentation and both documents are also available in the Investors section of our corporate website. The preliminary financial results included in the press release and slide presentation represent the most current information available to management. The company’s actual results, when disclosed in its Form 10-Q, may differ from these preliminary results as a result of the completion of the company’s financial closing procedures, final adjustments, completion of the review by the company’s independent registered public accounting firm, and other developments that may arise between now and the disclosure of the final results. Before we begin, I’d like to caution you that certain statements made during the call are forward-looking, including statements related to the future performance of our business, brands, categories, and product lines. Any statements we make about the future are, by their nature, uncertain. These statements are based on currently available information and assumptions and they are subject to a number of significant risks and uncertainties that could cause our actual results to differ from those projected in the forward-looking statements. We described some of these uncertainties in the Risk Factors section of our 2021 annual report on Form 10-K, our first quarter 2022 quarterly report on Form 10-Q, our earnings release and the presentation and the other filings we make with the SEC from time to time, as well as in other public statements. Mattel does not update forward-looking statements and expressly disclaims any obligation to do so, except as required by law. Thank you for joining our fourth quarter and full year 2022 earnings call. Our fourth quarter results were below our expectations as the macroeconomic environment was more challenging than anticipated. We entered the quarter expecting POS to accelerate. We did see POS growth in the quarter, including double-digit growth in December, but it came later than expected and was not enough to offset lower than anticipated consumer demand in October and November. This led to increased discounts and promotions by retailers and a more cautious approach to their inventory replenishment as they manage their existing stock. Our gross margin was negatively affected by higher cost to manage our inventory, but lower operating expenses helped reduce the impact on our bottom line results. Despite the very challenging environment, we achieved full year growth in net sales in constant currency for the fourth consecutive year, including over 2021, which had the company's highest annual growth rate in decades. We lowered our debt, further improved leverage ratio and ended the year on strong financial footing. Our balance sheet is in the best position it has been in years, which will provide more flexibility to execute our strategy. Looking at key financial metrics in the fourth quarter as compared to the prior year, net sales declined 22% or 19% in constant currency. Adjusted operating income declined $185 million to $79 million. Adjusted earnings per share declined $0.35 to $0.18 and adjusted EBITDA declined $163 million to $158 million. POS for the quarter was up mid-single digits and up in all four regions. Mattel outpaced the industry and gained market share in the fourth quarter per NPD. Putting it in historical context, this was Mattel's highest fourth quarter POS in eight years. Looking at key financial metrics for the full year as compared to the prior year, net sales were flat or up 3% in constant currency with growth in gross billings in all four regions. Adjusted operating income declined 10% to $689 million. Adjusted earnings per share declined 4% and to $1.25. Adjusted EBITDA declined by 4% to $968 million and leverage ratio improved to 2.4 times compare to 2.6 a year ago. POS for the year grew low single digits and was up in all four regions. This was the highest full year POS in nine years and second highest on record. Comparing 2022 results to 2019, before the pandemic, net sales in constant currency were up more than 20% and adjusted EBITDA more than doubled. The toy industry continued to show its resilience despite macroeconomic challenges. Per NPD, following two years of double-digit growth and a record year in 2021, the toy industry finished flat compared to the prior year and up 22% compared to 2019 prior to the pandemic. We believe the toy industry is a growth industry, and we expect it will continue to grow over time. That said, given continuing macroeconomic headwinds and market volatility that may impact consumer demand, we expect the industry to be flat to slightly up in 2023. Looking at gross billings in constant currency by category. In the fourth quarter, Dolls, Infant, Toddler and Preschool or ITPS and our challenger categories, in aggregate, were down significantly as retailers reduce replenishment orders, Vehicles was up strongly. POS significantly outpaced gross billings and was positive for Dolls, Vehicles and Challenger categories and flat for ITPS. For the full year, vehicles in challenging categories, gross billings grew meaningfully where Dolls and ITPS declined. POS for vehicles and Challenger categories grew low double digits, while for Dolls and ITPS, POS declined low-single digits. Per NPD, Mattel was the number one toy company in the US overall and number one globally in our leader categories, Dolls, Vehicles and Infant, Toddler and Preschool for both the fourth quarter and full year. As it relates to our power brands. Barbie and Fisher-Price and Thomas & Friends were down significantly as retailers reduce replenishment orders, Hot Wheels was up strongly. POS for each of our power brands significantly outpaced gross billings for the quarter. For the full year, Barbie was down following two years of double-digit growth, including the highest year on record. We are very confident about Barbie's strength and continued long-term growth. Hot Wheels performed extremely well and achieved its fifth consecutive record year. Fisher-Price and Thomas declined. Hot Wheel's POS was up low-double digits while Barbie and Fisher-Price and Thomas' POS were down low-single digits. Per NPD, for both the fourth quarter and full year, Barbie, Hot Wheels and Fisher-Price were each the number one global property in their respective categories, and Barbie was the number two global property overall. Looking at our multiyear performance, we have been successfully executing our strategy to grow Mattel's IP-driven toy business and expand our entertainment offering. Our portfolio is well balanced by category, genre, target demographics and retail channel. Inherently, there will be puts and takes by individual brand varying by quarter and by year. But our business model leverages our global assets and capabilities and allows us to scale our portfolio as a whole. While the fourth quarter was below our expectations, the full year results tell a more complete story in the context of our multiyear growth trajectory. Notably, holiday results were heavily skewed by the volatility and timing of retail inventory movement throughout the year, not by the underlying marketplace performance of our business, with growth in POS for both the fourth quarter and the year. 2022 was another year where we made meaningful progress on key priorities. Here are just a few highlights. We expanded Hot Wheels to new categories such as remote control and skate. We revitalized and relaunched Monster High which was the number one relaunch property within Dolls in the US in the fourth quarter. We continued to strengthen our relationships with the major entertainment companies with additions or extensions of key licenses, including Disney Princess and Disney Frozen, Pokemon and Universal's Trolls. We have grown Mattel Creations, our collector D2C business, which is capitalizing on the strength of our franchises and built-in fan base, increasing traffic by over 40% and volume by over 85%. We achieved $106 million of cost savings in 2022 from our Optimizing for Growth program and increased the targeted 2023 cost savings goal to $300 million from $250 million. We also made meaningful progress on capturing the full value of our IP. We partnered with Skydance Media to develop a Matchbox live-action motion picture as part of our growing development slate and announced that J.J. Abrams' Bad Robot will produce the Hot Wheels movie with Warner Bros. The Barbie movie completed principal photography and is in post production towards its global theatrical release this summer. On the television side, we launched 11 series and specials, including our first live-action movie musical Monster High, which premiered at Nickelodeon and Paramount+. The Mattel Adventure Park is under construction and is expected to open in the fourth quarter of 2023. And the Mattel163 mobile gaming joint venture with NetEase grew to over $175 million in revenue. As we look ahead to 2023, we continue to foresee a period of volatility and macroeconomic challenges impacting consumer demand. Additionally, there are two significant factors that will impact our 2023 performance. These are elevated retailer inventory levels, which will have a onetime negative impact on our top line and incentive compensation returning to target levels, which will increase SG&A. With that context, in 2023, we expect Mattel full year net sales in constant currency to be comparable to 2022 and for adjusted EBITDA to be in the range of $900 million to $950 million. Our guidance assumes growth in consumer demand for our product and positive POS for the year. We aim to outpace the toy industry and gain market share. Beyond 2023, we believe our strategy will drive top and bottom-line growth. In closing, while the fourth quarter was below expectations, the full year growth in constant currency and increase in consumer demand for our product speak to the strength of our portfolio as a whole, even in a challenging macroeconomic environment. We believe we are well positioned to continue executing our multiyear strategy to grow our IP-driven toy business and expand our entertainment offering and create long-term shareholder value. Reflecting our improved financial position and confidence in our strategy, we expect to resume share repurchases in 2023. We are committed to Mattel's purpose to empower the next generation to explore the wonder of childhood and reach their full potential. And to our mission to create innovative products and experiences that inspire, entertain, and develop children through play. We look forward to updating you on the progress of our strategy at our upcoming Virtual Investor presentation. Thanks Ynon. As Ynon mentioned, Mattel's fourth quarter performance was below expectations. I will start with a discussion of those items, which negatively impacted our performance relative to guidance. Our consumer takeaway or POS was below expectations as the macroeconomic environment proved more challenging than anticipated. Retailers reduced replenishment orders more than we anticipated and we incurred higher costs to manage our inventories, including closeout sales, as well as the negative fixed cost absorption impact from lower sales in the fourth quarter. With the shortfall to expectations, we significantly reduced incentive compensation, which mitigated the earnings impact in 2022. With that context, while POS increased by mid-single-digits in the fourth quarter, net sales were $1.402 billion, down 22% compared to the prior year or down 19% in constant currency. Adjusted gross margin declined by 620 basis points, reflecting the impact of managing inventory levels and cost inflation. Adjusted operating income declined by $185 million to $79 million, adjusted EPS declined by $0.35 to $0.18 and adjusted EBITDA declined by $163 million to $158 million. Looking at our full year results, net sales were flat as reported or up 3% in constant currency. Adjusted gross margin declined 230 basis points to 45.9% due primarily to cost inflation, higher cost of managing inventories, and increased royalties, partly offset by price increases and cost savings. Adjusted operating income was $689 million compared to $763 million in the prior year, while adjusted EPS declined by $0.05 to $1.25. Adjusted EBITDA declined by $39 million or 4% to $968 million, primarily due to the lower adjusted gross margin partly offset by lower adjusted SG&A. Turning to gross billings in constant currency beginning with the fourth quarter. As we've discussed on prior calls, first half gross billings outpaced POS as retailers were replenishing lower inventory, exiting the prior year and building inventory levels ahead of the holiday season. We expected this to reverse in the third quarter and accelerate in the fourth quarter, with POS outpacing gross billings. Although POS did improve and outpaced shipping in the fourth quarter, consumer demand was lower and came later than expected. This caused retailers to reduce replenishment orders throughout the quarter, which impacted our performance across categories and regions. With that context, while POS increased by mid-single digits in the quarter, Total company gross billings declined 19%. Looking at gross billings in the fourth quarter by category, Dolls was down 24% with declines in Barbie and American Girl, partly offset by growth in Monster High and early shipments of Disney Princess and Disney Frozen. Barbie gross billings declined 30% with POS down 1%. Barbie outpaced the industry in the fourth quarter and gained global market share per NPD. Vehicles grew 10%, driven by double digit growth in Hot Wheels and successful launches of remote control and skate. Infant, Toddler and Preschool declined 31%, while POS was flat. Mattel was number one globally in the Infant, Toddler and Preschool category and gained share in the quarter per NPD. Challenger categories in aggregate declined 22% due to lower sales of Action Figures, Games and Plush. Building sets was comparable to the prior year. For the full year, total company gross billings grew 3% with POS increasing low single digits. Dolls was down 6% due to declines in Barbie, American Girl and Spirit, partly offset by growth in Monster High, early shipments on Disney Princess and Disney Frozen and strength in Polly Pocket. As discussed last quarter, sales of higher priced items have been negatively impacted by macroeconomic challenges facing consumers. Barbie was down 8% following two years of double-digit growth. American Girl declined 16%, primarily due to soft performance for 2022 Girl of the Year and historical characters. Vehicles grew 20%, driven by Hot Wheels and Matchbox. Hot Wheels grew 22%, driven by core diecast cars, Monster Trucks and category expansion. Infant, Toddler and Preschool was down 6%, due to declines in baby gear, and infant, partly offset by growth in Imaginext and Little People. Mattel outperformed the industry and gained global share for the full year per NPD. Challenger categories increased 10% overall, with gains in action figures and building sets, partly offset by declines in Plush and Games. As Ynon mentioned, quarterly results were heavily skewed by the volatility and timing of retailer inventory movement throughout the year, not by the underlying marketplace performance of our business with growth in POS for both the fourth quarter and year. Looking at fourth quarter gross billings in constant currency by region. North America declined 25% while POS increased mid-single digits. EMEA declined 16% and POS increased mid-single digits. Latin America declined 8% with POS up low-single digits. And Asia Pacific declined 5% with POS increasing high-single digits. Ending retailer inventory levels were up in both dollars and weeks of supply compared to low levels a year ago and are elevated as we head into 2023. Retail inventory is predominantly current and of good quality. For the full year, gross billings and POS grew in each of our four regions. North America gross billings grew 1% with POS up low-single digits. EMEA increased 5% with gains in all key markets. POS increased high-single digits. Latin America increased 14% with strong growth in Mexico and Brazil. POS increased low-single digits. Asia Pacific sales grew 1% with gains in Australia and Japan, offset by the impact of COVID-related closures in China. POS increased mid-single digits. Per NPD, Mattel was number one in the US for the 29th consecutive year, number two in EMEA and number one in Latin America. Adjusted gross margin declined 620 basis points to 43.1% in the quarter. The decline was due to several factors: inventory management, primarily closeout sales and obsolescence of 350 basis points, cost inflation of 330 basis points, fixed cost absorption of 180 basis points associated with lower volume and increased royalties and other of 140 basis points. These negative factors were partly offset by price increases, which contributed 220 basis points and savings from our Optimizing for Growth program, which had a positive impact of 170 basis points. For the full year, adjusted gross margin declined 230 basis points to 45.9%. Moving down to P&L. In the fourth quarter, advertising expenses declined 9% to $243 million as we reduced advertising in response to lower volume. For the full year, advertising expense declined 2% and as a percentage of net sales declined 20 basis points to 9.8%. Adjusted SG&A in the fourth quarter declined $73 million, or 21%, to $282 million. The decline was primarily due to significantly reduced incentive compensation as well as cost savings, partly offset by increases in compensation and bad debt expense. Adjusted operating income in the fourth quarter was $79 million compared to $264 million a year ago. The decline was due to lower sales and adjusted gross margin, partly offset by lower advertising and adjusted SG&A. Adjusted EBITDA declined by $163 million to $158 million, impacted by the same factors. Cash from operations for the full year was $443 million, compared to $485 million in the prior year. The decline was primarily due to higher working capital usage, partly offset by improvements in net income, excluding the impact of non-cash items. Free cash flow was $256 million, compared to $334 million in the prior year. The decline was due to lower cash from operations and increased capital expenditures. Capital expenditures increased by $35 million to $187 million, reflecting investments to increase production capacity in fashion dolls and die-cast cars to support future growth. As a percentage of adjusted EBITDA, free cash flow conversion was 26%, compared to 33% in the prior year. Taking a look at the balance sheet. We finished the year with a cash balance of $761 million, compared to $731 million in the prior year, as free cash flow was primarily used to reduce debt. In the fourth quarter, we redeemed the $250 million, 3.15% notes due 2023. Total debt was $2.326 billion, compared to $2.571 billion in the prior year, a reduction of $245 million. Accounts receivable declined by $212 million to $860 million, primarily due to the decline in fourth quarter net sales. Inventory was $894 million, compared to $777 million in the prior year, an increase of $117 million or 15%. Leverage ratio improved to 2.4 times at the end of the year, compared to 2.6 times in the prior year. We continued to improve our credit metrics, as highlighted by the recent action by Moody's Investor Services to upgrade our credit rating to investment grade. We continued to generate significant cost savings. Optimizing for gross savings were $39 million in the quarter and $106 million for the full year, exceeding our prior forecast of $80 million to $90 million. Since 2021, when we launched the program, we have achieved $204 million of annualized savings. Based on our progress and continued focus on optimizing our operations, including actions to further streamline our organizational structure, we are increasing the targeted 2023 cost saving goal to $300 million from $250 million. Total estimated cash expenditures to implement the program are now forecasted to be $135 million to $165 million. As Ynon said, looking ahead to 2023, we continue to foresee a period of volatility and macroeconomic challenges impacting the consumer. Additionally, there are two significant factors that will impact our 2023 performance. Anticipated retail inventory reductions will have a onetime negative impact of three to four percentage points on our topline, particularly in the first half and incentive compensation returning to target levels will increase SG&A by approximately $100 million. With that context, we expect full year net sales in constant currency to be comparable to the prior year with growth in the Dolls and Vehicles categories, offset by declines in Infant Toddler and Preschool and in our Challenger categories in aggregate, primarily due to action figures as we lap theatrical tie-ins in 2022. Our guidance assumes growth in consumer demand for our product with positive POS performance for the year. With respect to the Power brands, we expect Barbie and Hot Wheels to grow and for Fisher-Price to decline. Going forward, the Fisher-Price Power brand will exclude Thomas & Friends, allowing greater clarity on the brand's performance. In connection with The Barbie movie, and as part of our capital-light approach, 2023 guidance includes movie-specific toy sales, a producer fee, and estimated participation in the movie success for licensing the IP. Foreign currency translation is expected to have a slightly positive impact on our topline performance based on current spot rates. Adjusted gross margin is expected to increase to approximately 47% compared to 45.9% in 2022. This reflects the anticipated benefit from pricing and cost savings, partly offset by cost inflation and fixed cost absorption associated with lower production volumes. With respect to timing, we expect the gross margin improvement in the second half. In the middle of the P&L, we expect SG&A to increase as incentive compensation is forecast to return to target levels, while advertising is expected to remain relatively stable as a percent of net sales. Adjusted EBITDA is expected to be in the range of $900 million to $950 million and adjusted EPS is expected to be in the range of $1.10 to $1.20 per share. Interest expense in 2023 is expected to benefit from the redemption of the $250 million 3.15% notes at the end of 2022 and the adjusted tax rate is forecasted to be approximately 25% to 26% compared to 24% in 2022. Capital expenditures are forecast to be in the range of $175 million to $200 million compared to $187 million in 2022. Anticipated spending in 2023 includes continuing spend to increase capacity of fashion dolls and die-cast cars supporting future growth as previously announced. Free cash flow in 2023 is expected to exceed $400 million, driven by a higher conversion ratio as we improve our working capital performance. In terms of phasing, sales and earnings are expected to be down significantly in the first half as we wrap 20% top line growth last year, and further reflecting anticipated retail inventory reductions in 2023. This is expected to be followed by top and bottom line growth in the second half. We are operating in a challenging macroeconomic environment with higher volatility, including inflation that may impact consumer demand. The guidance considers what the company is aware of today, but remains subject to further market volatility, any unexpected disruption and other macroeconomic risks and uncertainties. With our improved balance sheet and outlook for increased free cash flow, we expect to resume share repurchases in 2023 with approximately $200 million remaining under the company's current authorization. This action is consistent with our capital allocation priorities and reflects confidence in our strategy to create significant long-term shareholder value. While Mattel's fourth quarter was below expectations, we outpaced the industry and gained market share. In 2022, we continue to improve our financial position, further reduced our debt and achieved an investment-grade rating from Moody's, one of the three major ratings agencies. We look forward to sharing more information on our financial outlook and capital deployment priorities at our upcoming virtual investor presentation. Good evening. Thank you for the question. Anthony, I wonder if you could give just a little perspective on inventories at retail. Like specifically, like how far below normalized levels our retail inventories? And do you get a sense of how willing they are at this point to get back to normalized levels at some point during the year? And then I've got a follow-up. Sure. So let me comment on the retail inventory situation. As we look at quarter end retailer inventory levels, they are actually up in both dollars and weeks of supply and that's comparing to a low level coming into 2022. And I will also say that those inventory levels at year-end are elevated as we head into 2023 and also that they are predominantly current and of good quality. And the issue is, and this is in our 2023 guidance is we expect retailers globally to reduce inventory levels in 2023. And that's forecasted to have a negative impact on our sales of approximately 3 to 4 percentage points. And again, that's what we've reflected in our guidance and most of this issue will occur in the first half of 2023. Got it. And then it was good to see that Hot Wheels was up and pretty strong in the fourth quarter. I know you've added remote control and skate, but I'm curious, given that they've got relatively low price points, was that just a sweet spot for consumers given – given that impact? Thank you for bringing up Hot Wheels. It was an incredible performance in 2022. The growth was really fueled by strong performance across the brand, but in particular, our die cast assortment, Hot Wheels Monster Truck segment performed exceptionally well. We also had incredibly exciting two new innovative launch segments. We are in the RC category as well as Hot Wheels Skate, which performed exceptionally well. This was also for the full year, Hot Wheels achieved its fifth consecutive record-breaking year of gross billings. Our basic car assortment remained the number one best-selling toy in the world and Hot Wheels was the number one Vehicles property globally and also, by the way, the number five property across all toy categories. The momentum continues we're incredibly confident in Hot Wheels' long-term trajectory, and we're really looking forward to sharing more with you at the virtual investor event. Hi. Thanks for taking my question. I want to spend a little bit of time on the POS expectation for 2023. It seems like you're expecting POS up maybe in 3% to 4%, which is maybe a little bit better than 2022. You mentioned a volatile environment several times and the fact that retailers are reducing inventory levels. So maybe you can just help us understand what drives confidence in POS being better in 2023 than 2022 given these factors? And it clearly seems like we have a weaker consumer than last year. Hi, Megan. Yes, look, so the toy industry continued to show its resilience over the year, despite the macro challenges. And after two years of double-digit growth and a record year in 2021, the toy industry was flat essentially in spite of the economy, but still up 22% relative to 2019 pre-pandemic. So we believe this speaks to the resilience and strength of the industry and that the toy industry is a growth industry and that will continue to grow over time. Now what we also said is that given the continuing macro challenges, we do expect headwinds that may impact consumer spending and affect consumer demand. So we do expect the industry overall to be slight -- sorry, flat to slightly up in 2023. In this environment, we believe we will outperform the industry, achieve positive POS for Mattel. 2023 is off to a good start in terms of consumer demand for our product. It's still early, obviously, but we are seeing a good start. We have several key initiatives and drivers for the year on top of what we do that you're very familiar with, and all in all, feel confident about the composition of our portfolio. It's well balanced by category, by brand, by retail channel, by target demographic and we feel well positioned heading into 2023. Great. Thank you. And then, maybe a follow-up for Anthony. You mentioned the phasing of sales and EPS. It should be heavily -- growth heavily weighted to the second half. On that 3% to 4% impact to the top line, can you just help us understand maybe the magnitude of how much the first half should be down? If I'm doing the math correctly, that 3% to 4% is maybe a high single, low double-digit impact to the first half. So is that -- is it more heavily concentrated in 1Q because of where retail inventory levels are? And just any more help in terms of thinking about the phasing of how much the first half should be down. Sure. I think the way to look at it is, two parts to it, and you have to think about the phasing in 2022, right? And I would say that our sales and earnings for 2023 are expected to be down significantly, primarily in the first half, as we wrap 20% top line growth last year, recall our gross billings to outpace POS, so we won't have that. So that's going to be a reversal. And in addition to your point and further, reflecting the anticipated retail inventory reductions in 2023. So we kind of have a compounding effect in terms of what we're wrapping as well as what we're anticipating this year. Hey, good afternoon. Thanks for taking my questions. The first one, I was just curious if you could help size up in any way how incremental Monster High and Disney Princess/Frozen could potentially be for you this year? Well, on the Monster High front, first of all, we are very excited about the launch. It was one of the top performing launches this quarter, this past quarter, and we have full global rollout for the year. In connection with that, we've got incredible momentum on our content strategy as well with our partnership with Nickelodeon, new content that's going to be continuing to come out, inspiring and ultimately motivating additional purchases. We have a great history with the brand itself. Historically, it was one of the top fashion doll brands years ago when it launched. The relaunch itself was such a bright spot for our quarter. As mentioned, there's the number one relaunch in the United States in 2022 per NPD and this is being only on shelves for two months. The franchise strategy behind this involves comprehensive content, musical movie with a live action series, was the number one kids and family movie on Paramount, launched in 23 countries. We couldn't be more excited about the performance and of course, with the global rollout. There's also, obviously, within our Doll portfolio, an incredible lineup. The industry itself is calling it the year of the dolls. We've got, obviously, the leadership position with Barbie and our Barbie theatrical, the continued global rollout of Monster High and New Disney Princess, Frozen products. They've already started to hit shelves earlier this year. In addition to that, we also have Universal's Trolls. So, net-net, we couldn't be more excited about the portfolio that we have. We are the number one doll category-driven business in the industry and 2023 will be a very exciting year for us. And again, we will share a lot more detail at our Virtual Investor event. Great. Thank you. That's great to hear. And then as a follow-up, maybe for Anthony, I know you mentioned that the expectation for gross margin would be that we should see an improvement through the year. If you could help dimensionalize that in any way. I'm curious to what extent we are we expecting to see more discounting in the first half of the year, or can you just talk about what the puts and takes are on that cadence? Thanks. Sure. Four primary drivers in our gross margin guidance, we are forecasting 47% in 2023, up from 45.9% this year. And the two positive drivers for us being pricing, and that's mostly the carryover impact of our 2022 actions. Second is our optimizing for growth savings. As Ynon said in the remarks, we have increased our OFG target to $300 million from $250 million and the majority of this program benefiting cost of goods sold. And then going the other way, we continue to see some inflation in COGS, although it's significantly moderated from what happened in 2022. And that's because although we foresee some deflation in ocean freight, it's more than offset by increases in labor rates in some of our supply chain markets as well as some inflation on certain material and packaging items. And then the fourth item, which is a negative, we ended a bit high with owned inventory levels, which we plan to reduce in 2023. So we lowered our production schedule to do that, and that comes with a negative fixed cost absorption impact, which we factored into our guidance as well. Got it. That's -- just to clarify on -- I think there was like a 350 bps headwind from discounting in the gross margin rate for 4Q. But I'm guessing that was more related just to the holiday season. We're past that at this point, we shouldn't expect that to be a meaningful headwind in the first half of 2023? Hey, good afternoon. Thank you. Advertising declined about, what, 9% in the fourth quarter. It was down last year as well in the fourth quarter, but that's because you have no inventory to sell. So, this year, plenty of inventory, why spend less on advertising? Why do that and not try and stimulate some demand and stimulate more POS? Yes. So, Gerrick, as you know, heading into the fourth quarter, we had planned to actually increase advertising, assuming we hit our POS aspirations. But as we went through the quarter, we did see lower volumes and given a good portion of our spend is on digital media. That gives us flexibility to make adjustments in real-time. And as we saw the volumes come in a little soft, we made some adjustments to our advertising. It wasn't all that significant, I don't think. We finished the year, I think, down just 2% and at 9.8% of net sales, so down 20 basis points versus last year. So, a full spend there to support demand drivers and our products and our brands. Okay. This question was asked before, but it wasn't answered, so I'm going to ask it again. Disney Princess, how much do you think that will contribute to the year? What's built in your guidance there? And how much was shipped in the fourth quarter? Yeah. So as we, again, give the guidance, one of the primary drivers is anticipated growth in our Doll category. As Richard said, we've got Monster High. We've got Disney Princess. We've got Trolls. We've got the Barbie movie so that's all inside of that. And we also expect Vehicles to grow. So those are the key primary drivers, and that's all inside of our guidance. I don't know if that answers the question, Gerrick? Okay. Well, we know it was what, roughly a $250 million property like Hasbro. It's a $400 million property wouldn't left you six years ago. So maybe somewhere in between? Yeah. We can't comment, Gerrick, on that specifically. But what we are comfortable in saying is we feel very -- that we have great plans and exciting opportunity to scale Disney Princes and Frozen and take it to new levels. Hey, thanks for taking the question. I'm just trying to reconcile a couple of your comments, and I may have missed this in the comments earlier because it was very thorough. You're calling for POS to be up, you're calling for an industry to be up, you're going to be flat, you have a couple of lines that are effectively starting from zero Disney Trolls and Monster High in the year. So I'm just kind of curious -- and I think you also said Vehicles will be up for the year. So I'm just -- could you give us a little bit more color on where the weakness is, the quality of the inventory of those lines that are weaker and what's your confidence on moving through some of those segments? Thanks. Sure. Let me unpack the top line guidance again. I mean, overall, we expect constant currency net sales to be flat with growth in the Dolls and Vehicles categories, offset by decline in Infant, Todder, Preschool and Challenger categories, that's primarily in Action Figures as we wrap the theatrical tie-ins in 2022. Our guidance includes a one-time negative impact from the anticipated reduction in retailer inventory levels, and that's about three to four percentage points that's inside the guidance. We're also assuming underlying growth in consumer demand as measured by POS. And as Ynon said, our expectation for the toy industry is it -- for it to be flat to slightly positive. So that implies that we expect to outpace the industry and gain market share in 2023. Got it. Thank you for that clarity. And I guess my second question, if I could. What, kind of, impact should we expect from the Barbie movie? And what kind of mix do you see in the Doll category between Barbie, Monster High and American Doll and Disney Princess? In terms of the Barbie movie, we've made certain assumptions and factored into our guidance the impact of you know, movie-specific toy sales, and then more closely related to the movie producer fee and estimated participation in the movie success for licensing, you know, the IP, and then again, that's all, factored into the guidance that we gave. Thanks. Thanks for taking my question. Can I go back to the inventory levels at retail for just a second? How much exactly are weeks of inventory up year-over-year? Because it seems to be that there's this big gap between POS and sales declines for the quarter close to something like 30% delta, which shows you took very aggressive actions in the quarter for the quarter to clean that inventory? How -- I'm just trying to understand how is it still impacting full year by as much as 4 percentage points. Is there anything that would break that math of how inventories can be up significantly, or are they not up significantly? Because being up is not surprising because you were you're comping not so optimal levels of inventory given supply chain disruption in the year prior. So just trying to understand that a little bit better. And then I have a quick follow-up. Yes. I think the thing to recognize the typical pattern for retailer inventory is for them to build through the first three quarters of the year and then for it to decline in the fourth quarter. So we typically do see an inventory reduction in Q4. So that's not unusual. And although, right, it's been a little more significant in the fourth quarter than it's been in the past. As we look at the data, and we've got good data on retailer inventory levels, we do believe they're elevated and the quantification of that is the correction we're anticipating for 2023, which is that 3 to 4 percentage points of top line impact. So little more to burn off here going into 2023. Okay. And then on Barbie, it's very clear that it's very hard to sustain margins when Barbie declines. So my question is, whether you're planning for that brand to grow. And I think you did say you're planning on Barbie 2 growth for the year. What offsetting factors are there in case that doesn't happen from sort of Monster High, if you could take a moment to discuss kind of margin differential in Barbie versus Monster High, it would be super helpful. And then just an unrelated housekeeping question, does your EPS guide in core share buyback? So I'll start with the Barbie question and overall portfolio. First off, it's important to recognize, Barbie actually outpaced the industry in the fourth quarter and gained global market share per NPD. It was also the number one global Dolls property and also the number two global industry property in the fourth quarter. Now the fourth quarter performance was below expectations. POS, however, was only down 1% for the quarter, which, of course, significantly outpaced shipping. When we look at the brand's performance in context of the economic environment, retail volatility category dynamics and of course, consumer takeaway, we're very confident that our brand is really in a strong position to continue its leadership in the industry. And of course, its long-term potential. It continues to resonate with consumers in a profound way. And the movie expectation is just one example of that. But we're expanding our category reach. We're continuing to grow share, all of this is an indication of the overall health of the brand. Now as you asked, it's also really important to recognize, and we talk a lot about category management, that Barbie is part of our Dolls portfolio, which also continues to be the number one portfolio in the world in the Doll category, and Mattel overall continued to grow share in both the quarter and the full year in the Doll category per NPD. The lineup that we have coming for 2023 really will be the year of the doll. And of course, Barbie leading the pack in the context of what she represents, but there are incredible things happening from Mattel in the Doll category, most notably, of course, the theatrical for Barbie, but the Disney Princess collection and Frozen product lines that have already started hitting shelves earlier this year have already started to gain traction. Monster High, global rollout, as we mentioned before, and of course, the addition of Universal's Trolls, Polly Pocket, one of our strongest legacy brands as well. So there is really a great winning hand in the doll category that will really show up on the scoreboard. And again, I think we'll get into much more detail in our Investor Day coming up soon. Yes. Just a quick question for Anthony. Does the EPS guide includes share buybacks or not? Thank you. Thank you, very much. Yes. So we were happy to be able to announce that we expect to resume share repurchases in 2023. That’s really a reflection of our improved financial position, our improved outlook for free cash flow. We expect to do over $400 million in 2023. And it's really consistent with the capital allocation priorities that we've talked about. And we've got $200 million remaining under the current authorization and yes, we've made some assumptions. It is reflected in our 2023 guidance. Hi. I was just wondering if you could give a little color on the 17% American Girl decline in the quarter. Since it's mostly a DTC brand, it shouldn't have had such channel inventory issues. So I'm just curious why the demand was down so much in the quarter. Thanks. Yes. Thanks, Linda. Again, I'll start by reinforcing this is truly one of the most treasured brands in the industry, let alone the Mattel Doll portfolio. And the decline was primarily due to the soft performance of our 2022 Girl of the Year and in certain historical characters. You're right, Linda, American Girl is a premium brand where the majority of our sales are in our proprietary channels. But like general retail, we did see the POS accelerate in December, but it was not enough to offset the lower than anticipated sales that we had in October and November. We did see strong sales in our New York City flagship store, which was really encouraging. But, again, the flagship was impacted overall, because our Los Angeles store was closed as we're in the process of relocating that store. We continue to believe and progress on our strategy. We're optimizing our retail footprint. We're driving a consumer omnichannel experience. There are a lot of learnings in 2022, but ultimately, we really reaffirming our strategy as a purpose-driven premium DTC offering. 2023, there's a lot to look forward to. We've got new characters, new product launch timing, new partnerships that we're going to be revealing soon and of course, the opening of our new L. A. flagship store. Again, confident in the future and looking forward to sharing more detail with you soon. Great. Thank you. And maybe just one more on inventory. I was wondering if you could touch a little bit more on if there are any categories in particular where retail inventory levels ended the year in a particularly better worse or better spot? And maybe Hot Wheels fared better than the Doll category, for example? And then just as a follow-up on capital allocation, maybe for Anthony, it was great to see the credit upgrade in November. I was curious where the conversation stands with the other two agencies and what they're looking for maybe in terms of a potential upgrade this year? And maybe as it relates to that, how you're thinking about the magnitude of share repurchases that are incorporated in your guidance for 2023? Thank you. Yes. So, in terms of inventory -- retail inventory levels, there's no category that materially over-indexes either way in terms of this situation. With respect to the rating agencies, we're in continuing dialogue with them. and discussing our results. So, we'll have to wait and see what, if any, actions that they take in the near-term. We feel really good about where our numbers are, 2.4 times debt to EBITDA were down from 2.6 last year, down from 4.1 the year before. So, we've made consistent improvement in that metric. And then lastly, on share repurchases. As I mentioned, we have $200 million of remaining current authorization, but not ready to share a specific number in terms of what our forecasted repurchases are for 2023. Hey guys. Thanks for squeezing us in. I just wanted to ask about the expectation for higher incentive comp in 2023. I think you sized that at $100 million year-over-year. I would assume most of that came out of 4Q, but how should we think about the sequencing? Do you guys have to book some of that as we move throughout the year, or should it really just hit in the fourth quarter year-over-year? A good point. The reduction this year came predominantly in the fourth quarter. But in a normal year, we would accrue that ratably through the year and adjust as we update our forecast. Okay. And then there was a comment earlier just that you're assuming some film participation in the topline guide. I'm wondering if that is sort of a new treatment or a new expectation or if we think about some of the prior 2023 targets that were out there, that you guys had obviously removed last quarter, but if you were sort of always assuming there would be some film participation when you were putting numbers into the market? Yes. We've consistently made that assumption in terms of fill and participation. Some of the franchise adjacencies that we do have get included in our category reporting as well. This concludes the question-and-answer session for today's call. I would now like to turn the call back over to Chairman and CEO, Ynon Kreiz, for final remarks. Thank you, operator, and thank you, everyone, for joining us today. Just to recap a few words. Despite the challenges in the fourth quarter, the full year results tell a more complete story in the context of our multiyear growth trajectory. As you can see, in positive POS for both the quarter and the year, and positive POS in every region for the quarter and the year, our product is in demand, and we ended the year on strong financial footing with a stronger balance sheet, lower leverage ratio, better leverage ratio. And as we see it in the strongest financial position we've been in years. We are confident about our plans and look forward to next year. I also want to thank the entire Mattel global team for doing such a great job in a challenging environment and for the contribution in 2022, an ongoing commitment to executing our strategy. We hope everyone will join us on the Virtual Investors Presentation in March. Thank you again for joining us. We will share more information on that call soon. Appreciate your interest in the company. And now back to Dave. Thank you, Ynon, and thank you, everyone, for joining the call today. A replay of this call will be available via webcast beginning at 8:30 PM Eastern Time today. The webcast link can be found in the Events and Presentations section of our Investors section of our corporate website, corporate.mattel.com. Thank you for participating in today's call.

EarningCall_436

Good morning, ladies and gentlemen, and welcome to Carrier's Fourth Quarter 2022 Earnings Conference Call. I would like to introduce your host for today's conference, Sam Pearlstein, Vice President of Investor Relations. Please go ahead, sir. Thank you, and good morning, and welcome to Carrier's Fourth Quarter 2022 Earnings Conference Call. With me here today are David Gitlin, Chairman and Chief Executive Officer; and Patrick Goris, Chief Financial Officer. We will be discussing certain non-GAAP measures on this call; which management believes are relevant in assessing the financial performance of the business. These non-GAAP measures are reconciled to GAAP figures in our earnings presentation, which is available to download from Carrier's website at ir.carrier.com. The company reminds listeners that the sales, earnings and cash flow expectations and any other forward-looking statements provided during the call are subject to risks and uncertainties. Carrier's SEC filings, including Forms 10-K, 10-Q and 8-K, provide details on important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements. [Operator Instructions]. Thank you, Sam, and good morning, everyone. Our Q4 results for sales, earnings and cash flow were all in line with our expectations, as you can see starting on Slide 2. We delivered organic sales growth of 5%, supported by another quarter of double-digit growth in light commercial and commercial HVAC, global truck and trailer and aftermarket. Pricing remained strong and our realization continued to offset inflationary headwinds. Supply chain improvements continued, allowing for a reduction of our past due shipments with further improvements anticipated in 2023. Our backlog, which ended up mid-single digits year-over-year, up 40% on a two-year stack and up 2x from 2019 remains at very healthy levels. Adjusted operating margins of 10.1% were flattish compared to last year, despite a 70-basis point impact from the consolidation of the Toshiba joint venture. We made great progress on our productivity initiatives in the quarter and achieved our full year target of $300 million in savings. Adjusted EPS was $0.40 in the quarter at the high end of our guidance range. We generated about $1 billion of free cash flow in the quarter ending 2022 with $3.5 billion of cash, allowing us to continue to play offense with capital deployment as we head into 2023. Moving to Slide 3. I am proud of our team's accomplishments last year. We delivered on our full year outlook for sales, adjusted operating margin and adjusted EPS while significantly advancing our strategic priorities. We drove 8% organic sales growth, adjusted operating margin expansion of 60 basis points and adjusted EPS growth of about 15%, when we exclude the impact of the Chubb divestiture. Though we did fall short of our original $1.65 billion free cash flow guide, we discussed in October, resulting from supply chain and related inventory challenges we did deliver on our revised guidance of $1.4 billion as a result of our strong Q4 performance. So, our track record of delivering results without surprises continues, and our team is poised to continue to deliver in 2023, in part because of key secular trends that drive demand, as you can see on Slide 4. Our customers continue to look to us for healthy and sustainable solutions, and we have differentiated offerings that meet their needs, particularly in the fast-growing heat pump space. Our North America residential heat pump sales grew 35% in the quarter to a European commercial heat pump sales were up 30%. We expect those areas to only grow stronger as the inflation Reduction Act and the RePower EU initiative propel increased adoption. Additionally, Toshiba's innovative and leading inverter technology continues to impress. When combined with our multi rotary compressors, heat pump efficiency and capacity dramatically improve. Toshiba's technology and expertise are also helping us penetrate the attractive and growing residential heat pump market in Europe. Our position in transport electrification is also market-leading. We have units operating in 15 countries and plan to ramp significantly with more than half of refrigerated transport units sold to be electric by 2030. The healthy building trends continued to be a positive in the quarter as orders were up over 80% and our pipeline increased to over $1 billion. For the full year, healthy building orders were up about 50%. K-12 also remains encouraging with our pipeline up about 60% year-over-year, and with almost two-thirds of the federal government's ESR funds yet to be allocated, we expect further acceleration into 2023. As we continue to distinguish ourselves as a climate systems and solutions company, we remain focused not only on achieving our own ESG goals, but also helping our customers achieve theirs as well. We recently increased our previous aggressive 2030 net-zero targets, committing to set greenhouse gas emission reduction targets in line with the science-based target initiative criteria. Additionally, Carrier continues to be recognized in the ESG space, including distinguished recognition in London, where our customers' heating network will provide a 50% reduction in carbon emissions to network participants. We also continued to perform on our aftermarket growth objectives, as you can see on Slide 5. When we became a stand-alone public company in early 2020, we emphasize increasing aftermarket growth rates from historical low single-digit levels. And last year, we produced another year of double-digit aftermarket growth. Our focus remains on providing differentiated digital solutions through our Abound and Lynx platforms and connecting not only our new products, but also our significant installed base. Our Abound technology now monitors over 1 billion square feet, and we recently onboarded over 100 commercial office sites for a key large-scale customer. We recently released the Abound Net Zero management, which provides customers with an easy way to view, track and analyze energy usage and emissions data across their global footprint and proactively identify conservation measures. We've made similar progress with our innovative Lynx platform and launched several new capabilities in the quarter. We expanded our reefer health capabilities to include early refrigerant leak detection, and launched a managed services linked fleet offering for a major grocery retail chain in the U.S. We achieved our goal of having 70,000 chillers under long-term agreements by the end of 2022 and expect to increase that by another 10,000 in 2023. Importantly, we also achieved our objective of having 20,000 connected chillers and plan to connect another 10,000 this year. We recently announced a strategic collaboration agreement with Amazon Web Services, to jointly build, market and sell Carrier's digital solutions. Not only are we delivering on our financial and strategic imperatives, we are also making great progress on our portfolio optimization and executing on our capital deployment priorities as you can see on Slide 6. You'll recall that at the time of our spin, we carried approximately $11 billion of debt on our balance sheet and cash of about $1 billion. Over the course of just 2.5 years, we have reduced our net debt levels nearly in half from that $10 billion level to $5.3 billion while increasing our strategic organic growth investments by over $300 million. We have also completed a number of compelling acquisitions highlighted by the consolidation of Toshiba Carrier. All acquisitions have been strategic and core to our business focused on enhancing sustainability leadership, accelerating aftermarket growth, driving digital and technology differentiation and expanding adjacencies and geographic coverage. We've also been disciplined in evaluating our existing portfolio to ensure each business is core and that we are the best owner. As a result, we optimized our portfolio by completing the sale of Chubb and our shares -- completing the sale of Chubb and our shares in Bayer while also reducing our minority joint venture count from 41 to 29 since spin. In addition to our portfolio moves, we've been disciplined and proactive with our other capital deployment actions. We have steadily and consistently increased our dividend and have completed about $2 billion in share repurchases since spin. All of this to say, we have made great progress over the last few years, but that does not mean that we are done. We are always evaluating acquisitions in our current portfolio for potential opportunities for simplification and value creation. We will remain steadfast in our commitment to keep evaluating our portfolio as we enter 2023 and beyond. Patrick will cover our 2023 guidance in more detail, but I will emphasize a few highlights on Slide 7. Focus remains very thematic for us. All of our 52,000 team members are aligned on our key priorities, and those priorities remain consistent. Carrier 2.0 is a term that we have been using internally, which represents a very purposeful shift from a primary focus on selling equipment to now using digital and innovation to provide our customers with sustainable and healthy outcomes throughout the life cycle of our product and service offerings. The result will be our continued pursuit of higher margin, high aftermarket growth rates. We remain focused on reducing costs and expect to get another $300 million in productivity in 2023. We are clear-eyed about the broader economic challenges and uncertainty in 2023 and have done our best to calibrate macro factors in our guidance that you see along the left of this slide. We expect to deliver solid organic growth, strong margin expansion, excluding TCC and high single-digit to low double-digit adjusted EPS growth. Strong free cash flow and a very healthy balance sheet enable us to play offense on capital deployment. Thank you, Dave, and good morning, everyone. Please turn to Slide 8. In short, Q4 was very much in line with our expectations and the guide we provided. Reported sales were $5.1 billion, with 5% organic sales growth driven by about 8% price with volume down a couple of points. I'll provide a bit more detail on a future slide, but in essence, we saw continued strong organic growth in HVAC, Fire & Security and global truck and trailer, which was partially offset by a very weak quarter in container and to a lesser extent, commercial refrigeration. The Chubb divestiture reduced sales by 10% in acquisitions, substantially all Toshiba Carrier increased sales by 8%. Currency translation was a headwind of 4%. All segments were price/cost positive or neutral in the quarter. Q4 adjusted operating margin was about flat compared to last year, driven by a 70-bps margin headwind related to the TCC acquisition. Strong productivity almost completely offset the margin headwinds related to the lower volume and the TCC acquisition. Adjusted EPS of $0.40 was consistent with the upper end of our full year guidance range. For your reference, we have included the year-over-year Q4 adjusted EPS bridge in the appendix on Slide 20. $1 billion of free cash flow in the quarter was also as expected, and we generated about $1.4 billion for the full year. Moving on to the segments, starting on Slide 9. HVAC reported sales included a 16% benefit from the TCC acquisition. HVAC organic sales were up 9%, driven by low single-digit growth in residential, over 40% growth in light commercial and mid-teens growth in commercial HVAC. Sales growth was driven by both price and volume. Residential movement was down about 10% in the fourth quarter and quarter end field inventory levels ended up higher than the flat year-over-year levels we targeted. Residential HVAC growth was driven by price as volume was down mid-single digits. Commercial HVAC had another very strong quarter with double-digit sales growth in applied equipment, aftermarket and controls. All regions grew double digits. Adjusted operating margin was up 60 bps with volume, price/cost and productivity more than offsetting a 100 bps margin headwind related to TCC. Full year operating margin for this segment was 15.2%, in line with the guide we provided post the TCC acquisition, which had about a 70 bps dilutive impact on 2022 for this segment. Transitioning to refrigeration on Slide 10. Organic sales were down 7% and currency translation was also a 7% headwind. Within transport refrigeration, North America Truck/Trailer sales were up low teens and European Truck/Trailer was up high teens. This continued strong performance was more than offset container, which was down about 50% year-over-year driven by demand softness as well as a tough comp in the prior year. This is the second competitive down quarter for the container business and historical down cycles for this business have lasted about four quarters. Commercial refrigeration was down high single digits year-over-year, as our European food retail customers continue to be pressured by inflation and energy prices. Adjusted operating margins for this segment were up 60 bps compared to last year despite lower sales with the margin headwind of lower volume, more than offset by productivity and price cost. Full year operating margin of 12.8% was slightly ahead of our 12.5% guide and expanded over 70 bps compared to 2021, despite lower sales as our refrigeration team managed price costs and delivered strong full year productivity to offset the impact of lower volume. Moving on to Fire & Security on Slide 11. As expected, the Chubb divestiture had a significant impact on reported sales. Organic sales growth was 6%, driven by price with volume down low single digits. Operating margin was short of our expectations for this segment due to continued high supply chain and logistics costs and operational performance challenges. As a result, full year operating margin of 15.2% for this segment was short of our 16% operating margin guide. Slide 12 provides more details on backlog and orders performance. As our backlogs normalize in some of our shorter-cycle businesses, such as residential HVAC, we expect order trends to adjust accordingly. We have seen that trend over the last few quarters and in Q4, particularly. As you can see on the left side, total company organic orders were down roughly 10% for the quarter and up compared to 2019 and 2020. Backlog ended the year up mid-single digits compared to last year, with backlog growth in HVAC and Fire & Security, partially offset by backlog reduction in refrigeration. As expected, Residential HVAC orders were down in Q4. Light commercial demand remains robust as orders were up mid-teens in the quarter. The backlog is up well over 2x for that business. Commercial HVAC saw double-digit orders growth for the eighth consecutive quarter. The commercial backlog is now up 35% compared to last year and extends well into 2023. Refrigeration orders were down roughly 10% in the quarter, driven by market weakness in container and commercial refrigeration that was only partially offset by Global Truck and Trailer. North America Truck and Trailer continued to have strong orders in the quarter, up over 100% compared to last year. Global Truck and Trailer backlog is up high single digits as the strength in North America offset order weakness in Europe. Container orders were down about 50% compared to a very strong fourth quarter last year. Commercial refrigeration orders remain weak and reflect market softness. Finally, demand for our fire & Security products was mix. Orders were positive in roughly half of the businesses, including residential fire and access solutions. Fire & Security Products backlog is up almost 30% year-over-year with double-digit growth in all the businesses, except residential fire in the Americas. Overall, we entered 2023 with strong backlogs and continued strong order trends in commercial and light commercial HVAC and North American Truck and Trailer. Businesses experiencing softer order intake include container, commercial refrigerating and residential HVAC. Now moving on to our '23 guidance on Slide 13. We expect reported sales of about $22 billion, including organic sales growth of low to mid-single digits. Almost all the organic growth will be priced as we expect volume growth to be flattish. We expect currency translation to be about one-point headwind on while acquisitions, primarily the impact of Toshiba Carrier will contribute about 6% to the growth. Adjusted operating profit is expected to be up compared to 2022 with operating margin at about 14%, including a 50 bps dilutive impact from Toshiba Carrier. We expect high single-digit to low double-digit adjusted EPS growth in 2023. I'll provide more color on that on the next slide. We expect a 23% adjusted effective tax rate and full year free cash flow of about $1.9 billion or about 100% of net income. Our free cash flow guidance assumes approximately $75 million of cash restructuring payments and about $100 million tax headwind, since Congress has not renewed the full expensing of R&D. As shown on the right side of the slide, we expect mid-single-digit organic growth in HVAC as continued strong growth in light commercial, commercial HVAC and aftermarket are more than offset flat residential. Reported HVAC sales growth should be in the low teens -- in the low double digits, given the additional contribution from seven more months of consolidating Toshiba Carrier. In Refrigeration, we expect flattish organic sales as continued strong growth in Global Truck and Trailer is offset by container and commercial refrigeration. For Fire & Security, we expect low single-digit organic growth. We expect the HVAC segment operating margin to be similar in 2022 despite absorbing about 100 bps of pressure from the consolidation of Toshiba, and expect operating margin expansion in Refrigeration and Fire & Security. Let's move to Slide 14, adjusted 2023 EPS bridge at our guidance midpoint. Our operating profit is expected to be up about $200 million, despite flattish volume growth. Price cost and gross productivity combined or an expected operating profit tailwind of $500 million, with $200 million coming from price cost and $300 million coming from gross productivity. Annual merit adjustments and investments amounts to about $200 million in total, and we expect about a $50 million additional headwind of TCC integration costs. There are some other minor smaller moving pieces, but that all adds up to roughly $200 million in increased adjusted operating profit. Core earnings conversion, which excludes the impact of acquisitions, divestitures and FX is about 35% at the guidance midpoint. Moving to the right on the bridge, some modest savings on net interest expense and a lower share count offset the expected higher tax rate and currency translation headwinds. That gets us to our midpoint of about $255 million for next year or 9% growth compared to 2022. As usual, we provide estimates of other items in the appendix on Slide 19. On Slide 15, you'll see that our capital allocation priorities remain the same. In 2023, we expect about $400 million in capital expenditures. We recently announced another significant dividend increase and our dividend payout ratio is about 30%. Finally, we target $1.5 billion to $2 billion in share repurchases in 2023. Before I turn it over to Dave, let me provide some additional color on the first quarter. We expect a $0.06 headwind from a higher effective tax rate of about 25% compared to 16% last year. In addition, we expect our first quarter to be the weakest quarter from an organic revenue growth perspective with organic sales growth flat and volumes down. This reflects continued growth in the HVAC and Fire & Security segments and a decline in the Refrigeration segment driven by container and commercial refrigeration. We expect residential HVAC to be down mid-single digits in Q1. Recall that our Q1 '22 residential HVAC sales were up an industry-leading 23%, so certainly a tough comp for that business. Overall, we expect revenues in Q1 to be a little over $5 billion and adjusted EPS to be between $0.45, $0.50. We expect first half adjusted EPS to be about $0.45 to $0.50 of full year earnings, the reverse of 2022. And as usual, free cash flow will be more weighted to the second half. We expect organic revenue growth to sequentially improve after Q1 with easier comps in the second half of 2023. Thanks, Patrick. We delivered strong performance in 2022, and we are targeting another strong year this year as we continue to execute and control the controllables. We continue to see opportunities to use our strong balance sheet to create value for our customers, shareholders and the planet for future generations to come. Hi. Good morning. Just wanted to start with maybe start with the first quarter outlook there. So it sounds as if you've got maybe the operating margins firm-wide down perhaps sort of 200 to 300 points or so year-on-year. Just wanted to check if that's the case. And is the bulk of that downdraft really coming in HVAC presumably? And if it is, kind of what's the confidence that you can get back to full year margins in HVAC being flattish given the headwinds in resi for the year? Julian, good morning. Patrick here. The margins in Q1, we expect them to be down about 200 basis points, and there really three elements to it: One, acquisitions, and that is HVAC specific, expected to add over $500 million of revenue, but with very little operating profit contribution. Two, volume mix, as I mentioned, is expected to be down in the first quarter. That's not -- that is really not just in residential HVAC, but is also impacting, of course, the refrigeration segment. That's the secondary contribution to the 200 bps or so margin contraction in Q1. The third element is price cost. We expect price cost to be close to neutral in Q1, which actually is a headwind to margin -- margins in the first quarter. And that is across the three segments. So that gets to about a 200 bps margin contraction in the first quarter. In the second quarter, we would expect to return to year-over-year EPS growth. That's helpful. And maybe just following up, on the HVAC segment overall for the year. So I think you talked about a flattish margins there that sort of 15% plus in that business, and you've got organic sales guided up about mid-single digit for the year. Maybe just clarify for us what you're expecting there on your residential volumes, perhaps within that guide? And then any sort of weighting on things like the productivity savings, just trying to understand where you get the offset in that HVAC margin, if there's a mix headwind and a TCC margin headwind as well? Well, Julian, let me start with a little bit of color on kind of resi and what we're seeing across the mix between resi, light commercial and commercial, and then Patrick can give a little bit of color on the margins themselves. We do expect for resi in 2023. We're expecting flat sales, flattish sales, but we get there with volume being down potentially high single digits, offset by mix and price. So when you think about resi, we're looking at new construction potentially down 20%, 25%. Now remember, that's only about 20%, 25% of resi, but some of our customers are saying it could be much better than that, some were saying it's in that range. So we'll have to see as we get into the second half of the year, but we've calibrated residential new construction down 20%, 25% and replacement down mid-single digits. We are seeing that offset that gets us the flattish sales for the year driven by mix and price. So we have some price carryover. We've just announced a new price increase of 6% that's effective in March. We're going to mix up this year, as you know, because of the new SEER units that are coming in and we are pricing 10% to 15% higher, and we're also seeing a mix up as we transition to heat pumps. Also in the mix is that we do see a strong year for light commercial, which was, as Patrick said, up 40% in the fourth quarter, that continues to be very strong. And our backlogs in commercial with a nice mix with aftermarket of double digits, controls up double digits, helping that piece. Yes. On the margins, Julian, we're comfortable with the margin outlook for HVAC in 2023 of about 15%. Dave mentioned about aftermarket. But I did also mention that price cost is expected to be a tailwind for us of $200 million in the year. That dials in some benefits from what we call deflation. A lot of that sits in the HVAC segment. In addition, I mentioned that we're focused on delivering another $300 million of productivity in 2023. We did the same in '22. And of course, given the size of the HVAC segment, a sizable size, of course, is in that segment as well. So we're comfortable with those 15% margins for the full year. Thank you. One moment please for our next question. And our next question coming from the line of Joe Ritchie with Goldman Sachs. Your line is open. Thanks. Good morning, guys. So can we touch on that price cost neutral comment in 1Q? I guess that's a little surprising to me, just given that price was probably -- there's probably a good carryover effect occurring from 2022. And then from a cost perspective, I'm just wondering, is there like higher cost inventory that's coming through? Is it a function of like the merit increases being more front-end loaded? Just any more color you can provide on that price cost neutral in 1Q would be helpful. Yes. The short of it is, and it's mostly in HVAC is the first quarter of 2022, we were left in at some really attractive pricing from a steel point of view, and the year-over-year impact is actually a net negative for us. As I mentioned to Julian just earlier, we are dialing in a benefit from deflation that kicks in the second quarter of 2023. In Q1, we still have a headwind, particularly in steel that affects HVAC. Got it. That's helpful, Patrick. And then I guess I'm just going to stick on margins and just want to understand some of the operational challenges that you guys faced in the fire and security business this quarter. And then also, as I kind of think about the 2023 guidance, it doesn't seem to imply that much margin growth in the segment. So just maybe just kind of talk us through what some of the issues are and how those are supposed to rectify in 2023? Yes. If I look at the margin performance in Fire & Security, it was up year-over-year in the fourth quarter by 60 basis points. And the way you can think about it is the absence of Chubb is a tailwind to margins. Volume mix and price/cost was a slight headwind to margins. The net was still a margin expansion of 60 basis points. The margins were lower than what we expected. One, supply input costs and higher supply chain costs than what we expected; two, inventories not aligned with where the business is today. And that has some operational impacts, which we experienced in the fourth quarter of the year. And so we have to work through that. And that is what we expect for 2023. And therefore, we expect with minimal volume growth in ’23 to have margin expansion in Fire & Security. The revenue growth we expect in Fire & Security in '23 is mostly price driven, less volume driven. Thank you. Good morning everyone. Dave and Patrick, that color you gave on resi, obviously, encompasses what's going on with field inventories. But maybe you could elaborate a little bit more on how inventories ended versus your expectation? And how you think they kind of normalize over the balance of the year? Yes, Jeff, we had a target of getting field inventories at the end of last year, flat to where they ended '21. And they were actually a bit higher than we had targeted, not excessively higher, but just I would say, a bit higher. And we do think that there will be destocking as we go through the year. Obviously, when you're in the first quarter, there's some level of stocking that happens in anticipation of the season. So we think the destock happens throughout the year. When we -- we actually -- it's kind of interesting. When we talk to our channel partners, there are still significant demand out there. There's what happened in Florida where we have some of our homebuilders continuously pushing on us for more products. So we have a bit of a mix taking place where there's demand for the new product. Obviously, everything in the South that we're shipping is the new product, and we started that early. They're starting to ramp in the north to get the new SEER units. There's still demand from some of our key homebuilder customers, but we do recognize that there is some still destocking that's going to take place through the course of the year. So we'll have to see how the year plays out. You know that this business can swing based on a variety of factors, relatively quickly. So we think we've been conservative in how we've handicapped the year, and then we'll have to see how these next couple of quarters play out. And then can you just elaborate a little bit more on what you're expecting on TCC. We get kind of the arithmetic of the headwind on margins as it comes into the fold. But in terms of your internal improvement plan there, Dave, moving margins up over time and what kind of actions you're taking to drive that? Yes. I will tell you, we were in Japan and very pleased with the progress that safe and the team are making on TCC. We've said that we expect margins -- EBIT ROS margins to be in the mid-teens as we get out five years after the acquisition. We are certainly on track for that. We had said $100 million of synergies. I have a lot of confidence we're going to beat that number. And if you look -- if you kind of get rid of all the noise of getting -- eliminating the minority income that we were picking up and the integration costs. Right now, you're in the low teens. That's just a stand-alone business. So, that team is making a lot of progress. Technology, best-in-class. We talked about the rotary technology, the inverter technology. We're using that technology to penetrate the attractive residential heating space in Europe. There could be applications in North America, our prospects in China with TCC look extremely strong despite some of the macro uncertainty in China. Japan, we've had to come in aggressive on pricing rightfully so, and we've been doing that. And there's a lot of cost takeout opportunities, especially in supply chain, where we see the team really aggressive supply chain synergies between the two companies. So very pleased so far. Thanks. Good morning everyone. So it looks -- it looks like low to mid-single-digit contribution from pricing. So would that be what 3%? So the gross pricing of maybe $600 million for the full year. Is that in the right down? I'm just curious how much do you think comes -- is coming from carryforward from 2022 actions versus contribution from some of these price increases you're layering in, in the first half of this year? Nigel, the ballpark number you have there, it's in the ballpark, $500 million, $600 million of carryover in pricing. Most of that -- in total pricing, most of that is carryover. We have some new price increases that we've announced as well. We've dialed of course, some of that in, and we're looking at additional price increases as well. I'd add, Nigel, it's fluid. We came into the year. And over the last few weeks, we've announced new price increases that we feel that were appropriate. Resi announced a 6% price increase. For North America, light commercial and North American commercial, we're looking at up to 8% recent price increase. We're going to raise prices in both North American Truck Trailer, European Truck Trailer is probably in the low to mid-single-digit range. So -- we watch inflation trends. We watch our elasticity curves, but we do think it's appropriate that we are going to need continued price increases certainly in the first half of this year. And normally, if you announce a price increase of 6%, you capture maybe 2% when we need net of normal promotions and I made some discounts and volume discounts. That hasn't been the case in the last couple of years. But I'm just curious what sort of capture rate do you expect going forward? But maybe if you could just also break down as well how you see the Refrigeration segment in 2023? There's a lot of moving parts there. Just curious with the ease comps you've seen in the back half of the year in both commercial and transport, how you see the full year playing out within that segment? Yes. Let me start on pricing realization, a little bit of color on refrigeration, then Patrick will add to the phasing of the year. Look, our realization rate on pricing was very high last year, as you know. We came into the year thinking that we'd get $1 billion of price. And when all was said and done last year, the number was closer to $1.6 billion. So we've seen very high realization rates in pricing. And we would expect that to continue as we go into '23. On Refrigeration, I'll tell you at a high level, you're looking at a bit of a mix bag. North American Truck Trailer has been very strong. We saw order rates in Q4 over 100%, and that's still without opening the order book effectively for the second half of this year, and they were up 40% for the full year last year. European Truck Trailer has -- we've calibrated that business, we think, well, they performed extremely well last year. I think the thing that we're tracking in the refrigeration business is the container business, which we know was light. Patrick mentioned you're usually looking at about a four quarter cycle. We're coming off two of down sales. We expect another couple. So we expect to see that start to improve as we get in the second half of this year. And commercial refrigeration was a bit light, but there will be pent-up demand for commercial refrigeration. Some of the supermarket chains in Europe have been squeezing their budgets. They can't do that forever. So, we do think that as we go through the year, we start to expect to see commercial refrigeration come back. And I'll tell you, I know that both us and our key peer who we have a huge amount of respect for are both claiming that we've gained a lot of share in Truck Trailer. So mathematically, that can't -- we both can't be right. But I will tell you that when we look at its customer by customer, we look at our order rates, I could tell you with huge confidence that we've gained chair in Truck Trailer in Europe and in the United States and globally. So, we feel very good about that business, and we feel good about the snapback as we get into the second half as we start to see the recovery in container and our commercial refrigeration business. And Nigel, couple of comments on refrigeration. Think of Q1 organic sales being down mid to high single digits, Q2 down mid-single digits and then basically returning to mid-single-digit growth in the second half of the year. And that is all related to what Dave, just mentioned earlier about container. Four quarters that we assume to be down, two more to go. Same with commercial refrigeration, and we see continued strong performance in particularly North America Truck and Trailer. And so that is how we've dialed in the plan for refrigeration, which we expect to be flattish from a full year perspective on an organic sales basis. Hi. Good morning guys. Dave has covered a lot of ground on the productivity -- I'm sorry, on the demand front. Maybe just shifting over to productivity. I know you don't really talk about like Carrier 700 or whatever kind of iteration we're on these days as much now since the last Analyst Day and you kind of have this price/cost productivity formula. Just wondering how versus that $100 million net a year, you would think about it for this year? And kind of the totality of the pipeline in front of you? Do you feel like you've gotten through a lot of the opportunities since the initial separation? What's still left to go? We have a huge ways to go, Josh. We -- what happened is we came out of the gate, we had good productivity than we saw over the last year, a lot of the supply chain headwinds that were fairly unexpected that really hurt a lot of industries. So now as we're starting to come out of that, I think we see significant opportunity. What Patrick said effectively was $300 million of productivity plus 200 of price/cost positive for a total of five between those two. When we look at it, we think logistics is a big opportunity for us this year. We're starting to see rates come back to more traditional levels for containers coming from Shanghai to L.A. We see global logistics. We paid a lot in high logistics costs, in spot price for electronics, our spot price for electronics are significantly down month-over-month, quarter-over-quarter. We expect that to continue. We think there's a great opportunity with our Tier 1 suppliers. We had been very aggressive on Carrier Alliance, and then we really had to slow some of that activity because our focus became getting parts to feed the lines in the shops. And now we got to get back into our focus on having partners that we can rely on for the long term that share our desire for joint growth. So we look at it. We see opportunities for productivity in the factories. Continued takeout of G&A. You'll recall that we used to be 9.5% as a percent of sales. We got down to 7% at the end of last year. More transfers of work to low-cost places like Europe going to Eastern Europe. And all things direct material, which is a big percentage of our direct buy. So we got away from calling a Carrier 700. We said 2% to 3% productivity forever. And we think we're in early phases of what are significant opportunities for cost takeout. And Josh, our guidance is very much aligned with what we shared at Investor Day, $300 million of gross productivity, offset by about $200 million of investments in merit and a net $100 million falling through the bottom line. That's in our guidance. Got it. That's helpful. I appreciate that net number, Patrick. And then just shifting gears over to some of the stimulus out there. How do you guys think about some of the opportunities for IRA, whether residential or commercial this year? Well, we look at the IRA, still kind of going through final comments. We see that getting fully implemented towards the middle of the year, but the opportunity there is very significant. You have the 25C tax credits, which can provide a homeowner up to $3,200, really looking at $2,000 for a heat pump. And what was really significant there was -- they made that in the current drafting, especially in the key parts in the South, that's eligible for the two stage heat pumps, which means that it really provides a meaningful incentive for a customer not only to shift from cooling only to heat pumps, but also to a two stage heat pump, which could be significant. It used to be that 30% of our split sales for heat pump, we’re now at 35%. We're seeing our growth rates continue to start with [indiscernible] And you're seeing the same 30% -- 35% in North America, 30% for commercial heat pumps in Europe. So we think that the Inflation Reduction Act will be meaningful, both in residential, but also for commercial. They doubled in that 179D [ph] they doubled the commercial building tax credit up to $2.50 to $5 per square foot for energy efficiency systems. So we think that will be meaningful as well. And then there's a whole significant amount of incentives as you get into Europe. Europe effectively dodged the bullet because of the warm winter that it had this past winter, but the supplies are not going to be what they need as they head into the winter of 2023. And that's going to drive significant demand for heat pumps in both residential, which is a space that's very attractive that we're looking to continue to penetrate. And commercial heat pumps, we're number one in Europe. Good morning, all. Let me come back to the Refrigeration segment. I appreciate all the sales detail there. I was hoping you might be able to put a finer point on the profitability of that weaker container and commercial refrigeration. I imagine that profit profile is much lower. But any way to frame that or provide some context would be great? The container business is a really attractive business within refrigeration. Our enormous installed base also enables us to go after significant aftermarket given the 1 million-plus units that are out there that we're trying to connect and drive aftermarket revenue. Commercial refrigeration today has lower operating margins, and so they're below 10%. They're probably close to 5% in to 10%. But we've taken out a lot of costs. And so as we focus on productivity irrespective of volume growth, once volume starts to turn, we expect there to be attractive incremental in commercial refrigeration. So underlying profitability from an operating margin significantly lower than the overall average of the segment. But once volumes kick back in, given the work that we have done, we would expect to see attractive incrementals there. Got it. Thanks. And then just shifting over to the gross productivity. You noted the $300 million. Patrick, you said $50 million to offset Toshiba. What are the balance of those investment priorities? And then are those signed and sealed for 2023? Or is there an opportunity to flex those up and down as needed? Look, our priorities really center around our shift to Carrier 2.0, which is really around aftermarket enabling technologies, digital capabilities. So we have been very purposeful in our plan setting to make sure that we have plenty of investment set aside for a bound for Lynx for connecting our devices out in the field. That's been our priority. And then all things technical differentiation when it comes to more energy-efficient chillers and more energy-efficient products, electrification in both heat pumps and in our truck trailer business. So as we do our waterline process, there are some investments that we consider sacred because it's either part of our conscious strategic shift or because of differentiation for key product lines. Thank you. Good morning everyone. Maybe we could start with Patrick. Strong finish to the year on free cash flow, hitting expectations on the provided guidance. kind of take us through the dynamics, especially on working capital. It sounded like you ended up with higher inventory. Where do you stand on like buffer inventory with supply chain issues? And how does that impact the outlook for '23 on free cash flow? Well, we expect $1.9 billion in 2023 for free cash flow, which actually does include a tailwind from reduced inventories. And so, we know we ended the year inventories than we intended in the beginning of the year. Frankly, it's the main reason why we missed our $1.65 billion target for the year. So, we ended the year, I think it's fair to say with a few hundred million dollars of more inventory than we expected. I would not call all of that buffer inventory. Some of that, frankly, is related to the length of the supply chain and the lead times that are still not coming back to what we are used to. And so we're assuming that we'll see some continued improvement there in 2023, which will lead to about $100 million or so tailwind from lower inventories in '23 versus where we ended the year in '22. That's real helpful. And then, Dave, you had an interesting comment earlier on a question referencing elasticity curves, and it seems like during COVID there -- everything was in elastic. You saw no demand destruction anywhere. But maybe it's an impact of normalization. There could be some more competitive pressures. But just kind of take us through some of your insights here on the elasticity curves and setting pricing, what the reactions are because -- I don't know, maybe we've lost some muscle memory about how that is just part of the economics here. Yes. Look, we -- in our residential business, we went through something like six significant price increases in the span of 18 months. So I think that what we've seen over the last couple of years is an unusual pace of price increases that we've not only announced that we've also realized. We do think that as you head into '23 and to '24, you get back to more traditional levels. But in the first half of the year, we've realized that inflation is not over. And we've had to announce further price increases in January that perhaps even a couple of months ago that we might not have anticipated because the inflationary pressures continue to be there. So it's not equal in all segments. We think we'll probably get less pricing in the container segment right now than we will in commercial, HVAC, light commercial, residential to some extent. Parts of our Fire & Security business, we probably across our brands have implemented over the last couple of weeks, 20 different price increases depending on the segment within Fire & Security and the brand. So we'll watch it, but we've -- in the first half of the year, we believe that the inflationary pressures are still there, and we need to price accordingly. Good morning. Can you just talk about like the trend of what you see on Transport refrigeration orders as well as light commercial orders? Those have been very strong. I know the light commercial market is up nicely, but obviously, some very big numbers in the context of 50-week lead times in that industry. Just curious as to how you see that trending because there could be some perhaps unusual activity in that market in particular. But maybe how you see those orders trending over the next several quarters here? Yes. I'll start, Steve, with light commercial. Light commercial has just been extremely strong. We saw orders were up in the mid-teens in the fourth quarter. If you look at overall 2022, orders were up 45% And demand is still strong for things like K-12, value retail, fast casual and quick serve restaurants. So -- all trends seem extremely positive. The issue we have continues to be with light commercial keeping up demand, where we're implementing second-line second shift. And our focus is in our customers. The issue we have right now as far as the I can see, is not a demand one in light commercial. On the Transport side, orders were up extremely strong in the fourth quarter in North America, even with us trying to control opening the order book for the second half of '23. North American orders were up 2x, North American Truck Trailer. Europe Truck Trailer was down a bit. I would say mid- to high single digits, I believe. We have, of course, seen orders very light in the container space, which is why we've calibrated that business down, certainly in the first half of the year. But -- what's really encouraging is the North American Truck Trailer piece, the demand remaining very robust there. And then just one follow-up on the resi side. So you ended the year with inventories just a bit above what you expected in the channel. Like how do you -- what signals are you looking for here for like demand this year. How confident are you in your distributors' projections to make the assumptions you're making? I mean, how wide is the band of outcomes there, in your view, given the situation with inventory? It just seems to me that like everybody is throwing out kind of flat to down. But when you kind of ask for the underlying, they talk about what happened in the fourth quarter, maybe what happened in January. And anything that's informing your view and maybe a little bit of a ring fence around the band of outcomes there on volume? Well, it's a good question, Steve. Yes, we try to calibrate it what I would say conservatively, now we'll have to see when all is said and done, if it turned out to be conservative, but we put volumes down high single digits for the year with -- when we looked at it, we said new home construction down 20%, 25%. I -- we have a couple of customers in particular that on their earnings call said that they expect to get to flattish for the year. So will the industry be down 20% to 25%, perhaps we have outside share in the industry. So in many respects, we should go the way of the industry. But there's a wide range of outcomes there where could it be flat? Could it be down 30%? Who knows anywhere in that. But again, that's 20%, 25% of our residential business, the new home construction. And then on the market, you've been around this longer than I have, but that can swing very significantly in a short cycle business because it's fundamentally a replacement business. And a few hot weeks in the summer, you're going to see demand really pick up significantly. So we think we calibrated volume correctly there, but we'll have to see how the rest of the first half plays out. Again, tough comps in the first quarter. But even just yesterday, we were doing a review of the resi and demand is -- continues to be there from many of our key customers and some of our issues are just continuing to keep up with that demand. Yes, second half of the year. So we looked at it. We're just now opening our order book for the second half of the year. Now. I think we might have taken on discrete order for Q3 in Q4 for a specific reason. But basically, we only opened our order book now for the second half. Okay. That's helpful. And I was wondering if you could talk about inflation in the supply chain this year on your Tier 2 components, so not commodities. But just in aggregate, what is the pressure you're facing from component suppliers and the like? Well, I know they're not raw materials, but we do see -- on that piece, we should see some benefit. They've been swinging quite a bit. I know that's not the heart of your question, but we sort of block ourselves on the steel piece, which should be down from last year. Patrick mentioned, we had the hangover from really good pricing in the first quarter of last year on steel. So as we get out of 1Q, we see the benefit of that. Copper and aluminum down from last year. We did see a bit of an increase recently, but we still expect year-over-year benefit. And then what we're going to see with our Tier one’s is, you probably have two categories. You have some that have gotten a fair amount of inflation from us and our peers over the last 12 months that we'll continue to try to push inflation. Then you'll have some that are thinking for the long term and trying to build long-term relationships with us and that we won't get the level of inflation because they will look at trying to take volume from those that continue to push inflation. So for those that really want to be on the journey with us for the long term, they will be the beneficiary volume that we will shift from those that are continuing to push inflation our way. So net-net, it is our job, and I think our opportunity to really start to make a very conscious shift of our supply chain partners. And we were on that path. We had to pause it a little bit because of some of the supply chain challenges we saw last year. But I can tell you for sure, we're going to get back on that path in a very aggressive way here as we go into '23. And just last one, Dave. You talked about price and resi. I'm curious historically, and maybe what's your view on this cycle with respect to the minimum here? The 10% to 15%-point difference between the prior minimum. Do you think that holds or does that fade over time? I'm just curious like how sticky is that pricing on the minimums here? Thank you. Sticky. Yes. We have very high confidence that, that 10% to 15% for the new units will be sticky. It's been sticky thus far. We think it will remain sticky as we go through '23 and beyond. And look, we've all taken slightly different approaches. We took the approach for the unit to do more redesign rather than less and look for more differentiation, and we've done that. We've driven more of a copper to aluminum shift. We've driven a microchannel heat exchanger. We've done a lot of aesthetic and fit and spacing and size. So we've done a lot to make that our new SEER unit, a very, very attractive and differentiated -- And one of the big things will be some of the control features as well. So we think that because of the value we're offering and because of what the customer is getting, we think the pricing will be sticky. Okay. Well, thank you, everyone, for joining. We're excited about how we closed last year and even more excited about '23. And with that, we'll close the call, and please reach out to Sam for any questions. Thank you all.

EarningCall_437

Good morning and welcome to the Highwoods Properties Earning Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, February 8, 2023. Thank you, operator, and good morning, everyone. Joining me on the call this morning are Ted Klinck, our Chief Executive Officer; Brian Leary, our Chief Operating Officer; and Brendan Maiorana, our Chief Financial Officer. For your convenience today's prepared remarks have been posted on the web. If you have not received yesterday's earnings release or supplemental, they’re both available on the Investors section of our website at highwoods.com. On today's call, our review will include non-GAAP measures such as FFO, NOI and EBITDAre. The release and supplemental include a reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Forward-looking statements made during today's call are subject to risks and uncertainties. These risks and uncertainties are discussed at length in our press releases as well as our SEC filings. As you know, actual events and results can differ materially from these forward-looking statements and the company does not undertake a duty to update any forward-looking statements. Thanks, Hannah, and good morning, everyone. We had a strong end to a strong year for Highwoods. In the fourth quarter, we enjoyed solid leasing in terms of both volume and economics, acquired a best-in-class property in uptown Dallas, placed in-service our highly successful Midtown West development in Tampa, announced Midtown East, our second development in Midtown in Tampa and delivered strong FFO of $0.96 per share. Our healthy leasing during the fourth quarter is somewhat contradictory to the broader macro environment, with interest rates up sharply, limited capital availability and widespread concerns of a pending recession. We continue to believe that to be resilient, our portfolio must be diversified and not be overly reliant on any single customer, market, submarket, industry or lease size. This diversification is a core component to our long-stated simple and straightforward goal to generate attractive and sustainable returns over the long term. Our largest market, Raleigh, is less than 22% of revenues. Our largest customer, Bank of America, is less than 4%. Our top 20 customers account for less than 30%. Our largest industry, the highly diversified professional, scientific and technical services category is less than 30%. And our average lease size is under 15,000 square feet. We believe this purposeful diversification, our high-quality portfolio and continued strong population and job growth across our markets has driven our strong leasing since the onset of the pandemic, including throughout last year. In 2022, we signed 1.5 million square feet of new leases, the most in any year since 2014. We ended the year on a positive note with 337,000 square feet of new leasing and 924,000 square feet of total second-gen leasing. In the fourth quarter, we signed 28 expansions, nearly half of our renewal count, with expansions outpacing contractions by a ratio of 3.5:1 equating to 81,000 square feet of net expansions. In addition, we signed a 312,000 square foot renewal at a 50-50 JV property in Richmond. This renewal was for 100% of the customer's prior space with a roll-up in cash rents and limited TIs. As a reminder, JV leasing is not included in our overall leasing statistics. As we move into 2023 our occupancy and same-property cash NOI will be negatively impacted by the 263,000 square foot move-out activity in the Cool Springs BBD of Nashville at the end of this month, a space that we have already substantially backfilled. The backfill customers’ lease isn't scheduled to commence until early 2024. As is our practice, we do not remove in-service buildings from our same property pool. In addition to our solid leasing efforts in 2022 we are also pleased with our investment activity during the year. We acquired $400 million of best-in-class assets in Charlotte and Dallas both with meaningful long-term growth potential. We placed in service roughly $100 million of 99% lease development. We announced over $400 million of development in Dallas, Atlanta, Tampa and Charlotte and we sold $133 million of non-core land and buildings. This volume of work combined with our high-quality office portfolio and the strongest BBDs throughout the Sunbelt gives us the building blocks we need to generate additional long-term growth. Turning to our results. We delivered FFO of $0.96 per share in the fourth quarter. Our full year FFO was $4.03 per share including $0.13 of net land sale gains. Excluding land sale gains our full year FFO was $3.90 per share $0.06 above the midpoint of our initial 2022 outlook even with the unanticipated sharp rise in interest rates. Turning to investments. In the fourth quarter we expanded our presence in the dynamic Dallas market by once again partnering with local sharpshooter Granite properties, this time to acquire McKinney & Olive in Uptown Dallas and a 50-50 JV for a total investment of $197 million at our share. McKinney & Olive is a trophy mixed-use building with approximately 500,000 square feet of office and 50,000 square feet of retail. The building is well-leased with growing customers and average rents estimated to be 35% below market. This investment priced below replacement cost provides a unique combination of an attractive going-in cash flow yield with the opportunities to earn development-like returns as we roll rents up to market. Further, this building is only four blocks from our 2023 Springs development providing ample opportunity for leasing and operating synergies and with what we believe will be the two of the best buildings in Uptown. During the quarter, we also announced the Midtown East development in a 50-50 JV. This project will encompass 143,000 square feet in a highly successful Midtown Tampa mixed-use development. The total cost is estimated at $83 million with our share being half of that. This announcement follows our first office development in Midtown Tampa, Midtown West which we placed in service during the fourth quarter as originally scheduled at 97% leased. We started Midtown West on a fully specked basis in late 2019. And despite the pandemic, the project leased up successfully at rents at or above our original pro forma. Our 1.6 million square foot development pipeline now represents a total investment of $518 million at our share across five different markets it is a combined 21% pre-leased. Three of those developments representing nearly 800,000 square feet and $234 million of total investment at our share are scheduled to deliver in 2023, but are not projected to stabilize until 1Q 2025 through 1Q 2026. With rising interest rates and reduced debt availability, the investment sales market has slowed meaningfully over the past few quarters. Fortunately, our balance sheet is in excellent shape, which allows us to be patient with our disposition efforts. Over the long run, we will continue our strategy of monetizing properties we believe have below average growth prospects, limited upside or our CapEx intensive, and we'll use the proceeds to replenish our dry powder and ultimately recycle into higher-growth properties. As illustrated in our 2023 outlook, we expect to be a net seller this year, although, the volume of dispositions will depend upon the stabilization of the office investment sales market. Our plan is to sell up to $400 million of non-core assets this year, while we believe acquisitions are unlikely. Our initial 2023 FFO outlook is $3.66 to $3.82 per share. At the midpoint interest expense will be significantly higher due to rising rates and we also project higher same-property operating expenses. Same-property cash NOI growth is projected to be flat at the midpoint below our historical average due to higher CapEx and lower average occupancy largely as a result of the activity move out. While a 2023 FFO outlook is below 2022 actual results, as a reminder we have grown normalized FFO per share each year for 12 consecutive years at a 4% compound average rate. Since the onset of COVID at the beginning of 2020, we have acquired 3.2 million square feet of best-in-class office assets for a total investment of $1.2 billion delivered 1.2 million square feet of highly leased office development for a total investment of nearly $500 million and sold 6.4 million square feet of non-core properties for $1 billion. All the while growing normalized FFO per share 11% and continuing to strengthen our cash flows. With our ever-improving portfolio quality, we're now even more resilient and better poised for long-term growth. In conclusion, while our high-growth BBDs and high-quality portfolio received most of the attention from our shareholders are humble, hard-working and talented teammates are the ones who drive our success. I would like to thank our entire Highwoods team for their continued commitment and tireless dedication to our company during the past year. It's their effort that has positioned us for continued success for many years to come. Brian? Thanks Ted and good morning everyone. As Ted mentioned, strong fourth quarter capped off a strong 2022 and a strong three-year run through the pandemic that saw the team and portfolio meet every challenge and produce compelling results. We've leaned into our BBD strategy to upgrade markets and assets by taking a deliberate approach to diversify geographic reach across the Sunbelt high-growth markets, which include six of the top 10 and five of the top six US markets to watch for the most recent PwC, Urban Land Institute, Emerging Trends in Real Estate report. Within these markets our BBDs are both urban and suburban and have proved successful in meeting our customers where they prefer to be. Suburban workplaces have proven to be competitive options when Wayne and individuals and organizations flight to quality of life calculus as evidenced by the highest physical occupancy and leasing activity across our portfolio and a Sunbelt. It is our belief that the greatest determining factor of a workplace being commute worthy is the magnitude of the commute burden, the worthiness has to overcome. Our urban and suburban BBD portfolio provides a variety of options and amenities with regard to commute worthiness and has attracted a customer base across a broad spectrum of industries and sizes. Small and medium-sized customers are bread and butter with an average customer size of less than 15,000 square feet, are disproportionately back in the office and expanding. This customer mix has allowed our portfolio to weather the ebbs and flows of previous cycles, a pandemic and evolutions in the so-called future of work. While concrete, steel and glass may not be the most flexible of materials, we are formalizing the variety of flexible work options we offer under our Highwoods Commons banner based on the success we've had to-date. Whether it's convening a town hall in our Spark conferencing hubs, taking occupancy on one of our dedicated full floor Spec Suite collections or booking one of our ultimate Zoom rooms, we call the CoLab, the Commons platform provides our customers scalable flexibility with regard to space and duration and can be tailored to their specific needs. It includes both formal and informal spaces, all conceived around collaboration and the platform enters 2023 having delivered over 100 such spaces with healthy net new rental income associated with it. This deliberate diversification across a variety of factors makes our portfolio more resilient, coupled with our approach to creating compelling and competitive workplace making experiences. We are confident that the Highwoods portfolio will continue to serve as a location of choice for the best and brightest individuals and organizations. To that end, our team finished the year with solid financial and operating results for the fourth quarter, signing 924,000 square feet, including 28 expansions, the most net expansions we have signed since the beginning of 2018. As Ted mentioned, this does not include the 100% renewal of our 312,000 square foot JV owned property in Richmond through 2034. Net effective rents for the quarter were higher than our five-quarter average and our net effective rents for the year represent a record high. While there is often much focus on cash or GAAP rent spreads, we have long stated that our leasing focus is securing the best overall economics. For example, we may trade lower face rents for lower TIs or free rent if the overall net effective rents are attractive. Our all-time high for net effective rents during the year is a strong endorsement of our Sunbelt, BBD and diversified portfolio strategy. Trimming down on our market activity, in Raleigh, we signed 263,000 square feet and end of the quarter 92% occupied and where market rents grew 5.1% year-over-year for CBRE. Our local team has seen healthy activity so far this year and we expect this to continue led by job growth in professional and financial service companies. Second, in terms of volume for the quarter, Nashville signed 225,000 square feet and is nearing the finish line on hybridizing almost 1 million square feet of assets in Brentwood and Cool Springs, the two BBDs that garner the majority of leasing activity for the entire national market in 2022. Our signature reimagining and repositioning of these assets have been well-received leading to the substantial backfill of our portfolio's largest 2023 lease roll in Tivity, five months prior to expiration. According to Cushman & Wakefield, the national market posted positive net absorption for the quarter and a 4.7% year-over-year increase in market rent. As Ted mentioned previously, occupancy will be lower in our natural portfolio in 2023 as Tivity vacates and our replacement customers lease doesn't commence until the beginning of 2024. Moving further south to Tampa, which leads the state of Florida for net New York City resident relocations, we placed in service our 97% leased Midtown West joint venture development in the quarter and announced Midtown East a 143,000 square foot mixed-use development, which will offer the highest views in the Westshore BBD. Midtown has established itself as an address of choice for blue-chip organizations who have placed a priority on recruiting, retaining, and returning talent. Our newest markets in Charlotte and Dallas are great examples of decisively leaning into our simple and straightforward strategy and executing successfully via the wide and deep relationships we've built over time. With the off-market acquisition of 650 South Trian and Charlotte, the Queen City now stands is Highwood's fourth largest contributor to NOI. The December acquisition of McKinney and Olive, a 550,000 square foot 99% leased tower in the heart of Dallas' uptown BBD, which was tops in the market for annual absorption and rental growth for 2022, we're on track for Dallas to contribute 6% of pro forma NOI to our bottom-line, following the completion and stabilization of our two development projects. In conclusion, each and every Highwoods teammate remains focused on making our diverse portfolio the most talent supportive and commute worthy it can be. We believe this approach will enable our customers and their teams to achieve together what they cannot apart and when we do this, we will create value for our customers and in turn our shareholders. Thanks Brian. In the fourth quarter, we delivered net income of $27.6 million or $0.26 a share and FFO of $103.1 million or $0.96 a share. There were no significant unusual items in the quarter. For the year, our FFO was $4.03 per share came in at the midpoint of the upwardly revised outlook we provided in October. This was $0.19 above our original 2022 FFO outlook. Excluding $0.13 per share of land sale gains, net of impairments core FFO in 2022 was $3.90 a share or $0.06 above the midpoint of our original outlook. The upside in core FFO in 2022 compared to the midpoint of our initial outlook was due to the following: $0.08 of higher NOI, largely driven by lower than forecast OpEx and higher parking revenues $0.02 from less disposition activity than originally planned and $0.01 from acquisitions. These items combined for $0.11 of upside, and were partially offset by $0.05 of higher interest expense attributable to higher than forecasted rates, on our variable rate debt. In addition, to strong FFO during the year, our cash flows continue to strengthen. Even with what we believe is an attractive current dividend yield of over 6.5%, we had strong coverage in 2022 with a CAD payout ratio under 75%, providing us meaningful retained cash flow to reinvest. We have been purposeful with our focus on strengthening cash flows. We've sold assets that were capital inefficient and recycled into acquisitions and development projects, with higher long-term cash flow yields. To quantify this, since 2019, our cash NOI is higher by 16% or $75 million and our capital spend leasing and maintenance CapEx, is down 8% or $12 million resulting in $87 million more cash generated from our portfolio, and a ratio of CapEx to NOI that has improved by 15%, without any meaningful increase in our equity base. CapEx spend is often lumpy quarter-to-quarter or year-to-year. But regardless of the short-term fluctuations, the trend is clear. Our portfolio has become more efficient and our cash flows have continued to strengthen. Our balance sheet is in excellent shape. We ended the year with debt-to-EBITDA of 5.9 times, up from the third quarter due to the acquisition of McKinney & Olive and continued investment on our development pipeline, but still low overall. We have ample liquidity over $550 million between our line of credit and undrawn amounts on the construction loans, at our Dallas development JVs, which provide us plenty of room to fund the remaining $359 million to complete our development pipeline. We have purposely set up the balance sheet with ample flexibility, as we have over $900 million of debt that is pre-payable without penalty, and no consolidated debt maturities until the end of 2025. This fits well with our investment plan for the year, where we expect to be a net seller. We expect to reduce our floating rate exposure as we move throughout the year, with planned disposition proceeds. We also have a solid pool of unencumbered assets and the financial flexibility to obtain the longer-term fixed rate debt. As Ted mentioned, our FFO outlook for 2023, is $3.66 to $3.82 per share. As you know, the largest headwind for 2023 is higher interest rates. Based on the current of SOFR curve, we expect to incur $0.25 to $0.30 per share of higher interest expense in 2023 compared to what the forward curve implied just 12 months ago. As I mentioned earlier, we purposely structured our balance sheet to provide us optionality to be able to repay debt without penalty. While this means we expect higher projected interest expense in the short-term, given the forecasted peak in SOFR during 2023, and with no fixed great debt maturities until 2027, we are positioned to benefit from a downward trend in the interest rate curve after this year. In our release last night, we stated an anticipated headwind of $0.08 per share at the midpoint from higher OpEx, net of anticipated recoveries. The higher projected OpEx combined with lower average occupancy principally related to the Tivity move-out has negatively impacted our same-property cash NOI outlook in 2023. Year-over-year same-property comparisons are often helpful, but 2023 is somewhat distorted by the unusually low OpEx from the first half of 2022. Using our more normalized second half of 2022 as a comparison point, we expect positive cash NOI growth in our same-property pool in 2023. Finally as you may have noticed, we made some routine SEC filings yesterday and this morning. Under SEC rules S-3 shelf registration statements sunset every three years. It has been three years since our last shelf filing. As a result, last evening, we filed a new S-3 with the SEC. This was a joint shelf filing by the REIT and the operating partnership that registers an indeterminate number of debt securities, preferred stock and common stock for future capital market transactions. With this new shelf in place, we also needed to refresh our longstanding ATM program which we filed via Form 424(b) this morning. As you know keeping an ATM program in place is one of the many arrows we like to keep in our capital-raising quiver. To be clear, the FFO per share outlook that we provided in last night's release assumes no ATM issuances during 2023. Thank you [Operator Instructions] Our first question is from the line of Camille Bonnel with Bank of America. Please go ahead. Good morning. Just a few questions on the same-store NOI outlook you provided. When we think about your occupancy guidance excluding the impact of the large move-out in Q1, what sort of retention ratio is embedded in your outlook? Hey, Camilo, it's Brendan. Thanks for the question. So our retention when we look at 2023, in terms of what's remaining at year-end 2022 is below average. So with the Tivity move out that overall including that we're probably around 40% of the 2023 expiration. So if we back that number out, that goes back up to we're probably a little bit under 50% overall. I need to kind of just grab that right in front of me but that's probably about where that number would be, which is roughly in line with average when we're at this point in the year where you have just the forward four quarters. Over time, we do a lot of early renewals so that number tends to be higher. But 50%, as we roll into a new year for the forward four quarters is about average for us. Thank you. And really solid leasing last year. Looking forward though, and I understand it's a very challenging time, but can you also talk to your expectations for new leasing volume this year? Sure, Camilo. It's Ted. Look, obviously, last year, we had a really good year. We signed 3.3 million square feet of leases, 1.5 million square feet of new -- leasing new customers. Coming to Highwoods is roughly 180 new customers that came into our portfolio, which was a great number. I think that was most new leasing we had since 2014. And I think three of the fourth quarters, we had over 300,000 square feet of new leasing. So, we've been very pleased with leasing. And obviously, it's quarter-to-quarter. But we're off to a good start in first quarter. Our leasing pipeline is active in all of our markets. I will say, as we look at the pipeline, it's a lot of smaller deals. I think we've all seen that and you've heard it from others, and that was a case for us really in 2022 as well. Leasing activity, the large users sort of hit the pause button late in the year. But just -- the demand we're seeing right now plays to what our core portfolio is smaller and medium-sized customers where we continue to see demand. So first quarter, it's continuing, but it is a lot of small customers, but the volume in tour activity is pretty good, maybe a little bit slower than second half of last year, but still pretty decent. Camilo, Brian Leary here. I might just add on for a little additional complexion into that momentum that Ted talked about the small or midsized, who are they law firms? So what's interesting, I know there's a theory that law firms just move around. But what we're seeing in our markets are a number of law firms that are coming in from out of market, planting a flag and then growing. So we've seen that, say, in Charlotte, where we landed an inbound law firm from New York, open an office in one of our spec suites grew into the space next door and is now looking at growing further. Financial services -- engineering, we're seeing the engineering firms, I think, start to get the momentum with the infrastructure bill, starting to find its way down into the local markets as well, so just a little extra color. Good morning. This is Ari Tyres [ph] on for Michael Griffin. My first question is on the turn to office. How are you seeing return to office faring across your Sunbelt markets? Are there any markets or tenant types that are coming back stronger than others from a utilization perspective? Hi Ari, it's Ted. Look, as you know, the Sunbelt markets have probably come back quicker than a lot of the larger gateway markets. I think not necessarily types of tenants, really size of tenants. Our return to the office has really been the smaller customers, suburban customers, as well have been the first ones back. They've been back for a really long time. It's the larger companies, a large public company as well, have been a little slower in terms of their returns. So, I think it's more customer size than it has been a type of customer, type of industry. Hi Ari, Brian Leary to clip on there. The three days of the week, Tuesday, Wednesday, Thursday is absolutely when we're seeing our occupancy. So financial services in Charlotte, the buildings are full, top level of the parking garage is getting parked on. And so, we're even seeing the larger ones have implemented their hybrid work week. Three-two is what we hear a lot of. So Tuesday, Wednesday, Thursday is when we're seeing the majority of folks in our buildings, driving restaurant sales, sundry sales, things like that. Helpful. Thank you. My follow-up question is on the activity backfill. Wondering if you can comment on what the backfill rent is in 2024 relative to activity was paying? Hey, Ari, it's Brendan. Yes we had a modest roll up from a cash basis versus where Tivity was. And then a more normalized kind of GAAP roll-up in the double-digit range. So, we found that that was – we were very pleased with that execution given that Tivity was a build-to-suit done in 2007, 2008 and had healthy bumps that compounded over 15 years. So, I think we were pleased with the execution from a leasing standpoint to be able to roll that up on a cash and GAAP basis for the new customer. Great. Thanks. Good morning. You guys talked about the flexible work options you guys are providing within the portfolio. Can you just expand a little bit on that? Are there specific buildings or markets that those suites or flexible spaces work best in? And how much of your office space do you think could eventually be converted to more of a flexible use? Hey, Blaine, Brian Leary, good morning, thanks for the question. This is how much time does everyone have, because I'm obviously pretty passionate about this. So I'll be honest with you, it started with the momentum that we garnered a few years ago with rolling out spec suite program. And as we started to realize that not all spec suites are the same or customers are the same, or BBDs are the same, or buildings are the same. We started to flush out a matrix that can be applied across markets and BBDs to custom Taylor for instance in Brentwood. We've been very successful in Nashville rolling out floor by floor of our common spec suites, where there's a certain different complexion of the user that goes in there, what the rents are and that carries a certain amount of amenity base, where you look at a Buckhead collection, the type of customers that's there, we'll be able to demand and pay for something different. And so what we're doing is, we're also realizing that folks want to collaborate and kind of get out of their own office. It's not even just a potential of growing 110% occupancy, if you will. It's just giving them a diversity of spaces. So I don't think, I could give you an idea of what percent could be transformed over time. I think this is just now going to be embedded in the offerings that we provide. Yes, we've been fairly opportunistic, when vacancies presented itself to do this, and it's been successful, but we really see this rolling up as kind of our flexible option that you get by having a kind of long-term relationship with Highwoods, and not necessarily have to engage at the more typical kind of co-working environments. Great. Thanks, Brian. That's helpful. For my second question, can you just talk a little bit more about your capital needs this year? I know, Brendan you mentioned no ATM issuance was included in guidance, but should we expect you to issue any additional debt this year? And how should we expect leverage to trend as we progress throughout 2023? Yeah, Blaine, it's a good question. So we do have a lot of flexibility within the capital stack. So, as I mentioned in the prepared remarks no scheduled debt maturities until really the end of 2025. So, we have no need to be in the capital markets. However, we do have a lot of freely pre-payable debt that is outstanding. So the two options there are, one, I mean, we would like to have some of the non-core disposition proceeds come in the door. As Ted mentioned, that's highly dependent on the investment sales market in terms of how much proceeds we get in the door there but that would be used to help pay down some of that debt. And then, I think we also have options with respect to longer-term financing to reduce the floating rate exposure that we have. And on that we would be opportunistic. But I do think, it's probably reasonable to assume that at some point It -- I would say, it's more likely than not that we'll do some form of financing to term out some of the floating rate exposure that we have during this year. It's just we'll be opportunistic as to when and what form that takes. Hi. Thank you for taking my questions. So could you please walk us through the occupancy trajectory through the year? And what gets you to the low versus the high-end of the guidance? Hey George, this is Brendan. I'll start with that and maybe Ted and Brian will add in some color. So yes, I mean, as we talked about we obviously have the headwind from Tivity the 263,000 square feet. That's in the first quarter so that's 100 basis points. So we ended the year at 91%. And then you expect that number to go down in Q1 with Tivity and the backfill customer doesn't commence -- is not scheduled to commence until the beginning of 2024. And then, we have some other expirations that are -- some move outs that will occur as well. We had a government user that was in soft term that gave us back a sizable amount of square footage. So that also is impacting us. And then, we have some leases that are queued up to commence into occupancy later in the year. So with all of that, that's where we think when we mix all that stuff together, we think we'll end 2023 about 100 basis points lower than where we ended 2022. But keep in mind we'll also have then as we start 2024 we will have the backfill customer for Tivity that will be in a sizable amount of that space. They do leg into that space over time but they'll take the majority of their space at the beginning of 2024. This is Ted. Really we had a couple as Brendan alluded to. One of the government customer, they were -- again, just to reiterate they're in the soft term so they had the ability to terminate their lease on a reasonably short notice. I think it was a 90-day notice but it's a 116,000 square feet in Atlanta and then they gave that back I think they gave mid-January. So that's another big one for the majority of the year. And then, I'll just mention one other one. Those are the only two above Tivity and the government tenant above 100,000 feet. We had about 120,000 square foot customer that we went through a merger here in Raleigh. And they downsized to 46,000 feet. So they gave us back early as part of the renewal long-term renewal they gave us back about 77,000 square feet effective January one of 2023. So that's a hit on the occupancy as well. Now, the good part of that story is we've already released 55,000 of the 75,000 square feet and with customers that will be starting throughout this year. So really those are the three big ones. Great. That was very helpful. And just my last question, Can you talk about the sublet market. How is that trending in your markets and specifically in your portfolio? And George, Brian Leary here to take that question. So we've talked about this before and we are very much focused on the sublet activity the growth of it, the complexion of it. It looks different in certain cases not all of it is the same. And so where we see it growing, Raleigh is probably a market with the greatest amount of sublet space as a proportion of available space that's kind of the headline. As you dig into that you realize that almost 60% of all the sublease space in a market like Raleigh is in one single area called the Research Triangle Park, which we don't have any exposure to and have none in our market. And then -- so what -- the big thing is who's leasing, who's the sub-lessor and what are their motivations to write a check to move someone in there or how much term do they have left? And so if you look within our portfolio from a sublet standpoint, the average wealth of our sub-lessor is north of six years if you even take out one user who's got 14-plus years, it's over four years. So we feel pretty good about the visibility and exposure that's within the high risk portfolio. And then if you look at the general markets, Nashville is actually going down and we are part of that with folks backfilling. But it's out there. When it gets -- the ratio of available sublet space gets over 25% we have seen that that starts to impact rents. And Raleigh’s the place where that shows up. But other than that, most of the sublet amount has stayed stable quarter-to-quarter. It's definitely up year-over-year I mean nationally and within our markets. But quarter-to-quarter we haven't seen a lot move. Good morning guys. Brian you guys had north of $135 million of combined building improvements and second-gen expenses in 2022 and just shy of $120 million in 2021, what are you expecting in 2023 at this point given Tivity retenanting and other known spending? Hey, Rob, yeah that number is -- I mean, it's bounces around a lot. What I would say is, I think the leasing that we did is probably -- I mean, that's the hardest one to figure out. And I would say that we probably think leasing is likely to be reasonably stable. It depends a little bit on the volume of leasing and the nature of that leasing and things like that. We committed a little bit more in terms of dollars to leases in 2022 than what we spent. So I think our expectation is those things probably normalize. And we probably won't be pretty steady on the leasing CapEx. And then usually the maintenance CapEx numbers are fairly steady as well. So I would guess we -- and we -- this is what we project that it will be pretty consistent 2023 versus 2022, but that is a hard number to gauge. Okay. And then given Ted's commentary about the continued dislocation in the acquisition market are dispositions in 2023 likely to be back-end loaded? Do you have stuff teed up that could close in the first half of the year? How are you guys positioning that at this point? No I think you're dead on. Obviously, we put a pretty wide range of zero to $400 million for our dispo range and it's highly dependent on getting back to a stabilized fully functioning investment sales market. And I think we're starting to see some green shoots that some encouraging signs, at least for other property types. I think office is going to trail that a little bit. I got a little bit more headwind, but we're starting to see some positive things following maybe on the debt side so -- which is good. So yeah, any dispose we do likely going to be back-end loaded. We've got a couple of buildings and a couple of land transactions that are in the market now that I'd say so far they're going well. So that we may have a couple of things late this quarter -- or late this first half of the year. And then anything else we do likely be heavily weighted towards the back half of the year. Okay. And then Ted, I mean any updated thoughts on the Pittsburgh portfolio and the potential sale now? Is that tabled for now? Is that more likely to be a 2024 transaction, or are you still thinking that that might wind up going to market this year? Yeah. Look I think we can afford to be patient with Pittsburgh. There's no real rush. And again until we get a fully functioning debt market and fully functioning investment sales market, I think it's probably put on hold. We've hired the broker. We're preparing it to market. We do want to sell. But in the meantime again, while we're being patient, we're seeing some really good leasing activity in Pittsburgh. So we're going to try and take advantage of the holes we have there and button that up. But we'll wait and see, but likely not going to be for a while. Okay. And then last one for me. Brian, you were talking about utilization before. Have you seen any change an uptick since the beginning of the year with more companies having a definitive plan with the date of January 1 coming back, or has it not been really noticeable and your markets? No, I think it has Rob. That's a great point and question. I think the big firms they're not necessarily making decisions about moving or expanding. Some are putting stuff on the sublet market, if they're contracting. They have a plan to get their people back in the office. They have their rhythm for the hybrid. And I think you all have seen a number of leaders, CEOs be pretty definitive on this. We're a work-from-work company. It's hard to manage by Hollywood squares things like that. And if you look at the again the makeup of our customer base, if you kind of go ahead and capture the small and medium customers, as I mentioned our bread and butter, which makes up a great majority, they have been back and they are back. And then you look at the bigger users the corporates, the publicly traded, the folks in the financial services or what have you, they have their plan and we absolutely have seen it. I mean so much so as we're working on how to exit the garages faster because now what we've done is we've been deliberately engaged with our customers, how do we kind of help them that Jerry Maguire scene help me help you, how do we help them with their return to work policy because they are committed that they are better together and they want to see their productivity increase. Their productivity increases when they're in the building. So that's kind of what we're doing. We have kind of a campaign where we're literally partnering with them specifically on recruiting and bringing their teammates back to the office. Peers have been weak. I mean, I think those places that have the -- you've heard the term commute worthiness that we talk about. And so those places that might have the higher commute burden to overcome, right? So interesting enough, while it's considered itself the heart of the Sunbelt even Atlanta because of its greater commute times and distances is probably trailing the likes of Nashville. Pittsburgh, for sure, is a more traditional hub-and-spoke kind of commute model. But I would say, just Atlanta to some extent has kind of plateaued between 50% and 75%. Again, Monday -- Tuesday, Wednesday, Thursday, we've absolutely noticed it. We look at the restaurant sales, the deli sales, the cafes; they're much busier back to kind of pre-pandemic levels in terms of that activity. Yes. Good morning, everybody. Brian, I wanted to talk about rent a little bit and you talked about economic or effective rents earlier. Maybe they're not where you'd love them to be, but they haven't been terrible, but your average deal size has been about 10,000 square feet. So as you roll forward, is there any good evidence that you have now or that you're starting to have negotiations on, were these bigger deals, say 50,000 to 100,000 or north of 100,000 square feet are getting done, where you're seeing a substantially greater amount of pressure on rents or effective rents. It just feels like that comp could start to come out and maybe surprise us, but I'd love to know what you're seeing on that front. Dave, haven't really seen that yet. And I know, it probably -- it just sounds like I'm just talking my book. But, I mean, our customers, even the bigger ones are, through a person, telling us that they want to get their people back. And they see the workplace experience as part of that. So right now, the rents are holding up. The free rent is absolutely there. I think, they'd like to finance their TI through higher rents. Again, not to go back like two years and first they've been listening to me for a while. I think I sound like a little bit like a broken record, but a lot of these organizations, while they are cost-focused for sure, 1% of what they spend every year is on utilities, 9% is on real estate, 90% is on people and they're pretty focused on that 90%. And so, it obviously does have a connection to the 9%. So nothing yet to connect those days. Sorry for the long answer for fairly short yes or no. Ted, maybe a thought. Yes. The only thing I'd add is, Landmark, we did that -- to what third quarter of last year, over 200,000 square feet and the rent was pretty high on that space as well. It's been interesting just looking at our portfolio and it sort of goes to the question. Last year, we only did nine leases greater than about 50,000 square feet, which I thought was an interesting stat. It's just a lot of the small and medium-sized users, which, again, plays right to our portfolio. And then, some of the larger deals you have talked about the backfill of Tivity, or the deal that you did in Richmond. The larger transactions seemingly have focused on suburban markets. Is that not enough data to make that conclusion or leap, or are you seeing that definitely happening where the larger tenants aren't gravitating to Buckhead, but maybe are gravitating towards Riverwood, or something similar across your markets? I don't think there's really been any -- enough data points to know and some of it is on renewals, right? You can only renew the ones you have and it's where the holes you have as well in your portfolio. So, obviously, Tivity, we had a hole, so we're able to go aggressively try and backfill it. And then, some of the other ones. So it sort of just depends. But I will say, a blanket statement. I think we've said this before that, during the pandemic, we have seen a disproportionate leasing out in suburbs versus urban, but I don't think there's enough data points to say if there's any trend, one way or the other. I think just to clip on and this is decades in the making where people live is where they like to work. And so there's a great continue migration of homeownership and home buying by the millennials to the suburbs. And so I think the concept it's not -- commodity suburbs is not something that we think just because of some of the suburbs is competitive by any stretch. And so if you think about what we've talked about the repositioning of our assets in Brentwood and Cools Springs -- Cools Springs which said repositioning landed backfill of that building. It's about amenitizing walkable mixed use a place to get a cup of coffee a place to walk and grab lunch a place to workout outside. And we've been a fitness center and have collaborative workspace. So it's -- you just can't drop it down someplace in the suburbs or even in town and expect that to solve your problems, but that's -- it's what we've seen. And then last for me on the dispositions. Ted you mentioned in your last comment maybe some land and maybe not Pittsburgh as kind of a full exit this here. So what do you anticipate being able to sell this year? And I guess maybe the point of the question really is if you're selling $400 million how dilutive is that relative to the debt cost as you think about late 2023 into 2024? Sure. I'll take maybe the first part and Brendan can jump in. So the mix of assets it is it's a couple of land deals. And then we've got a couple of single tenant transactions in the market, but it's going to be a mix of typically what we've done in the last two or three large transactions where we go out and sell -- go out and buy an asset like we did in McKinney & Olive flex up a little bit and then pay off bring the balance sheet back down over time. So it's going to be a mix of single tenant some land some multi-tenant assets. Again assets that maybe have a lower growth profile going forward. So it's not unlike other stuff we've seen. Pittsburgh, it may be in there. We'll see but it is a large transaction and larger deals are harder to get done these days in terms of dilution. Brendan do you want to take that? Sure, Dave. So what I would say is, I mean, I think the marginal cost of borrowing on what we would pay off if you look at our forecast for 2023 you're probably in the mid to kind of upper 5s. So you can, kind of, apply the cap rates that you think versus those numbers. What I would say is from a cash flow perspective, which is where we have focused. Clearly there's CapEx associated with -- on going CapEx associated with the assets that we plan to sell. When we pay down the debt all of that interest savings falls to the bottom-line. There's no CapEx associated with that obviously. So from a cash flow perspective it's much less dilutive. And then when we staple on to that the development deliveries that come online that's where we do think over time our cash flows will continue to get better even with the planned dispositions that we have. Hi, guys. Thanks for taking the question. Just curious, sort of, if you can kind of touch on the development leasing pipeline and where it stands today? Sure, Dylan. Good morning. Yes, let me just walk -- maybe walk through each of them. And maybe I'll start in order of when they deliver. So the 2827 Peachtree just a reminder that's now topped out. It delivers third quarter of this year. So it's come together nicely. And we do have a stabilization date of first quarter 2025 and that. At the end of the year we were 75% leased and we've got a couple I'd say very strong prospects to get us somewhere in the mid-80s prior to delivery so we feel good about that one. GlenLake III here in Raleigh also delivers third quarter of this year stabilization as first quarter 2025. We did -- if you remember we started that with 15% pre-leased we have not signed anyone else throughout so far. But I will say in the last call it even 60 days late last year rolling into this year activity prospect as we've topped off the building. You can now see the shell of the retail that we're adding as an amenity come together that our activity has picked up pretty good. So we're encouraged by that. The third one that delivers this year is the Granite Park VI. That's as a reminder in the Plano, Frisco submarket 50-50 joint venture with Granite Properties a local sharpshooter that we're thrilled to be partners with that delivers in the fourth quarter so sort of towards the end of the year 12% pre-leased. And that one has been interesting in that, I'd say, mid last year the activity was just off the charts. A lot of larger users we are chasing, and we're moving down making progress with or some sort of progress. And all of a sudden late last year or the third quarter the big users like we've all heard they sort of just press the pause button. So there's still smaller activity. But again, incredibly well-located building and we're encouraged by again by the looks how the building is coming together. And then the other two are 23Springs also with Granite that doesn't get completed until first quarter 2025 stabilizes in 2028. And activity has been very, very strong there even though the delivery is a couple of years out. So we feel great about that. And then the fifth one just Midtown East, obviously, we're just -- we put the silt fence around it and we'll be breaking ground in the next week or two with that one doesn't deliver until 2025. And we've actually had -- since we've had the fence go up we've had some inquiries on that, which I didn't really expect. Tampa is really not a pre-lease market. So we'll see those are very early and haven't even responded to some of the RFPs, but we're getting some activity there. So, again, we feel good. We got a couple of years until we get that one done. Did that answer your question? Yes. That was perfect. I appreciate the color on that. And then I guess just you mentioned Granite Park just a follow-up on Granite Park VI. Have you guys underwritten or underwriting expectations changed given sort of the drop-off in leasing activity, or just kind of how should we be thinking about that? Not at all. Not at all. I think we feel very good about the underwriting. Again, we don't stabilize that until I think first quarter 2026. So again, we've got plenty of time. There's no rush here. We didn't have a lot of pre-leasing coming in before the building was done. So we think we are pretty conservative. The proposals we're putting out are well in line with our underwriting. So no we still feel very good about it. Yes. Thank you. I just want to ask what's kind of built into your guidance in terms of the mark-to-market that you're expecting for the year? Hey, Peter, it's Brendan. I would say, I mean, it's on a cash basis we've been roughly kind of around flat for the pack really almost since the onset of COVID. So that's probably a good marker and in the low double digits on a GAAP basis. So those are probably good markers. Again, a little bit difficult to forecast just given the mix of expirations and new lease signings and things like that. But I think if you use those guideposts that probably gets you to kind of where – that probably ought to be in line with what we've got included in our outlook. Okay. Got it. And then I guess a slightly different way of asking something that was asked earlier, but a lot of your coastal competitors have talked about a pickup in activity pretty meaningfully since the New Year. Are you seeing any signs of that in your markets and – or generally kind of any signs of an inflection in terms of business confidence and business leaders being more willing to make decisions, or is it still kind of the same that they've been for the past year or so? Hey, Peter. Brian here. So a couple of things to that kind of comparison. Our markets, our submarkets or BBDs are buildings we're already ahead of that curve. So that's kind of the first thing. But – so again, our smaller and medium-sized and particularly suburban were first back then they came back kind of across the board. Now the start of this year, I do think the bigger corporates, the ones that you've read about their CEOs saying that they want to get their folks back. We have absolutely seen that. Now what the great thing I think and we hope that this is the case, the issues around the pandemic, which still were hovering a year ago just as a potential back, those are really kind of abated in terms of the reason why folks are not coming back. So I think that's a good thing. Hopefully, that's in the rearview mirror. We have been a fairly consistent, ahead of the curve, that curves continue to go up, peak occupancy is Tuesday, Wednesday, Thursday for sure, Fridays are quiet, you're seeing more on Mondays than you did at the end of last year. But I do believe that to a company there is a plan now that folks are back in the office three days a week. Hi. I just have one follow-up. Given the big debate on whether the weakness of CBD urban office is temporary or not, can you remind us of the breakdown of the urban versus suburban in your portfolio? And within that are you seeing any clear distinction between the operating performance between the two, whether it would be leasing activity, occupancy or rents? Hey Camille, it's Brendan. So, yes, I mean I would say I mean from a CBD -- we kind of classify it in three different ways. So, CBD, infill, and suburban. So, suburban, they're not quite evenly distributed. You might have a little bit maybe suburban is about a quarter infill is -- and then evenly split between infill and CBD. So, that's kind of the portfolio breakdown in terms of maybe in terms of performance. I'll let that over to Brian or Ted to answer that. Camille just to add on. And our CBDs are fundamentally different from a CBD of the gateways. So, our customers and their teammates who are commuting to our CBDs on the whole are not spending an hour on the train each way. So, our CBDs have a different kind of complex. I keep using that term. Now, as I mentioned earlier those regions that do look more like a gateway in terms of longer commutes and kind of that hub-and-spoke from the burbs and then back out again, they are looking more like kind of the coastal gateways in terms of the return. But to Brendan's point the CBD, infill, and suburban kind of nature of how we break out our markets; infill, that's basically a Buckhead in Atlanta if you know that. It has a solid residential base with incredible incomes and educational attainment. Then what happened is they added the shops and restaurants for that high net worth population to service. And then because they already live there and they played there, they wanted to work there. And so that's Buckhead, that's South Park Charlotte, that's North Hills here in Raleigh. So, that is a little bit of a nuance between the CBD, within the Highwoods Sunbelt portfolio and a CBD analog to the gateways of coastals. Well, thanks everybody for joining the call today. We appreciate your interest in Highwoods and we look forward to talking to you all again soon. Thank you.

EarningCall_438

Good morning. My name is Julie, I will be your conference operator today. At this time, I would like to welcome everyone to Heroux-Devtek's Fiscal 2023 Third Quarter Results Conference Call. [Operator Instructions] Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. We refer you to Slide 2 of the accompanying presentation available on the company's website for the complete forward-looking statements. I would like to remind everyone that this conference call is being recorded today, Wednesday, February 8, 2023 at 8:30 a.m. Eastern Time. I will now turn the conference over to Mr. Martin Brassard, President and Chief Executive Officer; and to Mr. Stephane Arsenault, Vice President and Chief Financial Officer of Heroux-Devtek. Mr. Brassard, please go ahead, sir. Thank you very much, Julie and good morning, everyone. [Foreign Language] On behalf of all of us here in Longueuil, welcome to our third quarter earnings conference call for fiscal 2023. As usual, I invite you to follow along by referring to the financial statements, MD&A, press release and presentation which can be found in the Investors section of our website. We continue to operate in a very challenging and dynamic environment. Civil aerospace market continues to show signs of recovery with constant growth in passenger traffic and OEMs increasing their production rates. Defense spending also continues to grow, bolstered by the current geopolitical environment. Consequently, our order book has grown significantly due to orders from both the civil and defense sectors reaching, $870 million at the end of December or 28% higher than at the start of the fiscal year. On the other end, we are facing strong headwinds. The reliability of the supply chain is impacting our production and our ability to deliver products steadily to our customers. Labor availability remains a constraint for us and for our supply chain. And third, inflation continues to negatively impact our costs. This past quarter, we made further progress towards reestablishing our throughput as we delivered $141 million of sales compared to $133 million last quarter and $114 million, the first quarter. This is a good step in the right direction. However, our profitability was not at the level we would have liked. The challenges in the aerospace environment mentioned earlier caused disruption in our manufacturing plants, arming our cost and linearity. Our focus for the quarters ahead will be to stabilize our production system in order to produce more efficiently and get back to historical margins. Our teams remain focused on execution and are engaged in improving our profitability. First, we need to restore the health of our supply chain by continuing to qualify new sources and by increasing our presence in our suppliers' operations. Second, we will continue the automation of our manufacturing processes wherever possible. And third, we will review our pricing in order to offset the effects of inflation. Thank you, Martin and good morning, everyone. As usual, please be aware that we will be referring to certain non-IFRS measures during the call, including adjusted EBITDA, adjusted net income and adjusted EPS. All non-IFRS measures are defined and reconciled in the MD&A issued earlier today. In Q3, consolidated sales for the quarter rose 7.4% to $140.9 million compared to $131.1 million last year and $132.7 million in Q2, in spite of the ongoing production system disruption described by Martin. Civil sales were up 23.6% to $45.1 million from increased delivery for the Embraer Praetor, Boeing 777 and Falcon 6X program, while defense sales were stable at $95.8 million. Gross profit decreased to 14.1% of sales compared to 16.3% last year. The decrease is attributable to product mix and product system inefficiency and the impact of inflation on workshop supplies and utility, while last year, the impact of COVID-19 was partly compensated for by government relief measures, representing an impact of 1.4% of sales. Operating income was $5.1 million, down from $10.5 million at this time last year, reflecting lower gross profit and a nonrecurring $1.6 million foreign exchange loss on conversion of monetary items, representing 1.1% of sales. Similarly, adjusted EBITDA decreased to $14.1 million compared to $19.7 million last year. Net income stood at $1.8 million or $0.05 per share compared to $6.5 million or $0.18 per share last year. Cash flow related to operating activity reached $5.2 million in the quarter, a decrease from $17.5 million reported at the same time last year due to lower operating income and $11.5 million more in inventory acquired to mitigate the effect of supply chain delays. Our financial position remained strong at the end of Q3 with net debt at $152.7 million, stable with March 31, 2022. Back to you, Martin. Thank you, Stephane. In closing, we are pleased to see continued recovery in demand in the aerospace industry and to report a record-breaking backlog. Our challenge does not lie in obtaining orders but in delivering them in a profitable and timely manner. Future is bright and our strong balance sheet gives us the flexibility required to execute our plans. We have the necessary resources at our disposal to deliver on our strong backlog and our plan to restore health in the supply chain will be key to achieving our profitability objectives. Thank you for your continued support and I look forward to updating you on our progress in the coming months. Julie, we are now ready to answer questions. So my first one is on the operational challenges that you've been talking about. I'm wondering like what more can you do to mitigate these operational challenges? I mean you have some automation going on, you have kind of tried to kind of get some labor and hiring done but supply chains are still constrained. What exactly can you do here incrementally to get back to the margins? Or are we in sort of a structural margin pressure situation right now for at least the next year or so? Yes, we have the pressure. But additional is, like I said, is to continue developing new sources and to have our watchtower on the solidity of our supply chain. Obviously, it takes some time when you resource some parts in the aerospace industry and have more effort or more resource on the ground. So we call it the boots on the ground. We have a special team that's covering North America. That initiative has started last year and we are now having the resources to expedite our suppliers in North America and some parts of Europe. So we believe that getting these parts and making sure that our supply chain execute our orders in a timely manner, right, will give us more stability in our production system and will reduce the inefficiencies that we observed in the third quarter for profitability. And is that something that you would expect in the next couple of quarters? Or is it going to take longer? It's going to stay there for the next couple of quarters, Konark, to be quite honest. It's not the magic stick but we should see improvement in our margin quarter-over-quarter, gradually. Okay. That makes sense. And then my second question, before I turn it over, based on the defense business. So defense spending is growing and you've been receiving orders, obviously. Is there a pause in some of these programs or any kind of delays in some of the programs, some like the defense spending -- or defense sales for you guys has been declining on a year-over-year basis, excluding FX variances, so for the last 3 quarters. So I'm like, I'm just wondering if there's any kind of ramp-up going on in some programs which will take effect in the next few quarters and has not happened in the last 2, 3 quarters? It's all about on the execution, right, of what we're describing. So we have the orders to do more sales. We are set to do $150 million per quarter total sales. And the defense order like on the civil side is slowed down because we're not able to deliver the throughput, right, that we're targeting. So just going back to the margin question. Just looking at comparing versus the prior quarter in your fiscal Q2. I mean you had higher revenues, so higher throughput but margins worsened. So I'm just wondering what incrementally got worse in Q3 versus Q2? And what impact did product mix have on the margins in Q3 versus maybe prior quarters? So the impact, we see, inflation. If you look at the explanation we have on the MD&A, we see more inflation, for example, on the short supplies of our facility. So it's pretty significant. 20% increase when we compared to previous quarter and that includes the last quarter. Utility cost is higher also essentially from European business but also everyone, right? So we have increased costs. So both together compared to last year, represents 1%. And would compared to previous quarter it's about the same value. So we still have high overtime and labor costs to execute on the delivery that we have. In the product mix, yes, it had an impact from the previous quarter because we have ramped on the civil sector and we have less aftermarket than what we -- that we had in the previous quarter. Okay. And just thinking about your fourth quarter, I mean that's normally the strongest quarter of the year for you from a revenue perspective. I mean, should we expect that to be the case this year? And obviously, higher throughput should have a benefit to margins? Yes. We -- as we reach the targeted throughput, right? And it's first to reach $150 million and then to do it efficiently, right? I think that's -- as Martin described, that's going to be done gradually, right? Let's the $150 million and then we'll improve how we're doing the $150 million. So that's the game plan and that includes management of the supply chain as Martin described. Okay. And just final for me. Just, I guess, on the supplier health. I mean I know you've had some issues really over the last 12 months with some of your suppliers maybe being in some financial challenges and you mentioned that you're qualifying new sources of supply here. Did anything, I guess, get kind of worsened in Q3? I mean, did you have some suppliers who just kind of stop shipping? Or maybe you can just talk a little bit about what's going on there? No, we don't have any suppliers that stopped shipping, so it's mainly delays. So we haven't experienced any suppliers that are bankrupt but we're facing the reality and we're getting ready. That's the point. Okay. Does that answer your question, Cameron? So I guess, maybe just to follow on that, you mentioned that you have some -- some of your suppliers are -- I don't know how many but facing the financial difficulty. Are these things that have already happened? Or is this something you're expecting and that you're going to have to switch supply in future quarters? So we're going to have to switch suppliers in the future quarters. It hasn't happened yet, Cameron, in Q3. It hasn't happened but we've made sure that we face what we know and we are taking the measures immediately as we know it. I just want to return to Cameron's question there and see if it's possible to provide any insights into those suppliers that are having delays. Are you getting a sense from them what the issues are on the ground for those suppliers? Like what's causing them to not be able to get you what you need on time? Well, the labor and the absenteeism, right? So we just went through 2 years of disruption and reduction. So people have to let go some people. Now, we need to get it back. So that's the challenge with the labor situation and the capability and we need skilled resource. So we're in aerospace. So that's the challenge that we're all dealing with. It's a labor availability as well as the inflation pressure. And we are not the only company here in the aerospace. Many people are experiencing that. So I have been traveling everywhere in America and Europe and that's the challenge we're all facing. It's not a question of orders. It's a question of getting the resource. A couple of months ago, it was mainly to get the suppliers. Now it's to get the material. Now we're talking more about the resource to produce. And Tier 2, Tier 3 suppliers are important in our link in our industry. So that's why when I say boots on the ground is to try to help them and to organize and making sure that the priorities -- or the priority are given to them as well. We're working with our biggest customers because sometimes, when they go there, they put their parts in front of ours, right? And we need to work with them. So it's a challenge in all the communication and complexity to make sure that we utilize the resource available to produce what we have to produce as an industry. Yes, yes. I was just trying to get like specifically not within your operations and your plants, just the suppliers, whether it's still a combination of them not being able to get their raw materials and supplies on time or if it's there having problems with employee absenteeism or it's just poor execution on the shop floor. But it sounds like it is still both for your suppliers. Again, I'm talking employee absenteeism and materials that they're not getting on time. Labor shortage -- labor shortage, that's why we're focusing. We have 99% of our required resource but we still have turnover affecting the productivity but it's not all the same in the situation everywhere. So people that have to let go 40% of their workforce, now they have to get it back. Also, you see the production rate increase. You see big OEMs with -- struggling with their supply chain because it's getting fast. We need to go up fast, that's the thing. The demand is there. Capacity is not that much -- is that like it used to be. So now we need to rebuild that capacity. So actually, it sort of leads to another question and very big picture. I don't know if you care to comment on this. But as you look out at what your customers' plans are in terms of deliveries? And I guess, I'm thinking more on the civil and the commercial side of the business but maybe it's a question that you could apply to defense as well. Your customers, when they talk about their sort of delivery plans over the next couple of years, do you think those are realistic? Or sort of given what you're seeing in your business, do you think those growth plans from your customers could end up being challenging? It's aggressive, let's say, I can tell you. From my perspective, I cannot say that it's unrealistic with our suppliers on them. But it's really aggressive and it's like -- it will be a challenge for all of us to meet that demand. And again, to find a way to produce what we have to produce the most efficient way. But the plans of the rate up are pretty much aggressive. Every platform are going up to -- Yes, to 2019 level. Even the twin-aisle, trying to push it back up, you know? I don't know what they have disclosed but I know that they're trying to put it back to bring it back up. My final question and I'm thinking longer term here and I'm thinking about the challenges presented to you, in particular, related to inflation, specifically. Given the fixed pricing nature of many of your contracts, I mean, is that, that margin pressure -- like could that not be kind of a multiyear challenge that you have to deal with where you've got permanently higher costs and you've got pricing that, depending on the contract, obviously, is fixed for a period of time and therefore, you just have to kind of wait this out sort of narrower margins on some pieces of business? Is it -- am I correct in that thinking? Or could you basically kind of recover all of the inflation in some way, shape or form in the short to medium term? Very difficult for me to answer that question in front of everybody, right, Tim. But we'll do whatever we can to keep our -- and stay healthy and keep our supply chain healthy. So that's the nature of aerospace industry. We always -- as you know, we always fought inflation. There's no inflation in our industry, right? We always have find ways to offset this inflation through productivity and cost structure and best practices and lean practices. So in our DNA, it's like that. But now we're facing all as an industry something that it's been a while that we haven't seen that. It's back in the '90s, right, that we had these type of inflation. So we will have to have many discussions among all the actors of the industry, if I may answer like that, Tim. Just to come back on the labor front. Obviously, you discussed about the labor challenges. But could you talk maybe about the upcoming labor agreement in terms of renewal? And maybe if it could get worse before it getting better. Just wondering about if there's any big agreement up for renewal? We have 4 agreements in place, right? We have 4 union planned, right Stephane? 4 union planned, 3 of which are the one that is -- 3 of which are for the next 2 years, right, 2, 3, 4 years. The one that is upcoming for negotiation is our Longueuil plan. That union agreement expires in April 2023. Okay. And just in terms of pricing power -- and could you talk maybe about your ability to or the pricing power discussion you have with the OEMs right now. Whether they are receptive to some costs and/or price increase given the nature of your contract? Maybe the feedback overall from the discussion with your OEM that would be awesome. I've been 30 year in that business and I've never found a customer that wants to pay higher or more for the product, right? So if you find a customer like that, you let me know. But again, it's going to be a discussion, periods and things like that. It's an industry problem, because we have always been fighting the inflation. And you see some of the results of the people looking at inflation, Tier 1, Tier 2 people, that will have to be discussed. Obviously, if you're in the aftermarket, you don't have these long-term contracts or MRO and things like that. It's easier to pass this inflation. However, when you are on long-term -- like you said, on a long-term contract with the current fixed pricing, those negotiations, we will have to have discussions. So no, they are not welcome you open arms, right? Okay. And Martin, could you provide some color about the timing to get back to the kind of a 15% EBITDA level? Do you have some visibility on that potential timing? Great. And now when we look at the order flow in the quarter, there has been several announcements with the Canadian government that is finalizing the F-35 orders. We saw also Dassault and Airbus that have reached an agreement on the FCAS. Also more development around the FLRAA with the Bell Textron. So among those 3 opportunities, could you highlight the potential aftermarket opportunities and maybe the opportunities that you see among those 3. Well, of course, F-35. F-35, it's something that we need -- we are now working on to get sustainment of F-35, because all the production is made, marking as its supply chain. Unless they we decide to change some of their suppliers, right, because of performance or before because of deliveries, right? There won't be much there but the sustainment, this is something that we're pushing. On FCAS, obviously, Europe has decided to go with the FCAS. This is -- we have a good site in Spain. We will have our discussion with Dassault. Dassault is a good customer of ours. We have a very good reputation with them. And also -- and then there's Airbus, Germany that is in this FCAS. So yes, we do have some discussion. It's going to take time. You won't see the revenue soon but those are programs that we're discussing. There's also the Tempest in the U.K. that U.K. government wants to launch. So when you're number 3 in the landing gear and you have footprints in the U.K., in Europe and North America, so we participate in those discussions. Is it -- are we going to get the contract at the end? That's always -- there's other 2, 3 other companies there that are competing, depending what market, right. Sometimes it's 2, sometimes it's 3. So yes, we entertain that. But obviously, for revenue in the midterm, again, I want to remind you that we have the CH-53K, we have the MQ-25 and we have the MRO of F-18. What else? Those are -- we have the business jet -- the 2 business jets that are coming. So we should see revenue profile going up. And we need to get it back to stabilize our production system, get healthier with our supply chain or to get healthy and then produce as we used to, right. Produce as we used to in a more predictable fashion. We had exposure to -- we're Tier 2 on that platform. We believe that we can -- we will have some work on Tier 2. Could you give us an update on how you're thinking about tuck-in acquisitions and your plans going forward given the ongoing supply issues that are pressuring the EBITDA side of the leverage ratio? Acquisition, so we still -- if the right opportunities happens, at the right price, it's accretive to our shareholder, we'll do it. We have the balance sheet to do it. We'll do it. Right now, our mind is more to focus on the level of operation. But of course, we're going to look at all opportunities on all sides to be able to complement our offer to our customer. And should this acquisition be accretive, we'll do it. We have strong partners. We have good partners. We can do a vast or a large area of business acquisition. Stephane, do you have anything to add? Okay. And just on your contracts in general, could you remind us how the standard cost escalators work that are included in the line purchase orders and your ability to improve the pricing longer term under the longer-term programs? So we do have escalation clause in our life of the program contract when we have the IP. So this is typical in the industry. This is standard in the industry where you have a long-term contract, you have the IP. So we have the escalation clause that follows the WPU index and the CPI which is the labor. So those are contractually in the contract. So obviously, we have a lots of fluctuation these days and I haven't found a customer that wants to pay more for its product. I'm sure if you find one, let me know. But again, this is contractually and there's no reason why we cannot exercise our right there. Then we have a long-term contract. So we have the PO to PO basic contract which are lasting, like I said, 1, 2, 3 years. So when you place a PO for a landing gear, you're going to get the product in 2 years. So those, as soon as we're renewing and repeating, we take the opportunity to revise our pricing and it's going there and we're asking. It's a bid, obviously, it's a bid we're going with our supply chain and then we pass it on the actual cost. So -- and the aftermarket, well, it's a list price and then this is -- it's much more faster to put it in a price. Yes. So maybe just one follow-up, if I can. So the margin issues that resulted from pricing this quarter that you highlighted. Did those result from like cost inflation exceeding what you're able to capture through the escalators that are included in the orders? That's right. We got the deal -- we win the deal years ago and then we're delivering on that deal. And then the deal we received today, we're going to be delivering in 2 years. Okay. And I have a question on the backlog and the impressive growth we saw this quarter. How much of that relates to order terms and lead times getting longer? And I guess, how much of a higher level of annual revenue would you expect that to support once you're able to get the production capacity to meet that demand? I think it's not a question of order for us to ramp up the volume, right? We have the order. It's a question of execution. So as Martin described, both sectors are very strong on the defense side. And on the civil side, everything is ramping up. So it's really the strength of the order book is coming from those 2 groups, right? So. Okay. So truly a stronger demand. And just one other question on the margin outlook which I know you've spoken about quite a bit. But if you're paying to add staff and your suppliers to increase production throughput, would you expect that to be a net positive or a net margin net -- sorry, a net positive or a net negative for your margin percentage in the short term? So I'm just wondering if that's net negative for you or net positive, just as we think about the margin percentage going forward. Should be positive, because we're doing that to make sure that our shop will be linear and we don't create hole in our production system. Yes, that's for sure. It's going to ramp up the volume. In addition, as Martin said, month-to-month, I mean, or week-to-week will stabilize the incoming material so that we have a more regular flow within our shelf. Okay. And one more, if I can. Earlier in the year, you had identified 3 production facilities that we're experiencing challenges. Can you just provide us with an update on those? It sounded like they were trending low into September and October. And are we right to understand that the issues in Q3 was kind of just across the board, not at those facilities? Well, those 3 facilities, they performed as well as in Q2. So there's no deterioration from those 3 facilities. Although, we have not improved them, right? Or the improvement was not following our plan, right? So there's still room for improvement on 2 of the 3 facilities, right? The U.K. one, I think, it's pretty on its prime now, right. And the other 2 are the ones that we are targeting improvement and it's achievable, so for those 2. We have another one in the U.S. which is impacting our result this quarter. So throughput was lower than what we anticipated from that facility. And that's the go-get this quarter in order to stabilize that throughput that is coming from that facility and it's basically how the translation from Q2, Q3 is. So basically, the 3 facilities, one is at the level that we are expected and the other 2 are gradually improving. And just as a follow-up here. Martin and Stephane, you guys have been talking about the labor issues for some time now. I'm just wondering, is there room for more automation in your factories to offset some of that labor availability? Yes. All the time, Konark and our strategy is still to absorb production rate increase of the 777 without adding resources. But we're still on with this, right? We're still on with the automation in our facility in Ontario and in Springfield, Ohio. And those are the ones that are -- will benefit more from the automation and will continue to do that. We're doing the same thing in the Spain and in Laval. That the -- but the greatest impact should come from Ontario and Springfield would you agree? So because we're going to see these rates from 2 to 3 and maybe to 4 months right now, 777 and 777X. Right, that make sense. And then one more for me quickly on inventory. So there's been a $47 million kind of inventory built in the first 3 quarters. Do you expect any major reversal in Q4? Well, as Stephane said it's -- our goal is to get to $140 million to $160 million a quarter. So we're going to have some ups and downs, Konark but that's our goal. Just want to return, Martin, you were talking about 3 different types of contracts in response to kind of an inflation question. Am I correct that the life of program contracts that you talk about. Number one, the escalation that comes in, there's -- is there typically a delay on that, like the costs will inflate but it will be the next year before you really get to benefit from the pricing? Or is it matched better than that? Yes. There's always a delay. But for those contracts that I have in mind and not 2 years, the delay is shorter. So it's 1 year. Okay. And then I guess just to follow on that, those 3 categories, if you will, of revenues. Could you give us a sense for -- in the current fiscal year, let's say, by the year is done, approximately how much revenue will come from each of those or what percentage of revenue will come from each of those 3 different types of contract, life of program, the POs and aftermarket, just approximate values if possible? Thank you for asking the questions, Tim. But you can understand that we cannot disclose that and you guys are pretty good in figuring it out. There are no further questions at this time. I will turn the call back over to the presenters for closing remarks. Thank you. Thank you for your continued support once again and for your interest towards our company. So rest assured that we'll do what we have to do to bring it back, to navigate through the environment or the turbulent environment and to improve our performance. So thank you very much and have a good day.

EarningCall_439

Good day, and welcome to the Vertex Pharmaceuticals Fourth Quarter and Full Year 2022 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. Good evening, everyone. My name is Susie Lisa and as the Senior Vice President of Investor Relations for Vertex, it is my pleasure to welcome you to our fourth quarter and full year 2022 financial results conference call. On tonight's call making prepared remarks, we have Dr. Reshma Kewalramani, Vertex’s CEO and President; Stuart Arbuckle, Chief Operating Officer, and Charlie Wagner, Chief Financial Officer. We recommend that you access the webcast slides as you listen to this call. The call is being recorded and a replay will be available on our website. We will make forward-looking statements on this call that are subject to the risks and uncertainties discussed in detail in today’s press release and in our filings with the Securities and Exchange Commission. These statements, including, without limitation, those regarding Vertex’s marketed cystic fibrosis medicines, our pipeline and Vertex’s future financial performance are based on management’s current assumptions. Actual outcomes and events could differ materially. I would also note that select financial results and guidance that we will review on the call this evening are presented on a non-GAAP basis. In addition, the impact of a foreign exchange is presented inclusive of our foreign exchange risk management program. Thanks, Susie. Good evening all and thank you for joining us on the call today. We are pleased to have closed out a strong 2022 with full year global CF product revenue up 18% versus 2021. Our full year 2023 product revenue guidance is $9.55 billion to $9.7 billion, representing 7% to 9% growth year-on-year inclusive of FX headwind of approximately 1.5%. We have more than 20,000 patients still to reach with CFTR modulators and we continue to work with focus and urgency to reach all patients with CF around the globe who may benefit from our therapies. It is an exciting time for Vertex. Our medicines have transformed CF and the growth of our CF business has transformed Vertex. Our differentiated R&D approach led to our multiple life-changing therapies in cystic fibrosis and is designed to deliver transformative medicines for serious diseases at high rates of success. Agnostic to modality, it is delivering just that. In aggregate, our mid and late-stage clinical pipeline holds the promise to deliver potentially transformative benefit for patients across eight disease areas. As detailed on Slide 5, each program holds the potential to be best-in-class and transform the disease and each represents a multi-billion dollar market opportunity. Furthermore, we see the opportunity to launch new products into five of these disease areas within the next five years or our five and five goal and we're not done. The next wave of innovation is also making progress and advancing through preclinical development, including programs in Duchenne's muscular dystrophy and myotonic dystrophy Type 1. This breadth of pipeline success, accelerated pace of clinical trial progress and build out of commercial capabilities for upcoming product launches warrant continued investments in 2023. As such, we are strategically investing and focusing on execution to drive forward the significant opportunity with a uniquely strong and durable CF franchise, a deep, broad and advancing R&D pipeline with multiple potentially near-term commercial opportunities, a strong balance sheet and a deeply talented and committed team, Vertex is well positioned to deliver for patients and shareholders for years to come. With that overview, I'll turn to the details of recent R&D progress. Starting with CF. We'll continue our journey in cystic fibrosis as we serially innovate to bring highly efficacious therapies to all CF patients. Our next in class vanzacaftor triple combination completed enrollment in its two Phase 3 clinical trials, SKYLINE 102 and SKYLINE 103 in patients ages 12 years and older in Q4 of 2022. While TRIKAFTA sets a very high bar, our enthusiasm for this vanzacaftor program is also high. This program could deliver even greater benefits to patients given one, our highly predictive, in vitro human bronchial epithelial or HPE cell assays showed the vanza triple was superior to TRIKAFTA in improving chloride transport, a direct measure of CFTR function. Two, our Phase 2 clinical data also suggest the potential for greater efficacy for vanzacaftor versus TRIKAFTA. And three, the vanzacaftor triple also has the benefit of once-daily oral dosing and a substantially reduced royalty burden relative to TRIKAFTA. The Phase 3 trial are currently in the 52 week dosing period and we anticipate their completion towards the end of this year. Another important program is the VX-522 program, our CFTR mRNA approach that we are developing in partnership with Moderna for CF patients who cannot benefit from our CFTR modulators. In December of 2022, the FDA cleared the IND for VX-522 and the single ascending dose study in CF patients was initiated last year, a major milestone for Vertex and the field. We have high expectations given over five years of research that led to the discovery of VX-522 with the following properties, one, delivery of mRNA at high efficiency into HBE cells; two, expression of CFTR protein leading to high levels of chloride transport; and three, in both rodents and non-human primates expression of CFTR protein in the desired cells; and lastly, a preclinical safety profile that supported advancement into human clinical trials. We are excited with the progress of VX-522, which brings hope to the more than 5,000 CF patients who are still waiting for a treatment that targets the underlying cause of their disease. Turning now to exa-cel, our gene-editing program for severe sickle cell disease and transfusion dependent beta thalassemia. This is our most advanced program outside of CF and we expect exa-cel to be our next commercial launch. In late Q4, we completed our regulatory submissions for exa-cel for both sickle cell disease and beta thalassemia in the EU and UK. Both the EMA and the MHRA have recently validated the MAA submissions. And in the U.S., we remain on track to complete our rolling BLA submission by the end of this quarter. The remarkable clinical benefits are evident in the data we’ve shared to date. Exa-cel holds the promise to be the first CRISPR-based gene-editing treatment to be approved and represents a near-term and significant market opportunity, which Stuart will detail. Turning next to VX-548 and our pain program. VX-548 is our novel selective NaV1.8 inhibitor that holds a promise of highly effective pain relief without the side effects or addictive potential of opioids. If approved, VX-548 would represent the first new class of pain medicine in decades with the potential to address the staggeringly high unmet need in acute pain. VX-548 acts on the peripheral nerves to block the pain signal and thus may be able to provide effective pain relief without the abuse potential, which is a central nervous system phenomenon. We have high expectations for this program because NaV1.8 is a genetically and pharmacologically validated target. Second, we have multiple positive proof of concept results with VX-150, a predecessor molecule to VX-548 and proof of concept with VX-548 itself. And lastly, our Phase 3 program in acute pain is substantially similar to the positive Phase 2 trials we have already conducted. VX-548 has been granted Fast Track and Breakthrough Therapy designation in the U.S. We initiated pivotal development last year and we are enrolling patients across three Phase 3 studies with the goal of seeking a broad moderate to severe acute pain label. We anticipate completing the Phase 3 pivotal program towards the end of this year or the beginning of next, creating another potentially significant and near-term commercial opportunity, which Stuart will also discuss. In addition to validation of NaV1.8 as a target in acute pain, it has also been validated as a target in neuropathic pain. I am pleased to share that in late Q4, we initiated a 12-week Phase 2 dose ranging proof of concept study for VX-548 in peripheral neuropathic pain. We look forward to updating you as this Phase 2 program progresses and to sharing more on the market opportunity on future calls. Transitioning now to inaxaplin or VX-147, the first potential medicine to target the underlying cause of APOL1-mediated kidney disease or AMKD, post the positive Phase 2 proof of concept study, inaxaplin is now being studied in a single adaptive Phase 2/3 pivotal trial. This study has a pre-planned interim analysis at 48 weeks of treatment, which if positive could serve as the basis to seek accelerated approval in the U.S. Our goal is to complete the Phase 2 dose ranging portion of the Phase 2/3 pivotal study this year, select a dose, and then continue on to the Phase 3 portion. We are also working to increase awareness screening and diagnosis through multiple initiatives given the high unmet need and the approximately 100,000 patients in the U.S. and Europe alone. With inaxaplin, we see the potential of bringing a first-in-class treatment to patients with AMKD and unlocking a multi-billion dollar market opportunity. Moving to type 1 diabetes where a goal is to deliver a transformative if not curative therapy for the more than 2.5 million patients with type 1 diabetes in North America and Europe. We are advancing multiple programs. First, VX-880 is our stem cell-derived, fully differentiated, insulin-producing islet cells, which use standard immunosuppressive to protect the cells from the immune system. These cells are also foundational for the other two T1D programs. For VX-880, we achieved proof-of-concept last year with the first two patients treated in Part A of the VX-880 study. We have now fully enrolled Part B, where patients will receive the target dose on a staggered basis. The next phase is Part C, expected to initiate later this year in which patients will be treated concurrently with the target dose. We look forward to sharing VX-880 data from more patients and with longer duration of follow up at medical congresses this year. Second VX-264 or the cells plus device, which encapsulates the same fully differentiated insulin producing islet cells in a proprietary device that shields the cells from the body’s immune system and hence there is no requirement for immunosuppressants. In late Q4, we simultaneously filed a CTA in Canada as well as the IND in the U.S. As we shared last month, the CTA has cleared and we look forward to initiating enrollment and dosing of patients in Canada in the coming months. In the U.S., the IND has not cleared. We have received and responded to the FDA’s questions. We look forward to working with the agency with urgency, so that we can initiate the study in the U.S. as soon as possible. Third, in our hypoimmune program, we are editing the same fully differentiated insulin producing islets to cloak them from the immune system, another path to obviating the need for immunosuppressive. This program continues to progress in preclinical development. Let me close the T1D section with an update on the ViaCyte acquisition through which we gained intellectual property, tools and capabilities that hold the potential to accelerate our goal of developing transformative treatments for this disease. We have now completed our data and portfolio review and are very pleased with the progress to date. We have begun executing our integration plans. On the clinical side, a Phase 1/2 study of VCTX-211, a hypoimmune cell program that originated with ViaCyte and that Vertex is now developing in partnership with CRISPR Therapeutics has been initiated and is ongoing. All other ViaCyte clinical trials have completed enrollment and dosing and are in the follow-up stage. I’ll finish up with the alpha-1 antitrypsin deficiency or AATD program. Both a Phase 1 study of VX-634, the first in a series of next wave AAT correctors and a 48-week Phase 2 study of VX-864, our first generation AAT corrector are ongoing. We look forward to updating you as these programs advance. Thanks, Reshma. Today, I will review our continued strong performance and outlook in CF as well as potential near-term commercial launches in new disease areas with exa-cel and VX-548. Starting with CF, where we continue to bring our transformative medicines to many more patients globally. Last month, we raised our estimate for the number of patients with cystic fibrosis in the U.S., Europe, Australia, and Canada to 88,000 up from our previous estimate of 83,000. The growth in the CF population can be attributed to more patients coming forward to receive treatment, better data capture in patient registries, and perhaps most importantly, people with CF are living longer due to improvements in patient care and the availability of truly effective therapies. For a baby born with CF in 2021, the Cystic Fibrosis Foundation predicts the median age of survival is now 65 years. In the U.S., our focus remains on maintaining the very high persistence and compliance rates we have seen with our therapies and extending the benefits into younger age groups. Outside the U.S., uptake of KAFTRIO/TRIKAFTA in countries with recent reimbursement agreements continues to drive growth, as has the rollout of KAFTRIO in children ages six to 11 years in countries where this indication has recently received reimbursed access such as France and Spain. There are still more than 20,000 CF patients who could benefit from, but are not on CFTR modulator treatment. These patients fall primarily into two categories. One, patients in countries where we are early on the launch curve, and two, younger patients for whom we continue to pursue additional label and reimbursement extensions, such as the recent U.S. approval of ORKAMBI for ages one to two years and recent regulatory submissions for KALYDECO in children ages one to four months, and for TRIKAFTA in ages two to five years, which has received Priority Review and a PDUFA date of April 28 in the U.S. We are confident that we will reach the vast majority of these patients over time, which will continue to drive revenue growth in the near and long-term. We also see exciting growth potential for our vanzacaftor triple combo given the anticipated clinical profile, more convenient once daily dosing, and the potential to offer a new option for patients who have discontinued prior CFTR modulator therapy. Finally, in CF, as Reshma mentioned, our CFTR mRNA program VX-522 is being developed for the more than 5,000 CF patients worldwide who currently do not have any therapies that treat the underlying cause of their disease. I will now detail our commercial readiness efforts and the market opportunity for two potential product launches outside of CF, exa-cel and VX-548. Exa-cel holds curative potential for patients with sickle cell disease and transfusion-dependent beta thalassemia, and we are making significant progress with launch preparation activities. Our initial launch of exa-cel will focus on the approximately 32,000 individuals in the U.S. and Europe for whom these diseases are most severe, presenting a significant clinical, humanistic and economic burden. The estimated 25,000 severe sickle cell disease patients have multiple hospitalizations annually for vaso-occlusive crisis, while the estimated 7,000 TDT patients undergo near monthly transfusions. There is also a considerable financial burden both for these patients and to the healthcare system. In the U.S. economic models project the lifetime treatment costs for severe sickle cell disease patients to be between $4 million and $6 million. Recent market research indicates that physicians have a strong preference and interest in gene editing over other potentially curative approaches. And that patients with sickle cell disease are increasingly optimistic about the potential role for curative therapies in the treatment of their disease. In addition, payors view the emerging clinical data for exa-cel as highly impactful, most notably the reductions in vaso-occlusive crisis and hospitalizations. Importantly for our specialty commercial model, these 32,000 severe patients are concentrated geographically and we believe can be served effectively with a network of approximately 50 authorized treatment centers or ATCs in the U.S. and approximately 25 in Europe. We have established the needed supply chain and manufacturing infrastructure to support the launch, including validated chain of identity and chain of custody systems, global shipping infrastructure, and the needed manufacturing capacity to support uptake following approval. And finally, we continue to work with key commercial and government payors and policy makers in the U.S. and Europe to ensure they understand the significant burden of these diseases and that broad patient access and reimbursement are in place if and when exa-cel is approved. To date, we have engaged with all U.S. state Medicaid agencies, some 150 unique U.S. commercial payors, as well as multiple health technology assessment bodies in Europe, including NICE and GBA, to share important information about exa-cel and our commitment to working collaboratively to provide access to this therapy. Shifting now to VX-548, which we believe has the potential to play an important role across the pain spectrum, including acute pain and chronic pain conditions. I’ll focus my comments on acute pain, which is a near-term commercial opportunity. There are four aspects critical to framing the acute pain opportunity for Vertex. One, there is a significant unmet need due to the limitations and drawbacks of currently available treatments. Two, the market is large today, even with 90% generic prescribing. Three, prescribing is concentrated in the hospital setting and thus addressable with a specialty commercial infrastructure. And four, there is broad stakeholder recognition of the need for new therapies, which also helps provide a clear path to future patient access and reimbursement. Firstly, millions in the U.S. suffer from acute pain each year, yet it is often difficult to manage effectively given the limitations of existing therapies. The current standards of care are NSAIDs and acetaminophen at one end of the spectrum, which are non-addicting, but offer limited pain relief and can pose GI and liver toxicity concerns. And at the other end of the spectrum are opioids, which provide effective pain relief, but have many undesirable side effects, including nausea and somnolence and have significant abuse potential. Many large hospital systems and all 50 states have adopted restrictions for the use of opioids. This leaves a vast gap in the treatment landscape for a medicine like VX-548 with strong efficacy, a desirable benefit risk profile, and without abuse potential given it is peripherally acting. Second, the acute pain market is very large valued in the U.S. at $4 billion, despite 90% of prescriptions being generic. Third, this highly concentrated market can be served with a specialty commercial model. Of the 1.5 billion treatment days for acute pain annually, some two-thirds or 1 billion are driven by hospital prescribing, following inpatient or outpatient procedures such as surgeries or emergency room visits. Furthermore, these hospital-driven prescriptions are concentrated among approximately 1,700 hospitals that aggregate to roughly 220 integrated delivery networks. Thus, we believe we can reach a large proportion of this market with a specialty sales and marketing infrastructure and have begun to hire for key positions. Fourth, and finally, given the wide stakeholder recognition of the limitations of current treatments and the unmet need, we see both high demand and a clear path to access and reimbursement for a medicine with a profile like VX-548. A key example of the path to reimbursement and access is the recently passed NOPAIN or Non-Opioids Prevent Addiction in the Nation Act signed into law last December. Through the NOPAIN Act, Congress has directed CMS to make a separate add-on payment to hospitals in the outpatient and ambulatory surgery center setting for non-opioids for the treatment of pain. We believe this new law is an important sign of the growing movement to remove barriers for hospitals, providers and patients to utilize non-opioid treatment options. In closing, we are excited about the opportunity to extend the benefits of our CF medicines to more patients around the globe and the near-term potential to commercialize transformative treatments for patients with sickle cell disease, beta thalassemia and acute pain. Thanks, Stuart. Vertex’s fourth quarter and full year 2022 results represent another year of strong execution and exceptional financial performance. Fourth quarter 2022 revenue increased 11% year-over-year to 2.3 billion. Growth was led by a 24% year-over-year increase outside the U.S. on continued strong uptake of TRIKAFTA/KAFTRIO in markets with recently achieved reimbursement as well as label extensions into younger age groups. U.S. CF revenue grew 5% year-over-year with ongoing consistent performance. Full year 2022 revenue of 8.93 billion represents 18% growth versus 2021, marking Vertex’s eighth consecutive year of at least double digit revenue growth. Full year 2022 international revenue of 3.23 billion, increased 41%. And full year U.S. revenue of 5.7 billion, increased 8% compared to 2021. For the full year 2022, we estimate the changes in foreign exchange negatively impacted our global revenue growth rate by approximately 1.5 percentage points inclusive of our foreign exchange risk management program. Fourth quarter 2022, combined non-GAAP R&D acquired IP R&D and SG&A expenses were 872 million, an increase of 5% compared to the fourth quarter of 2021. Full year 2022 combined non-GAAP R&D, acquired IP R&D and SG&A expenses were 3.07 billion, a decrease of 11% versus the prior year. Recall that 2021 results were impacted by 1.1 billion of acquired IP R&D charges, including the one time $900 million payment to CRISPR compared to 116 million of such charges in 2022. Acquired IP R&D aside throughout 2022, we continued to invest in research and our advancing pipeline, which includes mid and late stage clinical assets across eight different disease areas. The year-over-year increase in spending reflects stepped up investments in programs where we made notable clinical progress, particularly in pain, the new vanza [ph] triple as well as type 1 diabetes. We also continued to invest in the pre-commercial buildout activities for exa-cel and preparation for other potential near-term launches. Given these programs potentially transformative benefit to patients and multi-billion dollar market opportunities, we will continue to invest accordingly. Fourth quarter 2022 non-GAAP operating margin was 50% and we generated non-GAAP operating income of 1.15 billion in the quarter, an increase of 15% versus the prior year period. Full year 2022 non-GAAP operating margin was 54% and full year non-GAAP operating income was 4.79 billion, up 48% versus 2021. We ended the quarter with 10.8 billion in cash in investments as our cash flow generation and balance sheet remained very strong. On the business development front in Q4, we announced a global collaboration with Entrada Therapeutics focused on therapeutics for DM1. The HSR period expired last night and the transaction is expected to close within days. As a result, our Q1 2023 results are anticipated to include an approximate 224 million upfront payment recorded in our income statement and an approximate 26 million equity investment recorded on the balance sheet. Now switching to guidance. We are establishing 2023 product revenue guidance of 9.55 billion to 9.7 billion, representing 7% to 9% year-over-year growth at current exchange rates. Note that this guidance includes an expected approximate 1.5 percentage point headwind to our revenue growth inclusive of our foreign exchange risk management program. Also note that 2023 product revenue guidance reflects revenue from cystic fibrosis products only. Exa-cel is not included in guidance as potential approval and launch dates in the EU, UK and U.S. are still to be determined. For our CF franchise in 2023, we see continued strong performance of TRIKAFTA/KAFTRIO in all major markets, further uptake in markets with recent reimbursement agreements and expansion into younger patient populations. Of note, with four years of TRIKAFTA experience, the majority of international reimbursement agreements secured and recent revisions in epidemiology, we have strong visibility to our 2023 revenue guidance range and another year of attractive growth for our CF product portfolio. We are also providing 2023 guidance for combined non-GAAP R&D, acquired IP R&D and SG&A expenses in a range of 3.9 to 4 billion, which includes approximately 300 million of upfronts and milestones from known collaborations, including the expected upfront payment in Q1 2023 for Entrada. This targeted investment increase is consistent with the significant continued progress of our multiple mid and late stage clinical development programs and the expansion of our commercial and manufacturing capabilities in anticipation of the multi-billion dollar market opportunities represented by our programs with near-term launch potential. In closing, Vertex performed exceptionally well in 2022. We grew revenue double digits for the eighth consecutive year, maintained our strong balance sheet, invested internally and externally and accelerated programs across our diverse pipeline. In 2023, we look forward to further important milestones as highlighted on this slide to mark our continued progress in multiple disease areas. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Salveen Richter with Goldman Sachs. Please go ahead. Good afternoon. Thanks for taking my question. Can you frame what we’re going to see from the VX-880 program this year and when, and also on the second program, the cells and device program, how you overcome challenges here in your confidence level that you’ll be able to kind of get to the bars that you want to see? Yes. Hey, thanks for the question Salveen. With regard to the 880 program, remember, this is the program that is, let’s call it the naked cell program that requires off-the-shelf immunosuppressives. This is the program that we demonstrate proof of concept with the half dose patients last year. Where we are now is we fully enrolled this Part B, that’s where patients receive the target dose, but in a staggered manner. And the real importance here is and our excitement is to get to Part C because then we can dose patients concurrently. You should expect data this year at congresses. And there are a couple of important diabetes congresses that occur each year that will have longer duration of follow-up and more patients worth of data. And the dimensions on which you can expect us to share information are what we’ve already done with the first two patients. That’s to say C-peptide levels decreases in exogenous insulin, improvements in hemoglobin A1C. With regard to the cells and device program, historically in the field, the challenge with devices has been fibrosis, lack of oxygen getting to the cells inside these devices, as well as the inability for nutrients to go in and for insulin in this instance to be secreted out. We have worked long and hard to develop a proprietary, what we call a channel array device. This device has particular features in terms of geometry, materials and proximity of blood and oxygen to ourselves to overcome these historic barriers. And what I’ll say to just give you a little bit more on this point is in small animal models and large with our proprietary device, we have seen no evidence of fibrosis. Last thing to point out, of course, the same 880 cells that we’ve already shown proof of concept with, those are the same cells in the cells plus device presentation as well as in our hypoimmune presentation. Hey, everyone, afternoon and thanks for the question. Just have two for VX-548 is the communication strategy here to have all the Phase 3 data in acute pain and neuropathic pain and then disclose everything before filing? I wasn’t sure what the plan was there? And then Stuart, given the hospital setting, what role do you think that treatment algorithms and cost benefit studies will play commercially? This is obviously a pretty different market than you guys are typically used to. And then for 522, I don’t have a doubt that you guys can express CFTR, but obviously has to be in the right tissues. Can you talk maybe about the technical challenges here with an mRNA strategy and your development plans and just at a high level? Thank you. Yes, sure thing Geoff. Let me start with the VX-522 question, which is the mRNA program that we are developing in collaboration with Moderna. And then we’ll switch to the 548 program in pain. So with regard to VX-522 and the mRNA program, the biggest challenge we and others have faced through the development of this approach for those last 5,000 patients who cannot benefit from CFTR modulators because they simply don’t make any protein, it’s been delivery. That is really what we have been working on for years. And it was only about 12 months, 18 months ago that we really had a big breakthrough in that area. The reason for our excitement for this program is that we can now deliver with our LNPs into our HPE cells using those same assays that are not only qualitatively translated to what we see in the clinic but quantitatively so. Second, we also can show that the protein expression levels with that mRNA delivery is high with high chloride transport. That’s the direct readout for CFTR function. And then lastly, we have taken this mRNA LNP construct and administered it to small animals and large, and we can deliver it to the right cell. That’s a really important part of doing this in patients. So that’s the technical challenges we’ve overcome and it’s really been all about delivery. With regard to VX-548, yes, you’re right. The plan is to complete the studies, all three Phase 3 studies, the two RCTs, which are very similar to what we’ve already done in Phase 2 and the one single arm study, let’s call it an all-comer study. So we get different pain types. We are projecting that we’re going to complete those trials towards the end of this year, beginning of next, and we’ll share all the data at the same time. Stuart, over to you for commercial potential. Yes. So Geoff as we’ve described before, this is a very big market opportunity with 1.5 billion treatment days of acute pain therapy prescribed per year. Just to dimensionalize that I talked in my prepared remarks about two-thirds of those prescriptions are either written and dispensed in a hospital or institution or ambulatory care center or they are written in the institutional setting, but given to a patient on discharge and therefore filled in the retail setting. And the combination of those two accounts are about two-thirds of the 1.5 billion treatment days. When we've talked to stakeholders across the board, they are well aware of the unmet need for new therapies in the acute pain space because all institutions and all states have put in place restrictions on the use of opioids. It's created this gap in the market for products like 548 that have a really positive benefit risk profile. I do think we are beginning to see a sea change in terms of policies which have been focused on limiting utilization of opioids to actually policies which are looking to remove barriers that might be created by cost sensitivity. And I'll point you to the NOPAIN Act, which I refer to in my prepared remarks that directs CMS to develop a system of add-on payments for non-opioid pain medicines in addition to the bundle payment that they give to hospitals for the outpatient and the ACS setting. I see that as a really important sea change and recognition that these are cost sensitive segments, but this is a way of creating barriers or – sorry, reducing barriers or creating incentives to do the right thing and prescribe non-opioid pain management when they're available. Hey Jeff, this is Reshma again, just to close out on pain. And others may ask questions later, but I just wanted to make sure I also mentioned the peripheral neuropathic pain with VX-548 that Phase 2 study also began last year. And those results we aren't calling yet when they would be available, but I wanted to make sure that that study is also ongoing. Good afternoon. Thanks for taking our question and congrats on the progress. A question on the expense side from us, it does seem like the guidance for costs for 2023 is a bit heavier than we had anticipated and even excluding the Entrada upfront, it does seem like costs are growing a bit faster than revenue. So I'm curious, what are the push pulls in the guidance? What elements are you including in the guidance? Is there investment for pre-launch, more heavy investment in R&D? Just kind of looking for a little bit more color on what is causing the expenses to rise so much. Thank you. Yes, Phil, thanks for the question. And just so you get an overall sense of where we're thinking about things, given the strong and predictable performance in CF and the recent success of the advancing pipeline, with the number of first-in-class and best-in-class assets, including programs with significant near-term potential commercially. We see this as absolutely the right time to be investing in the business. If you look at 2023, specifically, over 70% of the planned increase in R&D and SG&A is expected in programs which are past POC and therefore meaningfully de-risked. Specifically, we've got trials for vanza and pain and AMKD and Type 1 diabetes. You've got the full year cost of the investments in commercial readiness for sickle cell and beta thal and we're making commercial investments for pain as well. Importantly, all of these programs are advancing rapidly and represent multi-billion dollar market opportunities. So from our perspective, it's the right time to invest. And the good news is that if with our differentiated business model, we can deliver industry leading profitability while we're investing for innovation and growth. Maybe one follow up, is there a long-term goal for either operating margins or R&D and SG&A as a percent of sales? Hi there. Could you just tell us a little bit more about VTCE-210 versus 211? I noticed before you were a little bit more focused on 210, now we're talking about 211. And when what's the right form for data for there, and what should we be expecting to see? Yes, sure. Liisa, this is Reshma. VCTX-211, a bit of a mouthful. Is the study that Vertex is now running in collaboration with CRISPR Therapeutics, it's a hypo immune program for Type 1 diabetes where we are going to be assessing safety and efficacy. VCTX-210 was a safety study in terms of when you should expect data readouts and such. This study is just getting going. We haven't called when we will be sharing results, but it is just getting going. Okay, great. And then just a quick question, two quick questions actually on regarding the CF franchise. Can you talk about the new 88,000 patients? Is that kind of equally distributed amongst the key world regions or are you seeing that more in certain areas than others? And then as for the long-term patents, how should we thinking about exclusivity for vanzacaftor, and then I noticed you even have a next-gen after vanzacaftor and maybe you could enlighten us about market exclusivity there. Thank you. Yes, sure. Liisa, let me tackle the IP questions and then I'll turn it over to Stuart to talk about the CF epidemiology. The patent for TRIKAFTA goes out to at least 2037. And the reason, if you're wondering, gosh, how is it so long from when we launched? It's because of the rapid pace from when we had synthesized this molecule in the lab to when we got approval starting with the U.S., which is about three years, eight months or so. The vanzacaftor triple, we haven't given a specific date, but it's longer than the TRIKAFTA compound. And we have indeed identified potentiators and correctors behind vanzacaftor towards our goal of getting CF patients to sweat chloride levels in the carrier range. And those would be even longer than vanzacaftor. Let me turn it over to Stuart for CF epi. Yes, Liisa, so as you said, we updated our estimate for the number of people living with CF to 88,000 for North America, Europe, and Australia. That's an increase from our previous estimate from a couple of years ago of 83,000. It's really driven by three things, more patients coming forward for treatment, better data capture and more complete data capture in registries around the world. And perhaps most importantly, patients with cystic fibrosis are living longer due to improvements in the quality of care over the years, and also the availability of truly effective medicines. We see those trends occurring kind of across the globe in all of the regions that I mentioned, it's not just in one part of the world. Those trends are consistent and I have to say we anticipate those trends will continue into the future. Yes. Thanks very much. So my question is on VX-548. I guess first, could you talk about publication plans for detailed Phase 2 results in 2023? And if you are planning publications, what incremental points should we be expecting to focus on? And with respect to the commercialization scenarios, there’s one in which VX-548 is non-inferior to active control, and then another in which its superior to active control. So it would be helpful to just understand commercial opportunities in those two different scenarios. And then one final tidbit for Charlie, non-GAAP IPR&D was $116 million in 2022. What is the figure that’s incorporated in your guidance for 2023, please? Thank you. All right. Dave, you’ve given us three different questions here. Let me save the two related to VX-548 and let me ask Charlie to talk about the IPR&D. Let me now move to VX-548. Dave, I’m going to tell you a little bit more about the publication strategy and the study design and I’m going to ask Stuart to tell you about the commercial potential and how we see it depending on the two scenarios that you laid out. VX-548 and the – this target in particular, NaV1.8 has been the Holy Grail NaV1.7 and NaV1.8 in the pain field for many, many years. And for that reason, because we are the first company to come forward with a highly specific and effective treatment that has shown effectiveness in Phase 2 across multiple pain models, not only with VX-548, but its predecessor molecule, the interest level in the community is very high. And our intent is to publish the full Phase 2 data abdominoplasty and bunionectomy in a high profile journal this year. With regard to what additional information you will be able to look at honestly, the key information we’ve already revealed in our press release that is to say highly efficacious, statistically significant, clinically meaningful, results versus placebo and we’ve also already shared the numerical results for the opioid control arm. And you can – while the control, I’m sorry, the context arm, while that reference arm wasn’t there for statistical comparisons, you can clearly look and see what the context is there. And you’ll have the full safety. The safety profile for VX-548 is really looking very good. You might remember there were no related SAEs in the Phase 2 study. In fact, there were no SAEs at all in bunionectomy. With regard to the study design, the way we’ve set it up is that it is a study versus placebo superiority versus placebo. Obviously that’s there to demonstrate the efficaciousness as well as the safety profile. And then we have the opportunity to also assess versus opioids. You ask me what are we looking for, if we recapitulate the results in Phase 2 that is a home run. Stuart? Yes. As Reshma said about the design of the study, the primary endpoint is the comparison to placebo, and then we can compare it to the reference arm. I think in either scenario that you describe Dave, what we’ve got here is a very significant commercial opportunity. If you are in addition to being superior to placebo, as good as opioids from an efficacy point of view without all of their associated liabilities, which include addictive potential but aren’t restricted to just addictive potential, then that is something that’s going to be highly valued by the treating community. Obviously, if we’re superior, that’s even better, but something which is as good as opioids from an efficacy point of view, but without all the liabilities would be a very high value medicine. Hi, thank you so much. All right. I’ll go quickly. So we get a lot of questions on Vertex growth, even despite you have a robust pipeline, maybe talk about your thoughts around this 8% and if you would think that would continue to slow or how you’re thinking about it. And then with regard to next generation, despite like more robust efficacy, it still took some time to switch people over to the next generation product, maybe some color on what the bar might be to speed up switching. And then my last question was on chronic pain. I mean, so you’ve got a lot of acute pain data in house, more to come. I was just curious is chronic pain partnerships still on the table and what you think partners are really looking for in order to take that forward? Thank you. Yes. Robyn let me ask Stuart to go first with CF and talk about how we see vanzacaftor and the place for that in the marketplace. Yes. So Robyn, on vanzacaftor, as you know, based on our in vitro data, but also our Phase 2 data, we have good reasons to believe that the vanzacaftor triple combination could provide incremental clinical benefit even over TRIKAFTA, which as you know sets a very high bar. And that’s the way the study is designed to be able to compare vanzacaftor to TRIKAFTA. I think there’s really two patient populations for whom that would be an attractive proposition if it delivers that profile. One is patients who are currently being treated with a CFTR modulator who may be interested in switching to something which offers greater clinical benefit. In addition, we haven’t really talked about this part of the population for a while, but there are some patients who’ve discontinued CFTR modulators for a variety of reasons over time. Our persistence rates with our CFTR modulators are let me just reemphasize as high as I’ve ever seen for any chronic oral medication, but we do have patients who have discontinued over time. And so I think those patients who want to be on a CFTR modulator, but have to discontinue one of our previous generations may be interested in the vanzacaftor triple combination when a new treatment option is available. So I do think there is likely to be a significant interest from physicians and patients if the vanzacaftor triple combination delivers incremental benefits. Robyn, let me take the question about chronic pain next, and we’ll end with growth. We see pain as three distinct categories, acute pain, that’s what we’ve been talking about with VX-548 and this very near-term commercial opportunity, given we are well underway with our Phase 3 program, and it is only 48 hours of dosing. The second, we see is neuropathic pain. Obviously, that’s a version of chronic pain, but we distinguish that from musculoskeletal pain. For neuropathic pain, I see that as equally a Vertexian opportunity as is acute pain. There is a – there are discrete number of prescribers. It can be serviced with a specialty sales force. And we have already shown that this target NaV1.8 with our predecessor molecule, VX-150 is effective for neuropathic pain. When LYRICA was a branded medicine, just to give you a sense of the market size, it was approximately a $5 billion market for LYRICA in this chronic neuropathic pain. And then there’s the third kind of pain, which is musculoskeletal pain. It turns out that we’ve already studied that as well with our predecessor molecule, and it’s effective in that kind of pain setting as well, which is actually quite unusual. There aren’t very many medicines that work in acute neuropathic and musculoskeletal pain. We are – I don’t see the musculoskeletal pain as a Vertex sales and marketing specialty opportunity, but we’re absolutely going to serve all patients and we would partner that, but our focus is on the two Vertexian opportunities right in front of us, acute pain, very near term, and the neuropathic pain that’s already in Phase 2 and the predecessor molecule with successful there. With regard to growth, let me ask, Charlie to comment on the growth profile for the company. Yes. The question, so just a reminder on the guidance, we gave $9.55 to $9.7, 7% to 9% growth over 2022, and that’s after a 1.5 percentage point headwind from FX. Stating it differently, it’s a $700 million increment on – or 2022 revenue of $9 billion, so a significant increase in 2023. I think your question really was about where does growth come from? And so importantly, as has been mentioned, we’ve recently increased our estimate of epidemiology, several years ago, we used to say 75,000, then it was 83, now it’s 88. So the patient population is growing. Within that patient population, there are 20,000 patients or more who would benefit from a CFTR modulator who are not on medicine today. And we intend to bring as many of those as possible onto medicine, as we go with continued uptake across eligible patient groups in countries where we already have reimbursement or approvals, as we expand to younger age groups, and to a lesser extent, as we add additional new reimbursements. And so we have high visibility into our guidance for 2023, and with those drivers, we see growth beyond 2023 as well. And of course, we have the emerging opportunity from the vanza triple and the mRNA therapy in coming years. So overall, we’re in great position for continued growth in 2023, and we see lots of opportunity for growth beyond 2023. Robyn, I’ll just add, we’ve been talking about long-term growth, our five and five goal. This is five new medicines launching in the next five years. And then if you think about what qualifies in there, the very near-term opportunities are exa-cel and sickle cell disease and beta thalassemia, Vanzacaftor in CF and VX-548 in pain. Those are just right in front of us. And then we have AMKD that’s in Phase 2/3 with VX-147, the Type 1 Diabetes program that we spoke about, the neuropathic pain program that we spoke about. And there’s also the mRNA program and the AATD program, which is also in Phase 2. Great. Thank you very much for taking my question. And maybe can you talk a little bit about the capital allocation priorities? I know you announced a buyback program today, but your 2022 year-end cash is almost 14% of your market capitalization at this point. Did you think outside of internal R&D, you could think about some mid-size acquisition at this point given the cash position and the market at this point? Thank you. Yes. Mohit, thanks for the question. On capital allocation probably it sound like a broken record, but our priorities are the same, investing in innovation both internal and external is the top priority. We clearly see that as the best way to create value for patients and for shareholders. We have for the last five years now maintained share buyback program, where we focus on offsetting dilution from employee share programs and for some opportunistic buying. And so we have this new larger authorization at $3 billion, but it’s simply a reflection of the growing strength of our balance sheet and cash flow. Hey guys, thanks. Appreciate it. Two pipeline questions for you. One on the vanza triple. I know that you have commented that you think it could be better. I recall that in the Phase 2 there was although difficult to compare across trial debate around whether it was truly better on FEV or more about sweat chloride, and you would see the effects, I think more peripherally. Can you just comment on whether you actually think FEV actually would be better in the Phase 3 given the chloride transport data is so much better? I know David Altshuler has also sort of commented on that. And then on the mRNA program VX-522, I think you made a nice comment earlier in this call about how at least an animal models that was getting into to tissue. Can you just reiterate what you were saying about your view of or testing in HBS is about whether the LMP is actually getting in and how confident you are in CF tissue that the LMP is getting in? Thank you. Yes. Sure thing, Mike. With regard to the vanza triple, if you look at the Phase 2 data, and you’re right, these are cross study comparisons, but if you’re trying to glean and get a general sense for what the data are telling you in the Phase 2 trials, what you can see is on average the vanza triple compared to what we have shown with TRIKAFTA, it’s about 5 points better on sweat chloride. And if you look closely and look at the ppFEV1 values that we’ve generated there are some patients in the vanza triple where we’ve seen 20% improvement in ppFEV1. So if you ask me, gosh, can the vanza triple be better than TRIKAFTA? Yes. And I would say that the strongest evidence for that is the chloride transport in our HBE assays, which have proven themselves time and time again as well as sweat chloride because that’s simply a less variable measure. But if I look at ppFEV1, there are hints of that as well, but I would put that lower on the scale of evidence because the variability is greater. With regard to mRNA and why we are so enthusiastic about this program, which we are running in collaboration with Moderna. It is really a combination of three things. The first is the ability to demonstrate that with these LMPs we get the construct into the HBE cells, and that’s important because of how reliable the HBE cells are and how translatable they are. Second, it is about the high expression of the protein, and third, in multiple animal models we can show, and this has been difficult for others to show. Some have not talked about it, and it’s been difficult to gather whether they have or have not. But I can tell you we have a multiple animal model demonstrated that the mRNA gets to the right cells in the lung. Great. Thanks for taking my questions. Just a couple quick ones, maybe following up on the last. First with the SAD trial for VX-522 completing this year, should we expect to see data from that trial this year or might not come until later once the MAD work is complete. And similar question on the Phase 2/3 kidney trial, you’ve said you expected to complete the Phase 2b dose ranging portion this year. What will we hear at that point? Will we hear anything beyond that a dose has been selected? Will you communicate what that dose is? Thank you. Yes. Hi, Jess. With regard to the SAD/MAD VX-522 NCF, we do expect that the SAD will complete this year. And it’s hard to say that we’re going to see in effect because it is a single dose study, right? But we’ve been wrong before. When patients started on TRIKAFTA, for example, they tell us they felt differently with the first dose. So we do expect that the SAD will finish and we fully expect to initiate the MAD as well. And I do think that we will have a good line of sight on efficacy with the MAD. So we’re not guiding yet to when the data will be available, but we do expect to finish the SAD. We expect to initiate the MAD, and yes, it’s possible that data will be ready this year. On the VX-147 program inaxaplin and the Phase 2/3 study, you’ll remember this one is particularly exciting because it’s in kidney disease where there has been unfortunately very little advancement and there are really no products in development for APOL1-mediated kidney disease. And our Phase 2 results showed a 47.6% reduction in proteinuria, which is unprecedented in FSGS, let alone in APOL1-mediated FSGS. We do expect that the Phase 2 part of the study will be done this year. Because it’s an ongoing study it’s an adaptive 2/3, which means we’ll roll right into the Phase 3 once dose selection is made. I do not expect that we will be sharing results to maintain study integrity, but we will be sharing that we’ve completed that portion, we’ve selected a dose and we’ve rolled into Phase 3. Hi guys. Thank you so much for squeezing me in at the end. I wanted to ask on the IND for the cells plus device program for type 1 diabetes. Can you provide kind of any colors as to what exactly the FDA wants? And maybe colors to why Canada was more comfortable with moving into humans versus the FDA? Thank you. Yes. Evan, this is about cells plus device VX-264 in type 1 diabetes. This is the program using the same cells as the 880 program, but encapsulated in a device. So immunosuppressants are not necessary. The most important thing to tell you is we’ve received the FDA questions and we’ve already responded. No new data needed to be generated, no new experiments needed to be run. The questions and clarifications were ready at hand. Evan, if you ask why was one regulatory agency more comfortable than another, that’s just a tough question to answer and I don’t know that I have a good answer for you. What I can tell you is that it’s a high quality submission and we are very excited to get this up and running with patients enrolled and dosed in Canada. And we’re working with urgency to get the study in the U.S. as well. Yes, ma’am. The conference has now concluded. And thank you for attending today’s presentation. A replay of today’s event will be available shortly after the call concludes by dialing +1 (877) 344-7529, or +1 (412) 317-0088, and you can use the replay access code, which is 6823854 – again, that access code is 6823845. Thank you.

EarningCall_440

Good day and welcome to the NCR Corporation Fourth Quarter Fiscal Year 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Mr. Michael Nelson, Treasurer and Investor Relations. Please go ahead, sir. Good afternoon and thank you for joining our fourth quarter and full year 2022 earnings call. Joining me on the call today are Mike Hayford, CEO; Owen Sullivan, President and COO; and Tim Oliver, CFO. Before we get started, let me remind you that our presentation and discussions will include forward-looking statements. These statements reflect our current expectations and beliefs, but they are subject to risks and uncertainties that could cause actual results to differ materially from those expectations. These risks and uncertainties are described in our earnings release and our periodic filings with the SEC, including our annual report. On today’s call, we will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts in the presentation materials, the press release dated February 7, 2023, and on the Investor Relations page of our website. A replay of this call will be available later today on our website, ncr.com. Thanks, Michael. I will begin with some of my views on the business, and I will also provide an update on our previously announced intention to separate NCR into two public companies. Tim will then review our financial performance and provide an outlook for 2023. And then Owen, Tim and I will take your questions. Let’s begin on Slide 4 with some highlights from this past year. We closed out 2022 with strong demand and positive momentum in the business. Maybe a different way to say this is across all five of our business segments, our products are winning in the marketplace. We continue to make significant progress against our strategic initiatives to advance our strategy of becoming a software-led as-a-service company with higher recurring revenue streams. A key part of our strategy is to run the store, run the restaurant and run self-directed banking. It is contingent on our ability to cross-sell and upsell additional services to our clients. To do so, we have a maniacal focus on customer satisfaction, which we measure as net promoter score, or NPS. When we initiated the strategy in 2018, our NPS was 14, which is not very good. Each year, we continue to improve. We went the following year to an 18 on our NPS score, then to a 36, then to a 48. And in 2022, I am proud to say we improved to 52. So in 4 years, we improved our net promoter score from 14 to 52. That’s quite a significant improvement. We now have happy customers, which is a key to executing our strategy and transforming NCR into a software-led as-a-service company. In 2022, NCR delivered 13% total revenue growth, recurring revenue growth of 20% and adjusted EBITDA growth of 16%, all on a constant currency basis. These are strong results, particularly given the extraordinary macroeconomic and geopolitical challenges that we navigated throughout the year. Now moving to Slide 5, I thought it would be helpful to put our strong execution in perspective relative to the external macro headwinds we endured. Keep in mind, the headwinds in 2022 were almost all external uncontrollable impacts. Our revenues on a constant currency basis held up very well and our teams did a great job addressing the cost impacts over the last 3 quarters of 2022. First, we began the year with continued pandemic, this time the Omicron strain. For example, our NCR office is shut down in January and February of last year. Unfortunately, we were not alone. In countries we operate, most businesses were shut down as well, which impacted our transaction volumes. Second, a war in the Ukraine impacted our business in the region, and we suspended sales in Russia and exited that country. Third, supply chain disruptions resulted in significantly higher component and transportation costs, which adversely impacted our margins, particularly in the first quarter of 2022. While the supply chain impacts are easing, costs remain elevated. Nonetheless, our engineering and procurement teams have adjusted by designing alternative components and certifying more sources to reduce the impact. Fourth, inflation reached the highest levels in over 40 years. In addition to higher component and transportation costs, fuel costs increased and wage inflation escalated. And fifth, interest rates accelerated one of the fastest rates in history. Finally, in the second half of 2022, foreign exchange rates represented an incremental headwind. For the full year, the stronger U.S. dollar reduced revenue growth by 300 basis points and adjusted EBITDA by 600 basis points. Despite all these external headwinds, NCR executed very well against our strategic initiatives with strong growth across our KPIs. Although some of the headwinds we faced in 2022 are beginning to abate other headwinds like interest and inflation still persist. Looking into 2023, market expectations suggest at least a moderate recession in the U.S. and abroad. In anticipation of potential global slowdown, NCR has taken additional cost actions in the fourth quarter that we are expected to drive incremental savings in 2023. Throughout 2022, we had to take many actions to offset these headwinds. Some of those were temporal in nature. Others are permanent cost savings as we head into 2023. During 2022, we were able to reduce our headcount with attrition. Heading into 2023, we needed to reduce our cost even further. The total impact was to reduce our staffing levels by approximately 7%. Tim will provide some more details in his section later. Now moving to the business update on Slide 6. We have strong momentum across all 5 of our business segments. In retail, we continue to deliver on our strategy to be the retail platform company of choice. The consulting from RBR named NCR the number one global point-of-sale software vendor for the fifth year in a row. We were also recognized by RBR as the global leader for self-checkout for the 19th consecutive year. During the fourth quarter, Love’s Travel Stop and Country stores extended its partnership with NCR and is connecting over 3,000 lanes to the NCR Commerce platform to enhance the omni-channel experience to their customers. We continue to have positive momentum in winning upgrade imperative for retail point-of-sale software. Quick Trip, a regional convenience store chain with over 800 stores across the Midwest, turn to NCR support their mobile ordering strategy and enhance the customer experience. In self-checkout, we continue to see strong demand across our grocery and big-box retailers as well as the expansion into new verticals such as convenience and fuel in department and specialty retail. Our customers are embracing self-checkout usage to help them mitigate increased labor costs. In hospitality, we continue to experience strong demand across our enterprise and SMB customers. Chuck E. Cheese, a 20-year customer of NCR, committed to a new 5-year agreement to partner with NCR to deepen integrations through NCR’s platform, which enabled Chuck E. Cheese to enhance its ability to serve their customers through digital channels. Hot Valley, a 7-year customer of NCR is revamping their kitchen deploying Aloha integrated tablets alongside Aloha Kitchen to improve operational efficiencies in handling online orders. We also continue to gain traction with our integrated payments offering for our hospitality customers. In the fourth quarter, Chicken Salad Chick, a 226 site operator shows NCR as its merchant payment processor for all existing and future locations. In digital banking, we continue to have positive momentum. In the fourth quarter, digital banking activity was strong with 40 renewals, which represented one of the largest renewal quarters in the company’s history. During the fourth quarter, we also had 10 new logo deals, which are all competitive wins. For the full year 2022, it was a strong year for digital banking as we converted two large regional banks, Wintrust Bank and Associated Bank, to our digital banking platform. These two conversions added almost 1 million new digital banking accounts. We also had success with NCR’s DFB by our digital-first banking solution for retail banking, where we integrate a financial institution retail channels using our CSP or channel services platform. NCR signed two of the top five banks in the U.S. on our DFB CSP teller platform during 2022. In Payments and Network, we are making progress against both merchant acquiring and the Allpoint network. We are continuing to have success with our integrated payment offering for our hospitality customers, including roughly 90% of our new SMB clients selecting NCR’s payment solution. The Allpoint network continued its strong growth by delivering transactions to more financial institutions and cardholders than ever before. In the fourth quarter, NCR expanded a long-term agreement with Walgreens, making NCR the exclusive provider of ATM services across the majority of Walgreens stores. In 2022, P&C Bank partnered with the Allpoint network extending surcharge free ATM access to more than 10 million of their customers. We now have over 70 million cards on the Allpoint network. We also extended our Allpoint network with key merchant partners, most notably Circle K, 1 of the largest convenience store brands in the U.S., which activated NCR’s Allpoint network on more than 4,400 Circle K stores across 30 states. In self-service banking, we continue the momentum in our ATM as a Service solution. Interest in our offering is accelerating from both community banks and large FIs globally. In the fourth quarter, we signed 10 ATM as a Service deals, including Santander U.K. Santander extended its longstanding partnership with NCR, selecting NCR ATM as a service to transform, connect and run its self-service banking network of more than 1,700 ATMs across the U.K. The bank is shifting the operational management of a self-service channel, including software, transaction processing, cash management, ATM monitoring, help desk and hardware maintenance to NCR. During 2022, we signed 46 ATM as a service deals, including Bank of New Zealand and Bank of Baroda, which is 1 of the India’s largest retail banks. NCR’s ability to provide the scale and capabilities of a full stack integrated ATM as a Service offering when bundled with the Allpoint network has given us a unique solution in the marketplace. And lastly, we are on track to separate NCR into two public companies by the end of 2023. Following Tim’s comments on our financial results, I will provide an update on the separation activities. Thanks, Mike and thanks to all of you for joining us today. As Mike described, our solid fourth quarter completes a year described by a determined effort to drive sequential quarterly improvement after a very difficult start to the year while confronting a litany of external challenges. Last April, during our first quarter 2022 earnings call, we described unexpected impacts from the Omicron COVID wave to the then new war in Russia, extraordinary supply chain costs due to scarcity and modestly higher interest rates that totaled about $75 million of negative impact on Q1 EBITDA. At the time, we forecasted that these issues would have an additional $75 million of impact over the remainder of the year for a total of $150 million. That forecast accurately predicted the eventual full year impact of our exit from Russia and the COVID wave, but could not then anticipate worsening supply chain challenges and component availability, historically rapid interest rate increases, a 40-year high inflation and dramatic strengthening of the U.S. dollar. In aggregate, those extrinsic factors eventually impacted EBITDA by almost $500 million. In response, cost productivity and pricing actions that were launched in March were expanded and enhanced to insulate the P&L against further deterioration in macroeconomic factors and allowed EBITDA margin rates to expand to 19% in the second half of the year, up 450 basis points from the difficult start in Q1. Even more impressive than the success of the tactical grind that preserves the P&L through cost control and incremental productivity with our team’s ability to simultaneously drive strategic KPIs above our stretch targets. We exited 2022 with significant momentum across our platform and as-a-service offerings. I’ll start on Slide 7 with a top level overview of our fourth quarter financial performance. As we guided back in October, the fourth quarter reported results were very similar to those in Q3. Starting on the top left, revenue was $2 billion, down 1% year-over-year as reported and up 2% on a constant currency basis. Recurring revenue was up 3% year-over-year and up 7% when adjusted for FX. We continue to have success transitioning from onetime perpetual sales into multiyear subscription-based revenue streams. The nature of these contracts shifted roughly $83 million of high profit revenue that would previously have been recognized upfront to recurring revenue. The very strong U.S. dollar had an unfavorable impact of $72 million primarily within our retail and self-service banking segments. On the top right, adjusted EBITDA increased $27 million year-over-year to $380 million, up 8% year-over-year as reported and up 14% on a constant currency basis. Foreign currency exchange rates had an unfavorable impact of $20 million. Adjusted EBITDA margin expanded 150 basis points from the fourth quarter of 2021 to 18.9%. In the bottom left, reported non-GAAP EPS was $0.79, up $0.03 or 4% year-over-year as reported and up 8% on a constant currency basis. The strength of the U.S. dollar reduced EPS by about $0.03. The non-GAAP tax rate was 29.9% versus 26% in the prior year, and that impacted EPS by about $0.05. And finally, free cash flow was $202 million due to the predicted improvements in working capital, which had up until then been a persistent use of cash for the first 3 quarters of the year. I’ll have more on cash flow and leverage later. Slide 8 shows our financial highlights for the full year. Revenue was $7.8 billion, up 10% year-over-year and up 13% on a constant currency basis, driven by strong progress across our strategic growth platforms. Remember that 2022 benefited from the full year of legacy Cardtronics results, which was acquired in June of 2021. Normalizing for the inclusion of Cardtronics, revenue was up 6% on a constant currency basis. The very strong U.S. dollar had an unfavorable impact of $231 million on reported revenue, primarily within our self-service banking and retail segments. Adjusted for the impact of FX, all five of our reported segments contributed to our growth. Recurring revenue again outpaced total revenue growth, up 16% year-over-year and up 20% when adjusted for FX and now makes up 62% of revenue. For the full year, impact of shift to recurring revenue reduced revenue by $210 million, also primarily in our self-service banking and Retail segments. In the top right, adjusted EBITDA was $1.4 billion, up 10% year-over-year as reported and up 16% on a constant currency basis. FX had an unfavorable impact of $60 million. Adjusted EBITDA margin rate was 17.5%, remarkably, up slightly year-over-year. On the bottom left, non-GAAP EPS for the full year was $2.62, up 2% year-over-year and up 12% on a constant currency basis from the year ago 2021. Higher interest costs, higher tax rate and a higher share count together caused EPS to grow less quickly than EBITDA. And we generated $164 million of free cash flow for the year. More than all of that was generated in the fourth quarter. Supply chain challenges though now abating caused both nonlinear revenue generation and a purposeful investment in working capital to assure availability of parts for both OEM and repairs. And the impact of our labor cost reductions and changes in employee benefit programs impacted the P&L before they were evident in cash flow. Both of these effects are timing issues that we’ve benefited from in Q4 and will continue to harvest in Q1. I’ll provide more detail on cash flow on Slide 14. Moving to Slide 9, which shows our Retail segment results. Starting in the top left, retail full year revenue was up 5% on a constant currency basis. Fourth quarter revenue was down 5% year-over-year and down slightly adjusted for FX on lower hardware sales. Retail full year adjusted EBITDA was down 6% year-over-year and was flat on a constant currency basis. Full year adjusted EBITDA margin rate contracted 140 basis points, 18.4%. The full year EBITDA rate was particularly impacted by component cost inflation on POS devices during the first half of the year. Fourth quarter adjusted EBITDA declined 3% year-over-year and was up 2% adjusted for currency. While the comparisons are difficult because of the slow start in Q1, retail exited the year with margin rates north of 20%, a recovery of almost 800 basis points from Q1 levels. And fourth quarter adjusted EBITDA margin rate expanded 60 basis points over the prior year. We continue to have success transitioning our retail business from onetime perpetual sales into multiyear subscription-based revenue streams. The strategic deals that Mike mentioned were key wins in 2022. The nature of these contracts shifted roughly $45 million of very high profit revenue that would previously have occurred upfront to recurring revenue that will be recognized over the next 4 to 7 years. Most of this shift occurred in the second half of the year, including $25 million in Q4 alone. The bottom of the slide shows retail segment key strategic performance indicators. On the left, our platform lanes, a KPI that illustrates the success of our strategy to convert our retail customers to our platform-based subscription model. We increased our number of platform lanes by more than 200%. The platform lane increase was driven by rollouts at major convenience of fuel customers. While platform lanes currently only represent less than 4% of our total lanes, we are seeing accelerating momentum for conversion of our traditional lanes have a substantial lane conversion backlog. In the center bottom is our self-checkout revenue. Self-checkout revenue for the full year increased 3% year-over-year. And ARR increased 1% year-over-year on higher ARPU generated by those new platform lanes. Similar to the impact on revenue, currency rates did reduce all of our ARR calculations. And in this business by about 5 full points of growth. Slide 10 shows our Hospitality segment results and illustrates momentum across this business. For the full year, hospitality revenue increased $77 million or 10% adjusting for currency. Our enterprise business was up 8%, driven by new store openings, technology refreshes and services growth. Our SMB business was driven up by 13% by the success of our platform products and payments. Fourth quarter revenue increased $8 million or 3% year-over-year as reported and 5% adjusting for currency. Full year adjusted EBITDA was up 22%. Adjusted EBITDA margin rate for the full year expanded 210 basis points to 21%. A richer revenue mix with more payments and platform sales and improving indirect cost absorption drove profitability improvements. Fourth quarter adjusted EBITDA was up 38% year-over-year. Adjusted EBITDA margin rate expanded 570 basis points to 23%. Better mix of software and services combined with strong cost productivity drove better margin rates. Hospitality’s key strategic metrics are on the bottom of this slide and include platform sites, payment sites and ARR. For the full year, platform sites increased 20%. Payment sites increased 64% and ARR was up 6% year-over-year on the higher ARPU at both new platform and new payment sites. We continue to see strategic momentum in this business as enterprise clients shift to the platform and add services and SMB clients attach payments. Turning to Slide 11, which shows our Digital Banking segment. Full year digital banking revenue increased $30 million or 6% year-over-year, driven by client wins, strong renewal momentum and cross-sell success at Terafina and channel service platform. Fourth quarter revenue increased $6 million or 5% year-over-year. Full year adjusted EBITDA was up 6% year-over-year with an adjusted EBITDA margin rate increasing to 42%. A richer revenue mix and improving indirect cost absorption drove profitability improvements. Fourth quarter adjusted EBITDA was up 4% year-over-year with an adjusted EBITDA margin rate of 39%. Digital Banking’s key strategic metrics in the bottom of this slide include registered users, active users and annual recurring revenue. Both registered and active users, which drive about two-thirds of the revenue in this business increased 5% year-over-year, having outgrown two consolidation-driven de-conversions that impacted results in midyear 2022, and ARR was up 3% year-over-year. Let’s move to Slide 12. This is our Payments and Network segment. Starting at the top left, Payments and Network revenue for the full year increased $611 million or 91%, and 96% when adjusted for FX rates. Most of the effect of the addition of the full year of legacy Cardtronics results occurred in this segment. Normalizing for the inclusion of Cardtronics, revenue was up 12% on a constant currency basis. Fourth quarter revenue increased $24 million or 8% year-over-year and 11% adjusted for FX. Full year payments and network adjusted EBITDA increased 70% year-over-year and 76% when adjusted for FX. While the inclusion of full year Cardtronics results, strong revenue mix and cost productivity all benefited comparative profitability, short-term interest rates that are a primary driver of our cash rental costs significantly impacted 2022 results and will further impact 2023 results. The cost of renting cash in our ATM fleet goes through EBITDA’s cost of goods, and would have reduced EBITDA by approximately $50 million in 2022 and an incremental $95 million in 2023. That said, the combination of our hedging program, operational optimization and price protections will result in a net effective interest rates of $40 million in 2022 and another $45 million in 2023. Adjusted EBITDA margin rate was 32% for the full year. Fourth quarter adjusted EBITDA declined 9% year-over-year and 5% when adjusted for FX. Adjusted EBITDA margin rate contracted 550 basis points in the fourth quarter to 30%, down from the prior year, primarily due to those higher cash rental costs. The bottom of this slide shows payments and network key strategic metrics. On the bottom left, endpoints increased 24% year-over-year. These access points to the Allpoint Network and merchant acquiring terminals are expanding as we migrate them to our NCR installed base. In the center bottom, our transactions, the KPI that illustrates the payments processed across our Allpoint Network, and our merchant acquiring networks. Transactions were up 27% for the full year. Annual recurring revenue in this business increased 8% year-over-year. Slide 13 shows our self-service banking segment results. Self-service banking full year revenue was flat year-over-year as reported and up 4% on a constant currency basis. Fourth quarter revenue was down 2% as reported and up 2% on a constant currency basis. We continue to have success transitioning our self-service banking business from onetime perpetual sales into multiyear subscription-based revenue streams. In the fourth quarter, we shifted roughly $37 million of high profit revenue that would previously have occurred upfront as software licenses to recurring revenue. For the full year, the impact of the shift to recurring revenue for self-service banking was $100 million. We expect this effect to be closer to $150 million in 2023 as our ATM as a Service business accelerates. This future impact will defer less profit per dollar of revenue as the ATM hardware has lower margins than the accompanying software. Full year adjusted EBITDA declined 3% year-over-year and was up 1% on a constant currency basis. Adjusted EBITDA in the fourth quarter increased 9% year-over-year and was up 13% on an FX consistent basis. Full year adjusted EBITDA margin rate was 22% and the fourth quarter rate was 23%. Very strong cost productivity was able to overcome significant cost pressures, particularly in the first half of the year. The bottom of the slide shows self-service banking segment key strategic metrics. On the left, our software and services revenue mix was similar to last year at 68%. ATM as a Service units increased 226% year-over-year to over 14,000 units. We experienced significant growth in India and incremental growth in the United States. The shift to recurring revenue continues to gain traction with ARR up 4% year-over-year. Slide 14 describes free cash flow, net debt and adjusted EBITDA metrics to facilitate leverage calculations. As I said earlier, we generated $202 million of free cash flow in the quarter which represented more than all of the cash we generated in 2022. While the quarter results were solid, the full year results were insufficient. Looking forward, the combination of higher profitability further working capital improvements, particularly at inventory and the lapse of the timing issues and compensation and benefits, we expect $400 million to $500 million of free cash flow generation in 2023, with a significant proportion of that cash coming in the first half of the year. We have been clear about our intention to reduce total company leverage by at least $500 million, before we complete our contemplated spin transaction later this year. Beyond the operating activities described in the segment discussions, we’re looking at other ways to generate cash that can aid in reducing leverage. In Q4, a concentrated effort to repatriate overseas cash was actioned and delivered some early results. We also importantly completed our first non-recourse financing arrangement for ATM as a Service, which is crucial to funding this growth strategy. And finally, we made a $50 million voluntary contribution to the U.S. pension program to address underfunding and push out any mandatory contributions. This slide also shows our net debt to adjusted EBITDA metric with a leverage ratio of 3.8x, down from 4.1x in Q4 2021 due to higher profitability. We remain well within our debt covenants and have significant liquidity with over $750 million available under our revolving credit facility. We have a strong balance sheet, ample liquidity and the financial strength to support our growth strategy. On Slide 15, we present our first quarter and full year 2023 guidance. After 3 straight years of multi-varied uncertainty, we have proven that our forecast or guidance are only as good as the macro assumptions that underlie them and that they can become dated very soon after they are issued. That said, for this guidance, we have assumed the following: that interest rates are correctly described by the forward curve on January 1; that the currency exchange rates are also accurately described by the forward rates as January 1; that the global economy will experience a modest consumer-led recession that may constrain growth in our nonrecurring revenue streams; and that our ATM as a Service business defers $150 million of ATM revenue at the accompanying hardware margin rates from 2023 into future years. These assumptions mean that the pernicious effect of interest rates and currency exchange rates will drive tougher reported comparisons in the first half of the year but should ease in the second half. They also mean that our efforts to reduce cost and drive productivity needed to be extended. While price and cost actions taken in the first half of 2022 allowed a significant recovery in profitability in that second half, further actions are necessary to offset the wrap effect of 2022’s challenges and to preemptively address the dis-synergies that we anticipate from the spin transaction. In the fourth quarter, we initiated additional cost takeout actions that are expected to drive sufficient incremental savings in 2023 to more than offset any dis-synergies resulting from the contemplated spin. Before I walk you through the guidance page, I want to highlight that we intend to change our calculation of non-GAAP EPS to exclude the impact of stock-based compensation expense. This change will result in better alignment of our calculation with both our post-spin pure-play peers and with our own calculation of adjusted EBITDA that already excludes stock-based compensation. After reviewing the intended change with our Board, it was determined that the change should be made at the start of the new fiscal year concurrent with annual guidance rather than waiting until the spin transaction occurs. Because many of you have existing models based on our prior convention, I provided guidance both with and without this change. The impact of stock-based compensation was about $0.70 in 2022 and is expected to be about $0.75 in 2023. So for the full year 2023, we expect revenue of $7.8 billion to $8 billion after the impact of the ATM as a service shift of $150 million, and on a constant currency basis. While forward rates would suggest only a very modest full year impact from FX, it will be a notable drag in the first half of the year and will impact calendarization. We expect adjusted EBITDA to be $1.45 billion to $1.55 billion. Adjusted EBITDA margins are expected to expand to roughly 19%. I’ll provide more detail on EBITDA on the next slide. Non-GAAP EPS is expected to be $3.30 to $3.50 under our new convention. That range is comparable to $2.55 to $2.75 under our prior methodology. In calculating EPS guidance for 2023, we assumed interest expense of $330 million, an increase of $45 million or $0.29 a share. We also assumed a tax rate of 29% versus 28% in 2022 and a share count of 155 million shares versus the 150.4 million shares in 2022. The combination of these two impacts reported EPS by another $0.11. Obviously, these assumptions have a range of potential outcomes, and we will provide update quarterly as necessary. As I discussed earlier, we expect to generate $400 million to $500 million of free cash flow on a more linear basis than 2022. To assure alignment with your quarterly models, I also want to provide some thoughts on Q1 and the calendarization of the full year 2023. For Q1 2023, we expect reported revenue of $1.8 billion to $1.9 billion, up $50 million on a currency-neutral basis from the last Q1. We expect adjusted EBITDA of approximately $300 million. We expect non-GAAP EPS of $0.55 to $0.60 and expect to generate free cash flow between $100 million and $200 million. For the quarter, we have assumed a tax rate of 29%, a share count of 152 million shares and interest expense of $85 million. For the remainder of 2023, we expect relatively linear sequential quarterly improvement across most financial metrics, ultimately aggregating to the results described in our annual guidance. Slide 16 – finally, Slide 16 provides a high-level illustration of our EBITDA drivers, juxtaposing 2022 realized impacts against our 2023 expectations for the same bucket. I will walk you through the relative impacts for 2022 and our outlook for 2023. In the first red bar, we have aggregated the discrete items that we had talked about prior under external impacts, including in order of magnitude, component costs and expedited freight, exchange rate translation, interest expense, war in the Ukraine and finally, the last wave of the pandemic. Taken together, these effects totaled about $200 million in 2022. The next red bar labeled inflation includes both material and labor cost increases across our global cost structure that was nearly 6%. This bucket includes NCR labor, contractor labor, fuel and commodities, planned freight, parts, raws, etcetera. To address these two bars together, there were close to $500 million of impact, we launched similarly sized actions in Qs 2 and 3 that reduced our overall spend on improved pricing. In aggregate, our actions totaled about $400 million. Most of these actions targeted indirect costs to offset our uncontrollable effects in our direct costs. About 40% of these actions were permanent the remaining 60% were fast but temporal and have since been replaced with more permanent actions that will benefit 2023. Bringing down the page. In 2023, those same external impacts will be far less impactful. We will have residual wrap effect from interest costs. The other items are either built into the 2022 base like our exit from Russia or have swung to a net positive like premium freight and ship costs. And we expect excess inflation to ease to a more manageable level. In Q4, we launched another round of cost actions that are more sustainable and anticipate the dis-synergies from the planned spin transaction. These actions were more than sufficient to both replace the 2022 temporal actions and to cover the follow-on impact of last year’s shocks. We entered 2023 with almost 7% fewer headcount than we started with in 2022. About half of those reductions were from attrition and the remainder were reductions in force. And finally, as you read across the remaining columns, you can see that in both years, the volume growth is muted by an acceleration in our shift to recurring revenue and increased pricing is around $150 million. Thanks, Tim. Moving to Slide 17. Let me provide an update on our thoughts on separating NCR into two public companies. We intend to separate NCR’s existing payments and network and self-service banking businesses to form a new entity via tax-free spin-off and distribution of shares to existing shareholders. NCR’s ATMCo includes NCR’s self-service banking. In other words, our traditional ATM hardware, software and services business, and all of our payments and network business, except for the merchant services payment, which is integrated tightly into the retail and hospitality segments of NCR. NCR will include our retail, hospitality, Digital First Banking and our Merchant Services payment business. NCR will continue its transformation to a software-led as a service growth company. These businesses operate in markets where we expect to see continued spending on technology to run the store, run the restaurant and deliver digital-first banking solutions. We believe NCR continue to be positioned to win the business for those upgrade imperatives. Moving to Slide 18. NCR has made significant strides over the past 5 years to transform our company into a customer-first software-led as a services company. The actions we have taken to align our organization around customers and markets will help us move into two organizations. We believe we are number one in the markets we serve. They represent enormous opportunity for us, and our goal is to make sure we continue to take advantage of our market-leading position. Our NCR RemainCo on the left side of Page 18, will be the number one provider of point-of-sale software in the world and the number one provider of self-checkout, and NCR will be the leading provider of DFB or digital-first banking solutions. NCR RemainCo is anticipated to be a higher-growth company serving markets that have growing demand for integrated platforms to serve retailers, restaurants and banks and enable them to serve their clients with a differentiated experience. NCR ATMCo, which is labeled SpinCo on the right-hand side of Page 18, will continue to be the number one provider of multi-vendor ATM hardware ATM software applications and ATM middleware in the world and will have the largest surcharge-free network. We will continue our shift as-a-service with our ATM as-a-service offering. We believe that we will have a differentiated offering that will continue to drive growth and expanding margins as we capture more share of wallet for delivering ATM solutions. NCR ATMCo is expected to be a stable recurring revenue business with solid cash flow generation that can allow us to deliver cash back to shareholders through a dividend payment. We believe that spinning off NCR’s ATMCo in a tax-free transaction is the best path to unlock shareholder value. But should alternative options become available in the future that could deliver superior value such as a whole or partial company sale of NCR, the Board remains open to considering alternative scenarios. Slide 19 provides an overview of our separation roadmap. We have put together a separation management office and have defined our business separation plan. Operationally, the majority of our teams are organized by industry under a general manager business unit. These teams are ready for the spin. Additionally, there are areas of shared services functions such as legal, tax, HR, treasury, IT and real estate that we are in the process of preparing for separation. We are working on submitting our Form 10 registration statement, and then the timing of separation will be largely dependent on SEC approval and the state of the capital markets. We intend to de-lever through the generation of free cash flow between now and separation is expected to occur by the end of 2023. However, we are working to be in a position to execute the spin as early as late third quarter. This of course, is dependent on receiving approvals from the SEC and a favorable capital markets environment. In closing, on Slide 20, we are looking forward, the key priorities are clear. First, we have made significant progress executing our strategic growth initiatives. Our strategic KPIs are trending in the right direction, and we will continue to build on the positive momentum in the business. NCR is winning, and we expect to continue to win in the marketplace. Second, we will continue to execute our strategy of transforming NCR to a software-led as-a-service company with higher recurring revenue streams, we continue to have momentum in the business. Third, we are focused on improving our cost structure. We have identified efficiencies for cost action to streamline our costs in 2023. Fourth, these cost take out actions, along with positive operating leverage should drive margin expansion. Fifth, we expect to generate strong cash flow, as Tim had referenced in his section. And finally, we are focused on separating NCR into two public companies. We are working through the legal and organizational structures and expect to execute the separation by the end of 2023 and be in a position to execute the spin earlier if the opportunity arises. This concludes our prepared remarks for the day. With that, we will open the call for questions. Operator, please open the line. Hi. Thanks for taking my question. So, just on the free cash flow guide, can you talk about some of the puts and takes there? Where do you expect CapEx levels, expectations for working cap? And I would have thought there would be somewhat a more outsized benefit on working cap after a heavy investment year. And then you guys did a good job of more uniform cash flow over the course of the year back in ‘20 and ‘21, 2022 saw a reversion back due to kind of back-end loaded free cash flow. How do we think about cash flow kind of throughout the year this year? Yes. A lot of questions in there. CapEx, I would expect it – we have about $400 million this year. I think it’s going to be on $400 million is slightly higher. I do expect the cash flow to be much more linear this year. As we have said in the script, there were some – as we took cost out of the organization, the P&L benefit outstripped the cash flow benefit, and we will see that benefit come back in the first half of this year from a timing perspective. We harvested some of the investment in working capital in Q4. You can see that in our cash flow performance. And I think that we are going to make more progress on inventory in the first quarter. So, I think our cash flow guidance is very consistent with what we described a quarter ago, right, that we are going to have a very good fourth quarter. We are going to have a strong first quarter, and then we will get back on a more linear path after that. So, that’s the – it’s not perfectly easy to predict to the dollar, but I guess that we are closer to the high end of the range I described on the guidance page for Q1, which will give us a nice head start in the full year. Got it. And then just a follow-up on self-checkout, so, you had a very strong performance in ‘21, and then some monitoring pace here in ‘22. Talk about the expectations for ‘23 and longer term? And where you are seeing momentum across regions, verticals? And then can you talk about the Halo product, too, where you showcasing NRF? How impactful can that solution be kind of near-term, long-term? Thank you. Yes. I will let Mike take the product questions. The 3% growth in SCO this year was on an as-reported basis. There is actually three full points of growth that went to currency. So, on a constant currency basis, that 6% growth is very much in line with what we would have expected that mid to high-single digit growth at SCO. And next year, I would expect about the same. Yes. Paul, on the Halo product, which you saw at NRF, we are pretty excited about it. It kind of does the best of both worlds. It has the vision-based ability to scan items and identify what they are. But it also has a capability for those that can’t scan appropriately, which is one of the challenges that, that technology has. You can still scan the UBC code. So, it’s easy to use. A lot of the growth we have seen in self-checkout is in convenience stores and fast food restaurants, and it’s a perfect fit for that environment. Thanks. A couple of questions. Obviously, you are baking in, it sounds like some level of moderate recession into your outlook for ‘23. Can you talk maybe about incoming order rates and what you may be seeing there relative to your guidance framework? Are you seeing things indicative of a slowdown? Are your go forward look at the funnel suggesting some whom perhaps becoming more pronounced in that regard? And then I have a follow-up. No. I think the order book is strong. It’s about as strong as we would hope it would be at the beginning of the year. The uptake on our as-a-service efforts have been very strong. So, we have not yet seen any rollback of the order book. Let me give you some color on the total growth for the year because I think if you think about a 2% growth rate across the total company as reported. Self-service banking is likely to be down 4% reported. Now, that’s up 2% if you add back the shift to recurring revenue, but we are accelerating the shift in recurring revenue in that business. And so it’s going to be a 4% decline, we think, with really nice margin expansion. I think there is probably 3 points to 4 points of margin expansion in that business. We have got two businesses, Payments & Network and Digital Banking that are both going to grow nearly 10%. Both those businesses are going to invest back into growth. And so their margin rates are likely to come down a little bit, maybe a couple of points there as they invest in growth, which then leaves the retail and hospitality businesses that will grow low-single digits each hospitality coming off a rip roaring year. And retail, really, when we think about building in a consumer-led recession into our model, we took a little bit of – if you think about where the non-recurring revenue streams occur, it’s in hardware. It’s in POS and self-checkout and it’s in ATMs. And so we moderate our expectations for our hardware revenue in the year. If we are wrong and there isn’t a recession and our customers aren’t affected by it or don’t adjust for it, there could be upside to this plan. Yes. Matt, just to add to Tim’s comments, so specifically, have we seen a moderation in demand to-date, the simple answer is no. And as you look at Tim walking through the numbers, so some of the growth impact is literally the ability for us to execute our strategic plan and to shift our revenue streams to subscription. And so we are – it’s taken off the fastest a little faster than maybe we anticipated. It was ATM as-a-service in that backlog. The sales success in 2022 was very strong. The backlog continues to be very strong into 2023. And so that will portend for the future to have a very, very strong business there, but we have got to get through 2023 since have Payments & Network, strong business outlook. Digital Banking had an extremely strong fourth quarter, a lot of renewals, a lot of new logos, continues to have a very strong backlog in terms of potential I would say, backlog sales pipeline and then recon hospitality, the migration to platform lanes and platform sites. So, we haven’t seen that yet. We look at the outlook for the marketplace probably a little more concerned about banking, just as banks taking advantage of some margin spread, interest margin spread in ‘22. I think they are all looking at the same risk. And so later on in the year, will they start to slowdown in capital spending. But again, to-date, we haven’t seen that. And I think our outlook for the year is just trying to be cautious based on the economic outlooks that we are reading. Got it. And then just as a follow-up, and I only had a quick second to look at this, just given the timing of the call, but in Payments & Network, it looked like on a quarter-over-quarter basis. So, it’s not in your current slide deck, I had to go back and look at Q3, but it looked like endpoints were down a little bit quarter-on-quarter. Transactions appeared to be down a little bit quarter-on-quarter as was ARR. I realize there is an FX dynamic perhaps driving ARR. But if you can just kind of speak to that, that would be helpful. Thank you. Yes. That’s a typical seasonality in what we do. You are going to see a nice pickup in Q1 as tax season comes around. So, the end points are moving in the right direction annually. I don’t know if there is a modest downdraft in Q4, I can’t remember. The transaction numbers are higher. They will go higher. There is a seasonality to them. That’s why we moved the key – the transaction numbers to full year because it takes the seasonality out. But good transaction growth and the fact that we are going to be able to deliver that 9% top line growth in that business is heavily dependent on more endpoints and more transactions. Hi. Good afternoon and thank you for taking my questions. Just wanted to drill into the segments a little more. First of all, within Payments, if you were to take out LibertyX what would the organic growth rate look like for the fourth quarter? And then secondly, as far as Digital Banking goes, I know in the past, you referred to it as a double-digit grower. Is it fair to still think of that as a trajectory for that business on the top line? Yes. Let me start with Digital Banking. Absolutely, it was a little light in the fourth quarter. We – again, we had an extremely high renewal quarter, which drove extending our terms with our customers, which may be impacted revenue a little bit in the fourth quarter. But I don’t think that there is anything in the trends to cause us concern. I do think, as Tim referenced, high-single digit, low-double digit in 2023 based on what we are seeing for Digital Banking. I think the overall – without LibertyX, what do you get in mind. Got it. And then just as a quick follow-up, if I could refer back to some of your guidance from the prior quarter when you talked about $200 million in cost take-outs for ‘23 and $80 million to $100 million in dissynergies. Is that still a ballpark range of thinking about ‘23? Yes. I think if you get your ruler out and that EBITDA, it’s supposed to say causal walk, it says casual walk. The casual walk in the deck on Page 16, I tried to kind of roll all of these different efforts at cost take-out as they played out across this year and next because they don’t necessarily calendarize to any one fiscal year. We did see $500 million or so of pressure from both the discrete items we called out, external forces and then inflation in aggregate. And we have got about $400 million of cost actions or permanent actions – total actions done in 2022. About 60% of those were more temporal in nature. So, the raining and discretionary spending hard not backfilling positions that have been opened, and we need to add back some costs there and about 40% of that cost-out was permanent. Moving into ‘23 then, since we expect the external impacts and the inflation to moderate really considerably and in fact, a couple of the items turned around in our net benefits to us this year. We simply need to then cover the $100 million or so of wrap effect from the negative impacts last year and cover those temporal actions. So, if you add those together, it looks like in aggregate, about $350 million of permanent actions in 2023, which will then allow us to hit the numbers on this page. If there is – we have talked about $80 million to $100 million of let’s call it, negative synergies, dissynergies associated with the spin transaction. We have presumed across this model that it will be when we split, it will be $80 million, about $40 million on each side of the NewCo. We think as we – as the year plays out, we will be able to keep that cost down and offset it across the year. So, we found several opportunities for efficiency beyond the actions that we have described here to help keep that from being a negative at the time of the launch of the two companies. Hey guys. Thanks for taking the question. You look at 2023, and it looks like you plan to do more with less, I guess. Meaning your revenue guide is flat to up 2%, and we talked through some of the factors there. EBITDA is up much nicer kind of around 9% at the midpoint. Can you maybe just talk us through, Tim, I know you have talked about kind of like high level, but maybe walk us through how you are thinking about gross margins and the puts and takes there in 2023 versus OpEx just to help us maybe where the leverage in the model comes from next year? And then I have a follow-up next. Yes. That’s a good question because you will remember that this year, most of the savings came at OpEx, right. It came from indirect costs because that was we have more quickly act there. It’s going to be nearly entirely gross margin savings this year. The actions that we took to re-qualify parts and to diversify our supply chain, the efforts we have made to reduce our transportation costs and other direct cost efficiencies are going to help pay back nicely in 2023. So, I would expect most of the recovery to be in gross margin rather than at OpEx. Okay. Super. That’s really helpful. And then as a follow-up, I just want to make sure I get some of these items, right? So, I am obviously guiding to some nice year-over-year improvements in EBITDA and free cash flow. EPS has held back a bit more regardless of the kind of change in disclosures. Is that mostly tax rate, interest rate – sorry, tax rate, interest expense and share count. Was there anything else that I am missing? I just want to make sure I kind of understand why that measure maybe as much as the others. You are exactly right. There is $0.29 associated with interest expense and there is a little more than $0.10 associated with both share count and tax rate. Thank you. And that does conclude the question-and-answer session. I will now turn the call back over to Mr. Mike Hayford for any additional or closing remarks. Thank you. Thanks everybody for joining us today. I think our team is pretty excited about a strong finish to 2022. Obviously, we had some challenges at the start of the year and just a great big thank you to our whole team for working through the last three quarters and delivering a very solid 2022. We look forward to 2023. We expect it to be, again, a modestly challenging environment. This what’s going on out there, but we feel very good about our products. We feel very good about our strategic initiatives, and we are looking forward to executing the spin-off later in 2023. Again, thank you for joining us today.

EarningCall_441

Ladies and gentlemen, thank you for standing by. Welcome to KKR’s Fourth Quarter 2022 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. And following management’s prepared remarks, the conference will be opened for questions. [Operator Instructions] As a reminder, this conference call is being recorded. Thank you, operator. Good morning, everyone. Welcome to our fourth quarter 2022 earnings call. This morning, as usual, I’m joined by Rob Lewin, our Chief Financial Officer; and Scott Nuttall, our Co-Chief Executive Officer. We’d like to remind everyone that we will refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release, which is available on the Investor Center section at kkr.com. And as a reminder, we report our segment numbers on an adjusted share basis. This call will contain forward-looking statements, which do not guarantee future events or performance. Please refer to our earnings release and our SEC filings for cautionary factors about these statements. So this quarter, we’re pleased to be reporting solid results with $0.63 of fee-related earnings per share and $0.92 of after-tax distributable earnings per share. I’ll start by walking through the quarter. So beginning first with management fees. Management fee growth continues to be a real bright spot for us. In Q4, management fees were $706 million, that’s up 5% compared to last quarter, and up 19% compared to Q4 of 2021. And comparing full year 2022 to 2021, management fees increased 28% from $2.1 billion to $2.7 billion. Growth in full year 2022 was greatest within our Real Assets business where management fees increased over 50%. Net transaction and monitoring fees were $195 million, with our Capital Markets business, generating $144 million of revenue in the quarter. Now to go through expenses. Our fee-related compensation margin for the quarter was 20%, which is at the low end of our 20% to 25% range. Rob is actually going to circle back on this topic in a moment. And other operating expenses for us were $177 million. The increase here compared to last quarter was driven by higher professional fees given activity levels across the firm as well as increased expenses related to capital raising. So in total, fee-related earnings for Q4 were $559 million or $0.63 per share with an FRE margin of 61%. Moving to realized performance income. We generated $339 million with realized carried interest driven by monetizations of Minnesota Rubber and Plastics as well as a number of public positions while realized incentive fees were driven by the crystallization of performance fees at Marshall Wace. Realized investment income was $223 million for the quarter. Overall, our asset management operating earnings came in at $946 million. Now turning to our insurance segment. Global Atlantic had another strong quarter, generating $165 million of operating earnings. This quarter, the results were driven by an increase in invested assets from new business growth alongside a continued rotation into higher-yielding assets. This resulted in after-tax DE for us of $822 million, or $0.92 per share. Now turning to investment performance and Pages 7 and 8 of our earnings release. Page 7 shows investment performance across our major asset classes for the fourth quarter as well as the full year. Beginning first with traditional private equity, the portfolio was flat in Q4 and off 14% for the year. Those figures are below public indices for the quarter and ahead of public indices for 2022. In real estate in the quarter, the portfolio was marked down by 8%, driven by a widening of cap rates on unrealized investments, offset some by strong rent growth in the quarter. And for the year, the portfolio appreciated 3% meaningfully ahead of public REITs as well as broad real estate indices. The infrastructure portfolio was up 3% in the quarter and up 9% for the year, very strong performance in infra given broad volatility again across markets. And on the leveraged credit side, the portfolio was up 3% for the quarter and minus 3% for the year. And our alternative credit portfolio was up 1% in Q4 and up 2% for the year. Volatility in 2022, of course, was not limited to trust the equity markets, investment grade and high-yield indices declined 13% and 11% over the course of the year. Now perhaps more important are the figures that you see on Page 8 of the earnings release. This page shows investment performance since inception across our recent funds that have been investing for two-plus years. The figures you see here, of course, reflects any marks taken in Q4 or over the course of 2022. Looking at this page and taken together, we continue to feel very good about the returns we’ve been generating on behalf of our clients. In terms of our balance sheet investments, performance was flat in the quarter and down 5% for the year, again, against a volatile backdrop. Of note here, core private equity investments on the balance sheet have continued to perform. For the quarter and the year, the core PE portfolio appreciated 7% – excuse me, appreciated 5% and 7%, respectively. Turning to capital metrics. We raised $16 billion in the quarter. This was driven by fundraising across our growth and traditional PE strategies, leverage credit, a block transaction at Global Atlantic alongside incremental flows at GA. This brings our full year 2022 total new capital raised to $81 billion. Our assets under management increased to $504 billion as of 12/31 with fee-paying AUM coming in at $412 billion. We continue to find opportunities to invest deploying $16 billion in the quarter. Infrastructure and traditional private equity accounted for about half of the Q4 deployment with opportunities to disperse globally. And finally, before handing it to Rob, consistent with our historical approach, we’re pleased to announce our intention to increase our annual dividend policy from $0.62 to $0.66 per share. This change will go into effect for the dividend announced alongside first quarter 2023 earnings. And at the same time, we’ve increased our stock repurchase authorization back up to $500 million. Thanks a lot, Craig. And thank you, everyone, for joining our call this morning. I thought I would begin by giving you a sense of our recent annual planning meetings. We got our senior team together earlier this year to review where we are as firm, where we’re going and most importantly, what we need to get right to capture the opportunity that is in front of us. Listening and participating in these discussions was incredibly energizing. We’ve never had a stronger team and been more aligned around where we are going as a firm. We have a number of very clear avenues for long-term and sustainable growth and more confidence than ever in our ability to achieve it. I’m going to step through some of these more material opportunities for growth in a minute. But before I do that, I first wanted to emphasize just a few points about 2022. Starting with our fundraising, we raised $81 billion of capital last year, the second most active year in our history and of course, all against a much more complex market backdrop and without significant contributions from our flagship strategies. Over 70% of our fundraising last year came in our real assets and credit businesses, strategies that are often front of mind for our clients in rising interest rate as well as inflationary environments. Moving to deployment, we invested a healthy amount of capital over the last 12 months. Looking at private equity and real assets taken together, deployment here was approximately 20% greater in 2022 compared to 2021 as teams were able to find very creative ways to put capital to work. For example, across PE, growth in Infra, we announced or closed on ten take private transactions over the course of the year. And as our footprint has scaled and become more diversified, so has our deployment. Real asset strategies were 16% of total firm deployment activity in 2020, that number totaled almost 40% in 2022. Over that same two-year period, credit deployment has increased approximately two and a half times as the business has expanded with Global Atlantic as a partner and new focus funds such as asset-based finance. And finally, I’d like to circle back to our compensation expense and the comp margins that you saw in Q4. Fee-related compensation was 20% of fee-related revenues. That is at the low end of the 20% to 25% range that we’ve articulated historically. While realized investment income comp was 10% of realized investment income, also at the low end, in this case, of the outlined 10% to 20% range. Carried interest comp was at the mid of the quarter which, as a reminder, is 65%. This had the impact of reducing our total compensation margin for the quarter, which including equity-based comp, was 32%. Given realized carried interest generation across KKR over the course of 2022, we felt that we could move to the low end of our FRE and investment income compensation ranges and show some expense discipline in support of our operating earnings, while importantly, still ensuring that we have the capacity to recruit, retain and incent world-class investment, distribution and operations talent. As we think about levers that we have as a firm to generate long-term earnings growth from here, operating leverage is really a key component. As a reminder, KKR employees own approximately 30% of our stock. So, we are very well aligned to drive margin improvement across the business. And before I switch gears, let me give you an update on the outlook for Q1 monetization activity. Things have slowed a bit on the monetization side, but nothing that is surprising to us given the environment and how we’re thinking about the timing of when we want to generate realization outcomes for our limited partners. So, as we stand here today, we have visibility on approximately $250 million of monetization-related revenue for the first quarter. Now turning the page and looking forward, we think there are really six key areas that are going to drive significant growth for KKR for several years to come. The first area is real assets, where we have seen meaningful growth across our platform. AUM at the end of Q4 stood at $119 billion. That’s compared to just $28 billion at the end of 2019, so four times growth in three years. Growth in infrastructure has been driven not only by our flagship fund, but also our extension into areas such as core as well as Asia Pacific. The real estate platform continues to grow across a full suite of ten-plus products, further propelled by both Global Atlantic on the credit side and our acquisition of KJRM on the equity side. Our momentum across our real assets platform is obviously quite significant and aligns well with a big area of current focus from our limited partners. The second area of meaningful growth for KKR is continuing to leverage our market-leading position in Asia Pacific. Looking at our progress in 2022, our Asia infrastructure strategy raised almost $6 billion, the largest in the geography, and we closed on our first Asia credit fund as well. Looking ahead, we expect our Asia real estate strategy to expand in 2023 as well our Asia tech growth franchise. And as I mentioned a moment ago, our acquisition of KJRM, which is our Japanese real estate business, is a great example of how we can use our balance sheet to strategically pursue inorganic growth to both enhance our market position as well as to access differentiated forms of capital. Looking at this progress altogether. Our Asia-focused AUM has now increased to $60 billion at the end of the year, that’s up roughly three times since 2019. Our local presence paired with our KKR toolkit has created industry-leading business against very compelling long-term macro fundamentals in the region. The third area for us is core private equity, which is just a massive opportunity. As the addressable market is very significant, and the P&L impact can be positive across so many different parts of our financials. And most importantly, it is an area where we believe that we have the business model and culture that sets us up well to be the best global player in the asset class. As a quick reminder, Core PE is a long-duration investment strategy, and we expect to hold these investments for 10 to 15 plus years. We currently have 19 businesses within our core portfolio. These businesses generally have lower leverage than traditional private equity investments tend to be less cyclical and are more cash generative. These traits do create a more stable earnings profile within the portfolio. Today, we manage roughly $18 billion of third-party capital, which I believe is the largest in our space. The AUM we manage positively impacts our management fees, transaction fees as well as carried interest. But core PE also accounts for over 30% of our balance sheet investments. Yet these investments only accounted for 1% of our after-tax distributable earnings in 2022 when you look at their flow-through impact to realized investment income. Looking at this another way, and to highlight this point even further, if you look through our balance sheet to the core PE portfolio, our portion of the company’s EBITDA totals over $600 million. This is not accounted for in our distributable earnings. Make no mistake, this 30-plus percent allocation is purposeful. It is by design because we have a substantial opportunity to really compound our investments in an asset class where we know that we have differentiated capabilities. The fourth big driver for us is private wealth. We currently manage $67 billion of capital here compared to $37 billion in 2019. Approximately 15% of new capital raise has historically been sourced from this investor cohort, mostly from high net worth clients and in traditional drawdown products. Over time, we expect all private wealth focused capital will account for 30% to 50% of the capital that we raised as a firm. And along this path, we will continue to expand our footprint in the democratized access vehicle space. Our ambitions and views of the long-term opportunities we see for KKR have not changed. Next, my fifth point is our continued focus on the insurance space. Going back to July 2020 at the announcement of the Global Atlantic acquisition, their AUM was $72 billion. Today, it’s close to $140 billion. So it’s grown about 2x in the last 2.5 years. Our thesis in buying GA was multifold. We believe that the combination of a leading life and annuity franchise with multiple ways to expand against compelling market fundamentals, combined with KKR’s origination and capital capabilities could lead to strong growth in AUM, operating earnings and book value while also delivering for policyholders. This has really played out and looking ahead remains a key strategic priority for us. Not only is the $139 billion of GE Capital itself perpetual, but the business has also helped us grow our third-party insurance client AUM to $56 billion. That’s up from $26 billion at the time of the GA acquisition announcement as we have continued to create products that are tailored to this unique investor base. And finally, the sixth high-impact long-term growth driver for us is our balance sheet. I said the same thing last quarter as well. But there’s really not a corporate that I know that doesn’t wish they had more capital availability right now. The balance sheet has a clear competitive advantage in its continued ability to enable and accelerate growth in a way that is less dilutive for our public shareholders. To highlight this point, M&A, our investments in core private equity, our buildup in the insurance space and share buybacks have all accounted for roughly 90% of our net balance sheet deployment over the past five years. And we expect that trend to continue over the coming several years as well. This is just another tool that we have to be able to drive earnings per share over time. To summarize, we continue to feel extremely positive about our future outlook. The six drivers that I just went through are particularly impactful for our long-term success, and we have real conviction across the entirety of our management team in our ability to build on our existing momentum. Thank you, Rob, and thank you, everyone, for joining our call today. I thought today, I would share how things look from Joe’s and my seat. There is no doubt that markets and the economy remain dynamic. There’s also no doubt many remaining focused on the macro, quarterly results, short-term catalysts and the near-term outlook for our industry and business. In summary, there’s a lot of noise out there. We find that noise is just that noise. We continue to raise capital, find interesting deployment opportunities and selectively monetize our portfolio. It’s business as usual at KKR. So from our seats, while the noise creates some questions, it’s important to not let it become a distraction. Building KKR is a long-term effort that takes years of planning and investment to get right. Many of the businesses we are scaling now were started over 10 years ago. And many of the businesses we are starting now will be scaling for decades to come. We are singularly focused on what we need to get right: talent, culture, performance, clients and operations. If we get those things right, we will double KKR again at a rapid pace. If we don’t, our growth will be slower than it could be. Growth is the result of execution. So as a management team, we are focused on what we can control and executing on those five fronts. The good news is that as we look back at recent progress, we feel like our strategy is being executed well and the results are emerging. Named just a couple of things we look to as evidence. In the last two years, our AUM has doubled from $250 billion to $500 billion and our fee-paying AUM has more than doubled. And over the same two years, our management fees and TDE per share have almost doubled as well. So the results of execution are starting to come through. But these metrics are backward looking. What’s even more encouraging to us is the strong evidence we have of growth continuing to be very attractive for years to come. Some of this may be apparent for these calls and some less so. To name just a few of the things that we are looking at. First, we’ve continued to create new businesses over the last several years. In fact, over 50% of the capital we raised last year was in strategies that did not even exist five years ago. And over 50% of our AUM is not yet scaled in our definition. Said another way, we have had a lot of recent innovation and half of the assets we now manage are still approaching the inflection part of the growth curve. Second, our dry powder has grown from $67 billion to $108 billion over the last two years, positioning us well to invest into this environment, which we continue to find attractive. Third, our efforts in democratized products are just starting. We expect to have multiple vehicles launched this year after two years of structuring and team building work. This is upside for us and we expect will be an additional growth engine for the firm across all of our asset classes. Fourth, Global Atlantic goes from strength to strength, and has almost doubled assets since we announced the transaction 2.5 years ago, well ahead of schedule with significant opportunity ahead. Fifth, and maybe less visible, our sales team has grown from 100 people to 280 people in the last two years across institutions, insurance, family offices and private wealth. It typically takes a year or two for a new salesperson to learn our products and hit their stride. The result of this investment will show up over the next couple of years and create even more wind at our back. Sixth, our carry-bearing invested dollars in the ground have increased dramatically. It’s important to understand that the cash carry we generated last year largely came from investments we made five-plus years ago when our AUM was a fraction of what it is today and our carry eligible invested capital was as well. To be specific, the vast majority of last year’s carry came from harvesting investments made when our carry earning invested capital was roughly $50 billion. Today, it’s about $150 billion, up 3 times. So don’t let the near-term monetization environment divert your attention from what matters. The forward is incredibly strong as this much larger scale of invested capital matures with the returns on the slide Craig showed you. And finally, and perhaps most important, our team has never been stronger or more cohesive. In summary, over the last several years, we’ve made the investments for the next leg of growth at KKR and see years of opportunity ahead. And as we’ve done all this, the earnings power of KKR continues to increase. This is true regardless of the near-term noise and markets and is what gives us such confidence in our outlook. So don’t get distracted by the noise. The signals are strong and our confidence is high. Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Craig Siegenthaler with Bank of America. Please proceed with your question. So my question is on Global Atlantic. I wanted to get an update and hear how early stage credit quality metrics have trended inside of this business, especially given prospects that we may be entering a recession in the U.S. in the first half of this year. Hey Craig, it’s Rob. Thanks a lot for the question. The very short answer is that GA continues to trend really well as it relates to its credit exposures. We’ve talked about this in prior calls, but 95% of GA’s book is rated NAIC 1 or NAIC 2, so investment-grade in nature. The equity book at GA is sub 1% of total assets. And so we’ve done a bottoms up across the entire portfolio as we’ve gone into year-end and feel really good with how the strength of the balance sheet is holding up. Hey guys, good morning. I was hoping maybe we could talk a little bit about margins and scale in the business. So Rob, this is probably for you. But you guys were able to bring down FRE comp this year partially because of pretty good monetization activity this year, I think, as you alluded in your prepared remarks. So if monetization income weakens in 2023 for variety of cyclical factors, should we think about that drifting back higher? Or is there enough sort of scale in the business where FRE comp rate could be at a lower run rate on a more sustainable basis? And I guess, bigger picture, I was hoping we can maybe just, again, kind of double click into how monetization activity flows through the margins in other parts of the business. You guys report and we sort of think about it in silos, but that’s ultimately not how you sort of pay your people. So wrapping all of that around, we’re hoping get a little more color. Thanks. Yes. Got it. Thanks, Alex. A lot in there. So let me try and tackle one at a time. First, let me just start with margins. We believe that we’ve created a business model that allows for best-in-class FRE margins. And we’ve been consistent for a number of quarters now, a number of years now probably that assuming reasonable market conditions. We’ve got a business that can sustainably drive a low 60% FRE margins in spite of some of the investments that we’re making back into our business. But over time, as those investments that we’re making pay off and as the fees come in on the back of those investments as well as the efficiencies, we believe that we can create a business model that delivers mid-60% FRE margins. I think that’s going to come in a couple forms. I think that will come from operating expense leverage. I think it also has the potential to come from compensation expense leverage as you would’ve seen in Q4 of this year. Now taking back to how we thought about compensation margin inside of the quarter, I’d say a couple things as it relates to that. The first, we want make sure that we’ve got and I said this on the prepared remarks, the right amount of compensation in our business such that we can recruit, retain, and incent world-class talent across the board at KKR. And as we looked at the pool of compensation that we had available in 2022, we made the determination that in Q4, we can operate at the bottom end of that range. Now you asked the question of monetization activity comes down next year where might that shake out? I instead would look at it across our total comp margin. And what we’ve guided historically is on a total comp margin, we can operate in the low-40% range. In 2022, we were at 39.7%, I believe, 2019, 2020 and 2021. We were below that 40% guidance number. And if monetization comes down and carried interest comes down, that’s our highest comp margin at 65%. And so all things equal, you would expect compensation margin across the board to come down. So there was a lot in your question, but hopefully I got at most of it and happy to catch up more offline on the topic. Yes, Alex, the only thing I would add is our people understand that monetizations, if they come down, compensation is going to come down as a result. Our business, you get paid on cash outcomes. So I don’t think that would be a surprise to anybody. Hi. Thanks very much. So I’m a big believer in the big picture growth picture that you laid out. So cool with that. One of the five things you talked about getting right is performance, and I think your long-term performance is awesome. I want to focus on 2022 for a second, get the right perspective, PE down 14%. I think just the fourth quarter real estate was down 8%, leveraged credit down 3%. I want to – I know it’s a longer tail. I know your long-term track record is great. I wonder if we could talk about the right perspective on portfolio composition or how you do marks relative to Publix – that was only the only Achilles heel that caught my eye in the quarter. Thanks. Yes. Hey, Glenn, Glenn, it’s Rob. Thanks for question. Why don’t I just start with valuation methodology because I think that that’s really important for this discussion? Then Craig and Scott could spend some time as it relates to performance. We’ve been reporting as a public entity now for close to 17 years if you include KPE, which was the predecessor closed-end fund the KKR merged into. And we really do believe that over that period of time, we’ve developed best-in-class process for determining fair value for our Level 3 assets, which are those assets that don’t have observable marks. Our exact process and methodology is, of course, by its nature, different by asset class, but what is most important to us is that we have a consistent process and methodology quarter after quarter after quarter. And we believe that aspect is critical in delivering a fair and representative view on fair value, which we think you’ve seen over time and in 2022. I think the other thing that’s worth mentioning on valuation methodology, as part of our consistent process, we’ve got a third-party valuation agent, excuse me, who is an expert in their respective space and they either perform the valuation exercise or provide positive assurance on those investments. So if you look at our history, we feel we’ve gotten that balance right and that our portfolio is certainly impacted by market movements as well as by inputs like interest rates and equity risk premiums that might impact DCFs offset over the course of the year by operating performance as well. And so I think it’s important really to understand that our methodology doesn’t change and it’s consistent quarter-over-quarter. And in that respect, we feel really good that we’re delivering the right representative mark across our portfolio. And then Glenn, it’s Craig. I did have – why don’t I just pick up on one of the statistics you mentioned on opportunistic real estate. And there are really two points there. Rob’s already hit on the first just as it relates to the consistency around that process for us and the work we do with evaluation agent. In the case of real estate, specifically that value agent will look at recent transactions and they’ll come up with cap rate and discount rate assumptions for that specific quarter. So in a quarter like Q4, transaction activity was really muted. Volumes in the U.S. were off something like 60%, but in those observable transactions our cap rates widened. And so that’s really what drove the performance figure in real estate that you saw for the quarter. Now, the second point, which we think is more important honestly, is the fundamentals in the portfolio itself. As our – we continue to feel great about the portfolio as well as those fundamentals. So our exposures continue to be weighted towards those assets and themes where you’re seeing strong fundamentals and strong growth. Industrial assets, data centers, rental housing, student housing, storage, those are over 80% of the portfolio in total, and we’re seeing strong fundamentals and cash flow growth there. On the flip side, we globally have only 1% exposure to retail, and our U.S. office exposure is below 5%. And then just to help put those two things together, to give you a sense, if we had used constant cap rate and discount rate assumptions in Q4, you actually would’ve seen the portfolio marked up in the quarter instead of that down for the quarter percentage that you did see. So again we are really benefiting from strong underlying NOI growth, and that dynamic is really the reason that we put in Page 8. So I think as our clients evaluate us across our strategies, they’re looking at this inception performance, much less focused on any 90 day period, et cetera. And I think when you look at, since inception, as you noted and we appreciate that in your beginning of the question, the performance figures and in the case of real assets and real estate, the blue bars, I think we feel great about how we’ve been performing on behalf of our clients. Hey Glenn, it’s Scott. Just – if I were you, I’d be trying to figure out is there anything to worry about here? And the punchline from my standpoint is no. I think as the guy said, we’ve had a very consistent methodology. It’s not at all surprise given the markets have been off, multiples have been off, they see some marks come down, but they’re just that marks. What matters to us is the fundamental operating performance of the portfolio, which continues to be really strong. If anything, we feel even better that we got it right in terms of investing behind the right themes the last several years, revenue and profitability metrics remain strong. The fundamental operating performance of our real asset book and our credit book remains strong, candidly, bit stronger than I might have expected given what’s going on with the economy and the backdrop. So, overall we’re not worried about it. I would suggest you’re not worried about it either. My expectation is as markets rebound, you’ll see the marks rebound as well. Thanks. Good morning, everyone. So you’ve done a great job expanding into a number of adjacent strategies and products over the past several years. I’m curious though, as we think about the next three to five years, should we expect this expansion into new areas to persist or will more of the focus be going deeper in the strategies you have today and moving more of these platforms from earlier stages of the life cycle to more mature and scale stages? Brian, thanks for the question. I think it’s going to be much more focused around taking what we have today and scaling that up. We think there’s more than enough room to have very substantial growth. And as we’ve outlined, our 2026 profitability measure is greater than $4 of FRE per share, $7 of TD per share, that doesn’t rely on adding a lot of new products that we’re doing. That said, we continue the focus on innovation. We are likely to add products over time where we believe there’s large addressable markets and where we can be a top player in the world of what we do. But that list is going to be small because I think we believe that if we go execute on what we have in front of us today take that 50% of our products that aren’t yet at scale and get them to scale that the growth opportunity is going to be much larger than starting something new from scratch. Great. Thanks for taking my question. So I wanted to start with GA. It’s clearly a strong quarter there. And then given the favorable rate backdrop and the good new business trends that you’ve been seeing, any thoughts on how we should think about the next six to 12 months from that business? If you could maybe touch on the net investment income and the net cost of insurance, that would certainly be helpful. Thanks. Yes. Great. Thanks a lot for the question. Clearly, Global Atlantic in the two years of our ownership has had really outstanding performance. And we had targeted 12% to 13% type of ROEs. We’ve out achieved that over the course of 2021 and again in 2022. I do still believe that that’s the right level which to model GA on a go-forward basis. We are benefiting right now on the investment – net investment side of the business, we’re certainly benefiting from greater deployment as we’ve rotated on our portfolio, which we took some upfront losses on given where interest rates are and have put that into higher-yielding securities. We’ve also benefited while we are pretty well asset liability matched. We do have a decent size floating rate book. And so as interest rates have gone up, GA has benefited from that as well. At the same time, though, cost of insurance has, of course, gone up the price at which we price our annuities has gone up. But I think the team has done a really good job on the operating expense side of the business. And overall, you’re seeing that operating leverage flow through. So, we continue to be really encouraged. I think 12% to 13% still the right range to model that business going forward, and hopefully, they’re going to continue to be able to outperform. Great, thanks. Good morning folks. Obviously, fund raising [ph] remains a topical item. So just sort of hoping you could comment a little bit on how conversations with LPs have been evolving over the past several months. And also to the extent you might be able to sort of address this whole dynamic around LP allocations and their sort of “budget” as we look into 2023 and beyond. Thank you. Thanks, Gerry, it’s Scott. I’ll take that one. It’s hard to answer that question in Chris [ph] fashion because it kind of depends on where you are and who you’re talking to. So there’s no doubt, kind of as we got into the back half of last year, some of our LPs were struggling with allocations on the back of a reduced denominator, that was predominantly a U.S. pension fund dynamic. As the calendar has turned, and there’s a new budget year, some of that has softened and we’re having conversations that indicate they’re looking to put capital to work. But if you go outside the U.S., Middle East, Asia, sovereign wealth, insurance, in particular, you find investors aren’t struggling with those same issues. In fact, several of them are very forward leaning and trying to figure out how to invest into this environment. So the overall picture is not consistent depending on where you are. What is very consistent, though is, we’re finding this year, just like last, a lot of interest in a couple of themes. Anything with inflation protection and yield. So, I think real estate, infrastructure, credit, significant amount of interest. I’d say an increased awareness that in times like this, all things, private equity tend to perform quite well. So it should be some very strong vintage years coming out of this period of time. So people are kind of swinging a bit to think about how to take advantage of this environment. So, I’d say people are more in their front foot this year overall than maybe last year. And there’s more of the conversations gearing toward how do I invest into this in a thoughtful way. And then part of that is people look back and post-GFC and maybe post the initial stages of COVID, some of which they were maybe a little bit more aggressive in terms of deploying into the environment spend. And I think that’s what’s leading to some of this shift in sentiment. Okay thank you very much. Good morning everyone and appreciate taking the question. Maybe circling back to one of your growth drivers. If you could talk a little bit about on the global private wealth opportunity. You mentioned a couple of new products coming out. Maybe update us on what you’re hearing from the respective channels, just given some of the mixed macro backdrop with higher yields in more liquid products. And what might be having in terms of behavior and demand as you scale the business? Thank you. Bill, it’s Craig. Why don’t I start? Look, I think the tone in any near-term period is going to be influenced by what we all see in broad markets. But I think we’d encourage everybody not to miss what really is a huge opportunity for us. And when we look at how we’re positioned with our brand, our track record, our ability to innovate the relationships that we enjoy with distribution partners. I think some of the things that Scott mentioned in our prepared remarks, we spent the better part of the last two years really as a firm positioning ourselves to be able to launch a handful of new products, and we’re on the cusp of currently. So, I think we just feel really well positioned in what is an enormous massive addressable market. And again, our views of the opportunity here hasn’t changed. And I think, I guess one final thought in a product like KREST, again, we think the performance of KREST and the experience that people have had with that as an entry has been great. So performance was an 8% – over an 8% return in 2022, 16% inception to date, over a 5% current yield. So, I think when we look at the initial experience that investors have had from the democratize products, we feel very good about what they’ve experienced. Thanks, good morning. I have another follow-up on the real estate market. Is there any specific region or specific type of assets in the portfolio where those transaction cups – comps drove the mark? And as a follow-up to that, could you give us an idea of where the cap rates were moved to and where they were before? Patrick, we haven’t disclosed the specific cap rates. I think the dynamic this quarter is, one, I think I wouldn’t be – we wouldn’t be surprised if you’d actually see a real variability in those cap rate assumptions is, again, it’s – each manager is probably going to view the data points differently. And what you’re going to see in this 90-day period. And again, like the book that we have is going to be predominantly U.S. based just given the maturation of our portfolio. And again, from an overall exposure piece, as I’d mentioned, our largest allocation is 35% in those industrial themes and 80% in those themes where we’re continuing to see really strong growth. But almost by definition, those are going to have the big – just given the significance of those in the portfolio, those are the instances that are going to be the biggest contributors to that movements in the court. [Ph] Great. Thanks. Good morning, folks. Just wanted to come back to the retail democratized part of the retail strategy. Maybe if you could just remind us on the AUM you have right now in the actual democratized products where you might think that could go to over the long term. Realize it’s a – it’s definitely a long-term build. And then, how many products you plan to launch this year? And then, going back to the FRE margin, part of that as you scale the overall business and improve the FRE margins, should we be thinking of the rollout of those democratized products as a near-term headwind as you pay for shelf space and build up the infrastructure to scale that? Hi, Brian. It’s Craig. Why don’t I start? And then, we’ll let Rob pick up on the FRE margin impact. Just in terms of framing that significance for us, again, we’ve got about 500 billion of AUM, roughly 6 billion are in these democratized vehicles today. So it’s a little over 1% of our AUM. In terms of the launch of additional products and where we are from here, given SEC rules and filings that we’ve made, we can’t get into a lot of the specifics. But suffice to say we think there’s more to come in the first half of the year, and we’ll keep you abreast as we continue to make progress. Brian, some of those costs that you reference are costs that we’ve talked about, where we’ve been investing back into the firm in distribution and marketing as well as in technology. Some of that technology supports our efforts in the democratized vehicles. So as we talk about operating in the low 60s and over time, gravitating our business model to get to the mid-60s, that incorporates how we’re thinking about the democratized access vehicle space. And Brian, the only thing I’d add is, we’ve said over time, if you look at kind of what we’ve been selling to individual investors, so think democratized plus the more traditional fund formats sold through platforms to individuals, that’s been roughly 10% to 15% of the capital we’ve been raising ex-GA. And we’ve said that we expect that over time to trend to 30% to 50%. So to your question of where do we think this goes over time, think of it as kind of an increasing percentage of a larger base. And we’ve also shared over time that we expect to have democratized versions of what we’re doing across all of our major product areas in the near term and that’s still the case. Hi, everyone. Good morning. A follow on to the insurance ROE, appreciate your color on portfolio rotation into higher yields driving the impact, with that considered, how long should we expect the normalized ROE remaining elevated in today’s environment with today’s portfolio understanding the inputs can be hard to predict? Yes, Fin, thanks for the question. Listen, I do think that 12% to 13% range continues to be a good one for next year. And while there’s some things that can elevate that number as we look forward, there were some timing elements in 2022 as well on that portfolio rotation. So I think that’s still the good range for the near term. As I said, we hope that the GA team is able to generate returns that are in excess of that. They’ve done that in 2021 and 2022. But our internal modeling suggests that’s the right range for 2023. Hey, good morning. Thanks for taking the question. Just on deployment, just curious how you would characterize the 71 billion of capital that was deployed in 2022. Seems like a large quantum of capital, similar level as 2021, but a tougher backdrop. So just curious how you’d characterize that relative to your full potential? And what’s the scope for that deployment to say grow at a meaningfully step function higher level, maybe in 2023 or 2024. Just how you’re thinking about the capacity you have to deploy and what that might look like five years from now? And then just a quick housekeeping question for Rob, just if you could help quantify the investments and realizations off the balance sheet in the quarter? Thank you. Hey, Mike. It’s Craig. Why don’t I start on deployment. I think a couple of things. When you look at our activities, one, look, the primary markets are pretty shut. Capital is very precious. Those are good things for us in particularly when you look at a 100 plus billion of dry powder that we have as a firm. So I think when we look back at our activities in 2022, I think we feel very good about capital that we put to work. We’re value focused. We love carve-outs. One of the things Rob talked about that I think is pretty interesting against just the amount of public to privates we did in an environment where public markets are really dislocated. So I think for us to have announced or closed on 10 take privates is a pretty interesting statistic. Eight of those were done outside of the U.S. in private equity, infrastructure, real estate. So I think on balance we feel really good about that balance of activity. A couple of other thoughts just, if you look at deployment, some statistics that as we go through things, it’s always kind of interesting to reflect back. I think one, you’re seeing real diversification. So in 2022, traditional private equity deployment for us was $14 billion, real estate was $14 billion, infrastructure was $13 billion. So I think when you look back at this – it’s really a reflection of how the firm has meaningfully grown and diversified by strategy and by geography. Kind of brings us to the second point which is some of the growth you’ve seen. So in real assets, as an example is our infra and real estate footprint has grown, you’ve seen deployment grow meaningfully. Rob gave some of the statistics earlier on AUM growth in these businesses, but real assets deployment in 2018 through 2020 averaged a little over $4 billion a year be equally split between infra and real estate. Last year, that was $28 billion. So again, we’ve gone from $4 billion to $28 billion, again pretty equally split between those two businesses for us. And the third point, and I think this is not as well understood, but it’s interesting when you look at private equity deployment for us, as I think there’s a – again, I think we look at – we feel good about when we deployed where we leaned in. Let me give you a couple of statistics there. So I think in 2020 during COVID, I think everyone remember, we leaned in. So our deployment was around 33% higher in 2020 versus 2019. I think we are more active than our peers. I think people remember that. In 2021, it almost felt like the industry felt the need to play catch-up and industry deployment was up materially. So in the U.S., PE investment activity in 2021 was more than double 2020. I think that’s what many people remember and in some ways, fear. For us, deployment was flat. So again, you didn’t see any kind of an acceleration into that really throughout the environment. And then in 2022, again a year with a lot of volatility and challenge debt markets as you noted, deployment for the industry was down over 20%, deployment for us and private equity was up 35%. So again, I think you’ve seen this really thoughtful dynamic over time of how we look to deploy and take advantage of dislocation. And then the final point just relates to credit. Again, that same scaling thought. So in 2019, total credit deployment was $10 billion. 2020, that deployment was $10.3 billion, and last year deployment for us was $25 billion. So as the credit business has grown, as GA has come online, you’ve seen a meaningful increase in that deployment. So again, long-winded answer, but hopefully that gives a little bit of flavor for the activities you saw last year. Yes. The only color I’d add to that, Mike, is if you take the numbers apart you’re right, deployment was relatively flat in the low $70 billion in 2022 versus 2021. But if you look at the makeup, there’s a bit of a shift. Credit was actually down year-over-year. Part of that is overall transaction activity in the market, part of it is we had a lot of work on the GA front to do in 2021, in particular. But if you look at private markets, I think private equity, infrastructure and real estate our deployment was actually up 20%. So we were leaning in to Craig’s point into kind of what was happening with the markets last year after maybe being a little bit more cautious in late 2021 in a high valuation environment. Good morning. If I could just follow up quickly on the last question. Could you talk about a bit about the outlook a bit more on deployments? Are you seeing financing conditions improve in private equity? Is the bidder spread starting to narrow a lot of the participants in the industry are talking about that as an issue? Is that improving? And equally, if you could comment a bit more on infra. I mean that’s obviously been a very active area of the market. How are you seeing the pipeline of opportunities for deploying there? Yes. Thanks for the question. I think on deployment, I looked at the debt markets haven’t fully healed, but despite that, we’ve continued to find ways to deploy capital. I do think the capital markets business actually gives us a real leg up in helping to put together the debt side of a cap structure. Where we’re interested now would include those areas where we think we can really bring our operational resources to bear and move the needle. Again, we love carve-outs. We’ve been very active public to privates. I think by strategy, you actually hit on probably the single busiest area in our firm, and that’s infrastructure. And I think infrastructure has just continued to be a real success story and a real growth story for us. I think it’s – when we look back at our April 2021 Investor Day, we gave a bunch of statistics there of actually where we thought Infra would be over the course of 2022. Just to give you a sense, at that point Infra-AUM was $17 billion. We estimated at that Investor Day that Infra-AUM would exceed $30 billion and as of year-end we’re at $51 billion against that $30 billion estimate all organic. We look for management fees effectively to double from that $150 million to $275 million to $300 million was our estimate for 2022. And for the full year, infra management fees came in at $340 million, so nicely ahead of the top end of that range. And we’ve got $9 billion of infra for capital that will become fee-paying as it’s invested at a weighted average fee rate of about 120 basis points. So not only will we build the high end, but we’ve got lots of visibility towards future management fee growth. And I think as we look at opportunities for us, that opportunity for continued growth and innovation hasn’t stopped. So again, we think it’s an asset class that can lend itself nicely to the democratized marketplace. And we think the renewable space is again an area where our presence can increase. So I appreciate you’re asking about, but it’s been a real bright spot for us. Yes. The only color I’d add, Arnaud, is that our pipelines have been strong this year across asset classes. And I think to your question, it does take about a year for the public and private market valuations to start to align. We’re getting close to lapping that, and we’re starting to see that show up in the pipeline. Great. Good morning. Thanks very much. Just a follow-up question on Global Atlantic. I was just curious to get your thoughts around the outlook for inorganic growth for GA in the coming quarters. Any color on the pipeline that would be helpful. And would you consider raising or bringing on third-party investors to accelerate organic growth and M&A even further? Thank you. Yes. Thanks for the question, Rufus. You’ve hit on a spot of a lot of activity, actually. And our pipeline around the institutional side of our business at Global Atlantic as frankly is big as it’s been certainly since our ownership and probably since Jay’s founding. And so a lot of resources going into the institutional side of the business. And that’s both in the U.S., but that’s also global. I think there’s a real opportunity to leverage KKR’s franchise in Europe and Asia to help Global Atlantic grow in those parts of the world. So a lot of effort there. We do have today, as you talk about third-party close capital, we do have side car pool capital called IV Today [ph] that participates alongside some of our block reinsurance activity. It’s a big part of our go-forward strategy, and I would certainly look to continue to be able to add capacity to the IV strategy to help support Global Atlantic and its growth in the future. Good morning and thanks for taking the question. I wanted to ask about the core private equity business. And I think if I heard him correctly, I think Rob referenced that it’s $600 million of EBITDA which is about 15% of your pretax earnings, but only 1% of DE. And I guess I’m wondering when and how – what is your philosophy or outlook on when and how the EBITDA starts converting into DE. I mean, do we have to wait 15 or 20 years until these investments are mature and ready to be monetized? Are these companies in a position where they can start throwing off steady dividends? Or do the cash flows have to be reinvested to keep the growth going? Or are there dividend recaps down the line? Or what is the, I guess, the strategy for converting the EBITDA into DE for KKR shareholders? Really appreciate the question, Chris. Let me start. Really, what we want to do first is highlight to you and all of our shareholders the fact that we think there is a fantastic portfolio that we’re building in core that is generating a significant amount of underlying value creation. And you’re right, it’s not yet showing up in our distributable earnings. Part of that – the reason for that is because we report DE, which as you know, is a cash metric. These investments by their very nature amend for a very long period of time. So it shows up in our marked book value per share, but not in DE. And you’re right, we would need to sell them or we would need to pay dividends or do some kind of a dividend recap for actually needed to show up in DE. But even that, I think would understate the quality of the underlying earnings because these businesses are designed to have recurring revenue and recurring bottom line. And so part of what we’re doing now is just sharing with you that we’ve got a little bit of that disconnect that we’re building this portfolio that we feel great about. As the largest shareholder, and we think it will show up in some parts of the financial statements but not others today. Some of these businesses will start to pay dividends in the near term. So we’ll share that with you as we go along. But one of the things that we’ve been discussing is how over time, can we make it even more clear the value that’s being created in that part of our strategy and what are the ways to do that. And just 1 example, Global Atlantic, as you know, we consolidate our share of GA’s earnings, which is a long-term compounding investment that has a lot of other strategic benefits to it but not dissimilar to some of the things that we’re doing with the core portfolio in terms of the underlying. It’s just GA shows up in earnings and core today doesn’t at least yet. So part of what we want to do is create a dialogue with you and our shareholders so you know what we’re seeing. And then over time, we’ll discuss how can we actually remedy that, but it’s a good problem, not a bad problem. We have reached the end of the question-and-answer session. I’d like to turn the call back to Craig Larson for closing comments. Rob, thanks for your help this morning, and thank you all for your continued interest in KKR, and we look forward to giving you further updates on our progress in the quarters ahead. Thanks again, everybody.

EarningCall_442

Thank you, operator. Welcome, everyone, and thank you for joining us to review Kennametal's second quarter fiscal 2023 results. Yesterday evening, we issued our earnings press release and posted our presentation slides on our website. We will be referring to that slide deck throughout today's call. I'm Kelly Boyer, Vice President of Investor Relations. Joining me on the call today are Chris Rossi, President and Chief Executive Officer; and Pat Watson, Vice President and Chief Financial Officer. After Chris and Pat's prepared remarks, we will open the line for questions. At this time, I would like to direct your attention to our forward-looking disclosure statement. Today's discussion contains comments that constitute forward-looking statements, and as such, involve a number of assumptions, risks and uncertainties that could cause the company's actual results, performance or achievements to differ materially from those expressed in or implied by such statements. These risk factors and uncertainties are detailed in Kennametal's SEC filings. In addition, we will be discussing non-GAAP financial measures on the call today. Reconciliations to GAAP financial measures that we believe are most directly comparable can be found at the back of the slide deck and on our Form 8-K on our website. Thanks, Kelly. Good morning, and thank you for joining us. I'll start the call today with a review of the quarter and some recent strategic wins as well as an example of the game-changing innovation we are bringing to our customers. Pat will then go over the quarterly financial results and the outlook. And finally, I'll make some summary comments before opening the call for questions. Beginning on Slide 2 of the presentation, we posted strong year-over-year organic sales growth in the quarter and continued the successful execution of our strategic initiatives despite ongoing macroeconomic headwinds, such as high inflation, foreign exchange and COVID-related disruptions in China. Sales increased double digits year-over-year at 11% organically, offset by negative foreign exchange of 8% and business days of 1%. As expected, price continues to be a significant part of the sales increase. On a constant currency basis, all regions and end markets grew year-over-year, the Americas and EMEA both posted double-digit growth. It's worth noting that the EMEA growth rate includes the negative effect of approximately 300 basis points due to our exit from Russia in Q3 of last year. The growth rate in Asia Pacific was 2% in the quarter and was negatively affected by approximately 550 basis points from COVID disruptions in China. The growth rates, however, in all other Asia Pacific countries remained strong. By end market, aerospace, transportation and earthworks, all reported double-digit growth, while energy and general engineering grew mid- to high-single digits. So overall, our end markets continued to demonstrate resiliency despite the unpredictable macroeconomic environment, and we expect this to continue through fiscal year '23. Of course, we recognize there are still risks in the global economy. However, as I said last quarter, we believe we are well positioned in all our end markets despite short-term uncertainties and challenges. Our strength in aerospace was evident again this quarter, and we expect to continue to take share as aircraft build rates improve. It was nice to see transportation at double digits this quarter, and we believe the end market will strengthen as supply chain disruptions continue to improve. We already have a strong position in traditional transportation and will benefit from the leadership position we are establishing and tooling for hybrid and electric vehicles. Earthworks continues to benefit from the immediate demand for coal. We also see it benefiting from the conversion to green energy and from increased government spending on infrastructure projects, including trenching for Internet and electric grid expansion and for road and bridge rehabilitation and construction. We expect general engineering to remain steady despite some moderation in industrial production as we reach new customers with our fit-for-purpose tooling portfolio and with the significantly improved functionality of our digital customer experience platform. And finally, in energy, while the growth trajectory slowed slightly this quarter as our customers managed inventory levels for their fiscal year-end, we are optimistic that a long-term growth trend is underway based on customer feedback. Our products and solutions serve both renewables and traditional energy markets, which positions us well to benefit from increased demand in both. So while there are still some uncertainties in the current macro environment, we are working to ensure that we perform well in all scenarios. And right now, we feel quite good about the underlying long-term growth drivers in our end markets and believe we are well positioned in each. Turning now to profitability in the quarter. As I mentioned earlier, price was a significant portion of the year-over-year sales increase and the pricing actions taken in both business segments substantially covered all forms of inflation on a dollar basis. Metal cuttings volume came through at the expected operating leverage. The effect on this leverage, however, was masked by the FX headwind and operating margins remained flat year-over-year. Pat will go into more detail on metal cutting margins in his section. The Infrastructure segment, as expected, accounts for the decline in company operating margin year-over-year. The principal driver of the decline was our intentional action to extend the planned shutdowns of our powder production operations in December, and we carried those extensions over into January. Remember, these powder operations provide the raw material feedstock for many of our plants. So it was essential following the pandemic to carry sufficient safety stock to cover the extended and uncertain supply of raw materials and other inputs to production. The good news is that delivery lead times and reliability of supply are improving such that we are comfortable taking action to reduce safety stocks. This action drove a large absorption variance year-over-year, as during Q2 of last year, we were building safety stocks. We expect the effect of under-absorption to abate in Q3 and infrastructure margins to significantly improve by year-end, and Pat will go into more detail on the infrastructure margins in his section. Operating expense as a percentage of sales decreased to 21.3% this quarter. Customers continue to ease COVID restrictions for supplier partner visits. And this is good news for our commercial and engineering teams as it affords them the opportunity to demonstrate our latest product innovations across our entire brand portfolio. While obviously, an increased expense year-over-year, we see these costs as an investment in growth and gaining share. And I'll discuss on a later slide some examples of the returns we're getting on this investment. Adjusted EPS declined to $0.27 compared to $0.35 in the prior year quarter with the decline largely driven by the factors I discussed and a favorable tax rate. Free cash flow this quarter increased significantly to $44 million from $22 million in the prior year quarter despite a year-over-year increase in primary working capital, driven mainly by higher raw material costs and safety stock. And finally, we continue the share repurchase program this quarter with $11 million of shares bought back, bringing the total amount repurchased since the beginning of the program to $115 million. Our share repurchase program reflects the confidence we have in our ability to execute our strategic initiatives for long-term value creation despite quarterly macroeconomic headwinds and uncertainties. Now let's turn to Slide 3 for a summary of our growth road map. You've seen this slide before, so I'm not going to cover it in detail. However, at a summary level, I'd like to highlight that megatrends such as hybrid and electric vehicles, digitalization and ESG align well with our technical expertise and market exposure. In addition, we have a significant opportunity to increase share of wallet with existing customers and add new customers as we reach into underserved markets, geographies and application spaces. Now let's turn to Slide 4 to review some recent commercial wins that resulted from successful execution of our growth road map. On this slide, we show a great win with a global structural pipe manufacturer in the fit-for-purpose application space. We delivered a solution that increased the customer's tool life by up to 5x. And by outperforming in this application, we secured additional WIDIA business in a new facility. We also had a major win with a manufacturer that produces parts for aerospace, power generation, petrochemical and general engineering. We secured this win by delivering a 50% benefit to the customer, and we expect to secure a large share of this customer's business in the future. A great example of our ability to secure and sustain business is the renewal of our sole-source supplier status for corrosion-resistant mixer paddles with a large U.S.-based global chemical company. In the food packaging materials industry, we furthered our leading market position with a win at a leader in flexible food packaging. We won the business by outperforming the entrenched competitor, reducing the customer's defects by 10% and energy consumption by 8%. And finally, we furthered our leadership position in the rapidly growing hybrid electric vehicle space. We secured preferred tooling supplier status with a U.S.-based leading global auto manufacturer by partnering with the customer on the manufacturing of an aluminum transactional battery housing platform, and we expect this win will position us for further growth in this fast-growing application space. These are just some examples of wins that demonstrate our ability to gain a larger share of existing customers' business as well as our new customers. Now on Slide 5, I'd like to highlight an example of a game-changing innovation we're bringing to our hybrid electric vehicle customers. This slide shows our tooling solution for a typical housing used on hybrid electric vehicles. In this case, the customer is looking for a solution with exceptional productivity that can hold tight tolerances and be used on existing and standard machine tools to minimize capital investment. Each tool uses several Kennametal proprietary consumable inserts and achieves the lightweight and rigidity needed to machine the housing in a single pass by leveraging our proprietary additive manufacturing techniques. The net result for the customer is a 50% improvement in productivity and a 45% reduction in tool weight, which enables the part to run on a standard machine tool and yield a 40% reduction in energy usage. It's these types of examples that give us confidence that the investments we are making in commercial excellence and innovation are paying off. Thank you, Chris, and good morning, everyone. I will begin on Slide 6 with a review of the second quarter operating results. Before I begin, please note that like last quarter, we did not record any non-GAAP adjustments this quarter. Therefore, adjusted numbers are not presented for the current quarter and for today's discussion, year-over-year comparisons will be against the prior year's adjusted results. The quarter's results show that we continue to execute our initiatives in the face of significant headwinds from inflation, foreign exchange and the effects of COVID in China. Sales increased by 2% year-over-year with 11% organic growth, offset by headwinds due to foreign currency and workdays of 8% and 1%, respectively. As Chris pointed out, price remains a large portion of the sales numbers. On a sequential basis from Q1, sales were approximately in line with our normal Q1 to Q2 seasonal pattern of 1% to 2%. Operating expense as a percentage of sales decreased 60 basis points year-over-year to 21.3%. EBITDA and operating margins were 13.7% and 7.1%, respectively, versus 16.2% and 9.2% in the prior year quarter. The year-over-year decrease in operating margin was mainly due to the following factors: First, as discussed last quarter, we were aggressively raising prices in the prior year ahead of experiencing the full effect of higher tungsten prices. In Q2, for the Infrastructure segment, however, the favorability of price over material cost is now negligible as raw material costs reflecting the current market cost is flowing through the P&L. We expect raw material costs to be relatively steady for the balance of the fiscal year. Versus total cost inflation, overall higher pricing substantially offset higher raw material costs, wage and general inflation in the quarter. Further, there was a higher-than-anticipated mandated inflation bonus in Germany for all workers in the metal and electrical industries of approximately $2 million, which primarily affected the metal cutting segment. As Chris mentioned, we decided to extend the planned shutdowns of our powder production operations in December. Since our powder operations provide raw material feedstock for many of our plants, it has been essential to carry sufficient safety stock to cover the extended and uncertain supply of materials and other inputs to production post pandemic. As the reliability of these supply chains has improved, it has enabled us to more aggressively manage our safety stocks in the quarter, resulting in approximately $5 million of unfavorable absorption in the Infrastructure segment. As an added benefit, our decision to extend planned shutdowns helped us minimize the financial effect of the temporary supply chain challenges we faced last quarter, including those from the force majeure, which remains in effect at a key supplier. We expect this under-absorption to abate by the fourth quarter. Lastly, foreign exchange headwinds from the strong U.S. dollar were $6 million. The effective tax rate decreased year-over-year to 17.8%, primarily due to a final Swiss tax reform ruling this quarter and regional mix. The full-year effective tax rate is still expected to be in the mid-20s. Earnings per share were $0.27 in the quarter versus adjusted EPS of $0.35 in the prior year period. The main drivers of our EPS performance are highlighted on the bridge on Slide 7. The year-over-year effect of operations this quarter was negative $0.03 due to the factors that I just discussed. You can also clearly see the effects of the tax rate, foreign exchange and the reduction in pension income on EPS with taxes contributing positive $0.04 in currency and reduced pension income contributing negative $0.05 and $0.03, respectively. Please note that our U.S. pension plan remains overfunded and the change in pension income is noncash and is driven by market factors. This change in assumptions is affecting each quarter this fiscal year. Foreign exchange is expected to remain a year-over-year headwind throughout this fiscal year, although based on recent spot rates, the year-over-year headwind is expected to decline each quarter. Slides 8 and 9 detail the performance of our segments this quarter. Reported metal cutting sales were flat compared to the second quarter of fiscal '22 with a strong 11% organic growth, offset by a foreign currency headwind of 10% and business days of 1%. We achieved growth in all regions and end markets on a constant currency basis. By region, the Americas led at 12%, followed by EMEA at 9% and Asia Pacific at 2%. EMEA's year-over-year growth this quarter was particularly impressive when you consider that it was negatively affected by approximately 380 basis points from our decision to exit Russia in the third quarter last year. Asia Pacific's growth, as Chris noted, was negatively affected by COVID in China. We achieved strong growth in other countries in Asia Pacific. Looking at sales by end market, aerospace led again with strong growth at 19% year-over-year as we continue to win new business. Transportation grew 13% year-over-year, benefiting from improving customer supply chains and hybrid EV business in EMEA. General engineering grew 6% year-over-year. Energy sales this quarter were relatively flat as customers focused on inventory at their fiscal year-end. Adjusted operating margin remained constant at 8.8% on flat sales despite a 120 basis point headwind from the strong U.S. dollar. Pricing and productivity offset cost increases such that margins were held constant despite the higher-than-anticipated wage inflation from the required inflationary bonus in Germany. Operating income in the quarter also includes an expense from the decision to scrap certain assets this quarter that was mostly offset by a gain on the sale of property. Turning to Slide 9 for infrastructure. Organic sales increased by 12% year-over-year, offset by foreign exchange headwinds of 6% and business days of 1%. All regions grew year-over-year with EMEA leading at 23%, followed by Americas at 11% and Asia Pacific at 2%. We achieved double-digit sales growth in all end markets, with energy and earthworks growing 11% and general engineering at 10%. The strength in energy was driven mainly by improvement in the U.S. oil and gas market as seen in the continued increase in the U.S. land-only rig count. As Chris mentioned, despite the strength, we did see some customers managing inventory levels heading into their fiscal year-end. But based on customer feedback, we are optimistic that a long-term positive growth trend is underway. Earthworks was strong in all regions driven by underground mining. In general engineering was driven mainly by strength in EMEA were components. Operating margin declined year-over-year to 5.1%, primarily due to 2 factors. First, as discussed earlier in the call, the favorability of price over material costs we have been experiencing is negligible as raw material costs reflecting the current market costs are now flowing through the P&L. Again, we expect raw material costs to be relatively steady for the balance of the fiscal year. The second significant factor affecting the margin this quarter was the previously discussed under-absorption from actively managing safety stock levels as supply chain reliability improves. We expect under-absorption to improve through the second half, such that the operating margin will return to the Q1 fiscal '23 level by Q4. Now turning to Slide 10 to review our free operating cash flow and balance sheet. Our second quarter free operating cash flow increased to $44 million from $22 million in the prior year quarter despite an increase in our primary working capital. On a dollar basis, year-over-year primary working capital increased to $690 million, reflecting mainly higher raw material costs and year-over-year higher safety stock associated with extended supply chains. On a percentage of sales basis, primary working capital increased to 32.3%. We expect inventory levels to decrease in the second half as we manage inventory levels down now that our supply chain is beginning to improve. Net capital expenditures were $19 million, approximately the same as the prior year. In total, we returned $27 million to shareholders through our share repurchase and dividend programs. We repurchased $11 million of shares in Q2 for a total of $115 million or 4 million shares, representing approximately 5% of outstanding shares since the inception of the program. And as we have every quarter since becoming a public company over 50 years ago, we paid a dividend to our shareholders. Our commitment to returning cash to shareholders reflects confidence in our ability to execute our strategy to drive growth and margin improvement. We continue to maintain a healthy balance sheet and debt maturity profile. At quarter end, we had combined cash and revolver availability of approximately $700 million, and we're well within our financial covenants. The full balance sheet can be found on Slide 16 in the appendix. Now let's turn to Slides 11 and 12 to review the outlook. Starting with the outlook for the third quarter. We expect sales to be between USD520 million to USD540 million, which on a sequential basis and after considering the effect of a slightly weaker U.S. dollar is in line with our normal seasonality of 3% to 4% increase. On a year-over-year basis, the sales range assumes a $20 million currency headwind and pricing actions of approximately 7%. Our forecast for sales assumes that underlying demand strength in all of our end markets continues. Regionally, in Q3, we have assumed that the COVID-related disruptions in China begin to improve. And like the second quarter that the European manufacturing economy remains relatively unaffected by energy. We believe customers will continue to remain cautious in this environment and do not expect meaningful restocking or destocking at this time. Adjusted operating income is expected to be a minimum of $40 million, which reflects continuing inflation headwinds against our strong pricing actions and continued under-absorption in infrastructure due to extending the powder production shutdowns into January. Sequentially, from the second quarter, raw material costs are expected to be flat, but year-over headwinds remain at approximately $23 million. Pricing actions continue as we work to cover not only this raw material cost headwind, but also higher wages and general inflation. Lastly, lower year-over-year pension income continues in Q3. Turning to Slide 12 regarding the full year. We expect fiscal '23 sales to be between USD2.05 billion and USD2.1 billion, with volume flat to up 2%, price realization of approximately 7% and a headwind from foreign exchange of approximately $100 million. This sales outlook assumes that demand in China improves throughout the second half as the COVID effect abates and that there will be no significant energy disruptions in EMEA. On a full year basis, we expect to offset raw material, wage and general cost increases on a dollar basis. The $100 million foreign exchange sales headwind is expected to translate into approximately $20 million on an operating income basis. Lower pension income will be a headwind each quarter for a total of $14 million for the year. Depreciation and amortization is expected to be approximately $135 million, and our outlook for EPS remains unchanged at USD1.30 to USD1.70. On the cash side, the full year outlook for capital expenditures remains unchanged at USD100 million to USD120 million, and the outlook for primary working capital is unchanged at 31% to 33%. Taken together, we continue to expect free operating cash flow at approximately 100% of adjusted net income, in line with our long-term target. Thanks, Pat. Turning to Slide 13. Let me take a few minutes to summarize. Overall, we're pleased with the strong organic growth and free operating cash flow in the quarter. Although the operating environment remains challenging, we're encouraged by the continued resiliency of our end markets and the improvements that we are seeing in the supply of materials, which allows us to draw down safety stocks. And we look forward to margin improvement in the second half as we move past the inventory reduction actions we took in the quarter. Looking beyond fiscal year '23, we're encouraged by our strong market position. We're poised to benefit from the megatrends affecting our end markets and the opportunity we have to extract even greater operational efficiency from our modernization investments, and we're confident in our ability to continue to return cash to shareholders while investing in our strategic initiatives for growth and profitability improvement. Maybe just on the guidance here. Maybe start maybe big picture. The range that you guys have for the year is pretty broad, and I might have thought you might have narrowed that a little bit as we get into the second half. But maybe just talk about what your view is of sort of the book ends there. What has to go right to get to the top end and what would have to happen to get to the bottom end, just so we can think about how to level set there. Sure, Steve. I would say at the high end, what we would need is a very strong recovery in China. We're expecting some kind of recovery more at our midpoint. So we'd have to have a stronger recovery in China. And we'd also have to sort of be operating at kind of the high end of our normal sequentials. And then, of course, we sort of need FX to stay about where it is. I'd say on the low end, it's one of our risk areas, and we just don't know. There's a lot of uncertainty just given the sheer number of absenteeisms. And now with the Chinese New Year, even greater absenteeisms, it is possible that there could be a weaker China recovery. I don't think anybody knows for sure. We've tried to pick sort of a middle-of-the-road view of that, but it could certainly be weaker. And then we could also be just naturally at the low end of our sequentials. So that's how I would look at it. Okay. And maybe I think you talked about the interest margins getting back to kind of where we started by the fourth quarter. How should we think about metal cutting margins kind of sequentially? I think, Steve, when you think about metal cutting, coming off of Q2, moving into Q3, you're going to see some positive volume pickup there. currency should be a help quarter-over-quarter. And obviously, metal cutting has most of our foreign currency exposure. And also, we'll just see some stabilization in the cost structure. So overall, quarter-to-quarter, should be up slightly. This is on for Julian. I just wanted to ask on the guide for Q3 and the fiscal year. It looks like there's a step-up in terms of margins in Q4 versus Q3. And I get there's a step-up with infrastructure there. Are there any other swinging items that we should be aware of improving Q4 versus Q3? Yes. A couple of things to think about there. Number one, absolutely, the absorption will go away in terms of that drag in the fourth quarter. And then I would say, normally, when you think about infrastructure margins, Q3 to Q4, that's generally a better, more profitable mix quarter for us going into Q4. Got it. That's helpful. And then just one follow-up for me. I know you said price realization was a large portion of organic sales in the quarter. Do you have the breakdown of price versus volume in Q2, just so we can kind of see what's embedded for volume for the back half. So I wanted to understand the EBIT guidance for the quarter a little bit better. So sequentially, your sales are going up, call it, $30 million to $35 million-ish. But then for your EBIT, you're guiding to at least 40 and up. So can you sort of help me understand why EBIT would only go up by about $5 million? Like what's sort of the bridge from 2Q to 3Q for the EBIT guide? Yes. So if we work from Q2 to Q3, a couple of things to think about there. Number one is we will have an uptick in volume. We have some favorability in FX coming in from Q2 to Q3. You could think of that number probably in the $15 million range. Part of that will be, some additional price realization, of course, the cost structure will go up just a little bit as well. So those are your main bridging elements between Q2 to Q3. Got it. Okay. Okay. Understood. And then just following up on the previous question, does the low end of your guide for the year assume China seeing negative year-over-year? Or do you still expect growth in China but could be at a slower pace than what you are currently expecting? Yes. The low end of the guide from a China perspective would assume that China in the back half is down year-over-year. And if you think about the total growth number that where our guidance from a year from a volume perspective and for the quarter, that's a significant chunk of that low end in terms of what the negative is there for the negative to positive, too. Just can you help us understand, you made some comments about customer inventory adjustments at year-end. I think it was energy comment. I don't know if it was more broad-based with other verticals, but hoping you kind of flesh that out what you're kind of seeing there on the inventory adjustment. Yes. I think just sort of broadly, in general, we're not seeing much restocking or destocking. But what we talked about in our opening remarks was really related to oil and gas services company. And it's their fiscal year-end and they were, I think, managing their inventories down. They still believe and we talk to their leadership as part of our S&OP process. They still believe that the long-term trends are there, and they want us to continue to support them. But they did pull back on inventory a little bit, and since we are doing these planned shutdowns anyway, it gave us the opportunity to extend those and try to draw safety stocks down, which we were planning on doing anyway, but this gave us certainly impetus to do it in the quarter. And how do you feel about your inventory levels with distributors on the distribution side and at the company level today? Are you going to be producing in line with demand? Are you producing lower maybe than demand to try to draw down some of your own inventories? I'm just curious about how Kennametal feels currently with its own position there? Yes. I think from a customer inventory perspective, they've been distributors, in particular, I think they've been cautious to not get out over their skis. So that's why we don't think there's going to be a significant destocking or increase in stocking. For us, we believe we can largely based on our outlook produce in line with demand. And beyond that, normally in metal cutting, for example, we did carry a little bit more safety stock just because of supply chain disruptions. But that's the kind of thing that based on the current outlook, we feel we can bleed down, and we're not expecting to see a kind of a major absorption hit like we just did in infrastructure because we literally shut down processing plants. I want to start with volume growth guidance of basically flat for the year versus the 2Q recap, which says you're winning share of wallet with existing customers, securing new ones and driving share in underserved geographies. My question is, if all that's happening, but volume is flattish, does it mean other customers are rolling off? Or why isn't unit volume up more than 0% to 2% for the year? I think, Steve, just to talk about, again, some more on Russia and China. If we think about those 2 drags, those 2 drags alone for the full fiscal year are probably 200 basis points of growth based on where we think our current outlook is. So you kind of got to think about that because those 2 things are relatively idiosyncratic. Chris, you have anything to add? Yes. And I would also say that as I think Steve pointed out on the first question, we do have quite a large range there. There is a lot of uncertainty. And so we may be a little bit conservative on the low end of the sales range there. We do have moderating demand in the Americas and EMEA. So there could be some conservative at the low end, Steve, just to cover ourselves for things that we can't really control, and there is still some uncertainty around those things. Got it. So for the parts of the business where you are having success in new customers and wallet share, can you compare unit volume changes through direct sales versus distribution or digital if that's become more meaningful? I'm just trying to understand where you are growing units and what's happening there that's different versus other channels where there's less unit growth? Yes. I think the unit growth for sort of the direct sales force, these project bids, that continues to be strong, especially in transportation, EV and also aerospace, which is no surprise because that's where we have a targeted initiative to focus on there. And the distribution channels, that is driving some volume. We are seeing increase in volume there. So I think it's kind of coming from both, but there are 2 different animals. The project stuff is definitely a focused effort, mostly in transportation and aerospace. And then I think also even in the infrastructure business, we've been in business a long time as Kennametal, but there's still many regions and even customers that have more of a global presence that we have a good share of in the U.S. But for example, oilfield service customers, a lot of activity is happening now in Saudi Arabia, and we're leveraging our relationships with those oilfield service companies in the U.S. to start to gain traction to share in that part of the world. I guess if I can get a quick follow-up. I think part of your transformation process was scaling up the sales team for lack of a better word, maybe helping them understand areas to target or where you have it maximize the opportunity. Where are you in that process? Yes. I think that was definitely part of the simplification effort. And so for example, we've done a much deeper dive in segmentation of, let's say, general engineering. And what we found is that over half of that business is small machine shops, companies with less than 50 to 75 people. And we weren't necessarily reaching those folks, Steve, with distribution and certainly not direct sales. But that was the impetus to start to make our investments in our digital customer platform. And we're still improving that platform, and we've done a lot of investment over the last few years, and we're starting to see the fruits of that. I think also, we've done a lot of sales training and a lot of detailed strategic marketing analysis on where to target growth and to focus those resources where we got the best opportunity for profitable growth. And as I always tell my presidents of both metal cutting and infrastructure, the sales force is an investment just because it's an expense each quarter, we look at it like a capital investment, and it needs to generate a proper return. So that's the way we're running that business. And so I think in terms of our journey, I'm now in my sixth year here. I think if I could use a baseball analogy, we're in the sort of late innings in terms of that. And I look forward to that sort of revved up sales organization and processes generating more growth in the future. All right. So just following up on Steve's question. Chris, you talked a lot about share gains and definitely gave nice detailed examples. I guess what do these wins mean for Kennametal's top line and margin potential longer term? I mean maybe I can't wrap it around my head. But I mean, I guess, how has your addressable market expanded since embarking on your modernization journey and these kind of commercial excellent initiatives? Any color there would be helpful. Yes. I think we're very cautious about taking business just for the sake of growth. And I think there was a little bit of that in the old Kennametal, where, for example, in transportation, we were picking up share, but I remember when I came into the company, I'm not sure that some of that business we were making much money at. So we're very careful about the business that we are taking that's got the right profitability. Just to comment on some of these EV projects, customers are not in full production yet. So a lot of these projects are the initial sort of setup and prove out. So they'll generate more revenue maybe a year from now as they start to ramp up their production lines. And then certainly, they generate a consumable tooling spend after that. So aerospace is a little more immediate effect. As we win more share and greater machining percentage on these large projects, it means that as the Boeings of the world and Airbuses ramp up their production and their supply chain constraints start to abate, we look forward to more growth coming from those opportunities. So it's like we're kind of setting the stage with some of these major wins. And then as the customers' volumes pick up, that's going to certainly be a benefit for us. Thanks, operator, and thanks, everyone, for joining us on the call today. I think this quarter is another data point that demonstrates our ability to advance the strategic initiatives and definitely position ourselves for future growth and secure that market-leading position. And I am confident in the full year outlook. There still is uncertainty out there. But as we talked about on the phone, I think we've got the proper ranges out there, and we feel good that we're going to be able to execute to that outlook. So with that, if you have any questions, please follow up with Kelly, and have a great day. A replay of this event will be available approximately one after its conclusion. To access the replay, you may dial toll-free within the United States 877-344-7529. Outside of the United States, you may dial 412-317-0088. You will be prompted to enter the conference ID 35-666-70, then the pound or hash symbol. You will be asked to record your name and company. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

EarningCall_443

Good morning, everyone. And also we’re waiting for the attendee list to fill up, and I just want to say a brief welcome this morning at 8 o’clock on February 9th, the good year 2023, where you will listen to our presentation of the Year-End Report for 2022. So you will all be in listen and view mode only. When we wrap up the presentation, we’ll go into Q&A. You can either ask the Q&As by raising your hand and ask them verbally or you can type in the question in the Q&A box and we will answer those as well. Thank you, Stefan. Welcome, everyone to G5 Radio and it’s our fourth quarter call and the full year 2022 results call. So my name is Vlad Suglobov, I’m the CEO of the company. This is Stefan Wikstrand, our CFO. And we will take about 15 minutes to run through the presentation of the results, and then we’ll open the line for questions. And I will start by giving you some of the highlights for this morning’s report. Revenue was SEK 364 million, which is 12% more than last year in Swedish kroner, but 7% less in USD terms. This puts our top line performance in line with the overall Mobile Gaming market, which was most likely flat in the fourth quarter, and declined by single-digit percentage for the year. G5 internally made owned games stood for 71% of revenue compared to 67% in the same period last year, Sherlock continues to be our revenue highlight. It is up by a strong 61% year-over-year in USD terms, and it continues to grow. Our New Generation games, the ones released in 2019 and later generated SEK 216 million and stood for 59% of revenue compared to only 52% last year. So Sherlock has been gaining in the share of the Group’s total revenue since it has been released. As you can see in the chart on the right. The game now stands for 23% of total net revenue in the quarter. And the year ago, it was only 14%. And Jewels family of games continues to be a stable performer and stood for 30% of the Group’s total net revenue in the quarter. The gross margin was strong 67% and this was driven by more revenue generated by owned games and higher share of net revenue coming from our own distribution platform, which is called G5 Store and G5 Store revenue was up 30% quarter-on-quarter, this is quarter-on-quarter Q3 to Q4. We are proud to see G5 Store for the first time generating higher net revenue than Amazon Appstore in December. This is of course for us, for G5, not overall. Also for us, for G5, the G5 Store brought in more than 30% of net revenue generated by Google Play in the same month. So we are talking about a substantial distribution channel for G5. Year-over-year G5 Store grew over 120% in SEK and measured in USD growth was 82%, very strong performance. And then in January, the growth of G5 Store accelerated to over 100% in USD terms. We are obviously quite excited about this performance. And I’m going to talk more about G5 Store on the next slide. Among other things, UA spend in the quarter was 19% of revenue. So we are again back to 17% to 22% range that we’ve communicated for user acquisition, reinvestment as percentage of revenue. Increased R&D was driven by a lower capitalization due to the new development funnel and process we adopted in the third quarter and increased the amortization. During the quarter, we chose to spend some of our positive cash flow to repurchase 106,000 shares for almost SEK 20 million. And the average price was about SEK 188 per share. All in all, we continue to have a strong position. We remain profitable and cash flow positive and we are debt free and we also have a strong cash balance. And the recognition of the strong performance of the company, the board recommends the dividends of SEK 8 per share, which is 14% higher than SEK 7 last year. And moving on to the next slide, we’re going to talk more about the G5 Store, which is our game distribution store that’s available to players on Windows, Mac and Android devices as of now. All our games are available in G5 Store and players can download directly and make direct purchases. As a result, the cost of revenue in G5 Store is only payment processing fees in low single-digits as opposed to you know large stores, which take up to 30% in-store fees. We launched the G5 Store in 2020 as you can see in the chart on the right that’s been growing ever since. We’re glad to see G5 Store growing consistently over the last year, and then reaching much higher revenue levels than before. And our levels that are now comparable to net revenue that we derive from major distribution stores. And we’re especially excited about this acceleration and growth that we’ve seen towards the end of the year. So, as you can see you know, in January, we have reached a new all-time high for the G5 Store revenue and that particular month growth year-over-year was more than 100% as I mentioned previously. So G5 Store is an evolving project with a roadmap of improvements designed to reduce friction and the process of downloading, playing and paying in new games. And this project is by no means technically perfect or finished. For example, it was only in August 2022 that we released G5 Launcher, which is a wraparound any game that you download from G5 Store. And it contains the full catalog of G5 Games shows you which ones you already play and which ones you haven’t tried yet, and it makes it very easy to download and install new games compared to before. We are still quite early in the development of G5 Store. For example, we still don’t have local currency pricing, we still don’t have some payment methods available to users. We want to make it more convenient to buy crystals outside of games. We want to provide better integration with G5 France further optimized processing fees, develop G5 Launcher for Mac, make it easier to transfer progress from mobile and so on so the list is really long. So despite all these things still lagging in G5 Store, we are seeing continued strong dynamic at high revenue levels. And we are excited to see how big G5 Store can grow in 2023 and where it takes our gross margin, because again, it’s single-digit payment processing fees as opposed to double-digit store fees. So with that, let’s turn to full year figures. For the full year 2022, all in all, our revenue was stable and we consider it a great result given economic conditions and the obstacles we have encountered. We are happy that our New Generation games are growing at a faster rate than the whole company. This is once again a confirmation that our eternal studios are capable of producing successful and scalable games that perform better than the market and that our bet on our own internal studios was right. We’re also glad to see G5 Store growing consistently over the year reaching much higher levels than before as was already mentioned, and increased revenue from our own games and our own platforms drove the gross margin higher by 5 percentage points for the full year. So we see continuation of the trends from previous year and that – years and in that regard and continued expansion of gross margin. Profitability, the bottom line overall was negatively impacted by several factors during the year. Of course, the war in Ukraine was the largest issue having the largest impact on Q1 profitability, but also starting ongoing relocations which continued through the end of the year. In Q2 and Q3, our planned user acquisition boost on Sherlock weighed on earnings. In Q3, we have made changes to the development formula and process aiming to improve efficiency and probabilities of finding scalable games. This triggered a write-down of SEK 73 million in the quarter as we have made changes to how we capitalize the development expenses on new games. And this has also affected Q4 as changes in the capitalization ratio impact at the quarter was SEK 22.3 million. So as you can see in the table on the right, if we adjust for these factors and changes that we had during the year, our operating result would have increased by 15% year-over-year. That said, we ended the year in the best position we have ever been, I think with a strong balance sheet and strong cash flow, which is enough to fund our marketing and development efforts, while also increasing the dividend for the year, which the board is recommending. With that, let’s have a closer look at the revenue in the quarter. Again, it was a stable revenue development in a difficult market, SEK 364 million, it was up 12% year-over-year. If you look at the underlying USD dynamic, you can see that I think in Q2, we were minus 13%, Q3, we were minus 10%. So Q4 is minus 7%. So there’s some sort of improvement there. Our owned games stood for over 71% of revenue, that’s up from 67% a year ago. So the expansion of the percentage of our revenue generated by owned games continues to happen. Our main growth driver continues to be our New Generation games, which is now the biggest segment of the portfolio at 59% of revenue, up from 52% last year, Sherlock was responsible for 23% of revenue and was up 61% year-over-year. In the fourth quarter, the share of revenue generated by owned games as you can see on the chart was affected by a welcome rebound and stabilization on a higher levels of Hidden City, our largest contributor to licensed games. And finally, monthly average gross revenue per paying user was a stable USD 61.7, despite FX pressure on USD numbers, my guess would be that in constant exchange rates, it likely grew year-over-year. So let’s take a closer look at earnings and margins. In the quarter, we are maintaining a strong gross margin. Again, thanks to our continued positive development of our own games and our own distribution platform G5 Store. For the quarter, gross margin reached 67%. It is down a little from the all-time high in the third quarter because of the mentioned rebound and revenue of Hidden City which is a licensed game. EBIT was SEK 47 million, the EBIT margin was 13.1% and the user acquisition spend was back to normal 19% of revenue. And with that, let’s have a closer look at our cash position. So we continue to generate cash. Thanks to stable cash conversion and despite the write backs of almost SEK 20 million in the fourth quarter, cash at the end of the period was SEK 177 million, that’s more than last year. And yeah, let’s move on to the brief outlook. I think we’ve covered pretty much everything. So we entered 2023 with stable revenue generation, and we expect our New Generation games to continue to grow as a percentage of revenue, with an increased strategic focus on the new development process, we aim to soft launch five to six games per year, and then globally launch one or two of these, choosing the ones that can be released globally and scale. The goal of the new process that we have adopted in Q3 is to improve new game development, efficiency and probabilities of developing successful games. And for user acquisition in 2023, we intend to spend between 17% and 22% of revenue, so we’re back to the normal range for us. The increasing revenue from G5 Store should further boost our gross margin and help improve profitability. And in recognition of the strong performance of the Group, the Board is proposing to raise the dividend to SEK 8 per share, which is up 14% from SEK 7 last year. The total expense is equal to approximately SEK 65.4 million, which is 10% higher than SEK 59.1 million last year. And we only need to spend 10% more to raise the dividend by 14%. Thanks to the buybacks we have done over the last year. We expect to remain profitable cash flow positive, with zero debt, maintaining a strong balance sheet and cash position in 2023. All in all, in the year we strive to deliver stable performance in line with the new normal that we see beginning in the fourth quarter, after the big events of the first three quarters of 2022. I would like to say – we’d like to end the presentation by saying that I’m very proud of the strong accomplishments of the whole G5 team and would like to thank our international teams for their outstanding effort, truly outstanding effort in 2022. This concludes my presentation. And I’d like to open the call for questions. So I see that we already have some questions in the Q&A box. Let’s see if we have some – we have Simon Jonsson here that wants to ask the question. Simon – Good morning. So, you reiterated your guidance for the UA spending as a percentage of sales. But short-term, do you see any opportunities to be more aggressive here in Q1, for example, on the UA side? I don’t think we want to exceed the range that we have communicated. We want – you know, we will be as always transparent when it comes to how much we want to spend and we plan on spending. So, if we decide to spend more than the indicated 17% to 22% range, we would let you know in advance like we did with the Sherlock boost in 2022. Within the boundary of 17% to 22%, the discretion is given to user acquisition team, basically to react to what they see in the market. And they have certain ability to be a bit more aggressive or a bit more defensive, depending on what exactly they are seeing. This adjustment is happening through the month and also at the end of the month. They review the opportunities and they discuss the budgets that makes sense to them for the next month. So, to be honest, I think we were quite normal and in that range for January and then February just started. So I’m not monitoring the UA numbers every day. So, that’s the best I can say is that we’re still within that range and quite close to what we delivered in Q4 as of the end of January. That’s the situation. All right, thank you. And also you commented that the trend has been good for Sherlock in Q4, and also Hidden City. I think you said it’s also continued or expected to continue in Q1 as well. So should we expect incrementally stronger sales from those two games you think here in Q1? It’s hard to say. So again, January performance is quite good. We see that Hidden City did rebound to higher levels in Q4, especially in December and it stays at this higher levels in January. But also this is quite normal for the seasonality in the previous periods. It’s just the magnitude of the rebound that positively surprised us. We’ll have to see you know what follows and what the revenue development is going to be for the game going forward. But certainly this rebound in Q4, Q1 raises our or you know alleviates our concerns about how fast the revenue is going to deteriorate going forward. And so, it improves the chances that it’s going to stabilize or at least you know we’ll fall slower than our worst expectations. And again, no one knows exactly how the game is going to perform going forward. We are analyzing its performance against the only comparable that we have are a couple of comparables that we have from previous big hits. We believe – I mean we hope that the game should be stabilizing around this level and maybe performing a little bit better than our previously well performing games due to the cross selling and the fact we have other big games where we can cross sell users from. So, again, it’s hard to say. I don’t have expectations that over the course of the year Hidden City will necessarily you know grow. My expectations is that, it’s going to decline. Question is how much it’s going to decline. And if it stabilizes or if it declines only marginally in the year, that would make me very happy. For Sherlock, I expect the game to continue growing. It did look like in Q4, it could have done better, I would not make long reaching conclusions based on just one quarter performance, you know there’s always an influence of specific event around the holidays, specific other things. So we’ll see what happens next. But we have good expectations for Sherlock for the next year, we expect it to continue growing. All right, sounds good. And also maybe a longer-term question here. With the G5 Store gaining traction, and also increasing the share of own games, where could the gross margin go in let’s say, three to five years, I think? Could it reach 75% something like that? Is that possible? It’s not impossible. The question is, you know, how high, how big the G5 Store gets, and where our royalties are going to be from licensed games. And that is a question of the revenue development from Hidden City. But also, it’s a question of whether or not we’re going to find some new successes with licensed games. And we’ve mentioned it in the report, where we have signed a new deal with the team of former Happy Star founding members, which developed Hidden City. You know, a success in licensed games can happen, which will change the math, but in the absence of it, I think we’ll continue seeing royalty decline. And, you know, I’d like to see G5 Store grow substantially from here, if it doubles or triples or quadruples, that would be totally fine with me. And even with the flat revenue development, it would mean that we’re going to keep a lot more money. So, by all means, I think gross margin can still expand by several percentage points over mid-term. All right. And the last one for me here around the OpEx, the strong ruble, et cetera impacting the salary cost. What is the current trend there? Can we expect lower impact from the high ruble coming quarters? And also, what is the current like one-time cost for relocating your staff is that also decreasing coming quarters? It does affect. It did affect Q2, Q3 and Q4, probably the highest was probably Q3 and Q4, it will still be a little bit of a drag in Q1, Q2 this year at least. That said, it’s a one-time cost that it’s not a very high amount of per employee, just when you’re relocating hundreds of people sort of adds up. But it’s a one-time thing. And then we try to keep our salaries more or less in line with what they were before during the relocation process, you know, including the tax load and everything. So we don’t expect this to be a big change in profitability, but more like some extra expenses that we have to go through while we are working on these relocations. And I forgot your first question. Can you remind me, please? Yeah so relocations obviously make us independent of whatever happens with rubles, with the ruble exchange rate, and so we are as I mentioned, we now have did I mention that we have 37% of our staff physically in EU, Montenegro, Kazakhstan, Georgia, Armenia. And that was almost a huge I mean, it was almost nothing one year ago, just a few people. So this is – makes us more dependent on Euro exchange rate or exchange rate or local currencies in these countries. But it reduces our dependence on ruble. But that said, ruble is also – has been trending lower. I think the effect on our bottom line from that is going to continue to get smaller and smaller. So I don’t really know if that is a significant thing to pay attention to going forward, at least unless there are big changes. But, it also seems to be stable and kind of fluctuating within a relatively narrow channel now compared to what we went through in Q1 and Q2. Good morning. Good morning. I just had a question on the fourth quarter compared to the third. Looking at your revenues, they are not following the normal seasonal pattern here with you know dollar revenues being down in the fourth quarter compared to the third. And also, it does seem as though that effect comes mainly from your own games. Why is that? I mean, I can think of a couple of reasons. But why do you think that is? I believe in USD terms, it was plus 1% quarter-to-quarter. So it wasn’t dramatically up. But it wasn’t down either. Yeah, well as I said, we don’t – we haven’t seen as much increase in activity from the players as we have anticipated. But at the same time, December was quite strong and January looks quite strong as well. So that is, you know, my guess is that, the market conditions and the financial conditions are weighing down somewhat on the activity of the players, and looking at the overall market performance and seeing that we are in line with the market. Or maybe, you know, yeah, I think in line is the right term to use here. I think that’s just the overall situation in the market, that maybe there weren’t as many new devices sold. And usually that spike of new activity that is connected to unwrapping and using a new device did not happen. Maybe you know, people are going back into the workforce, maybe they decided to save some money this year and not buy big new expensive devices that would be consistent to reports from computer manufacturers and device manufacturers like Apple, which sold not as many devices as they were hoping for, from what I understood. At the same time you know, looking at our sales figures, I feel that the demand is quite stable, maybe it has to do with the audience that we have, which tends to be older and more female, and then a lot of retired people. And so maybe they have a little bit more stable situation with their income and their available time compared to younger generations that have to go back to work and so forth. But all of this is a bit of a speculation. But again, given that the market for our games is going through a correction. And you know, looking at the reports from other companies, I don’t think we performed terribly well, I would even say it’s pretty good result in the absence of any, you know, big new breakthroughs or games that are growing really fast. And we’re just recently released in gaining revenue rather fast. I’m glad to see that the main trends are continuing, the percentage of phone games keeps going down, you know, Sherlock keeps growing year-over-year. And the G5 Store is just going through the really fast expansion period. So this is what we have. I think we should add as well that we also aligned with the change in the development funnel in Q3 we aligned that process for all the games, which meant that we put some games in harvest mode in line, but that changed that impact. If you look at New Generation games, which now is a very broad category of games, which is almost four years old. The oldest. And so there’s a lot of games in there, but you know, moving some of these games into harvest mode have impacted their performance both sequentially and year-over-year. So that impacts the number for the owned games, and specifically the New Generation of games as well. Yeah, I think we – that’s right and thank you for bringing that up, Stefan. If you look at the New Generation game performance, for example, we’ve – in Q3, we basically removed the support, the active support for and harvested as we call it, [sunsetted] [ph] two games called Match Town Makeover and Hawaii Match-3 Mania. And in the new process, we probably shouldn’t have taken so much time to work on these games, and they would get to this stage. And so in accordance with the new process, they were sunsetted and we stopped actively supporting them, and over the quarter, they went through quite a substantial revenue reduction because of that, because we didn’t see the potential for them to scale in the future. And if you take those games away from the New Generation category, then the New Generation growth year-over-year goes up to 15%. So we still have this core group of games that’s showing healthy growth year-over-year in USD terms. But it only shows us 6%, because we’ve knowingly and deliberately have basically terminated two of these games, which led to a rather sharp reduction quarter-to-quarter in the revenue. Then that is all. I think we don’t have anyone else raising their hands, so we can go into the Q&A box. Yes. So let’s go with the first one. So [Ross Davidson] [ph] is asking. New Generation games grew at the slowest pace, it seems at some time essentially flat with Q3. If I’m understanding correctly, can you talk through some of the underlying dynamics driving the slowdown and the thoughts for future growth rates for this group of games? We’ve just were discussing exactly this. And again, it’s plus 6% year-over-year, but if you take away those two games that we have decided to sunset in Q3, then it goes up to 15%. So, again, there is underlying number of games that performed really well. Sherlock, a group of games, Jewels off, and then the not well performing games from the New Generation games were harvested in q3 and that created a decline, because we removed user acquisition support for these games. That created a pronounced decline in Q3 to Q4. And but if you look underneath that, there’s still plus 15% year-over-year in USD quite strong dynamic for the core games, considering that they already are very large in terms of revenue. So as they grow, you can expect the growth rates to sort of decline and so double-digit growth in the market that’s basically correcting down anywhere from 5% to 10% going up by 15%. I think that’s a quite a quite good performance compared to the overall market dynamic. The next question, Alex is asking, you claim to have a new vetting process of new games to improve quality, have you hired a specialist for that? Or what is your actual strategy? I mean, you can’t really claim you will manage it yourself. Now, when you haven’t been able to before? Well, to be honest, I mean, we’ve produced – to be fair, I mean, we’ve produced some good games like Sherlock, and Jewels Off, and, you know, some other games as well. So the revenue that we derive currently in the market, is not nothing, it’s some revenue. And it’s made by the games that we have vetted before. And the nature of the game development business is that, it’s very hard to be certain what kind of game you will get on your hands when you start the development. So, we’ve always went with the ideas that we thought are interesting and have potential in the market, only to later we find out whether or not they actually you know, live up to the expectation. What we’re trying to do in the new process is to formalize the process and make stages in the process, where we will look for the data, confirming that this particular game we are trying to get to another stage has the potential in the market. So it’s a little bit more data-driven approach. Essentially, the same people are involved in managing it, and trying to create a game that will scale. You know, it is actually not easy to hire a specialist for vetting games, because, you know, we actually – I mean, we could probably work as specialists vetting games, because we’ve made some successful games, but we already are in this company. And so, actually we prefer, the reason we’ve switched to this new process is that, we wanted to take the individual decision making a little bit out of the process or strengthen the individual decision making and the gut feeling, you know, an expert opinion with data, and with analyzing the potential using – users what they think, and you know market research. So I think it’s a great combination, when you have people who have spent a lot of time in the industry, and they maybe have some experience from creating games that sold, you know tens and hundreds of millions of dollars, but then you also improve their decision making by supplying them with a certain process and certain tools and you formalize it a little bit and have a more structured process. So I’m quite happy with how this new process is lining up. It’s a little bit too early, of course, unfortunately, to say that it certainly works, we would have to wait for some games to come out of this process. And I hope that it will start happening in 2023. So I hope I answered that question. And next question from Alex is, how come you decided on a dividend which was 98% of the years’ net profits? Well, because we have not distributed the profits from previous years in dividend, we have a lot of retained profits from previous years. And also, if you look at the profit, which is EBIT for 2022 SEK 73 million of that was a write-down from the balance, but it was paper-only. We did not lose that money. So, to compare the dividend to EBIT for 2022 maybe is not the right way to measure it, maybe it’s best to compare it to the free cash flow before financial activities. And then you get to a much more reasonable number. And then, once again, if you look at the Q4, and given that we expect Q4 to be more or less in line with what we expect with the rest of 2023, with 2023. You can see that we are in a you know compared to that amount of earnings that you can think we’re going to have in 2023, this dividend is reasonable. And so we intend to maintain – we want to maintain the dividend to make sure the shareholders have some predictability when it comes to dividend. All right. Next one from the same person. In another impressive – sorry, that’s the quote. In another impressive comparison G5 Store brought us more than 30% of what Google Play did in December and just reached over 7% of the Group’s net revenue. But the numbers displayed in the G5 Store monthly net revenue, USD does not match with more than 7% of net revenue. I get it to about 5% to 5.5%. What are your comments on that? Well, it is I measured it myself. When I measured it myself, it was more than 7% for December. So, Stefan, do you have any immediate questions on that? I’m sorry, any immediate comments on that one? No, but you can see the growth trend for October, November, December going into January. So obviously, you know, if it’s 5% to 5.5% exactly for the quarter, you know that might be a totally different thing. You know, we say it’s December. Yeah. And then I don’t understand, where do you see the total net revenue. I mean, if you wanted to do the calculation, you would have to take the G5 Store revenue from the chart, and divide it by the total net revenue. But net revenue is in January, specifically. Because I was referring to January, saying it’s over 7%. So maybe that’s where the difference is. All right, the next question from [Henrik Gronbeck] [ph]. Sorry, if I misspell or mispronounce your name. Is the quarter-to-quarter growth in monthly average growth revenue per paying user driven by newer games with higher monetization? The honest answer is, I don’t know, we didn’t analyze it on a per game basis. But generally speaking, New Generation of games had higher monetization than older owned games. Hidden City also has a – among licensed games, Hidden City has quite high monetization levels. But our New Generation of games was on par, if not better. So that’s how it is. Next question from Alex. Will you ever publish your earnings in USD terms now that FX is affecting the results pretty heavily? Well, to be honest, when it comes to the bottom line, I’m not sure FX is affecting the results substantially, it’s more of a top line dynamic that’s being affected the most. We have quite a good structure in the sense that we have a lot of USD revenue, but we also have substantial USD expenses for user acquisition, we have a lot of revenue in euro. But we used to not have a lot of expensive in euro, but now with all the staff in European countries and other countries, we are actually, we have more expenses in euro than before, and that aligns well with the revenue that we generate in Euro. So in the end, when we look at it, and when we analyze, how does the exchange – how do the exchange rates affect us? Whatever happens between euro and USD, when it comes to the bottom line, in my view, it tends to more or less neutralize, and then you end up having kind of the same bottom line. More or less the same profit. We’re more sensitive to currencies, in which we don’t derive a lot of revenue. So for example, although it’s now much smaller, but at the peak of the crisis like Q1, when we didn’t derive any revenue in rubles, but at the same time, we had a lot of revenue – a lot of expenses in rubles, that would create a situation where we are quite sensitive to the global exchange rate and now the same situation happening in Kazakhstan, Armenia, Georgia, and so forth. So we’re kind of becoming more sensitive to exchange rates with these currencies, but it’s not you know, it’s even if we switched to USD, you would still have that sensitivity to the exchange rate from euro and a bunch of other currencies. So I’m not sure switching reporting to USD fixes that entirely. And we haven’t done – In any sense it would be you know, we obviously thought we could have it as a comparison as we do with revenue but I would agree with now that I think the necessity or the information you get from that is limited, but we can’t report in USD that is not possible. We could theoretically report in euro, but what’s though that is a big hurdle to cross, but USD is not. We still need the SEK numbers essentially, that’s what I’m saying. All right. On to the next one. Net effect of capitalization and amortization on intangible assets amounted to minus SEK 5.1 million. Is it correct that we can expect the negative net capitalization as long as you don’t launch any new games globally? Well, I would say that we how we do this, you know, if we would not, if there are no other changes, so no increasing static, we remain kind of stable from here, and we don’t release any new games globally. These numbers should converge over time. So give it a few quarters – Report, and then they would converge more and more. So I think the effect will be less, but then obviously to launch a new game globally, the situation might be reversed. But at least in the short-term, I think we can expect the negative net cap. Yeah. Next one. There has been some major moves in the Microsoft Store grossing games. Am I skipping over? I am sorry, I just skipped over a bunch of questions, going back to the top of the list. Another question from Alex. Internal KPIs such as MUP has been trending down despite your words of strong performance. The numbers show that your revenue is actually declining, but FX is upholding it in terms of SEK. What will your strategy be when currencies stabilize? Again, we disclose our profit performance in Swedish kroner, but also give comparison figures in USD for a reason, because if you look at the market analysis, you usually get numbers in USD. And so, if you look at the market performance for 2022, depending on the analysts that you read, the market is correcting or declining by minus 5% to up to minus 10% is what I’ve seen in some of the estimates. So that’s the market situation, overall, we are correcting down. We are in the overall market size for 2022. I’ve seen some analysts say we are down to 2020 level, right, so we’ve lost all the progress with that overall revenue for 2021. So I think in this situation, performing in line with the market being stable, having products that are growing and replacing revenue on weaker products, which are probably losing revenue and audience is a good situation to be in. And the reason the market is declining must have to do with a declining active audience. So again, when you see the market decline, you probably can assume that the active audience in the market is also slightly declining. And this is what we see in our figures as well. So to me, this is performance in line with the market. We’re not performing better than the market, but certain parts of our portfolio are performing better than the market. And this gives me an optimism and the ability to say that some of our teams are delivering great games that are able to grow faster than this market in this situation. So, our strategy would be the same as before we will continue to developing the trends, the positive trends that we have, we will continue to work on new games. And you know, we’re being quite open about the numbers. Yes, the Swedish kronor figure is up 12% year-over-year, to some extent thanks to FX rate, but we give you USD numbers as well. We’re not trying to hide them. They’re right there in the report and in the slide deck. And again, this performance is in line with the market. All right. So from Henrik Gronbeck, again, I apologize if I mispronounce any of the names. Is the year-over-year increase in general and administrative costs all related to the war in Ukraine? Do you expect this to decrease or has the organizational changes with the new offices change the core structure? There is some extra overhead, because you do have to spend a little bit extra for maintaining more officers, you know, leasing some sort of space, which is required in some situations even though we have people working from home. Having some employees in the support of the new office we have – we now have more relocation officers that we didn’t have before. We have more people partners, HR, sorry HR managers that support employees. Like there’s a lot of hand holding – extra hand holding and supporting of employees happening compared to a year ago, obviously, especially with the relocation efforts. And so, there is a little bit of increase in the overall overhead connected to having many more officers. Indeed, also I would say the G&A probably includes our relocation costs. Would it be the right guess? Stefan, yeah? And so – And so then this is where you also see the increase just connected to paying out you know paying people for flight tickets, and a couple of months in the apartment lease and other support that we provide for people who are relocating. So, again, doing all of that, we are very mindful of the fact we don’t want to cement any permanent substantial cost increases, we are doing everything we can to maintain the costs at around the same level. To be honest, I think, considering the situation and considering the undertaking of spreading our development offices into a bunch of new countries, we’re doing quite well and our HR department is doing an amazing job really, administering all that at a very reasonable cost to the company. Let’s move on to the next one. Alex – a question from Alex, again. You wrote that Monthly Average Gross Revenue Per Paying User amounted to USD 61.7, which was higher than previous quarters, USD 61.2 and the market trust these numbers, you’ve been wrong about them before. So we did revise the numbers in this quarter. I don’t think that these revisions affected the monthly average gross revenue per paying user in any substantial way. I think he’s referring to that we needed to restate the numbers last year, because we found an error in the calculations. But I think, you know, of course, you can never – you know one can never be a 100% sure, but I think we wouldn’t publish the numbers if we were hesitant about them and yeah. I would also say that you have to look at the trend, right. I think even if we revise numbers or like this quarter, we have adjusted our audience numbers a little bit, because there are different mathematical ways to calculate your audiences. So, this month – this quarter, Q4, we’ve actually aligned our method for calculating that with the most popular attribution software in the market, just to make sure we see the same numbers in our own analytics, and when we use third-party analytics as well. And so we’ve aligned that, but it didn’t change the trends, we’ve changed the absolute numbers a little bit, because we accounted for shorter sessions, which we tended to just throw out in our account. But the underlying trend remains the same. And I suggest that when you look at these metrics, you don’t look at them in absolute terms, but you try to understand the underlying trends for several quarters, I think it would be a proper use of the KPIs, because also these KPIs like monthly average gross revenue per paying user, it’s a KPI. It doesn’t really give you a lot of - it doesn’t give you too much insight into what’s happening for a number of reasons like the average body temperature in the hospital, right. So it’s that kind of a metric. But in this particular case, you can use it to track the overall trend from development and that’s what it is for in our reports. All right. The next question is from [Ule] [ph] and there has been some major moves in the Microsoft Store grossing games list during the holiday season. Is it correct that G5’s games on the Microsoft platform has had a stable holiday season and that the movements in the list primarily are driven by performance and not G5 games? So I’m not tracking top grossing positions in Microsoft Store on a daily or monthly basis. We did have some reduction in revenue on Microsoft Store over the course of the year. But I think the last a number of months, it’s been very stable. And I think that also it was more than compensated by the growth in G5 Store. And you know, maybe there is a connection there because it’s the same platform essentially. But I think the situation is stable now. And we certainly appreciate having a direct channel and direct store connection to our own users and users in our games. And you know, well, some cannibalization is possible there. I think that if we look at the benefits of having a direct point of contact with the users, and we look at the expected lifetime value, considering small transaction fees, there is a much bigger opportunity in having G5 Store actively developing then kind of holding us back being concerned about potential cannibalization, even if that is even happening. We also try to do, and it’s not like we try, our idea with the G5 Store is that, we will find a new channel to acquire our users on personal computers. And we have developed a user acquisition channels, which are based in the web advertising ecosystem, basically, where we attract users into G5 Store and these channels we were not able to use with Windows Store, for example. So through G5 Store, we are tapping into a much larger pool of users that we can attract into G5 Store. So we’re not – we’re looking at the basically, I’m trying to look at it as the total revenue derived from a technological – technology platform called Windows between whatever stores are available on Windows. And that number is not of a big concern to me. I think there’s a good dynamic there. That’s the situation. And the next question is from Philip Cornier. Can you please comment on what has driven the increase in amortization of SEK 7.6 million of over larger write-down in the last Q3? Is it correctly understood that a write-down last quarter has impacted the level of amortization? I mean it’s a, yeah, because we have increased the size of the portfolio over the years, specifically with the New Generation games, even more specifically, maybe then Sherlock being a fairly big game on the balance sheet, that is being amortized. Whilst the games that we wrote down in Q3, they were primarily unreleased. So we didn’t amortize those games. So, they would have impacted amortizations in future periods. So, what we see is, it’s kind of a lagging effect of the buildup of well kind of current active portfolio, so to speak. All right. You have to sort of, sorry, another question from Henrik. And you had two launches in the quarter, correct? How have they been performing? Something we can expect to see soon as global launches? Well, as we said, when we launch a game globally, we will communicate through a press release. A soft launch is an iterative process, where usually on the first attempt, we see the opportunity to further improve the performance before committing to global release. And I will leave it at that. Again, stay tuned and again, this is a new process. We’re going through it for the first time, so I would also expect that it will take some iterations in the beginning. And in the beginning, the timeline is going to be a little bit longer to go through the soft launch process. But I certainly hope that and I would like to see that happen that in 2023, we’ll launch one or two games globally, as we have promised. Can you please comment on Sherlock’s development in January? It was good. It was on par with the strong performance in December. And this is consistent with the seasonality that we saw pre-pandemic. I would probably leave it at that. Are you still – another question from Henrik. Are you still looking at increasing ad revenue? You don’t mention it in the Q4 report? We are looking, we are working on it. But to be honest, it’s been a bit of a struggle. And we are fighting a little bit with a counter trend here, because from what I know for companies, deriving a lot of revenue from advertising on mobile, usually they – I mean, recently they had a negative trend with all the you know, IDFA or deals and all these things plus the reduction in activity of the players in the stores that was weighing on their advertising revenues. And I see even hypercasual developers talking more and more about hybrid monetization, and working hard to build up there in-app purchase revenue. So I think we are in a good place, because all of our revenue is in-app purchases. We would like to see more revenue come from advertising. Unfortunately, it’s not happening as fast as we want it to happen. And if we don’t mention it in the report, perhaps we haven’t achieved a new substantial high. We don’t think it’s a big news topic this quarter to discuss. That’s why. Okay, next question from Alex. Are you not over-presenting G5 Store? I mean, initially, you always give strong performance, because it is in the early stages, and therefore it’s easy to see strong performance percentagewise, you must not forget G5 Store only accounts for a small fraction of the revenue. Well, that was exactly my attitude in 2020 and 2021, when it was showing strong growth, but from relatively low base, but now that it’s bringing in more revenue than Amazon Appstore. Not that it’s bringing in more than 30% of what Google Play makes us. It’s hundreds of thousands of dollars a month, it’s no longer a small revenue base. It’s quite substantial. It’s hundreds of thousands a year ago, and now hundreds of thousands this year, and the growth is more than 100%. So I just thought that it would be reasonable at this level to talk more about G5 Store, because from what I see it’s doing really well I expect it to continue growing, and it no longer looks a thing that’s just taking off from a fairly low revenue base, 7% of our total net revenue for a distribution channel, where we pay almost no store fees, approaching 10% hopefully in during the year, I’d like to see that happen. I think it’s prudent to talk about it and explain a little bit more our thinking about the product and use this opportunity to kind of present a little bit more details on this. And I’ve held on you know on doing that for two years. So, I think it’s quite fair. A question from [Mathias] [ph]. You might have covered this already. But I wonder about Q4 being representative for 2023. Do you still expect EBIT margin in a potential range 13%, 15% as was indicated for Q4? Or is around 13% the communication – for 2023, the communication currently? So we don’t provide guidance. Please understand, we’ve – we did some sort of vague guidance for Q4 in Q3 only based on the fact so many changes were happening in how we account for things. Going forward, we’re not and as before as well, we’re not giving guidance. Q4 in many aspects is representative of what we expect to happen during 2023. But we don’t provide guidance for specific margin levels. All right. Alex is asking, you just said your audience consists of a lot of retired people. What is your revenue diversification age-wise? So as we’ve said many times actually in the history of the company, the audience, the typical audience for hypnotic games tends to be older, we usually define it as 35 plus, and it tends to be predominantly female, it’s not unusual to see female players account for 70% of the total audience. And then further, if we look into specific, paying segment, you usually see it’s even more female dominated up to 80% in some games, and even older. So sometimes we would see that the biggest paying segment would be 55 plus. Interestingly, for G5 Store, its cues even older. So G5 Store would have about 70% of its users above the age of 55. And we have – you know, we’ve, over the years, we found that this audience is quite loyal, they are not jumping you know, from one game to another, if they find a game that they like, they really tend to stay in this game. They’re also, you know, because of their age, they may prefer larger screens. And maybe that explains the popularity of Windows platform and G5 Store platform on PC among our users. But at the same time, we can find them and we can find younger audiences also on the iPhone and Android. And as part of the new pipeline for new ideas and new games that we are developing, we’re actually trying to diversify a little bit away from, not away but to also have games that appeal to younger demographics as well. And so some of the games that we have in the pipeline there, I would characterize them as shots at appealing to wider demographic. And with that said, we love our audience. They’re great players, great payers, they are also – you know they have a good amount of free time on their hands. And so, I think that, as a business, we can benefit in this difficult market times when the market is correcting, we can benefit from having a bit more resilient audience than maybe your typical video game company. No, we do not. We don’t think we understand Indian consumer. Historically, our games aren’t performing very well in the markets where average revenue per user is rather low. However, that said, and specifically, we don’t plan any specific games that are popular in India, because we don’t have really anyone who understands what is popular in India. So I think we will keep our focus on the Western markets, and things that we understand within our expertise. And when it comes to acquiring users into our existing or upcoming new games in India, we have our user acquisition team that is, you know, that’s giving a fair shot to many different countries trying to find the pockets of growth and the ability to acquire in these countries. But over and over again, we find that the types of games that we make, they monetize the best in more developed countries. And that’s why USA and Western Europe and Japan and more developed Asian countries, they just – they tend to drive the most profitable users to our games. I will leave it at that. So that was the last question. Thank you again for listening to us. And yes, and I see a comment thanking us. Well thank you for listening to us for such a long period of time and thank you for following G5. Have a good day.

EarningCall_444

Good afternoon. My name is Matt, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the New Relic Third Quarter Fiscal Year 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. It is now my pleasure to introduce your host, Ingo Friedrichowitz, Senior Vice President of Investor Relations and Corporate Finance. Thank you. You may begin. Good afternoon, and welcome to our third quarter fiscal year 2023 earnings call. On the call with me are Bill Staples, our Chief Executive Officer; and David Barter, our Chief Financial Officer. On our Investor Relations website, you can find the earnings press release and the investor summary slide deck, which is intended to supplement our prepared remarks during today’s call. In addition, an audio replay of this call will be available on our website, ir.newrelic.com, in a few hours. During today’s call, we will be making forward-looking statements, including about our business outlook and strategies, which we based our predictions and expectations on as of today. Our actual results could differ materially due to a number of risks and uncertainties, including the risk factors in our most recent 10-Q and our upcoming third quarter 10-Q to be filed with the SEC. Also during this call, we will discuss certain non-GAAP financial measures. Unless otherwise noted, all of the expense and profitability metrics discussed on today’s call are non-GAAP results. We have reconciled those to the most directly comparable GAAP financial measures in our earnings release. These non-GAAP measures are not intended to be a substitute for our GAAP results. Thanks, Ingo. I’m pleased to announce another well-executed quarter. We exceeded our revenue and profitability guidance. Revenue was $240 million, and we generated nearly $19 million of non-GAAP operating income, both high watermarks for the company despite an uneven economic climate. This is a result of the transformation we have driven across the business, including product innovation, our powerful and differentiated platform pricing model and focused execution. Let me start with an update on go-to-market execution this quarter. We saw strong new logo growth in the third quarter, adding more than 800 net new paid platform customers, a rate which is significantly ahead of other competitors in our category. As you know, New Relic’s success in growing new paying customers is a result of our unique product-led growth motion, which starts with a perpetual free tier that allows customers to use the product and fall in love with it at their own pace and then pay with a credit card as they begin to scale usage. Our free tier includes engineers from Fortune 100, Forbes Global 2000, leading public sector institutions and companies spanning a range of industry verticals. This well of tens of thousands of engaged customers, along with our growing paid customer base, makes New Relic the most ubiquitously adopted observability platform on the planet. Let me share a couple of examples of large new logo lands where we drove head-to-head wins versus leading competitors. First, we closed a strategic agreement with Confluent, the data streaming pioneer, who is standardizing their observability practice on New Relic. Confluent chose to move off a leading competitor in order to have access to more than 30 capabilities in one platform with better cost scaling that supports their rapid growth and better TCO. And second, BlackLine, a financial operations management platform, is standardizing on New Relic in order to consolidate spend from eight different tools as we partner with them to increase the productivity of their engineers and improve their service performance. So we’re clearly winning new customers through our growth engine at industry-leading rates as well as new strategic logos who are standardizing on New Relic. Perhaps most important for revenue growth in the short term, however, is how we’re driving more value for our existing customers by expanding their use of New Relic. One key factor in our success driving expansion within our base is our all-in-one platform pricing model, which I blogged about just a few weeks ago. I’d encourage everyone to read it. New Relic doesn’t offer just a different way to price observability, but a better way, which translates to better economies of scale and lower TCO as customers standardize on our platform. For example, unlike competitors, our data pricing model follows modern cloud service pricing trends where customers pay for actual usage instead of monthly peaks. This aligns with how our customers are driving their own cloud optimization efforts by making use of elastic scaling of their infrastructure and can translate to significant savings in their observability spend. Our incremental cost per gigabyte is also a key differentiator and can result in much lower spend versus leading competitors. Our customers enjoy 3x more value than host-based pricing for APM and Infra monitoring. Our pricing also stacks up very well against every log management tool on the market. Customers can get 2x to 4x more value than leading competitors. All of this results in lower overall total cost of ownership. New Relic can deliver more than 5x more value than leading competitors as customers standardize on our platform. In an uneven economy where every business is looking for efficiency, New Relic is the leading choice. Let me share just a few examples of how our pricing advantages meet with innovation to result in more value and growth within our existing customer base. MercadoLibre, the largest online commerce ecosystem in Latin America, has been standardizing on our platform for observability for some time. This quarter, they more than doubled their already large commitment to supporting their growing observability needs, including the use of OpenTelemetry. OpenTelemetry is a cloud-native computing foundation-driven standard, which New Relic is proud to support and a top contributor in our category. Next, William Hill is one of the world’s leading game and entertainment companies, and they quadrupled their commitment this quarter to support their consumption growth, which is also fueled by their embrace of OpenTelemetry in addition to using New Relic’s capabilities across mobile, network and MLOps. These are just a few examples that showcase why observability is a mission-critical category. It’s often said, what gets measured gets improved. New Relic helps our customers, large and small, measure the performance of their software and the digital experiences so they can continue to improve them. This helps their business in two ways. They can help them drive efficiencies to their bottom line by identifying idle systems that can be reclaimed or poorly written software to be fixed. It also helps them improve their top line as we deliver insights, which help them improve their digital business performance. The opportunity for observability to positively drive business performance only grows more mission-critical in an uneven economy. It’s an investment you can’t afford to lose. This is why our ability to land new paying customers and nurture increase consumption throughout the base continues to grow stronger despite current economic headwinds. We are simultaneously improving three things to catalyze this success. First, our product innovation continues to fuel increasing value for customers. Second, our all-in-one platform pricing model is a more efficient way to pay for observability and standardize on our platform, an important differentiator especially in this economy. And third, our new leadership is bringing new energy and focused execution. One might wonder with such terrific pricing, how is New Relic performing on gross margin? To answer that, let’s now shift our focus to our product efforts. The engineering team drove a four-point increase in gross margin this quarter and nine points over the last year. We are now operating a cloud-native 78% gross margin business. This is especially impressive relative to peers who enjoy the margin benefits of on-premise software to achieve these same levels. What I’m even more proud of is how the engineering team has been able to drive not, only significant efficiency improvements, but also simultaneously deliver many major innovation launched in recent quarters. Let me share just three examples of where innovation is having a business impact. We’re seeing really strong traction with our log-in capability. This quarter, we continue to see organic expansion across our base, and we also took share in dozens of accounts versus multiple competitors. The combination of rich features now available in this capability, including log authentication, log anomaly detection and a rich log management experience, along with a low cost per gigabyte for all telemetry data, is leading customers to realize they can save money by moving their log management to New Relic and get a better experience for their engineers. Second, we continue to expand our cloud to all hyperscalers. This is an important part of our strategy because we serve our customers best by enabling them to use the New Relic platform in their cloud provider of choice, keep their data resident alongside their infrastructure and apps and easily pay for New Relic through their existing cloud commitments. This quarter, we launched New Relic as a native Azure service. And our perpetual free tier and paid experiences are now accessible to millions of Azure engineers to discover, try and buy all inside the Azure experience. This opens an entirely new funnel of potential customers for us, and it’s an exciting addition for the existing Azure customers already in our base. Third, our vulnerability management launch last month went really well. We launched the preview last quarter and saw a very healthy engagement throughout the preview period. New Relic’s vulnerability management builds on our heritage and strengthen APM, allowing every one of our APM customers to automatically get insights into vulnerabilities in their code with zero configuration for deployment. In addition, unlike competitors, our platform approach allows them to integrate multiple security tools from Snyk to Lacework to AWS and more and aggregate those security signals into New Relic, allowing them to prioritize and plan where to focus across their stack. In January, we announced general availability and launched in-product acceptance and payment of this capability, which is available for an additional $0.10 per gigabyte data ingest increase or as part of our Data Plus bundle at $0.50 per gigabyte. We saw very promising acceptance of both monetization paths, and our sales teams are executing a focused sales play this quarter with special price-existing customers. Let’s now shift our focus to the road ahead and what gives me confidence in the long-term success of our business. First, I want to express my confidence and gratitude for the leaders who have joined New Relic in the last few quarters and who are helping set high standards and drive operational excellence in all we do. The management team today is stronger than it has been in my tenure at New Relic, and we continue to gain momentum. Thousands of Relics around the world continue to work exceptionally hard and demonstrate commitment to our company and customers with grit and resilience as they are transforming our business despite the global pandemic, despite social political unrest and uneven economy and market turmoil. I believe few companies would undertake what we have already done, and we’re just getting started. Next, on revenue growth. I believe we have significant opportunity ahead given our expanding base of new and existing customers and the increasing value of the platform. The pace of new paid customers is strong. Consumption across the customer base in the third quarter remains healthy, and our ability to capture commitments continues to improve with our largest ever sequential increase in committed revenue this quarter. We continue to see the cohort of customers on the platform using our modern consumption buying programs, growing much faster than overall company revenues. We’ve heard feedback over the last six quarters of our transition that investors would like more durable measures to model the business across these cohorts. We’ve been locking on our new metrics and are finishing baselines this quarter. We’re excited to share them with you, along with our FY2024 plan in May. We would like to invite all investors and analysts to an Analyst Day this coming May. In this meeting, we will share with you details of our FY2024 financial plan, the measures we use to benchmark and forecast our growth going forward, and updated product strategy and go-to-market strategy as well as a customer panel where you’ll hear directly from customers why they choose our platform. We’re excited to meet you in May. Stay tuned for the exact date and venue. Last, we are committed to profitable growth. In Q2, we turned the corner on profitability for the first time since our transition began. And we accelerated in Q3 in both revenue and operating margin growth. We can do both. We are not mutually exclusive. Look no further than how we’ve moved the dial on both gross margin and operating income. Four quarters ago, we reported 68.2% gross margin. And this quarter, we ran at 77.6%, a nine point increase, driven by our engineering team’s focus on cloud optimization and architectural improvements while, in parallel, delivering innovation and increasing customer value. Just two quarters ago, we reported a non-GAAP loss of $17.2 million. And this quarter, we reported a profit of $18.7 million, at the same time as a substantial sequential revenue increase. These are durable improvements to the business that we’re excited to build on. In closing, as a company, we’re growing stronger as our product, go-to-market execution and operating leverage all improved quarter-over-quarter. We feel well positioned as a strategic partner to our customers and helping them navigate through economic, social and technological change. Our simple all-in-one platform is optimized to support our customers’ efficiency efforts and drive their top line while increasing productivity of their engineering team as they shed less efficient competitors and standardized New Relic. Our ability to outperform in Q3 is a testament to strong execution of our team and the power of our strategy. Thank you, Bill. Our team executed well in the third quarter. We exceeded the top end of our guidance for both revenue and operating income. Our revenue was $239.8 million, an increase of 18% from a year ago. Operating income was $18.7 million, representing a margin of 7.8%. Our earnings per share was $0.32 on a diluted share count of $68.8 million. Profitability is quickly turning into a strength for the company. Our focused execution, which started last summer with a restructuring is yielding tangible dividends. Gross margin increased to 78%, a 4 point increase over last quarter and a 9 point increase over last year. Our engineering team continues to implement cloud optimizations and architectural improvements to lower our cloud cost. Our engineering team has also commenced work to shutdown our three remaining legacy data centers. With our AWS cloud reaching near 80% gross margin efficiency, we now can start to focus on introducing new cloud environments in strategic regions to serve more customers and drive growth and profitability. As an example, we’ve launched a cloud environment in EMEA, and we recently launched New Relic on Microsoft Azure. Looking beyond gross margin and gross profit, I’m pleased with our focus on efficiency and operational excellence. We continue to find opportunities to drive leverage and scale. Equally, we’re also finding opportunities to lower fixed cost. During the quarter, we further reduced our real estate footprint, resulting in a onetime non-cash $8.1 million expense. Without this cost, our operating margin would be over 11%. While we still have work to do, I’m energized by our progress. Our efficiency-focused efforts enable thoughtful investment in engineering, which has climbed to almost 25% of revenue, while the business is delivering meaningful levels of profit. Looking at next year, I expect New Relic will be able to produce durable double-digit operating margins. The other strength that’s starting to emerge is our commercial execution. As Bill highlighted, we performed well this quarter landing new logos and expanding relationships. You’ll see clear evidence of this in our 10-Q. Our remaining performance obligation, or RPO increased 19% year-over-year, representing an increase of $116 million. Similar to our efforts to enhance profitability, there is more work to be done, but our focused execution is yielding tangible proof points. Adoption of our consumption contracts is at very healthy levels. The growth in RPO gives us confidence we will be able to continue driving top line growth and reducing situations where customers overconsume versus their contractual commitments. Let’s shift to the balance sheet. We ended the quarter with $800 million in cash, cash equivalents and investments. We have a convertible note that is coming due on May 1. We expect to repay this with our cash on hand. We are not currently interested in or pursuing additional financing at this time that would dilute our shareholders. We believe the business will continue to generate improving levels of free cash flow. We expect our free cash flow margin to track our operating margin, while noting there might be some quarter-to-quarter fluctuations as we continue to phase in monthly consumption and invoicing. With that, let’s move on to the guidance for Q4 and full fiscal year 2023. Our outlook for Q4 contemplates a few points. One, the seasonal pattern of consumption is in line with how we described it on our last earnings call. In other words, customer usage peaked in December and then follow the typical pattern of less usage post holiday and into January. Two, our fourth quarter has two fewer days than fiscal Q3 when we averaged $2.6 million of revenue per day. These first two points are expected seasonal elements in the business that are part of the business model and are taken into account in our guidance, resulting in a lower sequential revenue increase in Q4. And three, our costs will be impacted by the normal beginning of calendar year headwind of $10 million due to the payroll tax and 401(k) reset. Factoring in these points for the fourth quarter of fiscal year 2023, we expect revenue between $240 million and $242 million, representing growth of approximately 17% to 18% year-over-year. We expect non-GAAP income from operations between $12 million and $14 million and non-GAAP earnings per diluted share between $0.20 and $0.23. For the full year fiscal 2023, we’re increasing our outlook, and we now expect revenue between $923.1 million and $925.1 million. We expect non-GAAP income from operations to be in a range of $20.4 million to $22.4 million and non-GAAP earnings per diluted share to be in a range of $0.40 to $0.43. To conclude, I’m very pleased with the performance we delivered in the third quarter and our focus on executing our plan. Equally, I’m energized by our strategy, and we’re very focused on delivering long-term profitable growth. Thank you. [Operator Instructions] The first question is from the line of Fred Lee with Credit Suisse. Your line is now open. Thank you for taking the questions and congratulations on an outstanding quarter. I was wondering what percentage of the quarter was derived from the platform versus legacy APM-only revenue. And then I have a quick follow-up. That’s a great question. I think the modern consumption contracts drove about 75% of the revenue. The legacy was about 25%. Okay. Thank you. And then regarding your gross margin performance, on your incredible performance, how much of the expense was related to price increase versus the cloud optimization, the engineering efficiencies you detailed on the call? Yes, I’ll take that one. Majority of the improvement there is due to our engineering team, really focused on cloud efficiency and architectural improvements that just make the performance of our overall service better. Thank you for your question. The next question is from the line of Derrick Wood with Cowen. Your line is now open. Great, thanks. It’s Andrew for Derrick. Dave, the RPO growth was very strong. Just wondering how CRPO looks within that. Was there any duration benefit in there? And is that driven by legacy customer switching to multiyear deals? It’s a great question. If you were to look at the duration, whether on a 12-month or a 24-month basis, I believe that was up about 15%. So it didn’t – the total RPO did show a little bit of a tick up as customers started to go to two and three-year contracts. But we were overall just pleased also with the CRPO expansion and also very pleased with how much was driven by the new consumption contracts around savings and volume plan. Great. And Bill, it seems like the competitive displacement or win rate activity had an uptick this quarter, very strong. Any more metrics to share on this and what is kicking that dynamic into a new gear? Yes. For example, our EMEA team was able to displace 25 different competitors tools and 22 of our customers during the quarter. I think it’s really driven off of the strategy that we put in place two years ago to build an all-in-one platform. If you remember, we told investors that we thought this category was ripe for disruption, and we wanted to bring it. The number one concern that we heard from customers, and we continue to hear, is that observability, the price is too high for the value. And the number two concern they have is tool fragmentation. Customers have been really hungry for a platform that helps them standardize their observability practice. So their engineers can stop swiveling between screens and get work done faster and because a platform approach will drive efficiency in their spend. We’ve been heads down building that business. And we believe the current economic climate really only accelerates what we saw coming two years ago. In essence, this is what we were built for. And the road ahead is an exciting opportunity to show the strength of our strategy to be the first true consumption observability business and solve those hard customer problems. Thank you for your question. The next question is from the line of Sanjit Singh with Morgan Stanley. Your line is now open. Thank you for taking the questions and my congrats on the excellent Q3 results. I want to ask you about the topic of cloud optimization, probably one of the bigger themes in this December quarter across software. What’s the role that observability has sort of enabling cloud cost optimization? Is that a trend that you saw in the results this quarter? And to what extent is the category itself, observability, a target for cloud cost optimization? If you could sort of address it from both angles, I’d really appreciate it. Thanks, Sanjit. Yes, it’s obvious, cloud consumption is slowing down as reported by all three hyperscalers this quarter. And while we aren’t immune to the cloud consumption slowdowns, we did see some of that in our base. It’s really important to think about the use cases of observability in answering the question, because New Relic really helps our customers do two things. We help them save money, and we help them make money. That’s why observability is so mission-critical, it supports both top line and bottom line initiatives for our customers. To help drive more efficiency, our customers use New Relic to understand how their infrastructure and apps are performing and where there are efficiencies to be gained. So in part, we play a role in helping them drive that cloud efficiency, but we also help drive their top line. Customers using Relic to optimize their digital business and increase its performance, reach more customers, deliver better experiences, sell more product and services. And therefore, it’s a key priority for every business right now who’s fighting harder for every dollar. So will optimization within our customer base happen around New Relic’s consumption services? Yes, absolutely. No vendor is immune. Every company is looking for efficiencies. But will they turn off observability? Absolutely not. And we believe the economic reset that we’re going through is ultimately just accelerating the vision that we had for observability two years ago. That’s super thoughtful, Bill. I really appreciate the answer. When we look at the financial model and how it’s evolved so materially over the last four quarters, and I imagine it’s probably a topic when we all get together in May. But do you sort of have any sort of financial operating sort of rule of thumb? Like does the rule of 40 makes sense in terms of a framework in terms of managing the financials? Because obviously, the gross margin, the operating margin expansion that we’ve seen over the last four years has been really, really impressive. And the growth has held in. You guys are one of the few that sort of sustained growth in calendar 2022. And so as we look ahead over the next couple of years, what’s your sort of operating philosophy, if you will, in terms of managing the business? That actually is the key topic for our May Investor Day, as you alluded to. But let me actually turn it over to Dave, and he can share a few insights in terms of how we’re thinking about the business. Yes. It’s a great question. It’s very timely. As we think out to what happens in 13 weeks and just sitting down in May, but I think what we’re excited about as we take all customers and turn all customers into consumption contracts, we do feel like there is an opportunity over the next four years in line with the plan that we’ve discussed with our Board to barely drive a nice balance between growth and profitability. I think we’ve talked about market rates of growth. And then as we highlighted, we think there are improving levels of profitability. And so we have a road map around how to get to rule of 40 and quite frankly, a road map on how to get beyond rule of 40. And it’s one that we’re excited to share with everyone where it just continues to play out logically, Sanjit, as you know, just kind of inning by inning as we continue to drive the business model forward. Thank you for your question. The next question is from the line of Erik Suppiger with JMP Securities. Your line is now open. Yes. Thanks for taking the questions. Two questions. One, just curious if you have any updates, metrics related to your consumption run rate metrics. I think last quarter, you suggested you would increase that by $50 million. I was curious if you had anything comparable. And then secondly, you talked about log management, and you sound like you’re doing very well going after that market. I’m curious if you are seeing any of your competitors, maybe Splunk, discounting in order to defend some of their share – their market share. What kind of behavior are you seeing out of some of the players in that space? Yes. Thanks for the question. I’ll start with the first one, CRR. I did share some updates around that last quarter and got a lot of questions about it. CRR as a run rate metric is inherently volatile. And so we’ve chosen, again, to not provide it just because it’s not the best metric to benchmark our business with. And that’s why we’re excited to come back in May with a set of benchmark metrics with historical view that we can share with you to help you built models for the path forward. I will say overall consumption for Q3 was healthy, and it was a very good quarter, which is accounted for in our revenue results. Ultimately, we report revenue based on consumption for the majority of our revenue, and that was reflected in consumption rates. So on the second question around log management, it’s true, we are seeing really good success with our logging product now coming up. Both customers who have not yet enabled logs for their services, which is the majority of our business, but also competitive takeouts against pretty much every other log management solution in the market. And we don’t see competitors reacting differently yet. It’s really for us an opportunity to drive that all-in-one observability platform play where we help customers save money, bring all their engineers in one place by bringing all of their data into our platform. And we’re seeing good success with that strategy. Just a follow-up on that. Would you say more of your business is coming from customers that have not enabled their logs at this point? Or are you seeing more of your business come from competitive environments where you’re displacing a competitor? Yes. It’s really – I would say a lot of our data growth comes from greenfield, comes from apps and infrastructures that are not instrumented, that are new or that are migrating to the cloud. And then, of course, customers do have logs and metrics and other telemetry in a variety of different places. That’s the tool consolidation problem I alluded to earlier that we’re really now increasingly effective at consolidating into our platform. Thank you for your question. The next question is from the line of Adam Tindle with Raymond James. Your line is now open. Yes. This is Mark on for Adam. Thanks for taking our question. I was wondering if you could give an update on early renewals after the impact of last quarter – was $18 million. And how does this factor into… Yes, its picked up. So can you provide an update on early renewals in the quarter? And then after – it was $18 million last quarter. And then how does factor in the growth plans? Well, give me a second. We’ll tapering [ph] pull the number up for you. But overall, the early renewals were quite successful. We saw a significant expansion of existing deals. We felt really good about the customer engagement in line with maybe Bill’s remarks around tool consolidation that we’re seeing in the market. We feel like it was – for customers who are overconsuming, it really allowed us to wrap up all of their consumption in the contract. And for a number of customers, we felt like it open up an opportunity to drive new growth as we add on new workloads and new scenarios. But overall, we saw a very healthy uptick in that segment of the business. Yes. I’ll just add on, our ability to execute that motion where a customer is consuming ahead of their original commitment is getting stronger with each quarter as you’d expect as our sales teams get more practiced in having that conversation and as we continue to seek to close that gap between consumption and committed consumption. It was a quarter, the first one, in fact, where we were able to close the gap, thanks in part to that early renewal process as well as our ability to capture increased commitment and incremental new revenue that’s reflected in the RPO results that we shared in our 10-Q, but it’s also a healthy signal that we’re able to capture commitments on consumption and start to close that gap. Okay. Thank you for your question. The next question is from the line of Rishi Jaluria with RBC. Your line is now open. This is Richard Poland on for Rishi Jaluria. Thanks for taking mu question. Just on the price increase as well as the Data Plus SKU. I know you haven’t given us any metrics in terms of how much of the customer base is on that Data Plus SKU, but just would be curious if there’s any incremental color you could give there, maybe if it’s directional just in terms of adoption on Data Plus. And then just on the price increase, is that kind of fully reflected in the base at this point? It is not. Price on a weighted average continues to climb, and we certainly saw through the renewals healthy adoption of both standard and Data Plus. Average price was just above $0.30 for telemetry data ingest this quarter as we went through renewals, which represents a hybrid of both the standard telemetry and the Data Plus telemetry. So overall, we feel like our pricing paradigm and framework is working as expected. Got it. That’s helpful. And then just kind of – is there an updated view just in terms of the data versus the seats component and how we should think about that going forward? I think right now, it’s about 50-50. It’s going to move around by account, depending upon how accounts are ramping up, particularly new accounts where – with their new relationships. And so users come on and probably at different rates in different paces. But right now, again, in aggregate across the portfolio, about 50-50. Thank you for your question. The next question is from the line of Taz Koujalgi with Wedbush Securities. Your line is now open. Hey guys. Thanks for taking my question. I have a question on – any impact that you can characterize from the price increase you had, I think, in the June and July time frame? One, how is that being received by customers? And any sort of tailwind or any sort of benefit from the price increase that you can quantify in the results? So we announced the price increase back in May at FutureStack, and it went into effect really in June, but that’s – June is our smallest period for expirations. We started to see some of it in, arguably, the September window. But again, that also is not a big quarter for us in terms of expirations. It was really this past quarter. And again, we saw a very healthy acceptance of it. So I think everybody understands the pricing model and how competitively priced our telemetry offering is. And again, relative to competitors where they charge so much more for the elemetry ingest, we just have not received a lot of pushback. Thanks. One follow-up. If I’m doing the math right, it looks like your sales and marketing spend was down year-over-year in the quarter, and you had a nice acceleration on the top line. So that’s a good thing. But just going forward, how should we think about that system marketing trending [ph] forward? Should that continue to lag your top line growth? Or is there anything else that’s driving slow down there while your top line is isolating? Great question. I guess we – I think we suggested a couple calls ago. We felt like we had an opportunity to operate with greater efficiency, greater scale, and I think you’re starting to see that percolate through the P&L. Thank you for your question. The next question is from the line of Mike Cikos with Needham and Company. Your line is now open. Hi, guys. Thanks for getting me on here. And I apologize if I’m duplicating on questions here. I’m juggling a couple of earnings tonight. But I did want to circle back, I think there was an earlier question where you guys had referenced this closed gap as far as what you’re able to drive with customers who had been over consuming versus those commitments. And I think this is the first time that we’re hearing about that closed gap. I know that or what it sounded like was Bill attributed that closed gap to the success of that early renewals program. But I did want to see is there anything else that would be driving that narrower gap today versus us having this conversation three months ago? I just wanted to see if there’s anything else to that. Yes. As I said a minute ago, it really is first our success driving early renewals gets better and better with every quarter. Practice makes perfect if you will. And we’ve been doing it for a few quarters now. The teams are getting more comfortable helping customers, commit early, helping structure those contracts accordingly. And we saw a significant amount of revenue commitments pulled forward from future quarters. We are also seeing healthy uptick on in-quarter renewals which also helps close that gap. Obviously, the primary driver for commitments in a consumption business is capturing the value that customers already receiving as well as forecasting where their consumption might go in the year ahead. And so that’s also driving a healthy increase in commitments. And you can see that in the RPO results that we shared in our 10-Q. That’s great. Thank you. And if I could just tack on one more question there. I guess a two-porter here. But the first is really around customer behavior. And I know that in previous quarters we’ve spoken about, let’s say a customer is over consuming north of 130% of their commitment. And so they’ll manage down their consumption to kind of right size or course correct for that commitment. Is that still the case? Is that even more I guess severe in today’s macro? I’m just curious on that. And then, the other question is more strategic here. I’m just curious, I know we’re talking about the RPO and some of the increased duration as far as maybe a greater focus on the multi-year as opposed to previous annual contracting. And just again, from a strategic level, would be curious to hear why we’re focusing on more multi-year commitments from those customers? Yes, thanks. I’ll let Dave take the multi-year one, but I’ll tackle the consumption behavior question you started out with. I really encourage investors to think about the consumption behaviors as an inherent part of the business model that we think is incredibly advantageous to our business in building long-term customer relationships. Customers value this consumption business model because they only pay for what they use. And in this uneven economy, it’s even more important than ever. If you compare us with competitors, they still charge based on a decades old pre-cloud era host based pricing model where they charge for penalties for peak rates and dealing customers with overages. Our pricing model matches what customers really expect today from a cloud service. They only have to pay for what they use. And so their usage scales automatically up and down as their infrastructure and apps usage. And when it comes time for contracts to be renewed, they also have the right and the ability to manage their consumption, to bring it in line with what they think their new commitments or spend should be. All of that really makes New Relic an incredibly attractive business, and especially in this economy because we offer the best value in observability category. So we do see those behaviors continue and in many ways, they’re a feature, they’re a benefit to our customers that we’re proud to provide them. On the multi-year question, Dave? It’s a great question. One of the things that we like about multi-year, and I think it kind of comes through with our customers, they’ve made multi-year commitments to hyperscalers. So for us, as part of the contracting process where we can ultimately get in there for either their Azure or their AWS commitment and they can peel off a piece of it and reserve it for observability, I think that works really well. Another dimension that some of our customers will say is, gosh, if I make a two or three year commitment, it also gives them an opportunity to pull forward similar to maybe some of the tendencies they would have with a Snowflake or a Mongo where they make a commitment. And then if it’s running hot, there’s a pool of funds that they can access and pull forward that to fund additional rollouts of the New Relic platform. So overall, I think just multiyear just naturally works well in this market for a few reasons. Thank you for your question. The next question is from the line of Yun Kim with Loop Capital Markets. Your line is now open. Thank you. So congrats on a solid quarter. Just following up on the – several questions around the multiyear trend that you’re seeing. Non-current deferred revenue balance was up a lot. Are you billing multi-years upfront? If you can explain that dynamic, there? No. Not typically. We’re not typically billing upfront. Our general twist or the adaptation we’ve made is actually switching to consumption, invoicing and billing more on a monthly basis. Okay. Great. And then my understanding is that there were some – there were a lot of large – or some large renewals that’s queued up in the second half. It sounds like the renewals performed very well in the quarter. But the net rate retention rate did decline sequentially. I am assuming that’s just a lag effect from prior quarters. So should we expect that NRR to perhaps at least stay flat going forward or even inch up to reflect the strong renewal that you guys mentioned in the quarter? Yes. It really reflects to that rolling 12-month view. So you’re right, it’s such a long horizon metric. It’s not a great indication of exactly what happened in the quarter given the arithmetic. Okay. Great. And then one last question. Bill, you mentioned special pricing on renewals. Is that different than some of the proactive measurements you guys have taken on some of the renewals or just more value-based kind of efforts that you guys put in for renewals? Or is that something different that you’re talking about when you mentioned special pricing on renewals in your prepared remarks? Yes. I was referring to special pricing on our vulnerability management capability that we took to general availability in January. We’re giving customers who’ve been in the preview and whose contracts are up for renewal this quarter, who want to pull forward a contract into this quarter, the opportunity to secure that capability for a discount. Our retail price for the vulnerability management capability is $0.10 add-on for their data charges or it’s bundled in our Data Plus offering, which is $0.50 per gigabyte. And for those customers willing to pull forward or add the pricing to their contracts this quarter, the sales teams are negotiating some pretty healthy discounts to help customers get that value sooner. Thank you for your question. The next question is from the line of Pinjalim Bora with JP Morgan. Your line is now open. Hey guys. This is Noah on for Pinjalim. Just two questions from our end. Can you maybe just touch on the linearity of the consumption trends for this quarter and what that looked like in January? And then I think it was mentioned earlier on the call that you were expecting double-digit pro forma operating margins for next year. If that’s the case, just trying to get a better sense of what are some of the levers you pull near term to achieve that, if so? Thanks. Yes. I’ll speak to the linearity patterns of consumption in the quarter and through January. 12 months ago, we saw the seasonal pattern of the business. And this year, the patterns are very similar. As Dave said, we made it clear in our earnings report last quarter that we anticipated the seasonal element in our business and guided accordingly. January, we’re seeing consumption resume in some customers, but not all are back up to their seasonal highs from last year yet. We believe the seasonality element of our business is pretty well understood at this point and should not be a surprise to investors. It’s not a surprise to us, and we’re managing it well. Not all quarters look alike for many businesses. And in fact, we think this one really reflects a unique and competitive advantage of the business model and real customer value that we’re passing to customers. So hope that answers the linearity question. And then in regards to profitability, I think we’re taking this in chapters or toll gate. So I think if you were to look last summer, we started – we announced our restructuring started to adjust our cost structure. We quickly kind of got ourselves up to that first round of kind of getting to about a 5% margin. Now we’ve kind of crossed that line where we’re operating about 10%. And I think what we wanted to signal to investors, and particularly looking at analyst models, that sitting at about – going into next year at about a 10% margin seemed like an area where we’re at a durable place where we feel confident that we’re at 10%. Clearly, we’re not satisfied at that level of profitability, and we’re working towards the next round, but we kind of take it in five-point increments, if you will. And I think, again, in our prepared remarks, I wanted to signal – given the success we had last quarter and the steps we’re taking this quarter, we feel like we’re at about 10%. Thank you for your question. The next question is from the line of Kingsley Crane with Canaccord Genuity. Your line is now open. Hi, thanks for fitting me in. I want to touch on the Native Azure Service. Bill, I’m sure this is gratifying for you. I know you’ve been thinking about this for some time. So what are you more excited about? Is this more about driving adoption from Azure users that would not have had exposure to New Relic? Or is it more about unlocking demand from existing customers to monitor more of their total cloud workloads? Great question, Kingsley, and glad we could fit you in because Azure is obviously near and dear to my heart, having spent a lot of time on Microsoft and helping launch Azure. And I’m so excited about this native integration for both of those reasons, frankly. I know millions of engineers use Azure every single day, and I know they can all benefit from New Relic. And the Microsoft team has just done a fantastic job integrating us into their console. You can discover New Relic. You can subscribe with just a few clicks. It’s free to get started like – just like it is when you come to our cloud. And they can pay for it on their Azure subscription. But what’s even more cool is you can look at every single application, every single host and infrastructure inside the Azure cloud. And with just a few clicks, you can inject New Relic’s agents and begin collecting all of your metrics, events, logs and traces directly into New Relic, running on the Azure cloud. So all of the telemetry data you collect comes into New Relic, but your data stays within the Azure cloud environment next to your infrastructure and apps. We think that’s incredibly valuable for new customers to come experience New Relic with and for our existing customers who already have commitments to Microsoft. They can now use those commitments to pay for New Relic as well. And that’s also of economic value to them, and they can also benefit from the experience I just described. So it’s really a win for everybody. Thanks Will. That’s really helpful. And just as a follow-up, is that Azure consumption ramps, I’m wondering if that will have any material factor on gross margins, which were quite seller this quarter. It’s a great call out. And I think we tried to highlight in our prepared remarks our investment in EMEA, our investment in Azure, almost our intentional natural – well, investments and a little bit of headwind to gross margin. But I think overall, we’re excited to have Azure scale because as it scales, it’s actually less of a headwind on gross margin. So looking forward to, again, that deep partnership with Microsoft and building out a very high growth, but highly profitable cloud. Thank you for your question. The next question is from the line of Michael Turits with KeyBanc. Your line is now open. Hey guys. Hey David and Bill. I just wanted to come back to the closing the gap question and consumption. So I’ll make sure I understand. So by closing the gap, you’re renewing early. So I mean people are upping their commits early. So they’re not going over on the consumption. And since there’s no penalty from a unit pricing, what incents them to do that? Are they – are you offering discounts for them to go at a higher volume rate? Or why should they? That’s a great question. Michael, I guess, I think about it from the CTO [ph] to the CFO when I reach out and work with customers, and I think we saw over $20 million of net new ACR from just people early renewing and expanding. I think it’s with the idea that they’re using New Relic more broadly, whether it’s for cloud, digital transformation or certainly in this economy taking out more tools. And so I think just well-run enterprises, they try keep their spend in line with their commitments, and that ultimately creates an opportunity, I guess, as I’ve worked with customers for us to go ahead and top off the contract and, again get it in line with whatever fiscal year plan they might have. We certainly, like every software company, will offer incentives and discounts, but I think those tend to be almost more pervasive for all customers rather than just signaling one particular segment. Thanks David. And then I know you’re not giving the consumption rate the way you did it at one point, but there’s two ways to think about a leading indicator if you will. One is what that consumption rate is. You’ve been – did 18% growth. You guided to high teens growth. So I guess I think about whether or not the consumption rate is in that same ballpark of high-teens growth and also whether when people renew, they’re renewing for commitments that are also, call it, 18% above on an apples-to-apples basis for products in terms of – on a product basis, not if they expand. So the renewals coming in same rate high teens or consumption high teens? Yes. I mean I think we saw ultimately renewals coming in at high teens and certainly some agreements were coming in much higher, particularly the early renewals. So I think we felt like from a contractual perspective, in line with the expansion, whether you look at current RPO or total RPO, really raising the ceiling very nicely on contracts. I think when we think about consumption, the way I think Bill highlighted, it is consumption certainly peaked in December, it’s come back in January, but that seasonal element certainly is what I’d say auto correlates, if you will, with revenue. So I think there is a dimension, if I understand the nuances in your question, between the contracts and the consumption. The consumption follows its natural seasonal pattern, which I think is tracking pretty closely to what we expected and close to the prior two years. Thank you for your question. There are no additional questions waiting at this time. So I’ll pass the conference back to the management team for any closing remarks. Hey everyone thanks again for joining the call today and your questions and your interest in New Relic. We’re excited to see many of you in the upcoming investor events in February and March. And one last reminder that we are inviting all investors and analysts to our upcoming Analyst Day in May. See you then. Thank you very much.

EarningCall_445

Good morning, and welcome to the Green Plains Inc., and Green Plains Partners Fourth Quarter and Full Year 2022 Earnings Conference Call. Following the company's prepared remarks, instructions will be provided for Q&A. At this time, all participants are in a listen-only mode. I will now turn the call over to your host, Phil Boggs, Executive Vice President, Investor Relations. Mr. Boggs, please go ahead. Thank you, and good morning. Welcome to Green Plains Inc., and Green Plains Partners fourth quarter and full year 2022 earnings call. Participants on today's call are Todd Becker, President and Chief Executive Officer, Jim Stark, Chief Financial Officer; and Leslie Van Der Meulen, EVP of Product Marketing and Innovation. There is a slide presentation available, and you can find it on the Investor page under the Events and Presentations link on both corporate websites. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's press releases and the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. The fourth quarter margins were improved off the lows we experienced during the prior quarter, but we are still faced with some challenging headwinds due to weakness in ethanol margins in the quarter, which happened very quickly over a few days. This industry has such great potential and we continue to have a small imbalance in production versus demand that weighs heavily on margins. In addition, the pricing structure, in our opinion, remains broken where very little margin there -- excuse me -- very little volume in the market each day on the close prices a million barrels a day of production. This pricing mechanism needs to be addressed in the future. In the Western Corn Belt, the basis remains stubbornly high for this time of year, about $0.45 per bushel higher than the prior five-year average and $0.30 higher than the prior year. A severe cold snap in December caused outages across our platform, and when combined with rail embargoes, which hit Green Plains unusually hard, we had inventory backed up at some of our locations leading to plant slowdowns and some plants going offline for a period of time. We estimate the storm cost our platform around $0.02 per gallon for the quarter alone, just over those few weeks. In addition, we made an economic decision to temporarily idle 10% of our production capacity based on current market conditions and continue to evaluate the right time to bring capacity back online. Despite these challenges, we ran at 93% utilization rate across our platform as we benefited from pulling our seasonal maintenance into the third quarter and continue to see increasing production rates at locations we invested technology into over the last few years. Overall, our results showed a consolidated cross margin of around $0.03 per gallon and EBITDA close to $6 million. What we're also learning is our transformation is more important than ever and contributed to our positive margins, even with the headwinds from the traditional platform, which is why we continue to execute on our ambitious transformation of Green Plains that we laid out for you over the past few years. Our focus is on our four pillars of protein, oil, sugar, and carbon, all combined with a focus on lowering our cost of traditional operations. During 2022, we've made great progress on the transformation, completing the construction of three additional MSC protein technology locations, which makes five total and breaking ground on our first clean sugar facility in Shenandoah at commercial scale. We continue to make progress on our overall decarbonization of our platform, positioning ourselves for the future of sustainable aviation fuel, with our exciting alcohol to jet announcements we've made recently. Our MSC projects at Central City Mount Vernon and Obion continued to come online during the quarter. The incremental yields from these new MSC systems during commissions -- during commissioning contributed to another quarterly production record for our low carbon renewable corn oil. I can now say that all five of our MSC facilities are now completed and operational and producing ultra high protein. In fact, during this week alone, we set daily production platform records. This is a huge accomplishment for our team to bring these facilities online in a continued challenging supply chain and labor market. On the last call, I indicated that we expect to make significant exciting progress on our commercial sales for 2023, and we have done just that, which I will discuss later in the call. Our carbon initiatives continue to progress. First starting with Osaka Gas and Tallgrass to utilize carbon from our Southeastern locations to produce a synthetic fuel and methane products. While still in development phase for now, we are optimistic about the potential of this project. We also just announced a sustainable aviation fuel partnership with Tallgrass, PNNL and United Airlines to develop a new alcohol to jet technology. United's offtake for this product demonstrates the urgency of developing pathways to decarbonize aviation fuel, and we believe the use of decarbonize ethanol as a low-carbon feedstock, which Green Plains has a supply agreement into the joint venture as well, could be transformational, not only for our company and our shareholders, but also for the whole industry. We are excited to continue to develop this novel technology from PNNL as Blue Blade Energy scales it up and works towards a pilot facility in the coming years. This gives us confidence in the long-term value of our biorefinery platform and the optionality around what we do and what we are coming. Today, the fundamentals of our base ethanol business remain challenged, yet as we all have seen things move quickly on our margin structures. We remain open to the forward margin as there has not been real opportunities to hedge forward. There are times I feel like a broken record, which is why our technology transformation is more important than ever. The EPA recently proposed RFS volumes of 15.25 billion gallons per year. This administration has repeatedly demonstrated a commitment to higher level ethanol blends, including allowing for E15 to be sold during the summer for the fourth straight year. Our value proposition as the lowest cost octane enhancer remains both domestically and globally. We are capturing more corn oil from every kernel and are headed to 1.2 pounds mechanically, and regardless of the final RVO levels, we believe the rapid expansion of renewable diesel production will continue and our distillers corn oil will remain in demand. As we always do, we are going to focus on the things within our control, executing on our transformation plan, bringing additional MSC and corn oil facilities online, completing our clean sugar build in Shenandoah and executing on our carbon plans. Jim will recap our efforts in just a moment and discuss our success during 2022 to strengthen our balance sheet as we ended the year with over $500 million in cash. As a result, we believe we are well-positioned to execute on our transformation strategy. Our partnership, Green Plains Partners delivered another consistent quarter and declared a distribution of $0.455 per unit while maintaining stable coverage ratios. Thank you, Todd and good morning everyone. Green Plains consolidated revenues for the fourth quarter were $914 million, $112 million higher than the same period a year ago, driven by higher run rates. Our plant utilization rate improved year-over-year to a 93.4% run rate during the fourth quarter, comparing favorably to the 83% run rate reported in the same period last year. As Todd mentioned, we are monitoring the economic environment closely for when to restart the 10% of viable capacity we have, which is having a minor impact on our utilization rate in the near term. For the quarter, we reported net loss attributable to Green Plains of $38.6 million or $0.66 per diluted share compared to loss of $9.6 million or $0.18 per diluted share for the same period in 2021. Adjusted EBITDA for the quarter was $5.8 million compared to $32 million for the same period last year. Higher corn bases in the Western Corn Belt and weak ethanol demand contributed to the lower margin for Q4, 2022 compared to last year. We realized the $0.03 per gallon consolidated crush for Q4, 2022, which is $0.17 a gallon lower than last year due to the factors described above. On a sequential quarter-to-quarter basis, we saw the consolidated crush margin per gallon improved $0.12 when compared to the third quarter of 2022. Our Ag and Energy segment turned in a better performance versus 2021, recording a $9.6 million increase in EBITDA to $11.8 million for the fourth quarter. This increase was driven by market volatility in our merchant trading and distribution businesses in our fuel racks and natural gas storage. For the fourth quarter, our SG&A costs for all segments was $28.9 million compared to $18.2 million for Q4 2021. This increase was driven by higher personnel costs related to higher headcount, as we described through most of last year on our quarterly costs, and we have fully staffed our company for our transformation plan. This increase is also related to higher insurance rents and other fees and expenses related to running the business. Interest expense of $6.5 million for the quarter, which includes the impact of dead amortization and capitalization -- capitalized interest, was roughly in line with the $6.9 million reported in the prior year fourth quarter. For the year, interest expense was significantly lower by approximately $34.5 million from last year as a result of the convertible notes being exchanged in 2021 and 2022. We anticipate interest expense for 2023 to be approximately $40 million given where interest rates are currently and that we are carrying in lower debt balances into 2023. Our income tax expense for the quarter was $4.9 million compared to a tax expense of $4.8 million for the same period of 2021. At the end of the quarter, the net loss carryforwards available to the company were $85.8 million, which may be carried forward indefinitely. We currently anticipate that our normalized tax rate for the year for Green Plains Inc., excluding minority interest should be around 21%. On slide nine of the earnings deck, we provide a summary of the company's balance sheet. As shown, we ended the quarter with $464.4 million of cash and working capital -- net of working capital financing compared to $698 million at the end of 2021. Our liquidity position at the end of the quarter included $500.3 million cash, cash equivalents and restricted cash along with approximately $235 million available under our working capital revolver. Our balance sheet remains in a solid position as we continue our transformation to Green Plains 2.0. For the fourth quarter, we allocated about $29 million of capital to profit sustaining the growth projects, including $14 million to our MSC protein initiative, about $10 million to other growth initiatives and approximately $5 million towards maintenance, safety and regulatory capital. Total CapEx for 2022 was $212 million, which was about $38 million in the range we communicated to you back on our Q3 call. To date, we have invested approximately $330 million of our shareholders' capital across our platform and the deployment of Fluid Quip Technologies MSC across the Green Plains biorefinery network, including our share of the Green Plains turnkey JV with Tharaldson Ethanol. For 2023, we anticipate CapEx will be in the range of $150 million to $250 million, including our share to finish up the turnkey project with Tharaldson this year and the capital to complete our clean sugar building in Shenandoah in late Q4 of 2023. We should also begin construction on the MSC project Madison, along with capital for a couple of DCO tech installations throughout our platforms. For Green Plains Partners, we continue to realize consistent performance earnings and cash flow, realizing net income of $9.6 million and an adjusted EBITDA of $12.7 million for the quarter, slightly better than $12.2 million recorded for the same period a year ago. Plant utilization rates at Green Plains were higher, increasing the storage and throughput volumes for the partnership by 12.3% for the fourth quarter versus the same period a year ago. For the year of 2022, storage and throughput volumes were approximately 16% higher than 2021, coming in at around 876 million gallons, and we anticipate a similar amount of volume for 2023 based on our current outlook. As a result, partnership continues to support steady returns to our unitholders, declaring a quarterly distribution of $0.455 per unit with just under a one times coverage ratio for the quarter. For the partnership, distributable cash flow was $10.7 million for the quarter in line with the $11 million for the same quarter 2021. Over the last 12 months, the partnership produced adjusted EBITDA of $51.2 million, distributable cash flow of $44.6 million and declared distributions of $42.8 million, resulting at a 1.04 times coverage ratio, excluding any adjustment for the principal payments made in the in the past year. I would also add the partnership did pay down $1 million term debt for the year and also increased its cash unitholders by $23.6 million in 2022 versus 2021. Thanks Jim. From a commercial standpoint, we've been pointing to 2023 for a while now, as we now have significant quantities of volume from our expanded MSC platform. Our team has been working with numerous customers for some time now and the impact is showing up in our sales efforts. For the year, we have contracted and sold nearly half of our anticipated production and when combined with what we believe will be repeat customers since we are in the ration and they expect us to keep volume available, we have approximately 250,000 tons or 75% of our capacity spoken for all intents and purposes. The engagement from our customers across species have been impressive and we appreciate each one as we know putting a new ingredient in, in mass is something that has never really happened in the span of my 35-year career. A new plant-based high protein product in volume besides the traditional corn gluten meal, or high pro soybean meal or fish meal, has never really been available. In addition, when we embarked on this journey, we initially focused on the crude protein differences between our legacy distillers’ grains and these protein centric products. This helped to underpin both the nature of our transformation and the view that we needed to become part of feeding the world. We always knew that once we solidified ourselves with our new customer base by providing unmatched production volumes and redundancy to focus would shift to nutritional value and the impact on our customer's bottom line. As we are successfully completing sales cycles initiated early to mid-2021, we are starting to see the customer's acknowledgement of the nutritional benefits that our fermented ingredients have to offer over certain other plant-based and solvent extracted ingredients. This embraced by our customers is also very much in line with our plans for product development, which is predicated on the view that our fermentation platform combined with our yeast and enzyme partnerships can develop amino acid and peptide solutions that will create an even stronger relationship with our customers, whether it's an aquaculture pet food or young monogastric animal diets. All of this is important, but we do know what matters to our shareholders as well as we have been stewards of the capital you dedicated to Green Plains. With that said, I'll give you a look under the hood a bit. Since the inception of the strategy, we indicated that our belief was the base product would sell for a premium of $200 over traditional distillers low protein products, and I'm happy and excited to report we have exceeded this target since inception over the average of the sales book. This is fully consistent with our initial outlook and guidance. This premium ebbs and flows depending on customer requirements for different protein levels and other requirements around quality control and quality assurance in addition to geographic locations. Keep in mind this is before much effort to move up the J curve as we are now beginning to focus on that in 2023. On our species focus for 2023, we expect based on sales we have made and in customer process advancements that approximately one-third of our production will go into global aqua and pet food customers and we are even starting some of those negotiations at over 58% protein levels, which we are confident we can now make on demand at our facilities. The remaining production is spread across all species for different uses at different feeding cycles from young to old. When you look at the average premium to date, which is trending, combined with the moving corn oil pricing, we anticipate to a fully achieved projected rate of returns on the MSC systems we have in running. This was not easy, as the bottlenecking starters were harder than we expected, but once we had real volume available to our large customer, they knew this product was real. Our great customers have demonstrated their confidence in our product and our journey. We are proud to offer a solution that helps keep -- helps meet their needs. The MSC technology is also contributing to higher renewable corn oil yields and with new pricing levels it helps cement long-term project returns. Rest assured, while we are seeing strong acceptance of our 50% protein product, we will continue to focus on developing and commercializing higher proteins at 60% and above. So, where does that leave us for the rest of our platform and timing? We have outlined supply chain issues, especially with our electrical gear and also permitting on the last several calls. Our turnkey partnership with Tharaldson a 175 million gallon plant where we own half of their MSC production is under construction. Our Madison, Illinois location is next up for us for our MSC technology development and pending receipt of the required permits from the state, which are in process now should be under construction this summer for a 2024 startup. Our Fairmont location in Minnesota is also in the planning stage, but the permitting situation there could take longer than Madison as we have outlined on the last several calls. At superior at Otter Tail due to the size of the plants and our focus on capital efficiencies, we are first focused on maximizing the renewable corn yields and are reviewing, deploying a full MSC system at a later date. But right now we're looking to deploy Fluid Quip DCO extraction technology from mechanical means to extract more oil in the meantime. This will give us approximately 885 million gallons of capacity, including of our half of Tharaldson that Green Plains will have MSD fully installed once completed. When you add into DCO enhancements, we will be relatively close to the original plan laid out, and even more important, the strategy we laid out as a three to five-year journey to move up the price and protein curve and I feel like we are right where we want to be. So, now let's pivot to our sugar business. We are deploying a truly game changing technology from Fluid Quip where we own and control the IP and are on the path to be truly disruptive to an industry that hasn't seen a new entrant in a long time. Our exercise and protein has set us up well for dextrose as we can apply those learnings to an even smoother execution of this strategy. Our ability to convert the starch component from a kernel of corn at a dry mill ethanol plant into a lower carbon dextrose product is opening door -- opening the door to a new source of supply in an industry dominated by an oligopoly. We've had potential customers calling us up because they were ration product from the big four dextrose producers, but unfortunately, our commercial facility isn't completed yet. Our commercial scale CST system is under construction in Shenandoah, Iowa, where we are building a revolutionary biocampus on a path to complete our first true biorefinery of the future that can separate the high value protein feed ingredients as well as the optionality to convert starts to dextrose. The great thing is once the CST facility begins, we will still produce protein oils and other animal feeds from each bushel of corn, just less ethanol. This is a game changing technology that demonstrates why we invested it and only a significant majority of Fluid Quip two years ago, and their efforts to design and engineer this technology to this scale is a testament to their IP suite they developed, the engineers and scientists have Fluid Quip that are there now and are dedication to disruptive ag technologies. Shenandoah is on track to build a facility capable of producing 200 million pounds, expanding to 500 million pounds of dextrose annually. And we believe in the coming year that investment opportunity will continue to expand this technology at Shenandoah or deploy it at additional locations. How do I know we're on the right track? The talent we are attracting from traditional corn wet milling industry is nothing short of extraordinary and they keep coming our way as they know this is a quote unquote change the world kind of opportunity. The economics remain compelling, and we are anxious to stand up our first system. Our carbon initiatives continue to gain traction as well. As I outlined earlier, the partnership on synfuels from biogenic carbon, we went into the IRA impacts and quite a bit of detail on the last call, and we continue to work towards maximizing our opportunities, reviewing such options as combined heat and power systems and many others. Summit Carbon Solutions continues to make progress on schedule with right away at over 60% of the mileage completed across the entire 2000 mile footprint, which has been acquired with over two-thirds acquired in critical states like Iowa. Important to Green Plains is that Summit has already put down payments on critical long lead equipment, like compression equipment that will go into our plants. Their progress means we are remain on track to start capturing the benefits of IRA in 2025. Certainty of carbon sequestration remains the most critical aspect for us as we believe in sustainable aviation of fuel and Summit's access to permitted class six wells right now and pore space can give us a competitive advantage quicker and better than the market in our low carbon strategies. Looking ahead, we remain optimistic about the potential of the Inflation Reduction Act to provide a meaningful uplift to our margins in 2025 and beyond. As I mentioned before, I told you -- if I told you the potential forward EBITDA estimates from this program alone, you wouldn't believe me. But the math is easy and I'll let you use your imagination. As you know, I'm adamant that all roads lead to alcohol to jet sustainable aviation fuel, which is the future of this industry. Recently, we saw the state of Illinois pass a new $1.50 per gallon, SAF blender's credit on top of the IRA. The aviation sector needs to decarbonize and we are their readymade solution from both our low carbon alcohol and also our waste oils we produce for the renewable diesel industry as they convert to SAF in the future as well. For scale, alcohol is a much bigger solution, but both vegetable oil-based and alcohol-based sustainable aviation fuel are important to give aviation the ability to reduce their Scope 1 and 2 emissions from jet fuel. We have -- with the opportunities in front of us from our MSE technology for protein and corn oil expansions, deployment of Clean Sugar Technology and carbon capture and utilization, we continue to have confidence in our strategy to hit our 2024 and beyond projections. The IRA impact and potential to move higher -- to higher protein pricing levels and upgraded nutritional outcomes over the coming years could even add to these totals. We have set this company up to be aligned with macro drivers that underpin our initiatives around protein and vegetable oil demand, decarbonization, and the emerging bioeconomy, and we are just getting started. Our employees are exciting every day to drive value, and our customers are excited as well, all which we believe will create significant shareholder value in the future. We appreciate your continued support at Green Plains transformation. Good morning and thanks for taking my questions. So, Todd, talking to some of the other players out there, the private guys, it sounds like there's something really funky going on again with asset values that they're particularly strong. We haven't seen something like this in almost 10 years. Can you maybe share with us what you're seeing point to data points that we can see publicly? And I kind of have an intuition and this might be related to operators confidence in SAF and the demand for those plants to serve the opportunity for the IRA and what President Biden's laid out. Can you maybe just unpack that for us and talk about whether or not this could put us into a capacity deficit for fuel ethanol in the future? Yeah. Thanks. Great question. What we're seeing out there, at least at the scale plants, the big plants that we -- that are have been built over a 100 million gallons is strong interest that we've seen on processes that are happening in the market today. We're hearing that some people aren't even making the second rounds of some of these asset sales because they're bidding what were traditional values that we were able to buy in the past, and they're not making it to the second round. So, we're hearing very strong values almost towards original replacement values. Even though today, it would cost a lot more to rebuild a platform like ours. So that's very enthusiastic for us. When we look at our asset values today, obviously you're going to have to watch whether you're subscale or not, but when we look at that today, our view is that the people that are showing up in some of these data rooms from what we understand are really taking the view of sustainable aviation fuel and decarbonization and looking at the IRA and thinking to themselves the optionality that's available in this industry has never been stronger based on all of the different aspects that this industry is heading down. Whether what we are doing on protein, oils and sugars, whether what others are doing around other technologies that they're deploying, whether we're going to do combined heat and power systems on co-generation to reduce our -- not only our carbon, but our energy costs all the way through this sustainable aviation fuel initiative, the optionality in getting a hold of these systems seems to be something that many new players and many other entrants are looking at the U.S. ethanol industry that traditionally they may have looked past it. So yeah, we certainly have headwinds in our traditional fuel economics and we've had them. How are we make a little more than we need every single day, but I think that's going to -- as we see every year, we sat last year at this time, literally on this call, not knowing what Q2 was going to look like and thinking to ourselves, it's going to just going to continue. And all of a sudden we saw a very, very strong change in the margin structure. Hard to predict that will happen or not this year, but we do know that the ethanol margin moves very quickly. Excellent. Thank you. My second question is about protein pricing. So, it seems like every few months, there's some controversy that whips around people speculating about your pricing for the MSC product. You were pretty clear in your commentary, but I was hoping you might be able to kind of put some boundaries around pricing. In the past you pointed to soy meal versus soy concentrate things to consider. Are we looking at potential pricing closer to that of soy concentrate, particularly as we look at the 58% product that you'll be selling into aquaculture. How should we really think about pricing today? And how this rolls out this year? Yeah. We hear a lot of rumors around our pricing, which is always very interesting. But obviously there's lots of things that go into consideration of whether it's geographics, freight spreads, where we're relative -- where we're at relative to production. What we wanted to make sure is the -- our investor shareholders understood first and foremost, what we laid out originally with that what we believed was a initial $200 value over our traditional products we are achieving and actually exceeding on average over the whole platform. Yes, certainly there's times when Nebraska distillers' grains rally very, very hard against protein, but maybe Indiana isn't. So, depending on where you have locations, some of your plants, you have higher and lower margin structures depending on the time of the year. But overall, what we -- and what -- and we wouldn't say it unless it was true by the way. So -- but overall, we've achieved greater than the $200 a ton on average across since inception, by the way. And we can go all the way back, but since inception. On top of that, what we've seen is the contribution from corn oil, which we put into our margin structure on this part of the house that has been strong because of values have gone up significantly since the start of the project as well. So, look, overall, we are bringing systems up still. We had two -- we had -- or we had record days of production this week again, across our platform, and we're still not at full rate. And so, we're very excited about it, but it does tell us that the production that we've outlined across these five facilities are on track. Our sales program is on track. We are having great conversations with what we believe will be our next strategy, which is to replace corn gluten meal to start in rations, both domestically and globally. We can make a 58.5% to 60% pro product right now. It has a better nutritional outcome because it's a -- because of the amino acid profile and the fact that it's fermented and there's yeast in it. So, this is just a step-by-step process. And as we bring these plants on, we are spreading our costs over more and more volume, which is going to help our margin structures as well. So, while we've seen some limited contributions so far now that we are have these five plants running, 2023 is really our inflection. But a lot of people think they know what's going on in protein pricing because they hear A, B, or C. But we're here to tell you right now, we are effectively sold out for the first -- almost the first half of this year. It is a wide range of species with what we have -- as I said earlier in the call, because we're in a ration, our customer expects us to have that product available. They may not want to price it all today for the whole year today, they have different views on price as well, but they expect us to keep volume available because we just can't go into a ration and say, oh, no, so sorry, we don't have any for you. So, we know what we have committed for the year as well. But at this point we have almost 50% priced and sold. So, it gives us great confidence on where we have from a pricing perspective. Maybe we could just start off on CST. I wanted to get a sense for how you are all approaching the commercial process there as you get ready later this year to bring that first facility online. Is there learnings to be had from the work you've done building up the protein sales side of things, and how should we think about that, whether it's a co-location or sort of an off take arrangement? Yeah. I think first and foremost, our learnings from protein will absolutely apply into our CST business. How we ramped up our sales process, our quality control process, the things that we did, how we brought plants online. We -- traditionally, it was pretty simple. You build an ethanol planet, it runs, now you have adding component technologies that you've seen in your visits as well. These are not part of the plant. These are actually separate and distinct functional assets. And so, we just -- we got great education on how to do this correctly as we think about our CST. Most of this first plant will ship to customers around the United States. We won't have a co-location set up there for several years, but we are working with partners on that as well. But we're basically looking for -- we've had a lot of discussions. We've had product in customer's hands. We are making product in York, we're first focusing on 95 DE which is a familiar term in wet milling. We're focused on refined and unrefined, which is unique. We are also in the process of increasing our capabilities to 43 DE, dextrose equivalent and making sure that our color matches what comes out of a traditional wet mill, which is why we're attracting wet millers to our company right now who would've never worked in the ethanol industry before, by the way. They all -- they looked at this and they -- it was child's play to make ethanol for these guys. When you look at what happens at a wet mill, it's much more complicated. So, when we look at not only the talent we're attracting, but the customers that are calling, we've had customers call across the United States that have basically been rationed and they're short supply and they need more dextrose. And you saw an announcement out of the one of the big four that they're going to expand some of their dextrose capacity. But in general, we believe that we're going to be the next big player and it's just a matter of time now. Yeah, we got to get the first ones started. We got to get make sure we debottleneck it. But we are anticipating, and we are thinking about really this is the game changing technology for Green Plains that could truly revolutionize our long-term margin structure above all else, above protein, above oil, even above carbon long-term. We believe that this product is -- the margin structure is just so robust and it has been for many, many years in this -- in the wet million industry. So, we're on track., We like what the position we're in. If I could go faster and wave my magic wand, I would. But today we just have to be a bit patient on this. But absolutely what we learned in protein is critical to starting up our CST systems and executing even better in the future. No, that's great color. Maybe just on a follow up. I don't know how much you can say here. But maybe from a more general level, I'm just curious how you're thinking about how the industry might go about pricing or structuring ethanol in an ethanol to jet situation, given it's -- it'll be kind of a low carbon feed stock situation. I'm just curious if you have any thoughts there. We can move quickly from access to a deficit as ATJ progresses. Obviously not today, but in the future. And so that really, I think, gives the industry back some pricing power. Now, first and foremost, you have to have decarbonized alcohol. You have to meet the standards that are set in the IRA. We're still focusing on the measurement of that carbon. When you start in your carbon scoring under GRE [ph], which is somewhere between kind of 50 and 60 from most of the industry, you drop 30 off as soon as you sequester the carbon, whether it's going to be direct and jacked on a pipeline or other areas. And then from there, another five to 10 points just on combined heat and power alone, before you even start to think about the aspects of what happens on the farm and even the seed that you plant. So, when we look at that, our low carbon alcohol relative to everything else should be higher in value than fuel. But I think it's going to be interesting to see how this plays out. I mean, today we're $0.50 under fuel, because we have a little bit of an excess in the market where there are times we're at fuel price as well. So, I think we move structurally from an excess to a deficit, and I believe we'll have some pricing power, but I believe the margins will be big across the whole supply chain. And I know people say, well, who's going to buy it? United Airlines is certainly committed in our joint venture. And remember, this is not just a off take agreement. Those are dime a dozen quite frankly. This is a very important structural partnership that we have with Tallgrass and infrastructure player who moves molecules every day. PNNL who brought forth this, what we believe is a efficient technology and United Airlines, which is saying, we don't just want to buy the fuel, we want to own the process and invest in the technology and have a real stake in the ground on this one. So that's the importance of this -- of this partnership. Just think about what we're hearing ethanol to jet. I mean, those are words uttered out of airlines today that weren't uttered three, four years ago, but it's the only real true volumetric path. Yes, absolutely. RD to jet is going to be very important. Veg oils to jet extremely important and it's going to happen as well. So, combined between veg oils and alcohol, we are going to make real impact, I believe, on sustainable aviation fuel in the future, but also really refine the margin structure of this industry significantly. Hey, guys. Congratulations on the ultra pro update or routine update you were all looking forward to it. My question is, now that this is locked and we can all see the price of what corn oil is doing, can you or Jim talk a little bit about what kind of EBITDA could we be looking in 2023? If you could just walk us through the various components of the EBITDA guidance for the current year. Yeah. I mean, the EBITDA range we've given you on what we control is still intact. It's really just comes down to what is ethanol going to do this year. And today, obviously, there's some headwinds, so we have to watch that closely. But as we know, and as I said, it moves very, very fast. We've seen margin structure improve a little bit on the curve, but it's just going from low to less low. And so we're going to have to continue to move that margin structure forward. And I think this, we're going to -- there's going to be some discipline and rationalization across the industry. I think the industry is getting a little bit tired of giving their fuel away too cheap and not earning the return that we should be earning on our asset base. And so, it was a pretty tough quarter in Q4 for ethanol and Q1s are always tougher quarter. But like I said, we're optimistic throughout the year that, that we will have times again to potentially earn some real returns against just ethanol. On top of that, with what we're achieving today on protein and the fact that even with this recent reduction in veg oil prices, we still -- we're still going to generate a significant EBITDA from our corn oil program. But even more exciting for corn oil demand this year is look at the sheer volume of the potential -- up renewable diesel production coming online this year. We're not talking like just a small amount. This is their big year where they don't just add a little bit. They potentially double this year in what they've been producing in the past, which means the demand for veg oils into that space doubles as well. And when you put it all into play relative to even with soy crushing to coming online, the real question is we will hit again where the market will crush for oil, even though the oil meal spread has widened out a little bit and people have sold the oil and bought the meal, but we will bring that oil shear back into play, in my opinion, back in 2023, which is very beneficial to our corn oil pricing potentially. So, we're looking forward to it and we're really in that same range of the guidance that we issued earlier. We just have to watch ethanol closely. I would add onto, Manav, is as you are seeing more and more of these renewable diesel plants want to add sustain aviation fuel technology, the low CI score of the renewable corn oil we make, we'll keep it in a preferred spot for demand as we move forward. No. thanks. A very quick follow up. As you also hinted, everybody is looking for corn oil. You have corn oil. We have seen [indiscernible] and ADM do some deals. Wouldn't this be a good time to lock up a very good price on corn oil with some of this new facilities that are coming on, which could give you like a hedge against some of the volatility if there is any in the corn oil pricing? Yeah. I don't think you're going to find somebody doing multi-year off take with a high price today. I think the view is they -- they'll rather remain in the spot market or at least try to lock-in volumes of the low carbon. I think it's a bit of like -- we have been in negotiations and discussions with several parties on a potential partnership. The volume's the easy side. It's really how do we structure the pricing side of this and really what's beneficial for our shareholders. What's been beneficial for our shareholders is our patients to wait and let this industry get built out. And with this industry building out, this will be the year where I start to think locking in the ability to source the low CI waste oils, that's going to be really, really valuable. And we continue to try and unlock that last half pound per bushel of corn oil in the kernel. It's still sitting there, and we believe that at $0.60 and $0.70 a pound, which is $1200 to $1400 a ton, that is very valuable that you could put some serious R&D behind, and I think others are as well, not just Green Plains. You could put some serious research and development behind trying to unlock that last half pound of oil in the kernel because it's still going to be lower carbon than anything else out there other than one other type of waste written residues. So, I think we're in a really great position. Can I control what's going to happen in veg oil pricing globally? No, but I think you see that the U.S. remains an island over global palm and global other vegetable oils. And I think we'll remain that way for the coming years because the demand is just so robust that's coming online for our products. Thanks guys and thank you again for the update on the protein side. I think the investors really appreciate it. Thank you. Hi, good morning. Thank you for the question. Todd, you mentioned this in some of your other responses, but I was wondering if you could just say more about the Tallgrass and United Airlines agreement. And specifically I want to ask about the progression of that partnership, what happens as you develop that catalyst? And just help us understand why this pathway is so different from the other SAF announcements that we've seen. Yes. That's why it's really exciting actually, is that this was a competitive process with PNNL. This wasn't like Green Plains and Tallgrass showed up and all of a sudden got a technology. There were other parties that you are very aware of their names, which we won't comment on. They were trying to get this technology as well. And it's unique -- and again, I'm not a chemist or a biologist, but I can -- I'll give you the Todd Becker view and then, we can certainly do a teach-in later on, on this technology. But the traditional SAF, alcohol/jet adjust technologies is a four-step process to a five-step process. And it's breaking the carbon chain, the double bond between carbon and carbon. And that's the difference. It's ethanol, ethylene, and then ethylene through the traditional steps of alcohol that you have. What's different about this technology, it's a three-step process and it's a doubled bond between carbon and oxygen, much easier to break. And that's what the catalyst really sets us up for. So, first thing we have to do is we have to optimize the catalyst. We knew we had to do that. When we partnered first with Tallgrass to get control of the technology from with PNNL to develop it, we knew we had to optimize the catalyst. We quickly were approached by airlines and specifically United where we felt we wanted a partner. We knew we could sell the alcohol to jet. We weren't worried about that. We knew there was -- that was easy to do. But the vision of United to say we're committed, we want to help optimize the catalyst. We want to partner with you financially, we want to make sure we get the fuel in either say Denver or -- and be efficient in Denver and/or Chicago. We want Tallgrass to move it for us. And we want Green Plains to supply us to low carbon alcohols through both what we're doing on direct injects in the East versus carbon pipelines in the West. And when you put all that together, it's a very, very valuable partnership. So, first and foremost this year, optimize catalyst, move as fast as we can. We're working with global experts to do that. Secondly, while we're doing that, start to think about what the pilot plant will look like and where it will be located close to a Green Plains plant or onsite with one of our plants in between what I would say Denver and Chicago. So, you can use your imagination of where that will go. But -- and then from there we engineer it. We put a pilot plant in place. We've each committed upon successful optimization to the catalyst that we would fund a pilot facility for our share. And we haven't said what each of our shares are, but you could -- basically just three partners. So -- and then from there, we will then move quickly to look upon success of that to commercialize the technology. It's a three-step process. You don't make ethanol to ethylene. It's a ketone process, so you can certainly do research on that as well. But we believe that this is a very interesting technology. Now that doesn't mean it's going to be the only technology. There's several others out there. We hope they're all successful. We hope ours is successful. And I think there'll be many choices for, not only industry, but also airlines to make, as well as, how we're going to produce it as well. So, excited about it. I think most important is the fact that the recognition is, if you want to decarbonize jet fuel, you're going to have to come through alcohol for volume, for share volume. And that could really be the most interesting part of the story, which is you go from excess to deficit very, very quickly. Because if you think about it, 16 billion gallons of production today really is only going to convert into 10 or 11 billion gallons of jet, which really isn't that much globally. And so, it's not just going to come down to jet a net credit, it's not how this world's going to work. It's going to come down to the fact that it will probably be more expensive than jet fuel. But in general, this is a pull through, not a push through. No, that's super helpful. And I think we'd all take you up on that key trend. If I could follow up on… If I could follow up with a slightly less interesting question, more on the ethanol based business. Just how you're thinking about the export outlook for 2023. How much demand do you see moving to places like Canada and just your ability to serve that market? Thank you. The Canada's robust. I mean, they continue to really drive down our drive programs around low carbon fuels, and ethanol is a key component of that. We're excited about the volumes that go there every day, but we need the other world. We need the other parts of the world to engage for sure. We're very competitive as a molecule. If you look at our discount to gasoline and [indiscernible] today, we remain at a discount, probably still right now, the cheapest molecule on the planet for octane. Our octane values still remain very, very intact. So, I think it's engagement. As I said, the world needs to continue to open up, and I know it's a broken record and I can't even believe we're still talking about it, but we still need China to open up post-COVID and bring demand back online. And I think that's going to be the real driver that probably puts a bid back into gasoline, but also puts a bid into molecules that can go into fuel tank as well. I think what's also really interesting is not just exports, but when you look at -- and I know these are easy states, Minnesota and Iowa -- blend rates are up to over 12% now and up to -- over 12% is because you can blend E15 pretty much year round in a lot of states at this point. And so, we think that will continue to increase as our value proposition remains. And ultimately this E15 just get one more percent blend on average across the whole industry or the whole gasoline supply in the United States. That pretty much cleans up our excess and really changes the view of where this ethanol industry can go. So, if you kind of look in your crystal ball and you say to yourself, yeah, Canada's really strong. We're still doing business with the rest of the world. We're still exporting some ethanol. We're still exporting some B grade. Those type of things are still happening. But if you kind of take a look at little more percentage blend in the United States, a little more export demand moving to SAF, you can move very quickly on this margin structure. And I think that's what we're all looking forward to. Hi, good morning. This is actually Kevin [indiscernible] on for Lawrence. Thank you for taking my question. So, actually most of my questions have been asked, but just to hop back on the SAF JV that you guys announced recently. So just wondering, I don't think you've shared how much you thought maybe this could contribute once it's up and running on a run rate business -- run rate basis to your earnings, but if you could share any thoughts around that, I'd appreciate it. And maybe just an adjacent question, I guess, how you guys think about IRS for the projects and JVs you get involved in. So any color around that would be helpful. Thank you. Yeah. I mean, first of all, I mean, when we look at the IRSs all the stuff that we do, whether it's protein, which I think as we indicated, our long-term and short-term now projections, we still remain intact. As we spread -- as we open up more of these MSCs every day, we're achieving the projected rate of returns, will be what we believe is something that we can do because of even where we're selling the first products. On top of that, with corn oil, finally spreading real volumes across these costs -- cost of startups are high. And so, we have to always take that in consideration and it just takes time to scale up. But over the long-term, we absolutely are on track. And our corn oil systems, obviously, they return very well. Our sugar system, when we look at the cost of construction and getting these scenes up and running versus the margin opportunity, if today we are up and running, it would be pretty close to -- almost a one year payback, but we're not up and running. So, we don't really know where that's going to be when we get there. But even in our initial thoughts, the base margin available was in the $0.60 a gallon range just for producing sugar at the traditional value of production and a traditional sales price and cost, we think is less than two times that, so less than a two-year payback on traditional pricing and potentially better than that on current pricing for dextrose. So, when we go -- when we move to that, obviously rate returns are high. And then comes down to alcohol to jet. Alcohol jet is a multi-step process for us on return. First return is the fact that we de decarbonize our alcohol and get opportunities to increase our margins just from that alone, from the IRA, from putting carbon in the ground and monetizing the alcohol all the way through. Then producing the jet at a full scale facility, which at this point, we're still determining what the economic model would be for that and whether we need to really own a ATJ plant or whether our supply agreement will be adequate and we'll just sell the technology or have somebody else build it with our technology. So, there's obviously things we can look at there as well. What expertise do we have in house versus others. But I think the IRRs will be inconsistent with everything else that we've been doing. Hey, so just on high pro, I know you talked about 50% spoken for you expect repeat buys here as the year progresses. Maybe, first could you just talk about the nature of the contracts, the typical length of the contracts? And then, maybe from a high level, what do you think the right number is in terms of locking that in, just when you think about moving up the J curve and also given pricing dynamics in the margin? Yeah. That's something we face it -- we face a question daily, right? So, it's not just spoken for by the way, let's just make sure we're clear. It's sold, sold and priced. So, I think that's important for our investors and our shareholders and our stakeholders to understand. In fact, almost sold out for the first half of the year. So, we did want to keep some volume back, because we do have new customers showing up every day. We've had to say our first nos to customers as well, which is good and bad, right? Because we do know that pricing then becomes more interesting. But we've had -- we put a sales plan together before we reach 2023 and where we thought we would sell all of our production. And that's ebbs and flows again depending on who shows up and when they show up. And we're already working on 2024 partnerships to replace corn gluten meal on certain rations around the world today. So, just to let you know, we're already focused on 2024, looking past 2023 at higher protein levels. So, we have to keep some back because the last half of the year is really when our sales team is going to believe we're going to hit in aqua as well, more globally than domestically because we are already shipping volumes into global aqua players and they are in the rations today. So, we're holding some of those volumes back for the last half of the year. We also know that some of these large customers have put us in the ration and expect us to be there when they come back for the rest of the year. So, we understand how we price. And I've indicated to you on that we also understand that we have made a commitment say that we will be there for you to buy supply from us. And we've had customers that. We had in for 3000 tons in our sales estimate. They came in for 30,000 tons. We had 5,000 tons, they came in for 50,000 thoughts. I mean, what we're seeing is truly game changing from our perspective. And they are realizing there's something very special about this product that's very different than traditional proteins that they've fed before. The amino acid profile is very, very different. The fact that they get 20% to 25% yeast in their product, very, very different than buying just corn gluten meal or just soybean meal. And so, those will all get fed. There's no worry. We're not displacing demand, we're not our supply. I mean, the demand is growing so fast for all proteins that -- it'll all get fed. But what we're finding is that we have a unique characteristic that the market liquid looking at and we continue to develop from there. This is a tailor -- we can tailor this project to taste and nutritional profiles, and we believe that in the coming year, we will make breakthroughs on that as well. So, -- and I gave you a little bit of a hint in the script on that. So, look, we don't want to sell out for the year because if we do, we don't have anything for even higher value customers when they show up. Understanding that we're going to have everything from 50 pro customers at more of a soybean meal type pricing or a DDG plus pricing versus customers that we move up to higher protein levels where we can now start to get towards corn gluten meal pricing, soy concentrate pricing, and moving towards potentially somewhere towards fish meal pricing depending on the product. So that, I will tell you one thing that is our Fluid Quip team is absolutely focused on, not just on 60 pro, but higher than 60 pro. They believe that they will have products that will go all the way up. And that's the thing we really need to start focusing on, is that, yeah, we wanted to make sure we put base volumes in place. We wanted base load on. We wanted to show the market number one. We could sell the product. We can achieve the returns. We can get inclusion rates. Yeah, I mean, it certainly hasn't been easy, but once we have real volume, the customer showed up. I think that's the most important thing. Yes. Thank you, Todd and Jim. So, my first question is on the [indiscernible], the partnership for CCNs. It's going to be the -- I guess the starting -- the first project is going to be done in less than two years, and you said, 2025, you're starting to have some income here. So, can you start quantifying a little bit what we should expect, because it's very easy, obviously, to do the math of the carbon sequestration with IRA payments and some of your expenses? But this clearly a project where you're putting on capital, but also you're making only fraction of the benefits. So, can you help us size the benefits in 2025 personally? And secondly, given the IRA benefits and how staggering I guess they are for a low CCS projects for ethanol, why not take the path of doing a project by yourself, which could yield $40 million or $50 million in profit per year? Yeah. We're going to have a wide variety across our platform of different things we could do with carbon. I -- obviously -- don't forget the IRA, the big part of the IRA, the clean fuel production credit is 2025 to 2027. So, we do need that extended. And yes, you could certainly gain a large advantage in the early years, but it still takes time to get direct inject classics wells, and approved. And that's something you have to weigh versus the time you have 2025 to 2027 on greenfield production versus having a partnership with Summit in the ground early and achieving some of those returns early. And so, Summit realizes as well that there's a lot of dollars on the table, and I think they've already -- they understand that the opportunity for the whole universe has become bigger and there's no question in my mind that our opportunity is bigger. But I think where we're really at is, is speed, which is critical. If you look at the pipeline we're on, they're two-thirds done in Iowa. They have poor space done in the -- in North Dakota. They've got storage, that's ahead of everybody else at this point announced. Now, obviously, some people may not announce, but we haven't heard much on right of ways from others. We haven't heard much on poor space for others other than permits are being pulled -- or projects got pulled in Illinois on these big storage spaces. But we like where we're at. I mean, look, in Indiana, we're focused on a direct inject project. In Illinois and in Tennessee we're focused with Tallgrass and Osaka on converting that to syngas and/or methane fuels. In Iowa and Nebraska, we're focused on sequestering our carbon. And yeah, you can look at different economics. But at the end of the day, the IRA is going to be really, really important. It can make us a lot of money, everybody, and it's going to, but more importantly is decarbonizing our products for the long-term. Having low protein dextrose or low carbon dextrose. Remember dextrose already before we even decarbonize, is 40% to 50% lower carbon intensity than what comes out of a wet mill today. We've gotten that analysis done, that's before we even sequester carbon. So, the value of low carbon dextrose will be very, very high. And what you do with that in chemicals down the road will be very, very big opportunities. So, you got to kind of weigh capital efficiencies. We're very capital efficient with what we're doing on the pipeline, because there is no capital. So, while maybe the return may be a little bit lower, we could still do things at each of those plants around combined heat and power systems. That's five to 10 carbon points at $0.02 per point per carbon per CI score. That's better capital efficiency than necessarily putting it, investing and making sure that we do direct inject. So, I think just pluses and minuses. It's what we have to focus on is what's the very, very best return for our shareholders. How do we allocate capital? Where do we get the capital from? So, when we look at co-generation on combined heat and power, we have plenty of tax equity interest in that. Plenty of partnership interests on people that do co-generation every day that look at it from a 20-year standpoint while we get the rest of it. So, we're focused on all of that, but I think there's going to be many, many ways to play the IRA, many ways to play the clean fuel production credit. How long will it last? And what we want to focus on first and foremost at Green Plains is things that aren't subject to government policy risks and pen stroke risk, protein, sugar, dextrose, that's not a government policy risk. And then margins there are significant. So, we want to be set up for all opportunities, but this IRA certainly is something we didn't anticipate and it's going to bring significant value for our shareholders in many, many different areas. I guess, [technical difficulty] my comment was mostly on the IRA credits where there's no need to hurry up and there's no 2025 to 2027 need to be online. I guess that's where I think most of the return will come. Just one… No, actually if I could just -- there is a -- you want to be in as fast as you can to -- those three years will be very robust. So, you want to go after all of that you can as fast as you can. And if you just go direct inject everywhere, you will not get all your classics wells done. So, you're going to have to kind of make your bets depending on how fast you can be online. And want to go after some of that stuff very, very early in the process, because after 2027 it reverts back to the 45Q and whatever the programs are. Now, we believe, I will tell you this from our discussions, is that the CFPC will get extended, but today the program in place is you want to be as fast as you can, sequestering carbon as early as you can into 2025 to 2027 time area. Thanks everybody for being on the call. Little over an hour. I know it went a little long, but it was the end of the year, and we had a lot to update. As you can see, we're making great progress on our four pillars. Protein, we gave you more of a look under the hood than we ever have before. And our confidence grows every single day that we're going to move up the curve in higher values, in higher protein levels. Oil and renewable, low carbon oils, veg oils, opportunity is still there, or the values are still strong, yet a little off from the highs, but with a lot of demand coming on this year. And even more importantly, their transformation from just renewable diesel to sustainable aviation fuels, sugar business, our enthusiasm there, we are on track. We want to be there. The margin is our robust best, best in anything we can do today. And lastly, decarbonization and our opportunities. And you can see the importance of decarbonized alcohol in all of these processes. Exciting about that. Got a deal with the headwinds. We get it. We'll get past it. We have -- we're in a great position financially at this point, and we think we're set up very well to start to achieve our 2024, 2025, 2026 guidance that we laid out with opportunities for upsides.

EarningCall_446

Good afternoon. Welcome to Affirm Holdings Second Quarter 2023 Earnings Conference Call. Following the speakers' remarks, we will open up the lines for your questions. As a reminder, this conference call is being recorded, and a replay of the call will be available on our Investor Relations website for a reasonable period of time after the call. Thank you, operator. Before we begin, I would like to remind everyone listening that today's call may contain forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including those set forth in our filings with the SEC, which are available on our Investor Relations website. Actual results may differ materially from any forward-looking statements that we make today. These forward-looking statements speak only as of today, and the company does not assume any obligation or intent to update them, except as required by law. In addition, today's call may include non-GAAP financial measures. These measures should be considered as a supplement to and not a substitute for GAAP financial measures. For historical non-GAAP financial measures, reconciliations to the most directly comparable GAAP measures can be found in our earnings supplement slide deck, which is available on our Investor Relations website. Hosting today's call with me are Max Levchin, Affirm's Founder and Chief Executive Officer; and Michael Linford, Affirm's Chief Financial Officer. Thank you, Zane. We appreciate everyone taking the time to join us. I hope you've had a chance to review our letter to shareholders as it contains a great deal of detail. Amidst increased macroeconomic headwinds, our fiscal Q2 had mixed results. Revenue was at the low end of our expected range and adjusted operating income came in better than expected. On the other hand, gross merchandise volume was short of expectations as was revenue less transaction costs as our mix shifted to more interest-bearing loans and we retain more loans on the balance sheet. We once again reported excellent credit performance as delinquencies fell on a sequential basis. Our continued vigilance and attention to credit outcomes allowed us to meaningfully increase our funding capacity in January. We also acknowledge a tactical error on our part that hurt our results. We began increasing prices for our merchants and consumers later in the year than we should have as this process has taken us longer than we anticipated. This is a lesson we will not soon forget, though it does not change our long-term outlook at all. We have taken appropriate action from implementing pricing initiatives, which are gaining traction, to refocusing our product development effort on margin optimization and core growth to the most difficult decision of all, reducing the size of our team by 19% today. I believe this is the right decision as we have hired a larger team that we can sustainably support in today's economic reality, but I am truly sorry to see many of our talented colleagues depart and we'll be forever grateful for their contributions to our mission. With a smaller, therefore, nimbler team, we are focused on achieving profitability on an adjusted operating income basis as we exit fiscal 2023 by executing on three key initiatives: accelerating GMV growth while optimizing RLTC; engaging consumers to drive greater frequency and repeat usage; and growing Debit+. We continue executing on our strategy to scale our network, make disciplined high conviction bets in our most promising opportunities and capitalize on our massive secular tailwinds. Anybody wants to ask me about the recently proposed rule on [indiscernible], please go for it. We'll head to Q&A now. Back to you, Zane. Thank you, Max. With that, we will now begin our question-and-answer session. Operator, please open the line for our first question. Hi. Thanks so much for taking my question this evening. I was wondering on the new pricing actions that rolled in a little bit late, what do you see there typically in terms of attrition or other impacts kind of downstream when you go about rolling those in? Is that a risk factor for later? Or do you have a pretty good idea in terms of what to expect as you roll those pricing actions in over the course of the next few months? We have seen zero attrition that I can think of. Michael will sort of correct me. But it is not a matter of risk of implementation, but it is very much a matter of timing. The process is a little bit more complicated than, in some cases, any way than simply notifying someone because for a large percentage of our merchants, they utilize something or anything in our set of offerings as far as buying down rates is concerned. So the conversation isn't just, hey, we need to raise prices on consumers or you need to pay us more MDR. It's inevitably a conversation about how the programs change, what buydowns will look like going forward now that there is a different construct in front of the consumer. For example, you might see – we now have a significantly more visible set of 4% and 5% APR is not a product or not a program that we featured last year at all, et cetera. So it's a matter of underestimating complexity on our part. And the other unfortunate reality is that having these conversations in calendar Q4 with merchants is just not something that happens very quickly. So we don't have much risk in those conversations, but the timing made a little difference. And then I think it's also important to know that from a consumer price standpoint, we continue to believe that there is very minimal elasticity. So in thinking about the impact on the top line and the top of the funnel, we don't think there is a measurable impact there. Okay. One quick follow-up for me. I also noted that more of your GMV was coming from interest-bearing loans, and as you called out, the highest ratio in the corporate history. Can you just kind of comment on how we should expect that to trend going forward? Is that a rate that should continue to increase? Or I've noticed that I've seen some, for example, some 0% loans on the Amazon website that hadn't seen in the past. Could we expect that to kind of come in? I think it's, generally speaking, reasonable to expect as the Fed rate continues to go up or at least remains high or elevated relative to last year to see more interest-bearing loans versus zeros. That said, the subsidies to reduce the rates or eliminate them entirely come from both merchants and platforms as well as manufacturers, et cetera. And so overall, the trend should be expected to be towards more interest-bearing loans, but we're certainly still very much in the business of finding ways of offering consumers magical deals that contain no interest at all, which is obviously far more valuable now that the overall borrowing cost for consumers went up a lot. Hi, guys. The new guidance, especially in the second half of 2023, points to lower volume and revenue growth in RLTC that's actually going to be down year-over-year. I know you stuck to the profitability target, but how are you thinking about the longer-term margin and profitability of the business? And how do you get there given that the growth seems to be slowing before you really hit an escape velocity? Yes, that's a great question. We continue to believe that the long-term range of the revenue less transaction cost as a percentage of GMV should be in the 3% to 4% range. I think what – you have a couple of factors going on in Q2 with respect to the timing of how we earn the revenue and how we recognize the expense that distorts it. And given the – that what we think is a one-time step-up in loans that are held for investment through our warehouse financing growth, we think that obviously will weigh down the full year number, but still allow us to end up in the 3% to 4%. And the reason for that is, as we've talked about before, the business is really a mix of split pay, paying for volume, which has margins that are much lower, and very profitable longer-term monthly installment and the two mix in a way where we can pretty reliably predict that 3% to 4%. Additionally, I'd point out that we feel really good about the quality of the assets that we originated this quarter. And as I say, the economic content there is really good. That hasn't been a primary driver. Most of what you're seeing is, again, how those yields flow through the P&L. Thanks. If I could just follow up there similar question but more from an operating profit standpoint. The long-term target, I think, used to be a 20% or 30% operating margin when GMV growth was below 30%. You're kind of there now, but still have a lot of fixed costs to scale. So from an operating profit standpoint, how do you think about the longer-term margin here? Yes. We've not given any update to the framework that we laid out last year. I think that we would probably say we're in the midst of one of the biggest kind of moments of volatility from a macro sense. So, not sure that we would hold ourselves to the framework that we outlined a year and a half ago in this very moment. But I think part of the reason we laid out our profitability commitment to the end of the year was a reflection of the fact that we were wanting to get ahead of that from a framework standpoint. Just for the record, this is not the growth rate that I personally like. We intend to grow the business faster. So the expectation of where they are now is not the expectation that I have for this business. That said, we will manage credit, most importantly as job number zero. Like we will never allow growth trump the necessity of managing losses, and yields, et cetera. But there is absolutely no reason to believe that having taken over a quarter of U.S. retail sales, we're going attenuate and match some steadiest gross growth rate. Thanks. I wanted to explore the long term profitability question again. But from the viewpoint I feel like I've heard you say at conferences like one of the biggest toggle points is, is really kind of the human capital aspect of your business and you obviously just did a very large reduction of force here. So my question is that seems to be helpful today, but to the extent that you're able to sustain long-term profitability, are you going to have to lean into something that requires a lot more automation on your part and are you doing that or are you just trying to match, obviously right now, obviously you're kind of matching an expense versus a downdraft in the top line, but I'm thinking about this longer term from a sustainability perspective. Thank you. Couple of different thoughts on that. The rift is very unfortunate and certainly saddens me greatly and the rest of the team. It is an economic reality that we have to live within our means and match growth of headcount with growth of revenue. But for the record, what we've done is we've rolled back six months of engineering hiring. This is not a – everything is going to be replaced by robots and we're writing a lot of code and we'll continue to do so. We have definitely shifted our geographic hiring focus to Poland where we've been able to attract exceptional talent at significantly lower cost than Silicon Valley, for example. We have a lot of things that we want to build and we'll certainly expect ourselves to build it and deliver it. What we're doing right now is not building all those things concurrently. What we've really done is reduce the surface area of engineering projects we're allowing ourselves to invest in, which a year and half ago or two years ago was exactly the right strategy. And I stand by those decisions. Today, it's a little bit tougher to justify having things that will create the next billion dollar business three years from now built today. We'll have to build it a year from now. Got it. If I could just do a quick follow-up on the pricing initiatives. The question here is really, as you increase APRs up to 36% is the cap. And then you are also, I guess, toying with the idea of increasing MDRs on the 0% APRs, which kind of puts a burden on merchants. I'm just wondering, do you kind of foresee any, I guess, diminishing returns associated with that. From a merchant perspective, I know you have to get some approvals it sounds like, in order for you to actually take those caps up. But I'm just wondering how those discussions have gone and what that kind of feels like from a merchant perspective. I think everyone, merchants and firm alike are keen on more volume. And I've repeated often, and I'll say it again, we are fundamentally governed by yield and risk management. So we must maintain the risk frameworks that we've signed up with our capital partners. If we are able to increase the compensation we get for taking the risk and we really do think of it in terms of MDR/APR trade off. There are many situations where the merchant is more than willing to pick up the increased cost because they want to pass the savings onto the consumer and attract them this way, but obviously works really well for folks with direct-to-consumer brands where maybe manufacturing is partially owned or fully owned. And in other situations where the brand is already paying us minimal possible and is unable to shoulder anymore, then it's the consumer that has to see increase rates. In either of those two cases, if we are able to raise the rates, we will increase approvals. Like this is fundamentally not about expanding a margin. We're quite comfortable with the margin structure that Michael outlined. We continue targeting those RLTC percentages. But being able to talk to our merchants about helping them sell more in a period of obvious consumer slowdown is a pretty welcome conversation. It is not in every case anyway, is it a, hey, well we're just going to go do this because again, we run complex programs. Part of why this business is so defensible is because vast majority of our merchants have significantly more to do with us than just showing up our logo on their checkout. If you look at their product details pages, you'll see that there are pre-quals and various forms of finding out the true cost to the consumer, which has to be updated for regulatory, and just marketing purposes, et cetera. So it's a more complicated thing to execute than perhaps meets the eye, but it is not a difficult conversation with the merchant. And as Michael pointed out, we've run the 36 versus 30 sensitivity tests last year and found that our consumers are actually smart enough to realize that when there are no fees, there are fixed schedules and there is no compounding difference between 30 and 36 on a $240 loan over 12 months is $0.70 a month. So, the true cost to consumer is practically de minimis on a cash basis, and our merchants are smart enough to understand that as well. I think it's important to note that our direct-to-consumer channel, where we have complete control, is probably the best insight into where like the structural economics are here. And that's our most profitable product and channel. We have a very efficient way to engage and monetize that engagement in our app. And I think Max's opening remarks pointed out that one of the ways we're getting to our goals is by driving that engagement back to our own services where we can very profitably engage consumers and we're in full control of that experience. Thank you guys. I just wanted to start on GMV. I'm just looking at the new outlook there. You talked in the shareholder letter about some slowdown in discretionary consumer spending, but just wanted to take your temperature on how much of the lower outlook on the volume is that versus other factors, whether it be competition or just some tightening of the credit box. And then if you can just talk about what you see ultimately reaccelerating the GMV growth, because I think, the mass suggests you'll be down around 13% or 14% in the next couple of quarters. Thank you. That's a great question. So, the discretionary spend is down. We get a pretty good preview of what that looks like, especially around Christmas shopping and Black Friday from our seats, electronics were down about 11%, homewares and supports equipment in particular, were hovering in the negative high 30s. So there's quite a lot of – I'm not sure of the right word to use, but folks are digesting the purchases they made during the pandemic. And I think those are not transactions that will disappear forever, but I think they are probably going to remain muted for, we expect at least a few quarters of that. On the flip side, credit is always an input. We set the loss rate that we're willing to live with and our capital partners are willing to live with, and then we manage everything towards that that's why the delinquencies are as good as they look. We have total control and we are willing to compromise GMV, although don't have to compromise too much of it to maintain industry winning loss rates. And so I'm not sure I'm prepared to give you a breakdown, but those are the two fundamental reasons consumers are pulling back their spend. Every time I talk to my friends CEOs of broadline retailers, they tell me that discretionary spend is down. There is quite a lot of movement into things like consumables and obviously food prices being higher does not help either. To the re-acceleration point, obviously we've talked for a long time about Debit + I'm sure somebody will ask me and I'll give you a full update on what's going on there, but I remain very, very bullish on that. We've worked really hard over the last six months. It's hard to overstate just how much work went into the product just over the last couple of quarters. We feel very good about its state of readiness and we'll start fighting out just how much of that food and consumable spend we're going to be able to shift to Affirm. Our consumers still love us, they still come back to us. You can see that the frequency per user is rising. The network activity is extremely healthy. I think probably the set of metrics that I would direct all of you to look at if you wanted – how does a firm win story spelled out very clearly. There's almost a 40% growth in active consumers year-over-year, almost 40% growth in transactions, 3.5 transactions per year per active user, 51% growth in transactions themselves and 86% up slightly from last one is the repeat transactions. And so, the network itself is increasing density, and that is fundamentally the long term play. Like if we are able to pick up more and more of your transactions, we will ultimately have a really good shot at also helping you buy groceries. And that is transactions that do not, generally speaking, diminish much in the positive and negative economic environment. So that is where the real reacceleration will come from. We’re also selling to more merchants and launching new projects and new products with them. So that, too, will bear fruit. But in terms of new categories, off-line and lower AV transactions off-line in particular, is where I’m most excited about. And then just quickly on Amazon, I think the exclusivity provision of the contract expired January 31. Just any updates there? Thanks again. I think the world where you can lock up your partners with a 10-year contract and not do much after that is – that’s left to card issuing banks. We’re not one of those. The way we maintain our partnerships and hopefully, have a rate to continue showing up is by showing up and delivering real value every day. I think we feel very good about all of our enterprise partnerships. Yes. Just real quick. In our Q, you’ll see we are breaking down the concentration that you see for Amazon. And I think we are – we have a meaningful exposure there. We are a little over 20% of our GMV. That is still underpenetrated versus Amazon’s share of e-commerce. So, we still feel like we have a lot of room to grow there. And nothing happened to our business on to Max’s earlier point, on the day the contract terms turned over. Hi, thanks for taking my question. Just looking at your FY 2023 guidance, you’re calling for cut at the midpoint on revenue of 8% and transaction costs to be cut by 2% at the midpoint. Just wondering what that – why there’s that big differential. Any call-outs there? Okay. Yes. I think we – the guidance for the back half of the year, transaction cost does reflect continued some volatile macroeconomic conditions, including and especially the capital markets where we would continue to expect there to be a lot of pressure on the yields that we need to generate for our capital partners. I think that’s reflected in the guide. That’s the thing that’s happening to us. The thing that we’re doing about it is the pricing initiatives that Max alluded to. I think we’d feel better about the world, have that already been in the ground and reflected in the mix of GMV that we’re originating. And so we do expect that continue to be a source of pressure on us in the near-term. Got it. That’s really helpful. And then just one follow-up. If you can just provide us an update on how the Shopify partnership is ramping and how that runway for growth looks like from here? We’re very happy with the Shopify relationship. Sort of the headline answer is, these things take a long time to build out. It’s just sort of – again, I love being our – just a little bit about the complexity of this business as a moat, but it really is that. It typically takes us two years to three years to get to kind of a full deployment because it’s such an interesting beast. You have to figure out how to promote the product the right way, and yet you can’t over promote it because then you’re going to be pushing people into death where they shouldn’t be. And so there’s a lot of finesse to figuring out how to get to a full sort of a fully deployed mode. And you know you’re there when you’re seeing kind of a 1% [ph] improvement and not better than that. And we’re still in a really happy position where we can roll out an improvement or a project with Shopify; the meaningful improvements come out in GMV or in profitability of the program, et cetera. So we’re still very much at work. We have a significant percentage of our effort dedicated to what we call PBA Powered by Affirm [ph], that’s the component come more in treat that powers both Shopify and several other platforms for us. And we’re still very significantly invested in building that out. There’s still quite a lot of opportunity there. So generally speaking, very excited, great relationship. Spend a lot of time talking to my counterparts there. Hey guys. Appreciate taking the question this afternoon. Michael, by all accounts, it would appear that capital markets are maybe healing a little bit, and equity as a percent of the total funding platform is up pretty substantially quarter-on-quarter. So, I guess a couple of questions. One, how do you sort of assess the state of the capital markets from a funding standpoint? I noticed you expanded capacity. And two, do you think you’re going to be able to stay below that sort of 10% pre-IPO equity funding threshold through the cycle? Yes. So the first question first. The markets are healing. I think that the New Year did an awful lot for the debt capital markets broadly. And you’re seeing the ABS market open up. You’re seeing much more constructive conversations with forward flow partners. Max and I spent a lot of time over the past couple of weeks meeting with couple of partners of all stripes. And the tone is just markedly better than where it was as the volatility appeared to be reducing, and the New Year really did help. So, we feel much better today, and yet we are still very much humbled around just how difficult it is to execute and how volatile and uncertainty remains. You saw the whipsaw this week in around the Fed meeting. And I think that kind of volatility is something we’re just – we’re prepared to and comfortable at navigating, but it does reflecting us being very thoughtful and careful about how we run the business. With respect to your second question, absolutely, we will stay below 10%. We think this is near the high watermark for where that number should be. We think that the seasonality of our GMV, specifically the holiday shopping season late in the quarter and then, of course, in the quarter itself, causes an increase, a pretty big step-up in total platform portfolio that we don’t think will continue to grow as quickly to the back half of the year, which means that our funding mix will probably be very stable through the back half of the fiscal year. So you wouldn’t expect any meaningful increases in that equity capital required. And we would continue to feel confident in our ability to execute both securitization like we did earlier in January as well as net new capacity with forward flow partners. And so we feel good about our ability to do that right now as we sit here today, but nowhere near 10%. Okay. And as a follow-up, wondering about – pardon me, I lost my train of thought. Yes, on the loan loss reserve, I know it’s – you’ve admonished as not to necessarily consider that as we would a more traditional financial, but can you just discuss sort of the 5% reserve and where you think that goes in the current environment should it fall given the slowdown in growth? I think 5% is a really good number. I think it is obviously linked to delinquencies. And again, I apologize if this comes off as a admonished. It’s really not. It’s just a chance to learn about how this business works. We have a target – in my letter, I would really encourage everyone to look at it. It shows the delinquency trends at Affirm as compared to some of those traditional players whose measures, I think, some folks are wanting to apply to our business. We’re the only player with the line on delinquencies pointing down, okay? And some players are not as high as others, but the directionality is very different. And that’s because our asset turns over so fast that you’re not building for losses for loans that you have. And it’s somewhat of a cheeky statement, but we can’t build allowance for loans that we don’t own. And so we can’t build ahead originations that haven’t happened yet. And what you see here then isn’t a judgment about how the back book will deteriorate in the macroeconomic environment. It is a reflection of the quality of loans that have originated recently given the velocity of the book. And so what you should interpret as the 5% is very much connected to that declining delinquency trend that you see. That’s a reflection of extremely strong credit performance, much more so than anything else. Lastly, we included a chart in the supplement that I would encourage folks to look at, it just breaks out where the allowance bridge two from September to December and then, again, where the last 12 months have gone. And you’ll see the allowance build is a reflection of both growth and assets, but also the actual charge-offs in the period. Just I don’t mean for it to be admonishment either, but I will attempt to say exactly what Michael said in a probably less careful way, but I think it’s really important to understand the whole point of including this chart. It’s not as though our consumers are experiencing less or more stress on average, is that we have through the really short-term nature of the product that we print, and the fact that we decide every loan individually where we think we are not able to take the risk, we don’t. And the downward slope of delinquency is a direct result of our action. We changed our credit posture sometime starting maybe nine months ago, and we’ve done it again several times since, sometimes with finesse and other times somewhat more actively. But the point is, we are in control of the credit outcomes and we’ll continue controlling them. And that’s really, really important to understand. We’re not building allowances for the mistakes we made that we couldn’t have predicted three years ago by giving someone a credit card. We make the decision every single time they choose to transact, has a direct consequence of GMV might be lower because we decided the GMV that is coming to us is higher risk than we want to take on. But we do rank risk really well. Reducing GMV a little bit eliminates a tremendous amount of potential loss, and we are in total control of what kind of loss we take on. That is the reason we included that is to just drive the message home. We’re not interested in building up giant piles of cash for losses that will make from loans from three years ago, because we don’t really have a whole lot of loans left from three years ago at all. I hope that didn’t sound too admonishing. Hi, good afternoon. I guess just thinking big picture here, Michael, what surprised you versus the guidance you just laid out last quarter Was it the pullback and consumer spend? Was it that you thought the pricing would get all pushed through? Was it the mix of loans? I’m just trying to get a handle on the reduction in the guidance going forward and kind of the surprise in that caught you by surprise? Yes, I think it really is the overall consumer demand, which shows up both in the aggregate GMV, but also the mix underneath that. And I think there’s some good progress that we made. So for example, we were pretty happy to get our business with Peloton to actually to be ahead of where we thought it was going to be. There’s a lot of strength of that program as they returned to some of the programs that we had from years before. And then there was a lot of real legitimate slowdown in the broad line merchants that we are very proud to partner with in some more of the durable goods categories. These are the larger considered purchases. And so I think we were surprised about that. And then frankly we continued to manage credit very tightly and we were probably and continue to be as Max alluded to, we’re going to manage credit first, and that shows up on the positive side with really excellent credit performance, which ensures that we continue to access capital and our capital is not a constraint on the growth in our business, and yet it does create some short-term top line headwind. Got it. No, that’s helpful. And then Max, I’ll take debate and ask about Debit+ the rollout there and the prospects of profitability. I know there was some hesitation worried about the profitability of Debit+, so maybe you can update on that as well? Thank you. You couldn’t have helped me out. Could not have set me up better for that one. Thank you. All right, so, sorry. All right. So the – I’ll spare you the long story. But – so sometime about eight – seven or eight months ago, we rolled out a first kind of a seriously sized batch if you will, of cards to our existing users and began observing. So obviously you’re rolling out a completely new set of credit programs, you’re taking overnight or multi-day risk on PayNow transactions and a whole bunch of different things that we needed to watch. And it’s the kind of thing that you can’t really model because you just don’t have any real background information. And so we did that and much to my chagrin, sometime by mid-summer, we knew that transactions we knew how to do, which is longer-term interest bearing and short-term pain for us. We’re generally performing fine, but we encountered a whole bunch of types of transactions, and I certainly won’t get into the details, but there are multiple modalities of using the card that were just fundamentally unprofitable. And as we were looking at the usage and the fact that the product is so sticky, consumers would literally shift from using Affirm in any other mode to using the card. The second they had access to it sort of debated the responsibility of rolling out a product that was inherently less profitable and in some modalities unprofitable to users who were very hungry for it. But we’re not going to transact with the – our other product. And so we spent the last six months just drilling into profitability of Debit+, and there are people who know who they are. So I’m not going to name them and embarrass them. But they spend an uncountable number of hours figuring out how to optimize. This is primarily machine learning work where you’re figuring out things like probability of insufficient funds in someone’s settlement accounts. And so it’s a major body of work that was actually in the end faster than I expected. But the punchline is that I’m very happy to report that now every class of transactions in Debit+ is profitable. And so to an enormous amount of optimization, again, one of these things where you look back and say, no one else will go through the trouble, they’ll just print out some revolving line and move on. But our consumer doesn’t want a revolving line. They won Debit+ and so very excited that this thing is profitable now. And the other thing a little bit less, but kind of even more in the weeds, we saw really good stickiness of the product once you comprehended the value proposition. But there’s a bunch of wrinkles in onboarding in particular that lost too many people as we were trying to onboard them. And so we spend the remainder of the time in the last six months just figuring out how to make it as easy to get live with a card, like eliminating a huge number of steps while not losing anything in KYC and all the other things that we have to do. So both of those projects are basically completed. The way you know – you will know that we are mashing the pedal through the floor, as Michael likes to say, is you’ll see Debit+ ceased to be its own separate application. So up until now, it’s been a standalone app that you have to download. So we purposely put in a bunch of friction so that we would be able to control the spread. Now that we feel very good about the economics and the comprehensibility of the product, we’re actually going to integrate it directly into the mainline app. I am not going to make the same mistake I did in the past and put a number out there. And I will do that internally, but the team knows exactly the pressure and excitement we have for the product. So, extremely bullish you’ll see it in your app soon as the rest of the team is looking at me angrily. So that’s all I’ll say. And remember, the Debit+ product is another one of these channels that we control entirely. So some of the profitability of the product is a function of that, and we feel really good about where that fits right now. Great, thanks. Most of my questions have been asked and answered. Could you talk a little bit more about the – how much of your GMV you think will be on the balance sheet? You sort of talked a little bit about some of that versus what you’d be able to sell and the idea of what in those discussions you were talking about that you’re having with your capital markets partners. How much is their pricing to you changing and how much do you need to raise pricing to keep them perhaps where they had been prior to this range of interest rate increases? Yes, it’s two factors. There’s interest rate increases and then there is credit. And I think we spent a lot of time on talking about why controlling credit is so important for the yield those investors get. And that is a point of pretty big differentiation when thinking about us versus some of the other alternatives that some of these forward flow partners could be buying. And as that differentiation grows, we know we’ll get rewarded for it. And yet also we need – we do feel the need to increase the revenue content in the loans that we’re selling in the form of higher APRs, for example. I think the – we’re not giving specific guidance to the balance sheet or to the funding models through the back half of the year. But we do expect the mix that we saw in our second quarter to be pretty consistent with the mix that you would end the year at. So, I think it’s safe starting point is to assume that we’re flattish, which means we still have our largest funding channel is still going to be the forward flow market. That’s where the most of the total platform portfolio will be sitting as a single channel. We did the securitization in the beginning of this quarter, which will allow us to grow that line item and yet that still is on the balance sheet with slightly more leverage than yet with the warehouses. So anyway, I would assume flat within – certainly within modeling errors is a good assumption, which means that our affordable partners are at the table and still dealing constructively and maintaining their level of commitment throughout the back half of the year. Thanks, Michael. Maybe just as a follow-up. When you gave the guidance for revenue less transaction cost, did you factor in kind of a better, worse or comparable level of gain on sale on the assets that’ll be sold? That’s a great question. It’s worse. So we’ve contemplated that we would continue to have yield pressure with respect to our forward flow partners. We saw that in the pricing conversations that we’ve had and been having. And while we’re very confident about our ability to control the asset yields, as Max talked about it is the case that the rising rate environment has put the yield threshold higher for all of these programs. Our next question is from Kevin Barker with Piper Sandler. Please proceed. Kevin, please check and see if your phone line is muted. Hi, thanks. Good afternoon. I want to try the volume question one more time, just to make sure I'm understanding correctly. Just relative to your expectations three months ago, is it fair to say that there was probably a little bit of consumer moving away from discretionary items, especially discretionary items that would be of a ticket size that would make an Affirm product? Is that – that's only part of it? What about the sort of the offset of increased consumer demand in a stressed macro environment? Is that still a factor? Or is it overall net negative what consumers are choosing to spend today? And I have a follow-up. It's a great question. The pullback from discretionary spend is exactly right. I think I already rattled off a bunch of category drops that we are seeing year-on-year. And so that's certainly factual, and we do expect it to continue. Nobody knows when the trough of consumer demand has hit, but I don't feel like people are running out and buying couches all of February or January. But the demand for the program, I think, dropped a juicy stats in the opening part of my letter. We see about $1 billion of demand every week and I think that's not the same thing as well, great, why don't you guys take it because each one of these loans or each one of these applications has to be underwritten for – through the lens of what's responsible for us to take a risk on and what's responsible, frankly, for this person to borrow. So increasing consumer demand is certainly there. I think if we were careless, we could probably grow GMV to astronomical numbers quite quickly, but that is most certainly not what we're going to do. We are unique in a sense that we don't charge late fees. We do not profit from delinquencies. We did not celebrate late fee increases. And I'm glad there's some pressure downwards in that particular part of the world recently. So hopefully, the playing field is getting a little bit more level. But the demand is a good thing to have. I think we are now big enough where the overall consumer sentiment makes a deference to our business a little bit more than it used to. We're still growing 3 times the U.S. e-commerce rate. But as people walk away from buying more TVs, for example, it will have consequences. And so long as we are responsible lenders, we will feel a little bit of that. Okay. Great. And then the follow-up would be sort of a clarification on sort of putting all these factors together, and correct me if I'm wrong here. But it sounds like consumers are experiencing BNPL burnout. To the extent that your last question or last answer suggests that there's still very much a lot of interest in BNPL, especially in this macro environment is not really consumers tiring of the product. It is more your line of skirmish [ph] calls on making sure you're using profitable loans. And because of the higher interest rate environment as well as higher sensitivity to credit costs, you pulled back maybe potentially at the bottom of the funnel, not at the top of the funnel, but more at the bottom of the funnel. And as you make pricing changes, that you could see a better conversion rate in the next fiscal year potentially. Is that fair? That's exactly right. And actually, Michael, I'm stealing his line in this one, but he loves to remind everybody that our loans are ranked in profit – correlation between profitability of our loans and the internal credit score or FICO score, if you will, more or less, are tightly correlated. In other words, the highest credit quality loans are also most profitable for us. We are not using – pardon the craft statement, poor people to subsidize great deals or rich people who are actually attributing the cost and profitability quite directly, which means that any time we need to or we decide to improve the profitability of the book, we end up taking slightly less risk at the very bottom. The overall demand for the product is still very strong. We're not seeing any – I've had enough BNPL during the pandemic back to my, I'm not sure which credit card we’ll step on here. But not seeing burnout. If anything, on the margin, I feel like there's demand for more flexibility. I think the one thing that we're probably seeing – this is a little bit more anecdotal, so take it with a little bit of grain of salt, but any experiments during Debit+, we looked at sensitivity and consumer demand for longer terms. And obviously, people always want longer terms because just a little bit less cash flow hit on a monthly basis. But as the overall economic environment softened and consumer pulled back, it seems that at least part of the full pullback is actually cash flow dependent versus kind of a general decluttering trend, which is also by the way happening. Yes. And again we don't talk enough about this, but we should. We're growing at somewhere between 2 and 3 times. We estimate the U.S. e-commerce growth rate to be, and that's despite posting 115% growth in GMV last year. And so I think it's easy to think about – thinking that the industry has slowed down, but you have to put into context the overall scale that we got to and how we kind of got there a little bit more quickly. We still feel like it's underpenetrated, and we'll get to the kind of numbers that we talked about. I think some of the quarter growth rate numbers are a reflection of the comps. And again, the growth rate last year was buoyed up by the launch of three major programs, all happening at the same time. And we're quite proud that we were able to do that, but that doesn't mean that some of the growth rates need a little bit wider aperture to get an understanding of what's really going on. The fact that transaction counts are up 50% year-on-year suggest that consumers are not at all being burned out by very high demand for. We are figuring out a way to profitably serve those transactions. Thanks. I want to ask a couple of follow-up questions, particularly the one that was just asked. It's understandable in terms of tightening the bottom of the funnel, as you said a little bit where appropriate to manage that. Any sense for how much that then cost you or introduces incremental friction to bring those people back, whether that'd be first-time applicants or people that have taking out multiple loans in the past, and for whatever reason just don't meet the criteria you're looking for, for that incremental one? That is a great question and something that is extremely top of mind for me. So I spent a lot of my time staring at reengagement stats, which is why you see it in my top three priority, both in my letter and certainly communications to the company. So the good news there – so first of all you're exactly right. If you tell someone, sorry, no loan for you and it's the first transaction that is not agreed, first impression and we will have to work harder to get the consumer back. Perhaps even worse, you can imagine a, I've been a loyal customer for a very long time, and now he can no longer serve me. So we invest a tremendous amount of resources to both the communication of the clients and also trying to make sure that we can bring folks back where appropriate. And part of why we know so well that the rate sensitivity is not actually a major problem for our consumer, certainly at the bottom part of the credit funnel is because we tested tremendous amount of those communications and just various forms of reengaging the consumer in our own services where we have total control where, of course, we are able to raise prices and ask for significantly higher down payments and optimize the overall experience instead of saying no, we can say, yes. The long and short of it is the results are good. Probably not worth getting into without a whiteboard. But perhaps when we see each other in person, I'll show you. We'll probably have to publish a charge for everybody to see, but we've tested what happens when we re-contact the consumer that we have declined. And what do they do when we tell them, hey, you're now approved or when we tell them here's a different form of transaction that we can approve you for. And they're very encouraging in the sense that consumers, especially those that have used Affirm before, are not particularly hurt or offended by the decline because we think we do a pretty good job explaining what happened and are quite willing to come back and reapply. So I'm, on the margin, confident we'll be able to continue engaging those consumers, and you'll see us actually invest quite a lot in products that enable that reengagement. That's a huge push within the product road map in the next couple of quarters, really, but it is very much top of mind and not something that we think is just going to be available to us and take it for granted. So it's an area of extreme focus for me. And then just as a follow-up, you mentioned a couple of times, particularly as it relates to the changes in pricing, et cetera, that some of those implementations took or price changes and work with the merchants took longer than expected and was more back and forth there maybe than you had anticipated. What is that – what are you being able to do so that in the future, like you've got more flexibility there and can move more dynamically as rates, you've got to imagine in the very long run, we're going to move around quite a bit? So just wondering how you're approaching that. Yes. This is, if I have some egg in my face to clean off still, but this is the one. I saw myself a bit of a payments expert going back 30 years, and I think I still am, but I completely forgot the part where Visa and Mastercard, whenever they change rates where any network rule changes, they always operated in the six months schedule with a six months notice, and then there’s a six months implementation window. And late summer we decided this is what’s going to have to happen, and it in fact takes six months. And the way you do this right, is you structure these into the contracts, you make sure that these contracts stipulate both what happens when the rates go open, when the rates go down you make sure that, what the transition periods look like, et cetera. And this is, again somewhat embarrassingly our first effort of that kind. This is the lesson that we’ve all now learned here. Certainly I am first in the line of the lesson learning, so I think you should not expect us to have to have another one of these apologizing sessions where we say, yes, we were going to change prices, but we took a lot longer than we thought. So, we’ve now figured out or we’ve learned how to price in the right amount of time. Hi guys, good evening. I wanted to ask about the merchant counts actually. So see the data on the slight decrease in total merchant counts and understand that, that’s driven by smaller merchants as you’re showing in a very helpful disclosure on what’s happening with the larger merchants. So even with the larger merchants, there’s a pretty noticeable slowdown in kind of the incremental merchants added to the network. Just wanted to ask about that, what’s sort of driving that in your view, and what’s your expectation for that trend going forward? How important it is to the overall growth of your platform for that kind of number of larger merchants, let’s say, to keep growing at a decent pace? First of all, merchant count as a little bit of vanity network at our scale. I think Michael has a few promises in the letter. We’re going to publish a slightly different metric to make sure it just shows kind of a true state of penetration. Huge merchants “is a very countable set”, and we are very well penetrated there, as I’m sure all of you know. Mid-sized merchants are important because these are kind of leaps and bounds of volume that we’re picking up, and that’s where majority of our, if you will, hand-to-hand sales combat takes place these days and probably has been in the last few years. And so those are important. Little merchants are a little bit different. They sometimes become inactive, especially at the really small scale, become inactive over a course of a quarter. The true count of installed merchants or activated, but not necessarily active is significantly larger than a number we published and be easy to sort of have a even more inflated vanity metric here. But we’re trying to be transparent here. So the growth of merchant base is kind of a set of weights for the weighted average total of GMV. Obviously GMV growth is what we are entirely focused on. Yes. Got it. Okay. That’s helpful, thank you. And then quick follow-up. I wanted to ask about the Affirm app and kind of the transactions that I initiated through your app, through your website. Think if I’m kind of looking at these numbers correctly, the proportion of that has declined a little bit sequentially, but my question is really broader, sort of what are the – what are your initiatives around improving the engagement with the app and again, how important it is to keep investing in it and what are you doing to keep driving traffic through it? Yes. Let, to be honest, I don’t have it off the top of my head, whether it declined or, oh, yes, I guess it’s slightly down quarter-on-quarter on the percentage basis. It is super important to us. So for the points of doubt, that is a thing that I care tremendously about. There’s a little bit of equivalence between transactions that happen in our partner apps, for example, as we grow within Shopify that, or imagine that you can service those transactions both inside the Shopify app and in our own app. And we always route the consumer towards the most likely place of repayment because again, job number one, job number zero is making sure that credit metrics remain excellent. But the overall reengagement within the network is what we care about the most and our app and our site and our user extension and a bunch of other things. And most importantly, to me, at least right now, the card is where we are investing a huge percentage of our engineering cycles. The opposite required companion to the card in fact, the functionality is in the app. You’re borrowing money in the app, you’re not ever borrowing money than the card itself. And that is where we think a lot more of this for engagement will take place. There’s some really cool experiments taking place there. I’m staring at a spreadsheet titled Max’s Top 20, which has 35 elements in it right now, which all the projects that we put in the motion over Christmas break with our Head of Consumer Products and we’re shipping a couple of those every week now. So, I’m very happy with the velocity of the experiments we’re doing there. And then there’s just also some math that’s really important when we are scaling programs like we are with the largest platforms and, e-commerce players and Amazon and Shopify as an example. All of that growth, all those transactions are obviously not starting, on our platform. And so a lot of growth is coming from there, which means that like, I’m actually very impressed we’ve been able to hold it as constant given, the rapid rise in growth in these partners. And so I think to Max’s earlier point, that the health of the network is reflected in those engagement stats and the user stats and growth in transaction counts, and the fact that we’re holding serve on the level of engagement through our properties today is a really encouraging sign given the growth that’s happening away. As those growth rates attenuate, you’re going to see our share pickup. Hey guys, thanks for squeezing me in. Just wanted to hone in on one of the comments in the shareholder letter here in where you say you’re redirecting R&D efforts towards margin improving projects. I mean, I guess how much of that is tangible in the current guidance. And is it fair to assume that is a bottom line margin improvement variable rather than, any kind of shift to potential long-term RLTC numbers? Yes. So the short answer is, when we talk about some of the speed of, for example, taking pricing, we would have a lot more of the impact in this year’s guidance had we acted earlier and especially true given the size of the balance sheet that we’re sitting on right now. So, we feel like there’s a lot of very long, very big initiatives to improve the margin, and that is up in the revenue less transaction cost line item, much more so than in an OpEx. We feel like there’s a lot of very big and structural improvements that we’re going to be able to make, but they don’t really show up in the vertical periods in Q3 and Q4 just given the timing of so many of, the flow-throughs for any moments on the balance sheet, for example. And so that’s where the focus is. The effort is reflected in our guidance, but you’re not going to see the full benefit of all of the efforts until the quarters play out in the back half of the calendar year. Makes a lot of sense. And then the sensitivity that you guys have just historically provided of RLTC relative to rates, any material change in that than what was provided last quarter. I know that, that heading into fiscal first quarter, you had narrowed the range of impact in, given where rates could potentially go, but just want to double check on that one. No material change. I think we’re thankfully staring down what looks like a more flat rate curve, which I think is allowing us to focus our efforts on making sure we create profitable units at the kind of peak rate curve environment. But further stress above that would continue to have the same reaction in our framework. That is all the time that we have for the Q&A today. I would like to hand the conference back over for closing comments. Thank you. This will conclude today’s conference. You may disconnect your lines at this time. And thank you for your participation.

EarningCall_447

Good day, ladies and gentlemen, and welcome to the Akoustis Technologies Fiscal 2023 Second Quarter Conference Call. As a reminder, this conference call is being recorded. At the conclusion of the company presentation, Akoustis management will take questions. [Operator Instructions] A replay of this call will be available on the Investor Relations section of the Akoustis website. Thank you, operator, and good morning to everyone on the call. Welcome to Akoustis second quarter fiscal 2023 conference call. We are joined today by our Founder and CEO, Jeff Shealy; CFO, Ken Boller; and EVP of Business Development, Dave Aichele. Before we begin, please note that today's presentation includes forward-looking statements about our business outlook. All statements other than statements of historical facts included in this conference call, such as expectations regarding our strategies, operations, costs, plans and objectives, including the timing and prospects of product development and customer orders, our expectations regarding achieving design wins from current and future customers, the possibility of entering into collaborative or partnering relationships, potential impacts of the COVID-19 pandemic, litigation matters, guidance regarding expected revenue, product orders and milestones for the current and future fiscal quarters and expectations regarding the integration of acquired business operations are forward-looking statements. Such forward-looking statements are predictions based on the company's expectations as of today and are subject to numerous risks and uncertainties. The company and our management team assume no obligations to update any forward-looking statements made on today's call. Our SEC filings mention important factors that could cause actual results to differ materially. Please refer to our latest Form 10-K and Form 10-Q filed with the SEC to get a better understanding of those risks and uncertainties. In addition, our presentation today will also refer to certain non-GAAP financial measures. A reconciliation of these measures to the most directly comparable GAAP measure is presented in our earnings call highlight release available in the Investors section of akoustis.com. Thank you, Tom, and welcome everyone to our fiscal 2023 second quarter conference call. I am pleased to report that the December quarter was a transformative period for Akoustis. This transformation is centered around our entry into the 5G mobile handset market through the qualification of our new wafer level packages that were developed and manufactured in less than one year in our Upstate New York fab. The availability of this disruptive package technology facilitated our first design win along with a high volume order for the 5G mobile handset market, our largest addressable market by volume and revenue. In January, we completed the acquisition of privately held Grinding and Dicing Services, Inc. or GDSI, a strategic addition to our business model across multiple fronts. GDSI has been a key part of our back-end supply chain over the past year, as we increase the usage of chip scale packaging or CSP and wafer level packaging or WLP in our XBAW RF filter product portfolio. Further, GDSI adds a critical piece to our strategy in 2023 to pursue CHIPS Act funding to reshore our back-end packaging supply chain on our existing campus in Upstate New York. Integrating and expanding GDSI into our New York operations will create an end-to-end domestic semiconductor manufacturing process supporting national security, while also creating many attractive high paying jobs in the Finger Lakes Region of New York State. Finally, for our current RF filter customers, we expect that the integration of GDSI will enable Akoustis to substantially speed up the prototype process and consequently reduce the time to market for our leading XBAW filters. This acquisition could not have happened at a better time as demand is rapidly increasing for (ph) BAW filters that operate at frequencies in our sweet spot above 3 gigahertz in the 5G mobile, Wi-Fi, network infrastructure, defense, timing control and other markets. I am pleased to report another quarter of record revenue with 5% sequential growth over the September quarter. Our XBAW filter revenue grew sequentially in the December quarter and we expect continued growth on a quarterly basis moving forward. This revenue growth was achieved despite significant macro headwinds across most of our operating segments. Looking ahead to the March quarter, we are expecting 20% to 40% sequential growth across multiple products and services participating in multiple end markets. The weakening demand in the tech sector along with several other macro challenges may impact the rate of growth of our business in the near term, which is consistent with recent commentary and guidance from other semiconductor companies. During the December quarter, we experienced broad weakness in our SAW filter business in end markets such as automotive, IoT, medical devices, and particularly in China and Europe. We expect strengthening in our SAW business in the current quarter, however, in our XBAW filter business, we expect to see growth increase in the second half of the calendar year as we ramp in mobile and our next generation Wi-Fi 6E products begin to ramp with multiple customers While we navigate near term challenges, we continue to expect incremental sequential growth each quarter throughout this calendar year. Further, we remain focused on executing our entry into the 5G mobile device market with volume shipments beginning this quarter providing Akoustis with a significant opportunity to grow rapidly in both unit volume and revenue for the foreseeable future. I would now like to give a brief update regarding the CHIPS and Science Act of 2022 and how Akoustis hopes to benefit from the act. The CHIPS Act legislation was introduced and authored in part by Senate Majority Leader Chuck Schumer. Its goal was to boost U.S. competitiveness with China by allocating tens of billions of dollars to increase domestic semiconductor manufacturing and science research. As some of you may recall, Senator Schumer has personally visited and toured the Akoustis fab in Upstate New York twice once in June 2021 and again this past September. He was pleased with the growth in manufacturing capacity and new jobs that we have delivered over the past year. Akoustis senior management is working closely with the local, regional and state government of New York along with Senator Schumer's office to support implementation of CHIPS Act opportunities in Upstate New York, which we expect will present a significant opportunity for the revitalization of Upstate New York semiconductor presence and in particular, the Greater Rochester area where Akoustis RF filter chip manufacturing facility is located. Over the past five years, Akoustis has proudly manufactured its innovative RF filter chip products in the USA. We believe the chips funding is meaningful to Akoustis and its shareholders and that we perfectly fit Senator Schumer's blueprint to make New York the global innovation and semiconductor hub. We plan to apply for funding under CHIPS Act shortly after the submission window opens to add multiple new 8 inch silicon wafer manufacturing lines at our New York site. In addition, given the supply chain delays, energy shortages and constraints associated with our Asia packaging partners, we hope to secure CHIPS Act funding to leverage the back end expertise of our GDSI business to build a U.S.-based advanced packaging center for the purpose of reshoring our packaging supply chain to reduce product costs and deliver our filter products with shorter time to market. This U.S. packaging facility would support Akoustis XBAW filters as well as be offered to GDSI's 250 plus customers requiring back-end services. With respect to the possible magnitude of the funding for Akoustis, we previously indicated the magnitude of our proposal could be a multiple of the current market cap of Akoustis. Of course, there is no guarantee that we will receive the amount of funding in our proposal and it is noteworthy to say that the requirements and processes for submitting a proposal for funding under the CHIPS Act is yet to be published. The projects financed by such funding would position Akoustis to manufacture and deliver billions of XBAW filter chips annually and to serve both Tier 1 and Tier 2 mobile device companies for 5G smartphones, as well as other multi-billion dollar end market including 5G network infrastructure, high frequency Wi-Fi devices and other wireless markets. I would now like to provide a little more color on our primary target markets. We recently achieved one of the most important milestones in company history allowing us to participate in the 5G mobile market with the completion and qualification of our internally developed wafer level packages or WLP. This new package technology is significantly smaller than our legacy technology and is the key that has allowed us to enter the 5G mobile device market, where miniature size is a gating factor. Our new packages are pin-for-pin (ph) compatible with rival BAW filter competitors and enable Akoustis to compete strictly on performance where we believe we can pair quite favorably. Bringing the WLP process in house enhances substantially our ability to control the quality, cost and customization of our advanced packages. The successful development and qualification of our new WLP Solutions facilitated our first 5G mobile design win and follow on high volume order both of which we announced in the last two months. This new filter solution will be incorporated in our customers' multiplexer for 5G mobile handsets and other portable devices. The multiplexer supports a major 5G mobile chipset reference design that is planned for introduction in the first half of calendar 2023. We expect to begin shipping to this first 5G mobile RF component company customer in the current quarter. And finally, during the December quarter, we delivered the first of two filters, one of which will be down selected after both have been completed and tested to a Tier 1 RF front end module customer that is targeting a production ramp in calendar 2025. The customer is leveraging our leading XBAW technology to develop a filter that can address difficult coexistence issues in 5G mobile and is expected to develop additional filters using our technology upon the successful completion of this initial design. Next, I would like to discuss recent developments in our Wi-Fi business. During the December quarter, we announced three new design wins in Wi-Fi 6E for carrier class applications. We received two of the design wins from a leading European Wi-Fi OEM that will be using Akoustis' 5.5 gigahertz and 6.5 gigahertz standard XBAW coexistence filter solutions, as well as our 5.6 gigahertz and 6.6 gigahertz standard XBAW coexistence filter solutions that allow for greater usage of the UNII-4 band. The first Wi-Fi 6E router entered production at the end of calendar 2022 and the second router is expected to begin ramping by the end of March 2023 quarter. The third design win is from a global network communication solutions provider that will be using Akoustis' 5.6 gigahertz and 6.6 gigahertz standard XBAW coexistence solutions in a Wi-Fi 6E extender for its carrier partner with a production ramp expected by late summer 2023. In October, we announced new next generation Wi-Fi 6E and Wi-Fi 7 filter solutions designed to meet the stringent rejection requirements enabling coexistence with the UNII-1 through 3 and UNII-5 through 8 frequency band. They offer what we believe is the best out of band rejection capability available today and at a significantly reduced size given our new chip scale packages. We expect to fully qualify these next generation Wi-Fi 6E and Wi-Fi 7 products and ramp production in the first half of the current calendar year. Switching from legacy packaging to our new advanced WLP and CSP products is expected to greatly improve our gross margins over the next 12 months to 24 months and supports our effort to achieve cash flow breakeven in the first half of calendar 2024. The Wi-Fi market continues to experience significant disruption from the supply chain issues we have discussed previously as well as new headwinds in the retail market that have emerged with the impact of inflation on consumer spending. Overall, this market is characterized as performance driven, but competitive. Nonetheless, we continue to increase the number of design wins in high frequency advanced Wi-Fi given that we were an early entrant in Wi-Fi 6 Dixie and Wi-Fi 7 BAW filter solutions and today have one of the most extensive high frequency Wi-Fi portfolios that address the enormous challenges of difficult dual bank coexist, wide bandwidth operation within the 5 gigahertz to 7 gigahertz frequency spectrum. While near term macro supply chain issues remain, we are executing on design wins, new production ramps and new product development at a higher pace than ever before and we expect the outlook will improve quickly once the broader supply chain issues improve. And now I would like to discuss our network infrastructure business highlights. During the December quarter, we received an order for the development of an ultra-high band demonstrator from a Tier 1 5G network infrastructure customer. If the demonstrator is successfully received, our customer plans to develop a 5G massive MIMO XBAW filter solution for a multi element array. Recently, we've engaged an additional Tier 1 OEM for the same frequency and end application. We continue to ramp production with three Citizens Broadband Radio Service or CBRS infrastructure companies in the December quarter. We expect these three customers to continue to ramp throughout calendar 2023 and beyond. We started to ramp our 3.5 gigahertz 5G network infrastructure filter with a new network infrastructure customer in the December quarter. This is the second design win we have received for this filter. Our customer is targeting both Small Cell and MIMO applications with our XBAW filter in the European and Asian network infrastructure markets. We are sampling the first iteration of our 3.8 gigahertz XBAW infrastructure RF filter for the U.S. 5G C-band market with multiple OEMs and expect to see greater Small Cell adoption beginning in second half of calendar 2023. And now, I would like to provide an update on our other business segment. As mentioned at the beginning of this call, we concluded the acquisition of GDSI, which closed on January 1, 2023. The acquisition brings a new cash flow positive services business to Akoustis with 250 plus customers, significant technical expertise in back-end services and alignment with our strategy to leverage the CHIPS Act to create new jobs and reshore core packaging technology from Asia. In our Defense contract business, we continue to progress on our existing multi-year, multi-million dollar contracts with DARPA to further enhance our XBAW PDK and scale our XBAW technology up to 18 gigahertz. We achieved a critical milestone during the December quarter and are making excellent progress towards scaling our technology to 18 gigahertz for our customer. The milestone achieved was enabled by our patented single crystal piezoelectric nanomaterials, which are unique to Akoustis in the BAW filter industry. During the December quarter, we completed and shared new XBAW resonator data targeting X band frequencies for a Tier 1 defense customer. Our next step is to simulate two XBAW filter designs utilizing the resonator model for this X band application and we expect to move toward product development upon successful completion of the design study. Our RFMI business experienced challenges in the December quarter that we believe will be short term in nature. These include a decline in the automotive market in China due to COVID lockdowns, general softness in its European business, which was impacted by the economic realities associated with the Russia, Ukraine war and rising inflation and overall weaknesses in the medical market. While January will experience the expected seasonal headwinds associated with Chinese New Year, we do expect revenue from this segment to increase sequentially in the current March quarter and return to a more normal run rate as calendar 2023 progresses. We continue to make progress with our two XBAW timing control products and expect to complete the qualification of the first-two solutions in the first half of this calendar year. The timing RF market represents a significant new opportunity for Akoustis in both unit volume and revenue. Our primary customers developing products that could be disruptive in the timing RF component market. Looking to displace older analog technologies with ultra-low jitter and phase noise devices. We are extremely excited that our leading XBAW resonators can offer our customers disruptive performance. Thank you, Jeff. For the second quarter ended December 31, 2022, the company reported revenue of $5.9 million, which is an increase of more than 5% over the prior quarter ended September 30, 2022, and representing an increase of 160% year-over-year. On a GAAP basis, operating loss was $12.9 million for the December quarter, mainly driven by revenue of $5.9 million offset by labor costs of $8 million, depreciation of $2.6 million and other operational costs totaling $8.2 million. As a result, GAAP net loss per share was $0.19. On a non-GAAP basis, operating loss was $10.6 million and non-GAAP net loss per share was $0.18. Reconciliation of these amounts to the corresponding GAAP measures is available in the press release issued this morning available on the Investors Section of our corporate website. CapEx spend for Q2 was $3.2 million, a decline from $4.8 million in the prior quarter, reflecting the approaching completion of the capacity expansion and equipment redundancy project in the company's New York fab. Cash used on operating activities was $11.2 million, down 25% from $15 million in the prior quarter. The company exited the December quarter with $46.6 million of cash and cash equivalents versus $60.7 million at the end of the previous quarter, primarily resulting from cash needed to fund operations and CapEx spending. Subsequent to the end of our fiscal second quarter, on January 24, we closed an underwritten public offering of approximately 12.5 shares of common stock at a price to the public of $2.75 per share, partially used to cover the acquisition of GDSI. Net proceeds to Akoustis after deducting the underwriting discount and estimated offering expenses payable by Akoustis were approximately $32 million. In the current March quarter, we expect multiple new Wi-Fi 6E and network infrastructure customers to ramp production along with our recent GDSI acquisition. And therefore, we expect to see record revenue with revenue up between 20% and 40% sequentially from the December quarter. And based upon our growing backlog of design wins, we anticipate that top line growth will continue into our next fiscal year and beyond. I will now turn the call back over to Jeff to discuss our third fiscal 2023 quarter performance and future milestones. Thank you, Ken. We are expanding our market share in CBRS and now 5G infrastructure, experiencing strong demand for our next generation Wi-Fi 6E and 7 products that are expected to ramp production in the June quarter. The big news, however, is that we have developed and qualified new wafer level packages, which have led to our first design win in high volume order for 5G mobile filters from a Tier 1 customer, the customer's module powered by our XBAW resonators is on a leading 5G mobile SoC chipset, reference design and we are excited to be positioned to penetrate what is our largest market by units and revenue for the first-time in calendar 2023. Looking ahead, our anticipated March 2023 milestones include: in our Wi-Fi segment, we expect to announce our first Tier 1 Wi-Fi 7 SoC reference design win, further we expect to ramp a recently announced Wi-Fi 6E win with a leading carrier class customer, and we expect to secure our first Wi-Fi 7 design win. For our 5G mobile segment, we expect to begin shipping filters to our Tier 1 RF component company customer against our 5G mobile high volume order. In addition, we expect to deliver the second iteration of a XBAW filter solution to our third Tier 1 RF front-end module customer. And we expect to complete the second of two filters to our second Tier 1 RF module maker customer for testing and down selection. Next, in our 5G network infrastructure segment, we expect to receive an order for an n77 5G massive MIMO structure received filter solution. We expect to sample in the first half of calendar year 2023, a new band 41 (ph) 5G filter solution for Small Cell base stations targeting the U.S. market. And finally, in our other market segment, we plan to sample a new CV2X XBAW filter solution for the automotive market. And finally, we expect to complete the qualification in the first half of calendar 2023 of two resonators for the timing market from our first customer. In conclusion, We believe the market opportunity for our patented high frequency XBAW filters is substantial. As of January 27, we now have 80 issue patents and 127 patents pending as we continue to build a substantial IP mode around our technology. We continue to work diligently to achieve each of our stated objectives and we will continue to provide updates on our accretion against these objectives going forward. Finally, I would like to thank our employees for their hard work, passion and dedication, which accounts for multiple design wins across the Wi-Fi, 5G network infrastructure and defense markets. We have also experienced an exceptional momentum in the 5G mobile market driven by our leadership in filters that operate above 3 gigahertz and our new and expanding wafer level packaging capabilities. I also wish to thank our shareholders, who continue to support our company. And with that, I would like to open the call for questions from the investment community. Operator, please go ahead with the first question. Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Harsh Kumar with Piper Sandler. Please proceed with your question. Again, Harsh Kumar, are you on the line? If Harsh Kumar is not on the line, we'll proceed with the next... Yeah. I'm sorry. I apologize. I was muted. Jeff, congratulations to you and your team, some excellent news here on a lot of different fronts. The first question and I had Jeff was on the 20% to 40% sequential growth and kind of the drivers. I wanted to understand, if this is -- I know there are a couple of areas you mentioned that are going to be stocked associated with macro in China. But are the core markets generally speaking on track or is this pretty broad-based revenue growth or is this coming from one or two specific areas? Okay. Good morning and appreciate your question. Let me get Dave to start in here and Ken may want to comment, but I'll start in with some couple of comments as well. Dave? Yeah. Good morning, Harsh. The growth is pretty much broad-based. We had good distribution of revenue across all sectors in last quarter with Wi-Fi base station. And the mobile picking up Defense and the contract government contract. So it's pretty well spread. We are seeing this quarter the growth coming from those sectors as well as picking up more in the mobile as we start to you know, chip that high volume orders that was mentioned in the script. Just to add to that, this quarter, the March quarter will also include our current acquisition of GDSI's revenue. So we have previously guided there about $1 million to $1.5 million in additional revenues for this quarter with the March quarter typically being the lowest quarter for them in the calendar year. Of course, great. And then Jeff, you also kind of went out and mentioned that this will be a Europe grow generally speaking that you don't expect it down quarter as such. And I know there's a lot of good stuff going on in the design win side, but maybe help us frame the cadence of the quarter or the linearity, if you will, do you expect a much better second half like all the other cellular companies are talking about or do you expect growth to be pretty evenly spread out? Harsh, yes. And another thing I'll point to just on the revenue front is, we mentioned we had a significant dip in RFMI in the December quarter. So that business -- we're expecting that business to kind of get back to normal levels in the second half. But if you look at the kind of the core business of the company, we do expect ramping in the mobile. Dave talked -- touched on that and we touched on that in the script that's going to begin later this quarter. And we expect to continue adding orders to that -- for that particular customer and continue following production on that throughout the year. In addition, we mentioned some other things in the script, which I want to point our investors too. We mentioned in Wi-Fi, significant activity. If you look at the dominant activity in the design wins, it's in 6E and Wi-Fi 7. For investors that may have been at the CES show significant activity and really connecting everything along that front. So we mentioned in the -- adding some -- a leading carrier class customer that’s we're expecting that to begin ramping at the very end of this quarter and particularly beginning of next quarter. We continue to grow in the network infrastructure. We talked about activity increasing. We mentioned specifically two customers in the massive MIMO area that we're currently working on solution. So we expect continued growth there. And then really in the other class, we've got activity really in all segments, but we mentioned the timing market we would expect that to complete disqualification and then began ramping in that market as well. We continue to execute and also in the other segment's market on our contract business with DARPA. I think this year could be a pretty significant year along the contract front, particularly in the second half, both not only we've mentioned in the script that our proposal with chips that's particularly in the manufacturing area. I think it would be a pretty good assumption to believe there's other assets in R&D that we'll be applying for. And those can be certainly significant growth drivers on the R&D -- contract R&D front. Hope that gives you some context. No, it does. Thanks, Jeff. And my last one, I'll get back in queue is, typically when we hear of design wins on the mobile side, we hear of a platform, not just companies don't -- OEMs don't give out just one phone. So I was curious, if you could provide some color, is this a whole platform that you're winning or one, or is it bigger than that or smaller than that? Just any kind of color would be helpful and anything to the magnitude of ASPs would be great, if you can? Yeah. And we've commented on this in the press release with the design win. It is in a RF component manufacturer that's doing a Tri-Flexor and they are designed into a Tier 1 major SoC provider. So it is a typical reference design that you would see go to multiple customers. So the pickup rate, we we're working with our end customer to understand who the end -- their end customers are going to be once it gets designed into the platforms. This is mainly targeting the China mobile market. So even though the China mobile market is depressed and we'll hopefully pick up latter part of this year. It's still a new opportunity for us going into new platforms. So it's a pretty significant growth opportunity for Akoustis and it's our first design win that will leverage to multiple opportunities in the future is the target. So that's a short summary on. And Jeff, do you have any other additional color? Yeah. I just sound -- obviously, give you some feel. As you kind of look out at the spectrum, you look at the high bands where you've got 5G bands in the 3 gigahertz to 5 gigahertz. We've been very vocal about the work we've been doing in the 5 gigahertz to 7 gigahertz and Wi-Fi 6, 6E and 7. So if you take a generation look back at 4G and where all the coexistence problems is where you get all these bands stacked up against one another. And I think, it's -- what our solution addresses is the coexistence challenges in the high band, particularly in the bands I just mentioned. So in addition to the reference design that Dave touched on focusing on China mobile. I think it also would be safe to assume not only that we believe the product is being marketed as on a reference design, but also to some large direct customers in the Tier 1 market. So that gives you a little bit of color. I would also add that the one project that we publicly announced, there's significant R&D that's going on behind that product for a potential new business, which will keep investors updated on a move forward basis. Good morning, guys. My congrats as well on the continued progress. Jeff, if you wouldn't mind, I know and maybe I missed this on the call, you're shipping to 15 different customers now. Maybe can you share your thoughts on where you think you'll be exiting this year and maybe going forward? And then maybe a tougher question for you, but I like the fact that you highlight you expect to be cash flow breakeven in the first half of 2024 on a large uptick in gross margins. Maybe help us think about where gross margins could be in 2024, 2025 considering different revenue rates? Yeah. So on the customer front, let me bring in Dave and maybe I'll add some color. But on the cash flow breakeven in gross margin front. I'll pull Ken in for that. I'll make some comments as well Dave. If you start on the customer, kind of how you see that expanding. Yeah. Good morning, Tony. So the 15 customers, a large percentage of those right now are the Wi-Fi customers, Wi-Fi 6, Wi-Fi 6E. Some of the Wi-Fi 6 programs are going end of life and they're getting replaced by new Wi-Fi 6E programs and then Wi-Fi 7. We have a handful of the base station designs that we're also going to be picking up. That's a longer secure rate than what we see in the Wi-Fi side and we're pretty well spread across the Wi-Fi between enterprise and carrier and also retail. And we continue to engage with those customers and with our opening of the Taiwan sales office, it's given us a greater visibility and opportunity to work closer with the ODMs as well. So I expect that we're going to continue to pick up one to two customers every three to four months. So by the end of the year, along with base station, we should be north of 25 -- north of 15 somewhere around close to 20 customers. And we'll continue to work on the other sectors as well with our RFMI acquisition, getting into IoT, also the medical and more activities happening right now around automotive, which is good, but that's a little bit longer cycle time to get designed in as well. RFMI is doing what we had targeted by opening up doors with the automotive customers and we're starting to introduce some of our BAW technology in for the CD2X and then looking closer at some of the telematics applications and having them as a unit that basically is qualified to automotive standards is helping us to accelerate some of that activity. So yeah, it's robust. The opportunity funnel is very large and we expect the activity to be pretty, pretty quick on moving these things forward. And Tony, let me add to that. On the Wi-Fi front, as Dave mentioned, some of the -- you see platforms on Wi-Fi 6 going absolutely. And so it's -- the Wi-Fi 6E, Wi-Fi 7 segment is what's being replaced with it. And the ASPs are a little bit better there. And then, as Dave mentioned on the base station front, I just want to point out that, in that particular end market, the ASPs are on the order of 4 times to 5 times higher for that market segment. And that can -- and those can be -- and it can be even higher than that depending whether you're talking about Small Cells or massive MIMO. So, clearly, we want to mix into higher ASP opportunities, but it's a little covered at least on kind of the segments there. Tony, let me talk a little bit on the gross margins. So as we're modeling out here, our march towards operating cash flow breakeven in the next 12 months to 15 months. We are looking to also improve our margins significantly through two different levers. One is increased back utilization. Also some land and size reductions for some of our existing products, which will significantly cut our back-end off. Certain price negotiations with suppliers and our newer products have a smaller form factor and are more cost effective even additionally. And then last but not least, we mentioned WLP in the December quarter. That is the lowest back-end off of all of our packaging. So we expect significant improvement as we go through the next 12 months to 15 months in 2024, margin towards approximately 30% margins. And then of the 40% and 50% plus as we move forward through the out years. And let me add to that, Tony. I think Ken gave a good -- the size reductions on these packages, you're talking about 4 times to 5 times smaller and really is up to 10 times smaller depending on the part moving from what we historically had was in chip and wire getting over to CSP and WLP. The other aspect of it, when you hear us talk about mobile, you hear us talk about WLP is a portion of that package, which we hope to eventually bring all of that in house. But a portion of that package today is actually fabricated inside our chip fab. So we're absorbing that back end cost internally at really our marginal cost to produce at the full wafer level. So that's a little bit more color on that. Got it. Just a follow-up for you, Jeff. Related to, I guess, more on the mobile side of things, for Akoustis and your opportunity. On the ASP side, it's clearly a lot more competitive on cellular mobile than on the Wi-Fi side. Where do you think you'll fit in? Are you able to get a little bit more premium pricing for your better performance or do you have to match up kind of with current pricing? You have to -- it is a -- for the customers we're engaging with is a performance driven market. With that, you have to be cost sensitive and you have to be able to drive cost savings. I think the true benefit to us, if you look at all the puts and takes here is that predominantly as I previously mentioned, the comments on the WLP being able to be produced inside our chip fab, that's a better cost structure for us, number one. Number two, we get a significant more number of die for wafer. So once you figure the back-end cost along with just the products per wafer. If you look at the revenue per wafer, which is kind of what I look at, it's significantly higher and more favorable for us than what we're seeing in Wi-Fi. So it is a favorable mix for us to move into. So even though it's a more aggressive market and we obviously have to be aware of the cost savings we've got to extend upon our customers as well. But the starting point for us is very good from a gross margin standpoint given the economics I just kind of walk you through. Tony, I was going to add a couple more points too. It is definitely a performance play for us. If you look at premium filter, demand in the 5G market is continuing to grow year-over-year if you look at the major Tier 1 OEMs on the smartphone side, the percentage involved designs that are going into the FEMs and into the applications are higher. And where we're playing is where applications are demanding that coexist even up at the higher frequencies, which is where technology is leading performance. But also down at lower frequency as well where you got the carry aggregation demand that's pushing for really high performance filters that don't have modes that give you that good coexist and also the high rejection. And also more important is being able to handle the higher powers as they're going up in frequency. So it's definitely a premium play. And so we can, as just highlighted demand a dollar per wafer that is attractive for us modeled against the other market segments that we're targeting as well. Good morning, Jeff, Dave, Ken. Congrats on the progress from me as well. On the mobile side guys, you have four customers I think. What's the timing of when maybe all four of those are ramping? Just to understand how far [indiscernible]? Is the revenue opportunity here contingent on the CHIPS Act funding and bringing the back end in house or is that not really required to get to ramp for these work? So good morning, Suji. I appreciate your kind comments. Dave, start with -- and start with addressing his questions and I've got a couple of things, I'm going to follow-up. So let me step back a little bit Suji. Yeah. With respect to mobile, we're categorizing two areas. One is the smart phone and then the other one is non-smartphone mobile. So with the non-smartphone mobile, these are good opportunities for Akoustis that we're introducing the diplexer technology, which is also of interest to the smartphone market once you start looking at Wi-Fi 7 in the multi-link operation. But the volume opportunities there within our capacity, but they're very attractive for the ARVR mat (ph) market, the PC modem market. With respect to the smartphone side, this first design win as we talked about is good volume targeting the China mobile market and it's within our capacity. And there are potential other opportunities with this Tier 1 RF component supplier. That would stay in that similar vein of volume. And the other guys that we're talking to, they’re targeting more of the Tier 1 OEM market. And as we highlighted in the script that it's more towards 2025. So there's alignment with the CHIPS Act. If that does come through to build up the capacity to support it and there's other means as well. So we're working closely with these other customers to align. So we've got multiple pathways that we're pursuing right now to stay engaged and continue to grow in the mobile market. Yeah. And Suji, let me add to that because I want to be clear on this point. You mentioned the CHIPS Act and supply chain for the back end manufacturing are, as we've mentioned, have been very vocal on our wafer level package, which is used for these mobile customers that process and manufacturing process is fully qualified. It currently uses a combination of both in-house as well as outsourced manufacturing, but we're dealing with very large OEMs on what we're outsourcing. So we don't think we're constrained at all in terms of supply chain being able to service that market. What the CHIPS Act does for us potentially is, as we kind of mentioned is to be able to in source that back end manufacturing to not only control the quality of that, control the cycle time more tightly with that, but also scale that up as well. As we also had mentioned on our scaling up our wafers up to 8 inch diameter would be a substantial expansion for us, using that legislation or leveraging that legislation. So that's -- I just want to be clear that the supply chain is already qualified for mobile. What we're talking about with CHIPS is scaling it up to address multiple Tier 1 opportunities. Okay. That's very helpful guys. And then my other question is on Wi-Fi. I'm curious the supply chain constraints, how that's impacting the transition from Wi-Fi 6 to newer 6E and 7 designs, if they're being end of life-ed (ph) faster because of the supply tightness or if they're being kind of held longer because of the supply tight just curious how that transition is happening -- supply chain constraints. Thanks. Yeah. Suji, on that, the Wi-Fi 6E actually still good, but what we're seeing is a shift on platforms that would have been Wi-Fi 6E holding back and going into Wi-Fi 7 more on the retail side and the carrier side is still pretty robust on the 6E side. The enterprise is, they've launched and they've released their 6E products and now they're working on Wi-Fi 7. So it's a mix. The 6E is -- there were more programs that we were targeting that are being put on hold and being shifted over to 7 because of those constraints on components and so forth. And it seems that the leaders on the [indiscernible] side have been pretty aggressive in getting their Wi-Fi 7 chips out. So we're enjoying all the activity across all fronts. And what we see though is a lot of transition of programs going to Tri-band. And then actually increased amount of opportunities on quad band with either 2 by 2 MIMO or 4 by 4 MIMO. So the dollar content in the existing Wi-Fi 6E programs and particularly in Wi-Fi 7 is going up pretty significantly. As Jeff mentioned earlier also with a little bit higher ASP for these platforms as well. Yeah. The only other thing to add to that is, we mentioned in the script and I think it's a good point to reiterate it. Dave talked about carrier class customers. So we've got -- we're expecting to ramp here in the first half with a leading carrier class customer. And we'll see some of that this quarter, but predominantly most of that's going to come in the second quarter of the calendar year. Yeah. Thanks for taking the questions. And guys, it's great to be on the call after all the years of conversation. And I'll just echo the congratulations on the huge development with mobile over the last couple of months. So I wanted just to start on that theme. With that, module maker volume design win really targeting the China market. And this may be more of a question for Dave. Dave, how should we think about the potential for that to sample into what would typically be product releases for the big Golden Week selling season in October product that, that customer set and customer set could have around single stay and then year-end holiday and in Lunar New Year. It seems like the initial volume timing would set you up well there. Is that how you see it? And what would be the milestones leading towards those new product release windows? Yeah. That's exactly how we see it, Craig and thanks for your comments. The activity with our end customers been very active for the last year, particularly as we were getting WLP released that was a critical milestone and it also was verified in their platform as well with their reliability studies and qualifications. So we've been working very closely with this customer and we've been feeding them the amount of quantities of products that they need on earlier orders so that they can stay engaged with a handful of the reference design customers. So the activity started prior to the beginning of this new year. And the volume order that we announced in January or end of December is helping to support the development ramp with these key customers for the target, as you mentioned in the Q3 timeframe and we're basically aligned with them on delivering the volume demand and also get line of sight to what that ramp is going to look like starting really end of Q2 and to Q3 and Q4. So if everything is aligned with what you mentioned model wise. That's really helpful. The second question, I wanted to follow-up on some of the earlier inquiries on Wi-Fi 6E and do it in the following way. So if we look back to mid-January, when Apple released its new Mac offerings. One of the things that they offered on some of the platforms was 6E and our checks in Asia showed that helped really ignite a lot of interest, not just in 6E, but with the transition to 7. So you've been clear on all the customer engagement. I was wondering if you could just talk about the color you're picking up from the consumer and enterprise router market over the last month or so regarding the to follow on activity that the supply chain would have in response to Apple's announcement since they tend to be a technology trendsetter and a customer that really pushes the market to next-gen technologies. Yeah. That's a good question, Craig. From our standpoint, we are actually very well engaged with all the Tier 1 guys now. We've built a good reputation out in the market that’s having, leading technology, leading performance of all filters. Particularly as the systems are shifting from a dual-band to a tri-band and looking at quad band. So we have pretty good line of sight to all the platforms that are in development. And Jeff mentioned with the Wi-Fi, it's a key carrier class service provider, ramping, utilizing the UNII-4. We see things like that. And those guys are the ones that we're talking to now on the carrier side. We're also in multiple platforms. We're also talking to the enterprise guys and we're also the retail guys. And the carrier guys are starting to launch RFPs that are doing Wi-Fi 7 that are looking at quad band architectures. And the enterprise guys are doing our fees out for Wi-Fi 7, looking at not only quad band architectures, but also dual mode operation, where you can get up to 24 filters per system with multiple tons and so forth. So these infrastructures both in enterprise and also in retail and home, they are getting out there. So that means that the UE side is going to start adopting it. I think we've mentioned that we're working with Tier 1 OEMs on non-smartphone mobile related device that would utilize Wi-Fi 7 and needs that infrastructure in place to support it. So they're aligned fairly well. The fixed is going to be in the market ended this year, early next year for Wi-Fi 7. And then I expect that to start some of the UE devices coming in latter half of next year maybe mid-part. That's not fully flushed out timing wise, but that's just some visibility we've got. Thanks, Craig and this is Jeff. Let me add to that, that -- all that cover Dave just gave that feedback, that marketing intelligence feedback into our product development, new product introduction cycle and so used to bring it kind of full circle where we were talking about kind of where our gross margins are going. We're incorporating these lower cost packages in those solutions to help drive gross margin improvements in the company. So it kind of feeds full circle. Those performance improvements we're also in capturing these new product packages in those to help on the gross margin improvement. I just wanted to add that to cover. Yes. Thanks for taking on there, Jeff. My last question is a follow-up on issue that's come up earlier in this call and in prior calls. It's the Wi-Fi SoC tightness issue and I'm well aware that this isn't an acoustic specific issue, but it's one that impacts the broader Wi-Fi business. The question is this, as we've seen foundry supply in Asia, loosen meaningfully at almost all nodes except the very highest nodes and acknowledging that Wi Fi SoCs have very long lead time. So we're not going to see a supply benefit immediately. But are you seeing any signs from the ecosystem that you're interacting with that we could see better Wi-Fi SoC supply in the back half of this year? And if so, to what extent are those indications moving up if at all? Thanks, guys. Yeah. So Craig on that, we are seeing a little bit of loosening on the -- at least the major two SoC providers. It still is long lead items. There's still inventories that are over there, the turns with the distribution market is still pretty high, both on the FEM and also on the passes, but also in the SoCs. But we are seeing in loosening one of the other providers is probably two-thirds of lead time of one of the others. So there is some attractiveness to chip to the Wi-Fi 7 platform as well because that is less constrained as well, depending on who the SoC is and what foundry that they're operating in which node. So it is softening. It's still is pretty long lead time and so forth and we do expect it to improve over the next six months to nine months. That we're keeping our finger on the pulse and making sure we -- every platform we look at in our funnel, we look at who the chipset is, as well as the ramp scheduling program just so that we're not being held on inventory levels and so forth over in Asia as well. And we have reached the end of the question-and0answer session now. I’ll turn it back over to management for closing remarks. Yes. I'd like to thank everyone for your time today and joining today's call. We look forward to speaking with you during our next update call to discuss the current quarter execution against our milestones as well as future expectations. Have a great day.

EarningCall_448

Good morning, and welcome to the Fourth Quarter 2022 Earnings Call for FMC Corporation. This event is being recorded and all participants are in listen-only mode. [Operator Instructions]. I would now like to turn the conference over to Mr. Zack Zaki, Director of Investor Relations for FMC Corporation. Please go ahead. Thank you, Emily, and good morning, everyone. Welcome to FMC Corporation's fourth quarter earnings call. Joining me today are Mark Douglas, President and Chief Executive Officer; and Andrew Sandifer, Executive Vice President and Chief Financial Officer. Mark will review our fourth quarter and full year performance as well as provide an outlook for full year 2023 and the first quarter. Andrew will provide an overview of select financial results. Following the prepared remarks, we will take questions. Our earnings release and today's slide presentation are available on our website, and the prepared remarks from today's discussion will be made available after the call. Let me remind you that today's presentation and discussion will include forward-looking statements that are subject to various risks and uncertainties concerning specific factors, including, but not limited to, those factors identified in our earnings release and in our filings with the Securities and Exchange Commission. Information presented represents our best judgment based on today's understanding. Actual results may vary based upon these risks and uncertainties. Today's discussion and the supporting materials will include references to adjusted EPS, adjusted EBITDA, adjusted cash from operations, free cash flow, net debt and organic revenue growth, all of which are non-GAAP financial measures. Please note that as used in today's discussion, earnings means adjusted earnings and EBITDA means adjusted EBITDA. A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website. Thank you, Zack, and good morning, everyone. FMC delivered record performance in the quarter, driven by a combination of robust volume growth and strong pricing actions. Sales of new products continue to accelerate nearly doubling year-over-year and representing 11% of the total sales in the quarter. We continue to make investments in expanding our market access in key geographies, including the U.S. and Brazil. Pricing actions in the quarter more than offset headwinds from both cost and FX, resulting in EBITDA margin expansion in excess of 40 basis points. This positive gap between price gains and headwinds from cost and FX and is expected to continue as we move forward through 2023. Agricultural markets remain robust with high commodity prices, increasing acreage for crops and positive grower sentiment, providing a solid backdrop for FMC. Our Q4 results are detailed on Slides 3, 4 and 5. Revenue was up 17% organically, EBITDA up 17% and EPS up 12%. The U. S. and Brazil were major contributors to the quarter's results, with volume and price driving the U.S. business, while price and FX drove Brazil's results. Adjusted earnings were $2.37 per diluted share in the quarter, $0. 07 above the midpoint of our guidance range. With this outperformance driven by higher EBITDA and lower-than-anticipated taxes. In North America, sales increased 35% year-over-year, driven by strong sentiment among growers and our distribution partners in the U.S. for the upcoming season. Selected herbicides for soybeans and other crops as well as fungicides for corn grew rapidly in the quarter. We have made great progress in revitalizing our North American product portfolio with almost 20% of the quarter's branded sales coming from products launched in the last 5 years. We have also invested in more sales and tech service resources, enabling us to reach more retailers to promote our newest technologies and expand our market access. In Latin America, sales increased 13% year-over-year and 9% organically, led by Brazil. Pricing actions, demand for our fungicides and selective herbicides as well as our investments in market access drove results for the region. Our market access investments contributed to about 50% of the region's growth in the quarter. FX was also a benefit in the quarter, driven by the strong BRL. However, dry weather negatively impacted corn and soy in Southern Brazil and Argentina. Asia was flat versus the fourth quarter last year and up 12% organically. Insecticides and selective herbicides led the growth in the region. Overwatch herbicide, which is based on Isoflex, the first active from our pipeline, continues to gain share on cereals in Australia. Almost 20% of branded sales in Asia came from products launched in the last 5 years. FX was a significant headwind in the quarter, offsetting the double-digit organic growth. EMEA was up 7% versus prior year and up 20% organically. In addition to strong pricing, results were driven by broad-based demand, especially for cereal herbicides. 13% of branded sales in the quarter came from products launched in the last 5 years and sales of [indiscernible] formulations almost doubled in the quarter. Overall, adjusted EBITDA for the fourth quarter was $432 million, an increase of 17% compared to the prior year period, resulting in EBITDA margin expansion in excess of 40 basis points. Average price increases of 8% contributed $109 million in the quarter and more than offset the cost and FX headwinds. Moving to Slide 6 in FMC's full year 2022 results. We reported record $5.8 billion in revenue which reflects a 15% increase on a reported basis and 18% organic growth. This is despite exiting our Russian business earlier in the year. More than $600 million in sales came from products launched in the last 5 years, growth of 50% over the previous year and about $100 million came from products launched in 2022, continuing the multiyear trend of strong growth from new technologies. Diamides grew in the mid- to high single-digit range for the year. Adjusted EBITDA was $1.407 billion, an increase of 7% compared to 2021, despite $463 million in cost headwinds and $74 million in FX headwinds. Exiting Russia negatively impacted our EBITDA by approximately $25 million. The benefit from pricing actions in the year was $372 million. This was necessary to overcome the most significant input cost headwinds we have ever experienced. We believe input cost headwinds peaked in the third quarter and expect them to ease going forward. 2022 adjusted earnings were $7.41 per diluted share, an increase of 8% versus 2021. This increase was driven primarily by the EBITDA increase and lower share count, offset partially by higher interest expenses and taxes. In addition to these financial results, we also had other significant achievements in the year as detailed on Slides 7 and 8. FMC continues to make substantial progress on our sustainability and net zero goals. For example, we reduced Scope 1 and 2 greenhouse gas emissions at our operating sites by at least 2% in the last year, while at the same time, delivering record growth. The consistent progress we have made on various ESG metrics was recognized by several raters that moved us up on their rankings in 2022. FMC now stands at or above industry average across these raters. In our Plant Health business, we launched 17 new biological products spread across all 4 regions as well as 2 new micronutrient products. We also acquired BioPhero in 2022. As we've said before, BioPhero is a pioneer in biologically produced pheromone technology with a patented fermentation platform that enables significantly lower cost production compared to current standards. In Precision Ag, we continue to advance our Arc Farm Intelligence platform, FMC's proprietary mobile solution that helps farmers manage pest pressure through predictive modeling. Arc is now deployed across 20 million acres spanning over 20 countries, and we have found the growers who use Arc are tending to buy a broader range of products from FMC. Finally, our venture capital arm, FMC Ventures continued to build its portfolio in 2022 with new collaborations and strategic investments in start-ups and early-stage companies, working on new or disruptive technologies. These engagements, which support or augment our internal capabilities span several technology segments, including robotics, drone technology, ag fintech, pathology detection, soil health, peptides and pheromone. As an example, in 2022, FMC Ventures increased its investment in Micropep, the start of developing short natural peptide molecules that target and regulate plant genes and proteins. In addition to our equity investment, we entered into a strategic collaboration with Micropep late last year to develop solutions to control herbicide-resistant weeds. Turning to Slide 9, which provides the key market and cost dynamics underpinning our 2023 outlook. We expect crop commodity prices to remain robust and that growers around the world will continue to rely on our advanced technologies to deliver high yields while they combat erratic weather patterns. The Latin American market is believed to have grown significantly in 2022 primarily due to rapidly price increases in nonselective herbicides, a product segment in which FMC does not participate. In 2023, we expect the Latin American market to contract by mid-single digits as some of those gains in nonselective herbicides reverse. Asian markets are expected to be flat to last year. And EMEA is expected to be up high single digits with improvements driven by increasing acres for cereals. Taking into account these regional market projections and in light of the very strong market growth in 2022, we expect the overall crop protection market will grow this year in the low single-digit range on a U.S. dollar basis. FMC's continued pricing actions, strong demand for our product portfolio, particularly our newest technologies as well as further market access gains are expected to provide solid support for FMC's top line to grow above the market rates. Costs are anticipated to remain a year-over-year headwind throughout the year. However, we aren't seeing deceleration of input cost inflation and these costs are expected to become a year-over-year tailwind in the second half. We will continue to invest in R&D and SG&A to expand market access, grow our Plant Health business, deploy new technologies through Precision Ag and develop new synthetic and biological products. Overall, we expect price increases to more than offset cost and FX headwinds, resulting in margin expansion in the second half of the year. Turning to Slide 10 for our full year 2023 outlook. We expect the full year revenue in the range of $6.08 billion to $6.22 billion representing a 6% growth at the midpoint compared to 2022. New launches and market access initiatives will drive volume growth with mid-single-digit pricing expected for the full year. FX is expected to be a moderate headwind to top line results. Adjusted EBITDA is forecasted to be in the range of $1. 48 billion to $1.56 billion, reflecting 8% year-over-year growth at the midpoint. Price is anticipated to be the primary driver of EBITDA growth in the year, with cost headwinds expected to be significantly lower than those experienced last year. Increases in the input cost portion of cost headwinds are anticipated to decelerate as the year progresses and become a year-over-year tailwind in the second half. We expect adjusted earnings of $7.20 to $8 per diluted share, representing a 3% increase at the midpoint, with EPS growth limited by higher interest and tax rates. This assumes a share count of approximately 126.5 million and does not factor in the benefit of any potential share repurchases in the year. Looking at the first quarter outlook on Slide 10, we forecast revenue to be in the range of $1.41 billion to $1.45 billion, representing 6% growth at the midpoint compared to the first quarter of 2022. We are targeting mid- to high single-digit price increases of which much has already been implemented. Price is expected to be the primary driver of revenue growth in the quarter. FX is anticipated to be a headwind in the quarter. Adjusted EBITDA is forecasted to be in the range of $345 million to $365 million, flat versus the prior year period at the midpoint, mainly due to pricing gains being offset by expected cost headwinds. Volume gains are expected to be offset by FX-related headwinds. We expect adjusted earnings per diluted share to be in the range of $1.63 to $1.83, representing a decrease of 8% at the midpoint due to higher interest rates and taxes. This assumes a share count of approximately 126.5 million. Moving now to Slide 12. I want to highlight some of the potential factors that could drive our results to either end of the guidance range. For the midpoint of our adjusted EBITDA guidance, we are assuming market growth in the low single-digit range and FMC achieving mid-single-digit price increases. Input cost headwinds are expected to continue decelerating and become a tailwind as the year progresses, while FX is expected to be a headwind throughout the year. With the resilience we've built into our supply chain, our base case assumes any minor disruptions are mitigated. Alternatively, if cost headwinds ease more rapidly, if the market grows at a higher rate than forecasted and if we are able to realize high single-digit prices or FX has a lower impact, we could deliver results at the high end of our guidance range. Major supply disruptions of critical inputs or services are examples of factors that would drive results below the midpoint of the guidance range. Thanks, Mark. I'll start this morning with a review of some key income statement items. FX was a 2% headwind to revenue in the fourth quarter, with weakness in Asian and European currencies, partially offset by strength of the Brazilian real. For full year 2022, FX was a 3% headwind overall, with the most significant headwinds coming from the euro, Turkish lira and Indian rupee, offset in part by a strong Brazilian real. Looking ahead to 2023, we see continued modest FX headwinds on the horizon, consistent with the initial outlook for 2023 we provided on the November call. For the first quarter of 2023, these headwinds are across a range of Asian and European currencies. Interest expense for the fourth quarter was $44.8 million, up $11.8 million versus the prior year period. Interest expense for full year 2022 was $151.8 million, up $20.7 million versus the prior year. Rising U.S. interest rates were the primary driver of higher interest expense for both the quarter and the full year. Looking ahead to 2023, we expect full year interest expense to be in the range of $200 million to $210 million, an increase of more than $50 million at the midpoint versus 2022, driven primarily by higher U.S. interest rates. Our effective tax rate on adjusted earnings for full year 2022 came in slightly better than anticipated at 13.7%, driven by a modest shift in mix of earnings across principal operating companies. The fourth quarter effective tax rate of 13. 1% reflects the true-up to the full year rate relative to the 14% rate accrued through the third quarter. For 2023, we estimate that our tax rate should be in the range of 14% to 16% with the increase driven by anticipated higher foreign earnings subject to U. S. GILTI tax versus 2022. Moving next to the balance sheet and liquidity. Gross debt at year-end was slightly below $3.3 billion, down $285 million from the prior quarter. Gross debt to trailing 12-month EBITDA was 2.3x at year-end while net debt-to-EBITDA was 2.0x. On a full year average basis, gross debt-to-EBITDA was 2.6x, while net debt to EBITDA was 2.3x. Moving on to cash flow generation and deployment on Slide 13. FMC generated free cash flow of $514 million in 2022, down 28% versus the prior year. Adjusted cash from operations was down nearly $250 million compared to the prior year. Growth in EBITDA and cash provided by nonworking capital items were more than offset by cash used by working capital. Receivables net of rebates, vendor financing and advanced payments were a major use of cash driven by the inflationary impact on receivables and price increases to offset cost headwinds. Advanced payments from customers in North America were up somewhat, but grew rate much slower than revenue growth. Inventory was the use of cash with year-end inventory levels higher, as expected, given our anticipation of a strong Northern Hemisphere season in the first half of 2023 and the impact of inflation on inventory values. Accounts payable was a source of cash driven by cost inflation. Capital additions and other investing activities of $119 million were up $5 million compared with the prior year, with nearly half of the spending directed towards capacity expansion. Legacy and transformation was down substantially with the decrease due entirely to proceeds from the disposition of an inactive site. Legacy and transformation would have been essentially flat year-on-year in the absence of these proceeds. Overall, free cash flow conversion from adjusted earnings for 2022 was 55%, with rolling 3-year average free cash flow conversion at 67%, slightly below our long-term goal for 3-year average cash conversion of 70% or more due to the inflationary impacts on working capital. With this free cash flow and a modest increase in net debt year-on-year, we deployed $566 million in 2022 with nearly $370 million returned to shareholders through $267 million in dividends and $100 million of share repurchases. The remainder of cash deployed in 2022 was used to acquire BioPhero and to make equity investments through FMC Ventures. With leverage levels through the year, slightly above our targeted ranges, we chose not to repurchase additional shares following our third quarter earnings call. Looking ahead now to free cash flow generation and deployment for 2023 on Slide 14. We are forecasting free cash flow of $530 million to $720 million in 2023, up more than 20% year-on-year at the midpoint. Underlying this forecast is our expectation of adjusted cash from operations of $800 million to $920 million, up $200 million at the midpoint, with the increase driven by growth in EBITDA and slower growth in working capital resulting from lower sales growth and easing input cost inflation. This is partially offset by higher cash interest and taxes. We further expect to continue to modestly ramp up capital additions as we expand capacity to meet growing demand and to support new product introductions. Legacy and transformation cashment is expected to be essentially flat to midpoint after adjusting for the benefit from the disposal of the inactive site for 2022. With this guidance, we anticipate free cash flow conversion of 65% at the midpoint for 2023, a significant improvement from the 55% conversion last year. The rolling 3-year average free cash flow conversion is expected to be 67% just under our targeted conversion range of 70% or more. With interest rates substantially higher, we do not intend to utilize incremental borrowing capacity for cash deployment this year so as to mitigate the impact of higher interest expense on earnings and cash flow. Free cash flow will be used first to fund the dividend and approximately $290 million use of cash at the newly raised dividend per share authorized by our Board of Directors in December. Free cash flow will then be used to fund inorganic growth, if attractive opportunities become available. Free cash flow remaining after any such investments will then be directed to share repurchases. Given the seasonal nature of our cash flow, any share repurchases will be weighted more heavily to the latter part of the year. That said, we do intend to repurchase in the first quarter at a minimum, enough FMC shares to offset any dilution from share-based compensation. I must emphasize that this is not a permanent change in capital policy for FMC. Rather, this is temporary as we adjust structurally higher interest rates in the United States. Our intent here is to actively manage the impact of higher rates in 2023. Should interest rates ease, we would consider using incremental debt capacity to expand our cooler deployable cash. Finally, moving on to Slide 15. Let me put our free cash flow generation and deployment into perspective. Since launching FMC is a focused agricultural sciences company in 2018, we've made substantial improvements in free cash flow generation and free cash flow conversion from earnings. As you can see on the left-hand side of this page, we've improved 3-year rolling average free cash flow conversion from adjusted earnings from 42% in 2020 to 67% at the midpoint of 2023 guidance. We've shown we can convert more than 70% of earnings to cash in a single year, as we did in 2021, and we are well on our way to our targeted 70% or more rolling 3-year average cash conversion. Equally as important, we've been very balanced in how we've utilized this improved cash flow generation. Strongly rewarding shareholders with nearly $2 billion in cash returned over 2019 to 2022, split equally between share repurchases and dividends, while fully funding our organic growth, as well as directing $268 million to inorganic growth investments like our recent acquisition of BioPhero. Overall, we feel this approach to cash deployment balances shareholder rewards over both the near and long-term horizon. Thank you, Andrew. FMC delivered a record performance in 2022 despite facing the largest input cost inflation headwinds in the company's history. Robust volumes driven by our market access initiatives and the continued accelerated growth of new products as well as strong pricing gains helped to overcome significant cost, supply and FX challenges in the year. We expect the broader economy to be volatile in 2023. However, agricultural market fundamentals are expected to remain solid. FMC's pricing momentum continues, and we should benefit from the potential deflation in the broader industrial supply chains. We continue to invest in our technology portfolio of synthetics, biologicals, precision ag and FMC Ventures. Our expanding market access initiatives are resulting in increased profitable growth, and we intend to continue the pace of these investments across more countries. Overall, there are fewer disruptive factors that we see today compared to the same time period last year, and this strengthens our confidence in the narrow guidance range we have provided. We expect to deliver another year of strong and profitable growth in 2023. Finally, as we are now in the final year of our current strategic plan, we are planning to host an Investor Day at our global headquarters in Philadelphia this November. At that time, we will share details of our new strategic plan and we look forward to seeing you here in person. We will, of course, announce the date for this Investor Day event soon. Great. It does look like you have some cost benefit built into your -- just the midpoint of your EBITDA growth versus your projected revenues. I know you've been taking a prudent approach on the price cost in terms of the cost side and forecasting. But can you just talk a little bit more on how you see that progressing throughout the year, specifically in the second half and even potentially how you think it progresses throughout the year, which would even have implications on the first half of '24. Yes. Thanks, Chris. So let me take a step back on that one and just talk a little bit about -- I mentioned in the script where we were last year versus where we are this year. Last year at this time, we had a wave coming at as of inflationary costs. And truly, we did not understand the order of magnitude. We ended up with what -- $463 million of costs at the beginning of the year, our forecast had nothing like that number. I would say this year, we're in exactly the reverse position. We see cost receding, we just don't know exactly how much that will be. We know it will impact us in the second half of the year. And we have built what I would call a modest amount of cost reduction into the midpoint of our guidance. But what I really see is a time line here that gets us through the end of this year and into early 2024, where costs do become a meaningful tailwind for us. We do expect to see margin expansion as we go through the second half of the year. We did talk about the fact that we will continue to invest in SG&A and R&D, and I'll have Andrew add a couple of comments here at the end on details here. We are investing in those areas because frankly, we are seeing profitable growth from those investments, whether I think about the growth in Brazil or I think about the growth in the U.S. or other parts of Asia, those investments are paying off very quickly in terms of how we gather new sales from new customers and new parts of the value chain. R&D is growing very simply because we're investing not only in our synthetic pipeline. And this year, we moved another molecule from discovery into development, and we'll talk more about that in Investor Day. But we've also got a full year run rate of our BioPhero investment in R&D, and we continue to invest in Plant Health and Precision Ag. So if you think about a growth rate of roughly 6% for the top line, you should expect SG&A to be growing pretty close to the 6%. And then R&D, a little bit above that. That's how it will flow through the year. The input costs are higher in the first half. And you can see what we said about in Q1, we still have high input costs. They were a legacy of what we bought in the second half of last year. Those will abate as we go through the half, and then in the second half, we'll get that margin expansion. So I've seen some of the flash reports last night at the -- are we being conservative? I think we've been prudent. The world is still somewhat volatile. We all know that. But we are confident enough to say that we're already seeing the trend lines, same as we saw last year, the trend lines are there. We just don't quite know where we'll be. So when I talked about on the script, could we see areas where we'll have improvement? Yes, absolutely. So we'll see as we go forward. The make call will be an important call for us because we'll have a much better view on where we are with raw materials. Our pricing actions, we probably have about 50% of our price target for this year is simply a rollover from last year, just pure timing of when pricing was implemented. So we feel good about the pricing side. We're less sure about the cost side, but the trend line is there for it to get better as we go through the year. Andrew, do you want add anything there? Yes. Let me just reiterate and expand on a couple of your thoughts there, Mark. I think certainly, input cost, the cost is at our COGS line, they are a significantly smaller headwind in 2023 than they were in 2022. And as Mark described, they remain a headwind in the first half, but we anticipate them becoming a tailwind in the second half. we will have growth in SG&A and R&D spending on a dollar basis. The SG&A should grow, as Mark described, generally in line with sales, R&D might grow a bit faster all of us to support growth, the addition of BioPhero, the investments in our Plant Health platform. We have moved another active ingredient from discovery into development in an active ingredient pipeline. So that SG&A and R&D dollar spending will continue to be a cost headwind as we go through the year. That said, on a percentage of sales basis, SG&A will stay relatively flat. R& D expand slightly. But this is against the contract where over the past 4 years, we've taken 300 basis points out of SG&A as a percentage of sales and over 100 basis points out of R&D as a percentage of sales. So while we might not get the same kind of leverage this year, more flat on SG&A and R&D as a percentage of sales, still a very, very competitive cost structure. The SG&A more than 500 basis points lower than our nearest competitor. So I think what you'll see through the year is that on a dollar EBITDA basis, SG&A and R&D continue to be a cost headwind, we will manage that carefully as we always have, and we'll adjust as we need to as we progress through the year. I just want to touch on the pricing environment a little bit. I think I heard you say, Mark, that you've already got 50% in place just sort of from a rollover of last year. Of the other 50%, how much have you already gone out with for the first half versus, I assume there's a fair amount that you need to go out with for the back half of the year. And just want to understand sort of what you're hearing from your channel partners in terms of continued receptivity for pricing at this point? Just thinking atmospherically, a lot of headlines about we're all entering into a deflationary environment. We're seeing fertilizer prices come down and glyphosate prices come down. I know those are very different products versus what you sell, but just we are sort of pivoting out of the inflationary or price increase environment. So what, if any, change in feedback are you getting from the channel partners? Yes. Thanks, Vincent. Well, listen, for pricing in the first half of the year, I mean, pretty much most of it, as I said, is already underway. The U.S. and Canada markets are active now, Europe is getting active right now. So those price increases are through. I think what you're referring to is probably in the fourth quarter as we roll into the Latin American market, where we will be. It's a valid question to ask. We don't know. We are planning price increases. At the end of the day, as Andrew just alluded to, input costs are still higher than they were last year. They are still increasing. They're just increasing at a much lower amount. Plus the fact that we're seeing significant labor cost inflation around the world, not only for SG&A, but within our manufacturing plants, et cetera. So for me, there is a cost environment that is still conducive to price increases. In Europe, you have high energy costs. Yes, they've come down off their peaks, but they're still meaningfully different to the average over the last few years. So we will continue to move price where we see fit. And of course, it's not a standard number around the world. We've talked about this before. It's different in different markets with different products. We continue to use that differentiation to move price. I think most of the value chains that we operate in really do see that inflationary environment. It's like any negotiation, they're always difficult. They're never easy. But overall, we are getting the price that we need to get to move us back to the EBITDA margins we want. You're right on the nonselective herbicides. You can look at all the metrics, you see them coming down. They went up very quickly. They come down very quickly. They truly are commoditized. We're not seeing that sort of curve for the more specialty products where you're really selling value not just on a cost basis through a contract. And that's a key differentiator for us. We don't have those nonselective herbicides. We don't operate in that type of environment. Okay. And just as a follow-up, Mark, did I hear you say -- I believe last quarter, you thought the market overall would grow low to mid-single digits. I believe now you're thinking low single digits for this year. Is that just a function of last year for the market coming in better than you thought. So just a harder compare? Or is there anything at all different about sort of what you expect for this year globally? Yes. I think overall, when I look at the market, we are -- we do have a lower view of the overall market. But frankly, it's driven by Latin America. I mean we still expect North America to have a reasonable growth despite how strong it was in the past year. There is very good sentiment in the North American market right now for the coming year. Europe, we expect to be up. We do see increase in cereal acres, which will be positive. So we see Europe up. Asia will be slightly flat. There has been some weather issues in India, Indonesia and other parts of Southeast Asia, offset by a good market in Australia. I would say the reason we're going lower in the world today is because of Latin America. There are independent numbers that suggest the Latin American market may have grown $6 billion in 2022. Now the vast majority of that is with nonselective herbicides, mainly price and then pricing for other active ingredients. So I do think that people need to watch that nonselective herbicide market in Brazil and Argentina. That's the reason we're calling for a lower overall market, but it really is focused in that particular segment, which is so large, it does impact the rest. The rest of it is probably close to where we said it would be in November. Unfortunately, we're not receiving any audio from Adam's line, so we'll move on to our next question, which comes from Aleksey Yefremov with KeyBanc Capital Markets. Just wanted to get back to your first quarter guidance, you had margin expansion in just reported fourth quarter '22 and you're guiding to some of lower margins and flat EBITDA in the first quarter. In what way are these quarters different? Could you just maybe provide some of the bridge items for Q1. Yes, Aleksey, I'll just give you a quick high-level view and then Andrew, please give some color commentary here. Very different markets in the sense of where you're selling into. Latin America, Brazil, Argentina, huge markets in Q4, still important in Q1 but to a lesser degree. And then obviously, in Q1, the European business is starting to kick in, which is very different. So you have a very different geographic mix across the world for how we see. And it's why we never ever talk about sequential quarters. It's almost impossible to look at the business on that light. But Andrew, if you want to make some comments on the revenue side and the cost side. Yes, certainly. I think, yes, to take Mark's comment, very, very challenging to look at our business on a sequential basis, given the different regional country mix for each quarter. I think what we're looking at is solid revenue growth and flat EBITDA, entirely due to cost headwinds in the first quarter, we're will be close to offsetting them with price increases in the first quarter, but we don't really get to that positive price cost comparison and for any strong way until we get into the following quarter. So we do see some EBITDA margin dilution from Q1 '22 to Q1 '23 which I would suggest is a better comparison period to be looking at and trying to understand the Q1 performance. Again, it's really driven by getting past this last part of the wave of cost inflation. Now as we move into the second half of the year, as input costs received as we're anticipating, that's when you start to really see margin improvement. And as a follow-up, you mentioned diamide, mid-single-digit to high single-digit growth, sort of -- they -- did diamides dip to mid-single-digit territory going forward over the next 2, 3 years. Is this the level of growth that you see as fairly normal? Or could it be a little higher or lower? I think we've said in the past, sort of that mid- to high single digits is where we think it will pan out over time. I wouldn't change that view right now. We do continue to launch new diamide formulations around the world and Cyazypyr is growing very nicely as we get the new registration. So I think the mid- to high single digit is a perfectly good range of legacy. Yes. I guess just to follow up on some of the raws questions earlier. I mean, you've been pretty clear in the past, you have about 6 months of visibility to what you're buying. So I mean is this something where next quarter you'll have a stronger view on second half and would adjust your view, kind of aligned with what you're seeing there? And just curious on some of the near-term dynamics as well. Is China disruption impacting your view of what pricing can be. Does that have an impact there? And if you look at your buy now, is there any way to frame what your raws will be doing year-over-year in the second half then. Yes. Listen, it's exactly what I talked about. I think as we go through the second quarter, we're going to have a much better view of, a, what have we bought and what are we buying in the second quarter, which will inform our raw material view in the second half. So I think at the May call, we'll be giving a lot more detail in that area. China has not impacted us at all through this latest round of COVID. We did have closures of some supply. But over the last 3 to 4 years, we've built up a really robust process and network of how to manage disruptions. So we didn't see any significant disruptions through the Chinese New Year and through the COVID wave that they had to deal with. China opening up is it's positive for us in the sense that, obviously, we get raw materials from China. It's not a huge market for us from a sales perspective. It's a nice market, but it's not one of our leading growth markets. So for us, it's a bit of a neutral event, China opening up. We've managed raw material as well out of China. We've been distributing our manufacturing network over the last 5 years to other countries. That continues at a pace. So overall, I think we feel pretty good from a supply position standpoint right now. Okay. And if I could just poke on your guide range on the high end specifically. I guess if I just take one of those variables and look at price and say you do high single digit versus mid-single digit, it's $150 million plus of EBITDA upside. Your scenario is $40 million higher and I guess you list a whole bunch of positives that could play out. So what are the negatives that we should be thinking about? Or is that higher upside potentially possible if you get more visibility there? Well, I think on the negative side, I highlighted supply disruptions, which is the obvious one. Weather disruptions would be the next one, I would say. Outside of that, it would be a lack of pricing or something in the world that creates an inflationary environment for raw materials. We don't see that today. As I said, you look at the script, we mentioned 3 or 4 items that could move us from the midpoint to the upper end of the range. We mentioned basically one that would come the other way. So you can read into that what you will. The EPA recently came out with a draft risk assessment on Cyazypyr and they concluded this -- the terminology likely to adversely affect. Is this meaningful in your view? Could there be impacts from this on how Cyazypyr appear is used? And how would you compare this to other insecticides? Is this fairly normal? Or is this a concern? Yes. Thanks, Steve. Top line, no, it's not a concern, and we've been following this for some time, as you can imagine. We're well clued into where the EPA is going. Cyazypyr is one of the -- what we call the softer chemistries, much more targeted. We don't see the EPA guidance has any impact on our business. We continue to see Cyazypyr grow at quite a fast rate around the world. It has numerous attributes that are very targeted. There are lots of old pesticides and insecticides that are more broad in nature that Cyazypyr would take share from and is taking share from. So we don't see any impact to our business from this ruling. Okay. And I wanted to just drill into your outlook on the biologicals. It's clearly an area that you're devoting a lot of focus on. Do you find that it has the potential to be, say, synergistic with your synthetics or is used in combination? I think that was view that Kathy Shelton had in prior years. Is that still the view that there's a synergy between the biologicals and synthetic chemistries. Yes, very much so. When you look at the growth rate of our biologicals, we talk about our Plant Health business. This year, it will be pretty close to $300 million in size. Biologicals is now roughly half of that. It's getting close to the $150 million business. It's growing in excess of 20% top line per year. And that growth is coming from not only the new products but the synergistic effect that you talk about, which is twofold. First of all, we are developing products where biologicals and synthetics are in the same formulation. So you're getting different modes of action and different attributes from a biological and lowering the amount of synthetic material in the formulation. The second one is in spray programs where you will replace a synthetic spray with a biological spray. So you are using a pure biological but using it in a way that augments what the synthetics are doing and once again reduces the amount of synthetic material. So we see that growth coming from both aspects. We're launching, as I said, we launched 17 new products last year in the whole biological space. I continue to see that space growing rapidly. We are investing more in R&D. We are investing through ventures as well. So I think it's one of the bright spots in the portfolio in terms of overall growth and investment for the company. Mark, how would you characterize channel inventory levels in the U.S., Brazil and Argentina exclusive of the nonselective herbicides where you don't compete? Yes. I think -- so from a North American perspective, U.S. in particular, I think channel inventories are a little bit elevated right now, but that's normal. I would say, as you enter the season, most of retail and distribution is stocked up for a very good year. When I think of inventory levels for FMC compared to our sales on a percent basis, we're about the same place we were the year before. So I think it's pretty normal. Brazil and Argentina, a different story. Forget the nonselective that we just talked about. I think because of the conditions that we saw in the south of Brazil and in Argentina, it was very dry in the fourth quarter. I have no doubt that there is elevated channel inventories in that area, would not be a surprise at all. If I run around the rest of the world, Europe, South of Europe is high again because of hangover from the last season. Northern Europe is pretty much okay, I think. In Asia, we've talked about India in the past. The weather didn't help again in 2022. So we see high channel inventories in India, which we'll be working through. Parts of Indonesia are similar, somewhat high. Rest of Asia is good. So overall, it's pretty much what you would expect. And don't forget, people are focused on what happened in Brazil in terms of growth. The vast majority of the growth in Brazil was price, it wasn't volume and that's important to recognize. So I think out of the weather patterns that we saw in the South and in Argentina, I think other parts of the country are fine. That's helpful. And as a second question, if I may, you've owned BioPhero for roughly 6 months now and so I was wondering if you could provide an update on what you've seen so far. I think when you bought it, you talked about potentially launching 5 new pheromone over the next 3 to 5 years with an eye toward $1 billion of sales by 2030. Maybe you could just provide an update as to how that aspect of the biologicals pipeline is going here? Yes. Thank you. Great question. We're very happy with the acquisition we made. In fact, I would say, when I think of the key metrics that we're looking at when we acquired the product, we had 5 new pheromones in the R&D pipeline. Today, that number is 9. So the accelerated rate of discovery and application of new pheromones is growing. We have made our first batches of products and move them into the marketplace. So that was a major milestone. The company that we acquired, BioPhero had not -- I was just at the very beginning of making commercial scale quantities. We've now got past that. We are looking to invest in our own manufacturing. We do use some toll manufacturers today, but we're looking at balancing that out across the world. And I would say the trial work, we have substantial trial work around the world on the pheromones that we already have in place. And those trial works are going very well. So from my perspective, the integration has gone very well. But more importantly, I see an accelerated rate of discovery and development coming out of that pipeline, which is very encouraging. First question on CapEx. It looks like for '23, a bit of a step up $140 million to $180 million versus 2022. Can you talk about where you're going to be adding capacity. What new products plan to increase? And where your operating rates are currently? Yes. So we spent about just under $120 million in CapEx in 2022. We're stepping up at the midpoint to about $160 million. So about a good-sized increment in CapEx. A lot of that additional CapEx is to support manufacturing capacity for our new active ingredients. So we're expanding production of Isoflex which is our serial [Averside] we introduced in Australia several a couple of years ago and are rolling out now more broadly around the world. We're expanding capacity for Fluindapyr, the fungicide that we've introduced in a couple of key countries and starts becoming much more material as we get into the next several years. That CapEx, I think, building on comments earlier, that CapEx is largely directed in places outside of China. We're expanding capacity in Europe. We're expanding capacity in other parts of Asia to complement the sourcing that we have today and the strong sourcing position that we have in China, helping just sort of balance that mix of sources that we have. And Mark, if you want to add anything to that? Yes, I would say a couple of things on top of what Andrew just added. Formulation capacity is also important. Having the active ingredient is one thing, but expanding your formulation capacity is also a key attribute of where we spend capital. It's nowhere near the same scale of capital, but it is important. And we have, over the last year, expanded capacity here in the U.S., in Europe, and as we go into '23, we're expanding our formulating capacity in Brazil as well. So you won't see -- it doesn't become so apparent in terms of overall dollars of capacity expansion but that is an important attribute that we're focused on as well. Okay. Great. And as a follow-up, in the slides you provided some details on your Precision Ag business, the Arc mobile solution. Maybe can you talk about how you're going to plan on monetizing this potentially in the future? What your expectations are for growth of that platform. And also, what would you say to folks who -- there's a thought out there that Precision Ag could be a negative to volumes longer term, given it could make farmers more efficient and they may be applying less volume of product. Maybe if you could touch on those. Yes, sure. So I'll take the last one first. Listen, I think once you apply something from a precision methodology, you are going to de facto use less volume. I think what gets mixed and what gets missed in this area is the discussion around volume and value. Where are you bringing value and how do you capture that value? Obviously, there are some very large products used around the world, especially nonselective herbicides to go back to that topic. See & Spray technology, which has been developed is an area that is obviously of interest in that space. For us, when I look at how do we capture value from Arc, what are we doing? We're allowing the grower to very precisely time when they need to put the best products in the field to remove insects. That's great from a sustainability perspective. It is also something where you capture value from not only the products you're selling today but the broader portfolio that you sell to those growers. I don't see anywhere in the world where we charge for Arc. We provide it free of charge. It is an SG& A expense, but it does have tremendous uplift in terms of the portfolio mix that you sell. And also, don't forget, it has another attribute, it defends business for us. We're defending on 20 million acres, quite a few hundred million dollars of high-profit products that is very difficult to remove once somebody is using a process like that. That's a differentiator that we believe adds more value to the company than anything else. So we don't necessarily see it as a separate profit center, but we do see it as an important element of how we continue to grow the portfolio and defend the business we have today. When you think about maybe ‘24 and ‘25, ‘23 and ‘22 have been impacted by FX as well as cost inflation. But when you look at ‘24 and ‘25, you expect to get back on to a 7% to 9% EBITDA growth rate? And maybe if you could give us a little bit of what you’re thinking strategy-wise longer term. Are you planning to have an Investor Day and maybe unveil the next 3 to 5 years of strategy and biologicals be a bigger part of that? Or maybe you can just explain maybe some of the longer-term strategy? Yes. Thanks for the question. As I just said in the script, we are going to have an Investor Day at the end of this year. We’ll give the dates coming. I don’t want to re-empt that because there’s a lot of work to do between now and then but we will be giving a view of the future, both, I would say, within the near-term few years and then a longer-term aspirational goal for the company. It is important that we feel that we have that longer-term view as we drive the company forward. We’ve been very good in managing the company through the last 5-year cycle, as Andrew has talked about before, we’re pretty much right now above our metric for revenue. But right on the bottom line of EBITDA despite well in excess of $1 billion so far of costs. So I would say you just have to hold that question until we get to the end of the year. All right. Thank you, Emily. That’s all the time that we have for questions. Thank you very much. Have a good day.

EarningCall_449

Hello, and thank you for standing by. Welcome to InnovAge Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Thank you, operator. Good afternoon, and thank you all for joining the InnovAge fiscal 2023 second quarter earnings call. With me today is Patrick Blair, President and CEO; and Barbara Gutierrez, CFO. Dr. Rich Feifer, Chief Medical Officer, will also be joining the Q&A portion of the call. Today, after the market closed, we issued a press release containing detailed information on our quarterly results. You may access the release on our company website, innovage.com. For those listening to the rebroadcast of this call, we remind you that the remarks made herein are as of today, Tuesday, February 7, 2023, and have not been updated subsequent to this call. During this call, we'll refer to certain non-GAAP measures. A reconciliation of these measures to the most directly comparable GAAP measures can be found in our fiscal second quarter 2023 press release, which is posted on the Investor Relations section of our website. We will also be making forward-looking statements, including statements related to our remediation measures, including scaling our capabilities as a provider, expanding our payer capabilities and strengthening our enterprise functions, future growth prospects, the status of current and future regulatory actions, Florida de novo centers, and other expectations. Listeners are cautioned that all of our forward-looking statements involve certain assumptions that are inherently subject to risks and uncertainties that can 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 for the fiscal year 2022 and our subsequent reports filed with the SEC, including our quarterly report on Form 10-Q for our fiscal second quarter 2023. After the completion of our prepared remarks, I'll open the call for questions. Thank you, Ryan, and good afternoon, everyone. I want to begin by expressing my gratitude to my InnovAge colleagues for everything they're doing to support our businesses, our communities, our participants who are a daily reminder of our higher purpose, and each other. I'd also like to share my appreciation for the investors who have stuck with us through a very challenging period. On behalf of all InnovAge employees, thank you. A lot has happened in the last 16 months. We have simultaneously navigated a pandemic and its associated disruptions, as well as federal and state compliance related enrollment restrictions. In Colorado and Sacramento, California. It is with great enthusiasm and responsibility we begin the next chapter at InnovAge. As you may have seen in our press release on January 23, we have been released for sanction in the State of Colorado by both CMS in Colorado's Department of Healthcare Policy and Financing, which represented approximately 44% of our total census as of December 31. Although it has been an extraordinarily challenging 16 months, we've spent this time rebuilding the foundation of our business to improve standardization, quality, and compliance in each of our centers. We have added staff and meaningfully upgraded talent across the organization and expanded our compliance capabilities, applying the audit lessons every day at every center. We have invested in tools and technologies to help our employees function more efficiently, effectively, and compliantly. Culturally, it has brought us together as one team, which we refer to as One InnovAge and are committed to a mindset of continual improvement to which we are holding ourselves accountable. The release of the sanction in Colorado is both the end of a difficult period and the beginning of the next chapter in this company's bright future. Simply, we are a different company than we were 16 months ago. And while our focus on compliance won't change, we're poised to help even more seniors with safely in an independent setting, as long as possible. And now more than ever, we believe there are meaningful tailwinds for the PACE model of care nationally. Over the last 15 years, we've seen rapid growth in managed Medicare plans in value-based primary care centers, the best of which make use of a sophisticated primary care model and care management strategies. However, the front-end of the baby boomer population is now approaching the average age of PACE participants, which is about 77. We believe this population will require more intensive coordinated community based geriatric model of care that combines the best of both Medicare and Medicaid services like PACE. All that said, our focus in progress remained consistent with what we shared last quarter. And my comments today will encompass a regulatory update, focus areas in progress, and perspectives on the quarterly financial performance. I want to begin the regulatory update by acknowledging and thanking our government sponsors for the continued partnership and solution oriented approach as we work through the sanctions together. They have rightly pushed us on our thinking and on our commitment to ensure that compliance remains at the forefront as we resume growth in Colorado. As I've shared with them, we are committed to responsible growth and we will remain vigilant to ensure that our rigorous compliance focus remains bedrock. As discussed in our press release, we have been released from the enrollment sanctions in Colorado by CMS and the state agency, which means we are free to begin enrolling new participants. Practically speaking, we don't expect to see our first new enrollee in this market until March. In conjunction with the sanction release, and as is typical in processes such as these, we will still have corrective actions to fulfill in post sanction monitoring requirements, including an annual audit conducted by the state for the next couple of years. Regarding Sacramento, recall we were released from the enrollment section by CMS in late November 2022. We continue to await word from California's Department of Healthcare Services and expect resolutions soon. Though we expect to continue to work closely with our state and federal partners in existing markets, we also believe the conclusion of these formal audits is a meaningful catalyst for us. In addition to reopening organic growth in Colorado, it brings us an important step closer to opening our existing de novo sites in Florida reengaging with other states or de novo opportunities and becoming more intentional on the execution of our growth strategy, which we've been able to refresh during this period. Our compliance commitments to CMS and our state partners go beyond our existing centers. We are committed to bringing this dedication recent investments in technology and operations and lessons learned in each center and state going forward. We believe that we are the only large multi-state paced program that has gone through such an expansive compliance audit and we're better for it. Frankly, we believe it should strengthen our value proposition to new states and potential partners and it has positioned us to be a more thoughtful acquirer in the future. Consistent with my remarks last quarter, our number one near term priority is responsible growth. And I can't express how enthusiastic we are to be at this inflection point. The hard work continues now as we shift our focus from closing important compliance gaps to achieving operational excellence and delivering consistent responsible, profitable growth. Our action plan for accelerated growth margin recapture in sustainability as five dimensions. First, increased same center and de novo enrollment growth rate over historical levels. Two, increased revenue per participant through more effective rate setting discussions to ensure fair rates based on actuarial soundness, and ensuring our [risk scores] [ph] accurately reflect the acuity of our population. Three, strengthen payer capabilities to better manage utilization and external provider costs. Four, run center operations more efficiently and effectively. And five, enhance discipline at the corporate level to better leverage our fixed cost base. Starting with same center growth, I wanted to take a moment to highlight where we sit at this moment regarding center capacity. We currently have 6,460 participants across 18 centers as of December 31. While the growth runway varies by center and market, in the aggregate, we have embedded capacity of almost 50%. Job 1 is to start filling this capacity responsibly. We have used this time under sanctions to improve our marketing messages and educational content, expand our go-to-market channels, train in onboard high caliber enrollment talent, redesign our compensation plans, and add new referral channels to expand our access to eligible seniors. Restarting growth in Colorado and accelerating growth in other markets will be a dial, not a switch, meaning we expect it will take a few months to ramp up our enrollment teams, marketing partners, and new referral partners before hitting our stride. Switching for a moment to de novos. Our two Florida centers have the capacity to serve 2,600 participants combined and the capital investments behind us. With the sanctions lifted, we are ready to resume the application process to become operational. Though it is still too early to comment on the exact timing of opening, we expect to begin the administrative process this quarter and aim to be operational, as early as possible in fiscal year 2024. Next, we're focused on ensuring premium readouts we'll see for each participant. Like Medicaid managed care plans, we are more of a price taker than we are a price center. While rate methodologies vary by state, in general, states determine how much they would have paid for our participants if they were enrolled in an alternative Medicaid program. And then establish a pace rate that reflects a discount from what they would have otherwise paid. We need to improve at this actuarially driven process to ensure we can partner effectively with states and that we're paid a fair amount that reflects the true cost we've been experiencing caring for our participants. We're already making great progress and plan to continue expanding our talent in preparation for the next rate cycle. The second dimension is ensuring our Medicare risk scores accurately reflect the acuity of our population. This is an area we have focused on over the last six months and I'm very pleased with the progress we've made. I believe our risk scores have lagged the underlying acuity of our population, particularly since the onset of COVID, and we're working hard to document all Medicare risk adjustment factors more completely and accurately. We have already executed on process improvements, which have increased our chronic condition recapture rates. As it relates to strengthening our payer capabilities, I continue to believe that we have a big opportunity to leverage the fundamentals used by the best managed care payers to improve quality and to lower the total cost of care. We're coming at this from both the utilization and unit cost perspective. On the utilization side, we're taking steps to avoid unnecessary hospital admissions and readmissions and reducing skilled nursing facility admissions and length of stay by delivering more care in the center or the home. We are also refining our claims payment project to identify overpayment opportunities that represent lost money that can be recovered and avoided going forward. On the unit cost side, we're reviewing the size and composition of our external provider network relative to the needs of our population to ensure we balance the mutual goals of access to quality of care with network cost efficiency. The near-term impact within our portfolio of clinical value initiatives or CVIs as we call them is only a few million dollars today. And while each of these initiatives will individually be additive, collectively, we believe they will become much more material with time. While we expect it will take a year more for this capability to mature, it is critical that we develop these muscles systematically as sophisticated managed care organizations do every day. You may recall that we identified 10 areas of operational excellence that were foundational to our success in resolving the audit deficiencies. I'm pleased to report that we are near complete with these initiatives and they have driven a strong improvement in participant experience and employee productivity, but we are by no means done. We will approach operational excellence with the same continuous improvement mindset that we are applying across the business. Recall, we made a conscious decision to retain and even augment our participant facing staff in sanctioning markets, despite census in those markets declining roughly 20% relative to December of 2021. During this period, we invested in hiring additional staff at the clinical and local leadership levels to ensure that we emerge from sanctions stronger and retain the staffing capacity to serve more participants. We expect to grow back into this excess capacity, but it's going to take some time for us to fully understand and have confidence in a new baseline for center level cost structure and contribution margin. As growth increases post sanctions, we plan to redouble our G&A focus and discipline going forward. In particular, expect us to be intentional about achieving leverage over fixed cost. I anticipate our corporate headcount to look very similar for the foreseeable future as we scale the business. Additionally, there are several tools we are leveraging to help the centers become more efficient and more productive. The most prominent example is our recent implementation of the first ever PACE specific instance of the EPIC electronic medical record. Now live in two Virginia centers with the remaining Virginia and Pennsylvania centers expected to be live by the end of the quarter. We anticipate full implementation across all our sites in the first half of fiscal year 2024. As mentioned last quarter, this is the most important technology investment in our company's history and we're very enthusiastic about the clinical and financial value this will unlock over time. We believe EPIC will be a cornerstone to operating more efficiently, ensuring standardized compliant processes at the point of care, and capturing the clinical information needed to deliver more targeted interventions. We expect these five focus areas: enrollment growth, revenue per participant, payer capabilities, center operations, and corporate costs, which we call our five to drive, to be key drivers of earnings growth moving forward. Now turning to the quarter, we reported revenue of $167.5 million, a sequential decline of approximately 2.2%, compared to last quarter, driven by census attrition in Colorado and Sacramento, which together represent approximately 45% of our total census. We ended the quarter serving approximately 6,460 participants. For the second quarter, we reported center level contribution margin of 22.6 million, and a corresponding center level contribution margin ratio of 13.5%, compared to first quarter fiscal year 2023 center level contribution margin of 21.4 million, an increase of $1.2 million. As expected, the current quarter's financial performance is unremarkable. The inability to enroll in almost half of our center portfolio coupled with the intentional investments we've made at the centers has pressured both our margins and growth. However, we believe strongly this financial moment is more reflective of the conditions behind us than in front of us as we begin the exciting work of serving more seniors. It is worth emphasizing that growing participants within our existing centers from currently depressed census levels will have two primary disproportionately accretive impacts to the bottom line. It will first employ the slack capacity. As I noted earlier, given the current census levels at approximately 50% of potential capacity, each incremental participant will drive center level contribution margin above our overall average and this will be true until we reach our optimal staffing ratios, which we don't expect to reach until sometime in our next fiscal year. Additionally, you'll recall that I stated we want our participant risk mix to mirror the communities we serve. A second order impact of the sanctions is that our risk pool has become [frail with] [ph] time as we've been unable to balance it with newer healthier members. We anticipate that as the participant composition naturally [rebalances] [ph], we'll see our participant expense improve. In closing, I'm extraordinarily proud of the team and the work we've accomplished to enable us to control our own destiny going forward and to continue to pursue our mission. It is responsibility we assume with the utmost seriousness and focus. That said, our journey in the worthwhile hard work ahead has just begun. I'm more energized than ever to expand pace to the many deserving seniors in need who would benefit from this amazing program. I know we will continue to work tirelessly to execute on the strategies discussed and to unlock the full potential of this great organization. Thank you, Patrick. I will provide some highlights from our second quarter fiscal year 2023 performance and some insights into the trends we are seeing through the first half of fiscal year 2023. As with our previous earnings calls, I will refer to sequential comparisons relative to the first quarter in order to provide a more meaningful picture of our performance. As of December 31, 2022, we served approximately 6,460 participants across 18 centers. Compared to the prior year period, this represents an ending census decrease of 8.4%. Compared to the first quarter of fiscal year 2023, this is a decrease of 1.2%. We reported approximately 19,470 member months for the second quarter, an 8.1% decrease over the prior year and a decrease of 1.4% over the first quarter of fiscal 2023. Compared to the second quarter of fiscal 2022 and sequentially, the enrollment freeze in Colorado had the greatest impact on member months and census in the second quarter. In our non-sanctioned locations, ending census grew 5.1% over the prior year period and 1.7% over the first quarter. Total revenue declined by 4.5% to $167.5 million, compared to the second quarter of fiscal year 2022. The decrease is primarily due to lower member months as a result of the ongoing sanctions, partially offset by an increase in both Medicaid and Medicare rates, net of the full reinstatement of sequestration in July 2022. Revenue declined by 2.2%, compared to the first quarter of fiscal year 2023, primarily due to a decrease in member month associated with the sanctions, coupled with a decrease in Medicare Part D revenue commensurate with pharmacy rebates received during the quarter. Due to the nature of the Part D program, this decrease has a negligible impact on pharmacy margins and center level contribution margin. External provider costs were $93.5 million, a 2.7% increase, compared to the second quarter of fiscal year 2022. Similar to last quarter, the primary driver was increased cost per participant, due to increased assisted living, and skilled nursing facility unit cost and utilization. As discussed in the past, de conditioning of our participants has led to higher rates of long-term placement coupled with increased unit costs as mandated by certain states. Sequentially, external provider costs decreased by 2.8% as a result of lower census, due to the ongoing sanction and lower per member per month pharmacy expenses, due to rebates as referenced earlier regarding Part D revenue. Our cost of care, excluding depreciation and amortization of $51.4 million was 19.7% higher than the second quarter of fiscal year 2022. The primary cost drivers include the following three items: One, salaries, wages and benefits, which accounts for over 60% of the total variance, increased to higher headcount as a result of selling key vacancies, higher wage rates, and increased labor costs associated with ongoing audit remediation and compliance efforts. Two, third-party audit and client support as we work through the audits in our sanctioned markets and proactively continue to perform self-audits in our non-sanctioned markets. And three, fleet and contract transportation driven by higher average daily attendance in our centers, an increase in external appointments and higher fuel costs. Cost of care decreased by 4.1% over the first quarter of fiscal 2023, primarily due to the higher than expected use of PTO during the holidays and lower building repair and maintenance. Additionally, from an overall staffing perspective, we have seen modest improvement with net new hiring declining quarter-over-quarter and we believe incremental staffing costs for our existing centers have largely plateaued. Center level contribution margin, which we define as total revenue less external provider costs and cost of care, excluding depreciation and amortization was $22.6 million for the second quarter, compared to $41.4 million in the second quarter of fiscal 2022 and $21.4 million in the first quarter of fiscal 2023. As a percentage of revenue, center level contribution margin for the first quarter was 13.5%, compared to 23.6% in the second quarter of fiscal 2022, and increased from 12.5% in the first quarter of fiscal 2023. Our second quarter margin performance continues to reflect the transitory state of the business under sanctions. With the sanctions in Colorado now lifted, we expect to see margins begin to normalize over time as we resume participant enrollments in Colorado and grow into the central level staffing capacity that we have invested in through the audits. The census growth will also improve participant mix and re-balance the risk pool, which will offset the higher average cost of longer tenure, higher frailty participants. Additionally, as our clinical value initiatives or CVIs develop over the coming quarters, we anticipate a reduction in external provider costs as these initiatives mature. Sales and marketing expense was $3.8 million, a $2.9 million decrease, compared to the second quarter of fiscal 2022. The decrease was primarily due to lower marketing spend and headcount count as a result of the sanctions, as well as the reduction in sales commission expense, due to the deferral of commission expense in accordance with ASC 606. Compared to the first quarter of fiscal year 2023, sales and marketing expense decreased by approximately $600,000, primarily due to the deferral of commission expense mentioned previously. Corporate, general and administrative expense was $28.8 million, an increase of $300,000, compared to the second quarter of fiscal 2022. The increase was primarily due to one, an increase in headcount to support compliance and bolster organizational capabilities; two, third-party costs associated with implementing core provider initiatives, expanding risk bearing payer capabilities, and strengthening organizational depth, including the transition to EPIC, which was successfully deployed in two of our Virginia centers during the quarter; and three, an increase in software license and maintenance fees. These increases in costs are partially offset by a reduction in bad debt in the second quarter of fiscal 2023 and executive severance and recruiting costs that we incurred during the second quarter of fiscal year 2022. Sequentially, corporate, general and administrative expense decreased $1.4 million, primarily due to the tapering of certain third-party consultant expenses associated with laying the groundwork for strengthening organizational capabilities and a reduction in bad debt expense. These decreases were partially offset by an increase in costs associated with the EPIC implementation and legal fees. Net loss was $10.5 million, compared to net income of $1.1 million in the second quarter of fiscal 2022. We reported a net loss per share from the fiscal second quarter of $0.07 on both a basic and diluted basis. Our weighted average share count was 135,578,888 shares for the second quarter on both a basic and fully diluted basis. Adjusted EBITDA, which we calculate by adding interest, taxes, depreciation, and amortization, one-time adjustments for transaction and offering related costs and other non-recurring or exceptional costs to net income was a negative $2 million, compared to $14.8 million in the second quarter of fiscal year 2022 and negative $3.8 million in the first quarter of fiscal year 2023. Our adjusted EBITDA margin was negative 1.2% for the second quarter, compared to 8.4% for the second quarter of fiscal year 2022 and negative 2.2% for the first quarter of fiscal year 2023. The sequential quarter-over-quarter improvement in adjusted EBITDA and adjusted EBITDA margin is primarily a function of reduced cost of care, the deferral of commission expense, and a net reduction in corporate G&A. We do not add back any losses incurred in connection with our De Novo Centers in the calculation of adjusted EBITDA. De Novo Center losses, which we define as net losses related to pre-opening and start-up ramp through the first 24 months of De Novo operations were $845,000 for the second quarter, primarily related to centers in Florida. Turning to our balance sheet. We ended the quarter with $99.5 million in cash and cash equivalents after deploying $45 million in short-term investments to take advantage of rising interest rates. We had $84.6 million in total debt on the balance sheet, representing debt under our senior secured term loan, plus finance lease obligations, and other commitments. For the second quarter ended December 31, 2022, we recorded cash flow from operations of negative $35.1 million and we had $7 million of capital expenditures. Finally, with the enrollment sanctions in Colorado lifted and we begin to focus on responsible growth and margin expansion, I will provide some additional visibility around the following trends we are seeing as we head into the second half of fiscal year 2023. Regarding revenue, effective January 1, we experienced a low double-digit Medicare rate increase associated with an annual increase in county rates coupled with an increase in risk scores. This positive outcome is tempered by notification from the state of California that Calendar 2023 rates will experience a low-single-digit decrease. We believe these rates do not consider post-pandemic cost trends and we have requested the state revisit their rate setting methodology. Regarding census, we are pleased that the Colorado sanctions have been lifted and have immediately restarted our enrollment efforts for new participants. As a reminder, we suspended all marketing activity in Colorado and Sacramento as a condition of the sanctions and participants can only enroll in pace at the beginning of each month. As a result, we anticipate it will take a few months to fully ramp up our enrollment levels as we responsibly restart the enrollment process. As Patrick indicated, we have additional physical capacity in each state for new participants. With existing [census alone] [ph], excluding our two Florida De Novos, we have physical capacity to more than double our current census. For example, in Colorado, we have the capacity to add approximately 1,900 new participants over time or a 40% increase from our current census. Additionally, we are also excited to re-engage with regulators and resume the application process in Florida, where our two new de novo centers in Tampa and Orlando have the combined capacity to serve 2,600 participants. Similarly, as we start to ramp up enrollment, we expect that margins will begin to expand following the last several quarters of contraction. We believe that staffing, operational, and technology investments we have made across the organization in the last 12 plus months will allow us to grow into our operating structure without adding a significant number of new FTEs. Additionally, we continue to believe that there is room to reduce some of the temporary costs associated with the audits in the future. Finally, some saw some cost of care, external provider costs and overall center level margins. As we move forward, we continue to believe that we can obtain margins similar to what we experienced before the sanctions, although the composition of our center level costs may look slightly different going forward. The investments that we have made, particularly in staff related costs, have elevated our cost of care expense compared to historical levels, but we are driving value through other focus areas, such as our payer initiatives and CVIs to bend the cost curve and deliver margin over time. Though it will take multiple quarters to return to expanded margins, our focus will be on the margin drivers. Specifically, accelerating census growth which serves to rebalance the participant risk pool, as well as to optimize staffing ratios, reducing temporary costs associated with the audits, and executing on clinical value initiatives to improve participant care and reduce unnecessary costs. In closing, we are excited to be entering a new chapter and extremely proud of the hard work and accomplishments of our team over the last year. We believe InnovAge is now stronger and more competitive as a result of the commitments we have made and we look forward to expanding access to pace to the many seniors who could benefit from the program in the future. Great. Thanks. Good evening. Just with the Colorado sanction lift, I was hoping you could delve a bit deeper on your expectations for the ramp and census in those centers after March. And perhaps just in context of your commentary around responsible growth, if there are any barriers or nuances that could impact the ability to ramp census growth? And then just in context of the entire entity, it sounds like census might not sequentially grow until closer towards the end of this fiscal year, but any incremental commentary on census growth expectations and timing would be helpful. Thanks. I'll start and then have Barb follow-up. Thanks for your question, Jason. In terms of growth, responsible growth in Colorado, what I would say is, we're well-positioned to begin growing our census there. We've got – our new enrollment team is in place and we are starting to engage our referral channels, as well as our local marketing activities around referral channel optimization, referral channel management. And so, we continue to feel good that we've built awareness for the program and we've got our team in place. And we're ready to start enrolling. It's a little bit too early to say whether we have significant pent-up demand in the market. We've enjoyed strong relationships in Colorado for years. And as you'd expect, we've got a lot of organizations that have viewed us as a resource and they're now excited for us to open our doors again. And I'm hearing from the team that we're starting to see interest start to [bout] [ph] in the market and – but it's still little too early, I think, to have confidence that it's better or worse than expected. When we think about the growth going forward, I just think overall the company was doing a little north of 10% annual revenue growth, and I think as we look over the rise and we think that's a fair target for us to shoot for. I'll let Barb comment further. Yes. So, not a lot to add. Hi, Jason. I think while we're not giving guidance, but I think it's fair to say that with this ramp of 90 days once we, kind of get through that ramp in our largest market, which is about half of our business that will be the point at which we start growing again. So, we think it will happen at the end of that 90 days. I'd probably add, Jason. Just – Jason if you think about what has to happen now that we're right to begin and rolling again, we've got to ramp our staff up. We've got to get our referral partners, sort of back into the swing of providing us with leads of individuals that could be great fits for the program. And then it just takes time for, sort of our marketing to make its way out through the market that we are resuming growth and that we are interested in taking on more participants. So, I think it's going to take a little time and I think by the next time that we talk, we'll have a better idea of just how quickly things are going to ramp up for us. Okay, got it. Thanks. Maybe just switching gears for a second here, I wanted to ask about rates. Maybe just a quick clarification, Barbara. Did you say that a low-double-digit Medicare Advantage rate to begin? And then just more so on the 2024 proposed MA rates, those have come in a bit lower than expected versus the past couple of years. I guess, can you just help give a barometer on what you would expect a realized rate would look like if the proposed rate comes in as finalized. Just any color around 2024 MA rates at this point? And then just, sorry, quickly another one here. Just on the state side, Patrick, given your comments, your prepared remarks on Medicaid rates, can you just give us an idea what the differential is between where your Medicaid rates are coming in right now versus where you believe it could go on a more appropriate basis? Thanks. Yes. So, I'll get started, Jason. So, yes, just to clarify, so for calendar year 2023, so Medicare is on a calendar year, we did say low-double-digit increase. So, we have for calendar year 2023, we have a nice Medicare increase. So, that's clarification there. And for calendar year 2024, you're right, the preliminary rates for MA were pretty low and pretty disappointing. I think it was net of just over what percent, you know net of risk score and star ratings. Our first read on that is our rates are in the same zip code. So, disappointing for us as well, but that's the first read on it. It's very similar to the MA rates. Related to the state rates, I'll start and then Patrick can weigh in. So, one of the things that we're trying to emphasize for example is the cost. There's a delay in our state Medicaid rate setting in terms of the data that's used to set the rates. And so, one of the things we're trying to really work on and work with the states on is to really identify our current cost trends relative to historical data that they're using to separate. So, I referenced California for calendar year 2023. They're using data from 2019 and 2021 to set the 2023 rates. And so, one of the things we're going to work on – try to work on with them is to really demonstrate the current cost trends, which were not reflective in 2019 and 2021. So that's an example of the things we're trying to work. Yes. I'll just reinforce, it's probably a little too early because we're studying our own data right now, but just to reinforce a couple of things that we're going to be looking for in this next round of rate discussions. First, it's really important that our distribution of our participants between those that are living in their own home versus those that are in some form of supportive housing, you know we want to make sure that mix is taken into account as we work on our rates together with our states. So, if we see more people that are in assisted living as an example, we want to be sure that that's recognized and how the rates are set versus more of a general community rating assumption. And then second, I think what Barb was saying is just doing everything we can to ensure that we're factoring in our most recent experience. PACE is a unique population and with the impact that COVID has had on the population, you see a much accelerated acuity, these individuals. And so we want to make sure that recent experience is really captured in the rate setting process. And then lastly, I would say, we want to make sure that we're really caring for the inflationary factors that we in all pace programs are dealing with, whether it's supply, salaries, wages and benefits, gas costs from transportation. I mean, you know this well, there's a lot of inflationary factors that we need to have the dialogue about how those factored into our rates. And based on some conversations I've had with some state officials, they're very interested in understanding what those inflation factors are. So, I think all-in, we got to get a lot better at this. It's very actuarially driven and we're going to put our best foot forward here in this next rate cycle. Thank you. Please standby for our next question. Our next question comes from the line of Lisa Gill with J.P. Morgan. Your line is open. Thanks very much. Good afternoon and thanks for the commentary. Barb, I understand you're not prepared at this time to give guidance, but as I think about the EBITDA loss in this quarter and then I think about the next several quarters. Can we maybe just maybe understand maybe some of the puts and takes? Patrick just talked about salary wages, you talked about that in your comments as well. Third party audit and support, I would think that that's going to start to decline. You said fleet and contract transportation costs, it looks like gas prices have somewhat stabilized. Sales and marketing, I would expect that that's probably going to ramp up as you start to go back out and put sales back out there in the Colorado market and hopefully in Sacramento as well? And then lastly, you talked about de novo being $845,000 loss. So, just when I think about those kind of puts and takes this quarter, is that something similar to what we should see in the next several quarters? Is there something you would call out that would be higher or lower? Just any direction you can help us to think about this would be really helpful? Sure. I think there are several factors we say, you know obviously, growth in and of itself will be helpful to that. So, in and of itself growth will be helpful. It will also be helpful from the standpoint of improving our risk pool, you know just balancing our risk scores. So, they are [not having] [ph] an effect on those external provider costs, which have been running higher than historically for a couple of reasons. One, the long-term impact of the pandemic, the imbalance risk pool, etcetera. So, it will have an impact on that as well. As well as our clinical value initiatives are also targeted at those external provider costs. We've talked about the fact we have elevated SWB because we have invested, we filled critical gaps, and we've done investing at the center level and retained that staff, despite losing in Colorado on average 2% of the census a month. So, it'll have a disproportionate impact to the center level contribution margin and EBITDA once we can start adding some expenses there because we won't have to add staff at that same rate. So, those would be some of the puts and takes. Yes, we'll have more sales and marketing, but there's a good correlation there to the revenue. And as Patrick said, we don't anticipate having to ramp up G&A. We really just want to leverage the G&A structure. So, I would say those are the – there's several puts and takes. Hopefully, that's helpful. So, if I think about the roughly 2 million adjusted EBITDA loss in this quarter was materially better than what I think we in the Street were looking for, is that kind of a good baseline to use over the next several quarters? Not commenting on the specific numbers, I think a couple of things. It's an improvement over Q1. And so, we're positive about the trajectory that we're on Q2 over Q1. And as we continue to grow, again, we think that it will be marginally dropped disproportionately to the CLCM [ph] and the EBITDA margin. So, I guess I would say, future quarters should drive us proportionately. Yes, I would just summarize it. The growth is, sort of everything right now. Growth is really going to help bring a lot of our ratios, sort of in the balance. And we do expect a positive trend from this past quarter going forward. I think the exact, sort of rate and slope is going to depend on a number of things. It's going to depend on how many new participants we enroll. It's going to depend on the speed at which we can grow into that capacity. And that's dependent on, sort of what's called the post audit, sort of baseline that we have to find, but as we add new participants, we think that the overall frailty of the population should come down on balance and that helps with our leverage. We need to drive center attendance up. As we drive center attendance up, we can get more eyes on the patients and hopefully have an impact to the cause. And then we put a lot of operational efficiency initiatives in place that should yield some dividends as well. So, I think there's – part of the reason we just need a little time is to really understand how all these factors are going to work together. And I think overall if we can grow the business as we anticipate, we should see a positive trend in earnings moving forward. Okay, great. And Patrick, I appreciate that you're not prepared to give guidance. How should I think about this though? Will it be that once all the sanctions are gone, maybe next quarter we'll think about guidance or is this something that we should think you'll give us guidance for 2024, I'm just curious how you're thinking about it internally? Well, we're still having that discussion internally. As we said, we really want to have a bit more time to see the baseline on our costs and how quickly our growth ramps up, but I would say that, generally speaking, guidance in fiscal year 2024 is more likely. And we certainly want to provide the guidance as soon as we can, but at the same time it's going to take a bit of time just to understand all the held pieces and parts fit together. I feel like we're going to get more confidence on revenue probably sooner than maybe some of the EBITDA side. And so, we'll look at this in pieces. Thank you. [Operator Instructions] Our next question comes from the line of Jamie Perse with Goldman Sachs. Your line is open. Hey, good afternoon. Congrats on getting to lot of these audits. I know that was a big lift. First, just on the risk pool and adding some new patients that are lower risk than your average today. Can you help us think about what the margin impact of that looks like? Are lower risk patients actually better margin or just any color you can give on how to think about the risk pool moving down impact on financials? Yes. Hey Jamie, it's Barb. Yes. So, we do know through the course of history and through our analysis that as participants progress in their tenure with us, the cost is higher because they typically end up in higher cost settings and they're more frail. So, as they progress over time, the cost per participant in that longer tenure, the longer tenure cohorts is higher. So that's what we mean by bringing in the new level to the risk pool because the cost on the front-end of the cohorts typically is lower. And so, that's what we mean by that. Yes. Let me just add, one of the key factors in understanding how new membership is going to impact the overall cost is the setting that they're living in. So, obviously, we want a balance of participants that mirror what we find in the community as it relates to the percentage that are in their home versus the percentage that are in the living facility versus the percentage that are in your [permanent staff] [ph]. So, that plays a factor as well in understanding our cost, how they're going to behave. And so until we have a little more time, have seen what the profile is of the new enrollment, it's going to be difficult to predict exactly what the impact is going to be to our overall cost. Yes. Okay, great. And then you guys have been talking about becoming more like a payer over the last few quarters and you spoke about the clinical value initiatives this quarter, I'm just curious now a few quarters in, where are you more incrementally confident in your ability to drive long-term external provider cost savings, what are some of the big buckets that come to mind where you think you can move the needle there? I'll start and then we’ll let Rich weigh in on a few things. So, yes, you're right. There are really just a handful of areas buckets we're focused on. The first is around utilization and resource utilization of the population. And we've taken a lot of steps there to review everything from our payment policies that articulate what we pay and how we pay and when we pay for services. We've also spent time focused on hospital admissions, readmissions, and SNF length of stay. So, a lot of work there and I know Rich will [indiscernible] that. We've also done a lot of work around our claims payment logic, really just ensuring that our claims and our payment systems are utilizing the most up to date clinical coding edits and this ensures we're paying for services that are consistent with the latest coding guidelines. And this is one where I think we're already starting to see some opportunity and that we're capturing. An example of that could be under what circumstances would we pay for a re-admission that is soon after a discharge. So, this sort of claim logic in [claim edits] [ph] is an area that the company really hasn't focused as much on in the past, but sort of a common practice that ensures we're only paying for the services that were appropriately rendered. Risk adjustment is an area that we've made a lot of progress on since we first started talking about the payer capabilities and I'm really pleased with the work that the team has done there. We believe that the COVID has impacted the disease states and risk factors in our population more substantially than less acute populations. And when you couple that with the lower center attendance during the pandemic, it just became more challenging for us to capture chronic condition diagnosis as disease progression changed. And so, we've had a concerted effort around that and we're really pleased with the progress that we're making. And then finally, I think as this relates to our unit cost, our cost we paid external provider we're doing a lot of work really to look at the size and the composition of our network, making sure we're balancing the need for high quality providers, but at the same time making sure that we're balancing the costs of our provider networks and we're seeing some opportunity there as well. That's a little longer-term in nature to capture the opportunity because it involves oftentimes renegotiations or rationalization parts of your network that may exceed the needs of your population. So, we have a lot going on there and I think we're starting to move forward with a good pace and Dr. Feifer's leading workforce. And I'm going to ask him to pick up anything you think I missed Rich Well, Patrick, you didn't miss much. You took the words out of my mouth. The way we think about our clinical value initiatives is in terms of four main categories. And you heard those described in different ways by Patrick, but those categories are risk adjustment, payment integrity, resource management, and then network and unit cost. And so to the question where are we seeing earlier wins, real traction? We're seeing them in risk adjustment and in payment integrity. We're seeing some improvements, payment integrity, as Patrick mentioned, things like claim audits and claims policies and rules, addressing [Modifier 25] [ph], which is something really common in the industry. So, those are already in motion. Some things that are going to take more time because they require building up more capabilities and more relationships with other providers are in the areas of resource management, for example, and in network and unit cost with contracting. In resource management, we’re talking about things like reducing hospital stays, reducing emergency visits, reducing and the like that's requiring building out capabilities for nurses to do coordination of care and having a tighter control on skilled nursing facility admissions, and skilled length of stay and all those things. So, it's all in motion, but I think Patrick you described it exactly as I would have. Thank you. Please standby for our next question. Our next question comes from the line of Madeline Mollman with William Blair. Your line is open. Hi. This is Madeline Mollman on for Matt Larew. I was just wondering in Florida, on New Orlando and Tampa Centers, can you talk a little bit about what is remaining in the process for you to get those approved and how much that's going to cost? Well, thank you for the question, Madeline. In terms of the cost, much of the cost as I said, I think in the remarks is behind us. Right now it's much more of a resumption of the application process. Some of the key steps that remain for us is a state readiness review. In the state of Florida, it's required that we have an adult daycare license to operate there. So, we've got – still have some work to do on that application. And then ultimately, we get approvals from both CMS and the state and then a three-way agreement is signed by all parties. And so, it's our intent to move quickly. The centers there are virtually ready to go. And we're going to be approaching the state as soon as it's prudent to discuss the timing around resuming the process and we'll tackle these administrative developments in due course and we're targeting opening of the centers as early as feasible in fiscal year 2024. We have a lot of experience with this and we think now is the time to re-engage and we'll be moving on that very quickly. Great. Thank you. And then in terms of the capacity expansion, I know you've talked a lot about the resuming enrollment in Colorado, but you also have significant capacity in centers that were not under sanction. And I was just wondering was that an intentional choice to focus on your regulatory resolutions as opposed to enrollment in those centers. Just wondering about the, sort of underutilized capacity there and how you expect to grow that and how that will impact margins as well? Hey, Madeline, it's Barb. I'll take a crack at that. So, our capacity is not just in Colorado market. We have capacity in many of our centers, most of our centers. And this is very similar to what we said when we initially went public. We build our centers to really – to be able to serve a large number of PACE eligibles in that market. So, for example, in San Bernardino, a center not under sanction, it's a very large center that we grow. We’re growing very nicely there, but we still have a lot of capacity. So, it's not just in the sanctioned markets in Colorado, however, because we have lost about 20% of our census over the time we've been under sanction, we have a little bit more capacity than we did before sanction, but we have a lot of – most of our centers have some capacity and that's intentional. Got it. Thank you. And then one more question on Sacramento. Is there anything about the state review in California that's different than Colorado's or just wondering about the timeline there? And if they've given you any updates on the process or anything like that? The first thing that I would say is, CMS in the State of California and the Sacramento have worked very closely together throughout the audit period. And as, you know, we were lifted from sanctions by CMS. We haven't received any incremental requests or clarifying questions from the state, which leads us to believe that we should be hearing any day now. They've been super constructive partners and we're being as patient as possible. It's our understanding that they have seen some significant demands across the agency that could be contributing to the timing on this, but recall, we had very good audit results with CMS and we feel strongly that we've made all the systematic improvements in Sacramento and should be released, but we do [indiscernible] from state. Thank you. Ladies and gentlemen, that concludes the Q&A session. I would now like to turn the call back to Patrick for closing remarks. Well, I'll just say thank you again for everyone who has taken the time to listen into the call and look forward to spending time with you in another quarter. Thank you so much.

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Hello and welcome to the DHI Group's Fourth Quarter and Full Year 2022 Financial Results Conference Call. All participants’ will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. With me on today's call are DHI's CEO, Art Zeile; and Chief Financial Officer, Kevin Bostick. Before I turn the call over to Art, I'd like to cover a few quick items. This afternoon, DHI issued a press release announcing its fiscal 2022 fourth quarter and full year 2022 financial results. The release is available on the company's website at DHI Group, Inc. com. This call is being broadcast live over the Internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company's website. I want to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical information statements on today's call may constitute forward- looking statements within the meaning of the federal securities laws. These forward-looking statements reflect DHI Management's current views concerning future events and financial performance. and are subject to risks and uncertainties, and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include the risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. DHI undertakes no obligation to update or revise any forward-looking statements. Lastly, during today's call, Management will be referring to specific financial measures, including adjusted EBITDA, adjusted EBITDA margin and adjusted diluted earnings per share that are not prepared in accordance with U.S. GAAP. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release, a copy of which you can find on our website at dhigroupinc.com in the Investor Relations section. Thank you, Todd. Good afternoon, everyone, and welcome to our fiscal 2022 fourth quarter and year-end earnings conference call. Thank you for joining us today. We are pleased to report that we delivered solid revenue growth in both our fourth quarter and full year as employers continue to use our subscription-based offering to find, attract, engage and hire the highest quality tech professionals. With a significant supply-demand gap created by the large number of tech job openings, more employers need access to our growing community of 6.5 million tech candidates. There continues to be strong demand for technologists across all industries, even in this difficult environment as they ramp their technology initiatives. December represented the 25th consecutive month of tech employment expansion in the United States, and employers posted job openings for over 833,000 tech jobs during the fourth quarter, according to Information Technology Trade Group, CompTIA. Notably, this is a deceleration from the 1.6 million posted job openings in the second quarter of the year. Nevertheless, because the unemployment rate for technologists dropped in December to 1.8%, there remains two job openings for every one tech worker looking for employment. And 72% of all laid-off tech workers have found new jobs within three months according to a recent study by Revelio Labs, a workforce data provider. Our two subscription-based offerings, Dice and ClearanceJobs are both tech-focused career marketplaces that attract the highest quality tech professionals. Dice has over 5.1 million technologists, while ClearanceJobs has 1.4 million tech professionals with government clearances, and we continue to grow the number of technologists on both marketplaces each quarter. Our marketplaces are solely focused on serving the technology workforce where candidates are measured by their technology skills that they've acquired over their careers and not their job titles. Both marketplaces use our proprietary tech skills mapping taxonomy and search algorithms to enable their subscribers to find and engage the best tech candidates for their open positions based on the specific skills requested providing a competitive advantage for both Dice and ClearanceJobs. Now let me dig into the performance of our two brands during the fourth quarter and what we see ahead for each in 2023. Starting with Dice, in the later stage of the fourth quarter, we began to see the impact of a lengthening sales cycle on our Dice new business bookings as many companies are starting the new year with a very cautious spending outlook. These headwinds contributed to Dice bookings being down 1% year-over-year during the quarter. Our existing customer relationships were less affected with Dice revenue renewal and retention rates remaining strong at 94% and 107%. Even with these headwinds, Dice's revenue for the quarter increased 16% year-over-year. Dice commercial accounts continues to be our most significant growth opportunity with now over 100,000 companies in the United States, meeting our ideal customer criteria. The staffing and recruiting industry continues to be a significant growth opportunity for Dice as well, with approximately 18,000 staffing and recruiting firms operating in the United States. Today, we service just a fraction of them, leaving us with a significant opportunity for growth as we expand into this market. Dice added several new clients in the fourth quarter, including UPS, Intelsat in the US Senate Sergeant at Arms. As we described in last quarter's earnings call, we have made a concentrated effort to focus on larger and more stable clients given the state of the economy. This focus on larger, more stable customers coupled with the lengthening of new business sales cycles as well as customer churn resulted in our fourth quarter Dice customer count being slightly less than last quarter. The clients that churned during the quarter were almost entirely less than $10,000 in annual contract value, consistent with our thesis that smaller customers are less stable during times of economic uncertainty. We are seeing our larger, more stable customers renew and increase their contract values as evidenced by our strong revenue renewal and retention rates. Additionally, our average Dice annual contract value increased 11% year-over-year in the fourth quarter. Now let's turn out our attention to CJ. We have two substantial growth opportunities with our ClearanceJobs brand that are not being impacted by the current state of the economy. The first is the government contractor market. We currently have the second growth opportunity is selling CJ's subscription offering directly to the multitude of U.S. government agencies that are in need of highly qualified technologists and are competing against private sector for these candidates. We continue to advance our relationship with government contractors and U.S. government agencies and added several new clients during the quarter, including the National Reconnaissance Office and United Launch Alliance. During the fourth quarter, our bookings for CJ grew 17% year-over-year, and our revenue renewal and retention rates were excellent, coming in at 98% and 117%. All of this resulted in our CJ revenue increasing 23% year-over- year for the quarter. Now let's look at our expectations for 2023. As I discussed on last quarter's conference call, we have several levers for driving continued double-digit sales growth this year. The first lever is to continue executing on our baseline growth strategy, which includes selling multiyear contracts that include year-over-year price increases and contracts with auto renewal clauses. Ending 2022, approximately 20% of our customers had contracts for two or more years. And 94% had a contract with an auto renewal clause, which includes an annual price increase. These automatic price increases are a predictable driver of continued sustainable revenue growth. Our second lever to drive growth is our increased focus on year one client renewals. We focus on ensuring new customers receive great return on investment in their first year. This is critical as renewal rates are significantly higher if a customer stays with DHI longer than one year. During 2022, we created a new account special handling group and generated a large uptick in our first year customer renewal and retention rates, which has laid the foundation for continued revenue growth in 2023. Our third lever for growth focuses on our continued evolution to create holistic solutions for our clients. A revenue stream we expect to grow in 2023 is corporate branding, allowing companies to tell the story of their mission, values and culture through video, images and text because technology candidates are in such high demand, they move for a new opportunity only if it has the right combination of compensation, technology stack and culture. During the quarter, we launched the CJ company page, a new incremental invoice line item added to a client's CJ subscription with an entry list price of $10,000 per year. We have already sold many of these packages despite releasing this capability at the end of the fourth quarter. We anticipate delivering an equivalent offering for Dice by the end of the second quarter. The fourth lever for growth is to focus on our new business efforts on the specific industry verticals that have the highest tech hiring needs right now. We use workforce data provider Lightcast, fact the exact number of new tech job openings by company each month. We know that the aerospace defense consulting, banking finance and health care industries have the highest number of postings currently. The elevated tech openings in the aerospace defense sector is a clear result of the U.S. signing the largest defense budget increase in decades late last year. In order to take advantage of this tailwind, we have already transferred several of our Dice new business team members to our equivalent ClearanceJobs team to focus on this significant opportunity. In addition to growing bookings and revenue in 2023, we will continue to focus on expanding our technologist community through our brand advertising campaigns. In the fourth quarter, these campaigns drove roughly 44,000 new Dice members each month to our community, and we generated a 43% lift in traffic to our site over the past year. In the fourth quarter, the Dice product team delivered a completely revamped technologist onboarding experience that makes it even easier for a new Dice candidate to complete a profile and become a member. Adding tech professionals for our marketplaces attracts more employers, making our platforms in turn, more valuable to tech professionals, enhancing the two sided marketplace. In summary, despite the challenging macroeconomic environment, demand for technologists continues to be strong. And with our industry-leading offerings in our large target markets for both Dice and CJ we have several levers to drive continued bookings and revenue growth in 2023 and well into the future. On that note, let me turn the call over to Kevin, who will take you through our financials, and then we'll take any questions you may have. Kevin? Thank you, Art, and good afternoon, everyone. Let me go into a bit more detail on our fourth quarter financial results. We reported a total revenue of $39.8 million which was up 3% sequentially and 18% year-over-year. Total bookings for the quarter were $37.7 million, up 4% year-over-year. Dice revenue was $28.2 million, which was up 3% on a sequential basis and 16% year-over-year. Dice bookings were $25.7 million down 1% year-over-year. We ended the quarter with 6,311 Dice recruitment package customers, which is down 2% from last quarter and up 5% year-over-year. Our average annual revenue per Dice recruitment package customer was up 3% sequentially and 11% year-over-year to $15,384. Approximately 85% of Dice's revenue is recurring and comes from annual or multiyear contracts. Our Dice revenue renewal and retention rates remained strong during the quarter with the revenue renewal rate at 94% and the retention rate at 107%. These metrics continue to demonstrate the value of the Dice products in recruiting technology professionals. ClearanceJobs revenue was $11.6 million, up 4% sequentially and 23% year-over-year. Bookings for CJ were $12.1 million, up 17% year-over-year. We ended the fourth quarter with 2,064 CJ recruitment package customers, which is up 2% from the third quarter and 10% year-over-year. Our average annual revenue for CJ recruitment package customer was up 3% over last quarter and up 11% year-over-year to $19,872. Approximately 90% of CJ revenue is recurring and comes from annual contracts. For the quarter, our CJ revenue renewal rate was 98% and CJ's retention rate was strong at 117%. These outstanding renewal metrics demonstrate the continued value CJ delivers in the recruitment of cleared professionals. Turning to operating expenses. Fourth quarter operating expenses were $39 million compared to $33.6 million in the year ago quarter, as we continue to invest in our sales team as well as third-party marketing spend to drive increases in marketing qualified leads. In addition, we continued to invest in our broader brand awareness campaigns to drive technologist’s growth on our platform. For the quarter, we had income tax expense of $358,000 on income before taxes of $2.7 million. Our tax rate of 13% for the quarter differed from our normal expected rate of 25% due to the reversal of liabilities for uncertain tax positions as federal and state statutes expired. We’ve recorded net income of $2.4 million or $0.05 per diluted share, which includes the positive impact of $2.1 million of proceeds from a legal settlement associated with the business DHI divested in 2018. Net income for the prior year quarter was $232,000 or $0.00 per diluted share. Adjusted diluted earnings per share for the quarter was $0.01 compared to $0.00 for the prior year quarter. Diluted shares outstanding for the quarter were 46.1 million compared to 48.7 million in the prior year quarter. Adjusted EBITDA for the fourth quarter was $8.1 million, a margin of 20% compared to $7.1 million or a margin of 21% in the fourth quarter a year ago. We generated $7.3 million of operating cash flow in the fourth quarter compared to $3 million in the prior year quarter. Our free cash flow in the fourth quarter which represents operating cash flow less capital expenditures was $2.8 million compared to negative free cash flow of $642,000 in the year ago quarter. From a liquidity perspective, at the end of the quarter, we had $3 million in cash and total debt outstanding of $30 million under our $100 million revolver. Deferred revenue at the end of the quarter was $50.9 million, up 10% from the fourth quarter of last year. Our total committed contract backlog at the end of the quarter was $117.3 million, which was up 27% from the end of the fourth quarter last year. Short-term backlog was $91.5 million at the end of the fourth quarter an increase of $12.5 million or 16% year-over-year. Long-term backlog that is revenue to be recognized in 13 or more months was $25.8 million at the end of the quarter, an increase of $12.1 million or 88% from the prior year. During the quarter, under our share repurchase program, we’ve repurchased approximately 640,000 shares for $3.6 million, an average price of $5.59 per share. As a reminder, our current share buyback program includes a $15 million authorization, which expires this month. Of the $15 million authorized, $2.1 million remained available under the program at the end of the quarter. Looking forward, for the full year 2023, we expect our total revenue to grow in the low double-digit percentage range for each quarter throughout the year. From a profitability perspective, we expect to maintain adjusted EBITDA margins at or near 20%, with margins expected to expand over the next 6 to 12 months. We are not limiting our investment in sales and marketing in the near term, but we'll manage our hiring and expense structure accordingly during this challenging environment. We remain focused on driving long-term sustainable value creation and want to be well positioned from a customer acquisition perspective when the economy begins to recover. To wrap up, we are very pleased to see our retention metrics remain strong, driving our revenue growth in 2023. Our customers recognize the value of our platform and their need to stay on it to be successful. Additionally, the fact that we continue to add a significant number of new technologists each quarter to our marketplace further validates our offering and adds value to the marketplaces we have built. Thank you, Kevin. I'd like to close by once again thanking all of our employees for their hard work this past year. It is a pleasure to be part of such a great team. Hi, Art, hi, Kevin. Thanks for taking my questions. Just starting off with Dice here in terms of new business, I mean, it sounds like you're starting to see some extended sales cycles towards the end of December. I mean, can you talk a little bit more about that dynamic? And are a lot of those opportunities completely going away or just put on pause for now as many of these companies figure out their hiring plans for the coming year? Great question. And again, kind of big picture-wise, we do have three new business teams. There are two that are associated with Dice, and that's a team that specifically looks for commercial accounts and another team that works with staffing recruiting agencies. We have that third team that is new business for CJ. And I just want to reiterate that we really didn't see any kind of material change for CJ, ClearanceJobs new business during the quarter. But what we saw were sales cycles that basically lengthened for the purposes of commercial accounts from roughly 35 days during the third quarter of last year to about 45 days. So approximately a 30% increase in the sales cycle. I personally believe that a lot of companies are still trying to figure out their forecast for 2023, given the uncertainty of the economic environment. And what that means is they have basically lengthened their budget making process and without having that budget in place, our clients, our prospective clients for these new business teams are having a hard time figuring out what their hiring plan is for the year. And so I think that those deals that are in the pipeline will get signed eventually if the companies believe in the growth prospects that they have for 2023 and they need technologists. But that's the reason why we essentially are talking to them in the first place. But it has been a lengthening of that sales cycle that has caused our drop in bookings. Understood. And then just talking about the retention side of it, I mean, nice to see it holding up pretty well for Dice despite all the layoffs that we've seen in the tech sector. But I mean can you just talk about how that's been trending in recent months. If I recall, the majority of your renewals typically happen in December and January time frame. So just curious of how the overall renewals have been trending? And any particular areas of churn that particularly stand out more than a new sector? Or it sounds like it's at the lower end when it comes to company size. Yes. So just to be clear, and you mentioned it in your question, we do have seasonality to this business in the sense that a lot of renewal activity takes place in Q4 and Q1 with a large amount within the quarters themselves that are ascribed to December and January. And that's really a matter of thinking about that budget cycle for our customers. They have generally in the past, at least historically, wanted to tie the contracts to their calendar year because that's where they get their budget authority. So we did see our customers, for the large part, renew at elevated rates. And if you think about our Q4 '22 renewal rate for revenue, it was 94% for Dice. That compares to 91% in the Q4 period of 2021. So I believe that we've made sustainable progress in the way that we essentially manage our accounts. We've talked about it in past earnings calls where we essentially have a health score that dictates what we think is the right set of metrics that show the health of our relationship with our customers, that's really working for us at this point in time. I would say that the retention rate, which is at 107% for this past quarter for Dice, also compares favorably to the 101% figure that we had for Q4 of '21. So we're doing a good job of retaining those customers and also upselling them. Now as I pointed out in my remarks, we did see customers churn in this fourth quarter at what I would consider to be a little bit of an elevated rate. And what I mean by that is that our renewal rate on count for Dice was 83% in the quarter. That compares to 86% a year ago. So those customers, when you look at the actual customers that left us for the most part, almost exclusively, we're in the category of $10,000 or less in ACV, denoting the fact that they were really small customers. And as we think about it, we think that when times are tough, when you go into economies that are uncertain, it's those smaller customers that are obviously the ones that are most at risk for going out of business or for cutting back expenditures greatly, including our platform. Understood. That's helpful. And just a final question for me, geared towards Kevin. I mean when we're thinking about margins, it sounds like they're expected to kind of hang around this 20% level for maybe the next couple of quarters. But how do you see margins trending towards the back half of the year as you get more operating leverage to the bottom line? Sure. We're expecting that margins will expand a couple of percentage points over the coming quarters. So we think for Q1, Q2, it will be, as we said, on or about that 20% level, and then we'll start to see some modest level of expansion. It's not going to be material, but it will be 1% or 2% as we exit 2023. And that's really based to your point, on the economies of scale. And we're not going to shift much of our spending as we think that on the sales and marketing side that there continues to be value in creating those relationships that while the sales cycle may be extended, that they are still ultimate buyers of our product. Yes. I wanted to take a look at the 2023 outlook here. Just first of all, a clarification. The double-digit growth. Are we talking 10% to 12%, 10% to 13%? Is that what we're talking about? Yes. I think the first comment you made in that 10% to 12% range is how we think about the low double-digit range. Yes. And then the bookings assumption, the bookings growth rate assumption for 2023, obviously, we're Q4 kind of caught you off guard with the 4% bookings growth. But we were at 20% bookings growth for the year. What is implied in the 2023 growth rate for bookings? Given that we're saying 10% each quarter growth rate on revenue, it would be a similar type of metric for bookings. So again, that low double-digit that, as you said, 10% to 12% range. Okay. And then your -- as we look at the sales force productivity, have you been -- is this strictly a macro issue? Or were there execution issues in the fourth quarter? I'd describe it as macro issues. It is that following of the sales cycle in particular to Dice, not to CJ and their new business team. Yes. And definitely great to see those renewal rates staying so strong. Last question for me, the repurchase plan. What can you tell us about -- you're pretty close to exhausting that with, I think you said $2 million or so remaining, yes, $2.1 million remains through the end of February. What's the intention? Do you plan to reload there? Do you plan to pause and take a break? Well, I can tell you that we have consistently had a stock repurchase program in place during the almost five years that I've been on board, and I don't foresee changing that this year. And you're absolutely accurate that we're almost exhausted for the plan itself. Hi, good afternoon, guys. It sounds like you're planning to continue investing significantly in sales and marketing at least in the near term. Can you just talk about whether you've seen any sort of changes in terms of the number of marketing qualified leads or other metrics we pay close attention to? And what is giving you that confidence to continue to invest even as some of the sales cycles slow a bit on the Dice side? Yes. I would say that we are continuing to invest in sales and marketing. That's a very accurate way of looking at the current positioning of the company. We believe that there are headwinds that we're facing right now, but we want to make sure that we are in a posture to take advantage of the market conditions once they get better and more clear for everybody that's involved. And so when I think about our marketing spend, what we're doing right now is we're trying to make sure that we're much more targeted in terms of those MQLs that we are searching for. And so our campaigns are looking in those categories, those industry verticals that still have an elevated number of tech positions. And I kind of mentioned them in my remarks, aerospace, defense consulting, meaning companies like Deloitte and Accenture and also health care and banking finance. So I'd say that what has transpired due to our experience in Q4 is we've sharpened our marketing spend to be geared towards those industries that we think are less prone to any kind of recessionary impact. And so again, I would say that we're actually expanding the number of MQLs Q4 to Q1. That is our plan. But we're much more targeted and more laser-focused on those areas of the economy that we believe are going to continue to need tech professionals at elevated rates. Understood. And just within the framework of the outlook you laid out for 2023 here, should we expect that Dice continues their bookings growth at more kind of depressed levels at least early in the year, whereas ClearanceJobs has the potential to accelerate? Or how you guys are thinking about the contribution from the two marketplaces over the course of the year? Yes. I think you're spot on, Kevin, is that we do expect CJ to continue performing at levels that we have seen over the last several quarters. And we will be lower on the Dice side. And so all in, I would say the combined rates will be in those low double digits. And then just lastly, with kind of the positive reception you've seen to the corporate branding product on CJ so far. Is that expected to kind of accelerate their growth rates over the course of the year as more customers have exposure to that? Or how material do you think it gets out of the gate here? I would say that I believe when you think about the current psychology in the market and particularly for commercial accounts, they are going to essentially realize one way or another that they have a hiring plan and they need to essentially enact it sometime in the first quarter, second quarter of this year, and then we should see what I would consider to be a more normalized pattern of a sales cycle for us for Dice. And as we've said, ClearanceJobs is really unaffected by the current economic situation. In fact, we believe that there is a tailwind that we want to take advantage of because of the larger defense budget in fiscal year 2023. And so again, that's our view is that we should see the sales cycle stabilize just because at some point, people are going to have their view of the economy to come and they're going to place their bets by virtue of their budget, and then that will open up their hiring plan for the remainder of the calendar year. I appreciate that context. I was actually asking specifically about the new corporate branding product. I was just wondering with some of the reception you had that whether you would expect that to accelerate CJ's bookings even more so? Oh, I'm sorry, I missed that aspect of the question. So I will tell you that we have booked roughly about 10 of these company pages in the last month or so, a little bit over a month. We have another dozen that are in the pipeline. So it's pretty early days for ClearanceJobs. And it's the kind of product where the salesperson needs to be able to show a representative sample. So now we're going to have two dozen representative samples for our sales team to really point out to the prospective ones that they're trying to talk through the sales cycle with. I do think that it's going to help CJ over the course of the year, but we have not modeled that into any of our budget, our plans, our forecast, the description that we've just provided. Great. And thank you for taking my questions. In terms of the churn, you're talking about that being smaller customers. Have you learned any sort of assessment on potential further churn among those? Yes. I was going to say, to be clear, as we saw churn from our smaller customers, it wasn't necessarily significantly different than what we had seen maybe up a little bit. What we did not see was churn from the larger customers or as big of an addition of larger customers because of the new business kind of extended sales cycles. So while our customer count came down and it was heavily, heavily driven by those customers with $10,000 or less in contracts. It was not materially different than what we had seen in previous quarters. So it is -- when you think about what is driving a reduction in customer count, it is the churn of the smaller customers. but it's not significantly different than we had seen previously. They're definitely -- whether it's customer size, whether they're small or larger, they do get treated the same way by the NASH team, which is that new account special handling. And they also do work with our client success organization in the way of QBRs, et cetera. But I would say it wasn't as if the churn in smaller customers spiked significantly more than we had seen previously. Okay, thank you. And then in terms of AI and the noise around the GPT and Bard, how do you think that might affect your business? Is there something you can leverage or...? That's a really great question, actually. So our Chief Technology Officer, Paul Farnsworth, actually is investigating a number of different AI technologies that are available right now in the market, including chat GBT, we think that they could be additive to our platform. In other words, we could essentially create a better, especially technologist experience by using the open API to chat GBT to essentially enable much more kind of personalized content, meaning if a technologist comes to the site and is a cybersecurity professional. They could essentially enter in questions that are focused on their area of specialization and get content that is proprietary to our site because it's written by our editorial team as well as other content that is available through at GPT to answer specialized questions about their careers. So, it's an area that we are investigating, but there's nothing that's on the product road map right now. But great question. And I can tell you that a big percentage of our engineering team is very fascinated with the opportunities that are available by TAT GBT [ph] and the number of different kind of variants of AI that are emerging in the market. No. In fact, I would say that the competitive landscape has been very stable over the last year or so. I would say that the last competitor that left the market was stack overflow, and there really hasn't been any new additions to the competitive landscape for technology workers or people that have dropped out, it has been kind of roughly the same for the last year. This concludes our question-and-answer session. I would like to turn the conference back over to DHI Group's CEO, Art Zeile, for any closing remarks. Well, thank you, operator, and thank you all for joining us today. As always, if you have any questions about our company or would like to speak with management please reach out to Todd Kehrli, and he will help arrange a meeting. And thanks, everyone, for your interest in DHI Group, and have a wonderful day.

EarningCall_451

Good morning ladies and gentlemen and welcome to the Modine Manufacturing Company's Third Quarter Fiscal 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Ms. Kathy Powers, Vice President, Treasurer and Investor Relations. Please go ahead. Good morning and thank you for joining our conference call to discuss Modine's third quarter fiscal 2023 results. I'm joined on this call by Neil Brinker, our President and Chief Executive Officer; and Mick Lucareli, our Executive Vice President and Chief Financial Officer. We will be using slides for today's presentation which can be accessed either through the webcast link or by accessing the PDF file posted on the Investor Relations section of our website, modine.com. On Slide 3 is our notice regarding forward-looking statements. This call will contain forward-looking statements as outlined in our earnings release as well as in our company's filings with the Securities and Exchange Commission. Thank you, Kathy and good morning, everyone. I'm pleased to announce another strong quarter with sales up 12% and adjusted EBITDA up 36% from the prior year. Mick will go through our financial results in more detail. But before that, I would like to provide an update on our transformation, focusing specifically on our 80/20 activities as we make progress towards our strategic goals. It was actually on this call 2 years ago, my first with a company that we began outlining our vision for the new Modine and the role that 80/20 would play. The initial steps were to simplify and segment the organization and align the teams around specific strategies for each market vertical. Once those steps were complete, our leaders began creating a high-performance culture driven by prioritizing and focusing our resources on our best returning opportunities. All of these activities were done in preparation for driving focused and sustainable growth. As I mentioned last quarter, the Climate Solutions segment was the first to launch 80/20 and is well along in its journey. The best example of this is in data centers which was the initial pilot for our 80/20 initiatives. Fast forward to where we are today and we couldn't be happier with our progress. We stood up the data center organization and immediately began expanding our manufacturing capability to bring our existing products to new markets. Our new chiller plant in Virginia is now up and running and we have shipped our first products off the production line early last quarter. This is an important step for us as it allows us to be a full system supplier of data center products in North America with local production capabilities. In addition, throughout the Climate Solutions segment, we are sharpening our commercial acumen by identifying and developing relationships with our top sales prospects and by providing our best customers with exceptional service in order to strengthen existing relationships and drive brand loyalty. We are strengthening our distribution model and simplifying our product offerings through SKU reduction for better focus. All this is leading to improvements across our business. Our segment adjusted EBITDA margin this quarter of 14.2% is more than 300 basis points better than last year and its run rate is tracking well towards the 2-year target range set at our Investor Day this past June. Our Heat Transfer Products Group was a large contributor to this improvement. This team has simplified their business by reducing SKUs and fine-tuning their pricing model. Given the level of improvement in this business, they are now focusing on growth in key markets, particularly within the European heat pump market where we will be increasing manufacturing capability. The rapid adoption of heat pump technology in Europe is providing a clear tailwind for this business. This glimpse in areas of the business where 80/20 is furthest along, demonstrates the effectiveness of our initiatives and the impact they're having. It is also a positive indicator for areas of the business that are in early innings of the 80/20 process. While I'm very pleased with the traction and the rate of improvement within our Climate Solutions segment, we are far from done. We will continue to drive 80/20 throughout the organization beyond the commercial team through the supply chain and to the factory floor in order to improve our efficiency and further simplify our business. We are creating focus factories with incremental capability and capacity created by eliminating low-margin product lines. In addition, we are also returning to new product development, filling our gaps or improving technologies were warranted. Please turn to Slide 5. In our Performance Technologies segment, we formally launched 80/20 in the latter part of 2022 and we are well along the way in training the workforce. We have our leadership team in place and we are working through the segmentation process. Although most of our contracts in the Performance Technologies segment allow us to pass through metal prices, we have generally not been allowed to pass through increases in other costs which have hurt our margins over the past several quarters. We have started to make major gains in this area, however and have reached agreements with several key customers. This has led to incremental improvements in EBITDA margins over the past 2 quarters. Our product groups in this segment have a clear understanding of their priorities. In our Advanced Solutions Group which includes our EV systems business, we continue to build our order book with one additional production order during the quarter in the last mile delivery space, increasing our peak annual revenue estimate to nearly $140 million. In our liquid cool business, we are moving in the right direction, identifying the strategic initiatives with a keen focus on improving the efficiency of operations and those plants that are not currently meeting our expectations. Our air cool business has the heaviest lift ahead and has a number of key initiatives underway. One major area of focus has been the genset market where we are building a strong book of business that will help us reach our financial targets. The key here is prioritization using 80/20 to capture the greatest opportunities. I have tremendous faith in this team. They have negotiated key commercial improvements. They are rationalizing product lines and reducing complexity. They are improving their cost structure by relentlessly focusing on supply chain optimization and they are introducing quoting filters to ensure that new programs meet our financial criteria. We are already seeing the improvements in their results and expect to see incremental benefits from our 80/20 actions in fiscal year '24. None of this is easy. In fact, it's quite difficult but is a critical step in our transformation of our business and hitting our financial targets. I'm optimistic that we will finish our fiscal year on a strong note. Now I'd like to turn the call over to Mick, who will review our results for the quarter and provide segment financial updates. Thanks, Neil and good morning, everyone. Please turn to Slide 6 to review the segment results. Climate Solutions had another exceptional quarter with higher sales volume and excellent earnings growth. Revenue was up 9% over the prior year and up 15% on a constant currency basis. Data center sales were up 68% or $16 million on strong demand from our North American customers. As Neil mentioned, we shipped our first chillers in the North American market this quarter. HVAC and our sales were up 3% or $2 million, driven by higher sales of indoor air quality products to the school market and increased sales of commercial refrigeration coolers. This was partially offset by some weakness in the heating market and 80/20 product rationalization. Sales of heat transfer products increased 2% or $3 million from the prior year. There was a modest growth across our global markets for coil products but we're seeing some softening in demand from residential HVAC customers. Adjusted EBITDA increased 48%, including a 370 basis point margin improvement to 14.2%. Earnings and margin improvements were primarily driven by higher sales volume and benefits from our 80/20 initiatives. The Climate Solutions segment is far along in its 80/20 journey and we are clearly seeing the anticipated margin improvement. In Q4, we expect data center and HVAC in our markets to remain strong but anticipate ongoing weakness in the heating market and lower sales of heat transfer products. Please turn to Slide 7. Performance Technologies also had a strong quarter with sales up 13% or $36 million. Revenue was up 19% on a constant currency basis, benefiting from volume growth in all product groups, along with improved commercial pricing. Advanced Solutions sales were up 17% or $5 million with continued growth in our electric vehicle product sales. Liquid cooled product sales increased 10% or $11 million due to solid growth in North American and European commercial vehicle sales, partially offset by softness in Asia tied to COVID-related shutdowns in China. Lastly, air cooled product sales increased 15% or $21 million, primarily due to strong demand in the off-highway and commercial vehicle markets. Adjusted EBITDA increased 48%, resulting in an 8.1% margin and a 200 basis point improvement. As anticipated, we experienced a small positive net impact of material costs this quarter. Aluminum and copper have been trending lower. However, stainless steel prices have been increasing to partially offset that favorability. SG&A was higher than the prior year but declined 30 basis points as a percentage of sales. As Neil discussed, the Performance Technologies segment is still in the early stages of its 80/20 journey but progressing very well. Adjusting our commercial agreements to better recover cost is key to margin improvement and the team's progress is evident in our results this quarter. We continue to see strength in most of our end markets and expect further gains in both revenue and earnings in our fourth quarter. Now let's review the total company results. Please turn to Slide 8. Third quarter sales were up 12% or $58 million, driven by gains in both Performance Technologies and Climate Solutions. Revenue was up 18%, excluding a negative FX impact of $30 million. In the quarter, the main revenue driver was higher volume of approximately $74 million, resulting in a volume growth rate of 15%. Gross margin improved 250 basis points due to the higher volume and pricing, partially offset by the net impact of other inflationary cost increases. SG&A increased $8 million from the prior year, primarily due to higher employee compensation-related expenses, professional fees and certain variable costs. As a reminder, last year's operating income was higher due to a large reversal of previous asset impairment charges related to auto divestiture activities in prior years. I'm happy to report that adjusted EBITDA increased 36% or $14 million. This represents a 170 basis point improvement and the fourth consecutive quarter of year-over-year margin improvement. Adjusted earnings per share of $0.48 was $0.17 or 55% above the prior year. Now moving to cash flow metrics. Please turn to Slide 9. Free cash flow was relatively flat in the third quarter. Working capital remains somewhat elevated as we are working through global supply chain challenges. Year-to-date free cash flow is at $33 million. This includes the negative impact of $13 million of cash payments, primarily for restructuring activities, including the European headcount reductions announced last year. During the quarter, we repurchased 100,000 shares for a total of 300,000 shares on a year-to-date basis. Net debt of $308 million was slightly higher than the last quarter end, partially due to a negative FX impact. Our cash balance was $82 million with a leverage ratio of 1.6 which improved slightly from last quarter. As we look to Q4, we expect stronger free cash flow mostly due to reduced working capital. Now let's turn to Slide 10 for our fiscal '23 outlook. We are confirming our outlook for fiscal '23 revenue growth at 6% to 12% despite the negative impact of foreign exchange has had this year. We have slightly reduced the sales outlook in HVAC&R and tighten the range for heat transfer products, mostly due to some weakness in heating products and coils that are sold into the residential market. In addition, we slightly lowered the high end of the ranges for sales of liquid and air cooled products. We are also holding our outlook for fiscal '23 adjusted EBITDA to be in the range of $190 million to $200 million, representing an increase of 20% to 26% versus the prior year. As we look to Q4, we'll have difficult comparables in Climate Solutions. In particular, the year ago period had extremely high sales and margins in heating and coil products. Given that we raised our guidance last quarter and the current economic uncertainty, we're taking a relatively conservative stance on the next quarter. That said and based on our year-to-date results, we are clearly trending towards the high end of our guidance range. To wrap up, we're pleased with the third quarter results and our business leaders continue to execute on planned improvements. We remain on track with our transformation and progress towards our long-term margin targets presented in our Investor Day last June. This is Will Jellison [ph] on for Matt Summerville today. I wanted to start out by asking you about the data center business as we head into your fiscal year 2024. And what your observations are with respect to both hyperscale and colocation markets in North America as well as Europe and whether or not you still feel comfortable with the level of growth that you've expected from these businesses up to now? Well, this is Neil. Thanks for the question. Yes, in short, I do feel comfortable with where we're at. I particularly feel comfortable because of the position that we have with our expansion of factories in not only in the U.K. but in Continental Europe as well as in North America. So we're seeing a lot of opportunity as we've expanded our product line. We've seen a lot of opportunity as we've taken very specific strategic customers that we want to grow with and over serving those customers. So in short, yes, I'm still confident with where we're at and where we're trending in the data center side. Great. And then on the Performance Technology side, it sounds like you had one incremental customer win within last-mile delivery but I'm wondering if we could get a broader picture about the go-forward funnel of interested customers and any other notable wins you've had in the EV thermal management space. Yes, that's a great question. Well, certainly an area of focus for us and where we see tremendous amount of opportunity for growth considering where we were 2 years ago. We're on -- our engagements have increased from 100 engagements in September to roughly 120 last month. We have gone from 18 wins to 19 wins. Our prototypes have increased from 56% to 58%. Our peak award last quarter when we made this announcement was $95 million. We're up to $140 million today. So we're continuing to solve critical applications in terms of battery thermal management for our customers. We've looked at specialty vehicles in a meaningful way and we've also pivoted towards some wins on the last mile delivery van. So we've expanded our commercial base. And we've also expanded our product portfolio as well. We recently put out a press release with our L-CON which is another version of battery thermal management system that's for harsh applications and tough environments that gets us into additional specialty vehicles. So the group continues to grow. We continue to invest. We're adding more resources, more capital and we're pleased with where we're at with the funnel today. Neil, Mick, I just want to touch on the implied guidance for Q4 at the high end, it's applying about $53 million of EBITDA. Can you just remind us of the Q4 last year and is the year-over-year comparison and how to think about that? I know you touched on it on the call but maybe just a little more detail there. Yes. Stef, it's Mick. Let me give you a little bit more color because there's a lot of moving pieces. So as we already mentioned, we're holding guidance but we're very confident in our ability to hit that top end of our range. With regards to PT or Performance Technologies, we expect that they'll have another good quarter with both sequential and year-over-year growth. So really good continued progress from Performance Technologies. We're anticipating that Climate Solutions earnings will be up slightly from Q3 but they do have some pockets of difficult comps. And last year, we had a really strong heating season and heating results from both volume and pricing. We also had a record I talked about last year in the coil heat transfer products area in terms of volume, price and the 80/20 activities. So as we flip ahead to this year, we see a little bit of softness in -- for the coils or HTP area where products are going into residential applications, plus some of our OE customers are leaning out their inventory a little bit. And then this winter hasn't really cooperated from a heating season. So the general heating market is down a little bit from last year. And then last but not least, in Q4, we're planning on a little bit higher SG&A, mostly tied to incentive comp. And last year, their incentive compensation was very, very low. So as we look forward, we're really trying to take a cautious view. We think we have an opportunity to exceed our guidance that volumes hold in Q4. And then even looking out into the next fiscal year, Neil just covered our Climate Solutions order books are quite strong. We feel really good about the upcoming year. And we're still holding to our fiscal '24 targets we laid out on our Investor Day. So I hope all of that kind of helps address that. Let me know if you have more questions. No, that's great color. And I just want to move on to free cash flow. Can you just talk us just about working capital, in particular, inventory levels and how you view those closing out to '23 and then going into next year? Yes. For most of the year and probably like a lot of other companies you follow, we've had higher working capital. Most of that is primarily due, as you mentioned, inventory. It's taking us some time to lean that out and the supply base is slowly improving. Neil's talked on previous calls about some components that in the peak or 52-week lead times. So it will take us a little bit of time. I would say for sure, we've been carrying at least a $20 million to $30 million excess in inventory and we're still up quite a bit over that from pre-COVID levels. So in Q4, we expect I mentioned to have positive cash flow, much improved, mostly driven by the working capital improvements. And as we go into next year, I think we're good from a working capital standpoint, a little too early to give you guidance on that side but we would expect as revenue and earnings grow, we'll do our best here to continue to manage working capital down to where we were for quite a long time pre-COVID. I guess I want to go back to just the outlook. It seems from your commentary and the numbers really bear it out, there's really positive momentum everywhere in the business. You and your team are doing a fantastic job. And pursuant to a question that was asked before fourth quarter guidance at the high end implies basically a similar quarter to the one that you just had. It just -- it seems to me that there's so much momentum and I know you've spoken to being at the high end, does that basically take the low end of the guidance just completely out of the picture, Mick. Brian, yes, I mean, we feel very confident that based on where we are 9 months to date, as you point out and where we see the year that we're going to come in at the very high end of our guidance. And the opportunities to exceed it really if our EDI or order rates remain solid in Q4 on our vehicular customers. The data center business is going to have one of its strongest quarters of the year in Q4 and those can be a little bit lumpy as far as when actual shipments go out of those. But those would be a couple of the drivers that we would see that allow us to actually overdrive our forecast. Yes. That makes sense to me. I want to just in regards to -- with regards to your balance sheet. I think the reaction today probably has some algo trading aspect to it given the headline EPS and the year-over-year comparison. The balance sheet is at 1.6x levered. You're going to take another $20 million now and eventually in working cap. And all you're really doing is really positive from a momentum perspective. Where down the line, would you start to consider something like a buyback where you can really be opportunistic on a day like today? Where would that start to enter your thinking, Neil? Yes. Brian, it's Mick. I'll go first and Neil wants to add anything. I think back to the previous question, where we've been on cash flow. We've been a little bit lumpy this year, primarily driven by working capital. Yes. As things stabilize here and we expect to see that working capital stabilized in Q4 and next year, we'd anticipate based on the targets we've set to have even better cash flow. At that point, I think, Brian, when we've got the relatively stable quarter-to-quarter free cash flow. And as you pointed out, we wanted to really work our leverage ratio down this year, I think a full point. We're at a point then when we enter 24 here, 23, calendar '23 or fiscal '24 is the point where we can look at both acquisition opportunities but also in between there opportunistically look at buybacks when needed. Appreciate that. Just one more anecdote really quickly, if I could. In each, I had a pretty significant strike at one of their facilities in Racine. Were you able to do any hiring from workers that may have gotten tired of being on strike. And any opportunity there that you were able to take advantage of from a labor perspective? Yes, that's a good question, Brian. This is Neil. Not that I'm aware of. We do very little manufacturing in Racine. It's primarily our R&D center for -- and testing and development. Most of our manufacturing footprint is in the United States was in Tennessee, Rhode Island. It's in Missouri. So it's in locations outside of the Wisconsin area but that's a fair point. I do want to run through a couple of more specific questions on guidance. As I -- I'm trying to match up your previous presentation just to see the shifts on revenue. When I look at Climate Solutions, the only real change I see here is HTP, you're actually -- you raised the lower end. HVAC and Refrigeration down very modestly but I'm in New York and we haven't had winter. I mean we've skipped it. I know the ground hog said 6 more weeks. But how much of an impact is that when parts of the country are just skipping winter this year. Yes. I think -- Neil, correct me if I'm wrong, our market data says pockets of the heating market is 20% or 30%, down. We're gaining share. We're nowhere near that. But the magnitude of what you're describing from really a lack of a cold snap or winter, it's really impacted heating, both commercial and then you see a little bit decline to where people have heaters on a residential application in new home starts. Yes. And I'd also add, Steve, that we also believe that there's a distribution with a little overweight in terms of inventory and we're going to start to see some of that work itself out. Certainly, colder temperatures would help that working out faster. But again, at the rate where we see the industry and where we're at, we know that we're gaining market share in the heating side of the business. Right. When I think about -- does that -- if we end up with a really warm winter, does that carry over into stronger next year? Or is it weather dependent? Because if you didn't replace stuff this year, although I guess new home starts will impact that as well, right? Yes, Steve, we've had years where it's that Neil said the channel. So the good and the bad of it will be is based on the winter if a lot of distributors stop restocking, they will sell remainder of the year, what they have on and we'll address that as we head into next heating season. But you're right, some years, you enter a winter with a really lean inventory channel and that can help quite a bit regardless of actual weather. Got you. That's helpful. And then on HTP, where are you with the -- I believe it was Serbia, where you're building the pump facility? Yes, that's correct. So we're still working through the final negotiations there with the landholder. We've recently started to work the process to secure equipment. And as you know, Steve, we currently do manufacture there in Serbia and 2 plants. This is a third additional plant to continue to build out the capacity to support the European heat pump market. So it'd be fair to say that, that number could have been different based on the timing that your demand is overwhelming supply still. Is that fair? So we're going to continue -- yes, we're continuing to win orders. Our order book is building quite healthy in regards to that very specific technology. Hence, the need for that additional factory we can I don't have in front of me exactly which quarter it is next year that we're back online but we will have production in that third facility. Okay. And then just briefly touching on liquid cooled and air cooled. We know that automotive production is starting to pick up. China is starting to reopen. I was a little bit surprised that you've reduced right now on those. And we know from hearing from ag and construction and supply chain constraints but mark [ph] the order books are still really strong in that area. So I'm just a little bit surprised on the modest reduction there. Yes. Our commercial vehicle and off-highway order book is healthy. We're confident in terms of the EDI and the messaging that we're getting back. On the auto side of the business, it's been more unpredictable, hence, where we hedged a little bit there on the automotive side. Okay. And just a quick question on that. So you're saying $140 million at peak production with EV. The last number I had written down was $90 million. Have you picked up that one order wasn't $50 million, was it? And then just in general, how you think that production ramp might work as component shortage disease. Yes. So that's incremental. If you combine all of the wins today, in addition to that other order that we won, we're seeing those forecast increase as well. So it's an aggregate of the trends that we see in that space. We're -- the team has done a really good job in terms of managing its inventory and managing our supply chain so that we can hit those targets. And so much so that they've launched this new product that we put a press release out for the Alcon BPMS which actually has a different technology and we're able to source the components where we need to source not only locally but we also do some of our own manufacturing for those components. Congratulations on the impressive EPS growth in the quarter and the continued execution of the 80/20 strategy. My first question is related to the evolution to full systems offerings with aftermarket maintenance packages for data centers, eating into air quality and EVs. Do you have to ramp up hiring there and open any additional service locations near major customers? Yes, absolutely. And thanks for the question, Tim. This is Neil. Certainly, that's an area where we want to expand in North America. We have a very good service organization that supports our business in the U.K. as well as partnerships that we use in Continental Europe. That's an area where we're starting to put together plans on the service side to help support some of our largest customers, particularly in the Virginia, Northern Virginia area. Great. That's helpful. And then maybe just more on the Virginia topic for your facility for the data centers, the precooling fillers for North America. When do you think you might be ramped up to generate $100 million in sales run rate? Will that take another 3 or 6 months? Or are you getting close to that? So yes, we produced our first chillers off that production line last quarter. We're ramping up our capacity there. We've added some additional capacity at the same time. So we believe we have the ability to hit triple digits and we put that out in the most recent press release that I believe was 2 years was, what, 150? Yes. $100 million $100 million. For U.S. data center production, so that would include chillers plus the other products that we produce and that would be in fiscal '24. That does. No, it seems like you're on track for that. I just want to make sure that was going well. And just switching gears, you mentioned the Serbia, the third facility for heat pump production. How is your initial read for calendar 2023 for the demand for heat pumps from Europe and those incentives there? Are those still holding up? And do you think 2023 could be maybe as good as a year as 2022 was? I do. We are seeing that demand and we're picking up more customers. And that's the reason why it's driven the capital strategy that we have in Serbia to continue to advance and build out the capacity there. The incentives are there, the motivation is there with the traditional products that we sell into that space today, we've seen increase in sales and orders. And then as we continue to win new customers, large OEMs, to be honest, that are really helping us pull it through, the team has been very successful commercially in that space. Great. It seems like an enduring trend for the next few years. And then just my last question is around free cash flow. And I know Mick gone into this already but just trying to wrap my head maybe around this March quarter of free cash flow, the positive free cash flow guide. I just want to make sure that the working capital reduction benefit, as you unwind some buffer inventories that should more than offset the restructuring and headcount cash costs. It sounds like you've already paid about $13 million in cash payments for the European headcount reduction. I was just wondering about the timing of maybe how much of a final payment you'd have to do in Europe. Yes. We would expect probably a few million of cash restructuring costs in Q4. Nothing unlike we've seen for the full year, we'll probably be a little bit more than $15 million in cash restructuring. So yes, we'd expect a similar -- we talked a lot about the EBITDA in Q4. And then we expect the favorable working capital is the main driver of it. I am showing no further questions at this time. So I would now like to turn the conference back over to Kathy Powers. Thank you and thanks to everyone for joining us this morning. You'll be able to access the replay of this call through our website in about 2 hours. We hope that you all have a great day. Thanks.

EarningCall_452

Greetings and welcome to the CME Group Fourth Quarter and Year End 2022 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, February 8, 2023. I would now like to turn the conference over to Adam Minick. Please go ahead. Good morning and I hope you are all doing well today. We will be discussing CME Group’s fourth quarter and full year 2022 financial results. I will start with the Safe Harbor language, then I will turn it over to Terry and team for brief remarks followed by your questions. Other members of our management team will also participate in the Q&A session. Statements made on this call and in the other reference documents on our website that are not historical facts are forward-looking statements. These statements are not guarantees of future performance. They involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or implied in any statement. Detailed information about factors that may affect our performance can be found in the filings with the SEC, which are on our website. Lastly, on the final page of the earnings release, you will see a reconciliation between GAAP and non-GAAP measures. Thank you, Adam and thank you all for joining us this morning. We released our executive commentary earlier today, which provided extensive details on the fourth quarter of 2022. I am going to start with just a few high-level comments regarding the year and then John will summarize our financial results and Lynne will speak to our expense guidance for ‘23. In addition to John and Lynne, as Adam said, we have other members of our management team present to answer questions after the prepared remarks. 2022 was the best year in CME Group’s history, with record average daily volume of 23.3 million contracts, up 19% from ‘21. The growth was led by our financial products, which finished the year up 25% to a record average daily volume of 19.5 million contracts. Options average daily volume across all asset classes also set a record with ADV of 4.1 million contracts, up 23% versus last year. And finally, our non-U.S. ADV increased to a record 6.3 million contracts. Throughout 2022, we continued our efforts on the LIBOR transition. We collaborated with the industry and the market participants to shift trading behavior, order flow and open interest to SOFR. And as a result, we are beginning 2023 with a SOFR’s futures and options as the leading tools for hedging short-term interest rates with deep liquidity supporting a wide range of strategies across the forward curve. Customer demand continued to drive our industry leading products and services innovation throughout the year. We enhanced our Micro product suite with additional contracts and in aggregate the Micros contributed nearly 3.5 million contracts of ADV to the overall record activity. During the year, we further invested in our S&P Dow Jones Indices joint venture to expand its offerings to include leading fixed income and credit indices. Our joint ventures and investments continue to produce meaningful results for CME Group. For 2022 on an adjusted basis, these investments have contributed nearly $350 million or 9% of our pre-tax income. 2022 also was a fundamental year for our Google partnership. We built out the cloud platform and successfully migrated some early application. ‘23 will be about accelerating our application migration, including launching data products in the cloud. We have an aggressive migration plan for ‘23 and look forward to reporting our accomplishments throughout the year. Risk management will continue to be critical for our customers as we move into 2023 with higher cost of doing business in general and uncertainty persisting across all of our asset classes. We continue to focus on what we can control, innovating and offering market participants, a meaningful capital and operational efficiencies across a diverse relevant product set. So far this year, volume is averaging approximately 23 million contracts per day, near the average for all of 2022 and our focus will continue to be on growing in the short-term while also positioning the business for long-term sustained growth. Thanks, Terry. Financially, 2022 was a record year for CME Group with adjusted double-digit revenue and earnings growth. Driven by CME’s record annual trading volume, 2022 revenues were $5 billion, up 11% when adjusting for OSTTRA, which was launched in September of 2021. Our annual adjusted expenses, excluding license fees and before the impacts of our cloud migration, were approximately $1.425 billion, which was $25 million below our annual guidance. Our adjusted operating margins for the year expanded to 64.7% and adjusted net income was up 20%. For the year, our incremental cash costs associated with our migration to the filed were $30 million and in line with our expectations. Turning to the fourth quarter, CME generated more than $1.2 billion in revenue with average daily volume up nearly 6.5% compared to the same period last year. Market data revenue was up nearly 8% from last year to $153 million. Expenses were very carefully managed and on an adjusted basis of $464 million for the quarter and $382 million, excluding license fees and approximately $9 million in cloud migration costs. CME had an adjusted effective tax rate of 22.8%, which resulted in adjusted net income attributable to CME Group of $698 million, up 15% from the fourth quarter last year and an adjusted EPS attributable to common shareholders of $1.92. Capital expenditures for the fourth quarter were approximately $23 million, CME declared over $3 billion of dividends during ‘22, including the annual variable dividend of $1.6 billion and cash at the end of the quarter was approximately $2.8 billion. Finally, in November, we announced fee adjustments, which became effective February 1. Assuming similar trading patterns as 2022, the fee adjustments would increase futures and options transaction revenue in the range of 4% to 5%. In summary, 2022 was the best year financially for CME Group. We served our customers well, successfully transitioned the majority of the volume of our LIBOR-based benchmarks to SOFR, executed on our cloud migration strategy, all while managing our costs very effectively. Thanks, John. We expect total adjusted operating expenses, excluding license fees, be approximately $1.49 billion for 2023. Our guidance reflects our continued focus on cost discipline, which will moderate the impact of inflation and a full year of normalized travel and in-person events. In addition to our core expense guidance, we expect the investment related to the Google partnership and our cloud migration to be in the range of $60 million in expense, offset by a $20 million decrease in capital expenditures, bringing our incremental net cash cost for the migration to approximately $40 million for the year. Total capital expenditures net of leasehold improvement allowances are expected to be approximately $100 million and the adjusted effective tax rate should come in between 23% and 24%. Thank you. [Operator Instructions] Our first question is coming from the line of Rich Repetto with Piper Sandler. Please go ahead. Good morning. So as we start the year, Terry, I just wanted to get – stay broad and get your outlook on volumes for 2023 given that you were so positive last year and they certainly came through on financial products. But just seeing what your outlook and we know no one gets perfect right all the time, but anyway, the outlook on volumes? Yes. Thanks, Rich. I think last year when I made the comments that I did, I think we saw the reflection in the marketplace by CME having the biggest year in its history. And I think that’s because of what was setting up whether it was geopolitically and just other fundamental factors in the market, whether it’s the price of rates at a given time, price of certain products, you could see that the market was setting up for what I thought was going to be a pretty exclusive year. Now it’s really difficult to predict future volumes as you know. So I am not going to try. I will make the reference, as I said in my prepared remarks that we are starting off in January with ADV roughly around the same as we ended last year, 22, 23 million contracts per day, which is a pretty exciting start to the beginning of the year. So it’s really hard for me to predict the broader – the balance of the 11 months we have left in this year. People talk about the age of depressions, the age of recessions I think it’s the age of uncertainty, Rich. And now the question is what does that translate into? So, I really don’t know, but I think, again, we are here positioned, as I have said in my prepared remarks, to give the offsets, to give the efficiencies for people to manage and mitigate that risk. It’s really hard to predict what’s going to happen to geopolitical events. It could be stacking up like we have never seen before. The debt ceiling issue, I mean, I’ve even had internal – I don’t want to say on arguments, debates with my own team about what does it mean because we’ve always had a debt ceiling that’s always been satisfied. We have a congress like I have never seen in the history. I am not so sure it’s going to be as easy as people believe that they can negotiate a debt ceiling agreement. So that will be interesting coming into Q2 and to the summer months to see what happens when that deadline arises where the Fed and the treasury can no longer move money around to pay that the country has built. So I think that’s got a big factor into it. We still have the Ukraine-Russian conflict, which seems to be not going away any time soon. So, I still think risk management is going to be at the forefront of people’s minds. And with the increase in the interest rates that we have seen over the last year, people that are managing money having to reissue new additional debt, they are going to need to lay off that risk. And I think our product suite lends to that. So I think there is a lot of interesting factors in there, but does that translate into volume is a tough one to come up at the end equation. Thanks. Good morning. I wanted to follow up on the pricing, the 4% to 5% increase that you mentioned, John, that’s I think above what the typical 1% to 2% we have seen from you in the past. So, maybe a little bit more detail behind that? And then also on the non-transactional side, as you think about maybe market data, is there pricing potential power there? And as you think about this year, any changes that we should be aware of? Sure, Dan. Thanks for the question. Let me back up and take a look at all the kind of pricing changes and adjustments that are going to impact 2023. As I indicated in my prepared remarks, the transaction fees have been adjusted. And we made adjustments across all of our asset classes in our futures business. We take a very careful and targeted approach with the objective of not impacting volumes. As I said, assuming similar trading patterns as last year, the increase would be in the range of 4% to 5%. The impact of financial products and commodity products each is an increase of about 4% to 5%, so about 4% to 5% each of our financials and to our commodity product sets. The impact took effect on February 1. So you see two-thirds of the impact in the first quarter and a full quarter impact in Q2, that’s related to transaction fees. So let’s look at market data. Beginning January 1, we had an inflation adjustment to our market data subscriber licenses, which is also in the range of 4%, assuming similar conditions as 2022. In addition, we have seen the completion of our very successful SOFR First for Options initiative. That had about an $11 million in fee waivers, which lowered revenue and $8 million to increase license fees in 2022 that we will not have in 2023. So a number of adjustments across our revenue set. I think as we look at it, we create a lot of value for our customers and felt that this was appropriate to do. Great. And so just to clarify on the market data, you had an $11 million drag in revenue last year that should normalize plus a 4% pricing increase? No, I am sorry, that was SOFR. That was our SOFR Options – our SOFR First for Options program and that impacted our transaction fees. That was not included in the 4% to 5% that I just mentioned. This was in addition to that. Good morning and thank you for taking my question. Can you please provide us with more details on the non-operating income outlook? Can you also provide a breakout of investment income, how cash within the clearing house is trending? And how you think the pace of clearinghouse cash balances could move over the next 12 months and where does the non-cash collateral stand? Sure, Gautam. This is Lynne. I will take that. If you look at the non-operating income in the quarter, it increased by about $8 million versus the third quarter. That was driven partially by an increase in the earnings on the cash of the clearinghouse. That was up about $9 million to $95 million for the quarter. We saw average balances relatively steady at $117 billion, largely the same as what we saw last quarter. What we did see is an increase in the returns from 29 basis points to 32 basis points. Now, we didn’t change the keep that we have on the funds held at the Fed, but what we did do is look to optimize our returns using repo markets and other short-term deposits. We also saw an increase in the returns on our corporate cash. That was up $12 million in the quarter to $23 million. These two increases were offset slightly by decreases in the equity and non-consolidated subsidiaries. Those were down $13 million in total. That included a $4 million one-time gain that we saw in Q3 related to the S&P JV. In terms of the cash and non-cash collateral, it’s difficult to predict obviously where it will go going forward, but I can provide a little more detail on what we have seen so far in this quarter to-date. As I mentioned, the cash balances were relatively flat at $117 billion in the last two quarters. To-date, through February 6, our average balances are at $113.7 billion. Sure. So, we saw in Q3, it was at $94.9 billion, it was at $89.7 billion for Q4. And quarter-to-date, we are at $90.1 billion. And just to go back to the clearinghouse question for a second, I think it’s really important to note, we strategically did not increase our keep because we knew there was alternatives that people could park their money in versus keeping it in our clearinghouse. That actually fared a tremendous amount of fruit by us making that decision because we were able to keep the numbers that Lynne referenced and continue to bring in the additional revenue that we may not have if we tried to increase our take and people would have gone to alternative investments. Yes, good morning everyone. I was wondering if you could provide a little bit more granularity around market data, maybe just some of the products rolling out with the addition of Google. And when this year you saw the year-over-year increase driven by some price increases in new demand in terms of SOFR. So maybe you could give us a little bit of color there just in terms of how that kind of breaks down? And just on the Google migration, I thought that was $30 million in annual costs. I know you are talking about incremental $60 million. I am just wondering what’s this incremental cost related to just in terms of is it more migration or is it new product developments, any color there would be helpful? Thank you. Yes. Thanks, Chris. We are going to let Lynne talk about the cost on the Google migration, because I think I will make sure we all stay in the same numbers and then we will turn it over to Julie to talk about the data. Sure. So on the cost side, in 2022, we did see $30 million in expense in line with our guidance. The guidance for 2023 is $60 million in expense. Now we will see an offset to that as we are seeing a decline in the capital expenditures related to capital refreshes that are no longer required. So we have about a $20 million offset that we are seeing step back. But the $60 million in expense guidance will be approximately evenly split between professional fees and technology fees for this year. Yes. So, market data certainly was – had a very strong quarter again in the fourth quarter, we were up another 8% year-on-year and the increases is due primarily to both the value of our data, the new products that we are introducing and also the fee adjustments that we made back in January of 2022. And we also are seeing throughout the year favorable performance both in our drive data area in terms SOFR licensing, as you mentioned and also just organic across our professional subscriber devices and also non-display. And I’d say the one thing as it relates back to our new products and also our work with Google is we know that we have very valuable data and we know being able to produce more of that data in analytics and putting that in the cloud is going to be really what our clients are asking for. And so we are highly focused on looking at new ways to develop that with our partners at Google. We have got a number of deep dives underway with them on the innovation front, including things on data analytics, AI, ML, new APIs and also new ways to help our clients understand the data and analytics around their risk management. So we have already begun to launch a number of those products, those begin to be rolled out in forward. And some of it is also just our new product operating model that we are using. And so we are seeing an increased velocity in which we can put these products out, so things like in our data mined area. Some of our new benchmarks and indices are also being created through that. And so you’ll continue to see a rollout of – specifically as it relates back to the term SOFR revenue. This is revenue that was part of the licensing effort that the team is underway. At the end of Q4, we had over 2,000 firms that we have licensed for term SOFR products. And really, we’re continuing to see increased demand for that. That was up over 300 firms just since the end of Q3, just to kind of show the acceleration of that. These are – the revenue there is around people being licensed for OTC derivative product usage. And also, we’re finding in a lot of these cases, these are new customers to CME Group. So we’re also working heavily within our sales organization to convert those users and expose them into our trading business. And so with everything within market data, it’s what can we do to provide insights to our clients that will also create support and synergies and transaction based. I hope that helps us. Hey, good morning. Thanks for the question. I was hoping just a follow-up on the last discussion around cloud migration and expenses related to that. As you guys think about the future beyond 2023, and any incremental costs associated with migration. I was hoping you could flesh that out. But also bigger picture, as you think about CME’s expense flexibility on a go-forward basis. To what extent do you think this sort of limits your ability to be more flexible like we’ve seen in the past? Thanks. Sure. So if we think about the Google migration, I think what John guided to last year, was that we would see about 4 years of incremental cash costs averaging $30 million cash cost per year. So we did see that $30 million in 2022. The cash cost for this year are estimated at $40 million. So we do expect over the next 2 years to have some incremental costs related to the migration. After that point, we see ourselves getting to breakeven and ultimately a cash flow positive for the investment. One of the reasons that we are pursuing this initiative is to increase our flexibility. And we will continue to see a move from infrastructure-intensive spend and moving into this environment where we have CapEx coming down, the coming down, ultimately, we will see more of the expense in the technology line as we are renting the capacity as we need it as opposed to building through infrastructure. So that is the migration that we expect to see over the next several years on the cost base. Just one thing to add to that, when you think about the investments that we make in technology, things like artificial intelligence, big query, machine learning, we’re able to get that through Google without having to make the investment ourselves. So there is a lot of positives associated with the migration to the cloud, including flexibility, ability to launch products faster. When you think about the business cases, certainly going to be able to have better returns on our investment because we don’t have to build out the entire infrastructure, assuming success, we can build towards success. So a lot of real positives we think in the long run strategically with our relationship with Google. Hi, good morning, folks. Come back to the – or actually talk about the interest rate franchise, obviously, record volumes and record revenue. There is a perception that as the Fed ends tightening that would reduce volumes, but we’ve got a number of other factors that could continue that strong volume. So just wanted to get your thoughts on that? Those being, obviously, the price increases and then also the new potential customers that, Julie, you talked about from the term SOFR, the introduction of those new customers. So maybe just if you can comment on that and also the 10-year – or the long bond complex in terms of what you’ve been saying historically about more treasuries making it into private hands and being hedgeable and then other things that you’re developing on the long end of the curve, not to mention that higher – I think high RPC on the treasury side versus the short side. Yes. Thanks very much for the question. Great question. In terms of the overall rates complex, obviously, a very good year this year, as you said, with record volumes strong open interest, record large open interest holders. In fact, if you look over the last decade, we’ve more than doubled the number of large open interest holders, so working very closely with Julie’s team, expanding our client base significantly. If you look at that growth in the market environment, obviously, the market environment has been a strong positive. In terms of the very long end of the curve to get specifically to your 10-year question, we haven’t actually yet seen a strong uptick that we – that I had expected in our treasury futures with the reduction in the Fed’s balance sheet. In fact, surgery futures are down slightly. This year, they are down 3%. So that marketplace is actually down. So how is it that we are up 7% so far this year relative to last year, which was a strong year. What we’ve seen is something that Lynne has mentioned, I think, on past calls, which is that now with the Federal Reserve having greater uncertainty as to whether they will be increasing rates or decreasing rates and with a much greater dispersion that you see in the economic numbers with some seeing a very strong economy and others seeing a very weak economy, we see greater demand than ever before for our interest rate options. So if you look at our short-term interest rate options this year, they are, in fact, up 40%. That’s obviously driven by the huge success in the investment we made in SOFR options last year. And if you look, in fact, now at our SOFR futures plus SOFR options, we’re doing 5 million contracts a day so far this year. So I think the outlook relative to the Federal Reserve having the opportunity or the potential for either increasing rates or decreasing rates makes greater need for our products than ever before. Maybe if you could about the organic side. I think you talked about the new – the potential new trading customers from the 2,000 firms that you’re onboarding? Yes, I’m really excited. Another thing that I’m very excited about is – think about what we did over the last couple of years was we migrated our single largest business, the short-term interest rate futures and options business from the LIBOR benchmark over to the SOFR benchmark. And what that’s meant is a significant investment in resources, time and money in order to facilitate that migration with our clients. What we’re going to get back to what we’re going to be able to get back to this year is innovation and new products. So I’m very excited about the new options products that we will be launching this year. We’ve got several of them in the pipeline. We’ve got some new future products in the pipeline. And you may recall that about half of the growth in our listed rates, futures and options business since 2012 has come from new products. So we will be launching many new products this year that we are very excited about and getting back to that innovation. In terms of the additional clients, where we now have more than 2,100 new clients licensed with CME terms so far. I’ll turn it over to Julie. Yes. So in terms of who those clients are. I think it might just be helpful if I just talk for a minute about some of the segments. Clearly, banks are the largest segments. They are the ones that are lending against this rate for all of the work they are doing across business loan, trade finance, commercial real estate. But some of those other groups that are more to that organic point that you asked about is for the first time, a lot of private lenders, so these could be specialized hedge funds, PE firms, insurance companies, those that definitely are lending and need this rate to be used. We’re also seeing licensees coming from the buy side and other investors running loan syndication, CLO death. And again, those are use cases very specific to buy-side participants, and those are really touching across the globe. So we’re seeing that in Europe and Asia as well. And also just other fin-tech and service providers, so you can imagine there is a growing number of vendors that are going to need these rates for valuations, risk management, loan administration, accounting. And this is where our sales team is critical to be able to work those through the funnel. And also, you can imagine the education around that, right? So we’re continuing to work with commercial clients, corporate treasurers to help them understand both how that rate works, get them licensed and help them understand what other risk management products and data we have available for them. So we are working through this and as I mentioned, still have a good pipeline of opportunities across those segments that we’re working through right now. Hey. Hello, everyone. Just another one on the pricing side maybe for a minute. I know you talked about your impact of the price increase, the similar way every year where you say like, hey, adjusting same mix as we saw last year, it should be this or that and then obviously a higher level this year. But what we’ve also seen in recent years is that mix never really seems to be driving that upside that a lot of us expect. So I know you don’t have a crystal ball, but – a, now with the 4% to 5% that you’re talking about, maybe the question is how much do you think or we should expect to stick? And maybe just review what the biggest drivers of that mix are that has maybe worked against you on the pricing side recently? I know there was a lot of question, but hopefully, you got the gist of it. Yes. Thanks, Alex. It’s very difficult, obviously, as you know, to predict how the mix is going to happen year in and year out. And I think what we’ve seen certainly over time as volumes build, the only real impacts we have are mix shifts to our RPC. So in other words, we generally don’t reduce prices. You saw an example when we wanted to change behavior where we adjusted and gave some fee waivers for the SOFR First Options, which obviously was hugely successful. But to put it into perspective, right, so if you look at what we did last year, we made a 1.5% to 2% price adjustment. At the time, I said that the biggest impact was going to be in the equity part of our business. And if you look at equities, our – if you look at the RPC for equities in the fourth quarter of 2001, we were at $0.526. If you look at the in our equities complex today for the fourth quarter, we’re at $0.535 and this is on a 25.6% year-over-year increase in volume. So when you talk about it’s sticking, I would say that’s pretty sticking, especially when you consider volume incentives and the like that we have in our equity business. So we do take our pricing adjustments extremely seriously. We look at it on a product-by-product basis. We’re very surgical. We have regular discussions around it to make sure that we’re making the investments in market maker programs and incentive plans appropriately. And I would say that overall, when you look at our volume and pricing dynamics, I think we’ve been pretty successful and what we’ve done in terms of adjusting prices at the right time. Hi, guys. Thanks for taking my question. Maybe show up, I can go back to you, just on the points on the previous question about, I guess, the Fed balance sheet reduction and I guess the surprise that we haven’t really started to see the benefit of that yet in the long-term rates franchise. That’s something I’ve been puzzling here over myself in terms of substantially higher outstanding debt that’s out there, the shifting balance towards more public holders of that debt. And yet the open interest relative to those levels of outstanding that seems still seems to be relatively low to sort to what it could be. What do you think would be the actual catalyst or what’s holding back that thesis from playing out at this particular point? Yes, I don’t see anything necessarily holding it back. I’m just looking at the fact. While in 2018, when the Fed is balance sheet by $500 billion, we saw a 26% increase in our treasury futures. The Fed – let’s maybe a bit careful here, right? The Fed didn’t start to substantially reduce its balance sheet until September. So it’s actually a very recent phenomenon, although it’s been about $500 billion. So as we know, the Fed is expected to reduce their balance sheet by more than $1 trillion this year. So I would wait and see. Again, it was – it had a very positive tailwind for our business in 2018, but as I said earlier, it has not yet shown us significant positive results this year. And that’s not yet. Okay. Okay. Great. And I was just wondering as well, in terms of – just going back to crashes as well as a follow-up. How should we think about the overall levels of collateral requirements at the moment? And how that should trend over time? Because obviously, they have resurged during the last year and I am just wondering how we think about things normalizing over the next couple of years and the impact to the business? Yes. This is John. I’ll jump in and then maybe Sunil can make a couple of comments. I would say it’s very difficult to discern overall collateral balances. When you think about it, really, it is a function of the trading that’s occurring on the exchange and the open interest that we have in our clearinghouse and the risk associated with those trades. So from our perspective, it’s really all about risk management and ensuring that the safety and soundness of the markets, and that’s very paramount. As Terry indicated, at the start, we’ve been doing a lot to incent our clients to keep our cash balances or to keep them the collateral in cash here at CME Group. We do it for two reasons. One, obviously, we earn more on it than non-cash collateral. But most importantly, from a risk management perspective, having cash is much more advantageous from a risk management perspective. than non-cash collateral. So we try to strike that appropriate balance. Ultimately, though, it’s a decision by our clients each and every day in terms of whether or not it’s going to be cash or non-cash based upon the returns that they can get. So we’ve been, I think, really prudent in terms of how we’ve been approaching it. And obviously, it’s something that has benefited our clients because they get access to the Fed the Fed balance to the Fed. And then also, it’s been beneficial for us. I’ll turn it over to – I don’t need to turn it over to Sunil. I guess I hit it. Hey, good morning. Thanks for taking the question. I was hoping we could spend a moment on the energy complex with volume a bit year-on-year in January. I was hoping you might be able to elaborate on what you’re seeing across the marketplace. How you see the opportunity taking shape for this year in energy? And maybe you could talk a little bit about how the customer participation has varied across your customer sets to what extent have elevated margin levels still holding back volume and activity at this point? And how you see all that evolving this year? Thank you. Yes. Thanks, Michael. Appreciate the question. Following the largest demand shock, we ever saw in the energy market in 2020, followed by the largest supply shock ever ‘22. We’re actually starting to see the global energy market begin to normalize. One of the indicators we’re seeing there is financial players are starting to return to this market. One of those clear indicators we’re seeing of that this year so far, we’re seeing our open interest recover in our WCI complex. We’re up about 28%, up to about 1.8 million open interest since the end of ‘22. And that’s really a function of both margins normalizing, but we’re seeing hedge funds managers and particularly index trackers come back into the market. They exited largely in the challenging circumstances of last year. Despite the fact that it was a challenging year last year, you look at some of the points that really carry the franchise or carrying over into this year to a degree. Last year, our options market performed extremely well on the energy side with energy revenue on the option side, up 9% versus the previous year. Globally, we also saw continued growth outside the U.S. with our LATAM business and energy up 70% last year and our APAC volumes up 15% last year. Finally, we saw continued growth back on the client side, specifically in retail, with our Micro WTI contract in the fourth quarter, TI volumes up 28% to a little over 100,000 contracts. So, good global participation and good client segment participation. More importantly, when you think about where the energy markets are going, we continue to see the energy markets revolve and evolve around WTI as the central marketplace and price setter for both physical and financial markets. Couple of proof points here. Number one, the U.S. is now exporting a record level of 4.1 million barrels in Q4. We look to believe that, that export capacity will continue to grow. U.S. waterborne crude exports are not equal to Iraq and the number slot behind only Saudi Arabia. So U.S. is putting more WTI product out into the global markets. We are also expecting that and the market expects global oil production out of the U.S. to increase about 1 million barrels between now and 2024. So, that just increased WTI’s footprint globally. So, the U.S. exports already up about 40% on ‘22 versus ‘21, and exports roughly up double into Asia since 2018, we continue to see exports of U.S. product out into the global market. So, what does that mean, what we are seeing not only is that strong and positions WTI at the central point of price making for the global oil market. But actually, our Argus Gulf Coast grades contract has a combined open interest of about 375,000 contracts. And we just had a record volume about 11,000 contracts this year. So, when you think about what that means, you got WTI set and the global price of oil, Brent is not going to be put in the Midland WTI grade into that assessment. That means that continually centralized the WTI there. We have got the largest export market and now production on the upswing. So, we like that we have got the strongest position in the export market and in that basis contract, those Argus grades contract, as I said, about 375,000 contracts open interest, 87% of that is commercial participation. That’s where customers price discover and WTI, and then they hedge their exposure out to the basis to the Gulf, and then it exports from there. So, we like the position that we are in, in terms of the centrality of WTI. We think we have got the right product mix and we got the client mix and financial players coming back in. So, like Terry said, we can’t predict what volumes are, but we can talk about the very strong structural position that WTI has in the global oil market going forward. Good morning and thank you for taking my question. Could you please give us an update about your strategy and outlook in the digital asset space? Do you see your clients pulling back? And then you recently launched three Metaverse reference rates and indices. What other reference rates or products would make sense for C&E down the road? Thank you. Yes. Thanks for the question. So, when we look at the digital asset space and the cryptocurrency business at CME, we remain seeing very strong growth in our offering. So, just as a reminder, our approach to the cryptocurrency products as being the regulated venue, offering regulated products in a way that provides bonafide risk management and trusted access to the marketplace. We have seen that value proposition remain true in Q4 with some of the more widespread events in the cryptocurrency space, where we saw record volumes in November, record large open interest holders of 439 holders in the month of November. And that momentum hasn’t slowed down with respect to the adoption and continued growth at CME. What I mean by that is, let’s look at the number of accounts. Typically, we add about 450 accounts per month in our cryptocurrency business. And in November, we added 934, over doubling the normal account opening. And in January, we have seen over 700 accounts – new accounts opened with respect to trading cryptocurrency products at CME. That’s really a testament to the marketplace broadly turning to CME in times of stress in the rest of the cryptocurrency ecosystem. When we look at the product development front, we have focused on additional pricing products. These are non-tradable reference rates in real-time indices. We did in last month, introduced three new reference rates around the Metaverse, that complements some of the additional indices we introduced with respect to D5 sector in cryptocurrency as well as the more than dozen so more traditional cryptocurrency tokens that we also have reference rates on. And really, the strategy here is we want to make sure that CME, along with our partner, CF Benchmarks, remains one of the preeminent pricing providers for cryptocurrency as people need a trusted source to figure out on a given day, once a day with reference rates or real-time tick-by-tick, what these assets are worth. That is where we will continue to develop on the reference rate pricing, but we will listen to customers. We don’t necessarily have anything else in the hopper with respect to additional tokens, additional reference rate. We have almost 50 real-time indices and reference rates out there at present. And our product development will be, again, sort of in the Bitcoin and Ether lane as a function of the regulatory landscape that we find ourselves in. However, the one thing I will add is when we look at the broader ecosystem, the product development is not just a function of what CME can lift, but our products are being more increasingly used by other participants in the marketplace as the underlying for ETF, structured products, OTC trades. So, we are at the center of the growing ecosystem with respect to Bitcoin and Ether regulated products, and we expect that trend to continue in 2023. Hi. Good morning. Thanks for taking the question. You registered to launch an FCM last year. Where does that application stand? And in the wake of the collapse of FTX, is launching an FCM, a priority or even still makes sense? Yes. Ken, I will take that. Listen, the FCM application that we launched is not exactly taking anybody away from their day job of following that process on the application. We are looking – and I am looking at a long-term market structure and what it’s going to look like. And I do believe, and I have said this, two congressional hearings prior to FTX’ collapse that if we are going to have a different market structure that we all need to participate and have things in place and rules in place in order to facilitate whatever the world is going to look like for tomorrow. Since none of us really know what the world is going to look like for tomorrow as far as what the FCM business is or not going to be, it was prudent for us to go ahead and get the application process in place. As I have said and I have said publicly, we are unwavering. I am unwavering about our commitment for our FCM model today. Whatever we do going forward, I would hope if in fact, the model has to change, that we can work with our FCMs to bring them along so we can have a bigger piece of the pie for everybody to be successful. So, I wouldn’t read too much into that. But when you are in a situation where the government appeared to be willing to approve technically a direct model without writing rules to the direct model and applying rules that were written back many, many years ago that are applicable only to the FCM model made no sense to us. So, I had to be prepared, along with my team in order to put certain things in place, just in case that was the decision of our government. I don’t believe that’s the case. I think there will be new rules. You heard Commissioner Johnson or you may have seen, in her public remarks from Duke University about wanting to write rules as it relates to a direct model, even if it comes forward. That is a very long, difficult process to write rule. And I have been around this business for 40 years, and I have been in Washington helping write rules and participated in the process. And it is very difficult to do. So, I don’t see that going anywhere soon. And – but for the same time, the FCM is nothing more than – it’s a wait and see for what the future may or may not bring. And there is nothing more to it than that can. Hey. Good morning everyone. I have a follow-up to an earlier question, but I wanted to hone in on energy specifically. So, now that your margin requirements have been declining and especially in energy, what has been the early feedback? And how much of a positive impact do you think this could have on volumes? Yes. Thanks Craig. And as I mentioned before, we are in the process of seeing this market normalize. Now, the first thing we saw when you saw the disruptions of the Ukraine war happened last year, margins popped up. That did basically deleverage the number of financial fitters in the market may pull back. We did not see commercial participants step away because that risk continued to be sitting there on their books. I think as we have seen margins normalize, that’s one part of the overall equation. We certainly have seen, as I mentioned, the open interest trends turned very positively. As I said, our open interest in WTI right now versus end of last year is up 28%. On the nat gas side, we are seeing similarly open interest is up about 10% from the beginning of Q4 last year. And the most important marker there is look at the open interest holders and the types of those customers coming back in. Our large open interest holders in natural gas have also grown up about 17% up to just about 420 versus the beginning of Q4. So, as we suspected, increased cost to transact, increased margin tends to initially push financial customers out, we have seen index trackers, retail in the form of micros start to come back. And that will be a process, and we see that reflected initially both in the large open interest holders as well as growth and rebuild of open interest. And more importantly, structurally, as I mentioned, we like our position in WTI and Henry Hub as the central points and being the largest export market in both of these products and setting the global price of both natural gas and oil globally. So, those are the markets we are seeing right now. That will be a slow build, but we like the trajectory this is on going into this year. Perfect. Thank you, guys. So, the 10-year is down like 40 basis points year-to-date. The Fed could go on hold in three months to six months. Those will probably be negative factors for your rate complex, but at the same time, QT does continue and there are margin – lower margin requirements. So, like how should we think about all these kind of mix of positive and negative factors on the rate complex? Yes. I think similar to my answer earlier, what’s pricing to the curve right now, obviously, the world goes to CME’s Fed funds futures to see what the expectations are in the market or the Federal Reserve. Currently, there is about 50 basis points or two more 25 basis points tightening priced into the curve. And then further out the curve, there is actually 200 basis points in easing. As I said earlier, the uncertainty about the Federal Reserve is, from my perspective, and if you look at the market like increasing, not decreasing, relative to the probability of either tightening or easing and in each case by substantial amounts. We see that the dispersion of economic data with the 517,000 non-farm payrolls, versus, for example, the ISM numbers, which are running in the high-40s, you have everything from the potential for continued boom to the potential for recession. In addition to that, you can look at the excess savings of households that remains post-COVID, which remains according to recent reports at around $2.6 trillion. So, enormous excess savings, enormous uncertainty, huge increases in rates from the Federal Reserve, I personally think that the uncertainty is very high. The rates could go either way. And what we have seen again is, overall, for our treasury futures, they have declined slightly relative to last year, down 3% in terms of volumes. But as I said earlier, our short-term interest rate options, which are reflective of that uncertainty of the Federal Reserve were up 40% year-over-year. So, I think that the environment is highly uncertain. Let me just add to what Sean said, and this is just a personal theory that I think the Fed. When you say, Craig, that they could hold on their increases, I think when you looked at most of 2022, most of the participants were looking through a pivot. The pivot never happened. And we saw, to Sean’s point, the Fed share talking more hawkish even as of recently a couple of days ago. So, even if they were as a hold, I think people would anticipate that, that would mean a pivot, which would mean massive activity on refis and people waiting to do a lot of business as they are waiting for that moment that you were referring to as a hold. And if in fact the market was to do a pivot if that was to happen, I think it would be more activity, not less. So, even at a hold, I think that would not be bearish for CME, that could be very bullish for CME. Hey. Good morning. Just following up on energy and specifically natural gas, 2022 was one of the tightest gas markets over the last decade. And this year, we appear to be set up for one of the more oversupplied markets in many years. We are seeing this pricing at the lowest level in 18 months. Can you talk about how this dynamic is likely to impact market participation and perhaps some of the structural shifts we have seen since natural – in the natural gas market since the Russian invasion? Yes. And natural gas is an interesting one. It was directly – certainly impacted by the Russian invasion when you had that pipe gas coming from Russia directly into Europe, which is effectively the basis for the flow for the TTF contract. So, like crude, natural gas market is beginning to normalize. Now, given the unusually warm weather we have had both in Europe, which I think has failed a lot of Europe out as well as here in the U.S. The market was making sure that there was enough supply going into a normal winter. It’s now feeling oversupplied in a warm winter, which is not a terrible thing for the consumer, but is some interesting dynamics in the market. We actually are seeing – when we looked at last year, the full year, our Henry Hub volume was down a couple of percent, 2%, 3%, something like I think – I saw something a little bit of a larger magnitude and the downdraft. But as I mentioned before, open interest is up 10% from the Q3 low. So, we are seeing that market begin to normalize. And more importantly, we are seeing participants in the large open interest holders up 17% from beginning [ph] to Q4. January is starting well. Overall, our nat gas complex as a whole was up about 1%, lead by options, up 8%. So, we are seeing some normalization of activity there. I think in the same way that we think about the structural position of our energy markets in the same way that we have seen the market evolve around WTI as that global physical market, we are seeing the same thing happen around Henry Hub. And Henry Hub is by far the largest natural gas market in the world growing the importance every year. That’s a function both of the significant production in the U.S., but the growing export capacity and volumes out of the U.S. as well. So, it’s not only is Henry Hub a huge domestic market, it’s becoming in light of the challenges to TTF, the global marker as well. TTF is going to have the position or the European market will have to begin to reference an LNG point out of Northern Europe. The TTF itself was taking pipe gas coming from Russia. So, in terms of where we are seeing client participation, similar to crude, we are starting some normalization, open interest up, client participations flowing back in and the centrality of Henry Hub global nat gas market puts us, we believe, in a very strong position. However, market dynamics evolve, whether we are going to be low and flat for a while or trending back up. That’s just a function of we are in the middle of gas season right now in an unusually warm winter. I think that’s part of the overhang in the price right now. But we like the dynamics. We like our position and just the magnitude of Henry Hub versus TTF is something like it, I think the Henry Hub market would you normalize by molecule size is about 20x the size of TTF. So, we like our position. We like our customer participation and the open interest trends are heading in the right direction. Yes. Hey. Hello again. Just one follow-up on the energy business, you got a bunch of questions on that. And I actually wanted to step back there for a second. I mean you said several times that you really like your strategic position. But when I look back over the last, whatever, 5 years, 10 years, 15 years, that business has been basically ex growth. And in the last 5 years, for example, I think it’s down 4% CAGR in revenue terms. When I look at your primary competitor, which obviously we all know and track, I mean I think at the same time, these guys have grown 5% revenue CAGR. So, there is a 9% delta. So, I hear you with the positioning, but I am just wondering like what structurally has happened there? And I know you have different product sets and so forth, but you still play in the same sandbox. So, hoping you can close that gap and maybe any idea like how? Yes. Thanks. I appreciate it. I think you are right. We do have different products that’s in our energy franchise. When you look at our Henry Hub franchise and ICE’s LD-1, for example, those results have not been markedly differently in terms of performance over the last couple of years. Certainly, ICE has the basis market here and the TTF complex, which I think is under significant strain right now, in terms of what that means going forward as a long-term marker given some of the physical challenges where those gas flows are going to come from and what that now represents. But I won’t try to tell you otherwise, that TTF market has been on a good run for the last 2 years or 3 years. So, they are in product sets that we are not. We are in product sets that they or not. I would point to our global missions offsets contracts in the voluntary carbon markets, as an example, of a market that we are in that they are not in right now. They are in the compliance markets or in the voluntary market. So, when you break down the pieces on the like-for-like businesses, those results have not been markedly differently where the different results are. Some of their asset – some of their products are there in where we are not have been contributors to the bottom line growth. So, from our perspective, we – as I said, we look at the structural benefits and the positioning of our core complex in WTI in global crude, which looks very positive as well as the Henry Hub complex, both of those being the biggest markets, now the biggest export markets for those respective products. So, we just – as a going forward, we like what we have done. We have globalized our business. We expanded our options complex. But that outperformance, Alex, as I said, it’s really a function of they have been lucky to be in products where they have franchises that we are not operating in. And that’s, you got to be both good and lucky to be successful in this business, and we like our position going forward. Hi. Good morning. Maybe a question for Terry, I know you agreed to an extension on your employment contract last year. But with that, I believe, set to end next year. I am wondering if you would be able to or will be willing to share whether you are open to extending your employment contract again? And also if you could address or provide any color as to how the Board views succession planning more broadly? Yes. Thanks Kyle. And obviously, there is some confidentiality into the conversations that I have had with my Board, but I will just give you a general take on it. My contract goes to the end of 2024. I am committed to my Board that I will be here through 2024. At the same time, we will be looking at – we are looking at succession. And if in fact, the Board is not comfortable with that process, I told them I would say until they are. So, that’s kind of how we are leaving it. So, a lot could happen between now and then, obviously, but my commitment is to a company, it has been all these years, and it will not deviate from that. So, the Board knows that, but we all have a job ahead of us to make sure that we do the right succession planning and make sure it’s a seamless one. And that has the attributes to do multiple things from Washington to M&A and everything else. There is a lot goes on in these businesses. And there is not too many exchanges as we know in the world that people know how to operate. So, we got to find the right person, but we got – we have a lot of talent in not only in this room, but through the organization. And if in fact, the Board is in-comfortable with where we are at, then I will extend until they are. Well, thank you all for taking time out this morning and we hope you have a good day and be safe. That does conclude the conference call for today. We thank you for your participation. Ask that you please disconnect your lines.

EarningCall_453

Good morning, ladies and gentlemen and welcome to the TMX Group Limited Q4 2022 Financial Results Conference Call. At this time, all lines are in listen-only mode. Following the presentation we will conduct a question and answer session. [Operator Instructions] This call is being recorded on Thursday, February 07, 2023. I would now like to turn the conference over to Paul Malcolmson, Vice President, Enterprise Sustainability and Investor Relations at TMX Group. Please go ahead, sir. Well thank you, Michelle and good morning everyone. I hope that you and all of your families are staying well and safe. Thank you for joining us this morning for the full-year and fourth quarter 2022 conference call for TMX Group. As you know, we announced our results late yesterday and a copy of our press release is available on tmx.com under Investor Relations. Good morning, everyone. We understand that there was perhaps a technical issue, so we are just going to repeat pause rises, there is a little bit of repetition, but we do appreciate you joining us this morning. As usual, we have with us John McKenzie, our Chief Executive Officer and David Arnold, our Chief Financial Officer. We will have a question-and-answer session following their opening remarks. And just a reminder that certain statements that we make today might be considered forward looking, and we refer you to the risk factories that are in our press release and also reports that we filed with regulatory authorities. Thank you, Paul and again, our apologies for the technical challenge to start off the day. I’m going to wish everyone a happy New Year for a second time. So if it wasn’t a good one to start already this morning, we hope it is better now and wishing you the best to you and your families in 2023. So my comments this morning, we are going to focus on TMX group’s performance in 2022, and some of the key strides we made during the year to accelerate our strategy and advance the evolution of our company to meet the needs of stakeholders throughout the capital markets ecosystem here in Canada and around the world. And then David will join us to discuss our fourth quarter performance in detail in just a few moments. So, there is no secret, 2022 was a tumultuous and difficult year for a broad spectrum of our client base and stakeholders across the markets that we serve. Geopolitical events and macroeconomic conditions, including [sore] (Ph) interest rates, escalating inflationary pressures, negatively impacted a wide range of industries and people across our communities. And these factors also had an adverse effect on capital markets activity and stifled economic growth. And while some of these challenges persist into the early weeks of 2023, we do have good reason to be optimistic. Overtime, our ecosystem has proven resilient through all conditions and turns of the market cycle and world events, and the fact that Canada’s markets are the best in the world, deep and diverse, fair and transparent, and innovative and responsive. And I want to take a moment to extend my sincere gratitude to all of our clients and stakeholders across the globe for your crucial contributions to this track record of success. Your partnership is the key enabler pushing the growth and continued evolution of TMX’s exchanges and venues and the broad ranges of services we provide. Now, turning to our performance, TMX delivered positive results in 2022. Overall revenue grew year-over-year despite decreased capital markets activity compared to a record setting in 2021. TMX reported revenue of over 1.1 billion, a 14% increase from 2021 due to higher revenue from derivatives trading and clearing, global solutions and insights, including Trayport and TMX Datalinx and capital formation. The increased revenue included 118.5 million in revenue from BOX consolidated in January, 2022, of which 52.1% relates to a non-controlling interest, and reflected contributions from recent acquisitions including 33.6 million in revenue from AST Canada, inquired in August, 2021, 3.4 million from Tradesignal acquired in June, 2022, and one million from Wall Street Horizon acquired in November of 2022. Increased revenue was also partially offset by lower equities and fixed income trading and clearing revenue due to lower trading volumes on Toronto Stock Exchange, TSX Venture Exchange, and Alpha, and excluding revenues from the consolidation of BOX and reconnect acquisitions, revenue was down slightly, 2% from 2021. On an adjusted basis, 2022 diluted earnings per share was $7.13 in 2022, a slight increase from 2021. And total operating expenses increased 21%, compared to 2021 or a 4% increase excluding expenses related to BOX, AST Canada, Tradesignal and Wall Street Horizon. Now in addition to environmental factors and economic conditions, historical context is important discussing TMX’s 2022 results. 2021 was a record setter and some of our key performance measures, including capital raising activity among our listed issuer client base on Toronto Stock Exchange and TSX Venture Exchange. In 2022, under extremely difficult circumstances, TMX’s deep and diverse business model performed extremely well and we made significant progress in executing our long-term strategy to achieve sustainable growth and build stronger for the future. Now moving to the individual business areas. Revenue from Capital Formation in 2022 was $261.2 million a 1% increase from last year, reflecting the inclusion of revenue from AST Canada and higher revenue from sustaining fees. The year-over-year increase was largely offset by lower revenue from additional listing fees due to a lower number of financing transactions and decrease in dollars raised on TSX and TSX Venture. Higher interest rates and inflationary pressures and increased volatility, weaken those capital raising conditions in 2022. And despite these challenges though, our public market ecosystem has again proven resilient and the entrepreneurial spirit of our issuers endures. While the number of new listings was down from near all time highs in 2021, we continue to add new companies to our ecosystem, and the number of listings has grown for a 7th consecutive year. Although IPOs garner all the headlines, they are not the only way to join our markets. In fact, most companies choose a different vehicle to go public in Canada. In 2022, we welcomed 257 new listings to our market via other means, including 71 additions to TSX Venture Exchange’s Signature Capital Pool Company Program. This past year still ranks among the strongest on record since the program’s exception in 1986 and it stands as powerful evidence of the appeal of the program in all market conditions. Overall, CPCs accounted for 32% of new TSX Venture listings in the past 10-years. And while these constitute smaller sized entry level transactions, small companies grow into big companies and this is what sets Canada’s markets apart. We do better than anyone, anywhere else in the world. TSX Venture Exchange is the foundation of our powerful two-tiered marketplace and a proven growth accelerator. In fact, 22% of the S&P TSX Composite Index are TSX Venture graduates. And we have embarked on a collaborative stakeholder driven initiative to ensure the public venture market remains a key differentiator and a competitive advantage. Venture Forward kicked off in the summer of 2022, canvassing the interconnected community of entrepreneurs, investors, financiers, lawyers and advisors to identify priority near and longer-term marketplace challenges. And we plan to announce next steps in the first half of this year, including identifying priority areas where we can work together with our stakeholders to affect positive change and potential tactics. Now in all conditions, we continue our efforts to expand our global listing franchise, with business development campaigns targeting growth companies that fit the profile of our markets and regions throughout the world, including the U.S. Europe and South America. Canada’s markets are the 10th largest in the world by market capitalization, But TSX and TSX Venture combined ranked number 2 in new listings, and number two, in new international listings amongst global exchanges through September 30th, according to data from the World Federation of Exchanges. In addition to this solid performance relative to our peers in a tough year, our TSX and TSX Venture teams remain closely engaged with the deal-making community. And we have a number of go public prospects, companies across a range of sectors in our near-term pipeline, poised to join our markets when conditions normalize. And with that, our long-term pipeline for new insurers remains extremely robust. Now I would like to turn to Derivatives. Excluding BOX revenue from Derivatives trading and clearing was 142.8 million in 2022, up slightly from 2021, driven by a 10% increase in revenue from CDCC due to higher repo, dealer activity and fee changes. The increase was partially offset by a 4% decrease in revenues from Montreal Exchange, reflecting termination fees related to a market making program and retroactive client billing credit, as well as a slightly unfavorable product and client mix. Total volume of contracts traded on [MX] (Ph) was up slightly compared with 2021 and overall open interest grew substantially in 2022, up 18% at December 31st compared to the end of 2021. And investors continue to seek out derivative instruments to manage exposure in their portfolio through the turbulence of 2022. While sustained volatility across equities in fixed income markets had a negative impact on volumes traded in some of MX’s core products, including the banks contract, we saw a strong year-over-year growth and equity futures and options. Some of those key highlights included 18% growth in volumes traded in equity options reflecting increased activity from institutional and retail investors in the energy and financial sectors. 43% growth in volumes traded on ETF options that are highlighted by record activity from institutional investors across broader index, financials and energy sectors, and 14% growth in volumes traded in index futures. We also saw a significant growth momentum in MX’s Government of Canada Bond Futures contracts during 2022 as they continue to gain in profile among global investors. Volume increased 126% in the CGZ or the two-year contract, and 28% in the CGF or five-year bond contract when compared to 2021. Now moving to Global Solutions, Insights and Analytics or GSIA, revenue was 360.1 million, a 4% increase from 2021, reflecting higher revenues from Trayport and TMX Datalinx. Trayport revenue grew 5% or 12% in common currency pound sterling when compared to 2021 driven by a 16% increase in trader subscribers and annual price adjustments. Continued efforts to expand the depth of trading tools, insights, and solutions across the core jewel network has enabled Trayport to provide essential support for energy market participants and navigating severe volatility. Trayport added to its dynamic set of features and functionality in 2022 with the signing of a partnership agreement and acquisition of a minority interest in Ventrix Limited, a cloud data technology company that offers a platform for data acquisition, integration, and business intelligence. The Ventrix Solution has augmented the trading experience for its growing client base, and Trayport has added more than 30 new clients in 2022, in core and new growth areas, as new market entrants seek to connect to execution venues and clearinghouses across world power and natural gas markets. Trayport’s global diversification strategy also made continued progress in 2022, pursuing opportunities to move into new asset classes and geographies. One example, the voluntary climate market, a collaboration with IncubEx launched last year to facilitate trading in the physical voluntary carbon market. The TVCM platforms offers carbon offset projects from five of the leading offset registries, which are tradable with live biding offer through Trayport’s Jewel platform. And then while still in the early stages of building this new market, we added several new build clients during the second half of the year and we are working alongside in Quebec to bring additional liquidity to platform in the future. And same with GSIA, revenue from TMX Datalinx was 202.7 million, an increase of 4% from 2021 due to revenue from data feeds, co-location, analytics, and price adjustments. These increases were partially offset by lower revenue from usage-based quotes, benchmarks, and indices. As reported TMX Datalinx revenue included one million in revenue from Wall Street Horizon, a Boston based company we acquired in November, 2022. This acquisition represents another step forward for the TMX Datalinx team as we expand to enhance the content we provide to clients around the world. Wall Street Horizon is a leading provider of global corporate event data sets to traders, portfolio managers, and academics. The company covers 9,000 publicly traded companies worldwide, offering information on more than 40 event types including earning dates, dividend dates, option expiration dates, and more. TMX continues to pursue new ways to expand our information services business, and to connect our global client base to the information they need to make a competitive advantage. So, we kicked off 2023 with a strategic investment in VettaFi Holdings, which includes a new commercial agreement. VettaFi is a U.S. based privately owned data and analytics indexing, digital distribution, and thought leadership company. And TMX acquired approximately 21% of the common equity of VettaFi for $175 million. Our investment and in partnership with VettaFi enables us to increase the depth and value of data driven insights we provide to clients, enhance our digital capabilities, and enrich our leading support for the ETF issuer community. These recent initiatives and investments build on TMX’s information assets and expertise, increase our global footprint and they accelerate our enterprise growth strategy. And it is no surprise TMX is an innovation story with a proven track record and proud 170-year history at the forefront of industry progress. And the expansion of our information business is the next step in the evolution of TMX and in executing our long-term sustainable growth strategy. Now, in addition to all that, we have a strong balance sheet. We have smart, dedicated people working together with a purpose to make markets better and empower bold ideas. And we are committed to executing and seeing it through. And so in closing today, I want to sincerely thank our people for bringing TMX’s corporate perfect to life in a way they do every day. Now, one person in particular that I would like to thank today and take a moment of acknowledgement for the contributions of an important member of our team and a familiar voice on these quarterly calls since TMX became a public company in 2002. As many of you already know, Paul Malcolmson, TMX’s, Vice President, Enterprise Sustainability and Investor Relations is retiring on March 1st. Now it is hard to believe, but this is Paul’s 81st and final quarter leading our IR function. This is a record only rival by the number of times he has run at Disney World over the same years. Now, at various times during his career at TMX, he has also had an hand in overseeing other corporate functions, including public relations, government relations and sustainability. And on behalf of the entire senior team and employees across the organization, I want to thank you, Paul, for your dedication to TMX, your steadfast professionalism and sound judgment over the years and for your friendship. For years, Paul and I sat side-by-side in the organization, plotting the future of where this company can be only to sit here today to see it come to fruition. Paul leaves behind a very impressive 20-year legacy as a trusted and expert source of insight for many of you listening today, as well as investors around the world and also leaves our team well-positioned with a legacy of the future and a strong IR team in place. Paul, thank you very much. Thank you, John, and good morning, everyone. Our results for the fourth quarter reflect our commitment to continue investing for long-term growth and our ability to effectively manage our business in challenging economic conditions. Revenue grew by 9% driven by the inclusion of revenue from BOX Options market or BOX For short, which we consolidated on Jan 03, 2022 and Wall Street Horizon, which we acquired on Nov 09, 2022. Revenue excluding BOX and Wall Street Horizon was down 3% in the quarter, compared with an exceptional fourth quarter last year, when we had our highest Q4 revenue on record. There were revenue increases from derivatives, trading and clearing, Global Solutions Insights and Analytics or GSIA, offset by decreases in capital formation and equities in fixed income trading and clearing. Excluding the aggregate amounts of expenses associated with BOX and Wall Street Horizon, our operating expenses increased by 3% compared with Q4 of 2021. We reported an increase of 17% in our diluted earnings per share this past quarter, benefiting from a decrease in income tax expense, compared to Q4 of 2021 from the reversal of a prior year tax provision as well as an increase in income from operations of $3.1 million compared with Q4 of 2021. The $3.1 million increase includes 100% of income from operations of BOX, of which 52.1% relates to non-controlling interests. After deducting the 52.1% portion of BOX, the non-controlling interest in BOX, our income from operations was down compared to last year and our adjusted diluted earnings per share decreased slightly by 2%. Turning now to our businesses. I will start with those that we experienced revenue increases in the quarter. Revenue and derivatives trading and clearing grew by 67% this quarter, compared to Q4 of 2021, driven by the consolidation of BOX’s revenue of $27.7 million included in the segment starting in Q1 of this year. Volumes on BOX increased by 17% compared to Q4 of last year and BOX’s market share and equity options grew to 7%, which is up 1% from Q4 of 2021. Derivatives trading and clearing revenue excluding BOX was down 6% in the quarter, primarily driven by an 8% decrease in the Montreal Exchange volumes this quarter, partially offset by positive impact on trading fees on the heels of pricing changes for our S&P TSX 60 Index Standard Futures or SXF, which came into effect on January of last year. And a 2% increase in revenue from CDCC, due to an increased repo dealer activity and interest rate derivatives clearing fee changes which also came to effect in January of 2022. Turning to our Global Solutions Insight and Analytics segment or GSIA for short, revenue was up 5% this quarter with increases from both Trayport and TMX Datalinx. Revenue from Trayport was up 5% in Canadian dollars or 11% in pound sterling. The increase in pound sterling was primarily driven by 11% increase in trader subscribers and annual price adjustments, partially offset by an unfavorable FX impact of $1.9 million. Revenue in our TMX Datalinx business including colocation grew 5%, driven by increases in data feeds, colocation and the impact of 2022’s price adjustments and one million related to Wall Street Horizon. We also benefited from a favorable FX impact of approximately 1.7 million due to a stronger U.S. dollar this quarter compared with Q4 of 2021. Partially offset by decreases in revenue from benchmark and indices and usage based quotes. In Capital Formation, revenue in the quarter declined 8%, primarily driven by lower additional listings fees, reflecting a decrease in both the total number of financings and total financing dollars raised on TSX and TSX Venture, as well as the decrease in initial listings fees. The decrease in additional listing fees were driven by a decrease of 21% in the number of transactions billed below the maximum fee, and a decrease of 58% in the number of transactions billed at the maximum listing fee of 250,000 this quarter versus Q4 of 2021. This decrease was partially offset by higher sustaining fees of 4%, reflecting an increase in the market capitalization of issuers at December 31, 2021 over the prior year, along with a 40% increase in TSX Trust revenue. In the fourth quarter, driven by higher net interest income and partially offset by lower transfer agent fees and corporate trust revenue. Revenue from our equities and fixed income trading and clearing segment decreased 2% in the quarter compared with Q4 of 2021. This decrease was driven by a 16% decline in the overall volumes of securities traded on our equities marketplaces. Trading volumes of TSX decreased by 5%, TSX Venture Exchange by 34% and alpha by 31%. However, we saw gains in our combined market share this quarter, which was up 1% for TSX and TSX Venture listed issues, and up 4% in all listed issues in Canada compared to last year. The decrease in revenue was somewhat offset by a favorable mix amongst our trading venues and a favorable product mix within TSX, the impact of April’s price change on continuous trading for securities with a price per share below a dollar and higher fixed income trading revenue reflecting higher activity in swaps and repos in the quarter. Revenue from our CDS business was up 1%, reflecting higher interest income on clearing funds and pass through liquidity fees, partially offset by lower special handling fees, international revenue, clearing fees on exchange traded volumes and lower depository revenue. Turning to our expenses, operating expenses in the fourth quarter increased by 14% compared to Q4 of last year. Included in this increase is approximately 13.9 million associated with BOX, which we now consolidate as well as Wall Street Horizon, which we acquired in November of 2022. These costs include the amortization of acquired intangibles, acquisition related costs and integration costs. So excluding the aggregate amount of expenses associated with BOX and Wall Street Horizon, year-over-year operating expenses increased 3% compared with Q4 of last year. The higher expenses reflected higher headcount and payroll costs, increased long-term employee incentive plan costs, increased IT operating costs, and higher travel and entertainment expenses. These increases in costs were partially offset by lower short-term employee incentive plan costs of 6.4 million and lower legal and severance costs. Our 16-months integration of AST Canada was completed in December last year. Total integration costs were 17 million down one million from last quarter’s estimate of 18 million, which was down from our original estimate of 20 million. We realized synergies of approximately 3.9 million in 2022, which were up from our estimate of 3.5 million last quarter, and our original estimate of two million. We continue to expect total synergies of approximately 10 million to be substantially achieved by the end of 2024, and expect approximately six million to be achieved by the end of 2023. The transaction had a positive impact on TMX Group’s adjusted earnings per share. Looking at our results sequentially, revenue decreased 4.8 million from the third quarter to fourth quarter of this year. This was driven by higher revenue in GSIA, CDS, derivatives trading and clearing, partially offset by lower revenue and capital formation. Operating expenses increased 10.6 million or 7% from Q3, including an increase related to the acquisition of Wall Street Horizon on November 9, 2022. There were also increases in technology operating expenses, commodity taxes, severance, long-term incentive performance plan costs, and consulting and travel costs. These were partially offset by lower short-term incentive performance plan costs of 2.1 million and lower legal and charitable donations. Turning to our balance sheet, in the full-year of 2022, we spent 74.3 million repurchasing 560,000 of our common shares under our normal course issuer bid program. Our debt to adjusted EBITDA ratio was 1.6 times at the end of the quarter. And we also held over 493 million in cash and marketable securities at the end of the quarter, which was about 318 million in excess of 175 million we target to retain for regulatory and credit facility purposes. Our Board approved a quarterly dividend of $0.87 per common share, payable on March 10th to shareholders of record as of February 24th, this is a 5% increase from Q3. As John mentioned, this marks Paul’s 81st quarter with the company. As many of you know, Paul will be retiring at the end of the month and while I have only had 20-months to get to know and work with Paul, I echo John’s sentiments. I wish Paul nothing but the best in his retirement and look forward to hosting Paul and his family, as well as our TMX colleagues as they close the market later this afternoon, which is a fitting way to celebrate both his career and contribution to TMX. So that concludes my formal remarks, and now for the last time, I would like to hand the call back to Paul for Q&A. Well, thank you, David, and thank you both John and David for your very kind words. Michelle, we will turn it over to you just to outline the process for the question-and-answer session. Thanks, good morning everyone. Now that you have presumably completed the year end budgeting process, just wondering if you can update us on how you are thinking about managing expense growth in the year ahead. Like is it flat to low single-digit growth, still kind of a reasonable expectation enterprise wide? Nik, it is David. That would be correct. We normally target flat to below the rate of inflation. So that is the wild card is the rate of inflation. Okay, very good. And then is there anything incremental that you might be able to share on the VettaFi investment just with respect to the expected earnings impact, when you folded in or how the evaluation they have compared to say the previous fundraising round? Yes. Happy to. And you will understand, Nik that I’m going to have to be a bit circumspect into my comments because this is a private company. We are a 21% shareholder. But in order to kind of give you a bit more sense of some of the guidance around it, the size of the company is not dissimilar to the size of Trayport when we acquired it, in terms of kind of both revenue size, growth rates profitability. So it kind of gives you a sense of the size of the business. Very strong performer in terms of Index, Analytics, ETF Solutions, it is one of the things that we were attracted to it and we have been in discussions with them for a while actually to find that right path forward. And the importance in our program that we are doing with VettaFi, it is a combination of the capital that we are putting in that is going to help accelerate some of the things that VettaFi is doing to accelerate its growth. But also we noted the commercial partnership, the long-term agreement we put together to really create net new index and benchmarking products for our broad client base. And so the exciting piece here is, it is both driving the growth of that investment, but also driving the growth of new products and revenues that we will share between us. So we do expect this to be accretive even in the minority investment phase, and with the ability to build revenue both in VettaFi and in within our joint revenue offering, which will impact our Datalinx business going forward. So I hope that gives you a bit more guidance, in terms of how we think about it. But I hope you get from my tone, it is something that we are extremely excited about. Understood. Okay. No, that helps clarify. And then one just final question for me. In the long-term objectives that you outlined, I noticed that, the target leverage ratio had just been taken down maybe half a turn. I think that is a bit lower than the range you have talked about previously. Is the upper bound of that range - I think it was 2.5 times how you would define capacity to re-lever the balance sheet to pursue further M&A, if anything kind of transformational presented itself or would there be appetite to exceed the high end of that range if necessary? Nick, it is David. Yes. So the 1.5 times to 2.5 times is something that we have spoken about over the last several quarters. And we put it into our investor brochure, but we have updated it in the annual disclosures. So it appears new, but it is not that new. But on your question about, if the right acquisition where to present itself, and there are many things that we look at all the time, our comfort level would absolutely be to exceed the upper end of that range. That range is really about through the normal course. But if there is a transformational opportunity, we are very comfortable like we did with Trayport going well north of three times and we have a proven track record of deleveraging very well overtime. So hopefully that gives you what you are looking for. Hi, good morning. Just following up on the VettaFi, just wondering your comment to rent accretion. Are you able to give any more insight in terms of is it low, mid, high single-digit, even double-digit accretion that you are maybe expecting over the next year? Yes. I mean, I can’t give you much more guidance. I’m really talking about EPS accretion because again this is a 21% investment, so we won’t be bringing the EBITDA into the organization into our statements. And as we go forward, with VettaFi and we do more with them, we will look to see what we can provide in terms of additional disclosures. But Geoff, that is the limit, I’m going to be able to show you today. Okay. Just my other question was, we have seen a number of other exchanges moving the business to the cloud. Just wondering if this is something TMX is looking into, and if you were to go down that route any sense of what this could do for margins? Jeff, it is a great question, and one of the things I like about that question is, I actually found that I’m going to be a bit - for a second. I think TMX has done more to move into the cloud than make cloud announcements like some others have done. We have actually been very active in terms of putting more core systems into cloud over the number of years than a lot of our competitors. So for those that don’t know, we are actually fully cloud enabled in everything we do around productivity workflow counting systems, HR systems, productivity systems is actually one of the reasons we were able to move so effectively or remote is because we’d actually done that work in advance. We have a full cloud enabled solution on the front end for issuers called TMX LINX, So all of our issuers actually connect to us through a cloud solution for all their filing activity, application activity, and the workflow that surrounds it. It has made the business substantially more scalable and particularly when you think about the activity we had in 2021, which was record activity, we did that with existing resources because we were just able to scale the business in a way we weren’t in the past. In addition, we have got a cloud solution for historical market data delivery and deep data analytics, both within TMX Datalinx and also recently what we are deploying in Trayport. So what we have been doing is actually just going about a cloud strategy is as we actually modernize and bring new initiatives online, we do it with a philosophy we call cloud first. What we haven’t done is gone into a big bang announcement with a single vendor for a long-term commitment, because we are still in the stage of looking at kind of who is the best-of-breed for each of these things that we are going to bring to bear. But actually to your point, as we look forward, we are looking at how do you think about those bigger systems like trading and clearing and data center management, as those technologies evolve, are we able to move those to cloud-based solutions as well. So it is something we are going to continue to explore in the future, but that kind of gives you a lens as to where we are thinking it is cloud first and delivery and we have got multiple partners to do that. Well that is helpful and maybe if I can just add one extra question just based on your response there is like for what you have kind of moved to the cloud, have you done an analysis in terms of how much that is helped margins and if you were able to move to your point, trading, clearing data center, all that other stuff potential for the financial impact? Yes, I what I would say to you in each of those programs the business cases supported the investments in terms of the run rate, but in addition, the real piece is the scalability that it gave us. So in each of those cases, like the ability to do a deep data lake program without the cloud solution, you really can’t do it in a way that is scalable for clients. Same thing with the work we are doing on issuers. It has made the business more scalable, so it reduces the amount of really variable cost in the organization as we grow. So that is the better way to think about it, in terms of providing that long-term scale and growth potential. Good morning and congrats Paul. On the introduction of - on the transformational objectives, how will TMX bridge the gap between the business today and your long-term objectives from organic and acquisition perspective? Yes, and then the - so one of the - I want to be clear in terms of when we put out these objectives, these are not new objectives, we have actually been talking to the street about the transformational objectives in terms of where we are trying to grow the business over the long-term and that is why they are long-term objectives. So I wouldn’t look to where are we at any point in time, but are we making progress against those components in terms of progressing into more data revenues, more global revenues, more subscription based services. So even in 2022, if you normalized and looked at the business in terms of taking out the impacts of kind of BOX and/or the acquisitions, and what the organic business did, you will see that all those numbers expanded and grew in terms of along that glide path anywhere from one to three percentage points. So our organic strategy as we set with the organization and the Board at the end of last year, builds in the types of investments and growth initiatives to continue to drive more global revenue, more data revenues, more sustaining recurring revenues, very much like the partnership we just talked about with VettaFi, which index and benchmarking is exactly in that sweet spot of delivering both global solutions and subscription and recurring in data revenues. So, we do believe that we have got an organic strategy to build there through the long-term, but certainly inorganic moves even small ones like Wall Street Horizon that we did in Q4 are ways for us to accelerate and get there faster. So that is what we are trying to give more guidance and a more consistent way in terms of what that long-term future looks like, so that when you see the strategic moves that we make, you can understand them in that context. Understood. And your long-term objective for Datalinx is now 5% plus annual revenue growths. This is an improvement from your prior objective for low single digit growth. So, I guess what is giving you improved confidence Datalinx can achieve stronger growth potential? We have got a plan to deliver it. So it is not just confidence, it is - we wouldn’t put out that direction without knowing that we had a plan to deliver it. So under the leadership of Michelle Tran and Jay Rajarathinam, we have been building a growth plan around Datalinx. You see the results in the last couple years that we had some - we have had track record already in 4% to 7% growth over that period, even in a very tough market in 2022, I might add. And it is a combination of factors that help give us the confidence that we can grow this business faster. So, we do have some potential for pricing in there that we have actually been executing, getting approved and bringing to market. We have been bringing new products to the table, new bundled solutions, new analytics solutions on top, the pieces that we are doing around expansion with, again, things like Wall Street Horizon. When I talk to my comments, this is an organization that does corporate action and event data for 9,000 companies, most of them are not Canadian, and we actually have all those data sets on 3000 plus Canadian issuers that we can build in their product and also a substantially larger global sales base to sell that product towards. So in all these pieces, we are looking at how we actually add more product and sell them globally to accelerate that and we have got a plan for that business that gives us confidence that we can give you that direction. And lastly, on VettaFi, I understand what the benefits of the partnership is to launch new index products. So, could you please share the next steps in this regard, and how would that be complimentary to your current partnership with S&P? That is a really good question. So S&P is a fantastic partner on broad big name index and benchmark. So, we have got a long-term relationship with S&P for the TSX, S&P 60 those types of products. Where we are really focusing here is in what I will call even more special products, special indices, thematics. If we are trying to do something special around a sector or creating a custom index for an ETF provider, this is the capabilities that VettaFi brings the table with us and our teams together are already working on, what I will call the pipeline of the products that we are potentially going to bring to market. That started immediately, and we immediately put it into the objectives or our key people in terms of things that they are looking to deliver with that partnership. And so it is really that ability to go into the middle market of more custom product, sector indices, thematics, those types of things that this allows us to do, and it is complementary to the relationship we have with S&P. And similar - the partnership we are putting together is also a long-term relationship with VettaFi similar to our S&P relationship. Your next question comes from Graham Ryding of TD Securities. Please go ahead. Mr. Ryding, your line is open for questions. Sorry, I was on mute. Thank you. Just to follow-up on the VettaFi theme. Just to be clear, so any - you have a commercial agreement here. So anything incremental around new products or indices, how does that flow through, does that -- will that come through in your GSI data line, or will that still come through as sort of equity ownership in another entity? Yes, Graham. It is David. So primarily the piece related to the commercial agreement that is for our account will flow through our Datalinx business, so the GSI segment. But because we also own a 21% stake in VettaFi, we will also won the income from associates pick up our 21% share after tax of any of those benefits that they would record. Got it. Okay. That helps. Maybe I can start with Trayport then just you know could you just sort of give us some context here with volumes down 25% year-over-year? You are still seeing good growth in your subscribers. And just where is this trading moving to that is not going through Trayport right now, is it going to other markets around U.S. or Asian [LNG] (Ph) products that are not on the trading platform? Is that how the market is adjusting here? No. I mean, if you look at kind of our market share of the trade flows going through, it is not materially changed. So this is more of a pullback in the overall market activity in those products. Remember that the prior year was substantially more volatile and had higher levels of trade activity. So that is what you are seeing as a reflector of overall market activity. But what you are seeing with Trayport in terms of the subscriber growth and the new clients is that the solution is just becoming even more valuable to the users throughout that network. So is there any concern in your part here that if this volume decline persists that subscribers growth may start to wane somewhat, if energy trading is shifting to non-European markets? No. It is not a market shift. It is just like markets move in cycles in terms of activity, but there is not a concern there. Our bigger concern was more around health of clients within the Trayport community, when you had that level of volatility, pricing impacts, margin and balance sheet impacts. And we did see one client loss through 2022 on that basis, but nothing material. So that would be our bigger concern that we watch about around client health. But our clients continue to be in good shape. Okay. And I think you are rolling through a 7% to 8% price increase on Trayport for 2023. How does that compare to your CPI increase that was baked into 2022? So the increase in 2022 would have been in-line with what the Bank of England and Consumer Price Index movements, which was in the four-ish range. So that kind of gives you the delta year-over-year. Okay. Jumping to BOX. I noticed there was a decline in your revenue yield from BOX. It just seemed to drop down again, quarter-over-quarter relative to the volumes. Maybe just some commentary on what that is reflecting. Yes, Graham, it is David. It is the mix between electronic trading and or traded on the floor. As you know, BOX has one of the few trading floors pit styles. So, the revenue per contract is subject to fluctuations between the two. Got it. And then one last, if I could. Just it looks like the CSA is reviewing some market data, cost just both around the methodology used to gauge pricing for real time market data, but also just I think possibly broadening its regulatory scope to other areas of market data. Can you provide some sort of initial commentary in your position here and the potential implications of how this could impact your business? Yes, I mean, this is something that the CSA and the commissions within it have been looking at for years and years and years. And if - I will remind people that we actually operate the information processor on behalf of the industry that pulls all the different markets together for the use of the clients. One of the things that actually that we will be putting our submissions in there and providing substantial information and data with respect to market data structure and pricing in Canada and how it compares to the world. The initial report that we put out really only compared Canada to the U.S., which is not a fair comparison given the size of the US market to Canada. And if you take Canadian data rates and compare them to anywhere else in the world beyond the U.S., we are extremely competitive and we are going to be providing that information. The other piece that is in there is they do actually now show what is the potential total cost to a user of combining all the different Canadian markets. And what you will find interesting in that is that the TMX piece is less than half of that total, despite the fact that we are 65% to 67% of all the trade activity in our listed names, plus 94%, 90 5% top of book in terms of data quality for anything that trades on our markets. So there is a lot of cost in the industry and it doesn’t come from us, it comes from other venues. And when you look to the recommendations that we have made in the past around what markets should actually be protected and required to be purchased from that threshold is likely too low and we are going to be making some market structure recommendations around that. And also when venues were able to price and include the value of crosses in there that was probably a mistake because it allowed markets to actually pump pricing up beyond the value they were providing to the industry. So we are going to be providing a very fulsome solution and recommendation to this in terms of how to prove it from a marketplace. I don’t believe that it is a challenge for TMX in terms of the market data we provide, because it is high value, we continue to add more content and we are globally competitive. And just the response to that I would also give you is that we have had multiple price changes over the past year approved so, it doesn’t show an indication of a concern around TMX particularly, but there are opportunities to make the market structure and the cost for the industry more competitive. And we would welcome some of those changes. We think it would be very good for our clients. Yes thanks. I wanted to first just start on the cost side. So looking at the Q4 results on the IT and the SG&A line specifically, was there anything from like a true up nature in Q4 or should we look at that quarter as being consistent for our run rate in 2023? Hi, Jaeme. It is David. Yes, so when you look at Q3, you are right on the IT line, as with many businesses, Q4 for us is the end of the fiscal year, so a lot more project wrap up activity, so a little bit of that in there. And then obviously, you have noted it on SG&A, a material item between Q3 and Q4 is also the impact of the pound and the U.S. dollar strengthening. That was about a 1.5 million, because as you know we bring in BOX’s operating expenses, which are primarily U.S. dollar and obviously Trayport, which are primarily pound sterling. Okay. So, a little bit of a step down into Q1 should be expected, but maybe not that material back to let’s say like the mid 20s range. That is fair, Jaeme. I would say because in Q1, you are going to have base salary increases and things like that compensation and benefit resets in terms of payroll source deduction. So yes, net-net you are probably going to see consistency between the two quarters, maybe a slight step up. Okay, great. Shifting to capital formation and sustaining listing fees, forgive me if this is guidance you have already provided, but as we think about the market cap of issuers at the end of the year and some of the changes on pricing, where do you see that shaking out in terms of the growth rate versus sustaining listing fees in 2023 versus 2022? Sorry, I think Jaeme, we have indicated in the documents there that impact I think is around 600,000 when you take into account the change in the market cap of our listed issuers plus the increased pricing for the sustaining fee. The maximum fee. Okay. Great. Thank you. And then, shifting to the derivatives business, this has been a business that is targeting double-digit revenue growth. I guess since back in 2018 for the targets, it is a bit of a challenging to achieve that. I guess folks from contracts traded point of view and then also from a capture rate point of view driving the revenues higher. I guess what is going to give - what are the catalysts here that we should be thinking about that is going to get that business back up into the double-digit growth range? Is it simply like this is a muted environment for derivative trading generally from a contracts perspective, and not I will normalize or are there some other factors here? There is a number of factors there, and I will take the liberty of correcting you on one piece, Jaeme, that was a - 2021, was soft in terms of that derivatives - activity, but the number of years before that was sustained at that growth rate that we have been talking to. And the biggest challenge in 2021 was the impact of market interest rates and Central Bank rate changes that were substantially -. Alright. I’m going to first indicate that, no way of these teleconferences is connected to trading systems. So let’s just put that right on the table right now. So I don’t know how far I got into the derivative piece, but let me talk about the pros going forward into 2023. So number one, stable interest rate environment, that means much more strength in the short-term rate products like the backs, which were down kind of 30%, 40% last year. You have got market impacts there that are very good. We have got growth in the new products we have added, which are not mature yet. So more growth in the two year, in the five year in the long government bond and that is a deliberate piece in terms of the pieces we have talked in the past about rounding up the yield curve. And also when you get stability in the Central Bank market, it is going to be easier for us to build in the international markets that we have been doing over the last couple of years. So the long-term expectation of building our international trade in our core products 5%, 6% this year, but looking to more long-term objectives and be more 15%, those are pieces that are going to continue to build out. Now when you take all those components, they give us a lot of confidence that we are going to be able to grow the contract volume double-digit plus and allow the support for high single, low double-digit growth rate in the revenue. The other pieces in there that, you are starting to see more of is, things like strength in the CDCC repo product, which we do provide some statistics forward, that is sustainable growth in that product, which actually rolls through the revenue. And there are more things that we are going to be doing in the future in terms of adding net new product to both trading and clearing to continue to provide products that support the client needs. So those are all the pieces that give us confidence in terms of that continued strong growth rate. At this time, there are no other questions. So I will turn the conference back to Paul Malcolmson for any closing remarks. Great. Thank you, Michelle. Back in January, I told many of you that, I would be retiring from TMX at the end of this month and the details on succession plans would be shared on today’s call. So today, I’m very pleased to announce that Amin Mousavian will be succeeding me as Head of Investor Relations. Amin has been with TMX for 12-years, having worked both in parts of our business as well as on our finance team. Last year, he joined the Investor Relations team and is well-positioned to succeed. As you know, Amanda Tang has been on a maternity leave and will be returning to TMX towards the end of this coming summer. Julie Park will now be dedicating 100% of her to ESG and sustainability initiatives and reporting. And finally, I want to welcome Nina Bai to the IR team. Nina joined IR in December and previously supported both CDs and CDCC on the finance side. In closing, I do want to thank the countless investors and analysts that I have met, and for making the last 20-years such a real pleasure for me. To TMX employees, that might be listening in, thank you so much for all us being there to get us the timely information that we needed for the street. To John now as CEO and before that as CFO, you could not have been more supportive of me as a colleague and a friend, and certainly to our IR program and now, David is following exactly that same vein as CFO. So thank you both for that. Finally, I want to thank the IR team past and present. Many on this call have been around a while like me, so I want to mention the names that most of you will recognize. Joanne, Shane, Christine, Amanda, Julie, Amin, Nina, as well as some great interns over the years, and our securities lawyer, Catherine, always been there giving us wives counsel for the entire run. So thank you Catherine. These amazing and talented people have made our IR program what it is today. And now I know you will all really truly enjoy working with the IR team that Amin will be leading. With that, I wish you every success and all the very, very best. Let’s stay in touch, and have a great day, everyone. Ladies and gentlemen, this does conclude the conference call for this morning. We would like to thank everybody for their patience and participation, and we ask that you please disconnect your lines.

EarningCall_454

Thank you for standing by. This is the conference operator. Welcome to the Finning International Inc. Fourth Quarter 2022 Investor Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Greg Palaschuk, Executive Vice President and Chief Financial Officer. Please go ahead. Thank you, operator. Good morning, everyone, and welcome to Finning's fourth quarter earnings call. Joining me on today's call is Kevin Parkes, our President and CEO. Following our remarks today, we will open the line to questions. This call is being webcast on finning.com. We have provided a set of slides that we will reference during our prepared remarks. These slides are posted on the Investor Relations section of our website. And an audio file of this call will also be archived on our website. Before I turn it over to Kevin, I want to remind everyone that some of the statements provided during this call are forward-looking. Please refer to Slides 10 and 11 for important disclosures about forward-looking information, as well as currency and specified financial measures, including non-GAAP financial measures. Please note that forward-looking information is subject to risks, uncertainties and other factors as discussed in our annual information form under key business risks and in our MD&A under Risk Factors and Management and forward-looking disclaimer. Please treat this information with caution, as our actual results could differ materially from current expectations. Thank you, Greg, and good morning. When I started my career at Finning more than two decades ago, I knew I was joining a great company, and I am honored to be asked to lead our amazing team of over 14,000 employees, particularly as we celebrate our 90th anniversary this year. I cannot find enough about how our employees make it a pleasure to work for our company every day. We focus on keeping each other safe, while striving to deliver high levels of service to our customers, a meaningful outcomes to our partners and communities. Turning to our results, beginning on Slide two. 2022 was a strong year. We did an excellent job of controlling what we could, effectively deploying all of our resources through our great teams to support growth in all of our regions. We secured significant strategic wins, drove strong product support and continue to improve our earnings capacity. We delivered product support revenue of $4.6 billion, up 24% from 2021, well ahead of pre-pandemic levels. We did this while reinforcing our mid cycle cost and capital model which allows us to control SG&A as a percentage of net revenue to 17.7%. We also reinvested to compound our earnings and delivered record EPS of $3.25. We achieved these results through relentless execution of our strategy and the fantastic hard work of our teams. My transition to CEO is going well. Succession is an advantage and with my team we are very focused on execution and building on our current momentum. I've been talking to many of our stakeholders to ensure I understand that perspectives before we start to work on the refinement of our strategy. I don't anticipate any hard turns, but rather a simplification and prioritization of the current plans, whilst ensuring all of our employees are empowered and engaged in our strategy. We will be focusing on prioritized growth opportunities, performance through all market conditions and reinvesting in our business. Looking ahead to 2023, please turn to Slide three. Overall, we expect demand commission -- conditions in our end markets to remain constructive, supported by favorable commodity prices. Activity levels remained strong in mining, energy and infrastructure. We do, however, expect some softness in the construction market in the UK and Chile. We are mindful of the uncertainty in the global business in economic environment, and we will continue to reinforce our mid cycle operating cost and capital model. Our goal is to strengthen the resilience of our business through all market conditions. The team was focused on productivity and optimizing working capital levels and we will also thoughtfully manage our capital expenditures and we will be prioritizing further debt repayment, which Greg will provide more details on in a moment. 2023 has started well and we expect to continue to grow in the first half of the year. Despite strong deliveries in Q4, we have maintained our record backlog. We continue to execute on our product support strategy and we expect to see growth in component remanufacturing, equipment rebuilds and product support contracts in 2023. I'm confident in our ability to continue building on our execution momentum and I look forward to seeing many of our investors in the coming months to update you all in person. Thank you, Kevin. I'll talk about our fourth quarter performance in more detail, including regional results and outlook. I'll also speak to our capital allocation priorities for 2023. Turning to Slide four. Net revenue of $2.4 billion was up 34% from Q4 2021, led by mining deliveries in Canada and South America and strong product support growth rates in all regions. EBIT and EPS were up 36% year-over-year on solid revenue growth and disciplined operational execution. $0.89 of EPS was very strong, particularly considering that Q4 2022, so a $0.10 per share higher LTIP expense compared to Q4 2021, due to our share price appreciation of 39% in the quarter. Consolidated EBIT as a percentage of net revenue was 9%, led by strong profitability in South America at 11.4% and in Canada at 11%. These strong margins were achieved despite the high level of mining equipment and overall new equipment mix in Q4 and a higher LTIP expense in the quarter. Due to these factors, operating leverage in Q4 was lower than prior quarters of 2022. We generated $332 million of free cash flow in the fourth quarter and finished the year with net debt to EBITDA of 1.6 times, down from 1.8 times at the end of September. Given our organic growth opportunities, we invested in working capital to support our build-up of backlog and strong product support growth rates, resulting in a use of $170 million of free cash in 2022. We encouraged to see -- we are encouraged to see our service work in progress balances up 50% year-over-year, reflecting strong activity levels and our inventory health is very strong and of a high-quality. Our equipment backlog remains at record levels, up 35% from the end of 2021, driven primarily by mining wins and a notable increase in power systems order intake. Now please turn to Slide five. New equipment sales were up 52% compared to Q4 of 2021, underpinned by strong mining deliveries. Product support revenue was up 32% year-over-year, reflecting continued robust market activity in all sectors and strong execution by our regional teams. Approximately half of the increase was due to price and half due to volume, including the acquisition of Hydraquip in UK. We're pleased to enter 2023 with a record equipment backlog of over $2.5 billion, mining orders comprised over 40% of the backlog today, a significant increase from a year ago and power systems orders now represent 20% of our backlog, the strong activity and order intake in our Canadian Energy segment in 2022. Turning to Slide six for the details on our EBIT performance. Our gross profit was up 30% year-over-year on strong volume and product support and new equipment. As a percentage of net revenue, gross profit was up 80 basis points -- was 80 basis points below Q4 2021 due to a higher proportion of new equipment sales in the revenue mix and lower margin of mining equipment deliveries in Q4 of 2022. We are pleased with the improved annual earnings capacity, we've demonstrated for pre-pandemic levels with EBIT as a percentage of net revenue up 300 basis points, return on invested capital up 670 basis points, and EPS has nearly doubled from 2019 adjusted results. Moving to our Canadian results and outlook which is summarized on Slide seven. Net revenue increased by 28% from Q4 2021, driven by strong market conditions in Western Canada. New equipment sales were up 56% with higher mining deliveries contributing to most of this growth. Product support revenue was up 30% on strong market demand and continued momentum in our product support growth strategy in all sectors. EBIT as a percentage of net revenue was 11%, up 90 basis points from Q4 2021, driven by improved operating leverage. SG&A as a percentage of net revenue was down 190 basis points year-over-year. Our outlook for the Canadian business is positive, given the strength in mining and energy sectors in Western Canada and we expect that to continue in 2023. We expect constructive commodity prices and improved capital budgets from customers to drive investment in renewal of aging fleets and product support opportunities in mining. We are pleased to see our mining customers committing to comprehensive rebuilt programs to extend the life of their assets and we expect strong growth in rebuilds in 2023 compared to 2022. In construction, demand for equipment, rental, and product support is expected to remain healthy, supported by ongoing infrastructure projects. While we are seeing signs of slowdown in forestry and residential construction, these markets represent less than 5% of our Canadian business. Power systems, high activity levels from our energy sector customers are driving a notable increase in order intake. Our power systems backlog and activity levels in Canada are now at the highest level since 2014. Turning to South America on Slide 8. In functional currency, net revenue increased by 34% from Q4 2021, driven by strong mining activity. New equipment sales were up 54% in functional currency on high mining deliveries in Chile, including catch-up of delayed backlog deliveries from Q3 of 2022. Product support revenue was up 25% functional currency, the strong overall demand and higher volumes from new and expanded mining product support contracts. South America's EBIT as a percentage of net revenue was 11.4%, up 130 basis points from Q4 of 2021, driven by revenue growth, improved cost structure and service productivity, as well as the favorable impact of Chilean peso devaluation. ROIC in South America was 24.5%, the highest on record, up 420 basis points from 2021. Looking ahead, we expect a strengthening copper price to continue to support positive mining outlook in Chile. Our recent wins and continued investments in fleet replacements across our mining customer base are expected to drive mining sales in Chile this year. We also see continued strong demand for mining product support and technology solutions. Construction activity in Chile is projected to decline in 2023, impacted by slowing economic growth and higher interest rates. We continue to monitor the process for approval and revised mining royalty proposal. We are encouraged by the latest moderation in the proposal. However, we expect the timing of investment decisions related to greenfield and new expansion projects to remain uncertain until the new royalty proposal is finalized and approved. We are pleased with our high quality, high return business in Chile and we are optimistic about growth opportunities in mining. We believe Chile will remain an attractive place to invest long term, as electrification trends drive growing global demand for copper. Please turn to Slide nine for our results in the UK and Ireland. Net revenue was up 38% in functional currency on increased volumes across all lines of business. Fourth quarter saw a high-power systems project deliveries, higher HS2 deliveries and strong product support activity across all sectors compared to Q4 of 2021. EBIT as a percentage of net revenue was 4.4%, just slightly above Q4 '21 levels. UK and Ireland delivered ROIC of 17% in 2022, up 220 basis points from the prior year, reflecting strong revenue growth and structural improvement in profitability, including the acquisition of Hydraquip. In 2023, we expect lower construction new equipment sales in the UK, compared to 2022. We have largely completed equipment deliveries to HS2. In addition, slower economic growth rates are expected to impact broader construction activity. However, we expect strong demand for product support to continue, driven by HS2 activity and high machine utilization. We also have a solid backlog of power system projects for delivery in 2023. And we expect demand for our Power Systems business in UK and Ireland, including the datacenter market to remain robust. As Kevin mentioned, we are seeing continued momentum to start 2023 and expect growth in the first half of the year compared to the first half of 2022, underpinned by our record equipment backlog, very busy workshops and growth in rebuilds driven by our strong execution of our product support growth strategy. While we expect demand conditions to remain constructive in 2023, we are mindful of the uncertain global business environment, including slowing rates of economic growth. We are reinforcing our mid cycle operating cost and capital model and reducing our 2023 capital expenditures budget by about 25% in 2022. We expect our 2023 net capital expenditure and rental fleet additions to be between $190 million and $240 million. We will be allocating a higher proportion of capital to rental fleet and strategic investments in electric drive mining trucks for demonstration at customer sites. In 2023, we will be replacing higher priority on debt repayment and further reduction of our net debt to adjusted EBITDA ratio. In summary, we're really pleased with the record results demonstrated in 2022. We have great continuity and momentum as we start 2023. We will continue to work to improve the resiliency of the earnings capacity for our business. Before I turn it over to Q&A session, I would like to invite everyone to attend our Investor Day and Tour of our Chilean mining operations in Antofagasta during the week of September 25. We'll be providing more details on this event in the coming months. We hope that you can join. In the meantime, Kevin will be doing additional marketing in the second quarter to share his views and plans for Finning's future operator. Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jacob Bout with CIBC. Please go ahead. So, you're outlining some softness in the UK and the Chilean construction markets. From a revenue perspective, would that be what roughly about 10% of revenues? And then, how do we think about that from a mix, new equipment versus product support, will it be similar to the rest of your business or a little more skewed to new equipment? Sure. So on the construction side, I mean, it's in -- it was one in 10, 15 year project with HS2 and the level of deliveries. It was about GBP200 million over the last two years. So that piece won't repeat. There still is very solid business in -- particularly in quarry in aggregates and on the power side, so that can offset some of that. That would be the UK case side. Chile would be somewhat similar. We are seeing declines in the market, but we will obviously push for share where we can. So I won't give an exact number on that, but certainly on the construction side, which is a smaller part of that business, we are seeing slower growth. We do think mining is more than picking up at the time in South America. And so from a mix perspective, I think mining will more drive the equation there. And we expect continued momentum on both new mining equipment and product support in 2023. Okay. And maybe trying to square your comments about reduction in CapEx versus H1 2023 being a little stronger than H1 2022. Maybe just comment on your duration of backlog? And then is the expectation a slowdown in the back half for the year? So from a backlog perspective, it's quite evenly distributed. As we discussed last call, lot of the backlog additions in the back half of this year, for the back half of next year, that would include BHP and others. And so, it's a great way to start the year when you've got your LTM sales and backlog and it's pretty distributed throughout the year. So we feel solid about that. Just wanted to follow up on that line of questioning, so the backlog evenly distributed throughout 2023. So the bulk of it gets recognized this year? And the follow-on to that would be, when you were putting your outlook together, I mean, why not comment on the back half of the year? Is it just that you don't have the visibility that far out? Yeah. So, Yuri, it's Kevin here. So we expect around 90% of the backlog deliver this year, but we are seeing some orders moving to 2024 now. I think that maintaining the backlog after the strong equipment deliveries is a really encouraging sign. But I've been around long enough to know that January is the reset month, particularly given there are macro uncertainties out there. So we've being very thoughtful about how we think about the second half of the year, but I would say that our strategic focus around the initiatives, around winning strategically important business, growing market share. And if you think about what product set this week about, you know, supply chain is improving as we move through the course of this year. That gives us some optimism as we move through the year. And so, I would say that we come back to work this year encouraged, but thoughtful about the second half of the year, but as every week goes past, we get more encouraged. Okay. And can you just comment on the outlook for product support for this year and whether you're expecting growth for the full year in 2023 versus 2022? And that'll be my two. Thanks. Yeah, sure. So absolutely, we expect growth in 2023. We expect growth because we have market share opportunity. We expect growth because it's a key pillar of our strategy, along with that of Caterpillar. And we've got the [minds] (ph) of both organizations focused on executing there. I think our track record over the last two years reinforces our execution capabilities in that regard. So we remain relentlessly focused on that. It's a critical value driver in this company, and we expect a strong year this year. Just given your positive outlook, how do you feel about your inventory levels? They are a bit elevated, but do you think you will need to build inventory through the year to meet ongoing demand if it materializes continuously? Yeah, we're certainly pleased to have been able to get our hands on inventory in a tight environment. Really big driver of that is our ability to build an effective backlog. So when you got $2.5 billion of backlog of which we just highlighted 90% dedicated for this year and we're still selling, that's a good spot to be. And so it's a highly committed set of inventory. So we feel really good about that, the high quality aging profile is excellent. And so we feel good about that dynamic and we feel like we've got sufficient to support that backlog. So we feel like we're in pretty good shape here. Yeah, just to reinforce, the quality of the inventory is a very high standard and the proportionate committed inventories is high too. So for sure, we have some safety inventory around us to be able to support our customers and we're confident we're going to be able to continue to support our customers. As the supply chain dynamic continue to improve, you'll see some normalization there, for sure. Understood. And then just with regards to the CapEx and rental fleet, additions decline, you mentioned adding our -- higher proportion going towards rental fleet additions, is the overall level going into rental fleet is declining or do you still see a strong demand there? Yeah. So it would be -- it's a little more than half of our allocation this year, which is a bit of a shift in percentages from history. And so, it would be up year-over-year and above half of the CapEx allocation. I know you touched on it, but maybe could we just get an update on supply chain? It seems like things are improving. Is it widespread across all products? Or are there still pockets that are challenged? Yeah, no, I describe the supply chain is dynamic and it's different by product. It's different -- a little different by geography as well, because of the specification of certain products. Obviously there are additional challenges to our shipping times to our Chilean business. So it's a very dynamic environment and we've got everybody focused on using all the resources available to maximize the opportunities and support our customers. So, we have resources and capabilities and we -- our role is to manage the dynamics of the supply chain and support our customers. I think ultimately it will get better as we go through the course of the year, but I think you can see from our revenues and our earnings, Bryan, that we're not complaining about supply chain. We're using the minds of the organization to push through it. Thanks, that's helpful. And then, what's the appetite like for external growth opportunities similar to Hydraquip and 4Refuel or do you see opportunity to expand those platforms? Yeah, I think for sure, with Hydraquip, we've added to that business since we bought as we have with for 4Refuel. So they are two excellent platforms. As I mentioned previously, I'm still in listening mode really with our stakeholders and we're about to embark on our prioritization of the strategy, which we'll communicate later this year, which will give some indication as to how we see the growth levers in the company, whether they are organic or inorganic, but we really like those two platforms. This growth in those platforms, both organically in the regions they operate, but also internationally as we expand them out. And we will always consider the right acquisitions to continue to build our addressable market, the penetration of that addressable market. So we're not -- I don't want you to take away that the business is on pause. It absolutely isn't. We are now fully focused on execution around our core business and the acquisitions that we've made. And we're going to embark on this pretty quick review and enhancement of the strategy that's working today. And I would be very surprised if there wasn't more organic opportunities coming out of that work. Great, thanks, and good morning. We've been getting a lot of questions on this space and the future evolution of product support and what a recession maybe does. Does it make increased as a decrease, given some of the trends we've seen in that business recently? Is there any commentary based on your current visibility on how you expect the mix of product support to evolve as maybe the backdrop evolve somewhat? Sure. As you can tell, it's been a bit of a unique relative to history mixed situation where product support is growing faster than new and pretty healthy up cycle conditions. So that's been a bit unique. So I do think it depends on how supply chains normalize through any potential down cycle. But the common denominator is that the product support business an excellent business as you can see, we're seating a lot of equipment in the field, which is great, and these are high intensity product support applications. And so we feel like we're doing a good job of increasing the population and when that equipment goes to work at mines or infrastructure projects it generates product support full cycle. So we're pleased with that dynamic. So, be kind of dependent on how supply chains normalize, but we'd expect product support to continue to play a very significant role even through a challenging market. I guess, it's hard to track. I mean products support is just more resilient than new equipment. And so that -- hence one of the reasons why we've been focused on growth in that area. With that said, we're all pleased as well with the refresh and some additional population that we're seeing going into -- particularly into the mining business, but also into the energy sector as well. Okay. Great. And then just my second one, obviously, the weakness on the construction side in Chile, it's been called out by you guys and the OEMs as well. I guess, if we just think over the next 12 to 24 months, we've seen a lot of the issues that have caused that slowdown, those make sense, but if the commodity market stay strong, is there potential for that construction site in South America to potentially pickup? Is it a pause or do you think it's maybe just bigger cycle that's slowing down on the construction side there? Yeah. I mean, I think it's just been a bit of a slowdown here when interest rates go as high as they have down there. And the cost of new equipment has increased and the pesos devalued, it's a challenging decision to make new. So we've seen high utilization hours on existing fleets. We're also seeing the current government delays some decisions which doesn't catalyze a lot of extra new equipment. So, we think with some clarity that we think is coming across mining, but also broader infrastructure and maybe some normalization of rates here, I think that can see a bit of a pickup. So it's not a sharp slowdown, but it's not a growth area. But you can see a line of sight to that improving over the next 18 months. Yeah. And I think, only thing to add to that, I've read in the UK. When we are suggesting slowed down the UK, you have to remember that we're coming off a huge higher delivery and a massive infrastructure project as well. So when I spent time talking to the teams in the UK, it doesn't feel like they're working in a slowdown environment right now, but it is moderated on last year for reasons of the huge project we delivered. This concludes the question-and-answer session. I would like to turn the conference back over to Greg Palaschuk for any closing remarks.

EarningCall_455

Ladies and gentlemen, good afternoon. It is a pleasure to welcome you all to the presentation of Equinor's Fourth Quarter and Full-Year Results for 2022 and our Capital Markets update. My name is Bård Glad Pedersen, I am since December last year, heading up the Investor Relations team in Equinor. We have looked forward to engage with you all, and I will soon take you through the program for today. But safety first, if an emergency situation occurs while we are here, the evacuation signal is a voice announcement. We will only evacuate if the announcement say that we should do so. Then please follow the marked fire exits and the instructions from the guards, exiting is at the ground floor, and venue staff will show you to the assembly point. Today we will have three presentations here in the plenary session. First of all, it's Anders Opedal, our CEO; then our EVP for MMP, Irene Rummelhoff will present before the session is concluded with Torgrim Reitan, our CFO. After the presentations, there will be Q&A session where the three presenters will be on stage and also the CEC is here and available to respond. Following that, you are all invited to join us for our lunch. And for those of you who have signed up, there are breakout sessions with the EVPs for EPN, EPI, Ren, MMP, PDP and TDI afterwards. They will all give short introductions and ready to answer your questions. Finally, let me remind you that all the presentations here today are subject to the forward-looking statements that are included. Thank you, Bård and it's really good to see you all and to me is a pleasure to welcome you finally here in London for our Capital Markets Update. And I and my team, we are really looking forward to share our financial results and the progress on strategy and ambitions. 2022 was our special year. The war in Europe still causes human suffering and has disrupted the energy markets contributing to inflation and cost of living crisis. In Europe, this year marks a shift as we move forward, not relying on Russian oil and gas. Equinor responded quickly and we are well positioned to be a part of the solution. Short-term, deliver the energy needed, longer-term to build up sustainable energy sources contributing to energy security and decarbonization. Our milestone this year is the start-up of the Dogger Bank, the world largest offshore wind farm here in U.K. This leads me to the topic of the day, how we will deliver strong returns through the transition. Our strategy remains firm creating value on the way to Net Zero. We are progressing on optimizing oil and gas, high value growth in renewables and developing market opportunities in low carbon solutions. Position for high value creation, we expect a strong and resilient cash flow. In a $70 Brent scenario, we expect to deliver a very strong cash flow from operations. On average around $20 billion after tax annually all the way to 2030, we estimate an annual return of capital employed above 15% towards 2030. This strong outlook annually $20 billion after tax and solid financial position funds increased capital distribution and continued investments in profitable projects. For fourth quarter 2022, we step-up our capital distribution and propose a 50% increase in the ordinary cash dividend through $0.30 per share. In combination with extraordinary dividend and share buyback, we expect a total distribution to shareholders of around $17 billion for 2023. I will revert to this, but let me first present our results. On safety, we have achieved improvements on key indicators over several years. Our serious incident frequency of 0.4 was stable from 2021, the best level ever so far. We had no serious well controlled incidents and hydrocarbon leakages are down. Total injury frequency was 2.5. We continue with our clear goal, all our people returning safely home from work every day. Last year, we enhanced security within cyber and for our assets, stricter security protocol, more training and closer collaboration with authorities, all of this to safeguard our people, operations and security of supply for our customers. Sustainability is all about making progress for society. We are committed to creating local value and equal opportunities and protecting the environment. In 2022, we responded to the energy security situation by boosting our gas production and shipping more crude to Europe. I'm really proud of the hard work from colleagues to ensure safe and efficient supply of energy. This is a true team effort. And during the year, 2,600 new colleagues joined Equinor replacing and renewing competence, demonstrating our attractiveness in a tight labor market. Last year we delivered strong operational performance, five new fields on stream at a capacity of more than 200,000 barrels per day, around half of this from Johan Sverdrup Phase 2. In addition, we have put our floating wind farm, Hywind Tampen in production on NCS. We delivered net operating income of $79 billion and adjusted earnings of $75 billion. This clearly demonstrate our ability to capture value from high prices and volatile markets. Our free cash flow before capital distribution came in at $32 billion. The earnings brought -- this earnings brought return on capital employed to 55%. Across the portfolio, we have progressed on projects to reduce our own emissions. Our CO2 intensity ended at 6.9, well below half the industry average. We're progressing our projects for decarbonization with CO2 transport and storage, including the Smeaheia license on NCS awarded last year, we have acreage to store around 30 million tons CO2 annually. Our strong cash flow outlook, continued capital discipline and robust balance sheet is the basis for the increase in capital distribution. To me, it is important that the step-up provides highly competitive distribution for 2023 and increased predictability and commitment in the long run. The board proposes a 50% increase of the ordinary cash dividend from $0.20 to $0.30 per share from the fourth quarter. Our dividend policy remains firm. We expect to increase the annual ordinary cash dividend in line with long-term underlying earnings now from a higher base. In addition to the ordinary cash dividend, no above pre-COVID levels share buyback are an integrated part of our ordinary capital distribution. We continue the program we introduced back in 20 June, 2021 of $1.2 billion per year. The record earnings last year and our strong financial position also enables extraordinary distribution to shareholders in 2023. We propose an extraordinary cash dividend of $0.60 per share for fourth quarter. This will bring total quarterly cash dividend to $0.90 per share subject to AGM approval. The board is clear in its intention to maintain this level for the first three quarters of 2023. In addition, we propose an extraordinary buyback of shares of $4.8 billion, making it $6 billion for the year. In total, this leads to a capital distribution to shareholders of around $17 billion in 2023. We are in a unique position to create value, providing energy, security and decarbonization. On liquids, gas and power production. Our liquids, gas and power production is high, but far exceeded by the volumes we sell and trade. Last year we sold more than 800 million barrels of liquids, a 100 BCMs of gas and traded more than 175 terawatt hours of power. We optimize and create value from production, our infrastructure, and the volumes we sell and trade. On top of this, we will provide decarbonization through CCS and hydrogen. We leverage our fuel portfolio as we seek to develop new value chains with industrial partners and customers. Going forward, we are set to continue capturing high value from volatile and tight markets. On back of this, we increase our guiding for marketing midstream and processing by 60%. Creating and capturing value across our business, we estimate a free cash flow over the four years to 2026 of around $25 billion. We will continue to develop our profitable oil and gas portfolio. Last year we sanctioned 13 projects adding around 600 million barrels in reserves. We keep on exploring with around 35 exploration wells planned this year. In 2023, we estimate a 3% production increase. By the end of the decade, we expect the production to be on par with today, while delivering a 50% reduction in our emissions. The estimated production will secure long-term supply of gas from NCS to Europe. We expect the average annual production to be above 40 BCMs throughout the decade. And our pipe gas to Europe have less than one-fifth of the CO2 intensity compared to LNG imports. Our Norwegian portfolio is the backbone of the company and we continue developing assets, increasing value creation. Internationally, we have further focused our portfolio with a clear mindset of value over volume. Kjetil and Philippe will show you how our Norwegian and international portfolio are set to deliver strong cash flow to 2030 and beyond. Our oil and gas business is robust and cash flow neutral at around $30 per barrel, and we continue to improve. Our projects in execution have reduced costs since investment decision despite inflation. Here again, Irene will talk about execution excellence and how we manage cost and create value through technology implementation. Across the fuel company, including renewables and low carbon solutions, we plan to invest $10 billion to $11 billion in 2023 and around $13 billion annually from '24 to '26. No company including Equinor is shielded from the inflation and cost pressure in our industry. Capital discipline and cost management is high on our agenda and we take firm actions. We use flexibility and optionality in our portfolio. We collaborate closely with suppliers and we use new technology to reduce cost and increase production. From this year and until 2026, we expect unit production costs for oil and gas below $6. We continue to work to manage cost and mitigate inflation and Torgrim will provide more details on this. Profitability is at the core as we grow in renewables, this is demanding and will require discipline. As history shows, we have one bids at price level supportive of value creation, also making us more robust towards impairments. Our California leads serves as a new demonstration. Our farmdowns have been at high price levels capturing the benefit of early access. We maintain our expectation of projects return of 4% to 8% real. As projects start production, power generation will grow rapidly and we have the optionality to prioritize the projects bringing the best returns. We expect to grow our annual production from the 1.6 terawatt hours today to between 35 and 60 in 2030. Pål and Helge will show you how we will further increase value creation from this. We remain firm on strategy, but flexible on execution and continue putting value over volume. Equinor has safely stored CO2 for almost 30 years at the Sleipner field. We introduced low carbon solutions as the part of our corporate strategy in 2021. Since then, we have made strong progress. We are taking the lead in developing the North Sea as a hub for commercial carbon storage. And we are on track to store 15 million to 30 million tons CO2 per year by 2035. For our projects and plants in Europe and U.S., the recent policy developments will strengthen the commercial potential. We see growing interest from -- in CO2 storage and hydrogen from industrial customers. Irene will give more details, but let me share a few highlights. Last summer, Northern Lights on Norwegian Continental Shelf signed the first commercial agreement. In U.K. our East Coast cluster was shortlisted in the government clustering process. And in January, we announced a corporation with RWE in Germany for energy security and decarbonization. Together we aim to help Germany transition from coal to gas to low carbon hydrogen and finally hydrogen from renewables. We are collaborating on new value chains in several industrial clusters. By 2035, we aim to have three to five clean hydrogen projects. The energy transition will be demanding with difficult dilemmas. We believe in a balanced transition and Equinor was solved for treating, reduce emission for ourself and our customers, build-up new energy sources and secure reliable energy. We will work hard to deliver on this, but at the same time, create value for shareholders and society. We continue to cut emissions from operations. Since 2015, we have cut almost 30% of our emissions on the way to net 50% reduction in 2030. The share of gross investments in renewable and low carbon is on track to our 30% share by 2025 and progressing towards with more than 50% in 2030. We are also progressing on our energy transition plan and remain committed to the ambition of Net Zero. So let me sum up. We are uniquely positioned to create value and strong cash flow on average around $20 billion after tax per year towards 2030. We reaffirm our commitment and step-up capital distribution while investing in our profitable portfolio. We can deliver the energy needed while driving the transition to a low carbon future. So thank you everyone for the attention, and I look forward to the questions later. But first, Irene, happy birthday, and the floor is yours. Just hoping to keep that a secret. But there you go. Well, thank you, Anders, and it's really good to see you all. I'll cover three topics today. I'll share some reflections on the gas market, then I'll explain why we upped our guidance. And then thirdly, I'll talk about and convince you that we're uniquely positioned to develop low carbon value chains. So first, the gas market. You all know what happened to the Russian volumes last year and how Europe managed to replace them through increased exports from Norway, severe demand reduction, but also very costly LNG imports. Lately, we've seen some relief, a relief that is directly correlated to the fact that we're in the midst of one of the warmest winters on record in Europe, and we actually saw demand reduction at 32% in January. So now the gas market is all about preparing for next winter. And we do believe that it's likely that storages will be built come November, the EU target or above 90%. But that requires continued demand reduction and high LNG imports levels. However, real relief will only come into this market beyond 2026, when we expect significant volumes coming in from Russia and Qatar. So in the meantime, the market will remain fundamentally tight and nervous, as my boss said earlier today. And I think there may be the three most or the biggest uncertainties to watch out for our weather, weather in Europe, weather in Asia, we saw how impactful that was this winter. Then it is also quite interesting to see whether for instance, industrial demand will come up again, now that we've kind of landed at a dampened level. And the supply interruptions is always something to look out for, particularly in such a tight market. Going forward, we expect massive investments in renewables. If you couple that with the rapidly changing weather patterns, you will need energy storage. And the call up on flexible gas is expected to be significant. And I think a very illustrative example is what happened in Germany this winter. Between a cold day in December 13 and a warm and windy day on January 4. The difference in store -- between storage injection versus withdrawals were 260 million cubic meter. And that's actually equivalent to all the gas that we export from Norway on a normal day. Volatility is something that me and my team, we've talked about for quite some time. We expected it, and we have prepared for it. Back in 2019, we changed our GAAP sales strategy, and we're basically now selling all our gas on spot indexation meaning that we can capture volatility and price spikes like the one we saw in August this summer. And I also do hope that you have seen how we are working hard to mature these low carbon value chains and we do attack four elements in parallel and I think maybe that's a little bit of a differentiator with respect to us. We work on the upstream production and storage. We work on the transportation and infrastructure, we work on the customer side and also the political support in parallel. If you don't do that, you will not succeed. So, thank you for your attention and Torgrim, it's your turn. So thank you very much, Irene and thank you all for joining us today. It is very good to see you again and it is very good to be back as CFO in Equinor. Since my last time around, a lot has changed, but one thing remains constant, value creation is our top priority. After safety, this is the first priority and it is always more important than the volume targets. So coming into this role, I have two main priorities. First, that Equinor steer safely through volatility and through these uncertain times and commode as a stronger company. And second that we continue to be a leading company in the energy transition and deliver cash flow and creating value for shareholders. Our robust balance sheet and strong cash flow outlook position us well to transition in an investor-friendly way. In 2022, we had solid operations and we contributed to energy security and at the same time we delivered a record returns and cashflow from operations. We stepped up or capital distribution and we invested more than ever in the energy transition. So this result does not come for free. My colleagues in Equinor have made significant improvements over the past years and we are all benefiting from that. So we're in a good position and we have a strong balance sheet, but in times like this we need to prepare for lower prices and drive costs and capital discipline. So I will walk you through our financial framework after I've taken -- talking to our results. So in the fourth quarter and full-year, we saw solid operations from oil and gas, against this dark backdrop of the Russian War on Ukraine, we completed or exit from Russia, the flexibility of our gas fields on the NCS enabled us to deliver more gas to Europe. However, in the fourth quarter we reduced our gas position, gas production since gas demand fell. So we will produce this gas in later periods with higher demand. But this reduced production in the quarter by 48,000 barrels per day. Snøhvit produced for the full quarter, Johan Sverdrup Phase 2 and Norge Norway started up and Peregrino in Brazil ramped up. Power generation from renewables came in 6% higher for the full-year in addition to our renewable assets in operations. We are now generating power from gas from the Triton Power Station. For the full-year, we had a record net operating income of $79 billion, $79 billion and we delivered unprecedented adjusted earnings before and after tax. In the fourth quarter, we continued to deliver strong results and net income of $7.9 billion and adjusted earnings after tax of $5.8 billion. So Equinor, we are not shielded from tight markets and inflation. We do see a growth in our OpEx and SG&A costs and the underlying increase is masked by the strengthening of the Dollar. So I will come back to how we are addressing costs. With the strong results from the U.S. business and the expectation that income will be taxable in a few years. We cannot recognize a deferred tax asset in the U.S. of $2.7 billion. We have net impairment reversals of around $1 billion in the quarter, mainly related to Mariner driven by an optimized production profile and higher prices. So let me turn to the segments. In the quarter on Norwegian Upstream business continued to deliver strong adjusted earnings before tax of $14.6 billion. Our international business excluding the U.S. had solid earnings driven by Peregrino ramp-up. The U.S. business also delivered solid earnings. However production there was slightly lower due to a major planned turnaround on Caesar Tonga. Within MMP, we continue to see very strong results as you heard from Irene from gas and power sales and trading. We had negative derivative timing effects for the quarter and without those adjusted earnings for MMP would have been positive $1.8 billion, which is well above both the old and the updated guidance. The negative derivative effect is mostly within the 78% tax regime, which leads to a positive earnings of $1.9 billion after tax for MMP. And finally, we continue to build our renewable business and in this phase, we see a negative adjusted earnings. Our assets in operations have a positive contribution of $37 million up from $28 million last quarter. And then cash flow, for the full-year, we delivered record cash flow from operations of almost $84 billion and after subtracting taxes, including the additional tax payment last quarter of $10 billion and subtracting investments and capital distribution, we delivered a net cash flow for the year of around $23 billion. For the year, we had organic CapEx of around $8.1 billion, which was somewhat below our guidance, mainly due to phasing of project activity and currency effects. Based on the strong cash flow, our net debt ratio is further reduced to negative 23.9%. As you know, this is impacted by the lag in tax payments on the NCS. During the first half of 2023, we will pay three tax installments related to the NCS of NOK 54 billion each which is lower than indicated last quarter, and this is due to the recent reduction in gas prices. So let's move on to our financial framework. We have four important boundaries for how we will develop our company and how we want to drive capital discipline. First, we have value over volume, very, very important. Return on capital is key, and we expect to deliver on average, more than 15% for the period towards 2030. Secondly, as solid balance sheet is the basis for all good risk management, and we maintain our guidance of a long-term net debt ratio of 15% to 30%. And then thirdly, our industry is cyclical, and we must be prepared and we will remain robust in a $50 environment. And lastly, of course, we will transition with force in line with our energy transition plan. So within this framework, we expect a very strong cash flow over the next decade. Cash flow from operations after tax of around $20 billion per year on average. So we will use this cash flow to create shareholder value. And we will allocate capital towards a competitive capital distribution. We will reinvest in our oil and gas activities in an attractive project portfolio with an average breakeven of $35 per barrel. And then we will continue to invest and grow in our high-quality project portfolio within REN and low-carbon solutions. So this financial framework is, as you understand, very important for us when we prioritize our spending going forward. Our capital distribution is a central part of our investor proposal, and this is important to us. The step-up is based on our outlook for strong returns and cash flow. The Board of Directors, they have proposed a 50% increase in the ordinary cash dividend to $0.30 per share per quarter, up from $0.20 last quarter. So we expect to increase the annual cash dividend in line with the long-term underlying earnings, and now from a higher base of $0.30 per share. In addition, we remain committed to the share buyback program we introduced in 2021 with share buybacks of $1.2 billion annually as part of the long-term capital distribution. This project is subject with the same conditions we set when it was introduced. We will also continue with an extraordinary cash dividend with an additional share buyback in 2023. The extraordinary cash dividend will be $0.60 per share for the fourth quarter, making total cash dividend $0.90 per quarter. Our clear intention is to continue with this level for the following three quarters. The additional $4.8 billion in share buybacks brings the total program to $6 billion for 2023. So in total, our capital distribution for 2023 is $17 billion, up from $13.7 million last year. The first tranche of this program of $1 billion will start tomorrow, and that will be based on the existing approval that we had from our Annual General Meeting. So as you understand, capital distribution is important to us. We are set to deliver a strong free cash flow of around $25 billion towards 2026 in a $70 reference case that is the free cash flow. This cash flow has both longevity and is resilient towards lower prices. As you can see, our company will be cash neutral, cash flow neutral at around $50 per barrel, meaning that cash flow from operations will cover planned investments at those prices. From '24, more than half of our CapEx will be linked to our non-sanctioned projects giving us significant flexibility going forward. We expect to increase our investments in both oil and gas and in renewables and low carbon solutions. I started out with one of my key priorities to ensure that Equinor steered safely through uncertain times and volatility. So this will require strong cost and capital discipline and we are prepared. The picture of Johan Castberg is no coincidence. In 2014, in times of high cost pressure we postponed Castberg rework the concept and reduced CapEx by 50% -- by more than 50%. We do the same today and that is why we decided to postpone the large Barents Sea development Wisting. So we will continue to improve a mature Wisting to make it even better and more robust. To build resilience, we need portfolio flexibility, and we need to execute project efficiently. And as a large operator with a strong investment program, we have exactly that. We set out on a $4 billion improvement ambition from 2020 to 2025. I'm glad to announce that we have already delivered three years ahead of schedule. So this was driven mainly by production optimization and utilizing our integrated operations center. In 2022, we saw an increase in unit production cost to around $6 per barrel driven by higher energy costs and CO2 prices in addition to Peregrino and Snøhvit coming back online. So we expect to be able to maintain at that level or lower towards 2026. We are working strategically with suppliers to drive efficiency across projects and using standardization to ensure pace and scale. So this has delivered more than 5% lower project facility costs and more than 45% lower drilling costs compared to peers. So we will continue to drive improvements Hege and Geir will speak more to this in the breakout session. And now to our oil and gas project portfolio. Our projects coming on stream over the next 10 years will create large value, low break evens of around $35 per barrel, high returns of around 30% internal rate of return, short payback time of around two and a half years and a low-carbon upstream intensity of less than 6-kilo per of CO2 per barrel, which is less than half of the global industry average. So through this portfolio, we will deliver strong production and cash flow to 2030 and beyond. We will reduce Scope 1 and 2 emissions by 50%, while we are doing exactly that. So we sanctioned many projects in 2022, and this portfolio is to a large extent protected against inflation with contracts already awarded. Our non-sanctioned portfolio is more exposed to cost pressures and changes in supplier markets. So we will continue to work hard to mitigate these pressures. And rest assured, we will not sanction projects that are not good enough just to drive growth. We are investing to create as much value as possible. We have an extensive portfolio of renewables and low carbon projects. We see significant synergies for them to be part of Equinor. First, with access to our strong balance sheet, we can reduce funding costs. We can warehouse risk and we can take on merchant risk. Also, working closely with our marketing and trading business will lift returns. And finally, we have, of course, deep competence and execution skills that these projects will capitalize on. So we will maintain a disciplined approach, and we will focus on value over volume, and Pål and Helge will go into this later. And by the way, I hope you saw Monday's news on Dogger Bank D, where we together with SSE are looking into a fourth phase of the world's largest offshore wind farm. So let me conclude. We expect to invest $10 billion to $11 billion in 2023 making CapEx for '22 and '23 slightly lower than what we said last year. For '24 to '26, we expect annual CapEx of around $13 billion. Important to note that CapEx will be back end loaded in that period. The CapEx program is driven by stable investments within oil and gas. Growing CapEx in renewables and low carbon solutions and that we intend to use our balance sheet more within renewables as sort of there is an increasing value in that. So that is the driver behind the CapEx program. In 2023, we expect to deliver 3% production growth in oil and gas. Towards '26, we will continue to grow production, and in 2030, we expect production to be on par with where we are today. So finally, I hope we have shown you how well positioned we are to transition and create value in an investor friendly way. First, we will deliver strong cash flow and returns over the next decade. Secondly, we are committed to our competitive capital distribution. And thirdly, we will lead the way in the energy transition. And all of this will be done within the -- a firm financial framework that we discussed just a few minutes back. So thank you very much for your attention. And then Board, I would like to hand it back to you to help us through the Q&A. So thank you. Thank you, Anders, Irene, and Torgrim. We are then ready to start the Q&A session. The Q&A is reserved for analyst investors here in the room, but also those participating on the phone. And to make sure that we have time to cover as many as possible. I ask that you limit yourself to one question each and that you try to keep that crisp. I also ask that you introduce yourself at the start of the questions. So then we can start here at the front, and then we'll make a list. Hello. It's Martijn Rats, I'm with Morgan Stanley. I wanted to ask you about the European gas markets, if I can only limit it to one topic. So last year, so part of the incremental gas supply from Norway to Europe was at the expense of some oil production, because it was gas that was otherwise reinjected. And I was wondering, given the balance of prices at the moment, whether you could reverse that, i.e., less gas, but then at the benefit of oil production? And secondly, on the same topic, I wanted to ask you, when you mentioned we lowered gas supply to Europe in the fourth quarter, because of the lower demand. That sort of sounds a bit like OPEC. It sounds a bit like some sort of market management going home. Now of course, the obvious question would be to ask at what price level would you expect to start doing that going forward? I'm sure you won't answer that question, but I was hoping you could say a few things about the circumstances under which you might sort of be quite dynamic and active, is it demand? Is it inventories? Is it price? I think that would be very helpful. Yes. Thank you. And you prepare for the last question. And we -- as you said, we are injecting -- selling the gas to the market instead of injecting into some the reservoir. This is something that we monitor very, very closely in terms of long-term value creation and making sure that we are developing the reserves and not leaving reserves behind. So this is a kind of trade-off between what is the equivalent liquid price for gas compared to the oil. And if you see that gas prices are lower than the oil prices, and we are seeing that we will might lose out a long-term value, we might change this, because again, this is about creating long-term value. What I think it's important to note that gas is still $120 oil equivalent. So it's still a high level of prices. I think with respect to your question on moving gas further out in time. I alluded in my presentation to the fact that we have an increasingly flexible portfolio. And what do I mean by that? We have flexibility upstream, some of our gas fields are now coming very close to the client phase, which means that depending on the price signals, where the demand is needed, we can choose to produce the gas now or we can move it to one year ahead of in time or two years ahead of time. So it's basically an optimization on prices, but it's reflective of the demand situation in Europe. So using the upstream production more or less as a gas stored. It's Lydia Rainforth from Barclays. And I want to come back, obviously, $75 billion is an amazing profit number, and you're matching it with $17 billion of cash returns to shareholders. Why is that the right number for '23? Because obviously, you could have phased it more on cap payouts higher for longer, but just at a lower level. So I'm just wondering why $17 billion is the right number for this year? And this isn't quite linked to that, but Torgrim, just on the tax side, obviously, the tax PAT guidance for first half is much lower than it was for the second half, I think, in terms of what you actually paid. So I'm just wondering, is that purely a price thing for it? When we look at the capital distribution. Now the shareholder distribution, as we said today, we're increasing the ordinary cash dividend to give the long-term commitment based on the long-term underlying earnings. And together with the $1.2 billion in share buyback, this demonstrates how we see -- feel about the business going forward. Then, as you know, we have a very, very strong balance sheet, and we are a negative net debt ratio. And we have said and as Torgrim said also it today that we are moving towards our long-term guiding of 15 to 30, the balancing between the ordinary dividend and the extraordinary dividend is what we feel is the right for optimal capital structure in the long run. And Torgrim, you got a question? Yes. Thanks, Lydia. You're right. So since we sort of initially gave expectations for taxes, gas prices have fallen significantly. So that's the reason why we are reducing sort of the cash tax payment expectations for the first half. Thank you very much. It's Oswald Clint at Bernstein. It was good to see the enthusiasm from Irene on the customer side. I always look for more of that from Equinor versus your customer-rich competitors. But -- so RWE, NG [ph], the deals you've laid out, you didn't quite talk about expected returns from these chains. Torgrim showed us 30% in the upstream, you said it took a lot of time to strike these deals, but you're selling gas, then blue hydrogen, then green hydrogen and there's different pricing going on there, which is quite opaque to us. So maybe just talk about what are these integrated returns that you can tell us that we should expect? And just a linked side question. In those discussions, do you think Russian gas could ever make a way back into Germany? Thank you. Yes, I'll start a little bit, and you can comment on the Russian gas as well. We have progressed very well on both working together with NG and RWE and gradually building up this new value chain that is so important to decarbonize the industry in Germany and Europe. We see that this will be based on contracts for differences in -- particularly for hydrogen and also the ETS price will drive the prices more for the carbon services. So we are seeing returns and it's too early to guide on this, because we are uniquely positioned, and we're going to really be one of the first one developing this, but we will see returns in the same range as we say for renewables. But too early to say exactly. But we worked really hard to develop these projects and make them as good as possible using the same toolbox as we have used for renewables and oil and gas projects to make these projects profitable. And I think there are two phases with respect to these kind of projects. It's one where we will need subsidies, both for the CO2 value chains and the hydrogen value chains. But I think when you get closer to 2030, the EU ETS prices going to be higher than the cost of capturing and storing CO2. So then you get into a commercially driven environment, and you could expect to see different returns at that point in time. But -- the other thing I would want to highlight compared to the renewables is that the entry barrier into this space is much higher. So if you start out on a level you're more likely to be able to hold on to that level than what we have seen in some of the renewable businesses. Then you asked whether I think Russian gas will come back to Germany. And I would say no, today. But then we also know that politics changes times move on. So -- but within the -- we have no assumptions in our models of seeing Russian gas coming back to Europe in the next three to four years. I think what will happen, though, is some of the Russian gas will be rerouted to China via pipeline, they might expand their LNG export capacity or so. So I don't think it necessarily will disappear from the market, but it seems as of now, at least very unlikely that it will hit the German market anytime soon. Teodor Nilsen, Sparebank1 Markets. So congrats on very strong results this year. Positive also to see how specific you are on dividends and buybacks. So more specifically on those $17 billion you promise as shareholder returns this year. How sensitive is that to oil and gas prices. We all know that this is a very cyclical and volatile industry. So in a scenario where you see much lower oil and gas prices this year, we'll still stick to the $17 billion? Or is it some kind of sensitive to oil and gas prices? As I said in my speech, is that this is the number we're setting out for this year. This board's clear intention to keep the same dividend level for the next three quarters. And as you see, we have a very, very strong balance sheet with cash and cash equivalents around $45 billion. So this is also about putting us closer to the long-term guiding of the 15% to 30% net debt range. Can I begin you Anders. I think the ordinary cash dividend and ordinary share buyback program, that is linked to outlook for the future, the $20 billion cash flow from operations and the return on capital employed. The extraordinary part is related to money already earned, and that is actually sitting on our balance sheet currently. So that is $45 billion in cash and cash equivalents. So that is linked to the extraordinary part and it is not linked to earnings this year or future earnings. Let's take one from the phone and then I give the microphone to Biraj in the middle of the room for the next one after that. Good afternoon gentlemen. You have changed your guidance for renewable volumes from gigawatt hours. The gigawatt or installed capacity terawatt hours of production. And I'm wondering a little bit about this. Firstly, is the terawatt hour guidance net number to you? Is it a gross number? Secondly, why did you change the guidance? And then thirdly, this chart of power generation of terawatt hours between now and 2030. Is that based on the assets you have today? Or is it assuming that you win acreage also in the future license rounds or do acquisitions. Yes. I'll start on this one. And I know Pål is also eager to jump in on this one. But first of all, the 12 to 16 ambition for renewables of 12 to 16 gigawatt remains firm. We have already accessed the 14 of this. So we are on the path to deliver on this. But gigawatts is just a potential, power and terawatt hours is really the power we will produce, which is a basis for future cash flow. And when we discuss to develop the renewable business further, we say that now we want to really measure ourselves on how we develop as in power generation. Remembering that different sources of renewables have different capacity to produce a different amount of power. So Pål might be allude a little bit how you have developed portfolio as well over the last year. Yes, thank you. So I don't think we have made a deliberate choice of changing our guidance. I think we've actually been providing more information on what we've been doing in the past. And our starting point is that we have built a very strong position in offshore wind. But during very heated markets over the last few years, what we have been doing is actually being a net seller of shares and offshore wind and monetizing in that market. We have also seen that we have a portfolio that was in need of a bit of diversification. So that is why you have seen us make bolt-on acquisitions into onshore platforms in Poland with Wento with a 1.6 gigawatt pipeline and with BeGreen in Denmark that closed only last week. So we have been diversifying our portfolio. So what you see in the installed capacity numbers is a higher element of onshore volumes and solar PV, in particular, than what you have seen in the past that comes on top of that strong offshore wind portfolio. So the 14 gigawatts of installed capacity roughly corresponds to the lower end of the production range that we have given today. But given that we now have a portfolio, we also see quite a bit of upside in bringing merchant onshore volumes where we can trade and market these volumes in the market compared to locked-in long-term PPAs that we have on the offshore wind side. So to me, it is a way of demonstrating that we are putting value over volume in the way that we are prioritizing our portfolio. Hi, thanks. It's Biraj Borkhataria, RBC. I wanted to ask about free cash flow deployment. So Torgrim, you were very clear that the CapEx increase was back-end loaded. And you're in somewhat of a unique position as a company given the strong macro environment last year. You're sitting on $20 billion of net cash and so on. But could you just talk about why you're choosing to make that CapEx profile back end loaded? Is it that you're concerned about supply chain inflation and so on? Is it they maturing the projects? And maybe you could also touch on policy because there is a narrative that the U.S. is obviously pushing ahead with the IRA and so on, and your carbon capture profile and options are largely European focused. I just wanted to get your thoughts on the regulatory environment there as well. So it's two questions. Thank you. Yes, I'll start a little bit on CapEx, Torgrim, and you can follow-up. So we have a CapEx guiding, which is very much in line with previous guidance. And with some smaller adjustments, which is from year-to-year and project phasing, we are fairly stable on the oil and gas. So the increase you're seeing and the increase with 13% on average, which is back-end loaded is really the increase in renewables and is also a potential increase where we will finance renewals over the balance sheet. Regarding -- we will not never sanction projects before they are good enough. And that's why also we will see that there are some flexibility to when we will sanction these projects, and there can be small adjustments, and that's why we're guiding in our range here going forward. Yes, IRA. And we do have projects both in Europe where we kind of have a very, very good, and I think Irene said it very clearly, where we have a strong position, which is with higher barriers to enter. And then we have also projects in U.S., but quite fierce competition. So maybe you want to say a little bit of what we're doing in the U.S. And if you have anything to add on CapEx to, please let me know. I can do that. I think we always trace where we have opportunities, where we have a competitive advantage. And clearly, in Europe, we have the infrastructure, we have the customer relationships, et cetera. The other place where we see some synergies with the existing business is in the U.S. And for some time, we've been chasing couple of opportunities, bigger ones in Tri-State area in the U.S. and also on ammonia export projects. These projects overnight with the IRA became much more attractive, and we continue to mature those. But Europe was way ahead of the U.S. when it came to incentives for a while. And then the U.S. moved ahead. You saw on the lane out there saying, we're going to up our game. So I think this is not going to be a static picture. You're going to see the supportive -- support machines change over time. So stick to where we really have a competitive advantage, but clearly quite excited about what goes on in the U.S. right now. Yes, on CapEx, a very important question. So -- it all starts with that we are driven by maximizing the value creation out of that investment program. So we have deliberately taken some decision to say, okay, these projects need to be worked more and they will come later. And I think this thing, as I mentioned, is sort of one example of that. The other one is that in a big portfolio where we are an operator, clearly, we need to manage execution capability and inflation as such. And we have seen inflation last year, quite significant, but we really, really need to manage that, meaning that we need to see to that we have a good portfolio over years to manage that. And you saw from our presentation, $35 breakeven of the upstream project portfolio, that has remained rather constant over the years despite that we have had inflation in the period. So that's sort of KPI or matrix to follow. That is really where we see that we can create value by actually profiling the investments in the way that we do. So we're not driven by volume targets, but driven by value. I think I've said it 10 times now. So that's for sure. That's good. One in the back there, and then we'll take one more on the phone and continue here in the room. Thank you. It's Chris Kuplent from Bank of America. I really welcome the clarity you've given on the capital distribution front. But maybe Torgrim, I'll challenge you here a little bit because you're presenting a $50 breakeven after CapEx and I think on your 2023 cash flow outlook, the $17 billion of cash returns are going to be covered roughly where we are right now in $80 plus/minus gas prices where we are right now. So it looks like you're giving yourself quite some time redistributing your balance sheet strength to pick up your comment earlier. So just wonder whether you can give us a bit more color in terms of how much time you have to reallocate that balance sheet strength that you've accumulated. And of course, my second question is the least popular one because I know you're not going to want to answer it, but I'll ask it anyway. What role does your M&A team play here in having a claim on that balance sheet strength? And maybe Anders if you or Irene if you want to give us a little bit of your view on what the market currently looks like. This is no longer a zero interest world. What does the M&A market look like to you? Thanks. Yes, I can start with that a little bit. As we have said many times, M&A is always in our toolbox. And you have seen what we have done in the past. You have seen how we have been optimizing our oil and gas portfolio both by acquiring some and divesting some, always constantly driving to make sure that the robustness of the company will increase by doing so. Of course -- and then also for the renewables with Wento and BeGreen, as Pål said, it was a time we felt it was very, very expensive, but then with increased inflations and interest rates we have made some acquisition and also with Tritan, a bolt-on acquisition there. Going forward, I'm not going to comment on it, but we follow this market very closely. But to follow my CFO, we will value over volume driven also when we use the M&A market. And then Torgrim, he challenged you and you want to comment as well. Thanks. A very important question and a great question. And I thought you actually had two because you talked about $50 breakeven on the slide. I just want to explain that a little bit to you because we are building a company that will function from A2C in a $50 environment, meaning that sort of the capital distribution that we have committed to, the ordinary part of it is going to work in a lower price environment assets. So that is very, very important. And again, we have significant flexibility in managing lower prices as we are a large operator, and we are the captain of our own investment program, if you like. So I think that is sort of very important to understand. The second one today or this year, we are planning on a negative net cash flow. And I'm glad for that. And it's probably strange to hear as CFO saying that. But with a $17 billion the cash distribution, we clearly planned for a negative net cash, and then moving towards a more optimal capital distribution. So we will -- we aim 15 to 30, and that's what will happen this year is on its way to that. And then clearly, the balance sheet will remain very robust and solid. And clearly, we will be careful as always. And I think you might want to look at the past and see the capital discipline under the CEO over the last few years. And clearly, we want to keep that intact. And just to add, two years ago, I presented the worst result from Equinor, and two years later, the best result ever. This shows the volatility in this market, and that's why we're focusing on the robustness, and Irene you're eager to answer. No, no, I just wanted to draw your attention to the M&A we have done within MMP, because we acquired Scatec ASA, then we acquired Triton and both of them have been tremendously good investments in the Danske Commodities, the results since the acquisition have paid back the acquisition the multiple times and Triton was actually paid back twice in the course of four months. So yes. Let's take the one on the phone. And can I ask you to limit it to one question so that we can cover as many as possible. Perfect. Thank you very much. And again, congratulations on the record -- on the record cash return to shareholders for 2023. I had one question. When I look at the delivery of mega projects in oil and gas, the industry from 2014 until COVID hit, was in a consistent trend of improvement, a quicker time to market, shorter delivery and everything was coming on stream more or less on time and on budget. Then through COVID the main problem were with the yards in Asia. How do you see the outlook for delivery? Where do you see the tightness in the coming years? And looking specifically at two of your most complex megaprojects, Castberg and Bacalhau, do you still feel confident those can come on stream on time? Thank you. Thank you very much. That was actually a very good summary of what happened in the project markets from 2014 and onwards. Yes, I think all projects were hampered by the COVID and not only the yachts in Asia, but also I think the yachts worldwide and also in Norway. We are recovering from that now. And Geir and his team are making really good progress. We are on plan with the Castberg project, but the Bacalhau project in Brazil will be delivered during 2025. Thank you again for the presentation. If you don't mind, I would like to go back on CapEx. And if you could provide some color on the breakdown, it's true that you are being consistent. We have not seen massive change in terms of guidance for organic CapEx. But at the same time, in the past year, we have seen Equinor exiting Russia. You referred to the Inflation Reduction Act as an impulse basically for investments. So can you explain -- and of course, I should add to that Wisting as well has been delayed for a few years. So can you explain basically what replaced the exit from Russia in terms of contribution to CapEx and the removal of Wisting to basically lead us to this level, which is sort of consistent with what you guided for before? Okay. Thank you very much. So yes, the guiding this year is actually, I would say, consistent and quite consistent with what we have said earlier. For '22 and '23, if you summarize those two years, it's actually slightly below what we said last year. Then sort of in the -- going forward, we are actually extending the period with one year, and we say that CapEx is back-end loaded. So in reality, it is sort of the same CapEx level that we know are putting forward despite that we have seen sort of inflation over the years. We have built in future inflation assumptions. So we are quite comfortable that these are sort of numbers that are strong. Again, I mean, the CapEx program is driven by oil and gas, which is flat over years. So we continue to invest on the same rate. We are growing our investments within renewables and low carbon solutions. And then we aim to use our balance sheet more in financing our renewables business due to that increasing interest rate makes that more sensible. So that will be to Pål's portfolio, and that will be reported as CapEx on equity terms, so that will actually change the reporting on the investments. So those are the key elements. So it is actually fairly consistent with what we have said earlier. Thanks. Alastair Syme at Citi. Can I ask about the long-term oil and gas production profile? The one you show to 2030 is sort of flat to down 15%. So what defines that range? And just to link it back to value, what's the $20 billion cash flow linked from a volume standpoint? The $20 billion cash flow from operation after tax is really based on both the production profile. We've shown on the oil and gas. And also with the contribution from Irene and her team as we have increased the guiding there. And gradually, also towards 2030, we will also see more and more coming in from renewables. So that is the basis for those $20 billion there. And then your first question was? Yes. In terms of -- of course, this is we are now constantly developing new resources on the Norwegian Continental Shelf, for instance, and sanctioning new projects. We have an exploration program, and we are using quite a lot of sanctioning smaller project would tie into existing facilities. So there are always a little bit some uncertainty, but Kjetil, heading of the Norwegian Continental Shelf. He can explain a little bit how he is working now to ensure that he keep the production on Norwegian Continental Shelf at a high level to 2030 and beyond. But very quickly, the variation between the upper and lower bound is basically the project that we need to sanction on the next three, four years, so that is the difference in the production. So it's a project that we're sitting on. It's not a lot of exploration. I don't think there is any in that time frame. So it's basically the project that we need to sanction the next three, four years, which is the difference. Yes, thank you very much guys. It's Paul Redman from BNP Paribas. I just had a quick question on gas prices. So normally, we think about cash prices on maybe an annual basis. But if Europe comes out this winter with significantly higher storage volumes, do you have a view kind of on a quarterly basis how that gas price could pay out? Could we go significantly lower than where we are today? And then secondly, how would that impact your extraordinary distributions if gas prices do go significantly lower through the middle of the year? I will start and then Irene can talk more about. But as Torgrim said very, very clearly earlier, the extraordinary distribution for 2023 is based on past earnings and it's the Board's clear intention to have the same level of dividend, ordinary and extraordinary for the next three quarters. Maybe on the gas market, it seems like the market has found some kind of equilibrium right now, but -- and taking it through the next summer. But it's important to remember that come November, storage as a full -- they were full in November last year as well. So it's basically a reset. And you're looking at the next year, again, needing to attract more LNG and reduce demand even further. So I think the best thing we can say is that we do expect volatility and also that the uncertainty or the upside is higher than the downside given what we have seen. We are a bit on over time, but I feel bad because I've overlooked this side for one. So if you take one final here. No, we don't plan to do that. We plan to develop the oil -- the energy transition needs to be a balanced transition. So that means that oil and gas will play a role in the energy transition. And as we have demonstrated today that we will continue developing the oil and gas business. I think we have 20 years of resources in our books meaning that Philippe and Kjetil will continue to develop those resources together with Geir bring them into real projects, implementing technologies and have a target of these break evens that Torgrim talked about, 35 in break even. So we will continue to mature reserves and not leave valuable barrels behind in the energy transition. Very good. I think we now need to close this session. I will leave the word to you to do that Anders. I just want to remind you all that you are invited to lunch in the area outside of here afterwards and that we will start the breakout sessions, what is it quarter past two. So Anders, if you want to say any concluding remarks. No I just wanted to say that thank you very much for coming. I think we have presented a very strong outlook for Equinor, both for 2023, but also into the future. So thank you for coming, and have a good lunch.

EarningCall_456

Good day, and welcome to the Under Armour Q3 2023 Earnings Conference Call. At this time, all participants are listen-only mode. After the speaker's presentation, there will be a question-and-answer session and instructions will be given at that time. As a reminder, this call may be recorded. I would now like to turn the call over to Lance Allega, Senior Vice President, Investor Relations and Corporate Development. You may begin. Good morning, and welcome to Under Armour third fiscal 2023 earnings conference call. Today's event is being recorded for replay. Joining us on today's call will be Under Armour, Executive Chair and Branch Chief, Kevin Plank; Interim President and CEO, Colin Browne; and CFO, David Bergman. Our remarks today include forward-looking statements that reflect Under Armour's management's current view and certain forecast elements of our business as of February 8, 2023. Statements made are subject to risks and other uncertainties detailed in the documents regularly filed with the SEC including our annual report on Form 10-K and our quarterly reports on Form 10-Q. Today's discussion also includes the use of non-GAAP references. Under Armour believes these measures provide investors with a useful perspective on underlying business trends. These measures are reconciled to the most comparable US GAAP measures, a reconciliation of which along with other further information can be found this morning's press release and at about underarmour.com. Thank you, Lance, and good morning, everyone. Amid a continued dynamic environment, we're pleased to have reported solid third quarter results and are on track to deliver on our full year operational and financial goals for fiscal 2023. By continuing to learn, evolve and grow as an organization, the Under Armour brand is strong, and this is an exciting time for us. We're making progress on our strategic refinements. And as I've said before, we will not miss the opportunity to reposition and establish our sector leadership wherever we compete. When I consider Under Armour's journey, I've never been more energized and excited about the road in front with the organization we have in place as well as the future we are building. We are certainly not standing still, building on our transformative operational improvements and continuing to evolve our strategy from a position of strength. We're working hard to amplify opportunities for our existing core business while strengthening our long-term ability to serve athletes beyond the gym, field and courts and throughout the entirety of their day. At the end of this month, our strategic evolution will gain more momentum as we welcome Stephanie Linnartz as our new President and CEO and as a member of our Board of Directors. Stephanie brings a wealth of experience to Under Armour after 25 years at Marriott International, the hospitality powerhouse overseeing a portfolio of 30 iconic brands, spending 138 countries. She has a distinguished track record of executing best-in-class brand strategies and developing talent and led Marriott's multibillion-dollar digital transformation and award winning loyalty program, expertise that will give us a critical level up in one of our most vital areas of strategic focus. I'm looking forward to the perspective that Stephanie will bring to the brand, leveraging our deep bench of industry experts to work in concert and unlock our full potential. And as brand Chief and Executive Chair, I'm excited to support Stephanie across the business with an emphasis on our product innovation pipeline and brand storytelling. We look forward to the complement of our diverse skill sets and strengths to prioritize top and bottom line growth for UA with Stephanie's leadership as CEO. Further strengthening our brand, we recently announced two new Board members, Carolyn Everson and Patrick Whitesell. Each brings a wealth of experience with successful careers across media, technology, sports and entertainment management. So fantastic new competencies to support the chapter ahead for Under Armour. And as we look to this next chapter, we continue to build on our momentum as a brand, delivering industry-leading innovation and premium consumer experiences always obsessed with empowering those who strive for more in a uniquely Under Armour way. To support this, we're making progress on the strategic refinements that we introduced on our last call, including broadening our product aperture to address the non-active moments of an athlete's day, maintaining UA performance and delivered with culturally relevant style, activating with greater precision to reach our target audience and inspirational muse of the 16 to 20-year old far city athlete and advancing our segmentation strategy across the spectrum of good, better and best, with a heightened focus on better and best level product offerings. Under Armour will build amazing product that delivers on our promise of solutions you never knew you needed and once you've tried them could not imagine living without. As we finish out fiscal 2023 and round the corner into fiscal 2024, there's much to do. But let me be clear, when I say that Under Armour is in a good place. We're strong and tested. We've got the right people and processes working together, and we're strengthening our leadership. We know what great looks like, and we expect to make significant strategic and operational progress this year as we set up to reinvigorate growth. And we're in this position, thanks partly to the man sitting next to me, Colin, we owe a lot to you. Thank you for your steadfast leadership of Under Armour during this interim period. As Stephanie joins, I know you'll continue to be a vital partner for her and all of us as we move forward. We're fortunate. So on behalf of our Board, executive leadership team, thank you and cheers. In closing, as we continue to push our evolution and scale towards a more significant global presence and realize our potential, we must never lose sight of our identity in the heart of who we are. As I said, our brand is strong. And we will continue to protect this house. 2023 marks the 20th anniversary of this iconic phrase, which helped establish and underscore our unique identity. As a core component of our brand, this concept is as raw now as it was then. And in today's dynamic world arguably even more relevant to sport, to identity, to community. This year, we'll call this code back into action, inviting a new generation of athletes to protect this house. This constant has been there all along, and it's time to wake a giant, time to invoke a new future. Colin? Thank you, Kevin, and good morning, everyone. It's been a great privilege to lead Under Armour during this transition and work more closely with our amazing teammates across the globe. I look forward to partnering with Stephanie when she joins on February 27, continuing to advance our strategy as I resumed my role as Chief Operating Officer. Having had the opportunity to spend some time with her, I know she is an incredible leader who will bring a breadth of pressure to our business with a keen focus on consumer centricity and digitalization as we continue driving our strategy forward. In the meantime, as Kevin mentioned, we are not standing still. Our purpose of empowering those who strive for more is internal. Our strategic evolution in creating the space necessary to broaden our product aperture, refining our target consumer to the 16-to 20-year-old varsity athlete and more effectively segmenting our product remains our immediate priorities. To touch on these, I'd start by underscoring that is one of only a handful of authentic performance brands worn by athletes at all levels of competition. We've earned our reputation as a trusted brand for sports, the go-to apparel, footwear and equipment that athletes never knew they needed and once they have them, can't imagine living without. In this respect, we're doing a great job of fulfilling the train, compete and recover moments of an athlete's day. That leaves the non-active or what we call live moments of their journey, which is a significant long-term growth opportunity that triples the total addressable market for Under Armour. So how does this translate to a broader sports style offering where the train, compete and recover stages of an athlete's journey, our performance with style product, the live stage will be style with performance products, science rationale or our track science, consumers will ultimately decide. It's our job to give them more choices and therefore, more versatility to suit whatever part that they're outfit. Soft launched in October, this type of versatility is embodied in SlipSpeed, our unique training footwear engineered with a convertible heel to switch between active and recovery modes. From early reads, SlipSpeed's strong DNA, also sees it slotted into the space in between moments of style and self-expression. As SlipSpeed launches globally on February 14, we're excited to bring this innovation to a much broader audience and learn even more about the possibilities of this hybrid platform. To support this, we're opening a physical manifestation of our brand positioning with a pop-up store in the Flatiron District in Manhattan, which will showcase SlipSpeed and our newest apparel offering and a new format with less product density and enhanced storytelling. Of course, none of this happens overnight. Still, you will see immediate progress and points on the board as we reimagining some of our Spring/Summer 2023 floor sets with enhanced merchandising and story talent to showcase how Under Armour can be worn away from training and competition. In apparel, we've got the new structured wovens coming and introducing more variation of our unstoppable men's and women's bottoms to hit broader wearing occasions. We're also leveraging our leadership in performance tees and in the latest sports front. And with programs like our new women's Meridian bottoms, which have significantly improved anti-pilling component, it's the only legging you'll ever need for style performance incumbents. In footwear, the near-term pipeline includes putting a younger spin on Phantom 1, Gemini and Forge. And this fall, you'll see even more sports side launches, including dynamic outfitting, new silhouettes and new colorways and maybe even a footwear collaboration or two. Transition to our second strategic refinement, we're also evolving our marketing and omni-channel strategies to better connect with the 16 to 20-year old vastly athletes. With an always-on social media activation approach, including a greater focus on unique content to amplify brand identity and drive cultural relevance. We're seeing early improvements in brand metrics with this demographic in the US and key international markets like Mexico and China. All this feeds into our ability to drive excellence into our omni-channel presence, particularly in e-commerce, where we also started to see the early benefits of recent investments. So overall, encouraging, and we look forward to leaning in and applying even more in the coming seasons. The third is the ongoing evolution of our segmentation strategy and better balancing of the top most parts of our product pyramid Consumers tell us that varsity athletes tend to buy more frequently at fuller and higher price points than other groups throughout the year. In this work, we're doing category – we’re going category-by-category, addressing what premium looks like at every price point, determining opportunities to drive additional better and best level product assortments and what the marriage of innovation and style should look like as if we're designing unencumbered. As we continue to sharpen and hone this strategy, we'll also heighten our storytelling to drive a more pronounced premium elements on athletes. And speaking of driving greater influence, our incredible roster of athletes continue to inspire us all from Sharon Lokedi winning her debut at the New York City Marathon to Julio Rodríguez winning the MLB American League Rookie of the Year award to Justin Jefferson, breaking the Minnesota Vikings franchise, single season receiving record and Jordan Spieth, winning the match alongside Justin Thomas. Under Armour continues to stand out, delivering performance and helping to empower athletes at the highest level of sport. And with 2023 in its early days, there's more in store for UA as we look forward to the second half of the NBA season for Stephen Curry and Joel Embiid. And in partnership with Dany Garcia and Dwayne “The Rock” Johnson, we launched as the official uniform supplier of the XFL inaugural season on February 18th. So UA's brand momentum remains strong. So back to our third quarter performance. We delivered a solid quarter with revenue up 3% to $1.6 billion or up 7% on a currency neutral basis. Clicking down into the results by region, North America declined by 2%, coming in at just over $1 billion for the quarter with wholesale down 6% and 1% growth in DTC, driven by strength in our e-commerce business, partially offset by recovery retail stores. Though we continue to see solid demand in our largest region, we were more promotional during the quarter to manage inventory against this challenging retail backdrop. Despite the dynamic retail environment, we continue to focus on elevating the consumer experience across channels while driving operational excellence. EMEA was a standout again for us this quarter with revenue up 32% to $265 million or 46% on a currency neutral basis. This growth was driven by a solid sell-through across wholesale and DTC along with earlier than planned shipments. We are encouraged by our momentum in EMEA and intend to remain nimble given the continued marketplace uncertainty and building inventories. APAC revenue was down 9% to $198 million, or up 1% on a currency neutral basis despite ongoing COVID challenges impacting retail traffic and store availability, Particularly in China; we grew our wholesale business during the quarter. In addition, outside of China, we saw positive momentum in our e-commerce business. And finally, our Latin American business was up 45% to $64 million in the quarter or up 41% on a currency neutral basis. Turning to operations. We continue to see improvements across our supply chain with our factory partners making progress in returning to pre-pandemic production efficiency. And ocean and delivery times continue to improve, which contributed to significant tailwinds and from less air and ocean freight during the third quarter, a trend we expect to continue into our fourth quarter. From an inventory perspective, levels continued to be elevated across our sector. At the end of the third quarter, our inventory was up 50% to $1.2 billion. As a reminder, though, our inventory was quite lean in fiscal 2021 due to our constrained strategy and supply chain disruptions. So a large part of this increase and the increase over the next few quarters is simply normalizing to levels to us being a close to a $6 billion brand. At the end of fiscal 2023, we expect a similar growth rate of about 50%. But again, to contextualize this, this growth rate is up an $800 million basis [ph] from the prior year, which was similar to 2015 when we were a $4 billion business. We do expect our year-end inventory growth – we do expect rate to be the peak followed by elevated yet appropriate step-downs in the following quarters. That said, we continue to feel confident about where we are relative to our plans and managing this aspect of our business. To this point, we expect inventory to stay around three turns as we work through this challenging environment. In closing, as I transition back to the Chief Operating role, I want to say how proud I am to be part of Under Armour. It's been an honor and a privilege to lead this iconic brand. Over the last nine months, I have worked with our amazing global teammates and now have a much broader understanding of our business, which will help me support Stephanie as she steps into her role. I'll now hand it over to Dave. Thanks, Colin, and good morning, everyone. With three quarters of our fiscal 2023 behind us, we delivered a solid quarter and are on track to deliver our full year financial and operational goals. As a reminder, due to our fiscal year change, our third quarter of fiscal 2023 ending December 31 is comparable to the fourth quarter of fiscal 2021. As mentioned earlier, our third quarter revenue was up 3% to $1.6 billion or up 7% on a currency-neutral basis. In addition to the regional comments Colin provided, from a channel perspective, wholesale revenue was up 7% to $820 million, with increases in our full-price and off-price businesses. Direct-to-consumer revenue declined 1% to $715 million due to declines in our factory and Brand House stores, partially offset by a 7% increase in our e-commerce business. And licensing revenue decreased 19% in the quarter to $30 million, driven primarily by the timing of minimum royalty guarantees associated with our Japanese licensee. From a product perspective, in a challenging retail environment, our apparel business was down 2% with strength in golf and team sports offset by softness in training. We also saw strength in men's and women's bottoms during the quarter, particularly the unstoppable franchise as well as a solid performance in outerwear. In footwear, revenue was up 25% with positive results in all categories, benefiting from better product availability during the quarter. Footwear growth was driven by strength in run with the HOVR Machina 3 resonating well, especially in APAC and EMEA, team sports, particularly basketball with the Curry 10 and American football with cleated products also performed well during the quarter. And our core run product continues to achieve solid results with Rogue, Assert and Pursuit demonstrating strength in the period. And finally, our accessories business was down 2% in the quarter due to softer sales of cold weather accessories, which more than offset strength in our bags business. Gross margin was down 650 basis points during the third quarter, driven by 400 basis points of negative impacts from higher promotions and discounting; 130 basis points of unfavorable channel impacts primarily related to higher distributor sales; 60 basis points of adverse effects from changes in foreign currency; 50 basis points of unfavorable region mix, related to higher EMEA and Latin American sales; and finally, about 50 basis points of unfavorable product mix due to the strength of our footwear business. These negative drivers were partially offset by 40 basis points of favorable supply chain impact, driven by lower freight costs, which more than offset product cost headwinds during the quarter. Our larger than expected Q3 gross margin decline was primarily due to higher than planned markdowns within our wholesale business and increased promotional activities within our DTC business as we manage through inventory. Third quarter SG&A expenses were down 11% to $604 million. Several factors drove this decrease, including lower marketing, incentive compensation, and consulting expenses. Bringing it to the bottom-line, operating income was $95 million, coming in above our outlook of $75 million to $85 million. After-tax, we realized a net income of $122 million or $0.27 of diluted earnings per share. Excluding a $45 million earnout benefit in connection with the sale of the MyFitnessPal platform and a $2 million benefit from a tax valuation allowance release related to prior period restructuring, adjusted net income was $76 million. In addition to the operating income overdrive, more favorable FX hedging impacts within the other income and expense line and a better than anticipated tax rate helped us to realize $0.16 of adjusted diluted earnings per share, coming in above our outlook of $0.07 to $0.09 for the quarter. Moving to the balance sheet. Since Colin already took us through inventory, I'll highlight our cash and cash equivalents, which was $850 million at quarter end with no borrowings under our $1.1 billion revolving credit facility. And finally, we've repurchased an additional $75 million of Class C common stock, allowing us to retire 8.8 million previously outstanding shares. In total, under our two-year $500 million program, we have repurchased $425 million of Class C stock and retired 35 million shares to-date. Next, let's turn to our fiscal 2023 outlook. As a reminder, the comparable period is the trailing 12-month period from April 1st of 2021 through March 31st of 2022. To start, we continue to expect revenue to be up at a low single-digit rate on a reported basis and a mid-single-digit rate on a currency-neutral basis. So, there is no change there. Next, due to the higher than anticipated Q3 promotional headwinds, we now expect the full year fiscal 2023 gross margin decline to be at the high end of the previously provided 375 to 425 basis point range. This compares with our prior year's baseline rate of 49.6%. Within this decline, we expect approximately one-third of the total to be from the negative impacts of higher promotions and discounting, one-third from elevated product costs, freight expenses and changes in foreign currency, and the remaining third is from mix impacts, including channel, product, and region. Moving down the P&L. Full year SG&A should be down at a low single-digit rate versus our previous expectation of down slightly. In this respect, we remain committed to ensuring our investment dollars are optimized to the areas with the highest returns, while proactively identifying areas to manage expenses appropriately. Dropping this through and in line with our previous outlook, operating income is expected to reach $270 million to $290 million. Excluding the company's litigation reserve, adjusted operating income is expected to reach $290 million to $310 million. Regarding items below operating income. Recall that, we have been planning for a material benefit from a valuation allowance release that we expect to realize primarily in our fourth quarter. That said, we anticipate a significantly negative adjusted tax rate or tax benefit in the fourth quarter, resulting in an adjusted full year tax rate in the mid-single digits. Putting it all together, diluted earnings per share is expected to be $0.71 to $0.75, which includes a $0.27 benefit related to the tax valuation allowance release. Of this $0.27 benefit, $0.15 is related to prior restructuring. Additionally, there is an $0.08 benefit from our second year earn-out on the sale of the MyFitnessPal platform, and a $0.04 negative impact from our litigation reserve. Excluding these net positive impacts of $0.19, we now expect adjusted diluted earnings per share to be between $0.52 and $0.56. This is higher than our previously provided range of $0.44 to $0.48 primarily due to favorable FX developments on the other income and expense line and a slightly lower tax rate. Before I close out, even though we aren't providing a fiscal 2024 outlook until our Q4 call in May, we are anticipating the macroeconomic backdrop to stay uneven in calendar 2023 with elevated sector-wide inventories that could result in ongoing promotions lasting longer than previously expected. In this respect, we are employing proactive measures to protect and ensure the health of our brand. To mitigate, these potential pressures as best as possible as we lay the groundwork for next year's operating plan. So to close, I'd underscore that we are pleased with our continued momentum and remain encouraged by our evolving long-term strategy, including broadening our product aperture, refined consumer focus and efforts to create a more premium consideration through improved better and best level product. Moreover, from an operational perspective, we are confident that our refined playbook and financial discipline position us well to navigate near-term uncertainty and drive Under Armour to our next chapter of pronounced growth as we continue to protect this house. Great. Thank you so much. My question is on the comments you just made about looking into the next fiscal year. It sounds like you're seeing a little bit of a change in the environment versus what you saw three months ago. Is that more of a consumer -- change in the consumer and the consumer's willingness to spend, or is that more on the industry dynamic with still inventory, pretty heavy out there and maybe some of the supply chain costs taking a little bit longer to get better than you thought. Just a little bit more color would be helpful. Thank you. Sure, Jay, this is Dave. I would say it's actually a little bit of both. We definitely have seen that the promotional environment went a little bit deeper and we believe it's going to go a little bit longer. And a lot of that has to do with some of the building inventories that are out there with all the brands. And that is something that all of the retailers are going to need to work through in the coming quarters. And we are seeing that, that's probably going to take a little bit longer than what we would have expected maybe 90 days back. And the consumers are out there, the traffic is reasonable, but conversion is a little bit challenged. And I think that folks are being a little bit more cautious here for a while. And so we expect that pressure to continue as we move through this calendar year for a while. Got it. And maybe a question for Kevin. Just on hiring Stephanie, can you just maybe elaborate a little bit more on what it was about her that made her the right person to come in the lead Under Armour from here? And do you have a Super Bowl prediction for us? Well, this is Colin jumping in here. Kevin is here, and Kevin's not in the room at the moment. But Stephanie, obviously, as Kevin alluded to in the script, Stephanie obviously has -- is an amazing executive. We've had the opportunity to spend some time with her. She obviously has had an incredibly successful career and the level of kind of insight that she will bring with regards to how we're thinking about our consumer and building relationships as a brand is something that we can undoubtedly -- we can already feel in some of the early conversations with us. So we're excited to welcome on board and looking forward to working with them. Thanks. Hey, guys. Good morning. Nice job. I was hoping you could talk just a little you bet. So I would just maybe elaborate a little bit on your expectations for stores e-com wholesale, got to throw it all at you, sorry. But like channel product and region basically, just given the improvements in the progress you're making. So as we think about DTC versus wholesale, as you look at maybe diverging trends with footwear and apparel, and then just would love any more color, if you could, on what you're thinking for China and Asia, if that's possible? I know that was a lot, sorry. Yes, I was going to say there's a lot of – there's a lot of that is coming. I think let me kind of see if I can kind of pick it a piece a little bit and David can kind of jump in. I mean, as you've seen in our results, we're showing up incredibly well in Europe, and that's something which we're really pleased with the progress we're seeing there. And part of that is the fact that the way the brand has been able to manifest itself in Europe allows us to really demonstrate the good, better, best kind of way in which we think about the brand. And when we get that right, it's very clear that it resonates well. And so we're seeing that in Europe in spite of what is a difficult time in Europe at a macroeconomic level, Under Armour is resonating pretty well. At the same time, we -- if you go up to China, obviously, we obviously as did everyone else, challenged in the third quarter because of the number of lockdowns we had. We had 35%, 40% of our stores closed for much of Q3. We're obviously now starting to see that open up a little bit more, and we're optimistic that we may see business continue to improve as consumers come back. Obviously, that's changing the dynamic of how people are shopping a little bit. People are going to stores as opposed to more of online. So we're seeing that play out. And in North America, we talked about this a little bit already, but we are seeing a softer retail environment, but we continue to invest in building our own DTC, and that's really a key focus for us, thinking through how do we actually talk directly to consumers, opening the store in New York is a great example. That’s really starting to step into that and really think through how we can build on that. And the investments we continue to make in unlocking the power of our omnichannel are all things that we feel we're well-positioned to lean into over the next 12 months. Yeah. I mean, maybe I'll just add a little bit from like an apparel footwear accessories perspective. Apparel, I think, is down 2% in Q3. But if you think about it, our first three quarters of fiscal 2023, we had year-over-year comparisons on a very favorable 2021 for a lot of folks that were in our industry in terms of demand. And I think across the industry, apparel was impacted with higher inventory. So as a product category, it's been more promotional activity there, which definitely challenges the revenue growth a little bit. However, as we work through that, we expect that to normalize more and get back into the right growth place as we go into next year. Footwear has been an excellent opportunity for us, and as you can see, growing 25% in Q3, definitely a strong area for us and one that we've always talked about as being a big opportunity. Now some of that is due to better product availability. If you recall, with the impacts last year from production, a lot of that impacted footwear even more than apparel. So comping that is a little bit helpful this quarter. But again, super exciting area for us to keep driving on as we go into next year. Great. Thanks guys. And then just one quick one, recognizing it's relatively new for you guys seeing the ASR. Any guardrails or how we should think about your approach to buybacks going forward? Yeah. I mean it's something obviously that we continually look at. There's a lot of different ways that we want to be able to utilize our cash. And a lot of it is going to be navigating the current environment and staying nimble. We still have the full revolver availability, so we're very liquid as well. But we want to make sure that we can reinvest at the right level in long-term growth, whether it be within our systems, processes, DTC, a lot of what Colin had mentioned as well. So we will continue to assess that. No decisions are made at this point in time, but we're going to continue to look at it as we go forward. Yes, hi. I guess, looking ahead to fiscal 2024, I'm certainly understanding that you are unwilling to guide here. But I'm curious, just as you're looking at the gross margin opportunities and puts and takes as we look to the first half and the back half, just given the depressed levels that we're seeing certainly on the markdown front here? Well, as David already alluded to, it's a little early, it's only February. So we're not really giving too much, we're not calling out anything, providing any color regards to full year 2024 at this moment in time. But we are obviously continuing -- we talked already about the continued promotional environment. But at the same time, we are starting to see some of these kind of supply chain issues that were currently previously with driving up costs. They're starting to destined to back out again. So things like shipping and container costs and this type of stuff. So we think there is an opportunity there. But it's going to be a challenging year just because of half the amount of product that's out in the market from a promotional activity point of view. So it's going to take us some time to kind of work through that. Dave, do you want to add any more color? Yeah. I mean, obviously, there's a lot of different areas that we're pushing on, and we want to keep moving the ball forward. But to Colin's point, it is early. And so at this point, we're going to kind of take advantage of the next 90 days to really dig in and continue to drive forward and be ready to speak more about it on our next call. Yeah, Kate, I would say to you, it's not that we're not willing. Like you used the word unwilling, I just wanted to kind of correct that. We didn't do this last year as well. It was one of the reasons we changed our fiscal year primarily due to visibility because in February, we're still barely into the order book for the fall/winter season. So lot of moving parts, but we'll definitely obviously get to it in our May call, but certainly, a lot of considerations as we move forward. Can I just ask – it's a fair point. Can I just ask one follow-up on the inventory level, I certainly understand that, you guys are kind of shifting towards the prioritization of growth here? But with guiding the year-end inventory by 50%, you're noting greater caution just overall in the environment, maybe the consumer. I guess, I'm just trying to balance opportunities on growth as well as maybe a potential return to positive gross margins next year? Again, I understand kind of willing to talk about trajectories on gross margins next year. But I'm just trying to understand the balance there between growth and profitability as we're looking ahead, especially with some of these inventory investments? As we already – we spoke a little bit about it, I think we're in somewhat of a different place than much of the industry. We were actually reasonably happy with where we now sit from an inventory perspective, because as we called out in the script, we were running the constrained model last year. We also walked away from some demand because we just couldn't see we'd be able to service it. So our inventory levels were incredibly slim last year. We're now getting our inventory back to what I would call kind of a steady state kind of number, which is – okay, that 50% increase is a big number. But when you actually look at the amount of inventory we're now holding, we're holding the right level of inventory for a $6 billion business. So we're comfortable where we are from an inventory perspective. And our inventory is right-sized for the way in which we expect our business to kind of evolve next year. And Kate, this is Dave. I think maybe what I would add a little bit there too is we have done a deep dive to kind of see what product we have that is more seasonless that we can pack and hold over to next year as opposed to liquidating it at very low prices now. And that's part of what's assumed in our outlook as well. And so that is something that is in our inventory growth numbers now that we'll be able to draft off of a little bit next year at least from a cash perspective. And then I think just thinking about where we are right now as a kind of around a return to Colin's point, is a pretty healthy spot for us. And as we move through next year and deal with any of the excess, we still will be managing our third-party liquidation in a reasonable spot. We would expect to stay kind of in that 3% to 5% range, hopefully at the lower end of that, which is what we've been doing and continue to do to make sure that we're keeping the brand healthy out there and leveraging our outlet stores as best as we can. So we feel really good about that. And to Colin's point, the growth rate looks high. But if you look at the actual health of the inventory and you look at our actual turns, we're actually in a reasonable spot, and we're ready to drive into next year. Good morning. Just a question on the marketing and the focus on the 16- to 20-year old varsity athletes, you talk about just some of the early improvements in the metrics for this demographic. I was wondering if you could share a few of those with us? And then I think the other question is just where -- on this year, where are you going to end up the marketing like levels or the rate of marketing spend this year? I'm just trying to understand that as it relates to more of a longer term perspective on how much you're going to invest? Thanks. Yes. And thanks for the question, Bob. Yes, as you mentioned, we have shifted our target audience to the 16 to 20-year-old varsity athlete. And I want to stress that, that's the target audience. That's not the target market. This is the inspirational news that we're looking to kind of work with and build relationships with, which would allow us to amplify the brand as part of our broader strategic evolution. Early days here, we really only made that shift in the back end of last year. So, we're starting to look at the marketing metrics around that. And it looks as if the work we're doing, and we're starting to see the results, certainly from the point of view of how we've been selling in things like our created foot ore is landing incredibly well, some of our team sports work is landing incredibly well. So, a lot of the work we're now starting to do and the way we start to think about focusing our marketing to ensure that we're meeting that athlete is really starting to resonate. And we're seeing that kind of show through in some of our results as well. From the point of view of our marketing, it's still -- it's focused on middle to top funnel activations. And again, continue to be focused on increasing awareness, engagement and consideration as we would do. And this sub-suite is a great example of us how we're looking to lean into that when it comes to that other part of our strategic evolution with what we call our lay of our sports style stuff. So, overall, we feel as if we're moving -- we've got a great story to tell, and this 16 to 20-year old athlete is the individual we want to tell it to. But Dave, do you want to give some clarity around number? Yes. Just from a dollar perspective, we finished Q3 a little below 11% of marketing dollars to revenue. And we're still managing through that operating objective of keeping marketing kind of in that 10% to 11% of revenue, and that's how we're going to keep driving forward. And then we'll talk more about next year as we get to the May call. Good morning. Thanks for taking my questions. So, the first question, I guess there's a bit of philosophical. I mean just to understand better what you're seeing out there as far as the overall backdrop. So, it sound -- the comments you made today it sounds like -- sounds suggests at least to me that maybe in your view, the backdrop has gotten a bit worse from a demand perspective. So, the question I have there as you think about how the consumer is behaving, how the consumer is reacting to the Under Armour brand. But at the same time, you and others are in this clearance activity to sort of say, rationalize excess inventories. Are those still two distinct events? I mean, is the consumer potentially weakening here at the same time you're strategically clearing inventory, or is that -- that clearance activity now either leading to consumer weakness or fueling consumer weakness? Yes, I think that from our perspective, we're not necessarily seeing it as a developing consumer weakness. I think it's more a little bit of a math situation. A lot of the brands had produced a lot more inventory for 2022, thinking it was going to be as strong as 2021, not realizing how big of a bounce back banner year 2021 was for most of the brands. And so with all that heavy inventory out there, it's really a math equation of being able to move through it. And so you see a lot of the brands are -- have been heavily discounting and we've had to play in that a little bit more than we wanted to in Q3. And now we're starting to protect a little bit more in Q4 here as we drive through. But I don't necessarily see it as a demand issue. I see it more as a situation with the numbers that are out there. And as we go further through this calendar year, that will -- we believe that, that will start to subside but it is going to take longer than what we expected, probably 90 days back. And then the other pressure that we saw more in Q3 was relative to China, as well with COVID, now very resilient consumer in China. So we're starting to see that bounce back a little bit, which is great, and we hopefully will continue to see that. But that's kind of what we're seeing out there, and we're going to keep driving forward. But I think the first half of our coming fiscal year will be a little bit more pressure than we expected 90 days back. Yes. And let me just jump in there. The way I've been kind of explaining, it's -- the inventories are bloated, and it's pretty stagnant out there at this moment in time. So it's just going to take time for it to kind of work through. I think the consumer is still there. And we're confident that certainly this -- the categories we're in and our business can certainly continue to win within this environment. But we do think, in some respects, actually, this actually gives us the right time to actually lean into the strategic work that we've already got in flight. We've already talked about the 16- to 20-year old vast athletes. How do we build that product, how do we start building that relationship. So this actually gives us a great time to do that. How do we start to bring live and sports styles in the market. Again, great time for us to do that as the industry works through the inventories. And first thing, our strategic segmentation, thinking about how we're continuing to build good, better and best product and how do we actually really start to bring that better and best product to the consumer. So yes, I understand it's bloated and it's stagnant out there, but actually from the point of view of how we can now start to play in this market, we can position ourselves incredibly well. So as this starts to play out, we can power out of it. That's very helpful. And the second question, a follow-up. I'm recognizing you haven't given guidance beyond the current fiscal year, but lots of moving parts right now with respect to top line or across geographies, across product categories, distribution channels, et cetera. Longer-term, as we're watching this business and watching business continue to recover, how should we think about what should be kind of a healthy top line growth rate for Under Armor? Brian, this is Dave. Great question. And we're excited -- as excited or if not more, to talk about the future. I think when you step back, we probably would go back to what continue to be some of the biggest opportunities for us. When you think about the footwear growth and the continued potential there, and how small our footwear business is in total to our mix, when you step back and look at where we are from an international perspective and being able to return to healthier growth in Asia Pacific as we get past COVID more, EMEA is a very healthy market for us, and we're driving forward there as well. So still a lot of great opportunities for us as we think about internationally. And then from a DTC perspective, it is an area that we've been over-indexing on relative to investment there, whether it be within the platform itself, whether it be within our loyalty, CRM, et cetera. So -- and you see that coming through in the e-com growth. So there's a lot of things to be excited about. Also, we continue to make progress relative to how we want to attack full-price brand house stores. And then on top of all of that, we have a new opportunity as far as expanding the aperture and going into that fourth quadrant for us or the Live Quadrant or Sportstyle project which we're super excited about. And that has a little bit of a longer lead time. You'll see some of that product coming into the market. But as far as bigger dollars and bigger volume, that's going to be a little bit more of a fiscal 2025 and beyond. So when you think long-term to your question, there's a lot of great opportunities out there. But as far as giving color on growth rates and things like that, we're going to hold back for now until we get more further down the road. Thanks. Good morning. Thank you for taking my questions. So I'm interested in really more about go-to-market strategies behind efforts to expand the wearable occasion for the brand. First, can you speak about the allocation of marketing dollars that effort versus the more sporter activity or dimensions of the brand? And then finally -- and I'm particularly curious here, can you speak to the buy-in of wholesale channel partners? Are there examples of commitment to point-of-sale representation for that product? Hey, Jim, yeah, let me kind of lean on -- let me kind of kick that off. Obviously, just thinking through how we think about this new segment, the Live, which is, again, just to remind you, this is kind of the fourth quartile of train compete recover Live. And we -- and building a little bit off the previous question, this changes our total addressable market enormously. So it's a huge opportunity for us to lean into that. We're building -- currently building this thing to our go-to-market model at this moment in time and understanding how we can optimize what we currently have in addition to how do we then think about bringing it to market differently. And all of that's work in flight at this moment in time. But the store that we're opening in New York is perhaps a great manifestation of how the brand wants to show up differently and intends to show up differently. And the teams are working through that, and you'll see more of that come to life over the next few quarters. With regards to how we're thinking about the utilization of athletes, obviously, we've got such an incredible roster of athletes that -- and many of them are really keen to have access to this kind of product. One of the expressions we used around here is tunnel walk, because we do an amazing job of providing athletes with products they can wear on and off to feel when they're training. But how do we allow them to have that swagger? How do we give them this tunnel walk kind of swagger that they deserve if you're operating at that level within the sports world? So again, many of the athletes are really up for this. They're really keen for this. They're really engaged and want to be part of this journey. And again, we've been talking with many of our key athletes with regards to how that comes to life. And you'll continue to see that in the way in which we're showing up from a marketing perspective as well. And again, we're just starting to build these relationships with our wholesale partners. We've had these conversations with them to build on your third question. They're excited about it as well. And the opportunity for us to -- again, the opportunity for us to increase our TAM, our total addressable market is something they can clearly see and they can see that we have an opportunity to play there. No. I mean I think that not surprisingly, one of the bigger opportunities is being able to more aggressively expand into the mall channel and some of the great partners that are in the mall business. So that's going to be a big opportunity for us, but there could be other distribution opportunities as well. It is early days at this point, but definitely a lot of potential. And within the walls and outside the walls of Under Armour, we're really excited about what that can mean. And then just following up on that, Dave, this builds on some of your earlier comments, should we think about fiscal 2024 as a foundational year for this and you build on it in fiscal 2025, or will we begin to see meaningful revenue contribution from these product categories in fiscal 2024? I think that, that's a fair assumption. Fiscal 2024 is going to be a little bit more foundational. If you think about our product life cycle and developing into more of the sports style and building out that aperture a little bit more so you might see a little bit of that coming in back half of fiscal 2024. But from a material perspective, it's really going to be fiscal 2025 and beyond where that big opportunity is. Good morning. Thank you very much for taking my question. I wanted to ask about EMEA. Last December, it was up 23%. This time, it was up 46%. Is the growth driven by a balance of footwear and apparel? If you can give a little bit more color on what you're seeing by regional performance within EMEA? And Dave, how do we think about 4Q performance for EMEA? Yeah. I mean, a couple of things. EMEA has been a very healthy region for us, and we've made a lot of progress there, which has been great. The team is doing an incredible job there. And we saw increases in Q3 in wholesale, but also on the DTC front. I will say that, a little bit of that was some earlier-than-planned shipments that were originally planned for early Q4 that ended up coming in and making it out in late Q3. So that did help a little bit. And we remain agile in the region despite uncertainty, including inflationary pressures and rising energy costs and things that, that region is dealing with. But we're in a very good spot relative to our key account relationships. We're starting to open more full-price Brand House stores, which we're excited about. So, definitely a DTC emphasis there and we continue to see it as a very high-growth region for us, and we would continue to expect that in Q4 as well. I wouldn't expect the Q4 growth to be as high as the Q3 growth, because there is some timing in there that I mentioned, but we still believe it's going to be a healthy growth area for us as we continue forward. Yeah. And building off that, and you asked about the countries, I mean, the UK has been a huge focus for us and somewhere we decided a couple of years ago, we really needed to win. And that's working incredibly well. We have – again, to Dave's point, we have great relationships with our whole partners there. And we are in the process of opening a number of stores in the first half of calendar 2023, which will all be opened up between London and up in Liverpool and Manchester and Birmingham. So stores opening up across the UK, as we really start to lean into it. Again, it's important to understand Europe is really where the brand manifests itself in the way that we want it to show up – and when we show up the right way, we clearly resonate with that core consumer. So the UK is incredibly important. We also have a major focus on Germany as well, thinking about how we're kind of continuing to grow in that market. We're a little bit further behind in Germany. But we've got other places in Europe. We're now starting to lean into more aggressively from Spain and Portugal through to France. So we're working our way through the region. But we really wanted to make sure we win in a couple of those core markets before we kind of roll out too aggressively in the region, but it's working. And it's a model that we're looking to kind of replicate back here in the US as we build those relationships further. Very helpful. And then, Dave, I'd love to ask about Kate's question around gross margin, just following up around those three buckets. It sounds like the third one mix is more structural in nature. Is that the right way to think about it relative to the other two buckets? And then you alluded to inventory turnover of three times over the foreseeable few quarters, how do we think about inventory growth year-over-year over the coming quarters, when does it kind of match revenues? Yes, I would say a couple of things. Relative to gross margin. As we think about that, I mentioned a third is the higher promotions and discounting, that's probably the biggest kind of individual piece for this year. The second bucket around elevated product cost, freight expenses, changes in FX, the two bigger pieces in there would be the product cost headwinds and then also the FX headwinds. Freight was a big headwind in the front half of the year, but has now kind of flipped the other way a little bit. And then the last one, which was more to your question, it is a little bit more structural. So, the mix impact, which is the other third remaining, probably the biggest piece of that is just having a higher mix of distributor revenue, which is a little bit lower gross margin business for us, but still very profitable on the bottom-line. And then there's a little bit of product mix in there with the higher percentage of footwear revenue, which is a little bit of a gross -- a little bit lower gross margin for us. And then a little bit or even a smaller amount impact with the region mix. But the biggest one in there is the channel mix with the higher distributor sales. And we'll provide fiscal 2024 inventory color when we get to our fiscal 2024 outlook in May. Great. Thanks. So, Colin, maybe as we enter 2023, you mentioned an uneven macro backdrop. But how are you seeing the progression of trends in the North America athletic channel, maybe post-holiday? And then, Dave, maybe just as a follow-up, could you speak to the composition maybe below the surface within inventory? What's durable versus what's at risk for markdown? And then to your point on the continued promotions, is there any parameters for us best to think about gross margin next year? Well, Matthew, thanks for the question. I think the word I used earlier is -- I think the industry, certainly, the sports industry is pretty bloated at this moment in time just because the amount of inventory that has hit the stores over the past six months, the overhang and I kind of call it the hangover from COVID a little bit where we had so much product that was late that was all kind of coming in at the same time as we saw perhaps a slowdown in demand somewhat, but we saw a correction in demand. So, you've got all of those things happening at the same time. So, you've just got a lot of inventory out there. And I think as we talked about already, I won't belabor the point, but I think it's going to take some while for that to kind of work its way through. I think, again, I think we're in a better position than most to kind of manage through it. But when the inventory -- when the industry sneezes, we catch cold somewhat as does everyone else. So, we're having to play within that environment. But I think we're in a better position because of half of the way we've managed inventories to power out just quicker and hopefully kind of protect our bottom-line as we go forward. Dave? Yes, I think, Matt, when you think about our inventory, we are in a fairly healthy place. We do not have a lot of aged inventory. So, if you look at what's in that 50% growth, it's not like there's a whole bunch of stuff that is two, three, four seasons old. It is all much more current. And therefore, we feel more comfortable of being able to move through that in a reasonable way. And we did, as I mentioned before, to take a lot of the seasonless product and we're going to pack and hold that and sell that next year as opposed to kind of moving that through liquidation or something at a lower margin or less brand accretive way. So we're in a position to be able to do that. We're comfortable doing that. And when you think about gross margin next year, we are going to wait until the May call to give color on that because there's just a lot of puts and takes. You would think that back half of next fiscal year you would probably have some less promotions. You would think that next year, we would have lower freight costs than what we've dealt with at least the front half of this year. But then on the flip side, footwear is probably still going to grow faster than apparel. And that's a little bit of a headwind, which we're comfortable with. And relative to foreign currency, who knows right? I mean it's difficult. So there's a lot of puts and takes out there. Obviously, we're going to continue to drive forward, and we've got a lot of initiatives to do so. But we're going to wait until the May call to be able to give more color there. Hey, good morning guys. Thanks for taking my question. The last couple of years, you've done a lot of work around retraining the consumer to look for you at full price and pulling back on discounts and pulling back on the off-price channel. And I think unfortunately, because of this inventory bloat that you've talked about, I think, obviously, you've been more promotional than you want it to be. How do you avoid I guess, having the customer be trained to look for your brand at a discount? And how do you eventually rein in the discounts and the promos that are occurring right now without facing pushback from the consumer who has been able to buy your brand and your competitors at a discount. This is Collin jumping in here, and thank you for the question, Tom. I think there's a couple of areas that I think are relevant to this. Number one, as you've talked about already, we've walked away from quite a bit of undifferentiated retail at this moment in time, and we have no intention of going back. So from the point of view of ensuring that we protect that core product that we have. We don't see that sliding again. We've also managed to Dave's earlier point, we're also making sure we control our liquidation at an appropriate level as well. So from the point of view of not allowing us to slide further into that trap, we're working aggressively to make sure that, that doesn't happen. At the same time, much of the work that we've been done recently is working through how do we bring more better and best product to the top of the house. We've got a really good level brand here in the US, but the opportunity for us to build into that better and best is what we're working on and where Kevin is spending a lot of his time because his history and his context for the brand really helps us understand that at the same time. We're also working through building out our wholesale distribution strategy to try and increase the opportunity of landing this stuff at a wholesale level and working through how that segmentation works and how we show up. Moving through to Live clearly gives us an opportunity to think about that a little bit from the point of view of where we show up. And Dave talked about a little bit about how do we make sure we're showing up in the right places at the mall because that gives us, again, a huge opportunity to lean into that as well. And finally, we've been continuing to make oversized investments in our own omnichannel and DTC parts of our business and certainly thinking about how we show up at retail, the Flatiron store in Manhattan is a great example and a first step on that journey. But at the same time, continuing to invest in our loyalty programs, which, again, we rolled that out last year. We're looking to roll that out more broadly here in the US later this year, and we're seeing great results from that. So it's a question of offense and defense. We're defending by making sure we don't slide back into that lower channel kind of network of retail. But at the same time, putting in place really strong plans and strategies to ensure that we're driving -- continuing to drive the brand up to that next level. Hey, thanks for all the detail here and particularly my question. So if I could just follow that last one very quickly as you look at the distribution map in North America for 2024. Are there also parts of the US distribution map that you need to mix away from to get to that targeted better, best mix on product as you kind of rethink distribution more broadly? And then I guess, one on SG&A. You talked a little bit about gross margin and how to think about some of the themes for next year. But same way, marketing, you commented on the near term to Bob's question earlier, it sounds like 10, 11 is where you plan to live next long-term, I guess. As we think about the other buckets, I'm guessing incentive comp, everybody would hope it will come back next year. are there any other buckets to just be mindful of maybe some front-loaded investment as you build the teams for Live, any other buckets that we should be thinking about as we look out to next year into the May call? Well, thank you, Michael. I'll take the first part of that, and then I'll pass it over to my partner in crime [ph] Dave, to take the SG&A part. But -- if I had my -- our plan here, Michael, is to not shrink the bottom of the market, but grow the top of the market. We want to get bigger as an overall brand. We believe -- and when we look at the way we resonate with consumers, when we look at the data, we see – we see from a consideration point of view, we have a huge opportunity out there. And part of that is not necessarily about shrinking the bottom end of the market. I think we've already done that to a large degree by walking away from much of those kind of differentiated doors, which just didn't make sense. But it's really about how do we grow at the top end of the market. So our focus is more about trying to elevate the brand and again, protect the core and elevate for more or want the better way of putting it, is kind of how we're spending our time and thinking through the product we're developing, the stories we're telling the consumer we're engaging with and the entire strategic evolution that we've got in place and we're working through will hopefully help us deliver against that. And Dave, do you want to jump into the SG&A? Yes. I mean I think from an SG&A perspective, through a lot of difficult work over the years. We are now more nimble. And so we're able to proactively manage much better than we were years back. And so think about this year with some of the pressures that have developed in the market, we've slowed down and prioritized hiring. We prioritized marketing investments differently and better continuing to manage things like consulting and T&E and things like that. And doing that has been not as difficult as it used to be in the past. And I think some of that also goes to the enterprise mindset within the company, whether it be the alignment of our leadership team and being able to make tough calls and drive through and prioritize further to be able to protect the bottom line or even if we just think about all the teammates that we have across the world and how much they're looking out for the brand, and trying to spend as if it's their own money and kind of make $1 spend like $3. And that enterprise mindset goes a long way for us. And it's just been -- I don't want to say the word easier because these are tough decisions but we've been able to act more quickly and more proactively on the cost structure, and we're going to continue to do that as we drive into next year and beyond. So I think we're set up well for that, and it's time to drive forward, time to go. Yes. And I'll just close out. I think we've done -- I think over the past few years, we've built an operating model that clearly works. We've had a solid quarter I think that demonstrates the fact that we've got it. We have a strategic refinement that we're putting in place at this moment in time, and they're starting to build out and starting to flow through the markets and starting to flow through to work with our teammates to kind of bring it to its full manifestation around – and I'm excited about how that's all going to come together. I think we're well feed up for future success. Can I follow up with just one more? I think you used the word stagnant twice in regards to the inventory clearing you're seeing in the marketplace today. Obviously, we have your revenue outlook for the fourth quarter, but would you mind elaborating a little bit on where you see pockets of stagnation and POS out there, perhaps where you're surprised to see that inventories are turning slower than you expected coming out of holiday? I think there's just a lot out there. I think, I'll use bloated again because I think I've used that a couple of times as well. So that may be the key word with regards to inventory. I think it's just bloat. I think it's different channels, obviously have different, different issues that they're dealing with. And different brands are obviously handling it in different ways. But you only have to go and look on websites to see how many people are running discounts out there to see how challenging it is – so yeah, again, I think it's just going to take some time for it to work through. Thank you. This concludes the question-and-answer session. Thank you for your participation. You may now disconnect. Everyone, have a great day.

EarningCall_457

Hello, everyone, and welcome to the SIGNA Sports United Fourth Quarter and Full Year Fiscal 2021 [ph] Financial Results Call. My name is Charlie and I'll be coordinating the call today. [Operator Instructions] I will now hand over to your host, Alima Levy, Head of Investor Relations at SIGNA Sports United to begin. Alima, please go ahead. . Good morning. And thank you, everyone, for joining us. Today, we will review our fourth quarter and full year results for fiscal year 2022. With me are Stephan Zoll, Chief Executive Officer; and Alex Johnstone, Chief Financial Officer. I would like to remind you that we will make forward-looking statements during this call regarding future events and financial performance, including outlook for the consolidated fiscal year 2023. We cannot guarantee that any forward-looking statements will be accurate, although we believe that we have been reasonable in our expectations and assumptions. Our 20-F filing identifies certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made today. Except as required by law, we undertake no obligation to publicly update or revise any of these statements, whether as a result of any new information, future events or otherwise. Also, please note that during this call, we will discuss certain non-IFRS financial measures as we review the company's performance, including adjusted EBITDA. These non-IFRS financial measures should not be considered a replacement for and should be read together with the IFRS results. Please refer to the Investor Relations section of our website to obtain a copy of our investor presentation, which contains descriptions of our non-IFRS financial measures and reconciliations of our non-IFRS measures to the nearest comparable IFRS measure. This call is being recorded, and a webcast will be available for replay on our Investor Relations website. Thanks, Alima. And good morning, everyone. For today's agenda, I'm happy to provide an overview of our fourth quarter and full year results for fiscal 2022 and share the progress we have made towards our priorities throughout the year. Fiscal year 2022 was a tale of two halves with great achievements, but also extreme turbulences. Let me first remind you of our achievements this past year. As you are well aware, in fiscal 2022, we became a listed company on the New York Stock Exchange. We also closed two significant acquisitions: Regal CSC in the UK and Tennis Express in the U.S., which enabled us to tremendously increase our scale and more than double our revenue base and customer reach versus pre-COVID in fiscal year 2019. We made great progress on our various strategic projects, reorganizing our logistics hubs to improve efficiency and better serve our customers and starting synergy implementation on the IP and commercial side. We readied ourselves to enter U.S. bike market, hiring an experienced team and setting up the right infrastructure through the year, which enabled us to successfully launch our U.S. bike business in Q1 fiscal 2023. Additionally, we expanded our own brand portfolio with multiple award-winning bike models. We also partnered with renowned institutions to advance our brand recognition. For instance, SSU’s Tennis Point was the first ever retailer with an on-site presence at the U.S. Open this year. Beyond these achievements, like many retailers in discretionary category we were severely impacted by the fallout of the conflict in Ukraine. Going into the year, the supply chain challenges brought about by COVID-19 were starting to subside albeit certain high-end categories such as e-bikes and componentry remained constrained. The inflationary backdrop that has been building globally since the start of fiscal 2022 accelerated dramatically with the onset of the conflict in Ukraine, resulting in all-time low consumer sentiment. This unexpected deterioration significantly affected the demand environment, resulting in significantly overstocked and competitive markets weighing heavily on margins, particularly in the bike business in non-core geographies. These prolonged macro challenges persistent in fiscal 2023 has forced us to rethink our operating approach. We have launched a strategic realignment assessment to return to long-term profitable growth, aligned behind three principles. First, a sharpened focus on core geographies, where SSU’s banners enjoy strong competitive position; second, adapt our commercial and operating models to drive efficiency; and third, deliver transaction synergies. We are convinced that in the current environment, a sharpened focus on our core markets and an adapted commercial model will return SSU to run rate profitability in fiscal 2024 and best position SSU for sustainable growth and value creation. We will provide a fulsome update on our plans in the near future. Whilst SSU needs to navigate the current turbulent environment, we continue to monitor the market in a disciplined way as we strongly believe current dislocation will create M&A opportunities at historically attractive valuations for SSU as a natural consolidator. We are convinced M&A will play a key role in the company's future, both to further increase our scale on the retail side and to further verticalize by inorganically adding to our portfolio of brands. Current headwinds are transitory in nature, while our tailwinds are structural. The current turbulence will drive consolidation leading to a healthier market structure. The long-term mega trends of health and fitness, e-mobility and digitization, will resume enabling consistent steady growth in the online sports retail market. And combined with our scale position in this fragmented growing market, we are very optimistic about SSU’s long-term prospects. With that, I would like to thank you all for your time this morning. Now I will hand over to Alex to walk you through our financial performance. Thanks, Stephan. And good morning, everyone. Today, I'll take you through our Q4 and full year results for fiscal year 2022 and offer some additional insights on the key factors affecting our financial performance. Let me firstly remind you that there were three quarters of full contributions of our recent acquisitions, Wiggle Chain Reaction Cycles and Tennis Express, which closed on December 14 and December 31, 2021, respectively. Additionally, we made the decision to discontinue stock operations in the Team sports business from the end of fiscal year 2022 and as such, have restated historical figures to present continuing operations only. As you may have seen in our materials released this morning, Q4 2022 net revenue was €300 million and full year revenue was €1.06 million, a 28% and 31% increase year-over-year, respectively. This reported performance reflects the enhanced scale of our operations and the beneficial effect of our recent acquisitions. Our pro forma revenue inclusive of a full year of acquisitions in the period, inclusive of the discontinued staff of operations was in line with the top end of our August guidance of €1.2 billion. However, on an organic basis, our financial performance was impacted by difficult market dynamics as the supply shock inflation dramatically impacted consumer sentiment in February 2022 onwards and supply constraints abated, resulting in overstocked competitive markets, in particular, in the bike category. On the operating level, we took a meaningful step forward, thanks to our recently closed transactions in full year 2022 and on a reported basis year-over-year, active customers grew 40% to 6.7 million, visits grew 22% to 320 million and net orders grew 40% to 9.5 million. Net AOV was broadly stable due to the effects of M&A and the mix effect of the lower fallback contribution in fiscal year 2022, whilst all KPIs declined on a pro forma basis year-over-year active customers, net orders and conversion, grew strongly relative to pre-COVID levels, indicating market growth even against the challenging backdrop. In fiscal 2022, gross margin declined from the pandemic highs by approximately 385 basis points to 34.7%, in part due to the sudden demand structure capitalized by the conflict in Ukraine. March onwards, organic demand was materially lower than prior year, just the supply chain constraints started to revert result in a lower stock highly promotional environment. This competitive environment, coupled with inflation across our OpEx space resulted in a reported adjusted EBITDA for the year of negative €66 million. The pro forma adjusted EBITDA margin, inclusive of discontinued operations was negative 6.1%. To offset the deterioration in organic demand, the group's companies invested heavily in marketing to drive with traffic and conversion. The competitive backdrop made it difficult to pass inflation and variable fixed cost to the consumer without further impacting demand. The company implemented various cost-saving measures to contain and reduce the impact of inflation. However, these savings were offset by lower-than-anticipated order volumes resulting in overcapacity and reduced efficiency across our operations. These results are wholly unsatisfactory and we have a focused plan to return the business to profitability. Before touching on the plan, I'll briefly cover our fiscal year 2022 cash flow and the current liquidity position. In fiscal 2022, net cash from operating activities was negative €191 million. Primarily driven by the lower level of adjusted EBITDA, a significant inventory buildup of approximately €14 million and material onetime transaction fees in connection with acquisitions and the NYSE listing. Our net cash from investment activities was negative €238 [ph] million, primarily due to acquisitions, which closed during the year and an elevated level of CapEx of approximately €45 million as we invested in logistics consolidation and IT projects to replatform acquired companies. Taken together with net cash from finance activities and the cash flow from discontinued operations, we ended the year with €43 million of cash in highly liquid investments. Pro forma, the subsequent capital raisings and commitments received, the company's liquidity position stood at €293 million as of fiscal year 2022 year end. This included €20 million of undrawn asset capacity, the proceeds from the issuance of the €100 million investable notes issued in October 2022 and a further €130 million investment commitment, both signed with an affiliate of our largest shareholder. Additionally, the company proactively negotiated waivers on various covenants of its €100 million bank facility, providing relief until June 2024. The company is confident this increased financial flexibility provides the run rate to pursue its strategic realignment plans. Now turning towards the outlook for this fiscal year, the challenging macro backdrop continues to impact our operations as inflation is forecast to remain stubbornly high in fiscal year 2023, in particular, in our core markets of DACH and the UK. We anticipate the promotional environment persists throughout the year until the excess stock, in particular, in the [indiscernible] works its way through the system. Stephan outlined against this backdrop the necessity to change our operating model to focus on our core markets and adjust our commercial approach. These changes are designed to return the business to adjusted EBITDA profitability on a run rate basis in fiscal year 2024. Together, we anticipate these changes will result in lower sales in fiscal 2013, albeit to a relatively higher contribution. We are experiencing significant gross margin contraction throughout Q1 [ph] as many market participants struggle for liquidity and the environment is increasingly competitive. We anticipate that this will start to reverse as seasonal demand picks up in the spring, summer and the stock situation sequentially improved. Against this backdrop, it is essential that we focus on lean operating processes with the benefits of various technology and logistics investments starting to kick in towards the end of this year and accelerating throughout fiscal year 2024. The market environment has pushed transaction synergies from the Wiggle and Tennis acquisitions, in particular, in procurement and in the cross-selling of our own brands into fiscal year 2024 but the opportunity remains significant. Finally, the company is focused on releasing capital from targeted inventory reduction of €30 million to €40 million in the year or managing CapEx in the €35 million to €40 million envelope. As Stephan discussed, we do see significant opportunity for M&A at very attractive valuation, but we will remain highly selective and disciplined refer tuck-in and brand opportunities with limited integration requirements in the near term. We remain confident SSU will emerge from this period of dislocation positioned to grow profitably in a consolidating growing market. Thank you. [Operator Instructions] Our first question comes from Xian Siew of BNP Paribas. Xian your line is open. Please go ahead. Hi, guys. Thanks for the question. I was just wondering about revenue growth. I don't think I saw how necessarily like what your expectations for revenue are in 2023? And maybe you mentioned gross margin pressure in 1H, is it fair to assume revenue pressure in 1H as well and then maybe some stabilization in the back half? Any help would be helpful. Thanks. I do. So I think the way that we're looking at it is that we expect that will be slower in the first half of the year relative to last year on a pro forma basis. And we expect that that will sequentially improve really from kind of March onwards as we start to map and the impact of the Ukraine conflict. And on a gross margin basis as well we're seeing highly promotional environment at the moment as we see many competitors struggling for liquidity, but we do anticipate that in the second half of the year that will sequentially improve. And we think that probably the overstock situation by the end of the year should be more normalized and then will be set up for a better year in fiscal year 2024. And yes, maybe just to add to that yes, the headwinds that we face right now we believe are transitory. So if you look a little bit further out there, our megatrends that we talked about, right, mobility the health and life fitness trend, the digitalization of our sports all these trends are structural. So they will move their way up again. So we see very positive growth in the midterm coming back. Got it. Yes, that's very helpful. And then maybe just on the profitability you mentioned getting back to run rate profitability in potentially 2024 or fiscal 2024. What does that mean for 2023? Are we still making progress versus 2022? Or could we take a step back just because of a deleverage? Or how do we think about – is it 2023 kind of in between 2022 and 2024? Is that the right way to think about it? So I think it will – it depends on really when the recovery and demand kicks in, but we would anticipate that deleveraging will certainly have a significant impact in the first half of the year and will start to get better. Where we end up relative to 2023, it's tough to say but we're very focused on controlling what we can control. Levels, and obviously managing as much cost out of the business as possible, and we will start to see in a significant benefit in part due to the transaction synergies between Wiggle and our existing bike business in the second half of the year, but really that will really ramp up in fiscal year 2024. Thank you. [Operator Instructions] Our next question comes from Randy Konik of Jefferies. Randy your line is open. Please go ahead. Hey thanks guys. Just back on the outlook for, I guess, first for gross margin. Can you give us a little bit of color on how to think about the extent of the gross margin declines that you expect, I guess, either in the first half or throughout the year? Is it going to be more similar to the gross margin declines exhibited in the fourth quarter? Or how in this past fiscal year, the gross margin declines were obviously less worse? So I'm assuming that it's more closer to what you saw in the fourth quarter. Is that fair? And if that's fair, when do you start to see that inflection in gross margin? Is it back when the comparisons get easier in the fourth quarter? I just want to get a feel for the extent of gross margin decline and then the shape of the flow of the declines and if they inflect towards the back half of calendar 2023? Hi Randy. I would say that sequentially, gross margins have worsened in Q1, we anticipate that we will continue to do so in Q2. We are starting to see – we expect an uplift in gross margins as we go into the seasonally stronger spring and summer months. So we would anticipate that we'll be kind of back to pre-COVID levels of gross margin by the end of this fiscal year. Okay. And then just can you give us some perspective on the demand environment, the U.S. versus Europe across bike versus tennis? Just give us some more kind of flavor there would be super helpful? Maybe I'll start, Randy. So from a U.S. versus EU perspective, U.S. is definitely less hit, right? There's less consumer sentiment decline versus in the EU and especially in our core markets in Germany and the UK, we saw that most advanced. So U.S. is in a much happier place there. And from a tennis and bike perspective, there's not a very big difference there. Our tennis business is slightly more seasonal, right, but there's not a massive difference in terms of consumer sentiment. Okay. And then I guess lastly, how are you thinking about just the cost structure of the organization. If you think about the SG&A number in 2000 that you put up in 2022 calendar. How do we think about that number in calendar 2023 and beyond? Is that a number you can kind of keep bringing lower? Or is it going to be flattish or how do we think about the – it looks like you want to kind of obviously sharpen to get towards – to get to run rate profitability in 2024. Just want to get a sense of how we think about the SG&A? Thanks, Randy. So we're currently working through our kind of strategic realignment work. And what we will see is that, firstly, the change in commercial approach will sequentially improve and the contribution of the sales that we're generating across with a more focused approach towards our core markets. And then in terms of our approach towards our overhead, we're being very, very focused in trying to reduce an aggregate cost, and it will probably tread water this year due to the lower sales level and the deleveraging effect, but we anticipate that once the level of demand in a position to pass more of the inflation of cost base to consumers, and we expect that, that will start to pick up materially fiscal year 2024. Got it. And then just on the strategic realignment assessment, is that something – I guess something you're working through now? And you plan to communicate some sort of outcome to the market in the next quarter or two quarters from now? Or how do we think about the outputs of that assessment and when we should hear about what we learned from that assessment that you're working on now. Yes. So Randy, you see in our presentation there's already a couple of items mentioned, right? The three areas that we cover with it and also some of the areas within those three buckets. And it will be, let's say, like that, it will be published in the near future. TBD exactly when, but it won't take very much longer. Hey good morning guys. Thanks for taking the question. I guess, just one thing is you didn't give full year guidance, and I understand there's a lot of moving pieces here. But we're kind of through the first three or four months of the year; presumably you'll be reporting 1Q soon. But any more granularity on what you're seeing in 1Q that was one-data point kind of in one of the charts on organic revenue in 1Q? And know we're talking about it in the big picture, but anything from what we're seeing so far and then how to think about guidance, we could expect guidance again in the future. I'll start with that one. Hi Ygal. So I think the chart you're referencing is kind of indicating kind of mid-teen year-over-year organic declines in Q1, and that's about right. And as we just alluded to and answer on Randy's question in terms of gross margin compression we're seeing similar levels as we witnessed in Q4. In terms of the timing of when we see the reversal of those trends, we think that Q2 will follow a similar trend. But then Q3, as we start to comp sequentially against the start of the conflicts in March last year, we saw a significant drop in organic demand. The advent of Russia's invasion of Ukraine, that obviously persisted and got worse as the inflation situation developed throughout the year. We anticipate that you're starting to see some data points that indicate that inflation in our core markets is starting to decline. Consumer sentiment is starting to improve slightly warmer winter than anticipated. So there's a few data points that indicate that H2 will be better, in particular as you're starting to see stock [indiscernible] to move a little quicker as we get closer to spring. So I think we're being very prudent, but we are optimistic that the second half of the year will be materially better, but there is a lot of distress, in particular in the bike industry right now where we're seeing both with the OEMs and the suppliers will have a lot of stock, and that's resulting in a competitive market. But the situation will normalize in time. We just don't have a crystal ball of when exactly that will be. And so we're trying to really focus on controlling what we can control in the coming months and quarters. Okay. And then – sorry, just to add to that, if you look out there a little bit, next to the normalization that Alex just described, there's also a consolidation happening in the market, right, that will take place. So we'll see a more cleaned up, if you wish a market structure over the next years to come, which also will have a tremendous impact we believe in our business and a positive set. Okay. All right one on the supply constraints. So does the supply chain back to normal fully? Is that how you would characterize it? And then within tying that to the markdowns and inventory controls, any learnings from the markdowns you're expecting that to kind of dissipate fully by the second half and get back to normal pricing? Or would that potentially continue throughout the course of the year, maybe just less than it is right now? So that depends a bit on a couple of factors, right? So first of all we do see an easing of the supply chain disruptions, right? We still have some left and especially our higher-priced items and e-bike, for example, in bike. So that's still not normalized, but we expect that to normalize in the course of 2024. In terms of the promotional levels, that obviously depends how it's a bit by category, how quickly the overstock fades out of the market likely to take a little bit longer in bike than in tennis, for example, our categories. But that's something that we obviously watch very carefully. Okay. And last question, just on the commercial change and the focus on the core geographies. Presumably, U.S. is included in that but I just want to make sure. And then talking about M&A here and continued focus there. Does this understanding there will be a continued focus on M&A and there should be good opportunities in the market in the coming months or so? But does it change your M&A strategy at all? Are you focused on different things than you were before, just tying all those pieces together? Thanks. So U.S. obviously remaining a very key part and our tennis business, as you know, Tennis Point and Tennis Express in the U.S. are very strongly positioned and we are currently working on driving the synergy. So basically bringing these businesses closer together and work the market even harder. That's a very important piece of our growth strategy moving forward. Our U.S. bike business particularly well started. I mean that's a nascent business, right? We hired a team in the beginning of last calendar year in February 2022. We launched our first jobs with our own brands in November 2022, so less than nine months after the first hire. Very, very strong start, and that's also part of our growth strategy moving forward. In terms of M&A, not a real shift in focus in terms of target. We still target online retailers to complement certain geographic reaches but also brands to complement our own brand portfolio. The shift is that we obviously look much closer and as Alex outlined, very disciplined in terms of looking at the best opportunities out there. However, right now, it's obviously time where renovation came down heavily, and it's a good time to look at those targets again and to see there's good deals to be struck. So target is not very different disciplined increase for sure. Thank you. At this time, we currently have no further questions. So I hand back over to Stephan Zoll for any closing remarks. So thank you very much everybody for: a) joining; and b) your questions. And we're very much looking forward to the next update. Thank you.

EarningCall_458

Good morning, everyone. Welcome to Gartner's Fourth Quarter 2022 Earnings Call. I'm David Cohen, SVP of Investor Relations. At this time, all participants are in a listen-only mode. After comments by Gene Hall Gartner’s Chief Executive Officer and Craig Safian Gartner’s Chief Financial Officer. There will be a question-and-answer session. Please be advised that today's conference is being recorded. This call will include a discussion of fourth quarter 2022 financial results and Gartner's outlook for 2023 as disclosed in today's earnings release and earnings supplement both posted to our website, investor.gartner.com. On the call, unless stated otherwise, all references to EBITDA are for adjusted EBITDA. With the adjustments as described in our earnings release and supplement. All growth rates in Gene's comments are FX neutral unless stated otherwise. And its contract value comments exclude Russia from 2021. All references to share counts are for fully diluted weighted average share counts unless stated otherwise. Reconciliations for all non-GAAP numbers we use are available in the Investor Relations section of the gartner.com website. Finally, all contract values and associated growth rates we discuss are based on 2022 foreign exchange rates unless stated otherwise. As set forth in more detail in today's earnings release, certain statements made on this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's 2021 Annual Report on Form 10-K, quarterly reports on Form 10-Q, as well as in other filings with the SEC. I encourage all of you to review the risk factors listed in these documents. Good morning, and thanks for joining us today. Gartner drove a strong performance in the fourth quarter with double-digit growth in contract value, revenue, EBITDA and EPS. We generated nearly $1 billion in free cash flow and we returned even more than that to shareholders through our ongoing share repurchase program. Enterprise leaders are dealing with high volatility and uncertainty. Inflation accelerated to the highest level in 40-years. The dollar was the strongest it's been in 20-years and it remains extremely volatile. There are ongoing supply chain issues, energy prices has been volatile. The labor market has been volatile. Enterprises are assessing the impact of remote versus hybrid versus in-person work. There are widespread concerns of a recession. All of these factors and more impact enterprises around the world. Leaders need help navigating this turbulent time and they know Gartner is the best source for that help. Our services often make the difference between success and failure for executives and their enterprises. We help clients succeed with their mission critical priorities, whether they're in growth mode or cutting costs. With all this volatility, our most recent research shows that Chief Financial Officers are more carefully scrutinizing expenses. But at the same time, they're increasing investment and mission critical priorities. Even in enterprises, they are under extreme financial pressure. Our research business continues to be our largest and most profitable segment. We help leaders across all major enterprise functions in every industry around the world. Our market opportunity is fast across all sectors, sizes and geographies. And we're delivering more value than ever. Research revenue grew 13% in the fourth quarter. Total contract value growth was 12%. Contract value growth was broad-based across practices, industry sectors, company sizes and geographic regions. We serve the executives and their teams through two distinct sales channels: global technology sales or GTS is our largest sales force. GTS contract value grew 11%. The large majority of GTS serves IP leaders and their teams and we saw double-digit growth with this client segment despite tough compares. GTS also serves leaders at technology vendors, including CEOs and product managers. In this segment, growth moderated, but still grew at high-single-digits, despite even tougher compares. Global Business Sales or GBS serves leaders in their teams beyond IT. This includes HR, supply chain, finance, marketing, sales, legal and more. GBS contract value grew 19% in 2022. In the five years since we launched our GXL products within GBS, we've seen exceptional compound annual growth rates. Gartner conferences deliver extraordinarily valuable insights and engaged and qualified audience. In the first half of 2022, we delivered most of our conferences virtually. In the second half, we pivoted back to in-person for nearly all our conferences. Feedback has been excellent. Most in-person conferences were sold out in 2022 and we've sold significantly more than half of our exhibitor space for 2023. Gartner consulting is an extension of Gartner Research. Consulting helps clients execute their most strategic initiatives through deeper, extended project-based work. Consulting is an important complement to our IT research business. Consulting revenue grew 24% in the fourth quarter. We exited the year with a strong backlog and pipeline. Our business is fueled by our highly talented associates. During 2022, we grew our team by about 2,900 associates. With this growth, we ended 2022 with the lowest percentage of open positions ever. When we're fully staffed, we provide our clients better service, which results in better retention. We also sell more in territories that are fully staffed. We have carefully aligned our hiring with recent demand and the long-term opportunity we have for growth. Our 2023 outlook reflects our most recent experiences from Q4. We've also been prudent in considering the potential impact of volatility from the global environment. We expect to deliver at least 21.5% margins across a wide range of economic scenarios. And our guidance has opportunity for upside if the business performs in line with historical trends. Craig will take you through our guidance in more detail. One of the unique things about Gartner is that we provide value to enterprises that are thriving, shortly or anywhere in between. By being exceptionally agile and adapting to the changing world, we have sustained record of success. We're well prepared as we enter 2023. We've carefully aligned staffing levels with demand and we have the lowest percentage of open positions ever. Our content addresses today's mission critical priorities. And we know the right things to do to be successful in any environment. In closing, we again saw strong growth across the business. Looking ahead, we are well positioned to drive growth far into the future. Even as we invest for future growth, we expect margins to increase modestly over time and we generate significant free cash flow well in excess of net income or return capital to our shareholders through buybacks, which reduces shares outstanding and increases returns over time. Thank you, Gene, and good morning. Fourth quarter results were strong with double-digit growth in contract value, revenue, EBITDA and adjusted EPS. FX neutral growth was even stronger than our reported results. We also delivered better than planned EBITDA margins. During 2022, we generated almost $1 billion of free cash flow and we returned more than that to shareholders through stock repurchases. Our financial performance for the full-year 2022 included total contract value growth of 12%, total revenue growth of 16%, EBITDA growth of 14%, diluted adjusted EPS of $11.27, and free cash flow of $993 million. We are introducing 2023 guidance, which reflects higher than normal variability in the set of reasonably likely outcomes. The guidance accounts for the tough compares at the start of the year and the opportunity for upside if near-term demand is stronger than we built into the outlook. With the catch up hiring we did last year; we are very well positioned to add value to enterprise function leaders and their teams across all industries and around the world. Fourth quarter revenue was $1.5 billion, up 15% year-over-year as reported and 20% FX neutral. In addition, total contribution margin was 68%, down 100 basis points versus the prior year. EBITDA was $421 million, up 37% year-over-year and up 44% FX neutral. Adjusted EPS was $3.70, up 24% and free cash flow in the quarter was $166 million. We finished the year with 19,505 associates, up 18% from the end of 2021. About 40% of the headcount growth was catch up from prior years. Our hiring has been carefully calibrated to revenue growth and future demand and we are well positioned from a talent perspective heading into 2023. Research revenue in the fourth quarter grew 9% year-over-year as reported and 13% on an FX neutral basis driven by our strong contract value growth. Fourth quarter research contribution margin was 74%, consistent with 2021. The contribution margin had a benefit during the quarter from somewhat lower headcount levels and travel expenses still modestly below our post-pandemic expectations. For the full-year 2022, research revenues increased by 12% on a reported basis and 16% FX neutral. The gross contribution margin for the year was 74% in line with 2021. Contract value or CV represents the annualized revenue under contract at a point in time. In looking at our global contract value across both GTS and GBS, more than 75% of our CV is from enterprise function leaders and their teams with the bulk of the balance coming from leaders at tech vendors. Our enterprise function leader’s business includes IT leaders, who are end users of technology and who we serve through our GTS sales force. And leaders of other business functions who we serve through our GBS sales force. In both cases, we serve leaders around the world and across all industries. We're helping these enterprise function leaders address their most important mission critical priorities. CV was $4.7 billion at the end of the fourth quarter, up 11.9% versus the prior year and up 12.3% adjusted for the impact of exiting Russia. CV from enterprise function leaders across GTS and GBS grew at strong double-digit rates. CV from tech vendors grew high-single-digits, compared to a high-teens growth rate in the fourth quarter of ‘21. Quarterly net contract value increase or NCVI was $189 million [Technical Difficulty] business of almost $400 million. CV growth was broad-based across practices, industry sectors, company sizes and geographic regions. Across our combined practices, all industry sectors grew at double-digit rates other than technology and media, which grew at high-single-digit rates. The fastest growth was in the transportation, retail and manufacturing sectors. We had double-digit growth across all of our enterprise size categories. We also drove double-digit growth in nine of our top 10 countries, with high-single-digit growth in the 10. Global technology sales CV was $3.6 billion at the end of the fourth quarter, up 10% versus prior year and up 10.5% adjusted for the exit of Russia. GTS had quarterly NCVI of $138 million, while retention for GTS was 105% for the quarter. GTS new business was down 8.5% versus last year. New business with IT function leaders was up modestly year-over-year against a tough compare. New business with tech vendors facing even tougher compare against Q4 of 2021, which was its strongest quarter ever. GTS quota-bearing headcount was up 18%, compared to December of last year, about 40% of the growth was catch up hiring from 2021. Our continued investments in our sales teams will drive long-term sustained double-digit growth. Our regular full set of GTS metrics can be found in the appendix of our earnings supplement. Global business sales CV was over $1 billion at the end of fourth quarter, up 19% year-over-year, which is above the high-end of our medium-term outlook of 12% to 16%. All of our GBS practices other than marketing grew at double-digit growth rates led by supply chain and HR, which both continued to grow faster than 20%. GBS CV increased $52 million from the third quarter, while retention for GBS was 112%. GBS new business was up 3% versus last year against a very strong compare. The two-year compound annual growth rate for new business was 9%. GBS quota-bearing headcount increased 22% year-over-year with a little more than 50% of the growth being catch up from 2021. Headcount we hired in 2022 will help to position us for sustained double-digit growth in the future. As with GTS, our regular full set of GBS metrics can be found in the appendix of our earnings supplement. Conferences revenue for the fourth quarter was $188 million, contribution margin in the quarter was 53%, we held nine in-person conferences in the quarter. It has been very exciting for our business to return to in-person conferences. For the full year 2022, revenue increased 82% on a reported basis and 90% FX neutral. Gross contribution margin was 54%. Fourth quarter consulting revenues increased by 17% year-over-year to $138 million. On an FX neutral basis, revenues were up 24%. Consulting contribution margin was 37% in the fourth quarter. Labor based revenues were $96 million, up 11% versus Q4 of last year and up 19% on an FX neutral basis. Backlog at December 31 was $140 million, increasing 24% year-over-year on an FX neutral basis with another strong bookings quarter. The inclusion of multi-year contracts in our backlog calculation a change we described earlier last year, contributed about 13 percentage points to the year-over-year growth rate. Our contract optimization business had a very strong quarter increasing 36 % as reported and 39% on an FX neutral basis versus the prior year. As we have detailed in the past, this part of the consulting segment is highly variable. Full-year consulting revenue was up 15% on a reported basis and 22% on an FX neutral basis. Gross contribution margin of 39% was up 140 basis points from 2021. Consolidated cost of services increased 19% year-over-year in the fourth quarter as reported and 24% on an FX neutral basis. The biggest drivers of the increase were higher headcount to support our continued strong growth and the return to in-person destination conferences. SG&A decreased 3% year-over-year in the fourth quarter as reported and increased 1% on an FX neutral basis. We had lower non-cash non-recurring charges in 2022, compared to 2021. On a comparable basis, SG&A was up due to additional headcount for sales and G&A functions. For the full -year, cost of services increased 17% on a reported basis and 21% on an FX neutral basis. SG&A increased 15% on a reported basis and 19% on an FX neutral basis in 2022. EBITDA for the fourth quarter was $421 million, up 37% year-over-year on a reported basis and up 44% FX neutral. Fourth quarter EBITDA upside to our guidance reflected revenue exceeding our forecasts, most notably in consulting and expenses at the low-end of our expectations. EBITDA for the full-year was $1.47 billion, 14% increase over 2021 on a reported basis and up 19% FX neutral. Depreciation was $24 million in the fourth quarter, down modestly versus 2021. Net interest expense excluding deferred financing costs in the quarter was $29 million about flat with the prior year. The modest floating rate debt we have is fully hedged through maturity. The Q4 adjusted tax rate, which we use for the calculation of adjusted net income was 16.7% for the quarter. The tax rate for the items used to adjust net income was 23.2% for the quarter. The full-year tax rate was 21.6% on the same basis. Adjusted EPS in Q4 was $3.70, up 19% year-over-year. The average share count for the fourth quarter was 80 million shares. This is a reduction of about 3.7 million shares or about 4% year-over-year. We exited the fourth quarter with about 80 million shares outstanding on an unweighted basis. For the full-year, adjusted EPS was $11.27, EPS growth for the year was 22%. Operating cash flow for the quarter was $203 million, excluding insurance proceeds in Q4 of 2021, operating cash flow was down about 7%. Q4 cash flow was impacted by Hurricane Ian, which hit our center of excellence in Fort Myers extremely hard in late September. While we were able to sell and service our clients from Fort Myers, we did have some delays in getting invoices out as quickly as we normally would. Elections for some of these delayed invoices slipped into January, but we are now caught up. CapEx for the quarter was $38 million, up about $16 million year-over-year, led by increases in capitalized technology labor costs and catch-up laptop spend. Free cash flow for the quarter was $166 million. Free cash flow growth continues to be an important part of our business model with modest CapEx needs and upfront client payments. As many of you know, we generate free cash flow well in excess of net income. Our conversion from EBITDA is also very strong. With the differences being cash interest, cash taxes and modest CapEx, partially offset by strong working capital cash inflows. Free cash flow as a percent of revenue or free cash flow margin was 18% on a rolling fourth quarter basis. On the same basis, free cash flow was 68% of EBITDA and 123% of GAAP net income. At the end of the fourth quarter, we had almost $700 million of cash. Our December 31 debt balance was $2.5 billion. Our reported gross debt to trailing-12-month EBITDA was under 2 times. Our expected free cash flow generation, unused revolver and excess cash remaining on the balance sheet provide ample liquidity to deliver on our capital allocation strategy of share repurchases, and strategic tuck-in M&A. Our balance sheet is very strong with $1.7 billion of liquidity, low levels of leverage and effectively fixed interest rates. We repurchased more than $1 billion of stock throughout 2022. We expect the Board will refresh our share repurchase authorization as needed, which they did earlier this month. We now have about $1 billion authorized for share repurchases. Across the past two years, we have returned $2.7 billion to shareholders by repurchasing more than 11 million shares. Over that timeframe, we have reduced our shares outstanding by 11%. As we continue to repurchase shares, our capital base will shrink. This is accretive to earnings per share and combined with growing profits also delivers increasing returns on invested capital over time. Before providing the 2023 guidance details, I want to discuss our base level assumptions and planning philosophy for 2023. For research, we continue to innovate and provide a very compelling value proposition for clients and prospects. Executives and their teams face uncertainty and challenges and they recognize how Gartner can help regardless of the economic environment. Our plan allows for a higher-than-normal level of uncertainty in the world as Gene discussed. We've got tough compares across the business and particularly with tech vendors for another quarter or two. We've taken a prudent approach based on historical trends, as well as more normal patterns which we reflected in the guidance. If near-term demand is stronger than we've built into the outlook and NCVI phasing, retention rates, and non-subscription growth performed closer to the way they have historically, there would be upside to our guidance. In addition, our teams are focused on driving greater growth than what's embedded in the guidance. Finally, as you think about GBS overall CV and revenue growth for 2023, please keep in mind that we closed on the divestiture of a small non-core asset last week. We sold Talentneuron which we acquired as part of the CEB transaction for $164 million. In the earnings supplement appendix, we've provided historical contract value updated for 2023 FX rates, as well as the removal of Talentneuron from prior years. For conferences, we are basing our guidance on being 100% in-person for the 47 destination conferences we have planned for 2023. We expect to return to more typical seasonality for the business with fourth quarter the largest followed by the second quarter. For consulting revenues, we have more visibility into the first half based on the composition of our backlog and pipeline as usual. Contract optimization is seasonally slower in the first quarter and remains highly variable. We had a very strong year in 2022, especially in contract optimization in the fourth quarter. Our base level assumptions for consolidated expenses reflect significant headcount increases from 2022 annualizing into 2023. Our plan for headcount for 2023 is more in line with our normal model as we caught up on hiring last year. If demand is stronger than what's in the initial plan, we will have opportunity to add even more great talent to our teams. We also expect T&E cost to more fully normalize this year. Finally, we continue to invest in our systems and process automation, both client facing and internal applications as part of our innovation and continuous improvement programs. We will continue both to manage expenses prudently to support future growth and deliver strong margins. At current rates, FX will be a modest tailwind to growth for the full-year with the benefit in the second half. Our guidance for 2023 is as follows: we expect research revenue of at least $4.92 billion, which is growth of about 7%. Excluding the effect of the divest adds 1 percentage point to the year-over-year growth rate. We expect conferences revenue of at least $445 million, which is growth of about 14%. We expect consulting revenue of at least $500 million, which is growth of about 4%. The result is an outlook for consolidated revenue of at least $5.865 billion, which is growth of about 7%. Excluding the divested business from 2022 would add about 80 basis points to the growth rate. As I've mentioned, we've taken a prudent approach to planning for 2023. This applies to revenue, operating expenses and free cash flow. We expect full-year EBITDA of at least $1.26 billion. We expect to be able to deliver at least 21.5% margins in most economic scenarios. If revenue is stronger than our guidance, we expect upside to EBITDA and margins. Included in the guidance is equity comp of $132 million, up from 2022. We expect 2023 adjusted EPS of at least $8.80 per share. For 2023, we expect free cash flow of at least $920 million. Our EPS guidance is based on 80 million shares, which only assumes repurchases to offset dilution. Finally, for the first quarter of 2023, we expect to deliver at least $310 million of EBITDA. All the details of our full-year guidance are included on our Investor Relations site. Our strong performance in 2022 continued in the fourth quarter. Contract value grew 12%, adjusted EPS increased 195, fueled in part by the significant reduction of shares in 2021 and 2022. Over the past few years, our hiring has been carefully calibrated to demand and we are well positioned from a top perspective heading into 2023. Our continued investments in our teams will drive long-term sustained double-digit growth. We repurchased more than $1 billion in stock last year and remain committed to returning excess capital to our shareholders over time. As I mentioned, we expect to generate at least $920 million in free cash flow in 2023. In addition, we have ample liquidity and the net proceeds from last week's divestiture for capital deployment initiatives. Looking out over the medium-term, our financial model and expectations are unchanged. With 12% to 16% research CV growth, we will deliver double-digit revenue growth. With gross margin expansion, sales costs growing in line with CV growth and G&A leverage, we can modestly expand margins. We can grow free cash flow at least as fast as EBITDA, because of our modest CapEx needs and the benefits of our clients paying us upfront. And we'll continue to deploy our capital on share repurchases, which will lower the share count over time and on strategic value enhancing tuck-in M&A. Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] And our first question comes from Jeff Meuler from Baird. Your line is open. Yes, thank you. Maybe if you could talk through what you think for the outlook for the tech vendor channel? Just given the more recent risks and a need to cycle through kind of renewals on annual and multi-year contracts? And related to that, is there an opportunity or a plan to reallocate some of those sales resources into, kind of, the functional leader channels? Hey, Jeff. It's Gene, I'll get started. So as we think about the tech vendor channel, I'm going to start with tech industry itself, the technology companies. And we think that those as being in two different segments: One, is sort of enterprise IT and the other is consumer and devices, things like that. On the enterprise IT, we're expecting the technology companies -- technology vendors to grow about 7.8% globally during ‘23. And the reason they're growing pretty robustly is that enterprise IT spending that's the ones that are not certainly consumers is selling to large complex B2B sales and they tend to be multi-year contracts and annual increases, et cetera. So that's the technology vendors that are selling to enterprise IT. They're also seeing continued demand for cloud, security, digital modernization. And so all those things are growing at a much higher rate than the general tech industry. And when we survey CEOs, that CEO's this is a end users, their customers, they're buying the speed of the equipment. Their business is saying things, I believe digital modernization is still really important to meet the economic situation, as well as staffing situations they face, as well as consumer requirements for more technology and services they offer. So on the enterprise IT, just summarizing the enterprise IT, tech vendors, we have to see that growing about 7.8% globally at ’23. On the consumer device side, that's going to be a lot worse in the sense that we expect demand to be lower there. And that's because a lot of demand was pulled forward during the recession and during the pandemic. And so there's sort of a tale of two cities in the tech industry. So that's the tech vendors themselves, our business is predominantly on the enterprise IT side. We just proportionally serve those. So looking forward, we expect actually to check vendors that we serve to be doing okay as opposed to the consumer and device manufacturers, which we expect actually to shrink during 2023. And so that translates into our own business we expect -- we had a -- as Craig [Indiscernible] results, our vendor, our sales force that sells to technology vendors actually went from very high teens growth. I'm sorry, that's a high teens growth to low-single-digit growth. So they actually -- I’m sorry in high-single-digit growth. So they actually performed pretty well in the fourth quarter. Going forward again because our major business is selling to the enterprise IT technology vendors, we expect that business to do pretty well on a go forward basis. And Jeff, the last part of your question on the territory assignment and where we're putting our growth, we've got a pretty robust territory optimization and analytics team that is always looking at this and we have the ability to very quickly and with a lot of agility flex up or down on where we're putting those territories. And so obviously as we're looking at our selling environment and the growth of the business, we're continuing to allocate those resources accordingly. And then the last thing, I mentioned and you sort of had this buried in your question, but I'll pull it out, is our business selling to the enterprise functions, both in IT and outside of IT through GBS performed very, very well in Q4 and for the full-year. And it was really the tech vendors that had, as Gene said, a very tough compare going from high-teens growth to high-single-digit growth in the quarter. Appreciate that. And maybe just a follow-up, given that comment on the strength selling to the functional leader channel. Productivity metrics, I understand, kind of, the way the metric works and the year-over-year acceleration in sales headcount growth, but productivity was down and quarterly productivity was also quite a bit down year-over-year. Can you just kind of like tease out 10-year mix impacts? I don't know if there's anything on -- anything further to say at the tech vendor channel, but just kind of like help us bridge that because it does look pretty soft. Thank you. Yes. So Jeff, I mean, again, the way to kind of think about the results in quarter and if you look at it on a rolling four quarter basis, is again that the end user side of the GTS business held up really, really well. And performed really well throughout the year and in the fourth quarter, including the productivity. And again just we saw that deceleration from high-teens to high-single-digits, obviously impacting the productivity as well. I think as we have brought in more and more new associates and the sales force. Last year, we talked about in 2021 rather, we had the best tender mix we've ever had. In 2022, we had really the highest proportion of new people we've ever had that's obviously going to impact productivity. We'll start to see the benefits of the tenuring over the course of 2023 as all of those people we hired over the course of 2022 start getting up the productivity curves. Hi, thank you for taking my question. I guess, first off, you've communicated a fair amount during the call that you're taking a prudent approach to guidance. And I know you just addressed the tech center piece of the business, but I'm curious if you can elaborate a little bit in terms of how you're thinking about the overall macro environment in your guide, especially on the research side? And then as well for conferences and consulting, because it seems like the guide for those parts of the business imply the economy holds up pretty well. So just want to kind of get your deeper into your train of thought? Thanks. Sure. Good morning, Heather, and thanks for the questions. So I think a couple of thoughts there. So I'll start with conferences and consulting first. And so as we look at those two businesses, again, coming off of very strong 2022, if you look at the backlog position in consulting, we actually entered the year in really good shape. We had a very strong delivery quarter in the fourth quarter, but also a very strong bookings quarter. And again, based on the visibility that we have, roughly through the first half of the year, we feel really good about the consulting business and the trending looks good there. And again, I think our client base to Gene’s earlier comments about the tech sector, are still embarking on a lot of -- embarking or continuing on a lot of digital transformation and major tech projects and programs where our consulting team really can't help them get the most value out of that. On the conferences side, again, we had a great year of returning to in-person conferences in 2022 and the team has done a fantastic job of driving forward, what we call, forward bookings, but basically locking up the revenue from the exhibitor side into 2023, and so as Gene mentioned, we've got significantly more than 50% of our pre bookings already under contract. As we head into 2023, and so feel very, very good about the conferences business as well. On the research side, again, our enterprise function leader business is performing very well and we expect that to continue to perform well. We do have -- continue to have tough compares there, but we do -- we're driving great value for our clients and we expect that to continue. We have been thoughtful and prudent about our experience in the fourth quarter with our tech vendor clients and making sure that we don't assume just some magical return to high-teens growth right out of the gate. And so we're trying to be prudent by making sure we use our most recent experience, enrolling that through the four quarters from a research perspective. But again, end user enterprise function leader business again performing very strong, nice double-digit growth rates. The tech vendor business still at high-single-digits. Just down from where we were a year ago. Thank you. And as a follow-up question, sort of, a follow-up on the last -- the earlier question with regards to the new associates and the hiring you've done, you're going into a potentially tougher environment in 2023. And you have a kind of a relatively young sales force. How are you preparing your teams for this environment and thoughts around ability to attract new customers in this environment with sort of associates who are, say, one-year in? Hey, Heather, it's Gene. So we always train our associates on what are the most important mission critical priorities with our clients and prospects today. One of the issues that's going to be on people's minds in some industries is going to be cost reduction. And so we train our salespeople on, among other things how to help clients with cost reduction. We're a very small proportion of cost for any client. They can't -- they're not going to save a lot of money by cutting our services. On the other hand, we can help them save a whole number of multiples of what they pay for us in their actual ongoing business. In addition to that, as I mentioned earlier, most companies, even in a tough environment [Indiscernible] they want to invest in technology and it's on things, like automation that helps with their own labor situation, their own labor costs, [Indiscernible] other kinds of costs. And again, the continuing transition to more and more digital services that are often in just about every single industry. So we train our new salespeople on both how to sell to clients that value proposition, which is the continuing transition to digital, but also how to save money on their IT purchases, so that they actually get -- they could be more efficient over time. So the combination of those things, and of course, our traditional selling skills where we -- I think, are quite good at training new salespeople in terms of how to sell effectively, you put those things together and it lets new salespeople -- they're not as productive as experienced salespeople, but they're actually quite good in the broad context. Thanks, so much. Wanted to start out on the margins. Margins in the quarter, really exceptionally strong again. And obviously, the guide being 21.5% next year. You've had about 2.5 quarters, let's say, of this sort of higher sales headcount level. I guess, are you fully back on T&E? What's really going to drive the margins to that sort of low 20s level? Good morning, Toni. Yes, I mean, the way to think about the bridge from 2022 to 2023 is consistent with the way we've been talking about it for the last several quarters. And so, the biggest piece of it is the annualization of all the hiring we did in 2022 and obviously, paying the full load for all those new associates over the course of 2023. So that's by far the biggest piece of it. A lot of our hiring was back-end loaded or second-half loaded, I should say. And so, obviously, there's a pretty significant uplift in the annual cost as we annualize all of those individuals. There's an element of T&E, to your point. And so, we're -- fourth quarter was kind of in line with where we expected to be. But obviously, the first part of 2022, we were still mostly in lockdown and not traveling. And so, there are incremental T&E expense that we expect in 2023, as we get to kind of the new normal of travel post-pandemic. And there's a few other nits here and there, but the two primary ones are really the annualization of the headcount and a little bit more on the T&E side. Okay. Great. And wanted to ask about free cash flow. I know you mentioned a couple of things in the prepared remarks, but maybe just talk about why the free cash flow came in below the guidance and then the ‘23 guidance also looked a little bit lighter than I was thinking? So any puts and takes on free cash flow would be helpful. Thanks. Yes, absolutely. So in 2022, the bulk of the story is, what, I discussed in my prepared remarks, which is just some invoicing delays coming out as a result of the Hurricane. And we thought we would be able to get all caught up on that in 2022 and a bunch of it did slip into 2023. And actually, through the end of January, we actually are all caught up on that. So we feel good about both the ‘22 finish and getting that all behind us. In terms of 2023, obviously, there can be a lot of variability to the free cash flow numbers. If you look at it on the surface from the guidance, the free cash flow margin is in line with what we'd expect free cash flow as a percent of EBITDA is roughly where we'd expect and the free cash flow conversion as a percent of GAAP net income is in the range as well. And so, I think the free cash flow guidance and the free cash flow expectation is sort of in line with the business performance. I do think there are a couple of things impacting ‘23 that potentially put it a little bit below your expectations, probably, most notably cash taxes. So because of all that extra earnings in 2022, we have more to pay in taxes, and that's obviously reflected into 2023 free cash flow guidance as well. Hi, good morning. Thanks for taking my questions. First one I wanted to ask was just on conferences. I think you said in your prepared remarks that there would be 47 conferences in ‘23, or at least that's what's planned at this point and all in-person. Obviously, a decent bit lower than where you were running pre-pandemic. So just looking for an update in terms of strategy there. I know you've talked about adding conferences to different functional lines over the course of the next couple of years. Where does kind of ‘23 sit relative to your ultimate goal on conferences? And is there the potential for additional destination conferences to be added as we move through the year? Yes. Hey Andrew. So the -- our strategy is to have conferences for all the major functional areas in our businesses, I think, in IT, HR, finance, et cetera, as well as within -- cybersecurity applications and so forth. And we're far from that now -- and sorry, and also each of those conferences in each of our major geographies. And so, there's a -- it will take us a long time to get to the point where we have the aspiration I just said, which is to have a conference for every major of share count in every major geographic region. And we're at -- because these conferences add so much value to our -- the attendees, our seat holders that actually go and attend these conferences, we really want to expand those as quickly as we can. We're limited by what you do operationally with how fast we can actually hire people and build these conferences. And so, we're going to continue on that path. We did that -- we've had as an as we think we can handle operationally in 2023. If we find during the year, we can have more, we will do that. And certainly, in ‘24, ‘25, ‘26, we expect to have a continuing expansion of these conferences, again, because of the very high value they provide to our attendees, our seat holders and also our prospects. Great. Thank you. And then for my follow-up, switching gears a little bit. I just wanted to ask more specifically about growth in GBS. You talked about some of the things that have, kind of, evolved outside of the functional leader channel in GTS. But can you speak to the different businesses within GBS, how conversations with clients have evolved over the past couple of months there? And if there's any individual businesses there to call out either positively or negatively relative to last quarter? Thank you. Yes. We had great performance in GBS during 2022, including the fourth quarter. There's tremendous opportunity in GBS. As with the rest of our business, really grow GBS as quickly as we can to capture that enormous opportunity. We had growth in -- across all functional areas, very robust growth, actually. And the areas that were slower, it was more internal operational things that we had. So for example, we might have had one area where we were a little slow in hiring than another area. And so, the places that GBS was a little slower, we believe are more due to more internal operational things that we're working on. But again, the overall performance was very strong, we're very happy with that performance. Yes. And Andrew, just to underscore that, I mean, 18.9% growth for the full-year coming off of a 24% full-year growth in 2021 is really, really strong, continued consistent growth. And as I mentioned in my prepared remarks, both supply chain and HR were well above 20% year-over-year growth again, coming off of really strong years in 2021 as well. And so, really strong demand there. It's indicative of the fact that across all of GBS, we are providing enormous value to the functional leaders that we serve in finance, HR, supply chain, marketing, sales, legal and so on. Hey, good morning, guys. Gene, in an answer to one of the prior questions, you mentioned customers looking to manage costs better. I'm wondering if you're getting any pushback on pricing, less appetite for multiyear contracts? Or can you just talk about the pricing environment and how perceptive customers are? And what you think that might look like in an environment where inflation starts to come down? Thanks. Yes. So we've had larger-than-usual price increases over the recent past, because of accelerated inflation. And we've had, I'd say, essentially zero pushback from our clients on it. And if you look at the cost of Gartner for an individual user or for even a contract for the company, it's a small ticket item. And whether it increases 3% or 7% isn't a swing factor. The swing factor is the value we provide. And we provide a tremendous better value to these clients for the costs that they have to pay, spend any alternative and can provide some credible value. So we have had, I'd say, kind of, no measurable pushback on our price increases, even though they're at higher rates. Yes, absolutely. Absolutely. In fact, again, the -- many of our clients prefer multi-year contracts. It's a small ticket item and they have administrative costs in dealing with it. And so, many, if not most of our clients actually prefer multi-years, because the procurement people don't want to waste their time doing this over and over again. And so, to actually see demand from our clients for multi-years as opposed to the other way around. Yes. And on top of that, obviously, their mission-critical priorities are not founded by a contractual term. And so, they want to make sure that they have support and insight to support their mission-critical priorities. And so, we've seen no pushback at all on our ability to sell multiyear contracts. Okay. And then Craig, you mentioned the 50% sign-up prebooking for the conference business. Can you just -- how does that compare to pre-COVID levels for this time of the year? Yes, it's a great question. So actually, significantly greater than 50% is actually the -- what both Gene and I said, we're actually comparable or perhaps even a little bit stronger than we were pre-pandemic on that metric. Hi, thanks. Good morning. You mentioned headcount growth in 2023 for Research will be more in line with the normal model. Can you discuss how hiring is progressing in GTS and GBS given the tight labor market? And what level of headcount growth do you think will be achievable this year? Hey, George. So the -- our -- we are a very attractive employer in the marketplace. When we go for talent, we're a place that people want to work. And we -- it's a -- we're actually a tough place to drive into reverse selective as well. We've had no trouble hiring at all, which is why our growth rate in our associate body has accelerated so much as I talked about in my remarks. So again, we're an attractive place to work, people going want to work here. And so, they have a great associate value proposition, so we don't have any trouble hiring people. And I think, George, the way to think about just building on Gene's comments, we've -- in ‘21 and ‘22, we invested to rebuild our recruiting function and recruiting capacity. And we have that now available rolling forward. As Gene mentioned, we have a great selling brand and associate brand more broadly for those recruiters to go out and attract people. As we think about the headcount growth for this year, it is more in line with our kind of “normal algorithm” where we expect to grow headcount 4 points to 5 points lower than CV growth. That being said, given the recruitment capacity we have and given our standing in the market, if we see our CV growth accelerating, it gives us the opportunity to potentially go a little bit faster there. And if we see challenges with the business, we can easily tap the breaks and slow down. So we've built a plan that we feel real comfortable with that is in line with our normal -- or our go-forward model, but also allows us the flexibility to flex up or flex down given on what we're seeing from a demand perspective. Got it. That's helpful. And then as a follow-up, you're guiding to at least 21.5% EBITDA margins in 2023. Under what conditions could you outperform the 21.5% target? Yes. I mean, I think that the major way would be from revenue upside. And as we mentioned in the prepared remarks, we've taken a prudent approach on the revenue, on the expenses and on the free cash flow. And if revenue does come in stronger, we would anticipate potential upside to the margins, that's probably the primary way that we see it. We are, again, making sure that we are calibrating all of our expenses most notably headcount, but all of our expenses with what we're seeing from a revenue perspective. And we're making sure that we're also seeing the right investments so that we can sustain growth into the future and also deliver really, really strong margins. And so, we feel like we've got the balance right now. We're obviously -- our structural margins are significantly higher than they were pre-pandemic. And as we talk about, we believe we could modestly expand margins on a year-over-year-over-year basis moving forward. Thanks so much. You mentioned the divestiture of the Talentneuron business. Can we get a little bit more color on that? It looks like you own that business for about five or six years. What did it do? Why we sell it now? And should we expect any other kind of divestitures? Hi, Jeff. So Talentneuron is a business that provides data -- labor market data, principally to people that -- in companies, that are doing long-term planning for where companies should have their workforce. And we've got the business when we bought CEB. It was an acquisition CEB had done. When we bought CEB, therefore, we acquired that business. As we looked at it, we've been looking at the business to see does it really fit with our business on a go-forward basis, and it is strategic to us. We've looked at it in a lot of depth. We've looked for innovative ways we could use it. And at the end of the day, we decided that it was not a strategic bet that were better owners for that business than us, which is why we divested it. Let’s just focus on the -- our core business in HR, which that was not really related to. In terms of other divestitures, again, if we see things that don't fit our core business, we would divest them. We'll discuss those when it's appropriate. All right. Great. Sorry, I got the name mixed up with Jimmy Neutron. In terms of my follow-up, nothing mid take here, you provided a tremendous amount of data. But in looking at wallet retention, it did decline slightly year-over-year. Is there anything to read into it? Are you giving pricing concessions or people pushing back on reordering, et cetera? Jeff, I won't comment on your Jimmy Neutron comment. We'll save that for later. In terms of wallet retention, again, I think it's consistent with the way we talked about all of the GTS business earlier and the overall research business as well. Our enterprise function leader business performed very, very well across GBS and GTS. And essentially, what you're seeing in the wild is just that deceleration of the tech vendor business from high teens growth to single-digit growth. Even with that, it's still really strong at 105%, obviously, well above 100% and significantly in excess of client retention. And so, the core value is still there. But the slight deceleration or variance on a year-over-year basis can be completely attributed to the tech center business. And again, I underscore the enterprise function business in both GTS and GBS performed very well in the fourth quarter. Thank you. Good morning. I just wanted to clarify on the tech lender side again. I think you said it was a quarter of your business. It grew high-single-digits. And did I hear you say that even for ‘23, you assume it's going to be growing high-single-digits? I was just curious if that decel was due to churn or new business and how that's going to come basically? Hey, good morning, Manav. So we didn't talk about the expectation from a CV growth perspective. For any part of the business, we don't provide CV guidance or anything like that. I think, again, it's -- as we built the plan and our guidance for 2023, we've utilized what we saw in the fourth quarter in terms of retention metrics, new business metrics and productivity metrics and things of that nature as some of the inputs to extrapolate out our expectation for 2023. I think on the tech vendor side, in particular, obviously, there's a lot going on in that industry right now. We're still selling through it. High-single-digit growth is still pretty nice growth, just not high-teens growth. And so, we believe that given the value proposition that we have for even leaders in that space, that we've got a great value proposition and a great set of products, and we'll continue to serve those clients and help them with their mission-critical priorities in the same way that we help the enterprise function leaders across GTS and GBS. Okay. Got it. And then just on the sales -- the question around the sales force growth. You said 4 points to 5 points below CV. I guess -- and I think you said lowest level of open position. So does that mean this year's growth is going to be less than the kind of -- maybe even much less than the kind of 10% we were used to historically? Yes. So we recalibrated the way that we were going to grow the sales force back in 2019. And essentially, the model -- obviously, 2022 is different, because we had to do a lot of catch up. But our model moving forward is we want to essentially not dilute our overall cost of sale. And the way we do that is grow the sales headcount, call it, 4 points to 5 points depending on wage inflation, slower than CV growth. That's our stated model moving forward. And so, that's what we've got in place for 2023. And so, yes, it will not be 10% to 15% headcount growth unless we see 15% to 20% CV growth. And again, as I mentioned, during George's question, we believe we are set up to speed up or slow down accordingly as needed. And so, if we see CV growth start to accelerate, we have the recruitment capacity to be able to increase that. And if we see CV growth slowing, we obviously can tap the brakes as well. So we feel like we're in a really, really good place from a talent perspective. We are, as we both mentioned, Gene and I carefully calibrating headcount growth and expenses. And we feel like we've struck the right balance between making sure we're investing for future growth and delivering strong margin performance. Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Gene Hall for any closing remarks. Here's what I'd like you to take away from today's call. In the fourth quarter of 2022, we again saw strong growth across the business. Gartner delivers incredible value to enterprises that are thriving, struggling or anywhere in between. By being exceptionally agile and adaptive to a changing world, we've delivered a sustained record of success. We're well prepared as we enter 2023. We've carefully aligned staffing levels with demand and with the lowest percentage of open positions ever. Our content is today's mission-critical priorities. And we know the right things to do to be successful in any environment. Looking ahead, we're well positioned to drive growth far into the future. And even as we invest for future growth, we expect margin to increase modestly over time. We generate significant free cash flow well in excess of net income. We'll return capital to our shareholders through buybacks, which reduced shares outstanding and increases returns over time. Thanks for joining us today, and we look forward to updating you again next quarter. Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

EarningCall_459

Good morning, and welcome to Crown Holdings Fourth Quarter 2022 Conference Call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that this conference is being recorded. I would now like to turn the call over to Mr. Kevin Clothier, Senior Vice President and Chief Financial Officer. Sir, you may begin. Thank you, Nicole, and good morning. With me on today’s call is Tim Donahue, President and Chief Executive Officer. If you don’t already have the earnings release, it is available on our website at crowncork.com. On this call, as in the earnings release, we will be making a number of forward-looking statements. Actual results could vary material from such statements. Additional information concerning factors that could cause actual results to vary is contained in the press release and in our SEC filings, including Form 10-K from 2021 and subsequent filings. Earnings for the quarter were $0.74 per share compared to a loss of $7.95 in the prior year quarter. Adjusted earnings per share were $1.17 compared to $1.66 in the quarter. Net sales in the quarter were down 1% from the prior year as global beverage can growth of 3% and the pass-through of higher raw material costs were offset by foreign currency and as expected, lower volumes in the Transit Packaging business. Segment income was $292 million in the quarter compared to $357 million in the prior year, primarily due to timing of costs associated with higher inventory levels, lower cost absorption from planned inventory reductions and higher energy prices in Europe. As outlined in the release, we project EBITDA to grow between 8% and 12% in 2023. The projection assumes better results in our global beverage can and Transit Packaging businesses, offset by lower results in North American tinplate business, the result of Q1 inventory gains not recurring in 2023. As stated in the earnings release, first quarter adjusted earnings per diluted share are projected to be in the range of $1 to $1.10 with the full year projected to be between $6.20 and $6.40 per share. The adjusted earnings guidance includes net interest expense of $400 million in 2023 compared to $270 million in 2022, $0.40 of incremental non-cash pension and post-retirement costs, average common shares outstanding of approximately $120 million. Exchange rates at current levels with the euro at 1.07 to the dollar and full year tax rate between 24% and 25%. Depreciation of approximately $350 million compared to $301 million in 2022. Non-controlling interest to be in the range of $140 million. Dividends to non-controlling interests are expected to be approximately $110 million. We currently estimate 2023 full year free cash flow of approximately $500 million with approximately $900 million in capital spending. We expect a net $100 million improvement in working capital, which is driven by lower inventory partially offset by continued investment to support beverage can growth. We expect the majority of free cash flow to go towards debt reduction until we get within our stated leverage range of 3 to 3.5 times. Thank you, Kevin, and good morning to everyone. Before reviewing our fourth quarter results, we want to briefly update you on the company’s situation in Turkey. For those of you not aware, twin earthquakes, the first registering 7.8 magnitude and the second at 7.5 struck Southern Turkey on Monday. Across the region, several thousand buildings have collapsed, resulting in significant loss of life, with brutal winter weather further complicating rescue and recovery efforts. The epicenter of the first quake was only 50 miles from our beverage can plant in Osmaniye, and we at Crown feel truly blessed that all employees are alive and accounted for. Electricity has been restored to the plant and with no damage to the physical plant structure, equipment or inventory, we have resumed shipments to those customers able to receive deliveries. The company is currently coordinating shelter for displaced employees and their families, and we have every confidence that the global Crown family will again rise up to support their fellow associates in Turkey. As reflected in last night’s earnings release, performance in the fourth quarter was a bit ahead of our previous expectations due primarily to firm global beverage can demand, cost reduction activities within transit and the weakening of the U.S. dollar. Compared to the prior year fourth quarter, lower cost absorption from planned inventory reductions, higher cost inventories related to the timing of customer sales, higher energy costs and inflation all weighed on income results. Looking ahead to 2023, we expect significant improvement in segment income as higher beverage can volumes, contractual cost recovery and benefits of cost reduction activities will more than offset the significant 2022 steel re-pricing benefits realized within our North American tinplate operations. Below the line, as Kevin described, we will face headwinds from higher interest and pension costs. As Kevin also noted, capital expenditures for 2023 are currently estimated at $900 million. And looking forward, we project $500 million of capital expenditure in 2024. The commercialization of our various beverage and food can capacity expansions are described in last night’s release. Turning to the operating segments. In Americas Beverage, unit volumes advanced 4% in the fourth quarter, with the gain found primarily in Central and South America as North American volumes were up only modestly. Volume advances were offset by lower cost absorption, the result of planned inventory reductions and the timing effect of higher cost inventories. We estimate that the North American market, that is Canada and the United States was down 8% in the fourth quarter, with much of the decline found in fewer imported cans year-over-year. While only five weeks into the new year, we remain confident in our outlook for 10% North American volume growth in 2023. Volume growth, combined with contractual inflation recovery leads us to expect income in the segment to be up significantly in 2023 with flatter performance in the first half and the gain to prior year spread over the back half. Our North American growth assumption assumes an overall flat market. Unit volumes in European Beverage increased 2% in the fourth quarter with growth noted in Greece, Jordan and Turkey. As previously discussed, the impact of higher inflation and energy costs, coupled with timing of higher cost inventories, negatively affected income in the segment. For 2023, we expect to begin to claw back margins about halfway back to 2021 levels as low to mid-single digit volume increases, coupled with the benefits of renewed contract terms and recovery of prior costs accelerate income performance beginning in the second quarter. Beverage can volumes in Asia-Pacific advanced 2% in the fourth quarter as growth in most Southeast Asian countries was partially offset by economic weakness in Cambodia. The carrying cost of higher cost inventory ahead of customer sales continue to weigh on income performance, which we expect will continue into the first quarter of 2023. However, we do expect income in the segment to advance in 2023 as comps in the back half of the year become much easier. When adjusted for currency and the divestiture of the Kiwiplan business, fourth quarter segment income in the Transit Packaging business was within $3 million of the prior year. The benefits of the previously announced overhead reduction program, coupled with positive price almost entirely offset high-single digit volume declines. Continued benefits from the overhead reduction program, combined with a more favorable steel cost price relationship is expected to drive mid to high-single digit income improvement in 2023. The North American tinplate and can-making equipment businesses closed out an exceptional performance in 2022 with another firm performance in the fourth quarter. Segment results in 2023 will be down compared to 2022 million mainly the result of inventory re-pricing benefits realized in the first two quarters of 2022, not recurring in 2023, coupled with continuing weak aerosol can demand. As Kevin described, target leverage, given the existing business portfolio remains in the range of 3 to 3.5 times, and we are committed to applying excess free cash flow towards reducing leverage to that range. Over the last two years, we have returned in excess of $1.9 billion to shareholders in the form of quarterly dividends and share buybacks. In summary, and looking ahead to 2023, we remain confident in our ability to reaccelerate EBITDA growth in 2023. Contractual terms will allow us to begin to recover significant inflationary increases, our inventory positions have largely been rightsized at year-end 2022, renewed European contracts with more appropriate terms, initiated significant overhead cost reduction activities within Transit Packaging and have or will commercialize significant new beverage and food can capacity in the United States and Europe to continue to serve our customers’ growing requirements. And just before we open the call to questions, we ask that you limit yourselves to one or two questions so that others may have the opportunity to ask their questions before we run out of time. Thank you. We’ll now begin the question-and-answer session. [Operator Instructions] Our first question is from the line of George Staphos of Bank of America. Your line is now open. Hi everyone, good morning. Thanks for the details. My two questions, Tim, you mentioned that you remain confident in the 10% growth outlook for North America for this year, and we appreciate that. Can you remind us about what is making you most comfortable about that outlook either by end market or whatever you would be able to share and talk to how the risks may be to the upside or to the downside on that 10% relative to where you were and what you were speaking to last quarter. The second question is on cash flow. Kevin, can you talk to us about some of the other key line items we need to consider in getting to or at least evaluating your $500 million free cash flow target? Is there anything that you need to put in for pension recognizing the pension expense is non-cash, nonetheless, it does reflect balances that you need to amortize anything in there for pension funding, et cetera. Thank you, guys. Okay. So George, on growth, I think the upside or downside to the 10% projection revolves around what the markets going to do. As we said, we are confident with the 10%, assuming a flat market in 2023. If the market is up, we’ll do a little better. If the market is down, then our customers may not pull as many cans. But the entirety of our growth centers around those customers who have continued to grow principally in the carbonated soft drink and sparkling water categories as well as some of the energy and other nutritional type drinks. That growth for us is principally centered on their growth and/or Crown gaining a greater percentage of that customer’s volume from where we stood last year. Kevin provided a sea of numbers already. I’m not sure how you digested all that already. But to the extent he can give you any more numbers. Go ahead, Kevin. Okay. Hey George, in terms of pension, we don’t expect a material difference from where we were this year. Remember, this year included some recovery from the UK pension plan that we had. So if you exclude the UK pension plan, it should be in line not much different from there. In terms of the other line items, if you think about there’s a fair amount of taxes paid that we have anywhere between call it $250 million and $280 million depending on how much income we make. We’ll have to pay in taxes, and interest paid is obviously up as a result of the P&L being up but... Great. Thanks. Good morning, guys. And maybe it’s appropriate to throw in a quick go birds [ph]. First, on the leverage side, you talked about recommitting to the 3 to 3.5 times. I guess when do you expect to kind of get there this year? And I guess given the interest rate and just kind of the macro backdrop, does that change at all how you think about the leverage? Do you want to get closer to the bottom end before you reaccelerate repurchases? Just kind of flesh out how you’re thinking about that. Yes, really a thoughtful question. Thank you. So we – I think if you take the mid-point of the EBITDA range we provided you, if you take the $500 million of cash flow that we’re going to generate, less the dividends we pay to the common shareholder and the dividends to the minority partner I think if you flush all that, you probably get yourself down to around 3.2, 3.25, something like that by the end of the year. Just given the seasonality of the business and our borrowing requirements on a seasonal basis, I would expect that much of the decline into the range as it does for many packaging companies whose principal businesses in the Northern Hemisphere. We won’t feel comfortable that we’re within that range until the year – until we get into the – late into the fourth quarter as we collect receivables and the business winds down before the build of business into the next year. I don’t – you can do the math there. I think it’s pretty close to what I’ve said. I think the real thoughtful part of your question is what is the appropriate level of leverage within that range, just given the current global economic environment we’re in, the central banks around the world, what their motives are to curb inflation, and just the cost of the debt and the relative dilution, let’s just call it, relative dilution that comes from higher cost debt then the free money we all experienced for the last several years. So I think to your question, I think 3 to 3.5 is a fairly large range and 0.5 a turn in absolute terms is worth $1 billion of debt. So as you think about refinancing and refinancing at advantageous rates, obviously, the less absolute amount of debt you have to refinance, theoretically, the better absolute rates you can get for a long-term period of time. So I would say, in this environment, you feel more comfortable in the 3 to 3.25 times range as opposed to the range as wide as 3 to 3.5, but we give you a range because it’s all subject to review as facts and circumstances change over time. Great. Appreciate that answer. And then second, real quickly for Kevin, I apologize if I missed this at all the numbers you threw out there. But can you quantify how big the headwind is for steel in the first quarter? And then secondly, real briefly on pension, is that just spread out through the year? Or is it lumpy in a quarter? Or how should we think about that? I’ll take it, Mike. So the pension will be equally spread through the year. So that incremental $0.40, you can think about an incremental $0.10 per quarter. On the steel re-pricing headwind, I think last year, in the first – principally in the first quarter, a little bit into the second quarter, we had $35 million to $40 million of gain. The year-over-year impact, 2023 versus 2022 is a little more than that because you’ve got to decline – a low-double digit decline in steel prices this year. So if you had $35 million to $40 million gain last year and you’ve got $15 million to $20 million loss this year, the year-over-year impact in the first – principally in the first quarter, a little into the second quarter, totaling somewhere between $50 million and $60 million headwind. Thank you. Hey guys, good morning. On your comments on inventory level adjustments, did that fully play out in the fourth quarter? Or is there any sort of spillover into the first quarter as well? No. So Ghansham, what I said, we’re largely rightsized. We still have a little bit in Mexico, and we have a chunk in Asia, which is probably going to – first quarter in Asia is going to cost us a handful or a touch more in terms of income until we flush it through. Okay. Got you. And then in terms of the EBITDA guidance, I mean, 8% to 12%. Can you just give us more numbers in terms of – I mean there’s so much going on with the contractual recovery, cost savings, et cetera. Can you just give us the dollar amounts associated with that in terms of what you’re embedding for 2023 EBITDA guidance? Yes. So I kind of want to stay away from too much, but I think if you think about – as we sit here today, we take care of the easy ones. You’ve got FX is flat. We’re talking about EBITDA, so we don’t have to talk about depreciation increases. I think between volume and price, you’re well over $200 million, you’ve got some cost reduction principally in transit, but also in Europe and Asia, probably in the 25% to 30% range than a little bit more than that, adding for the overhead reduction in transit we’ll have higher benefit – higher bonus accrual. We hit these numbers. The folks might get a bonus in 2023 as opposed to getting very little in 2022. Not sure I really want to give any more than that on a public call, Ghansham, but that’s – think about price cost and volume being in the range of $200 million to $250 million cost reductions and overhead restructuring benefits being in the range of 50. And then I guess the only thing I’d say that $200 million to $250 million inclusive within there is the $50 million to $60 million headwind I described for you for tinplate. So some pretty big numbers year-on-year. Hi, thanks for taking my question. I was wondering, you talked a little bit about your kind of 1Q expectations. I was hoping you could give us a little bit more color as to what’s embedded by region in your assumptions for volume as well as kind of EBITDA and on what that bridge looks like. Yes. I mean what we gave you – again, Angel, we gave you so many numbers. I’m not sure I can give you any more. But we look at I think the big headwind in the first quarter is the steel re-pricing benefits we had last year and the steel cost this year, summing to $50 million to $60 million, I would say, for the most part. When you get through that $50 million to $60 million and some higher start-up costs in the first quarter because we’ve got a number of lines coming up in the first quarter that pretty much everything else is flat in the first quarter. But you’ve got the earnings estimate, and you can work through the earnings estimate, you can probably come up with a – you got $50 million to $60 million headwind on steel and everything else, you’d probably get yourself a total of $75 million EBIT headwind in the first quarter, principally centered around, as I said, the steel and the start-up costs. And then we start to return to better earnings and better acceleration in the second quarter. But I would say that on the Americas Beverage business, first and second quarter in total, largely flat to the prior year. European Beverage will be down in the first quarter, will be up in the second quarter. Asia will be down in the second quarter – down in the first and second quarter, start to return to growth in the third and fourth quarters. I think we expect Transit Packaging to be up in every quarter. And obviously, the tinplate business is down significantly in the first quarter, as we described, down a little bit in the second and then up in the third and fourth quarter so. Listen, the Americas Beverage business is going to be up in every quarter. And mainly as a result of the North American volume increase, while we also expect some increase in Mexico and Brazil, we had a pretty good performance in Brazil in the fourth quarter. I think Brazil perhaps off to a little slow start here in January, but we expect Brazil to do better this year than we did last year. European Beverage will be down in the first quarter as we start to bring on capacity in Italy, Spain and even the UK as the year progresses, we’ll begin to accelerate volume performance in Europe. Asia, I think, Southeast Asia and China has reopened. Southeast Asia doing well with the exception of Cambodia right now. Q1, down, and then I think we start to see volume start to accelerate Q2, Q3 as the year goes on. And I think from the standpoint of Signode, compared to the prior year volumes down in the first and second quarter, easier comps in the third and fourth quarter. And then I think in North American tinplate, we expect food volumes to be up each quarter and aerosol can volumes to be down each quarter. That’s very helpful. Thank you. And you talked about your inventories maybe a little bit more rightsized with some nuances across some regions. Could you give us a little bit more color on what you’re seeing across your customers, kind of the supply chain distributors, retailers, what are you kind of hearing from customers in terms of their inventories and the overall kind of levels of destocking that you kind of anticipate here as we think about the beginning of 2023. The beverage world, the customers don’t carry a lot of inventory, right? It’s – we deliver just in time. They fill and they ship. And I don’t think at the end of the year or even as we sit here today, there’s any significant – especially the large CSD water and beer companies, I don’t think there’s any real large backlog of inventories in their possession. And the retailers only have so much space to store. So I think the channels are set up for a pretty good year this year. The cost of aluminum is down significantly over – from the first quarter last year until now on the order of $1,000 to $1,500 a tonne. So the hope is – and we’ve seen some green shoots of promotions, buy two get two, buy two get one. So the hope is that we see some more promotional activity, and we do even better than we’ve outlined for you. Great. Thanks for taking my questions. When you look at North America, you guys have been talking about 10% volume growth for a little while. Have you seen any kind of downside to that? We have seen it in some categories. There was some greater destocking in September and December. Maybe you can just give us an update on what you’re hearing from your customers as far as – and again, what gives you that confidence in that 10%. And then could you also provide us with like maybe a 2024 outlook on new capacity, what that – you provide? Thank you. Well, so I think the third quarter and as you rightly point out, the month of September was really disappointing. The fourth quarter as we talk about North America, we were on track to have a pretty good volume performance in the fourth quarter and then the last week of the year, the holiday week, things basically shut down. Now having said that, and only five weeks into the year, things are really off to a strong start. So – but as I said, we’re only five weeks in, so don’t you read too much into that, but all signs point to – and what we’re hearing from the customers, all signs point that we should have a pretty firm performance this year. And as I said, our confidence with our number considering the backdrop of a flat market is entirely centered on carbonated soft drink and sparkling water, some energy guys where they have penetrated more retail outlets and they’re growing and/or we’ve gained a greater share of that customer as compared to where we were last year. I think we said in the prepared remarks that CapEx looking at $500 million next year. We obviously have a fair amount of capacity coming online in North America and Europe this year. And so we will have increasing capacity next year to absorb further growth as those lines come through learning curve and produce more cans. Tim, and then on Europe, there’s a segment income recovery effort, I guess, underway. Maybe you can just give us an update on how you’re thinking about how that segment evolves and maybe get back to 2019 levels or 2018 levels in 2024? Or how are you thinking about segmenting from there? Thanks. Okay. I’m sorry. Again, in the prepared remarks, we expressed our belief that with some modest volume growth this year and the renegotiation of numerous contracts where we more appropriately reset base pricing plus pass-throughs for inflationary items and recovered some past inflation that we expect the 2023 segment income to be halfway back to 2021. That is, if you took 2021 and 2022, we should be somewhere in between. Hi, this is John on for Chris. Can you please break out the various substrates that led to some weakness in the fourth quarter? And then what specific substrates give you optimism in 2023? Thank you. Yes. So listen, we were up – in North – in the Americas, we were up 4%, which was double-digit growth in Central and South America and a little bit less than 0.5% in North America. We had previously thought we might be up 2% to 3% in North America. As I said, we were tracking for that, and basically, across all product lines or all end markets that we support in our North American beverage business, shipments – I don’t want to say they shut down the last week of the year. But certainly, the holiday week between Christmas and New Year’s shipments were very light. The pull from customers was very light, but that was across the board. I wouldn’t necessarily ascribe it to any one end market versus another. Tim, one on Brazil. My understanding is last year, cans lost some share to returnable bottles for economic reasons. The Brazilian economy had a rough go of it and there was some trading down going on. You mentioned the year is off to a bit of a slow start there, but you’re expecting a recovery thereafter. Can you just talk about how you’re expecting cans to do relative to returnable bottles as distinct from last year? Are you expecting the economy to get better? What exactly are you expecting regarding Brazil this year? Yes. So we were – I mean, I’ll give you – if you want the exact number for Brazil, I’ll give it to you. I don’t know what you guys do with all this data, but I think we were up 13% or 14% in the fourth quarter in Brazil. So tremendous performance in the fourth quarter. The first quarter of last year was really weak. So even though we’re off to a slower start here in the first quarter, we’re fairly confident in Brazil having a good performance this year. I think our – I think if I was to go back or you were to go back and look at last year’s transcript, we probably see that we in the market. I think we were down about 20%. The market was down about 25% in the first quarter of last year. Having said that, the performance over the last three quarters last year, I think we ended up down 1.5% for the full year. So we almost clawed back the entire first quarter shortfall. I think we’re where we’re at. I think most fillers and most consumers in a market like Brazil prefer the aluminum beverage can over glass, okay? The glass guys might want to tell you otherwise, but I think history over the last 10, 15, 20 years, will tell you otherwise. And so we’re pretty confident that the flexibility of cans to produce numerous sizes with numerous decorations to promote the product on the shelf is far superior than the bottle. And I think, as we’ve said before, you can get all hung up looking at six months, one year performance in Brazil I think if you look at a period of time, three to five years, and I don’t care when you want to start that period of time and when you want to end it, you take three and five-year chunks of time. You’re going to see can penetration rates higher and you’re going to see absolute level of can volumes higher, and we continue to believe the Brazilian market is going to be a tremendous market for the aluminum beverage can. Got it. Thank you. And back to North America. So I think some of the energy drink customers, the beer companies were still implementing price increases late last year and even into early this year. Embedded in your expectation of a flat market, are you expecting much of a return to promotional activity in the summertime, are you not? What exactly are you expecting in terms of price increases, promotions, neither? I’m just trying to understand how you think the market might evolve this year as distinct from whatever? I know you said you think the market was down 8% in the fourth quarter. I don’t know if you said what you think it did for the full year. But how are you thinking this year will be different from last year? So I think CMI hasn’t published the data anymore. But if I had to Tom Fischer and I were looking at this the other day, if we had to try to give you a view as to the full year, I’d tell you that perhaps the market was down in the order of 6%, 5%, 6%. And I think it all related to fewer imported cans. I think domestically produced cans were probably up 1% and imported cans down 6% or 7%, leading to an overall 5% or 6% decline. Do you agree with that, Tom? Yes. So as I said earlier, we’ve started to see some evidence of promotions. And so Adam, I now live in Florida, we got the office down in Florida. So I’ve seen some promotional activity in the Tampa area, but I’m not all over the country, but we have started to see two for twos or buy two get two, buy two get one. We’re starting to see more activity in the carbonated space. And on the sparkling water side, they never really took their prices up as high as the CSD guys, but they are beginning to promote a bit more as well. And – but I think that we’re – it’s kind of like when you give benefits to people, you never take them back. When you put inflation into the system, it never goes back. So while the rate of inflation is slowing, there’s still inflation on a higher base. So the consumers are faced with higher and higher cost, even though the rate of that inflation year-over-year is slower. I think only people in Washington and Wall Street can try to tell us inflation is better right now. You cannot tell that to the people in Iowa and Ohio and Oklahoma, the people that are out there working every day, trying to make a living. So for most of us on the call today, we can absorb this. For many people around the country, this is a week-to-week situation, and things are more expensive. Now having said that, drinking canned beverages is a small pleasure and people like to give themselves the enjoyment of small pleasures. And I think we will see some moderation in the rate of increase in the cost of canned beverages. And I think we’ll see some promotions. And I think the – our estimate of an overall flat market is – our current estimate or our current belief that the higher base level of cost that people are feeling at some level is offset by promotional activity at another level. And so that may be that those people at the lower end of the economic spectrum are buying less, but the people in the middle and the higher end are buying more as promotions come in. It doesn’t have to be equally across the board for all folks depending on their economic situation. Hey, good morning. Thanks for taking the question. The contractual recovery and inflation within the beverage business, do those benefits principally begin in 1Q or is a major reset period for you later in April? Just how should we think about the timing of those benefits? Depending on customer and depending on contract and when the contract was renegotiated, it could be January 1, April 1 or July 1, but the large majority, especially in North America – in North American beverage centered around April 1 on the food can side in North America, more centered on January 1. So thinking about food cans, while there is a significant or a low double-digit decline in tinplate pricing, the price of cans to our customers is almost the same because we’re passing through the PPI to them on January 1. So there is no increase to them. The steel price decline offsets the PPI that they’re getting. Got it. Yes, that makes sense. And then it’s been a couple of years since you did the Board-led capital allocation and portfolio review. What’s your view of the portfolio now you like the diversification with transit and food and beverage end markets? Or do you see more shareholder value being created by being a pure-play beverage can company? Let’s – no, I know you do. Thank you for the question. Let’s be real clear. I think – after today, there are two beverage can companies that have reported. You’re going to see a report from another beverage can company over the next couple of weeks and the other private – European private beverage can company that has entered the United States. You probably saw their recent rating agencies reports. I think the beverage can world, if we’re all being very honest, we all understand it’s an expensive business, but it’s a business with exceptional upside, and we’re prepared to invest the money in the business. But the cash flow performance of all the beverage can businesses in 2022, not very positive. I think you’re going to see cash flow performance in other packaging businesses, be they food or industrial or a combination of both, where they’ve got positive cash flow in 2022. And we happen to be pretty close to breakeven on free cash flow, which what I’m trying to explain to you is the combination of our food and industrial packaging business is generating significant cash flow, offsetting the continued investment in the beverage can business. Now we do believe beverage cans will generate significant cash flow in the future, but you need cash flow to pay your bills. And it’s a fantasy to think that cash flow is not important as some investors like to tell us from time to time. And so I think we like the diversification of cash flows. We like cash. With cash, we can pay dividends. With cash, we can buy back stock. With cash, we can make more investments in beverage. However, having stated that, we are all about trying to increase shareholder value. I’m a shareholder, just like many of you on the call. I own a lot of shares. I’m all about trying to make more shareholder value. But I’m also all about making cash flow so we can accomplish all the things we need to accomplish to satisfy the wide variety of investors that we have and the reasons why they invest in a company like Crown. So listen, we’ve got a couple of new board members. We welcome their input. We think our interests are exactly aligned with their interest. That is to drive further shareholder value by the company for the benefit of shareholders, and we’ll see where that takes us. Well, Tim, you stole my thunder. I was going to ask you about free cash flow. But it’s good to see free cash flow is going to certainly accelerate going to 2024. You’ve talked about a CapEx number close to $500 million, which is pretty on par of D&A. Is that a level of CapEx that you think is sustainable for, call it, the next few years starting 2024? And with all that cash, what are you going to do with that cash flow? So Phil, let’s assume – and it’s a little hard, but let’s just go back to – this question has been asked a number of times over the last several years. And my standard responses, let’s hope we get the opportunity to spend more capital. That means there is more growth. We’ll – we had an acceleration – let’s just deal with the North American beverage can market. We had an acceleration of can volumes from about $90 billion to $115 billion to $120 billion from 2019 to 2022, which required an immense amount of capital by the can makers to meet the customer requirements and the consumer demand. I’m hopeful we’ll have that period of time occur again in the near future. And if so, we are prepared to invest ever increasing amounts of capital to meet that customer demand depending upon the economics of contracts we can enter into to get proper returns on those investments. Short of that, if from time to time, there are lower growth expectations or lower conversions from one substrate to another, we are prepared to reduce capital to appropriate maintenance levels and incremental volume growth in a region like Southeast Asia, for example, where I think we’re going to continue to have volume growth opportunities. But – so that’s the answer around capital. It could be – I think as we sit here today, we’re looking at $500 million for 2024 and $500 million for 2025. It’s hard to think that we’re going to need to go significantly above $1 billion over that two-year period. And then we’ll see where post-2025 takes us. So that leads to your second part of your question, what am I going to do about cash flow. We’re going to get debt down to where we think it’s appropriate, given borrowing rates. And we’ll continue to assess the level of the dividend. And then obviously, once you’re through that, the excess cash flow, the best way we found to deploy the excess cash flow is to reduce the share flow. That’s super helpful. On Europe, can you remind us how you’re set up now? I mean you guys have done a lot of good work contractually renegotiating on this. I just want a better understanding how you derisk as it relates to energy. Have you kind of restructure it where it’s more of a pass-through? And when we think about lower energy prices this year in Europe, is that a good guide going forward? And just lastly, you’ve clawed back half of the shortfall. When do you expect to kind of fully recoup that? Is that a 2024 event or is that going to take a little more time? Hey, Phil. So in terms of your last question, in Europe, we expect to get back to the 2021 level by the end of 2024. Largely, this is rightsizing the contracts that required energy recovery within the contracts. The lower prices that we’re seeing now in energy, Phil, we’ve gone out and we’ve hedged a fair amount of the energy exposure that we had this year to eliminate any volatility. So embedded in the numbers that we’ve given you takes that into consideration. So if you think about the lower energy prices potential upside, probably maybe on a minor level, but if you think about it, by the time we get into 2024, we’re rightsizing the rest of the contract, so we could get that as a pass-through. So if it stayed at a lower level, that would pass through to the customers, but allow us to get back to our income level that we like. I wanted to ask on transit. And if you could just help us think about some of the profit outlook and some of the key kind of year-on-year drivers for 2023, especially in the context of a weaker kind of macro, kind of where the book-to-bill sits entering the year, kind of the magnitude and cadence of some of the restructuring savings and how those would layer in? Yes, sure. So I think as we described earlier, from a volume perspective, we’ll expect volumes to be down in the first half of the year, and we expect volumes to recover in the second half of the year. Largely, the comps actually become easier in the third and fourth quarter from a volume perspective. I think we’re doing a real good job in the businesses to holding price or put a different way, recovering our costs. Significant overhead reduction program that we announced and implemented in the second quarter last year, where we’re looking to take out in excess of 600 heads, these are heads above the factory floor. And I think through the end of December, we’re at least two-thirds of the way through that process. We recognized a fair amount of value last year and that in the fourth quarter, and we’re going to continue to accelerate the savings each month. If you thought about it, it’s $2 million to $3 million a month of overhead savings at least you’re going to have. So the backlog principally in our automation business, that is equipment and tools, but automated packaging technologies continues in about the $280 million range. So it’s on the order of a full year’s worth of equipment that we sell is the backlog. And from time to time, we still struggle with supply chain for motors and circuit boards and things like that. But the situation is beginning to ease, and as we get more supply from those – the guys who supply those integrated parts, we can finish assembly and ship products. So actually, as we sit here today, the outlook for that business is quite strong this year despite – from an income perspective, despite what you might think about a softening industrial economy, we think that the need for back-end automation lowering cost with automation, we think we’re really well positioned in that business to benefit from. And I guess along on just on – I mean, is there an actual expectation of the volumes recovering? Or is it purely easy comps that frame the kind of current outlook? No, I think – we think that as we get towards the fourth quarter, not only the easier comps from the third and fourth quarter, but we start to see volumes start to reaccelerate in the fourth quarter. Thank you, Tim, Kevin and Tom for taking my questions. Tim, I wonder if you could just talk about the cadence of volume growth you expect in North America in 2023. Obviously, you’re confident in terms of achieving a 10% volume growth. But I just want to get a sense of the case, particularly with your new capacity things still beginning. No, that’s a good question. I’m hesitant to say anything, but you guys scratch the surface. You guys scratch everything. So – but as we said, we’re five weeks in and things are really good. If I had to take a look at the month of January, we’re up somewhere between 5% and 10%, and we’re going to bring a lot more capacity on beginning this month with the second line in Martinsville, and Bowling Green is back up and running full steam ahead as compared to last year at this time when it was down from the tornado, and we bring Mesquite up beginning in the middle of the year. So you should expect volume growth to accelerate second, third quarter. But I’m not – what we’re trying to tell you is that we have volume growth right now as well. We’re not waiting for all that capacity to come up, things are pretty good right now. Got it and thank you for that. And then just one quick follow-up. Can you talk about what has changed internally regarding how you vet your customers’ growth forecast and their demand for cans? Now I realize you’re close to your customers, but I’m just trying to get a sense of what’s changed with your interactions with your customers, the diligence that gives you more – and diligence. What gives you more confidence regarding their forecast now relative to the way that you do things historically? So I think – I want to – what I will say is we had a little blip perhaps in our understanding of the market last year as we headed into the summer months and into the third quarter. I will tell you that – the disappointing thing for Kevin and myself is that we had that blip because we’re not a fly at 30,000-feet operation. We’re – Kevin and I are and everybody shorts every day. Somebody wants to ask me what I do as a CEO, and I told him my chase people all day long. And so I think part of the problem with the success that we had in the North American beverage business over the last several years, we kind of took it for granted that the customers’ forecast were accurate. And perhaps at some level, we didn’t realize the customers were concerned with supply chain, and they were overestimating. So we’re back to square one, chasing people all day long and doubting people. And that doesn’t mean doubting our customers, that means staying on top of our team internally to make sure we don’t have that happen again so… I had a question about, I guess, utilization or capacity and just – I know you won’t speak to what you guys are running at. But just from an industry standpoint, it looks like we’re sort of in the maybe the high 80s exiting 2022. And I think, obviously, you guys had renewed a lot of contracts domestically the industry has. So do you feel like you’re – and the industry is in a comfortable spot from a contract perspective maybe until the middle of the decade? Historically speaking, high 80s, low 90s wasn’t a great spot for the beverage can industry and perhaps things have changed to the extent that there are more sizes – size requirements and maybe label changeovers and things like that? Just how you’re thinking about optimal utilization rates for the industry. Yes. So you bring up a good point, different sizes – change over to different sizes and the complication sometimes it’s running different sizes will reduce capacity from manufacturers rated speeds to what is actually achievable when you bring down a size and you bring back up another size. I think that you’re right to point out, we would prefer utilization to be in the 92% to 95% range. I would say that we’re at least at that level. I can’t comment on the other manufacturers in the marketplace. But I will say that much of the decline that we had last year will – more than all of the decline was related to imported cans. So the domestic produced cans were actually up last year. So I don’t know if the industry is as low as you think it is right now. And I think there’s – there’s been some capacity realignment or the announcement of some capacity realignment by one or two of the other manufacturers. So I think we’re not in as bad a shape as in the industry as you think we are. But we’d rather be 92% to 95%, as you point out. And now the contracts, a lot of – again, I can’t comment on the competition, but so many of the contracts are out several years. We’re not in the near-term too concerned with where the market is today. We’d be more concerned with where the market is a few years from now. Okay. Thank you, Tim. And I kind of segue to the next question. A lot of those imported cans, some of them, a decent chunk, maybe a third were coming from the Middle East. And so the logical part of me says to the extent they were able to find their way into North America, they could certainly maybe find their way into Europe. I think you guys are talking about low to mid-single-digit growth. What we heard from our competitor was mid to high single-digit growth. Still a decent amount of capacity coming there. Is that a concern or something that you guys are chasing people down for as you look at the European market? And then I think we did see an announcement of a second, I guess, Chinese-sponsored plant over in Europe. Any thoughts on that? Thank you. Well, any time you export cans or customers or companies want to import cans, there’s a significant freight component to that. They are not competitive to locally produced cans. So somebody has to absorb freight cost, whether that’s the customer and/or the company that’s – the can company that’s importing to support their business. So we’re not overly concerned with cans being imported in from the Middle East into Europe or the United States, unless customers want to pay that incremental freight costs. And I don’t think they want to do that. The European market, listen, it continues to grow. We don’t happen to be where the Chinese – the new Chinese – rumored Chinese plant is going. We don’t happen to be very large in that region. It is for a specific customer. And in the near-term, we don’t see that impacting us. Again, I can’t comment on how it may impact others, but we don’t see that impacting us. Good morning. I just had a question on specialty cans. I think at the Investor Day, you had guided to a 25% specialty can mix in North America by the end of 2022. So I’m just wondering where you stand there now and where you think that could go once the announced capacity adds are completed? And maybe just broadly, if you’ve seen any sort of change in competitive intensity specifically for specialty sizes? Yes. So I think I don’t know if we’re at 25% or we’re at 23.5% or 24%, but we’re in that range. And I think the market will continue to demand more specialty cans as opposed to the standard 12-ounce can, whether that’s 16-ounce cans or smaller portion sizes or slim 12-ounce cans versus the standard 12-ounce can. And all of the capacity we’re putting in has multiple – or multi-sized capability, be it taller cans, shorter cans, fatter cans, skinnier cans. So as the market demands or requires different sizes, we’re well positioned to support our customers with those sizes. I would point out that – and again, I always hope that somebody is looking at this. And while our specialty can mix might be slightly below some others in the marketplace, I don’t think our margin profile is lower than theirs. So I think we do a pretty good job managing the business, the portfolio of customer business we have and running our industrial infrastructure to maximize income regardless of the size of the cans we’re making. Great. Great. I appreciate that, and that’s very helpful. Just one – maybe one quick one last one. Kevin, is there like a rule of thumb on EPS sensitivity changes in the euro and maybe interest rates? On the euro, a 0.1 move typically is a point – is a $0.02 change in EPS. On interest rate sensitivity, I don’t have that in front of me. Why don’t we reflect on that, and we’ll try to give you a better feel for that in April. It’s kind of – you can go through the 10-K and look at our data as to whether it’s fixed or floating and you can apply rates to that. But as Kevin said, I don’t think we have that with us right now so – okay. You’re welcome. Okay. So Nicole, I think you said that was the last question. I want to thank everybody for joining us, that will – and conclude the call today, and we’ll speak with you again in April. Bye now.

EarningCall_460

Welcome to the BellRing Brands First Quarter 2023 Earnings Conference Call and Webcast. Hosting the call today from BellRing Brands are Darcy Davenport, President and Chief Executive Officer; and Paul Rode, Chief Financial Officer. Today’s call is being recorded and will be available for replay beginning at 12:00 P.M. Eastern Time. The dial-in number is 800-695-0671 and no pass code is required. At this time, all participants have been placed in a listen-only mode. It is now my pleasure to turn the floor over to Jennifer Meyer, Investor Relations of BellRing Brands for introductions. Ma’am, please begin. Good morning and thank you for joining us today for BellRing Brands first quarter fiscal 2023 earnings call. With me today are Darcy Davenport, our President and CEO; and Paul Rode, our CFO. Darcy and Paul will begin with prepared remarks, and afterwards we will have a brief question-and-answer session. The press release and supplemental slide presentation that support these remarks are posted on our website in both the Investor Relations in the SEC filings sections of BellRing.com. In addition, the release and slides are available on the SEC’s website. Before we continue, I would like to remind you that this call will contain forward-looking statements, which are subject to risks and uncertainties that should be carefully considered by investors as actual results could differ materially from these statements. These forward-looking statements are current as of the date of this call and management undertakes no obligation to update these statements. As a reminder, this call is being recorded and an audio replay will be available on our website. And finally, this call will discuss certain non-GAAP measures. For a reconciliation of these non-GAAP measures to the nearest GAAP measure, see our press release issued yesterday and posted on our website. With that, I will turn the call over to Darcy. Thanks Jennifer and thank you all for joining us. Last evening, we reported our first quarter results and posted supplemental presentation to our website. I am pleased to share that fiscal 2023 is off to a good start with our first quarter results coming in ahead of our expectations. Net sales grew 18% over prior year and adjusted EBITDA was at 42%. Overall net sales came in better than expected with slightly higher premier protein shake productions, that translated into stronger shipments. In addition, adjusted EBITDA benefited from COGS favorability. I am particularly encouraged that premier protein volumes returned to growth in Q1 and we are starting to see its momentum grow. As you saw in yesterday’s press release we affirmed our fiscal 2023 outlook of net sales and raised a low-end of our adjusted EBITDA range. We don’t expect major changes to the cadence we communicated last quarter. Paul will provide more details. Let’s start with shake production. We saw significant growth this quarter in production as we lost the worst of our capacity constraints. This growth allowed us to modestly increase inventory at our retailers as well as increase our own inventory. Both have improved, but are still not at optimal levels. Over the next few months, we expect most of our customers will be at normal levels, while we don't expect our internal inventory to fully recover until early 2024. Our state capacity expansion plans are on track with annual production expected to grow low double digits in fiscal 2023. Our new bottle co-manufacturer continues to scale up with production improving each month throughout Q1. Our three new co-manufacturers for 2023 are tracking to plan. Recall, we have a small co-man that comes online late in Q2 with the step up in production in Q4 with our two dedicated greenfield facilities coming online. Consequently, their benefit will not be fully realized until fiscal 2024. Our incremental capacity in 2024 is expected to be north of 20%, setting us up for many years of robust shake growth. Before reviewing category and brand updates, I want to share that we have changed our sources for tracked consumption as well as household penetrations. These changes are outlined in greater detail in our supplemental presentation but in general, these new sources provide us with better coverage of our business and in turn, deeper, better insights. The communication [ph] category remained strong, up 14% in Q1, accelerating compared to prior quarter. Ready-to-drink was up 18% and ready-to-mix up 28%. Both segments are growing despite price increases and continued capacity constraints across the RTD competitive set. The Sports Nutrition segment is driving the category as more consumers pursue their fitness goals. The club channel is especially strong, with growth rates greater than 20% of top accounts. Protein as a macro trend continues to show a huge runway for growth. Premier Protein consumption returned to growth this quarter showing remarkable strength. The brand grew 15% with solid growth across mass, food, and club. This momentum continued through January with consumption up 17%. E-commerce consumption growth was the only exception. It was hindered by the slower-than-anticipated scale up at our new bottle co-man that we highlighted last quarter. Our key brand metrics reaffirm a long runway for sustained growth. Market share has stabilized at 18% for the past year despite our reduced SKUs and limited demand driving activities. Premier Protein shakes lead in velocities with all SKUs performing in the top third in track channels. TDPs experienced small sequential gains this quarter, reflecting more inventory on shelf. As we discussed last quarter, household penetration has softened as a result of our intentional pullback in flavors, promotion, and marketing. Despite this slowdown, Premier Protein still has the highest household penetration in the category, and our buy rate and repeat rates are holding steady, demonstrating the loyalty of our high-value buyers. We expect household penetration to rebound later this year as we reintroduce our full portfolio and restart light sales -- light shake promotion and marketing. Premier Protein powders are a small but growing part of our portfolio. Powders currently have three flavors and are rapidly gaining distribution. The top two flavors, chocolate and vanilla currently rank in the top 15% in tracked channels. Consumption in the quarter was up 64% versus prior year, and we launched our first ever national marketing campaign in January. It's exciting to see a Premier Protein brand successfully expand formats. Turning to Dymatize, the brand had another great quarter with consumption dollars up 30% across tracked and untracked channels. We saw strong double-digit growth in all key channels driven by distribution gains, pricing, and promotion. Impressively, the momentum accelerated into January with consumption up 50%. As you may remember, we temporarily lost distribution at a key club customer last year. I'm happy to report we regained that distribution late in Q1 and consumption rates are already performing well. Dymatize's expansion in the mainstream accounts is propelling the brand with market share, TDPs and ACV reaching all-time highs this quarter. We ended the quarter with 4.6% market share in tracked channels, up significantly versus a year ago. Dymatize continues to add new households with repeat and buy rates holding steady. In closing, we are making significant progress in our shake capacity expansion to grow and diversify our supply and deepen our competitive moats. Our high-growth category continues to accelerate above historic mid-single-digit growth rates with strong macro trend tailwinds. We are close to re-introducing our full range of Premier Protein shake flavors and restarting marketing and promotions. Lastly, we have a robust innovation pipeline that will help fuel our growth in 2024 and beyond. We remain confident in the long-term outlook of BellRing and look forward to sharing our progress next quarter. Thank you for your continued support. I will now turn the call over to Paul. Thanks, Darcy and good morning, everyone. As Darcy highlighted, fiscal 2023 is off to a good start. Net sales for the quarter were $363 million and adjusted EBITDA was $85 million. Net sales grew 18% over prior year and adjusted EBITDA increased 42% with strong adjusted EBITDA margins of 23.4%. Starting with brand performance, Premier Protein net sales grew 23%. Higher average debt selling prices contributed 18% to overall growth. Volumes grew 5%, reflecting increased shake production compared to a year ago and continued RTD category growth tailwinds. Net sales growth outpaced consumption growth in the quarter due to typical seasonality as well as continuing to build customer trade inventories back to optimal levels. Dymatize net sales grew 3% compared to a year ago, benefiting from higher net pricing, distribution gains, and favorable product mix, offset partially by lower volumes. Moreover, we are lapping our strategic decision to discontinue certain Dymatize products, which was a headwind to growth in Q1 and continues into Q2. In addition, shipments into the international and domestic specialty channels both of which have historically inconsistent shipment patterns deloaded inventory during the quarter. The combination of shipment timing and the lapping of discontinued products was a 25% headwind to the net sales growth rate in the quarter. Excluding these items, net sales growth tracks closer to consumption growth. Gross profit of $122 million grew 34%, with gross margins of 33.6%, up 350 basis points. The increase in gross margin was partially driven by production attainment fees from our shake co-manufacturers as well as the lapping of prior year supply chain and efficiency. Excluding these impacts, gross margins decreased 120 basis points compared to a year ago as our pricing actions offset significant inflation. Excluding onetime separation cost, SG&A expenses increased $6.6 million compared to last year and were flat as a percentage of net sales. Before reviewing our outlook, I would like to make a few comments on cash flow and liquidity. We generated $36 million in cash flow from operations in the first quarter. We expect to generate much stronger cash flow in fiscal 2023, particularly in the second half, with the full year more in line with our historical EBITDA to cash flow conversion rate. With respect to our share repurchases this quarter, we bought 1.8 million shares at an average price of $23.33 per share. Our remaining share repurchase authorization is $29 million. As of December 31, net debt was $910 million and net leverage was 3.1 times, down almost a full turn from the spin-off last March. With our expected EBITDA growth and strong cash flow generation, we continue to anticipate net leverage to be lower than 2.5 times by the end of fiscal 2023. Turning to our outlook. We are maintaining our guidance for net sales of $1.56 billion to $1.64 billion and raising our adjusted EBITDA range of $306 million to $325 million. We continue to expect sales to sequentially grow each quarter as RTD shake production increased. Our pricing actions on Premier Protein shakes are offsetting significant inflation on protein and other input costs. However, we expect gross margins to sequentially decline from the first quarter as protein and packaging costs step up. We continue to expect adjusted EBITDA dollar growth to be weighted towards the first half of 2023, which has a greater benefit from pricing actions, while the second half of 2023 has further inflationary impacts and incremental brand building investments. For the second quarter, we expect high teens net sales percentage growth compared to prior year. Pricing continues to be the primary sales growth driver. Similar to Q1, we expect Q2 adjusted EBITDA dollars to grow significantly from prior year, driven by increased net sales. However, adjusted EBITDA margins are expected to be similar to prior year as gross margin improvements are largely offset by higher marketing spend to support Premier Protein patterns and Dymatize. Before wrapping up, I want to provide an update on our relationship with Post Holdings. During the first quarter, Post sold us remaining shares of our common stock and has completely exited its ownership of BellRing. Post has been a great partner over the years, and we are grateful for their guidance and stewardship. Post will continue to provide services through a master services agreement and Rob Vitale will remain in his role as Executive Chairman of the Board. In closing, our momentum continues to grow. Our strong Q1 results gives us greater confidence in our full year outlook and long-term growth prospects. I will now turn it over to the operator for questions. Thank you. I think you just made a comment there about promotions and marketing for the rest that there would be some step-ups there. Could you maybe give some color or some numbers around how much you would expect promotion spending and marketing to be up for the rest of fiscal 2023 and how we should think about the implications for the model? Sure. And I'll start with marketing. So from a marketing perspective, we do expect marketing or advertising and promotion to step up in the second quarter. We'd expect it to be in the 3% to 4% of net sales range for the second quarter. For the full year, we'd expect our advertising and promotion spend to be in the mid-2% and really, that's pretty consistent first half and second half with again the highest spend in the second quarter. From an approach perspective on shakes, it's pretty -- we are doing some light promotion primarily in the second half, but it's not a significant drag. It does impact the fourth quarter margin a bit, but that's not a significant driver. Thanks. And just maybe a comment about the competitive environment you see for Premier Protein. These days, do you see some smaller competitors that appear to be at least benefiting from limited capacity across the industry for some of the -- for some players but could you just talk about the competitive environment and how you see that shaping up through the rest of your fiscal year? And thank you. Yes. The competitive environment hasn't changed a ton since kind of the last quarter and before. I would say the same themes have continued. So a few more people have taken pricing this last quarter, including us, within RTDs and then capacity constraints kind of across the competitive set have continued. TDPs for the category are actually down about 6% for RTDs. To your question about smaller -- we are seeing some smaller brands pick up some TDPs. So I think what should happen is for the -- if you kind of look forward as the -- as some of these brands that have had capacity constraints like ourselves start re-introducing our full line and then accelerating with innovation, etcetera, I think that you'll see a combination of expansion of the category, the RTD category from a shelf space perspective as well as just picking up from some of the competitors that aren't necessarily performing to the levels that the big brands can. Hey, good morning folks. Thanks for slotting me in. I guess I'll go with two here. Starting with the PET bottle supply. When you first kind of brought online, it was expected to only bring a substantial amount of capacity, but I believe it was also going to bring a substantial amount of cost savings allowing you to effectively get the margin profile on PET bottles down in line with your Tetra Pak. Given the challenges so far since you've on boarded that, where do we stand in terms of absolute magnitude of capacity at run rate as well as that margin position? Thanks, Jason. I'll hit the capacity, and I'll let Paul hit the cost savings. From a capacity standpoint, we have improved. So you are exactly right. The plans were to expand it quite dramatically. So last quarter, like I said in my prepared remarks that we increased every month from a run rate standpoint. Actually, Q1 is pretty close to where our run rate needs to be or where we assumed it would be for the whole year. It steps up a little bit. We are expecting it to step up a little bit in the back half but we saw some real improvement this quarter, which was needed and nice to see. So I would say we're very close to the run rate we need to be for the rest of the year. And it absolutely is a big cost savings and you described it well that it was going to be consistent with pretty close to Tetras. Paul, do you want to add anything on cost savings? No, I think you covered it. We certainly do -- we are realizing benefits on cost from this switch. It's definitely been paying us in the first half, and then obviously, we'll start lapping as we get later in the year. But yes, we're seeing the benefits from this relationship. Yes, Jason, the other -- the only other thing I would just add is there's also a fair amount of sustainability improvements with this change around just the amount of plastic that is actually used in these PETs. So there's a real benefit to the change on that front as well. That's good to hear. I'm more enthused about the potential to allow you to enter C-stores for that format, though. Sticking on the topic of cost, the way protein prices have come in quite a bit, like they've been falling fast, which is really encouraging to see. You made comments last quarter about sort of hedge timing. So a question to you, where your hedges stand and when can we expect to see these lower prices roll to your P&L? Yes. So our biggest cost is actually milk protein and then whey proteins on the powder, so milk is on the shakes and whey protein on powders. We're really -- we're coming through really kind of the peak of the protein costs, especially on the milk proteins here in the second into the third quarter, and then we do expect that our protein costs will start to pull back. Whey protein is, to your point, falling more dramatically and so we will see perhaps some benefit to that starting as early as Q4. But really, I think most of the year-over-year tailwinds will come more in fiscal 2024. As we go through the rest of the year, the magnitude of the headwinds from protein declines as we go through into Q3 into Q4, but it's still net headwind as we just get through the peak of the market. There's a lag time from the time we procure protein to the time it rolls through cost of goods sold and that's somewhere in the six to nine months depending on how far out we are. And so we expect the peak of that to hit us this quarter and into next. Hi, thanks. Just to build on your answer to Jason's question there. Historically, your gross margin has gone up or down, a little more, I think, than most companies that we cover. And part of that, I think, is because of the underlying movements in non-fat dry and in whey. And I guess my question is, as you look ahead, is there any reason to think that as those prices remain lower, if they remain lower, that you'll have to discount your products more heavily, you have such -- you're still capacity constrained, the industry is still capacity constrained. I guess my question is, should we assume for modeling purposes that as these costs come down, your gross margin should increase and you won't have to give back a significant amount of that pricing? That's, I guess, the way to ask it. Yes. So I'll start and then Darcy, if you want to touch on just discounting. But there's a couple of pieces of this in play that you have to consider. So yes, as we go into 2024, we'd expect to see some headwinds on protein. We are seeing inflation in other places, especially starting in the second half, which is around packaging and some of our other manufacturing costs. But keep in mind that we're also in a year where we're doing very little promotional spend. So as we go into 2024, you have the dynamic of protein costs going down, but the thinking is that we are going to invest in brand building and more into the promotional side of it. And so net-net, I think gross margins ought to bounce up a bit next year, but those are the two primary things that are in play. On whey protein, because of the magnitude of the change is so dramatic, we should see gross margins for powders come up quite nicely from where they are right now. But on shakes, it's really a trade-off between protein costs coming down and obviously, restarting the promotional activity. But net-net, I would expect that to be unfavorable. The other thing I want to mention, I think, Jason asked this and maybe I didn't get to, which is we're covered on our proteins about 75% to 80% at this point for fiscal 2023. Thank you for that. And then in e-commerce, I'm just curious for an update there. It doesn't seem like it's quite as strong as for other channels in Premier. Just curious for your strategy there and for the outlook for the year, if that's changed at all? Yes, we are -- you're right. It was the only channel that was down a little bit for the quarter. Just a reminder that for our e-com business, about 50% is Premier and about 50% is Dymatize and Dymatize is actually up quite nicely. But on the Premier side, yes, our issues are still stemming from our -- the bottle co-man constraints that we talked about last quarter. We've had kind of continued challenges getting our flavors -- all flavors back in stock at one of the key retailers. They are tight on warehouse space and prioritizing promoted items, especially during the holiday time and we see this firsthand because Dymatize is promoting and they are fully in stock online at this key retailer. So we are actively working on Premier, getting it back. I do believe we have the inventory. They need the inventory. So I believe that this will be solved kind of in the next several months, hopefully sooner than later. But one thing I would just remind you that e-commerce in total for our business is only about 10%. So it's an important channel. We want to get it on track because it is one of the areas -- it's one of the channels that we build households, we get trial, but it is still a fairly small part of our business. Hi, good morning. So given that the production capacity is improving better than you expected, can you talk about any changes in your advertising or promotion plans, is that driving any change in your plans for the year there? And I guess, how are you thinking about the further recovery in TDPs over the course of the year, can they approach 2021 levels given improving supply? So promotion and marketing. We are fairly consistent with what we communicated before. So our plan is just to remind you, we will -- we are doing some market -- we're coming back with marketing, as Paul said, in Q2 around non -- mostly non-Shake items. So we're actually marketing more of our Dymatize as well as Premier Protein powder, basically any product that we have ample supply on. We'll come back towards the end of kind of back half marketing our shakes. So we'll start getting back into marketing there. And that was really always the plan. From a promotion standpoint, again, consistent with what we talked about before, we're looking at light promotion but not until Q4. So that's the kind of answers the promotion and marketing fees. On TDPs, we are seeing and I assume you're talking about TDPs on shakes, we are seeing some slight improvements this quarter, and that's really having to do with just better in-stocks. We'll continue to see that through next quarter with the reintroduction of our SKUs which will hit in Q3. We'll start seeing, again, some bump up of TDPs but it's not going to be dramatic. We're waiting on resets to happen, and that will happen in the kind of late spring, which really is Q3 for us and then into Q4. As far as 2021 levels, honestly, I think that it's going to take, I would say, Q4, Q1, probably Q1 of 2024 to really get back to 2021 levels, but we'll be consecutively improving every single quarter, I think. Great, thank you. And then just on Dymatize, can you elaborate on what's impacted the performance this quarter and how you're thinking about Dymatize growth over the rest of the year? Sure. There were two items that were headwinds to the quarter. The first is we did see some shipments pull -- we have some shipments into especially international that was stronger in Q4 that de-loaded in the first quarter. So that was about 15% of the 25% headwind and then we were lapping discontinued products, which we've called out over the last couple of quarters as a headwind that we will see continue into the second quarter. So those are the two primary items if you pull out that, those two combined were about a 25% headwind that gets you closer to the consumption growth, which was up 30%. So we really feel like it's -- the brand is doing well from a consumption perspective. So we really want FDM and e-commerce, we're just -- we just have some shipment timing items and the decision we made last year and just got items that are weighing it down. Yes, I would just encourage everybody to focus on the consumption for Dymatize. The business is super healthy and shipments can be a little lumpy in that business because international and specialty represent about 50% of the business and those ordering patterns can really -- you can get three big orders one quarter and then one the next. So really, focusing on consumption is the best barometer of the health of the business, and we've been consistently seeing double-digit growth. Hi, first, just let me ask you if your revenues came in quite nicely ahead of expectations. But you only brought up your guidance on the EBITDA side. So is there anything maybe timing related that we should be aware of as it relates to revenues? Yes, from an EBITDA perspective, we did bring at the bottom end of our range, that's largely reflecting some of the margin favorability that we saw in the first quarter. And really specifically, we saw the production attainment fees of about $3.8 million in the first quarter that we did not include in our original guidance. And so that is certainly a big part of the reason for raising on EBITDA. And Kaumil, I would just say on just the guidance piece, strong start to the year, but it's early. And we just want to see -- we're being a little more conservative. And I think we want to see another quarter before making any changes to our guidance. Okay. Got it. And anything you'd like to add on spring shelf resets, just maybe with the outlook, I think by now maybe you would have a good sense on where you stand and how that lines up with your ability to supply? Yes, sure. So I'll hit fall first. I think I talked about it a little last quarter, but I would say, overall, both Dymatize, so let's just talk about product that we have supply, that ample supply. So powder is really good. So Dymatize, Premier powders, doing very well in actually both fall and spring resets. We've gotten store expansion. We've got new items in. I talked about in the prepared remarks around getting back club distribution on Dymatize, which was exciting, looking forward. And then on -- and that actually applies to spring resets as well. When we're talking about shakes and our focus is for spring is reintroducing our pos [ph] SKUs so the three flavors that will be coming back in really March, April. So those -- and actually, it's more April, May for the spring reset. And it's looking good. So most places, they're excited to get our full line back, and we're expecting to -- everywhere where we've heard for spring, they've taken all the three items. So feeling pretty good about resets. Thank you, good morning. I had a quick question for you, if I could. And just to understand, you mentioned having stronger production this quarter. Was that just a one quarter factor or you've seen that kind of continue through the year, I guess, ultimately, I'm just curious with your volume growth expectations for the year have changed if you're seeing a stronger rate of production from your co-manufacturers? So yes, we had stronger production this quarter and I will say that we are lapping, kind of the worst of our capacity constraints last year. So we're lapping a low number, but we did have strong -- about 20% production growth. So we were very pleased with that. As far as our full year, we're still expecting to be -- we talked about low double-digit growth as having for production. And although I think we're feeling better about that after getting the first quarter under our belt and hopeful we'll over-deliver that. But right now, I think that it's still a good number to go on. And then related that, would you expect to ship ahead of consumption in the second quarter, again, if this were still an inventory rebuilding mode, is that right? I would expect to -- I would expect shipment and consumption to be closer tracking in the second quarter. We may see a little bit of build as we get into the second half, as we start to relaunch some of the flavors, we may, we'd expect to see that shipments may be slightly ahead of consumption. But I think we'll be a little bit more balanced as we go forward, as we close kind of the remaining gaps on shelf, we'll ship a little bit ahead, but it should be a better balance as we go forward, I think. And then just one final question, the production of TDPs. Is that a onetime factor, do those continue, just want to understand how that could affect the business in the future? And I am finished here, thank you. Sure. Yes, those specifically related to a contract period that has now passed. So it's basically a minimum volume commitment that is over a contract period. So we would not -- but we are not expecting to have further production attainment fees as we go forward. Good morning, thanks for the question. I guess I just wanted to touch, first off, on your change in the data providers, especially the move to Numerator. What have you sort of learned if anything from seeing those expanded, the data, the insights there, are you thinking any differently about penetration now, are you reassessing how or how much you can mark up on the brand going forward, is there any impact on how you think about channel expansion, just anything there would be helpful? Thank you. John, I would love to get this question next quarter. We just changed -- we are -- it is a ton of new information. Our focus for the last quarter has really been reconciling the old data with the new data, making sure that we feel good about it. So that has really been our focus. We are -- the team is digging in to really mine the data because I think you know this, is that there is a ton of wonderful kind of insights in there, but we've only gotten a really -- the top level at this point. The reason -- the main reason for the switch is it's at -- both Numerator and IRI actually better -- we have better coverage over our business, especially when it comes to e-commerce and specialty. So it was a good move for us just from a coverage standpoint. And then just the depth of insights that I think we're going to get from on the Numerator side will be great. But we haven't even scratched the surface so far right now. So ask me that next quarter. Okay. So I'll save that for next quarter. And my follow-up on the innovation and the Good Night product. I think it's a big step for Premier moving into functional as opposed to just flavor introductions. I imagine there's likely more on the way from that pipeline. But based on the research you've done, how are you thinking about the role that Premier and Dymatize can play in functional going forward, are there certain segments of functional, are you seeing lend better to one or the other? And then is it fair to think these products will be at least gross margin neutral, if not accretive, when they get to a normalized basis? Thank you. Yes. So we don't look at it necessarily on functional or not functional. We -- our innovation strategy is all about incrementality. So if you think of looking at our pipeline, it's either incremental users, so incremental consumers or incremental occasions. This one is perfectly aligned to the occasions side of things. I think we will also get some incremental users, but this is all about occasions. Our 30-gram shakes are mostly consumed in the morning. Obviously, Good Night is a nighttime beverage. So this is a limited launch. We are -- it's three flavors on RTDs, one on powder. And it is just a test launch this year. So we're kind of dipping our toe in it. Early results -- very early are encouraging. I think it's exciting to see some of the online reviews and consumers really getting it, really understanding that this is designed to be a new occasion. It has a great name for it. So -- but in general, if you think of our innovation strategy on both brands, it's all about incremental. And if that overlaps with more function and leading into function, I think that's great. But again, our focus is being incremental to the current line. Hi, guys. This is Jim for Ben. Congrats on a good quarter. I'd like to ask on feed mass, you guys posted really strong results there. Is that just because the in-stock rate is improving as the capacity constraints start to alleviate, can you just give us some detail on what's going on there? Although both brands had a great quarter in FDM, but yes, in Premier that channel, like so FDM, those channels were most affected by our capacity constraints last year. So yes, so better in-stock rates are really driving those improvements. We've gotten some minor distribution gains, just really more stores that are factoring in as well, but the primary reason is just better in-stocks. I think you know this, but our biggest opportunity really is FDM. So I think that just -- I think we'll continue to see strong growth within those channels from here on out. Is there a certain point that you guys said, whether it's consistency, same stock or maybe shelf velocity that you guys can move from kind of in-aisle for the NCAP [ph] because I know sometimes in the mass channel, the shopper might not go into the aisle where the shakes are. They're not specifically looking forward, people have more visibility on the end cap. Is there anything -- metric that you need to hit to maybe start to see some of those ships in the store? Just improved in-stocks. We need to have enough product that not only are we filling out the shelves, but we have extra product that we can also fill up the NCAP. So directly related to production capacity, it will flow in. We've been asked by many customers, if we can do NCAP. We have held off. We actually did get some display in January, but in a couple of stores. But in general, this is the capacity -- it's a capacity thing. We just need more products, and then we can sell it to shelf. Hey, thank you operator. Good morning everyone. I just wanted to start with just a clarification first and then I had one question. I think Darcy in the prepared remarks, you mentioned that in 2024 you'd have a 20% incremental capacity or extra capacity available for Premier shakes. And I just want to make sure the 20% you're talking about is volume, right, not revenue? Okay, thank you. And then I guess, this question is for both you, Darcy and Paul. And as we're kind of thinking about modeling out beyond even next year, so kind of thinking about fiscal 2025 and kind of normalization of margins. I guess at the peak, gross margins were 36% and EBITDA margins were in the mid-20s. Obviously, there were some anomalies right, that affected gross margins that I think promotions weren't -- you weren't promoting as much. But just I guess, if we're trying to model the business going forward, right, and trying to balance margins, but also funding growth and given just you've got more co-man capacity, I think there's some structural costs here that are higher, but you've priced, is a mid-30s gross margin still achievable, should it be maybe more low 30s? And again, how that translates to EBITDA margins, just really trying to understand how much leverage might be in this business as we kind of move into the out years or whether we should be thinking about more kind of the -- funding the revenues and revenues being the bigger driver of EBITDA growth in the out years? Sure. I can start, and then Darcy, feel free to jump in. So you mentioned some of the margins in the past. And so I think some of those peak margins were during the time when we had capacity constraints a few years ago, and at that time protein costs were relatively low and we pulled all of our promotion of marketing. And so we always call those kind of outsized margins, the mid to upper 30 margins and the EBITDA margins in the 23%, 25% range. As we go forward, really, the way we think about the business is that our gross margins historically kind of strip out some of those unusual periods were more in that 32%, 33%, 34% range. So I do believe our gross margins could be in that range over the long term. And then with our spend behind promotion and our investments into marketing, we still think EBITDA margins, we -- obviously, our algorithm is 18% to 20% EBITDA margins. We've typically been on the -- in the mid- to upper side of that. I still think that is certainly achievable perhaps above that as we do gain leverage. And I think most of the leverage will be primarily at the G&A line, we would likely get some within gross margin as well, but I do think the G&A leverage that we would get. So as we think about it, I think the long-term algorithm is a good proxy for EBITDA margins on the -- maybe on the upper half of that. And like I said, gross margins in the 32% to 34% range is how we think about it long term. And Bryan, just to note on just the cadence. Obviously, the margins, specifically EBITDA margins can range from a quarterly basis. Q1 is always the highest because we don't do a lot of marketing and then Q2 is usually the lowest because that's a big -- it's a big time when new consumers come into the category. So new year, new you and usually we market on the heavier side. So that's -- and then kind of flat Q3, Q4. So that's usually the cadence of EBITDA margins. Okay, thanks. That's helpful. And if I could just squeeze one more in, just thinking about, again, beyond next year, just longer term, and maybe this is -- this maybe you'll be better quick to answer this when John Baumgartner asks, he re-asks his question about household penetration in the data, but do you have a measure or a sense of just -- you have a sense of household penetration, but brand awareness. So -- and I guess what I'm thinking of is just -- is brand awareness greater or less than household penetration and I guess if it's greater than that means if there's more availability, that household penetration would ramp faster, if brand awareness is still lagging penetration in some way, then perhaps it needs -- there needs to be a step up in marketing but just trying to understand kind of people's awareness of the brand versus household penetration? Yes. I think it's the funnel, right? You have to be aware, before you can try. And then -- so yes, I think that our opportunity is definitely kind of the top part of the funnel, which is getting people aware of the brand. We have decent, kind of aided awareness. So have you heard it from your protein where we have some big opportunities. The unaided is name a convenient nutrition RTD brand and then to come back with Premier Protein. So I think there is definitely -- we've been dark. I think this is where I think we all kind of forget because we're close to the story, but we've really been dark on marketing and promotion for over a year or plus. So, we've got some work to do to get back on and get in consumer’s kind of vocabulary. I think what's so encouraging for me is even during this period of time when we haven't been marketing and promoting, we're holding on to -- we lost a little bit of household pen, but we're really holding on to those high-value loyal consumers and our loyalty metrics are showing that. So I think that we've got some work to do definitely unaided and that would be the -- our unaided awareness, and that will be the start. Thanks, good morning. You just -- trying to understand kind of how this -- the demand or the volumes grow over the next as we move especially into 2024. Specifically, I mean if you look at the scanner data, in 2022, volumes for kind of your business and the whole category were flat to down. And I'm trying to understand is that the thought is -- the pricing is there, the capacity constraints, and how does it really change as you get more capacity, I mean, to get consumers back into the -- just to grow those volumes again, is it coming through the track channels or is it coming back from the club, can you grow even faster on the club channel? Both. So you're right. Volumes have been pretty -- depending on the quarter, slightly down in the category or kind of flattish in 2022, and that was a response to both fair amount of pricing but also capacity constraints. I mean I said and I think in an earlier question that TDPs for the category was down 6%. So just lot of capacity constraints and issues across the competitive set. So as we look forward and improve capacity, improve in-stocks and start getting back to demand drivers, I don't see a lot more pricing coming into play this coming year. So yes, I think you'll start seeing volume improvement. We started seeing for Premier volume increases this quarter, which, again was nice to see. And from where is it coming from, from track and untracked, I think we expect both. We'll have bigger increases in likely kind of the food drug mass area because they were the hardest hit by the capacity constraints. But we still see upside on club and what we've seen in the past, which I expect will be the same for the future is we often get new households, a new trial within both e-commerce as well as FDM channels. And then as we have this 50% repeat rate. So as consumers repeat and become everyday users, they often repeat within the club channel because they want bigger packs at a cheaper price. So the whole model that has gotten us here, I think, will continue in the future, and you'll see growth -- volume growth within both tracked and untracked channel. Got it. And I guess I'm trying to understand like it seems like you're modeling or we're looking for kind of a soft landing as you -- over the next three quarters lap the double-digit pricing and at the same time, capacity comes up and volumes need to accelerate. So I mean do you see that taking a few quarters to adjust or is it that simple of if you can get kind of the full set at the track channels like you have right now with the club channels that the volumes pick up pretty quickly? I mean just -- I'm just trying to understand how you look over the next three to four quarters as you lap the price increase, but volume doesn't -- are you expecting volume to pick up that quickly to offset it? Sure. So we do expect volume to grow for Premier in the -- as production comes online, and the key drivers for that are, we will relaunch some of the flavors that we aren't currently selling. We talked about having some wide promotion in the latter part. But as we get into the next fiscal year, obviously, we -- our current thinking is that it will be more of a normal promotional cadence of forward promotions in club, which drives a lot of volume. I also want to just highlight that we still have a pricing benefit for shakes in the second half. We took a price increase in October of this year and so while in the first half, we get the benefit of kind of two price increases, the one we took last April and the October 1 of this year. In the second half, we still get a pricing benefit in the second half related to the current year price increase. So we still see a mix of volume and pricing benefits in the second half, but volume does become a more significant contributor to the second half than we expect to be in the first, and that's because of the production coming online. Thanks. Just have a quick question, longer term, and a quick follow-up. Darcy I'm just curious, if we think longer term, just around brand positioning where in it seems like category is still strong or are you still holding share despite the reduction in TDPs recently, there's still some new innovation kind of being generated in the pipeline but if you step back and you think about the entire category and kind of the competitive backdrop, it usually when volumes are growing so much, there's usually increased competition, new innovation, repackaging, just kind of a very general question, do you kind of foresee any repackaging design, coloring what have you need as we think for just I don't know, next two to three years? I had a quick follow-up. We're always looking at those kind of things. I think that we've updated kind of the look and feel of Premier over time. I think from a brand positioning stand point we're feeling really good. We continue all of our consumer research just continues to tell us kind of we have a tiger by the tail. And this is -- this kind of mainstream approachable protein is right on trend. And so I think that the brand is positioned right. I think our challenge is just -- it is production, it's capacity, so then we can drive the message to more people. And that is absolutely the focus. Okay, fair enough. And then just quickly on cash flow. Look, obviously with more production way coming down, everything you talked about, there's margin moving up and the sales moving up, EBITDA is moving up, leverage is in a good spot, should be generating more free cash flow and your command. So not a lot of CAPEX needs, at least for now. So just kind of generally speaking, again, cash flow starts to pick up later this year, definitely in the next fiscal year, where would you kind of view priorities for cash allocation? That's it, thanks. Sure. Yes. So you're completely correct. We -- our business generates really strong cash flow, which obviously gives us a lot of optionality on the capital allocation side. Where we are today with -- our focus is on organic growth. We have a high bar for M&A and so really, the capital allocation decisions are really between share buybacks and deleveraging and the deleveraging is really primarily around paying down our revolver as the remainder of our debt is fixed. So we still look at share buybacks as a prudent capital allocation option for us and we'll continue to assess that versus delevering as we go through the year. And keep in mind, we delever just through EBITDA growth. So we'll get below 3 times just with growing EBITDA. So it just gives us the optionality to look at share buybacks versus bringing down our revolver. Thank you. Ladies and gentlemen, we have reached our allotted time for questions, and this does conclude today's program. We appreciate your participation, and you may disconnect at any time.

EarningCall_461

Thank you for joining us on our fourth quarter 2022 earnings call. During the course of this call, we will be making certain statements that may be deemed forward-looking within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, including statements regarding projections, plans, or future expectations. Actual results may differ materially due to a variety of risks and uncertainties set forth in today's press release and our SEC filings, including the adverse impact of the novel coronavirus on the U.S., regional and global economies and the financial condition and results of operations of the Company and its tenants. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the earnings release and supplemental filed on Form 8-K with the SEC, which are posted in the Investors section of the company's web site at Macerich.com. Joining us today are Tom O'Hern, Chief Executive Officer; Scott Kingsmore, Senior Executive Vice President and Chief Financial Officer; and Doug Healey, Senior Executive Vice President of Leasing. Thank you, Samantha. We are pleased to report another strong quarter with the majority of our operating metrics continuing to trend very positively. After a solid first 3 quarters of '22, we had a very strong fourth quarter. We saw robust retailer demand. And although tenant sales were flat in the fourth quarter versus a very strong fourth quarter of '21, we were up 3% for the year. Our average sales per square foot for tenants under 10,000 square feet was $869, a 7% increase over 2021. We continue to see traffic at about 95% of pre-COVID levels, but tenant sales are exceeding pre-pandemic levels with year-to-date sales up 13% compared to the same period in 2019. The quarter continued to reflect retailer demand that is at a level that we have not seen since before the great financial crisis. Some of the other fourth quarter highlights include occupancy, which ended the year at 92.6%. That was a 110 basis point improvement from the fourth quarter of '21 and a 50 basis point sequential quarter improvement over the third quarter of '22. We continue to see strong leasing volumes, which for the year, were in excess of '21 levels. For the quarter, we executed 261 leases for 900,000 square feet. Doug will be providing more detail on that in a few moments. We saw same-center NOI growth of 2% in the fourth quarter compared to the fourth quarter of '21, which was a very strong quarter and a tough comp. FFO per share for the quarter came in at $0.53. For the year, FFO was $1.96, which was about $0.03 ahead of consensus. On January 27, we declared a dividend of $0.17 per share, payable March 3 to record holders as of February 17, '23. Since our last earnings call, we've had a significant amount of financing activity, which Scott will elaborate on shortly. The debt markets for our A-quality town centers is improving, and we're getting our deals done. We continue to focus on redevelopment and repositioning of our top-quality centers. Much of this work is mixed-use, diversification and densification. Some examples of that include at Kierland Commons, we're moving forward with a 110-unit luxury apartment project which leverages a developable surface parking lot at this highly attractive open-air center. At FlatIron Crossing in Broomfield, Colorado, in partnership with a national residential developer, we are planning a 330-unit luxury multifamily project, centered around 2.5 acres of public amenities. At Biltmore Fashion, we're advancing plans for a 10-story, 250,000 square foot Class A office tower, including best-of-class retail and food and beverage. Plans are also evolving for a 250-unit luxury apartment complex at Biltmore. At Scottsdale Fashion Square, we're moving forward with plans for multifamily, residential and up to 500,000 square feet of Class A office. This is in addition to the re-merchandising of the Nordstrom wing with luxury brands and dining, which is well underway. At our flagship Tysons Corner Center, we're building upon the highly successful Phase 1 mixed-use development that brought Tysons Tower, Vita and the Hyatt Regency to the center. We are using a portion of our 2.4 million square feet of available entitlements to plan for another mixed-use project. Also recently, we announced the addition of Arte Museum at Santa Monica Place. Arte is an immersive digital art destination which is expected to occupy 48,000 square feet of space on the third level of the property in the former ArcLight theater space. Arte expects to attract 1 million visitors per year. It's a great entertainment addition and a major traffic generator that will bring tremendous energy to the third level of Santa Monica Place. As Doug will elaborate on shortly, we continue to be pleased with the strength of the leasing environment. As expected, given the depth and breadth of the leasing demand, we've had a very robust leasing result in 2022. The leasing interest continues to come from a wide range of categories. That includes health and fitness, such as Lifetime at Broadway and Scottsdale Fashion Square, food and beverage usage, including Pinstripes and Round1, entertainment such as Arte Museum and sports such as Scheels and Dick's Sporting Goods, co-working, hotels such as Caesars Republic at Scottsdale and multifamily projects at Kierland, FlatIron, Tysons. Interest continues at levels we've never seen before. Bankruptcies continue to be at a record low, and we continue to expect gains in occupancy and net operating income as we progress through '23. And now I'll turn it over to Scott to discuss in more detail the financial results for the quarter, significant financing activity and guidance for '23. Thank you, Tom. Now on to the highlights of the quarterly financial results. This morning, we posted solid operating results for the fourth quarter. Same-center NOI increased 2% versus the fourth quarter of 2021, excluding lease termination income. For the year, same-center NOI increased 7.5% versus 2021, excluding lease termination income. This was consistent with our prior estimates and our prior guidance. This is the second straight year of NOI growth that has exceeded 7% with 2021 same-center NOI growing 7.3% over 2020. FFO per share for the quarter was $0.53 and was $1.96 per share for 2022. The quarterly result was equivalent to FFO per share during the fourth quarter of 2021, which was also $0.53 per share. Similar to our same-center NOI growth result, this FFO result was consistent with our prior estimates and prior guidance. FFO per share exceeded Street consensus, as Tom mentioned, by roughly $0.03 a share. Primary and offsetting factors contributing to this quarterly FFO per share -- this quarterly FFO per share result are as follows: One, we had a $7 million increase in straight line of rent due to straight line rent from the Google lease at One Westside as well as from straight-line receivable write-offs during the fourth quarter of 2021 as we then finalized our remaining pandemic tenant-related receivables last year. Secondly, a $4 million increase from same-center NOI. And third, a $4 million relative improvement in valuation adjustments pertaining to our retailer investments, net of taxes. Offsetting these 3 positive factors were the following: One, a $7 million increase in interest expense due to rising rates; two, a $5 million quarterly decrease in FFO generated from land sales; and three, a $3 million decline in lease termination income. On to guidance. This morning, we issued our initial guidance for 2023 FFO, which is estimated in the range of $1.75 to $1.85 per share. Here are some details underlying the guidance. This FFO range includes an estimated same-center NOI growth range of 2% to 3%. This FFO range includes an estimated decline in lease termination income from $25 million in 2022 to a more normalized $10 million in 2023. In terms of the quarterly cadence for 2023 FFO guidance, we expect 23% in each of the first and second quarters, 25% in the third quarter, and the remainder in the fourth quarter of 29%. Primary factors to reconcile between our 2022 actual FFO that we've just reported and this 2023 estimated FFO were as follows: Same-center NOI growth is estimated to contribute $0.08 of FFO. Secondly, $0.05 of FFO is estimated to come from a relative improvement in valuation adjustments pertaining to our retailer investments, net of taxes. These factors are offset by a $0.21 increase in estimated interest expense due to rising rates; secondly, a $0.07 decline in lease termination income; and then lastly, approximately a $0.02 decline in noncash straight line of rental income. To emphasize, our 2023 outlook continues to reflect healthy operating cash flow of roughly $315 million before payment of dividends. More details of the guidance assumptions are included within the company's Form 8-K supplemental financial information specifically on Page 15 that was filed earlier this morning. Now on to the balance sheet. We continue to make good progress in our financing pipeline. In early December, we closed a 3-year extension of our $300 million CMBS loan on Santa Monica Place. The loan extended -- the extended loan carries a very attractive floating rate of LIBOR plus 1.48%, which is converted to SOFR probably in the next 2 to 3 months. The loan now matures on December 9, 2025, including extension options. On January 3, as we turn the page on the calendar year, we closed a $370 million 5-year refinance of the previous $363 million of combined loans that formally encumbered the Green Acres Commons, both on the mall and the power center, both of which were scheduled to mature in the first quarter of 2023. This new CMBS loan bears a fixed interest rate of 5.9%, is interest only during the entire term and matures on January 6, 2028. The company's joint venture that owns Scottsdale Fashion Square is in the process of refinancing the existing $405 million mortgage loan. The new 5-year loan is expected to be a fixed rate that will -- the loan balance will be $700 million, and that is expected to generate roughly $150 million of incremental liquidity to the company. The CMBS loan is expected to close within the coming several weeks. At year-end, we had $512 million of available liquidity. Debt service coverage was a healthy 2.7x. Net debt to forward EBITDA, excluding leasing costs, at the end of the quarter was 8.8x. Thanks, Scott. We closed out 2022 with very strong leasing metrics and leasing volumes. In fact, 2022 was a record leasing year dating back to before the global financial crisis when viewed on a same-center basis. Fourth quarter sales were basically flat versus fourth quarter 2021. But for the full year 2022, sales were up almost 3% when compared to the same period in 2021. And given the very strong sales volumes we saw in 2021, it was a very difficult year to comp positively against. Sales per square foot as of December 31, 2022, were $869, down just a little from our record $877 at the end of the third quarter. Trailing 12 leasing -- trailing 12-month leasing spreads remained positive at 4% as of December 31, 2022. That's down from 6.6% last quarter, and essentially flat when compared to December 31, 2021. In the fourth quarter, we opened 226,000 square feet of new stores. For the full year 2022, we opened almost 900,000 square feet of new stores, which is just about on par with where we were during the same period in 2021. Notable openings in the fourth quarter, including Anthropologie at Biltmore Fashion Park, Aritzia and Timberland at Fashion Outlets of Chicago, Free People at The Oaks, Freebird at Kierland Commons, Lululemon at San Tan Village, North Face at Washington Square and 3 stores with JD Sports at Country Club Plaza, Scottsdale Fashion Square and Victor Valley. In the luxury corridor -- luxury category, we opened Brunello Cucinelli, Dolce & Gabbana and GUCCI Men, all at Scottsdale Fashion Square. We also opened Shake Shack at Kings Plaza and Capital One Cafe at Country Club Plaza. In the digitally native and emerging brands category, we opened Alo Yoga at Kierland Commons, Brilliant Earth at Santa Monica Place, Everlane and Oak + Fort at Tysons Corner, Fabletics at Broadway Plaza and Chandler Fashion and Vuori at Kierland Commons and Village Corte Madera. Now let's look at the new and renewal leases we signed in the first quarter -- fourth quarter. In the fourth quarter, we signed 261 leases for just over 900,000 square feet. For the full year 2022, we signed 974 leases for 3.8 million square feet. And as I mentioned earlier, 2022 was a record leasing year dating back to before the global financial crisis when viewed on a same-center basis. Our focus in the fourth quarter was, in large part, addressing our lease expirations, finalizing 2022 and getting a head start in 2023. In doing so, in the fourth quarter, we signed over 200 renewal leases with almost 100 different brands totaling 640,000 square feet. With that, we now have commitments on 52% of our 2023 expiry square footage with another 27% in the letter of intent stage. These figures are virtually unprecedented at this early stage in the year. And given the noise and uncertainty that exists in the macroeconomic environment, I'm pleased with these statistics as we are basically taking a great deal of risk off of the table in 2023. 2022 is also a year of newness for us, bringing new, unique and emerging brands with a major initiative for our leasing team and a way for us to really reimagine and differentiate our town centers from our competition. To that end, in 2022, we signed over 100 leases with 88 new-to-Macerich brands totaling 440,000 square feet. Examples include Arte Museum, as Tom mentioned, Hermes, Balenciaga, Everlane, Oak + Fort, Parachute, Reformation, Roark, Rothy's and Samsung. That's just to name a few. Turning to our leasing pipeline. At the end of the fourth quarter, we had 140 leases signed for just over 2 million square feet of new stores, which we expect to open in 2023, 2024 and early 2025. In addition to these signed leases, we're currently negotiating nearly 100 new leases for stores totaling about 0.5 million square feet, which will also open in '23, '24 and early 2025. So in total, that's over 2.5 million square feet of new store openings throughout the remainder of this year and beyond. And I want to emphasize, these are new leases with retailers not yet open and not yet paying rent. And these numbers do not include renewals. And I can tell you that this leasing pipeline of new store openings now accounts for $62 million of incremental rent. And this represents approximately 8% of our current net operating income. And this incremental rent will continue to grow as we approve new deals and sign new leases. So to conclude, our leasing and operating metrics were very solid in 2022. Sales in 2022 outpaced 2021 by nearly 3%, and 2021 was a very strong year to comp against. Occupancy is up 110 basis points since the end of 2021 and up 410 basis points in only 7 quarters since our trough at the end of first quarter 2021, and we expect this trend to continue throughout 2023. There are no bankruptcies in our portfolio in the fourth quarter and only 3 for all of 2022. And bankruptcies overall are at their lowest level since 2015, which is consistent with our significantly reduced tenant watch list. Leasing volumes were at record level when viewed on a same-center basis. The result of which is a very strong, vibrant and exciting pipeline of tenants slated to open this year and into '24 and even 2025. I mentioned this last quarter, but I think it's worth repeating. Although the future remains unknown and despite the macroeconomic backdrop and looming potential recession, to date, we continue to see very little pullback from the retailers. And I think this is the result of the very healthy retail environment that exists today as well as a testament to our best-in-class portfolio of super regional town centers. Thanks for the puts and takes in guidance, Scott. I was wondering, what bad debt assumptions did you forecast in guidance given the macro backdrop? And any background assumptions on retention ratios or insights or further insights into the $10 million in lease termination income would be helpful. Thanks, Derek. Bad debts, we expect to be very normal, not significant at all. And that's consistent with what we're seeing. Again, Doug mentioned our tenant watch list is very low, incidents of bankruptcies are low. So we don't expect a significant amount of bad debts. And that's kind of consistent also with the level of lease termination income dropping so significantly from $25 million last year down to an estimated $10 million this year. They're just -- there's a lot less volatility. Those numbers obviously escalate during times of volatility. So we expect that environment to be much more normal. Yes. Thanks, Derek, for the memory jog. We have, for the last several months, last several quarters, frankly, experienced very strong retention rates. At times where we're remerchandising space, we're certainly choosing to take that offline and upgrade the merchandising mix, which results in some downtime. But generally, we're seeing very strong retention rates as we talk to retailers about renewing their fleet. Okay. And then let's shift to leasing, right? I mean so clearly, the way it looks right now, according to you, the deal pipeline is shaping up pretty strongly. But are you seeing any shifts given the macro uncertainty? I mean clearly, '21 and '22 were solid leasing years. But I guess the question is, are retailers still pushing through with expansion projects in your view? How are leasing and rent negotiations progressing or changing early in '23? And I guess, lastly, like you've been through downturns before. Are you seeing any leading slowdown indicators at this point? Any further leasing info certainly is valuable. Derek, I'll start and then I'll pass it off to Doug. We're seeing actually quite a bit of interest with, I would say, even heightened sense of urgency to get deals documented and done. You saw, we just announced a big one in Santa Monica Place, and there's 2 or 3 that are going to follow that are not subject to mentioning the retailer's name yet, but you'll be seeing announcements within the next few weeks. So if anything, we're seeing a heightened sense of urgency to get deals done and documented, and not a lot of pressure on rate, at least on the bigger, higher profile deals. Doug, you might care to speak more of the in-line spaces. Yes. Derek, I mean it's early days in 2023. But I can tell you, and I mentioned this in my remarks, that, to date, we've really seen no retailer pull back. Retailers are honoring the leases they signed. They're opening the leases they signed. And they continue to negotiate the leases that are out. And I think if you think about it, we have a very, very healthy retailer community out there, environment. And so many of the retailers that were suffering pre-pandemic failed during the pandemic. So we're left with a lot of big public companies that are long term in nature and are really being opportunistic when it comes to best-in-class real estate, which we have. I apologize. I was on mute. Rookie mistake. I apologize if I missed any opening remarks, but what's the land sales expectation built into 2023? Greg, 2022, we had about $0.09 of FFO from land sales, net of taxes. We still have a pipeline that we're executing on numerous transactions that are under contract. If we're looking at 2023, I would say that will land somewhere between 40% to 50% or so of '22 levels. Okay. Great. Back to that leasing on that, you got a pretty sizable pipeline that's expected to open up over the next few years here. I believe you said 2.5 million square feet, if I'm not mistaken. What's the net increase in NOI that's expected to benefit from that? And is that occupancy already reflected in that 92.9% just to check? Greg, the occupancy does reflect that pipeline. So it's included in the 92.6%. The pipeline of square footage is 2 million square feet, although Doug is rapidly trying to add to that. And it's a top priority for us to get that space signed. We've got to get it open because really the high 5s come when the tenants start paying rent. And I think Scott or Doug may have mentioned that $62 million of incremental revenue top line. That may not all hit NOI because obviously, we're in inflationary times, and we're fighting some rising operating costs, but the vast majority of it will. So I'd estimate we can see north of $55 million of NOI pickup as a result of getting those pipeline deals open and paying rent. One, I was just wondering, are you still getting signs from the consumer that they want more restaurants at your property? And how has the success rate been of the restaurants that you have opened in the last couple of years? Craig, it's Doug. Yes, restaurants, food and beverage, fast cas continues to be a huge priority for us. In fact, food and beverage and restaurants were the highest comping in terms of sales in our portfolio in 2022. So there is a lot of demand. And we are seeing -- if you read what's out there, we are seeing a shift in sales from traditional apparel and retail to services, including travel and including restaurants. So to answer your question, yes, we're seeing it and the demand is there. Great. And then maybe you can tell me a little bit about Arte Museum at Santa Monica Place? The visitors seemed very impressed, but what exactly would you be seeing at the museum? Well, it changes constantly, Craig. They control the content. It's immersive video. So you walk in and you feel like you're part of it, a wave crashing over you, for example. And you can go to their website. They're open in Korea. I think they've got one other U.S. location, maybe in Las Vegas. But they certainly generate a lot of interest, a lot of traffic, a lot of visits. And we think it's going to be very beneficial for the third level of Santa Monica Place, and we're hoping the concept can -- can travel a little bit through the rest of our portfolio. But it's exciting. There's nothing really like it around, and it's going to be a tremendous addition. Scott or Tom, how are you thinking about variable rent or percentage rent this year with the conversion to fixed rent? And I guess on that point, is there any sort of potential upside from sort of international tourism coming back, whether it's from China or other areas? Yes, Samir, we expect percentage rents to continue to decline as we renew leases and convert those variable rents to gross rent -- or excuse me, to fixed rents. That's a concerted effort on our part. We saw some of that in 2022, and I think you'll see that accelerate in '23. We've -- just by frame of reference, we've budgeted our sales to be neutral in 2023. So we'll see how the rest of the year pans out in that regard. But we'll certainly see variable rents continue to convert over to fixed rents. And then Samir, I'm sorry, second part? No. With international tourism coming back, I mean, from China or other areas, is there a potential upside to that number, you think? I mean how -- are you baking in any sort of upside to percentage rents coming from international tourism coming back here potentially? No, we're not getting that specific. But if you think about it, you think about the revenge spending that occurred domestically here in 2021 as the Asian consumer gets back out into the world, we'll certainly see some benefit, obviously, some benefit in markets like Santa Monica, in Chicago and Tysons Corner. So we're not building that into the guidance, but there's certainly room to think that as those consumers start to venture into the United States that we'll see some of that international tourism that's been missing for the last few years start to return. And any color you can provide on sort of what your assumptions are for occupancy for '23? How much of an occupancy pick up will we see, you think? We're going to continue to push that. Obviously, the higher the occupancy gets, the tougher it is to get there. But we were about 94% pre-COVID, dropped as low as 88%. And we've leased our way back to 92.6%. And we'll be -- our expectation is to be somewhere between 93.5% and 94% by the end of next year. I had a question. Where you think -- at what point do you expect you're going to recover '19 levels of NOI in your portfolio? And obviously, your portfolio has changed a little bit over the last couple of years. You made a couple more asset sales, et cetera. But it would be good for -- maybe for the market to get a sense of what the reference point is and how quickly you can get there? And obviously, clearly, your guidance assumes a slowdown in your NOI growth from the 7% plus levels that you've achieved over the last 2 years. So maybe you can give some comments on that as well, when you get a chance. Yes. Well, the same center growth, I mean that's coming against some very tough comps. 7% growth for 2 years in a row, that's extraordinary. So that's a little bit out of the norm, and this year, we're getting back to a more normal level. But in terms of when we get back to pre-COVID NOI levels, we've said for some time, we believe it's going to be around the fourth quarter of '23 and going forward from there. And it will track, to some extent, with the occupancy level as we get closer to that 94%, which we're pushing for this year. So we think we'll be there in the fourth quarter, and that's not inconsistent with what we've said in the past few quarters. Things are moving along nicely. And if Doug keeps doing a great job with his team on the leasing front, we'll get there later this year. And maybe if you can -- 1 comment and maybe on -- or if I can get your comments on your recovery ratios. One of the things that, obviously, you're part of what's going to be a drag on your earnings a little bit and your NOI growth this year is the fact that expenses are going up perhaps in excess of your fixed CAM bumps which will -- which could drag your NOI growth, which benefits from your 3% bumps in your occupancy gains and hopefully some positive lease spreads as well. But if maybe you can give a little bit more comments on what's happening in new leases. Are you asking and receiving higher fixed CAM? What other initiatives do you have underway that improve your recovery ratios and presumably moving from turnover-based rents and tenancies to permanent tenancies should hopefully improve your recovery ratios and your margins as well going forward. Yes, Floris. We -- as you know, we've been a fixed CAM shop for many years. In fact, most of our leases are on a fixed CAM basis with annual escalators that are in ranging between 4% to 5%. So if I were to say, '22 and '23 inflation has resulted in an abnormal increase in our shopping center expenses, perhaps that slightly outpaced the annual bumps that we're getting in fixed CAM. But bear in mind, year after year, leading up to this hyperinflationary environment that we're currently experiencing, we've been clipping along with annual increases that well surpassed inflation. So I think we've had plenty of, call it, "bank" to absorb the increases that we're dealing with right now in operating expenses for things like labor and real estate taxes and insurance. We're certainly going to see -- we are getting those fixed bumps in our deals with very rare exception. And we're certainly going to see our recovery rates continue to improve as we convert temporary space, which today is about 7.5% of our occupancy over to permanent. We'll certainly see a continued growth in our recovery rates from that. So 2 questions. First up, Tom, on the sales, obviously, we know stuff can be -- you always get a mix in sales. But curious, in the fourth quarter, sales were down relative to third quarter. Is this mix? Is it inflation like our -- I understand, obviously, tenants are strong, they're leasing. We firmly understand that. But at the sales level, are customers pulling back? Or was it a mix of what merchandise they were buying? Just -- I would have thought in the fourth quarter, people splurge and go out with a bang for the holidays and then maybe pull back once they get the credit card in the first quarter. Yes, Alex, the comparison was versus the fourth quarter of '21. And sales in the fourth quarter of '22 were flat with the first quarter of '21. But '21 was a very strong quarter, fourth quarter of '21. And so that's not necessarily bad news or an indication that consumers pulling back. I think it's just we were going against a tough comp. A lot of the retailers blame weather issues. I'm not going to go there. But we weren't uncomfortable with that result. We were up 3% for the year. And in terms of traffic and activity, the consumer is still there and proving to be very resilient. So we weren't necessarily concerned about what happened with sales and traffic in the fourth quarter. It was just going against a very tough fourth quarter of '21. Yes. I was comparing it to third quarter trailing 12 to third quarter versus trailing 12 to fourth quarter, but I'm guessing your response would be the same. Second question is on the -- going back to the occupancy build, you guys clearly got a lot of lease term in '21 and '22, recaptured a lot of space. Your overall occupancy is still a few points behind your public peer, although they have a different portfolio composition with outlets and malls versus you guys. But it would seem like you guys would still have a lot of bumps in the tank, if you will, on occupancy rebuild that would get maybe better NOI growth. So are there other things there? Is that maybe it's just the length of time it takes to physically open the space, get the tenant in that's really the hindrance, so the occupancy build will come in time, but maybe it's just physically getting it there? I'm just sort of curious because it seems like you guys would. You're right about that. I mean we announced the deals, the day we sign them, they go into occupancy. But in some cases, if you look at something like a Pinstripes or a Lifetime Fitness, it's going to take close to a year to get it built out, and it doesn't start hitting NOI until the build-out. So a lot of the stuff that we're talking about today, like Arte Museum, we're going to get the benefit of that in '24 and '25 as it relates to NOI growth, but not in '23. So that big pipeline does bode well for the NOI growth as we look forward into '24 and '25. Yes. We spoke about that just briefly, Linda. We do not expect those to be significant at all. As a result, we just did not disclose the guidance. It wasn't trying to be opaque or anything, but we just do not expect that to be significant. It's a very, very small line item when you're looking at a company that generates nearly $800 million of NOI. And then what's demand like right now from digitally native retailers? That's something that you've talked a lot about in the past. Is that still kind of going on at the same level of velocity as you've seen in prior quarters? Linda, it's Doug. I would say that the digitally native, the ones the retailers that are currently online that are starting to open bricks-and-mortar stores, that slowed compared to the last 2, 3, 4 years. But then you think about the brands that were born online that turned into bricks-and-mortar retailers, think about Warby Parker and think about Vuori and Allbirds. They were all born online, but now they're just basically traditional retailer. They have as much business in their bricks and mortar than they do online. So the new ones are slowing, but the ones that are emerging are really picking up. Just one last one. Are the luxury retailers turning their store opening plans back to Asia given the reopening? Or what are you seeing as it relates to domestic demand from the luxury retailers? Where that's most relevant for us, Linda, is at Scottsdale Fashion Square. We had such great success to the luxury wing and the food and beverage that we added a couple of years ago that we're converting the Nordstrom wing to luxury brands. And the demand has been very, very strong. So not a big sample size to speak to your question, but where we are looking to put in luxury brands, we're having pretty strong demand. I don't see it pulling back at all. Do you, Doug? Just a question about the same-store NOI growth forecast of 2% to 3%. As occupancy is expected to increase, which you indicated, and it appears rent growth is holding steady here, obviously, a lot of other factors, including the expenses and recovery income that you discussed, but can you just provide a little bit more detail around that build up to the 2% to 3%? And sort of, I guess, my question is, what's kind of holding it back a little bit? You talked about the $62 million of incremental rent or I suppose, $55 million of NOI that is expected to come online. That's pretty significant growth off your current base. So I'm just curious if you could talk about that a little bit and a little bit more detail around the 2% to 3%. Sure, Todd. This is Scott. The biggest factor, I think we touched on it earlier, is downtime. As you take large space off the market, most of which is committed, some of which is not, you've got downtime, which impacts you. And as we took a step back as we were doing all of our detailed work, looking at our business plan for 2023, we realized that coincidentally or not, some of our better space and some of our higher rent-generating space in our New York assets were, in fact, spaces that where we're taking offline. So that downtime certainly cuts against growth. You touched on the other component, obviously. It temporarily cuts against growth. It ultimately -- so we talked about the $55 million of incremental pipeline. That doesn't all hit in '23. Significant percentage of that hits in '24 and maybe some of it even in '25. So as Scott is saying, as we take space offline, it's a temporary hit to NOI to be picked up as we put the new tenants back in. And Todd, just refer to the disclosures we have on our pipeline. Those will actually get a little bit better than the one we had over Investor Day because of the improved leasing demand that we continue to see. But you can take a look and see what the incremental pipeline is by year. Okay. That's helpful. And how much of the $62 million or that leasing pipeline, how much of that is in the same store? The vast majority of it is same-store. We don't have a lot of development -- ongoing development projects that are significant where we pull anything out north of 95%. Okay. And just last question. On the occupancy specifically, you're looking to sort of be in that 93.5% to 94% range by the end of the year. Just in terms of seasonality, you talked about sort of low levels of bankruptcy. And last year was obviously very muted in terms of what occupancy was lost after the holidays. Do you have visibility on what that sort of seasonal occupancy decline might look like early this year, whether that will be similar to '22 or more of a historical sort of average if we think about that occupancy trend throughout the year? Yes. We're really going to see occupancy -- physical occupancy tick up by the time you get to the end of the year. Today, when we looked at physical versus leased occupancy at the end of 2022, it was approaching nearly 3%, which is pretty elevated for us, Todd. As our pipeline continues to get built out, the new stores start to open and start to pay rent, we'll see that gap start to narrow. So I expect physical occupancy will really start to pick up in the latter half of the year, which certainly sets up a good backdrop for cash flow and NOI growth in 2024. What about seasonally moving from 4Q '22 into early '23, right, 4Q to 1Q, sort of 1Q to 2Q, are you expecting any seasonal occupancy loss? Or do you expect this to be another year where there's just very little muted sort of levels of occupancy loss early in the year? You'll always see a drop after the fourth quarter. January is typically when leases roll, you've obviously got the temporary tenancies, which are seasonal in nature, and those guys may roll off. So you'll always see a little bit of a tick down from the fourth quarter to the first quarter. It could perhaps be a little bit less. We'll see how that pans out. But that's just traditional with our business. Yes. Historically, if you go back over the last 15 or 20 years, it's been a range of 20 basis points to 60 basis points decline between the fourth quarter and end of the first quarter. And I would expect that it would be very similar this year. Scott, what is the actual retailer valuation income assumption in the '23 forecast? I think you said it was about $0.05 higher year-over-year, but what's the number? It's about $0.01 in aggregate, very small. Very hard to predict also where these market valuations are going to be, but it's nominal in 2023 to be conservative. Got it. Okay. And then on some of the densification opportunities that you talked about, can you just run through some rough time lines? It's -- those are really going to run -- some happened -- the ones I mentioned relating to multifamily, it takes a little while to get the entitlement perfected and move forward. Those are going to mostly hit in '24 and '25. As it relates to the retail projects such as Scheels Sporting Goods and Arte Museum, those will be open late '23 or into '24. So it is a variety. We expect to spend about $150 million, Mike, in '23. And I would expect to like them out '24 to get those entitlements up and going. Biltmore might be a little further out there as we perfect the entitlement there. That's probably more like a '25 opening, '24, '25. Can you just talk about the trends in operating costs that we should expect in '23? And as these costs go up and as you pose higher lease spreads, I'm curious, how much of those higher lease spreads actually can translate into the bottom line versus maybe anticipated into a higher cost? Yes, our operating expenses will continue to tick up. Ki Bin, we expect about a 3% to 4% growth in shopping center expenses. It's a range of outcomes, from labor costs to property taxes, big line item, insurance, big line items. So we'll see that. Leasing spreads are kind of independent, right? You manage your expenses on a fixed CAM world. And the spreads, your ability to generate pricing power is really driven by growth in occupancy and creating that tension between supply and demand. And we think we're there. We've started to see spreads over the last couple of quarters in the mid-single-digit range. I think it's reasonable to assume we'll continue at that level. Doug, do you disagree? Yes. No, I agree. And the one thing I would add, Scott, is for the first time, probably since pre-pandemic, we're starting to see competition for space again, especially in our better centers. And that's just, by definition, going to drive rate up. So you combine competition with increased occupancy, we're starting to see it in terms of driving rate. And when you negotiate with tenants, how often is the topic of crime and safety being elevated when you discuss leasing with tenants? And can you talk about some of the things that you've done as a landlord, maybe in conjunction with the study to make a safer kind of shopping environment? Yes, I'll take the second half of that. We work with all of our cities pretty closely. Santa Monica, for example, we spent a lot of time with the various people in the city as well as the police chief to try to make sure that we make Santa Monica Place the safest environment possible for shoppers. We have a lot of urban properties. And as a result, we're very sensitive to those issues. I think 1 area that we don't scrimp on as it relates to expenses is security. And we use one of the biggest firms in the country, if not the world, to handle our security, and it's something that we're in close communication with every single municipality we do business in to be aware of issues that are happening. And that's really all you can do. Doug, you can speak to the retailer side of it and how they're reacting or what kind of feedback you get. Yes. So we don't really negotiate security when we're negotiating leases. But what I can tell you, and this is happening a lot. We're having the retailers security departments reach out to us, to partner with our security department and vice versa. So there's meetings, there's functions, there's conventions, if you will, that marry up our security and the retailer security. So we're starting to see a pretty dynamic partnership there. But it's not really a function of the lease. Just a question on what you guys are baking in from a perspective of delivery times on leases? I mean, are lead times getting better on that? Are you guys maybe taking -- or is there some conservatism in guidance around timing of some of that stuff that you're saying could be hit end of '23, early '24? Is there any chance of that hitting earlier on? Yes, Craig, Tom touched on it, probably the most sensitive are the larger spaces that generate a significant amount of rent. And just as a practical matter, those take a fair amount of time to get permitted, get built out and ultimately start paying rent. We look at this space by space, and we coordinate with the tenant's construction department to determine what those estimated rent start dates are. So I'm not sure that we're necessarily being conservative. We're trying to be as realistic as possible because, again, we've got a fair amount of the space that came back to us during the pandemic. It's an exciting space. We really want to get it open as soon as possible. But each circumstance is different. Each municipality you're dealing with is different. So it's very space-by-space specific. And I think we've got a pretty realistic perspective when we think that rent is going to start to come online. Are labor issues still a bottleneck for your tenants in terms of opening new stores? Getting employees, is that still an issue? Or is that easing up on the margin? I think -- it's Doug. I think it is easing up. I mean we're talking to the retailers all the time, and that was a real issue last 12 to 24 months, but it's really quieted down. Great. And just on the financing side, you guys had mentioned Scottsdale. The new loan there is progressing. Are you guys looking at the same type of costs that you were at the Investor Day? Is there anything positive or negative on that front to report? Yes, Craig. During Investor Day, at that point in time, the market was pretty locked up. As we've started '22 -- or excuse me, 23, there's certainly a fresh allocation of capital. So bond investors are back in the game. Investment banks are starting to form pools, transactions are getting done. Generally, we think it's going to be a slow first half of the year. And while things have improved, it will take a little while for things to start to get back to normal. All that said, we've seen a pretty significant rally in credit spreads over the last, say, 4 to 5 months versus the fall. You've obviously seen benchmark rates, 10-year treasury, 5-year treasury, bounce all over the place, including over the last couple of days with the recent employment report. But net-net, I think rates have improved to the extent the refinancing markets are open for certain assets. I think generally, rates have modestly improved, but it's very volatile still, and that could change on a dime. The good news is transactions are getting done. We've got 1 refinance complete. We've got 1 finance expected within the next few weeks. And more to follow as we look at the balance of the year, we do think that the second half of the year should be much better than the first half. On the Scottsdale loan? We'll close -- that will close in the first quarter. And if I were to guesstimate rate, it's probably going to be in the low to mid-5% range. A couple of quick ones. Just going back to some of the targets on levers at the Investor Day at the end of '23. Just trying to tie those comments with sort of the sources and uses. You talked about sort of $315 million and operating cash flow. You take the dividend out, that gets you to $160 million. After you sort of put development spending in, you don't really have a lot sort of left over. Just trying to get a sense of if that -- how we get to that leverage target? Is it just basically contingent on an equity raise or how to think about it? Yes. We -- if you look at that chart that we talked about on our Investor Day, we did have a placeholder for a nominal equity raise. That doesn't mean we're committed to raising equity at $13 a share. But that was a placeholder in there, if you look at the footnotes. In addition, NOI growth certainly is an important component to us, ultimately getting our target leverage below 8% -- or excuse me, 8x over the course of the next year or 2. So those are the primary factors. We think that we're certainly headed down the right path of achieving reasonable NOI and EBITDA growth between now and next year. Got it. And then going back to sort of the refinancing question, just on Washington Square, some of the paydown for that loan, only $15 million. But just curious for commentary, both generally in terms of what the servicers are asking for? And more specifically on Danbury Fair or Fashion Outlets of Niagara, if there's any updates there? Yes, sure. Every case is specific. If you look at Santa Monica Place, it's an asset where there's still a fair amount of leasing to be accomplished. We talked about the Arte Museum with a couple of other names, hopefully, to be announced in the near future. If you were to look, Craig Realty, at taking that asset to market, the outcome would have been dramatically different. So an extension was very efficient for us. It resulted in no repayment of the loan proceeds. Again, that's 1 isolated example. But generally, the extensions have been very efficient from both a liquidity standpoint as well as a rate standpoint. Frankly, if you step back and look at what's happened historically, if you look at the Fed funds chart, when the Fed has increased rates, there's typically been a fairly significant falloff of those rates shortly thereafter. So if you think about extensions for 3 to 4 years, not only is it efficient in the moment, it's very efficient from a rate standpoint because you're not locking yourself into higher rates for a longer period. So it's combining not just what we expect in terms of rate, but also taking a look at the inverted yield curve and trying to find the right duration. And if you combine those, you end up with a 3- to 5-year term seems to work best for us, and that's the strategy we've pursued. And then if you look forward, we do have some financings that we do think we'll be able to get accomplished. A couple of the highlights for the balance of the year. We'll be financing Tysons Corner towards the end of the year, obviously, a marquee asset for us. And we think that should very well likely be an incremental liquidity event for the company. And we attempted to finance Danbury Fair last year. The markets closed up on a couple of different occasions. I think it's very realistic to assume over the next several months that we could get that asset financed. It's got an awful lot going for it, trending in the right direction from an occupancy and absorption standpoint. So I think that's a financing we'll be able to get accomplished here within probably the next couple of quarters. And we have reached the end of the question-and-answer session. I'll now turn the call back over to Tom O'Hern for closing remarks. Thank you for joining us today. Again, we're pleased to report a strong conclusion of 2022, and we look forward to reporting to you over the coming year as 2023 unfolds.

EarningCall_462

Good day, and thank you for standby. Welcome to the Intapp Fiscal Second Quarter 2023 Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, David Trone, Senior Vice President, Investor Relations. Please go ahead. Thank you. Welcome to Intapp's fiscal second quarter 2023 financial results. On the call with me today are John Hall, Chairman and CEO of Intapp; and Steve Robertson, Chief Financial Officer. During the course of this conference call, we may make forward-looking statements regarding trends, strategies and the anticipated performance of our business, including guidance provided for our fiscal third quarter and full year 2023. These forward-looking statements are based on management's current views and expectations entail certain assumptions made as of today's date, and are subject to various risks and uncertainties, including those described in our SEC filings and other publicly available documents that are difficult to predict and could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Intapp disclaims any obligation to update or revise any forward-looking statements, except as required by law. Further on today's call, we will also discuss certain non-GAAP metrics that we believe aid in the understanding of our financial results. A reconciliation to comparable GAAP metrics can be found in today's earnings release, which is available on our website and as an exhibit to Form 8-K furnished with the SEC prior to this call. Thank you, David. Good afternoon, everyone. Thank you for being here with us today as we share our results for our second fiscal quarter. I'm pleased to share that once again we've achieved strong quarterly results supported by cloud ARR growth, SaaS and support revenue growth, the acquisition of new logos and the continued growth of our existing client accounts. As an intro for any of you who may be new to our story. Intapp targets and underserved and overlooked, but actually very large $3 trillion industry of professional and financial services firms. Professionals in these firms are the investors and advisors who work in the world's private capital investing, investment banking, legal, accounting and consulting firms. These professionals work in specialist and cross specialty teams every day to support the global industry of deals and disputes. Most of our target firms are originally fed up as partnerships, not corporations. As a result, they operate both internally and in their go-to market model very differently from traditional corporations and on top of this, our target firms are a highly regulated industry and needs to manage a wide range of statutory professional ethics and client compliance obligations that are unique to them. Intapp industry cloud has been designed specifically for the unique operating and compliance needs of these firms. We are highly differentiated from traditional CRM and ERP systems which were built for companies selling a tangible product. In contrast, our industry cloud understands that our clients firms business is based on leveraging their collective specialized knowledge, expertise, experience and relationships to win business and to deliver value for their clients and investors. Our industry cloud helps these firms to increase their revenues and returns, operate more efficiently and profitably, manage risk and compliance more effectively and leverage their collective knowledge for competitive advantage. Intapp is leading cloud transformation for this global deal making, legal, and advisory industry and our strong Q2 results continue to validate our strategy. Okay. Here's how we did. In our second quarter, our cloud ARR grew 42% to $191.8 million. Cloud now represents 64% of our total ARR of $301.3 million which is up 26% year-over-year. We earned second quarter SaaS and support revenue of $61.6 million, up 31% year-over-year and total revenue of $84.7 million, also up 31% year-over-year. We now serve more than 2,200 premier firms across our target verticals. Despite the current climate of broader economic concerns, we continue to see steady demand for our purpose-built solutions in our Q2 results. We gained some direct insight into what's driving this steady demand at our two day Intapp City Tour event in New York in November. Our event was attended by clients from our private capital, investment banking, legal accounting and consulting firms, as well as our partners and industry experts. Participants had a chance to share and learn from each other about the challenges, opportunities and initiatives that each of their firms is pursuing. Presenters included keynote speaker Luke Flemmer, Managing Director at Goldman Sachs; Ian Clark, Managing Director and Global Chief Technology Officer at Lazard; Angie Goenaga, Senior Investment Associate at Women's World Banking; and Jamie Fowler, Chief Transformation Officer at Grant Thornton, who shared their experiences creating efficiencies within their complex organizations, operating successfully and they're highly regulated industry and winning business by leveraging their knowledge, intellectual capital and relationships for competitive advantage Many of our attending clients shared, but they do not anticipate. Their digital transformation initiatives slowing down even while facing an economic downturn. Instead, they see the increased capabilities and efficiency provided by the adoption of cloud technology as essential to enabling their firms to weather any challenging economic conditions. The event also included a dedicated daylong session attended by members of our large partner ecosystem, which plays a crucial role in our strategy to deliver optimal value to our clients. We featured a discussion between the Microsoft team and Intapp's Chief Product Officer, Thad Jampol on innovation an Intapp's industry cloud strategy, which delivers a path for these firms as they pursue digital transformation. Our discussion underscored the importance of our strategic partnership with Microsoft, which continues to develop and mature. Last quarter, we were officially recognized as a top tier partner of Microsoft, which fewer than 1% of partners ever achieved. Deployment of all our Intapp solutions to Azure is progressing in line with our plan as a key part of our partnership strategy We worked with some of our new partners to advance our industry cloud and innovation roadmap in the quarter. We released our new relationship paths capability, which helps firms source and win new business by leveraging their current network of professional connections, using applied AI to intelligently surface deeper paths to high value contacts. The feature helps professionals in our firms to source potential warm introduction by evaluating our partner Equilar's database of 1.5 million executives and board members. And combine that with the firms own proprietary relationship information. Relationship pads expands our relationship intelligence capabilities to enable higher quality outreach to help professionals builds new and deeper relationships and to drive growth and greater success in winning new business. In the second quarter, we also integrated capabilities from our Billstream acquisition to enhance our Intapp time solution. Together, these solutions help firms integrate compliance across time entry and pre-billing processes in a way that accelerates the work to collect cycle, as well as improving realization rates and driving profitability which offer compelling hard ROI benefits for any firm in the current climate. Our clients who are embracing these operating efficiency features, have also noted that the design of our solutions as an additional benefit of enhancing both the professionals and the clients experience the firm in the smoothness of the billing and collections program. We are also continuing to advance our industry cloud's compliance capabilities, designed specifically for the regulated industry we serve. We further enhanced our market leading walls product to allow for self-service by our professional users. Automated ethical walls and information barriers are critical compliance requirement, designed to protect sensitive client and investor information. Our enhanced lawyer portal for walls ensures that partners, lawyers and associates can process critical ethical barrier requests in real time, removing potential bottlenecks and avoiding slowdowns in client onboarding processes and firm's ability to respond rapidly to their clients requests. Finally, demonstrating our ability not just to design, but to deliver our innovative solutions. In Q2, we went live with a number of large and notable client implementations. We celebrated Go Lives of DealCloud for the asset management arm of one of the world's leading investment banks, as well as a large global financial advisory and asset management firm and go lives of our risk and compliance solutions in our industry cloud for one of the world's top strategy consulting firms Notably, all three of those deals closed just in Q1, demonstrating our ability to shorten our time to value even on large or complex client implementations. Our rapid time to value enables our clients to operate more efficiently in the current climate to manage regulatory compliance quickly and to grow effectively. Our innovation was also recognized with several awards in the quarter. Notably, our DealCloud solution was named as best deal origination technology in Private Equity Wire US Awards in October and DealCloud also won Enterprise Product of the Year for the financial software category at the 2022 Best in Biz Awards in December. Both awards validate DealCloud's ability to support the unique and complex needs of deal makers, helping them effectively and efficiently source and originate deals from any location. Turning now to notable client wins. We continue to add new logos, grow existing client accounts through up-sell and cross-sell and expand our international footprint. I'd like to highlight several of the new logos we acquired in our second quarter. In Q2, we welcomed Global Venture Growth Firm B Capital as a new clients. Founded in 2015 and led by Howard Morgan, Sheila Patel, Eduardo Saverin and Raj Ganguly. B Capital invest as an integrated team across nine locations in the US and Asia. They chose to shift from a legacy system to DealCloud across their deal, IR, operations and business development teams. Because it possesses the robust data infrastructure, IR functionality and reporting capabilities B capital needs to support the long-term growth of their business. European Investment Banking franchise SEB is another new client who selected DealCloud to replace its legacy system. Previously using a large horizontal CRM, SEB struggled from a lack of user adoption of the system, which was a tailored for the way it's professionals work. Additionally that's CRM required a level of IT support that was impacting its ability to support other IT projects and initiatives that could drive growth. SEB chose DealCloud, because of its reputation as the market leader, the way our technology is tailored to the way the firm operates, its flexibility and the fact that it will significantly reduce ongoing IT support requirements. There'll be implementing the software across M&A, leveraged finance and capital markets teams to improve connectivity and collaboration and better leverage data and institutional knowledge. Last quarter, we also continue to expand our footprint in the consulting industry with another new client win. A top global management consulting firm executed a multiyear contract for our risk and compliance solution, which enables the firm to better identify and process complex conflicts for use cases like M&A, bankruptcy, adverse parties or conflicting relationships. While this is a new consulting firm logo for us. It's notable, but many of the firms professionals had previous experience with Intapp at other professional firms, including law firms in the industry. Their familiarity with our brand and their trust in our capabilities, help to speed the deal and illustrates how deal and disputes professionals networks bring us referrals across the vertical industry we serve and supports our continued expansion and logo acquisition throughout this market. Finally I'd like to highlight the recent addition of accounting business and wealth advisors Kreston Reeves to our client portfolio. Based in the UK Kreston adopted Microsoft Office 365 to enable a secure collaborative modern work environment. They quickly realize their needs to extend the platform's capabilities with solutions tailored to their unique needs as an accounting firm. Kreston selected our collaboration and content solutions to help maximize their Microsoft platform investments and to create a collaborative document management solution. To conclude, having reached the halfway point of our fiscal '23, we're pleased with our consistent growth and performance. We are pursuing a deep and unreserved $24 billion global TAM. Our revenue model remains highly predictable and our durable end market continues to demonstrate a strong commitment to investing in digital transformation despite the global economic uncertainty. We continue to add new clients and to grow existing client accounts and we're continuing to pursue the significant growth opportunity ahead to help our industry embraced cloud's transformation. Our purpose-built industry cloud platform has compelling value for our specialized clients, helping them to increase revenues and returns, operate more efficiently and profitably, manage risk and compliance more effectively, and leverage their collective knowledge for growing competitive advantage. As always, I'd like to thank our clients, our partners, our investors, our Board and our employees whose teamwork and dedication led to our strong Q2 performance. Thank you all very much. As John noted, we had a strong quarter with our cloud ARR up 42% year-over-year and our total ARR up 26% year-over-year. Before I go through our financials, I'd like to quickly review a few fundamentals of revenue recognition in our financial model, just as a reminder. Cloud ARR is recognized as SaaS revenue ratably following a new sale or renewal. On-premises ARR is recognized in two parts, 50% as subscription license revenue recognized upfront at the time of the sale or renewal and 50% as support revenue recognized ratably and included in our SaaS and support revenue line. Because it is recognized ratably, SaaS and support revenue is more predictable quarter-to-quarter. While subscription license revenue can vary based on the timing of revenue recognition. Okay. Moving to our numbers. SaaS and support revenue was $61.6 million, up 31% year-over-year reflecting both new sales to new clients, and upsells and cross sells to existing clients of Intapp's purpose-built cloud solutions. Total revenue was $84.7 million, up 31% year-over-year driven primarily by continued strong sales of our cloud solutions, as well as by solid growth in professional services revenue. Subscription license revenue was $11.0 million compared to $9.3 million in the prior year period, reflecting annual and multi-year renewals inclusive of CPI based price increases. Professional services revenue was $12.1 million as compared to $8.4 million in the prior-year period, reflecting an increased growth rate consistent with our current pace of software implementations. Overall, we continue to execute our land and expand model, ending the quarter with more than 2,200 clients, 561 of which had ARR of more than $100,000 up from 457 in the prior year period. In addition, we upsold and cross-sold our existing clients, such that our trailing 12 months net revenue retention rate was above our projected range of 110% to 114%. We have decided to increase our range to 113% to 117% and this quarter's net revenue retention rate was within that range. Before discussing gross margins, expenses and profitability, please note that I will be discussing non-GAAP results going forward. As a reminder, our GAAP financial results along with a reconciliation between GAAP and non-GAAP results can be found in our earnings press release and its supplemental financial tables. Second quarter results were as follows. Total non-GAAP gross margin was 71.5% as compared to 68.5% in the prior year period, primarily reflecting an increase in our services gross margin and a previously executed organizational realignment of a portion of our client success team from cost of sales to sales and marketing. Non-GAAP operating expenses were $57.7 million, a $13.2 million increase year-over-year as we continued to invest in sales, marketing and product development to support our growth. Non-GAAP sales and marketing expense was $25.7 million, a $7.0 million increase year-over-year as a function of increased headcount and related sales commission to capture new business in our growing markets along with the previously mentioned organizational realignment. Non-GAAP R&D expense was $18.7 million, a $5.6 million increase year-over-year as we increased headcount and made investments in our product roadmap. Non-GAAP G&A expense was $13.2 million, a $0.6 million increase year-over-year as we began to see some leverage and scalability in the business. Non-GAAP operating profit was $2.8 million as compared to our second quarter fiscal 2022 non-GAAP operating loss of $0.2 million, as we continue to generate some modest initial profitability in the business. Non-GAAP net income per fully diluted share was $0.03 in the second quarter of fiscal 2023 as compared to a loss, but rounded to $0.00 in the second quarter of fiscal 2022. In terms of the balance sheet, we ended the quarter with $51.6 million in cash and cash equivalents. Now turning to guidance. For the third quarter of fiscal '23, we expect SaaS and support revenue of between $63 million and $64 million and total revenue in the range of $87 million to $88 million. We expect non-GAAP operating profit in the range of $0.5 million to $1.5 million and non-GAAP per share results in the range of negative $0.01 to positive $0.01 using a fully diluted share count weighted for the quarter of approximately 75 million common shares outstanding. For the full year of fiscal '23, we expect SaaS and support revenue of between $246 million and $250 million and total revenue in the range of $340.5 million to $344.5 million. We also expect non-GAAP operating profit to be in the range of $4.5 million to $8.5 million and non-GAAP net income per share in the range of $0.02 to $0.06 using a fully diluted share count weighted for fiscal year '23 of approximately $73 million common shares outstanding. Hi, this is Natalie Howe for Koji. Thanks for taking my question and great job on the quarter. Last quarter you guys said, you are not seeing a lengthening of sales cycles right now. Is that still the case now and are there any verticals and geographies outperforming and any better feeling the impact of the macro more than others? Thank you. Hi. Natalie. Thanks for your question. So we have not seen a lengthening of sales cycles. We continue to monitor that. We think that our clients are pretty committed to following through on their cloud transformation program and we've been talking to them about that. And that was one of the questions that we were asking at our City Tour event in New York in the winter, what's going on inside your firms and how are things going, and we were very encouraged by the general tone that folks are following through on their cloud transformation initiatives, because they see some real benefit to themselves operationally to better position to weather any kind of economic uncertainty and they see in our platform some real advantages that they can take advantage of its capabilities. So that gave us some confidence. That being said, we're going to continue to watch To your second question about the sub-verticals. There is good strength across the board. We're fortunate to be relatively broad based across the professional financial services industry. The law firms, the accounting firms, the consulting firms, the private capital, private equity firms tend to be very stable. We have said in the past that, it's the investment banks that may see a little bit of variability and we're watching that carefully. At the same time, a lot of them are doing these improvement initiatives to position themselves better. So we're going to continue to monitor that, but overall it's been pretty steady. Great. Thanks so much and really, really terrific results all around. I don't know if this would be for John, Steve or David, but really happy to see increase the bands on the NRR. Maybe just aggregate the components and kind of what gives you the confidence to do it now? Sure. Kevin. We've been seeing good performance better than we had forecasted for a few quarters in a row, it looks like this has settled into a pattern that we can count on and we just thought, this is a good time to raise it up and reflect sort of a new range that we expect we will be in here. It's pretty balanced. It is both cross-sell and up-sell and both professional services and financial services. So we really are kind of hitting on all cylinders in the sense of selling to our existing clients as part of our land expand strategy. So it's really working well and as you can see, we continue to add a lot of new logos every quarter too. So that's really -- it is pretty straightforward, we probably indicated in the past you and might be thinking about something like this, we decided to go ahead and do it. It's a great outcome. And then you're obviously seeing, it feels like a structural change in kind of the average client size. If you think about that in excess of 100,000. Are those --- is there any way to frame-up? Steve, how much of that is new logos as opposed to maybe existing clients being pulled off from additional modules, maybe qualify that? Well, I'll observed something that someone point out to me to add the day, which is, our client -- our new client logo rate looks like it's growing on the order of 10%. We give a rounded number there, but the 100K clients are going at 20% and it's -- because it's a combination of new logos that land north of 100,000 in any quarter and then upsells from previous land and expand clients that might have started below 100,000. So we get the benefit of both in that number in the starting phase. Yes. Hi, good afternoon gentlemen. Hopefully you can hear me okay and I'll like to congratulations on the quarter and the outlook. I have two questions. The first one might be a little bit multi-part, but it -- seems like it's pretty important, so I wanted to kind of delve into that a little bit more detail, but Microsoft. But I'm curious is, where are you in terms of the cycle of them starting to work well with you all? And that seems kind of collaborating and starting, where are they in terms of influencing business for you? The second part of that is, I think you mentioned earlier, a customer that was rolling out Microsoft teams and it sounded almost like you all were brought in. Do you see more dynamism around -- helping you into new logos or equally installed base? Is there any one kind of go to market that seems more intriguing? And then I had a follow-up Thanks, Terry. The Microsoft relationship is going well. We have a multi-track plan that we put in place with them jointly when we started the partnership just over a year ago and we've begun collaborating on the technology side, on the cloud side and in our go-to-market. There are relationships from each of those organizations inside our company with different parts of the Microsoft team. To your question about go to market, they absolutely are collaborating with us in the field. We're very excited about that and vice versa, because we have a position in the professional financial services industry, with an industry cloud, value proposition that augments the whole Microsoft Office 365, Teams, Azure capabilities in a way that makes it more specific for this end market that historically has been very Microsoft friendly, but has had to do a lot of work to try to adjust the Microsoft platform to really work for the way that the partnership based firms operate and we're able to solve that problem. So the Microsoft field reps are excited to have us come in and we're bringing our team together with them that many accounts. They've introduced us in places to your question. And we've also brought them in for an opportunity for them to expand their Azure footprint for example at some of the firms. So it's a good collaboration going there. And as to new logos or installed base. It's both. And we've had good successes in some of the stories that I was telling in the overview, where they worked with us both to win new business and also to help us grow some of the accounts that we have with new capabilities. That's great to hear. And I guess a follow-up question. We get the question a fair amount in terms of just the ongoing kind of cloud transformation in your own business, that sounds positive in terms of clients seem like they're still wanting to move forward with their digital transformation initiatives. But what about in terms of some of your larger customers that still may be on-prem. How are you thinking about over the next couple of years in terms of a greater propensity to move to cloud, because what I'm getting is, 64% of the total ARRs cloud? Just trying to get a sense on how that should kind of evolve over the next couple of years towards cloud? Thank you. Sure, I'll take that one Terry. Well, first of all, as we may have said before, 64% of our cloud ARR more than that -- more than 80% of our customers have at least one product in the cloud. So, we have hybrid customers that are on their way to making the migration as you described. And for some of our larger customers, what we've been doing and seeing mostly recently is, when some of those clients are ready to buy or implement some new capability that's often a time to sign up a full our cloud migration for whatever they still have on-premises and might want to fully meet the cloud. So it's an ongoing sort of organic assessment as we go along, but we continue to sign up and sell migrations continuously each quarter and I think our progress is steady towards getting to the cloud for the whole client base. Thank you. One moment for our next question. Our next question comes from the line of Brian Schwartz from Oppenheimer. Your line is open. Yes. Hi, John and Steve, thanks for taking my questions this afternoon, and congratulations on really strong quarter. John, I had a question about the up-selling activity in the NRR. I actually -- my question is around the cadence of when those opportunities are coming. Are you seeing any speeding up at all in the cadence when customers are coming back to you to make additional purchases from that original purchase? Hi, Brian. Thanks for the question. Yes, I think the cloud program has put us in a position to help people get up and running faster if they want to bring up additional modules in the cloud. We've always had good upsell and cross-sell from our clients, whether it was in the on-prem generation or cloud, but we are encouraged about the opportunity to help people once they've got the industry cloud running to help them adapt more capabilities quickly and that's one of the many reasons that the model is a good model and we're excited about the evolution there. Thanks, John. And then one question Steve for you. Just a question around the assumptions for the macro in your outlook. Is your expectation in the guidance that the strength of the business is seeing and the steady demand in the macro that persist throughout the year or are you discounting at all the macro in the updated guidance that you gave us today? Thanks, Steve. Well, I think the way I would respond to that Brian is, I think that we are always a little bit careful. I mean we have -- we certainly have, as John has said and we said, pretty strong pipeline, the business is good and the tone of that is the same as it's been last quarter for us, if you will. We continue to monitor it though and none of us know for sure. So we're being careful about that, but there is no particular shift in the way we are modeling our thinking going forward in terms of the macro right now. We're just watching carefully. Thanks. John, I want to follow-up on your remarks around the Billstream enhancements and the harder ROI benefits there. Is where you're landing with new customers or where you're telling your sales force to focus on from a value proposition perspective changing at all in the current environment? Any additional pressure to be selling on that part ROI? Hi Alex. Thank you. It's interesting, the platform has a range of value propositions from helping with origination and sourcing and sourcing origination and winning new business, two, efficiency and profitability to compliance and to knowledge and competitive advantage. And firms are in different places in their own strategy and operations and market position and what they're looking to do. So the team is very skilled now at listening carefully to each client and making sure we understand what their strategic and operational and compliance goals are and positioning the offering in our story, the way that really helps the firms achieve, what's important to them at the time. I do think that in the current environment, there is a higher proportion of firms who are looking at operating efficiencies and hard ROI, but not exclusively. There are firms who are focused on the compliance story, their firms who are focused on positioning themselves for growth and having the right kind of experience for their professionals and for their clients. And part of the differentiation of Intapp's overall platform is that, we can bring that richness and potential to the firms and it's going to grow with them as their strategy evolves, and that's one of the things folks really like about it. And that they struggled in the past with traditional CRM and ERP is to get that kind of flexibility and support for what they're trying to do today and they can get it with us. So it's been a good broad strategic story because of that broad potential and then we get very specific in each client case to drive the deals. Okay. Great. That's super helpful context. And then, Steve, on the profitability outlook quite a bit higher than where we started the year. Can you just talk about the drivers of that upside and any changes in your overall thoughts on hiring plans for the year was a couple of quarters ago? Yes. Sure. No, we, I mean, part of this certainly we're having good revenue performance and that -- some of that, of course, drops to the bottom line. And -- but no, we are continuing to hire, we're seeing good growth. We want to get ahead of that and capture, we've said this for a couple of quarters now, it remains true. Having said that, we -- also we are starting to see a little bit of leverage here from the business and I think we expect to sort of steadily do better over time in our operating profit line, that's certainly something we're looking at here now. So we're planning for next year now, and the future. But no, we are hiring where it makes sense and getting ahead of our growth opportunities, so we can capture. One moment for next question. Our next question comes from the line of Parker Lane from Stifel. Your line is open. This is Matthew Kikkert for Parker. Thanks for taking my questions and congratulations on the quarter. Customer expansion have been a key part of your growth strategy. I want to ask about the top of funnel demand that you're seeing recently. Has there been any change there over the last quarter? And do you have any planned incremental investments in 2023 to address that top of the funnel demand? Look, top of the funnel, the whole pipeline remains strong. We are continuing to invest there steadily, I think, because as I said, we want to capture growth. So, no particular change in our investment orientation towards the opportunity we're seeing in terms of sales in the marketplace right now. Thank you. One moment for next question. Our next question comes from the line of Arvind Ramnani from Piper Sandler. Your line is open. Hi. Thanks for taking my question. I want to ask about your -- when you sign up a new clients, what is like timeframe and I'm sure it varies client by client and how complex environment is, but if you can help frame for typical client, but maybe just provide a range for -- when they sign up with Intapp or they put it -- implement and what does that timeframe and when do they start to sort of realize some of the benefits of your platform? Hi Arvind. Thank you. So generally speaking, it's six months to nine months on our mid-size and larger clients. We can do implementations and get clients up and running in 30 days, we've done that in certain situations. The smaller firms have an easier time doing that. And for the very largest enterprise global class firms that can take a year. But a lot of it too is, how focus is the IT group on their side to get us up and running. So usually we're doing things in about six months, maybe nine months if you wanted to total average. Perfect. And then in terms of like growth kind of expansion at existing clients, are you to kind of provide some sort of wafer to think like once you sign up a client, the initial six months or 1 year, is X dollars in revenue. But once they stay with you for three years, does revenue typically go up 2x, 3x, like what type of expansion are you seeing in the in the sort of medium term after someone signs up with you? Yes Arvind. This is Steve, I'll take that. We don't track it exactly that way, but we do -- we certainly look at how we progressed after we land. As I think we said in the past, our penetration is actually quite low on an average basis across our client base, some clients are certainly have the whole platform and are fully penetrated, others have just gotten started. As John said, as you can appreciate it if an implementation is six to nine months, it might be the next year. So we're ready to come back and sell and implement the next set of capabilities. Sometimes that happens quicker, sometimes it doesn't. So we don't have exactly the answer to your question, but I think you can see from our NRR rates which we're raising our range here and we're seeing strong performance. We are definitely selling strongly to existing clients in both cross-sell product opportunities and upsell new users. So it's a strong momentum and will continue to be so we think. Terrific. And just to clarify, like in terms of like your revenue build. I think what I heard on today's call is. I mean clearly clients who had started six months or nine months ago, those are continuing, but as far as like in new project starts and new logos and pipeline, those are just as strong as they have been in the last 12 months. I just want to confirm that. Yes. I think, we've added 50 or so plus net new customers every quarter for several quarters now. So it's been steady that way. Thank you. And I'm not showing any further questions in the queue, I'd like to turn the call back over to John for any closing remarks. Okay. Thanks everyone for joining us today. We'll look forward to talking with you all again at our third quarter release in May. Thanks again. Have a good day.

EarningCall_463

Good morning, everyone and welcome to the Conference Call for Pandora’s Full Year 2022 Results. I am Bilal Aziz from the Investor Relations team. And I am here joined with our CEO, Alexander Lacik; and CFO, Anders Boyer and the rest of the IR team. As usual, there will be a Q&A session at the end of the call. If you could kindly limit yourself to two questions at a time, that would be great. Please pay notice to the disclaimer on Slide 2 and turn to Slide 3. Thanks, Bilal and welcome everyone. Let me start by taking a step back and look at ‘22 as a whole. As you all know, the year was marked by heightened macroeconomic and geopolitical uncertainty and, of course, as well as the ongoing COVID-19 situation in China. Despite all of this, we still delivered at the high end of our expectations. The organic growth ended at plus 7% with our sell-out growth at plus 4%. I believe the year very much demonstrates how we are able to navigate uncertain times thanks to the combination of our strong brand and our diverse geographical footprint. As ever, our growth continues to be highly profitable. The gross and EBIT margins expanded. And we saw some promising results from the price increase. I also want to highlight that we retained good discipline in our promotional activities. Due to the weakened macro economy, we faced a more competitive environment in general and a sharper promotional pressure during Q4 in particular. Underpinning the resilience is our relentless execution or the Phoenix growth strategy. A couple of key points. Our core remains in incredibly good shape. And we delivered solid sell-out growth for Moments. During ‘22, we expanded our store network and opened net 88 new stores. Network expansion is a very productive growth driver, which has short payback and is a low risk opportunity in our toolbox. Of course embedded within our strategy, our ambitious sustainability objectives and we made good strides on this front as well. We also received some important recognition that I will come back to in a minute. Now, let’s move to Slide 4, please. Looking into 2023, we are confident. But we remain vigilant due to the macroeconomic uncertainty, although we have so far only seen limited shifts in consumer behavior and have been quite encouraged by early trading this year. However, our job is to prepare for all scenarios. And we have today issued our preliminary guidance for ‘23 of organic growth of minus 3% to plus 3% and EBIT margins around 25%. The wide range – revenue range accounts in the lower end for a scenario with a somewhat weaker economic backdrop than what we see today. As usual, we will look to narrow the range and provide updates as we move through the year. Despite this uncertainty, our starting point is strong. We have a strong brand with a diverse geographical footprint as I mentioned the favorable margin structure and a strong cash generation. We have already taken prudent cost measures to protect profitability and we’re able to invest and accelerate. In addition to continued strong marketing and innovation efforts, we intend to accelerate our network expansion plans. A few words on current trading. It is very early days and January is a small month for us. Nonetheless, we’ve been encouraged by what we’ve seen so far, with a good broad-based pick up in sell-out growth in the first 5 weeks of the year. This will clearly moderate from now as it’s helped a bit by easier comps in Jan ‘22 due to Omicron and a slightly early timing of some product launches this year. But even accounting for that, we’re pleased with the underlying health of the business. We believe trends are stable versus what we witnessed on an underlying base in Q4. Now let’s move to Slide 6, please. Before diving into the quarter four results in detail, I want to give a quick recap of the four pillars of our growth strategy Phoenix, and some key takeaways from last year. First, our brand momentum remains strong with the most recognizable jewelry brand in the world. And we’ll continue to invest in marketing to retain this position. We continue to test new heights for the brand strength and our recent price increase a good example of that. Secondly, we continue to elevate our core business. Moments stand strong as the engine that drives Pandora and we continue to innovate here. Our SPIDERMAN collection was well-received and we have plenty more to be excited about for 2023, with for example, the new iconic studded bracelet. We also remained focused on driving new platforms. And last year, we brought our diamonds by Pandora to the world’s largest diamond market in North America. Thirdly, we are making better use of data analytics to get wiser on how to engage with consumers. One example of this is the launch of targeted marketing in the UK with SMS messages over the Christmas period. We have seen encouraging results from this. Finally, our fourth pillar is about growing our core markets and optimizing our store network. As mentioned already, we added 88 concept stores in ‘22. And these are already contributing positively to our performance. We’re planning to increase our efforts here for ‘23. Please go to Slide 7. Sustainability is one of the foundational elements in our strategy. It is about future-proofing the company. We see that it supports our growth ambitions and aligns our actions with our values. Our three strategic priorities are low carbon business, circular innovation and an inclusive, diverse and fair workplace. The launch of diamonds by Pandora in North America last year was a very visible mark of our ambitions to become low carbon and circular. Our lab-created diamonds have a footprint of 5% that of a mined diamond. On top of this, it’s the first collection made with 100% recycled silver and gold, a major milestone. We have recently received a couple of important recognitions for our sustainability efforts, an A score from CDP and a leader rating from Sustainalytics. I’m happy that this work is getting noted as our aim is to lead our industry on this agenda. Next slide, please. In the fourth quarter, we’ve had plenty of great moments to ensure we stay top of mind for our consumers, not least our collaborations where we continue to see great traction and we remain excited for 2023 with Disney’s 100 years anniversary. You can also see how a diamond’s launch has also already started to stretch our brand. And I’ll talk more about this in a second. In short, our brand momentum remains strong and we’re focused on taking this even higher. Next slide, please. As you may remember, we implemented a 4% global price increase across the portfolio in early October. It was the first time we did something like this in a systematic way. We based it on successful testing earlier in the year. I would like to remind you that we did not change our opening price points on items of strategic importance. We believe the DNA of the brand lies in strong value perception and that will not change. I’m very pleased to report positive initial analysis which indicates that this has a positive impact on profitability. Given the heightened consumer pressure on discretionary categories such as ours, we interpret these results as very promising for the brands’ strength and future potential. We will now be moving ahead with an annual structured review of prices to identify further opportunities. It’s too early to say how much or when, but we will continue to be guided by the data and are confident we can stretch our pricing architecture further. Slide 10, please. As mentioned, we are pleased with the resilience we have demonstrated. Although we saw pockets of macro-driven weakness in some markets, the core of the group remained stable. To remind you of the numbers through ‘22, first quarter was obviously inflated by the pandemic in the comp base. The sell-out growth was plus 2% in the second quarter, plus 1% in the third quarter and basically flat in the fourth quarter if you adjust for the fire at a distribution center in Hamburg. And as you can see in the lower graph, the same is the case for sell-out versus 2019. In fact, sell-out versus ‘19 increased through those three quarters. This stability speaks to the diversified footprint we have. And the fact that consumers have a special connection to, in particular, the core of our business Moments. This is why Moments was and is the number one priority in the Phoenix strategy. The captive business model is unique. The many millions of installed Moments bracelets enables a strong and highly profitable recurring business stream from our Charms portfolio. We not only own this model, we are demonstrating day-in and day-out that we are the masters of this platform. Let’s move on to the next slide to take a detailed look into the growth for the fourth quarter. Trading through the quarter was roughly flat with November, in particular, being impacted by the fire. We did see consumer behavior and trading being more in line with pre-pandemic trends where Christmas shopping happened closer to the day. So in that respect, it was more of a normal year. We ended at minus 1% sell-out growth, which is basically flat if you adjust for the fire, as I mentioned. As I said before, in Q4, we did see notably higher external promotional environment. We partly expect that this given the macro, we remained disciplined and we’re tactical in our approach. We ran our promotions for slightly longer in some markets, but kept the absolute promotion level consistent. We play in the mass market, so we will sometimes have to react, but it is controlled and it’s surgical. In that respect, our promotional days have been back to normal so far this year. Going into the individual markets, you will see that some of our key markets declined in Q4. However, there are reasons for this. So let me talk to you briefly through this. Firstly, as I’m sure you remember, we flagged at the start of the year that the U.S. business would decline in ‘22 due to the comping effects of the stimulus checks back in ‘21. This did indeed take place, but was better than our initial expectation. Our U.S. growth in Q4 improved sequentially to minus 7% as the underlying business remains solid. Secondly, our total European growth was encouraging at plus 2% in the fourth quarter. We did see some macro impact, mainly in Italy and France. We flagged some of this at Q3 already, and it was a continuation of that very same trend. Elsewhere, Spain was very strong and UK remained resilient despite the quite weak macro backdrop in there, in fact. We’re generally encouraged by the performance in Europe and in the few markets where there is broader market data, we believe we are gaining market share. We will continue to invest in marketing to consolidate our position further. China was weak, as expected. Traffic was materially down due to the COVID-19 situation. Now I know some of you may ask what we’re seeing today in China. It’s still very early days with a lot of uncertainty. But we are seeing some clear pickup in the brick-and-mortar traffic across our stores in January. We will be moving ahead with our brand re-launch for China in the second half of the year. But right now it’s too early to call how China ends up finally through the year. And finally, in rest of Pandora, we saw good strong growth driven by many markets, particularly Mexico stood out with plus 34%, which also put them at the $1 billion – no, not dollar, DKK1 billion revenue mark. Next slide, please. We launched Diamonds by Pandora in North America end of August. We did this with a selected distribution across 269 stores as well as online. We continue to see promising results with the best-performing stores adding 10% of incremental sales. There is a large range on this. But we are convinced that the opportunity is vast. We believe the brand is ready to be stretched with the category selling at 15x the average selling price from Pandora’s traditional U.S. products. Looking ahead, we will now be scaling up our efforts and see three main opportunities. First, optimizing and adding more to our assortment. We believe a greater product range will appeal to a wider market; secondly, improving the salesmanship from learnings in the best-performing stores; and finally, continued to sequentially expand into new markets. Moving to this category aligns well with our sustainability strategy. In particular, the relatively low carbon emission profile compared to mined diamonds, we grow the diamonds with 100% renewable energy. And they are set in recycled silver and gold. So for a 1 carat ring, this brings us to carbon footprint similar to a pair of jeans. And arguably, it lasts a bit longer than that. In conclusion, it’s a promising start for us. Growth here will not be linear. But we remained convinced of the transformative nature of this move for the brand. Next slide, please. Now this is a slide and I am sure some of you are getting familiar with, but the network opportunity is very important for us. So let’s have a look at it again. Our baseline for growth is strong with a very profitable and cash-generative store network. In addition to this, we see an opportunity to expand the store network in areas where we don’t have a Pandora store today. We see great untapped opportunities in making our brand more accessible in many of our core markets. Back in 2021, we carried out an extensive analysis of the real estate network in our top 40 markets. We have mapped 13,000 locations. And as a starting point, we plan to open new stores in the best 600 of those in the next few years. Next slide, please. As I mentioned already, our network expansion has become more visible in the numbers through ‘22. We ended up opening 88 net new concept stores and 130 owned and operated shop-in-shops. Combined, this contributed to 3% of our organic growth. We’re now targeting an additional 50 to 100 new concept stores in ‘23, which would add an additional 2 to 3 points of organic growth. Given the macroeconomic situation, we have the option to keep momentum here as access to good locations could open up. This means we’ll be at least towards the high end of the initial guidance we gave in ‘21 of 100 to 150 new stores over the period of ‘22 and ‘23. As always, the deals must be very attractive before we engage. We are focused on expanding our network with quality. There is a short payback of roughly 1 year on the CapEx investment and new lease contracts are, in most cases, quite flexible and include regular break clauses, which significantly reduces our risks. Finally, we have been hard at work to develop a new store concept that we call Evoke 2.0. This will be rolled out at scale starting this year. Thank you, Alexander and good morning and/or good afternoon everyone. And please turn to Slide 16. The key takeaway for the quarter was that the performance was in the high end of our expectations and not just on the top line and on the bottom line, but also on some of the other KPIs such as cash conversions and earnings per share. I’ll comment on revenue, on EBIT on the following slide. So, on this slide I will just pick out some of the other KPIs. On gross margin, it remained strong. And it expanded 50 basis points year-over-year and that’s despite 90 basis points of headwind from foreign exchange in the quarter. So that’s an underlying gross margin expansion of more than 100 basis points. And that reflects a combination of, for example, our price increases and channel mix. And it’s also a testimony to our good promotional discipline in the quarter. On cash conversion, we saw, as expected, a big improvement sequentially and landed at 110% in Q4. And that number includes a decrease in the inventory level to just above just around DKK4 billion as we also flagged back in the third quarter announcement. And most of you know that we decided to increase inventories during the initial part of ‘22. And this obviously impacts the cash conversion for the full year. But with this behind us now that also means that in ‘23, this year, we expect cash conversion to be back to the long-term sustainable level of around 70% for the full year. I will then go to Slide 17, please. This is the revenue bridge for the quarter. Organic growth came in at plus 4% for the quarter. And on a 3-year stack versus ‘19, that’s an acceleration to 17% growth, up from 13% that we delivered back in the third quarter. The first building block in the revenue bridge on the slide is sell-out. And the sell-out growth was negatively impacted by the fire in the European distribution center by around 1 point. There is no insurance compensation for the revenue loss included in the Q4 numbers and that will be a potential income in the financial statements for ‘23. On top of sell-out, we saw, as already mentioned, a solid contribution of 3 points from network expansion. And the network, by the way, it doesn’t just drive top line, but also bottom line. And then go to Slide 18, please. On the EBIT margin bridge, I’d just like to draw your attention to the dotted box in this bridge. And that shows that our underlying EBIT margin was up 110 basis points versus Q4 of ‘21. The reported EBIT margin was up even more, 280 basis points. And that was partly helped by some one-off costs that we had in Q4 back in 2021 and we’ve illustrated that in the left part of the bridge here. Then let’s move on to Slide 20 and the guidance for 2023. We have obviously spent more time than normal reflecting on the financial plan for ‘23 and our financial guidance. Let me just start by giving you a few corner posts for our thinking behind the guidance. And the first corner post is that, as Alexander showed, that revenue growth has been resilient during the last 3 quarters despite the growing macro headwinds. And quarterly sell-out growth has also been broadly flat both year-over-year and also versus ‘19. The second corner post is that the external data – external experts continues to show a challenging backdrop for consumers. And a general consensus that macro is going to be weak in 2023 and with some markets being in a recession. And the third corner post we would like to mention is that we continue executing on the Phoenix strategy in 2023. The macro environment does not change that. We’re just making a few twists in terms of priorities. And of course, we also have a harder push on costs. And all of that has led us to give a relatively wide guidance on organic growth from minus 3% to plus 3%. And as you can see in the bridge, the guidance includes a flattish to mid-single-digit decline in sell-out. And the midpoint of that range is obviously a slowdown compared to the last couple of quarters. And it’s a slowdown compared to the underlying current trading because the underlying current trading, as Alexander already mentioned, is in the high end of this guidance range. But it’s still early on in the year. And we prefer to be cautious and let’s see where we land the year. But to put it in another way, our key message with this guidance is that – first of all, that we are preparing for a difficult trading environment entirely driven by macro. We don’t really see this in the numbers yet, not in Q4 and neither in the current trading. But now we have set the cost base to prepare for a difficult macro environment and thereby protecting margin in 2023. And then go to the next slide, please, the EBIT margin. We’re guiding around 25% EBIT margin for this year. And this may probably look a bit narrow given the range on the top line guidance. But the way we think about it is that the current macro environment requires an extra element of flexibility and quick reaction on the cost side in Pandora. In short, if macro hits harder and growth lands towards the lower end of the guidance, we will take cost actions that we believe can keep the margin around 25% despite lower top line. And if growth lands towards the upper end of the guidance, we would like to have and retain the flexibility to invest more in future growth if we decide to do so. We have laid out the building blocks for the margin guidance on this slide here. And we are happy to dive more into that if you have questions either here or in a follow-up afterwards. There is just two things I would like to note. And the first is that the recent combined adverse movement of foreign exchange and commodities gives us a net 40 basis point headwind on the margin versus last year, versus 2022. And the second thing is that within the guidance, we have absorbed the margin impact coming from higher than normal salary increases that we expect here in 2023. Then some of you may also ask what the current guidance means in relation to the Capital Market Day targets that we issued back in September ‘21. And clearly, the world has changed significantly since we issued those targets with a weaker macroeconomic backdrop and the ongoing COVID-19 situation that we are still facing in China. Despite that our new EBIT margin range is actually currently is just within the targeted range that we set out back in at the CMD in ‘21. And for the growth guidance, I want to stress that’s a greater element of uncertainty. But the upper end of the new guidance would place Pandora within the CMD range despite the macro situation. And let’s see where we end up when the year has gone. Then let’s go to Slide 22, please. On this slide, we have the other guidance parameters for the year. And as Alexander has already covered the store network ambition, so the other one to mention is the pickup in CapEx to 6% of revenue this year. And this pickup mainly reflects our investments in the store network, both new stores as well as refurbishments. And it also reflects our new ERP platform and a number of other digital investments. And the 6 points of revenue is in line with the target from the CMD back in ‘21. And finally, we expect the effective tax rate to be in the same range as we guided for last year being 23% to 24%. And then go to the next slide, please. I’ll finish off with an update on our cash distribution for the year. Our cash distribution for 2023 is a signal of confidence and a signal of strength. We have ample liquidity. We have a fairly low leverage. And we will continue to generate good cash in 2023. We are therefore announcing this morning a total cash distribution to shareholders of up to DKK6.4 billion. And at the full amount, DKK6.4 billion, that would be around 11% of the current market cap. And this includes a proposed dividend of DKK16 per share. And that’s in line with last year. And it reflects actually a shift in our dividend policy from previously targeting a 2% dividend yield to now a progressive dividend per share. And on top of this, we also this morning announced that a new share buyback program of DKK2.4 billion running until the end of June and then with a clear ambition to get to DKK5 billion as we move through the year. Thank you, Anders. So to conclude, we are very pleased with what we achieved in ‘22, especially given the numerous challenges which emerged during the year. As I said, I believe the year reflects that Pandora can navigate uncertain times thanks to the combination of a strong brand, unique captive business model and a diverse geographical footprint. The brand has shown good resilience in a very turbulent environment. We are confident that our brand position in affordable luxury will continue to support financial performance during a potential recession. And we’ve already taken a number of precautionary steps to protect profitability. We entered ‘23 with confidence while well-prepared for a range of scenarios. And our ambition is to yet again deliver a strong performance. Slide 26, please. Before we open up for Q&A, I would like to invite all of you for our Capital Markets Day in London on October 5 this year. And I hope to see you there for an exciting program and a great dialogue. Thank you. [Operator Instructions] And the first question is from the line of Martin Brenoe. Please go ahead. Your line will now be un-muted. Martin Brenoe? We will take another one. The next question is from the line of Lars Topholm from Carnegie. Please go ahead. Your line will now be un-muted. Just a couple of questions from me. First of all, congrats with another excellent quarter, well done. I have some questions to Q1 also to the trends you have been seeing in January. You of course, commented on current trading. But I wonder if you can put some words on the ASP, if you’re seeing the consumer trading down in your product range for – and maybe also some colors on individual markets. And you know, I am very fond of you guys, but for example, why isn’t it a red flag that U.S. is only 38% up versus ‘19 in Q4, but 56% up in Q3 that would imply some kind of a slowdown? And then, a second question, if I may. So on your store expansion plans of 600 new locations, I assume that is concept stores. But maybe you can elaborate a bit on what kind of expansion you see within other points of sales. And then, Anders, I’m sure you have done the math theoretically, 600 new concept stores and some other point of sale, what would that add to revenue, everything else equal? And how much of that has already been captured with the store expansion you’ve already made? Thank you. Okay. Where do we start? So if we look at – when I say current trading, I mean, we could include, let’s say, Q4 into January. So we have a slightly longer time horizon. At the end of the day, it’s a rather low frequency type of category. And we are not really seeing anything on the basket, nor on the ASP. If I take, let’s say, the global average, there might be some ups and downs between the countries. But generally speaking, there is not a major difference. The difference in terms of outcomes is – and in fact, I should also add that traffic actually continues to be – was good in Q4 and continues into this year. The delta is purely in some markets where we know that people are a little bit more cash-strapped like Italy and France, as an example. We can see that that impacts a little bit the conversion rates. But that’s pretty much it. So this kind of down-trading at the full level is not something that we are registering to be honest with you. U.S., on this one – I mean this one is quite difficult. I haven’t thought about it like this. The way I suppose we view the U.S. is we saw a sequential improvement from Q3 to Q4. It went from a sell-out growth of minus 9% to minus 7%. So that will lead a bit more towards... But this is now versus ‘19. And I’m just trying to remember back in ‘19 whether there was such an easy comp for the U.S. I don’t think so really because the kind of the big push in the U.S. came the following year in August, if you remember, Lars, when we actually changed a bit the marketing approach in the U.S. So that’s not really what I would see. That’s a fair point actually, you were down 18% in Q3 ‘19 and only 4% down in Q4. So point taken. That actually answers my question. But I think – yes, I know you guys always divide the world up in quarters, but – and that’s fair enough. But the underlying business in the U.S., I think, is given kind of the stimulus backdrop, actually the way I’m thinking about it is held up surprisingly well. And based on some market data we have, it seems like December was more of a normalized month, whatever that’s supposed to mean. But I find that the business in U.S. in general is in a pretty damn good shape given everything that’s going on. So that’s probably how we think about it. What else? Then, maybe general stores, Anders, maybe you can help a little bit there. Yes. Let me do that. Thanks for the question. I would just go back to the U.S. The organic growth, the drop that we see on the 3-year stack in ‘22 is actually coincidentally exactly the same as we saw in – from Q3 to Q4 of ‘21, where it went from 60 to 42. And this year around of in ‘22 from 56 to 38 to 80 points drop. So it sits all the way back in the base in ‘19 after the brand re-launched in August ‘19 – late August ‘19. On the network, the 600 new locations, it’s – when we – at the Capital Markets Day, we said it would be roughly 80% concept store, 20% shop-in-shops. That was a split. I think with last year it was more evenly, actually, the more shop-in-shops being opened. So it might skew a bit more towards shop-in-shops than what we thought back at the Capital Market Day. But still, the – once executed everything, you can think about this as an additional incremental revenue of around DKK4 billion and give and take, DKK1.5 billion in EBIT. And so far, we’ve only done third of that in round numbers, a little bit, so still quite some way to go. A lot of upside both for ‘23 and for the years to come. And then, obviously, this is the first 600 location, the best of those. But that doesn’t mean that it’s only the 600. But there is a limit to how much we can execute at a time. But even if you start digging below from the store number 601 and below, so to speak, it’s still a lot of opportunities, but we will have to take it in steps. The next question is from the line of Martin Brenoe from Nordea. Please go ahead. Your line will now be un-muted. Okay, thank you. First of all, congratulations with a strong ending to a difficult year. I just have a couple of questions and then I’ll jump back in the queue. First of all, I think that you were alluding to it and the EBIT margin guidance is a bit narrow while you have quite a wide top line guidance. Can you maybe help me understand a little bit the dynamics you saw, just elaborate a little bit more for me because it’s – yes, it’s difficult sort of – there are a lot of moving parts. And I think that the EBIT bridge is getting longer and longer for each year. But it sounded to me like you’re already taken the precautionary measures through sort of a recession scenario, so you’re ready for that. And then in case the credit growth is higher than sort of or ending in the high end when you will invest more money, is that the correct way to understand it? And maybe also just understanding what is the Phoenix investment? Is that sort of relating to the China reopening or how should we think about that? Thank you. Thanks, Martin, for the questions and fair questions. I think the way to think about it is that if we ended up in the lower end of the range, let’s say, the minus 3% top line, then that will be – I think that would trigger cost actions that might not otherwise normally be triggered within the guidance range. Let’s say, in a normal year, we have been guiding 5% to 7% growth. Let’s just use the Capital Market Day range, then it’s a bit different cost dynamics. And so if we get into that negative territory on the top level, then things like – of course, we will have to take another look at staff levels. We will have to take another look at things like travel restrictions and things that will not be in play in a normal year. And that’s why we are saying that it’s framing the EBIT margin guidance in a different way than we would normally do. On the upside then, if we ended at the plus 3% organic growth, then at least we would like to have the flexibility to invest even more if need be. It’s not a given that we will do it, but we would like to have the flexibility to do it. We saw back in the – during the pandemic that opportunities arose to – came up when times are difficult to invest. And that might be the case here as well. That could be in the brand in media. But it could also be in sort of other parts of the business. So I hope that explains a bit on our thinking. Then on the Phoenix investments that we have, we have included here. Just to mention a few, we have the ERP sits in here, the investments where we started back at last summer. There is a normal range of other digital investments, personalization among others that we keep putting incremental money behind. We actually keep investing incremental money also on the people side on the talent development that ends up being a bit of money as well. And then another sort of fairly large bucket in there is incremental depreciations coming from Evoke 2.0, the new store format. We have been investing actually very little in store refurbishment since ‘18. And as you know, we have been working on the new store concept for quite a while. And in the meantime, we have been holding back. And we do have a catch-up need on store refurbishments. And that will – that CapEx will feed into incremental depreciations in ‘23. I hope that helps. China? Yes. And on your China question, in the current guidance, we have not included out-of-plan investment behind China. Reason being, obviously, that we are still kind of waiting for the China, let’s say, the fog to clear in a way. And there are two aspects there, which we are looking at. One is that we see that consumers actually come back into the stores. Even though we – as I mentioned in my opening words, that we have seen sequential growth in brick-and-mortar throughout January. It’s still coming from rather low levels. So we need to see that that actually continues to grow and comes back a bit more to what we were used to in ‘19. So that’s point one. The second one is also that we have a proper line of sight of what the government is thinking about when it comes to the pandemic. So at least, so we know that they are not going to turn on a dime and close down because then a lot of this investment would be wasted. So that’s kind of things which we watch. Then, the approach on investment, we’re probably not – or not probably – we’re not going to go national in the first pass. We’re going to pick a couple of major cities and double down and make sure that the model which we’ve been working on actually is working. And then once we’re comfortable with that, then we will probably put even more firepower behind it, but then we’re into ‘24 as far as I’m concerned. So maybe Q3 would be a timing that we currently have in our mind on when a kind of a brand re-launch as such would happen. But again, as I said, it would be in our top five, six cities. But just to put some color to that, each city there is like 20 million, 25 million people. So when you put five of them together, you’re talking about half of Europe or half of Western Europe. So it’s nothing. The current investment level that sits in the base plan for China is similar to a going level in any other market. But of course, that’s not going to be sufficient to give it an extra punch. So that’s an out-of-plan item, which is also why we are thinking about this kind of doing a couple of cities to begin with. The last thing I forgot to mention, Martin, on the investments in Phoenix. It’s a sustainability agenda. It’s not massive money, but it’s actually still meaningful money in that bucket of 100 basis points of Phoenix investments, not least the premium that we are paying on recycled silver. The next question is from the line of Antoine Belge from BNP. Please go ahead. Your line will now be un-muted. Yes. Hi, good morning. It’s Antoine Belge, BNP Paribas Exane. Two questions, first of all, coming back on the store roll-out plan. Is it fair to say that there is an acceleration maybe initially that put a bit of pressure on the margins this year, with maybe some stores that are yet to achieve maximum profitability? So could that mean maybe a bit of a seasonality in terms of the quarters with whatever improvement in the margins, maybe more happening in Q4? And my second question is more broadly on the different moving parts of the gross margin in 2023, if you maybe would add a bit of granularity? Thank you. Yes. Hi, Antoine. Thanks for the questions. Here, the line is a little bit shaky, but I think we got the questions. On the store openings, our home has tempered to see I would expect none of the 100 to 150 stores in total to be margin-dilutive. That’s not the plan. And so almost disregarding when they are being opened, even though, they might only be opened by the back half of the year, which we, by the way, do expect that most of the stores will be in the back half of ‘23. There should still be as a minimum EBIT margin neutral for the company. And on average, there is definitely still margin-accretive. So it’s sometimes when we speak internally in Pandora about it, I call it a CFO’s dream to have this margin driver because it is quite mechanical low risk, a lot of hard work, but with almost instantly being EBIT margin-accretive after a very, very short period after opening up the stores. So the main – and maybe elaborating a bit on that, then you may ask why not then go even faster? And again that has two main bottlenecks, one being that we don’t want to jeopardize quality. We would rather wait another year or 2 to get the right location in that city on that street rather than getting second level quality and the other being organizational capacity. It is taking quite some time and efforts across many parts of the Pandora value chain to open up a new store. I hope that that’s it on that piece. Then, on the gross margin bridge, it’s true that I think you should think about the gross margin as being up next year – or this year in 2023. And that’s also what we talked about back at the Q3 announcement. And since we spoke back at the third quarter announcement, we have had quite some headwind from foreign exchange, a bit from silver as well, but that’s mostly heads up from foreign exchange. So now on the gross margin, the net impact of those more external factors, commodities and FX, it’s a net headwind this year, 60 basis points of help from silver, give and take, but then 80 basis points of headwind from foreign exchange as it looks at the current foreign exchange rates. But on the other hand, the gross margin will be driven up by the network expansion. It will also be helped by a bit lower forward integration than last year. Sort of – you probably remember that’s a temporary hit on the gross margin when we do a forward integration. That’s probably going to be – I think we’ve said 50 basis points help on the gross margin this year. And then there will be a bit lower non-recurring costs from hopefully, we don’t have any extraordinary costs related to the pandemic in Thailand. So net-net, the gross margin will be up a bit here in this year. And then – so then, of course, you can also by that conclude that the OpEx ratio will be up as well. Otherwise, the bottom-line EBIT margin guidance doesn’t quite make – doesn’t quite make sense. And it is true that we expect the OpEx ratio to be up a bit, especially in the first half of the year. Our base case is that recession is going to be a bit harder impact in the first part of the year than the second half of the year. And obviously, who knows, let’s see how it plays out, but that’s our base assumption. And that also means that the OpEx ratio will be a bit harder hit in the beginning of the year than in the later part of the year. Thank you. [Operator Instructions] And the next question is from the line of Thomas Chauvet from Citi. Please go ahead. Your line will now be un-muted. My first question on your revenue guidance, last year for the ‘22 revenue guidance, you provided some details on the moving parts by region. And remember, there is quite a big divergence between the U.S., which you guided would be down and the rest of the world, which was up low teens. How would your ‘23 guidance look like if you have to split let’s say, U.S., Europe and the rest of Pandora? Would U.S., Europe be close to each other and rest of Pandora up strongly? And on that rest of Pandora, which is about 30% of your business and outperforming so much like I guess some smaller markets where you may be underpenetrated. But there you still have plenty of room to grow close to double-digit medium term in those markets, whether that’s in Mexico, you mentioned other countries like Portugal, Holland or Scandinavia? My second question on the salary increase, you mentioned in your EBIT bridge 100 bps dilution due to a higher-than-normal wage inflation. Would that imply around 4%, 5% wage inflation globally? Is that a fair assumption this year? Would it be split differently between Thailand and [indiscernible] that’s associating your core markets between the manufacturing workforce and the sellers in your core market. How does that compare to ‘22? And do you think that level of wage inflation is delayed say for 2 years, which would obviously put a bit of a cap on profitability? And could you clarify one last thing. Alexander, you mentioned – or Anders, you mentioned the change in dividend policy from 2% yield to a flat to growing dividend. What is the rationale for that? Is it to allow potentially for more flexibility towards more buybacks and a lower payout ratio? Thank you. So let me start with the revenue guidance. I mean last year, it was normally given the stimulus checks in the U.S. And that was the sole reason for us to pull that out, given the sheer weight the North American business has in the group, but it’s certainly not something we will continue with. So we are not guiding by – even by region. That’s just not how we’re structured. But then your question, which I think is interesting, is on the rest of Pandora, the Spains and the Mexicos and all of those guys. Of course, we had a really good run in Mexico, not just last year, but in fact, over the last 5 years. We’ve had a super run in Mexico and it looks like there is plenty of steam to go. So we do expect a good outcome in Mexico. There might be some other countries in the LATAM that maybe we could kind of look for a similar type of trajectory, of course, not of the same weight and size yet, but that’s of interest to us. Portugal, we just took over I think midways through last year and then posted quite some good numbers, opposed to takeover. But it wasn’t without pain, let’s say, in the beginning, which is not unusual when you take over a whole country, to be honest. But there should be some interesting underlying performance that we could eke out of Portugal and that’s probably true in a couple of other places as well. But that’s probably as specific as I would get now. As the year goes by, we’re happy to kind of share a bit more detail on those geographies. Then on the ASR piece, I mean, it is in the range that you suggest. It’s different by market essentially. But it’s probably fair to say that that 4% to 5% is probably the top end or is the higher ASR as we call it that we’ve seen over the last few years. But it’s also a reflection of what’s going on around us and we want to try to support our employees as much as we can. And then I leave the dividend question for the two gentlemen next to me here. Thanks for that, Alex. On the dividend policy, the 2% dividend yield policy that we’ve had since the Capital Market Day, it makes very good sense in a stable environment. And since September ‘21, I think the interest rates have gone up quite significantly. That was one of the reasons you said a 2% dividend yield. That was a reflection of what’s the sort of the general interest level on the market. And then obviously, there is been some share price volatility. So if we had been 6 months ago and sitting and announcing our full year results back in autumn last year, then a 2% dividend yield would have resulted in a DKK8 of dividend, 50% down from ‘21, which just doesn’t make sense. So while we would like so external circumstances to be more stable, they are not. So we think it’s a better reflection of how we think about the business and we pay out a dividend that’s going to be flat to up every year. Now it was DKK16 in ‘21. We are proposing the same this time around, meaning that we are skewing this year the cash distribution towards share buybacks. But we think that the concept of a progressive dividend as we’ve called it or flat to increasing in absolute terms makes more sense in this environment. The next question is from the line of Maria-Laura from Bank of America. Please go ahead. Your line will now be un-muted. Thank you very much for taking my question. Good morning. Just one question on my side. With respect to the EBIT margin guidance that you have for 2023, what are the underlying assumptions that you have both in terms of price? Because during the call, you mentioned that you could have incremental fuel prices potentially coming through this year. And perhaps on an underlying basis, can you discuss the type of promotional environment that you are seeing? And what is the promotional environment assumption that you have in your EBIT margin assumptions? Thank you very much. Thanks, Laura for those – for that question. The EBIT margin guidance in the bridge that we have put into the announcement as a bucket called cost reductions and price increases 110 basis points. And so give and take half of that is assumed to be pricing increases and you can probably do a little bit of math in that. That assumes very round numbers a 1:1 elasticity on the price increases. That’s our base assumption, so 50 basis points. Sorry, just to be clear, it’s not new price increases. This is the rollover effect of the price increase we did in October, just to be very clear on that. Exactly. So in other words, we have not factored in additional price increases into the EBIT margin guidance. And then on the promo level, we are assuming that it’s probably still going to be a quite a promotional environment, but that we will remain disciplined. And on a relative basis, if you can call that detoxing compared to the outside world, we will obviously look at how the other brands are, what they are doing, but we will not go crazy. But we remain disciplined like we did in Q4 and like we’ve been doing in general. So it will be sort of I think in round numbers. I think the base assumption is that it will be unchanged, the promo level. The next question is from Anne Bismuth from HSBC. Please go ahead. Your line is now open. Anne Bismuth, your line is open. We will take the next one in line that is Kevin [ph] from Goldman Sachs. Please go ahead. Your line is now open. Great and thank you very much for taking my questions. Just two quick ones from me. So, firstly, you have seen an increase in your inventory levels as a strategic measure to increase availability. Could you help us think about what the right level of inventory is for the business? And also how you are approaching your inventory strategy this year? And then secondly, you have accelerated your store network expansion plans. Can you just give us some color on what criteria you look at in terms of location or economics of opening new stores? Thank you. So, I will start with the inventory. Thanks for the questions. If you take the midpoint of our revenue guidance for ‘23, so call that 0% organic growth, you should think about that in the year with inventories that are flat and maybe at tops down depending a bit on how we think about the pandemic insurance premium that we have had in the inventories for a while. So, the inventories are very healthy as we stand and we are quite happy with the level. And we see that the availability that we have across our products is generally quite good. And so even though inventories at this point in time is higher than where we were 1 year or 2 years back, net-net it helps drive availability and good availability on our individual product drives conversion and thereby revenue. But the sort of the cash conversion drag from higher inventories is behind us. And then in terms of the location, I think if you go back to Page 13, partly answers your question is. So, as I mentioned there, we have looked at our top 40 markets, analyzed 13,000 locations and then you kind of boil this down. And of course, what we are looking for is where we get the highest incrementality of putting up a store. So, if I am in a place we have no Pandora presence and there are plenty of those still in particular, in parts of the U.S., as we have been discussing in the past, then that is the key driver. Other than that, I think we use normal econometric metrics when we look at where to place a store. We make an assessment on the cost of establishing the store, running the store and what type of revenue we can generate. So, there is nothing peculiar about it. But I think the point here was more that in the U.S., we found ourselves quite underpenetrated in rather large geographies. And in the past, we have spoken to the west of the U.S. to south of the U.S. If you look at the East Coast, there we have a higher store density. But even there, you could argue if you compare to UK or an average European country, then we are still – the density is on the low side. But we are focused on where we get a bigger bang for the buck, which is – so now we are focused on the west and the south primarily. And of course, the same goes for Latin America, which was the second focus area, where it was a matter of – there is no Pandora at all, and where is the best location in the given kind of retail environment. China, similar story, and as you know, we have been a little bit more conservative of adding new stores to the China portfolio. It went a little bit low. It’s – in China, you have to swim to stand still in a way. And if you miss a beat, then actually your network can go backwards. So, we are essentially just rightsizing it back to where we think is the right level at the current business size. But of course, once we can kind of unlock the China opportunity like-for-like performance, then we believe that there is still plenty of opportunity to drive the network in China, which is part of the 600 that we identified. So, there is no particular magic to it. But we have lots of white space where we still think the brand has a role to play. Hello and a question related to current trading and just to make sure that I understand what you are trying to say. But basically you are saying that here in the beginning of January, you are seeing a flat like-for-like and a positive effect from network expansion, meaning that your organic growth must be in the range of 3% to 4% here in January. Is that correctly understood? And then just a follow-up question to that because I would actually have expected that you would be somewhat – you would have a more negative development here in January due to the tough comps, because if I look at your organic growth in Q1 last year, then you actually had a very high organic growth. So, is there anything in the comp base for January that is making this way to look at it wrong? That would be my question. Should I start? Thanks for the question, Klaus. The way to think about it is that the pickup, we have actually seen a pickup in sort of the reported, if you like, sell-out growth in the first five weeks of 2023 and it’s broad-based. So, it’s not sort of one country, but across the globe. And – but when we – it’s a fairly short period to look at five weeks. Obviously, in January, it’s not a big month. It’s a little – an average, a little bit below average size a month. So as usual, we have to be careful when we look at the numbers. But that’s a broad-based pickup in sell-out growth for the first five weeks of the year. But two things to note there. And that is, one is that there is some Omicron in the base in Jan or the first five weeks of ‘22. Omicron was an issue in Europe and the U.S. as well, not hard lockdowns in most countries, but still a lot of people being infected. So, there is some of that in the base, especially in the first few weeks of the year. And then this year, we have launched a couple of products earlier than the new products that came into the market last year. Last year, in Q1 of ‘22, one of the main new products in Q1 was the Marvel collaboration that came in mid-Feb, something. Now, we have launched a new iconic – started a bracelet chain in early Jan of this year. And all of that obviously gives – impacts the numbers. So, what we are trying to do to hopefully help you is saying what underlying, when you filter out pandemic, filter out the timing of product launches, the underlying sell-out growth is in line with Q4. Let’s call that flat. So, what we are trying to convey is that, yes, everybody talks about macro headwind. We didn’t see that read in the numbers in a big way in Q4. And we don’t see that yet either for the first five weeks of this year. But when you go back then and look at Q1 of last year where the significant growth numbers that you are referring to, Klaus, then that was clearly helped by the pandemic impact in Q1 of ‘21, where there were a lot of markets were in hard lockdown. So, it’s – in that way, it looks like a hard comp base, but it’s not really a hard comp base from that perspective. But hopefully, we have all that pandemic noise behind us soon, at least when we get into the second quarter of this year, then we only actually really Q1, we only have China, there is a bit of noise in the base from a pandemic perspective. Okay. And just to be clear, that also means that your organic growth, if we look at the organic growth, so including your network expansion, then you are tracking at, I don’t know, 3%, 4% for the first five weeks, correct? If you look at the full year, then, yes, we have said 2 points to 3 points of growth from network, and that keeps rolling. There will be swings within the months. But for the full year, then the organic growth will be above the sell-out. So, I think that the line of thinking is right. Good morning Alexander and the team. Just a couple of ones for me. First of all, on the low end of the guidance range, I just want to probe a bit. You expect that macro environment to be in the ASP some price increases. That implies volumes down more than 5%. So, is this a sort of pressure in line with the magnitude you have seen during the financial crisis [ph]? Is it more or less at the things have to get to minus 3%? And second is on the CapEx of 6%. I think the step-up is largely that ongoing [Technical Difficulty], given this is expected to continue and you have got about 20 models coming up. Do you still expect a couple of percentage of sales to drop from potentially next year? Thank you. But I think the first one is on how bad the macro – I mean the way we have been thinking about just to repeat what Anders said earlier on the call is the midpoint of the guidance is kind of what we see and experience as we sit here today. The low end of the guidance suggests that it’s going to deteriorate somewhat, okay. And the higher end of the guidance suggests that maybe the macro is a bit better or some of our programs actually yield more than what we necessarily had initially expected or a combination thereof. I mean this is not science. I mean we don’t have the crystal ball of the macro, which we did. But that’s kind of how we have been thinking about it and don’t try to read more into it because we haven’t. So then, okay, you can make your own theories, if you want. But then actually, on the CapEx question, it was so bad line. We didn’t catch your question. So, could you maybe repeat that just so we make sure we answer the right question here? Sure. So, the broad question is, do you still expect CapEx as a percentage of sales to drop in ‘24 and beyond given that the store expansion program is continuing ahead? I think I was one of the younger guys here who have better hearing than I have here. But it seems like that you are asking whether the CapEx to drop in ‘24 and beyond? It’s a bit too early to say. When we go back to the Capital Market Day in ‘21, we said that CapEx would be elevated in ‘22 and ‘23. The long-term level probably being, let’s call that 5% of revenue. And then we said for a couple of years, we will be at the 6% to 7% level, at least in ‘22 and ‘23. That might stretch a bit further into ‘24 because we do have some backlog of store refurbishment ahead of us. We still have a – might have a bit of elevated CapEx while we build the new manufacturing site in Vietnam. We will talk more about that at the Capital Market Day. But there is nothing that has changed in the business that doesn’t mean that as an average or a longer cycle than we are at this 5% of revenue as the CapEx. Sometimes, it’s a bit above. Sometimes, it’s a bit below. It’s been below in ‘18, ‘19, ‘20, ‘21, and I will have a couple of years where it’s above. Yes. Hi. Thanks for taking my question. Just one quick one on the like-for-like. So, you said that for your 2023, it assumes a zero to mid-single digit like-for-like decline. But you said that the prices of the products has been increased by 4%. So, just to be clear, are we expecting a volume decline for 2023, looking at just that? So, when we did the price increase, the assumption going in that the elasticity would be such that there was no revenue pickup based on the volume – sorry, on the priced items. So, meaning that you structurally improve the unit P&L, but not necessarily get the volume gain coming out of it. Sitting here today, it’s a little bit too early to say exactly what the revenue impact is. It’s not worst than our ingoing assumptions. But I think we need to sit through another couple of months because we did it in early October. Then we went straight into a fair amount of noisy months with Black Friday and Christmas shopping, etcetera. So, we need to see this kind of more in a, let’s say, non-promo environment to see exactly what the effect is. So, probably in the next quarterly announcement, we can come back and report on what the revenue impact is on that pricing. So, as we built the budget, we kept the assumption that the elasticity is going to remain, one, i.e., no revenue benefit necessarily. So – but we put the EBIT in the bridge as you have seen, as Anders spoke to before. Yes. Just one question on the refurbished stores. And if you can comment on how they are performing compared to normal stores? Thanks. So, we have – I mean, essentially, you have three types, I would say. So, one is the stuff that we forward integrate. Then you have newly established stores, and then you have the stores where we put in the new Evoke concept. So, we can – I don’t know exactly what you have in mind. But let me comment on the – overall on the whole network expansion, if I kind of put that under the umbrella. They performed at least in line with the average of our own and operated. So, I think that’s point one. When you then look at Evoke stores that we have done and they are Evoke 1.0. So, it’s not 2.0 that we are actually going to roll. And the difference is more look and feel, rather than the actual store operation as such. In general, of the stores that we have up and running for a while, they performed better than the comparative stores. Now then, we can always debate what’s a comparative store, is that the neighborhood store or is that kind of in a region of the country or the country. But literally across all those three metrics, they seem to be more productive than what we have in the current evolution concept, which is the – that’s kind of the typical Pandora store you would walk into the white stores with glass and chrome, etcetera. So, the Evoke 2.0, we hope to do at least as good as Evoke 1.0. And the final question is from the line of Anne Bismuth from HSBC. Please go ahead. Your line will now be un-muted. Yes. Hi. Thank you for taking my questions. So, the first one is on the investment side and the fact that if assuming that seems turn up to be better than expected and you higher end of the guidance range in terms of organic growth. What is the base in terms of marketing spending given the fact that you flagged that you could invest even more, you would get the flexibility to invest even more so where the marketing to sales ratio could land in that case. The second question is about, can you remind me what do you need in terms of organic growth? What is the medium threshold you need in order to get operating leverage? And maybe a final one on the rollout of Evoke, you mentioned that you are planning to scale that up this year. So, in order there, but if you plan to rollout a concept? Thank you very much. Okay. I will do, which I will take the top and the bottom. I will leave the middle to Anders. So, when it comes to marketing, as I have said all along, we have a range of 13% to 15% of revenue. And as I said, it depends on the year. It depends on the initiative, etcetera. But that’s kind of the level at which we cruise. Then of course, last year, we did a global pitch on the media, which also rendered lower GRP costs. So, of course, with a lower spend, essentially, I get the same bang for the buck. Sometimes we reinvest that. Sometimes we put that in our pocket. But from a modeling standpoint, if that’s what you are actually asking, then the 13% to 15% is the range. The only kind of let’s say outlier to this conversation would be an additional investment in China. That would sit on top of that 13% to 15% range if and when we decide to go in a bigger way. But we really haven’t built that into the base plan, as I mentioned. Then on the Evoke 2.0, so what we have to do is we are going to do this in batches, because what we need to do is we rolled out Evoke 1.0 in a number of places last year. Now, of course, we have changed some of this furniture. We changed some of the material. And before we then push the button and say, are we going to change 2,500 stores, 3,000 stores all around the world, we need to ensure that actually the material works properly. So, we are going to roll out a few now here in the first half. And on the basis of that learning, that everything from a quality standpoint holds up to what we expected, then the kind of acceleration point happens in the back half of this year. So, right now I think we are probably planning something like, 50-odd and should everything go well, then that number will increase as we go through the year. And remember, when we talk about the store expansion, we talk about net stores. So, it means that in some instances, we shutdown an evolution store. And then when we then put the equivalent up, that’s going to be Evoke store. So, the actual gross number of stores is higher than the net that we keep quoting here. But we talk about the net because if you do your modeling, you put a revenue number against a net opening, not the gross number, just not to confuse things. And then, Laure, on the question about operating leverage, if I heard the question right, otherwise, you will correct me at the end here, but a couple of thoughts. One, if you look at operating leverage in a bigger scheme rolling forward and model for some years, then obviously, there will be salary increases every year at a certain level and typically also some inflation across the OpEx base. But if you think about a normal year, if that exists over, let’s call that 3 points of salary increases across the globe as an average and then maybe 1 point of OpEx inflation on other types of OpEx. Then the 3 – the first 3 points of growth every year, 2 points to 3 points of growth every year would offset that inflation unless you of course, can find cost efficiencies, cost reductions that can offset the salary increases. That’s the bigger part of that annual sort of automatic headwind, if I can call it that. That’s one way to think about. If we couldn’t find additional cost efficiencies, yes, then the first 3 points of growth. So, that will be funding the salary increases and other types of OpEx in place and that might be in the numbers. There will be constant cost efficiencies. Obviously, we have done a lot, as you know, since ‘18. We still have a couple of ideas. We have actually a dedicated team that – of a few people that just sits hunting and looking for ways that we can run the company more efficiently and find cost reductions. But then we move above and having funded that automatic headwind every year. Then the – then there will be, let’s call it, 25 basis points of operating leverage on each point of organic growth just around that level. I think that that’s a number that we have talked about for a while. I hope that helps. Otherwise, we are happy to follow-up some more modeling questions if needed. Okay. Thank you very much. We certainly appreciate your interest in Pandora. We are passionate about it, as I hope you can note. Before I do my closing remarks, I know that you guys represent a lot of companies. And I hope you do, like we did, to put a donation into the suffering children in Turkey and Syria. I think it’s close to our heart. We have a big cooperation with UNICEF. So, that’s a good destination for any funds that you may want to put to help people in need. Then on the closing remarks for the company, I think we proved last year that Pandora is very good at navigating all these uncertainties and curveballs. From that, we put a record year out there. Underlying the brand is very good. As I spoke to, we have a captive rather unique business model. We have a diverse geographical footprint, which reduces risks. And we took a number of precautionary measures last year to shore up our cost base. So, we stand ready to, first of all, deliver our promises to our shareholders, but secondly, also having the agility to jump on any opportunities that we see in front of us. And there are always opportunities when things are rough and around the edges. So, our ambition is, as it’s been all along to continue delivering a very strong performance. And on that, I once again thank you for the attention and I will probably see you around on road shows, etcetera, out there. Have a nice day. Thank you very much.

EarningCall_464

Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Fourth Quarter 2022 Earnings Call. [Operator Instructions]. I will now turn the conference over to Dianna Higgins, Head of Investor Relations. Please go ahead. Thank you, Justin. Good morning, and welcome, everyone. Thank you for your interest in MGIC Investment Corporation. Joining me on the call today to discuss our results for the fourth quarter are Tim Mattke, Chief Executive Officer; and Nathan Colson, Chief Financial Officer. Our press release, which contains MGIC's fourth quarter financial results was issued yesterday and is available on our website at mtg.mgic.com under Newsroom, includes additional information about our quarterly results that we will refer to during the call today. It also includes a reconciliation of non-GAAP financial measures to their most comparable GAAP measures. In addition, we posted on our website a quarterly supplement that contains information pertaining to our primary risk in force and other information you may find valuable. As a reminder, from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website. Before we get started today, I want to remind everyone that during the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results to differ materially from those discussed on the call today are contained in our 8-K that was also filed yesterday. If we make any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. No one should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or issuance of our 8-K. Thanks, Dianna. Good morning, everyone. I'm pleased to report that we had another great quarter. And for that matter, we delivered exceptional financial results for the entire year while providing meaningful capital returns to our shareholders. Simply put, we have the best financial results in our 65-year history. We will get into details of the financial results throughout this call, but we again demonstrated the strength and flexibility of our capital position in the quarter and produced an annualized 16.9% return on equity. In the quarter, we earned $191 million of net income, an increase of 10% compared to the same period last year. For the full year, net income increased 36% to $865 million, an all-time high compared to $635 million in 2021. Insurance in force at the end of the quarter stood at more than $295 billion, a 7.6% increase from a year ago. The growth in insurance in force during the year reflects an increased persistency rate, offset by lower volumes of new insurance written. Persistency increased to 80% at the end of the quarter, up from 63% a year ago. In the quarter, we wrote $13 billion of NIW, and we finished the year with $76 billion of NIW. Although the volume of NIW is lower than the record volumes for the prior 2 years, 2022 was another great year, the third largest year in our 65-year history. We expect the reduction in our NIW volume for the fourth quarter is a reflection of the smaller MI market but also reflective of our market position as we continue to take actions based on the increased risk in the current environment with a focus on the continued long-term success of our company. Turning to the performance of our insurance in force portfolio. Approximately 80% of our insurance in force is from the 2020 and later book years and the credit quality of those books remain strong. To date, we have not seen a material change in credit performance in our portfolio overall. We remain encouraged by the continued favorable employment trends and the positive credit trends we continue to experience, including the low level of early payment defaults, which we believe is a good indicator of near-term credit performance. I also want to highlight that the rapid home price appreciation experienced in the past couple of years allowed homeowners to build up significant equity. This equity, combined with the strong credit quality of our insured portfolio, should help reduce the incidence of claims on the related mortgages on much of our risk in force, even with the modest declines of home prices in recent months. Our comprehensive reinsurance program will also help mitigate potential losses. As a result of the strength and flexibility of our capital position during the year, we not only deployed capital to support new business and grow our insurance in force, we also paid $800 million in dividends from MGIC to the holding company. We used our strong capital position to repurchase most of the remaining convertible junior debentures due in [indiscernible], repay MGIC's Federal Home Loan Bank advance and redeem our senior notes due in 2023, reducing our leverage ratio to approximately 12% in annual interest expense by $25 million. We also returned approximately $500 million of capital to our shareholders through a combination of repurchasing common stock and paying common stock dividends, including a 25% increase in the quarterly dividend beginning in the third quarter. As I mentioned during last quarter's call, retiring debt and delevering has been a significant use of holding company cash in 2022. But with our debt-to-capital ratio and our target range and with the uncertainties and potential challenges in the economic environment in the near term, we continue to expect to retain higher levels of liquidity at the holding company. Our approach to capital management is dynamic so that we may continue to achieve our objectives in changing our stressed economic environment. We continually assess and evaluate the level of capital at both the operating company and holding company, including the level of capital that we retain for future deployment versus return to shareholders. As part of our assessment, we consider the operating environment we are or expect to be in. We strive to be prudent and thoughtful in our capital allocation decision-making so that both the operating company and the holding company are positioned to achieve success in varying environments. Our balanced approach to capital management includes the use of forward commitment quota share reinsurance agreements and excess loss reinsurance agreements. These agreements reduce the volatility of losses in weaker economic environment and provide diversification and flexibility of sources of capital. Approximately 85% of our risk in force was covered to some extent by reinsurance transactions at the end of the fourth quarter. Drilling down further, approximately 97% of the risk in force relating to the 2020 and later books was covered to some extent by reinsurance transactions at the end of the fourth quarter. We agreed to terms on a quota share agreement that will cover most of the policies written in 2023. This is in addition to the 15% quota share reinsurance agreement we already get in place to cover the 2023 NIW, bringing the total quota share that will cover most of the policies written in 2023 to 25%. In light of the current economic environment and near-term uncertainties, let me take a few minutes to provide some detail on our approach to credit risk. We employ a comprehensive risk management framework that includes our proprietary risk-based pricing engine for the majority of our customers, MiQ. MiQ allows for frequent and granular pricing changes including those to address our view of emerging and evolving market conditions and risks. We take actions intended to manage the mix of our portfolio, including expected returns with a goal of positioning ourselves for continued success in changing environments. The timing between taking actions and the resulting NIW is not immediate as pricing leads NIW by a month or 2 on average. So what you see in the Q4 NIW is primarily a reflection of our views of risk return from last fall. While we won't comment on current market positioning given competitive considerations, our internal analytics indicates that our lower Q4 NIW was likely impacted by both the smaller MI market and a market share that was down a couple of percentage points in the fourth quarter. Our market position continues to be defensive in recent months, which we expect will lead to further declines in our market share in the first quarter of 2023 and may be larger than the expected decline in the fourth quarter. We are comfortable with our actions and the results because it's reflective of our views of risk return while maintaining focus on our customer relationships and the continued long-term success of our company. Thanks, Tim, and good morning. As Tim mentioned, we had another strong quarter. We earned $191 million of net income or $0.64 per diluted share compared to $0.52 per diluted share during the fourth quarter last year. For the full year, we earned $865 million in net income compared to $635 million last year. On an adjusted net operating income basis, we earned $2.91 per diluted share, a 52% increase from the $1.91 last year. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in our earnings release but the primary differences in the past 2 years have been losses on debt extinguishment from our debt reduction actions. The results for the fourth quarter and the full year were reflective of continued strong credit performance, which has led to favorable loss reserve development and resulted in losses incurred being negative each quarter in 2022. Net losses incurred were negative $31 million in the fourth quarter compared to negative $25 million in the fourth quarter last year. For the full year, losses incurred were negative $255 million compared to $65 million last year. Our review and reestimation of ultimate losses on prior delinquencies resulted in $76 million of favorable loss reserve development compared to $141 million of favorable loss reserve development last quarter and $56 million of favorable loss reserve development in the fourth quarter of last year. The favorable development in the quarter was primarily related to new delinquencies from 2020 and 2021. As curate on those delinquencies continue to exceed our expectations, we have continued to adjust our ultimate loss expectations. In the quarter, the delinquency inventory increased by 2% to 26,400 loans. In the quarter, we received 11,900 new delinquency notices compared to 11,000 last quarter and 13,700 in the fourth quarter of 2019 before the start of the COVID-19 pandemic. We continue to expect that the level of new delinquency notices may increase due to the seasoning of the large 2020 and 2021 vintages into what are historically the peak loss emergence years. During the quarter, total revenues were $292 million compared to $294 million for the same period last year. For the full year, total revenue was $1.2 billion, flat with last year. Net premiums earned were $244 million in the quarter compared to $253 million last year. The decrease in net premium earned was primarily due to a decrease in accelerated single premium cancellation, increase in ceded premiums and a decrease in our premium yield, offset somewhat by growth in our insurance in force. The in-force premium yield was 38.9 basis points in the quarter, down 1/10 basis point from last quarter. The in-force portfolio yield reflects the premium rates in effect on our insurance in force and has been declining for some time, but the pace of decline has been slowing in recent quarters. With the smaller origination market, higher persistency and continued high credit quality for NIW that we expect in 2023, we expect the in-force premium yield to remain relatively flat during 2023. Book value per share increased 4.4% during the quarter to $15.82 from $15.16 last quarter and $15.18 at the end of 2021. Unrealized losses in the investment portfolio due to higher interest rates continue to be a headwind for book value per share, reducing book value per share by $1.39 at year-end, while unrealized gains on the investment portfolio added $0.47 per share last year. While higher interest rates are a headwind for book value per share in the short term, higher interest rates are a long-term positive for the earnings potential of the investment portfolio and that is starting to come through the results. The book yield on the investment portfolio ended the year at 3%, up 20 basis points in the fourth quarter and 50 basis points from the end of last year. Sequentially, investment income was up approximately $4 million in the quarter and up $7 million from the fourth quarter of last year. Assuming a similar interest rate environment, we expect the book yield on the investment portfolio will continue to increase during the year and approach 3.5% by the end of 2023 as reinvestment rates remain significantly higher than the current book yield. Operating expenses in the quarter were $74 million, up from $62 million last quarter and $46 million in the fourth quarter last year. For the full year, expenses were $249 million compared to $211 million last year. The increase in expenses during the fourth quarter compared to recent quarters was primarily due to higher pension settlement costs in the fourth quarter. Other factors impacting the full year expenses included higher performance-based compensation expense due to our exceptional financial results in 2022 as well as continued technology investments, particularly in our data and analytics infrastructures. We expect full year operating expenses will be down modestly in 2023 in the range of $235 million to $245 million. Turning to our capital management activities. Our priorities have been consistent and include maintaining the financial strength and flexibility of the holding company and deploying capital for growth at the writing company. For the holding company, this means maintaining a target level of liquidity in excess of near-term needs. At the operating company, it means maintaining a robust level of PMIERs excess that we expect will enable growth in changing operating environments. During the fourth quarter, the capital levels at MGIC and liquidity levels at the holding company were above our targets, and we paid a $400 million dividend from MGIC to the holding company. Consistent with our capital strategy, we repurchased 6.1 million outstanding shares of common stock for a total cost of $80 million, and we paid a $0.10 per share dividend to our shareholders for a total of $30 million. The holding company ended the year with cash and investments of $647 million. In January of this year, we repurchased an additional 2.1 million shares for $28 million and our Board authorized a $0.10 per share common stock dividend payable on March 2. At the end of January, we had $87 million remaining on our current share repurchase authorization, which we expect to exhaust in the first half of 2023. Any additional share repurchase authorization will be determined in consultation with the Board. At the end of 2022, MGIC had $2.3 billion of available assets in excess of the PMIERs minimum requirements compared with a $2.2 billion excess at the end of 2021. Throughout 2022, MGIC's capital level was above our target. Consistent with our capital strategy, we received OCI approval and paid $800 million in dividends from MGIC to the holding company. Future dividends from MGIC to the holding company will also require OCI approval. As we mentioned last quarter, in the near term, we expect to retain higher levels of liquidity at the holding company. Part of the reason for maintaining higher levels of liquidity at the holding company is the outlook for future dividends from the operating company is more uncertain than in the past 18 months. We will evaluate future dividends to the holding company using a consistent framework, but if we experienced a more challenged economic environment for mortgage credit, that will impact our target capital levels, which could extend the time between dividends or reduce the amount of future dividends. Our strong capital position entering 2022, combined with the exceptional financial results during the year, position us to reduce our debt outstanding by approximately $500 million, increased our quarterly shareholder dividend by 25%, reduced diluted shares by more than 10% and end the year with a stronger excess capital position relative to PMIERs than we started the year. Thanks, Nathan. Few additional comments before we open it up for questions. In January, under the direction of FHFA, the GSEs announced certain pricing changes effective May 1 of this year. Overall, we think the actions taken since October of 2022 have been directionally positive for low-down payment borrowers. At this point, we are uncertain what impact these changes will have on our overall business. However, we are supportive of efforts to facilitate access to low-down payment lending for first-time low- to moderate-income homebuyers. We look forward to continuing to work with FHFA, the GSEs and other industry key stakeholders to responsibly expand access to homeownership. As we look ahead into 2023, we do expect downward pressure on home prices to continue and further expect the overall market opportunity for new private mortgage insurance to be smaller compared to 2022. Even so, we remain encouraged by favorable demographics that suggest meaningful long-term MI opportunities. As we close out another record year, we have confidence in our transformed business model and believe that our strength and flexibility position us to continue to execute and deliver on our business strategies in 2023 and beyond to create value for all of our stakeholders. Lastly, we're often asked what differentiates us. First and foremost, it's our people. Our people have been the cornerstone of our accomplishments. Additionally, there's 65 years of industry thought leadership that we bring to the table. We listen, build partnerships, provide a superior customer experience and deliver quality offerings and solutions to our customers so that together, we can help borrowers to overcome the largest obstacle of homeownership, the down payment. Our commitment and ability to help borrowers achieve the dream of affordable and sustainable homeownership has never been stronger. I had a question about how you're thinking about the alternative uses of your excess capital. One of your competitors announced an interesting acquisition this morning. Just I'm wondering what your latest thoughts are on using some of that capital to potentially diversify the business in ways that may either kind of dampen some of the cyclicality of your earnings and/or be accretive to returns or the multiple? Mark, it's Tim. I appreciate the question. It's something that we think about from an overall strategic standpoint. It's safe to say that on a routine basis, we consider alternative deployment of capital and whether it's diversification underlying. Quite frankly, we haven't seen opportunities that we think move the needle and that we think would be a benefit to the franchise and to our shareholders. That could change in the future, but to date, we have not really seen that. Okay. Got it. And then just one question. Nathan, I heard your comment that guidance for the in-force portfolio yield to be relatively flat in 2023. What's the outlook for the net premium yield? Should that kind of track that? Or is there still more pressure there? Yes, Mark, I think the net premium yield, there's a couple of factors that are hard to forecast, whether that's accelerated single premiums or things like that. The one thing I would point you to is the ceded premium number was benefited in the year from our negative losses incurred, which drove profit commissions to be very high on those quota share deals. As loss levels return to more normal levels, certainly positive numbers versus negative numbers, that will have an impact on the profit commission, which was, I'd say, unusually large in 2022. So I think that ceded premium number, all else equal is likely to increase a little bit, which would -- with a constant in-force premium yield number, that would lead the net premium yield to come down a little bit. But we'd also see the benefit then come through from the quota share on the loss line. So your commentary on market share suggested -- or just curious in terms of the commentary, is the decline that you're anticipating driven by your tighter underwriting or prices or a combination of both? Or just a little more color on that would be great. No, I appreciate the question, Bose. And again, it's not exact time to be able to predict exactly where we are, but we feel like we have a pretty good handle on that it's not just market size. It's down that we we're probably down some share and want to call out probably even more so as we look to report on Q1. I think it's safe to say that as I mentioned, MiQ allows us the ability to more granularly price -- express our views on risk into the marketplace through price as well as dimensions as far as the risk factors, but it's a combination of those. But I think the thing that I most likely think about in terms of risk return is what do you do to reflect the premium you need to get in return for the risk that you think that you're taking. Okay. Yes, that makes sense. And then you noted that you maintain higher liquidity at the holding company. I mean, is there a way for us to kind of size that? What does that mean just so we can kind of triangulated to potential capital return? Yes, Bose, this is Nathan. I think what we were trying to call out there is throughout 2022, when we were getting the large dividends up, we were using that money very quickly, whether -- and a lot of debt reduction activities in particular. And that without that, as a need for cash right now at the holding company because our liquidity and leverage ratios are near our targets right now that we're -- we continue to repurchase shares in the fourth quarter and through January. As we said, we expect that we'll exhaust our repurchase authorization. But beyond that, repurchase activity and the dividend are things that we continually discuss with the Board. And I think in April or in Q1 and our earnings, we'll have a better update for you on what that looks like, both from a dividends from the OpCo up to the HoldCo with 3 more months of kind of performance and macroeconomic updates as well as what the go-forward plan is on repurchases. I did want to ask about just delinquencies. Are we back to like just the normal cadence of delinquencies now just from regular way business, like nothing unusual going on there in terms of both [indiscernible] or just new notices coming in? And does that mean the delinquency rate drifts a little higher from here as we enter those peak years of losses that you mentioned? Just trying to understand expectations around delinquency rate. Yes. Mihir, it's Nathan. I appreciate the question. I think as I mentioned in the opening remarks, the level of new notices is still down quite a bit from pre-COVID levels. So I think we're still really pleased with the level of credit performance, but I don't think we're seeing a lot of kind of direct COVID or unusual circumstance notices. I do think that this is becoming more just kind of regular way delinquencies that we've seen throughout time. In terms of where it trends, I think there's a couple of things. We do think that we're likely to see increased delinquencies out of the 2020 and 2021 books over time. They're entering their third and fourth years now of seasoning, and that's typically when we've seen the increase in delinquencies. I think in terms of the impact on the delinquent inventory, some of the reason that it's remained as elevated as it is, is that the pace of paid claims is still very, very slow. And if the pace of paid claims starts to pick up, if foreclosure activity starts to pick up, we might see resolution from some of these long delinquent notices that we do expect will ultimately go to claim at a pretty high rate. And that could impact the size of the inventory, too. So I think the other thing that we would have seen pre-COVID is more seasonality. I think a lot of that got really muted. But historically, the months of February, March, April are pretty strong seasonal months for credit. So I don't know if it's kind of monotonically increasing from this point. But we might see -- I think we do think it's relatively flat with maybe a slight increase as we've insured a lot more loans than we had pre-COVID and these books -- these large books get into their peak notice years in 2023 and 2024 here. Okay. And then maybe just going to expenses, if it's okay. For many, many years, MGIC was the market leader in terms of like just having the lowest expense ratio in the industry. 2023, on the other hand -- 2022, sorry, on the other hand, was quite different. Was there a little bit of a catch-up in 2022? And I guess the question is like I know you gave numbers for 2023, but I'm just talking about just more generally, is the expense philosophy a little different going forward? How are you thinking about that expense ratio? Just is there a target expense ratio you work towards? Just trying to understand like your philosophy around expenses because there does seem to be a little bit of a change. Yes. No, I appreciate the question, Mihir. I'll start and Nathan can chime in if he wants to. I think it's safe to say that over the last couple of years, we felt it important to invest in the platform over the long run. Part of that is to make sure we invest on the actual technology platforms that are legacy, but a big part of it is investing in our data and analytical capabilities that we think are critical as the industry continues to evolve. As Nathan called out sort of the biggest headwind in Q4 was really related to the pension expense and really, that's coming from the discount rate moving up there as much as anything. So I think you should think about us as continuing to be very focused and disciplined on expenses. I think Nathan talked about where we think we'll be in '23. It's a reflection of us wanting to exercise discipline around expenses because we do believe that over the long run, within this industry, being good stewards of how you spend dollars is very important although you have to do it. You have to invest in the platform to make sure that you can continue to progress and grow over the long run. So I wouldn't say a change in philosophy as much as the recognition that we have to invest to grow over the long run to be as competitive as we can in the marketplace, but we want to do that in a very thoughtful manner. Got it. And then just my last question. Just within more and more mortgage companies offering higher interest rate, buydowns and things like that, do you underwrite those differently? How do you think that some of those kinds of, I guess, innovations will impact the credit performance longer term? No, it's a good question, Mihir. And it's innovation or it's -- I think the concern would be a return to what we've seen before. I think the good news is buydowns, I think we'll get a lot of press. I think rightfully so, as we -- hopefully, people have long memories. The good news is for anything that we underwrite their buydowns, normally, those are qualifying, assuming that there is no buydown. So qualifying that at the sort of the full rate. So that makes us -- give a certain comfort level over that there's not undue risk being put into that loan. Always have some concern about payment shock example. But if they're underwritten with the thought that there is not the buydown in there, that goes a long way towards making sure that you have a borrower who cannot only get in the home but can sustain that at a level. So I feel generally comfortable about what's happening in that aspect of the market right now. Just one more on the market share outlook. Just wondering if there's anything that's kind of changed in your view that's leading to that, whether it's kind of your outlook on credit quality or your outlook on kind of the competitive dynamics that kind of led to this happening kind of 4Q and into '23? Yes. I think, Doug, it's really -- it's a matter of our view is that home prices are actually falling right now. I think we're all hopeful that unemployment doesn't spike up, but we are in a more stressful environment. We think our premium rates should reflect that. And we're okay if we lose some share because of that. Ultimately, we want to make sure we're getting the right return in our views of what we need to have to cover that risk. MiQ gives us a great ability to do that and do that in a real-time basis. And so we feel very comfortable with it. And again, it's for a company that has a lot of strong customer relationships, we want to win as much business as we can, but we also want to be very disciplined about making sure that we're getting the appropriate return for deploying that capital. A couple of questions. First, with respect to your guidance on the core premium rate being stable for '23, if we look at your disclosure on the MRA charge on new risk, it was climbing over the 4 quarters coming up to Q4. So I would guess that there was a mix shift benefit to your premium rate that's helping that stabilization. But this quarter, it dropped down as you -- it looks like maybe it became tighter on your credit. If that rate stays low below 7%, is that something where as it builds throughout the year, we'd expect the core premium rate to then decline again in '24? How does that mix shift and MRA charge act as a bit of a guidance for where that core rate might go? Yes, Geoff, it's Nathan. I think you're calling out a really important factor there that the mix does matter a lot for the overall in-force premium yield. I think one factor that may cause it not to have as big of an impact next year is just that we don't expect that the market will be as large, so we won't be writing as much volume. But I think -- I would think about that guidance as kind of indexed to maybe the back half of 2022 business, so maybe somewhere in between the mix of business that we wrote in the third and fourth quarter, so something around that 7% level. So if we were writing business that was well below that or well above that. But I think even the third and fourth quarter is at 10, 20, 30 basis points on either side of that 7%, I think that's still kind of within the range that we'd be comfortable with that flat guidance. Okay. And then I was wondering if it were possible to help simplify the impact on credit from the equity build-up in the portfolio. Obviously, a number of people, including myself, I think we're heading into some sort of recession type of scenario in which you would normally see notices go up, incidence assumptions go up, claim severity assumptions go up. If I painted in an environment where it was a 10% incidence assumption, but then you adjusted that for how much equity is built up in your existing book, is that something you can help frame up all of a sudden, if that 10% become 9.5% or 10% become 9% simply because of the benefits from the equity? Geoff, I think I'll start, Tim, I mean, I'll have to think a little bit more and probably won't be able to answer it as precisely as the question. It's obviously -- it's something we think about. I mean, from an overall standpoint, it's obviously fair to say that the mark-to-market LTVs have continued to improve and are probably sub-70% to the end of the year. The way we think about it, though, is there's good home price appreciation for a good chunk of our book, especially before interest rates started to rise. The back half of '22 is probably somewhere around 10% of our in force. So that feels like it's got -- doesn't have the same embedded home price appreciation in it. And so it really feels like you're looking at 2 different sort of groupings of loans to a certain extent that could respond a little bit differently depending upon home price path, unemployment. But all of it underlying is, again, we're in a business where when home prices if they decline and if there is unemployment challenges, those confer losses. I think to your point, built-in equity helps mitigate that. And so we feel really good about having built in equity in a lot of our book of business because that goes a long way towards not only reducing severity on anything that would come in, but also, quite frankly, reducing incidents because it will now return into a claim because there's other ways to resolve of homeowner not being able to pay their mortgage. Okay. And then just last question. Nathan, was the incident rate unchanged at 8% this quarter? And can you also provide your average new money yield? Yes, there was no change in the new notice claim rate. And then I'm sorry, Geoff, the second part of the question, are you referring to the investment portfolio? Curious if you would say there's any meaningful catalyst away from lower mortgage rates, which could lead to lower persistency and, call it, the near term. And in that near term, do you think we could get a nice pop in housing demand, especially from first-time buyers if mortgage rates fall even just a little bit. Yes. I think from a persistency standpoint, we're at 80% now. I think run rate is higher than that. It could get into the low to mid-80s, that is what we would say. From a refi, if rates go down, there's just not a lot of loans that have been done that would be sort of in a range that would be want and willingness to refi. So I think there could be challenges to that persistency, but not -- I don't see a lot in the -- especially in the very short term here because you're really talking about our portfolio in the back half of the year, which I said was -- is probably 10% of our overall in-force that might have some ability if rates drop down closer to 5% as an example, but not a lot of built-up equity at that point either. So I think that's something that we feel good about the persistency of the book running forward. And Eric, remind me the second half of your question. Yes. I think as I said in the opening comments, demographics still remain strong over the long run. And we still think there's a lot of pent-up demand for first-time home buyers. I think when rates rose as quick as they did, that has people stand by the sidelines, especially when you consider how much home prices that went up, so affordability gets stretched. I think once you get past the sticker shock of the higher interest rate and you look back and say, okay, do I feel comfortable in my job? Do I have a life event? Is it the right time to purchase the home? That shock of the higher interest rates, which just gets closer to longer-term sort of historical norms becomes less of an issue. And to the extent that home prices have come down a little bit and certain markets make it more affordable to that combination. So again, I think over the long run, really attractive for first-time homebuyers and ultimately, that's a big chunk of our market. I think there is just a little bit of sticker shock with affordability with both the double whammy of home price appreciation and rates. But I think that moderates over time, quite frankly. Yes. That's helpful. And then following up on the GSE changes. Can you talk about how much demand you've typically seen for the cohorts where they cut the fees the most? And then kind of [indiscernible] that same point, like, can you talk about how much risk layering you guys have typically done in the 90-plus LTV bucket? Yes. We try to look at all the fee changes really combined, looking at what the GSEs did from October. And so it's safe to say that a good chunk of our book gets affected by it. I think you put it all together, I don't think we feel like there's a very material change in what ultimately might flow to MI versus other sort of execution, some changes within the different categories, but it doesn't feel like it's dramatically expanded or narrowed the box of what would come to private MI. Yes. Eric, it's Nathan. I mean most of our business is done at the 90 LTV and above. So I think when we think about risk layering, we think about it as combinations of the highest LTV, so say, 97 LTV with higher DTI or lower FICO or things like that. And on some of those dimensions, if you look at above 45 DTI, for instance, and 97 LTV and below 680 FICO, the amount of business that we do that has, say, 2 of those factors is in the low single digits. I don't have it exactly in front of me, but maybe 3% or 4% of our new businesses in that category. So not a lot of business, but if you include kind of 90 LTVs and up, that's most of what we do just given the space that we operate in. And I am showing no further questions. I would now like to turn the call back over to Tim for closing remarks. Thanks, Justin. I thank everyone for their interest [indiscernible] MGIC. I thank all of our coworkers for another phenomenal year. And being Groundhog Day, hope that Punxsutawney Phil [indiscernible] with only 6 more weeks to winter. Thanks, everyone.

EarningCall_465

Hi. Good evening, everybody. Thank you for joining StarHub’s FY 2022 Results Update Call. My name is Amelia and I take care of StarHub’s Investor Relations. This evening we have with us our Chief Executive, Nikhil Eapen; our CFO, Dennis Chia; Johan Buse, our Chief of Consumer; and Kit Yong Tan, our Head of Enterprise Business Group. We will start off with opening remarks and an overview of our performance by Nikhil, followed by Dennis on financials and then Johan and Kit on business highlights. We will the floor to Q&A thereafter. Just before we start, a gentle reminder to please mute yourself when you are not speaking. Nikhil, over to you, please. Yeah. Hi, everyone, and thank you very much for making time for us this evening. It’s that time of the year again I was reminded by my team that every year, this usually happens on Valentine’s Day. So, hopefully, it’s much appreciated that today is not Valentine’s Day. But with that, let’s start with the financial highlights. And let me just start by focusing on service revenue. Now service revenue for fiscal 2022, we achieved $1.9 billion, for the second half, we achieved $1.27 billion, and for Q4, we achieved $535 million of service revenue. So when you look at the growth trends associated with those numbers, fiscal 2022 year-on-year, we grew 17% and if one extracts the acquisitions that we made in India in fiscal 2022, namely MyRepublic and JOS, the growth rate for fiscal 2022 year-on-year is 6.6%. Now for the fourth quarter, we grew 29% with the acquisitions and 17% year-on-year for the fourth quarter without the acquisitions and then quarter-on-quarter service revenue growth, where the acquisitions don’t really matter since they weren’t acquired and made their first contributions in Q3, we actually grew 11% quarter-on-quarter. So that was service revenue. On Service EBITDA, as you recall, when we ended 2021, we ended at about a 30% margin and we went into DARE+ and we guided down to 20% and that’s where we have ended. So as you recall and as we are talking -- as we have been talking about, our Service EBITDA number reflects 3 things. It reflects our DARE+ investment, but it also reflects the macro costs, namely utilities and other things, as well as early investments that we have made on products and platforms. So, overall, 2022 for Service EBITDA was a tough year for us, you will see in our guidance that we anticipate recovery into 2023 and acceleration into our DARE+ outcomes. Now our net income is reflective of that EBITDA trough in fiscal 2022 for DARE+. But it is also impacted by roughly about $31 million in non-recurring provisions, as well as impairments, which Dennis will elaborate on further. And then last but not least, not on this stage, despite the DARE+ investments that we have made, which are significant, we generated for the strong free cash flow of about $220-odd million and remain at low leverage of about 1.38 times. So, therefore, we intend to accelerate into DARE+ in 2023 and to continue to -- and actually accelerate the harvesting process. So perhaps we can then move on to segment revenue. So for segment revenue, we recorded growth across all segments, across all business lines. We recorded growth across Postpaid Mobile, Prepaid Mobile, Broadband, Entertainment, Cyber, Regional ICT and Network Solutions. So we grew across all business lines for the quarter and for the year year-on-year. Now zoning in on Mobile, we generated for fiscal 2022 $564 million, for the second half $296 million and for the fourth quarter $153 million. So, again, when we look at some of those growth rates for fiscal 2022 for Mobile, we were up 7.5% and for the fourth quarter, we were up year-on-year year, up 13% and sequentially, quarter-on-quarter, we were up 7%. So these growth rates -- these strong growth rates were driven by subs growth and we have continued to be very judicious about how we take subs without diluting our ARPU. They were also driven by roaming increase, which we were able to capture, while holding a stable ARPU ex-roaming, and of course, our intent is with Infinity Play to drive greater consumption, greater customer lifetime value. And with all of that, one of the things that we were happy with was based on the recent results that we have seen, we were able to extend our lead in revenue market share vis-à-vis the player below us. Now on Broadband, we saw higher revenue scale as a result of our acquisition of MyRepublic and some moderate revenue growth due to improved ARPU, as we continue to do what we do, which is to drive increased penetration of 2-gigabit plants into our base. On Entertainment, Johan will elaborate, but we saw very healthy year-on-year growth of 16%, lifted by Premier League, the World Cup, as well as our other content offering. And then on Enterprise, last but not least, this continues to be a key growth engine. Cyber continues to grow strongly at double-digit annual revenue growth rates with improved profitability this year. Regional ICT with or without acquisitions, grew year-on-year. And Network Solutions, which if you recall, a year ago was something that was eroding is now stabilized and growing, driven by strategic services and our order book, particularly in new product and platform lines rising rapidly. Next page, please. So our checklist versus our guidance. Now if you recall, at the beginning of fiscal 2022, we had guided to service revenue growth of 10%. After Q3, we upgraded that service revenue guidance to 12% to 15% and we are ending the year with service revenue growth, exceeding that revised guidance and achieving 17%. Now for Service EBITDA margin, at the beginning of the year, we had guided to 20% and we are ending the year in line with our expectation at 20%, which when you couple with the service revenue growth outperformance, therefore, implies higher EBITDA than we had anticipated in 2022. Now for CapEx commitment, this was again something that we started the year with a level of guidance, which we have since revised after Q3 to 9% to 12% including investments and we have beaten that revised guidance, ending the year at 7.3% including investments. And then last but not least, we had guided to our dividend policy of $0.05 and we are reiterating and reaffirming our payout of $0.05 per share. Thank you, Nikhil, and good evening to everyone. Recapping on our full year results. For the second half, we reported revenues of $1.69 billion, $2.327 billion in terms of the full year total revenue, representing a year-on-year increase of 14%. Service revenue for the second half was $1.018 million -- billion. The full year was $1.88 billion, representing a 17% growth in service revenue. We reported second half EBITDA of $187 million, excluding the provisions that we have taken, which are non-recurring or EBITDA that we would have reported for second half would have been $215 million. Full year reported EBITDA, $417 million or $445 million if you exclude the provisions which are non-recurring. This represents a 21.6% Service EBITDA margin adjusting for these non-recurring items. The second half profit that was reported was $1 million, adjusting for non-recurring items and impairments that we took at year-end. The second half net profit after tax attributable to shareholders would have been $57 million. For the full year, we reported net profit after tax that attributable to shareholders of $62 million. Excluding these items, they would have been $119 million or $0.069 on an EPS. Our full year free cash flow that we generated was $222 million or $0.129 on the FCF per share basis. We ended the year with $573.6 million of cash and cash equivalents on our balance sheet. The short-term debt that will be maturing in the next 12 months would be $120 million. There’s no debt maturing in the year 2024, which implies that we have got long-term liquidity and a very strong balance sheet to take us forward to fund our DARE+ Transformation initiatives and other opportunities to come along. With the strong results that we have generated on the back of strong revenue growth and ongoing strategic cost optimization initiatives that we have taken to pay the way for the DARE+ transmission initiatives that were still in the midst of executing. The dividend, as Nikhil reiterated, we are declaring a final dividend of $0.05 -- $0.025, making the full year dividend to be $0.05. And on that, our net debt-to-EBITDA ratio ended the year at 1.3 times, well below industry average. Thanks, Dennis, and good evening, everyone. I will take you through some of the highlights in terms of consumer. So, first and foremost, ARPU, we really had a good quarter on Mobile ARPU was 32%, up from the previous quarter and $3 up year-on-year. And on top of that, we saw a healthy growth in the subscriber base, 19,000 in the quarter and year-on-year $81,000. That has translated into revenue growth as you have heard earlier from Nikhil. Underlying components to that revenue growth are roaming, but also the organic growth in terms of the Postpaid base and value-added services. Prepaid, the ARPU is at 8%. Customer base increased significantly. That has to do with the opening, the reopening of the borders, but we also have been very forthcoming and working on the local segment, the local tourists and foreign workers segment. So let’s move -- moving to Broadband on the next slide. Broadband also have good performance. I would dare to say, $34 ARPU, customer base at 578. That’s really good. What is also important to highlight there is that the churn remains low. Churn is at 0.6%, and on the previous slide, you saw that the Postpaid churn is at 0.8%. So we are holding our ground, which is a good indicator in terms of satisfaction level of our customers with our services. Segment revenue was explained earlier on, so I will not repeat that, but you saw organically StarHub have a 5.6% growth year-on-year and almost 3% for the last half year. So that is a strong performance from my point of view. Then Entertainment, Entertainment is something which has been a busy year, as you all know. Pleased to inform you that the ARPU stands at $36 coming to the end of this year, which is $4 year-on-year. A bit of tapering off the base 492 to 478, but year-on-year, still a significant growth. That has to do with some of the OTT elements. Churn is low. Actually churn is lower than the previous year. We managed to cut churn further to 0.9% and revenue growth, as I explained earlier, 16% for the full year and 27% for the second half of the year, obviously, driven by Premier League, as well as World Cup, but also the other OTT components we have, which we are offering to our customers like Disney+, Netflix and so forth. So moving forward, a few words around something which is close to a heart and which may be of interest to you. Besides being commercially busy, we actually in Q4, launched first set of deliverables of what we call the Infinity Play for Consumer, DARE+, which is a new app linked to that, part of our Mobile offerings are on a new platform. That new platform is end-to-end digital. It enables customers to transact any piece of service or a purchase fully digital without any intervention either in shops or physical customer care. Now that’s important because, obviously, that delivers a significantly better customer experience and it also creates efficiency. Why do we call this Infinity, as we go forward in this quarter, we will expand that and during the year, we will end up having all our products and services in a seamless fashion on this platform, which is envisioned and basically experienced by customers in the form of this app. That is important because Infinity Play basically means that on this app, you will be able to transact and subscribe to other services than the traditional services we have and you do not need to be a traditional staff customers to do that. So we are talking about gaming, protection in Cybersecurity Services and so forth, as well as our health, LifeHub+, our healthcare solution. So those are well beyond traditional StarHub services and actually available for anyone in Singapore. That is important. Now initial results are very promising. We have launched this late in the quarter and we already see a 20% increase in terms of MOU, because the navigation is much better and the experience is far superior compared to what we had before. We have very high Appstore ratings as well, by the way. And we also saw this translated into a significant increase in terms of transactions, both in sales and 14% increase in terms of online transactions purchased, but also importantly, our Care transactions. Majority of our Care transactions are coming through the app handled by chatbot and we managed to achieve 80% accuracy again and very important for customers in terms of satisfaction, but also important for the company in terms of efficiency. So we will progressively release the upcoming releases throughout the next three quarters and we aim to end this by end of this year so that we have revamped our business totally and you can barely really call it Infinity Play for everyone. So that’s from my side. And on that, I will hand over to Kit Yong to give you an update on the Enterprise side. Thank you very much. All right. Thank you, Johan. All right. Okay. Enterprise business itself. Nikhil, just earlier talked about double-digit growth. Let me break it down into the three segments, Network Solutions itself. On second half 2020, right, the data internet revenue is higher due to MyRepublic Broadband and also Managed Services revenue is higher because we complete more projects. And overall, right, we have been the setback is due to the lower Voice Services revenue due to lower domestic and international traffic. When it comes to Cybersecurity Services, double-digit growth itself and mainly driven by overseas markets that’s contributing the growth. And also, they are also contributing operating profit of $13.6 million. For Regional ICT services, the consolidation JOS Singapore and Malaysia, right, is giving us higher revenue and also contributing an operating profit of $3.1 million, right? Now going to the next slide, right? As we evolve our Enterprise services from a pure Mobile Services now we are moving into Mobility Services to address the future of work for Enterprise clients, right? And you can see that on the left, we have six new value propositions. Under Mobile plans, we offer green device leasing. What does that mean? We give our client two years leasing and we take back the device, not recycling it, but really reuse it, right? So and you can see that there are other Mobile Device Management, Workflow Automation, End User Computing, Mobile Security and Business Application that we do in-house to help our clients evolve to be a more digital and hybrid workforce. I am pleased share with you some of the wins that we have in End User Computing and services for Enterprises where the team secured more than $8 million and this is a one of attraction of highlights of overall Enterprise business. And we also have won two virtual desktop infrastructure, right, for health organization here in Singapore. So as we progress, we are integrating our connectivity, cloud, Cybersecurity, platforms that we have and we partner to deliver services and solutions for Enterprise clients, right? Yes. Thank you very much. So, if you recall, when we released our -- did our Investor Day in November 2021 and outlined what we wanted to do with DARE+, it was our DARE+ reveal, as you recall, we had talked about a spend of $270 million on DARE+, against which we would achieve outcomes of $500 million, broken up by $280 million of expected savings and $220 million of attributable gross profit from revenue increase as a result of what we are driving as part of DARE+. Now the other thing that we had talked about, if you recall, was that as a consequence of DARE+ and at the end of the transformation period, we were targeting, generating an incremental $80 million of incremental net profit on top of our 2021 run rate, which if you recall, was about $150 million. So with that, where do we stand today? So number one, as we had talked about, not in our initial DARE+ Investment Day in 2021, but in our last Investment Day, Investor Day in 2022. We were increasing our DARE+ investments from $270 million to $310 million and that was as the result of incorporating Cloud Infinity, which is our network transformation and putting our network on the cloud. And we were incorporating the impact of Premier League within our outcomes, as well as our spend. Now we have started achieving some of these outcomes in 2022. We hope to achieve more outcomes in 2023 and really for a full year start achieving material outcomes in 2024. Now when you look at our spend on DARE+ investment today, which is something that you have asked us about, in cash terms, simplistically speaking, we have invested about 24% of the quantum anticipated. But when you include the provisions that we have taken and the various bring forward, that number is actually about 35% and that’s the number that’s actually baked into our end of year financial results. So, with that, we can perhaps move on to talk about our guidance for 2023. So for 2022, we had achieved Service revenue growth of 17% versus our initial guidance of 10% and 12% to 15% revised. That was, of course, incorporating organic growth, as well as the acquisitions that we have made for 2023, which is organic growth, we are guiding to Service revenue growth of 8% to 10%. Now on Service EBITDA margin, we had guided to 2022 of 20% and we are extending that guidance for 2023. So, therefore, coupled with the Service revenue growth guidance, you should anticipate a continued increase in Service EBITDA year-on-year between 22% and 23%. On CapEx, we had achieved for fiscal 2022 7.3%, including investments and we are extending our guidance to 13% to 15% including investments in fiscal 2023. And last but not least, we are reiterating our dividend guidance of $0.05 per share or 80% of net profit, whichever is higher, and we remain well positioned to do so with our earnings, our cash flow and our leverage capacity. Thank you. We will now open the floor to Q&A. To join the question queue please click the raise hand button and let me call your name and then you can unmute yourself so you can post the question. We will start with Sachin? Hi. Just two simple questions. Firstly, on your Service EBITDA margin guidance remains stable. Now we know that this is despite the fact of more transformation OpEx going into 2023. So I think it was $30 million last year. Just -- could you just give us some estimate how much are we expecting in terms of transformation OpEx this year. And it seems like there’s a lot of cost-cutting benefits, that’s why the margins can be stable despite a lot of transformation OpEx. That’s question number one. And number two, on the CapEx, there’s a significant increase in the CapEx. I can see this -- you are talking about cloud and DARE+. But could you give us like more color or more -- something more concrete to understand what are the things you are investing in and what is the end result of all those? Are we saying these are -- you are buying new licenses, you are buying, what kind of investments are these, which actually and how will they benefit you in a more concrete manner here? Thank you. Yeah. Okay. Hi, Sachin. Okay. On the OpEx in 2022, we had made provisions of about $30 million at the end of the year. But to put things in perspective, that’s not the only investments we have actually made in respect of the data transmission during the year. That’s on top of the investments that we have made as well, which is partly recorded in CapEx, partly recorded in OpEx. So if you add that $3 million to the OpEx that had gone in 2022, you are looking at about $60 million of OpEx investment in respect to that but for the total year FY 2022. Then you forward the outlook to 2023 and embedded in and that is a number north of $60 million. I will stop short of giving you that number for purposes of confidentiality and competitive positioning. But I will tell you -- I will guide that it is a number north of $60 million that’s embedded in our guidance and taken into consideration in our guidance for FY 2023. So notwithstanding the increased OpEx that we are anticipating for 2023 for the investment. We are leaving our EBITDA margin -- Service EBITDA margin guidance stable at 20%. And as you pointed out, that on the back of ongoing cost optimization, as well as some of the DARE+ outcomes that we expect to incur in or realized in 2023. I will pause there to see if you have got any other questions on the OpEx before I move on to the CapEx. Okay. All right. On CapEx, if you look at the CapEx that we ended the year in 2023 and 2022. And again, just to emphasize, this is CapEx commitment. So in other words, the CapEx that we are actually raising purchase orders again. Now we had anticipated that CapEx commitments to be higher than 7% in 2022, which is what we ended the year and this is a result of some timing of execution of certain initiatives, around the IT transmission initiatives, as well as some of our network transformation initiatives. At the end of last year and the start of this year, we had guided the market to some clarification of our network that we are undertaking and this is something that we will execute during the year. So a result of some timing influence of some of these capital expenditure, capital -- total capital guidance, including all these transformation CapEx that we are making is relatively higher than what we anticipated. And if you then aggregate the two years together, that average down to about 11% or 12% a year, which is very much in line with what we have always said to the market. On a steady state basis, our CapEx would be between 5% to 7% and our transmission CapEx would be an additional 5 -- 4% to 5% thereabout. So that’s how we would look at the capital investment. The outcomes would be in the bulk of optimization of our IT systems. So you will have legacy systems that will be decommissioned. There’s a fair amount of licensing costs that we will take from that, as well as repair and maintenance costs that we typically incur to maintain those systems and there are multiple IT stacks that are a result of that. Then there’s the network side of it, where we have legacy infrastructure that we are also sunsetting. There will be a bunch of optimization opportunities around that, which translates into repair and maintenance savings also. That -- those are the outcomes that we are working towards executing. Nikhil? Yeah. If I could add to that and just picking it -- picking out the one incremental piece, Sachin, it’s obviously Cloud Infinity, which we updated you on in November 2021 and that’s a driver of the incremental CapEx. Now what Cloud Infinity does is a couple of things, right? What we essentially do as we move our packet call our cloud control plane, our cloud forwarding plane to run off a combination of public and private cloud. And when we do so, we will be, I believe, the core telco in the world to do so across the entire environment after Rakuten and IGS or DISH [ph]. So what that allows us to do is to improve to a dramatically new level of hygiene automation and scalability in our network, which therefore enables us as we have anticipated to achieve efficiencies and reduce cost in the way we run our network, which will recover the capital and the OpEx incurred, but not in the first year, as you can imagine. Now subsequently it also achieves in terms of outcomes, a whole new world of revenue opportunity in furtherance of some of the things that we are already doing, right, whether it’s multi-cloud networking, whether it’s a future of work, whether it’s a Cybersecurity, but done, embedded in the network in a way that’s sort of much faster, more powerful and agile. But that’s not something that we can really elaborate on in a lot of detail to for competitive reasons, but it’s something that we will talk about in future forums. So recovery from hygiene efficiency and automation of the capital that we have incurred, but not in the first year, obviously, and then beyond that revenue opportunity. Just follow-up on that, Nikhil and Dennis. So have we done the complete end of -- because many of our legacy systems are reaching end of life, probably, earlier than expected. Have we done whatever provisions or impairment to be done for those systems or no, something we can expect in this current year? Yeah. I think Dennis can add. But I think we have been -- I don’t know whether it’s aggressive or conservative, but we have taken sort of provisions for legacy systems where we are going to be sunsetting. Those obviously release cost on an ongoing go-forward basis. And there is also a degree of -- with things like Cloud Infinity and cloudification of our IT. So network and IT, there’s avoidance of spend in the future on legacy systems, which is something we would rather not do. But unfortunately, a lot of telcos are kind of caught in that trap. Dennis, sorry. So, Sachin, just as a recap, at the end of 2021, we did take a bunch of impairment or accelerated depreciation on a couple of IT legacy systems. You did see that translate into a lower run rate of depreciation and amortization that’s reported in our numbers in FY 2022 versus 2021. And then if you look at the impairments that we have taken at the end of 2022, this represents certain legacy assets that we have also identified that we will be transacting. With these provisions or accelerated depreciation, as well as impairments that we have taken, there are no further impairments that we are anticipating in regards to the equity systems for 2023. Hi, Nikhil, Dennis and team. I have got three questions. I think the revenue growth side is fairly straightforward enough, consolidation of acquisitions driving most of it, et cetera. But I do have a couple of questions on the fourth quarter net profit and the full year net profit. Strateq impairment, this is a fairly new acquisition. So what was driving this impairment? And especially related to that, Dennis, did I hear you correctly, you said like, excluding the one-offs, the profits would have been about $150 million? Oh! Sorry, yeah, $119 million versus $150 million in an environment, which, if you are stripping out the one-offs in an environment, which is in the fourth quarter, definitely a big improvement in business sentiment, et cetera. Yes, there were higher interest costs weighing down on economies, et cetera. I am kind of struggling to see how that is a good outcome, though. I mean, with the one-offs I can understand, but when you strip that out, if those are the numbers that you are saying, how is that? The second question is CapEx commitment. I remember the third quarter, Nikhil, Dennis, both of you mentioned that there was some sort of deferral of CapEx and that’s there in your slides, too. How much has moved to the right from your plans on a time line, so to speak, right, whether it’s 2023 and 2024, just a rough idea. I think we can sort of work out from your annual guidance, but it would be interesting to know how much has moved to the right and why so? Is it like supplier constraints? Is it any other reason? And the third is just overall to do with profitability. This is like a long-term type question. Negative jaws, right? DARE+ was announced well more than a year ago. How should we think and we were all aware, I think, about some level of cost frontloading to achieve that. But how should we think about the organic EBITDA growth and reversion to positive jaws, is it another two quarters down the road, four quarters, two years? I mean, this is just, I suppose, a ballpark estimate, there are so many market variables involved, but it would be interesting to get your thoughts on that? Thank you. Yeah. Okay. Hi, Neel. Good evening. Your first question on Strateq, right? So Strateq has six separate lines of businesses and it operates in different regions, mainly in the regions like Malaysia, Thailand, Hong Kong, for example. But it also has, at that point in time, a business in the U.S. that was part of the group that we took over. Now we this acquisition back in July of 2020. So it’s now been two and a half years. And over that two and a half year period, we have been working with management to really identify lines of businesses that have line of site in terms of delivering outcomes and the market positioning that Strateq had and also in consideration of the skill set that it brings to the table. At that point in time, we looked at the U.S. business and the challenges we are operating in the U.S. market and the dynamics of it. Of course, the last two years with the COVID situation was not terribly helpful. But all things in perspective without hiding behind that, the reality is that, that line of business we thought was going to be challenging to execute on. And therefore, at the spirit of rationalizing lines of businesses that we will continue to invest in and grow, which will yield us the meaningful results of investment. We then decided to discontinue that one single line of business in the U.S. and focus on the rest of the lines of businesses that Strateq still has, which are all very healthy and continues to deliver growth. So this is part of any business and a portfolio of business that we would as management run and this is just part of the exercise that we did. The reality of this is that, if we decided to continue on that business, it would have resulted in an ongoing cash burn. So, yeah, in the foreseeable future in the short- to medium-term. So, again, we would never say that, we will never invest in business -- businesses that yield returns in the medium-term. We do take bets and we will take educated and calculated risks. But this was one where we looked at it and said this was not a risk that we wanted to take on, on an ongoing basis. So there are other means of deploying capital and other things that we are doing, which we do see better returns in the short- to medium-term. So this is a rebalancing of our portfolio in other words, yeah. Your second point on the net profit, right? So if you look at the net profit for the full year of 2022 against 2021, for the full year is, excluding these non-recurring items and impairment have been $119 million. Now if we then look at it on a year-on-year basis, yes, it was a decline. But look at it from the perspective that we were delaying macro factors that primarily utilities costs when we started the year and that was something that gave the path as we went through the year and we are grappling to manage the volatility that came along with this, right? So along with that, there are -- there were wage increases, it was a function of how the market was transpiring, and of course, the tech layoffs towards the end of the year was an event towards the end of the year. But throughout the most part of 2022 there were labor inflationary increases that we are dealing with, along with the macro utilities increases. So if you then put these back… … into consideration, we actually delivered profitability, which is almost on par with 2021 level. And on the back of an ongoing competitive market position in the industry, which is something that all of us are aware of. We continue to execute well on the acquisitions that we have made. Some of them delivered good growth and we looked at how to drive profitability in all of them, and more importantly to drive synergies, both on the topline as we work together to drive that outcome, as well as cost synergies. Some of it trickled into 2022, I use the word trickle, because it’s very little, but it sets the pace for 2023 and onwards. So that was what we are working on. So as we look at it, I think, from management’s perspective, we back off the macro factors, which I guess is something we still are accountable for and responsible for, but we couldn’t really control. It was a great year in terms of profitability, all things considered. Would it be roughly equal, i.e., the first half and second half roughly about 20% or more or would it be an equal like this year in 2022 where first half is much higher and the second half is much lower? Okay. I will take that. So, typically, if you look at our numbers that we report, the first half profitability is very higher compared to the second half. And this is quite typical, because as we start the year, we look at various things that we need to depend on, and of course, we don’t need to spend on it in terms of activities that we carry out, whether it’s just maintenance of our network or marketing and promotion expenses, for example, those are things that we look at managing at least at the start of the year. So there’s no reason for us to incur those if we don’t see any need to do so. And as we go into the second half of the year, we typically look at it and look at the competitive positioning and the market dynamic, and then we invest in activities to allow us to exit the year on a stronger note. So there typically would be higher activities than our expenses in relation to the equities that are carried out in the second half. I would say that based on what we anticipate, it would not be as skewed as was for 2022, but there will be relatively higher margins in the first half versus the second half. Yes. Two questions, please. Firstly, on the guidance revenue growth, you mentioned 8% to 10%. Are you able to spilt this out across business lines through 2023? And the second question I had is with regard to the investment, which you put out on slide 17, you mentioned around $210 million related to DARE+ and Infinity. Am I correct to believe that based on the 24% guidance that you spent last year, so it’s around $75 million and it seems like you are going to spend another $200 million this year based on the incremental 8% CapEx to sales on slide 18. So that means by 2024, we should see a significant reduction in CapEx, is that how we should look at this? Hi, Arthur. So on your first question on the guidance of 10% on the topline on Service revenue goal. We will not provide the breakdown for each line of business, as you probably will understand why, right, otherwise it naturally revealed to the marketplace exactly what we are planning to experience each line of business. However, I would say that, the growth that we are anticipating is across all our lines of businesses, including all the recent acquisitions that we now have under our portfolio. So I will leave it at that for now. Yeah. Let me just emphasize one or two things. So, Arthur, so first, as Dennis said, we grew not just through acquisitions, but actually organically on all business lines and our intent is to continue to grow on all business lines. We are a bit careful of talking about how our growth splits up, because in certain segments, obviously, like Mobile, we are operating in segments that are highly competitive with traditional competitors. In other segments like ICT and Cybersecurity, there are a different range of competitors, and perhaps, not as competitive. And the things in between like Broadband and Entertainment, which aren’t as competitive as Mobile, but more than some of the others where we have market leadership. So we are a little bit lower to break that up if you don’t mind. Arthur, your second point on the investments, on the DARE+ investment. Just as a recap, when we disclosed or unveil our DARE+ plan in 2021 during our Investor Day, at that point in time was $270 million of investments. As a recap, those $270 million refer to both OpEx and CapEx investments, not just CapEx. And that investment includes investments in building staff strength, band strength and closets within our ranks, investment in key infrastructure, which is CapEx, but also investments in the IT license platform, which are treated as OpEx. So there are a bunch of OpEx items and a bunch of CapEx item. Now for 2022, we have incurred 24% or as you rightly pointed out, $75 million. We also made provisions at the end of 2022 of totaling about $31 million. So we actually aggregate the two, it will be about $106 million or about 35% of the total of $310 million that we would be envisaging to incur. The rest of the $200 million of both OpEx and CapEx is -- will be incur in 2023 and in some -- in the early part of 2024. So not all of the remaining $200 million will be incurred this year. But a good part of it will be incur this year. So maybe if I could add to that and maybe take off one of Neel’s questions as well, so he doesn’t have to re-ask it. I think Neel just tying the spend and the harvesting to where we see DARE+ going, not just kind of on an aggregated level, but perhaps, year-on-year. So as Dennis talks about 35% of the spend for DARE+ incurred in 2022, the bulk of the rest in 2023 and some left over in early 2024. So we had, as you recall, given sort of a soft outlook when we launched DARE+ that we were looking to get back to the 2021 level of EBITDA, which was about $500 million by 2023. So that would have implied a very, very compressed and rapid transformation period to sort of, call it, that kind of breakeven EBITDA level. In fact, one that was two years. Now clearly, the environment has shifted and macro costs have gone up, but it is still the intent to get back to that $500 million as soon as possible. 2024 is certainly a full year harvest year for us, and we hope and are closely monitoring and driving our quarterly EBITDA run rate. So our intent is to get back to that $500 million a few quarters later than anticipated. Sorry, I am just a little confused with regard to the CapEx. When I look at the next slide, right, on slide 18, you break down the CapEx on BAU as 5% to 7% and including investments of around 13% to 15%. And the 8% differential versus sales would refer to DARE+ and IT Transformation. So if I just take that 8% CapEx to sales against your, whatever, $2.5 billion target revenue, that implies additional CapEx of around $200 million related to investments. And I mean, putting it together with the $100-plus million that you spend, it seems like they are pretty much done with DARE+ by this year. Is that how I should look at it? Yeah. So if you look at the difference of 8% on the spread, we were anticipating to end the year about 11% to 12% or thereabout in 2022. We ended the year about 7.3%. So we are not -- there were some deferment of the capital expenditure into 2023. Yes, you are absolutely right that, we are guiding to 13% to 15%. And if you then look at the upper range of that 15%, it does imply that remaining $200 million or thereabouts would be incurred in 2023, but that’s the upper end of the range. So we are anticipating some of it to go into 2024. Hi. Can you hear me? Anyway, yeah, I would like to answer a few questions. Maybe I just ask one by one. I’d like to ask about Temasek buyback of the 20% stake in Ensign. That’s going to be by October this year, am I right? Yes. And my question is basically, would it -- does management expect that you would have a positive material impact on our P&L and balance sheet. Yeah. So let me just answer that in two ways. So number one, we are focused on the Cybersecurity business. It is call Protect [ph]. We do Cybersecurity within and outside of Ensign. We have good alignment with our core shareholder, Temasek on the direction of the business and what we want to do with it. And we would intend for that alignment to continue irrespective of what happens with the 20%. Now as far as the 20%, if they were to exercise their option to take 20% out of the 60%, leaving us with 40%. That would generate substantial gain vis-à-vis the investment cost that we had allocable to us. Yeah. And with this in view, Nikhil, why isn’t management more confident about its guidance about -- its guidance for earnings and dividend payout for FY 2023? Well, I think, we had anticipated DARE+ investment period. The bulk of that investment period is two years and those two years are 2022 and 2023. And as I mentioned, we had targeted getting back to that $500 million of breakeven EBITDA, which was a 2021 number in that two years, with the macro factors that’s been delayed a little bit. Our target is to get back to that breakeven a few quarters later, looking at run rate EBITDA, but we are in an investment period. The other thing I would say that vis-à-vis Ensign, again, this is something that we have ongoing discussions with our core shareholders on. Frankly, whether we continue as a consolidating shareholder or not, both have good outcomes -- both are good outcomes. Yeah. And more specifically, Nikhil, this buying back is not factored in your guidance, in your EBITDA guidance, as well as dividend guidance, do you factor this development -- this potential development into the guidance? But it certainly wouldn’t factor into our EBITDA guidance, because it would be -- if the 20% were sold, it would be a one-off gain for cash proceeds. And as far as our dividend guidance, we will take that as it comes, I think. I don’t think that’s something we can comment on at this point in time, Sonu. We have to, I think, weigh this matter alongside with various other matters together with our operating performance and see where we get to. Yeah. I understand. And regarding the slides, Nikhil, there’s just non -- about the non-operating income due to Strateq? I noticed that there’s a non-operating income, as well as non-operating expense. Do you think, maybe Dennis would be able to expand this line. There’s one non-operating income for $30.9 million, and at the same time, there’s a non-operating expense for $60.1 million. Yeah, how does that come about? Yeah. Okay. Sure. Perhaps just one more for me, I mean, in terms of the lumpiness, Dennis, is -- what is shocking about the fourth quarter result is we took basically a Q4 we returned on a loss for Q4. My question is, is there going to be more lumpiness for FY 2023? Is -- I mean, is Strateq as a non-recurring, but is this lumpiness going to -- is it going to happen one or two more times that’s going to impact the quarterly results like in Q4? Okay. Hi, Sonu. We commented on a response to an earlier question in regards to our FY 2023 guidance and whether or not this would be evenly spread on 20% throughout 2023. At that point in time, I had commented that, we do expect in line with our usual operating trends, the first half of the year, the operating margins are typically higher than the second half and that’s in tandem with the way we manage expenses and what we need to incur and spend on. And then as we go into the second half of the year, they are typically relatively higher activities that we engage in to try and exit the year on a strong burner. So there will be unevenness in the margins, but not to the extent that you see this in 2022. To your other question in regards to the non-recurring items that we took at the end of 2022. The reason behind that, we looked at all our rebalancing of our portfolio. Again, this was a response to an earlier question in tandem that we took in relation to that, and as well as discontinuation of certain lines of businesses and really focus our attention on. So we did take impairment on certain assets that we believe will not generate income going forward and to this and continue certain line of business and therefore an impairment in relation to that. Just to finish off on that, the non-operating income is in relation to what we call forward liabilities. So there are deferred consideration elements as part of the acquisitions that we have made and as businesses perform better or worse, then there’s an income or expense that’s recorded accordingly. So, as Amelia said, we will take this offline review. I am happy to explain this in greater detail offline with yourselves. So let’s keep it within ourselves. Yeah. Let’s keep it within ourselves. Yeah. Just two questions here. Sorry to take this on. Just to go back on the DARE+ spending. So you spend -- this -- I suppose $310 million. So far, if you assume $35 million to $100 million is being spent, so there’s $200 million left. So the CapEx could tick up maybe $150 million, $160 million, so the balance is $40 million. So my -- so about a bit in conclusion will be spent on FY 2023. So my question is when we go to FY 2024 and we look at your DARE+ on slide 17. So is that the kind of savings that we should expect? I know the FY 2024 is a bit far, but I am just wondering, is that what we should assume that $108 million roughly of savings that or maybe a dip down in costs, when we look at your slide 17, I just wanted to understand that? Thanks. Okay. So, Paul, I just want to again reiterate, right, if you look at our DARE+ investments, both in OpEx and CapEx, yes, based on the guidance that we have given, the implied CapEx investments for DARE+ would be north of $100 million in FY 2023. A lot of this OpEx investments in both license costs and the investment in people and building our bench strength. Reality is that when these investments -- when these transmission initiatives have been fully executed, the people that we brought in to bring on the skill set tendering do not -- will not disappear on that day, right? So there will be ongoing staff costs in relation to the people that we bring on to -- into our organization. Naturally, we continue to look at opportunities to see how we can reorganize ourselves, particularly in terms of driving business outcomes, right? So having the headcount deploy outcomes that yield the business leaders as opposed to keeping the business growing. So it’s driving growth, right? So it’s about optimizing the people that we bring on stream and some of these costs will continue because the reality is that we bring them on to deliver these outcomes and there’s an ongoing obligation and objective to deliver these key results. Now on the IT licenses, again, when we bring them on in their new platform, these license obligations continue as well. So there will be ongoing costs in relation to these things, which will then become what we then classify as business as usual run rate expenses, because at that point in time, these are part of our business operations at the point in time once we fully transform. What does, discontinue are the legacy expenses in relation to IT infrastructure, in relation to legacy network that we will transact at that point in time. And in the case of the Strateq U.S. business, it’s no longer an ongoing running costs in respect of that also. There will be things that we will time check and discontinue, and this spend represents savings that we will be offsetting against this and this is part of the that broad outcome. Okay. Thanks. Just one last one for me. For the guidance for 2023, what is the -- I wouldn’t say assumption, but what’s the thinking behind roaming, like, is it like, there’s still a lot -- just some thoughts on roaming as you put in this guidance? Thanks again. Yeah. Thank you for that question. No. In terms of roaming, it won’t be a surprise to you that the year closed quite strong on roaming and we basically exapolate that when there is for us enough foundation to be able to expect a similar trend as we exited in 2022 going into 2023. It would be nice if China opens up as well, that’s mainly for the inbound roaming beneficial. But roaming has been well. So we expect that trend to continue. Hopefully, that’s answering your question. Just, Paul, I just want to add, right, in the guidance, we have assumed roaming, as Johan pointed out, to continue to be robust. However, we have not assumed a huge uplift in roaming year-on-year against 2022. So if that transpires, and as Johan pointed out, is when China reopened and roaming recovered at a more accelerated rate, these are upsides to our actual numbers than what we have guided the market. So this could be like 30%, 40% below pre-pandemic or I am not sure how much you can decreasing, I am just wondering, is that the kind of level? Yeah. We will not -- we will stop short of giving you the percentage against pre-pandemic there, but it is below pandemic… …levels at this point in time, and of course, the thesis and the verdicts out there to whether or not it will ever revert to pre-pandemic levels because the way people travel and roam, they also changed the patterns have changed. So we are looking at it in totality. But I think in broad teams, China remains to open. We have not felt that impact yet. That’s on the consumer side. On the Enterprise side, I think, we are well below pandemic level. A couple of questions. Firstly, can you give us some update on the network deployment by Antina? What is the plan going forward? Any operational challenges which you have faced? Any learnings which you can share from running that JV? And what changes you have made to address those bottlenecks? And what should we expect more, right, from there? Secondly is just housekeeping, what percentage of your subscribers have 5G handsets today and how much of your data is actually going through the 5G network? Thank you. Yeah. Let me start on the first question, Dennis can add. I think Antina has worked out well for us. Its generated CapEx savings and cost savings. There is, of course, some element of CapEx to OpEx substitution, which show up its wholesale cost. But, overall, I think it’s been a good experience for us that has been value accretive. The rollout continues. We are in line with the commitments of coverage that we have made with INDA, in fact, back ahead. And I don’t think we have really come across any major operational challenges. There’s much we want to do with Antina. So please stay tuned. I think it’s the only thing I’d say. Anything to add, Dennis? Yes. No. Antina like three years in the making, right? And of course, like anything else at the starting phase, there were learnings in terms of how we would work with our joint venture partners and also how we can identify opportunities to get the best outcome on Antina three years into it. I think we have learned a lot in terms of how to optimize and to put together our strength in terms of negotiating our vendors as well. So there are very positive outcomes as a result of the collaboration and we have set -- that sets the stage for future collaboration and expanded collaboration that we can identify and we anticipate that we will do through Antina. Yeah. And on the question two and three related to the number of subs on 5 or a number of substitute 5G-enabled for datausage [ph]? And I have to be a bit cautious in terms of giving you exact numbers. But what I can tell you is that more than half of our subscriber base is actually enable of 5G phone at this point in time and that’s continued -- that’s continuing to grow, obviously. If you talk about traffic, that’s obviously significantly less good at this point, simply because of the fact that 5G indoor penetration is still, I would say, growing. That’s something which is important, because quite a lot of users is triggered from I think. But it’s all healthy trending also. Hopefully, that gives you a bit of color. We come to the end of our call this evening. Thank you so much for your time. And if we didn’t get to your questions, please feel free to reach me at ir@starhub.com.

EarningCall_466

On the call today, we have Meredith Kopit Levien, President and Chief Executive Officer; and Roland Caputo, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that management will make forward-looking statements during the course of this call. These statements are based on our current expectations and assumptions, which may change over time. Our actual results could differ materially due to a number of risks and uncertainties that are described in the company's 2021 10-K and subsequent SEC filings. In addition, our presentation will include non-GAAP financial measures, and we have provided reconciliations to the most comparable GAAP measures in our earnings press release, which is available on our website at investors.nytco.com. And finally, please note that a copy of the prepared remarks from this morning's call will be posted to our investor website shortly after we conclude. Thanks, Harlan, and good morning, everyone. 2022 was the first full year of executing our strategy to become the essential subscription for every serious English-speaking person seeking to understand and engage with the world. We're proud of our results, which reflect the differential value of our expanded product portfolio, the multi-revenue stream nature of our model, strong unit economics and disciplined cost management. I'll start by sharing a few highlights from the year. Consolidated adjusted operating profit was $348 million, well ahead of our guidance and an increase over 2021. At The New York Times Group, we grew adjusted operating profit by 14% and drove more than 100 basis point improvement in margin. Notably, that margin improvement follows a 200 basis point improvement in 2021 and reflects palpable progress on our journey to building a larger and more profitable company. Moreover, these results demonstrate the proven nature of our model to grow profit even in a dynamic and challenging market. They also give us the confidence to announce a new midterm target for capital return, a new share repurchase authorization and our fifth consecutive annual increase to the quarterly dividend payment. We recorded just over 1 million net digital subscriber additions for the year, our second best year ever for net adds behind only our blockbuster 2020. We ended 2022 with 9.6 million total subscribers, including print. We achieved that result despite contending with many of the same pressures impacting others in a digital subscription industry at the moment. With each passing quarter in 2022, we saw increasing proof that there is strong demand for a bundle of our news and lifestyle products. Both the total volume of new bundled subscribers and the share of new subscribers choosing the bundle grew significantly over the course of the year. We reached record highs on both metrics by year-end with more than 30% of new subscribers taking the bundle. That's roughly 6x more than in the prior year. The bundle proved successful in international markets as well where it accounted for over 25% of digital starts by year-end. The higher engagement we see among bundled subscribers has sustained even as we've increased its uptake at roughly 10 to 20 percentage points more than news-only subscribers on a weekly basis. That's been aided by our efforts to help those subscribers discover and enjoy offerings from across our portfolio, such as highlighting games, like Spelling Bee in our news app. And given the strong relationship we've seen between subscriber, engagement and retention, we expect the shift towards the bundle to yield benefits that continue accruing well into the future. We recently passed the 1-year anniversary of our acquisition of The Athletic. We finished the year ahead of our expectations for The Athletic outperforming the adjusted operating profit assumptions we shared at the point of acquisition. We're playing a long game here with ambitions to become a global leader in sports journalism. To that end, our focus continues to be on building engagement for The Athletic as part of The Times bundled, significantly widening its audience funnel by further opening up its hard paywall and increasing overall awareness for The Athletic journalism. We also finished our first full year with the hit game Wordle, which continue to delight tens of millions of players each week and contribute substantially to our ability to engage people and introduce them to other Times' products and games. And on a full year basis, advertising performed relatively well in an increasingly difficult market. New York Times Group advertising revenue grew 3% with strong results in print, offsetting a slight drop in digital revenue. Our early efforts to build a broader ad business on The Athletic are also showing promise. I'll turn now to the results of the quarter. In Q4, we added 240,000 net digital subscribers, roughly on par with the prior year, but as noted, with a much higher share going to the bundle. Digital subscriber revenue in the quarter grew in line with our expectations, driven mostly by the continued transition of early tenured subscribers to higher prices. Including The Athletic, consolidated digital ARPU grew sequentially for the second consecutive quarter. We expect that positive ARPU trend to continue throughout 2023 as more subscribers transition to paying higher prices. Advertising revenues exceeded our expectations in the quarter in both digital and print, demonstrating the enduring value of our first-party data and premium ad products and the appeal of the Times brand to a wide range of marketers even in a challenging macroeconomic environment. Our fourth quarter results also underscore the power and benefit of having diverse sources of revenue even beyond subscriptions and advertising, as we enjoyed a record quarter for affiliate revenue to Wirecutter, driven by a highly successful holiday shopping season. And we signed a multiyear commercial agreement with Google at the end of the year, which stretches across many facets of our business, including content distribution, marketing and product experimentation. We'll begin to see the financial benefit from this deal starting in 2023. I'll turn now to expenses in the fourth quarter. Over the last year, we've talked about being ready to begin leveraging the investments we've been making for years in our journalism and digital product experiences and as a result, slow cost growth. We've done so now for the second quarter in a row. As with the third quarter, this was largely the result of two factors. First, we've become more effective at driving subscription growth through our organic audience engine and digital product work, allowing us to substantially reduce marketing spend. Second, while we continue to invest thoughtfully in areas that widen our moat, including our newsroom, engineering and data teams, we've slowed headcount growth in most other areas across the company. We also reduced headcount in a few areas where we believed we could do so, without affecting our growth strategy. Our strategic clarity and strong execution give us confidence that we can continue to manage costs well going forward. I'll close by looking ahead to 2023 and beyond. We are entering the year with meaningful momentum toward our goal of 15 million subscribers by year-end 2027. While our path to getting there is unlikely to be linear, we have deep conviction in our market opportunity and our ability to create shareholder value. There remains much uncertainty in the current environment, including macroeconomic pressure on advertising, shifting traffic patterns from the tech platform and a more varied news cycle but we've shown that we have a strategy and to manage through short-term challenges and emerge stronger. To that end, in 2023, we'll lean further into two big areas intended to press our advantage. First, we are especially focused on growing audience share and widening our pools of high-quality prospects in news and across our expanded product portfolio and bundles, which we expect will drive subscriber growth over time. Second, we are intently focused on increasing ARPU through continued success at transitioning subscribers from promotions to full price, driving bundle uptake and experimenting with price increases on individual products for tenured subscribers. I've already indicated our progress on the first two, and I'll note that we like what we see so far on our individual product price increase tax. Now let me set this all in context. Last June, we noted that the midterm profit target we shared was influenced by several potential headwinds. Those headwinds have largely materialized as we anticipated. Even still, we beat our adjusted operating profit expectation for 2022, which, as you'll recall, represents the base year for that profit target. Building on that higher base, we are aggressively focused on capturing tailwinds and seizing every opportunity to drive strong performance. Now before I turn it over to Roland, I want to say a few words about my two colleagues on this call. This is the last time you'll hear formally in this setting from Harlan Toplitzky who has served ably as Head of Investor Relations for The Times for the last 6 years. I'm grateful to Harlan for his tireless work and commitment to our mission and business, and I wish him well in his next professional adventure as he and his family settle into a new life on the West Coast. And I want to acknowledge the announcement we made just before the year turned, that my friend, and long-time Times colleague, Roland, will retire midyear. We'll have plenty of time to send Roland off properly. In the meantime, we're working closely together to position us well for the arrival of our next CFO, a search for whom is well underway. Thank you, Meredith, and good morning. As Meredith said, we're very pleased with the fourth quarter results we are reporting today. We're reporting $348 million in adjusted operating profit for the year, an increase of $13 million versus last year. This means annual growth of The New York Times Group more than offset the losses at The Athletic. Turning to the quarter. Adjusted diluted earnings per share was $0.59, $0.16 better than the prior year. It's worth noting that we've modified the definition of adjusted diluted EPS to exclude the impact of amortization of acquired intangible assets to improve the comparability of earnings across periods. This adjustment was $0.04 per share in the quarter and $0.16 for the full year. We reported adjusted operating profit of $142 million in the quarter, higher than the same period in 2021 by over $32 million. Adjusted operating profit at The New York Times Group was approximately $149 million, an increase of $40 million compared to the prior year while The Athletic had adjusted operating losses of approximately $7 million. In the fourth quarter, the company added 240,000 net new digital-only subscribers and 240,000 net new digital-only subscriptions, with, as Meredith noted, continued strong growth in adoption of our bundled products. The number of digital-only bundle and multiproduct subscribers grew by approximately 380,000 in the quarter, driven mainly by increases to the number of new bundled subscribers, augmented by existing subscribers who upgraded to the bundle. Moving to revenues. As a reminder, the company has adopted a change to its fiscal calendar and as a result, our 2022 fourth quarter and fiscal year included an extra 6 days as compared with 2021. The earnings release published this morning reports revenues on both a GAAP and estimated 13-week basis. A reconciliation of revenues can be found on Page 21 of the earnings release. My comments on revenues today will exclude the estimated impact of the additional 6 days to provide like-for-like comparisons. However, estimating the cost impact of the extra 6 days for cost is more difficult than subjective. Total subscription revenues increased approximately 11.5% in the quarter, with digital-only subscription revenue growing nearly 23% to approximately $252 million. Digital-only subscription revenue grew primarily as a result of the large number of subscribers whose introductory promotional subscriptions graduate to higher prices, the new subscriptions we've added in the past year and the inclusion of subscription revenue from Athletic standalone subscriptions. Moving to digital-only subscriber ARPU, which includes all of our digital products. For the quarter, digital-only subscriber ARPU decreased 7% compared to the prior year due to dilution from our early 2022 acquisition of The Athletic. On a sequential basis, digital-only subscriber ARPU increased nearly 70 basis points compared to the prior quarter. Print subscription revenues declined approximately 4% as the benefit from the first quarter home delivery price increase did not fully offset lower volumes in both home delivery and single copy. Again, excluding the estimated impact of the 6 days, total advertising revenues decreased almost 2.5% in the quarter. Digital advertising declined approximately 4% as higher direct sold advertising at The New York Times Group and the addition of advertising revenue from The Athletic was more than offset by lower creative services revenue. Meanwhile, print advertising revenue was higher by more than 0.5% compared with 2021, primarily driven by growth in the luxury category. On a GAAP basis, which includes the impact of the additional 6 days, both digital and print advertising revenues beat the fourth quarter guidance we issued in the third quarter. Digital advertising exceeded guidance as a result of better-than-expected performance in programmatic advertising and also in direct sold advertising from the advocacy and entertainment categories. Print also exceeded our expectations largely from the luxury and entertainment categories. Other revenues increased approximately 9.5% compared with the prior year to approximately $72 million primarily as a result of higher Wirecutter affiliate revenue, higher live event revenue and higher licensing revenue despite the expiration of the Facebook licensing agreement. All of this was partially offset by lower television revenues. Other revenue outperformed guidance due to better-than-expected results from Wirecutter affiliate revenues, which grew by more than 20% in the quarter. Inclusive of the extra 6 days, adjusted operating costs were higher in the quarter by approximately 8.5% as compared with 2021, primarily due to the addition of costs associated with The Athletic while costs at The New York Times Group were approximately 1% higher. These results were consistent with guidance on our plan to slow cost growth in the back half of the year. I'll now discuss the cost drivers for The New York Times Group. Cost of revenue increased approximately 11% as a result of the impact from the additional 6 days in the quarter, growth in the number of employees who work in the newsroom and higher print raw material costs. Sales and marketing costs decreased approximately 45%, largely due to lower media expenses. Media expenses were $22 million, approximately 2/3 below last year, which was a period of elevated marketing spend. Product development costs increased approximately 22% as a result of growth in the number of digital product development employees in connection with expanding and improving our digital product portfolio. And general and administrative costs were higher by approximately 11% due to an increase in the number of employees needed to support the growth in our business over the last several years, higher enterprise technology costs and onetime building maintenance costs, partially offset by a lower incentive compensation accrual as compared with last year. We had two special items in the quarter: A $22.1 million charge in connection with the company's withdrawal from a multiemployer pension plan and a roughly $4 million impairment of an intangible asset. Our effective tax rate for the fourth quarter was approximately 25% versus an expected marginal rate of 27%. Our qualified pension plans ended the year 106% funded with an approximate $70 million surplus. This is largely consistent with the 105% funded status we reported at year-end 2021, a strong result in light of the general market performance in 2022. Moving to the balance sheet. Our cash and marketable securities balance ended the quarter at approximately $486 million, an increase of approximately $17 million compared with the third quarter of 2022. The company remains debt-free with a $350 million revolving line of credit available It's worth noting that our 2022 cash generation was adversely affected by the change in the tax deductibility of research and development expenditures. We estimate that this resulted in approximately $60 million in lower cash flows this past year. We expect to recapture the value of these deductions over the next 5 years. Share repurchases during the fourth quarter totaled approximately $25 million, and the company continued to purchase shares subsequent to the end of the quarter. As Meredith noted, given the continued strength of our balance sheet and the confidence we have in the cash-generative nature of our business model, we're updating the midterm capital return target of 25% to 50% of free cash flow announced at our June Investor Day. We now aim to return at least 50% of free cash flow to our shareholders, which will allow us to return more capital to shareholders while maintaining the strategic flexibility to continue to invest thoughtfully in the business. And in light of this updated capital return target, the Board of Directors has approved both a $0.02 increase to our quarterly dividend to $0.11 per share and $250 million share repurchase authorization, which is in addition to the nearly $40 million remaining under our existing authorization. Let me conclude with our outlook for the first quarter of 2023 for the consolidated New York Times Company. This represents a change in practice in the last 3 quarterly calls in which I provided guidance to The New York Times Group only. We are making this change now to correspond with our lapping of the acquisition of The Athletic in the first quarter of 2022. As a reminder, the company acquired The Athletic on February 1, 2022, and as a result, The Athletic's first quarter 2022 result reflects approximately 2 months of the quarter. Total subscription revenues are expected to increase 6% to 9% compared with the first quarter of 2022, with digital-only subscription revenue expected to increase approximately 13% to 16%. Both overall and digital advertising revenues are expected to decrease in the low single digits compared with the first quarter of 2022, mainly due to macroeconomic conditions and the comparison to a strong first quarter in 2022. Other revenues are expected to increase in the mid-single digits. Both operating costs and adjusted operating costs are expected to increase by approximately 6% to 8% compared with the first quarter of 2022. We expect expense growth to slow in the second half of the year compared with this first quarter guidance. Meredith, just on the update to the capital return program. Can you maybe discuss a bit, the background to revisit this, less than a year later, you haven't updated your midterm operating targets. Just wanted to better understand what you're seeing in the business that gives you the confidence to kind of increase the allocations to buyback and dividend? And then Roland, you mentioned just now cost -- or cost growth dropping sort of in the back half of the year. I'm not sure if you'd be willing to kind of say a few overall would expect to grow margin in 2023? Sure. I think I can give a short answer, which is just the update on capital return reflects real confidence in our strategy. We had a very strong year -- strong first year of execution. We like what we're seeing, and we think the model itself is a strong one and a durable one. But Roland, you may add more detail to that. Well, I mean, I just want to say we're really pleased to increase the return to shareholders at this time. And we believe that doubling that minimum percentage of free cash flow that we aim to return illustrates the real confidence in the business and the desire for us to return capital to shareholders. And I guess the last thing I'd say is both the dividend increase and the new share purchase authorization at the levels we announced reflect the company's balanced approach to returning capital. David, your second question, I think, was a cost -- related to cost but got to margin expansion, I believe. And what I'd like to just say is we aim to modestly increase our margins this year in 2023. Two quick things. Meredith, The Athletic did $5.3 million of advertising according to this table in the fourth quarter. I realize you had extra days. It's a seasonally strong quarter. But that's evolving towards a $20 million annual run rate. You have to be somewhat pleased with that. Is that a fair statement? I'll just say, ads are off to a promising start. We're optimistic about The Athletic as a real driver of advertising. And I could go on and on, but I'd basically be giving -- affirming that we're excited about ads on The Athletic, and we like what we see so far. Is there any -- can you put any kind of contours around what type of advertising or -- I mean, I'm on The Athletic all the time, but what type of advertisers you're attracting? That's a great question. I'd say there are kind of two buckets. One, The Times has a pretty wide base of advertisers, but we get particular campaigns from those advertisers. And one of the things we're really pleased to see in the early days with The Athletic, and I think we launched ads in September, Roland and Harlan are nodding. We got -- we had some of the same advertisers to The Times but giving us different campaigns, targeting different people. So that's one. And then two, there's just a whole category of advertisers who spend a lot of money around sports and who The Times doesn't necessarily get, and we think there's real promise there as well. And as you know, we sent our former head of ads from The Times over The Athletic to build that business and a couple of folks went with him, and they've built out a team, and I would just say it all feels very promising. I'll give you one more kind of technical detail. The Athletic's -- The Athletic did have a very small ad business when we acquired it. That was largely an audio business. They have a lot of podcasts, which are great. You should listen to them. And so, what we're adding here is a premium display business, like the business we have on The Times with great ad canvases, and you can imagine all the things we've done with The Times including building a rich trove of first-party data and building partnerships with marketers that want to do something kind of more meaningful than just run display. You can imagine, we're good at that at the Times, and we're kind of bringing all that to The Athletic. Great. And then, Roland, just one sort of contextual question. In terms of this bundled multiproduct subscriber number of 2.5 million, is there a way to kind of give some color as to how much of that is print? How much of that comes from The Athletic? I mean how does that number break down in terms of what people are going at? Yes. So first of all, I think last quarter, we changed the definition of that to exclude print. So that is exclusive -- that 2.5 million is exclusively a digital number. So that's the first thing to level set. You've also got two other categories of subs that we disclosed, and you'll see how many folks have news in their subscription, how many folks have Athletic in their subscription. And you can track those increases as well. So a bundle will count there as well as a standalone. So the majority of the folks in that have at least a news entitlement and obviously, they have something else. So that's by far the biggest chunk. And I would just add to that, the fastest growing piece of that is the bundle. Okay. So you used to call it total multiproduct subscribers. That included print. You've wiped that out. You've cleaned that up. Meredith, you touched on it in your prepared remarks, but I wanted to ask you to talk in more detail what you're seeing in how your subscribers or trial subscribers behaving in this -- over the past several quarters that were going through inflation, recessional, whatever we want to call it, macro headwinds and stuff like that. Are you finding any kinds of behavior that are surprising to you and causing you to adjust your strategies, retention practices and acquisition strategies? So would appreciate some color on that. Sure. And great question. Broadly, my answer is we're not seeing much on the subscriber engagement or on the subscriber front that surprised us. Subscriber engagement, which was a huge area of focus in 2022, I think has gone well. We really like what we see. And I'd say part of why it's gone so well is, as we put a lot of energy and resources into deliberate intervention to get people if they were new subscribers to experience more, and if they were bundled subscribers or potential bundled subscribers to do other things with us. We are building our understanding of what really drives that additional engagement if you buy the bundle versus news, I alluded to that in my prepared remarks. And it's -- if you engage with a second product, so if you're a new subscriber and you've also engaged with The Athletic or you also engage with cooking or games, that is a retentive behavior. So we're very focused on driving that, and I would say, put a lot of energy into executing and that has gone well. I'll add because I think you're poking at it. We said a year ago at this time, maybe even a little further back that it was going to be really important to keep churn to a manageable level. And I think we've done that. It will be an ongoing focus, given the size of the base now. It's quite important to the net add story. But so far, so good, and we -- the bundle strategy plays a role in that. But just broadly, I think we have been able to hold churn to a manageable level. Meredith, you mentioned expectations for a sequential positive digital subscriber ARPU trend to continue throughout '23. Does that include some benefit from these experiments that you cited around individual stand-alone products? And any more color on what you're planning to implement there from a pricing change perspective would be really helpful? And then secondly, just any color on the drivers of the ad trends into 1Q. I think down low single digit seems to be sequentially better than the core trends in 4Q, excluding the extra days. Has the macro pressures that you kind of cited as picking up stayed the same or updated as we headed into the last few months, that would be great? So I think I can remember all that. So on ARPU, there are a few things at play here. One is we continue to be successful at transitioning subscribers from promotions to interim and full prices. That's going well. And that's obviously a huge part of the model and the story here. And so, that's a big driver. That's one. Two, I'll just remind you that the bundle itself, at every price point, even on a promotion, is a little more expensive than any individual product on a promotion. And then, of course, over time, the assumption is we're going to transition bundle subscribers to higher prices as well. And that sort of the pricing power of the bundle versus individual products carries through the transition to full price. So one, transition full price continuing to go well. Two, more bundled uptake has positive effect on ARPU. And then three, to your question, I think you're asking more sharply. Yes, we have been in the market since the very end of last year testing price increases to a portion of the population who are tenured subscribers to individual products, so news and the other stand-alone products. And as I said in the prepared remarks, we like what we see. So far, I'll just remind you, we've got experience here. I think I always forget if this is '20 or '21. I think in 2020, we did a major price increase. First one we had done since pay model launch for tenured news subscribers. And we went about that, and I kind of test first very rigorous way. And it went well. And that's what we're doing here as well. And all of that should play a role in subscriber monetization and ARPU improvement, and that is a real focus for us this year. So I think that's the first question. On ads, look, I think we've got the right strategy in ads. It is a really tough market, it's a complicated market, but the Times benefits from a few things. One, and this goes to Doug's question earlier, within -- better with The Athletic but even before The Athletic, we play in a wide range of categories, and I think that helps us. Different categories fare differently in market cycles. For example, luxury was strong in the fourth quarter and other categories weren't. So in general, the wits of our sort of marketer interest for the Times helps us. And then I'm just -- I'm going to keep saying that the basic thing the Times offers, which is a really premium environment with a very strong and growing powerful body first-party data that can help marketers target in privacy-forward ways is really benefiting us. So I think the strategy and the model are just really enduring in advertising. Quick question on media expenses. I get that they were elevated in 2021 with some elevated marketing spend, but it also seems like they dropped below the 2020, 2019 run rate. Should we expect that going forward into '23? So let me talk a little bit about that. Reducing that marketing spend over time has always been a part of our plan. We've communicated that to the market for quite some time. And as we continue to improve our digital products through the investments we're making in our journalism and in our product development, that's enabling the reduction, has enabled the reduction in that marketing spend. Going forward, I think you can think about it in this vicinity, that there may be a quarter where we want to spend some brands. So that's always on the table. We did not do that in Q4. But other than that, you can see this, I think, a pretty typical run rate for the near future. This concludes our question-and-answer session. I would like to turn the conference back over to Harlan Toplitzky for any closing remarks.

EarningCall_467

Greetings, and welcome to Schneider's Incorporated Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Thank you, operator, and good morning, everyone. Joining me on the call today are Mark Rourke, President and Chief Executive Officer; Steve Bruffett, Executive Vice President and Chief Financial Officer; and Jim Filter, Executive Vice President and Group President of Transportation and Logistics. Earlier today, the company issued an earnings press release. This release and an investor presentation are available on the Investor Relations section of our website at schneider.com. Our call will include remarks about future expectations, forecasts, plans and prospects for Schneider. These constitute forward-looking statements for the purposes of the Safe Harbor provisions under applicable federal securities laws. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from current expectations. The company urges investors to review the risks and uncertainties discussed in our SEC filings, including, but not limited to, our most recent annual report on Form 10-K and those risks identified in today's earnings release. All forward-looking statements are made as of the date of this call, and Schneider disclaims any duty to update such statements, except as required by law. In addition, pursuant to Regulation G, a reconciliation of any non-GAAP financial measures referenced during today's call can be found in our earnings release and investor presentation, which includes reconciliations to the most directly comparable GAAP measures. I'll provide a financial recap for our fourth quarter and full year results, and then Mark will provide his insights on various aspects of our operations as well as on market conditions. I'll then offer some additional context for our 2023 guidance before we open up the call for your questions. As Steve Bindas indicated, Jim Filter is with us today on the call, and he will be joining our quarterly earnings calls on an ongoing basis. So we look forward to his participation and perspectives. Also, we have refreshed our Investor Relations presentation, and it's available for your reference on our website as we'll mention some of the slides during our comments today. Regarding our quarterly results, the $148 million of adjusted earnings was the second most profitable fourth quarter in our history, behind only the $177 million we earned in the fourth quarter of 2021. Adjusted EPS for the fourth quarter was $0.64 compared to the record high of $0.76 in 4Q, '21. The 2022 fourth quarter included an adjustment for our full year tax rate, mostly related to state income taxes and the associated apportionment that has been slightly modified by the inclusion of MLS in our mileage. The lower effective tax rate bolstered EPS by $0.03 as compared to the 25% rate, we've been using as an estimate for the first three quarters of the year. While fourth quarter adjusted earnings were 16% below those of 2021, full year earnings of $617 million or 16% above 2021. In addition to the favorable financial results of 2022, the path traveled is worth noting. 2022 as a year in which we advanced our strategic objectives of growing dedicated, intermodal and logistics at, a faster rate than the other components of our portfolio. Dedicated revenues within the Truckload segment grew 45% over 2021, a result of organic growth in the MLS acquisition. For the year, dedicated revenues were 53% of Truckload segment revenues as compared to 42% in 2021. Intermodal and Logistics both posted record revenues and earnings in 2022 and together, they delivered about half of segment earnings. Regarding cash flows, we generated $856 million of cash from operations, which was an all-time high and compares to $566 million in 2021. Net capital expenditures finished 2022 at $462 million, just below our most recent guidance of $475 million. During 2022, we reduced our debt by over $60 million and our total debt currently stands at $205 million. Also, we paid $56 million in dividends during 2022, which was 12% above 2021 as we steadily increase our returns to shareholders. I want to thank our valued and diversified customer community and our 17,000 associates across North America, especially our professional driver community for their contributions and tireless efforts in support of another record performance year for the company in 2022. We set records in revenue, excluding fuel surcharge of $5.7 billion, delivered record adjusted earnings of $617 million, achieved record free cash flow of $395 million and posted record adjusted EBITDA of $967 million. In my comments, I'll provide additional commentary on our fourth quarter results by segment and what that may signal for the New Year here in 2023. Specifically, I will highlight the status of our three strategic growth drivers of intermodal dedicated and brokerage, including the emerging influence of Power Only. As expected, the fourth quarter was atypical what is normally experienced during the peak holiday, shipping season, especially in the regular route network portions of our business, in both truckload and intermodal. Domestic intermodal container volume moderated as import activity waned and apart from specific e-commerce driven channels, high-intensity capacity coverage, volume and service premium project work in truckload was limited. Notably, in the month of December, we successfully completed the conversion to our new Western intermodal rail partner with the Union Pacific. So let me start there. The planning and execution work of the conversion teams of both Schneider and the Union Pacific exceeded expectations as we collaboratively focused on ensuring a positive customer experience through the conversion. I also want to thank and recognize our experienced professional dray driver associates who made it happen at the rail terminals and on the street. In the end, we did not have as much cost impact as expected as we move from running two networks in the West to one. A good portion of the setup work of positioning and stacking containers and chassis for the conversion was completed in the third quarter. With less overall seasonal volumes and with rail congestion improving, our intermodal operations enjoyed higher dray productivity levels, less use of third-party dray resources as well as running less empty repositioning miles than we had anticipated. In the quarter, intermodal year-over-year revenue per order improved 7% with order volume contraction of 6%. This combined with solid execution and transitioning our Western rail partner resulted in only a 50 basis point year-over-year contraction in operating ratio to 83.3%, a 740 basis point improvement sequentially from the third quarter. As we look at 2023, we are now uniquely positioned with our intermodal model of company-owned containers and chassis and company driver dray partnering with the Union Pacific in the West and the CSX in the East. With more origin destination pairs and more frequent daily to purchase schedules in the West and CSX highly reliable execution model in the East, we are very well situated to take advantage of opportunities for growth including over the road conversion. That being said, in the near term, we expect intermodal volumes in the first quarter to be pressured until Asia import activities ramp back up. We are in the early stages of the 2023 contract renewal process, and we are monitoring several customer decision threats. For instance, how are they shaping their import location strategies between the Eastern and Western ports. For those who push more volume through the Eastern ports in the last 18 months, considering going back to the West, as fluidity has improved, what is the differential between intermodal pricing and over the road alternatives as well as what are customer strategies and take advantage of the favorable emission reduction opportunities that intermodal uniquely offers. For the latter, we intend to offer additional value throughout the year as we ramp up our sizable battery electric dray presence in Southern California for customers looking for the greenest solutions available. We are intently focused on intermodal asset productivity to take advantage of the investments our rail partners have made in service recovery and the investments we've made in container count growth in '21 and '22. As such, we do not anticipate adding to our container count this year. Let's move on to the Truckload segment. Our Dedicated tractors count grew 33% year-over-year through a combination of organic and acquisitive growth. Truck count was down slightly from the third quarter as new business start-ups were limited and contractual flexing was were less prominent in certain customer applications as we match resources with individual customer demand levels. Dedicated revenue per truck per week improved 2% sequentially as annual pricing adjustments are being implemented. We expect positive price appreciation in dedicated in 2023 as first half renewals reflect the inflationary pressure of equipment replacement costs, parts, maintenance and driver wages. We finished the year with dedicated tractors making up 57% of the truckload fleet. Our strategy is to continue to grow dedicated truck counts due to the long-term nature of the contractual relationship and the deeper integration level with the customer which leads to a higher percentage rate of contract renewals. Furthermore, and importantly, professional drivers increasingly prefer the predictable nature of the work and proximity to the customer relationship that dedicated provides. As we enter the New Year, our dedicated sales team has closed on several hundred units of new dedicated business awards and we'll begin implementation later in the first quarter and ramp throughout the year. Our network tractors finished the year at 43% of truckload fleet, essentially flat sequentially from the third quarter. Revenue per truck per week was down low double-digit percentages year-over-year, with two-thirds of that being price comparison driven primarily to the lack of premium project work and lower seasonal spot rates. The remaining third was productivity driven due to the moderating demand condition and the disruptive nature of the winter weather front that we experienced across a large swath of the nation during the week leading up to Christmas. Our 2023 plan in truckload will be focused on organic growth in dedicated. However, we are also actively pursuing and screening acquisitive opportunities in specialty and dedicated truck and are positioned well to move on the right opportunities this year. Finally, our logistics operating ratio dipped only 36 basis points sequentially from the third quarter from this year as third-party support for port dray transloading and promotional support work in brokerage moderated in the fourth quarter. Despite the limited seasonal project and promotional opportunities, order volumes in brokerage proved highly resilient, down just 5% over last year's fourth quarter. We would attribute the resiliency in order volumes to a few things. First, it is our direct demand creation capability in brokerage, a function that is complementary to our truckload offering but not depend upon it. Secondly, our contract percentage in brokerage is 60%, and our investments in our digital freight power connections for shippers and carriers continues to increase our market nimbleness in both the capture of demand and capacity while lowering our acquisition costs on both the buy and sell side of the equation. Thirdly, we expect the year improving our collaboration technology and processes between our Power Only third-party carrier offering and our asset-based network truckload service. We have improved on the customer lens, our revenue management, order acquisition and trailer management execution model. It fits our strategic imperative to offer a broader submitted contract solution to our customers to address their regular route coverage needs. As a result, over time, we see our network business evolving to a more trailer-centric versus truck-centric service offering. And moving now to our forward-looking comments, you can find the summary of our 2023 guidance on Slide 26 of our investor presentation. As it has been well documented, 2023 has started off in a softer economic and freight environment than we experienced a year ago. At the same time, we expect that the broader macro forces of supply chains and inventories will further rationalize in the early months of the year as our customers have been diligently working to address these issues for several quarters already. As such, we expect steady improvement in freight conditions as we progress through the year. Importantly, we expect our earnings to demonstrate resiliency given the progress we have made over the past several years with the composition and performance of our multimodal platform. Speaking of the platform, I wanted to touch on the long-term margin targets - target ranges that we have for our three segments, given that this is the time of year when we review these targets and provide any updates. For the Truckload segment, that range remains at 12% to 16% and for the Intermodal segment that range continues at 10% to 14%. For the Logistics segment, we are raising the long-term target margin ranges by 100 basis points, and that will be to 5% to 7%. This range has been at 4% to 6% for the past several years but with the momentum of our brokerage business, coupled with our rapidly growing Power Only, offering it makes sense to raise the parameters for this rapidly growing piece of our business. You can find these target margin ranges on Slides 23 through 25 of the IR deck. Moving now to equipment gains for 2023, we currently expect these to be in the vicinity of $27 million that we realized in 2022. Also, our 2022 adjusted EPS of $2.64 included $0.06 of net equity gains, while our 2023 guidance currently assumes none. As we incur equity gains or losses, we'll incorporate them into our guidance as we progress through the year. Regarding our effective tax rate, we expect it to be approximately 24.5% for the full year of 2023. And that brings us to our 2023 guidance range for adjusted EPS of $2.15 to $2.35. Our guidance for net CapEx is a range of $525 million to $575 million and our capital plan includes meaningful investments in trailing equipment in support of growth in our Dedicated, Power Only and Intermodal offerings. The plan also enhances our tractor age of fleet that has trailed our targets for the past couple of years due to OEM production constraints. Continuing with the theme of cash flows, we've announced a share repurchase authorization of $150 million. Then the primary purpose of this repurchase program is to offset the dilutive effect of equity grants to employees over time. And the program will serve as a complementary component of our overall capital allocation framework. And finally, we recently announced an increase in our quarterly dividend to $0.09 per quarter, a 12.5% increase from the $0.08 per quarter in 2022. That's also an 80% increase from our IPO five years ago. So capital allocation, return on capital and shareholder returns remain at the forefront of our financial priorities in the year ahead. Great, thank you. Good morning everyone. So with the new logistics margin targets and the commentary kind of that you're focusing on more of a trailer-centric rather than a tractor centric network. It sounds like you guys are going all in on Power Only, which is understandable given the growth in that business in the last couple of years? So a few questions there, one is, does it - in the downturn, is it not clear that, that is a structural growth area of the industry and not something that was driven by kind of pandemic supply chain tightness? Second, what is the competitive environment there compared to the rest of brokerage? And maybe third, what's the margin profile for that business like compared to the rest of logistics? Great, thank you, Ravi. This is Mark. We've been at the Power Only game long enough to really understand what we believe is a very resilient model. It was - in my opening comments of despite the fourth quarter of 2022 being much different than the fourth quarter of 2021 from a seasonality standpoint. Our brokerage volumes inclusive of Power Only, only contracted 5%. So I think that's a good indication that the durability of that business model. Increasingly, we see it as a very instrumental part of our overall network offering alongside our excellent owner operator and a company-driver model within our truckload group. And so from a customer perspective, that is a very seamless decision point for the customer. What we're ultimately trying to do is offer a broader range of contractual commitments and then use our processes and technology that we continue to invest in to integrate Power Only into that. So, we would only expect us to be more effective over time for those investments. And certainly, we've now seen the benefit of Power Only in conjunction with our network offerings and on the asset side, both in upmarket and now in a more moderating market and our enthusiasm and our commitment there remains very, very strong. Great. And maybe as a follow-up kind of on the intermodal business, you guys had a pretty good fourth quarter and kind of the guide shaping up pretty - nicely as well. How do we think about what the margins of that business looks like in '23, especially given some of the competitive shifts in the marketplace, kind of do you feel like the business that's move through UP kind of - is it now stable or do you feel like there's going to be a little bit of back and forth there on maybe the price initiative shifts? Yes, Ravi, good question. As you think about 2022 in one form or another, we were in a state of transition throughout the year, whether it be commercially or whether that would be operationally. And so, we're quite pleased on how well that transition went from a customer view and our ability to execute, and that's a great credit to the Union Pacific. And certainly, the Schneider team who was heavily invested throughout the year to get to that type of result. And so, if you kind of put the whole year in context, we came within our 10% to 14% range, which we reiterated earlier on our call this morning at about 13%. And so as we move forward, we're pleased that we have some of the distraction, if you will, and we're operating in much clear air all across the board as we head into 2023. Obviously, we want to see some import activity return. We want to see some of the other value that we think the customers are going to get particularly around emissions and what we believe is a very rich pool of over the road conversion. And so, those are the things that we'll be focused on in 2023, and we feel that we'll be well positioned within our margin range that we stated going forward. That's a new one. It's Ken Hoexter from BofA. Just following up on Intermodal, can maybe can we talk a little bit conceptually about revenue per load, given the softer market and the transition out West. You're now competing with [Harvey Knight] on that same network. Does that -- do we see more pricing competition given they're more moving on UP and the new environment or as fuel comes off, maybe you just talk about the pricing environment and how that's going to impact, I guess ultimately, that margin question as well? Yes, yes, Ken, this is Jim Filter. Really, right now, when I think about the competition for our intermodal services, by far the largest company is from over the road and that's the focus to be able to continue to grow that service offering. We've seen over the last few years that Intermodal has lost share to over the road and opportunity to be able to grow there is by providing overall value. And so some of that is based on service ability to provide more value there that's competitive with truck and we've certainly seen an improvement in the rail partners that we're working with, especially over the last couple months here on the Western network. So, we think we have a great opportunity to be able to sustain that value. Can you talk in terms of metrics to perhaps, I don't know, maybe box turns or something that helps us understand the efficiency shift with the new network? Yes, so yes, on box turns, obviously, we have a huge opportunity to improve box turns. There's an opportunity we've been below this - our expected level of box turns over the last couple of years, not from a matter of necessarily performance, but just overall demand. So there's an opportunity to get back up to the 1.7 to 1.8 turns that we're operating at previously. And both of the rail networks are operating efficiently as well as the way that they're operating with our drivers, our ability to cycle in and over the ramps has improved dramatically over the last 18 months. Thank you, good morning. Mark you mentioned, how the Dedicated pricing environment was holding in pretty well. I think you even said you plan to be up this year based on early bid season. What's customers' willingness to kind of fully absorb some of these elevated inflationary costs? And given your service and your growth in that business, are you able to get kind of inflation plus pricing or are you just kind of trying to hold on to cover the cost inflation in Dedicated, normally? One of the benefits of - good question, Jon, one of the benefits of Dedicated is we have less variability in that business, both from a demand standpoint and our overall cost structure, much more steady than sometimes we experience in the irregular route network side, hi, because that's where their drivers want to participate in and we just have a better predictability there. That being said, it's not immune to the inflationary pressures that have taking place in the industry from wages, maintenance costs, parts, equipment replacement, et cetera. And so, we have mechanisms in working with our customers there. We're deeply integrated. We provide great value, and we have confidence, and we have seen confidence in our renewals in the second half of the year to recognize those inflationary pressures, and we're confident that we'll be able to - based upon how we're structured there to achieve that as we enter the new year here. And I think that's probably more of a first half renewals as we had our second half renewals, those were taken into account fairly effectively. So that's why we still think, overall, we'll still have some price appreciation in Dedicated for full year 2023. Okay great. And then just a follow-up on the truck side so, you have to go back a long way to see a sequential decrease in the Dedicated truck count. That's probably - I'm guessing just some pruning in equipment. I don't know if there is some seasonality involved too. But network moved up sequentially. Again, small numbers, but kind of against the run of place, so to speak. As we think about the fleet growth this year, I mean, I guess there's two parts to this? One, is it primarily still in the Dedicated segment as you continue to gain share there? And two, as the OEMs kind of eased a bit, and what's the total kind of overall growth to your fleet that you're expecting in '23? Yes Jon, strategically, our growth focus on the truck side of the business is in Dedicated. And as mentioned earlier, we have sold several - hundred units of new business that we'll start to implement here in the late first quarter and through the second quarter. And so that will be our growth focus. And as we've mentioned, we want to make sure that the best we can is we want to stay stable on the network side and provide additional coverage and value by integrating our Power Only offering and with our network asset side. And so our growth on the network side whilst report in logistics will be more focused around Power Only than truck count on the asset side in our network business. Steve, any color on the margins for the segments in '23? I know we got the long-term margin targets. I'm just curious, '23 looks any differently for any of the businesses? Yes, I guess providing those ranges is our attempt to provide some insight on how we view the business over the longer term and it can vary year-by-year where we fall within those ranges. But - it's part of the benefit of having the complementary portfolio of services that we do have in any given year, one might be toward the upper end, one might be in the middle and the other might be lower or wherever it might end up. But it all contributes to the enterprise profitability over the course of time. So on a full year basis, it's hard to nail down a specific number, and it's probably not a path that will go down on a frequent basis, but I feel very comfortable with the range of margins that we have outlined as we look at 2023 here early in the year. Okay. Maybe just to follow up, like the one intermodal [91] in Q3, 83 in Q4 so that's the one that's moving around the most, so maybe the one we need the most help with. Any thoughts on beginning of the year where we should be thinking about for intermodal margins, do you think those improved or not? Any color? Yes, sure Scott. As we look at 2022, we look at that on a full year basis. Obviously, we had a lot of work that we were doing in the transition and working with our rail partners to effectively execute that. I'd have you look and maybe the second half of the year by putting the third quarter and the fourth quarter together, and that too, would be on an average almost that 13%, right? So there were different puts and takes based upon when we were staging and preparing for the transition. And obviously, coming down through the stretch with a little less volume, we were a bit more efficient in the fourth quarter than we anticipated. But overall, I think that full year look and that full year 13% or 10% to 14% range is, I think, is very appropriate to assess 2022 in. And as we kind of enter here in 2023, we feel same relative to that positioning. And I'd add to that Scott, that we look through a lens of growing earnings dollars and providing a steady growth story to go with our organization here. And so, there's a balance between volume and margin that we're conscious of and that can - as we adjust those dials, it could vary a bit by segment and by service offering is what we've got going on in there. And so, I anticipate some of that to continue. But the point I'm trying to make is we emphasize growth in earnings dollars and aren't necessarily trying to always be at the high end of the margin range or whatever, depending on what type of profitable opportunities we see ahead of us. I guess this is probably for you, Mark. You weren't able to stay above the $400 million mark in logistics during 4Q, which you guys mentioned the clear rate and volume headwinds, where does that segment go from here? And I'm not really talking about 2023, but more maybe 2030. You talked about intermodal doubling in size by 2030. Do you see a similar setup for the Logistics segment? And if you do, do you think that becomes more a function of an increased footprint in the digital side or is it really more on the Power Only side? Yes, Bert. As it relates to the logistics side of the business, we really place Logistics, Intermodal and Dedicated as our strategic growth drivers. On the logistics side, less capital intensive and so, getting a bit more capital intensive with the Power Only offering, but our strategic approach to that is why we have a complementary commercial collaboration with our asset side of the business. And I think that's one of the real benefits of a brokerage business tied to assets is your ability to collaborate and Power Only is a perfect example of that between assets and third-parties. But we also have heavily invested in not only the ability to generate our own freight demand within Logistics, so they can chart their own course and be accountable for their own success while collaborating, but not dependent upon our assets. And the digital investments we've made in freight power for shipper and freight power for carrier in ways that we can scale that business and aggregate capacity and one end aggregate demand on the other, particularly around that long tail, small carrier, small shipper and the digital footprint allows us to do that economically feasible and grow our business without growing our people count at nearly the same rate. And so, we will continue to invest in those elements, and we're seeing great benefit by on the efficiency factor with Power Only coming upon our freight power for carrier and freight power for shipper execution. And so really, we don't see that being limited for growth. It's our ability to go out and add value, and we'll continue to invest to the degree that's necessary to achieve that. And so very bullish, and we think we're more resilient through cycles because of this asset-based brokerage alignment that we have that I think offers advantages over perhaps others with slightly different models. And maybe just to clarify there. Do you think it's more of a margin than a revenue growth story. I know you talked more about the net revenue side there. Clearly, the two go hand-in-hand when you think about operating income. I'm just curious, like based on your answer there, if you think there's just more efficiency to be - had in the market just increased automation or if you think it's a combination of that and expanding the market in which you play? Yes, we think we have opportunity to improve margin with the efficiencies of the technology and being more digital. There's no question. We probably are focused more on earnings dollar growth here than margin because of the more asset-light nature that logistics has. And so, we want to make sure we're growing and growing earnings. And so that is really the focus of the logistics group. And the change in the range that we've made is to recognize if we're going to bring assets to bear in some way, shape or form like a trailer in Power Only. We have to get a good return on that additional investment that we're making on the assets and which is what's behind our range expansion from 4 to 6 to 5 to 7. So yes, we're leaning on top line growth, margin improvement and getting a return on the investments that we're making there. And we've got a really good group and the results of what we've seen in this business really track over the last three years is really - from our view, at least impressive. Got it. And just a quick follow-up you provided your initial look at '23 guidance range of $215 million to $235 million. Can you give us some more detail on how you developed that guidance? And really, the reason I ask is, I'm just curious if you made assumptions that the first quarter is the trough and then ultimately, we see sort of incremental improvement through the year or do you assume that there's a big step-up in the second half it just clearly an uncertain backdrop. I'm just curious how you were able to back into the numbers just for some more detail? Thank you. Ah okay, this is Steve. And I'll take a crack at that one. I think it probably is - we don't necessarily - when we were sitting here a year ago, we felt pretty strongly about a first half, second half narrative of 2022. We felt like the first half of the year would remain quite robust and then soften a bit in the second half and it kind of played out that way in that year as we sit here at this point in the year, I don't know if it's exactly a first half, second half narrative. But I think it's like I articulated in the prepared comments earlier, more of a steady improvement as we go through the year. So I do think fourth - first quarter of 2023 could be the softest point and then we see some traction steadily gaining as we move throughout the year. So that could, by definition, play out to be a stronger second half than the first, but I don't know they will uniquely fit within the months, quite like that. I think we see some improvement before the second half. So Mark, I guess maybe a question for you. I mean I'm looking at the stock it's trading at a couple of turn discount to your larger truckload peers pretty substantial discount to some of your intermodal peers. When you think about capital allocation, you guys announced a $150 million buyback, but it's principally related to sort of offsetting dilution. My understanding is, like there's just some challenges buying back stock more aggressively because of the dual share class structure? So I guess as you got to think about things moving forward, why does the dual share class make sense here? Do you feel like it's doing your B Class shareholders justice? And I guess, is the Board considering some changes? Well, Jack, there's a lot there that I'm probably not at liberty to discuss or talk about. So I don't have any changes to predict or really even bring color to as it relates to that. So what we are focused on as it relates to your opening comments on the discount, I think we're going to continue to focus on this multimodal platform. that has different capital intensities based upon our truck, Intermodal and Logistics business. And keep looking for ways organically to invest in those strategic growth drivers that we keep hitting upon, but also prepare ourselves and be very active and looking for acquisitive opportunities from our capital allocation priorities that can help advance those three strategic growth drivers of Dedicated, Intermodal and Logistics. And so, those are the things that we're focused on. We would like with our share buyback. You know this, it's just from a capital allocation approach there as we'd like to get to a fixed amount of shares so that we can be more predictable what our share count is and not to add to it with incentive grants. And so, we think that $150 million authority over the next three years will allow us to achieve that portion of our capital allocation strategy. But our real primary focus is around the organic investment and potentially where we can find the acquisitive opportunities that help us advance like we did this past year with MLS, a raging success from our view it got from both a Dedicated growth and a Dedicated effectiveness standpoint. And so, we would like to look at those options as well. No, that makes sense. I guess my point is you guys are just doing an outstanding job really across the business. And I just don't know if the stock is getting a lot of credit for it. So I guess maybe for my second question, I would love to kind of get your thoughts on sort of the increasing strategic value that trailer pools are providing. We've touched on it a lot? But as you guys are going through bid season here in 2023, to what degree, having such a large trailer pool and the ability to deploy trailer pools to customers, is that helping you navigate through this bid season, maybe better than folks would have anticipated if you go back a year or so ago, just kind of curious how that's impacting rate negotiations, if at all? Yes Jack, this is Jim. The real opportunity here is also for our customers because with this large trailer pool and being able to integrate both the asset base where we're using a company driver and using third-party being seamless to our customers gives us some flexibility that you don't have if we're just limited to one or the other. And so that's providing additional value for our customers and additional value for our enterprise. And Jack, as we get into the allocation season, obviously, we're looking for where those may complement each other or where we could add and take a broader share and do so in a way that's easy for the customer to say yes to us and obviously easy for us to say yes to that increased share. And so really pleased with the flexibility the integration and the collaboration on those networks that trailing asset allows us to share back and forth and be effective in doing that. I wanted to touch on intermodal again, if I could. Maybe to ask sort of the margin question a little bit differently. Obviously, you're not updating the long-term forecast, but there's a major shift, obviously, changing the carriers, the providers that you're using? So kind of curious, do you feel like there's any uptick that you might get or any increased dynamic aspects of the pricing arrangement that you have with the new railroad out West that could influence how margins play out, particularly in 2023 when obviously, there's going to be pressure on truckload rates? Yes, our deals with all of our railroads are long-term deals. They're market competitive, and there's, some adjustments in the structure that we work with that we just don't get into details about how those necessarily work. But we believe that this is going to put us in a very competitive position when we look at how we're operating, and it doesn't matter if we're talking about competing with truck or what the competitors are on the rail. We bring some differentiation on the UP. The fact that we are bringing the largest company dray fleet using our own chassis. We'll be the only one that has a large chassis fleet using all of our own chassis and our company drivers are able to be more productive. So we feel like we compete well in all directions on this new rail partnership as well as the - just tighter integration between the UP and the CSX having more steel wheels and expect that as we grow this network, we'll be able to expand that and create even more seamless options for our customers. Okay that's helpful. I appreciate that. And then, Mark, maybe a bigger picture question. When you think about sort of the M&A landscape or anything else you want to do? Obviously, you've had some success there. Kind of curious if you think there's going to be incremental opportunities in 2023 as we see a little bit of this transition period going on or is this something that maybe takes a bit of a breather for a time? Just kind of curious what your sense is and where maybe those opportunities could be? Of course, Chris I think we're certainly active and feel that we're positioned at the right one that we can get to where we want it to be, can be done in calendar year 2023. We don't have anything, obviously, to announce at this point. But that's our mindset is continue to look for those opportunities, both proactively and prospectively. So that we can continue to advance those strategic initiatives and the success and the approach that we've taken with our most recent two that we've had in the last, I guess, its 13 months now suggesting gives us confidence that we're on the right path there. And so yes, I would love for that to be something that's steady and periodic. I just don't have anything to announce just yet. Just anything from a vertical standpoint where it might fit in the portfolio where you think you have needs in the portfolio? Yes. Well, Logistics is a growth segment for us. We think we have such robust organic growth opportunities there for the investments that we're making in our digital footprint, the Power Only offering and our own ability. It would have to be something, I think, really special there for perhaps that to be the primary focus. We wouldn't eliminate it, but I think we have to be really special. Intermodal poses a little bit more concentration and a few less options to consider there. So that leaves the most, probably attractive target for us would be in that specialty truck or dedicated truck arena. And that's the one that's probably has our attention the most. And then within that, you can't find yourself at times expanding into new markets that you don't presently serve or don't have a large overlap of customers, which is the additional benefit of that. So I wouldn't rule out logistics put a really remote on Intermodal and much more target-rich environment perhaps in the Dedicated and specialty truck area. Great, good morning and thanks for the color particularly on the Intermodal piece. I wanted to stay on that. Maybe you could talk about the long-term target to double that business by 2030. Maybe you could kind of go into some of the details of how you think that, that doubling would proceed in terms of whether it's taking share or overall growth for the intermodal industry. Kind of what's the progression to get to that target? Thanks. Yes, thank you. So it's really based on both of those factors. First, the largest opportunity is clearly over the road conversion. And we've seen this swing towards more over the road than intermodal over the last couple of years. But I believe as the country has set an objective to remove carbon emissions by 50% by 2030. The fastest way to do that is by converting to intermodal. And expect as we get closer and closer to 2030, that there's, more customers that are going to be feeling the pressure to reduce their Scope 3 emissions. And we're going to be darn available with the capacity to help them do that. And then certainly, we feel really good about our position relative to our other intermodal competitors, whether they're asset-based or non-asset based. So, we don't feel that converting from over the road that we would see a slip back that it's being one-by-one of our competitors. Got it okay very helpful. And then just for my second question, I wanted to ask about the potential for efficiency gains, particularly on the truckload side. I think during COVID, when supply chains got really tight, obviously, we saw some inefficiencies kind of creep into not just for you guys, but for many carriers, whether it was higher deadhead miles, higher unseated tractor counts, to what extent do you think that can kind of reverse in 2023 or to what extent has that already been in the process of reversing? Maybe you could just touch on that, it would be appreciated? Yes, we think asset productivity and people productivity is our largest self-help item as we "return to something more normal." We are seeing improvement the efficiency factor and how quickly boxes are turning. We're not back to pre-pandemic levels yet and intermodal, where Jim mentioned earlier. But we are seeing improvement and less friction in the supply chain, and we need to take advantage of that. While we still expect some allocation constraints with our OEM providers. Those are improving slightly, and we want to get more efficient equipment, higher - excuse me, lower cost per mile, maintenance is associated with getting some catch-up in our age of fleet. But whether it's our tractor, whether it's a trailer, whether it's a container, we believe we have some light at the end of the tunnel here that we would expect to start to see some reversal of some of the erosion we've had because of all the supply chain and the friction issues that we've experienced to include the nice progress our rail partners are making relative to crews and the investments. The UP has done a terrific job on some of the technology advancements that they've made to make us more efficient with our dray fleet in and out of rail terminals. And if we can make them more efficient and make ourselves, we all win in that environment. So our alignments are very closely aligned. And I am really, really pleased and impressed with the commitment that the UP has made, and we're seeing the benefits of that very, very early in our relationship here. So that's we're focusing the entire organization on how do we address some of this inflationary impact and asset productivity as our best remedy. Is there any way to quantify the magnitude of that benefit or maybe if you could give us like a data point or two in terms of what some of those efficiency metrics might have looked like and to what extent they can improve in '23? Yes, there's a host of those there - and certainly we believe - we look for build miles per tractor per day. We look at contribution across those assets per day. We look at net revenue for order differences and in our brokerage business. So, we have a series of metrics that really focus our associate base who can impact those metrics to include our professional driver community and how that benefits the entire enterprise to include themselves. And so, we have great visibility to those, and those are distributed and embedded in everything that we do in our operational approach to the business. Yes good morning. So Mark or Jim, I wanted to ask you about your thoughts on the competitive dynamic in Intermodal. I know you've had a few kind of questions broadly along that line - along those lines. It does seem like the backdrop is weak in the near term, just given the imports being down. I think that the competitors you want to grow, other big players want to grow. So - how do you think that the kind of big intermodals will - names will play it? Do you think that there is a risk of - everybody focuses on volume, you all have flexibility with the rail partners and you kind of push price down? Or do you think there'll be maybe ability to accept weaker volumes for a period and just kind of focus more on preserving price. I mean I guess it's a couple of big players and the competitive behavior does matter? Yes, Tom. Well, we certainly already felt the competitive dynamic here in terms of demand in the fourth quarter with extreme decline and imports into the West Coast. So I believe we're already experiencing that type of situation. And you've seen that when you look at our revenue per order, up 7.5% year-over-year, up sequentially despite the weakening demand. So I don't believe that we're seeing a situation where everybody is going - needing to move every single container, a little bit different than over the road where you have a driver and you need to get, that driver moving. You have the ability to take capacity out of the marketplace and just by stacking containers, and it appears that across the industry, there's been some of that. So I think, Tom, as you look at our 2023 approach here, we don't anticipate at this juncture of adding container count. We've done a good job in '21 and '22 of building our containers, and we're really focused on the asset throughput in conjunction with our rail partners and looking to focus on as the productivity yields and being a really good alternative to over the road. And that's why it's so important that we serve it well and the connection between the UP and the CSX and the efficiency factor, all of that matters because that allows us to put a very truck-like experience, particularly all the investments that they have made to improve fluidity. And so that's what we're focused on, and we won't be adding container count this year. So okay that's helpful. So you think that even as you go through the contract season, I wouldn't expect the rate pressure to show up in 4Q because you're not - you don't have new contracts coming in, right? But even if you look at the bid season and contracts, you think that you'll have a pretty good amount of discipline. Do you think that, that results in maybe intermodal contract rates being down a lot less than truck? And then I guess just one more element to that, and I'll pass it along. What about the - how mindful should we be of storage revenues - assessorial revenues rolling off? Is that a real headwind in Intermodal or is that something that it's not really that big a deal? Thank you. Yes, I don't think storage revenue is that big of a deal because that's not something that you make money on, you'd rather have your assets out there generating additional earnings rather than the cost to stack in store or pulled on to that equipment. So whether it's there or not doesn't necessarily have an impact on earnings. So Tom, as we get through this allocation season here, as I mentioned in my opening comments, we're looking for several customer threads. How are they thinking about the locations of the import decisions that they make between the East and the West, and there has been some shift to the East as there's been concerns about fluidity and as that's now improved and returned, how are they thinking about that this year and going forward. Obviously, the emission reduction piece is a very powerful trend in the favor of intermodal and there's, different customers at different locations along that spectrum where that's important. And then obviously, we have to then see the differential between the value proposition between pricing between over the road and intermodal to include the dynamic of fuel and how that impacts those decisions. So there's a lot that kind of goes into that customer. We certainly tried to show where value can be derived through those combinations. And the beauty that we have is that we are - we don't really care if it's over the road or intermodal. We have options on both of that. So we're agnostic. We're really trying to put the best solution to front of the customer that meets what they're trying to accomplish. So maybe - on the last part, Mark, what's the visibility you have to taking share back from the highway that's obviously a big focal point of the industry, and you've talked about it several times today. But spread savings spreads are probably coming down. You mentioned some of the factors that are going to affect that, but demands probably weaker in the near term? So if you have visibility to that coming back in, is it a little too early with bid season? What's the level of confidence in, I guess, connection you have to sort of plan for that coming back? And how much headway do you think you can make this year as service improves and the transition is done? Brian, well, it is a little bit early, but I would tell you, our customers are enthused about getting back to an intermodal option that they can put into their allocation mix in a more aggressive way. And for all the reasons we just talked about cost commissions, et cetera. And so, we've all been working in a way to give them more confidence that they can do that with a good service product in the end. And I know our rail partners are intently focused on that as well. So we're optimistic as we sit here in, I guess, the first couple of days of February. And - but it's really early in that process. But the dialogue that we've had really throughout last year and we're always in constant dialogue around what customers are trying to accomplish and how all the services we have fit. So - but we'll have a better feel for that as we get out through the April, May time frame. Jim, so maybe... Yes and it does appear that spot rates have really found a floor, and there's some movement around there. But at this point, we do see signs that capacity is leaving the market at these levels. And so the question is, if demand returns in the second quarter that's probably less of a shop and if that occurs in the fourth quarter at the back end of the year, it would be - a recess that would be a larger shock. And so as we're talking to, customers, that's the dynamic that they're thinking about is at what point does demand start to return? What impact does that have? They've gone through some dramatic shifts over the last couple of years. And so while balancing the opportunity to reduce costs today versus exposing their organization to risk later in the year. And so that's the dynamic that they're playing. All right thank you. So just a follow-up on that with the capacity leaving the market, what are you seeing specifically there? I know when we first saw some of the owner operators leaving - I'm sorry, people leaving to go in their own front operators back in I call it like '20, I guess, that was the first sign of things getting really tight, assuming some of them are coming back or maybe they're still coming back. So is that one of the data points that you are viewing in terms of monitoring capacity? What else are you looking at that? And is it a purge or is it just continued kind of grind out of some of the excess that might have been built up over the last cycle? Maybe a little bit more of a Grind, there's a variety of different factors that we're using across our organization to get data points to understand what's going on with capacity. But I would indicate that there is more of a Grind out exiting the marketplace. Yes, we're monitoring things of defaults on leasing of units that looks like through our channel checks that that's back to pre-pandemic levels, which was quite muted coming through the pandemic era, also insurance renewals and the number of units being renewed versus prior. So there's a number of signals. And again, these are the public, I think, the government employment stats may be a dip lagged. And so we're trying to get what's more real time and looking for some of those other signals. And those channel checks, Brian, I think, would suggest that we're seeing an accelerated on that small carrier front on some of those indices. We have reached the end of the question-and-answer session. I would like to turn the call back to Mark Rourke for closing comments. Great, I preach everyone's time and attention and day. Let me just close by referring you if you have an opportunity to go to Page 12 of our updated investor presentation. Our strategy is to be disciplined in our deployment of capital to enhance shareholder returns and grow this enterprise. And to achieve that, we have outlined our key - strategic growth drivers of Dedicated, Intermodal and Logistics. And obviously, we had a chance to talk about that today. While our priority is on organic growth first, we are actively pursuing the right acquisitive opportunities that advance those priorities, and we're continuing in this environment to evaluate our whole enterprise for cost-saving opportunities and maximize our operational efficiencies to expand our margins. And furthermore, we're committed to the design and implementation of this continued digital transformation in our industry, and we want to dramatically improve the speed and the accuracy of information that we share and the visibility that we have with all our stakeholders across our value chain in both transportation and logistics. And finally, we intend to lean in and advance our social and environmental goals and offer our customers sustainability options, tools and services to provide value as they reduce their carbon footprint, and we can be a key and trusted partner in doing that. So again, thank you, everybody today, and we'll talk to you next quarter.

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Ladies and gentlemen, thank you for standing by, and welcome to Prudential’s Quarterly Earnings Conference Call. At this time, all participants have been placed in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, today’s call is being recorded. Good morning, and thank you for joining our call. Representing Prudential on today’s call are Charlie Lowrey, Chairman and CEO; Rob Falzon, Vice Chairman; Andy Sullivan, Head of International Businesses; PGIM [ph], our Global Investment Manager, Caroline Feeney, Head of US Businesses, Ken Tanji, Chief Financial Officer and Rob Axel, Controller and Principal Accounting Officer. We will start with prepared comments by Charlie, Rob, and Ken, and then we will take your questions. Today’s presentation may include forward-looking statements. It is possible that actual results may differ materially from the predictions that we make today. In addition, this presentation may include references to non-GAAP measures. For a reconciliation of such measures to the comparable GAAP measures and the discussion of factors that could cause actual results to differ materially from those in the forward-looking statements, please see the slide titled Forward-Looking Statements and Non-GAAP Measures in the appendix to today’s presentation and the quarterly financial supplement, both of which can be found on our website at investor.prudential.com. Thank you, Bob. And thanks to everyone for joining us today. As we look back on 2022. I am proud of the progress we've made executing against our strategic priorities. During the year. We continue to transform our business to be less market sensitive and better positioned to deliver sustainable long-term growth. We exceeded our $750 million cost savings target one year ahead of schedule, and our rock solid balance sheet provided the financial strength to navigate the evolving macro economic environment. I'll provide an update on each of these areas, beginning with our business transformation. Turning to slide three, during 2022 we reduced the overall market sensitivity of our business by completing the sales of the full service retirement business and the pay lock block as well as the run off of traditional variable annuities. We simultaneously continue to invest in the long-term sustainable growth of our business through programmatic acquisitions, and partnerships in emerging markets. In Africa, we acquired a minority interest in Alex Forbes, a leading provider of financial advice, retirement, investment, and wealth management in South Africa. We also continue to grow our third-party distribution network in Latin America, particularly in Brazil, where third-party distribution now accounts for about 50% of sales and complements our strong Life Planner channel. Additionally, we advanced our vision to be a global leader in expanding access to investing insurance and retirement security. For example, we completed the second largest pension risk transfer transaction in US market history with IBM and close several major longevity risk transactions, including the $8 billion transaction we completed in the fourth quarter with the Barclays Bank, UK retirement fund. These transactions underscore our leadership in these markets, as well as the strength of our interconnected business model. Our IBM, PRT transaction provided PGIM with more than $8 billion in additional assets under management, and is a good example of how we leverage synergies across our businesses. We see a strong pipeline of opportunities in these markets in the year ahead. We continue to expand our product offerings to meet the increasing customer needs for financial solutions. For example, building on the success of our FlexGuard annuity products, we introduced during the fourth quarter FlexGuard Life, an indexed variable universal life product. In PGIM, we expanded our private loan capabilities through PGIM private capital, including our direct lending capabilities. This broad proprietary origination platform provides our insurance businesses and our institutional clients with unique investment opportunities and is another example of our self-reinforcing business model. We also invested in enhanced customer experiences that blend human touch with advanced technology. In Brazil for example, we expanded our digital sales application to expedite same-day policy delivery and processing with greater automation. In addition, as we administrator for the IBM PRT transaction, we introduced new technology capabilities to expedite the onboarding experience for 100,000 IBM pensioners. And as part of our continued efforts to refine customer experience, we implemented a company-wide initiative to better understand the evolving needs of all our customers around the globe. And in turn, deliver the most effective products and solutions to meet their needs. Moving to slide 4, we achieved $820 million of annual run rate cost savings, exceeding our target of $750 million one year ahead of schedule. We reach this milestone by streamlining and automating the way in which we operate, while improving the customer and employee experience. We leverage new systems and technologies to enhance our digital underwriting, claims and fund processing capabilities, improving efficiency, while reducing customer wait times. For example, for many of our Individual Life customers, we reduce the underwriting time from 22 days to 22 seconds. Our Group Insurance claims processing is now three times faster, and fund verification to process new annuity sales now takes two to three days, down from two to three weeks. We also implemented a hybrid work model for our employees that reduced our U.S. real estate footprint by 50%, equating to approximately $50 million in annual run rate savings. And finally, we adopted a continuous improvement mindset that helps us proactively identify and execute on cost savings opportunities that enhanced customer and employee experiences, and continue to improve our competitiveness going forward. Now to slide 5, our rock solid balance sheet and disciplined approach to capital deployment have helped Prudential navigate financial and macro economic challenges for nearly 150 years. And 2022 was no exception. Our financial strength, including our AA ratings is supported by $4.5 billion in highly liquid assets at the end of the fourth quarter, as well as a high quality, well diversified investment portfolio. We continue to balance investments in the growth of our businesses with returning capital to our shareholders. During the fourth quarter, we returned more than $800 million to shareholders through dividends and share repurchases, for a total of over $7.5 billion since the beginning of 2021. For 2023, our Board has authorized up to $1 billion in share repurchases, as well as a 4% dividend increase beginning in the first quarter. This represents our 15th consecutive annual dividend increase. Looking ahead, our strategic progress, financial strength and self-reinforcing business system, coupled with a higher interest rate environment position as well to be a leader in expanding access to investing, insurance, and retirement for our customers across the globe. Now, before turning it over to Rob, I'd like to extend a special Thank you to all our employees for their dedication to our customers and our communities. Together, we have made significant progress on our transformation, and are fulfilling our purpose of making lives better, by solving the financial challenges of our changing world. And now, over to Rob, to talk about the fourth quarter financial results, and to provide an update on our business performance. Thank you, Charlie. I'll provide an overview of our financial results and business performance for our PGIM, US, and International Businesses. I'll begin on slide six. Pre-tax adjusted operating income was $4.7 billion or $9.46 per share for 2022 and $1.2 billion or $2.42 per share in the fourth quarter. These results reflect lower variable investment and fee income, partially offset by improved mortality as COVID has transitioned to an endemic phase, an increase in spread income due to rising interest rates, and underlying business growth. In addition, full year results include the strengthening of reserves from our annual assumption update and the gain on the sale of the PALAC Legacy variable annuity block. Our GAAP net loss for the quarter was $1.53 per share and included net realized investment losses and related charges and adjustments of $800 million, largely reflecting the impacts of rising interest rates. This loss also included a $700 million goodwill impairment due to the reduction in the estimated fair value of assurance. While assurance is making good progress in many areas and had a profitable fourth quarter, the impairment reflects lower growth expectations, higher discount rate applied to future applied to future cashflows reflecting macroeconomic conditions, and lower publicly traded peer evaluations. Turning to the operating results from our businesses compared to the year ago quarter. PGIM, our global investment manager reported fees, primarily due to lower assets under management, resulting from higher rates and equity market declines. Results of our US businesses primarily reflected less favorable variable investment income, partially offset by the impact of higher rates on spread income and more favorable underwriting. The decrease in earnings and our international businesses primarily reflected lower spread income, largely due to less favorable variable investment income and less favorable underwriting including elevated surrenders in Japan through the depreciation of the yen. Turning to slide seven, PGIM, our global investment manager has diversified capabilities in both public and private asset classes across fixed income, equities, and alternatives including real estate and private credit. PGIM's investment performance remains attractive with more than 79% of assets under management outperforming their benchmarks over the last three, five, and 10 year periods. For 2022, PGIM experienced positive institutional net flows that were more than offset by retail outflows, primarily in fixed income, consistent with industry trends due to the rising rate environment. In the fourth quarter, PGIM experienced third-party net outflows of $11.7 billion, driven by public fixed income strategies across institutional and retail clients. Institutional net outflows were driven by a few large client redemptions, while retail net outflows reflected the impact of the rising interest rate environment on retail flows across the industry. As the investment engine of Prudential, success and growth of PGIM and of our US and International Insurance and Retirement businesses are mutually reinforcing. PGIM's asset origination capabilities, investment management expertise and access to institutional and other sources of private capital are a competitive advantage, helping our businesses bring enhanced solutions and create more value for our customers. Our insurance and retirement businesses, in turn, provide a source of growth for PGIM through affiliated flows that totaled $13 billion during 2022 as well as unique access to insurance liabilities. In addition, we continue to grow our alternatives business, which has assets in excess of $230 billion across private credit and real estate equity and debt and benefits from our global scale and market leading positions. Notably, PGIM’s private businesses deployed nearly $43 billion of gross capital in 2022. Turning to slide 8. Our US Businesses produced diversified earnings from fees, net investments spread and underwriting income and benefit from our complimentary mix of longevity and mortality businesses. We continue to shift towards higher growth and less market sensitive products and markets, enhance our customer experience while reducing costs by amplifying the use of capabilities and self-service tools and further expand our addressable markets. Retirement Strategies achieved robust sales in fourth quarter and full year 2022 across its institutional and individual lines of business. Our Institutional Retirement business has market leading capabilities with full year sales of almost $32 billion driving record account values at the end of the year. This includes being selected for a 50% participation in a $16 billion pension risk transfer transaction and our fourth largest international reinsurance transaction of $8 billion in the fourth quarter. In Individual Retirement, product pivots have resulted in continued strong sales of more simplified solutions like FlexGuard and FlexGuard income, representing over $12 billion of sales since inception, as well as increased fixed annuity sales. Our Individual Life sales were consistent through the year and reflect our earlier product pivot strategy, with variable life products representing approximately 70% of sales for the year. And our Group Insurance benefits ratio has improved during the year from lower COVID mortality. Turning to slide 9. Our International Businesses include our Japanese life insurance companies, where we have a differentiated multi-channel distribution model as well as other businesses aimed at expanding our presence in high growth emerging markets. In Japan, we are focused on providing high quality service and expanding our geographic coverage and product offerings. Our needs-based approach and protection product focus continue to provide important value to our customers as we expand our product offerings to meet their evolving needs. In emerging markets, we are focused on creating a carefully selected portfolio of businesses and regions where customer's needs are growing, where there are compelling opportunities to build market leading businesses and where the Prudential enterprise can add value. Our International Businesses experienced their highest sales since the third quarter of 2020, including record sales in Brazil. Compared to the prior year quarter, Gibraltar sales were up 20% mainly driven by the life consultant channel primarily from higher US dollar sales. Life Planner sales were also up 17%, driven by continued momentum in Brazil's third-party distribution channel, as well as higher sales in Japan. As we look ahead, we're well-positioned across our businesses to be a global leader in expanding access to investing, insurance and retirement security. We continue to focus on investing in growth businesses in markets, delivering industry leading customer experiences, and creating the next generation of financial solutions to better serve the diverse needs of a broad range of customers. Thanks, Rob. I’ll begin on slide 10, which provides insight into earnings for the first quarter of 2023 relative to our fourth quarter results. As noted, pre-tax adjusted operating income in the fourth quarter was $1.2 billion and resulted in earnings per share of $2.42 on an after tax basis. To get a sense of how our first quarter results might develop, we suggest adjustments for the following items. First, variable investment income was below expectations in the fourth quarter by $125 million. Next, we adjust underwriting experience by net $60 million, as we normalize for fourth quarter experience and expect seasonality in the first quarter. And last, we expect other items to increase adjusted operating income by $91 million, primarily due to seasonally elevated expenses in the fourth quarter. These items combined get us to a baseline of $3.01 per share for the first quarter. I'll note that if you exclude items specific to the first quarter, earnings per share would be $3.07. The key takeaway is that, our underlying earnings power has improved due to the business growth and the benefit of higher interest rates. While we have provided these items to consider, please note that there may be other factors that affect earnings per share in the first quarter. As we as we look forward, we have included other considerations for 2023 in the appendix. Turning to slide 11. I'll now provide an update on the adoption of the new accounting standard for long duration insurance contracts which went into effect on January 1. The new standard applies to our GAAP financial statements and will have no direct effect on our statutory financial statements, cash flows or dividend capacity. We estimate that as of September 30, 2022, GAAP equity will increase by approximately $15 billion comprised of two components. Accumulated other comprehensive income, or AOCI, will increase by approximately $17 billion, primarily due to remeasurement of long duration liabilities with higher discount rates in our Japan business. Retained earnings will be reduced by approximately $2 billion, reflecting the reclassification of non-performance risk gains from retained earnings AOCI and other changes in reserves. Also of note, GAAP equity will continue to exclude certain unrealized insurance margins from products subject to LDTI. As of September 30, 2022, the estimated after-tax unrealized insurance margins related to those products are approximately $50 billion, primarily in our Japan business. These margins are an important factor in determining financial strength and assessing profitability. And finally, we do not expect significant impacts from LDTI on our total underlying earnings power, as impacts across our businesses will largely offset. Turning to slide 12. Our capital position continues to support our AA financial strength rating. Our cash and liquid assets were $4.5 billion, at the high end of our liquidity target range. We have substantial off-balance sheet resources, including contingent capital and liquidity facilities. We remain thoughtful in our capital deployment, balancing the preservation of financial strength, investment in our businesses and shareholder distributions. Turning to slide 13 and in summary. We are transforming our businesses for sustainable growth. We exceeded our targeted cost savings one year ahead of plan and will maintain our discipline and continuous improvement mindset going forward. We continue to navigate the current macro environment with the financial strength of our rock solid balance sheet. Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Erik Bass from Autonomous Research. Your line is now live. Hi. Thank you. Just hoping you could talk a bit more about how you're viewing excess capital. If we look at the pieces you provide, the pike RBC ratio is below the 400% level where it's run historically, I think the SMR ratio looks in line and Holdco liquidity is within your target range, but at the low end, if we adjust for the planned debt call that you talked about on the last call. So if this suggests a little excess capital, but are there other pieces or sources that we should be considering? Yeah. Hey, Erik, it's Ken. Overall, we do feel good about our overall capital picture in multiple parts, as you suggest, but I thought it might be helpful to give a little bit of an overall context for our capital management. We've had a very well-established and consistent approach. And we've served us very well particularly last year as we look to shift our business to be less market-sensitive and grow, while also maintaining financial strength and the flexibility. We closed the sales of our full service business and the PALAC variable annuity block last year that released capital at attractive terms. And we also deployed capital to the second largest PRT transaction with IBM. We also, as we mentioned and discussed on our last call, absorbed the capital impact of the assumption update in our life insurance business and the non-economic impact of higher rates on staffed capital. Again, that was expected. It's manageable, and we've appropriately addressed those capital implications. When you put that all together, we ended 2022 in a solid capital position. Our RBC ratios were above our AA objectives and our target there is to be above 3.75%. Our Japan solvency margin ratios are above their AA objectives. We have an HLA balance of $4.5 billion at the Holdco. And as you mentioned, that's at the high end of our target range. And we have a healthy outlook for our businesses with sustained profitability and free cash flow, so that led our Board to authorize $1 billion of share repurchases for next year – or this year, actually, 2023, and that's reflective of our capital position as we end 2022. That also considers the free cash flow outlook for our businesses and our opportunities to deploy capital and also the macro environment, whether that's a potential for another recession or other stress events. So again, when we put that all together, we feel good that we're consistent with our AA objectives. We have a level of flexibility, and that's what our board considered when they issued where they authorized $1 billion in share repurchases for this year and increased our dividend 4%, which, again, is the 15th straight year of dividend increases. So hopefully, I gave you a much broader answer there, but I hope that's helpful context. Yes. Thank you. And then my second question was just hoping you could provide a bit more color on the company's sensitivity to short-term interest rates, which it seems like has been a big uplift, particularly in the individual retirement business. Hoping to get a little bit of the sensitivity there. And then just wondering if it were to reverse and the Fed were to cut interest rates would then you see kind of the earnings pattern for individual retirement move back lower? Hey, Erik, I'll start and then turn it over to Caroline to give a broader business context. But just from a sheer sensitivity to short-term rates, yes, we are benefiting from short-term rates. And generally, overall, our variable annuity business is sensitive to rates, both long-term and short-term. So a rise in both is actually helping us. In terms of short-term rates, we did see a pickup in earnings, because we're earning a higher return from collateral, that's posted on our hedging positions, and that's driven by the uptick in short-term rates. But there's more dynamics going on broadly for the business. So maybe Caroline, I'll turn it over to you for that. Yes, of course, Ken. So Erik, first, I should point out that the individual annuities market had a record year last year with over $300 billion of sales and our own individual retirement strategies business delivered strong sales and earnings, and our sales success continues to be driven by our FlexGuard suite of index variable annuities where we now have over $12 billion in sales clearly reinforcing our leadership position as a top five player in this market. We also saw, Erik, some strong growth in our fixed indexed and fixed annuity solutions with fourth quarter results twice that of what we saw in the third quarter. Actually, in fact, more than 25% of our sales for the quarter came from these products. So ultimately, we're pleased with the progress we've made in this space. And we like the diversification these products bring to our overall business mix and the role they can play as a strong complement to our FlexGuard suite of solutions. Good morning. Ken, should we think about that reduction being a planned use of the $4.5 billion of Holdco cash in 2023. I think you have a callable instrument in the middle part of the year of $1.5 billion. Should we assume your planning on calling that, or you still expect -- should we expect that to remain outstanding? Yes. Generally are -- and again, I think I mentioned this on the last call, our overall level of debt has been pretty consistent over the last few years. And we do have the ability to call about $1.5 billion of debt this year in June. But that's up to us. We're not obligated to do so. It is our practice to pre-fund upcoming maturities and calls and we've factored that into our debt issuance plans last year. Having said that, we're going to continue to evaluate the market conditions in our liquidity position and factor that into the decision to -- and the timing to call the debt or not. And we're also going to look at our overall funding needs going forward. And again, our discipline is to pre-fund upcoming plan. So it's really an ongoing cycle is the best way you should think of it. Okay. Thanks. And then can you -- just for my follow-up, can you talk about how big of a GUL charge you took at -- for the -- at PICA for year-end? And any other, we'll call it, adjustments that we consider that occurred on a statutory basis at year-end between I assume there might have been AAT reserve releases or any other ins and outs that you can provide on the statutory impacts? Thanks. Sure, Tom. We -- as we described, when we updated our assumptions for GAAP, we would be making those same assumption updates for stat and that -- for statutory purposes occurs in the fourth quarter. So that was -- our GAAP impact was about $1.4 billion. It is larger on a stat basis. Stat tends to be more conservative, and that's what occurred in the fourth quarter. That was generally what led to the -- our RBC ratio in the fourth quarter going from above 400% to below it, but still, again, above our AA objective of 375. And we didn't make a capital contribution into PICA to achieve that again as we expected. So, just a reminder of the moving parts there. Thanks. I guess for Ken. Just curious, have you used Lotus Re yet and if and when you use it, should we expect sort of the freed resources to be somewhere in that neighborhood of the $800 million capital contribution that you originally made? Yes, thanks for bringing that up. We do have a company in Bermuda called Lotus Re, which is a reinsurer. And it does give us the capability to reinsure business to that entity, and we did so in 2022. As you mentioned, we initially capitalized it and then we reinsured a block of variable life business to that business -- to that entity in 2022, and that was a source of capital release. And all that was factored into our PICA outcomes for the year, which, again, we continue to be above 375. I don't think we want to put a precise number on it. It's an internal reinsurance transaction, but it does improve our flexibility. Got it. And then I guess my follow-up for Charlie. I guess, overnight, we saw some headlines that came out about -- I don't know if they were quoting you are referring to some comments that you made about Prudential's M&A strategy and perhaps a change post I'm assuming the goodwill write-downs for Assurance IQ. So, I just wanted to give you a chance to comment on that and kind of how you're thinking about M&A, especially as you think about that strategy around improving the earnings contribution from growth businesses that you talked about, I guess, two years ago? Sure, Suneet. Thanks for the question and our ability to clarify. Yes, we saw the headlines too and we're slightly surprised. The -- our strategy remains consistent with exactly what we have been doing. So, what we've said is that we won't be investing in early-stage companies with less proven track records. What we're focusing on is developing a portfolio programmatic acquisitions, concentrating on more established businesses where we can expand the capabilities and scale of our existing businesses. And this approach supports what you said, which is our strategy of growing PGIM and emerging markets and really focusing on asset management and high-growth international markets that will help increase our fee earnings and growth profile. And if you look at our recent -- most recent four transactions, which include ICEA LION, Montana Capital Partners, Custom Harvest Asset Management, and most recently, Alexforbes, these are all examples of this approach of acquiring more established companies and are consistent with what we have done and what we will do going forward. Hi. First one I had is on just sort of sources of cash flow as we think about 2023. You've talked about $1 billion of share repurchases, potentially some debt reduction. Could you talk about how that will be funded between PGIM cash flows, PICA in the US businesses versus Japan. And specifically, I'm interested in particular in PICA, if you plan to take dividends out this year? Yes. Alex, it's Ken. Our businesses are generating free cash flow to maintain our shareholder distributions, but -- and also to support the growth of the business. And we do have diverse sources of cash flow to the parent company. That's provided by our business mix across our US insurance and retirement PGIM and Japan businesses. And they're all expected to contribute over time, I think the way to think about our free cash flow ratio is it's been about 65% given our -- of our after-tax AOI, given our mix of business and growth. And we think that's about right. And we would expect, again, to receive capital from all of our businesses, including the PICA legal entity. Got it. Second question I had is on Japan. Sales have picked up recently and looked pretty good. I guess, the premium growth is still a bit weaker on year-over-year comps and so forth. So I was just interested in what you expect from that, what kind of top line growth can we expect from that business? So Alex, it's Andy. I'll take your question. Yes, you sort of mentioned some of the effects as we look back from the COVID pandemic that obviously resulted in some headwinds from a sales perspective. But thankfully, as we sit here, those pandemic challenges have subsided quite a bit. We're exceptionally proud of our Japanese businesses. We've steadily increased our market share over time, and we've consistently ranked in the top three for new business face amounts every year of the last decade, that's generated significant earnings and cash flows for Prudential. Our strategy to grow the business is threefold. First, we're very focused on continuing to strengthen and expand both our captive and our third-party distribution; Second, we're going to continue to innovate and expand on the solutions that we deliver to our customers; and finally, and importantly, we remain laser-focused on delivering an outstanding customer experience with a particular emphasis on our digital capabilities. We're very, very proud and good at that. In fact, we're consistently ranked by J.D. Power's in the top three and often number one in policy issuance, policy service and claims. The market remains highly attractive to us, and we intend to grow our position in the low-single digits over time. Hey, good morning. I had a follow-up on Japan. Have you seen any change in policyholder behavior in terms that may be driven by the weaker and volatile yen that we've seen over the last year regarding the FX products? Thanks. Yes, Ryan, it's Andy again. I'll take the question. So given the rise in the US dollar and the weakening of the yen, we have seen an elevated level of surrenders in the business. The effect there is really some customers are looking to monetize their gains out of their non-yen products in yen terms. That being said, we saw this effect begin to decelerate in the month of December, and that deceleration has continued here in the month of January as the yen appreciate it. So we would expect as the yen starts to stabilize, this effect will stabilize in the business. Got it. And then on the FC well charge, is there a chance that some of that could reverse from AAT subtest from higher interest rates when you do the look back in 2023? Ryan, it's Ken. I think you're referring to our asset adequacy testing. We're not expecting any significant change in our AAT reserves in light of the higher rate environment. Thank you. A follow-up on your statutory reserve charge for your assumption update. Last quarter, Ken, you mentioned it would be absorbed within PICA's excess capital position. Has that changed in the quarter where the ultimate size ended up being higher than your expectations and also on like GAAP reserve charges, I understand that funding for a statutory reserve charge does not have to come in all at once in 4Q. So can you share if you booked a portion of it before 4Q? Hey, Tracy, no, in terms of the assumption update, that is recorded in – that was recorded in the fourth quarter, again, consistent with established practice for statutory reporting. And nothing new there to report came in as expected, and we did not – we did not need to fund PICA with capital from Holdco as – also as expected. So, nothing really new there. Okay. And your latest buyback authorization levels suggest you're not meeting your objective over three years of $11 billion of capital returns. So I'm just – if you could walk us through what has changed since you set that objective. Was it just the reserve charge, or is it something else like PRT? I guess, my broader question is from this experience, are you rethinking the idea of coming up with a multiyear plan versus a singular year plan? Yeah. Tracy, it's Ken. Just looking back here and as a reminder, we set that a three-year objective in 2021 and the target was initially $10 billion over the three-year period. Later in 2021, we increased that objective as cash flow for 2021 was very strong. And as I kind of highlighted earlier in the call, in 2022, last year, we managed through a number of significant items, which was our assumption update in our life insurance business, the jumping rates and the non-economic impact on stat accounting and then we had the major PRT transactions. And again, when we put that all together, we think we end up to – at the end of 2022 in a very competitive position from a capital standpoint and a healthy outlook for our businesses with sustained cash flow going forward. So yeah, that's what got factored into the decision along with the outlook of the economy with the recession uncertainty. So the $1 billion will put us a little shy of the $11 billion, but it will only take about another quarter to achieve that. Thanks. First, just could you talk about your sales pipeline in PGIM in both the retail and the institutional side and how that's looking? Sure, Jimmy, it's Andy. We have a high degree of confidence in our approach in PGIM. As you've heard me say before, flows are an outcome of really three things; having a broad and diversified product portfolio, great long-term investment results and great distribution. The bottom line is we've stayed very focused on those elements because we know they work. It has resulted in our strong track record over -- with positive flows in 18 of the last 20 years. So we're continuing to expand our product range in vehicles. Just as an example, our ultra-short bond ETF ranked number two in terms of net flow rate in its category. Second, we're continuing to invest in distribution on both the retail and institutional side. In retail, we're maintaining our high activity, high visibility approach with advisers. And in institutional, we added a significant number of new clients this year. And then obviously, finally, our long-term investment track record speaks for itself over three, five and 10 years. The predominant impact that we've seen has been a fixed income impact. And in particular, we believe that sustained higher rates are really good for the fixed income business. So we're going to keep doing what we know works, and we're confident that we're going to be a net grower over time. Do you have enough visibility to assume that you'll have positive flows on an overall basis at PGIM for 2023 or too early to say? So as I've said in the past, flow is very a good bit quarter-to-quarter, especially on the institutional side, they're chunky. So we wouldn't provide a forecast on that. Over the long run, we know that we're going to grow. Thank you very much. My question is around agents. As I look at the agent count, they've declined overall in international. Is there anything being done to drive greater agent recruitment, or with productivity improved? Are you taking assurance lessons on the tax side to the agent force more generally? So John, it's Andy. I'll take your question. So really, the impact you saw near-term, COVID kept pressure on our recruiting efforts and retention efforts. Fact is, throughout the last couple of years, it was a harder environment to recruit and establish culture with new agents. That impacted our life consultant count more so than our Life Planner counts, but it did affect both. As we've started to transition to more of an endemic, we are seeing an improvement and expect to see an improvement over time. We'll remain focused on two areas; first, strengthening our existing people's performance and we're exceptionally proud of our talent. We have the highest number of million dollar roundtable members who really deliver every single day for our customers. And second, we are continuing to lean in to attract land and develop new agents, which as we come out of the COVID pandemic, we believe will be easier for us. So this is a model that has worked for us very consistently over a long period of time, and we expect to keep seeing steady performance. Thank you for that. And then my follow-up question. Can you talk about the decline in group new annualized premium in both Group Life and Group Disability? Is this from renewals, selective exits or job cuts at the large and jumbo into the market? Thank you. Sure. John, it's Caroline. So I'll take your question. So first of all, just let me say, we're very pleased with the momentum that we've seen in our Group Insurance business. And as you're aware, the fourth quarter does tend to be a little lighter in terms of sales quarter, with the first quarter being our largest, as the majority of our cases do have January 1 inception dates. So the lower sales that you're noticing on a year-over-year basis is largely due to just a large case buyout last year that drove up sales volumes. And these do occur periodically and certainly can produce some variability in sales volumes, particularly in those lighter sales quarters. So John, if you were to normalize for last year's one-time buyout that we saw sales are actually up about 7%. And obviously, this is on the disability side. On the life side, it was just a matter of timing of premiums driven by changes in when some customers do enrollment in the year. So I would just say, overall, we feel very good as well about our existing pipeline as we continue with our strong sales momentum. Hi. Thanks. Good morning. My first question, can you talk about the impact that you've seen on your RBC ratio from the IMR getting forward at zero. And do you think that, that issue is solvable via either NAIC changes or by getting a permitted practice from New Jersey? Yes. Hey, Elyse, the impact on our PICA RBC ratio was about 35 basis points, maybe a little bit more. And that occurred with the rise in rates from 2Q through 4Q. And you'll be able to see that in our Blue Book and Green Book combined. So we'll be reporting that at the end of the month. We have been with very active discussions with regulators, and I know many others have across the industry have been as well. There seems to be a good understanding of the issue and a lot of careful consideration being given on how to best address it, so more to come. But rest assured, we're working with our regulators and many others are as well to see what -- how best to address this issue. Thanks. And then, Rob, I think you had mentioned that the Board was looking at capital deployment in the context of a recession and severe credit cycle potential. Can you talk about what kind of credit outlook factored into the Board's decision on the 2023 buyback plan? And what is your budget for downgrades and impairments if we enter into a recession? Thanks, Elyse. We -- as Ken articulated earlier, the decision with regard to the buybacks factored in a number of considerations, including in that the possibility of recession and obviously, a recession that might be accompanied by a credit cycle, which could affect the portfolio. A couple of thoughts on that. First, while we do scenarios, which would anticipate the potential for both negative migration and credit losses, we also take some comfort, as our Board did from the strength that we have in portfolio management. We think we're incredibly well positioned in the event of any deterioration in the economy that might lead to a credit cycle. We're not yet seeing any of that, I'll note Elyse. If you look at our net credit migration in the fourth quarter and for the full year 2022, it was actually positive. So, we haven't seen any imminent signs of distress sort of percolating within the portfolio that would lead us to be overly concerned about that. But as we established the buyback amount that was authorized, we did anticipate that such a thing could occur and that we would want to be able to both anticipate that level of buyback and have the strength to be able to absorb anything that might happen from a negative migration or default standpoint. Maybe I'll just add just to remind people, we do have contingent sources of funding, in particular, our PCAPs, which is $3 billion is a guaranteed source of funding. So, that's an important source of funding in the event of a variety of reasons, including stress. Hey good morning. I know there's been a number of capital questions and the IMR was impacted this quarter due to derivative losses given rising interest rates, now we've got rates coming off a bit in 1Q 2023. So, I'm wondering if you could give us a little sensitivity on rates and how we can think about that impact on capital, particularly with regard to these derivatives? Yes. Again, rising rates is generally a good thing economically. But for this one item called IMR, a decline in rates would help. But it's a pretty complicated and complex item and will also vary depending upon the activity level. So, I can't give you a precise sensitivity as a result. But we factored into our overall capital position in order to make sure we can deal with the volatility. Okay. Okay. And maybe help us on the expenses. So, you've got this terrific $820 million run rate savings. But as I look at results, I'm unable to kind of find those benefits falling to the bottom-line. So, maybe like a little color geographically, is all of it hitting the bottom-line? Like just a little color as to how we could think about that $820 million going forward? Yes. It has been a company-wide objective. So, the impact is across all of our businesses and the contribution that our corporate centers make towards that. And it does hit the bottom-line. Having said that, we are investing to grow certain business lines, particularly PGIM and International and so they just want to add that dynamic in there as well. Got it. And just a real quick technical question. Are you planning to deploy capital into Assurance IQ going forward, or will it -- now that its generating a little profit, can it be self-funding? Yes, we've maintained Assurance well-capitalized and funded its losses as they've been incurred. Profitability continues to improve and we'll continue to keep it well-capitalized going forward. Thanks guys. Good morning. Just a high level question, I was wondering if the capital pressures, reserve charge, maybe earnings pressure in certain lines over the last 12 months or so. I'm wondering if that has changed specifically how you think about your business mix at all. And I know you've taken a few solid steps so far, but it seems like some incremental divestment or derisking could help reduce some of these pressures going forward. So I'm just wondering how you think about that prospect? Sure, Mike. It's Charlie. I'll take that. So as you know, we've made significant progress in our transformation so far, but we would also note, we still have more work to do to become a higher growth and less market sensitive company. And as we look ahead, we're going to focus on our financial performance. We're going to focus on advancing our transformation, including the customer and employee experience, and we're going to focus on continuing to thoughtfully deploy capital. All of that, with a goal of creating long-term sustainable value for all our stakeholders. And we think we're well-positioned across our businesses to be a global leader in expanding access to investment -- investing insurance and retirement security. And we'll do that in three ways. We'll continue to invest in our growth businesses and markets as we go forward, we'll deliver industry leading customer experiencing, leveraging our broad capabilities and scope of diversified businesses, and which we'll continue to invest as well, and we'll create the next generation of financial solutions to better serve the diverse needs of a broad range of customers. So what I'd say in summary is that we're definitely committed to becoming a higher growth, less market sensitive company. And our progress will obviously be dependent upon opportunities that arise and the macroeconomic conditions we face, but we're laser focused on what we need to do, and we'll accomplish that. Okay, great. Thank you. And most of my questions were asked, but I was curious, just sort of nail in the coffin, making sure you're not liable for the earn-out with Assurance IQ? Yeah, I'll cover that. Actually, one of the things that we disclosed for GAAP is the fair value of that earn-out, and we've been disclosing that as zero. So I think that would give you a good indication. Great. Thanks for the follow-up. Maybe just two quick ones. Just for Ken, I was curious about your comment about no change to AAT reserves even with the move up in rates. Can you just talk about why that would be the case? Yeah, because AAT, I mean it looks at a number of scenarios and it also looks at not just the level of ending surplus but also interim periods. And with derivatives, we have some interim periods that offset the impact of higher rates on the ultimate period. So it's a little technical question. But overall, little changes there. Got it. And then just curious on LDTI. I know you said that the AO impacts offset across businesses. But can you just give us a sense of maybe, which businesses benefits, and which businesses saw some pressure? Yeah. Sure. So yeah, again, overall, we don't expect an overall change to the run rate level of the earnings. And actually, some of the businesses will have no or little impact, which would be, as you would expect, PGIM, Assurance and Group Insurance. The earnings from our International and Institutional Retirement businesses, are expected to increase on a run rate basis, and that's really due to the earlier recognition of the unrealized insurance margins, which are quite sizable. On the other hand, earnings from individual retirement and life insurance in the US are expected to be lower, and that's primarily due to the slower recognition of revenue for those businesses. Again, kind of some pluses and minuses that offset but that's sort of the segment level information. We, like others, will be providing a lot more information prior to our first quarter earnings when we restate under the new standard. So, you can expect to get a lot more. Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Lowrey for any further or closing comments. Okay, thank you. And thank you everyone for joining us today. I hope we demonstrated the progress we are making to transform Prudential to deliver sustainable, long-term growth and meet the evolving needs of our customers. Looking ahead, we remain confident in our strategy and the strength of our company. For nearly 150 years, Prudential is focused on creating value for our customers and other stakeholders who we will continue to serve as we strive to be the global leader in expanding access to investing, insurance and retirement security. Thank you again for your time today. Thank you. That does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

EarningCall_469

Welcome to the Impinj Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. Thank you, MJ. Good afternoon, and thank you all for joining us to discuss Impinj's fourth quarter and full-year 2022 results. On today's call, Chris Diorio, Impinj's Co-Founder and CEO, will provide a brief overview of our market opportunity and performance. Cary Baker, Impinj's CFO, will follow with a detailed review of our fourth-quarter and full-year 2022 financial results and first-quarter 2023 outlook. We will then open the call for questions. Jeff Dossett, Impinj's CRO, will join us for the Q&A. You can find management's prepared remarks, plus trended financial data on the investor-relations section of the company's website. We will make statements in this call about financial performance and future expectations that are based on our outlook as of today. Any such statements are forward-looking under the Private Securities Litigation Reform Act of 1995. While we believe we have a reasonable basis for making these forward-looking statements, our actual results could differ materially because any such statements are subject to risks and uncertainties. While we describe these risks and uncertainties in the annual and quarterly reports we file with the SEC, we do not undertake, and expressly disclaim, any obligation to update or alter our forward-looking statements except as required by law. On today's call, all financial metrics except for revenue, or where we explicitly state otherwise, are non-GAAP. Balance sheet and cash flow metrics are GAAP. Please refer to our earnings release for a reconciliation of non-GAAP financial metrics to the most comparable GAAP metrics. Before turning to our results and outlook, note that we will participate in Susquehanna's 12th Annual Technology Conference on March 2nd in New York and the 35th Annual ROTH Conference on March 13th in Dana Point. Also, we will host an Investor Day on June 13th in Seattle. Please save the date. We look forward to connecting with many of you at those events. Thank you, Andy. And thank you all for joining the call. Fourth-quarter 2022 capped a very strong year for Impinj. We delivered record revenue in both the fourth quarter and for the full year. We delivered sequential double-digit revenue growth in second, third, and fourth quarters. We delivered record adjusted EBITDA in the third and fourth quarters. We delivered our 75 billionth endpoint IC, another milestone on our journey to connect every item in our everyday world. And we have record backlog entering 2023. Our strong support for, and shipments to, enterprise end-users drove those results, despite persistent wafer and component shortfalls. As we look into 2023, we see significant end-user opportunities for our platform, and we expect those opportunities to pay further dividends in the form of continued strong endpoint IC volume growth. Starting with endpoint ICs, 2022 demand held strong, with program expansions and new programs more-than-offsetting retail inventory headwinds. Fourth-quarter endpoint IC revenue exceeded our expectations, setting a record for the fifth consecutive quarter. We anticipate significant endpoint IC volume growth in 2023, despite macroeconomic crosscurrents and retailers' ongoing inventory reductions. The bulk of that growth is rooted in our platform focus on supply chain and logistics package tracking as well as retail self-checkout and loss prevention. On the wafer front, we are seeing improved supply. As anticipated, our inlay partners layered on additional bookings as our wafer visibility improved, creating record year-end backlog. With that improved supply, we can and will ramp shipments into that strong demand. That said, our shipment volumes will remain constrained at least into second-half 2023 to wafer-delivery timing and teething issues as we ramp our expanded 300 millimeter post-processing to volume production. Turning now to systems, fourth-quarter reader and gateway revenue exceeded our expectations, led by deliveries to the visionary European retailer's self-checkout and loss-prevention deployment and despite component shortfalls constraining shipments. Looking forward, although we anticipate less schedule and cost variability as component shortfalls abate, a few components remain stubbornly tight, and we do not expect supply to normalize until second-half 2023. Like for the fourth quarter, we entered first quarter with significant reader backlog. Reader IC revenue set a record for the third consecutive quarter, driven by Impinj E-family strength as our partner's built products ahead of their product launches. Looking into first quarter, we expect lower E-family volumes as those partners follow the typical product cadence seeding the market, followed by subsequent strength as they ramp production volumes. We expect first-quarter strength in our Indy reader ICs to more-than-offset the E-family decline. Looking further into 2023, we expect our E-family to significantly outpace and rapidly replace our Indy family. On the product front, in November we announced the Impinj M780 and M781, our latest 300 millimeter endpoint ICs. They expand our M700 product line with extended product identifiers and significant user memory. We also introduced our patent-pending Impinj Core3D Antenna reference-design portfolio that enables omnidirectional reading for all M700 ICs, improving item readability. On the project front, the visionary European retailer continued deploying, contributing strong fourth-quarter gateway revenue. We expect this project to deliver a strong first-quarter revenue and step down as this deployment phase approaches completion. We anticipate future self-checkout and loss-prevention opportunities with this retailer at other brands and in new geographies. The Asia based global retailer's self-checkout deployment also generated meaningful fourth-quarter revenue. And in supply chain and logistics, we continue to expect the second large North American end user to both continue their system deployment and drive large endpoint IC volumes in 2023 and beyond. Turning to our organization, I would like to start by welcoming Cathal Phelan as our Chief Innovation Officer. Cathal will focus on long-term innovation and intellectual-property strategy as well as remain on our Board of Directors. Welcome, Cathal. It is a pleasure to have you on our Executive Team. In December, we published our second Corporate Citizenship Statement, outlining our commitments to people, culture, the environment, and governance. Last year, we strengthened our ESG program's foundation by formalizing our Board's oversight of ESG matters, measuring and reporting our Scope 1 and Scope 2 emissions, and adopting a new Supplier Code of Conduct. In 2023, we will focus on corporate culture and environmental sustainability and anticipate meaningful progress on both. Last, and certainly not least, I want to congratulate my dear friend and Impinj Co-Founder Dr. Carver Mead on his 2022 Kyoto Prize in Advanced Technology. This award is a wonderful honor for a gem of a person who is also one of the fathers of modern IC design and computing, in addition to his many contributions to engineering, physics, and applied science. Carver, it makes me so very happy to see you win this well-deserved award. Congratulations. Before I close, I'd like to thank every member of the Impinj team for the grit you showed every day of 2022. Our results are a testament to your grace under pressure, facing challenge after challenge. To each of you, every member of this company you have built, I'd like to offer my heartfelt thank you. In closing, 2022 was a banner year for Impinj. We delivered record revenue and adjusted EBITDA while launching new products, investing in our team and unlocking new opportunities. As we continue driving our bold vision to connect every item in our everyday world, I remain confident in our market demand and position and energized by the opportunities ahead. Thank you, Chris, and good afternoon everyone. As Chris noted, Impinj had a fantastic 2022, with four consecutive record-revenue quarters, record adjusted EBITDA margin, and record backlog entering 2023. Momentum built throughout the year, culminating in record fourth-quarter revenue, adjusted EBITDA, and EPS. That said, we also wrestled with wafer shortfalls and component challenges, preventing us from fully capitalizing on our demand. Despite those challenges, our team's consistent execution led to meaningfully improved supply and sequential revenue growth every quarter. Today, more than ever, I am energized by our many enterprise deployments in retail and supply chain, and logistics that are driving strong secular demand and which will, in turn, enable us to deliver growth and operating leverage. Fourth-quarter revenue was $76.6 million, up 12% sequentially compared with $68.3 million in third-quarter 2022 and up 46% year-over-year from $52.6 million in fourth-quarter 2021. Fourth-quarter endpoint IC revenue was $58.7 million, up 15% sequentially compared with $51.2 million in third-quarter 2022 and up 53% year-over-year from $38.4 million in fourth-quarter 2021. Quarter-over-quarter endpoint IC revenue growth significantly outpaced our original mid to high single-digit expectations. Unit-volume growth also exceeded our original expectations, more than offsetting the expected decline in specialty and industrial mix. Looking forward to first-quarter 2023, we expect low-double-digit sequential endpoint IC revenue growth, driven by increasing volumes as wafer supply continues to improve. Fourth-quarter systems revenue was $17.9 million, up 4% sequentially compared with $17.1 million in the third quarter 2022, and up 26% year-over-year from $14.2 million in fourth-quarter 2021. Systems revenue exceeded our expectations, due to our contract manufacturer delivering more readers than we had anticipated. On both a sequential and year-over-year basis, gateway and reader IC revenue increased while reader revenue decreased. Despite strong backlog, we expect first-quarter 2023 systems revenue to be similar to the fourth quarter due to a few stubbornly tight components. 2022 revenue was $257.8 million, up 35% year-over-year compared with $190.3 million in 2021. Endpoint IC revenue grew 38% year-over-year, driven by growing volumes from new deployments, expansion at existing deployments, and a strong specialty and industrial mix. Systems revenue grew 30% year-over-year, driven by E-family reader IC strength, the loss prevention deployment with the visionary European retailer, and broad-based reader demand. Fourth-quarter gross margin was 53.8%, compared with 56.9% in third-quarter 2022 and 58.2% in fourth-quarter 2021. The quarter-over-quarter decline was driven by endpoint IC product margins, specifically the lighter mix of specialty and industrial ICs. The year-over-year decline was driven by endpoint IC product margins, both from the lighter mix of specialty and industrial ICs and less sales of fully reserved inventory. Full-year 2022 gross margin set an annual record at 55.5%, compared with 54.2% in 2021, with the increase due primarily to endpoint IC product margins, specifically the specialty and industrial mix, partially offset by less sales of fully reserved inventory. Total fourth-quarter operating expense was $29.5 million, compared with $29 million in third-quarter 2022 and $25.3 million in fourth-quarter 2021. Research and development expense was $14 million. Sales and marketing expense was $7.3 million. General and administrative expense was $8.1 million. 2022 operating expense totaled $114.2 million, compared with $94.1 million in 2021. We expect total first-quarter 2023 operating expense to increase, driven by annual payroll tax resets, bonus-structure changes, legal fees as well as continued investments in our platform. Fourth-quarter adjusted EBITDA was $11.8 million, compared with $9.8 million in third-quarter 2022 and $5.3 million in fourth-quarter 2021. Fourth-quarter adjusted EBITDA margin was 15.3%. 2022 adjusted EBITDA was $28.9 million, compared with $9.1 million in 2021. 2022 adjusted EBITDA margin was 11.2%. Fourth-quarter GAAP net loss was $100,000. Fourth-quarter non-GAAP net income was $11.6 million, or $0.41 per share on a fully diluted basis. 2022 GAAP net loss was $24.3 million. 2022 non-GAAP net profit was $26.3 million, or $0.96 per share on a fully diluted basis. Turning to the balance sheet, we ended the fourth quarter with cash, cash equivalents, and investments of $192.9 million, compared with $201.1 million in third-quarter 2022 and $207.6 million in fourth-quarter 2021. Inventory totaled $46.4 million, up $14.5 million from the prior quarter, with the increase coming primarily from endpoint IC work-in-process. Fourth quarter net cash used in operating activities was $6.2 million. Property and equipment purchases totaled $6.1 million. Free cash flow was negative $12.3 million. For the full year, net cash provided by operating activities was $600,000. Property and equipment purchases totaled $12.1 million. Free cash flow was negative $11.4 million. Before turning to our first-quarter guidance, I want to highlight a few items unique to our fourth-quarter results and first-quarter outlook. First, we currently anticipate first-quarter 2023 gross margins between 52% and 53%, with the sequential reduction due to a lighter mix of E-family reader ICs and unanticipated costs in both 300 millimeter endpoint IC post-processing and reader components. We are actively addressing these elevated costs and anticipate gross margins to return to our targeted 53% to 54% range in second-quarter 2023. Looking further ahead, we see gross margin stabilizing in that 53% to 54% range until product innovations create opportunities for gross margin accretion. Second, our business model demonstrated significant 2022 operating leverage. And while we expect a step down in first-quarter 2023 adjusted EBITDA margin, our goals remain operating margin expansion and then consistent free cash flow. That said, in first-half 2023 our planned inventory growth, comprising primarily endpoint IC work-in-process, will consume more cash than we will otherwise generate from operations. Finally, upside wafers began layering into our fourth-quarter 2022 inventory and we expect another increase during first-quarter 2023. Despite that increase, we expect to be hand-to-mouth on finished endpoint ICs at least until second-half 2023, for the reasons Chris already noted. Nonetheless, we anticipate growing endpoint IC shipment volumes to drive low-double-digit sequential endpoint IC revenue growth in first-quarter 2023, and mid to high single-digit sequential endpoint IC revenue growth in second-quarter 2023. Turning to our outlook, we expect first-quarter revenue between $82 million and $85 million, compared with $53.1 million in first-quarter 2022, a 57% year-over-year increase at the midpoint. We expect adjusted EBITDA between $9.2 million and $10.7 million. On the bottom line, we expect non-GAAP net income between $8.6 million and $10.3 million, reflecting non-GAAP fully diluted earnings per-share between $0.30 and $0.36. In closing, I want to thank our Impinj team, our customers, our suppliers, and you, our investors, for your ongoing support. Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Toshiya Hari with Goldman Sachs. Please go ahead. Hi guys, good afternoon, and congratulations on the strong results. My first question is for Chris. I was hoping you could talk a little bit about how you're thinking about the full year, both from a supply perspective as well as a demand perspective. On the supply side, it sounds like you're still working through some of the constraints both in your IC business as well as your system's business. But at this point in time, what kind of visibility do you have? What kind of support do you have from your foundry partners and some of your component suppliers in terms of growth for the full year? And I guess on the demand side if you can talk a little bit about what you're seeing from a pricing perspective and how you're thinking about volume, particularly across the logistics supply chain, and retail. That would be super helpful. Thank you. Okay. Thank you, Toshiya. And I will do my best to hit that question. I'm looking at Jeff and Cary for a little bit of assistance because there's a lot of items to unpack there. So to start out, in 2023 we anticipate significant endpoint IC volume growth. Despite macroeconomic crosscurrents and retailers' ongoing inventory reductions, we see long-term multi-year tailwinds for our industry overall. We have, of course, a very strong backlog entering the year. There is pent-up demand out there in the market from programs that were either delayed or that we couldn't fully get going in 2022. And we are seeing increased supply from our foundry partner. As I noted in my prepared remarks, that increased supply is ramping up. So, we will -- as well as our post-processing is ramping up. And so, we will still be running hand-to-mouth for at least the next two quarters heading into the second half of 2023, and we'll have to give an update at that time based on what the demand looks like and what our supply and our post-processing look likes to give -- to give an idea of how much we're catching up if at all. In terms of overall strength in the market, we collectively, all of us feel very good about where the market is right now. The growth opportunities that we're seeing both in retail and supply chain and logistics and more broadly, and I'll just add a little anecdote here, back when we first started at RAIN RFID 15 years ago, I remember a lot of programs that were potentially going to ramp at that time, including everything from magazines, to pharmaceuticals, to building supplies and so many -- just so many areas. Back at that time, the technology wasn't ready, the products weren't ready. And quite frankly, the RAIN RFID wasn't far enough along for that kind of broad-based adoption. What we're seeing right now is those programs starting to return. We're seeing demand on the market from many verticals, in addition to the strength in retail and supply chain and logistics. That gives me a very positive feeling for the future 2023 and beyond. And I'll pause to see if anybody else here I would like to layer anything else on, or I'll just turn it back to you Toshiya for a follow-up question. Yeah. Just -- Chris, on pricing. I think it's well-telegraphed that your key foundry supplier increased pricing across the board. Not just for you guys, but for all fabless customers, your ability to pass that through to customers in 2023? And then I'll just ask my follow-up as well. And this one is for Cary. So the increased costs you spoke to on the post-processing side of things, I wasn't quite sure what exactly is going on there in Q1. So if you can kind of expand on that or elaborate that'll be super helpful. And then your conviction level around that reverting in Q2 and beyond? Thank you. All right. So, Toshiya, starting with the first part of your question. Yes, our foundry partner raised prices, those price increases are going into effect right now. Expect us to handle that in a similar way that we've handled previous cost increases, we will look to pass those on to our customers in a way that enables us to maintain the integrity of our margin model. Those price increases are going into effect now over the course of the first couple of quarters of the year at this point. And then to your question on post-processing, the dip in gross margin is temporary and will rebound in Q2 for a couple of reasons. First, we had a very last-minute cost increased from one of our back-end partners. For the first quarter, we are prioritizing production volumes over costs, so that we may deliver on our customer commitments and continue scaling into those record demand. For Q2, however, we will flex our supply chain, so that we may get back to our targeted gross margin percent while delivering on increased volumes as well. So, we just need a little bit more time to flex to support that. And then the second item relates to ongoing component challenges for our reader business. We had a cancellation and decided to pay a premium to get -- to secure the component from an alternative supplier. Based on today's visibility, however, we expect to deliver flat systems revenue in Q2 at a richer margin than Q1. So, for those reasons, we expect Q2 to bounce back into the 53% to 54% range. And I would end with, I expect full-year gross margin to be in the 53% to 54% range. So, we will more than make up for it in the back half of the year. Yeah. Hey, guys. First of all, congratulations. Pretty incredible results in this economy. I had a couple of questions. First, I wanted to clarify something Cary, did you say the second quarter will see double-digit sort of teams endpoint IC growth just as a point of clarification? And my question is, you are seeing a very healthy increase in the revenues and endpoint IC. I was curious if you could -- just to take Toshiya's question and sort of turn it around, could you point us to the end markets that this is coming from. Yeah. I'll take the first one and then hand over to Jeff for Chris for the second. So, Harsh, to clarify, in Q -- for the first quarter, expect low double-digit quarter-over-quarter revenue growth for endpoint IC. In the second quarter, expect mid to high single-digit quarter-over-quarter endpoint IC revenue growth. Yeah. Demand is -- So, Harsh, demand is coming from, as I said in my prepared remarks, significantly from our target verticals. Retail and supply chain and logistics buoyed by some of the work we're doing in packaged tracking and supply chain logistics and loss prevention and self-checkout on the retail side. But as I said, and answered to Toshiya's question, we're also seeing a kind of broad-based growth in the other verticals and other opportunities and although we don't call those out specifically. We feel some buoyancy in the market from those many opportunities. They will not all materialize into instant volumes but programs are -- that I thought were well behind us and I kind of put out in my mind, it’s starting to return right now. So, I feel good about the mark and I see Jeff nodding has said the same. So, I think we feel good about where we are in terms of long-term endpoint IC unit volume opportunities and tailwinds we see overall for our industry and for us in particular. Okay. Great. Thank you so much, Chris, for that color. And then, Cary, for my follow-up. I think when I work the numbers to the model, the OpEx was up quite significantly -- I think you laid out a bunch of things. Would this be the new base for OpEx as we move forward? Or are you expecting a sort of a one-time step up for a variety of reasons in the March quarter? Because you gave us the revenues, you gave us some margins and then there isn't a whole lot outside of OpEx [indiscernible] the numbers. And then Chris for you, Avery Dennison talks about 20% growth organically in the Intelligent label business. Your growth is much larger and I was trying to understand why you're growing so much faster than your biggest distributor. Okay. Harsh, this is Cary. I think I can take both of those. So, yes. We are anticipating a step up in OpEx for the reasons I mentioned in the prepared remarks. It is the seasonal effect of payroll tax resets. It's the structural change to our bonus, remember this is the second final step to changing our bonus to 100% cash. It is legal fees and then it's our ongoing investment in our platform. So, as you look forward, I expect this level to be at approximately where we'll be for the near term with fluctuation depending on G&A related to legal fees, which I expect more first-half weighted than second-half. And then as the seasonal expense abates expect our investment in our engineering team and our sales and marketing to step into that. So, the trend will match somewhat similar to what you saw in 2022, since many of the dynamics are present in 2023 as they were in 2022. And then your second question regarding our growth rates relative to one of our top customers Avery Dennison, we don't always line up with Avery Dennison in each quarter. They report an enterprise-wide intelligent labels revenue growth rate, but there are mix and ASP differences that need to be taken into account. We are also in a high inflationary environment right now and it's unlikely that it's impacting us both in this exactly the same way. What I would add is that, we're incredibly encouraged that they are talking about the market acceleration in 2023 and that's exactly what we see as well. We serve kind of the broader market in general. Denison is, of course, one of the key suppliers of labels [indiscernible] but there are others out there. And so, we serve the broader market, which includes many other partners also. And keep going [indiscernible]. I'm sorry. Great. Thank you. Let me add my congratulations. It's been certainly fun to follow the Impinj journey over the past decade and all that you guys have accomplished. I guess my first question -- my first question is just on the systems business, you've had some very large projects roll out over the past year and it sounds like it should be flattish into the first half of the year, but how should we think about just the systems business in the pipeline and maybe the second half of the year or is it too early to call once new projects might hit. This is Jeff. I'd start by saying that the system's pipeline is strong and growing nicely. We do have some large enterprise deployments that are going well. And success in those initial deployments creates opportunity to expand within those accounts as well as other enterprises in the retail and supply chain and logistics sectors, which are both significant growth vectors for Impinj. As it relates to -- I'll pass it to Cary to speak to the timing and impact of revenue in 2023. Yeah. Mike, thanks for the question. We signaled that we expect similar systems revenue in Q1 that we delivered in Q4. And in Q1, we have a lot of the same dynamics with the visionary European retailer continuing to deploy the second phase of their loss prevention deployment. Now that phase will wrap up largely in Q1. There's opportunities to win more business with this customer that are as great as what we've already delivered to the customer, but the timing may not match up perfectly. We have been prioritizing that deployment in terms of allocating our finite components that continue to be a struggle for us to get. So, as that Phase II ramps down, that frees up some components for us to deliver to other customers that have unfortunately been waiting on the sidelines for their readers. So, now that we have a little bit better visibility into 2Q component supply, we're able to signal that Q2 will be similar to Q1, whereas you recall last quarter, we were worried that we wouldn't be able to deliver similar revenue and we actually guided Q2 down just a little bit. So, we're in a little bit better position than when we were a quarter ago. But we're still in a situation where demand outstrips our ability to supply for systems because of these component shortfalls. Right. That's helpful color. And for my follow-up question, maybe for Chris or Jeff. Just how is the customer feedback for Impinj authenticity now that you've had a quarter that rolled out and do you see anything even close to competitive on the market that can match this vision and solution? I'll take that one, Mike. And I'm excited that you asked the question. I'm very encouraged by the growing level of interest among our solution partners and an increasing number of enterprise end customers who are guiding Impinj authenticity solution engine. Recall that it's an innovative differentiated Impinj platform solution engine that delivers cryptographic product authentication that protects brands and consumers. The pipeline is growing nicely. Of course, the time and pacing -- or the pace and timing of those opportunities is challenging to predict. But I am even more optimistic today than when we had this conversation last quarter regarding the opportunity not only to build endpoint IC recurring revenue, but also to establish a new services revenue opportunity in the longer term. Mike, I guess, I'd like to add one thing there. Just as you think about it long-term, now think about any technology. It does matter of [indiscernible] think of any early successful technology that hasn't rolled out security, you'd be hard-pressed to find one. And here, we're the first ones to truly launch and endpoint IC design for broad-based adoption that has a cryptographic engine and the key in it. And that cryptographic engine and the key allows us to authenticate the item to which the IC is attached. We believe that capability for the future will be essential and that at some point in the distant future, as you know, because we get better and better at doing this, there will be a key in every single IC, there needs to be. It’s just how technology goes. So, we're excited about where we stand today. We're excited about our pipeline, and I personally I'm excited about the long-term opportunities, not just a year or two out, but further out in time as well. Hey, Chris, in past quarters, I think you've talked about under-shipping demand from an endpoint IC in the ballpark of 50% plus. I didn't hear a number this time around. So, I was wondering if there is one that you're willing to share with us. And then on the systems outlook, I just want to clarify, again, it sounds like now with the European visionary retail Phase 1 deployment rolling off in the first quarter, you still have visibility at this point and comfort to a flat second quarter. I'm kind of wondering how you think that progresses then into the second half of this year. Because it sounds like Phase 2 is not being factored in there. If it does, that would be upside that we could possibly see in the second half of this year or into 2024. So, Scott, I think I'll take the first part of -- the first question and then I'll hand off to Cary. We had signaled that for six consecutive quarters, demand exceeds supply by more than 50%. I can say that the same for this current quarter as well. So for seven quarters, demand is at 60%, supply more than 50%. However, we're going to stop using that metric going forward, and instead focus on providing more detailed information about demand, supply, the market, and other things, we're going to try and provide more color rather than just one single number going forward. But if you're asking about, did we achieve that metric again for the seventh quarter? The answer is yes. And Scott, this is Cary, I can take the second question. Yes. You heard correctly -- we now believe systems revenue will be flat through the first two quarters of the year. The loss deployment phase will roll off and then the limited supply that we have will go to other customers in Q2, but keeping revenue about flat. I don't want to guide second-half systems revenue just yet. We are still navigating these component shortfalls. So, I don't feel comfortable going beyond kind of the next couple of quarters. But as soon as we have better visibility to components we will update that. Great, very helpful. And if I could, just on the big picture front, I guess two items. Following up on Mike's question on authenticity and you kind of opened the door there from a services revenue standpoint, I'm wondering how you're starting to see that model develop, if there's any commentary in terms of timeline, how you think that'll function and when we would actually see some contribution? And then, Chris, from a really high level If we look over the past decade, endpoint IC have been growing in the ballpark of 25% to 30% per year on a compound annual growth rate. We're seeing that start to inflect being pulled forward by the pandemic, obscured by a lot of the supply chain issues that we've had ongoing for the last several quarters. So, I'm wondering if you would take a stab at what the growth rate of this market looks like over the next two, three, five years. It's still very early days. We're still constrained by supply and wafer availability, but that's easing. But it's just a market that's going to grow 50% for the next three to five years, you guys have any take on that? Thanks. So, let me take the second question first then I'll hand over to Chris on authenticity. Scott, I could hazard a lot of guesses in terms of where this market could go or might go, and I do feel there is very strong demand out in the market at [NRF] (ph) really for the most part I was talking to enterprise end users as opposed to partners. So, I feel very good about the market, about the opportunity, about growth not only in our core vertical in adjacent ones as well. With that said, I don't feel good enough I don't have predictive powers that are good enough to suggest that the market in the future will be any different from the historical trends of 25% to 30%, it may turn out to be the case and if it is, we'll come forward and tell you, but right now the best prediction that I can make is just the historical trends have been 25% to 30% and that's kind of what we're holding going forward. And Scott, unfortunately, my answer on the authentication model is going to be roughly similar. It's a little too early to model authentication revenue in 2023. We are shipping or we will ship units on our endpoint IC authentic and extreme endpoint IC some as early as Q1, but very small quantities at this stage. So it won't really hit the radar. So, give us a little bit of time before we can provide clarity on that. And go ahead, Jeff. Yeah. I think I would just add to that that I'm very encouraged by the creativity of our solution partners who will integrate cryptographic product authentication into their overall solutions offerings. And one of the important things we're doing right now is engaging with leading enterprises in how they see the building value through the introduction of product authentication within their overall service certain product portfolios. And in those discussions, these enterprise end customers are bringing forth creative ways in which that value could be attributed to both endpoint IC recurring revenue and the services revenue and how we and they and their partners might share in that building value. So, I think it's very important that we're -- as we're developing this emerging opportunity to listen to enterprise customers on how they create value, the contribution that the Impinj authenticity solution engine is making. And therefore, how we ought to in partnership create and share that value. Could you talk about M700 as a percentage of the mix and how you expect that to progress over the next few quarters? So, we don't break down on a percentage basis. The difference -- our different product families. What I will say is that our Impinj M700 family product volumes are growing. They represent our newest products. That's where we're investing and building our post-processing capacity, and our future really is around that entire Impinj M700 family. So, you should expect and -- you should expect that more and more as we go forward our volumes will be focused on the Impinj M700 family. Great. And with respect to the two new chips that are targeting the new use cases in automotive, pharma and food. What should we be looking for there in terms of key milestones? And what would you be planning to share with us over the course of the next few quarters? I think the answer to that question is that we have particular customer opportunities that are using those ICs will come forward and highlight them. Otherwise, we intend to just treat the new Impinj M780 in M781 as kind of core element of the M700 product family and just expanding the breadth of the offering. So, if something notable comes up like we have a particular win that gives them expect us to come forward with it, otherwise, we won't be breaking it out separately, but we're excited about the introduction because those particular ICs open up just a broader range of opportunities for us. Hey, gentlemen, also my congratulations as usual. I'm just going to ask one quick question here, it can be for Jeff or for Chris? But I'd like to just chat a little bit about the pipeline and specifically logistics. We know you've got the big first customer and the marquee second customer, but we've always talked about others waiting in the length and it has to be apparent now that this big marquee customers clients success moving forward. So, just curious if you could talk about big opportunities there. Do you think we will be talking about a third logistics customer in 2022? This is Jeff. I can't speak to any specific customer. But when you do have sector-leading enterprises speaking publicly about the investments they're making in their RAIN RFID deployments and the benefits they are already seeing in it, no doubt others in the industry sector are tracking that -- those developments if you will. And I will say that the system's pipeline including supply chain and logistics continues to build nicely. As always, I want to reinforce that the pace and timing of those opportunities is hard to predict. But I see increasing opportunity for follow-on enterprises in that sector evaluating planning for and ultimately deploying solutions that are relevant to how they create business value in the future. And Tory, expect us to keep investing in this [indiscernible] logistics opportunity, because we truly think that it's about whether opportunity for us, specifically, given the solutions that we're bringing to market. Yeah. Hey, guys. Actually, I had two quick ones. I noticed that we're modeling taxes at zero going forward. I was curious, Cary, if you could give us a sense of what kind of tax loss carry-over you have and if it's appropriate to model zero percent taxes for the foreseeable future. Yeah. It's almost zero. We have some foreign taxes that I think are in a couple of hundred thousand dollars range. We have almost $250 million of NOLs. So, I don't anticipate a tax bill in the near term. Fair enough, and then that's pretty straightforward. And then for -- one for Chris. Chris, there was a fair bit of talk, I think mid-point of last year that the Japanese convenience store guys were very interested in RFID if the cost could come down just a little bit. I was curious if you could help us understand how the total tax costs might come down. I mean I know it's probably not you guys because you're the main brands behind it at a penny. But what are going to be other components that might come down and maybe an update on those -- on the Japanese convenience sort of consortium. Yeah. First, I'll do my best to unpack that one and give a kind of a cogent broad-based answer to it. Post-COVID the world has changed. Prior to COVID there was a significant push to drive the inlay cost down as the key driver that would enable adoption. Of course, inlay cost and the increment on our overall tag costs are still important, but the discussions we're having with end customers now a much more about digital transformation, and how we can help those enterprises change their business, change how they run their business, enables them to track every item they manufacture transport and sell, optimize their labor teams in terms of overall efficiency drive efficiencies in the organization themes their dynamic has changed post-COVID. So, I'm not saying cost doesn't matter, but it's no longer the single biggest thing that we get into a discussion on. A lot more discussion is how we can solve the problem for the end customer. Now as IC costs, other costs have gone up across essentially all industries costs have increased. We, of course, still have those cost discussions, it's hard to predict what the future holds from a cost perspective. But I would anticipate as things settle out long-term post-COVID we will go back to gradually decreasing costs over time low single-digit ASP declines overall for our industry, but that's to be determined, it really depends on what the future holds. As I think specifically about that opportunity in Japan, that opportunity has gone slowly and at least from our perspective although not gone away, there are other food opportunities worldwide that have actually come to the fore really ahead of it. We don't have the ability to really speak about those opportunities. We hear about other companies talking about food on some other calls. And food is one of those areas where we see these kind of long-term growth prospects and so we will be pushing in that area. And of course, food is very sensitive to cost and so if the cost aspect will come up associated with food. But right now, what we're really focused on is digital transformation. Two quick things that I would add to that. This is Jeff, is that recall that the challenge that the Japanese convenience store enterprises are seeking to address is the scarcity of labor and the cost of labor, and that challenge is no less today than it was when they started their investigation into the role of RAIN RFID and helping address that challenge. So, while cost does matter other costs have continued to increase, which has a favorable impact on the business modeling, if you will, about making a platform investment to address the labor shortage or scarcity and I would say the Impinj platform and its contribution to self-checkout has advanced well within that same timeframe. So the opportunity to smartly invest in increasingly performance Impinj platform-based solutions to self-checkout in an environment where labor costs continue to increase and labor scarcity continues to worsen, means that over time though it's hard to predict the pace and timing, that opportunity within that sector as well as Chris mentioned to overall food and quick service restaurant, et cetera, is an increasing opportunity and growth vector for Impinj in the longer term. This concludes our question-and-answer session. I would now like to turn the conference back over to Chris Diorio, Co-Founder and CEO for any closing remarks. Thank you, MJ. I'd like to thank you all for joining the call today. I hope you and your loved ones are remain safe and well. Thank you.

EarningCall_470

Good morning and welcome to the KKR Real Estate Finance Trust Inc. Fourth Quarter 2022 Financial 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. Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust earnings call for the forth quarter of 2022. As the operator mentioned, this is Jack Switala. Today, I'm joined on the call by our CEO, Matt Salem; our President and COO, Patrick Mattson; and our CFO, Kendra Decious. I would like to remind everyone that we will refer to certain non-GAAP financial measures on the call which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the Investor Relations portion of our website. This call will also contain certain forward-looking statements which do not guarantee future events or performance. Please refer to our most recently filed 10-Q for cautionary factors related to these statements. Before I turn the call over to Matt, I'll provide a brief recap of our results. For the fourth quarter of 2022, we reported GAAP net income of $14.6 million, or $0.21 per diluted share, including a CECL provision of $21.2 million, or $0.31 per diluted share. Distributable earnings this quarter were $12.4 million, or $0.18 per share, including a write-off of $25 million, or $0.36 per share. Distributable earnings prior to realized losses were $0.54 per share relative to our Q4 $0.43 per share dividend, driven largely by the higher rate environment. Book value per share as of December 31, 2022 was $18, a decline of 1.5% quarter-over-quarter. Our CECL allowance decreased to $1.61 per share from $1.66 per share last quarter. Finally, in early December, we paid a cash dividend of $0.43 per common share with respect to the fourth quarter. Based on yesterday's closing price, the dividend reflects an annualized yield of 10.9%. Good morning, and thank you for joining us today. Before turning to the current market and company results, I'd like to reflect on KREF's achievements during 2022. Despite a very challenging environment, we made significant progress enhancing our liquidity and diversifying our already best-in-class non mark-to-market liabilities. In 2022, we optimized and diversified our financing sources, and as a result, sit on record levels of liquidity. Last year, we added $2.5 billion of non mark-to-market liabilities. Notably, we increased the borrowing capacity on KREF's corporate revolver by $275 million to $610 million and extended the maturity date through March 2027. This revolver is a key contributor to our nearly $1 billion in liquidity as of year-end. 77% of our secured financing as of year-end was completely non mark-to-market, and the remaining 23% is only mark-to-credit. In addition, we have $1.9 billion of CRE-CLO liabilities that are priced at attractive spreads and still in their reinvestment periods. In 2022, we grew our permanent equity base by 15% to $1.6 billion. We raised approximately $150 million of preferred equity at a 6.5% fixed-for-life coupon. We completed two public offerings of common stock, resulting in net primary proceeds of $188 million. KKR reached its target long-term hold position of 10 million shares, representing 14% of our shares outstanding, resulting in market-leading alignment between KKR and KREF. Equally as important was our disciplined approach to buying back shares, when KREF traded below book value. In 2022, we repurchased 2.1 million shares for nearly $36 million. Since our May 2017 IPO, KREF has repurchased nearly $100 million of stock. I cannot overstate the impact of our partnership with our manager, KKR, and the strength of our real estate platform. KKR's integrated real estate business provides us with a robust view of the current operating environment, which has become more dynamic over the past few quarters as the Federal Reserve has embarked on a virtually unprecedented pace of interest rate increases. This broader real estate platform collectively manages over $64 billion of AUM and has grown by approximately 60% since the end of 2021. For example, KKR's real estate private equity team owns or manages over 90 million square feet of industrial assets and over 30,000 multifamily units globally. We are able to draw on real-time data and market intelligence from this property portfolio, which informs our investment decisions as a lender. The KKR real estate credit business is substantial in its own right, with $30 billion of assets under management and a dedicated team of 66 at year-end 2022, with nine senior investors responsible for over $10 billion in originations. As a reminder, KREF is KKR's flagship senior transitional CRE lending strategy and holds a first priority position within the allocation waterfall. This team originated $2.7 billion on behalf of KREF in 2022 across 25 loans, concentrated our efforts in the growth property types, with nearly 70% secured by multifamily and industrial properties and another 22% secured by life science properties. Our focus on lending to institutional sponsors on high quality real estate and growth sectors and markets has positioned us well to navigate the current environment. Our largest property type is multifamily, which represents approximately 45% of the overall portfolio. We continue to see strong performance across that segment, with median same-store rental rates up 12% in the portfolio of fourth quarter of 2021 to the first fourth quarter of 2022. That said, and as we discussed last quarter, the office sector remains challenged with little liquidity across both debt and equity. Our underweight and office will benefit KREF on a relative basis, we are diligently working through our watch list office loans. Our first preference is to work with our existing sponsors. However, many properties will require additional capital and sponsors will need to demonstrate commitment to the asset with additional equity. We are not in the free option business. And our mindset is to deal with any issues now, and not to kick the can down the road with a sponsor, who is not economically incentivized to lease the current market rates. Fortunately, we have many tools at our disposal to optimize these outcomes, including taking title and operating assets until the liquidity returns. We're also in a position to be proactive with our borrowers and work towards faster resolutions because we have high levels of liquidity at the corporate level. Turning to earnings. The high interest rate environment continues to be a tailwind for our distributable earnings. In 2023, we expect the portfolio to turn over modestly, and we will continue to match originations with repayments. We expect repayments for 2023 to be approximately $1 billion, weighted to the back half of the year. As we navigate this New Year, we're very well-positioned with a strong portfolio, best-in-class liabilities and record levels of liquidity. Lastly, I want to take a moment to thank Todd Fisher, who resigned from the KREF Board of Directors earlier this month to accept a position with the United States Department of Commerce. Mr. Fisher has been an integral part of our team since KREF inception. And we thank him for his thoughtful guidance and steering the company. We wish him well and as future endeavors. Thank you, Matt. Good morning, everyone. I'll focus today on our efforts on the capital and liquidity front and provide an update around our CECL reserve and watch lists loans. In 2022, with the continued help of our partners in KKR Capital Markets, we added $2.5 billion in non mark-to-market financing. In the public capital markets, we closed $1 billion managed multifamily CLO earlier in the year, providing KREF with $848 million of non mark-to-market and non-recourse financing the two-year reinvestment period. In the private markets, we closed on a term lending agreement totaling $350 million with an option to increase the facility to $500 million and entered into three new asset specific financing facilities, totaling nearly $500 million. We also increase the borrowing capacity of an existing $500 million term lending agreement to $1 billion. Finally, we increased our corporate revolver by $275 million to $610 million, and extended the maturity date through March 2027. Of the $2.5 billion in total capacity added this year, two-thirds is truly bespoke liabilities. The resiliency of our financing structure, coupled with our independence from the public capital markets, is a true differentiator. In buffers KREF on the liability side, during times of capital markets volatility. KREF is well capitalized today, and continuing to preserve flexibility in today's market environment. Our debt to equity ratio was two times, and our total leverage ratio was 3.8 times as of quarter end. Our approach to managing the balance sheet allows us to start 2023 with a record level of liquidity in excess of $950 million, including our $610 million undrawn corporate revolver, and $240 million of cash. Additionally, at quarter end, KREF had $180 million in unencumbered senior loans on the balance sheet. We're maintaining our defensive posture with a focus on managing liquidity. This quarter, we recorded a $4 million net decrease in our CECL reserve of $115 million to $111 million or 147 basis points based on the funded loan portfolio. Similar to our commentary in Q3, nearly half of our total CECL reserve remains held within our five rated loans. Additionally, as we noted last quarter, the CECL reserve is unrealized in non-cash. We would recognize a loss through our cash metric of distributable earnings, if such amounts are deemed non-recoverable, as we did this quarter. Turning to the watch list, in December, we finalize the plan to modify a $161 million senior office loan, previously risk-rated 4 located in Philadelphia. As part of the modification, KREF agreed to subordinate 25 million of our senior loan in the form of a junior mezzanine loan, in return for a $25 million principal repayment from the sponsor. The principal repayment is structured as a new senior mezzanine loan and reduces KREF's mortgage exposure to $111 million. At year end, the loan was risk-rated 5 However, following the execution of the modification in January, the new senior loan was upgraded to a risk rating of three. In addition to the $25 million pay down, the sponsor committed to fund an additional $16.5 million for future capital expenditures and leasing cost, which will bring the total senior mezzanine loan balance to $41.5 million fully funded. The subordinated hope [ph] note is structured as a junior mezzanine loan and does have priority of cash flow once a senior mortgage and senior mezzanine loans are fully repaid with interest. KREF wrote off $25 million of the loan balance in Q4. Regarding our other two risk-rated 5 loans, there are sponsored lead sale processes in progress, and we are maintaining an active dialogue with these sponsors. With Minneapolis loan, we executed a short-term extension to facilitate the sale process. And for the other Philadelphia loan, we have an initial maturity date in May of this year. With regard to the broader portfolio, 88% of our loan portfolio remains risk-rated 3, and we collect it 100% of scheduled interest payments across the portfolio in Q4 and through the first payment date in 2023. A few final comments. KREF finish 2022 strong with a $7.9 billion total funded portfolio representing a 17% year-over-year increase. We originated three senior loans in Q4 for a total of $370 million in sourcing closed $125 million asset specific financing. Finally, we repurchased approximately 500,000 shares of common stock in Q4 as a weighted average price per share of $16.41 or a total of over $7.4 million. Over the last three quarters, we've been opportunistic in utilizing our share repurchase program, with 2.1 million shares repurchased in 2022 for a total of $36 million. Additionally, this month, the board reauthorized $100 million buyback program. Hi, good morning. Obviously, office continues to be a pressure point. Can you talk a little bit on how your borrowers are handling the higher rate environment? Are you making modifications? And just talk a little bit about your expectations. I would assume that there'll be more reserve building on your office portfolio as we go forward through 2023? Sure, Don, it's Matt. Thank you for the question today, and I appreciate you joining the call. I'd say specifically, let's start at the interest rate environment right now, certainly putting a lot of pressure on the overall system. However, borrowers do have interest rate caps in place. And so, they're not fully exposed to current SOFR, or current LIBOR, if we haven't converted it over yet. And then clearly, as those interest rate caps expire, typically at the initial maturity date of the loan, they are required to re-up those interest rate caps and buy a new one. And that's really when the conversations take place around potential modifications on the loan, it's another opportunity for us to take a look at the credit and understand where we are and add any other structural features that we want. And we've been working with our sponsors in terms of giving them some flexibility on their interest rate caps. So for instance, if interest rate cap requires a two-year term or requires a very low strike, accommodating them to either a shorter duration or a little bit higher strike and return for typically cash reserves that we would hold for future interest rate cap purchases, et cetera. Yes, so we want to work with them and help alleviate definitely pressure points as it relates to that, but it's typically in return for some type of other consideration within the loan document. As it relates to further build up on office, in terms of our reserves, we go through the portfolio every quarter. And where we stand now, we feel comfortable with the reserves. It is a very robust process. I think we're eyes wide open. You've seen us, it'll be very transparent and pretty front footed as it relates to not only increasing reserves, but as you saw this quarter, modifying loans and trying to get to the other side and create the right basis for us and for sponsors, so that they can lease in what's a difficult operating market for Office. So feel comfortable right now with where we stand on the reserves, and we'll just have to see what the future brings in terms of how we're positioned elsewhere. Thanks, everybody, and appreciate for taking my question this morning. Look, one of the few places where GAAP and tax diverge is related to realize losses. So, to the extent you did realize a GAAP loss of $25 million. I'm curious if you believe that it's met the threshold from an IRS or tax perspective, as well. And then, if you could talk specifically about, because it occurred in the fourth quarter, but perhaps the tax loss might be realized in 2023. How we should think about the timing and how that falls? Sure. Thank you, Rick, appreciate you joining and appreciate the question. The -- you asked about the write-off that we incurred in Q4 and that $25 million write-off will be a taxable event in the year the modification closed, which was 2023. Maybe pulling the thread on this a little bit, the sum of our quarterly dividends paid in 2022 plus borrowing part of the dividend that was paid in January 2023. And the throwback dividend concept is a practice that's allowed under the REIT rules and that we've used in the past, means that we are fully distributed for 2022. And so, there is no special dividend that would be required. Hi, good morning. Patrick, I guess, I'll start with point this to you, since you mentioned it in your comments. But, I think, half the reserves are related to the 5-rated loans. As we think about that, and kind of pair it with Matt's comments that going to focus on resolutions, quickly and not kick the can down the road. How do we think about those moving from specific losses and to realize losses and running through distributable earnings over the course of this year? Stephen, thanks for the question. So, if you look at our reserves, as we said, about half of the 5-rated loans, or the half the reserves are attributed to the 5-rated loans. If you look at the asset, where we had the write-down in the fourth quarter, we realized the write-down about 16%, against a balance. And coincidentally, the reserve that's held against those 5-rated loans is pretty close to that number. We're obviously working through each of these loans, individually, all of the fours and fives that are on there, going to have potentially different levels of loss content. Not every 4-rated loan is a loan where we think there's a high degree of loss, some of the 4-rated loans are on there as a reflection of the fact that we think there's a near-term catalyst or a near-term event that may lead to a modification. So hopefully that addresses what you were asking. Yes. I guess, kind of to take half of the one, where were we 111. So, if you're looking at $55 million, we see all of that runs to a loss, assuming your reserve where your view at the appropriate level for the assets, resolved or monetized, but just trying to think about the timing of when that's going to hit. Is that a this year event? Is it early next year? Kind of how do we think about the timing of those monetization, realizations? Yes, sure. I think the timing is difficult to forecast here. And clearly, with those 5-rated loans that we talked about, there's processes in place to get to some form of liquidation event. So, not unreasonable to think that we could see some realization over the course of this year. I think the bigger question probably is just related to the quantum there. We feel good about where we're reserved, but clearly in this market, the realized amounts could come in greater or less than when we've set aside. Yep. Thanks, Patrick. And moving to the financing side on these loans, can you talk about how the watch list loans for finance, and if that is financing exposed to credit markets, how those discussions are going with counterparties as you work through these watch lists, loans? Sure. There's a little bit of a disconnect between necessarily what's on a watch list and, the loan -- whether the loan is performing. As we've indicated, we collected 100% of our interest payments through last year, and the first payment date of this year. So, the real driver, especially on these non mark-to-market facilities is the loan current. And in fact, all of these loans are current. So there isn't really much concern, and then in the immediate term, as it relates to those loans. Obviously, as we get to maturity dates, or we need further modifications or restructuring, that's when we're going to have more in-depth conversation with our lenders. I would say those conversations have been constructive. And to-date, as we've worked through some of the loans, the asset that we had a write-off in the fourth quarter that was not on a financing facility. That was that was unlevered. But sort of post, now the modification that loan, that loan is a loan that we can finance on any number of facilities. But I would say that, the conversations have been constructive. And we have an opportunity to kind of work through and get runway where needed. Thank you very much. I wanted to ask, in terms of your quarterly interest income, do you know what percentage of that is funded out of interest reserves that are structured upfront as part of the loans? Hey, Jade, this is Matt. I can jump in there. I don't have that number right in front of me right now. It's not abnormal, obviously, for us to have reserves or recourse obligations to new guarantees to fund interest payments, just given the nature of the business plan and lease up, et cetera, but don't have the exact number in front of me. Okay. But is that an issue in terms of any shortfall and performance and pressure from elevated interest rates, the exhausting of those reserves in coming quarters? I mean, what's it comes back down to value at the end of the day. So, you look at most of our portfolio is in these growth sectors, and the value there has held up well and the fundamentals are really strong. So, I kind of put this in the same bucket as interest rate cap discussions as those expire, there's a lot of value behind these loans and the sponsors re-up and come out of pocket and buy the next interest rate cap. So, lots of times our reserves are set to accommodate for interest at the cap, et cetera. But to the extent they're not, I wouldn't expect a lot of pressure there. I would just expect the sponsors to re-up on the reserve. Thank you very much. On the multifamily credit outlook, it was somewhat surprising to see the downgrade on the West Hollywood asset. I was wondering if you could talk to your overall expectations for that sector? It's definitely been a resilient sector in past cycles. However, the early 90s did see credit issues. And CMBS throughout time has always had credit issues in multifamily. This time around we do have a record level of units under construction, disproportionately concentrated in the growth markets. And then a lot of deals done at very low cap rates, which would have pressure from valuation as well as interest rate caps. So what would be your outlook in terms of multifamily credit performance? Yes. I think we're still, I think very favorable outlook on multifamily credit performance. Clearly values have come down a little bit too, and cap rates have increased just to accommodate the higher cost of capital and the current interest rate environment. On the on the occupancy side, the properties or the markets still operating it at basically all time highs. And we're still seeing pretty favorable rent growth. Although it's come down a fair amount, as you -- as we reported, just on this call, we've got about -- in just in our KREF portfolio, rents were up on a same-store sales basis, 12%, year-over-year from fourth quarter of 2022 to 2021, from 2021 to 2022, excuse me. So, and I expect that to continue to come down, and my guess is across a broader set of assets, that's probably in the high single-digits today, by the way, which I still think is very, very healthy and is kind of the Fed is activity is obviously having some impact on that, which is probably a net positive for the whole market. In terms of supply, agree, there is a wave coming out right now. And I think that'll impact some of these some of these local growth markets. But at the end of the day, all these markets are under housed. And so, it really is just a short term phenomenon in terms of digest, the market digesting those new units. And keep in mind, there's very little behind that. There hasn't been a lot of new construction financing available in the market over the course of the last six months or so, and certainly not readily available today, either. So you're going to have a little bit of a blip, probably as the market goes through that. And then, it should be a pretty favorable setup after that, with the new supply really tapering off. So I would say overall, still very constructive on that market, and haven't really seen any material signs of deterioration there. Hey, thanks. Good morning. I'm curious how you think your appetite for risk, maybe changes as a result of raising your reserve. Like, should one expect the parameters for your target assets to necessarily change? And is there a threshold for further reserve where it does begin to change your risk parameters more meaningfully? And Eric, you're speaking about this new loans that we're making in terms of how we're evaluating like the current market, et cetera. Well, yes, let's just start. Let's start there. The one -- number one, it's a very lender friendly market right now. You've got a lot large participants completely on the sidelines. Commercial banks are still not actively lending in the market. Your loan-to-values have come down a fair amount, obviously, the - we [ph] in that equation is down with the current interest rate market. So, we like the market right now. We think it's very attractive. And you could see what we did last year, the vast majority of our lending activity was in multifamily industrial sectors, which we still believe in the fundamental backdrop there, as I just described with Jade. So, I don't think that really like what we're looking at like, or reserves or things like that are really impacting how we're thinking about making a new loan are what we would focus on. Some of it does come back to liquidity. And we are -- as you saw in our report at pretty high levels of liquidity right now. And I think that's more of a function of just the market uncertainty and the volatility that we're seeing in the market, and just making sure that we've got plenty of excess liquidity to deal with any issues that may come up. And I think it's a little bit less about reserves. But one of the reasons why we've been so front footed and trying to work out some of these loans, and you saw the modification we did this past quarter. Once we get through this, there should be a pretty good opportunity to lend on the other side of that. So, probably less about reserves and more about just watching the liquidity and working through a couple of these loans that we got a 5 rated loans. And once we get through that, I think you that will really kind of change some of our posture in the market as relates to taking advantage of the current market opportunity. Yes, that's really helpful. Maybe you can share some of the things that you're seeing from your seat at KKR more broadly about the flows of capital into commercial real estate. how much capital you see getting allocated to the sector this year? Maybe even who you see being the incremental buyer in the market with there being this layer of uncertainty that we're all talking about? Thanks. Sure. So stepping away from KREF for a second and just talking about what we're seeing broadly in capital flows. I would say that the start in the real estate credit side, there is a pretty consensus view and a strong view really globally that credit is very attractive today. And within that segment, real estate credit is very attractive. And so, while a lot of allocators in the market are experiencing a denominator effect, just given where the equity market is, to the extent, so the overall pie might be shrinking. You want to think about the component of that pie being real estate credit is growing. So we're taking market share, if you will. And we're certainly seeing that on the fundraising side with more allocators favoring real estate credit for that. That feels like a good opportunity. And on the real estate equity side, I think the market is very much looking at values and trying to understand, okay, where value stay thinking about their own portfolio, but at the same time, the opportunistic funds, I think we'll have successful raising capital. First of all, there's ample dry powder available today across the market, almost record levels of dry powder to invest in real estate. And the fundamental setup in many of these property types and markets is still pretty good. So I think you'll continue to see capital being raised on the optimistic side of the market, as well as on the equity side. And so, its overall, everyone's dealing again, with a little bit of headwinds from the denominator effect, but still seeing very good flows across the real estate spectrum. Thank you very much. You mentioned the $1 billion repayments this year. Do you know the dollar amount of loans scheduled for initial maturity that will have to meet some kind of extension test? And I know, you talked about, you're not giving away anything for free, so sounds like you're going to be pretty strict in those discussions? Yes, Jade, I can talk about it, and I'll turn it over to Patrick to give you the exact number. But a lot of the portfolio was originated post-COVID. And so, it is a smaller dollar amount. But we can give you the initial maturity here. And agree, I mean, we want to work with our sponsors, we want to be reasonable. And however, all those initial maturities or most of those initial maturities will have some form of test to get into extension periods. And those tests can be met in many cases. And in some cases where they're not met, that's another opportunity to have a discussion and try to better our credit overall. So that's how we approach it. And with that, I'll turn it over Patrick. He could add whatever any other comments he wants and talk about the numbers Jade, sure. Happy to elaborate here. So in the supplement, we show kind of our fully extended terms. And you can see that this year, about 6% of the portfolios is scheduled to have a final maturity date in terms of like the initial maturity date, inclusive of those numbers, that grows to about 21% of the total portfolio. So about 1.7 billion in total. Thanks very much. The West Hollywood multifamily deal. Sorry, I didn't hear before. But did you provide any color on that deal? And if not, could you talk to just some overall statistics or give some sense of what characterizes it? I see that the average unit value is something like 2 million per unit and you make some cap rate assumptions, you're talking rents north of 15,000 a month. So, any colors you can give there and why that deal was downgraded to risk-rated 4? Yes, sure. I can give a little bit of color there. You're right, in the sense that it's a very high-end luxury, multifamily property is actually conduit [ph], it was built for condo. It is basically top of the market. And great location in West LA, as you highlighted there. And the reason we downgraded that was really around modification, discussions that we were having around interest rate caps and just try to get to, make sure we got to a good place as those discussions were ongoing. And this again, comes back, a little bit back down to -- comes back to value. And so, I think we feel pretty good about our bases and the overall value of that asset. But they just downgraded it as we went through modification discussions on interest rate caps. Thanks. I have one more. If there -- are there any other questions in the queue? Because just wanted to ask it, I've gotten some investor questions on this. Just on the CMBS exposure, which is a joint venture. What's the risk of any write-down there? And I believe those positions are B pieces. So there would be special servicing rights? Is that really just a marks [ph] model kind of calculation? What would drive any value designation there that we can see? Got it. Yes. So that's an investment in a fund that owns 2017 and 2018 Vintage conduit, conduit B-pieces. The marking process on that is same as -- pretty much everything we do at KKR, that's a third-party service provider that that marks that. We don't work that internally on a model or anything like that. That's a purely outsourced marketing service. And obviously, the two main things that could impact that market are number one, just risk premium increasing in the market. And number two, fundamental -- fundamentals and defaults. What we've seen in our overall CMBS portfolio, I would say, again, keep in mind, it's a tiny, tiny part of what's within KREF. So I'm speaking more broadly about funds we manage outside of KREF, is continued strong performance there, especially on the conduit side, where these borrowers have locked in 3.5% fixed interest rates for 10 years, the going in coverage was very high, typically over 2.5 to 3 times coverage on those lower interest rates. And they'll enjoy that interest rate for quite some time. So another called seven years or so in some cases. So I think that we continue to see strong performance across that portfolio with really de minimis delinquencies. This concludes our question-and-answer session. I would like to turn the conference back over to Jack Switala for any closing remarks. Great. Thanks, operator. Thanks everyone for joining today, and please follow up with me or the team here, if you have any questions. Take care.

EarningCall_471

Thank you for standing by and welcome to the Third Quarter Fiscal Year 2023 Cavco Industries, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder today’s conference call is being recorded. I would now like to turn the conference to your host Mr. Mark Fusler, Corporate Controller and Investor Relations. Please go ahead. Good day, and thank you for joining us for Cavco Industry's third quarter fiscal year 2023 earnings conference call. During this call, you'll be hearing from Bill Boor, President and Chief Executive Officer; Allison Aden, Executive Vice President and Chief Financial Officer; and Paul Bigbee, Chief Accounting Officer. Before we begin, we'd like to remind you that the comments made during this conference call by management may contain forward-looking statements, including the statements of expectations or assumptions about Cavco's financial and operational performance, revenues, earnings per share, cash flow or use, cost savings, operational efficiencies, current or future volatility in the credit markets or future market conditions. All forward-looking statements involve risks and uncertainties, which could affect Cavco's actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of Cavco. I encourage you to review Cavco's filings with the Securities and Exchange Commission, including without limitation, the company's most recent Forms 10-K and 10-Q which identify specific factors that may cause actual results or events to differ materially from those described in the forward-looking statements. This conference call also contains time sensitive information that is accurate only as of the date of this live broadcast, Friday, February 3, 2023. Cavco undertakes no obligation to revise or update any forward-looking statements, whether written or oral to reflect events or circumstances after the date of this conference call, except as required by law. Welcome and thank you for joining us today to review our results for the third quarter of fiscal 2023. This quarter, we achieved another significant year-over-year improvement in revenues and profit. Revenue was up 16% and pretax profit was 29 %. Units sold were approximately flat and the improved financial results were driven primarily from year-over-year average selling price and gross margin improvement. Operationally, while adjusting to the changing market, our plants continue the reach high levels of efficiency. We generally calculate capacity utilization using all available operating days. For the quarter, this yielded an approximate 65% utilization. However, we operated about 84% of the total available days due to holidays, weather driven downtime and market downtime. On a days operated basis, we ran at about 80% capacity utilization. This indicates that our plants are doing the right thing by adjusting to the market conditions while remaining ready to go when orders improve. Cancellations continued during the quarter, but only at about 60% of the previous quarter's rate. And the bulk of the cancellations were in regions that had lagged the initial stages of the downturn. So in a sense the process has been moving through the regions and for some of the earliest hit areas, cancellations are no longer a major factor. As backlogs reduced to much lower levels, the cancellations naturally become less of a factor because the order to delivery timeframe is so much closure to real time. Retailer inventories are still an issue that clouds the picture of underlying demand. This is because wholesale orders will naturally be slower than homebuyer purchases until retailer inventories are reduced to their targets. Inventory resolution will not be an abrupt change in the market. It's happening every day and each retailer that individually gets to their target moves us closer to a one to one relationship between homebuyer demand and manufacturing orders. Third quarter order rates were hit from all sides. The economy's effect on consumer activity, seasonality, and the industry wide excess inventory have all resulted in declines in the backlog. Our backlog is down 34% sequentially to $427 million or approximately 9 to 11 weeks at current production rates. Well, we normally don't get into the first quarter updates. In this market, I think it's important to share what we're seeing in the first month and the new year. We are seeing early indications of a seasonal pickup in traffic as well as in quotes, which have increased considerably in January. In fact, we view quotes as a leading indicator of future orders and over the past several weeks, quotes have been at or above the level we've seen in the last year and a half. These observations are positive indicators about underlying demand and that we might experience with seasonal pickup in order rates. So there is reason for optimism that a pickup in demand might accelerate the inventory correction and resolve an increased wholesale orders. It's very difficult to predict when the inventory issue will be behind us because we're still watching the see how orders develop going into the spring. However, my best guess is we have a few more months of feeling some level of the inventory drag. For the most part, price has held up well to this point, recognizing that there is a range of competitive pricing pressure from location to location. This is and always will be a cyclical industry and prices never stay stagnant for very long. Again, the question about near term price movements will largely be answered when we see how orders develop in the coming months as well. Let me change course and touch on a few developments in our growth strategy. First, we've talked about this in the past. We successfully started up the new Hamlet, North Carolina plant this quarter. That plant is fully staffed with a strong management team and production of employees that carried over from the prior owner's volumetric building operation. We needed to execute a complex transition to ready the plant for HUD production. And that project was delivered on time and on budget. So really a great job by everyone at both in Hamlet. On January 3, we closed on the previously announced Solitaire Homes acquisition. We're excited about the opportunities this combination brings. Solitaire has four production lines as well as 22 retail stores. We anticipate significant value added opportunities that include filling out product lines across the combined retail network, bringing best practices to the Solitaire production facility, and accessing their retail network to enhance sales in our insurance company. I'd also like to take a minute to discuss our work in the area of digital marketing. I might not talk enough about developments we are prospectively working on in the company. So it's important for me to make it a point to tell you when our major company efforts come to fruition. This is one of the situations because we've been working on this for some time now and have reached a big milestone. In January, we went live with cavcohomes.com, our new consumer facing digital home marketplace. Launching this new website makes it easier for homebuyers to discover and research 1,500 manufactured, modular and park model floor plans, and 2,700 stock models across our flagship brands. It also connects them to our 1,500 retailers and communities based on their geographic area. The home shopper can seamlessly research floor plans, photos, videos, virtual tours and product availability using any smart device. This new site enhances the experience for our retailers as well. They now have the ability to have their own pricing photos, videos and special offers to the dealer specific microsites that we are providing for them. The site is integrated with our ERP system, giving retailers and customers easy access to dealer and product information, as well as current availability. And perhaps most importantly, our dealers benefit from the directed leads and phone calls generated by consumers using this digital marketplace. I know that's a mouthful, but this is really a major milestone. It opens up a new era for Cavco to build our brand nationally and to more effectively reach and serve our customers. Launching with the site is the culmination of a tremendous collaboration between our technical and marketing teams. Through this work, we've not only built site, we've built a powerful organizational capability in the team. And that digital marketing team under the leadership of Colleen Rogers, our Senior VP of Marketing Communications, will continue to add an improve upon the foundation they've created for the benefit of our homebuyers and retail partners. Thank you, Bill. Net revenue for the period was $500.6 million, up 16% or $68.9 million compared to $431.7 million during the prior year's third fiscal quarter. Within the factory built housing segment, net revenue was $481.2 million, up 16.3% or $67.6 million compared to $413.6 million in the prior year’s third quarter. This increase was primarily due to a 15.9% increase in average revenue per home sold due to product pricing increases. Financial Services segment net revenue was $19.4 million, up 7.1% or $1.3 million from $18.1 million. This year-over-year increase was due to a higher number of insurance policies in force. Consolidated gross profit as a percentage of net revenue was 26.2% consistent with the 26.7% in the same period last year. In the factory built housing segment, gross profit percentage increased to 25.5% in Q2 of 2023 versus 25.2% in Q3 of 2022, primarily due to product pricing. Gross margin as a percentage of revenue in Financial Services decreased to 46.6% in Q3 of 2023 from 61.2% in Q3 of 2022 due to the impact of weather related events in Arizona and Texas. Selling, general and administrative expenses were $58.9 (ph) million or 11.8% of net revenue compared to $60.3 million or 14% of net revenue during the same quarter last year. The SG&A dollar decrease is primarily due to lower cost of third-party consultants assisting with the energy tax credit project and was partially offset by greater incentive and commission wages on improved earnings. Net other income was $3.2 million compared to $4.3 million in the prior year quarter. The decrease is primarily driven by $2.4 million in lower unrealized gains of corporate equity securities, partially offset by higher interest income earned on commercial loans and cash balances. Pretax profit was $76.1 million up 29.2% or $17.2 million compared to $58.9 million in the prior year period. The effective income tax rate was 21.7% compared to a benefit of 35.1% in the same period last year. Our third quarter of fiscal 2022 income tax included a non-recurring benefit of $34.4 million, pretax credits related to the sale of energy efficient homes. Excluding this item, our tax expense as a percentage of pretax income would have been 23.3% in that period. Net income attributed to Cavco shareholders was $59.5 million compared to net income of $79.6 million in the same period last year, the diluted earnings per share were $6.66 versus $8.57 per share. In addition, I note our next quarter will include the results of our recent acquisition of Solitaire Homes. Through that acquisition, we acquired finished home inventory at the retail site. Purchase accounting requires us to record that inventory at fair value upon acquisition, which means we'll not recognize a profit upon sale of those homes. As a result, we will see an impact to our margins of approximately 150 basis points to 200 basis points in the next couple of quarters as we sell through these homes. This is the same dynamic that happens on all acquisitions and the cash we will receive for these homes is not affected by the accounting treatment. We are bringing this to your attention because of the amount of inventory we are purchasing, which is driven by the fact that we're purchasing several retail locations. Before we discuss the balance sheet, I'd like to take a minute to highlight that we continue to execute on our capital allocation priorities with the recently closed acquisition of Solitaire Homes, the opening of our Glendale, Arizona and Hamlet, North Carolina manufacturing facilities and our share repurchase of 34 million in the quarter. The purchase of Solitaire Homes will utilize approximately $93 million in cash before closing adjustments, leaving us with just over $280 million in cash subsequent to the purchase. We will continue to appropriately deploy this capital including share repurchases. Thanks, Allison. Today, I'm going to walk through changes in the December 31, 2022 balance sheet compared to April 2, 2022. The cash balance was $376.1 million, up 54% or $131.9 million from the end of the prior fiscal year. The increase is primarily due to net income adjusted for non-cash items and changes in working capital, providing cash of approximately $230 million. This amount was partially offset by common stock buybacks of $73 million and purchases of property, plant and equipment, primarily at our new facilities in Hamlet, North Carolina and Glendale, Arizona. Investments, including short-term, decreased primarily due to the return of capital from one of our joint ventures involved with home sales. Inventories decreased due to lower raw materials and a decline in inventory at the retail lots. Prepaid and other assets were higher from greater prepaid income taxes, partially offset by lower assets recorded in regard to the repurchase option on delinquent loans that have been sold to Ginnie Mae. Property, plant and equipment is up primarily due to the purchase of the facility in Hamlet, North Carolina and continued development of the Glendale, Arizona facility as discussed previously. Accrued expenses and other current liabilities increased from higher rebates payable, more setup, freight, combination work and warranty reserves, all on higher sales. Lastly, stockholders' equity was approximately $955.5 million, up 15.1% or $125 million from the end of the prior fiscal year. Thanks, Paul. As Allison and Paul explained, our balance sheet remains very healthy, which supports a continuation of the consistent capital allocation path we've been delivering upon. While the industry is working through the abrupt (ph) quarter drop off for the past several months and the resulting decrease in backlogs, we view these mini cycles as something to be well managed within the much bigger picture of the dire need for housing. We view the return to a strong market where manufactured housing demand stretches available capacity is inevitable given the nationwide lack of affordable housing. And we feel very good about our continuing strategy. We'll continue to invest in operational improvements and growth, and we will continue using share repurchases to responsibly manage the balance sheet. Good morning. Thanks for taking the question. Appreciate it. Maybe start with Bill, just can you delineate at all between trends in terms of traffic inquiries, quotes across retail versus REITs and institutions as well as maybe community developers, just your different end markets. Are you seeing -- what are you seeing across them? And are you seeing more interest from customers trading down from traditional site built, even if it's not translating directly to orders because of the inventory issue. Yeah. I can take a stab at that. First, I think we've been pretty consistent through this time period that communities have remained strong. So the big impact we've seen recently of decreased retail activity has mostly been more of the street retailer side. So I'd say communities continue to be strong. And a lot of our comments here, which I don't -- I want to present a very balanced picture, right? We've got a few data points here in January. We thought it was important to talk about January because I know my level of interest in trying to figure out where we're going here. It's just a few data points, but they're encouraging data points. Most of that reflects what I would characterize as a generally optimistic mood on the street retailer side coming back up. So communities have been consistent, Street retailers slowed down. The inventory is still there, but there looks to be some reason for some optimism with the data points we have in January. As far as the trade down, I think that's been consistently happening. And I'm always a little bit frustrated because we haven't figured out a great way to give people a sense of the magnitude of that dynamic, but we know it goes on, right? And we know it because we've got retail that's having -- that's talking to folks that might come in and say, I didn't expect that manufacturer helps. But given the way things are going, I want to see what you've got and they end up buying something they're happy with. And I think we also hear it from our independent retailers. So I can't really just give you any sense of how big that trend is. But I know that it certainly is something that this industry has taken some ground on over the last couple of years, actually, with the run-up in pricing. Does that cover it, Dan? Did you have another aspects I missed? No, that's very helpful. Kind of switching gears, I guess, a little bit. Backlog about nine to 11 weeks. Do you -- how should we think about production over the next, say, one to two quarters? Do you expect to curtail production given the decline in backlogs? Are you comfortable continuing to produce over 4,000 homes before we -- obviously, before we add layer in Solitaire, given the order rates that you're seeing, just trying to think about how you're kind of managing that backlog versus when you need to see a significant uptick in orders. Yeah. It's probably a really important question to talk about for a minute because the last couple of years, we reported backlog numbers and it was just across the board, right? I mean everything was going up, and it didn't -- there wasn't much differentiation region to region, and it didn't really matter because the numbers were big, right, Dan. But to expand on your question a little bit and give you a little bit more flavor, when we do that kind of estimate of weeks, that's very much an average now in a situation like this. And the situation does vary from plant to plant, region to region, meaning we do have plants that have considerably less backlog, and we've got some that have very, very strong backlogs. So I told you in the scripted part of the call that we did have some market downtime this past quarter. And that takes different forms, extended holiday outages that we took advantage of where backlogs were lower. And some of our plants, a good number of our plants, actually, have adjusted to four day work weeks. So that was what was going and that kind of lowered our running time of available days to about 84%. And we're continuing in that mode until those individual plants that see even the lower end backlog in weeks, they start to see it stabilize and come up. So a very long winded kind of conceptual answer to you, but I do expect that we'll still not operate all available days. But as we see cancellations abate and get closer to a 1:1 flow-through of homebuyer orders, which I think is happening every day. And if we get kind of the seasonal order pickup that we're starting to see signs of, that's all good news for reducing that market downtime. Just I'll throw this in, again, we're always a little bit hesitant to get into the mode of giving up to the minute updates on these calls. We'd like to focus on the quarter we're reporting on. But I did comment on quotes being significantly up. Also kind of tell you that we looked at orders written, right, not net of cancellations. And last few weeks, they've been honestly comparable to about late summer, early fall of last year. So I'm going to keep qualifying my statements at a couple of data points doesn't mean we're out of the woods by any means, but they're good data points. No, that's really helpful, Bill. I guess and I know you don't want to get into the exact guidance in terms of production number of units. But it sounds like Q4, the last quarter was a reasonable proxy for where we will be, give or take, in the short term versus a big leg down or anything of that nature? Lastly, maybe one or two more ASPs, just expectations as raw materials come down, we expect those to continue to tick modestly lower? Yeah. I've kind of always maybe a little bit of an outlier on this question because I read a little bit less to materials and being a direct relationship and a little bit more to how backlogs are going and how competitive it gets for manufacturing orders. And there, again, I apologize that I can't give you a generalized answer, but it really is playing out in local markets. We have seen some markets where backlogs dropped quickly and to lower levels where there's been some tax sliding on price. And we've seen in others where it just doesn't make sense to reduce price because the backlog still remain or the issue of dealer inventories is really what's restricting orders, not a reduction in price. So again, hard to generalize. We are in a more competitive environment in some geographies and this backlog stabilize, I think we'll be able to make it through this with not a lot of price leakage. Very helpful. Lastly for me, I'll jump out. Allison, I apologize. There were some disturbance and I missed what you said about SG&A. It was lower in the quarter sequentially. What were the factors and just how do we think about what the run rate maybe including Solitaire. Yeah. Thank you. Apologies for the background noise. Lower sequentially due to the reduction in third-party expenses. Third quarter last year, we were right in the middle of our tax energy credit efficient project. So we had a large outflow for support on that by third parties by the offset of then commissions and variable compensation that we have been slow with based on all of these. So basically, SG&A still being the component of about 40% that's variable, now we can leverage as we expand and contract. Yeah. On for Greg Palm today. Thanks for taking the questions. I was hoping to just hit on that last one real quick on SG&A. I mean, it still was quite a bit lower than the Street was modeling here. So I guess before layering on Solitaire, is that say, $59 million number, a more reasonable baseline to go off of? I think the current quarter that we just left kind of represents more of a steady state, if you will. We did absorbed a year ago, an amount that was significant as we talked about because we were going and working with very expertise on the third-party side for the tax credits. What you're seeing now is a more relatively related consistent level. There always has a fluctuation on SG&A, which helps our model because 40% of it is variable compensation and commission structure as is the industry that will ebb and flow with the revenue. So if you modeled at a level of SG&A revenues now, probably a realistic picture. Okay. That's helpful. I guess, just kind of in terms of the overall demand backdrop, maybe for that current quarter, what kind of cadence you saw throughout the months? I appreciate the color on January. It sounds like starting to see things pick up. And then maybe just more broadly, I guess, realistic scenarios for industry shipments for the calendar year '23. Just for this fiscal quarter three, how, I guess, more of a monthly cadence, how you saw that play out throughout the quarter? Okay. Yeah. You got it, I mean, it's interesting because you think of those months, there's a lot of holidays in there and there's seasonal slowing too. So it's a little bit messy to interpret the month-to-month within that quarter. I guess, one of the things that we commented on is that cancellations were for the entire quarter were about 60% of what they were in the previous quarter, which I think is a good sign as well. So I would say cancellations were improving throughout the quarter, kind of they're still present but they're going down. And order rates just typically slow down more in December than we do in the other months. So a lot of things going on there. Hey. Good afternoon. So my first question with Solitaire, any kind of guidance you could give us around what you think run rate annual revenues would be? And then also maybe what collectively calendar year '22 shipments were from the combined entities? So I mean for Solitaire kind of what we've said is overarchingly that the deal went about 10% overall. So also a similar ASPs and the gross margin as the rest of the -- as we work through the rest of the fiscal year. We did touch upon that for the next two quarters because of purchase accounting, the margin will be down a bit. That's for the reasons that we know about and expect. But basically, if we can think about it as we said about in the prior quarters, which is about a 10% increase to our overall capacity. Understood. Just trying to make sure, get a sense of how we need to model this out. I guess the second question, what -- do you feel like this might be a quarter where you're seeing an inflection point in the backlog with cancellations starting to come down or does it feel like the inventory in the channel is still a little too heavy to make that call? Yeah. That's where I want to be really balanced. I mean we're trying to give you guys as much of an update view of what we're sensing in the market as we can. But it doesn't mean we have a clear view of how things are going to unfold here in the next couple of months. I would say, when we turned the corner on the calendar year, I was really focused on, are we going to see a seasonal uptick, right? Because the doomsday scenario would have been that when higher activity and traffic deposits ultimately orders. If we had turned the corner and the economy was kind of winning the game, and we didn't see that seasonal -- the indications that seasonal pickup that would have been -- that would have been a negative sign. Just as I explained, the good news is, over a period of a few weeks here, right, you get beyond the first week or so of January, and you finally start seeing some data really kind of encouraging data around traffic, quotes as I talked in the earlier discussion. And I think I said here in one of the answers that even orders were back up to levels that were from pretty healthy times. So the early indications are good. We're going to keep our eye on it. There's a lot going on in the economy. There's still uncertainty out there. And I think all that stuff connect (ph) have to unfold for us to really know how things are going to shape up for the year. I think for the industry shipments, I'm talking calendar years now, started off with an unbelievably strong first half to push in three quarters of the year, and we finished up overall in shipments as an industry, but that was with the tail off there in the last couple of months. I think Mark (ph) might have the data, I think November was seasonally adjusted rate of November industry shipments was down in the mid-90,000 range. So there was a bit of a tail off there. We're probably going to start off a little slow in this calendar year. And if things go well, it will be a reverse of last year. That's what we're kind of hoping for. Got you. We've seen mortgage rates come down really since October. Are you seeing the same type of decline in mortgage rates for chattel (ph)? No. Chattel states, chattel is a fancy [indiscernible] sticky. So we haven't seen chattel move really at all over the last couple of months. It tends to be independent of land home rates. So nothing to note as far as improvement there. Net chattel rates, I'm looking around because I don't have all the data. I think chattel rates are running in the high 8%s to low 9% right now. Got you. And then -- and I apologize if you might touch on this earlier, but just what are you hearing from the park operators these days? How are they thinking about '23 and what should we expect to hear from them? Yeah. I mean there's been a bit of a rock in the whole thing. They've just been staying and I'm generalizing, but I think it's a good generalization that community operators, it's particularly large REITs that we deal with quite a bit. They've been pretty steady with significant growth plans, a lot of capital put to work, and they've got lots that they can't get paid for if they don't get a house on them. So I've talked in the past that there's -- I use a term buffer a little bit, maybe too often talking about this industry. But one of the buffers, I think we have is downturns really is within the communities where their model may be to have a person own their home and come put it on one of their lots, so they can get the land lease payments, but they also are doing a lot of buying homes and renting them. And so they kind of become a solution for that homebuyer that can't afford right now to own. And I think that gives some resiliency to those community operators when we look at it from a demand perspective. So they've been very consistent. I don't think there's been much at all of waning in their demand through this whole period. That's great to hear. I mean, what do you think now is the mix of community operators versus retail dealers and maybe versus what it was last year? Yeah. I don't think, I'd note a huge shift. I mean, over time, that's been about 30% community operators or about 30% of the industry. So I get your question, I mean, it stands the reason if they're normally crazy and Street realtors take a pause. That's going to shift a little bit. But I don't think it's shifted that dramatically that I focus on it personally. Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Bill Boor for any closing remarks. Okay. Thank you. Again, it's been great to report on another quarter of strong results. I think the financial results just continue to highlight the ability of this organization. Across manufacturing, retail lending, and our insurance operations, our leaders are working really closely together, and they're flexibly responding to the market dynamics, and they're staying focused on the through-the-cycle opportunities, which I think is really important. So I want to thank everyone, as always, for your interest in Cavco, and we look forward to keeping you updated. Thank you. This does conclude today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.

EarningCall_472

Thank you for standing by. And welcome to the AGL Energy 2023 Half Year Results Briefing Conference Call. All participants will be in listen-only mode. There will be a presentation followed by a question-and-answer session. I'd now like to hand over the conference to Managing Director and Chief Executive Officer Mr. Damien Nicks, please go ahead. Good morning, everyone. Damian Nicks speaking. Thank you for joining us for the webcast of AGL's first half results for the financial year 2023. I'd like to begin by acknowledging the traditional custodians of this land that we I'm presenting from today, and pay my respects to their elders past, present and emerging. I'd also like to acknowledge the traditional owners of the various lands from which you're all joining from and any people of Aboriginal and Torres Strait Islander origin on the webcast. Today I’m joined by Gary Brown, Chief Financial Officer. Before we commence, I would like to say that I am truly honored to have been appointed as the Managing Director and CEO of this incredible organization, which has a vast history spanning over 185 years. This is certainly an exciting time to lead AGL as we strive to deliver upon our refreshed strategy and accelerate the decarbonization of our customer and generation portfolios, supported by a highly experienced board and management team now in place. I would also like to congratulate Gary on his confirmation as CFO. Today’s result reflects a challenged first half performance, driven by the impact of plant outages during unprecedented energy market conditions in July, when our resulting short position was exposed to high coal prices, together with the prolonged outage of Loy Yang Unit 2, which was caused by a generator rotor defect. Earnings were also impacted by the closure of Liddell Unit 3 in April 2022, reducing generation volumes, as we indicated in our FY'23 financial guidance update in late-September. The first half also saw another disruptive period for energy markets through the implementation of domestic commodity price caps and a Mandatory Code of Conduct for gas producers. And I’ll speak to the impact for energy markets and our business later in the presentation. …will reshape AGL's generation portfolio and represents a major step forward in Australia's decarbonization journey, ultimately connecting our customers to a sustainable future. Pleasingly, our inaugural Climate Transition Action Plan was endorsed by shareholders at the 2022 Annual General Meeting in November. Good progress was also made in advancing our 3.2 gigawatt development pipeline, and the transformation of our thermal sites to low carbon industrial energy hubs. Both the Torrens Island and Broken Hill batteries are on track to commence operations mid-2023, and I am pleased to say that the Liddell battery will be backed by ARENA, with funding negotiations underway for the first 250-megawatt phase. A feasibility study is also well underway with Idemitsu for the Muswellbrook Pumped Hydro Project. In terms of guidance and outlook, we have narrowed FY23 financial guidance, and I’ll discuss this further at the end of the presentation. Although forward wholesale electricity pricing has lowered from historically high levels over the past six months, these prices remain elevated compared to FY'20 and FY'21 levels, which we expect to see reflected in strong earnings growth for FY'24. Moving now to safety and customer metrics which both remain very strong. Our Total Injury Frequency Rate continues to trend lower reflecting a disciplined and sustained focus on safety culture and performance over three years in a row And as mentioned before, we achieved a record Strategic NPS score of plus 12, an excellent result given the sheer volatility in Australian energy retailing of recent months. Turning now to a more detailed discussion on Customer Markets performance which was underscored by strong growth and improved customer experience. Total services to customers increased AUD61,000 to AUD4.3 million, delivered through both energy and telecommunication services growth. Pleasingly, disciplined margin management and scaling of growth business areas delivered an AUD11 million-dollar improvement to gross margin. Looking forward, we will continue to responsibly grow our customer base whilst prudently managing margin. We also delivered improved retention with our churn spread improving to almost 6 percentage points, an excellent result, reflecting both our improved service quality as well as heightened market activity as selected retailers withdrew or lowered discounting to regulated pricing. AGL continues to have the least consumer electricity complaints of any Tier 1 retailer, and Ombudsman complaints also reduced by 15%. Encouragingly, net operating costs per service have continued to trend lower, driven by digitization, reduction in net bad debt expense and labor savings. However, we do expect an increase in the second half driven by net bad debt seasonality, as well as higher technology spend and growth investment as we scale our energy solutions businesses to drive distributed energy under orchestration. Significant progress has also been made in Customer Markets key priority areas. We continue to have the highest brand awareness in energy and now have over 50% of customers interacting solely through digital channels. Pleasingly, Consumer EBIT per service also continues to grow, increasing 9% compared to the first half of FY'22. Good momentum is also being achieved in accessing future value pools. Customer Markets green revenue now accounts for over 20% of total revenue, and our virtual power plant has grown 44% to 199 megawatts of decentralized assets under orchestration, underpinned by the NEO platform. Strong commercial behind-the-meter revenue growth has been recorded, as well as a significant increase in commercial solar assets under monitoring and management. We are also excited to have secured new strategic partnerships, which will make the transition to electric vehicles simpler and easier for our customers. And finally, our partnership with Ovo Energy Australia and Kaluza continues to grow, with over 40% of customers now migrated to the Kaluza platform, a strong increase on the 30% migrated at the end of the period. Moving now to fleet performance and operations. Commercial availability of the coal fleet was weighed down by a particularly challenging period in July, with high levels of forced outages at Liddell and Loy Yang A Unit 2, coinciding with the planned outage at Bayswater. On a positive note, we have completed testing to lower minimum generation levels at both Loy Yang A and Bayswater. We are now able to ramp down Bayswater Unit 4 to 200 megawatts, and are awaiting AEMO’s approval for the remaining units. Additional work is underway to further lower these to between 130 and 150 megawatts. The ability to flex our coal-fired plant is increasingly important as new renewable generation enters the system. Volatility captured through trading was also lower. Whilst we saw significant market disruption with severe weather events driving forced outages in the NEM, the trading team was able to manage this using a combination of financial and firming assets, particularly the Kiewa Hydroelectric Scheme in Victoria, which provided greater flexibility during this period. Lower generation volumes overall were primarily driven by the closure of Liddell Unit 3 and the unplanned outages, marginally offset by stronger renewable generation volumes which were 13% higher than the prior corresponding period. Despite a challenged start to the half, we’ve seen a strong uptick in availability from November, illustrated by the dark blue line. Overall, whilst we had lower unplanned outages compared to the second half of FY22, the confluence of the Liddell and prolonged Loy Yang Unit 2 outages, combined with the planned outage of Bayswater Unit 4 as well as summer readiness activities, resulted in an overall outage factor higher than we were targeting. Looking forward, we have less days of planned unit outages in the second half, giving us a higher availability base to work from and reduce the overall impact of any unplanned outages that may arise. We will also continue to run Liddell at its sweet spot to manage operations and reduce derates and outages through to its end of life in April. This slide shows the key areas we have been focusing on to improve thermal fleet availability and reliability as we responsibly transition to a low carbon portfolio. Our main priority is minimizing equipment failures that may result in future unplanned outages and derates. This includes additional preventative maintenance on mills, precipitators and chemical cleans of boilers to reduce known failure modes such as tube leaks. We are also bolstering preventative maintenance through stronger inventory management to ensure that, where appropriate, critical spares are held on site or accessed within a reasonable timeframe. Repairing Loy Yang A Unit 2’s spare rotor and stator is an example that would provide a shorter return to service time if such an incident were to reoccur. As mentioned, sizable CapEx investments have also been made to increase the reliability and efficiency of our fleet, with upgrades to the turbine and generators of the Bayswater units, as well as further investment in Digital Control Systems, which enables us to flex each Bayswater unit by nearly 500 megawatts. A quick update on our decarbonization pathway, growth pipeline and Energy Hubs. The planned closure of Liddell Power Station is on track for April 2023 and will be the first key milestone of our accelerated decarbonization pathway, reducing AGL’s annual greenhouse gas emissions by approximately 8 million tonnes per annum. Importantly, by closing and transitioning the Liddell Power Station and site to a clean Energy Hub, we are undertaking one of the largest decarbonization initiatives in Australia in 2023. We look forward to both the expected commencement of operations of both the Torrens Island and Broken Hill batteries in mid-2023. Numerous feasibility studies are also underway to bring strong opportunities to commercialization, and we are progressing initiatives to rationalize our upstream and midstream gas portfolios. Now a quick recap and update on a strategy before I hand over to Gary. I am very proud to say that AGL is leading Australia’s energy transition, backed by a bold and accelerated plan to connect our customers to a sustainable future and transition our energy portfolio. We will drive this transformation by ensuring a strong foundation across our business placing ESG at the forefront of everything we do, continuing to inspire and empower our dedicated workforce, and importantly, leveraging technology, digitization and artificial intelligence to enhance customer experience, as well as strengthen our trading, operation and risk management capabilities. Our focus on both leading and emerging technology will underpin the future energy relationship with customers, unlocking the value of electrification and decentralized energy. We have a defined strategy to deliver an accelerated low carbon future. And this slide, which you may be familiar with from our announcement in late-September, provides a good summary of the key targets along our 12-year decarbonization roadmap. We will deliver this strategy whilst maintaining our relentless focus on our valued customer base, and importantly, work closely with our people to explore opportunities for career transition as we progress towards a low carbon energy portfolio. Our ongoing priority is to strengthen and drive value from our core business, providing a strong platform for growth in the medium to longer term to realize opportunities through the energy transition, which you can see on the right-hand side. As mentioned, one of our core priorities will focus on how we help customers decarbonize the way they live, work and move. We will drive electrification through the propositions we offer and propel growth in e-mobility, starting with in-home charging. We will continue to accelerate growth in decentralized assets, helping our customers electrify and decarbonize, and positioning AGL as leading in energy solutions. Our market leading position in Commercial Solar is evidence of the strong progress achieved in this area. Additionally, our retail transformation program which Jo spoke to at our full year result in August not only simplifies our core, but extends to new energy technology, which will enhance capability to remotely manage distributed energy resources in a flexible and digital-led way. This slide provides a good summary on how we are tracking today in terms of delivering our strategy as well as near-term focus areas. I’ve already spoken to many of these points for our customer portfolio - including our desire to accelerate decentralized assets under orchestration, drive growth in e-mobility and expand our Commercial and Industrial energy solutions portfolio. Our energy portfolio will focus on progressing the feasibility studies mentioned on the bottom left hand side, accelerating the development of the Liddell battery and importantly, advancing and accelerating our project pipeline to meet our 5-gigawatt target of new renewable generation and firming in place by the end of 2030. Importantly, we look forward to sharing further details on our business strategies at an Investor Day, targeted for mid-2023. Thank you, Damien and good morning, everyone. It is my pleasure to address you in my first result as Chief Financial Officer. This slide shows an overall summary of our financial result, which I’ll cover in more detail on the following slides. Let me first take you through group Underlying Profit in more detail. The stronger Customer Markets performance was largely driven by growth in our Commercial and Industrial business, a reduction in net bad debt expense, as well as labor savings and efficiencies being realized through ongoing digitization. Turning now to Integrated Energy where there were some material movements. As indicated previously, July was a particularly challenging month for AGL, with the confluence of planned and forced outages across our coal-fired fleet resulting in a short generation position. Compounding this short position, AGL experienced significantly higher pool prices which were driven by heightened winter energy demand, as well as elevated fuel input costs due to the spike in global commodity prices. The AUD73 million movement primarily related to lost generation earnings caused by the prolonged Loy Yang Unit 2 outage, as well as the closure of Liddell Unit 3 in April 2022. This was partially offset by the positive impact as higher forward electricity prices started to reset through our customer book, hedging and trading gains, as well as stronger hydro generation. Higher global commodity pricing has also increased both the revenue and costs for our gas portfolio. Pleasingly however, AGL’s competitively priced gas portfolio coupled with prudent trading performance drove the strong margin contribution you can see in the Trading and Operations gas bar. Please note that AGL’s gas portfolio is well positioned to meet customer demand, having taken appropriate measures to support future supply, including a short extension of our Camden gas field and the filling of Newcastle Gas Storage Facility to cover upcoming winter demand. Finally, the higher depreciation and amortization charges primarily related to the accelerated closure of the Bayswater and Loy Yang A power stations, whilst lower income tax paid reflected the reduction in earnings. Let’s take a quick look at the reconciliation between underlying profit and statutory profit, which we’ve included due to three materials movements. Items on the left were largely driven by external and market factors, whereas those on the right represent structural or operational decisions made by AGL. Starting from the left. The onerous contracts gain was driven by an increase in the price of largescale generation certificates, partly offset by lower forward electricity pricing in relation to AGL’s long-term renewable power purchase agreements, as well as updated discount rates used to value the liability. The negative movement in the fair value of financial instruments primarily reflects the impact of a drop in forward prices for electricity on a net bought position, noting that we had an increase in this number in the prior period when forward prices were much higher. And finally, the impairment charges related to the carrying value of our Generation Fleet cash generating unit. This as a result of our accelerated decarbonization plan and decision to bring forward the targeted closure date of AGL’s thermal generation assets by the end of FY35, as we announced in September 2022. In August, we did indicate a step up in forecasted operating costs for FY23 to be roughly in line with CPI. Pleasingly, during a period of significant inflationary pressure, operating costs continue to be well managed across the business, consistent with CPI increases once adjusted for the non-recurring items identified at the full year result. A portion of this increase is a small yet prudent uplift in cyber security spend to further bolster protection for our operations and customers. Turning now to cash and debt. Net cash from operating activities of AUD37 million was 94% lower compared to the first half… …due to the high payable position at the full year driven by high prices, and then the significant reduction in electricity pool prices across the period and the resultant cash outflows. Notably, the impact of government intervention contributed to a sharp decline in forward electricity prices, resulting in AUD119 dollars of variation margin outflows at the end of the half. As you can see, whilst these working capital outflows did result in a reduction in AGL’s credit metrics, we forecast this reduction will be temporary as cash conversion rates recover to historical levels in line with a stabilizing wholesale pricing environment and improved generation performance. Encouragingly, Moody’s have retained their Baa2 rating and upgraded their outlook to stable. The process to finance maturing debt is also well underway. Now briefly touching on CapEx. As noted last August, growth CapEx for this year will focus on the completion of the Torrens and Broken Hill batteries. You will also notice a marginal uptick in thermal sustaining capex compared to the forecast we provided last August. This is primarily due to additional spend to strengthen the reliability of our thermal fleet as they transition to closure, which Damien discussed earlier. Before I hand back to Damien, I’d like to take a few moments to discuss how we intend to fund and deliver our future target portfolio. This slide shows the indicative ranges for the primary channels AGL will leverage to deliver its 12-gigawatt ambition as announced in late-September. Damien has already spoken to decentralized assets under orchestration - which is a growth area for AGL and key component of our targeted energy portfolio. Assets developed on AGL’s balance sheet will comprise the largest component and will focus on firming assets, building upon AGL’s existing development pipeline of grid-scale batteries and pumped hydro projects. These assets will be funded through a mix of operating cash flow, capital recycling via the potential sell-down of developed and operating assets, as well as project and corporate level funding. Importantly, we have an excellent track record of raising capital for clean energy projects, having raised over AUD3.5 billion of equity and debt funding into renewable assets since 2008 and are confident in our ability to access a growing pool of global capital dedicated to fund the energy transition. Partnerships will be the second largest component and includes the 3.5-gigawatt development pipeline via Tilt Renewables. We will partner with renowned renewable asset developers which will deliver additional capital and expertise and help accelerate our development options. The main focus of partnerships will be in renewables such as wind. The balance is expected to be delivered via offtakes, and we intend to leverage the scale and diversity of AGL’s customer base to achieve the most favorable supply mix and terms. Importantly, our strategic asset base and extensive renewable development capabilities position us well to generate excess returns from the transition of our generation portfolio. As an integrated player, AGL will seek to maximize investment returns through additional development, management, trading, and ongoing services that typically would not all be available to a pure-play energy company. The returns and ranges shown are for observable comparative companies and projects and are provided as an indication of the types of returns that we would expect to see. Thanks Gary. As mentioned, I’d like to take a moment discuss the impacts of recent federal government interventions in energy markets. Whilst we do support certain measures, namely the customer bill rebates as well as the role of the safeguard mechanism, we are concerned that the commodity price intervention has created regulatory uncertainty for coal and gas suppliers, undermining their business and investment confidence. I must emphasize that policy certainty and clarity is key to encourage new investment in clean energy generation and supply to ensure the pace of Australia’s energy transition. Importantly, our core business fundamentals remain strong despite market interventions, our robust risk management has ensured retail strength and stability amid significant volatility in Australian energy markets. Additionally, our coal-fired generation portfolio is well supported via a combination of wholly owned and production-cost linked fuel supply, minimizing exposure to rising global commodity prices and the impacts of the commodity price caps. Taking a closer look at market conditions – you can clearly see the reduction in spot and forward pricing from historically high levels, partly driven by the introduction of the commodity price caps, milder weather and additional plant availability. The shaded area on the right-hand side shows the downward pressure on FY'24 forward pricing, illustrated by the difference between the dotted and solid lines -- which represent FY'24 forward pricing snapshots taken in September 2022 and January 2023, respectively. Encouragingly, as we’ve indicated via the data point callouts on the graph, FY'24 forward pricing still remains elevated compared to FY'20 and FY'21 levels, which we expect to see reflected in strong earnings growth for FY'24. I’ll now conclude by talking to FY'23 guidance and our outlook. As I mentioned earlier, we have narrowed our underlying earnings guidance ranges for FY23. Our full year guidance reflects an improved second half as expected, largely driven by an anticipated increase in generation, with improved plant availability and a reduction in outages, partly offset by lower forward electricity prices. Customer margin is expected to improve due to growth in customer services. Operating costs are forecast to increase half-on-half due to seasonal net bad debt expense and inflation. Encouragingly, the outlook beyond FY'23 remains positive. Wholesale electricity pricing remains elevated compared to prior periods, with AGL expected to benefit as historical contract positions reset in FY'24 and FY'25. Additionally, sustained periods of higher wholesale electricity prices are expected to flow through to retail pricing outcomes, and the Torrens Island and Broken Hill batteries are also anticipated to commence operations in mid-2023. This will be partly offset by lower earnings due to the closure of the remaining three units of the Liddell Power Station. We'll now open for questions. In the room, in addition to Damien and Gary, we have our Chief Customer Officer, Jo Egan and Chief Operating Officer, Markus Brokhof. [Operator Instructions] First question comes from Dale Koenders from Barrenjoey. Hi, good morning, guys. Thank you very much. Just a lot going on in the market in terms of government intervention and cost inflation. Just wondering if you could provide some comments as to how you're thinking about what's going on and retail competition at this point in time, the outlook for bad debts and churn? I know we've obviously got the data for the half to the past, but sort of more on a going forward basis. And the labor cost pressures when you combine it all together is cost plus CPI sustainable going forward? Thanks, Dale. Good morning, all I'll take that one. Look, let me first start off so on net bad debt expense, we're really pleased with the results of the half came in lower than the previous half. And that sort of represents some of the strength of the work we're doing around rent collections and so forth. Yeah, we anticipated it probably higher than it otherwise would have come through and something we'll watch, we'll continue to watch closely. But that's another reason why we continue to support the government customer bill relief. We think that's important in this sort of environment. From an inflationary perspective, we are like other seeing inflationary impacts through the organization but we continue to manage that very strongly. You see, we put a forecast I see out there for the full year to manage within CPI. And we'll continue to do that through sort of digitalization of much of what we do. But also continue to drive efficiency through our generation units as well. Sure. So appreciate your managing your inflation costs well, and that could be high some high bad debts in the second half. But just interested as to what were the key changes to your view on guidance, given that's been lowered EBITDA as well as [Indiscernible] please. Yeah, so what you've seen is a tightening of the range and narrowing of the range. The rationale behind that is what we saw, obviously, we run a long position, let's call it 2 to 3 terawatts of energy, because that curve came off around December, January, you're just seeing some of that length of ordinary cell, we're selling that at obscene lower prices into the market. And that length we have typically relates to those thermal assets and renewable type assets in the marketplace. So that's the key driver there. Good morning, can I just ask a question about your forecast rates of return on those two types of assets? Just on the renewables 6% to 8.5% I have to admit that's a 9% to 10% [ph], a little bit high? Can you just clarify does that suggest a change in gearing? Or is that an actual arm's length wholesale electricity market return or is there some customer margin potentially captured net benchmark? Hi, it's Gary Brown here? Look, just to sort of answer that question. So we've obviously provided this as sort of some indicative ranges to try and give some clarity to the market. I guess, from an AGL perspective, we do see ourselves as being able to extract additional returns from the traditional pure players. So you're looking at things like, the ability to be able to be participate in things like development and orchestration and political things. So, we do see ourselves as a global model to, I guess, move up in that in terms of where the returns are. But again, these are observable returns that we're seeing in the market as well. If I can just ask one quick follow on then is, given the higher returns, you see in the firming assets, is there a limit to how quickly you can deploy those and you kind of hinted that that's where you want to have your on balance sheet assets. How quickly can you deploy those is from a market perspective? How much how big is the market, the storage still returns degrade if you pump too much capital in there too quickly. Thanks, Max, I think look, what was what you're seeing today, we've got obviously at the Torrens Island battery coming on mid this year, that's really demonstrates the strength of our infrastructure and our assets, if you like. We took idea that battery only 18 months ago. So the ability to deploy the right batteries in the right locations, and using our infrastructure is incredibly valuable. So obviously got the Torrens Island battery, but also Liddell. We continue to work with rain on funding in that phase. And we'll continue to drive that as quickly as we can. But you can imagine those sites have the capability and capacity for us to go very, very quickly, when we see the market that are available for us. So that will be a big part of what we put on our balance sheet, because we can do it quickly. We can also do it when the market needs it. And we have the infrastructure and grid connection. Good morning, guys. Maybe you can give us a little color on how your strategy has changed as a result of the coal caps and the gas caps and whether that's going to have an impact on the profitability of those businesses. Good morning, Ian. Look, I'll take that one. And I might even just hand over to Markus as well, just from a broader hedging and risk management perspective. But, we are from it from a coal perspective, you'd be aware we have the own all our in Loy Yang and contract that for -- with the hands of [ph] Macquarie. So we like we were not part of our cap if you like we're well underneath that cap and that provides us sort of the breadth to manage risk management and profitability in that space. What we're seeing however, is obviously having an impact of bringing down the curve. From a gas perspective and I'll get Markus to talk on with some of those conversations at the moment. What we've seen since that intervention come in is a lot of those conversations and negotiations have dried up. So we're just, we're wanting to see them come live again so we can bring more gas into the market and help our C&I customer base. Yeah. On the gas side, I think our book is very much covered in FY'25 end of FY'25. And we are still in negotiations with one of the large, with the few large producers here in the local market. For sure, there is at the moment, a resistance to enter into contract with us, because due to the fact that there's quite some uncertainty about pricing, but particular I think [Indiscernible] of market intervention, and that is applying also for the coal side. At the moment I would say, there's no change in our strategy overall, when it comes to contracting our gas, and our coal. But the big question mark, how long is the governmental intervention taking place? I think there are a lot of discussions, is it only for one year? Or will it continue to be? And this will somehow influence a strategic decision about change in our strategy? Could -- I know this sounds very unpleasing, but could we expect to see the coal fired plant actually all turn up as a result of this AUD125 return cap, because there will be profitable running much harder now than ever before. That's true. Maybe some people which have not done proper risk management are running now much more harder, that's most probably true. I think we will most probably still study the terms and condition very carefully, because I think it means the line, you can read that there are some obligations, that's not a free lunch, 125, because there are some obligations, that you can be directed and there is a must run. And we are not happy about this. So they'll be very most of the NFL not participate in this scheme. And I think just the other thing to call out is in through the work that we've done on this point over the last number of years, I mean, requiring now we're able to burn down to 200 megawatts from 685 and Loy Yang well below that 40% as well. So that flexibility is going to be incredibly important in this market going forward, particularly in the middle of the day. And we'll continue to see how far we can drive that down so we've got the flexibility we need. That's great. Does that -- just as a side of that, does that create a CapEx impulse? Because these machines are really originally designed to turn up and down with a thermal heat going through the metals. So we've spent, over the last number of years when we've done a number of the upgrades, a lot of that's been -- has been incurred? I mean, what we are obviously then just trying to manage carefully is any additional ongoing maintenance of the fleet as a result. We're not seeing any that way, but things such around the mills and so forth hot spots where the work takes place, but the value in doing that would far exceed some of that cost. I don't know Markus do you want to comment? Yeah, good morning, guys. Just my questions around the balance sheet. This was an enormous amount of talk around during the presentation. Just keen to get a feel for something that dates back up to almost AUD3 billion in loss and other working capital drag will normalize. I just came to a get a feel for how much headroom you think you have organically over the next couple of years. But also maybe give us an update on how refinancings go and your ability to raise debt at the moment. I'm just cognizant that it's a move document now, but if we go back to the demerger documents, so that you guys felt that it was going to be much easier for the businesses to raise that as separate entities? And together, can you give us a feel for how those conversations are going with vendors, but particularly keen also to get a feel for what you think you'll have an headroom over the next couple of years for investment? Hi. So firstly, as we've sort of said in the slides, we've sort of talked through the amount of headroom that we had in terms of liquidity at the end of the half, which was about AUD485 million. As we've talked about, we saw a significant reduction in working capital as a result of the reduction in prices. And we're very confident that those cash conversion rates will return to historical levels throughout the second half, particularly as we see more normalization of those working capital levels. In addition to that, you know, we've obviously spoken to having a strong expectation of a strong '24 and '25 as well so I think that'll certainly assist the balance sheet. We've also sort of had a number of discussions of discussions with financers. And we're very confident about our ability to refinance the company and certainly set ourselves up for growth in the future. As we all know, there's a lot of demand for renewable projects to deploy capital into those areas as well. So we're very confident going forward. And much of a change in the -- sorry [Indiscernible]. You're seeing much different in the rates are rising, but the premiums you're paying for debt? Yeah, look, I think it depends on which market you tap. I mean, certainly, because the risk free rates gone up, that obviously has an impact as you move through. But again, we're pretty confident with the ability to be able to source competitively priced debt going forward. And not just the other thing, I'd say, I think having a clearly endorsed strategy now going forward, having a board in place management team in place. The banks now look at our transition plan and strongly support that transition plan. And that's a key part of us getting access to that capital. And the whole team is involved in plenty of these discussions with the banks just to talk about this transition plan and our delivery of it. So we are confident to be able to deliver on that refinance. Thanks, good morning. Gary, as you see in your comment, looking at to '24-'25 that you said the increased earnings in the Torrens Island and Broken Hill battery will be partly offset by the closure of Liddell. Is that would imply partly -- the word partly would imply the times in Broken Hill is greater than the earnings loss in Liddell. So could you just please unpack that a little bit? What the uplift you're expecting from the batteries is, what the earnings of Liddell is and also include the what your expectation is around the change in operation of Bayswater, once you bring Liddell out. Thank you. I'll try. I'll let me try and unpack that one a little bit. So what the intention of that statement is, is obviously when Liddell comes out of the market, clearly will have lower generation and lower earnings as a result. It will partly offset, it went fully offset it that was the notion of the words we're trying to use there. Clearly different revenue streams from a battery, then will be from a generation perspective. But what we do see is particularly in the SA market, that battery playing an important role in those periods of peak demand and so forth. But the intention wasn't, I think you might -- the way you've read, it's probably the other way around. We don't intend that to obviously offset Liddell, it will provide some additional revenues and margin into the business going forward. And we anticipate that coming on halfway through the year. Maybe to keep in mind, the results of Liddell are overstated. If you would continue to run the Liddell, there is no reason to believe that this would -- the margin or the gross margin, which we are generating would stay like this because it needed heavy investment. And from Bayswater, if you look then after the Liddell closure, what happens and this Bayswater, most probably Bayswater will then run a bit harder in order to make sure that we have the energy in the portfolio. From an energy point of view going forward, we are balanced, but for sure. Some capacity is missing overall when Liddell is going out. And we have secured already because the closure of Liddell is known for the last seven years. We have already secured the capacity in the market via additional contracts, which we have secured via cap contracts and so on that's under control. Good morning, and congratulations to all the team members who have been confirmed in their roles. I guess my first question is just about the Slide 18, where you've called out an AUD82 million increase in gas gross margin in trading and origination, and so that's great. I just wanted to get a sense of if that continues for the current half and next year, or should we be looking to include at the very least the short term gas price cap has impacting that number please? I think there's a few elements to this on the one end we have optimized and I think I said this to you already in the past. Ae have had optimized haulage and transportation portfolio, have optimized the contracts in renegotiation and so on, in order to cope with the pressure on the gas portfolio, because you are well aware that our legacy contracts over time are running out. And we had to successively fit the gas portfolio, the shorter term contract. So there was some pressure on and the heads managed to get some costs out of this. On the other end, this rise in gas prices, we were able to increase the profitability of our overall gas book that most probably will then have also some spillover effects in the second semester. Going forward, this year price caps, it will be most probably, and that's something we will lose some competitive edge when it goes forward. Because everybody could theoretically then secure price at AUD5 per gigajoule, but we believe we have a competitive edge with the with our portfolio, because at the end of the day, we have to add some flexibility in the portfolio. And this will be our USP going forward our unique selling proposition. So I think we are very pleased. But for sure, if price caps will not only stay for 12 and so further on, then it will be a very tough market. Thank you, Mr. Brokhof and comments about that the intervention that's clear. If I can sneak in another question to your head of customer who had a really great half. Maybe just a quick update on number of services per customer, there was a previous target, but that was 1.6. But that was set quite some time ago. So just wondering how we should think about that, please. Thanks, Damien. And thanks for the question, Rob. And we are incredibly pleased with the result. We've got not only great services growth, but really strong customer experience, which is excellent in a challenging market. So the services per customer are attracting about 1.5. And we've been really strong churn reduction continue on customers that have multiproduct services. So at the end of the year, we updated on that with energy and telco. And we're continuing to see that performance go really strongly. Good morning, folks. Thanks for taking our questions. I just want to unpack this -- excuse me, I just want to unpack this guidance changed a little bit more. So back in September last year, you told us that the extended Loy Yang outages are going to have a material earnings impact. And then the September guidance probably would have had visibility on the July outage costs. So is this AUD40 million odd stepped down in EBITDA is that predominantly just due to your net long position getting sold in at lower spot prices? Or is there some other incremental change here? Yeah, and I think what we made really clear, July was a very challenging month for us because of the outages we had and obviously, the incredibly high prices at the time when we were short. The narrowing of the guidance is exactly as you say. We are long energy, let's call it 2 to 3 terawatts in that length. When we look to sell into the second half back into the market at lower wholesale prices, because of the forward curve is off is what's reduced that buys, let's call it AUD20 million odd. So there's been no other change from a Loy Yang perspective. We've got a plant running incredibly well at the moment. Availability, last three or four months has been exactly where we want it. And I think hearing from Markus last day, I also think in January, we saw we've seen record availability over January month. So it again will continue to drive the reliability on our plant particularly hard and we have less outages planned in the second half as well, which also helps from a managing availability over that term. Okay, so I mean, given that Liddell is going to come out now in April, and you're taking on a bit more load. Let's say if you end up with a net short position and in FY'24, I mean, in theory, would the lower forward prices actually be marginally positive for FY'24 given that you're going to have to have some spot purchase costs but now at a lower level? Yeah, I think that's the story that we tried to convey over the last years, I think the most probably '23 was the most challenging year the most of the hedges, which we have entered in a holding off now, on the lower price level. And that yeah, you can assume that the prices are auto market prices that you have seen over the last couple of months, and even year will flow into this. So that will contribute very much to a higher hedging revenue going forward. I think that's important, why we're using the words, we see strong revenue growth or earnings growth into '24. That's the language we're using and quite deliberately. Yeah, hi, everyone. Just a quick one really, the gas margin was an impressive AUD4.8 a gigajoule this period. Just wondering whether you can comment on how sustainable that is, given your increase in gas costs likely to come through. And secondly, have you had any impression with the government about concern of how the retailers are not bound by the price cut the same way that producers are and maybe they'll extend the price cap to you, so that they're making some very good money of that gas the moment. Most probably, you're right. There was this margin is mainly because for sure, gas prices have come up very much where if you have seen some lengths in the portfolio, we could benefit from this is for sure not sustainable, because gas prices have come down from record levels. If you look at the AUD40 per gigajoule price range, which we had. We were coming down now. I think also what is very important, and maybe Jo can compliment me, we are trying still to get more competitive gas in the market. And we will give this back to our C&I customer. But maybe Jo. Thank you, Markus. Yeah, absolutely. We're working very closely, particularly with our large commercial and industrial customers, many of which rolled off longer term contracts on to default rates, post the announcement of the interventions. And where we can we're giving rebates to those customers, shorter term contracts, while we wait from some more certainty into supply. But we're certainly doing everything we can to support customers, because we know it's incredibly challenging for them with this uncertainty. And just to add to that a little bit, just so in terms of those rebates that are out there, it's where we buy spot gas in the month in question. So it's a month in question, we've been able to buy some spot gas for that customer who's on a default rate, then we'll give some form of rebate back to them as part of that. But until we can start getting that long term gas back into the book for those customers, we're having to manage on that basis. Coming back to your question. In addition, I think the margin is not sustainable to be honest with you. We are still going forward that it will be a tougher market. And you are right, we are not bound by the price get but at the end of the day, if you wants then to secure additional C&I customers or if you want to start another marketing campaign is our customers at the end of the day, we have to find the additional gas. So, still we are then falling back to the AUD12 per gigajoule depending what is in the -- how is the flexibility and how haulage and so on will be priced. And then at a later point of time, I think that as you're well aware that still not clear from a regulatory point of view, how this is all put into the overall pricing scheme. Thank you very much. Markus question for you again on the gas book. Because I correctly hear you say earlier in the presentation that the books now covered up to FY'25? Hello, you hear me? Yes, that's true. We've been covered -- we are covered at the moment is our current customer portfolio and our current demand, we are covered on the financial year '25. Thereafter, we have a gap. But we are, as I said in the beginning, we have for sure not waiting on the price gaps and so on. We have started to negotiate already some long term contracts going forward. At the moment the producers are waiting understandable on the detailed terms on condition. And we are still confident that we can fit it and also the gap, which is coming up. And we have shown this in the previous financial years. There is a gap then opening up to 20 petajoules 30 petajoules, we are confident that we cover this gap then going forward. Okay, just -- sorry, my confusion on this, as I'm looking at the slide that you presented last year, which shows your gas book. And when you're looking at FY'25, it looked like 50 petajoules were basically uncontracted. So I'm just trying to understand whether that 50 petajoule gap has now been contracted? We have secured some gas. But the demand has gone down. And that's something where there was quite some competition in the market. So we have lost also some of our portfolio customers at the same line. Thank you for taking the extra questions. Just wondering about some comments around DMO processes going through. What your expected outcomes are? And is that a risk to retail profitability FY'24. Yeah, thanks, Dale? I'll take that one. So we're aware that the outcome of the DMO has been pushed back a little bit through to the end of May? I think it is. So ultimately, that's going to be a decision for the AER. We expect that the methodology will be similar. And certainly when we look at our retail pricing decision, which will be for majority of our customers on market contracts, we will absolutely being applying methodology. So whilst we've seen wholesale prices, come off somewhat, we do still expect significant increases because of the 24 month rolling average that still needs to flow through. Maybe to clarify, though, for our portfolio, the DMO really only applied to about 10% -- 10% to 15% of our customers, whereas the majority are market contract pricing. So, based on AGL's pricing decisions. So based on the base that we don't see any change in methodology on the DMO. And the way we manage our book, there's no change to the way we think about hedging and risk management, from a pricing perspective. Sure. Okay. And then just as we stare into FY'24, you've call out sort of higher electricity prices, better generation reliability, Liddell 2 batteries. What are the other moving pieces that we need to be aware of, if any? I think I mean, they are the key moving pieces that we're talking about. Clearly, our business is so leave it to where wholesale prices are and the pricing through the customer. The other things to be aware of, which we've called out is, from a cost point of view, continuing to manage that incredibly tightly and efficiently in this market. The other one would be net bad debt expense continue to manage that very, very closely. They are probably the things that we're really focused on. And then from a from an integrated energy perspective, continuing to see both the flexibility in our fleet, but also the availability in our fleet into '24. But as I said, what we're seeing through business performance over the last three to four month, really positive business to strengthen step up into the second half of '24. Good day, guys. Thank you for indulging me here again. Just I guess more of a modeling question just for the depth facilities going forward. Should we factoring any amortization in this or just standard corporate revolver for investment grade? I think on a broader level, I think, think about the corporate revolver but for the time being in terms of your models. Thank you. I just wanted to ask a question on customer. So that sounds what you're pretty happy with the first half result with the EBIT increase. Just wondering what your expectations are into the second half and effectively for the full year, in light of the guidance for an increase in OpEx in the second half. Do you expect an increase in gross margin in the second half to to offset that increase in OpEx? Or are you actually expecting like a net margin decrease in the second half? And if you could also, in answering that, maybe explain why consumer electricity gross margin was pressured in the first half? Yes. Okay. So yeah, look we're seeing really strong momentum in the customer business. So I expect a strong second half. I think they're signaling around OpEx is due to some investment in our growth businesses, timing on technology spend in our retail transformation program. And also there's a bit of seasonality on net bad debt. But as Damian said, like we're in a really strong position with our debt portfolio, so we'll continue to focus on that. In terms of electricity, I really just was a timing position, not on the impact of the retail price change. So margin compression has really stabilized and we're seeing really good results with less customer switching in the portfolio. And I think Pete, it broadly on your question, we expect to see a net margin after expenses being positive in the second half and up on the second half is the way to think about it.

EarningCall_473

Good afternoon, ladies and gentlemen. My name is Sarah, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the Kimball International Second Quarter Fiscal 2023 Earnings Conference Call. As with prior conference calls, today's call, February 2, 2023, will be recorded and may contain forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from the forward-looking statements. Risk factors that may influence the outcome of forward-looking statements can be seen in the Kimball International Form 10-K. During today's call, the presenters will be making references to an earnings slide deck presentation that is available on the Investor Relations section of Kimball International's website. On today's call are Kristie Juster, Chief Executive Officer of Kimball International; and T.J. Wolfe, Chief Vice President and Chief Financial Officer. I would now like to turn today's call over to Kristie Juster. Ms. Juster, you may begin. Good afternoon, everyone, and thank you for joining today's call. I'm pleased to share in the second quarter of fiscal 2023, we drove significant year-over-year revenue growth in all our end markets, Workplace, Health and Hospitality. And this marks the fourth consecutive quarter of strong gross margin expansion, delivering 550 basis points improvement year-over-year. We are especially pleased by Kimball International's continued ability to outperform the industry despite a challenging macroeconomic environment and heightened recessionary risks. After our last earnings call, from early November through mid-December, we saw a softening of demand in our Workplace and Health end markets. While we observed this across many of our geographic regions, the slowdown was more pronounced in major metropolitan markets such as New York and San Francisco. It is also important to note this quarter faced a strong bookings comp from the previous year as we experienced a pull forward from pricing actions taken in December 2022. Through our conversations with our customers and dealer partners, we can the slowdown in an order conversion to macroeconomic headwinds combined with a continued forming view of the hybrid Workplace. Our upstream activity and sales funnel continues to be strong. However, for many projects that average time to close a transaction has increased by several weeks and in some cases with our larger health systems even by month. Demand in secondary markets, which makes up 79% of our trailing 12-month sales was down as well, but to a lesser degree, outperforming primary markets by more than 10 points. And we believe this strategic focus has proven to provide resiliency throughout the market downturn and will accelerate our return to demand growth. Order patterns during the second half of December and into January have seen a material improvement with Workplace and Health orders in January up approximately 10% year-over-year. Turning to our end markets. In the second quarter, our largest end market Workplace saw a sales increased 15% year-over-year, and our view on return to office is highly consistent. The office matters more than ever in a hybrid format. It is beyond a workspace, but a place to create the longing community and connection. We believe hybrid is here to stay and it will influence location, size and format of offices, setting up secondary markets and ancillary categories as the highest growth areas. This hybrid change will require flexibility and an employee-centric environment, turning the office from a space to a personalized place filled with a wide variety of formats servicing individual work, collaboration and community. With return to office as new record highs, companies are settling into and becoming more comfortable with defining their own unique hybrid work strategies. As one of the largest manufacturers of ancillary products, which comprised 88% of our trailing 12-month sales, our comprehensive product portfolio is structured to benefit from this trend. Poppin's Q2 performance has been softer due to a heavy reliance on the top 5 major metro markets for its core B2B business model. We continue to offset this with focus and delivery around our new incremental growth initiatives. PoppinPro revenue continued to comprise more than 50% of overall top end sales for fourth quarter in a row. And our new Pod category grew more than 35% sequentially and more than 75% year-over-year. We are also excited to launch the second generation of our Pods this quarter, which provides a full array of functional upgrades, including enhanced privacy, mobility, durability and accessibility through our new ADA-compliant model. These new Generation 2 Pods are now available through both our Poppin direct selling organization and our Kimball International dealer sales team. We continue to expand the incremental opportunities with the Poppin brand and categories and the role they play at Kimball International in the diversification of our channels and synergies within our Workplace and Health business. Sales to our Health end market increased 17% year-over-year in the second quarter as the adaptability and flexibility of our product portfolio continues to effectively address the needs of health care facilities to maximize efficiency and quality of care. In December, we became a key supplier to HealthTrust, one of the largest group purchasing organizations in the United States, which serves over 1,800 hospitals. We are already seeing significant adoption and traction with this key customer to anticipate for results and further market share gains. During Q2, we also made significant progress on our 3 key initiatives of our Perfect Harmony go-to-market strategy. We activated our new customer excellence operating model designed to deliver industry-leading personalized customer service experiences, launched a multi-branded specification and ordering capability for our full Workplace and Health portfolio and are going live in a few days with our brand-new Kimball International website. Our new unified infrastructure delivers a seamless experience for all our brands and shares market insights and trends across our distribution partners and our end users. These key enablers truly unleash the power of Perfect Harmony and our unified multi-branded go-to-market strategy. We are also incredibly proud that in addition to many of our showrooms, our corporate headquarters in Jasper, Indiana, advanced our well certification to Platinum status in December. With one of our guiding principles being our people, our company, it is incredibly important to us to have an environment that puts the health and safety of our employees first. And aligns this focus with the products and solutions we create for our customers. Turning to Hospitality. Revenue was up 64% year-over-year as increases in both leisure and business travel drove property improvement and decision-making. We have been very consistent over the previous quarters and our belief in the return to growth in this end market due to pent-up demand and continued renewed interest in travel. We took a measured approach to this rebound by focusing on driving customer mix, streamlining our logistics network and partnering with our customers. Our Q2 bookings increase of 20% year-over-year shows further proof of this demand ramp, and we now anticipate an even stronger performance in the back half of fiscal 2023 and into fiscal 2024, making Hospitality a clear differentiator for Kimball International. With our operational improvements and our focused approach, we believe we will drive further profit contribution and margin expansion in the coming quarters and will continue to build on the exciting leadership position of Kimball Hospitality. Over the past 4 years, we have taken critical actions to improve and optimize our business in all our end markets. In the second quarter, we returned to pre-pandemic levels of operational reliability, reinforcing our long-standing commitment to quality assurance, customer service and lead times. Our efficient operating model and our omnichannel multi-branded go-to-market strategy combined with our expertise in ancillary products in secondary markets has proven our continued ability to adapt quickly to changes in the environment. Kimball International is well positioned to continue to grow profitably as we move into the second half of fiscal 2023. Now I will turn over the call to our CFO, T.J. Wolfe, for a review of our second quarter financials and a discussion of our outlook for the remainder of fiscal 2023. TJ? Thanks, Kristie. Good afternoon, everyone. Our second quarter results reflect solid execution from the Kimball International team with strong growth in both the top line and profitability. Net sales growth of 21% was driven by strong performance in all 3 end markets as pricing actions taken over the previous year offset inflationary pressures. In Workplace, we saw particular strength in the commercial, education and government verticals, leading to 15% overall sales growth. The sales growth benefited from our previously announced price increases and was partially offset by a volume decline of approximately 8%. Workplace orders were down 17% due to volume declines partially offset by price. Health revenues grew 17% overall with previously announced pricing actions more than offsetting volume declines of 5%, while Health orders were down 31%. We attribute this large drop in health order volumes to the fact that health projects are generally more complex and have longer conversion times and therefore, are subject to delays more than our Workplace business. The return of property improvement demand drove strong performance in the Hospitality end market with revenue up 64% and orders up 20% year-over-year. As Kristie already noted, our order trends in all 3 end markets during late December and into January make us cautiously optimistic that the patterns observed in Q2 were of a temporary nature. We achieved exceptional gross profit expansion of 550 basis points year-over-year to 36.2% as a result of our focus on eliminating running hard costs such as overtime and expedited freight, facility optimization and other operational excellence programs, combined with further realization of our previously announced price increases. Throughout the quarter, we reached pre-pandemic levels of performance and operational reliability. We are seeing an easing of the supply chain disruptions and associated costs while experiencing moderate inflation in certain commodities. Our manufacturing operations are running efficiently and virtually all of our products are back to standard lead times. Driven by continued operational excellence improvements, we successfully lowered our SG&A spend by 330 basis points and adjusted SG&A by 210 basis points. As Kristie mentioned, due to lower demand in major metropolitan areas, which are Poppin's primary markets, we have recognized a onetime $36.7 million noncash goodwill impairment charge associated with the Poppin acquisition, bringing the carrying value to 0. This action does not change our view of Poppin's long-term prospects, it simply reflects the current operating environment and near-term . As a result of this charge, we reported a GAAP net loss of $36 million or $0.99 per diluted share, excluding the noncash charge for Poppin and restructuring expenses, we reported adjusted net income of $3 million or $0.08 per diluted share. Our ability to execute in the market, combined with our industry-leading gross margins, our ability to scale SG&A expenses with revenues as well as our operational excellence programs continue to drive strong adjusted EBITDA performance totaling $16 million for the quarter, which is 4x higher than last year's comparable quarter. Adjusted EBITDA margin also expanded significantly to 8.8% compared to 2.7% in the year-ago quarter. Our total backlog at quarter end of $144.8 million comprised of roughly 2/3 Workplace and Health and 1/3 Hospitality is in line with our expectations as we continue to improve our operational reliability and reduce lead times, which are now back to pre-pandemic levels. Turning to the balance sheet and cash flow statement. We ended the second quarter with in debt, equating to a net debt-to-EBITDA ratio of 0.9x compared to 1.8x at the end of fiscal 2022 and remain well below our covenant levels. In the second quarter, we generated $13 million in operating cash flow. In addition to our recently opened warehouse in our metal automation facility that is slated to go live in April 2023, we are also investing in an automated storage and retrieval system to increase efficiency and capacity at our Santa Claus, Indiana facility, which produces the majority of our case goods products. These 3 projects represent capital investments totaling approximately $17 million, which will drive efficiency, enhanced production capabilities and margin improvements in the coming years. We also returned $5.2 million of capital to shareowners in the form of dividends and share repurchases. Working capital needs have flattened and are beginning to ease as a result of our initiatives, which will have a beneficial impact during Q3 and Q4. Proceeds from an improved cash conversion cycle will be used to reinvest in our business, further reduce leverage and return additional cash to shareowners in the form of dividends and share repurchases. Now looking at our full year 2023 outlook. Despite the current demand environment and considering our order trends through January, we are pleased to maintain our adjusted EBITDA guidance of $48 million to $52 million, representing approximately 47% year-over-year growth at the midpoint. However, due to the uncertain macroeconomic and demand environment, we are lowering our revenue guidance to $720 million to $740 million, representing approximately 10% growth at the midpoint. Our industry-leading gross margin improvements, along with our ability to scale SG&A with revenue, give us a continued clear path to deliver the impressive adjusted EBITDA growth we guided to you at the beginning of the fiscal year. For Q3 specifically, we expect a sequential decline in revenue as we enter our seasonally slowest quarter. We also anticipate a modest sequential decline in Q3 gross margin as a result of lower operating leverage in Workplace and Health combined with an adverse impact from end market mix. We do, however, expect a strong recovery of our revenue and adjusted EBITDA contributions in the fourth quarter. We are planning for full year capital expenditures of approximately $25 million and expect our full year effective tax rate to be in the range of 25% to 27%. Thank you, TJ. Our strength over the last 4 quarters and our ability to navigate short-term demand dynamics continues to prove the Connect 2.0 strategy and transformation at Kimball International is well entrenched and activated. Our focused approach on 3 connected domestic end markets, our expertise in secondary and ancillary, our growing omnichannel capability and our commitment to operational excellence and optimization, all lead to driving industry-leading gross margins and a focused approach to market share gain. I'm very pleased with our meaningful progress at Kimball International, and I want to thank all our employees for their commitment and care of what we do every day. Maybe if we could start with the changes to the [indiscernible] I want to make sure I understand it correctly. So the lower revenue outlook, how much of that is from the softness that you already saw in November and December versus an expectation that things will be choppy or weaker on a go-forward basis? Because it sounds like, for whatever reason, that was a fairly short-lived pullback and that things have already kind of recovered. I mean, is the change in the outlook simply explained by what you already experienced? Sure. I would say that the majority of it so, if you think about it, as we mentioned, November and early December, was the slowest period that we saw during the quarter. It improved significantly in the back half of December. And as we noted, January orders were up 10% year-over-year. So I think primarily what we experienced a little bit of cautious optimism around what Q4 will hold and also thinking about the fact that education buying season is one of the biggest drivers from Q3 into Q4 and our belief that, that would potentially be more resilient than maybe the corporate vertical. And the reason you're able to maintain the EBITDA guidance range, is that -- is price/cost coming in better than you anticipated? Are there other cost savings initiatives or anything else? How are you going to manage to get to the same spot? Yes, Reuben. I think the gross margin delivery in Q2 was above our initial expectations and our belief is that, as you mentioned, you're making faster progress on price/cost, faster realization of our operational excellence initiatives, driving synergies. And then really into Q4, leverage coming back in our facilities as we ramp to the higher volume period in Q4. So I think it's a combination of those 3, but we're really pleased with the gross margin performance in Q2, and that gave us confidence to hold the EBITDA guidance for the full year. And Reuben, I'll just add a little bit of color there. As you know, we've made a lot of operational changes over the last couple of years, facility optimization, et cetera. And we're just starting to see that flow through the gross margin. So we were very pleased with the gross margin that we were able to deliver and feel confident that some of that favorability is on a sustainable basis. Perfect. That's very helpful. And then so the health care side was a little bit surprising. What exactly do you think went on there? Did you see the same kind of recovery kind of late in the quarter and in January across all of your units or, I guess, with the pattern in orders the same? Or was health care or Hospitality, any different at all than Workplace? Yes. Let me start with your question on the Health vertical. So there's no doubt that we saw a lag in order conversion in the quarter. So it did operate a little differently than we anticipated. The activity -- we are tracking the activity closely, and we still feel very comfortable that, that activity is in the funnel right now, but that -- some of that activity is delayed. Just to remind you, the Health vertical was the first vertical to actually achieve pre-pandemic levels for us. And so we are seeing some of that slow down at this point in time, but we have no change to our perspective on how important that vertical is to us. And I'll just comment on kind of the 2 things that are new to us. One is the Fed Gov business continues to be a really important part of business for us. And we like the progress that we're seeing there as well as we just opened up the new HealthTrust GPO and both of those pieces will be critical to our growth in the future. TJ, maybe you want to comment on the Hospitality? Yes. Just on Hospitality, for you Reuben, if you look back to Q2, we did see some softness in the same period in Hospitality than we did in Workplace and Health and trying to think about what drove that during that period. Was it higher anxiety around recessionary concerns and the cumulative effect of all the Feds rate hikes, but that was certainly a period of slower decision-making and investment commitment by our customers. But I think from a more macro standpoint, we mentioned the Hospitality is at a different point in its recovery cycle and we can talk more about this, but I think we still believe in room rates and occupancy levels continuing to improve and thereby, allowing for more investment in these hospitality properties. I just wanted to start with the EPS in the quarter. Can you just bridge me between EBITDA and EPS? It looks like there was like kind of a strange tax rate going on. But it just seemed like the earnings were much lower than what the EBITDA would have implied. Sure, Greg. So one of the things when we think about the impact of the Poppin goodwill impairment that we mentioned, we had an impairment of the goodwill roughly similar amount in the same quarter of the previous year. And one of the issues you have is that, that is not a deductible item for tax purposes, so you in effect have a negative tax rate. When you take out the goodwill, we would have had positive earnings and net income. However, that's not reflected for tax purposes. So you actually have a tax expense on a book loss. And that will -- when we look at the full year adjusted numbers and you heard my guidance of 25% to 27%. When you look at the full year number and you strip out the goodwill impairment, that's how you get back to that effective tax rate, which is what we've seen in a normal case. Also to, Reuben, if you -- sorry, Greg, if you look back to the prior year, when we had the impairment in the prior year, although that was a similar amount, that was partially offset by a reduction in the earn-out associated with Poppin. So there were a couple of different things happening in the prior year versus the current. Okay. And then in terms of the volume kind of metrics you were talking about before, I was trying to keep up, but I don't -- I might have missed it, but did you mention like how much in terms of the orders, like -- how much is volume driven? And then when we look at the full year guidance for 10% revenue growth, could you just kind of give a mix of what the assumption is there for volume versus price? Yes. We didn't -- on the sales numbers, we disaggregated the sales volume and price. So the volume decline in Workplace sales was 8%, Health was 5%. We didn't do that for orders. Workplace orders were down 17%, Health down 31%. And there was obviously a benefit from price in those numbers. I think when you look at the remainder of the year, as we mentioned, we have put all the pricing actions that we believe we need to keep up with inflation those are already in the market. So the benefit of price will mathematically fade over the back half of the year. So what we have thought about is that you get to a place where your volume will look more flat year-over-year into the second half. And one of the things to think about, Greg, is the comps we're addressing, right? If you think about this quarter now, the Q3 versus the prior year, we were very much in the depths of the Omicron variant wave at this time last year. And so when you think about the comps in the second half, they are different. From a volume perspective, a little bit easier in the second half of our fiscal year than in the first half. So we're taking all that into account. But certainly, still price driven, but that will begin to fade over the second half and volume unit levels will stabilize. Okay. And then in terms of Poppin. How much is that business below like the revenue when you bought it, because if half the revenues or it sounds like more than half of the revenue is coming from new initiatives since you bought it. So how much is that core business still down? Yes. I think if you look at the core B2B business, I would say it's down directionally what you would see the entire kind of industry on a unit volume or the major metro markets down. So you could say something in the magnitude of 25%, which is what those major metro markets are down. But to your point, the Pods, which is new, but that's a Poppin direct sale as well through Poppin Pro, the growth there in the secondary market. So I think certainly, Poppin's feeling the effect of the major metros, New York, San Francisco. But I think our belief is that, that does have a path back to growth. It's just a longer-term play. And I think it also speaks to our desire to diversify Poppin's footprint into more secondary markets, into the Poppin Pro channel and through additional product expansion. And Greg, I would just add the Poppin performance in metropolitan markets, it's more reliant on the metropolitan markets, but it's no different than what the overall market is seeing. Got it. Yes. Okay. So when you -- I guess, can you bifurcate Poppins revenue, maybe that core legacy B2B versus the new initiatives? Like how much growth are you seeing from maybe the new areas versus, I guess, what might be considered legacy Poppin revenue. And is that equaling like flat? Or is it still down even with the new growth initiatives? Yes, I don't have a split of that at hand, Greg, I have to get back to you offline. But I think we're certainly -- what we're trying to appreciate is in the near term, with -- if you think about return to office, if it is kind of at some level of more stagnation in the major metros, we believe there's room to grow from there, but I think that has pushed our investment towards these other areas, which is, again, secondary Pro and Pod. So I don't have the bifurcated numbers by kind of product category or channel right now, but we can -- I can take a look at that. Greg, as we struck to grow Poppin going forward, one of the things that you'll see is we're kind of channel agnostic as to where the order goes to. So when you think about the end user, they're the ones who will make the decision as to whether they want to buy it through the dealer, which is the KI selling organization or the Poppin direct model. And so we're doing all that channel work right now. But that brand and that opportunity will start to become fully integrated throughout Kimball International. I had a couple of questions. First of all, congratulations on the really strong gross margin performance. You gave some components of that gross margin improvement. So we can kind of understand where that goes in the future. Can you kind of break out how much of those gross margin improvement came from each 1 of the 3 components. Can you kind of give us some color on how you achieve that where that's going into the future? Sure, Rex. I think if I was to put in and we can talk a little bit about how the specifics, but in sort of order of magnitude, I think it was certainly price realization would be first on the list. And then I think after you look at a price, I think number 2 would be operational excellence savings. And then I think the third bucket will be comprised of really all other being -- whether it's leverage, product, BU mix and just kind of overall moderations in things like inflation, for example, LIFO being an actual income item in this quarter versus an expense in the prior year. So I would say price certainly leading the way, operational excellence and then a combination of all others below there. So I think when you think about the sustainability of that, we would say that absent a change in the trajectory of inflation, we have closed the price cost gap that we had desired to. And so now we would see incremental price realization in the back half, but no immediate pricing actions necessary to close the gap further. Okay. Then looking forward, we can expect the improvement due to pricing to kind of fade over the next couple of quarters, but the operational excellence, is there more juice in operational excellence to Health there? Yes, Rex, there is. And then the example would be when we mentioned these capital investments, our metal automation investment in our [indiscernible] facility of approximately $6 million to $7 million, that isn't even commissioned until April. So we still have 2 months before that's commissioned. And the automated storage and retrieval system in our Santa Claus facility, that will be commissioned in the following fiscal year. So we feel that we still have a lot of benefit that can come from operational excellence from things like these capital investments, but also a lot of it is just some classic lean manufacturing and kind of more ways of working. Okay. The second topic I wanted to address was the tax rate, which was very high, even the adjusted tax rate was extremely high. Excuse my naive entail a little bit about tax accounting, but can you give me some -- a little bit of breakout of why that number was so high, given the -- I understand that the write-off is not tax deductible, but still a $7 million tax expense seemed really high. Yes. No, absolutely, Rex. So maybe this can be an off-line topic as well. But as you mentioned, our GAAP tax rate was a tax expense on a loss, which would be a negative tax rate. But as you mentioned, even the non-GAAP tax rate after adjustments was higher than the effective rate that I indicated for the full year, and a lot of that has to do with the accounting treatment, whether these things like the goodwill impairment are treated as a discrete or nondiscrete item. So what happens is the impact of that tax effect, it gets captured in a quarter or spread out over the remainder of the year. And what you'll see is that the tax impact of that is going to be spread over the following 6 months. And so it will normalize into roughly the full year non-GAAP rate that I indicated of 25% to 27%. But happy to talk more offline about our [indiscernible]. That's where I was going. How do you get from that big tax number to a 25% tax rate over the course of the year? And that helps. And then we'll talk about that a little more later. Finally, I'm very -- from a -- from the perspective of holders of the equity, your continued return to capital is important. And I congratulate you on continuing to do buybacks and dividends in a difficult environment over the last couple of years. Can you give me some color on where you think that's going over the remainder of this year and into next? Sure. Rex, and we've talked before, I think that's very important to our management team is an effective and diverse allocation of capital. So we've certainly shown that we want to invest back in our business, with $25 million in CapEx this year. As you mentioned, we've maintained our dividend throughout the entirety of the pandemic. And now we've been able to decrease our leverage to what is a much more sustainable level at 0.9x, trailing 12 months net debt-to-EBITDA. So if you think about places where we're going to allocate in the future, I think it's certainly continued investment in our business. I think -- thinking about the share repurchase, but also M&A. And as we look at where our leverage is now , where we'd like it to be looking at opportunities in the market for us to continue to expand our capabilities. So I think what we would talk about is a balanced and consistent allocation of capital to generate the best return. This concludes our question-and-answer session. I would now like to turn the conference back over to Kristie Juster for any closing remarks. Thank you, Sarah. Well, thank you, everyone, for joining our call this evening. Have a wonderful evening, and we very much look forward to sharing our progress in the future. Thank you.

EarningCall_474

Good morning and thank you for standing by. Welcome to the Linde Full Year and Fourth Quarter 2022 Earnings Teleconference and Webcast. At this time, all participants are in a listen-only mode. Please be advised today's conference is being recorded. And after the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Mr. Juan Pelaez, Head of Investor Relations. Please go ahead, sir. Thanks, Devon. Good morning, everyone, and thank you for attending our 2022 fourth quarter earnings call and webcast. I'm Juan Pelaez, Head of Investor Relations, and I'm joined this morning by Sanjiv Lamba, Chief Executive Officer; and Matt White, Chief Financial Officer. Today's presentation materials are available on our website at linde.com in the Investors section. Please read the forward-looking statement disclosure on page 2 of the slides and note that it applies to all statements made during the teleconference. The reconciliations of the adjusted numbers are in the appendix of this presentation. Sanjiv will provide some opening remarks, and then Matt will give an update on Linde's fourth quarter financial performance and outlook, after which, we will wrap up with Q&A. Thanks, Juan, and good morning, everyone. By all measures, 2022 was another successful year for Linde, despite the significant and unprecedented headwinds. I'm incredibly proud how every employee rose to the challenge by not only delivering record financial performance but also living our core values and supporting key initiatives for all stakeholders. And while there are hundreds of daily examples where Linde employees have created real value through their commitment and determination, I'd like to highlight just a few on slide 3. Starting with shareholders. We delivered record financial performance against the backdrop of an energy and inflation crisis not seen in half a century. Three important metrics for our owners: operating margin, EPS and ROC, all reached record highs, both for the fourth quarter and the full year. In fact, we achieved our ninth quarter in a row of growing EPS ex FX by 20% or more. On top of that, $7 billion, almost 5% of our average market cap, was returned to owners in the form of dividends and share repurchases. We also expanded shareholder focus beyond fundamental results by identifying persistent technical constraints on Linde's stock valuation. The Board recommended a solution to simplify our exchange listing, which is approved by an overwhelming majority of shareholders. However, achieving sustainable long-term value creation requires more than just a commitment to our owners. We need to successfully integrate all stakeholders, including employees, customers and the very communities we operate in. So on the environmental front, we continue to make great progress, and 2022 was no exception. Looking at the numbers, we added 50 additional zero-waste sites in 2022, reaching 760 sites around the globe. We reduced absolute Scope 1 and Scope 2 greenhouse gas emissions by over 1 million tons of CO2 versus 2021, despite growing volumes. This is a good start towards our stated goal of reducing 35% greenhouse gas emissions by 2035, which was recently validated by the science-based targets initiative. In addition, through the use of our technology, products and services, we help customers avoid more than 2 times the CO2 emissions from our operational footprint. These achievements have been recognized by the Dow Jones Sustainability Index, CDP and several other independent organizations. And we're not only committed to reducing our own carbon footprint, but we're also playing a major role in the global energy transition, which I'll cover later. Of course, none of this is possible without the commitment of our employees. When I measure performance and human capital, I first look to our longstanding company values of safety, integrity, inclusion, community and accountability. Our safety performance continues to be best in class as defined by a double-digit improvement over 2021 in lost workday cases and commercial vehicle incidents. Creating a diverse and inclusive environment where employees can achieve their full potential remains a priority for us. In support of this commitment, Linde has recently implemented a number of development programs across the enterprise. We're currently at 28% for gender diversity, and I fully expect us to exceed 30% by 2030 across the entire organization. The local nature of our business has also enabled over 500 different community engagement projects, an increase of 25% from 2021. Linde donated more than $10 million to support various charitable and STEM programs, including over $2 million in support of our Ukrainian employees and relief efforts. These highlights represent only a handful of accomplishments during the challenging 2022. However, here at Linde, we have a relentless focus on how to improve, including better positioning ourselves for the future. And while we've had four great years since the merger, I'm even more optimistic looking ahead. The $9.2 billion project backlog, which we define as contractual growth project with secured returns, increased $2.4 billion versus the third quarter due to our OCI win, which I'll talk about shortly. Additionally, 2022 was another record year for small on-site wins as the 52 new contracts will provide secured revenue for the next decade or more. With this in mind, for 2023, we expect to invest almost $5 billion in CapEx and acquisitions across all three supply modes, enabling high-quality growth while increasing asset density and reliability. Furthermore, we expect to start up over $2 billion in sale of gas projects this year, including our $1.4 billion project with ExxonMobil in Singapore. You'll recall that this project is expected to start up in phases, beginning this summer. Therefore, we'll remove it from the backlog sometime during the middle of this year. Of course, it's difficult to talk about growth today without mentioning key secular drivers. I'd like to remind everyone that a few years ago, we stated how we would leverage the secular driver of electronics capacity expansions and win more than our fair share of high-quality projects. Our current project backlog of Tier 1 electronics customers validates that strategy as we continue to lead the industry. I view clean energy opportunities as being no different. I expect to win more than our fair share of high-quality projects across the energy transition spectrum. We are already partnering with global leaders and actively developing large-scale projects with contractual terms and conditions and scope that you've become accustomed to with Linde. This approach is consistent with what I mentioned last quarter. Of course, it never hurts to reiterate. First, we intend to partner with subsurface experts for all underground operations. We're not geologists. Secondly, all projects will follow our investment criteria. In other words, earn a commensurate return for the risk undertaken. And finally, we will stick to our core, which is management of industrial gases. We have no interest to own or speculate on globally traded chemicals. Rather, we'll have offtakers for our products. Our recent win with OCI perfectly aligns with these principles, which you can find on slide 4. We will invest $1.8 billion as the long-term supplier of nitrogen and blue hydrogen into OCI's ammonia facility with terms and conditions and a return profile consistent with our traditional on-site contracts. OCI is an expert in ammonia production, logistics and marketing, something Linde doesn't want to engage in. In addition, we are partnering with a world-class oil and gas company for the CO2 sequestration. This blue hydrogen project is a great start, and we have several more large-scale energy projects under development. These opportunities follow our traditional gas model and involve partners that are global leaders in their space. In addition, we will continue to execute in our base business, managing pricing, productivity and increasing density across all three supply modes because we recognize that our owners appreciate the resilience of the industrial gas model. Overall, 2022 was another stellar year despite the many headwinds. We achieved new highs across several key financial metrics whilst relentlessly focusing on our core values. This is the fourth year in a row of double-digit EPS growth, and I see no reason why this won't continue. Stated simply, I have confidence that we will deliver strong results irrespective of economic and geopolitical climate. From my vantage point, I've never been more confident about Linde's future. Please turn to slide 5 for an overview of the fourth quarter results. Sales of $7.9 billion were down 5% from prior year and 10% sequentially. Note that underlying sales increased 7% year-on-year but decreased 2% sequentially. So, there are several moving parts distorting the trends. First, you can see FX down 6% year-on-year due to the strong U.S. dollar. This trend has already started to reverse as evidenced by the flat sequential impact. I'll speak to guidance at the end, but based on current FX levels, we might have some upside going forward. Divestitures from GIST and the deconsolidation of Russia resulted in a 4% and 2% headwind when compared to prior year and the third quarter. We’ll lap that part of this in June and the rest in September, although I do expect a sequential tailwind in the first quarter from our U.S. acquisition of nexAir. The engineering business decreased 4% from last year and 3% sequentially. The prior year variance is driven by Russian projects, and the sequential decline is from timing of a U.S. project. I expect a few more quarters of engineering volatility as they resolve and subsequently lap suspended Russian projects. While we ceased all Russian activity in July of 2022, we continue to reconcile balance sheet liabilities upon reaching settlements with our vendors and former customers. Cost pass-through trends are starting to stabilize with a 2% increase over last year but 3% drop sequentially. As you know, this represents the contractual pass-through of energy costs and has no effect on operating profit dollars. However, this will impact operating margins as we gross up or down sales and variable costs. Volume is down 1% from last year and 4% sequentially. This -- prior year, economic weakness in EMEA and severe weather conditions in the U.S. more than offset growth in APAC and project start-ups. Most of the slower volume came from pipeline customers. So, there's a larger impact to sales than profit given the contractual fixed payments. Versus the third quarter, volume decline is coming from weather impact to U.S. pipeline customers, EMEA's softer economy and normal seasonal impacts from Southern Hemisphere LPG. We saw a larger-than-normal amount of U.S. pipeline customer outages toward the end of the quarter from weather. This mostly occurred in December, but the vast majority of customers are back to their seasonal run rates. Therefore, this is not expected to be an issue going forward. Pricing actions remain robust with an 8% increase from 2021 and 2% from the third quarter. These increases are broad-based and aligned with the weighted inflation rate. Operating profit of $2 billion resulted in a record 25.3% operating margin. Excluding pass-through, operating margins expanded both sequentially and year-over-year in all gas segments as pricing effects net of cost inflation continue to improve underlying business quality. The engineering segment had an abnormally high operating margin this quarter due to favorable project timing. Recall that engineering follows a percent of completion accounting method. Customer cash deposits are held on the balance sheet as liabilities until we have the contractual right to bill the customer, at which point the liability is recognized on the income statement as revenue. This quarter, we settled a large contract, enabling us to retain all related cash deposits, thus recognizing the remaining liability as current period revenue. I do not expect this margin to be sustainable beyond this quarter. A lot of you are likely wondering how to model engineering going forward given the recent performance. I believe the best approach is to use the sale of plant backlog as the next 3 to 4 years of revenue with average profit margin in the low- to mid-teen percent. During times of rising backlog, cash inflows and margins tend to be higher, whereas in a declining backlog, it's usually the opposite. However, the current situation is deviating from this pattern due to the significant project wind-down from sanctions. So, we still may have a few more volatile quarters ahead. EPS of $3.16 increased 14% from last year or 20% excluding FX. As Sanjiv mentioned, this is the ninth quarter in a row of 20% or more EPS growth ex FX. Operating cash flow is down versus prior year and sequentially. This is almost entirely driven by engineering project timing. Please turn to slide 6 for a review of 2022 capital management. Operating cash flow was $9 billion for 2022 or 82% of EBITDA, consistent with our multiyear average. The business continues to deliver steady levels of cash in any economic environment. You can see to the right how we invested that cash, aligned with our stated capital allocation policy of growing the dividend, reinvesting in the business and using leftover cash for share repurchases. During the year, we invested $3.3 billion while returning $7.5 billion back to shareholders. We anticipate a meaningful step up in 2023 for new business investments while raising the dividend and maintaining a healthy share repurchase program. I'll wrap up with guidance on slide 7. For the first quarter, we’re providing an EPS range of $3.05 to $3.15, an increase of 4% to 8% versus prior year or 9% to 13%, when excluding FX. Sequentially, this range assumes that recovering U.S. pipeline volumes and an acquisition are mostly offset by China seasonality and lower engineering profit. Full year guidance is expected in the range of $13.15 to $13.55, representing an increase of 7% to 10% or 9% to 12% when excluding an estimated 2% FX headwind. Both ranges assume no material change in economic conditions at the midpoint. Furthermore, we're estimating a 4% FX headwind for the first half year and flat for the second half, although recent trends have been better. At this time, we believe it's appropriate to remain cautious against the backdrop of an uncertain environment. If the economy grows, we'll have upside. And if not, we'll take actions to mitigate like we did in 2020 and 2022. Our job of management is not to predict what will happen, but instead, execute in a volatile world and deliver on our commitments. Yes. Good morning. A couple part question just around the new project announcement. So, historically, a lot of the fertilizer companies used captive production. So one, I'm just wondering with this outsource, does that indicate that maybe either moving to an ATR or something in the IRA or just connected to your pipeline? Does that give you guys an advantage, particularly in the industry in general with outsourcing hydrogen going forward? And then, I just -- on the project itself, so the way to think about it, your $0.10 of op profit for every dollar of capital, we should put in about $180 million run rate kind of whenever we think that starts up in 2025. Is that a fair way to think about this? Thanks, Duffy. So, let me just take a step back and tell you why projects like this become attractive to have Linde as a partner with. And in the OCI project, as an example, there are a few things that work in our favor. And then, that kind of translates into your question as to why outsource versus captive. Linde brings a number of things to the table: one, EPC capability with a successful track record executing very large and complex projects; integrating different technology packages. You referenced ATRs. ATRs are new for many people to operate. I mean we already operate one and clearly -- at our own facility. So that advantage is something that then becomes available to people who are thinking about that outsourcing model. Add on to that the reliability that we're able to bring, which a single captive standalone unit does not have. We, of course, hope the hydrogen pipeline up to our U.S. Gulf Coast system and to the cabin [ph] that has the ability, obviously, to store excess hydrogen at times when we are able to produce more; and strong operational expertise in managing the ATR ASU complex. I mentioned to you already operate one at Clear Lake and obviously adds to that whole piece. Ammonia players, in my mind, are increasingly seeing Linde as a very complementary partner, supporting their efforts to start their expansion programs on blue and subsequently green as well. You put all of that together, I think it's a compelling argument, Duffy. As far as the return profile is concerned, and I heard some numbers there, I'd say to you the way we think about returns -- and again, this goes back to our disciplined capital and investment criteria, our -- for us, double digits unlevered post-tax returns is how we would assess a project like this. This is a traditional industrial gas project, no different to any other that we do, and that's how we would then factor the return coming back into the returns you would see hitting the EPS. Maybe just another one on the blue hydrogen opportunities. You're in a position now where you've got a partner on the carbon sequestration side. I guess, when we think about the Q45 credits or the value of them, so maybe there's some negotiation there, I guess, how should we think about how much you capture as part of this carbon capturing that you set up versus how the sequestration gets allocated? Is there a way that we should be thinking about that or a rule of thumb? I'm sure every contract is going to be a little bit different, but your partner sounds like it's going to be a steady and long-term one. Exactly. So Duffy, let me just -- sorry, John, let me just start off by quickly kind of identifying. As you saw on slide 4, there are three components to this deal coming together. There is a customer who is the offtaker. We've defined that as a core part of our strategy. Without an offtaker, we don't develop these projects. There is the Linde scope, which is the ASU, the ATRs and the carbon capture equipment that we are investing in. The 45Q is linked back to the entity that captures the CO2. In this instance, obviously, when you think about how the project moves forward in examples like this, we are working with numerous partners, developing multiple project streams like this. At the moment, we are in advanced conversations with a number of partners for this very project. And essentially, what we're agreeing with them is potentially what you could call a tipping fee, where we would have structures which allow them to take the cost of transmitting and injecting the CO2 for storage underground and obviously managing that on a permanent basis. So, that's how you would structurally see it. Obviously, the 45Q benefits are part of that discussion and negotiation that we are currently pursuing with a couple, three different carbon sequestration experts. I'll stay on the theme and ask another one on the OCI project. You mentioned it will connect to your existing pipeline. For your existing customers on that pipeline, I assume you're currently supplying them traditional gray hydrogen. I'd assume there's also now an opportunity to sell them blue hydrogen at some price or value premium. Am I thinking about that correctly? And then, when you think about your base returns or hurdle rates for this project, would those incremental home upshift opportunities, the blue hydrogen on the pipeline, be considered in your base returns, or is that, call it, potential upside from here? So Mike, you're right that there is some excess blue hydrogen that we will have out of this facility. We've obviously scoped for that. The linkage into the U.S. Gulf Coast hydrogen pipeline network is both space, right? It works as a reliability factor, very attractive for OCI, at the same time, gives me the opportunity to take that surplus blue hydrogen and put it back into my system. We have demand for that blue hydrogen. And yes, there is a premium. In the past, I've explained between gray and blue, the premiums that exist, and we will be putting that into the pipeline for customers who are moving onto blue hydrogen and have the willingness to pay for it. So to that extent, whatever surplus we have, we have factored that into our economics. As you'd expect, we tend to be fairly conservative around how we model some of that stuff, and you will see that also here. Is there a potential upside longer term? There is always going to be as that transition to blue hydrogen happens. Thanks, everyone. Hi. I’m getting off theme. I'd like to ask a little bit about the buyback actually. I see that it stepped down a little bit from the usual sort of $1 billion per quarter in Q4, which I assume was due to restrictions around ahead of your AGM. If I understand correctly through the delisting process, there may be a few restrictions around your ability to pay dividends or do a buyback until you get the approval from the Irish court. So, can you just sort of clarify whether that you see any constraints in terms of your buyback or timing of the dividend around the delisting period? Thanks. Nicola, I'm going to headline that by saying I don't see any constraints, but I'll ask Matt to just give you a little more color on that. Sure. Hi, Nicola. So, to your two questions, I think, first, just on the buyback pace. Yes, we were -- since this is classified as a merger of the actual structure, we were essentially out of the market entirely for most of the month of December. We are back in as our traditional 10b5-1, and then it will open up again to active buybacks in a couple of days. So that would drive some of the quarterly reductions given that we needed to be officially at. As far as the Irish distributable reserves, which you're referring to on dividends and buybacks, as you know, this is the same process we went through on the original merger between Praxair and Linde AG. It is a somewhat perfunctory exercise, especially now that we have a track record in history. So, we don't see this as any issue. We are well ahead of it, and this will not affect the dividend. It will not affect the buybacks. And we've got that well accounted for. So, there's no concerns on that in my part. Jeff, the impact of the winter storm was primarily on our on-site customers, resulting in customer outages. We were there to support them with whatever nitrogen requirements, et cetera, were there, but the outages were at the customers' end. Thank you, Sanjiv. Back to the OCI project, should we think about the 45Q tax credit as additive to your low-double-digit return or is it embedded in that assumption? It is -- David, it's embedded. So obviously, the relevant portions are appropriately embedded into the economic model. And obviously, double digit, as you know, is a wide range. So, it's an attractive project for us the way it comes together. Very good. And you mentioned last quarter about 30 projects you're working on, I think, in the U.S. on the back of the IRA implementation. Would we stand in additional projects, like OCI be announced perhaps in the next few months or a few quarters? Thank you. David, I've mentioned that we have a large number of projects we're working on. We've said that we had visibility over a decade now of about $30 billion in overall terms of decisions that we expect to be making. I also mentioned that I see $7 billion to $9 billion of decisions on projects for investment over the next two to three years. And that, despite the $1.8 billion that we've now announced, I still see that $7 billion to $9 billion number as being robust in terms of decisions over the next two to three years. Again, it's going back to the OCI a little bit. I mean, obviously, that plays to your strengths. You can see that with the infrastructure, the pipelines and everything. Obviously, there's a lot of talk now coming out of Europe, though with a response to the IRA. And I see your footprint there. It's not quite the same as the Gulf Coast. You don't have the hydrogen pipelines, the same expense and stuff. Just wondering how you see your advantages there, if there is a real risk. So Peter, I'm going to give you the example of Germany and Leuna where we have exactly the -- that we have here in the U.S. Gulf Coast. Well, I think -- yes. I'm saying in Europe, you don't have the same pipeline infrastructure that you have on the Gulf Coast. So... We do. And I was going to give you an example of Germany and Leuna where we have exactly the same structure, multiple customers, pipeline network, serving refineries and chemical companies in that industrial network. So, that's an example of where we have incumbent strength. In fact, we are building our electrolyzers there to provide some green into that very pipeline network. So, that's one example where we do have the ability to expand and use that incumbent position that we have as a leverage to win more into that industrial activity and the part that we operate in Leuna in Germany. So, that's an example in Europe. What I'd say also to you is I think the nature of the projects in Europe is going to tend to be quite different, where there will be a complex producing product and then putting it into a pipeline network. Our ability, therefore, to participate in these islanded developments remains very strong. And I can also tell you that of the number of projects that I referenced previously in response to David's question, I see a number of those currently being developed in Europe as well. Got it. Can I add -- just sneak one in on trading? Just on Europe, obviously, the margin shot up. You had the volumes down. A lot of that was the on-site business. So I presume that helped you with the margin. But effectively, how you see the price/cost argument in terms of pushing the selling price through against the energy cost situation now? Because I presume most of it is through and you caught that up. So just how you see that progressing in '23? Thank you. So Peter, the way I think about energy costs and their implications for our business is twofold, right? In terms of power cost and natural gas costs, anything that happens in terms of it going up or down gets accounted for in our contractual cost pass-through mechanism. So, if that moves up and down, yes, you will see some shifts happen as a result of that. For the rest, the way we recover inflationary impact and the way we manage our business is pricing. And as you know, we've got a 30-year track record now of positive pricing. And I see no difference -- nothing different to suggest that there'd be any different as we move forward. If fuel costs go up, we manage that through a pricing mechanism. That's the cost inflation piece. If other costs go up, we manage that through a pricing mechanism as well. One of the things that we do is we manage that through product pricing and not only surcharging. And therefore, the stability of that pricing longer term is quite sound. And we feel pretty good about where it stands and how we'll be able to cope with that as we move forward. And Peter, this is Matt. I would just add to Sanjiv's point. I mean, I think a good indication to see these changes you're looking for are the sequential trends. So, when you look at EMEA sequential trends in this most recent quarter, you can see that, to Sanjiv's point, pass-through is negative 6%. That is the energy pricing, that is the natural gas pricing coming down, yet pricing was up 4%. So, we're still seeing stability in the pricing levels. But of course, we are seeing large reductions in the pass-through as that energy comes in. Sanjiv, would you comment on your expectations for China as they emerge from the Lunar New Year holiday? What are you baking in there in terms of baseline demand trajectory for '23? And then, I'd welcome any thoughts on non-China, Asia as well, taking into account your ExxonMobil project start-up in Singapore. Sure. So Kevin, just talking about the APAC business overall, and I'll just walk you through APAC more broadly. That would give you the color that you're looking for. Again, we had solid pricing, as you saw. We had record operating margins. They are up at 26.5%. I've said to you folks before that there's a target on the back of the Americas business, and APAC and EMEA are moving in that direction to try and bridge that gap. Sales were pretty strong in electronics, in particular, across APAC followed by chemicals energy and then a bit of manufacturing. It is a story of two halves, if you will. Ex China, again, electronics, very strong chemicals, engineering, energy and manufacturing also extremely strong, some seasonal impact of LPG business in South Pacific that you would normally expect. We see that level stable, and I'm seeing that in January, the same momentum carrying through. In China itself, in the last quarter, we saw steel automotive being reasonably weak. The Chinese New Year, obviously, in January kind of impedes our ability to really see how that recovery is going to come through given the reopening that's been touted now. I think the next couple of weeks, I'm watching carefully to see how that trend shapes up, and that's really going to determine what that long-term view on China is going to be. I said last year that I expect moderated growth out of China, and that's kind of what we've considered in our guidance. Is Linde interested in the disassociation of ammonia back to hydrogen and nitrogen? And I don't know if any of the OCI ammonia is targeted for export for local disassociation, but I'm more interested in general. Since there are a number of blue ammonia projects underway by companies who don't sell hydrogen and nitrogen and I guess, there could be some extra cargoes that will be available eventually in that market. John, I'll answer that in two parts. Let's talk about technology, and then I'll talk a little bit about the commercial side of things. As far as technology is concerned, Linde has some really good technology around backtracking, which is cracking that ammonia back to get -- disassociate and get hydrogen back. And we are, in fact, running pilots as we speak on some new catalysts and some new developments over there to make that a lot more efficient as a process. We're running with one of the largest oil and gas companies in the world kind of doing that -- those trials. So, I feel very good about the technology we have. I feel very good about that particular project that we're running through, and you'll hear more on that in the weeks ahead. As far as the commercials are concerned, I really struggle with this. The reality is for us to make ammonia blue or green, we put a lot of energy into that process. We get the ammonia molecule. We'll then move that molecule from point A to point B in a large ship. We will then take it to a storage at the other end, and we will back-crack it. The amount of energy loss that you see in that entire process makes the economics not viable in my mind. I don't see -- so for me, direct ammonia usage, either on the fertilizer front or direct as a fuel injection or fuel blending, makes a lot more sense in the near term. As technology changes and improves and as the energy balancing work that we are doing, in fact, in our pilot continues to improve, then it becomes a little more viable longer term. Can you provide a little more granularity on how you got the 21% sales growth in electronics year-over-year given that end market that's clearly slowed? Steve, when a fab has been constructed -- and we're talking about solid contracts with long -- Tier 1 players across the world. When a fab is constructed, they have to manage that operational elements to a point, right? So that capacity utilization works in our favor. And we are actually growing that market both in terms of ramp-ups that are happening on new fab that came up two or three years ago, and we continue to ramp our gases into increasing production that is happening over there. And in addition to that, we also continue to improve some of the molecules that we bring into these fabs given the new technologies that are there. We call them electronic special gases. That -- we are continuing to see growth over there as well. And of course, I'll always add that there is a good strong pricing element to that. And if I could, on the OCI blue ammonia project, the 2025 start-up does seem quite ambitious. Is construction already underway? And maybe particularly for your partner, does your contract with them take effect in 2025 if their plant is not on stream? And at the other end, your -- is your partner for sequestration well on their way to getting a classic injection well? Can you comment on those perhaps key bottlenecks? Sure. So, these projects typically take many months to develop, in some cases, years. And so, we have been working on this project for a while, Steve. So, that's the reason why we are reasonably confident about getting this up and running in 2025 and in commercial production. So, I feel pretty good about where things stand with that. Having a local engineering organization with ability to do EPC on very complex projects obviously helps and is a competitive advantage from a Linde perspective. Our customers have obviously been working on their project for a period of time as well and are well advanced in terms of their own construction activity. So again, for you, good watching that. And I am not concerned about delays on their end. Having said that, contractually, we always protect ourselves, and we have date certain contracts to ensure that we are -- if we have done the investments and done the construction that we needed to do that we are able to then ensure that our facility fees or facility charges are then paid to us on a date certain basis. Coming on to the downhole activity. We are talking to at least three, if not more, very competent world-class companies that are experts in carbon sequestration. And those discussions are progressing well. And obviously, you would expect us to do some diligence around their ability to get permits sake, where they stand in that process. Some have already applied. Others are fairly advanced in terms of their preparation. Again, we feel good about how they are kind of in terms of readiness to manage the sequestration when it comes to the pipeline. Just sticking with that global end-market trend slide, two aspects of it. One, is this going to be the last quarter of difficult healthcare comparisons? And should that yellow box start to turn green? And then secondly, the other piece within industrial actually had the worst sequential sales growth. So, what in particular within that other bucket was driving that minus 6% sequentially? Right. So, we are about lapping the COVID volumes. Vince, you're right that we will see that largely lap now. I think the point that you can also note is a sequential movement on that suggests that we are actually headed in the right direction. You'll see that green -- the greening up of it, if you like, in the quarters ahead. So, that looks pretty much in -- along the expectations we have for that. As far as the rest is concerned, clearly, we -- there are sequential elements over here that have a range of different things. Matt has referenced most of this. I'm going to just highlight a couple of them, so I make sure that I cover that. One, we told you that U.S. on-site business saw customer outages due to the winter storm in the U.S. That obviously affected between metals and chemicals and energy. We have -- and again, you've heard this before, but I'll just repeat it. Our January trends look very good. Most on-site customers are back to seasonal run rates, in line with expectations or even slightly above. We mentioned that in our Q1 guidance already, as you might have seen. So, feeling pretty good about where that trend is in terms of the developments out of the Americas that you saw. As far as EMEA, I'll just briefly cover and let you know that from our perspective, there has been lower economic activity across EMEA for the course of this year, has been especially true on the on-site business given the volatility on the energy costs, customers in metals, chemicals and energy, obviously, impacted by that. So, volumes were down versus previous year as far as our on-site business portfolio was concerned. But again, having strong contracts and high-quality customers helps, and you can see that in the EMEA margin, which hit that 25% mark, which was a target that I'd set for them as they moved down that journey to try and bridge the gap to the Americas margin. As far as Europe is concerned, sentiment is, of course, improving. And given the stability in energy pricing, we're starting to see some volume creeping up slowly as far as that on-site business that I mentioned to you earlier on. But of course, they still remain below previous year levels, and we're just waiting and watching how that all shapes up. And just to that other end market, which is the bottom one on that slide, under industrial, is there anything specific in that other piece? Yes. Sure, Vince. So a couple of things on other. Generally, what it represents, clearly, items that wouldn't fit in the categories above it represents a competitor or it would represent distributors that we don't have an actual end market identified. It is the smallest percent, so large moves could shift it. In this particular case, it's the seasonal component of LPG. That's the big driver since that is a sort of a retail component of our Southern Hemisphere business. And that just shows on the year-over-year, right? You can see the year-over-year is still up slightly. This is mainly driven by the seasonality component of some of that residential LPG component. I just wanted to ask about volumes. With the good visibility you have over the next couple of quarters, do you think some of the new projects ramping up will offset slower end-market trends, particularly EMEA, and maybe even the U.S., if things deteriorate from here? Tony, as I said, the volume trends that we were looking at in January look really good. And I mentioned the on- site customers in particular, we're seeing them back at seasonal run rate that I would expect them to be at or slightly above that. More broadly around manufacturing, we're also seeing a snapback after the holiday period, so the seasonal impact. And kind of watch out for what happens beyond that. Again, January showed us a good clear path to that in the U.S. as well. In Q4, our packaged goods, if I look at the gases and hard goods, both grew sales double digits, and we are seeing momentum continue into January on that as well. Yes. Good morning. Sanjiv, in the past, you talked about three buckets of capital. I think decarbonized Linde was $3 billion, decarbonized customers was $10 billion, and then greenfield projects was $20 billion. Are the returns on -- in these three buckets kind of similar to each other? And then, how do you go about forecasting long-term hydrogen price given that these could be 20, 30-year projects and hydrogen costs have been coming down substantially? Thank you. P.J., let me talk about the hydrogen price quickly and then we can talk about the three buckets and how we look at them. So, as far as hydrogen price is concerned, we've been in the hydrogen business for about 50 years now. So, we've got some long-term experience around hydrogen pricing. In terms of how we think about hydrogen pricing, we look at our projects, the capital that we put on the ground and look at, as I said before, double-digit unlevered post-tax IRRs to make sure that those projects stand on their feet. You walk that back into the hydrogen pricing. And obviously, given that we lead the hydrogen market, both in the U.S. and elsewhere in the world, we feel pretty good about being very competitive in terms of what we bring to offer. Now, the hydrogen price development that you're referencing over here is largely going to be that variability is largely going to come on the green side of things, a lot of scale-up needed. Green is neither scalable today, nor is it cost-effective today. Even with the PTC of $3 per kg that might come out of the IRA, I would say to you that the inflection point for green isn't quite there yet. I see a journey of at least 5 to 7 years there. But you're right. You'll see some pricing curves on that will kind of develop in the next 5 to 7 years to make it -- get to a point of inflection on volumes. The three buckets that we spoke about, you're right, they are three different buckets. There are two specific elements in there that you can think about the first. When we have assets on the ground in the U.S. Gulf Coast, as an example, today, when we add capture capability to that and then work with the sequestration partner to put a downhole, there is an existing asset base on to which I'm adding a little more incremental capital and getting the leverage of that installed base that I have. So clearly, the return will look more attractive. For the rest, whether it's decarbonizing our customers or new markets, we are largely setting up new assets, which will be just as we have in the OCI case, in an ASU plus an ATR plus carbon capture. You put that together, we would then again look for a traditional industrial gas contract structures and return profile where we would expect to have returns commensurate with the risk that we undertake. So, that's how I would kind of say to you that those two buckets would really play out. On the last earnings call, you had a very helpful slide for, I'm sure you remember, it was the IRA and accelerating the U.S. clean energy transition. Can we just hit on actually one of the smaller buckets, the decarbonized Linde? It seems like you have a lot of projects, $3-plus-billion opportunity, fairly low-hanging fruit. How should we be assessing those opportunities in terms of your prioritizations versus, obviously, the -- I'd say short, intermediate and longer opportunities with customers as well as new markets? Thank you. Thanks, Chris. So, that bucket, and I referenced this briefly to P.J.'s question earlier on as well. That bucket is installed assets that we have today. There are about 11 to 13 assets that we have on our list for that, $3 billion spend that we talked about. And really, I expect that in the midterm, we will be looking at decarbonizing that. There are two drivers for that. One, we're seeing conversions and demand buildup of blue hydrogen across our existing network. So clearly, we want to make sure our assets are ready and able to supply that. The second, remember that from a sustainability point of view, we've made a commitment that we will bring absolute reductions to our Scope 1 emissions, which are coming from that installed base of steam methane reformers that we operate in the Gulf Coast. So, we will be tackling that both from a point of creating economic value, but also living up to our sustainability commitments that we made in reducing absolute scope on emissions. In the midterm, you'll see actions on all of that. Devon, thank you, and thanks to everyone, for participating in today's call. If you have any further questions, feel free to reach out. Have a safe day.

EarningCall_475

Hello and welcome to the Nokian Tyres Q4 Conference Call. My name is, Francois, and I will be your operator for today's event. Please note that this conference is being recorded. And for the duration of the call, your lines will be on listen-only. However, you will have opportunity to ask questions. [Operator Instructions] Thank you. Good afternoon from Helsinki and welcome to Nokian Tyres Q4 and full year results conference call. My name is Paivi Antola. I'm the Head of Investor Relations in Nokian Tyres. And together with me in the call, I have Jukka Moisio, the President and CEO of Nokian Tyres and Teemu Kangas-Karki, the CFO. In this call, we will go through our Q4 and full year results and more importantly discuss our plans for 2023 and beyond and the new start for Nokian Tyres. But now I am handing over to Jukka and team. Please go ahead. Thank you, Paivi, and welcome on my behalf as well. So, first of all, I would go through the prepared presentation. The heading is resilient performance in 2022 and 2023, a new start for Nokian Tyres and indeed we could also say about 2022, that was an eventful year. I move to Page two, and there we reflect the first steps we've taken to build the new Nokian Tyres. The most important thing is that, we made a decision in 2022 to build the new factory in Romania. We went through more than 35 sites in Europe in about six months’ time, prepared the investment proposal, decided and announced that in November. So, quite a rapid action to [indiscernible] our capacity. First tires will be rolling out in second half of 2024 and we aim for commercial production in 2025. Right now, we have various actions ongoing including land purchases, permitting processes and indeed, we've ordered the first production equipment already in late 2022. Financing will be taken care with our own cash flow and leveraging the strong balance sheet. We are not looking to raise new equity to finance this factory. Actions also to increase capacity in Finland and in the US are proceeding in line with the plan. So we had a plan to go all the way up to 4 million tires in Dayton, that plan is very much ongoing, equipment’s will be installed this year and ramping up of those equipment’s will be taken place this year and early 2024, to achieve that 4 million tire capacity or capability. Also in Nokia, increasing capacity, we decided that those investments on new equipment late 2021 and early 2022, they are being installed as we speak and also we are increasing ramping up the capacity increases in Nokia. Right now, first contract manufacturing agreements were signed in Q4 and negotiations with other manufacturers are ongoing. So the first off take volumes we expect in the second half of 2023, and the sale process in Russia is ongoing. Move to Page three. Despite an eventful year, we had a resilient performance and I want to highlight some of the key achievements. First of all, heavy tires had all-time high net sales, all-time high profitability and productivity. Vianor delivered all-time high net sales. In North America, we achieved the highest ever sales in terms of volume in passenger car tires and also, of course, production records in our Dayton factory which progressed in 2022 according to plan or actually ahead of the plan in 2022. Important achievement was also on new products, which are high performing and we had strong partnerships with our customers, which drove our net sales in 2022 despite demanding year and eventful year because of the war in Ukraine. I go to Page four, so Q4 is impacted by lower supply volumes, net sales at EUR411 million. This is 22% behind 2021 fourth quarter in comparable currencies and the most impacting reason for that was the lower passenger car tire supply volumes. Segment operating profit at EUR13.5 million was EUR88 million a year ago. We had the same reasons, lower passenger car tire volumes also changed factory mix and -- but also had price increases to combat cost inflation and we had higher net selling price or average selling price. Teemu will talk more about the profitability impacting our factory mix and supply volume impacts soon. I go to Page five and which is reflecting the full year 2022 performance. So all-in-all, our net sales, EUR1.78 million, which is all time high. Last year, we achieved EUR1.71 billion – sorry, EUR1.78 billion, net sales in 2022 and EUR1.71 billion in 2021. So, actually 2022 despite it being an eventful year had the all-time high net sales of Nokian Tyres. However, in comparable currencies they're slightly behind 2021 net sales. We had lower budget car tire volumes as the sanctions came into force and the tire imports from Russia to Europe and North America ended in July. However, we had also record year in heavy tires in Vianor. This shows a strong performance by our Nokian Tyres team and also the resilience under very demanding circumstances in 2022. Segment's operating profit EUR221 million versus EUR325 million in 2021, again supply of -- the lower passenger car tire supply volumes, as very as changed factory mix had most important impact on the profitability. We are facing from price increases and they helped to combat the cost inflation. Based on 2022 performance, the Board proposal on the dividend payment is as follows, EUR0.35 to be paid in May, and also the Board will seek authorization to decide on the second dividend payment of maximum EUR0.20 per share in second half of the 2023. So, all-in-all, the dividend pay proposal is up to EUR0.55 per share. On Page six, we have the highlights of the financial performance. I call out some key numbers here, cash flow in the final quarter, cash flow from operating activities EUR390 million, capital expenditure EUR70 million. In that EUR70 million, we have about slightly below EUR40 million of new equipment for the Romania factory. Our EBITDA -- segments EBITDA, a new profitability measurement, segments EBITDA at 12.5% and segments operating profit at 2.3%. Full year net sales at EUR1.78 billion versus EUR1.71 billion in 2021 as I mentioned earlier, segments EBITDA in 2022, 21% at EUR367 million versus EUR455 million or 26% in 2021. Equity ratio remained strong. So, we have 65% equity ratio and interest-bearing net debt at the end of the year at EUR141 million. Capital expenditure for the year at almost EUR130 million. And on Page seven. Just to highlight those achievements in sustainability. We had excellent safety performance. Lost time incident frequency was record low at 3.2, at 1 million hours worked. We also started to build the first CO2 emission factory in Romania in tire industry, introduce the most sustainable concept target yet with 93% of the materials in the site being recycled or renewable and also an important achievement in 2022, we were included in the Dow Jones Sustainability Europe Index, being one of the top scoring companies in the Automobiles and Automotive components industry. With those highlights, I hand over to Teemu to give more color to financial performance and financial details. Teemu, please go ahead. Thank you, Jukka, and let's start with the passenger car tire business. And as we see in Q4 net sales, which was on a level of EUR236 million clearly declined from comparison period because of the lower supply of volumes from our factories. The segment operating profit was negative in the fourth quarter of EUR14 million. Then looking at the full year numbers, the net sales for passenger car tire was on a level of EUR1.233 billion, increase of close to 3% with reported numbers and with comparable currencies, a decline of around 5%. Then the segment operating profit for the full year, EUR179 million and clearly down from the comparison period. As we knew the lower tire supply had a negative impact, especially in Central Europe and in Russia. The inventories are on a high level in the distribution that will have an impact than to sell in. The segment operating profit, it declined as expected, but we have been able to increase prices to offset the headwind from raw materials and other cost inflation. Then if we look the net sales by quarters, here you can clearly see the volume impact already declined after the third quarter being the biggest decline in the fourth quarter and then price -- positive price mix development, but due to the fact that we have been able to increase prices that we started already in year 2021 in the second half. Then currency has given us tailwind during the year 2022 and most likely year 2023 looks like that we will have a headwind from currencies. Then looking at the performance of our PCT slightly more in detail and focus to the segment operating profit bridge you can see here the impact from volume some EUR120, price mix significantly up almost EUR240 million and then, which is clearly offsetting the material headwind of EUR130 million. Then if we zoom into the supply chain bucket, which shows a negative development of EUR134 million, half of that is coming from the lower production in Russia and then the other half of that headwind is coming from higher logistics, warehouse and custom duties from North America. So, good to remember 50/50 split of this headwind. Then moving to the heavy tires. They had a record year that we are really proud of. The net sales in the fourth quarter was on a level of EUR65 million and the segments’ operating profit EUR6 million. Full year numbers EUR274 million almost is all-time high as is the segment operating profit almost EUR44 million. In the fourth quarter, the net sales decreased slightly due to supply constraints. And as an example, the sick leaves were on a high level in the fourth quarter in our Nokian factory. A stated all-time high full year net sales and profitability in year 2022. Moving to the Vianor, which recorded all-time high net sales and we had a strong finish to the year in the fourth quarter, reaching EUR129 million in the fourth quarter and the segment operating profit almost EUR11 million. The full year numbers are EUR362 million and segment operating profit EUR3 million. As you might remember, we had a weak first quarter and now, strong fourth quarter and therefore we landed almost on the same level than in 2021. In Vianor, we have continued to improve our operational efficiency as well as to offset the cost inflation in 2022. Today, we also announced our alternative non-IFRS figures excluding Russia, and here you can see the figures 2022 and 2021, our segments net sales and segments operating profit look in those years. This year, we have now introduced the new segments net sales that we will guide in 2023 excluding Russia due to the fact that the sales process is still ongoing. And if we look the year 2022 and 2021 net -- segments net sales figures, you can see that they have been on a level of EUR1.35 million in 2022 and EUR1.39 million in 2021. And then looking at the segments’ operating profit for 2022, here you can see the segments’ operating profit on a level of EUR18 million and here good to remember the headwinds from the supply chain last year some EUR60 million due to that extra cost relating to moving tires out of Russia closer to customers. Then moving to the assumptions for this year 2023, we are expecting that the first half will be weak due to the constraint capacity and the seasonality and then the second half is supported by the winter tires all season sales and the off take volume that we are getting in the second half. In heavy tires sets all-time high net sales and segment operating profit last year. Now, we see the market softening, so the most likely it is a short-term headwind even though overall we believe that the market is going in the right direction. Then the guidance for this year. Now, we decided to guide with absolute numbers, unlike earlier years. So, the net sales will be between EUR1.3 billion and EUR1.5 billion, the segments net sales and segments operating profit percentage of net sales between 6% and 8%. And I like to highlight the seasonality, especially in the segments’ operating profit, meaning that the profit is generated in the second. Thank you, Teemu. So, we go back to looking at 2023 and it will be a new start for Nokian Tyres. So, what will happen, what is important for us. First of all, we count on our team. We've been through 2022, which has been quite a demanding year. We look optimistically into 2023. We have our agenda quite full. First of all, the work on the new factory in Romania. We have a very tight schedule to build it and to get the first tires dropping out, which is the latter part of 2024 and then commercial production starting in 2025. The second one is that the Nokia factory capacity increase is ongoing. So, right now, we are ramping up new equipment as we speak and increase the capacity, same with the Dayton, new equipment is coming, and we are ramping them up and we have factories fully utilized at this point of time, both the tires, we can make are being made and being shipped in the second half, mostly as Teemu was saying about due to seasonality and focus on winter tires are our core products. We have also already made an agreement to have contract manufacturing. We keep on negotiating additional contract manufacturing opportunities so that we complement our product portfolio in late 2023 and especially in 2024, 2025. And as you may remember, we announced in December that we have already concluded one agreement that will help us to supply winter tires in Central Europe. At the same time, it's important that we provide our customers with world class products and services. It's important that we'll process from our factories to our customers and consumers, continue uninterrupted. We will [indiscernible] safety, product quality and sustainability, building on our achievements in 2022 in sustainability and safety, which were -- safety was at record level and also the including Dow Jones Sustainability Index in 2022, we aim to do the same 2023. We also will use this opportunity to improve our processes and build our systems and capabilities for the next stage of Nokian Tyres growth and this is important when the new factory in Romania comes on stream. And I move to Page 18, which is capturing all these key initiatives and actions that we see. We have an investment phase in 2023, 2025. So new factory Romania, capacity increase in Nokia, Dayton factory completion and growing contract manufacturing. In 2026, 2027, we will see a significant growth phase. And based on the new products and invested capability and we target to have EUR2 billion net sales at the end of that period or during that period. Obviously, many of you remember that when we had the Capital Markets Day in 2021, we were aiming to be a EUR2 billion company mid-term. Now we still aim for the EUR2 billion company mid-term with some important hits in 2022 and it was a demanding year. However, we [indiscernible] we focused on key actions, we are confident that implementation will be successful. Financially, we are able to do it and we have strong cash flow, strong balance sheet to rely on and that will allow us to build the new Nokian Tyres. This is the end of the prepared presentation. And the final page says it's a new journey and it will be a new journey. That it will be. Thank you Jukka, thank you Teemu. Before going to the questions from the audience, Jukka mentioned on Capital Markets Day in 2021 and then there is a question about the next Capital Markets Day as announced earlier, that will be arranged once the Russia exit has been finalized and that, as said, the process is on growing. Thank you. [Operator Instructions] The first question comes from the line of Michael Jacks from Bank of America. Please go ahead. Hi. Good afternoon Jukka, Teemu. Thanks for taking my questions. I have three. The first -- first of all, thank you for providing more specific guidance ranges on revenue and EBIT, but could you please also provide some steer on the building blocks for cash flow in 2023? I think the dividend send a somewhat confident message in this regard, but just wanted to understand the moving parts to that. Secondly on heavy tires, your guidance flags risks from general economic development. Just curious, is this based on trends that you are currently observing or are you taking a view on the macro development for the year? And then finally, with reference to your restated segments operating profit figures, what are the main reasons for the wide margin gap between the 2021 ex-Russian margin of 15% and your 2023 guide of 6% to 8%? Thank you. Yeah. As you stated, the dividend proposal to the AGM should send a clear signal to investors how we see our cash flow developing, not only in year 2023, but also in the coming years. Good to remember that we have now a heavy investment program in the coming years and the first two years are the biggest in terms of investments and as we have stated that the investment in Romania is some EUR650 million. So if you divide that by two, taking into account that we have maintenance CapEx of some-EUR100 million, so that might be a good proxy for year 2023. So dividing EUR650 million by two, meaning that Romania investment is not yet completed in two years, because in three years, but then taking into accountant maintenance CapEx on a level of some- -- close to EUR100 million. Then in terms of working capital changes, most likely, no major changes there in this year. Yeah. And then if you look at the net debt EBITDA ratios, we see that we can [indiscernible] clear the situation in 2024, 2025 and not having too higher leverage based on net debt EBITDA, despite these investments. Heavy tires, we basically talk about the heavy tires that what we see right now. Obviously, the general economic situation it's a concern and we need to pay attention, but right now, of course, the -- as Teemu was saying that inventories and pipeline is relatively full and we see current situation, which appears to be softer. However that may change, of course, depending on how the economic momentum evolves over the year. And then the restatement, Teemu? Yes. I just want to understand the main reasons for the difference in the margin between the 2021 ex-Russia margin of 15% and the guide for between 6% and 8% for 2023 given that that one is also excluding Russia. So if we start with 2022. And as I said we should bear in mind that there we have this headwind from logistic, warehouse and custom duties some-EUR60 million, so on the EUR80 million, you can put that on top. And then if we looked at 2021, there we should remember that we get the benefit of lower production cost in Russia. So if we take that into account, then we come closer to the guidance of 2023 indicating the range of 6% to 8%. Hi, Jukka. Hi, Teemu. Akshat from JPMorgan. Three questions from my side [indiscernible]. The first one on the deal with [indiscernible] on the Russian plant. Obviously, you mentioned that the process is still ongoing. Is it possible to give us some more clarity in terms of the timeline or the next steps in this process please? And how have things really evolved in the last three months from when this was announced. And I’ll ask other two later. As we stated already in -- was it in late October when we announced the deal that the Russia exit has substantial uncertainties related to timing terms and conditions and the closing of the transaction and the situation definitely has not got any better. So it is a demanding topic and environment and therefore I would love to give you more clarity, but I don't have that either. So therefore, I cannot comment that unfortunately. But maybe if I just add something which you didn't ask, but nevertheless I add. So, despite the ongoing Russian process, the rebuild of the company in terms of building the new factory in Romania and advancing with capacity rebuild is not dependent on the Russian exit. So that these are two separate things. Russian exit is one, it's a close its own and then the other part is that we build new Nokian Tyres independently how it goes and when it comes to conclusion. So therefore, these two things are not dependent, just as an addition to your question. And if I build on that -- If I build on that of the team, Nokian Tyres team 99.9% are focusing to the future building at the new Nokian Tyres. Myself and few -- my team members are the ones who are only focusing closing the deal in Russia. It's a necessity -- yeah, it's a necessity from the company point of view that, we move on we build the new company, at the same time, we value -- pay attention to that thing, of course, that we do in a best professional way, the process in Russian exit. Yeah. That is -- yeah and that is very clear and I believe in that that the balance sheet still is in a strong position. The second question was on the 2023 guidance and the implied passenger car margins. So you're talking about a 6% to 8% segment operating profit margin. So, firstly, in terms of your disclosure, what will be the difference between segment operating profit and operating profit in 2023? Just probably a list of items that you will still be adjusting for in 2023. Is it still the Dayton ramp-up expenses or maybe some more ramp up expenses in Romania? So some kind of details on those adjustments will be helpful. And secondly, within that group margin, can you also guide us to what kind of passenger car margins are you looking for in 2023, because your Q4 passenger car tire margin was in the negative territory. Thank you. Yeah. If I start with the PCT for passenger car tire guidance, we have been guiding on a Group level and we stick with that approach. Then in terms of the profitability guidance between 6% and 8% there as you said, the exclusions are not included and the exclusions in year 2023 are as you said that the Dayton ramp-up until we reach that EUR3 million level as we have been communicating. And then on top of that, we exclude now that the Russian business and that's the reason why we introduced segments net sales, because as long as they have some business there, we will report the net sales and operating profit as non-IFRS exclusion. Sure, understood. And for the underlying passenger car margins, like just in terms of Q4 was a negative number and what are we building for 2023? I did hear the comments in terms of the second half weighted profitability, but just in terms of how the passenger car profitability is panning out with the two underlying plants that you have today? Thank you. As I said in our Q3 call that you shouldn't over analyze our Q4 results, because of several activities happening in passenger car tires business and therefore I just reiterate the same comment that don't over analyze the Q4. Please look our guidance for 2023 and our comments regarding the seasonality and maybe there is a good point to give you some color you might take a look what kind of a business we had for the sake of argument in year 2000 before we started the Russia era. There you get some flavor how the seasonality was between the quarters and what kind of profitability we recorded in those quarters. Thank you very much. [indiscernible] Maybe I'll be a bit blunt. You had EUR337 million exclusions in 2022, EUR57 million in 2021. Should we expect you to be closer to 2021 or 2022 levels of exclusions in 2023 assuming the process of your Russian disposal goes broadly as you imagined. So, I assume sometimes in H1? So the Dayton part is on the [indiscernible] market that it has been and then the Russia is the big question mark that nobody has an crystal ball at the moment. But as you can see from our numbers, we from last year, we recorded EUR300 million impairment related to Russia that is in the exclusions and we make the conclusion that impairment is still valid at the year end with the information that we had at the year-end. However, let's see what is the end result when this saga ends. Okay. Thank you. Second question please. You present adjusted figures that you called excluding Russia. So I just want to clarify, because for me maybe I'm [indiscernible] but I'm not sure I understand what you mean -- are you talking about without Russian sales? [indiscernible] the Russian revenues as a destination, right? Would it not have made more sense to present an adjusted set of figures without Russia as a production center on top as sales [Multiple Speakers] We are completely unable to look at what your underlying performance as long as you still assuming that Russia as a production center were still there. I just want to make sure I understand that the exclusion is just Russia as a destination, right? No, its Russia excluded completely, including all the top line, all the manufacturing everything. And then that is segment net sales and segment operating profit excluding Russia. So there is no Russian impact at all in those numbers and in the guidance... Yeah. EUR1.3 billion to EUR1.5 billion net sales is completely without Russia and also 6% to 8% segment operating profit is completely without Russia, no manufacturing, no net sales none whatsoever. Okay. But you mean that the 2022 adjusted figure of EUR1.3 billion excludes the production of tires in Russia as well? So that's only what you have been in Finland and Dayton that has been recorded in your EUR1.3 billion sales for 2022? You have no tires produced in H1 in Russia, in that? As I tried to comment earlier, when we were looking the year 2022, there we had the impact from Russia for the stage that we generated outside Russia, because we produced those tires in Russia. And then, maybe it's more clear in year 2021, if we look our segments operating profit EUR210 million, that contains the cost of tires produced in Russia with a lower production cost. That's clear. Yeah. I think for the guidance, it's clear. Thank you. Can you guide us on the tax rates now that you don't have Russia anymore, it's been an important source of substantially the tax rate than you would have had normally? What should we assume in 2023, 2024 as your tax rates now that you don't have Russia anymore? Okay and last question please. You have, if I looked at your -- your backup slides, 83% of your debt to be refinanced in 2023, 2024. Can you guide us on what -- how you plan to do this refinancing, you plan to use your existing and unused bank loans or you plan to issue bonds and what kind of cost should we assume for 2024, 2025 net interest charges? So, we are now in process to organize the financing or the funding for the company and this is now the moment where we become like a normal company, with a different kind of funding. Because in the previous years, we have been in a net cash position now. So now during this year, we will structure our funding totally different and bond is one of the sourcing of funding the investments in the coming years. Our profile becomes different because from now on, our net sales and our profitability and our assets are outside Russia. So they are essentially investing in Europe and in North America and so therefore our leverage and our asset base as well as our financing structure can and will change. So therefore we look different kind of a company in terms of the balance sheet in years to come. Yes. Good afternoon and thank you for taking my questions. A couple to be asked from my side. So, the first one is actually relating to the product mix development this year. So what is your outlook? I guess you will be capacity-constraint and that can actually improve your mix and how it actually looked like in Q4 excluding Russia. Yeah. Our product mix, obviously, when we look into 2023, so we'll be capacity constrained and so therefore we go back to our core, which is winter tires and all-season tires and high premium summer tires for Nordics, but basically the key driver will be winter tires. Obviously, that's why we talked about the seasonality in terms of our supply that winter tires will be supplied towards the end of the year and so therefore when we talk about our guidance, we said that the net sales will be accumulated in the second half quite strongly and this is what we do. So therefore, clearly we prioritize those tires and those SKUs that bring us the best benefit from our current capacity and that we have seen already in the latter part of the year. Of course, Russia, if you exclude that you will see that winter tires in the latter part of the year has been the important part. And going into 2023 that will be the key. It's obviously, I mean this is I guess as nobrainer everybody that winter tires is our core and we prioritize them as well as all-season. Yes. And then I had -- another question is relating to your cost structure and potential actions what you've taken on that front. So your EBITDA loaded -- about those funds in accordance with Q3 results, could you provide some update, let's say, you're planning for some, let's say, cost initiatives looking at this year. So we already took out cost in 2022 in anticipation that especially in the Central Europe we will have a lower volume, because that was supplied by Russia, so therefore, we took cost actions already in 2022. Those will bring benefits in 2023, but we also look at the spend very carefully. And under these circumstances, we regulate our cash flow quite carefully, as well as our spend and so therefore, you can expect that all kinds of actions that are needed to conserve cash and be cost efficient taken. But the major restructuring and those actions were taken already in 2022. Okay. That is very clear. And maybe last one from my side is actually relating to Dayton ramp up and you actually mentioned that 3 million tires is the mark after which you won't be recognizing any ramp-up related costs. Is it fair to assume that you would be reaching this type of ramp up or run rate in terms of production already during this year? We will install the machines and equipment for that kind of a run rate this year. But then achieved run rate sometime in 2024. And then it's up to us to be as quick and as efficient in hiring the people and getting the machines up and running, but basically the machine deliveries will happen this year and this goes back to many previous discussions that when did we ordered the equipment late 2021, early 2022 and they are now being delivered during the course of 2023 and then ramped up one-by-one. Hi. Thanks for taking my question. First one on the EUR2 billion target by 2027. I'm just wondering what are you assuming here? Are you assuming a normalization of pricing in case the material costs has to normalize? And any chance you can give us a rough indication of what the margins can do and how quickly to reach those by 2000 levels? The second question is on the inventories, you said that inventories are quite high. I was just wondering if you can specify, which are we talking about and if that's true across all segments, winter, all-seasonal and summer. Yeah, thank you. When we look at the EUR2 billion target, obviously, it's a combination of volume. So we ramp up volume, not only our own manufactured volume, but also off take volumes. We assume trend pricing for that. So that's how we look at the revenue plan. In terms of margins, we have not given any indication, so perhaps we wait until the Russian situation is clear and they we have the year C&D and then we will come back with the margins and details of achieving EUR2 billion, but basically it just give a high level ambition for 2026, 2027, we aim to be a EUR2 billion Company. We had that in our plans already in 2021, we were about to achieve that in 2022, but then the war between us and success. However, we want to achieve that success in the years to come, more details when the C&D will be organized and that is dependent on the conclusion of the Russian process. Can I -- if I can just follow-up on that basically, so just to make sure I have understood it correctly, you are assuming current pricing and recovery in volumes. So, you're not assuming a normalization of pricing? We are assuming trend pricing, so trend pricing is a normalization. So it's not the highest of the high, not the lowest of the low, but trend price. Then regarding your question about the raw material price development. So on a year-on-year comparison, we expect that to still increase in 2023, but if you look at the development by quarters, good to remember that the first half last year we had a lower raw material prices peaking towards the year-end. Now, we don't see that to increase, but we have a low comparison in the first half and therefore, the year-on-year comparison is higher. And having said that another factor that impacts our raw material price level is that, because of the situation that we went through last year we purchased high amount of raw materials in order to secure our production. Now, we have more than enough raw materials with higher prices in our inventories that we will consume in the first half and then we are on a normal level with our raw material inventories in the second half. Yeah. And that's a good point what Teemu saying that when we went through the eventful 2022, we wanted to secure that indeed, we will not run out of raw materials in either in Nokia or in Dayton and to have that kind of reason to not to be able to manufacture or ship tires. That was important for us to ensure that this does not happen. Thank you. And sorry on inventories in the distribution. You mentioned that they are quite high, so I was wondering if you can comment on where they are high and on which products and what was the reason for that? Thank you. Yeah that was basically because the slowing economy in the final quarter and early in 2023 pipeline across the system is quite full. We expect that that will then clear up -- be clear out step-by-step. But towards the end of the year, the pipeline was quite full. That was a general industry comment, but relates also some of our tires. So it's not that we're immune to that. Hey, thank you for taking my question. Well, those will be on the ramp up of the contract manufacturing volumes that you foresee. So, the first one on that, how big is your confidence in the ramp-up, given that it's not entirely yourself operating those volumes? And then just in terms of the pricing that you assume for those volumes to go into the market? In the meantime, before you have sizable volumes from the contract manufacturing, I would assume you just technically lose market share to some degree. Obviously you have a strong brand. Do you just assume that you can go in with the market pricing that you see at that point and your premium pricing versus competition or do you need to be a bit more aggressive in order to place the volumes in the market as well? Thank you. Point of view that how confident we are that we can deliver those contract manufacturing volumes. We are quite confident, we tested the quality with audited or we are in the process of auditing the supply plans and we see that in terms of logistics, manufacturing quality, we are confident that we can deliver. Now, obviously, the pricing wise, they are not as profitable as our premium tires made in Nokia or in Dayton. However, important part of making sure that we provide to our customers and our distribution Nokian products so that they have a good portfolio of products. This is of course something that all the time will evolve and we expect that the off take will be an important or more important part of our portfolio in years to come. Historically, we haven't done that, but we see that even when we start Romania factory increase capacity in Nokia and in Dayton, off take will be an important part of our portfolio. And so therefore, we invest time effort development to make sure that that is going to be successful. Now the first volumes will be in the second half of 2023. So at this point of time, these are plans. We are confident, we will deliver, but then the reality will happen then we actually deliver, but those are included in our guidance of 2023. Thank you. Just a follow-up if I may, on that. You just said, to pervious question I think that inventory levels are fairly high. So, by H2 of 2023 in Europe, you would expect it to normalize and the deal were at a level where they happily take those volumes they come on stream. Yeah. We expect that because the expectation of the new car deliveries will be positive in 2023 versus 2022. So, we expect that there will be an increase in demand and improvement in the plant and so therefore the inventories will be going back to normalized level during the course of 2023. Okay, thank you very much. It's getting 4 o'clock here in Finland, so it's time to finish the call. Jukka, any closing remarks. Maybe a couple of words about building the new Nokian Tyres. Thank you, Paivi. Maybe if I come back to that guidance. So EUR1.3 billion to EUR1.5 billion in 2023, and that doesn’t include any Russia. So, this is based on our output in Nokia and Dayton off take as well as heavy tires Vianor, so that's the perimeter of our guidance, 6% to 8% segment operating profit and then, obviously, the segment EBITDA will be at -- with double digit kind of number or higher. And key actions for our team in 2023 are well lined out. So, it's really to achieve the Romania factory first steps, so building real estate and then starting to install machines, but being prepared for H2 2024 first tire manufacturing and then commercial production in 2025. So this is one project, the other one is to ensure that the Nokia factory ramp up, the new capacities that’s being installed right now will be delivered, as well as heavy tires expansions will be delivered and Dayton continued ramp up company machine installations will be delivered. Those are quite important things and then the off take, which is a new element or impact scale and new element to our company that the quality, delivery, the process will be impeccable and that we get the benefits in our topline profitability in the second half of 2023. So lots of new things in our company for our teams at the same time, as Teemu was saying 99.9% of the people are working on these fronts, but we have an important professional team working on the Russia exit at the same time. And again, when the Russian exit is being achieved or concluded, the process concluded, we will then seek to organize CMD as soon as possible to give more color how we get to EUR2 billion net sales based on trend prices, not the highest of the high not lowest of the low and what kind of volumes we expect from various sources coming and what kind of margin profile can we think about achieving at that point of time. Again, you all have been used to our Russian factory long time ago. Russia, as we knew it, at the time, delivered high margins. We don't see that Russia being there anymore. So we as a company want to move on and we have new highs, new opportunities ahead of us and we will deliver on those. That's where Nokian Tyres is right now. Thank you, Paivi. Thank you for joining today's call. You may now disconnect your lines. Hosts, please stay on the line and await further instruction.

EarningCall_476

Okay. Good afternoon, and good morning, and thank you for joining us for our Fourth Quarter 2022 Earnings Release. Today, it will be presented by myself, Niels Stolt-Nielsen, and Jens Gruner-Hegge, our CFO. The normal agenda, we will go through the fourth quarter results, take you through the highlights of Stolt-Nielsen Limited. I'll go through each of the businesses. Jens will take you through the financials, and then we'll open up for question and answers. I believe you can both call in or you can send messages through. Yes. So if we go to Slide 4, the fourth quarter highlights. It was a strong quarter, giving us a record year for our company, a record year at least as long as I've been CEO. The net profit came in at $95.3 million, that is up from $74.7 million in the third quarter of '22. And the increase that we saw in the quarter was primarily driven by the improvements that we saw in the Tanker Trading division. EBITDA came in at $196 million, and that is up from $184.4 million. Again, strong tanker results due to higher spot rates and also higher volumes. Terminals, marginally lower results due to softness in the European market, but that was offset by higher utilization, partly offset by higher utilization in our U.S. terminals. Tank Containers had another strong quarter, and that's reflecting the success they've had in maintaining margin against a backdrop of declining ocean freight rates. I will be talking more about that, of course. Still Sea Farm, the lower results, excluding fair value due to the seasonality, you have to remember the fourth quarter ends in November and the Christmas sales starts in December. Free cash flow decreased slightly $123.6 million, and that's down from $140.4 million. We declared an interim dividend during our November Board meeting of $1, which was paid out in 8th of December '22. And we continue to have a nice liquidity position of $473 million. That is down from $568 million from the previous quarter. Jens will take you through that. Just on the net debt to EBITDA ended the year at 2.85 as a multiple of the EBITDA. Then doing the net profit and a variance of analysis from the third quarter to the fourth quarter, here you clearly see that Tankers operating profit increased by 17%. Stolthaven slightly higher of 0.1%, STC maintaining strong earnings of higher of 1.8, Sea Farm down by 2.4%, gas 0.9, lower corporate costs of $4.5, others of $3 million and lower income tax of $3.5 million bring us at 95.3% for the fourth quarter. If you look at the year as a whole, what really happened, it's -- we've been waiting for this. And this year was finally the year where things really fired on all cylinders. And you see, if you go back from 2006, we saw an enormous increase in our net profit for the year of $281 million. It's nicely illustrated and also the EBITDA ended at $715 million for the year, which is also significantly up. It's driven by, again, by firming the tanker market, the fundamentals are strong. We've been seeing it for a long time. We know that the order book is low, and we were just waiting for that balance to happen. And as you know, the balance was pushed in our favor very quickly when the product tanker market strengthened because of the war in Ukraine. We are seeing, I'll talk about each businesses, but it was really -- so far, it's really primarily the earnings increase that we've seen is driven by the higher volumes in the spot market. We also took the opportunity during the year to acquire also some nice secondhand tonnage, which brought our fleet to the record size of I think it's now at 164 ships. In Terminals, high utilization and throughput pushed operating profit up by 43% to $99 million in '22, and that is up from $62 million the previous year. Tank Containers, the Clear Star, a record-breaking year with higher transport rates and demerged revenue increasing operating profit for $273 million for the year, and that is up from $82 million in 2021. And even in the fish is went our way to the prices, both for sole and turbot were fantastic and gave us a result accordingly. Then if we move to our biggest division, still Tankers, we can just start with the operating profit variance analysis, we had a higher trading result compared to -- comparing the third quarter '22 to the fourth quarter. We had a higher operating profit of $21.4 million compared to previous year. We had higher net bunkering cost of $7.9 million, higher operating expenses due to higher maintenance and repair costs, consumables and other owning expenses caused by inflation. Higher depreciation of $0.5 million, higher equity income from our joint ventures and higher others bring us the operating profit for the quarter to $78.2 million. The bunker cost, again, 99% of our COAs have bunker clauses at the end of the year, the total volume covered by those bunker clauses is 63%. The bunker surcharge revenue was down by 20.3% as prices of the bunkers dropped. Even though the price of the product we consumed remained -- was higher. The bunker consumer was down by only 12.3%, resulting in a net increase in bank cost of $8 million. Strong fundamentals. And we have -- if you look at on the chart on the right-hand side, HBR, that's what we call from Asia back to Europe and the United States, and that's where we've seen a really strengthening of the market. Of course, you see a dip in January. I think that is driven by, I would say, year-end inventory adjustment, holidays, Chinese New Year's, we'll talk a little more specific about the market of how we see it now. TransAtlantic is strong, Transpacific has had the right trend, but came off a bit towards the end of the year and the beginning of this year. And the Gulf West bound, that is AG to Europe has also come off in the beginning of the year. But still at a nice level. Now the sell-in for the quarter ended at 27,162. So the spot volume in the fourth quarter versus COA was 37% spot 63% contract. We -- approximately 55% of our COAs are renewed in the fourth quarter and in the first quarter of each year. So we are now in a heavy contract season. As I wrote in the press release, we are pushing hard to get the contract rates up. But we have let go or have not renewed quite a bit part of the contract portfolio because customers haven't been willing to accept the rates that we have asked. So we are being quite aggressive, and that's why our spot exposure has gone up. Some of the customers, most of the contracts that we have not renewed have not gone to other owners. Some of them have gone to -- a few have gone to other ones, but the other ones are mostly in the spot market. And when they go to the spot market, we charge them the spot rates, which is currently higher than the COA rates. And we're also seeing some of -- they're also starting to come back to see if we can come to an agreement. So we haven't lost them. We just haven't renewed them. It has taken a longer time, and they are exploring the spot market. I don't think that they are structured in a way that they can handle their volumes through the spot market, but we are standing firm. So we're not backing off on the rates that we're asking. And I think that we will continue to see that we will be able to get and push through the contract rates. So when we say that in the fourth quarter, we increased our COAs by 20% or 30%, you have to keep in mind that, that is a 30% increase on the contracts that we renewed. We are not telling you what -- which contract we renewed and what level those contracts are. So it's quite difficult for you to kind of predict our sales in based on just saying 29% because we haven't -- there's a lot of these contracts that haven't been renewed yet. So I think what we discussed it long how we're going to kind of give you better guidance because just telling you what we were able to achieve on the contracts that we renewed doesn't give you the full picture. So we have kind of said that based on what we -- we have renewed over the first, second, third and fourth quarter of last year and based on what we see is coming through the pipeline and what we see in the spot market, we're going to give you a guidance of what we think the sales in on our fleet is going to be for the first quarter. Based on what we are seeing now and based on the contracts that we have renewed, remember, when we renew a contract, when we go into contract negotiation, it's usually 1 to 2 months before the existing contract expires. They negotiate and then we come to agreement, hopefully. Then it takes 2 years before those new rates apply. But then new voyages has to start with the new rates. And a voyage takes 30 up to 60, even more days. So to get the full impact, that whole voyage or the 2 months have to go before the existing contract expires, and then the new voyage has to be completed fully before you get the full impact of the increased. So it's so difficult to explain in a simple way. So I think the best way we can do is to give you kind of -- based on what we're seeing today, based on the contracts that we have renewed and what we believe the spot market is going to give us, we are indicating to you now that we believe 5% to 7% increase in sell-in for the first quarter of this year. Now 5% to 7%. It's actually -- is it slowing down? Well, if we use what we are selling in exactly now, it would be 7% up. But there is a bit -- as you read, the product take market has come off a bit. The market out of the AG has come off a bit. I think it's temporary. I think it's -- as I said, I think it's the year-end inventory adjustment. I think it's the holidays and the Chinese New Year. And I think once the inventory has kind of stabilized, and we're getting into the new year, I think that you'll start to see a continued improvement in sales in and that we will be able to push through the increases in the contract. But we are being tough, and we're not backing off. And I don't see any reason to back off in what we're asking for. So as we stand, we are around 37% spot. It might increase even further. But in the long run, I think we will continue to have around 70% contract, but it needs to be at the right rates. Also, I think we have shown this before for each $1,000 in sale then increase that we're able to get through, that gives us approximately $7 million increase in net income on the bottom line per quarter. So we're giving you 5% to 7%. And what each $1,000 of increased sales in will give you on the bottom line. ESG. So actually, the emission intensity reduction in the target of reducing it by 50% by 2030. As we stand now, we -- based on the reference date of 2008, we have reduced it by 30.4%. That is actually slightly less than previously reported, and that's because of the change of speed. We are still optimizing our fleet based on sold in. So actually, we have taken a slight step backwards. So we have a further 19.6% to go by 2030. Moving over to Stolthaven Terminals, pretty steady. Comparing fourth quarter -- the third quarter with the fourth quarter in operating profit, it was one-offs that we had in the third quarter. So the normalized operating profit in the third quarter was actually 23.3 million, slightly lower revenue because of throughput, as we mentioned, lower throughput and slightly lower utilization primarily driven by our in Asia and in Europe, higher operating expense, primarily driven by inflation, lower depreciation and equity -- lower equity income because of, again, that's our joint venture in Europe, a slowdown in Europe in throughputs, bringing the operating profit for the quarter to $20.8 million. What we're seeing right now is that we're seeing high utilization in the U.S., but slightly lower throughput. Same thing in Europe. We're seeing utilization pretty stable, but lower throughput, Asia, slightly lower utilization and throughput, but we're seeing a pickup as we speak right now, a significant pickup in China. This is an illustration that we have shown you before, but the blue -- okay the black is the total current capacity at each of our terminals. The blue is the organic growth that we can do at existing terminals, land that we have at existing terminals. To give you an idea of what the expansion capacity is through organic growth. So we have currently 240,000 cubic meters that we are planning for Houston, New Orleans and Dagenham, Westport and New Zealand. The biggest part of that expansion is in Houston and New Orleans, where the market is quite strong and the margins are quite high. We have an additional 750,000 cubic meters that we can build at our existing terminal as we call organic growth. Then we also have some greenfield projects planned and also the potential for future expansion at those terminals that we are building, one in Turkey, one in Taiwan, and we're looking at also in Brazil. Moving to Stolt Tank Containers. So the operating profit for the third quarter was $43.1 million. Lower transportation revenue decreased by 14.8%. That was driven by the lower transportation rates and fewer shipments, but primarily driven by lower transportation rates from the container lines. We had hired a merge and other revenue. The demerge increased by 18.6%. We actually had a record amount of tanks on the merge, and it's good business. But unfortunately, the mergers is during covid or during the logistic nightmare that we've been through or the realistic issue the world has been through, it was positive because customers ordered extra tanks, used them as storage and also to have a buffer to be able to have product available. Now we see -- it's too early to say what the long-term trend, but now that the merger is more driven by they're consuming less or taking a longer time to the logistical bottleneck has eased up. So now the merge is more driven by products being consumed, taking a longer time to exit. So in the fourth quarter, we had a great part of the income was from the merge, but for the wrong reason. And we're seeing that the demerge is coming down going forward. When you have lower shipments and lower freight rates, we also lower move expenses. So that was a positive of $25.6 million, higher repositioning expenses. So we are starting to reposition empty tanks into areas where we are short tanks. And we're seeing right now that there's a big shortage in China. So China is picking up quite significantly. And then we had higher other operating expenses, bringing the operating profit to $44.9 million for the fourth quarter. Market outlook. We say it in the headline margins expected to soften. Demand remains steady but sign of margin pressure. So there's more shipment container line space available. That shipment time takes longer because they're not waiting import load or discharge. So there are more Tank Containers available costing more competition and putting pressure on margins. However, volumes out of Asia and the Middle East, India, very strong, and we're seeing a significant pickup in China. America is pretty flat. The big change is in Europe. Europe is dramatically down. And that is, of course, driven by the energy prices where the -- we're not talking about the various markets, I've talked about the export markets from these markets from the various markets. So Asia and Middle East, very strong, India, very strong. America, pretty flat. Europe is down dramatically. So we are seeing downward pressure on margins in regions where space on container lines is opening up, but we're seeing a significant pick up, as I said, in the China exports. Carrier spot rates dropped globally as space on ships open up in most regions, new container line capacity expected to be delivered in 2023. Just talk about the expectation in the container. So we are still doing quite well. If you look at historically, forget about 2022, it was an exceptional year. But at the historical levels, if you look at historical earnings, I think we're still going to be a very profitable division, but not that 2022 levels. Quickly Sea Farm comparing operating revenue. Turbot sales were down by $2.2 million lower sold sales, that's more seasonality. Low operating expense of $0.7 million, lower depreciation, higher A&G, okay, bringing the operating profit for the quarter of $1.4 million. If you look at the right-hand side, on 2021 and '22, we are seeing phenomenal growth both for Turbo and sole. So our operation is doing fantastic. The growth on the Sole business, land-based recirculation of the sole, it is growing faster than we had in our models. It is just an absolute fantastic development. And the demand for Sole is phenomenal. So we are very excited, and the next step is, of course, to expand the existing recirculation, where we are, but also build new and that's part of the growth plan is to go globally and develop these land-based recirculation farm. Another nice little recognition here. I know you guys are shipping analysts, we did win an award for Superior Taste Award from the International Taste Institute. And that is quite important to think about land-based recirculation, and that the taste that they gave us the 3 star, the highest award you can from these specialists. So that's a very -- for our industry, that's a huge achievement and a big kind of stamp of approval for our technology. Then I'll give the word to Jens, who will take you through financials, and then we'll come back and hopefully answer some questions. Okay. Thank you very much, Niels. As Niels mentioned, our quarter ends November 30. So we do have that skewed financial year, as you know. Also, for those who want to go in and download it, we have the presentation and of course, all the press releases that came out earlier today on our website, www.stolt-nielsen.com, under the Investors section. So feel free to go in there and take a look. We are also working on a year in review video, which we're actually proud of. We're very proud of what we do as a company and the function that we serve in the world, and we're happy to share that with you in the form of a video. Moving over to net profit. Niels has talked a lot about this already. I will do a quick reminder of some of the main items. You have the revenue slightly down from the previous quarter. Tankers freight revenue was up. That was driven by good volume and spot rates, as Niels mentioned. However, the bunker surcharge revenue was down $20 million because of the lower rapidly falling bunker prices. And that's, of course, also reflected in operating revenue. We also saw a reduction in Stolt Tank Containers revenue, not because of a margin drop, but more because of the freight, ocean line of freight coming down. Those are really the big items there. But you see also that there is a similar or slightly larger reduction in the operating expense tied to very much the same events, bunker price and ocean liner freight, and that resulted in our sort of gross margin, if you like, to be improved quarter-on-quarter. Other items to note, slight improvements in the joint venture, the sharing profit of joint ventures. Administrative and general expenses were down from last quarter. That's because of a slightly lower profit sharing accrual. We had a gain on sale of 2 ships. One was for recycling, Stolt Groenland, -- so that ends the whole saga with Stolt Groenland, and we sold a small ship for onwards trading. So that was a $4 million gain. And then net interest expense, you will see is flat, So even though we have a reduction in debt that I will come back to later, we are also seen an impact of rising interest rates, very small because we're still close to 80% fixed on the interest rates. Yes, it ends up bringing us down to the net profit of $95.3 million versus $74.7 million last quarter. I noticed in the consensus that a number of analysts had a higher expectation. I think a big part of that difference is due to what happened with the bunker surcharge revenue versus the bunker cost, which now with the fall in bunker prices, you would have expected to see that as a positive in the results, but it actually turned out to be a negative because of how we continue to consume historically priced bunker. On the bottom right, you have an EBITDA bridge that takes us from the full year 2021 EBITDA to the 2022 full year EBITDA. One thing I wanted to point out is you see Stolt Sea Farm is there with a negative 3%. But if you actually look under the hood of Stolt Sea Farm, you will see that there has been quite a good improvement in the operating results of Stolt Sea Farm. Niels mentioned a great performance on volume and price. The difference there is the fair value of the inventory. And they had, in last year, when prices were rising rapidly in '21, they took a gain on the fair value of about $18 million, and that was absent in this year. So keep that in mind when you look at that -- look at Stolt Sea Farm. Going over to our capital expenditures, which, of course, impact also our future debt levels, you will see in fourth quarter, we took delivery of 1 ship in September. That was one of those K-Line ships that we bought. We also have then forecast that we will spend $42 million. That's also related to 2 smaller ships that we have bought as well as a barge that we're building for service to BASF, which is quite a fantastic groundbreaking project. Then for the terminals, not much in the fourth quarter, but a significant jump that you see for 2023. A lot of this is the jetty that we then will finish off during the year at the Dagenham Terminal. And then otherwise, it's maintenance and repair. Once we finish off some of the project work for the other expansions that we talked about, you will see those also being reflected here, but those are not finally been approved by the Board yet. Tank Containers, the 97 and 50 reflect growth in the fleet. So there are -- because they are prime performing business, they are out and aggressively growing their fleet as well. And that's reflected in the $97 million and $50 million predominantly. And then Stolt Sea Farm that's expanding their capacity to continue to grow the business. So compared to 2022, when we spent about $184 million for the year, we're looking at an increase to about $267 million. It's ambitious. I would expect when we stand here in a year's time that some of that will have dropped off to 2024. But yes, we'll see how far we get on that. Moving over to cash flow. I want to spend a little bit more time on this because the nice result of -- the nice consequence of improving results is that we're actually also improving our cash flow generation. If you look at the top line, the cash generated by operating activities looks to be pretty much in line with the prior quarter. However, that is driven by the negative impact of working capital. So with an increase in our working capital, we've seen a drop a bit in the cash flow. Also on the next slide, the interest paid was up, but that is because we have a number of loan facilities that have half yearly interest payments. So every second and fourth quarter, you will see a higher interest expense. That leaves us with $164 million this quarter versus $170 million, $180 million in the third quarter, again, mostly working capital related. Capital expenditures was about $68 million. That number in comparison with the previous slide show you includes also the drydocking of ships. And that's more notable when you look at the full year figure because we spent close to $90 million on drydocking of ships during 2022. Then you have investments and advances to joint ventures. That relates to the Taiwan project that Niels mentioned in the terminal section where we are contributing our part of the equity capital. We bought $6.6 million worth of shares. That's relating to Kingfish that we bought during October, about a 10% stake. And you will see for the full year, we have spent $37 million, challenging in memory a little bit. That goes back to earlier in the year when we bought up in Odfjell, and we also bought the shares in CoolCompany. That means we spent for the quarter, about $78 million in investing activities versus $65 million in the previous quarter. And for the year, we spent about $245 million versus $180 million in 2021. During the quarter, we also took our debt and we have every quarter a lot of debt activities, but you will see that the proceeds are not nearly as much as the retirement of debt of $287 million. The bulk of that was the bond that we retired in September, $175 million. And if you look at the year overall, we added debt of $484 million, but we repaid debt of $684 million, plus $40 million, which was short-term debt with -- on some credit facilities. We'd paid during '22 $1 per share in dividends, so that was $53.6 million. But as Niels mentioned, subsequent to the quarter end on December 8, we paid a further $1 per share, which was an interim dividend. So another $53.6 million. That excluded from here, it means we had -- we'd spent about $173 million on financing activities. And that brought out the cash flow for the quarter to a negative $82 million, but we started out with a significant cash balance in order to be able to repay that bond in September. So now we're down at $152 million. And then subsequent to quarter end, we paid a dividend of $53 million. So we're barring any inflows of cash of about $100 million. You see on the bottom right, you have our available liquidity. The main tool we have is the revolving credit lines. One is consisting of a fairly large facility with a number of banks secured by ships. The other one is a $100 million facility secured by shares in one of our joint venture terminals. And then you have the light blue is the $152 million in cash. We have talked about reducing debt and you get a bit of the view here on the top left side, where we -- from the same quarter last year, have actually now managed to reduce our gross debt by $246 million. That's about 10% reduction in the debt. It hasn't gone faster one because we have been active in building up the tanker fleet to the largest it's ever been. And we also have other projects ongoing. But we're also hampered by the maturity of the debt in order to avoid break fees, et cetera. I'll come back to a little bit how we're looking now at cash going forward. But if you look at our average cost of debt, it has come up a little bit to about 5.1%, but with the reduction in the debt that remains steady. Looking at the bottom there, you have our debt maturity profile. You have the June maturity of $132 million. That's a bond, a NOK bond. Our plan is to pay that off with cash on hand. And with the cash generation that we're going through now, we're building out that position. And likewise, as it stands now, depending on what we're going to do with capital expenditures and projects, our intention is to also pay off the February 2024 maturity of $141.5 million. And Julian is also already working on the Singapore loan, which matures in March or May 2024. And that's because that transitions from LIBOR to softer at the mid of this year. So we might as well get that done. Now if you take those away, you will see that on average, we have about sort of, let's say, $35 million in maturities, regular debt amortization each quarter. If you add on to that interest expense of $30 million, maybe we say $35 million if interest rates continue to increase. And our interest rates will go up as we refinance new facilities and have to face today's reality. So $35 million in amortization, $35 million in interest puts us at $70 million. From the previous slide, you saw the cash flow. If you assume that we are going to be at a cash flow generation of $175 million. That will leave us with $105 million per quarter, really to take care of our capital expenditures and pay dividends. Annualized $420 million. We had $260 million of capital expenditures. So it's been very nice to now see that we have a very good development on our cash, a good balance between cash generation, capital expenditures and debt service, which leaves a lot over also to service our shareholders. And I believe that with what we see fundamentally in the market, we will actually see this story continue to improve going forward. Looking at financial KPIs, suffice to say, with a strong EBITDA all the EBITDA-related ones are improving. Our balance sheet is strengthening with our debt to tangible net worth now at 1.6 million and I'd say, a curiosity for those who have followed us for a while. If you go back to 2016, pre the Jo Tankers acquisition, that was the previous law at 1.20. So this -- finally, we have now gotten to a better position than when we bought Jo Tankers. And that's not a purchase we have every regretted by the way, so. So with that, Niels, I would like to hand it back to you. Thank you. Just so to again give you an idea how we look at the next year for each of the businesses. We think that we will see a continued strengthening of the tanker market or the chemical tanker market. Steady improvement across the terminals in most regions. We expect margin pressure in Tank Containers. But I think that we will kind of be at normal levels pre-2022 in STC. And I think that we will continue to see similar levels at Sea Farm as we did in the year-- in 2022 for 2023 in Stolt Sea Farm. So being -- tankers being the biggest part of the group, I think that we will see -- we will have also a nice year for the group in 2023. So key messages. Performance across all of our business is robust, strong fourth quarter caps still at 2022, improved market and focus on delivering our strategy results in all businesses performing. Jens showed you the EBITDA increase that we were able to achieve year-on-year. The net debt-to-EBITDA is at below 3x. Stolt Tankers contract renewal season is ongoing. It's tough. We're remaining tough. But I think the market really is in our favor. The market volatility is expected to continue our expectation of solid cash flow generation for debt service and dividend and growth. So overall, I think that yes, we will have a good 2023. That completes the presentation. So I don't know where we should start with questions. We can start here if there's any questions in the room. I don't know if there's a microphone anything. We just talk up so that they can probably hear you. Sure. . So you've been pretty good go over last year was in terms of consolidation and the chemical bank market, potential stand-alone entity? And has your views changed regarding them? Like as you've been saying, the tanker chemical tech markets is very strong. We were seeing some of the other segments maybe have gone up from one. So what's the remaining puzzle pieces that needs to be sold for work on that front? So the plan is to do an IPO of Stolt Tankers at the right time. As we explained during the third quarter earnings release, we need to have the right debt level remaining at Stolt maintenance and we're approaching that now. So now it's more the timing opportunity. So we are looking at 2023 IPO for Stolt tankers. When it comes to the purpose of the IPO and making a stand-alone entity, Stolt maintenance will still be a big part of Stolt Tankers, but we would like to create this stand-alone entity to look for further consolidation. I think for this business, this industry to be sustainable through the cycle, there is room we have to build scale. So the market is what the market is on the revenue side, but we need to build scale. And the only way to do that is to become bigger. Now most shipping companies in this segment is now making money. So that's not really on the top of their agenda right now. So we haven't given up. We still stand by that this is what is needed for the industry, but I don't think that's going to happen while the market is as strong as it is today. Any other questions in the room here? Okay. So I have quite a few questions. Tanker values have gone up 40%. Could this be reflected in asset values over time or eventually less depreciation? Tanker values have gone up by 40%. Could this be reflected in asset value over time? We operate the ships ready for life from beginning to end. We don't write up our assets on the books because market values increase. So as such, that should not have any impact on the depreciation. Your fleet size is up compared to earlier. What is the reason behind the increase in the number of vessels as you have also upped your fleet size in prior quarters? Can you comment a bit on this secondhand purchase or other reasons your fleet size is up compared to earlier. What is the reason behind the increase in the number of vessels as you have also upped your fleet size in prior quarter. So Anders, if you go in the -- back on the yard stick you will see the answer to the question. At the last earnings presentation, you mentioned that 50% of net profit is a reasonable dividend level. Any updates or comments about increasing dividends? While we did increase dividends, we called an interim dividend instead of being $0.50, we increased it to $1. And we'll see what the Board will decide in February when we have -- when we make a decision about what the final dividend for the year should be. But we were around 50% dividend out of net profit, I think, is a reasonable assumption. But again, that is determined by recommended by the Board and approved by the AGM. Can you comment on the impact of new carbon regulation on market balance? Do you see increased scrapping or slow steaming as a result of this? What is the impact on your fleet? And do you expect any significant capital expenditure to stay compliant? The answer for us is derating some of our engines on the older ships and also slow steaming. And of course, slow steaming means less tonnage available or less operating days or less tonnage available. So that will strengthen the market. Capital expenditure to meet these targets, no, there will be some capital expenditure associated with derating of the engine, but nothing significant. We continuously always look at way of becoming more fuel efficient. But the real capital expenditure will be, of course, when we order new ships and when we then determine what kind of power generation to ships will have. You have had a few extremely well-timed fleet acquisition over the past 5 years. How satisfied are you with your fleet today? Yes, we have had some good acquisitions. We have been patient. We decided not to go and order new ships and instead try to acquire existing tonnage in the market, which we have successfully done. So -- and today's fleet, yes, it is an average age, I think, 15 years. So it is aging. We are aware of that, but we felt that we needed to get our debt level down. The market needed really to improve before we were again going to start to order new ships. But of course, we are an industrial shipping company, and we will always have to order new buildings. So if we want to maintain our current position, of course, we will have to eventually order new ships. We continue to also look at acquiring existing tonnage, but also through consolidation or acquisition of one ship there and one ship there. But I think that the price expectations are -- is not the right time to try to buy secondhand tonnage at this time. Is there any way you can give a little more guidance on Tank Containers EBIT development? Rates coming down, but utilization improving again due to stronger demand in some regions. Do we give any EBIT guidance, Jens? We don't -- the only thing I can say is that the guidance I can give you is that we expect that the year will be more similar to pre-2022 levels, and that varies between $30 million net profit for the year up to $65 million, still a very, very profitable and a good business, but we do not expect and we are seeing the pressure in the market. We do not expect that we will have a 2022 year ahead of us. We're not considering Sea Farm, but again, as I said, we are looking at an IPO of Stolt Tankers. Again, we need to get the right debt structure remaining at Stolt Nielsen before we do it. The cash generation from Stolt Tankers is now causing our debt level to come down. So we are approaching that level that where we feel comfortable. And now it's more timing about how the market looks for an IPO of Stolt Tankers. Terminals, interesting side. Can you please elaborate more on the organic CapEx expansion plans for terminals, CapEx cubic meter capacity in cubic meter for the next few years. So if we go back to -- we -- Sorry. I think he's referring to that slide. So planned is on the drawing board right now, but not necessarily approved yet, but most likely it's going to be approved within the next couple of quarters. The size of the CapEx, is that something that we -- it's 240 million in total, but we haven't -- yes, but the -- yes, I think we can... Rough guidance is around $1 million per cubic meter. So the total capital expenditure will be around $240 million. We've been benefiting very much from the bond market over the years, and we were at one point over $900 million, which was very too high for us and our balance sheet, we felt having gotten it down has put it all in a much better balance. Ideally, we would like to see the debt down into the businesses rather than have that on an SNL corporate level. But the bond market, if there is a need or an interesting opportunity that has a yield on that investment that would justify going to the bond market, I think that is something we would have to consider. But at today's levels to use bonds as a regular financing source, it's a bit too expensive review. So we'd like to have a presence, but it needs to be at the right price. Yes. And the last question from Peter Hagen, -- what is your plan for newbuildings in tankers? Yes. Again, we eventually will have to order new ships. We don't have anything on order now, but at sometimes we need to put in new orders for the next generation of ships. When we have something ready, we will announce it. But of course, being an industrial shipping company, we need to build the core fleet, which is the large 30,000 deadweight plus stainless steel chemical tankers. That was all the questions on the page here. Is there any call-ins, I don't know if – operator? No. Any further questions here in the... And no further questions here. Thank you very much for participating in the meeting in the presentation. I hope that the guidance that we gave you on the sale then is going to help your model. It's very difficult for us to kind of explain. There are so many different variables and moving parts within the CEO in negotiations. I can only emphasize that we were able to get 30% increase on the contracts that we did renew, and some of those contracts actually had caps on them, some were 15%, 20%. The other ones, we were talking 50% to over 100% increase. So we are pushing very hard. And most of the contracts coming up do not have caps. And I think that takes a while for some of our customers to accept. But I do feel -- I don't feel guilty. I'm not taking advantage of the market. For us to make a sustainable business out of it, we have added a historical return of around 5% in the last 20 years in the tanker market to be able to justify for us to spend $0.75 billion in ordering new ships, we need to have the proper earnings. We need to get the rates and we need to get the terms and conditions at the right level before we make that such commitment. That completes our presentation. Thank you very much for participating. Thank you.

EarningCall_477

Hello, everyone, and welcome to the Catalent, Inc. Second Quarter Fiscal Year 2023 Earnings Conference Call. My name is Emily, and I'll be moderating your call today. [Operator Instructions] I will now turn the call over to our host, Paul Surdez, Vice President of Investor Relations. Please go ahead, Paul. Good morning, everyone, and thank you all for joining us today to review Catalent's second quarter 2023 financial results. Joining me on the call today are Alessandro Maselli, President and Chief Executive Officer; and Tom Castellano, Senior Vice President and Chief Financial Officer. Please see our agenda for today's call on Slide 2 of our supplemental presentation, which is available on our Investor Relations website at investor.catalent.com. During our call today, management will make forward-looking statements and refer to GAAP and non-GAAP financial measures. It is possible that actual results could differ from management's expectations. We refer you to Slide 3 for more detail on forward-looking statements. Slides 4 and 5 discuss Catalent's use of non-GAAP financial measures and our just issued press release provides reconciliations to the most directly comparable GAAP measures. Please also refer to Catalent's Form 10-Q that will be filed with the SEC today for additional information on the risks and uncertainties that may bear on our operating results, performance and financial condition. Now, I would like to turn the call over to Alessandro Maselli, whose opening remarks will begin on Slide 6 of the presentation. Thank you, Paul, and welcome, everyone to the call. Before turning to our results for the quarter, I want to address the Bloomberg news report that appeared over the weekend, but only to say that as a matter of policy, we do not comment on market rumors. With that topic out of the way. Our second quarter results met our expectations and have strengthened our forward momentum for our strategic plans, highlighted by expanded collaborations with strategic partners, significant new business wins in our drug product and gene therapy offerings, renewed business development in [indiscernible] and exceptional demand for our world-leading Zydis fast-dissolve technology. As we pass the midway point in fiscal '23, I would like to first look back at the past six months. Our non-COVID business continued to shower strength, as we grew organic constant currency net revenue above market at approximately 12% despite softness in nutritional supplement demand. We brought online new capacity to support areas of market with anticipated high demand, particularly of prefilled syringes, viral vector manufacturing and Zydis. We executed our plans to meet the increasing demand for fit-for-scale, high potent drug manufacturing through the acquisition of Metrics. We are very pleased with its overall performance out of the gate, including the recent FDA approval of two new high-potent drugs that Metrics is manufacturing. Broadening our lens. Since the beginning of 2022, Catalent has been a manufacturing partner for a total of seven new approvals across our -- FDA approvals across our network. In addition, we touched approximately 50% of all FDA approvals through that time through our critical -- clinical supply, analytical support and early development service offerings. We have agreed and announced an extended partnership with the two of our largest customers. All of these validates our strategy of providing to our partners a comprehensive portfolio of services underpinned by our operational excellence track record, which together position Catalent to be the partner of choice to maximize the potential of their pipelines and allows us to continue to increase our share of the most valuable molecules in the CDMO market. Looking forward, I'm very excited to be leading Catalent in the next chapter of our journey. We have a clear mission to help people live better, healthier lives. At an investor conference last month, I discussed several aspects of Catalent that should excite everyone about our premier place in the market and the growing opportunities in front of us. Among other things, I noted the continuing growth of our total addressable market, which you can see on Slide 6. Our strategic investments have materially expanded our total addressable market and will provide us with greater future growth opportunities. Since fiscal '17, we have invested over $7 billion to enable accelerated growth in exciting segments of the CDMO market, and those moves have expanded our opportunities. In fiscal '19, we addressed a $35 billion market. After our thoughtful diversification, including investment in technology, capacity and new capabilities, today, we address a $70 billion market as an active and scaled player in many of the largest, fastest-growing segments in our space. Looking ahead to fiscal '26, we anticipate our addressable market growing another 40% to $100 billion across the markets in which we operate, and we are incredibly well positioned to continue to increase our share in these markets over time. Now moving on to the highlights of the second quarter. As expected, our second quarter results compared to the prior year period were negatively impacted by the lower year-on-year demand for COVID-related products. However, notably, revenue from COVID products grew sequentially as we were the primary U.S. fill and finish site for a pediatric booster vaccine that received emergency use authorization during our Q2. Net revenue of $1.15 billion was down 6% on a reported basis or a 2% decrease on a constant currency basis compared to the second quarter of fiscal '22. When we exclude the impact of acquisition and divestitures, our organic revenue declined 4% measured in constant currency. I would like to call out that our organic non-COVID revenue grew approximately 4% in the quarter in constant currency, including double-digits growth in our Biologics segment. This is a slower growth they realized in the first quarter because we prioritized the launch of the pediatric booster and COVID-related work at our Bloomington facility. We expect consolidated non-COVID revenue growth for the remainder of the fiscal year to be more in line with the Q1 levels, which was more than 20% on a constant currency organic basis, as we address our large backlog of non-COVID work, particularly in our gene therapy and drug product offerings, and our PCH business returns to growth. Our second quarter adjusted EBITDA of $283 million declined 9% as reported or 6% on a constant currency basis compared to the same quarter of fiscal '22. When excluding M&A, the organic adjusted EBITDA decline was 7% when measured in constant currency. Moving to Slide 8, I would like to cover some data regarding our COVID-related revenue that we addressed during the recent public webcast. Our revenue guidance assumed an approximate $750 million decline in COVID- related revenues from approximately $1.3 billion in COVID revenue we recorded in fiscal '22. We're actually tracking slightly better than previously reported with approximately $450 million in COVID revenue recorded in the first half of the fiscal year and expected additional demand in the fourth quarter to prepare for a seasonal COVID vaccine in the fall, which is expected to result in fiscal '23 COVID revenues that is more than $600 million. Having said that, given the expected new seasonality of the product, we expect a minimal revenue contribution from COVID products in Q3, resulting in a decline of COVID-related revenue of nearly $350 million when compared to the third quarter of fiscal '22, which was our peak COVID quarter. Moving on, we continue to position ourselves as the industry partner of choice across the pharma, biotech and consumer health sectors. Our position has been further validated by two significant strategic partnership expansions. First, we will be extending and expanding our manufacturing partnership with Moderna, which will see Catalent support the manufacture of multiple Moderna products in multiple formats across our North American and European biologics drug product network. Catalent will continue to provide the drug products fill and finish services and production capacity for Moderna's COVID-19 programs. In addition, there are plans to extend the non-COVID-19 programs such as, two non-COVID-19 programs such as flu and RSV vaccines from our manufacturing site in Bloomington, Indiana, as well extending the partnership to support Moderna from our state-of-the-art European facility in Anagni, Italy. We look forward to our strengthened long-term relationship in helping Moderna advance its robust mRNA pipeline. Second, we recently expanded our existing manufacturing partnership with Sarepta. Catalent will be the Sarepta's primary commercial manufacturing partner for its leading gene therapy candidate for the treatment of Duchenne muscular dystrophy, which has May 29 PDUFA date. The agreement was also created mechanisms for Catalent to support multiple gene therapy candidates in the Sarepta pipeline for limb-girdle muscular dystrophy. To meet increasing demand for maturing gene therapy pipelines from Sarepta and other customers, we are ramping up additional suites at our BWI campus later this year. Critical to our business in building strong partnership with our customers is our quality and regulatory track record. Quality and compliance are central to everything we do and our strong quality management system continues to be a differentiator for Catalent with several strong recent regulatory inspection results. In addition to enhancing our strong quality performance, our management team and I have a renewed focus on improving efficiency across the organization and free cash flow generation, as demonstrated by our recently executed restructuring activities. Tom will share additional details on these activities in a moment. I will also walk you through our fiscal '23 guidance ranges, which are unchanged from our November call. On Slide 9, we cover our recent progress in ESG areas. We have a strong commitment to ESG and corporate responsibility at Catalent. And we will soon publish our fiscal 2022 corporate responsibility report which shows our continued progress in this area. We have developed our CR strategy to align to our patient-first culture, enhancing our inclusive culture, which drives our commitment to operational and quality excellence. Our CR strategy is focused on three main pillars: people, environment and communities, each of which is informed by our employees, communities, customers, investors and other key stakeholders. We put patients and people first, invest in and show respect for our employees and promote responsible supply chain. Recent progress includes completion of a third-party human rights assessment as part of our responsible supply chain initiative, A sizable increase in diversity in our global leadership teams and extensive adoption of our employee resource group at our sites. For the environment, we are heavily focused on reducing our greenhouse gas emissions, waste and water used, as you can see by the targets and initiatives on the slide. Finally, we give back to our communities by investing our time, talent and resources in serving patients. I'm proud of the increasing contribution that Catalent and employees have made to communities we serve and where we live and work. To close, we are uniquely positioned to leverage our cutting-edge technologies to advance health care innovation on behalf of our customers and their patients, while powering the next generation of medicine. We've also created many opportunities for our business through our investment so that we may achieve long- term attractive growth. With the assets we have in place, we are focused on executing our strategy to optimize our best-in-class CDMO ecosystem. We are maximizing asset utilization and free cash flow generation to enhance value for our customers, patients and shareholders. Thanks, Alessandro. Before commenting on our segment performance, let me provide you with some additional details related to our recent restructuring activities and other cost savings measures. Our restructuring effort, which was in part driven by our desire to align our organization to our business following the peak surge in COVID-related activity, reduced our cost structure in both operations and at the corporate level and consolidated facilities within our Biologics segment to optimize our infrastructure. Under the restructuring plan, we reduced our head count by approximately 700 employees and expect to incur cumulative employee charges between $14 million and $20 million. As a result of our restructuring plans, we expect to deliver annualized run rate savings in the range of $75 million to $85 million over calendar 2023, with approximately half of the savings to be realized in the second half of our fiscal '23. In addition, we expect to generate savings from other cost efficiency and procurement programs above and beyond the reduction of approximately 700 staff that are expected to generate additional annualized savings of tens of millions of dollars. Now let's discuss our segment performance where commentary around segment growth will be in constant currency. As shown on Slide 10, Q2 net revenue in our Biologics segment of $580 million decreased 7% compared to the second quarter of 2022. The decline is primarily driven by lower year-on-year COVID-related demand. Q2 results included $54 million from the vaccine take-or-pay settlement disclosed last quarter. The decline in COVID revenue was partially offset by growth across our non-COVID programs, with gene therapy being the strongest growth contributor. Total non-COVID revenue growth for the Biologics segment was more than 10%, down from Q1. The non-COVID revenue growth rate in Biologics is expected to return to the higher levels of growth we saw in the first quarter driven by increased demand in our gene therapy offering, easier comparisons in Brussels and uptake in demand for several drug product programs. The segment's EBITDA margin of 31.3% was slightly higher than the 31.1% reported in the second quarter of fiscal 2022. Year-over-year margin expansion is mainly attributable to the vaccine take-or-pay settlement that we discussed during our Q1 call. As shown on Slide 11, our Pharma and Consumer Health segment generated net revenue of $570 million, an increase of 3% compared to the second quarter of fiscal 2022 with segment EBITDA down 3% over the same period last fiscal year. The segment's revenue growth was primarily driven by the recently acquired Metrics business, which contributed three percentage points to the segment's top line and four percentage points to the bottom line. There were a number of moving pieces that drove organic PCH results in the quarter. First, as you can see on the revenue stream chart, our Development Services and Clinical Supply Services showed strong growth, but that was offset by a decline in our manufacturing and commercial supply revenue. Within the commercial stream, growth in over-the-counter cold and cough products were offset by a decline in prescription products and lower consumer spend for nutritional supplements such as gummies and other premium formats. The segment's EBITDA margin of 23.7% was lower by roughly 170 basis points year-over-year from the 25.4% recorded in the second quarter of fiscal 2022. Year-over-year margin decline was a result of cost inflation and unfavorable product mix across the network. We expect the PCH segment organic growth rate to modestly increase in the back half of the year, particularly in the fourth quarter, due to continued demand for clinical supply services and increased volume for prescription products, most notably in our Zydis delivery platform. Moving to consolidated adjusted EBITDA on Slide 12. Our second quarter adjusted EBITDA decreased 9% to $283 million or 24.6% of net revenue. On a constant currency basis, our second quarter adjusted EBITDA declined 6% compared to the second quarter of the prior year. As shown on Slide 13, second quarter adjusted net income was $122 million or $0.67 per diluted share compared to adjusted net income of $163 million or $0.90 per diluted share in the second quarter a year ago. Slide 14 shows our debt-related ratios and other capital allocation priorities. Catalent's net leverage ratio as of December 31, 2022, was 3.7x, up from the 3.2x as of September 30, 2022, due to draw-downs on our revolving credit facility to fund the Metrics acquisition, which closed October 3, 2022. Net leverage as of December 31, 2021, was 2.8x, and our long-term net leverage target ratio remains at 3.0x. Our combined balance of cash, cash equivalents and marketable securities as of December 31, 2022, was $470 million, an increase of $125 million from September 30, 2022. Although our free cash flow generation is improving, there's still work to do and this remains a significant focus of the management team. For the second quarter, we were pleased to generate free cash flow of approximately $45 million, making the first time in several quarters that we generated positive free cash flow. This was a result of more disciplined CapEx spending, as previously discussed; a strong quarter of AR collections; and a rise in contract liabilities due to upfront payments from several customers. We continue to expect our fiscal '23 CapEx as a percentage of revenue to be between 10% and 11%. Free cash flow was again negatively impacted by our strategic decision to maintain increased inventory levels, which we do not expect to change in the short term due to our concerns about the stabilization of the global supply chain and our commitments to our customers to deliver reliable supply. Note that approximately 15% of our inventory includes work in process with the remainder being raw materials and supplies. As a reminder, we do not include our customers' finished goods in our inventory balance. As noted in the past, contract assets are generated as revenue is recorded based on percentage of completion versus entirely on batch release as it is for typical commercial programs. As of December 31, 2022, our contract asset balance was $513 million, a sequential increase of $52 million. This increase was primarily driven by gene therapy programs in the development stage, for which the cash conversion cycle is longer given the duration of the manufacturing and release testing process, which can take multiple quarters from start to finish. We have a number of internal initiatives in place to optimize the manufacturing cycle time. In addition, improvement of our contract terms is a potential lever that could reduce our cash conversion cycle and contract asset balance. Once the batch subject to contract asset treatment is released to the customer and the invoices sent to the customer and the related balance moves from contract assets to accounts receivable. As you will read in our 10-Q filed today, we have two strategic customers that collectively represent approximately 35% of our aggregate net trade receivables and current contract asset values in the second quarter. Separately, and unrelated to our balance sheet, during the second quarter, we had two customers that each accounted for more than 10% of net revenue. The majority of revenue from these customers were derived from COVID programs. Now we turn to our financial outlook for fiscal 2023, as outlined on Slide 15. We are reiterating our guidance ranges for the full year. However, I would like to highlight some of the changes in the assumptions that underpin our projected full year results. First, as mentioned earlier on the call, our COVID business is tracking ahead of our expectations, with full year revenue now expected to be above $600 million compared to our previous estimate of approximately $550 million. Based on current visibility, we expect Q3 to have a minimal COVID contribution and be our lightest COVID quarter by far in fiscal '23. However, looking to Q4, we expect revenue to sequentially increase based on customer demand related to the fall booster season. Second, as consumer discretionary spend challenges continue, our projections for consumer health products, including gummies, have been negatively impacted that are now anticipated to be down when compared to prior year levels. Third, we continue to see increased strength in gene therapy with a significant program further ramping late in our third quarter, which we expect to lead to a notable step-up in Q4 revenue and earnings. Fourth, our non-COVID business outlook remains strong with the second half of the year expected to be in line with the growth we saw in the first quarter, which was more than 20% on an organic constant currency basis. For the full year, non-COVID growth is expected to be in the high teens. Fifth, from a quarterly perspective, we expect Q3 revenue to be roughly in line with the reported Q2 results. However, as Q2 included the $54 million take-or-pay agreement, we project margins to be sequentially down from Q2 to Q3, then expanding as we get into the fourth quarter. Finally, the U.S. dollar has weakened since our last report, resulting in a modest FX tailwind when compared to our November assumptions. Maybe for Tom, following up on those last comments around the guidance. The updated guidance assumes kind of less of an FX headwind, slightly higher COVID revenue. That would seem to imply maybe you're tempering slightly your organic ex-COVID growth versus prior expectations. Maybe some of that's related to the 2Q actual. But any areas where you built in some conservatism there? And then still a fairly wide range for the guidance for this year. Just any kind of puts and takes you'd call out as we think about the high and low end of guidance? Sure. Jacob, thanks for the question. Look, I would say we did see, as we mentioned on the call, non-COVID organic growth in the first half of the fiscal year at about 12%. It was down in the second quarter in comparison to where we saw in first quarter levels. However, as we get into the second half of the year, we have line of sight, which is very typical at this point in time to have strong visibility to adjust the remaining five or six months that we have in the fiscal year from those volumes, so expecting to see non-COVID growth in the second half more in line with what we saw in the first half, again, in that 20% range, and that will bring our full year non-COVID-related growth to be in the mid-teens as I mentioned on the call. I think we continue to be very bullish on the demand profile we see around gene therapy programs as well as on the drug product side of the business. Those would be the main contributors that we would see to the change in organic non-COVID-related growth in the second half of the year, and we were able to still hold our guidance range and pull back around the assumptions on the PCH side of the business, where, as we mentioned, we continue to see some pressures, particularly when it comes to discretionary spend on the gummies and, I would say, just Nutraceutical products across both Softgel and gummies in the second half of the year. You did mention FX that is, I would say, a modest tailwind for us here. But given where we are in the year and only the modest weakening of the dollar we saw in comparison to the euro and GBP, not a significant uplift there. I would say, as you think about the range that we have out there for the full year guide, I think it really comes down to execution in terms of where we land fits in the range. As I said, at this point in time, we typically do have very strong visibility to the demand profile across the business and it comes down to execution across our network. And we've certainly, I would say, built in some natural hedge just based on the normal execution-related hiccups you can see in this business when you operate 55 sites across the globe. Got it. That's helpful. And then just my follow-up maybe for Alessandro. Just on the agreement with Moderna. First, congratulations, and it's good to see. Can you just talk about this relationship kind of beyond FY '23, as we and investors think about kind of the endemic COVID revenue opportunity, but also the non-COVID work you could do with them perhaps with RSV and flu and COVID, all of these things are kind of blurring together, but just kind of any thoughts about that relationship, kind of COVID, ex-COVID dynamics? Sure. Look, first of all, I would say that our relationship with Moderna, it goes back many, many years. So we started to work with them when they were at the very beginning of the journey in 2015-2016. So, we are very, very pleased how this relationship has grown and continuous to grow into the future. I believe that with regards to the vaccine, we are keeping that network to be in the best position to serve what is going to be a seasonal product going forward. So that, on one hand, we can search capacity across our network in multiple sites. And at the same time, maintain a level of efficiency and productivity, which is important to us, right? And this is the best way to do it when it comes to seasonal demand. On the other hand, very, very excited about participating to these promising new platforms, we continue to support them, both on the clinical side, but also preparing across different formats for what the market might require. So, we are very excited about this relationship. We've always been in partnership with them, and we are very pleased that this relationship will continue to grow as in the next few years. This is [Sam] on for Luke. Just a couple of questions here. With a couple of quarters left in the fiscal year, what gets you guys to the low to high end of the EBITDA guidance range? Does Sarepta factor in there with their approval? We can just start off there. Sure. So obviously, we did mention the Sarepta relationship and the PDUFA date being in late May, I would say, very little downside risk associated with Sarepta outside of just normal execution here just given the fact that at this point in time, we really do have very strong visibility, as I mentioned earlier, to the volume related to that program and quite frankly, related to many of the larger development and commercial programs that we have across the network. As I said, we continue to manage the business to a higher set of financial targets internally, as we commit to -- that we commit to externally, which is very standard. And as I think about the range of our guidance for next year, I think execution really drives where in that range do we land versus any material changes in demand, just based again on where we are in the fiscal year and the amount of visibility we have around the demand profile across both -- especially across our Biologics business, but I would say even across our Clinical Supply and Pharma side of our PPD or PCH segment. The one area where I would say we have a little more variability, but again, have a relatively reduced outlook related to the consumer health side of our PCH business is certainly already factored into the guidance as well. That's helpful. And then on a follow-up. So the top line guide implies a bit of a step down. What got materially worse? And is that kind of split between PCH and Biologics? And that also implies a 4Q step-up outside of historical norms, is that just from COVID? Any color around that would be helpful. Sure. So we did highlight in our prepared remarks that where we do see a change in outlook is primarily driven on the PCH side of the business. And I would say the consumer health part of that business, really the area where we have derisked. I would say, from a COVID standpoint, there certainly is a step up here in our fourth quarter. As we mentioned, we have orders and visibility to a booster season in the fall with demand ramping up across multiple formats for a major strategic customer in that fourth quarter. So given the fact that we do expect to see minimum COVID revenue in our third quarter, based on what we have visibility to, but significant demand in our fourth quarter, we wanted to ensure that, that point was communicated to you all. So again, I would say, PCH continues to be the area where we have seen the most pullback and again, on the consumer health side of that business. So Tom, I wanted to try to focus a little bit on gene therapy and some of your commentary around the contract asset and the conversion of that. So if we presume that Sarepta gets good news and gets approved and you continue there, you say like you'll move the contract asset into build receivable. And then I guess from a commercial product standpoint, it would then become a batch delivery revenue recognition model. I guess I'm trying to understand at the point at which that gets approved and you've been recognizing revenue in the contract asset, do you then have a period where there's not revenue recognition until you get the next batch done and deliver that because it's now an approved product? Can you walk us through that a little bit? Yes, Dave, it's a great question and one that we continue to wrestle with and work through internally here. I would say there's various different ways that we can address in the event that we do see the Sarepta product essentially moving to commercial, though the scenario that you laid out, which would be a movement from percent completion as it's done on the development cycle to batch release upon commercialization is certainly one of those alternatives. There are other alternatives as well that would align to U.S. GAAP and ASC 606 guidance around revenue recognition. And we are pursuing those and looking at those with our auditor -- in conjunction with our auditor EY to ensure that we have the best possible scenario as outlined. In the situation in which you highlighted, if we were to move to batch release being driving the recognition and the cycle time remains as long as it is from that production cycle, it wouldn't relate -- it would create a period of an air pocket, as you mentioned, from a revenue standpoint. And I think that's the piece that we essentially need to continue to look at. So as we know more around this and come to determination, one, whether or not that commercial approval is granted in that late May time period, again, being outside of our control, obviously, we'll communicate more to The Street around this. I would say, regardless of what happens on May 29, the impact to us in fiscal '23 is minimal, if at all, right? Because what we will have at that point in time is the majority of revenue that we would be recognizing in that June time period being batches that are essentially already in flight that have essentially kicked off while the product was still considered a development product. So, many moving pieces around this, Dave, I think you're asking the right questions. These are the types of things we're looking at internally. And when we come to a determination on exactly what that revenue recognition profile is going to look like for this particular product, given the binary event associated with the approval where we will ensure that that's properly communicated so that you all understand how to model it. I appreciate that. My follow-up question, Alessandro is for you. You mentioned in your prepared remarks some recent successful regulatory reviews. I was going to ask or give you the opportunity to maybe elaborate on that. Going back a little bit further, you've obviously had some fairly high-profile 483s that probably caused some angst with management and trying to address those and energy and so forth. And so in the context of those things, I guess, I wanted to understand what -- you emphasize Catalent's quality, I wanted to understand are your aspirations to eliminate these 483s or deal with them best you can when they happen? I'm just wanting to understand where the aspirations are on the track record relative to regulatory review? Sure. Look, this is a great question, and thanks for asking it. So look, first of all, I would say, as you said, 483s are not uncommon in our industry, especially in some type of manufacturing operations, surely sterile operations are the one that the CDs to happen more frequently. Just to be clear, we don't plan for 483s. So we work very hard across our quality management system, with our leadership, with our people, with our operational excellence expectations to avoid this 483 to the extent as possible. However, it's -- these are public information. You see that there is a share of those inspections, which will result in 483s. This is true for all the players into the industry. And it's as important as try to prevent them, but even more important, how you respond to those observations in a thorough, extensive and holistic way committing to corrective actions. And some of those corrective actions, actually, most of them yields to an improved operation on the other end of them. So that's one part of the answer. The other part of the answer, which I want to stress, is that as we signaled many times, Catalent receives regular inspections all the time. Now in this couple of cases happen to be, as you said, more visible, but there are inspections all the time. And we are pretty pleased with our track record of inspections, both from share and ratio of the ones resulting in 483s, but also looking at the number of observations that are normal in those 483s. So look, I know it's been an element of noise in the last few months, but given that the outcome of those inspections you're referring to, plus the ongoing track record on the further inspections we received, we feel pretty confident about our quality management system and our operational excellence. I just wanted to touch on funding dynamics. I know last quarter, you pointed to some cash conscious decision- making from customers on the biologics side. Just curious if your conversations really have changed here at all given some of the positive developments in the market, and what are customers telling you about their conviction and their ability to go out and raise funds? And how does that compare to when we spoke this time -- or at the end of last year? Yes. Sure. Look, thanks for the question. I believe, look, we need to separate it out in our consideration -- relative considerations and absolute consideration. I will tell you that in absolute terms, our market could continue to be a very exciting market. Our share in this market continues to be one of the leading shares into the market. We continue to see very nice wins across the board of our offerings. So some of the considerations sometimes are in relative terms in terms of what was and what could have been. But in general terms, we are very, very happy about the market that we're operating in. The funding has been surely reducing. But when you look at the growth in our core business, our non-COVID business, you're still seeing the business growing above market and to be honest, in the mid-teens. And when you look at Biologics specifically even more exciting than that. So I would tell you, the market that did correct a little bit, but still supporting a very exciting growth perspective for the future. That's good to hear. And then just a quick follow-up for me around the Brussels facility. I know last -- in fiscal year 2022, it was closed down obviously for six months. Just wondering if there's any way or any detail you can provide that helps us think about the margin tailwind in fiscal 2022 from that factory being online for the full year? Yes. This is -- Brussels is a relatively small facility for us overall, but it's certainly, as I mentioned in my prepared remarks, Matt -- Max, provides a little bit of a tailwind for us here, both from a revenue and a margin standpoint, as you mentioned, the site was taken offline in the second half of the fiscal year. So it is up against a relatively easy comp. But again, Brussels not a significant site in terms of size from a revenue and profitability contribution for the Company. On the inventory discussion earlier, are you finding that you can effectively destock now because of better supply chain conditions as well as normalized customer demand? So, I would say, Paul, we're seeing pockets of improvement. And again, we order many different components and inputs for the various different types of products that we manufacture across our Biologics and PCH segments. I would say there are areas of improvement, but there are certainly areas especially on the PCH side of the business, where we do continue to see some challenges from a supply chain standpoint that factored into our decision to continue to remain, I would say, slightly elevated or elevated from an inventory standpoint. We were very specific to say that in the short term, this is going to be a tailwind opportunity for us when we have the comfort in being able to pull back on some of those higher levels of inventory are more likely to be a meaningful contributor to free cash flow in '24 than I would say it is in '23; although, as we get into the back half of the year, we should see some modest improvement. Yes. Look, cutting short the answer, I believe that our level of comfort in destocking is higher in biomanufacturing than it is in small molecule. Given the geographical source of these components, there is a little bit of a difference there. And then last question would be, you had mentioned at the beginning, Alessandro, the fill/finish market, very good. And what are the dynamics creating these positive trends in fill/finish and I believe you're at top one, two, three in the world? Yes, sure. Look, number one, we are very, very excited about our position in that market being one of the top players. And surely one of the players that before others moved into the state-of-the-art technology, which is fill and finish under isolator. So that is really creating a competitive advantage for Catalent and surely continued to increase our share of the most attractive molecules from a CDMO standpoint. I believe that the positive trends are twofolds: number one, the pipeline itself is lending naturally towards fill and finish because you're looking at assets in the pipeline, which are -- you cannot put in oral solid, so they are lending themselves more to fill and finish. And because there is a tendency to self administration, they lend themselves more towards prefill syringes and auto-injectors. So that's one dynamic. So, the pipeline -- when you analyze the pipeline, that's one dynamic. The other one is related to the increased movement of critical products to under isolator technology. Clearly, the regulatory environment is an evolving environment. And so the expectations when it comes to steady assurance I'm really suggesting that going forward, the preferred -- by far, the preferred way of doing this is going to be under isolator. And for that, we are very well, well positioned with great assets already online and many more coming online in the next 18 months. Tom, just a quick cleanup on the margin trajectory here into the back half of the year, it sounds like based on your comments, you are expecting a pretty significant sequential step up in EBITDA dollars into the fourth quarter here. Is the right way to think about it, essentially just the fact that you'll get over $150 million essentially in COVID revenue in the fourth quarter and very little in the third quarter? And ex-COVID, can you just point us to sort of how you see that margin line fourth quarter here? Sure. Tejas, I think your point is spot on. Certainly, we will see COVID in that range, as you mentioned, the $150 million-plus after a minimal contribution in Q3 that will certainly drive part of the margin story. But I was also very specific in discussing the ramp-up of the major gene therapy program, as we've talked about being late in the third quarter here and having a full quarter of ramped contribution to us from a fourth quarter standpoint, and given the operating leverage, you can see from the utilization of assets there as well as the just novel attractive margins that you see related to the gene therapy side of your business, and Biologics overall you can see that step-up. I would say from a non-COVID standpoint, if you were to strip out COVID out of all of our quarters, you would see a seasonality profile that very closely mirrors what our historical seasonality has been pre-COVID, which is that step up in -- with the second quarter versus Q1 levels, then a step up to Q3. But then ultimately a significant ramp in Q4 ahead of the summer months and some of the, I would say, downtime that we see across our customers and across our customers' networks as well as our own network related to normal maintenance-related activities that you see in the summer months there and taking up sites off-line. So, that's certainly all contributing to that significant step-up we see in the fourth quarter. Got it. That's super helpful. And then one on the -- a two-parter the top line actually perhaps for Alessandro here. So first on Bettera, how confident are you that the asset can return to those sort of 20% growth levels that you talked about at the time of the acquisition? Or do you think that perhaps is being partially driven by uptake during the pandemic and perhaps now normalizes to a slightly lower level? And then the second part of my question here is on the Biologics front. As you think about potentially a $400 million to $450 million step down into fiscal '24 from COVID, you'll also be lapping some of these pre-approval sort of like inventory build for Sarepta, et cetera, how do you think about framing the growth for the Biologics segment as it sort of anniversaries those dynamics? So, look, for the Bettera one, this is a market we are looking at very, very closely. The overall BMS market has decreased in fact, in 2022. So, we are really trying to get together with our customers, with our biggest customers to try and to understand a little more. The fundamental dynamics about this market have not changed, meaning that there is a tendency of people to go to self or preventative medicine, so to speak. However, you want to call it, and surely gummies is our preferred dosage form. So the fundamentals are there. Clearly, the market is going through a correction both because of the end market demand, which has contracted in 2022 and because of destocking for cash considerations. So, we have seen surely be clearly a disappointing trend in the last few quarters. We expect this to continue through our fiscal year. But at the moment, there are signals that at some point in the later part of this calendar year, the correction of inventory could go out, we will be back serving the end market demand. With regards of the 2024, it's a little bit too early to have any consideration about it. So, as we're going to continue to walk through the fiscal year, we're going to keep you updated about this. But I would say that we continue to be excited about the partnerships we have with the key customers going into the future. Yes. Tom, you mentioned the $75 million to $85 million of headcount-related savings. But then said there could be some additional beyond that, that could be in the tens of millions of dollars from other efficiency and I think you said procurement initiatives. Is there any more kind of detail you can share on the timelines for the latter? When do you expect the benefits from the other efficiency and procurement initiatives begin to accrue? Yes. I think it's the same timing of what we're seeing from a headcount standpoint. The headcount initiatives said we were actioning by the end of the calendar year to be able to see the full benefit in the second half of fiscal year and the full annualized savings over the calendar 2023. I would say it's been the same for some of the non-employee-related initiatives and procurement initiatives that we've had underway. We did highlight the tens of millions, but I would say there will be a partial contribution in fiscal '23 assumed and then the carryover of that being into the first half of fiscal '24. So again looking at that from the same lens on a calendar year basis. Okay. And just to clarify, you said about half of that annual run rate you expect to capture in the second half of your fiscal '23. It looks like some of these headcount reductions took place after the beginning of Q2, was there any amount of these savings reflected in this most recent -- your fiscal second quarter? No, there was no material impact from these initiatives in the second quarter. They were actioned, I would say, late in the second quarter. Some of the cash costs associated with those exits were contemplated in the second quarter. Some of that may perhaps carry into Q3 as well. You'll see that as an add back to our adjusted EBITDA through the restructuring line item. But the real impact from a savings standpoint will be realized in the second half of the fiscal year and then again carry into first half of '24. So just based on the comments on PCH us coming in a little lighter, it would imply that Biologics is coming in stronger. Can you just help us bridge the non-COVID growth in the second half of the year and some of the key drivers there? Yes, Justin, we really didn't highlight any material change to the non-COVID Biologics growth. I would say it's very similar to what was assumed and what we saw as part of our last guidance. The real change that offsets the call, the pullback on the PCH side is the over performance of the COVID portfolio. As we mentioned, COVID was originally assumed to be approximately $550 million of revenue for us in our prior guidance. And based on the orders that we have now related to our fourth quarter as our customer ramps up for the fall booster season, we now expect COVID revenue to be more than $600 million in the year. So, it's really the COVID revenue that's offsetting the pullback on PCH. Okay. Got it. And then just you talked about tech transfers over the last couple of quarters. Have those started or are they contributing yet? And then just with the commentary on the additional suites at Harmans, are they -- when are those coming online? Is that a fiscal year event or is that a calendar year event? Just a little more clarity there would be helpful. Yes. Look, let me ask this from the latter part of your question. So yes, additional suites are coming online as we speak in the -- as we have already shared. The level of utilization is ramping -- will be ramping up in the next few quarters, right? So I believe that in Q3, you're going to see a little bit of a balanced impact because, yes, you're ramping up, but you also -- the utilization, but you're also ramping up the cost associated with adding and training the people that are required for these new suites. As we said, we remain very optimistic around the gene therapy demand and viral vector manufacturing going forward, not only with Sarepta, but across the spectrum of our clients, it's a pretty good space for us. With regards to the tech transfers, these tech transfers continue to progress. Of course, there are several programs at the same time progressing. And I would say that they -- we are pleased with the kind of program we're transferring in. And surely, these programs will continue to contribute to our drug product growth into the future. Can we talk a little bit about the Sarepta contract? I'm just sort of curious, is that contemplated and sort of like the ramp-up contemplated in your original fiscal '23 guide or is what you're seeing now more incremental to what you had originally expected? So related to Sarepta, Derik, this is playing out as we had anticipated for the fiscal year here. As I mentioned, the PDUFA date in late May, we're depending on where that lands, that doesn't have a material change for us regardless of whether that's an approval or not in the current fiscal year and the outcome of that will have more of an impact for us on fiscal '24. But I would say nothing materially different from what we had assumed based on the -- this has always been a program that obviously our customer that we have been bullish on as well. So, no real change in outlook there in terms of what the '23 impact is related to the announcement here. Yes. I just want to say that the partnership with Sarepta goes -- is a little bit wider than these only programs. So, they have some capacity that we dedicate to them into our Harmans facility, and they can allocate different programs, both clinical and preparation for commercial as they see their internal plants developing. So that is more than just DMD here. Got it. And I want to follow up on Tejas' question on the PCH business. I mean it does look like that the -- when I look at third-party research on the gummies market, it looks like that's more like a 12%, 13% sort of like growth market from what I've been able to dig up. I mean when you look at that 6% to 10% guide you put out for the long term in the PCH, how critical is the gummy segment going back to the 20% range to sort of like get to that number? So look, number one, I would tell you that we never assume a business going forward to grow at the top end of any range. So we didn't assume in our story there, the 20% assumption for sure, right? So we tend to be pretty conservative on these forecast because, as you know, things may change in these markets. So that's the first consideration. The second consideration I would say in terms of the PCH story, there is much more to PCH just regarding the gummies. When you look at the demand we are seeing that was in my remarks around Zydis dosage form is just exceptional demand. And I used the word exceptional, not by chance or mistake, we are seeing the demand that is far exceeding capacity. So we are building capacity as fast as we can. We're going to be opening soon in North America, not very soon, but sometimes in the next few quarters a North America facility for Zydis because we need an additional facility. We have installed recently -- last year, we have installed an additional line in Zydis, we are working on a number of operational excellence programs to debottleneck capacity there. But there are some very, very visible products, which are growing very fast in the Zydis format. So that is one area that is surely contributing to the growth story of PCH. And let me remind you that's one of the most profitable business of the current network should be over and above some other businesses, even considering Biologics. And with regards of the other parts of PCH, look, clearly, PCH, especially in the pharmaceutical supply is very much dependent on the timing of some approvals and the timing of some of -- and the launch of some of these approvals. So, it tends to be a little bit lumpy at times. But when you look at in the three to five years' horizon, that is a business that is a very exciting pipeline to support growth. Just with the increase in the COVID guidance in that greater than $600 million in strength in 4Q, any one you could provide some color on what the endemic COVID runway looks here even beyond fiscal '23? And what should we -- how should we think about this long term? Well, I think it's a difficult question to answer, John. So, we're going to hold back from giving any more specifics around what fiscal '24 could look like here. But I think the relationship and the continued relationship and strategic partnership that's been extended as well as expanded with Moderna, I think, speaks to the future that we believe exists for COVID- and vaccine-related revenue in the future for us. But again, we're going to fall short of giving any specific run rate as we exit this year in terms of what that could look like for us in '24. I'm going to add one comment to this one. Look, the fact that we are bringing online more assets into the network surely will contribute to the ability of running an endemic business with better productivity and profitability. If I could ask sneaking a follow-up, the Company has previously said, I think, working on greater than 150 supported gene therapy products. Any update just on the number of programs here? And just how we think about with the additional capacity coming online in that non-Sarepta opportunity with some of these programs? Yes. I wouldn't say there's any change to that. We continue to work on about 150 development programs across that part of the business. That's what has justified further capacity expansions within that space. And I would say not only we're pleased with the number of programs we work on, on the gene therapy side of the business but also the progression and maturity of those that continue to move from earlier phase to a later phase. And obviously, the Sarepta relationship and program or programs is just one example of that. So again, feel very good about the growth prospects and opportunities in this business. Just one for me because as John asked one of mine, but this is a cleanup. Last quarter, you said you had some efficiency initiatives that were in flight and in your last updated guidance, so I just wanted to be perfectly clear that 75 to 85 of efficiency actions that you kind of noted today. Is that, that prior program or is that incremental addition -- an additional cost savings to your guide today? No. Evan, these were all originally contemplated. We felt the need to be able to provide some additional disclosure and meat on the bone, if you will, related to the cost savings initiatives. The 700 headcounts we've talked about were difficult for us to talk through at the time of our last guidance because we weren't able -- we didn't execute on those, but now we've since executed on that through the end of the calendar year, so we'll see half of that run rate savings in the current fiscal year with the remaining half to be carried into the first half. So, you should look at that annualized number across calendar '23 versus our fiscal year. And I would say the further commentary around the tens of millions of dollars related to other cost savings initiatives, efficiencies and procurement programs were also contemplated as part of the original guide. So, I want to talk about core organic growth. It was over 20% last quarter, it was 4% this quarter. Can you frame for us the math on some of the moving parts that led to the quarterly slowdown? And then for 3Q, is the reacceleration over 20% happening right now? Just talk about your visibility at the end of that. Sure. So Jack, I think we've said in Alessandro's comments that one of the things we needed to do was prioritize a COVID-related program related to the emergency use authorization of the pediatric COVID vaccine over non-COVID-related revenue out of our Bloomington facility. I'm not going to be in a position to tell you what our non-COVID growth would have been in the second quarter. If we weren't prioritizing that program, but that certainly had a significant impact and why we were only able to achieve 4% non-COVID growth in Q2 and 12% non-COVID growth in Q2 for the Biologics business. But it's not necessarily the same assets and lines that are being utilized, but it's certainly the same operations and quality folks that we have in terms of putting in the time and efforts around releasing of batches. So, that certainly played into why we had a depressed non-COVID-related growth in the second quarter. So, I think returning in the third quarter back to non-COVID levels that we have seen through the first quarter of the year is what I would consider to be normal course or a low bar based on what we've been able to show. And again, the uptick in COVID-related revenue that we expect to see in the fourth quarter is really offsetting the pullback on the PCH side of the business, where we continue to experience headwinds, particularly in consumer health. Got it. And I wanted to try on the margin one more time. Just looking at the fourth quarter, your guidance in the commentary, I think it implies 4Q EBITDA is about 40% of the full year. I look over the last five years, it's about 33% -- so just help us with the math again. I know there are some things that are really stepping up in the fourth quarter. It's just much more pronounced than I think we've seen previously? Yes. I think your numbers are probably close. Maybe I'd say it's a little bit on the high side in terms of the Q4 contribution, but again, not materially different, I would say, three things like point to one, the COVID-related revenue here is going to be sizable. As we've already talked, as we've already talked about, the ramp-up on the gene therapy side of the business related to a major customer program that we've talked about here, new capacity that's going to be coming online in the third quarter. It's going to be utilized. This is going to be by far the strongest gene therapy contribution we've ever seen in the fourth quarter. So very difficult to compare that to historical years where we weren't seeing gene therapy contributions to the levels that we'll see here around the business. But third area that I would say I would factor in and then just a normal level of seasonality that we see around the PCH side of the business around Q4, heading into the summer shutdown period is another item to take into consideration here. Lastly, I would say the Brussels dynamic for us in the prior year, if you're looking at this and certainly, I would say, a headwind that we had in the prior year. So the natural lift up that we'll see here for the fourth quarter that was a business that was shut down or a facility that was shut down for us, that will be up and running here as well. So, I think all of those things factor into the margin profile we expect to see in the fourth quarter. And lastly, I would say I'd just reiterate that this was -- that the demand is there, right? The level of visibility that we have to volume or demand for the second half of the year and even the fourth quarter is high and it comes down to the levels of execution that we're able to deliver upon across our network of sites.

EarningCall_478

Good morning, and welcome to Aramark's First Quarter Fiscal 2023 Earnings Results Conference Call. My name is Norma, and I will be your operator for today's call. At this time, I would like to inform you that this conference is being recorded for rebroadcast, and that all participants are in a listen-only mode. We will open the conference call for questions at the conclusion of the company's remarks. I will now turn the call over to Felise Kissell, Vice President, Investor Relations and Corporate Development. Ms. Kissell, please proceed. Thank you, and welcome to Aramark's first quarter fiscal 2023 earnings conference call and webcast. Hope you all are doing well. This morning, we will be hearing from our Chief Executive Officer, John Zillmer; as well as our Chief Financial Officer, Tom Ondrof. As a reminder, our notice regarding forward-looking statements is included in our press release this morning, which can be found on our website. During this call, we will be making comments that are forward-looking. Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties, and important factors, including those discussed in the Risk Factors, MD&A and other sections of our Annual Report on Form 10-K and our other SEC filings. Additionally, we will be discussing certain non-GAAP financial measures. A reconciliation of these items to U.S. GAAP can be found in this morning's press release as well as on our website. I'm pleased to share that Aramark began fiscal 2023 with strong performance driven by a continued commitment to provide exceptional service to clients. I am incredibly proud of our teams across the globe who demonstrate each and every day what makes Aramark so remarkable. This morning, Tom and I will review our fiscal first quarter results as well as the key initiatives currently underway that we believe will drive continued success. As announced, just last week, we reached an agreement to sell our non-controlling 50% equity stake in AIM Services for $535 million. The proceeds are intended to be used for accelerated debt repayment and we expect that monetizing this interest will further enhance operating focus, strengthen our balance sheet, and be accreted to EPS. The sale to Mitsui, our partner in the joint venture since it was established decades ago, to provide food services in Japan, is expected to close at the beginning of our third -- our fiscal third quarter subject to customary closing conditions and approvals. We will continue to identify these types of opportunities specifically in areas where we have a non-controlling interest to enhance our ongoing focus on delivering profitable growth and shareholder value. Operationally, we remain focused on managing our cost structure and maximizing unit efficiencies coupled with pricing to counter persistent inflation. We continue to work closely with clients to tailor solutions that meet their needs, leveraging our extensive supply chain network and are constantly monitoring evolving market conditions for opportunities to benefit from improving pricing and product availability trends. Our results in the quarter built on both the top and bottom line momentum we've established over the past couple of years. Organic revenue grew 18% and adjusted operating income increased 47% on a constant currency basis, resulting in more than 100 basis points of improvement to AOI margin. Within the U.S. Food and Facilities segment, organic revenue also increased 18% compared to the first quarter last year, driven by strong performance from all sectors. Education experienced increased student enrollments and improved presence of staff and more events on campuses in collegiate hospitality, partially offset by the end of universal government-sponsored programs in K-12 student nutrition. Sports, Leisure &Corrections continued its strong growth trajectory again this quarter, primarily from increased event pricing and per capita spending, as well as a more robust event calendar. Corrections particularly benefited from a significant level of new business growth. Workplace experience group growth levels led the way with a year-over-year increase of more than 40%, driven by client pricing, higher meal participation rates and greater in-person activity in addition to solid new business openings. Healthcare+ continued its exceptional performance driven by ongoing base business growth from vertical sales and greater visitor presence that was complemented by a substantial step up in net new business compared to historical levels. And Facilities & Other grew as a result of expanded services and frequency, particularly from large client accounts, along with a strong level of new business start-ups. International organic revenue is higher by 28% year-over-year, driven by consistent net new business performance, pricing and ongoing base business volume recovery, particularly within the B&I portfolio where we experienced greater lunchtime participation rates and a return of catering activity for special events, including holiday celebrations and work -- networking gatherings. Organic revenue in our Uniform Services segment increased 7% compared to the first quarter last year, due to solid new business sales and retention rates, as well as the implementation of additional pricing strategies. Our U.S. and Canadian operations experienced strong recurring rentals and double-digit growth in adjacency services. We continue to make progress on the uniform spin and still expect completion in the second half of this fiscal year. Within the last few weeks, Kim added the final pieces to our executive team, complementing the leaders already in place, including a Chief Technology Officer. We have identified the individuals who we expect to serve as the Board of Directors for Uniform Services after the spin is complete and who will be available to act in an advisory capacity throughout the separation process. We are extremely pleased with the skillset and industry expertise that we believe will make a significant strategic impact on the business. Last week, we released a comprehensive update on our ESG platform. The Be Well. Do Well. Progress Report is the latest chapter documenting our ESG journey. And in it, we highlight our ongoing commitment to diversity initiatives, community building, climate-related actions, crude and worker safety, and the progress we've made in responsible sourcing and waste reduction. MSCI recently gave us an A rating and Newsweek recognized us as one of America's most responsible companies. We continue to drive the importance of ESG metrics reflected by the inclusion of an ESG scorecard in our fiscal 2023 annual incentive plan for our senior leadership team. I'm proud of those significant measures we've taken to make a positive impact on people and the planet and the efforts underway focused on making a lasting impact. Before turning it over to Tom, I would like to highlight the recent election of Kevin Wills to Aramark's Board of Directors at our annual meeting on Friday. Kevin's impressive background and accomplishments are an excellent addition to our Board and align with the company in strategic value -- in strategic vision. I also want to thank Board member, Dan Heinrich, for his numerous contributions and partnership. It is our intent that Dan will move over to serve on the Board of Directors for Uniform Services upon the spin. Our performance in the first quarter reflected continued momentum across the Aramark portfolio, as we delivered revenue and AOI results that demonstrated the team's growth mindset and commitment to deliver great service to our clients and increasing profitability for our shareholders. For the total company, organic revenue of $4.7 billion was 18% higher year-over-year, and consisted of more than 4% from net new business, roughly 6% of pricing and approximately 8% related to higher base business volume. Adjusted operating income was $242 million, constant currency increase of 47% compared to the first quarter last year. AOI margin increased just over a 100 basis points to 5.3%. Improved profitability during the quarter compared to prior year was due to leveraging higher sales volume from broad-based net new business growth, pricing and base business recovery, primarily within the B&I sector and sports and entertainment business, as well as disciplined operational and administrative cost management, all of which more than offset inflation, a tight labor market, and new account start-up costs. Generally, we've experienced an increase in the use of agency labor to support the rapidly growing level of operations, particularly in collegiate hospitality, which we expect to manage down over time. In addition, we are encouraged by the continued signs of stabilization within the global supply chain that have allowed us to begin to gradually transition back to preferred sourcing programs where possible and appropriate. This has helped partially mitigate rising food costs due to persistent inflation that we continue to experience during the quarter. Over the medium-term, we continue to see four key opportunities to drive improved profitability despite a tough economic backdrop. Continued supply chain stability, and ever-increasing purchasing power from growing our managed spend and GPO business. Second, the improving profit profile of past new business wins as they mature over the coming years, coupled with our ability to consistently maintain our higher level of net growth into the future. Third, continued tight management of above unit cost. And lastly, the potential to benefit from pricing actions already implemented as inflation mitigates. These opportunities, together with the ongoing option to create value through actions such as the AIM Services sale, give us confidence in our ability to continue to grow our bottom line over time. Our results in the quarter led to adjusted EPS of $0.44 on a constant currency basis, nearly double the $0.23 reported in the first quarter fiscal 2022. On a GAAP basis, Aramark reported consolidated revenue of $4.6 billion, operating income of $200 million and diluted earnings per share of $0.28 for the first quarter. Now, turning to cash flow. In the quarter, net cash used in operating activities was $607 million, and free cash flow was a use of $706 million. As expected the first quarter experienced a cash outflow associated with Aramark's normal seasonal business cadence specifically in the collegiate hospitality business. In addition, accounts receivable increased due to strong year-over-year revenue growth in the quarter and accounts payable was a higher use of cash in the quarter largely from the timing of supplier disbursements. Cash flow results also reflected the scheduled remaining deferred FICA payment of $64 million granted under the CARES Act that we highlighted during our last earnings call. At quarter end, Aramark had approximately $1.1 billion in cash availability. As John mentioned, and as you saw in our announcement last week, we reached an agreement to sell our equity stake in AIM Services and we plan to use the proceeds for debt repayment. Let me make a few quick comments on the P&L impact from the transaction. As a non-controlling interest revenue from AIM Services was not historically recorded as a part of our financials, so there will be no impact to future revenue. We did record our share of income, which contributed approximately $30 million to pre-COVID AOI in fiscal 2019 and was not expected to be fully recovered until next year. But the planned debt repayment associated with the sale, we expect annualized interest savings of more than $30 million making it immediately accretive to EPS. So let me conclude with our outlook for fiscal 2023. We maintain our previously stated full-year outlook while updating certain measures associated with the sale of our interest in AIM Services. With that, we currently expect organic revenue growth between 11% and 13%, adjusted operating income growth of 32% to 37%, reflecting the effect of the AIM transaction. Free cash flow in the range of $475 million to $525 million before payment for the $64 million FICA payment just completed this quarter and the anticipated cash flow of approximately $100 million to $120 million related to restructuring charges and transactions fees associated with the uniform spend. After these specific items, we expect our reported free cash flow to be in the range of $300 million to $350 million. And finally, as I just mentioned, we plan to use the proceeds from the AIM Services transaction toward debt repayment that is expected to bring our leverage ratio to approximately 4x by the end of this fiscal year. We begin the New Year as we finished the last resolute in our commitment to drive profitable growth. The new fiscal year is off to a solid start, and as we manage the business in the midst of the current ongoing macroeconomic challenges, we will continue to work to balance delivering short-term results without sacrificing our ability to sustainably grow the top and bottom line over the long-term. We believe there are numerous opportunities for the business and that we are well on our way toward achieving them. We will continue to manage our portfolio to drive significant and sustained value through organic growth, margin progression and a strengthened balance sheet. Our new business pipeline is strong and we're highly motivated to continue winning. I'm immensely grateful for our teams across the globe who are the driving force behind our success now and in the future serving our clients, employees, and the communities we live in. I also want to take this opportunity to congratulate our clients the Philadelphia Eagles and Kansas City Chiefs will be competing in the Super Bowl this upcoming weekend. Hi, thanks so much. I was hoping you could talk about the new business trends this quarter versus last quarter and areas of notable strengths and core weakness and particularly maybe within education as well. Thanks. Sure. I -- the first quarter is always probably our slowest quarter from a new business development perspective, as you would expect, particularly in education, most of the sales activity occurs in the latter half of the year as accounts go out for bid and then awarded typically towards the springtime. But I would say it's very consistent with prior year’s performance. Pipeline is very strong. We have a lot of verbal new wins in that that we don't count until we have a signed contract. So we're very pleased with the current results and our expectations are that we will be able to deliver on the net new business as we project it, so nothing to add beyond that. Great. And we've gotten a couple of questions this morning on basically the understanding the impact of the divestiture on AOI for next year. Any sort of clarification that you can give on that, just so that I think people can understand it a little bit better? Thanks. Sure, sure. Well, like I said just a minute ago, the base sort of pre-COVID AOI level was roughly $30 million, if not fully recovered yet. So the AOI impact will be less than that for the full fiscal year. And obviously, we'll be missing by the time we close about half of that number. So I -- something a bit less than $30 million roughly divided by two is the AOI impact and that that's roughly the 2% decrease in the -- or move in the AOI guidance that we put out. And then our savings on the interest side should be in excess of $30 million. So the net of those two really gives you the accretion between the two numbers, the AOI given up in the interest savings. Thank you. One moment for our next question. Our next question comes from Ian Zaffino from Oppenheimer. Your line is open. Hi, thanks. Very small quarter. I just wanted to follow-up maybe if I could on this AIM. Maybe talk about the multiple, I mean I'm calculating about 18 times, what sort of drove that work? And then also maybe you could touch upon any -- like any other opportunities that you could identify maybe that you haven't mentioned so far? And I've a follow-up. Thanks. Sure. We've talked in the past about monetizing our potential sports teams' ownership in the San Antonio Spurs. There’s nothing to report on that front currently, but that's obviously a non-controlling interest that that we wouldn't historically continue to own. We have a couple of other joint venture opportunities that we're always evaluating in various parts of the world as well. So nothing specific to report currently, but as we said, we're always evaluating those for potential value creation opportunities for our shareholders. I think the driver, Ian, was the ability to grow those businesses and a lot of times when we don't have a controlling interest; it's a little tougher to have the impact that we'd like to have. So that that's where we're really evaluating these. And if they're just meandering along, so to speak, we'll monetize and use that elsewhere. Yes. I would follow-up that comment with AIM Services has obviously been a terrific joint venture for us over multiple decades. We've enjoyed a wonderful relationship with Mitsui, and we expect to continue to enjoy our relationship with them, helping to build other businesses in other parts of the world and are working to develop a memo of understanding to that effect going forward. So we expect to continue these kinds of relationships and look for opportunities to grow strategically. But ultimately in the end with AIM Services, clearly, it required a significant amount of energy for the company. Yet, we didn't book the revenues and we had a little impact in terms of the management of the business itself. So this allows our international team to really focus on driving growth in those companies and those countries where we're fully baked, if you will, and really allows us to focus from a development perspective and a management perspective more effectively going forward. Okay. Thanks. And then just on the inflation front, can you maybe give us an outlook on sort of I know you touched upon it, maybe a little bit more of a detailed outlook? And then also remind us your ability to hold onto some of the pricing, especially on the P&L side as maybe inflation rolls over. Thanks. Yes. I mean, persistence the word, I think John and I both used it that that's especially on the food side. So if you look under the -- some of the headlines that you're seeing recently where inflation is slowing, it's certainly not reducing, but its rate of increase is slowing. Underneath that headline, food is persistently high. So we're experiencing that and our units are hanging onto that. We're having to communicate that fact to our clients because sometimes the headlines do change opinions without looking underneath it. So we're in that mode right now where we're really continuing to keep up, keep the pricing mindset going within our units. I don't think that for the balance of the year, we really are going to be looking at much of a softening of the inflation, the food inflation. We certainly hope it's coming, and our ability to hold onto the pricing and the P&L contract environment, I think should be strong. I think we'll be able to hold onto it and keep that impact in place. I mentioned that as one of our ability to drive profitability as we go forward into the future. Thank you. One moment for our next question. Our next question comes from Andrew Steinerman with JPMorgan. Your line is now open. Hi, Tom. If you could believe it, I'm going to ask my two questions about FX. So the FX drag in the just reported quarter was $0.03. And you said, of course of the stronger dollar than a year ago. Could you just tell us how much FX drag on EPS was expected by management in the just reported quarter, kind of like back in November when you started to guide? And I might as well just give you a second question about FX. So also now looking at that full-year guide on Slide 13, your model assumptions, I see this line that says FX will be a 2% drag on fiscal 2023 guide at current FX rates. I assume that's a revenue figure. So if you could, what is the assumed FX drag on EPS? And of course, you can imagine I'm talking about at current FX rates. Yes. About both for -- is the answer for or about 2% for both -- both what we anticipated and then what we expect for the full-year. And then it does impact revenue and bottom line equally. You said, I just to make sure I heard you said you were expecting about $0.03 of FX drag in the quarter? Beginning of the year and then we expect it to be a little bit lower to average out about 2% for the year. Thank you. One moment for our next question. And our next question comes from Neil Tyler with Redburn. Your line is now open. Yes. Thank you. Good morning, John. Good morning, Tom. Quick question on the revenue guidance and breaking that out into the components. You are running I think you said pricing is running around 6%. I understand the base effect will cause that to slow. But then if you add net new into on top of maybe a mid-single-digit price effect that doesn't leave a lot within the mid-point of your revenue guidance for further organic growth recovery given the trajectory you're on. So are you being -- are you seeing any sort of signs of maybe participation rates declining anywhere or any other trends that would cause you to be sort of cautious on the recovery of the base business? One moment, please standby. Ladies and gentlemen, please standby. Your call will resume momentarily. Ladies and gentlemen, please standby. Your call will resume momentarily. Ladies and gentlemen, please standby. Your conference will resume momentarily. Ladies and gentlemen, please continue to standby. One moment please. Yes. I can hear you now. Thank you. Our next question comes from Neil Tyler with Redburn. Your line is now open. Yes. Hi guys. Yes, so the question I had was really on the revenue guidance and taking the mid-point of that organic revenue guidance. And if I deduct pricing, which I think you said is running at about 6%, obviously that will ease due to base effects. And if I deduct your net new contribution in the mid-point, then that doesn't leave a lot left for the base business recovery. So I suppose the question, is there anything in the business that you are seeing that would cause you to expect that to sort of -- to the rate of recovery to slow meaningfully i.e. participation rates going in the wrong direction or any longer-term caution on the impairment of any of your businesses? Thank you. No, really don't. It's just really a gradual lapping of last year's recovery because we started the year in the mid-1980s, finished the year in the mid-1990s. And so the recovery is going to ease the sort of base recovery is going to ease as we go throughout the year with net growth staying in that sort of 4% to 5% range that we've talked about. And then pricing obviously will ease a bit too as we lap what was very strong pricing this past Q4 as we get to the next this year's Q4. So I think all those things will naturally ease the net growth will stay constant. Okay. And then I suppose -- yes, so in that context, when you spoke previously about the sort of bridge to your revenue targets and trajectory and you talked about $1.6 billion to $1.9 billion at the beginning of last fiscal year, and I guess you sort of overshot that a bit, so maybe there was $.5 billion left. Can you give us some updated thoughts on how much of that you think may not come back? Well, yes, the bulk of it is B&I and it could be 80% of that that balance. I mean we're so far well beyond the 2019 number that it in terms of recovery it's almost irrelevant now. And it's also hitting the crosswinds of what is not COVID recovery and what is the beginnings of recessionary impact layoffs and that type of thing, particularly within B&I and you see in the tech sector. So it's really hard to disaggregate coming up on three years on or past three years on as to what is layoffs, what is COVID recovery, what is participation rates, what is pricing. So with respect to the question, I -- it's just becoming less and less relevant, especially as we're moving way beyond our COVID-19 base revenue levels. Yes. I would -- Neil, I would just add that there really all the other businesses have gone well beyond the COVID recovery index and are growing rather nicely without significant impairments. Really the only business that has any lasting impacts is B&I, which still has some return to work kind of activities taking place. But you're seeing those trends accelerate, so hard to predict exactly how the rest of that business will get layered in whether companies continue to maintain four-day work weeks or continue to re-expand their work schedules. So it's just really hard to predict. But we fully expect that B&I as a business will be very profitable and will continue to grow going forward. And so we're not really focused on the recovery -- on that recovery number any longer. It's just business growth driving base revenues and growing new accounts, adding new accounts and the like. So -- and I have to also add my apologies for the technical difficulty. Sorry, that call dropped. We couldn't reconnect. So apologize to the listeners for that brief gap in coverage. Thank you. And our next question comes from the line of Heather Balsky with Bank of America. Your line is now open. Our next question comes from Shlomo Rosenbaum. Hi, thank you very much for taking my questions. Tom, may and -- John, maybe you could give a little bit more detail into the growth in FSS International. Maybe break it apart a little bit into new business growth. You said you're not so focused on COVID recovery, but seems like there was some kind of COVID recovery over there. Can you just give us some of the components maybe like you did for the overall business? And is there something in particular where you're winning a lot more business internationally that might be driving above -- much above average growth well into the future? How should we think about that? Yes. Well, the quarter was obviously heavily impacted by Merlin internationally compared to first quarter last year. That remind me, John, the opening was early summer, so it would've been third -- Early third quarter last year. So first and second quarter, have a bump for international because of the size of that that account win. But again, they've also maintained very consistent growth levels throughout the years and have benefited from that. And then also have had -- they're a little higher B&I mix in international business than the U.S. And so that recovery post Labor Day in the first quarter also helped them a bit more than the U.S. Okay. Great. And can you talk about the trends in retention just by business unit a little bit more. Is there any -- are there any nuances or change from last quarter? And are there any specifics you can give us? Because I know that was -- John, that was a big focus of yours coming in, in terms of strategically improving the services to improve the retention in the business? Yes. I would say that retention rates are very high across the Board, both domestically and internationally all businesses performing extraordinarily well, well above our targeted range. And so we're very pleased with the current results year-to-date and continue to drive towards those very high numbers. We're consistently setting the target at 96 plus and we are really on target to achieve those numbers again this year. Hi, thank you for taking my question. My first question is just with regards to your long-term outlook and the business exit and how to think about margins? And is there an impact there? And also taking into account what you're seeing in FX and inflation, it would be great to just touch on that again. Math-wise, I think it was about 20 basis points for the company. So that would probably be the impact as we move into the 2024/2025. In terms of inflation outlook, John? Yes, I think we're -- we have an expectation that inflation will continue to moderate over the balance of this year, but still running at fairly high levels from both the food and labor rate perspective. So our units are working very hard to continue to recover those cost increases, looking at opportunities for service changes, menu changes and the like, just managing actively the P&L. And so we're -- our expectation is that it will be here for the next couple of quarters. We're going to work very hard to offset it. And so far, we've been able to minimize the impact from a P&L perspective. You see things like the price of eggs and everybody responds to those headlines. If you can imagine, eggs are a big component of collegiate education, and it's a significantly higher cost than expected, but our units are finding a way to work around it. And that's the expectation we have. And we'll find the appropriate mechanisms to go ahead and offset those cost increases as we move forward. FX, Heather, you asked about that. I think we expect it to soften a little bit as the year goes on, the first quarter being a heavier impact than the second half of the year is the current expectation. Okay. And you mentioned earlier in the Q&A about -- on inflation that there's a little bit of an education piece now, just given the disconnects between food costs and food inflation and big headline around CPI. I guess, how -- can you talk a little bit more about how those conversations are going? Are you seeing more resistant? Like have you been getting the price increases that you want through? Yes. I would say that generally, we're getting the price increases that we need. You've got timing issues that affect some of the businesses with respect to when they can achieve pricing, some regulatory in nature, state -- state-oriented purchasing contracts that require certain pricing on certain dates, particularly in the Corrections business. You see some of that in the K-12 sector as well. And delayed pricing in collegiate hospitality as Board rates were negotiated literally the year before. So there are some of those kinds of timing impacts in terms of when you're able to actually achieve the price that you need. But one of the things that we do is we provide our frontline managers with very detailed tools that talked -- that they can use as talking points with their customers and clients related to what the real cost of food is on a food away-from-home perspective, what they're dealing with from an actual cost perspective. So they have those tools that are provided to them on a monthly basis, so they can use in those pricing discussions and negotiations. And they also use those as tools to help them manage the menu mix, if you will, going forward. So there are active discussions all the time. Pricing is one of those things that we're consistently doing. And we call it hand-to-hand combat. It's basically you're in there negotiating consistently to go ahead and achieve the results that you need to achieve. Good morning. Thanks for taking my questions, John and Tom. If I may ask, firstly, a follow-up really on AIM Services. The underlying operating income guidance was lowered to reflect disposal, but the free cash flow guidance was maintained or has been maintained. Can you help bridge this gap and explain the moving -- the difference? And then, as a follow-up, on guidance for the year, Q1 margins, in particular, FSS United States and to some degree, Uniforms took a step back in Q1 2023 compared to Q4 2022 on a versus 2019 basis. Can you explain -- maybe you have already explained why this is beyond the timing of contract openings? And also why this gives you the confidence to leave the guidance unchanged for the rest of the year that would be great. Thank you. Leo, just to be clear that last part of that question, you were comparing it sequentially, right, Q4 of 2022 to Q1 of 2023? And I'm -- and I'm -- I suppose tough comp of Q1 2019 because FSS United States margin was very healthy back then but --? Let me rather than give you a quick answer, I'd rather -- let me look at that, and then we'll come back to you specifically on an answer to that one.. If that's okay. On AIM Services cash flow, because it was non-controlling interest, we would receive a dividend from them. We really didn't have the cash crossing borders and that that dividend was de minimis, to be honest. I'm not particularly material and not certainly material enough to change our free cash flow guidance for the year. So that's why you don't see a change in that? Is it just -- it wasn't big enough for us to call out. Great. Thank you. Good morning. I wanted to ask about the Uniform business actually. I know you mentioned that you're still on track for a spend in the back half of the year. Give us some color on when we should expect carve-out financials and give us a better sense of what's been happening with this business? Has it trended sort of -- since you've made the announcement, has it been trending in line with your expectations both from a revenue and margin perspective? Yes. I would say that the business has generally been trending according to our expectations and the plans that we've established for, as we work through the process of achieving the separation, adding the public company costs to the business to go ahead and adding resources to the business to go ahead and prepare it for the separation and so the process continues at pace. As we said, we expect to close it by the end of this fiscal year or in the back -- second half of this fiscal year, if you will. And I think that's all we're prepared to guide to at this stage. We've gone through the process of the separation audits. Those are largely complete. We've established the Board that we'll be making an announcement in the future about the actual -- the people selected to serve on the Board going forward as an independent public company. And there are a number of other steps that we're taking over the course of the next several months. We are also -- we also are giving consideration in the capital markets and what the potential timing might be to go ahead and do whatever the debt raise might be for the business and looking at optimal timing from that perspective. So there's a number of variables that will impact the timing ultimately. And we're working through all those. But I would say at this point, the business is performing at expectations and according to plan. Great. Thanks. I guess, Tom, my question for you. The cash flow from ops section of your report shows a $30 million reduction to a contingent liability. I was hoping you could talk about what that is and how it affected, if at all, your adjusted earnings. It's not specifically called out in your reconciliation and so I guess that's the genesis of my question. You have this other line here gains loss in settlements, but I don't know if it's in there or not. So hoping you could just talk about what that was and how it affected your adjusted results. It's -- it's -- it is in there. It's in the -- in that net 12 I think you're looking at. And it's related to the next level earn-out. The long and short of that is that we -- in order to get the deal done, we had a gap in price as you normally do with buyers and sellers. And their expectation was high and ours was a little bit lower. And so to fill that gap, we had an earn-out construct, and they're going to perform to our expectations as opposed to their very ambitious goals at the onset of the deal. So that's just a reversal of some of that earn-out. Okay. That's helpful. And then I was just wondering, secondarily, with, I guess, 6% price in there. Are you able to understand how the elasticity of demand is either affecting your customers or the end market consumers of your product? I mean, you've got the COVID, kind of ramp, you've got the layoff trends. There's a lot of different things that are affecting volume today. But I was just wondering specifically if the end market consumer is reacting to these and changing behavior at all that you can see. Yes. Great question, Andrew. I would say that consumer behavior continues to remain very consistent. Our participation rates are rising, which would indicate that customers are satisfied and our understanding of the pricing needs, if you will, so participation rates increasing in the core business. And so really no change to real consumer behavior over the last several quarters related to what I would characterize as related to pricing dynamics. So that's really the only way I can answer it. I think it's so far no impact. I wanted -- good morning. I wanted to just ask about your view on customer appetite for outsourcing, how this might change in a weaker macro environment? I know that this is a secular tailwind for the business. So I would love to get your thoughts on that as we navigate what might be a weaker macro? Yes. I would say -- again, very good question. I would say we continue to see an increased trend towards outsourcing in a number of the businesses that was first originally driven by the COVID environment and the transition. Now we see continued improvement in that outsourcing environment due to cost pressures that may be facing those self-operators from both an inflation perspective and a labor staffing perspective. So it continues to be a tailwind. The pipeline of opportunities that we have is still significantly populated with self-op conversion opportunities. And so I would say it continues to be a significant source of new business potential for us, and it crosses a range of the businesses that we operate in. And it's not just the food; it's also facilities as well. Great. And that's really helpful. And then switching gears to B&I. Curious if you can callout maybe any specific markets where you've seen a more acute increase in activity as of late? Well, we are seeing B&I business in Europe has been increasing at a rapid rate. It was more depressed last year. The rate of recovery in the international was slower. This year, it's accelerating. We're seeing continued B&I business improvement in Continental Europe. And so we're very pleased with that and continue to see that business growing nicely. Okay. And then, lastly for me, and I apologize if I missed it, but did you touch on the P&L transition and the back to P&L and cost plus and is where you are in that transition for the end of the last quarter? Thank you. Yes. I would say it's really unchanged. There is no significant pressure from client organizations to transition back to P&L. And I would say it's relatively consistent with prior quarters. We continue to be predominantly management fee in the B&I sector except in the very large operations that have P&L capability. If you continue to have companies struggling with their return-to-work strategies, the three-day work week, four-day work week. And so there has not been significant pressure to transition back to P&L. And frankly, in this inflationary environment, when you've got both food cost inflation and labor rate inflation that actually works to our advantage to continue to stay on a management fee or cost plus basis, as we grapple with the challenges in those segments, particularly if you're not fully up to speed or fully back operational in a particular customer or client location. Hi, good morning, everyone. And just one question really, which is trying to put together all the comments you've made on inflation trends through the year, new business trends through the year and the recovery in like-for-like volumes, which, obviously, towards the end of the year, you won't have much of that left, inflation will be normalized. And so now that the year has really started and you had this first Q1 and you're able to reiterate the full-year guidance for 11% to 13% organic growth. And I'm really curious what sort of Q4 performance you're seeing once most of these factors normalize or slowdown is going to be a very, very interesting data point that exit rate of organic growth is almost test to what you can do medium-term? So yes, I guess my question is, if you've -- talk a little bit more about the quarterly sequencing, and do we think the sequence of organic growth is going to be 18%, 14%, 10%, 6% or a bit stronger than that the exit rate? Or on the contrary, a lot more content loaded in that with the volume recovery and the inflation that's above trend in H1? Well, yes, I think directionally, you're correct. We said at Analyst Day, our medium-term algorithm is 5% to 7% top-line growth, that's what we'd expect from the business on an ongoing basis, once the COVID recovery and the base volume recoveries subsided and that also included 1% to 2% pricing. So if you strip it all the way back to that that net growth number, we would continue to expect to see that anchor that 4% -- sort of that 5% -- 4% to 5% as we exit the year and going into 2024 and 2025, the variables are what's pricing. And is there any remaining COVID recoveries for what that's worth as we continue to get further away from that. So something that's more with what we said at Analyst Day, the four to five days plus pricing is probably roughly going to be what the Q4 year-end exit rate going into 2024, 2025. All right. Super. And then are there any specific breakpoints in the year that you flagged? Or is the volume recovery and inflation subsiding? Is that going to be very progressive throughout the year? Yes. I would say it's very hard to predict exactly when inflation will abate. We are continuing to move price to offset the cost of food and labor rates throughout the year. So I would expect pricing to remain relatively high going into the close of the year and call it, the second, third and fourth quarters. So unless we see something drastically change in terms of the overall environment, I would expect pricing to continue to be at a relatively high-level compared to prior years, but we do anticipate that at some point it will transition and normalize. So what we're really focused on is selling the net new business and growing accounts and the core growth of the company and just using the inflation impact or using pricing to offset the impact of inflation and to generally grow the company through those new account acquisition opportunities. So hard to say exactly when those breakpoints will be. But we're focused on delivering net new and ultimately growing the company in that way. I'd just add one more comment that it's coming off of 1% to 2% growth for a number of years pre-COVID to then exit this as we get into 2024, 2025 and beyond at mid-single-digits. It's maybe easy to lose perspective on how good an improvement, how fundamentally different that is pre-COVID to sort of going into next year and beyond from 1% to 2% to mid-single-digits or upper single digits. So we're proud of what the business has accomplished and changed throughout the last few years to be able to get us to that incrementally new level of growth as we go forward. Hi, good morning. It's Ronan Kennedy on for Manav. Thank you for taking my questions. May I ask, can you just recap the sources of new wins and also your current assessment and outlook for competitive dynamics within the industry? Well, the sources -- we haven't really disclosed the sources of new wins. We typically -- if you look at the historic trends, we typically sell about 35% of self-op conversions, about 35% from our core competitors, and then the balance from small to regional competitors. So I think that's very consistent with the historical trends, maybe a little bit higher rate on the self-op conversions over the last couple of years, but -- and we expect that, that trend may continue throughout this year. So that's our anticipated source. And I'm sorry, the second part of your question was? Competitive dynamics. I think nothing has really changed. It's a very competitive marketplace, and we're all competing aggressively for new business, but our win rates are going up. We've achieved record new account wins in the last two years, and we expect to achieve, again, another great result this year, and we're very focused on that net new perspective, if you will, in growing the business dramatically. And achieving what Tom just highlighted in that mid-single-digit net growth number is truly an extraordinary result that we've been able to achieve the last couple of years and have expectations for continuing that trend going forward. Thanks for taking my question. I wanted to drill down further on the prior question on the Uniform business. And then particularly, on the pricing, there was a particular callout on pricing, I was just wondering if you could talk about how the pricing realization is trending compared to prior year -- pre-pandemic levels? And also a question on the growth and demand environment there, some concerns around unemployment or employment slowing down could be on the growth in that business. I was just wondering if you could help respond to that and talk about the strength there from ancillary services. Thanks. Sure. I think we'll see continued demand improvement in the Uniform sector, continue to see lots of opportunity to convert non-users, non-wearers to Uniform to weekly rental uniforms. And we continue to see very strong demand for ancillary services in both in the U.S. and Canada, both of those businesses grew at double-digit rates last year on the ancillary services side in the last quarter. So we anticipate that demand will continue to be strong and that we can achieve significant growth in those -- in that sector, in that business. And I think further commentary at this point is probably left going forward to Kim as she begins to get ready to spin the business. There'll be an opportunity for the -- an Investor Day and Roadshow that will take place later this year, and she'll be able to talk much more openly about the plans for the business going forward in the competitive environment as well. The one thing I'd add is on pricing. You asked about that is through the ABS system and just sort of the leadership and Kim's approach to pricing, I think they have been more equipped and more aggressive with pricing than historical and have on the back of the energy increases over the last year or so, really worked very hard to get pricing into their clients, both appropriate through the energy surcharges but also just the base pricing and they feel like that is becoming fairly sticky. And again, with the ABS capability, they're able to target that within their client base a little bit more calculated in specific. Again, thank you very much for joining us this morning. We really appreciate the support of the company and its operations. Again, thanks to the Aramark team around the world for all the hard work that they do. And again, my apologies for the technical difficulty in the middle of the call. Thank you very much, everybody.

EarningCall_479

Thank you for standing by. This is the conference operator. Welcome to the Chegg, Inc. Fourth Quarter 2022 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Tracey Ford, VP of Investor Relations and ESG. Please go ahead. Good afternoon. Thank you for joining Chegg's Fourth Quarter 2022 Conference Call. On today's call are Dan Rosensweig, Co-Chairperson and CEO; and Andy Brown, Chief Financial Officer. A copy of our earnings press release, along with our investor presentation, is available on our Investor Relations website, investor.chegg.com. A replay of this call will also be available on our website. We routinely post information on our website and intend to make important announcements on our media center website at chegg.com/mediacenter. We encourage you to make use of these resources. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the Company. Before we begin, I would like to point out that during the course of this call, we will make forward-looking statements regarding future events, including the future financial and operating performance of the Company. These forward-looking statements are subject to material risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. We caution you to consider the important factors that could cause actual results to differ materially from those in the forward-looking statements. In particular, we refer you to the cautionary language included in today's earnings release and the risk factors described in Chegg's annual report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2022 as well as our other filings with the SEC. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of new information or future events. During this call, we will present both GAAP and non-GAAP financial measures. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release and the investor slide deck found on our IR website, investor.chegg.com. We also recommend you review the investor data sheet, which is also post website. Thank you, Tracey, and welcome, everyone, to our 2022 Q4 earnings call. Chegg ended the quarter and the year on a strong note, beating the high end of our guidance with services revenue growing 10%, finishing the year with over 8 million subscribers and generating over $150 million in free cash flow. The last few years, we saw significant headwinds in higher education, including the loss of nearly 1.5 million students during COVID. Through it all, the Chegg team executed very well, positioning us for a much bigger future. In the second half of the year, we saw significant improvements in new subscriber growth, increased take rates for Chegg Study Pack, which is now 40%, and retention for CSP is now nearly equal to that of Chegg Study. In addition, we also saw increased demand over the year for Chegg Skills to our partnership with Guild. We believe that this positive momentum will continue and lead to accelerating revenue growth in the second half of 2023. After the initial wave of the COVID pandemic, as students return to campus, we saw fewer of them enrolled and those that did took fewer classes. There was also less of an emphasis on academic rigor from both students and professors. This created a reduction in the demand for higher education support services and ultimately, a substantial loss in our subscriber base, particularly in the first half of 2022. Since August, higher education has begun to normalize, which has helped us start to climb out of the COVID hole and helped us increase our new subscriber. This shift, along with the strong execution from our team, led to better performance and predictability. As a result, we see new opportunities for growth. Domestically, we have continued to expand our content offerings with initiatives like University, which adds professor created content and new subjects and formats to our platform, allowing us to be relevant to millions of students that we historically haven't served. We also invested in improving the quality of our existing experiences with our new structured Q&A platform, which enables our experts to create better and clearer learning solutions for students. Early feedback has been very positive. Students tell us they prefer this format and believe it is more helpful to understand the topic and learn the concepts so they can solve the problems on their own. Our new Ask and Learn platform provides students with richer and more personalized learning experience from Chegg. We will continue making smart investments in content, technology and AI to improve our value, quality and relevance to even more students around the world. Internationally, we've also made progress localizing our content. We've created new apps for Turkey and one in Spanish initially targeting students in Mexico. We launched local pricing in four countries and we are currently testing and optimizing pricing in nine other countries. All of these efforts make our services more personalized and accessible to learners everywhere and we are expanding into new markets to reach more students. To expand into new growth categories, we invested in our language learning platform, Busuu. We are making great strides with the launch of our freemium version for the United States and have already seen increased registration and engagement, which we believe will lead to future revenue growth. We also invested in one of the hottest growth areas in education, skills-based learning. We expanded our partnership with Guild, growing significantly faster than we expected, which suggests that this is a big opportunity for Chey. Outside of the U.S., we launched a pilot program in Africa with Nexford as the demand for skilling frontline workers is now global. As the opportunity grows, we are expanding our range of courses from technology fundamentals to cybersecurity. We are also excited for all that is ahead. And in '23, we will continue making strategic investments for that growth. The opportunity to better serve learners continues to evolve and expand and now includes helping students solve some of their biggest non-academic challenges. That is why we now provide free access to Calm, the world's number one app for sleep, meditation and relaxation, through Chegg, and we just announced a partnership with DoorDash to offer dash paths for students for free to our subscribers. These offerings help students deal with their mental health and help them save money. We believe these partnerships not only increase our TAM, but will also increase conversion and retention, allowing us to improve ARPU over time. These types of initiatives are designed to deepen engagement, accelerate growth, strengthen brand loyalty and importantly, help learners by delivering overwhelming value. Our ability to partner with these companies also validates how valuable our audience is to some of the biggest brands. The hot topic right now is AI and machine learning. We've all seen that large language models, such as ChatGPT, have captured the attention of many people. We believe AI will have a significant effect on human capabilities and humanity overall. But AI and machine learning models are not new to Chegg. We have been leveraging these technologies within our platform for years, and we believe these continued advancements will benefit Chegg as students. As an example, we've been using GPT 2 inside of our writing products, improving our ability to provide support with grammar, paraphrasing and set structure. We also use it to increase speed and quality while reducing the cost of content development. We will continue to build and leverage AI tools, including those from open AI and others, allowing us to expand our content capabilities, increase the number of ways students can learn through our platform and increase our efficiency. Importantly, we believe the best learning experience for students will leverage AI. We use a combination of vertical experts who utilize data, ML models and AI on a user platform designed specifically for learning. The last several years have been very challenging for everyone. However, the best, most innovative companies come out of difficult times and are able to improve their market position. We are very excited about the next chapter for Chegg and are energized by the scale of the opportunity in front of us. We believe there is significant growth ahead for our business, both domestically and internationally, and that we are in the best position to drive some of the most transformative trends to shape our industry. Thanks, Dan, and good afternoon, everyone. Today, I will discuss our financial performance for the fourth quarter and full year 2022 and as well as our outlook for 2023. As Dan mentioned, we ended the year on a positive note with revenue, adjusted EBITDA and free cash flow all coming in above the high end of our expectations. And while the beginning of the year did not transpire as we initially thought, due to external factors, including reduced enrollments and uncertain economic conditions, the Chegg team performed well, demonstrating the strength and resiliency of our operating model, where we continue to grow Chegg Services revenue, drive profits and cash flow, while many others struggle. Looking more specifically at our 2022 performance, total revenue was $767 million, with Chegg Services growing 10% to $734 million with six points of growth coming from Busuu, which we acquired in January of 2022. We increased our total services subscriber base to 8.2 million with 2.1 million coming from International. This increased the diversity of our revenue streams as international represented 15% of total revenue in 2022, an increase from 11% in 2021. We were very pleased that we were able to deliver an adjusted EBITDA margin of 33% or $255 million and free cash flow margin of 20% or $155 million, which represented 61% of adjusted EBITDA above the high end of our expectations. As we survey the broader learning landscape, it's clear we have best-in-class margins and free cash flow, and we expect to increase free cash flow margin in 2023. Looking at Q4, total revenue was $205 million, driven by better-than-expected Chegg Services revenue growth of 7% to $201 million, which led to adjusted EBITDA of $74 million, the high end of our expected range. Looking at the balance sheet, we ended the year with cash and investments of $1.3 billion. This was bolstered by the aforementioned free cash flow of $155 million. We believe our balance sheet and operating model that generates significant cash flows represent a competitive advantage that can drive shareholder value, whether that be through adding assets or prudent security repurchases, both of which we did in 2022. During the year, we demonstrated the power of our balance sheet by opportunistically buying back $500 million in principal of our convertible securities for approximately $400 million. As a reminder, as of December 31, we had $643 million remaining under the securities repurchase program. As we enter 2023, we no longer have significant revenue from Required Materials. Required Materials did not 100% revenue share base and we expect it to represent less than $5 million of revenue for the full year. Therefore, we are changing the way we report revenue to better represent what Chegg is now predominantly a large subscription service with several other smaller product offerings that while in part have yet to reach scale. As such, our revenue breakouts moving forward will be subscription services, which include all of our subscription offerings, including Chegg Study, Chegg Study Pack, Mathway, Chegg Writing Subscriptions and Busuu. The other bucket will be called Skills and Other, which today represents skills, advertising and the required materials revenue share. We believe this new breakout will allow our investors to better monitor and evaluate our business trends to provide full transparency, we have provided additional details on both the new and historical revenue breakouts in the data sheet and in the investor deck, which are available on the Investor Relations website. Before I go into specific 2023 guidance, I want to provide a little bit more context on the numbers. As we discussed last year, the issues of low enrollment a strong labor market and inflation impacted the higher education industry and led to reduced traffic to education support sites. While the business executed well with stellar retention, record Chegg Study Pack take rates, macro headwinds negatively impacted our new subscriber growth. As Dan mentioned, new subscriber growth turned the corner in mid-2022, and that improvement has continued. Our plan reflects this momentum continuing through 2023, where the benefits become more evident in our revenue starting in the second half of 2023 and into 2024. On the non-subscription side of the business, we expect continued growth in skills, offset by a decline in Required Materials as we have fully transitioned out of textbook ownership and we are forecasting reduced advertising revenues due to the well-documented headwinds in the macro advertising environment. We also expect to see a meaningful increase in free cash flow in 2023, resulting from both strong operating performance including a reduction in CapEx for the year and a higher interest rate in bars. Also to assess with modeling, we have added a slide to the investor deck of our Investor Relations website that includes expected revenue and adjusted EBITDA seasonality of 2023. Specifically, for 2023, we expect total revenue to be in the range of $745 million to $760 million, with subscription revenue in the range of $675 million to $690 million. Gross margins to be in the range of 71% to 73%, adjusted EBITDA to be in the range of $240 million to $250 million with free cash flow increasing to $185 million to $195 million or approximately 80% of adjusted EBITDA. And finally, we expect CapEx to be in the $80 million to $85 million range, which as a reminder, is mostly content. Moving to Q1 of 2023, we expect total revenue to be between $184 million and $186 million, with subscription revenue between $166 million and $168 million, gross margin to be in the range of 72% to 73% and adjusted EBITDA to between $53 million and $55 million. And finally, in addition to building a great business, we are also building a great company, and that can only be done by building a strong culture and being a good citizen in our community. I want to acknowledge our ESG team led by Tracey for some recent accolades Chegg has received. We were thrilled to be upgraded to AAA by MSCI, their highest rating. And we also recently were added to Sustainalytics 2023 Top ESG Company List. All of this took a tremendous amount of work from our team, and we couldn't be more proud of the progress we have made. Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeff Silber with BMO Capital Markets. Please go ahead. Can you hear me? We can hear you -- I can hear your now. Yes, okay. Sorry about that. I wanted to start with subscriber growth. You talked about your new subscriber's growth turning the quarter. Specifically in the U.S., are your U.S. subscribers growing, and do you expect that to continue to grow into 2023? I'll take it first. Yes, the answer is yes. Both are growing, and we expect both to continue to grow. So what Andy referred to in the prepared remarks was there were hundreds of thousands of subscribers that did not come back from that 1.5 million group, and because students, if you recall in our earnings calls -- a year ago, there was no academic rigor. So we had a double whammy hit us at the beginning of the year. But as you saw, over the year, things progressed for us and they began to be revealed themselves in our numbers. So we are seeing continued growth in new accounts, both domestically and internationally. And international, in some of the countries, we're seeing it because they're coming back, but also because of the choices that we made, which is we lowered the prices in a number of countries, and that's making a big deal in subscriber growth. We've also invested in the Turkish app and the Mexican app. We're seeing not only increased renewals but also substantial increased conversion. So the choices and investments we made have been working in the U.S. It's not simply the return to school. It's because of the investments we've made in content and expanding the content in the relationships that we've done with Calm, and we're beginning to see the impact of DoorDash. We'll see whether or not it continues to improve retention or not is too soon around that. But also the investments we're making in the quality and personalization of the site. All those things are helping. And again, as Andy said in his prepared remarks, we began to see in the summer school time, an increase in new accounts, and we're seeing that through the first five weeks of this year. So, we have a large hole to dig out of. But as you see it from the way the seasonality works as we dig out of it, we exit the year in substantially higher growth and going to '24 with an expectation of return to double-digit growth. And that's a combination of the investments we made, the expansion of the TAM, the growth of new accounts plus continued improvement in Chegg Study Pack, take rates, and renewals. So those things are beginning to show promise. We just have to spend the year digging out of that hole and we are. Okay. Appreciate that. And I also appreciate the dialogue about AI and machine learning. It's really helpful that you guys pointed out what you've been doing all along. But I'm just curious, again, there's been a lot of media speculation about ChatGPT and what it's been doing. And I know the product, is in its infancy. Are you seeing any impact on your business in terms of new subscribers' growth or returning subscribers this quarter? No. Nothing at all that is noticeable. And obviously, we're going to track it, but we've seen nothing. We've seen continued really powerful renewals and reduction in cancellations. We've seen continued high take rates of Chegg Study Pack. The fact that we crossed 40% at the end of last year, and we continue to see that, I think it's a very powerful statement. But I mean, look, it's early with that, but no, nothing that we've seen right now. But our expectation, and I think you're going to see it from a lot of companies -- remember, Chegg, they've already said that they do not plan to keep it free. They can't run it if it's free. So it's going to be an API-based business where we will be participating and using it to enhance our product. And we think it's going to be a big opportunity to say you get everything from them plus what you get from us plus all the expansion. So at the moment, we feel like the plan we have in place is the right plan, and it's pretty exciting. The more of these things develop, the more the companies who are the leaders in the space use them to their advantage, and that's our plan. But at the moment, we see no degradation of anything. It's Bryan Smilek from JPMorgan on for Doug. Just to start thinking about the 2023 guide, what gives you confidence that growth will meaningfully continue to reaccelerate as you enter the back half of 2023 and into 2024? And then, can you just discuss the road map to achieving higher normalized growth rates longer term? Yes. So when we look at our guide, particularly as the first question was on the new subscriber growth. We're already on the trajectory. And so, we're not expecting anything dramatically different than what we're on. And to a great extent, it's kind of like it's kind of what I call -- it's kind of called subscription math, right? It takes a while to refill the renewal base, which is what we're dealing with right now. And the trajectory we saw starting in the second half of last year, we just expect to continue not to dramatically increase in any way for us to meet our numbers. So, if I could just sort of -- while the operator is figuring this out, just sort of add a little color to what Andy just said there, which is our plan if we achieve it, and obviously, we wouldn't put it out if we expected not to, but things can happen over the course of the year, shows a constant progress of growth, which there's -- when you exit the year, that number with the new subscriber growth, the base being filled back up, the rollover of the subscription math, as Andy pointed out, the continued take rate of Chegg Study Pack and the renewal nearer quality between Chegg Study and Shave Study Pack, the Company returns to a substantial growth over the course of '23 at the end of the year, and then into '24. And we have all the leverage in the model in terms of you're already seeing increased free cash flows in the Company. So we feel like this is a year that we've got to get through to refill that hole, and it's the hole that we talked about last year when we had to change the guidance because literally 1.5 million kids didn't show up. So -- but our confidence in what we're seeing is very top and it's very positive, and we're seeing also growth in skills. So, we feel like the next several years, you'll see that sustain but because the businesses and the choices that we made to invest are returning in that direction and it's very positive what we see right now. It seems like one of the bigger potential growth drivers here is keeping students on the platform longer. I'm just curious how you're thinking about what's a real realistic expectation for that? How do things like Calm and the DoorDash memberships kind of play into that and other forms of student support? How optimistic are you that you can extend that student retention? And what would the financial implications be? Yes. Great question. And the goal has been to go from historically two days a year to 365 days a year. We've done an incredible job getting close to five-plus months per student. And the goal is to keep them over the summer or in the December-January period before school starts. And so these are examples of the kinds of things that we're doing. So if you take a look, for example, at the Calm deal and the DoorDash deal, students get them for free. It's the value -- the two of them together equals a value greater than the price of what they pay for Chegg. And so the hope is that they continue to use it over the summer because they get other benefits outside of the academic support. And so the way to look at it is for each month that they stay on, it's on average another $17. So it's a 15% or 20% increase depending on when that starts to work and how well that works. So these -- the deals are designed to do that, to increase conversion and increase the take rate and increase retention. What we've seen so far is, yes, it's helping on conversion. So, you see new accounts growing, and you see take rates now being over 40%, which I think is pretty remarkable. So, the next way we'll take a look at it is over the summer, and we'll see the impact on retention. We still know yet because it's too early. We just launched them. But that is the vision and the goal for adding these things. And eventually to become a 12-month service, which goes from academic support to nonacademic support, skills-based support. So just adding more and more value to our services to students, so that they stay on for much longer periods of time. So the economic impact will be quite substantial when it works. I was hoping you could talk a little bit about your subscriber base and the composition of it and how it breaks down between STEM versus humanities or literature? Yes. So three to four years ago, the way college students broke down was there were more humanities and non-STEM-B than there were STEM. Now it's more STEM-B than it is non-STEM-B. So hours break down, 90% STEM-B, which humanity users using us within a quarter or a semester where they have to take the class. But the goal with content expansion, University and ultimately using the AI content creation is to grow beyond that. So, we're relevant for those students every semester, even if they're not taking STEM-B classes. So that is what we've been talking about for the last few years. That's what we mean by the expansion of the TAM, the 5 million students that we historically have not been the primary learning service for. But with the use of AI, chat AI, as well as University, we're expanding that content. And we think that's going to help a lot and help us grow in those areas. The difficulty is this year. We got to get through that hole. But if you saw the inside of the Company, you say the hole is getting filled up very fast. And so if it continues to get filled up very fast, you'll see the growth return and sustain because the investments we've made are paying off at least internally in the Company. It's just that's a hole that was just something nobody would have expected 1.5 million students left, a bunch of professors didn't assign anything. And that's hundreds and hundreds of thousands of subscribers. What I'm really excited about is if you look back before COVID, we only had about 3 million subscribers. Now, we have almost twice as many. And even though we lost a bunch, we're still more than 2x what we were just in 2019. So, we see ourselves returning to growth. We just have to fill that hole, and that's what we're doing now. And when we do you'll see double-digit growth return and all of that fall to free cash flow and improving margins. So, we just got to execute, execute and execute this year. And I'm very excited we're able to do it with increasing our free cash flow substantially. So, a lot of good news happening on top of the fact that we're just not growing that fast externally in the first half of the year. I was hoping I could ask one on the study pack reaching around 40% of all subscribers. I guess, really like where can this go? And then I'm also just wondering if, from a linearity perspective, like does this consistently trend higher? And also just wondering, if there's seasonality with Study Pack adoption or usage around finals similar to the rest of your business? Yes. Great questions and ones that we couldn't answer 1.5 years ago or 2 years ago when we launched these, but now we have multiple semesters, renewal periods and we've been able to improve the investment. So look, we know we have additional pricing power. So we took the dollar increase, and we said by taking that dollar increase we would also be able to move more people to Study Pack, and we did. So more people are in, almost -- we're almost at one out of two willing to pay in $19.95 rather than $15.95. The expectation is as we add more value, we'll be able to not only move for people in there, but then Chegg Study Pack will become the base. So, these are all steps that we're taking in terms of to get us to a much higher ARPU and much higher profitability per customer. But in difficult times, the last thing we want to do is use that pricing power. We want them to volunteer for it and four out of 10 are doing that now. So that's a very big step for us and something that we think is going to yield investors a great return. In terms of what's happened, every semester since we launched it, there has been a higher take rates and every semester since we've launched it, we've been able to improve retention. And we're almost at parity. I mean it's within two points of parity right now. And that's a huge step for us. So ultimately, though, you can imagine the base price of Chegg being closer to $19.95 than $15.95 and the pack being higher because we keep adding more value. But our view is you need to take each step at a time. You need to confirm that this is accurate. We only saw about 7,000 loss of customers out of 8 million customers when it came to taking the price increase. So, we know we have substantially more price increase, and we're just not leveraging it beyond getting people to take Study Pack right now. Dan, I wanted to ask about the localized pricing initiatives. You talked about that you're testing in nine additional countries right now. And as we think about how that's being factored into the fiscal '23 revenue outlook, how should we start to think about when those nine countries where you're testing and go officially live -- and what sort of impact do you expect that to have on ARPU trends in the near term? Yes. So, we expect it to have -- so remember, we have to deal with semesters. The actual school year is late August through May. So, we're in the spring of this year. So any increase in enrollment, an increase in change in behavior isn't going to happen until the second half of the year, and that's the way our business works. So again, that's a variable in the front half of the year about why you don't see a big jump up in the first half of the year because you're dealing with the same subscriber pool that we had in the fall of the year, which we did take a step up. So, we expect to continue to -- what we've seen in every country that we've done it is substantial improvement in conversion and with retention remaining where it was. So, we're seeing improvements across the board. We're rolling them out over the course of this year. All nine additional ones will be rolled out by the second half of the year. So, we'll start to see that impact on subscriber growth in the second half of the year. A lot of the ARPU decline that might come from charging less in those will be offset by the fact that so many people are taking Study Pack and renewing at higher rates in the U.S. Super helpful. And maybe just a follow-up question in regards to Busuu. So you talked about you rolling out the freemium model and you're starting to see more engagement there. Just curious how you're thinking about the cross-sell strategy potential between Busuu and the core Chegg Study user base and whether what you're doing if there's anything you can do around promotional pricing to kind of continue to drive that motion? Yes. We're -- yes, great question again. We're testing the promotional pricing to existing Chegg customers because remember, part of the premise of why we bought it was that 55% of U.S. college students said they need or want to learn a language, but we didn't have the right product for them. So offering one with an automatic paywall when there's one with a freemium model, we knew it wasn't going to work. So that's why we've invested in the freemium model. We're beginning to see positive results from doing that. I think you'll see the cross-promotion in the fall semester, which is the first semester of the year. Everything right now is to keep our growth that we've been seeing since last August of new accounts continuing to go and adding more value into Study Pack with Calm and with DoorDash, and those are our priorities right now. So -- and they're working. So, we're pleased where we are right now to be able to achieve the numbers that we put out, which would lead us to exiting the year at a much, much higher growth rate. I don't know if I heard how the dollar price increase to existing subscribers in October went, and kind of the retention related to that? Yes. Mike, yes, we only lost about 7,000 customers in total. So, what it says is we have extraordinary pricing power the value of Chegg continues to go up. Investment in personalization, utilizing AI to make the user experience better, utilizing it to be able to get more content in for lower prices, these are all things that allowed us to take it really with absolutely no disruptions whatsoever. At the same time, you can see the pricing power we have by the fact that four out of 10 are taking the $19.95 product. So since they're willing to pay more for value and we are adding that value. So we know that we could do more sooner. We don't think it's a good idea to do more sooner. But the ultimate goal, Mike, is to move everybody to $19.95 and then have the Study Pack be at a higher price and adding DoorDash now and adding Calm now, and you'll see other announcements coming out over the course of the year, puts us in a position to do that. But we're very careful about picking the right times to do these for students because that's the relationship that wins us all this business. Got it. And then you mentioned Calm and DoorDash. And I think you -- so can we expect like a third, a fourth and a fifth over the next year? I mean, do you plan to build up those perks or benefits, a couple more, several more? Yes, I don't want to put a number around it because not sure what it would suggest to people, but the answer is yes. You will see more over the course of the year. You'll see more potentially in the base. You'll see more in the Study Pack. You'll see more opportunities outside of those things because the demand to have access to our audience is only increasing, and we have the most efficient access to the audience. So, I mean we're talking about two of the leading brands that we're working with already and you see other very well-known brands that we're working with now to figure out what is the best way for them to reach college students through Chegg and advantage to Chegg Student by doing so, and improve our business. So -- yes, the answer is yes. Just one question for me. Even with the savings that we're getting from the textbook transition and the benefits from the price increases and the higher take rate study pack it's disappointing to see the margin still compress this year. Is this just a function of lack of top line growth? And then are there any leverage drivers we can think about outside of just revenue growth accelerating? Yes, that's a good question. Yes, we can still continue to drive pretty stellar margins. And if you -- particularly if you take a look at cash flow, our cash flow margin is actually increasing this year or at least we're forecasting to increase this year. As far as the levels go, I mean, the big levers are revenue growth. When you think about it incrementally, when you think about adding a subscription probably in the very short term, $0.95 at the dollar drops to the bottom line. So our focus internally is driving new subscribers, driving retention through all of the -- many of the things that Dan has already talked about. And we're -- certainly early in the year, we're on a path to do that. But that's the real -- that's going to be the real driver. But it's just sort of a follow-on to that question. The leverage comes with obviously revenue growth. So we could be a lot more profitable at any time. But the things that we're investing in, again, it's hard because it gets masked by the big hole. But we think that they are working. And as the Company grows, the margins will grow. So I think, as Andy has said multiple times, we're nowhere near fixed data margins. We expect this company to be closer to 40% than where we are now. And really is the gross margin of the Company to allow these things to fall to the bottom line over time. We still -- we're still investing in skills in language, and those continue to improve dramatically year-over-year. But it's really a function right now of just executing on our plan and the margins automatically get higher. This is Dave Lustberg on for Brett. Two, if I may. But to start, you guys talked a little bit about the subscription path and adding more value and increasing the pricing of Chegg Study Pack over time. Just curious if you guys have thought about the optionality to do annual subscriptions for a slight price decrease or even create a higher-price bundle that includes things like Busuu and skills based learning embedded side of that? Or is it really just focusing on the Chegg Study Pack that you have now? Yes. Great question. Also the answer is yes. You can expect you'll see an annual subscription from us. And believe it or not, it was technologically a challenge for us to be able to do that. We now can do that. And so we are looking and we are testing what the right price would be for an annual subscription, but yes. And now we have reasons for people to want to stay annually, right? Initially, without something over the summer like Calm and DoorDash or the other things that we'll be adding, it's just a matter of sort of discounting with the hope that people will stay on longer to pay the credit card. We want to actually give them real reasons to do it real value to do it. So yes, you can expect to see that from us eventually. And just as reminder. We as a -- on some of our other subscription products, we do have annual subscriptions. So for example, Mathway and Busuu both do annual subscriptions. In fact, Busuu is predominantly an annual subscription. So I just want to give you that information also. Yes. No, that's super helpful. I appreciate the color. And then one more on AI and ChatGPT, I appreciate the color that you provided in the intro Dan, super helpful. But I think it would be really great if maybe you could provide a little bit more color around how long you guys have been using AI? What the level of investment has looked like? And then as you guys think about 2023 and 2024 and beyond that, do you guys plan to increase your investments around AI? And maybe does some of that come from in-house. Do you guys continue to partner with some of the leading AI venders out there, appreciated? Yes, you'll see both. So we've been using machine learning, we've been using for five, six, seven years. Those are the algorithms. Those are the things that we do to match people to the right content and match is the right experts. As AI has been getting better and we've been using our own plus external, we've really focused on getting the efficiency of the question answering and the scale and the speed and the quality up a lot, which is why you can see a substantial reduction we have in CapEx. It's because the cost to get a solution is now substantially less than it used to be based on the investments we've made in technology like. And we've been able to reduce duplication. We've been able to get better quality answers, to get them answered faster. All of those things have saved us a tremendous amount of money and improve the quality of the product over time. That's never going to end. What you will see for the first time later on in the year, will be user-based experiences that would be more obvious to the consumer. So think about a scenario where we have the AI companies don't have. We have the 100-plus million questions that are asked and answers. What we can use AI technology to be able to do is to be able to say something like -- so you've gone through the solution. Do you want to build you a sample test, a multiple question test? We can make the questions as easier for you to understand if you're not understanding the concept. Everything that we'll be using for on the user side will be able to have the user be more engaged and expand the ways that they can learn at the levels that they're more capable of learning at. So, we're actually really, really, really excited. I think we, like everybody else, was impressed. I have the good fortune of sitting on the Adobe Board. So, I've seen all the AI investments that they're making on images and other things. So it was less of a surprise for us. But it's really impressive. It just -- it doesn't do what we do yet. So I think we've discovered this maybe 6% overlap in what they can provide versus what we provide. And of the 6%, I think currently, 50% of them were wrong. So we have time to work with them, but we expect a number of vendors. We expect to work with whoever the best center is to do the things that we want to do to help students to be able to learn better through us. So it's actually a very exciting time. It's a real substantial platform shift, and I don't think he's been one of this magnitude probably since mobile. And my experience is that the companies that utilize this. These are companies that are building APIs for companies like ours to do exactly these things. But the verticality, the experts that we have, the knowledge the user experience designed specifically for learning is going to be our moat and our advantage. What we have plus what they have. This is [Jessica Ang] on for Brian. I've got a high-level question. As we started spring semester in the U.S., is there some time at the start of the semester where you typically see adoption rates really increase with your different subscription? And what is that sort of spreading? Has there been any deviation so far from the pattern in 2023? I'm sorry. You broke up just a little bit. Do we see what in the spring, which -- do you mind repeating it? Yes. So the whole question. Is there a certain time in the start of semester, we typically see adoption rates really increase for your subscriptions? And like when is that in spring? And has there been a deviation from that pattern in 2023? Okay. So, it's sort of the timing. We've been at this a long time, so our timing is pretty good. Textbooks was always harder. But the subscription services are easier now once it returned to some form of normalcy in the middle of last year. Beginning of last year, it was nearly impossible because we just didn't expect so many people not to show up. But now that we're back to understanding the size of these markets, each semester has its own world, like September is the biggest month of the year for us. But in this case, for the spring semester, the biggest days for new account growth have passed us, meaning we're -- when Andy says that we like what we see, it's because we passed the three biggest days of new account growth. So, it is -- it's really the second, third and first -- second, third week of January and the first week of February, and then it's September, October, leading up to midterm. So, the second half of the year is always substantially bigger than the first half of the year. And -- but the rollover that we expect to get to the first half of the year shows that base that we lost a year ago. So that's how we build back to growth, and that's the path we think we're on right now. Did that answer for you? Maybe just zooming out and asking two sort of big picture questions as we look out over the next 6 to 12 months and put a finer point on some of the themes on the call. When you look out to the next full year starting out in August, September, October, what do you see as the two to three things that are the top priorities for you on the investment side or the product side that you think will set the Company up well landscape as you see it now? And second, I know someone asked earlier about annual plans, how do you see the broader pricing matrix for the Company sort of evolving not only just into the next school year, but on a multiyear so you're striking the right balance between now you provided and sort of value received from your basic users. Yes. I would say that the answer to the first part of your question is. The investments that we've been making are starting to show real signs of payoff. In the skills area, we think in the Busuu area, certainly in DoorDash, Calm in terms of the Study Pack, the rate increase we took. So probably the newest area of focus or the only additional area of focus, it's more just executing on what we've been executing on, which is creating more content, expanding the TAM in the United States, getting the pricing right from outside the United States, building into the bundles get the higher take rate. We'll be -- now that these AI products are released, our teams have been working feverishly with them to be able to incorporate them into the user experience. And so that's probably the only priority that is one that we haven't already been working on in a substantial way. So we -- the priorities of last year are the priorities of this year with that addition. Those will set us up, we think, very well. In terms of the pricing scenarios, the plan has been we have a multiyear plan, which is the first plan was to put out a bundle, get people to use the get retention near equality. And then take a raise in the base that was very small, but one that we could capture in losing almost nobody and push conversion more towards the bundle. Those things have worked. So the next step is to be able to build an annual subscription plans become an annual membership plan. And in addition to that, ultimately, the first package at $15.95 will probably be the basic $19.95. These are all over the next couple of years. So we're very judicious about when we take it, we test these things. The reason we were so successful is because we knew the outcome before we did it because we had tested it for a year. So we have to make sure that unlike other companies, we have basically six weeks out of the year, we're all our growth, certain we can't afford to make a mistake. So we take our time with these things. But you will see us move towards more in the bundle, higher take rate. Once we get over the number that we want to get over, you can imagine that becoming the base -- and then adding on annual subscriptions with discounts. So we have a plan. All of that will generate a lot more revenue and a lot more margin and a lot more free cash flow. It's just not what you should expect to see in '23. '23 is the year that we want to return to excellent subscriber growth because we've already gotten ourselves to a really excellent retention growth. So taking price increases now will hurt us from filling that base that we lost a year ago. That's our view. This concludes the question-and-answer session. I would like to turn the conference back over to Dan Rosensweig for any closing remarks. Okay. Thanks, everybody. So, this has been a very challenging time over the last couple of years. But in the ad tech space, we're growing. We're the only company that's profitable. We're increasing our margins on free cash flow. The investments we've made are returning our new subscribers to growth, and our retention continues to go up. And we believe that the execution is what's critical to us to achieve these numbers and return to much more substantial growth and higher profitability. We couldn't do all of this without the incredible employees that we have Andy pointed out the ESG categories, you know the number of awards that we won for inclusion and for the balance of growth and the quality of employees to be able to attract the right kind of people who care about the mission that we're on. You might have also seen today that we announced a very important partnership with the United States government and the Vice President of the United States. So, we announced today that we'll be working with the Vice President, along with other people, to help scale up and provide academic support in Honduras with the expectation and hope to train thousands of people who, instead of immigrating here, will become much more productive employees in their own companies. It's a validation of what Chegg can do in terms of helping people learn. We'll also provide new areas of growth. So there's a lot of good going on at Chegg. We just got to get through the first half of this year. And as we do, we will be returning to growth and greater profitability. I really want to thank everybody for joining the call. And I want to send our thoughts and our prayers to the people in Turkey. We have a lot of students there, and we have a lot of contractors there, and we're checking on them. None of this is easy, but all of this is worth doing. So, we're grateful for our employees, and thank you, everybody, for dialing in, talk to you next quarter.

EarningCall_480

At this time, I will turn the call over to Mitch Haws, Investor Relations for Skyworks. Mr. Haws, please go ahead. Thank you, JP. Good afternoon, everyone, and welcome to Skyworks' first fiscal quarter 2023 conference call. With me today are Liam Griffin, our Chairman, CEO and President; and Kris Sennesael, our Chief Financial Officer. Before we begin, I would like to remind everyone that our discussion will include statements relating to future results and expectations that are or may be considered forward-looking statements. Please refer to our earnings press release and recent SEC filings, including our annual report on Form 10-K for information on certain risks that could cause actual outcomes to differ materially and adversely from any forward-looking statements made today. Additionally, the results and guidance we will discuss include non-GAAP financial measures consistent with our past practice. Please refer to our press release within the Investor Relations section of our company website for a complete reconciliation to GAAP. With that, I'll turn the call to Liam. Thanks, Mitch, and welcome, everyone. Skyworks delivered solid first fiscal quarter results with revenue exceeding consensus estimates, strong profitability and record cash flow performance. Looking at Q1 in more detail. We delivered revenue of $1.329 billion, drove gross margin of 51.5% and operating margin of 37%. We posted earnings per share of $2.59 and we generated $773 million of operating cash flow, a quarterly record for Skyworks. In addition to the solid financial results, we expanded our design win pipeline in several emerging high-growth segments. In IoT, we extended our broadening technology portfolio across a growing customer base. We partnered with AT&T to launch their first WiFi 6 gateways, unveiled the industry's first WiFi 7 networking system with TP-Link and leveraged our advanced connectivity portfolio to support 6 gigahertz fixed wireless access points at Cambium Networks. Across infrastructure and industrial markets, we integrated Power-over-Ethernet functionality in Cisco modular switches for enterprise networks. We ramp timing platforms to meet high precision and speed requirements for the leading data centers. And we delivered frequency generation and clock distribution technology for 5G massive MIMO deployments. In automotive, we achieved our sixth consecutive quarter of record revenue, strengthening our EV design win pipeline with onboard charger content at a Japanese automotive supplier. And securing design wins for digital radio platforms with a top European OEM. Moving forward, the rapid expansion of mobile network traffic, advances in cloud and edge computing, IoT and the electrification of vehicles are major trends that drive complexity and demand for our highly integrated and customized solutions. A few highlights underscore these remarks. Wireless connections continue to proliferate with mobile network traffic doubling over the past two years. Market estimates project over 25 billion IoT devices to be installed by 2027. The automotive industry is undergoing a revolutionary shift towards electrification of autonomous vehicles with EVs projected to make up over 30% of the U.S. market by 2030. Skyworks is well positioned to capture growth upon these opportunities in transformative markets, leveraging key technologies, human capital and significant scale. Collaborating with our partners and customers, we are leveraging key technologies from PC soft to high-performance bulk acoustic wave filtering, gallium arsenide and state-of-the-art packaging. With that, I will now turn the call over to Kris for a discussion of last quarter's performance and our outlook for Q2. Thanks, Liam. Skyworks' revenue for the first fiscal quarter of 2023 was $1.329 billion, exceeding consensus estimates. Mobile was approximately 65% of total revenue with weakness in Android as customers work down their inventory levels. Broad markets was approximately 35% of revenue with a strong contribution from automotive, infrastructure, industrial and the global shift to WiFi 6E and 7. Gross profit was $684 million, resulting in a gross margin of 51.5%, up 30 basis points year-over-year and up 20 basis points sequentially. Operating expenses were $193 million or 14.5% of revenue. We generated $491 million of operating income translating into an operating margin of 37%. We incurred $16 million of other expense and our effective tax rate was 12.8% driving net income of $415 million and diluted earnings per share of $2.59. Turning to the cash flow. First fiscal quarter cash flow from operations was an all-time record of $773 million. Capital expenditures were $64 million, resulting in a record free cash flow of $709 million and a free cash flow margin of 53%. We paid $99 million in dividends and repurchased approximately 1.8 million shares of our common stock for a total of $166 million in the quarter. On a trailing 12-month basis, we have returned $1.2 billion to shareholders through dividends and buybacks. Also today, we announced that our Board of Directors has approved a new $2 billion stock repurchase program, highlighting their confidence in our business and its ability to continue generating strong free cash flow. Now let's move on to our outlook for Q2 of fiscal 2023. We anticipate revenue between $1.125 billion and $1.175 billion. Gross margin is projected to be in the range of 50% to 50.5%. We expect operating expenses of approximately $189 million to $191 million. Below the line, we anticipate roughly $19 million in other expense and an effective tax rate of 12.5% to 13%. We expect our diluted share count to be approximately 159.5 million shares. Accordingly, at the midpoint of the revenue range of $1.150 billion, we intend to deliver diluted earnings per share of $2.02. Thanks, Kris. Skyworks delivered solid first quarter results, demonstrating strong profitability and record free cash flow generation. Importantly, our technology-centric operational scale and expanding set of innovative solutions are fueling a robust design win pipeline, positioning Skyworks to continue to outperform. Despite a challenging macro environment, Skyworks remains well positioned with the most diverse customer and solution set in our history, a technically seasoned and talented workforce, a strong balance sheet and predictable cash generation underpinning our ability to fund future opportunities while returning cash to our shareholders. That concludes our prepared remarks. That was pretty short prepared remarks, Liam and Kris. Always appreciated. But I just wanted to get a little bit of your thoughts on excess inventory. Qorvo has talked about maybe a whole year before component inventory comes back in check. MediaTek has talked about finished goods inventory and overall 3.5 months, if I remember correctly, winding down to two months. So what's your take on the inventory -- excuse me, your inventory as well as in the channel? And then a quick follow-up on your own balance sheet, inventory was up quite a bit. How should we think about it going forward, Kris? Sure. Yes. This is Liam. Of course, at Skyworks, we're a very operational-centric and technology company together. And a lot of our products, the lion's share of our products are done in-house in our own fabs and our own assembly and test locations. So we have really good eyes and ears on the balances here whether it be inventory on our sites or even with our partners. So we are very, very careful to ensure that we are aligning our revenue with natural demand. We always want to be right on step with our customers. I think our teams have done an incredible job. There are markets today right now that -- there has been some excess inventory, and we're just -- we're letting that bleed down. And our exposure there is extremely small. Some of the markets in China are a little bit more volatile. But in those cases, we have very little exposure. So I think it's important to note that we can control our ship and our products, working with the best customers out there, lots of great communication with our customers as well. So everybody is on the same page, and we feel really good about that. And I think it's something we'll continue to work through and be well positioned for the back half of the year. Yes. And Ambrish, as it relates to the inventory on our balance sheet, it's definitely somewhat at an elevated level, but I'm very comfortable with the level of inventory that we have right now. You have to take into account that we came out of a period where supply chains were challenged. We definitely wanted to make sure we support all the customer demand, we've been increasing some of the buffer stocks. And now more recently, of course, we have seen some softness due to some macroeconomic challenges. And we have been adjusting our wafer starts and factory loadings accordingly. We've been doing that for a couple of quarters now proactively. Having said that, again, it's a little bit elevated. So -- but you have to keep in mind that we are level loading our factories, and we do expect, based on known design wins the business to bounce back, especially in the second half of calendar year 2023. And so we will continue to level-load to support those big ramps based on known design wins with many of our customers. We also do expect some of the Android-based business in Korea and China to bounce back in the second half of the year. And so we will continue to make adjustments. I do expect that the days of inventory will come down back to a more normalized level in the second half of the calendar year. I had two. And obviously, it's a tough mobile backdrop. I think these are pretty good results. Just curious if you can level set us for December. I don't know if you're willing to give how much your largest customer was but then in the March guidance, if you could just talk through how you're thinking about the iOS versus Android there? I mean, does Android bottom in December or March? And any thoughts on the recovery for Android. Yes. So as it relates to the large customer revenue with that large customer was approximately 68% of total revenue. That clearly demonstrates great execution by the team supporting that large customer in the ramp of their new phone lineup. We have some great content in that phone, some really high-performance complex devices, many of those devices leveraging our bulk acoustic wave filtering. And so I think we did really well in the December quarter despite the fact that, as you know, the large customer talked about that, they were somewhat supply constrained due to some COVID-related issues in China. But the team here executed really well in December with that customer. Yes. And Blayne, just to follow up. We are starting to get back on the saddle here with the Android portfolio. And as you know, we've actually been holding back because there was some inventory in that channel. I think there still is, but it's been bleeding. And the opportunity for us to have incremental gains there is a very high given the fact that we kind of stay on the sidelines until these inventory levels got to a more normalized position. It's not about the product. The products are ready to roll. We've got everything we need to drive that business, but we just want to be careful as the markets move forward. So -- but we have the design win momentum for sure. And then I wanted to ask you on broad markets. Whether you think that business would be up in March as part of the guidance? And then I know you had a record I&A quarter in September. Just kind of curious how that business is doing trajectory-wise? Yes. So in the broad markets, as we said, was in December, roughly 35% of our overall revenue. It was slightly down on a year-over-year basis as we see similar things that some of our peers and competitors are seeing in that market due to some macroeconomic headwinds, there's a little bit of a softer demand. But on the flip side, we definitely saw strength for Skyworks Solutions in the automotive segment, some parts of the infrastructure and industrial segments. And as we said as well, we see some really good traction in the upgrade to WiFi 6E, which is a big step-up in content as well as some early design wins that are being turned into revenue for WiFi 7. As it relates to the March quarter, we do expect broad markets to be slightly down sequentially, somewhat in line with normal seasonality. There have been some teardown reports out there that have highlighted your content associated with the satellite link, I guess, in particular, with your largest customer, somewhere in the order of 4 or 5 specific sockets for you guys. Can you speak to the content opportunity for you, not only the iOS world, but as well the Android world? Yes. I think we are engaged with all of the relatives and meaningful applications. And I think if you're referring to Satcom, is that right? Yes, sure. Absolutely. So we have the technology, the IP and kind of the building blocks to make that work. It's an early -- it's still early in the global market, but it's definitely an opportunity to bring more scale to units. And so we definitely are -- we're engaged, we're involved. We have the technologies to make some of these work. We also have the partnerships with the companies that can do some of the -- kind of the groundwork to have that network evolve. And it would be a great opportunity for a company like Skyworks. We have many of the building blocks. We understand in the radio frequency space deeply and in the Satcom world as well. So it's an evolving opportunity, and we'll definitely be at the table we are today, but more upside to come as the markets evolve. Okay. Just my follow-up, I want to ask about utilization of your supply. It sounds like you won't have any underutilization charges associated with internal supply, at least not for the intermediate term. But maybe if you can speak to external supply, purchase commitments there and your ability to fully utilize those without taking these sort of reserve. Yes, Gary. As indicated before, we have been managing this proactively for many quarters right now. And we are adjusting our factory loadings all the time, depending on the demand that we see. And of course, the earlier you do that, the more attractive you are, the more you can take the time to, of course, accordingly adjust your cost structure, taking out cost where needed. While at the same time, of course, continue to work on operational efficiencies, yield improvements and so on. We've done that with our internal factories. We've done that with our third-party purchases and vendors as well. Having an open dialogue, making sure we have, on one hand, enough capacity in place, but at the same time, not overcommitting as well. And I think the team has executed pretty well on that. Liam, I was hoping you could provide a little bit more context, a little bit more color around your broad markets business. I think you talked about record revenue in your automotive business and strength across comms and the industrial end market as well. But specifically, I was hoping you could size those individual buckets within broad markets in calendar '22 where you landed from a revenue standpoint across those key end markets? And how you're thinking about the forward? And on the forward, I guess, the commentary on automotive from most of your peers continues to be pretty bullish and pretty positive. But there are signs of moderation in comms and industrial. So I was hoping to hear what you're seeing in those markets as well. Sure. Well, we put a lot of energy into those markets, and we're getting great returns. And the size of the opportunity there is substantial and some of those products and markets that were not really the purview of Skyworks two, three, four years ago, but they are now. So the automotive opportunity for Skyworks has been incredible leveraging some of the IP that we brought in with the SLAB I&A deal, coupled with our own internal developments and design wins and technology partners. We've got a business now that is in the hundreds of millions of dollars a year, really at a time where EV and electrification of vehicles is really just starting. So I think this is going to be an incredible piece for us, one of the markets that will drive our broad market portfolio. The other thing is the IoT space generally is really clicking now for us. And you've heard for years that if we think about our solutions, they're not just handsets. We leverage the handset because it's a great opportunity to demonstrate what benefits we could have as a user but we're starting to drive the same types of technologies in IoT, things like WiFi, for example, GPS, many other sensor technologies that we can populate with our solutions. So some of that core wireless engines don't have to be specific to smartphones, but that technology, that know-how, that scale, the ability for Skyworks to uniquely develop end market solutions, I think, is quite a differentiator. And we're really just getting the wheels turning on those opportunities, but there's definitely quite a large opportunity set for us over the next four to five years. Got it. And then as a quick follow-up, one for Chris on gross margin. In the December quarter, your margins came in in-line. They were up a little bit both sequentially and year-over-year despite revenue declining both sequentially and year-over-year. So curious what were some of the positive offsets in December? And then more importantly, for the March quarter, you're guiding gross margins down, I guess, roughly 100 basis points, give or take. I mean is that primarily revenue or something else going on? Yes. First of all, I'm pleased with the fact that in December, we did 51.5% gross margins, up 30 basis points year-over-year, up 20 basis points sequentially despite the challenging macroeconomic environment. And I think, again, kudos to the team who continue to drive operational efficiencies into our factories with great execution there. And that's really, I think, the main driver there, how we are able to keep up the margins where they are. Again, despite some of the adjustments that we make in terms of factory loadings. As it relates to March, you have a little bit of a mix that comes into play and some of those headwinds, right, the revenue, as you indicated, that translate into the adjustments we make on the factory loadings. When you put it all together, I'm guiding margins in the low 50s. On one hand, I'm not happy with it. I wish it was 53%, and we're going to continue to work hard to get at 53%. But on the other hand, I'm happy with where we are from a margin point of view right now. Yes. I wanted to ask about sort of inventory levels. I mean there's been tons of conversation through this earnings cycle around inventory levels in the smartphone space. But I'm maybe more curious about the broad markets business. You guys mentioned a couple of times the obvious macroeconomic things that are going on and maybe affecting that business, having it be down a little bit. How diverse is the inventory situation in the broad markets business? Maybe you just kind of walk through what business goes direct, what business goes through the channel and how you're seeing inventory levels just for broad markets in the near term? Sure. Sure. This is Liam. The good news here is the broad market portfolio is very diverse, extremely diverse. And it's leading towards a lot of great opportunity in many different end markets. So we have a pretty decent play there. And our teams on the operational side are highly sophisticated, we have our own supply chains. We do most of our stuff in-house. So we have a really good read on inventories are and where they should be. And I think we're managing it quite well. There's certainly some pockets of inventory out there, but really nothing that's going to impede the progress of the business. I think the really cool thing is the number of new customers that we're bringing in. And there's a mix issue when you're doing kind of the $10,000 and $20,000 accounts versus the $1 million accounts that you may have in some of the smartphone space. So a little bit of a different play. But the diversification, the margin profiles are outstanding. And like you know, Skyworks is an operator. We do just about everything in-house. And the ability to do that also includes great supply chain management, our sales teams being online, understanding where distribution plays versus direct, there's a lot of angles there that we can control. It's not easy, but it's the way we work this business. And I think we're starting to really see the benefits there in broad market and the diversification. We've talked about a few major new segments like automotive. Automotive is really tough. You've got to get certification. You got to prove your ability to execute in challenging environments. There's a lot there. We've done all that work. And we've really kind of flexed our muscles in some of the tough cases in mobile over the years, but those -- the efforts there and the knowledge that we've built is applicable for so many other markets. So we look forward to it. There's always going to be a couple of bumps and a few wrinkles, but the diversification is playing well. The customer set is growing. And the lion's share of our top tier customers are really accounts and companies that matter. So we're looking forward to more as we go forward. Really appreciate it. Kris, just to follow up on that topic. You had said in your script about the business snapping back in the mobile business in the back half of the calendar year, and I think we're all kind of modeling that as we work our way through the inventory correction in smartphone. But just seasonally or based on the inventory comments that Liam just made, how do you think about the shape of the year potentially in broad markets? Is that a business that can still grow again for the fiscal year and just how should we think about the shape of that as it comes back? Yes. No, we -- our broad markets business, as you know, it's a $2 billion -- on or about $2 billion business on an annual basis. And despite some of those macroeconomic headwinds and challenges and somewhat softer demand and maybe a little bit of inventory correction that is going on, we do believe that we can grow our broad markets business this year. And I'm not going to repeat what Liam just said, but we have strong design win momentum. We play in some high-growth markets with some really key technologies. And based on all of that, we do believe we can grow our broad markets business. Sounds like you're doing very well at your largest customers and you plan to do well again this year. But a real quick question about Samsung and first of all, did they broach 10% this quarter? More importantly, both in Samsung and in China, you've kind of missed a falling knife there because you don't really participate very much at all. I know that Samsung is converting over to modules in the masters, et cetera. What are your prospects for, let's say, revenue growth because everything is going to be content growth, specifically at Samsung this year because phone demand slowing for them, the ASPs in their flagship are way below where they were when they were doing a custom design. I know that the flip side is true for the master, but you don't play bigger than master. So I'm trying to get a better profile of what you think seriously could occur this year, calendar year '22 at Samsung given all the different moving parts and the fact that luckily you weren't playing much there at all in the last year or two. And then if you maybe you could break that down between flagship and master, what you think about each of those prospects, that would be helpful. And then I had a follow-up, please. Yes, just add. So Samsung was less than a 10% customer. I think it's very well documented. They are going through an inventory burn-off period right now. And again, proactively, we have reduced our shipments to that customer, especially in the December quarter. And I'll hand it over to Liam to provide some more color on Samsung. Yes. I mean it's -- look, Samsung is a major player in the industry, and I think they got banged up a bit here in the cycle as did some other Android players. So we've been working through that, Ed. And the irony is like we've actually got some pretty good content in those phones. And so we look forward for the inventory to get cleared and we'll be up and to the right in terms of our business there. But I think some of that is just the volatility that the semiconductor industry and even beyond, I mean, the technology industry is going through and trying to sort through ways to get back on their feet, so to speak. And we're very focused on our own inventory and our own supply chain. So we have eyes and ears. We never want it too hot or too cold. We want to be able to deliver what the customers want. We stepped back a bit on Android as the inventory levels were building in the channel. We didn't want any part of that. Samsung is a great, great customer. Just having some bumps, we're going to work with them and ensure that we can do everything we can to help not only on the technology side, but even on the fulfillment side. So I think that's a temporary blip, honestly, I think Samsung is going to continue to do very well. They're a significant company with a lot of technology and the markets in Korea are very dynamic in cell phones and technologies that we make are vital and viewed as a really critical asset for a person there. So we think that's going to flow over and we'll start to see more accretive revenue in the second half. And if I could, you've done particularly well at your BAW. Actually, it was rather surprising to see you go head to head with some of the leading BAW guys and actually win in that. So I'm trying to get my arms around second half of the year, say, content growth. We saw you took the satellite. We don't tear down. We got your satellite part. I think we illustrated that you got twice as many BAW filters in your Tx, your transmit DRx module as last year. And I know it sounds from this call and from what we've picked up is that you're pretty optimistic about second half content. Is it going to be a new class -- should we be looking for new classes of parts like you did with satellite? Or is it going to be more content, especially in the BAW side of the business with some of the existing as capabilities spread because we're also obviously hearing -- Qorvo didn't make no sequel, the fact that they're going to gain some in areas they had before like antenna-plexers. So I'm just trying to get my arms around how competitive the market is going to be in BAW and where you guys think you'll fit in with that given what you've done in the last couple of years? Yes. No, that's great. That's great. I mean you know the business and you know the technology. So the nice thing here is I felt like some of the technologies were ready to go, but the market wasn't there, right? The appetite, the consumer appetite or the customer appetite wasn't really jumping all over this technology. But now you're starting to see, as we get more and more nodes and we're starting to get more efficient in delivering high-speed data and it's just becoming an opportunity for us now for -- at a more broad level. And I think you're going to see a small set of players of which we're going to be one, of course, that can do what needs to be done with these incredible customers. I mean the customers today, it's changed so much from a standard cell phone that needs the requirements, the current consumption, the ability to run globally, it's becoming more and more complex, and we love that. That's exactly what we want to see. We want to solve the tough problems. You know from the technology side, and this stuff is not easy, right? When you're bringing in all these disparate technologies into one simple module, apparently simple, right? It's really hard to do. And it's one of the things that our teams here at Skyworks love to do, our technologists, our operational team, all the way to sales. And so we love that opportunity. We love that complexity and the more use cases that emerge are great for us. And just to illustrate that point, our revenue from devices that have BAW filters inside is getting really close to a $2 billion annualized run rate and so it's definitely a major success story, and we believe that number will continue to go up to the ride. A question about the Android business in general and how that translates to linearity through the year. And you said last quarter that you thought that the China business would be the low point in December. What -- did that turn out to be true? Is that true in general for Android either in December or March and if that business is sort of bottoming out, does that have any implications for June? Do you think that March quarter would be the low point in the year for revenue? Yes. I think that's fair. December was low. March will continue to remain low as especially China, Vivo, Xiaomi and to a certain extent, Samsung as well are still going through this inventory burn-off process. But then I think we will start seeing some improvements in the June quarter and then for sure, in the back half of calendar year 2023. Got it. That's helpful. And maybe a little longer term, as we look at the revenue prospects over the next two years or so after we get through this inventory correction that's going on right now, what do you expect to be the relative growth rates between the mobile business and broad markets? I know you've spoken a lot about the content that you expect to get in the mobile business. But do you expect that you can grow the mobile -- I'm sorry, the broad markets business at a faster rate? And maybe two years out, what do you expect broad markets to be as a percentage of revenue? Yes. I would -- definitely, Chris, we're expecting double-digit top line in the broad markets for sure, mid-level top line, and we should be in the teens, I believe, given what we can do, what our products look like and obviously, when the air gets cleaned, the markets will be stronger. I think we're going to be in great shape. And then even on the mobile side, there's a lot of invention and unique technologies that are being brought up in mobile that people haven't really seen yet, but the best customers in the world know what they're doing, and there's a lot of incredible opportunity. For the right types of technologies and the technologies that we make are those technologies. So I think we're going to have a nice combination with, again, our strength in mobile, which is a disciplined approach. We know what we're doing. We're working with the right people. It's not easy. We've made great steps in capital. A lot of our CapEx is behind us right now. It's another key point. We talked about the free cash flow on the call already. And then the diversification theme, Chris, is really playing nicely. You heard questions about satellite, for example, you look at the broad markets. Think about our hundreds of millions of dollars of automotive revenue that we didn't have three or four years ago. So we are -- we have really core technologies that we can take across a broad set of mobile and connected devices, but this is an extrapolation now of new applications. That is really driving the business. And you're going to see more and more of that as we go through it. It's unfortunate right now that the market is just -- we're all in kind of a bit of a slowdown here as we’re emerging, but we've got great stock that's ready to go and design wins that have been cemented, and those will roll out in the second half of the year for sure. Two questions, if I may. First, I know you have little exposure to China Android right now. But one of the investor concerns is that you may have lost content and so perhaps you won't receive as much of a snapback as some of your peers when China demand eventually recovers. I was hoping you could address why those concerns might not be warranted? I have a follow-up. Yes. I mean I'm glad you asked the question. We're ready to roll with Android. We have the technologies. We have the products, but we're not going to fill the channels, right? I mean there was a bit of an overhang there. We want to run discipline in our business. But I will say that inventory overhang is going to -- is starting to abate already. We see it. We have product ready to go, high-quality, top-of-line technology that we can move in. And that's just -- I can't tell you exactly when, but it's definitely happening. And we're ready. So it's an upside in our pocket that we haven't really rolled out. But we've had years and years of great position in China, OVX, specifically, Oppo, Vivo, Xiaomi and then Samsung on its own vector, which is a huge company. And it's just unfortunate that those markets got banged up because they're going through an inventory cycle now. But on our end, we never built the inventory up. We were trying -- we try to meet the demand as it is. We don't want to get ahead of it. And our teams were very disciplined. And you could see, even in the last quarter, we talked about China revenue is below 5%. That's because the market didn't need more than that, and we didn't want to sell more than that. So I do think as we get through this quarter and starting to see towards the second half of the year, more improving macro environment, we will be very well positioned to execute. And if things change, we can move faster if we need to. But it's not a technology issue. It's not an execution issue. It's really just trying to manage the business in the appropriate way for our shareholders. Very clear, Liam. Kris, if I may, a question for you, more of a simple one, I suppose, but what's driving the big step down in CapEx in December? And I'm curious if this implies anything for content as we think about calendar '23. Yes. No. As it relates to CapEx, we definitely expect our CapEx trend to moderate compared to what we have been doing over the last five years. Just as a reminder, the last five years, we were in the 10% to 12% of revenue. We've put a lot of capacity in place. We put a lot of technology-related investments in place, especially as it relates to bulk acoustic wave and now we have to leverage that capacity. We are focusing on yield improvements. We are focusing on die shrinks. We can create more capacity without putting more equipment in place. And as a result of that, you will see a little bit of a more moderate, less capital intense CapEx in the next couple of years here. But again, we feel good about the investments that we make. And it really will help to further improve our strong cash flow that we have already. We started the year very strong. We expect further strong cash flow the remainder of the year, again, based on some moderate CapEx but we could drive our free cash flow over 30% in this fiscal year. Yes. Just to reiterate that, the capital base that we have, okay, is -- it took a long time to get to this scale. We did a tremendous amount of work, brick-and-mortar, site level in our own facilities, and it positions us now for kind of a downhill run from CapEx. We still have great technology, great equipment, but it's brand new, right? So we spent that money over the last four or five years, strategically to build up a competency in bulk acoustic wave and other filter technologies, very, very difficult stuff. It's not available in the merchant market. So it was a make versus buy approach. We did the make. And so we developed solutions that are purpose-built for Skyworks and purpose-built for our customers. The great news is the capital is up and running. It's humming along. And sure, there'll be incremental CapEx spend over the next several years, but it won't be at the level that you look back in the last three or four because now those investments are in-house, at scale and running. Liam, I wanted to get your perspective on new 3GPP Release 17 and also WiFi 7 using 6 gigahertz. And when it comes to these upgrades, when do you think they're going to ramp more broadly, particularly in smartphones and consumer devices? And then just maybe from a business perspective, how should we think about the overall RF content when you start to scale up WiFi 7 and Release 17 5G versus today's devices. It seems to be quite big architecture changes. So I was just curious how you think about this and the extent to which Skyworks could benefit. Yes. No, that's a great question. Those technologies are just starting to emerge now, and they do add a great deal of complexity, and you mentioned that in your words. The good news here for us is that we've been making in-tandem investments and technology. So we've got, of course, the WiFi cycle that's going from 6 to 6E and WiFi 7. And that has its own set of incredible opportunities and kind of on the launch pad there and the complexity and the newest cycles and the new devices has been incredible for us. So we could definitely hit that and then back on other connectivity nodes, adjacent connectivity the IoT line. So those types of technologies we can deliver to the end market solutions. And that would be a big part of our broad market portfolio. And some of the most relevant players in that space, we've already had design wins with them at earlier stages, and we have a good trusted partnership. So it's definitely further into the year, but definitely an opportunity for us to get into '23, '24, '25 as we look out. But definitely another cycle that we can leverage. And as you said earlier, much more challenging from a technology perspective, but the consumers benefit there would be amazing. So I think those new technologies, they're hard to do. We've got the IP, we've got the know-how and they can create their own cycles within the next set of IoT devices. And is there a meaningful step-up in content, Liam just -- I mean, WiFi 7,for example, I think 6 gigs and quite a lot of changes on the modulation side and the MIMO side. So I'm assuming this should be a fairly healthy step-up in IF content base. I don't know if there's any numbers you can sort of here with us on the upgrade to WiFi 7. Yes. No, it's hard to handicap the numbers, but it's meaningful. I think you're going through. And it's kind of a pretty long step from from WiFi 6 to 7. There's a lot of work being done there. And so work also means a lot of technology being embedded. So I think we could get a 10% to 15% CAGR on that segment. And then also kind of -- that's just on content. But then if we get the user count up, you've got a double whammy. So that's kind of what we're looking for and anything along the way there is going to be incremental. And maybe just one quick one for Kris. Just on the BAW filter, CapEx moderating. Can you talk a bit more about where the capacity for BAW looks today? And how should we think about Skyworks addressing 6 gigahertz with your BAW technology? And are you able to address that going forward? Yes. Again, if you look at the CapEx over the last couple of years in the $500 million, $600 million per year, the vast majority of that CapEx was going into expanding our bulk acoustic wave filter operation, where we have, of course, from a small base, doubled and doubled and doubled again the capacity there. Again, we're focusing really now on driving operational efficiencies, die shrinks, yield improvements, which gives us a lot more capacity, leveraging the installed base of the equipment that we have. And we are not done. I mean we're going to keep expanding that as we see fit. And we do believe that our revenue from devices that has bulk acoustic wave filters in will continue to grow very strongly. And we're ready for that, and we will not hesitate to put more capacity in place if and when needed. Very incredible results, to be honest with you, in this turbulent environment. Liam, let me ask you about China. I'm sure you're tired of it, but I know that this is hopefully the last question on this topic. You’ve de-risked China completely last go around. I think the message was that it was very close to zero. But what do you think the China opportunity is? And do you even want this business, given the volatility, the geopolitical nature of it and if you can remind us at the peak, let's say, how much it got to, let's say, over the last 5 years, maximum as a percentage of sales. I just want to gauge where you're playing and what you're really going after. Yes, yes. Good question. Well, we've always been -- we'll work with anybody that needs our technology. We'll partner with anyone. So there really isn't any bias around where we're going to go in our markets. But China has been a challenge, I think, for ourselves and the peers in the U.S. here. And you think about even back to the Huawei situation with Huawei shutting down, that was a big business for a lot of companies in our space. It's been a volatile market operationally and some of that is COVID and all kinds of things going on. But the technologies and the work that we're doing is applicable for anybody, right? There's no reason why -- I mean the China opportunity is as good as any opportunity. But unfortunately, there had been some inventory here that we've all talked about, not specific to Skyworks, but just in general, where the markets kind of got out of sync and created a bit of an inventory overhang. And that kind of weighs on the sector, I would say. But turning it back to Skyworks, you've heard us talk about our operational efficiencies and our know-how and labs, the fabs approach. It's not -- those aren't just words. That's how we run this business. So we're very keen on what we're doing with our customers. We want to be great partners, but we also want to stay in sync with the market, right? That's really important for us. And this is just a case like that now. I think we've got a situation in China where that was in the inventory. There were some lockdowns. There were a lot of things that would impede the natural flow of revenue and engagement. And that's kind of where that market is. So we're standing ready to step back in. We have the -- it's not a technology issue. It's not even a gross margin issue really. It's about managing inventory and making sure that we're delivering to the right cadence. That's what we want to be able to do. So having said that, long dialogue, I would tell you that we think things will get better. Things will get better as the markets start to really kind of recover. And the technologies that we have are really good and we can populate just about anything out there with the solution suite that we have. So there's really -- at this point, the bad news is flushed out for us and the opportunity to grow into those markets and deliver incremental growth is right there. So we're looking forward to making that happen. And I think things are starting to warm up a little bit already. So we feel good about that as we exit. Okay. Liam, can I just ask maybe the similar question in a different way. Is it fair to say that you mostly look to sell standard products in China? So it doesn't -- it's not a lot of work for you outside of what you already do. And then you look to sort to service those customers while leveraging your own facilities. Is that a fair way to think about it without too much effort? Yes. I mean, sure, we can take the business and the technologies. I mean every market has its own flavor and there's different technology nodes, higher or lower to more complex, and we're able to scale through all of it. So I would say that over time, the markets are going to get -- the markets are actually going to embrace higher levels of technology. I think a lot of the stuff that we're talking about right now, two, three years today is going to be much harder, much more difficult and companies like Skyworks, I think, will have an incremental advantage. So I think you've got a China market that solved some macro things that weren't specific to mobile. But as we wake up here and the markets start to recover, the technologies have not sat by on the sidelines. The technologies have gotten more complex and more challenging and more powerful for the users. So the one thing I would say is in the China market, have they been able to catch up with that technology? I'm not quite sure it's there. But I know that we can do that with the partners. So it's not a technology gap with us. It's not a revenue issue. It's really getting the China market to get back on their feet and then get that partnership where it should be, where it's in a natural supply and demand view. And I think we can do that. And we have no reason why we wouldn't want to do more business in China. But all those things that I mentioned, need to kind of clear up a little bit before the markets and the opportunity for us is what we want to see. Got it. And for my follow-up, it's March. You probably know the content for the year because these wins happen about a year before. Units are going to be pretty depressed. I was curious if you could give us a sense of what to the extent that you can, a sense of content this year? And also maybe a sense of 5G units, whether you expect 5G units to be up this year and then one for you, Kris, the 53% free cash flow number, that's a monster number, to put it bluntly. Is there something onetime out here? You talked about CapEx going down? Or is this something sustainable for Skyworks? So Harsh, I'll take the cash flow question first, and then I'll turn it back to Liam. Very happy with the very strong cash flow and free cash flow, obviously, in December. I would say three elements. Our world-class profitability level, 37% operating margin, not a lot of companies and tax base doing that. Secondly, yes, great working capital management, although a good guy and a bad guy, right? Inventory is still somewhat elevated. We will work it down over time. But we definitely had strong collections in the December quarter, which is a little bit of a onetime item. And then thirdly, as we discussed earlier, some moderate CapEx in December and going forward. And the combination of those three, delivered strong cash flow, and we'll continue to deliver strong cash flow. And then I'll turn it to Liam on the other question. The content, yes. Exactly. So yes, when we think about content it's -- the way we're seeing it now with the customers that we're working with, especially at the high end. It's not more of the same thing. It's not, hey, we had two devices now, there's three devices. It's really about what's going on inside. We're seeing a lot of innovation and performance and the new suite of technologies. Now I'm not going to give you the time line on this because this is kind of a cycle of improvement. So stay with me on that. But there's no question that if you look at where a high-end smartphone is today and the content that is available versus what we see one, two, three, four, five years out is going to be dramatically different. We really believe it. We have great engagement with customers, and we -- they're all kind of in the same spot. Everyone has a different way to get there. So the units I think are going to continue to be where they are. There'll be more growth. But the content and the usage cases are going to expand. And I say usage cases because that doesn't mean just a mobile phone. If you think about technologies like 5G, they're technology vectors. They connect things wirelessly. It could be an automobile, it be connected to a data center, a HiFi WiFi solution. There's so many different applications with the right use cases. And I think if you think about Skyworks, it's not just about mobile. Mobile is an important vector, but all the other technology vectors that we can work through IoT and other markets will continue to grow. And the other thing that's great about that is they're on their own cyclical path. It doesn't go through the same kind of annual cycle that we do see in mobile, which is fine. But the opportunity to have an uncorrelated path in technologies that are not in a mobile phone. And I think we're going to see that more and more things like automobiles and data centers and some of these other really interesting IoT devices. So keep that in the back of your mind because that part of the business is really moving. Mobile is doing great. We have super technologies. We're going to continue to do well. But the other side of the field is an incredible opportunity for our investors and the opportunity for Skyworks to deliver world-class solutions. So I'll leave you with that. Ladies and gentlemen, that concludes today's question-and-answer session. I'll now turn the call back over to Mr. Griffin for any closing comments. Great. Thank you all. I appreciate your participation in today's call. Look forward to seeing you in upcoming conferences. Take care.

EarningCall_481

Good day, everyone, and welcome to Banco Santander Mexico's Fourth Quarter 2022 Earnings Conference Call. Today's call is being recorded. Following the speakers' prepared remarks, there will be a question-and-answer session. I'd now like to turn the conference over to Mr. Hector Chavez, Managing Director and Head of Investor Relations, who will make some opening remarks and introduce today's other speakers. Please go ahead, sir. Thank you, operator. Good day, and welcome to our fourth quarter 2022 earnings conference call. We appreciate everyone's participation today. By now, you should have access to our earnings press release and the presentation for today's call, both of which were distributed yesterday after the market closed and can be found on our Investor Relations Website. Before reviewing our fourth quarter results, we would like to remind you that as previously announced, our parent company, Grupo Santander intends to increase its ownership in our bank from 96.2% to a 100%. And it is therefore our intention to delist the bank's shares from both the Mexican and the New York stock exchanges. Currently we are waiting the regulators' approval in order to proceed with the transaction, which is expected to conclude during the first quarter of 2023. As always, we also remind you that certain statements made during the course of the discussion may constitute forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, including COVID-19 pandemic that could cause actual results to materially differ, including factors that could be beyond the Company's control. For an explanation of these risks, please refer to our filings with the SEC and the Mexican Stock Exchange. Felipe, please go ahead. Thank you, Hector. Good morning, everyone, and good afternoon to those of you participating from Europe. We hope you have the opportunity to enjoy the holidays and our best wishes to you and your family for 2023. We're very pleased to share with you that we closed a very successful year reporting the highest net income in the history of our bank. The result was 46% higher than what we achieved in 2021 and '24 higher than the pre-pandemic level in 2019, demonstrating our tremendous capacity to adapt and grow in complex and challenging operating environments. During the fourth quarter, we maintained solid performance levels in our core businesses, while maintaining excellent asset quality throughout the loan portfolio. In fact, during 2022, we achieved the best risk metrics we have ever had with an NPL of 1.88% and the cost of risk of 1.56%. This record low levels were due to the excellent work done by the risk area of our bank in coordination with all of our business units. Total loans grew 8 -- almost 8% year-on-year with strong performance across our entire loan book. In individual loans, we had a solid increase compared to last year, mainly due to double-digit growth in credit cards, payroll and auto loans. I would like to point out that November was our 32nd consecutive months of annual market share gains in individual loans after becoming a third largest player in the consumer loan market as of September. In terms of deposits, during last year, we continued executing our strategy to attract and retain individual clients, while letting go some expensive corporate deposits. With this, total deposits were 6.9% higher than a year ago. Also, it is worth noting that at the end of 2022, we had achieved various exposure to individual borrowers that we ever had at 41.4% of total deposits. However, we're still far from where we want to be. So we will continue to focus on it until we're able to achieve a similar mix to what relevant [indiscernible] in the Mexican market. We close 2022 with an ROE of nearly 16%, 481 basis points higher than in 2021. This reflects our great exposure to individuals both in terms of credit and deposits as well as the excellent risk management that I noted previously. Further, if we adjust for the excess capital that we continue to have, our ROE for 2022 would be 174 basis points higher. Also, during the fourth quarter, we continue to maintain a strong balance sheet as reflected in our solid capital ratio and liquidity position. As of this year, and following the appointment of [indiscernible] Santander globally CEO, I take full responsibility of the bank, which has enormous strengths as well as exciting opportunities. I’m convinced that together with the entire Santander Mexico team and ongoing collaboration with the group, we will become the best banking option in Mexico and the primary bank for our clients by ultimately offering the best user experience in the market, both in the advisory side and in retail banking. The chart on Slide 4 show a still complex environment in Mexico with regards to the economy. While GDP expectations for the full year 2022 have improved, the forecast for 2023 has been declining more recently, as the perspective on the Mexican economy continues to be less and less optimistic. The shift in sentiment is due to a moderate outlook on private consumption and investment, along with the possible recession in the U.S during the first half of 2023. The ongoing impact of COVID-19 as well as reduced fiscal stimulus and improved monetary tightening. Regarding inflation we expected to gradually converge to its pre-crisis levels, reaching 5.3% by year end, and then declined to a level of 4.2 at the end of 2024. Given the inflationary conditions, the [indiscernible] rate reached its highest point of 10.50 in December. We expect it to reach 10.75 by year-end 2023, and then gradually decline to 9.75 by 2024. According to the Mexican Institute of Social Security, more than 750,000 new jobs were created during 2022, bringing total jobs to 21,272,000, of which 87% are permanent. However, as we mentioned in previous calls, most of these jobs are of relatively low quality. Other macro indicators have also shown improved economic performance. Private consumption is now 4% higher than before the pandemic, while industrial activity and investment remains practically at the same levels as 2019. That said, while 2023 will be a year with substantial challenges on the macro front, it will also be a year with significant opportunity for the Mexican economy. The ongoing rearrangement of global supply chains, known as near shoring, provides Mexico with a unique opportunity for increased domestic and foreign investment, which could translate into higher growth rates for the economy in the future. The discipline in macroeconomic policies is in place, including the fiscal monetary policy fronts, with Mexico in a favorable position to capitalize on this opportunity. [Indiscernible] of manufacturing experts in the recovery from the pandemic, and the recent strength of the exchange rate provide evidence of the potential benefits of the current juncture for the Mexican economy. In fact, the successful recent debt issuance made by the federal government and the mix reflect the confidence and optimism on Mexico and from foreign investors. On Slide 5, you can see that system volumes, loan volumes in November maintain their solid growth trend, increasing low double-digit year-over-year. This good performance was mainly driven by continued growth in consumer loans, which increased 17% as well as improved demand in commercial loans. System deposits continued a strong rebound, growing more than 10% year-over-year with demand deposits increasing by almost 8%. Now, I will ask Didier to continue from here with a deeper discussion of our fourth quarter results. Didier, please go ahead. Thank you, Felipe, and thank you everyone for joining us today. Turning to Slide 6, our total loans increased close to 8% year-on-year, with differentiated dynamics between high margins and low margin segments. Starting with high-margin segments, credit card stood out as November was the eighth consecutive months of gains in market share, reflecting the excellent performance of our LikeU credit card among our customers. In fact, at the end of 2022, LikeU's portfolio balance already represented close to 15% of our total credit card portfolio. As a reminder, we only launched [indiscernible] innovative cards in September 2021. In the consumer segment, the performances of both auto and payroll products were also excellent. In fact, at the end of 2022, the auto portfolio was close to MXN 26 billion, resulting in a market share of 15.6% consolidating ourselves in the third position of the market. At the same time, we continue to make this portfolio more profitable through new and key commercial alliances together with price adjustments. On the commercial front, loan demand is also improving among mid market companies and governments and financial entities, increasing by single-digit year-on-year. It's also worth noting that corporate loan demand improved on a sequential basis increasing by a low double-digit amount. [Indiscernible] to protect the profitability of the product, we're the bank that raised its interest rate the most during last year, causing a deceleration in the growth of this portfolio from 12.1% in 2021 to 8.8% in 2022. Taken together, we continue seeing an upturn in our higher yielding loan segments which coupled with higher interest rates should continue helping drive our margin expansion, while we maintain safe and sound asset quality. On Slide 7, you can see that individual loans grew 14% year-on-year. It is worth noting that as Felipe mentioned, we are outpacing the market in loan growth for 32 consecutive months. This has enabled us to achieve a 14.8% market share. Our mortgage portfolio continues to expand at a solid pace, increasing to 9% year-on-year and 11% organically, despite the higher interest rates that we charge during the year, and thanks to the wide range of mortgage products that we offer. Over the years, we have distinguished ourselves with an innovative and competitive offering in mortgages. We are the only bank recognized for offering a comprehensive set of banking products and services associated with our mortgages. Also, we have made substantial progress in the digitalization of our processes. Currently, more than 97% of our mortgages are being processed digitally, improving the customer experience and creating another point of differentiation in the market. Regarding our consumer products, these were mainly driven by auto and payroll, which allowed us to become the market's third largest player in consumer loans in September of 2022. In auto loans, we also continue expanding our business gaining 411 basis points of market share during the last 12 months. With 15.6% of the market as of November 2022, we have consolidated our position as a number three player in the market. We're very proud of this significant accomplishment and remain determined to move up in rank soon. With the aim of expanding the business even further, we're now very active in the use car segment of the market. Currently use car loans represent around 10% of our total loan portfolio, and we are targeting an 25% level in the medium term. Similarly, payroll loans deliver a solid performance during the quarter increasing close to 21% year-on-year, while personal loans increased close to 8%. At the same time, credit cards continue to accelerate with a solid 20.5% year-on-year increase, or 6% sequentially. These excellent results were mostly driven by our flagship digital credit card LikeU. Since its launch, we have issued over 822,000 LikeU cards exceeding our own expectations. In terms of demographics, more than 45% of our LikeU clients are junk. Less than 30 years old compared to 21% of the rest of our credit card products. I would also like to point out that nearly 13% of total billing comes from these relatively new credit cards. So our new payment and credit value offerings, we are confident that we will continue to acquire a significant number of new LikeU users with our customer base during this year, including customers participating in a recurring program cash back [indiscernible], we're all LikeU credit card users and almost MXN 5 million payroll customers are automatically enrolled in an already enjoying the program's benefits. Turning to Slide 8, the solid expansion of loyal and digital customers continue with year-on-year increases of 11% and close to 9%, respectively. With additional growth in loyal customers, they now represent 45% of active clients compared with 41% in the same quarter of last year. This growth reflects consistent improvements across a large number of our products and services, as we aim to be the best option for our clients and continue working very actively until we achieve these goal. Also we're very proud of our sustained improvements in particular metrics. With product sales via digital channels accounting for 62% of total sales, a significant increase compared to 56% a year ago. Digital monetary transactions also maintain an upward trend, reaching 49% of our total, with mobile transactions accounting for 98% of total digital transactions. In addition, mobile clients grew nearly 10% Over the past year to almost 5.8 million, thanks to promotional campaigns, and the incentives we offer through digital channels. During 2022 continuous improvement of our digital ecosystem remain a strategic priority, as we focus on building on key pieces that in the aggregate positively impact the end-to-end of digital experience of our customers when using each of our financial products, both mobile and web. Leveraging this experience, we continue working towards the bank's complete digital transformation. As shown on this Slide 9, commercial loans increased 3.4% year-on-year, driven by a high single-digit increase among mid market businesses and meet single-digit increase in government and financial entities. Although corporate loans decreased 1.3% year-on-year, they increased 11.8% sequentially. We're seeing encouraging evidence of growing investment in certain states in Mexico, driven by near shoring. The increased demand has mostly been in northern and central Mexico. Conversely, SME loans are still being affected by weak economic conditions, resulting in low credit demand. This category of loans decreased 8.5% year-on-year and 2.8% on a sequential basis, similar to the prior quarters sequential contraction. When we got to funding on Slide 10, total deposits increased 7% year-on-year and 9% sequentially, like the previous quarter deposits were driven by term deposits, increasing a bit more than 30% year-on-year on the back of a higher interest rate environment. Demand deposits decreased 2% year-on-year, mainly due to a 6% drop in corporate demand deposits as we continue for growing certain expensive deposits to improve our funding costs. The bank deposits from individuals increased 4% year-on-year supported by our promotional campaigns. As a result, we have been able to show credit resilience to Central Bank very tight. The cost of deposits increasing 121 basis points year-on-year, mostly in line with the system where the reference rate has had increased by 100 basis points year-on-year as of December. Turning to Slide 11. We continue maintaining very strong capital and liquidity positions. At the end of the quarter, our liquidity coverage ratio stood at 181.2%, 3% in a substantial buffer and still far above the regulatory threshold. Our core equity Q1 and capitalization ratios as of December were 13.93% and 19.38%. respectively, significantly above the minimum requirements established for systemically important financial institutions like ours. At the end of the quarter, we also maintain a sound funding position with a net loss to deposit ratio of 94.4%. As you can see on Slide 12, net interest incomes have a solid double-digit increase of 24% year-on-year and almost 9% quarter-on-quarter, Mainly driven by higher return volumes in loans and deposits, as well as the higher interest rates we've been discussing. During the quarter, Banco de Mexico increased the reference rate by one quarter and 25 basis points to 10.50%. These impacted positively are NIM, which expanded 82 basis points year-on-year to 5.28% for the quarter. Please turn to Slide 13. Net commissions and fees had a strong increase of almost 8% year-on-year. The solid performance was mainly driven by a double digit increase in insurances and cash management. In addition, purchase and sale of securities and money market transactions increased 20% year-on-year. Going forward we expect to sustain good performance levels in credit card fees as our ambitions for the lackey credit card are to continue increasing average monthly billings, while achieving a better mix of being. Turning to Slide 14. Gross operating income increased close to 18% year-on-year and 6% sequentially. This growth was driven by the solid performance in net interest income supported by a greater focus on individual loans and deposits. Higher fees were also a driver, mainly insurance fees and cash management which more than offset lower market related revenue. Moving on to asset quality on Slide 15, our NPL ratio improved 13 basis points sequentially to 1.88%, reflecting healthy trends across the loan portfolio, and the adoption of the IFRS 9 methodology. Provisions in the quarter increased significantly on a sequential basis. Due to previous quarters one-off items, the release of provisions related to some corporate clients and the recalibration of some of our risk models. At year end, our cost of risk stood at 1.56%; one quarter and 34 basis points year-on-year decrease and a two basis point sequential increase. As Felipe noted at the beginning of the call, this record low levels are due to the excellent and consistent work done by the risk area for bank as well as by each of the business units. However, we wish to note that these external results are nonrecurring as we benefited from the recovery of some loans associated with the pandemic during 2022. Thus we expect both metrics to converge to more normalized levels. Turning to costs on Slide 16. Administrative and promotional expenses decreased 3% year-on-year, but increased 6% when excluding the IPAB reclassification. On a sequential basis expenses increased by 18%, mainly driven by administrative expenses and higher personnel expenses. Expenses also rose due to depreciation and amortization costs related to our investment plan. However, thanks to our solid revenue growth and strict cost control. We managed to improve our efficiency ratio by 799 basis points year-over-year to 48% at the end of the quarter. It is noteworthy that we accomplished this despite inflation pressures. Turning to profitability on Slide 18. Net income increased 20% year-on-year to MXN 6.3 billion, mainly due to the solid increase in net interest income and fees along with disciplined in cost control. Profit before taxes rose 82% year-on-year, reflecting the strong performance of our core business. Return on average equity was slightly above 15%. 222 basis points higher than a year-ago level and close to 16% for the full year, reflecting our greater exposure to individuals both in credit and deposits. The return was also due to the excellent risk management that we’ve highlighted. Additionally, when adjusting for the excess capital that we continue to maintain. ROE would be higher by 174 basis points as we also pointed out. On the other hand, our effective tax rate was 27%, a significant increase compared with last year's period. Due to a low 2013 as Felipe noted at the beginning of his remarks. If we exclude the one-off benefit from the provisions release, ROE would have been 13.6%, still 159 basis points higher than a year-ago level. On the other hand, our effective tax rate was 27.5%, 819 basis points higher than last year's period. We anticipate the effective tax rate to be between 25% and 26% by year-end. was also due to the excellent risk management that we've highlighted. Additionally, when adjusting for the excess capital that we continue to maintain, our UI would be higher by 174 basis points. As we also pointed out, On the other hand, our effective tax rate was 27%. A significant increase compared with last year's period due to a low competitive base, and certain fiscal payments made during 2022. Before we open the call for the Q&A session, let me conclude by saying that we're pleased to have met or exceeded our financial targets for the year. This was particularly gratifying, given the challenging environment that we operated in, during 2022. We are also very proud of the strong quality of our results, and the robust core earnings expansion. Our growth in deposits was above our guidance range, even though we continue to prioritize retail over corporate deposits, a strategy that we will maintain during 2023. In terms of expenses despite persistently high inflation throughout the year, we effectively control costs, which will below our target altogether to healthy growth for retail loans, coupled with a reduction in our cost of risk and effective pest control generated solid net income growth, building on our buyers efforts to consistently deliver strong results. In summary, we continue successfully working on and advancing our strategic priorities, enhancing our products, digital offerings, distribution network and most importantly, the overall customer experience. Although we have made good progress with our bank's operational transformation, continually simplifying processes and operations, we're then nevertheless mindful that we might step up the pace in working toward a goal of building a much stronger franchise and becoming the number one bank for all our customers. If the group's tender offer is approved by regulators and succeeds, we are aware that this could be our last earnings call. I want to thank you for your support as a listed company. For all your questions, challenges for all the analysis that you have produced for all these more than 10 years. For all the investor treats [indiscernible]. You made us a better company, and for sure a better management team. We will remain available for you. This concludes our prepared remarks. We're now ready to take your questions. Operator, please open the call for questions. Hi, this is Carlos Gomez. Actually, I don't have a question. I just wanted to give you thank you for all the time, as you say all the tweets, all the [indiscernible], all the talks that we have had over the years. You have been a great listed company and we wish you all the best and we hope that you will be listed again in the not too distant future. Thank you very much. Hello, good morning, and thank you for the call. I had a question on your commercial book, sequential growth, there were a number of diverging trends. And I guess also, depending on the comparison being sequential or year-on-year, but we were a little surprised by the decrease in the middle market book. Do you want to confirm? Was that due to you increasing rates in that segment? I think that the competitive dynamics, as you pointed out, is, clients are being quite sensitive in grades. We've seen certain banks being quite aggressive. It is comfortable, so but also let me know year-on-year it's a marginal decrease sequentially. It's less than -- slightly more than MXN 10 billion pesos. Okay. So, yes, one thing I have to do with increase the competition, and also some amortization of some [indiscernible] Okay, okay. Thank you. And you mentioned in the press release that the you’re in the process of launching the digital bank. [Indiscernible] is that going to be, let's say, fully separate bank and follow-up can you comment on what the strategy will be to, I guess, not cannibalize your legacy bank. Yes, I can -- okay with that one. It's going to open bank. Open bank already operates in Europe, Argentina and a few other countries. I work extremely well, it's a fully digital [indiscernible] clients. We want to become a digital bank with branches. That’s the aim of the group in the middle -- in the medium to long run. And we want to serve clients whichever way they prefer. We have some clients that want to go to branches, we have some clients that want to be 100% digital. So open bank will be an alternative that will be 100% digital. It will be separate from the bank, it will be 100% digital, and we believe that it's going to cater to a different part of the pyramid that we are currently not serving probably as much as we would like to, given that the cost of serving digital is much cheaper, we believe that we're going to be able to be an open bank, broaden the client base. Thank you all. And first of all, thank you for the partnership in all those years. I have a first question regarding I guess this has been maybe one of the most asked questions in those years. So regarding our margins, right, what is the [indiscernible] are seeing today. We saw a very good expansion this quarter. So for every 100 bits change on rates, how you are seeing the similar upside for your [indiscernible]. And I have a second one regarding our charge-offs in the mortgage book, when we look through our NEPL You had some benefits from higher write-offs this quarter. And when we look by segment, we saw the write-offs coming from the mortgage book. So what happened there is something specific, it's regarding to legacy portfolios, like what is driving this higher losses on the mortgage book. Thank you. Hi, Yuri. Good to talk to you. Regarding sensitivity donate [indiscernible]? I think that we remain positive, positive sensitive. I would say that the 100 basis points increase on a parallel curve would give us close to MXN 600 million, with the most recent estimates. Also, when you look at it on a NIM basis, given how the increases in the reference rates have happened, over the last few months. We think that the NIM for 2023, I would say that there's a floor in a potential increase of at least 100 basis points relative to what we saw last year. And I would say that could be within 100 to 150 basis points, the potential increase and the associated with the interest rate environment, we were expecting interest rates in Mexico still to increase slightly above the current level. And if those and we also expect that those will be maintained for the rest of the year, so that's a very positive environment for business. And Hector, you can comment on the mortgage book. Hi, Hi, Yuri. Yes, on mortgages, you're absolutely right. There was a slightly higher level of write-downs. But there's nothing special about it. It's simply a decision managing the stock of NPL. So it's business as usual. Thanks very much for taking my questions. And I apologize, I just dialed into this call. So if you already said something on my questions, I apologize for that. So first question on your 2028 [indiscernible] bone which is scalable in October. It's really not [indiscernible] is kind of assuming it's going to get cold. Of course, in the past few have called this [indiscernible] I remember when you call the 24s back in 2019. If you were to call an [indiscernible] new bond. The idea here would again be that the parent company Santander Spain would buy most of the new issuance. So that's my first question and any thoughts in general in terms of the call option in October. Second question on the non-bank financials given that we have seen so many defaults and all of the companies trading at very distressed levels, do you see any real value in the sector in the sense that perhaps you would be interested in acquiring any of these companies given current valuations either leasing company payroll lender et cetera. And then finally and again, maybe you have already mentioned this in this call, but once you complete the -- once you've completed the delisting of the stock in Mexico, are you going to continue having quarterly earnings calls such as this one going forward or not? Thanks very much. Hey, Nicolas, we already answered all of these three questions. So, I suggest that you listen to the replay. On your first question, we obviously acknowledge the market conditions to evaluate whether makes sense or not the ball, our capital securities. We will do so again, when time comes. As you rightly pointed out, this is due on in October of this year. And also we will be open for whether a parent company takes significant part of the issuance or not, those are positions that I would say depend on market conditions I would say Okay. So, we already started the process to get approval for either calling it or a issuing a new one or just given it. We have to discuss that with a central bank, per configuration and we already started the process. So, usually takes a few months to have those approvals. So we would remain open as to what's the best for the bank, okay. If a foreign company ends up buying the significant part of the issuance, as we have done in the past, it has been at market conditions. So, in terms of Santander Mexico as an issuer, I would say that its relatively indifferent for us, because we get the right pricing in the issuance okay. Then regarding a non-bank financials, I would say that the businesses in which these companies are in, are not that attractive to us. We continue to remain open and analyze different opportunities to consolidate the market we configure ourselves as the key candidate to consolidate the Mexican banking system for opportunities that first of all make strategic sense for us. And secondly, that are accretive to our shareholders, okay. So, of have those company that have had some stress over the last few quarters. I would say that we are not that interested in their business models, but we remain open to analyze any potential opportunity to consolidate the market. And yes, your final question, if the parent company succeeds, in what well first, if the regulators approve the transaction, the parent company succeeds in doing the tender offer, this would be our last earnings call. We are issuers in the Mexican market. Of that and also in international markets will continue releasing information is used as a quarterly call is the one we would no longer have. As I mentioned earlier we will be -- would remain available for you if you have any, any question the performance of the bank. Okay. As there are no more further questions, I would like to turn the floor back over to Mr. Hector Chavez for any closing comments. Well, thank you, operator and thanks everyone once again for joining Santander Mexico on this call. And as we have said, if you have additional questions, please don't hesitate to call us or email us directly. Thank you very much. Have a good day. Thank you. This concludes today's call. You may disconnect your lines at this time, and thank you again for your participation.

EarningCall_482

Greetings and welcome to the Lumen Technologies Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, February 7, 2023. I would now like to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead. Thank you and good afternoon, everyone and thank you for joining us for the Lumen Technologies fourth quarter 2022 earnings call. Joining me on the call today are Kate Johnson, President and Chief Executive Officer; and Chris Stansbury, Executive Vice President and Chief Financial Officer. Before we begin, I need to call your attention to our Safe Harbor statement on Slide 2 of our fourth quarter 2022 presentation, which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements on Slide 2 and the Risk Factors in our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures that can be found on our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, all of which can be found on the Investor Relations section of the Lumen website. Thanks Mike. Good afternoon, everyone and thanks for joining us today. In a few minutes, Chris will cover our fourth quarter results and discuss 2023 outlook measures. Let me begin by saying how excited I am to be here at Lumen during such a pivotal time in our company’s history. I have a passion for leading businesses through the challenging world of digital transformation. It’s what I’ve been doing for a few decades and it’s where I feel most comfortable. And while it’s only been 3 months since I joined Lumen, I already feel at home. I have had the opportunity to get to know many of our employees, customers and partners. And I have spent time understanding our business processes, our proprietary gifts and our go-to-market capabilities. I can tell you that I see a very significant opportunity for Lumen and its stakeholders. That said, there is hard work ahead for our team as we make significant changes to how we serve our customers and how we execute for better financial results. 2023 will be a year of rapid change for Lumen as we execute on our plans and pivot towards growth. As with any successful transformation, it’s essential to get the right talent and I am delighted to report the addition of three seasoned technology executives to the Lumen team. Sham Chotai has been appointed Executive Vice President of Product and Technology, running our newly integrated product development and IT organizations. Ashley Haynes Gaspar has been appointed Lumen’s Executive Vice President and Customer Experience Officer, running our marketing functions as well as customer success. And Jay Barrows has been appointed Executive Vice President of Enterprise and Public Sector sales. With the addition of these three executives to the team, we infuse deep digital transformation leadership, product development and innovation muscle, marketing and customer lifecycle thought leadership and enterprise selling expertise, all essential components of our transformation. Now with the team in place, we are ready to execute our plan. Clarity is an existential priority for any company seeking to transform. As such, over the past 3 months, we have spent considerable time with employees, customers and partners, drafting and rolling out a crystal clear strategic plan, what we are calling inside the company, the Lumen North Star. In short, our North Star to find who we are, who we serve, our proprietary gifts that yield a competitive advantage, our targeted success metrics, and of course, our aspirational culture. This important plan provides clarity to the Lumen team and our stakeholders on our path to growth. It starts with our mission to digitally connect people, data and applications quickly, securely and effortlessly. The first part, connecting people, data and apps, that’s our core DNA and positions our world class network as the crown jewel of our portfolio. The three words at the end of that mission statement, quickly, securely and effortlessly, that’s really what our customers are demanding as we solve their core problems such as delivering cost effective operations, securing their data and apps, innovating for their customers and helping their employees thrive. It’s where we have the most amount of work to do and is the underpinning of our investment in operating plans. A big part of our North Star plan is a detailed economic model that provides some sensitivity analysis around our Grow, Nurture and Harvest revenue categories. This work has informed our plans to disrupt negative growth trends in our legacy businesses and bolstered our intention to innovate for growth. As a result of this work, we have established five core priorities for Lumen. Our first priority is to develop company-wide customer obsession. Lumen is the product of many mergers. And as such, we have been forced to drive operational efficiency to ensure we achieve the synergies and the value intended from combining these entities. And that takes a fair amount of looking inward and we’ve built thick muscle memory doing this. Our path to growth lies in solving customer problems and helping them deliver on their desired business outcomes. And that requires looking outward first. Reorienting our people to focus on understanding customer problems and shaping our core intellectual property in connectivity, security and edge cloud to solve those problems will be a material mindset shift. As with any mindset shift this will take time and practice. It will require deep skills building, a significant part of our culture development priority, which I will talk about shortly. But more than just a mindset shift, delivering on our desire to become a customer-obsessed company requires innovating and investing for growth, our second core priority. As such, we are reshaping our organizational structure by combining our product development teams with our IT teams for greater speed and agility. We are centralizing marketing for tighter alignment to the customer lifecycle. And we are installing what we call a growth operating system to build the muscle inside of Lumen that enables us to innovate new products that delight customers and drive shareholder returns. Our innovation focus will be to create and monetize capabilities that enhance the value and commercial potential of our work. Now, I think it’s worth spending a minute on this concept of growth operating system. Lumen has been focused on driving operational efficiency, as I said, in our scaled businesses. But to grow, we need to become great at innovating and establishing new to big businesses. We want our teams to act like entrepreneurs, collaborating with our customers and the Lumen teams to solve problems that our customers experience. And at the same time, much like in the VC world, we will foster this innovation in an environment with important guardrails, including a growth board, executive sponsorship and co-founder teams to ensure we are pursuing and maximizing the value of high potential projects. This means performing extensive testing with our customer base, bailing fast on many concepts, but recognizing the high potential of others and quickly allocating capital accordingly to maximize growth. This is a critical motion as we pivot to an outside-in mindset. And while I just shared our intention to develop net new capabilities that enhance the value of our network, I also want to emphasize that we will continue to invest in our world class network. We just won’t stop innovating here. And we will continue to invest in our fiber infrastructure to meet the demands of our sophisticated customer base who are dealing with complex business problems, coupled with a workforce that now demands remote work flexibility in the post-pandemic world. We recently announced our major network expansion plan to drive 6 million additional intercity fiber miles to our already expansive network by 2026. As we execute and pivot towards growth, our third core priority will be to ensure we have the complete go-to-market capability in place to enable us to compete in today’s technology market. We believe Lumen will benefit significantly from incremental investment in our marketing and field-facing teams to properly cover the market and capitalize on near-term opportunities in growing spaces like security and edge cloud. We will therefore inject OpEx and CapEx to ensure that Lumen can serve two distinct groups requiring unique approaches. The first group includes large customers in the public sector, large enterprise, and upper mid-market channels. These organizations offer require extensive intricate and customized solutions. And to serve this group, we aim to offer scalable solutions with a higher level of personal engagement in a robust set of managed service offerings. The second group includes customers in the consumer SMB and lower mid-market channels. This group tends to prefer a less hands-on approach and often utilizes self-service options. To serve this group, we will offer a simplified product selection with a user-friendly digital platform for easy ordering and seamless interactions. Our goal is to remove any obstacles for them by offering straightforward solutions that can easily be accessed and managed securely and digitally. To support our first three priorities of developing customer obsession, innovating and investing for growth and building a reliable execution engine, we are going to lean heavily into the fourth to radically simplify our company. Simplification will come in two major forms. First, we will focus on doing fewer things better. That means shutting down subscale or non-accretive businesses, which includes no longer selling products or services that don’t directly enhance our value to customers or benefit Lumen and its shareholders. We will ensure all resources are aligned to promote the programs and projects that support our mission to digitally connect people, data and apps quickly, securely and effortlessly. The second form of simplification will come as we build the digital enterprise, consolidating systems and modernizing our IT infrastructure to support effortless employee and customer digital experiences. These two forms of simplification will help us optimize for cost and growth simultaneously. Our fifth and extremely important core priority at Lumen will be to further develop our culture. We know that the cultural common denominators of companies that successfully transform in the digital era include clarity, customer obsession, courage and a growth mindset. At Lumen’s straight from the tap, we are committing to clarity in everything we do. And I hope my comments today have reflected that commitment. The remaining common denominators won’t come in the form of an edict or a mandate. We will invest in and train our employees to develop the skills required to change. That wraps up the high-level summary of how we plan to transform Lumen to pivot to growth. We need to do a lot of things, some basic and some quite complex, to position ourselves to take advantage of the opportunity that lies before us. We will continue to move with great speed, but also very thoughtfully and collaboratively, leveraging our customer and partner relationships to guide us. The team is coming together with formidable energy and I am really looking forward to sharing more of our story with you as the year progresses. Before we move on to our discussion of results and the 2023 outlook, it’s important that I talk about a couple of items as we enter 2023. First, on EBITDA and CapEx, we are leaning into our growth and optimization priorities and Chris will provide financial details of these initiatives shortly. We believe these investments are critical to position Lumen for strong execution and scalable sustainable growth. And we expect revenue and EBITDA stability in less than 2 years. Second, let’s talk about our Quantum pacing. As we have said previously, we hit the pause button during the fourth quarter. Now to be frank, it was more of a stop button than a pause button, which impacted our Quantum metrics for the quarter. That said the evaluation we undertook was absolutely critical to position Quantum for long-term success. By focusing on all metrics and not just the location enablement goal, we have established a higher IRR, more predictable long-term outcome for this exciting project. A natural outcome of our assessment of Quantum is a more focused build target where we are able to achieve proper returns for shareholders. We believe the overall Quantum enablement opportunity is 8 million to 10 million locations. The engine is ramping back up and we are aggressively working to ramp our build activities in 2023. And to that end, we made an important change during the fourth quarter to separate our operational activities like planning, engineering and all field operations between mass markets and business. Maxine Moreau, our President of Mass Markets, now has top to bottom operational and P&L responsibilities. This is a significant change internally that I expect will improve our Quantum deployment pacing, but it will take time to reach scale. My expectation is that later this year, you will see significant improvement in our execution on enablement. Thank you, Kate and good afternoon everyone. To start, I hope you had a chance to review the 8-K we filed on January 27, which provides modified financial information back to first quarter of ‘21, removing the impact of the ILEC and LATAM businesses as well as the impact of the CAF II program. The 8-K also outlined the new business sales channel reporting structure for 2023 reporting, which collapsed IGAM into large enterprise and pulled public sector out of large enterprise. This provides better alignment with how we manage these channels internally and should provide for more clarity when modeling our company. Let me move on to discuss some macro thoughts. Later in my remarks, I will address our outlook for full year 2023, but near-term, we continue to face macro headwinds. Supply chains remains strained with labor as the key headwind and we are all facing the impacts of inflation. In addition, we are actively working to offset dissynergies, resulting from the divestiture of our 20-state ILEC business as well as our LATAM business, but those headwinds are likely to persist through this year. Despite these near-term pressures, this is an exciting time for Lumen and our team. Kate has energized our company and we are positioning Lumen to win. This will require internal systems and process investments to solidify our platform, pivot to a position of playing offense and enable us to grow. I will discuss the impact of these investments later in my remarks. With that, I will move to the financial summary of our fourth quarter results. I will be referencing results on a modified basis, which aligns with the 8-K disclosures mentioned earlier and removes the impact of the divested businesses that closed during 2022 as well as the impact of the CAF II program. Overall, business revenue declined approximately 4.2% year-over-year and 0.3% sequentially on a constant currency basis and after adjusting for the sale of our correctional facilities business in the prior year period. Mass Markets revenue declined 7.6% year-over-year and 2.8% sequentially. We reported adjusted EBITDA of $1.393 billion in the fourth quarter and generated a 36.7% margin. Our free cash flow was $126 million in the fourth quarter. After paying all taxes owed on the 2022 business divestitures, we reduced estimated net debt by approximately $10 billion during 2022. And during the quarter, we repurchased 33 million shares of common stock for $200 million. Moving to a more detailed look at revenue, I will be referencing all revenue growth metrics on a modified adjusted basis, where applicable, to remove the impacts of foreign exchange and the correctional facilities business sale in the fourth quarter of 2021. On that basis, our fourth quarter total revenue declined 5% year-over-year to $3.8 billion. This is the last quarter for which year-over-year comparisons are impacted by the sale of the correctional facilities business. The benefit related to the correctional facilities business was about $3 million in the fourth quarter of ‘21, while the impact of FX year-over-year was a headwind of approximately $20 million. Within our two key segments, business revenue declined 4.2% year-over-year to $3.005 billion and Mass Markets revenue declined 7.6% year-over-year to $795 million. Within our Enterprise Channels, which is our business segment, excluding wholesale, revenue declined 5.9% year-over-year. Our exposure to legacy voice revenue continues to improve within Enterprise Channels dropping 141 basis points year-over-year and now represents less than 12% of Enterprise Channel revenue. Large enterprise revenue declined 2.5% year-over-year. As I previously noted, in the new reporting, we will be providing, starting this quarter, we have collapsed IGAM and large enterprise into the large enterprise channel and have moved public sector to its own channel. Now representing our largest enterprise channel, large enterprise had improved revenue trends both year-over-year and sequentially and was our strongest performing enterprise channel. Public sector revenue declined 13.8%. We have had significant wins in this channel and we expect to see improving trends as the year progresses. We also had a contract in this channel expire last quarter which is impacting the year-over-year comparisons by 176 basis points. On a sequential basis, public sector revenue declined 0.9%. Mid-market revenue declined 6.6% year-over-year, with VPN and voice, the most significant headwinds. Wholesale revenue grew 0.5% year-over-year. This is the channel that will likely decline over time and one we manage for cash. As I move to our business product lifecycle reporting, I will be referencing percentage changes on the same modified adjusted basis I referenced earlier. As Kate mentioned, our North Star plan incorporates a detailed economic model with plans to disrupt legacy declines and help us innovate for growth. Grow products revenue grew 2.5% year-over-year in the fourth quarter. We saw strength in waves, security services and unified communications. Grow now represents over 36% of our business segment, up from 34% in the prior year period and carried an approximate 84% direct margin this quarter. For added color, Grow products represented the majority of our enterprise sales in the fourth quarter, which will continue to improve our mix of revenue going forward. I would note that Grow revenue was negatively impacted by approximately 100 basis points related to a public sector contract that expired. This will continue to impact our Grow comparisons through the first half of ‘23. A key focus going forward will be to accelerate the growth of the Grow portfolio. This will take some time, but we believe we have real opportunity here with our outside-in focus that Kate mentioned earlier. Nurture products revenue declined 7.5% year-over-year in the fourth quarter. The decline was driven by VPN and Ethernet, and Nurture now represents about 31% of our business segment and carried an approximate 68% direct margin this quarter. We are making good progress on our Nurture strategy and our efforts to migrate this revenue back into Grow products. Harvest products revenue declined 8.3% year-over-year in the fourth quarter. Our Harvest team continues to work hard to manage to a lower rate of decline within this product set, which is helping to extend the life of these products. In addition, as with our Nurture products, we are managing customers back to Grow and Nurture products. Harvest now represents approximately 26% of our business segment, and carried an approximate 76% direct margin this quarter. Other products revenue declined 6.4% year-over-year in the fourth quarter. Our other product revenue tends to experience fluctuations due to the largely nonrecurring nature of these products. Moving on to Mass Markets. As I mentioned earlier, total Mass Markets revenue declined 7.6% year-over-year and 2.8% sequentially. Our Mass Markets fiber broadband revenue grew by over 18% year-over-year, and in the fourth quarter, represented approximately 19% of Mass Markets revenue. Our exposure to legacy voice and other services revenue has improved by 320 basis points year-over-year. As Kate discussed, we have made significant changes in how we are approaching the Quantum Fiber opportunity. This was a thoughtful evaluation that will result in a significant improvement in long-term shareholder value. That said, our location and subscriber results were impacted by the pause we had in place through our evaluation. This change in strategy will continue to impact Quantum metrics until we get to scale with our new plan, which we expect to occur late this year. During the quarter, total enablements were approximately 97,000, bringing the total enabled locations to over 3.1 million as of December 31. During the quarter, we added 19,000 Quantum Fiber customers, and this brings our Quantum Fiber subscribers to 832,000. Fiber ARPU was stable sequentially at approximately $60, but we’ve seen accelerating year-over-year growth each quarter during 2022. As of December 31, our penetration of legacy copper broadband footprint was less than 12%. Quantum Fiber penetration stood at approximately 26%. Our Quantum Fiber 2020 vintage penetration was approximately 29% at the 24-month mark and is now over 30%. Our 2021 vintage was at approximately 17% at the 12-month mark. Our Quantum Fiber NPS score was greater than positive 50 again this quarter, an indication of the quality, value and superior service that Quantum Fiber delivers. As Kate mentioned, we have recalibrated our addressable footprint to ensure we are generating healthy returns for our shareholders. Based on that recalibration, we are targeting 8 million to 10 million locations for the overall build or roughly 5 million to 7 million incremental locations over the next few years. We continue to monitor how the economic environment is impacting our customers, and we have not observed any discernible changes in customer payment patterns. Turning to adjusted EBITDA. For the fourth quarter of 2022, adjusted EBITDA was $1.393 billion compared to $1.496 billion in the year ago quarter. As I mentioned earlier, we are seeing cost pressures from inflation in addition to our OpEx investments to drive growth. Special items this quarter totaled $583 million related primarily to a non-cash loss reported upon the designation of our EMEA business as held-for-sale and transaction and separation costs, partially offset by a gain on the sale of our ILEC 20-state business. Our fourth quarter 2022 EBITDA margin was 36.7%, down slightly from 37.2% in the year-ago period. Capital expenditures for the fourth quarter of 2022 were $833 million. Additionally, in the fourth quarter of 2022, the company generated free cash flow of $126 million. Our reported net debt was $19.5 billion as of December 31, 2022, and our expected estimated net debt stands at $20.4 billion. Our expected estimated net debt reflects our utilizing cash on hand to settle the tax obligations related to the divestitures we closed in 2022, which totals $900 million to $1 billion. We anticipate paying these taxes during the first half of 2023. Given the investments that Kate identified, we anticipate leverage to rise to between 4 to 4.3x in the near-term. We expect leverage to peak as we approach year-end 2023 and decline thereafter. For the full year 2023, we expect adjusted EBITDA to be in the range of $4.6 billion to $4.8 billion. When bridging to our full year adjusted EBITDA guidance, in addition to the CAF II completion and divested business EBITDA, there are a few other drivers to keep in mind. We estimate that our full year EBITDA will be impacted by approximately $100 million related to incremental inflationary pressures. Combined with dissynergies, we expect a headwind of between $200 million to $250 million this year. We’re actively working to mitigate the impact of these dissynergies. As Kate discussed, over the next couple of years, we will be aggressively investing both OpEx and CapEx to position ourselves for long-term sustained success. The focus of these investments will be to enable growth, improve customer experience and simplify how we operate. These investments will include a number of items such as digitization, ERP, Network as a Service and IT simplification. These growth and optimization investments outlined in our EBITDA guidance waterfall chart are expected to total $150 million to $200 million. Importantly, we expect our revenue and EBITDA to stabilize as we exit 2024 with growth thereafter. Moving to capital spending. For the full year 2023, we expect total capital expenditures in the range of $2.9 billion to $3.1 billion. Growth in optimization investments totaling $250 million to $350 million are included in this guidance. Additionally, we expect to enable an incremental 500,000 Quantum locations in 2023 as we emerge from our project reevaluation. We anticipate a cost per enablement of $1,200 in 2023. Lastly, our capital expenditure guidance includes $35 million to $65 million related to rebuilding efforts in the wake of Hurricane Ian last fall. Moving on to free cash flow. We expect to generate free cash flow in the range of $0 million to $200 million for the full year 2023. In total, our 2023 free cash flow will be impacted by $435 million to $615 million related to our growth and optimization investments as well as the impact of Hurricane Ian recovery efforts. We do not have any required or planned discretionary pension fund contributions in 2023. Additionally, the cash tax is due on the 2022 sale of the ILEC and LATAM businesses, are being paid out of the cash proceeds from those deals and are excluded from our free cash flow guidance. As a reminder, our first quarter typically has seasonally higher expenses related to timing of bonus payments and other prepaid expenses. We expect net cash interest expense in the range of $1.1 billion to $1.2 billion for 2023. In terms of special items for 2023, we expect a significant ramp-up in costs compared to prior years, primarily driven by dedicated third-party costs to support transition services for the divestitures. The reimbursement for these services will be in other income with no material net impact to our cash flows. In closing, we are positioning Lumen for growth. We’re making tangible progress internally, and we’re investing in ourselves over the next 2 years to deliver on our longer-term goals. We look forward to sharing our progress with you as we execute on our plans, and we will provide more detail around those plans and expected financial performance at our Investor Day in New York City on the afternoon of Monday, June 5. So please save that date. More details will follow in the coming months. Thank you. [Operator Instructions] And our first question is from the line of Simon Flannery with Morgan Stanley. Please go ahead. Great. Thank you very much. Kate thanks for all of the positioning of the company and the opportunities. Help us understand the path to revenue and EBITDA stability. I know we’ve got the Analyst Day coming up, but what sort of milestones should we be looking for during 2023 to suggest that things are improving? Do you think there’ll be an inflection in the rate of revenue decline, rate of EBITDA decline? How do we get comfortable that you are on this path to turn this around within a couple of years? And then on the fiber side of things, could you just talk a little bit about how the BEAD program fits into your expectations given you’re kind of sort of less aggressive posture towards Quantum? Is BEAD something that’s interest to you at this moment? Thanks. Sure. Thanks, Simon. So first and foremost, 2023 is a reset year. So we talked about new leadership. We talked about a new mission. We talked about new priorities. And it’s going to take us some time to get rolling. I think we bring a couple of things to the story that we haven’t done before. The first is injecting energy into the growth engine in the form of marketing, in the form of disciplined sales approach at the high end of the market, really an execution focus and mindset with some of the new leaders that I’m bringing in. So I’m excited about that, and I think that we will get some early traction in the form of things like funnel and pipeline. I think that the story of 2-year stabilization is really, as we go into ‘24, we’re going to have sort of the green shoots to show you more explicitly. With respect to your question about BEAD, our projection this year is – or our projection for about 8 million to 12 million enablements in total doesn’t include any BEAD funding. And BEAD is super early. The funds haven’t started flowing yet. So we really don’t know how that story is going to pan out, but it does represent a potential upside to our story. Hi, thank you. Following up first on the enterprise space, the $150 million to $200 million in investment, can you just dig more into that? And how much of that is sort of one-time in terms of new ERP investment versus ongoing costs? And how should we think about the potential for revenue and EBITDA growth in business over a long period of time? If we go back to the underlying market, is this a growing market or is it a shrinking market that you need to take share in? Thanks very much. So great question. Our pivot is about moving from a place of playing defense to offense. Where – I talked about changing mindset to really obsess about customers, that’s about finding new problems and addressing them with both our existing capabilities as well as building a capability to address those problems with net new capabilities, either build, buy or partnering. And if you think about it, customers are dealing with these giant problems, it’s the usual stuff, cost-effective core operations, how do I get my employees to thrive? How do I secure my data and applications? How do I drive business process improvement? How do I innovate for my customers? But they are doing all of that in the hybrid world, which basically hybrid meaning, working from home or working from the locations that have been in place for years. As all of that changes the complexity of their networking solution needs is changing as well, and that represents a huge opportunity for us. But I think we all know that we really need to sort of glide up the stack a bit and really lean into both security and edge in order to drive net new growth on top of that core networking solution set that we have. Chris, do you want to add anything to that? Yes. So – hey, Phil. The – in terms of what the spending is focused on, we talked about it a bit, but we’ve got to digitize more of what we do end to end, so that, that customer experience is more seamless and self-serve wherever possible. We’ve got to continue to simplify and really stop doing some things, automate some things, which will allow us to get it to dissynergies, but makes us easier to do business with. And the ERP is one piece of that. And then beyond that, we’ve obviously got to invest in things that are going to drive growth, things that would allow us to enable network as a service, for example. So really understanding where the network is so that customers can quickly access it and deploy from there. So that’s what’s in there, but none of those things will be complete this year. I referenced in my comments that this is probably a 2-year journey in terms of spend. As it relates to why we think we can get to revenue and EBITDA stabilization by the end of next year, I want to be really clear. That’s based off of the things we have today. So when Kate talked about growth OS, that’s extra. That’s kind of supercharging the growth down the road. But with what we have today, I think we can very accurately say that from a product and sales standpoint, we were not executing as cleanly as we could have. And there is renewed focus. There is a lot more rigor behind the connectivity between product and our selling efforts. And frankly, there is some low-hanging fruit that we can go after. So I’m not going to sit here and tell you that it’s fixed by second half of this year. That’s why we said by the end of next year. But I can tell you that the reason we said that is we’ve got line of sight given what we have in-house today. If I can follow-up and forgive me this – I don’t mean to sound disrespectful at all, but we’ve heard from Lumen and the predecessor companies for 12 years about the new changes and plans and how things are going to turn around. And I know you have an Analyst Day coming up in June, and you’ve only, really, as a team, been together for a little while. Is there anything that’s sort of dramatically changing under the hood that can start to give us some faith that this business is really turning as opposed to what feels like another iteration of things that we’ve heard before? Yes. So I’m here now, and I’m excited to be here now because there is a huge opportunity. And one of the things that I’m bringing to the table is this maniacal focus on execution. And I think that, that’s a really important shift. I think when you think about the pivot to growth, you need to think about Lumen as a collection of companies that was trying to drive synergy from a bunch of mergers, and was inwardly focused on driving operational efficiency. Every dollar of revenue looked good because as a potential contributor to EBITDA, and every dollar of cost take-out look good. But there was no anchoring North Star. There was no customer obsession. There was no really focusing on how do we innovate for growth. And we hadn’t been in a position to invest in our go-to-market engine, everything from marketing to sales and sales support and customer success. And now we are, right? The capital allocation priorities that we set for the company now enable all of that. And the leaders that I’m bringing in from technology, combined with the leaders that are already here at Lumen that really know this business, the combination is going to be incredibly powerful. It’s a really exciting time. Hey, guys. Thank you so much for taking the questions. And Kate, congrats on the new job, and welcome to the mosh pit. So I guess I got a few, if I could. I guess, Chris, you’ve been talking about disrupting legacy declines. If you could be more specific about what that really means? And then Kate, you talked about a priority being radically simplifying. Does that mean that there is more strategic stuff to come in terms of the asset base that we’re looking at inside Lumen today? And if I could ask a third. I apologize. Chris, with respect to the stock buyback of $200 million in the fourth quarter, could you walk us through kind of whose idea that was and how you landed on that being the right choice for allocating capital? Thank you. Yes, sure. So the first question really on kind of how we can disrupt the growth trajectory of legacy products. Look, the historical motion, I think, broadly in telecom is sell things until they die. And hopefully, that new thing, you can sell more of that. What is absent from that is a customer lifetime value mindset. And there is this fear of cannibalization. And I want to be really loud in saying cannibalization is good because if you can keep that customer for longer and you can manage that migration, you’re going to be much better off. So what we’re talking about is aggressively managing end-of-life products, moving customers up the stack. So think about legacy voice, right? Think about things like customers who are nearing the end of a VPN contract who don’t want to renew, but there is IP and ways out there, and we can wrap security around it. So more proactively addressing those migrations and that’s something that hasn’t been a key focus and I think that’s some of the low-hanging fruit I talked about. As it relates to the buyback, look, there was a big change. And you and I have had conversations about it. We’ve had conversations with your peers about it and other investors. It was a tough decision. But it was guided by the fact that the way we solidify Lumen’s performance for all of our stakeholders going forward is by getting back to growth. And so cutting the dividend did that. In the near-term, we knew that there were index funds and other investors who relied on that dividend to have an ownership position in Lumen. And so we bought back stock around the time that those index funds were rebalancing to support the stock through those big shifts. And so that was the thinking in terms of how we manage that in the fourth quarter. And David, do you want to – you asked a question about simplification. Could you repeat it? I didn’t hear some of it. Yes. Kate, the question was within the confines of the – I think, the fourth priority like radical simplification of the business, I think the streamlining of processes and that sort of thing, I think, is kind of one side of the interpretation of what that might look like. Another side might be further asset divestitures, other kinds of strategic types of things and stones that have not been turned over to-date? Thanks. Yes. I mean the two sort of pieces of it, as I discussed, was going to be understanding how we could do fewer things better, I think, is what I said. And with this mindset around simplification of our product portfolio, we’ve had a proliferation of SKUs. And when you think about the proliferation of IT systems through all the mergers to support those SKUs, both sides of the equation, simplification of what we sell as well as how we sell it, that’s the winning formula. So, those were – that was the intention of our remarks. Regarding the overall strategy, I think if you keep coming back to our mission statement, to digitally connect people, data and applications quickly, securely and effortlessly, anything that we do will strategically map directly to that statement. Great. Thanks for taking my questions and echoing the congrats, Kate. My first question is just on what are the larger puts and takes on the range – $200 million range of your guidance that determines the low end and the high end? And then second question is just on the reduction of your Quantum Fiber forecast. I believe I heard it’s been a 500,000 enablement. What’s your comfort level on the fears of third-party overbuilders coming in as you are not building? Is that sort of contemplated in the fact that you have now reduced your overall build from $12 million down to $8 million to $10 million and those third-party overbuilders, it is just coming over build in that territory? Thanks. Hey Greg, it’s Chris. In terms of the guidance range, I would say that the pieces that I spend more time being concerned about are the things, frankly, that are beyond our control, things like the inflationary environment and just the broader macro. So, I would say that’s probably the biggest piece of the variability. I can tell you that the guidance is mapped directly back to things like sales quotas, and the way we pay people for performance has changed as well. So, all of that is designed to drive us to where that guidance is. But it’s really around the things beyond our control that move us to between the high and the low. As it relates to the Quantum piece, I mean I think your point is a valid one, and that’s obviously I think a risk. But – and frankly, I think you can even see it in some of the penetration numbers from 2021. I was very concerned about putting fiber in the ground for the sake of putting fiber in the ground, right. We need to make sure that we remain focused on those large metros that we have talked about and that we stop being so focused on a cost per enablement and on a number of enablements and more around making sure that in those markets that we are serving, that customers are going to want our product. And so I think even though this is a little bit painful in the near-term, we are seeing really good performance on our planning yield, meaning when we plan a market and it goes to engineering and then it comes out of engineering that we have been able to accurately estimate the cost so that we can proceed to construction rather than having to go back to planning all over again. So, we are seeing some really good activities internally. But I would much rather have this conversation today than one 5 years from now, where we hit $1,000, and we hit the 10 million enablements, and then you guys are asking me where the annuity stream is on all that fiber. And my own opinion, our opinion, is that I think you are going to see that from some of the overbuilders in markets that are building for the sake of building rather than really having a returns mindset around it. Great. Thank you. It looks like you are expecting another 10% decline in organic EBITDA this year aside from the impact from dissynergies and inflation and higher investments for growth. Can you provide a little bit more color on the drivers for that organic decline? Does that assume maybe worsening top line trends as we go through the transition, or is it more of a mix shift where growth is coming from lower margin services? Thank you. Yes. Batya, it’s Chris. I think the key thing is we do have that grow bucket which is now the largest bucket. It’s not growing enough, okay. And that’s really where the focus is. So, the reason you see in total organic declines is that we have harvest and nurture buckets that are declining at high-single digit rates. Margin is really not a concern as we move into the grow bucket. We have disclosed that in the presentation. But when you look at our direct margins, it’s actually beneficial to us when we move into the grow products. So, it’s really about managing that migration because we still have roughly two-thirds of the business that’s declining at very high rates and how do we supercharge the grow bucket. So, the starting – the performance itself isn’t where we want it to be, but the starting point is actually pretty strong. We have got a good base there. So, I would say that’s one thing. The second thing is, obviously, we are in a tough macro environment where everybody is being very thoughtful about the money they spend. So, if you think about us doing a reset, we are doing it in a tough environment. So, I think both of those things combined are really what’s driving that. Maybe just a quick follow-up, how should we think about the pacing of that EBITDA decline through the year? Is first half the trough because you have the dissynergies, or is that going to be offset as you ramp up investment for growth? Look, I don’t want to get too scientific around that because we obviously have a lot of variability. For example, in our OpEx quarter-to-quarter, we have higher OpEx in the summer when it’s hotter and we are doing more construction. So, there is a lot of moving pieces in there. I would say the most important thing is that revenue number. And I think over time, we would like to be able to show you guys that the decline rate is slowing. And I think that’s going to be the first leading indicator that we are on our way to growth. And so I don’t want to predict when in the year you start to see that. Again, it’s a 2-year journey until we get to stabilization. But I would watch that over time, and I think that’s the best way to measure our success. Thanks. Good afternoon. Curious if you could share a little bit more detail in terms of what’s happening currently in the sales cycle in the pipeline? And are you entering 2023 with a better backlog, just given some of the announcements that you have had over the past number of months, particularly in the public sector. And then just one other question. On the bridge regarding dissynergies, are those dissynergies isolated to the divestitures, or do those dissynergies encapsulate the decision to separate the operations of mass markets from the business segment? Thanks. Hey Mike, this is Kate. So, to address your question about what’s happening in the enterprise business, the first thing is from a public sector perspective, you are absolutely right. We have a healthy backlog, and we are excited about seeing a lot of that convert this year. Our pipeline continues to be steady and strong. And regarding enterprise decision-making, I think with the macroeconomic environment, we all see sort of more approvals required for purchases of technology. I think that plays right into the pivot that we are making where we need to be great at pitching our value story and how we can help customers address their most existential problems and help them get through those buying cycles. Chris? Yes. And the dissynergies are really around the divestitures. It has nothing to do with ops. So obviously, there is corporate overhead that doesn’t go away when you sell off big chunks of EBITDA. But there is other efficiencies we can get to internally if we can automate some more things going forward. And that’s really where the focus is there on the dissynergies. Now, I will say that as we were talking about dissynergies last year, we actually thought they would be a little bit higher than where we are calling it for this year, and that’s because we have got some other cost savings initiatives going on internally that we think can start to eat away at that. So, that’s good. And one other follow-up, on the net debt leverage, you mentioned it could be 4 to 4.3. Is that the peak through this whole cycle of getting back towards your goal of EBITDA growth, or is there the potential for leverage to go even higher before it goes lower? Yes. That is our estimated peak. And quite frankly, that excludes any assumption on the EMEA deal closing, because right now we are assuming that doesn’t happen until early next year. So, when that closes, obviously, those – given where leverage is, we said that we would – from a capital allocation standpoint, focus on growth and then manage leverage and buybacks dynamically. Obviously, with an exit leverage ratio that high, those proceeds would be focused on debt reduction, and that would bring us back down. But operationally, yes, we would expect that, that leverage is peak as we exit this year because we are doing, obviously, the spending that doesn’t give us all the benefits from that spending until we go forward and then some continued spending next year. But I would not expect it would go above that. Great. Thank you. How long do you think it will take to integrate the IT systems from the past mergers? And will you be integrating or changing any billing systems? That’s my first question. The second question, when you talk about getting rid of some of the businesses that you mentioned and don’t really support the growth, how many of the – how long will that take, given that some of these may still have longer term contractual obligations or regulatory obligations that may be harder to just eliminate? If you can give us some color on that, that would be great. Neither one of these things are overnight stories. With respect to simplifying the IT infrastructure, it’s complex. We have a lens towards customer satisfaction, customer experience, and that’s driving our prioritization and how we actually do the planning as well as what’s the level of difficulty and how much will – how much can we do that will impact things in the short, medium and long-term. So, we are right at the planning stages of building the framework to be able to give you more clarity. The second piece of that was – what was the question? The simplified – doing less and doing it better is the focus, obviously. When we talk about businesses that don’t accrete to the North Star, whenever we have customers, whenever we have revenue, whenever we have EBITDA, we have to be very thoughtful and use a product life cycle framework to evaluate how to move these customers to modern technologies and how to create a great customer experience in doing so, where they can get the benefit of more of our capabilities than maybe some of our partners as well. And that framework is something that is new to our teams in terms of taking a disciplined approach to simplifying and narrowing what we do every day. So, we are right in the early throes of doing that. We are not going to be turning anything on or off overnight without careful consideration. Yes. And Frank, I would only just add one quick thing there because I know you have been at this game a lot longer than Kate or I have, and that there has been a lot of disaster scenarios with billing systems so I want to address that head on. Part of what we are doing is really determining where we want the endpoint to be, because quite frankly, there – in some cases, there is going to be no business case for integrating old billing systems if the products that are supported by those billing systems are maturing out from a product life cycle standpoint. So, in the near-term, it’s really about simplifying what the customer sees, which may not deal with the front end. And then where we can deal with the front end in a seamless way, we will, or we will just migrate to the new thing as we build going forward. So, it’s complicated, as you well know, but we are not blindly running into a billing replacement program. And our next question is from the line of Nick Del Deo with SVB MoffettNathanson. Please go ahead with your question. Hi. Thanks for taking my questions. I have one for Kate and one for Chris. Kate, your predecessor, Jeff, used to emphasize profitable growth and free cash flow per share as kind of the financial measures, he was most focused on. I saw the profitable growth got a mention in the deck. What other financial metrics are you going to be most focused on? And is there anything you need to do to get the organization aligned around them? And for Chris... Yes. And I was going to say then for Chris, with respect to the growth and optimization spending, I think you said it’s a 2-year journey in terms of spend. I don’t want to ask for 2024 guidance, but if we think about that 2-year journey, should we expect heavier spending upfront with sort of a tapering over time, or should we think of that as being relatively even over the course of 2 years? I will jump in first with respect to measurements for success. Look, there are two key measurements for success that we are holding ourselves accountable to in the North Star plan. The first is the ease of doing business for both employees and customers. And by the way, there is a one-to-one correlation between a great customer experience and a great employee experience, right. Making it easier for both is a win-win. It also materially influenced our design criteria around bringing product and technology together because the customer experience becomes the product that we are selling. The second main measurement which I have discussed is really profitable revenue growth. Now that said, that’s at the highest level. We have spent considerable time mapping the KPIs and the measurements, both financial and operational, to our mission statement to digitally connect people, data and applications quickly, securely, effortlessly. Those descriptors quickly, securely effortlessly, there are literally hundreds of metrics that we are going to be thinking about as we transform operations, as we intensify go-to-market, as we build all of the engines to execute for this company in a reliable way. And we have done so for our Business segment, for our Mass Market segment and for corporate as well. So, it’s a complex set. We can shine a little bit more light on that at Investor Day, but we are not short on KPIs for sure. Yes. And as it relates to the spend profile over the next couple of years, I would assume it’s relatively flat from year-to-year. And really, the key thinking behind that, Nick is, there is only so much we can do at once. And I think we are going as fast and as hard as we can. If we could do more now, I would so that we get to the finish line faster. But from an organizational capacity standpoint, particularly given the fact that we are still providing service agreements to the two divestitures last year, we are working on another big one this year, we just got to be careful. So, I would assume that next year, from a CapEx standpoint on those growth initiatives and simplification, it just looks a lot the same as this year. Thanks for taking the question and welcome, Kate, to the team. So, a question on the nurture bucket. We have seen that declining around 7% or 8% the last couple of quarters. And maybe you could help us understand how much of that is due to maybe substitution or cannibalization into other buckets like grow? How much of that you think is maybe more legacy in nature that eventually could churn off? And whether there is an opportunity there to maybe turn that trajectory into a better direction if you can price more aggressively like you have done in some of the harvest buckets? Thank you. Yes. I will take that. So, the harvest bucket declines have been aided, in part, by rerate activity. So, part of what we are doing there is looking at what can we do on cost, what can we do on managing re-rates. That – the benefits of kind of shifting more into growth, I would say, really haven’t started yet. That’s got a lot more life in it as we have gotten into 2023. So, I would say that, that’s yet to come. As it relates to nurture, there is really not been much in the way of rerate activity there. I think that’s something we can do. And nurture is probably the harder of the two because if you think about something like VPN, we have a lot of customers that like the VPN they have or they have recently signed VPN contracts because it meets their need today. It’s really the VPN customers that are more at an end of contract and don’t want to continue with that where we have the opportunity. So, we have got to get a little more clarity around what we think those longer term growth rates can look like. We have an opinion on that. I think it’s a little early to share that, but that’s something we would certainly provide some more color on at the Investor Day. Thanks for squeezing me in and welcome, Kate. If I go back to the deck, can you talk about sort of the updated fiber addressability opportunity, the 8 million to 10 million locations. When that’s complete, that would still represent, I think a little less than half of the locations that are in your landline footprint at this point in time. How are you thinking about managing the portion of the footprint that’s not on the upgrade path? Is there a meaningful amount of revenue and EBITDA coming out of those markets right now? And there is obviously a lot of legacy fixed costs embedded in that area. Is that something you can start taking out now, or is it going to be a little further down the road when you get those savings? Thank you. Yes. I will take that, Brett. The – when you look at our existing footprint, we have obviously still got a lot of areas that are rural. And as we have said, our plans for Quantum are dense urban areas and major metros. And that remains. We are not going to be looking to run fiber to lower density areas because the numbers just don’t make sense. As it relates to those areas, though, they – their overall performance has been more stable than the 20 states that we have sold. So, the performance there has been good. We will manage that very closely for things like rates and costs as time goes on. But at this point, those are assets that are attractive to us, and we will continue to manage them closely. So, I just want to say thank you for the warm welcome for everybody. Thanks for the great questions. And thanks for joining today. I hope you come away with the same level of excitement that I have for this great business. The investments we are going to make over the next couple of years are the right ones to position us for our very, very bright future. And I look forward to sharing more about the journey with you and all of our goals for the next few years when we host our Investor Day in June. And with that, we will end the call. Thank you, Kate. We would like to thank everyone for your participation and using Lumen conferencing service today. This does conclude the conference call. We ask that you please disconnect your lines. Have a great day, everyone.

EarningCall_483

Good afternoon. Thank you for attending today's Pinterest Inc. Fourth Quarter and Fiscal Year 2022 Earnings Conference Call. My name is Hana and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to your host Neil Doshi, Head of Investor Relations. Please go ahead. Good afternoon and thank you for joining us. Welcome to the Pinterest earnings call for the fourth quarter and full year ended December 31, 2022. I'm Neil Doshi, Head of Investor Relations for Pinterest. Joining me today on the call are Bill Ready Pinterest CEO and Todd Morgenfeld, our Chief Financial Officer and head of Business Operations. Now, I'll cover the Safe Harbor. Some of the statements that we make today regarding our performance, operations, and outlook may be considered forward-looking, and such statements involve a number of risks and uncertainties that could cause actual results to differ materially. In addition, our results, trends, and outlook for Q1 2023 and beyond are preliminary and are not an indication of future performance. We are making these forward-looking statements based on information available to us as of today and we disclaim any duty to update them later unless required by law. For more information, please refer to the risk factors discussed in our most recent Forms 10-Q or 10-K filed with the SEC and available on the Investor Relations section of our website. During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP to GAAP measures is included in today's earnings press release and presentation, which we -- are distributed and available to the public through our Investor Relations website located at investor.pinterestinc.com. Lastly, all growth rates discussed in today's prepared remarks should be considered year-over-year unless otherwise specified. Thanks Neil. Hi everyone and thank you for joining our Q4 earnings call. I'm proud of our team's focus and execution over the past year and in particular Q4. We reinvested in our core product experience that led to deepening engagement and a return to user growth. We built and shipped new ad tech and measurement solutions that resulted in improved returns for our advertisers. And we're just getting started. I have strong conviction that we will continue to innovate and deliver value to our users and business partners. We grew global MAUs in Q4 to 450 million, up both sequentially and year-over-year. Our global mobile app users which account for over 80% of our impressions and revenue grew 14% and our US and Canada mobile app users grew 5%, accelerating from last quarter. More importantly, sessions continue to grow significantly faster than users, demonstrating deepening engagement per user as we focus on driving greater per user monetization. In Q4, we delivered revenue of $877 million growing 4% or 6% on a constant currency basis, roughly in line with our mid-single-digit guidance range. Strength came from large US retail advertisers and international markets, excluding the impact of FX as these advertisers leaned into our full funnel platform during the holiday season. However, this strength was partially offset by CPG advertisers, as well as small and mid-market advertisers in the US who faced headwinds from the macroeconomic environment. For the full year we generated revenue of $2.8 billion, growing 9% or 11% on a constant currency basis. We're pleased with our results this quarter despite headwinds from the softening ad market, which Todd will speak to later. We remain confident in our long-term strategy in our ability to execute and drive value for users and advertisers. We're also increasing operational rigor and have taken actions to control costs in Q4. For example, we significantly slowed the pace of hiring such that our headcount was flat quarter-over-quarter. We reduced our infrastructure spend, which declined sequentially, despite strong engagement volume increases, and we closed some of our smaller offices for future cost savings. These actions put us on the path to meaningful EBITDA margin expansion in 2023 and demonstrate our focus on generating strong cash flow. As we build upon the solid foundation we set in 2022, we're laser focused on our four strategic priorities: one, growing monetization and engagement per user; two, integrating shopping into the core of the product experience; three, improving operational rigor and therefore, margin expansion; and four, strengthening our leadership as a positive and brand-safe platform. First, as I mentioned last quarter, we're focused on growing monetization per user. Given the users come to our platform with intent to make, do or shop, we are well positioned to achieve this by deepening user engagement, driving more intent to action and helping advertisers better monetize our supply. On deepening user engagement, we believe that we have a large opportunity to grow the frequency of engagement from episodic users. On top of our 450 million MAUs, hundreds of millions of logged in users come to Pinterest episodically. In 2023, we're pursuing more ways to bring these users back more often and to find the next use case by leveraging our machine learning models and building new experiences for them. We're also continuing the work, we began last year to serve more personalized, relevant and ultimately more engaging content. This effort has already yielded results, including our return to MAU growth and double-digit growth in mobile app users. However, we have more opportunity to leverage the unique first-party signal on our platform. Our users save and organize content to boards and active human curation at scale that is unique to Pinterest. This gives us insights into emerging trends and product associations as well as the ability to assist users when they have intent but have not yet decided what to buy. We're actively working to refresh the Pinterest board experience to make it easier for users to organize their interest, which should yield more and higher-quality signals. This, in turn, enables us to deliver increasingly relevant and timely content recommendations. I'm particularly excited about the work we've done to bring new and emerging demographics onto the platform. In Q4, Gen Z was once again our fastest-growing cohort, growing double digits and accelerating from Q3. We're building an experience that resonates with this audience on Pinterest, specifically around video. In fact, nearly half of all new videos pinned in Q4 were from Gen Z users. And in Q4, Gen Z sessions grew much faster than sessions from our other demographics. As I discussed last quarter, video also drives deeper engagement. We remain focused on growing our supply of videos from multiple sources, including creators, brands and publishers. Last quarter, we grew our supply of video content 30% quarter-over-quarter. And we recently announced a deal with Condé Nast Entertainment to create high-quality video content aligned with Pinterest's key seasonal and cultural moments like fashion months, wedding season, summer and back-to-school. We believe high-quality and inspiring content will further deepen engagement, especially for Gen Z. Monetization per user should also be driven by our ads initiatives. Pinterest is unique because users come to our platform with intent, and we are one of the few places where people can go from seeking inspiration to fulfilling that intent through action. And we've built a full ad solution that helps advertisers meet users in their journey across the funnel from top to middle to bottom. In fact, our revenue is roughly split across the funnel with one-third brand, one-third consideration and one-third conversion. We've seen advertisers who take a full funnel approach see more success than those who are only active on one campaign objective. In 2022, advertisers adopting a multi-objective media strategy saw up to a 50% improvement in sales lift compared to those who use one objective based on our conversion [loss] (ph) study. I believe ads when relevant and personalized can be highly valuable content for users, fostering authentic interactions between brands and consumers. In Q4, we launched ad load management with whole page optimization, which flexes ad load opportunistically in context where ads are most well-suited for the user. In our initial testing, this drove double-digit improvements in ad relevance on search, while simultaneously reducing CPAs for advertisers. We expect the whole page optimization will enable us to continue to improve the efficiency with which we monetize our platform over time. In addition, we continue to improve conversion visibility through our measurement solutions in a privacy centric way to demonstrate the value that Pinterest brings to advertisers. For example, in Q4, we launched our conversion API, and we recently integrated this API with Shopify so that merchants can use our conversion measurement tool. Based on our tests, for advertisers using our conversion API with the Pinterest tag, we found an average of 28% lift in the attributed checkout conversions and 14% improvement in the checkout CPA metric. At CES this January, we announced our new privacy safe clean room solution with LiveRamp and Albertsons. Pinterest's integration with LiveRamp provides a protected third-party space where brands can join the first-party data and Pinterest platform data in a secure, privacy safe environment. Our second strategic goal for 2023 is to lean into the high intent that users express on Pinterest by integrating shopping into the core of the product experience. Based on surveys of our users, over 50% say they view Pinterest as a place to shop. Yet we haven't made it easy for them to shop historically as shoppable content was not integrated into core experiences. In our endeavor to make Pinterest the home of taste based shopping, we're integrating shopping across our most traffic surfaces, including home feed, search and related pins to show users products most relevant to them. Over the long-term, we also want to make every pin shoppable. To that end, we're making video content on Pinterest more actionable using the same playbook we applied to static images. Over the course of this year, we will be deploying our computer vision technology across our video corpus to find products and videos and make them shoppable. To make Pinterest more shoppable, we're creating a more seamless handoff by taking the user directly to the product detail page on the merchant's app. To this effort, we continue to deploy our mobile deep linking format, or MDL, on shopping ads. During the Black Friday, Cyber Monday period, MDL accounted for 40% of our shopping ads revenue, which grew 50% in Q4. People are shopping on Pinterest, and we are helping merchants find end-market consumers. Third, we're driving operational rigor and are committed to delivering value to our shareholders. While 2022 started off as an investment year, we took steps to cut down on costs in this challenging macroeconomic environment starting in early Q3, and we are continuing to find ways to reduce our expenses so that we can meaningfully expand EBITDA margins. As I've said before, I'm a strong believer that constraints breed creativity, and I believe our teams will deliver more compelling products and experiences that set us up for sustainable growth long-term. Furthermore, Todd and I have been evaluating our broad capital allocation strategy, including investing in the business, maintaining flexibility for strategic acquisitions and options for returning capital to shareholders. Given the significant cash balance at Pinterest today, combined with our robust ongoing operating cash flow generation, we're planning to execute a stock buyback program of up to $500 million, which we plan to commence this quarter to help mitigate dilution from stock-based compensation. Todd will go into more details on our buyback program. Finally, one of the biggest differentiators of Pinterest is that we are an inspirational platform and we're intentionally tuning our business to be a positive place on the Internet. Pinterest's mission is to bring everyone the inspiration to create a life they love. And I believe in an online environment that is increasingly full of toxicity, this is more important than ever. Not only does it help our users, but also our advertisers as they look for more brand-safe environments to attract customers. From a user perspective, we've long been investing in being a more positive platform from products like inclusive search to important business decisions like banning political ads because we want our users to be in a positive space for inspiration and action. Users are noticing this investment. We have research confirming the positivity of our platform and emotional benefit to our users that we're planning to release in the coming weeks. We're seeing this sentiment come through with our advertisers as well. Some of our latest research also shows that ads that appear in a more positive environment drive more purchases at every stage of the funnel. We believe that positivity makes people more open to brands, more likely to remember them, and more driven to purchase. As I mentioned in our last call, I value the communication, input, and feedback with the investor and analyst communities. As part of that, we plan to host an Investor Day later this year, and we'll update you in the future on timing and additional details. Finally, as you may have seen in our press release today, Todd Morgenfeld, our CFO and Head of Business Operations, will transition from the company to pursue new career opportunities on July 1st. Todd has been instrumental to Pinterest's growth over the last six-plus years and is committed to ensuring a smooth transition, while we search for a new CFO. I'd like to take a moment to recognize Todd for his dedication to our employees, our Pinners, advertisers, and our shareholders. Todd has made significant contributions to our business over the last six-plus years, including leading the company's IPO process, helping the company navigate the pandemic, advancing our revenue functions, maturing our business operations, and partnering with me when I joined the company last year. So, Todd, we thank you for your partnership and leadership. Everyone at Pinterest will be cheering for you in your future endeavors, and I intend to be cheering the loudest. Thanks Bill. I appreciate the kind words and the partnership. I also want to thank the entire Pinterest team and the Board for the opportunity to contribute over the past six years. I look forward to watching the company continue to innovate, execute, and grow. I'll now discuss our results. In my remarks today, I'll talk about our Q4 financial performance and our preliminary Q1 outlook. All financial metrics except for revenue will be discussed in non-GAAP terms unless otherwise specified. And as a reminder, all comparisons will be discussed on a year-over-year basis unless otherwise noted. In 2022, we made platform-wide innovations that resulted in improving the user experience through more personalized content, showing more relevant products that fit users' tastes and preferences, and delivering increased value to advertisers through ad stack innovation, new measurement solutions, and more seamless handoffs to merchant sites. Even though softening demand lowered ad pricing across the industry, including on our platform, we grew revenue in the fourth quarter. Furthermore, we expect our 2022 investments in our ad stack to help deliver competitive cost per action as the demand environment normalizes in the future. As we continue to innovate on new products like mobile deep linking, whole page optimization and improved measurement solutions, we believe these investments will drive better returns on ad spend for our partners. As Bill mentioned, we remain focused on deepening engagement with our existing and episodic users, which should allow us to grow our revenue per user over time. From Q4 2019 to Q4 2022, our revenue grew at a compound annual growth rate of 30%, while our monthly active users grew at a compound annual growth rate of 10%. Our growth opportunities should continue to be robust as we improve frequency of visitation, make Pinterest more shoppable to satisfy intent to action, deliver more solutions for advertisers and improve the relevance of our advertising to match our users' commercial intent. During the quarter, 450 million global monthly active users came to Pinterest, growing 4% year-over-year and 1% sequentially. We believe that our investments in relevance and personalization are the primary drivers of our return to seasonal growth. In the US and Canada, monthly active users were 95 million, back to year ago levels. As we've noted before, our mobile application users are our most monetizable users and account for over 80% of our total impressions and revenue. Global mobile application monthly active users accelerated to 14% growth, and US and Canada mobile app MAUs accelerated to 5% growth after returning to growth for the first time this year in Q3 of 2022. Furthermore, global and US and Canada sessions grew significantly faster than monthly active users and accelerated from the third quarter. In addition, we saw growth in many of our core verticals as well as some of our emerging verticals like travel, vehicles and men's fashion. Turning to our financial performance. Q4 global revenue of $877 million grew 6% on a constant currency basis or 4% on a reported basis. Strength came from large retailers looking to drive sales during the holiday season, and we had solid growth from our international markets when adjusting for foreign exchange headwinds. There was also resilience in our awareness objective or brand ad spend, as advertisers continue to lean into the brand safety and positivity on Pinterest. Furthermore, some emerging verticals, including automotive, travel and financial services, posted strong revenue growth. While we saw pockets of resilience from some CPG advertisers, many of our CPG partners and our US mid-market and SMB advertisers continue to face some challenges stemming from the current macro climate. In terms of revenue by region, US and Canada revenue was $722 million, an increase of 5%. Total revenue from Europe was $123 million, growing 5% on a constant currency basis but declining 7% on a reported basis due to foreign exchange headwinds. Total revenue from our Rest of World region was $32 million, growing 33% on a constant currency basis and 26% on a reported basis. Turning to our EBITDA and expense profile. Adjusted EBITDA was $196 million in Q4 with an adjusted EBITDA margin of 22%. This EBITDA figure includes several actions we took in the fourth quarter that we believe will reduce our expense profile for 2023 and beyond. Most notably, this included a realignment of our resources against our shopping strategy as well as reductions to our recruiting staff and closures of some of our smaller and less utilized office spaces. Collectively, these actions accounted for about two percentage points of EBITDA margin. I'd also like to provide more color on how these actions impacted some of our expenses. Total operating expenses were $508 million, up 17% quarter-over-quarter. If you adjust for the costs associated with the actions I described during Q4, our operating expenses grew 13% quarter-over-quarter, in line with our guidance. These costs were spread across sales and marketing and G&A. More specifically, our sales and marketing expenses grew 29% quarter-over-quarter. The actions I referenced accounted for approximately five points of that growth, while our brand marketing campaign that I've referenced on past calls drove the vast majority of the rest of the growth. G&A expenses grew 25% quarter-over-quarter. Over 80% of that growth was driven by the actions I previously mentioned, as well as increased taxes and bad debt expense. Excluding all of these items, our G&A would have grown 4% sequentially. Finally, we ended the quarter with approximately $2.7 billion in cash, cash equivalents and marketable securities. As we look ahead, while the macroeconomic environment remains volatile and we're experiencing softer advertiser demand, we want to share our best judgment around our guide based on the signals we have today. For Q1, we expect revenue to grow in the low single-digit percentage range year-over-year. Quarter-to-date, our revenue growth is trending nearly in line with our reported revenue growth from Q4. However, similar to last quarter, we believe the error bars are a bit wider given the volatility in the market. Our guide includes about one to two points of foreign exchange headwind, and we also expect headwinds to persist from our US small and medium business and mid-market advertisers as they continue to face outsized challenges in this macro environment. While we've made significant progress in opening up more monetizable supply and reducing cost per action, these advertisers remain price-sensitive. For the first quarter non-GAAP operating expense, we expect a sequential decline in the low double-digit percentage range. First, we're not planning to invest in a brand marketing campaign in the first quarter as we did in the fourth quarter. Second, the net impact of the actions we took in Q4 and to date in Q1 related to expense reductions are reflected in the guidance. While these actions resulted in additional costs within these quarters, we believe they will contribute to our full year goal of returning to margin expansion. As you think about our operating expense cadence through the year, you should expect a meaningful deceleration each quarter and year-over-year growth in OpEx, especially as we move into the second half of the year as we will be lapping the significant investment in hiring we made into the business in the first half of 2022. On monthly active users, as you know, we generally do not provide guidance. We are encouraged that our investments in relevance and personalization brought us back to top line MAU growth, and we're focusing on deepening engagement within our core and episodic users. As Bill mentioned earlier, we're focused on providing long-term shareholder value, including through our capital allocation strategy. Our Board of Directors has authorized a share repurchase program of up to $500 million. We plan to commence repurchasing shares this quarter, and we intend to complete the program over the following 12 months. We believe it's important to have equity as a portion of our overall compensation program as it fosters an ownership culture with our employees, and this share repurchase program will help offset the dilutive impact of this equity compensation. Our repurchase program is in addition to an operating -- operational approach to mitigate dilution that we implemented in the second quarter of last year called Net Settlement, under which we, as a company, hold back shares to cover the taxes on employees vested RSUs, where the company pays for the taxes from our own cash reserve on behalf of the employees. Net Settlement could amount to a use of cash of approximately $275 million in 2023, depending on a variety of factors, including the stock price and the number of grants that vest through the year. Finally, I want to thank our teams of interest, our advertising partners, and all of the people that come to Pinterest to find inspiration. And with that, we can open it up for questions. Thank you so much for taking the questions. Maybe two, if I can. And first, Todd, congratulations on future endeavors. I'm sure we'll probably have one more earnings call together, but just wishing you best of luck in future endeavors. Maybe on the first question, obviously, visibility remains low in the overall advertising environment. Can you give us your perspective on how you're managing through that sort of low visibility that you're seeing right now versus managing towards building what you want to build on the advertising side for the long-term and how we should expect the interplay of those factors in the coming quarters? And then second, as we exit 2022, and you guys sprinkled a lot of this into your prepared remarks, but how should we think about what the top priorities are for investment into 2023 and how, again, that maybe plays back against sort of the broader growth environment that you're seeing? Thanks so much. Thanks Eric. So, if I step back and sort of address your questions on the broader landscape and sort of where we are in progressing along our objectives there, first, I'd say, while 4% to 6% revenue growth typically wouldn't be something to write home about, we're actually outperforming compared to a lot of our peers. And we believe we're gaining share, especially with our larger and most sophisticated advertisers, where we're gaining more share of wallet. So, as we talked about, we have huge growth potential in front of us, and I'll try to frame out that potential. So, when I came to Pinterest two quarters ago, analysts and investors had a few questions. Could we regain share with our core user base after the pandemic unwind? Could we compete in a world of more short-form video? And could we build a monetization engine at scale? After a little over six months, I'm more confident than ever that we can do all of the above, and we're focusing our investments in employing operational discipline across the organization to get there. So, on the first question, can we return to user growth? Yes. We've returned to year-over-year MAU growth. And better than that, we're seeing double-digit growth in our most monetizable and stickiest mobile app MAUs. And we're also seeing that our engagement overall is growing double-digit percentages. So, we feel really good about the growing sessions and the fact that sessions are growing even faster than users, and that growth is accelerating. In fact, in our 10-K, which will be filed today, you'll see that our weekly active to monthly active user ratio is at its highest level ever at 61%. That's clear evidence that we're deepening engagement as we've been talking about for the last couple of quarters and finding really good success there. Second, we can compete in a world where our peers -- the second question was, can we compete in a world where our peers are all in on short-form video? And I think we're answering that question with a clear yes as well, but doing it on our own terms. Our supply of content is growing. Video content is up 30% quarter-on-quarter. We're finding more efficient ways to get engaging content on Pinterest, serve the needs of our Pinners from inspiration to action. And importantly, while we're seeing more than 10% of our engagement is on video, it's more than 30% of our revenue that is on short-form video. So when we think about monetizing that short-form video, which I think has been an open question broadly, we're seeing really good success in the monetization of short-form video, which I think is unique and stands out. And so further to that point, the question of can we build a monetization engine at scale, absolutely. I couldn't be more excited about the advancements we've made in our ad stack and how that's allowed us to grow monetizable supply north of 15%, higher than overall engagement gains because of tech innovation like whole page optimization, which opportunistically increases ad load when a consumer is in a shopping mode or has a commercial intent. We're building solutions to help advertisers measure results on our platform like our conversion API and our new clean room solution. And while we're early in the adoption curve on those measurement capabilities and those new tools for advertisers, we're seeing that our best share gains, our best growth is coming from the discerning advertisers that are implementing those tools and the more they see visibility into our performance. The more we see that, that performance is clear and I think that bodes well for our future as more and more of those advertisers adopt those tools from us. So while we remain in a demand-challenged environment, I think the improvements we've made to deliver advertiser value are paying off. I think that's why you see us growing faster than many in the peer set. And while demand doesn't flip overnight, we think the setup that we have of deepening engagement, the supply on our platform growing even faster than the deepening engagement with innovations like whole page optimization are making sure we have really great relevance of those ads and allowing us to serve more relevant ads in commercial context, that, coupled with the progress we're making on measurement tools and the performance we're seeing there early in that adoption curve with discerning advertisers, we think all that sets us up really well for the medium to long-term, even as we're fighting through a lot of choppiness in the near-term, just as everybody else is. And then one final point. I think, Eric, you also asked about top priorities. I think I addressed many of these in the call, so I won't belabor those. But I think on each of these points, while we have really great progress, we continue to proceed forward on those. I talked about making sure that we're making our -- all of our core experience as shoppable as well as driving further improvements to engagement and our ad stack. We think we're early in those journeys. We're going to have really good proof points. Those continue to be our priorities. And then finally, the operational rigor, where we've implemented a program around operational rigor, we're seeing good results from that. And importantly, even as we're implementing more operational rigor, we're seeing really good product innovation. And so the comments I've made multiple times around constraints leading to creativity, we're seeing that in action. And we feel really good about the progress on that. Thank you. Hey. Just following up on the prior question on priorities and investment levels. So Todd, if revenue -- I know we don't have a ton of visibility, but let's just say low single digits is what we see in the first half and then it improves to something higher than that in the second half of the year, what kind of margin expansion might we see based on the planned investment levels that you talked about for 2023? And then the second question, Bill, you guys have talked about using an ad partnership idea as a supplement to your direct ad sales, where you bring in demand from some of these retail media networks and DSPs and other third parties. So could you just talk a little bit more about timing and magnitude of something like this? It didn't come up on that prior checklist. So is that more of a 2024 event? And then how do you -- if you do implement that, balance the partnership idea with direct ad sales? Thanks a lot. Yes. Thanks a lot. I'll hit your second question first then give it to Todd to hit your first question. So we definitely think about sourcing ad demand as an opportunity for us. Our first priority is always going to be our direct sales and the partnerships that we're driving there. And we feel really good about the progress that our sales team is making on that and how we're winning with those advertisers that have implemented our latest tools and the most sophisticated and discerning advertisers seeing our performance be the strongest. We feel really good about that first-party selling motion. But we do believe there's an opportunity to augment our demand with third parties. And you mentioned one of those that we've done already around Retail Media Networks. We think there's a lot more opportunity in those. And we also think that leveraging third-party demand has been an underutilized lever here, particularly compared to other platforms. And so that is something that we will continue to explore. While no specific updates on specific deals or specific partners or those kinds of things, I do think that is something that we'll look to take more action on. We're already taking action on it with Retail Media Networks and something that we'll look to continue taking action on more in the near-term. It is not something that I'd put into 2024. It's something that we're actively exploring. And again, no specific updates or specific announcements on what we do there. But we are very much looking at that as a meaningful opportunity in the near-term versus something that would be relegated to the medium or long-term. And Ross, on your margin question, not to be too basic about it, but in a world where we have a volatile demand picture and some uncertainty on the year, generally from a top line perspective, we know revenue needs to outgrow costs. We talked about meaningful margin expansion a few quarters ago, and that's something we're still committed to and understand the levers that are needed to get there. Ideally, we can grow as the demand environment hopefully normalizes given all the factors that Bill describes. Deepening engagement, that strategy is working. We've opened up more monetizable supply at lower prices. We've built tools, including whole page optimization and mobile deep linking to better utilize that monetizable supply. And our measurement tools are proving that those ads are working better and better. So I'm confident that we'll -- as the demand picture normalizes, we'll see some upside from a revenue perspective. But we also know that there's another part of this equation that's on the cost side. And from a gross margin perspective, you saw in this current quarter that our cost of revenue declined quarter-over-quarter after meaningful expansion through the year. That's a product of more discipline from an infrastructure standpoint and hope to continue to invest in further optimizations through the year, which creates a little bit more headroom for OpEx. And as Bill mentioned, we slowed hiring pretty significantly in the summer of last year. We took some actions in the fourth quarter. We've taken more actions already, and we continue to evaluate other levers, including things like our real estate portfolio, to make sure we're on track to deliver that margin expansion. If I'm in your shoes thinking about modeling how the year will unfold, you probably can sense from my guide that year-over-year OpEx growth for the first quarter is a huge step down from the year-over-year growth that we posted in the fourth quarter on OpEx. You'll see another meaningful step down and further step down as the year unfolds because we're lapping in each of the four quarters because we're lapping a lot of headcount-related investments that we made in the first half of last year. And then we're lapping a lot of our brand and marketing campaigns in the back half of the year, including some creator rewards programs, which we would dial back and are discretionary. When you think about that from a modeling perspective, that means that we would be able to post much, much, much reduced OpEx growth through the course of the year that should support even low levels of revenue growth, driving margin expansion. Operator, next question. Thanks for taking my questions. I have two. The first one, you've made a lot of progress around users and sessions and engagement. I was just wondering if you have any stats to share at all about clicks to advertisers, interaction with advertisers or anything on transaction? I know it's early, but just any way you can quantify sort of some of the early progress you're making on your users engaging more with your advertisers? And the second one, Bill, I guess, if you sort of look at your user behavior as well as the key merchants and inventory you're putting on the platform, what are sort of two or three of the most important verticals in e-commerce that you think are going to really catalyze the advertising growth to materially faster growth over the course of the year into next year? Thanks. Maybe on the first question, on the progress we're seeing there, I mentioned in my remarks, shopping ad is growing 50% year-on-year as well as not only solving for shopping, but giving easier conversions, easier ability for the user to connect with the place to buy through our mobile deep linking capabilities. And so I shared how significant the percentage of revenue from shopping apps is coming from mobile deep linking. I think that is an early indicator of just how much we can do not only to make more of our content shoppable, but also our ability to drive that full funnel engagement where we've historically been much stronger at the upper and mid-funnel. But at the lower end of that funnel, we're seeing that low-funnel conversion objective being about a third of our revenue overall in things like mobile deep linking, which we have not had that adopted across the board, but the early adopters of that have seen really strong performance. So, I mentioned that part of what gives me a lot of confidence in our future is much of our performance is coming from early adoption of new conversion tools like -- or new measurement tools like our conversion API and new capabilities like mobile deep linking that right now have been adopted by a smaller set of our larger, more sophisticated advertisers. As we move along that adoption curve, I think that bodes well for how we can compete more broadly, particularly on shopping-type actions, conversion objectives, and these lower-funnel objectives. So, those are really good early indicators that as we move on the adoption curve, I feel quite good about. You asked also about which categories we think of. Shopping is pretty broad based on our platform. There are some obvious ones that you would think about, women's fashion and apparel and those kinds of things that are definitely places where we have very large engagement, significant opportunity. We have other large moment engagement, things like weddings and home redesigns and these kinds of things that are meaningful user behaviors as well. We have some really interesting emerging behavior also. Todd mentioned growth in things like autos and men's fashion, Gen Z being our fastest-growing demographic. So we feel like shopping is a broad-based opportunity. While there are some categories that we will lean into first, we see it as quite broad-based, probably more broad-based than many may appreciate on our platform. Todd, I don't know anything you would add to that? Yes. I mean, I think there's a different way of cutting it too. I think everything Bill said is absolutely right. The other way of thinking about it is just in terms of these joint business partnerships that we signed. So if you cut the market by large versus small as opposed to category of retail or category of shopping marketplace, we've seen -- I think I talked about it a couple of quarters ago that we saw 25% growth in joint business partnerships first half of 2022 versus first half of 2021. And we talked at the time about how that was a source of confidence in that the ad stack and the experience, the full funnel model here was working for the largest, most sophisticated advertisers. We ended the year up 27% year-over-year on joint business partnerships. So we saw that tick up. And so from the standpoint of what Bill was describing, some of the largest, most sophisticated specialty e-commerce and specialty retailers are seeing great success on the platform. And that expands from brand through consideration, through purchase behavior. So really high confidence in success being driven by some of these larger players through the cycle where there's been a lot more resilience. Hi. Thanks for taking the question. Bill, how should we think about your comments around time spent in deepening engagement. I mean, is there -- I know you're only reporting sort of -- you sort of give us overview metrics, like you haven't gotten to DAU yet. But it does feel like -- I mean, is that the metric that you're sort of solving for is to get people to be using Pinterest on a daily basis? And like you made these comments about sort of Gen Z and video. And I'm curious if a user touches video Pin, do they end up spending a lot more time on Pinterest, if they create X number of boards? Like I guess what I'm trying to understand is what the unlock it gets someone to spend meaningfully more time? Is it engaging with video, creating a board? Like what have you learned since you sort of took over Pinterest? Because I guess we're all trying to understand, like what are you solving for that ends up leading to a far more engaged user who comes back -- I guess I'm sort of curious, like is the goal daily, every few hours, every week? Like what are you trying to solve for? I know that's a long-winded question. Yes. Thanks for the question, Rich. As I mentioned in my remarks earlier, we think there's a huge opportunity in moving Pinterest users from episodic usage to more frequent usage. And certainly, when you think about something like shopping as a behavior, those become the kinds of use cases that can be more daily-type use cases versus monthly or quarterly use cases. And so a lot of the progress you've seen from us over the last multiple quarters has been around using good AI and machine learning to get better recommendations, better personalization and using that to provide better recommendations to our users. And we think there's a lot more opportunity to use those nudges to the user to help them find new use cases on Pinterest. And we've got some really good early evidence of that. Again, it's our personalization and the AI capabilities behind that are a lot of what's been driving our improvements in engagement. But yes, we want to move people from episodic use cases to things that are weekly and daily use cases. And again, we feel like we're well on our way there. We are by no means done. But to see things like engagement sessions and multiple measures of engagement at 10%-plus, we feel really great about that. I think the other thing that I mentioned this before, underscore gains, I think it's a big unlock, which is the work that we've done around whole page optimization and demonstrating that ads can be valuable content to the user. If you think about the levers of growth in the businesses, yes, we're going to grow MAUs. But more than that, there's so much what I would call leaked engagement from the platform, where somebody couldn't satisfy their intent here and monetization would occur someplace else. So as we get more and more ability to take action on the things that people are already finding here that's plugging a lot of leaked engagement, a lot of leaked monetization, but then also give the use of reasons to want to come back to us more and then our ability to monetize that as we've made progress with whole page optimization that we launched in Q4. What that's really showing is that in those commercial context, we can actually serve a lot more ads, a lot more relevant ads in ways that are good for the user, helps them satisfy their intent and very highly monetizable for us. So I think that makes me feel really good about our long-term prospects is that we have multiple levers of growth there, like yes, getting from episodic to more monthly, weekly, daily usage, but then within that, playing a lot of that leaked engagement, playing a lot of that leaked monetization and actually being able to bring much more ad load and much more relevant ad load to the platform than what we've had historically. So that's how I think about the way that unfolds over time. And while we've had good early indicators, we are at the very beginning of the potential from that. And I think there's -- if you thought about our monetization on these commercial interactions, I think we're at a fraction of the ad load that you would see in a lot of other places that have these highly commercial intents. So there's a lot more we can do there. We've set the foundation for how we can dynamically take that ad load up in a way that's good for the user, good for the advertiser. That's a foundation that will allow us to grow quite a bit more. And actually tying back into the questions around third-party demand, one of the things you need to do first before you bring in more demand is make sure you've got the supply to be able to serve that demand. With our supply growing -- engagement is growing faster than users, supply is growing faster than engagement, we now very clearly have the supply and the ability to go serve that ad content in a way that's relevant and helpful to the user that we think lets us unlock a lot more potential in the ad platform going forward. The only other thing I would add on that, so we -- I've had an aspiration -- over the last few years, you may think back to the IPO, we talked about bringing people back to Pinterest for more things in their life, because we know that that drives stickiness with our user base. We invested a lot in personalization and relevance last year because we wanted to address deepening engagement. You've seen the results of that this quarter with growing MAUs, our mobile application user growth at 14% globally, up 5% year-over-year in the US and Canada. Bill referenced the weekly to monthly active user ratio at an all-time high, sessions growing faster than all of the above. So, the deepening engagement story is working because we were investing heavily in personalization and relevance. You saw that in the financials because our gross margin and cost of revenue climbed last year. Why did it climb? It climbed because we built 100 times the size of our machine learning models last year to power that experience based on unique first-party signal. We're now seeing the results of that in the engagement figures, and that gives us a different foundation on which to deliver new use cases to our users going forward. Operator, next question. Great. Thanks and good afternoon everybody. Maybe first, just as a follow-up on the comments around the episodic users. I know this is in early stages, but what's sort of the time frame you'd expect where we could see an acceleration in MAUs above sort of the seasonal trends? I think, Todd, you talked about that you saw in Q4. And then secondly, regarding features like Watch and Pinterest TV, which you're gaining more visibility on the app, curious how these are impacting monetization or ARPU? Bill, I think you mentioned a stat around video and the portion of monetization growth. So, I didn't quite catch exactly what that was, though. Thanks. Great. Thanks Colin. So, on the shift from episodic to more frequent usage, I think you're seeing some of that reflected already. The progress we've made, as Todd and I both mentioned, around greater personalization, giving you just more reasons to come back, I think that's part of why we're seeing engagement grow much faster than MAUs overall. You asked about a timeframe for MAUs to move beyond seasonal. Again, I would point to focus more towards the overall engagement and the revenue per user rather than MAUs. As I mentioned in my prepared remarks, we have hundreds of millions of users that come to Pinterest that are not in our MAU count that come to us on an episodic basis. And so we're much more focused on how do we drive deeper engagement with the users we have. You can imagine we have a very good view as to where those other users are, which ones monetize well. If we wanted to chase MAUs as a vanity metric, we will chase it as a vanity metric, but they may not be the users that would monetize the best or where we need to go defend our platform the most. And so we're much more focused on deepening the engagement with the users that are in places where we know we need to compete most and where we also have the best monetization opportunity. And so I'd point your attention more towards the accelerating engagement and the accelerating revenue per user on where we go there. And on video, and especially the monetization around video, I think this is a place -- it's one of the most exciting things that I've seen in our work here is that -- prior to my joining Pinterest, a -- I think a commonly held viewpoint on short-form video that I held as well was that the engagement is fantastic. But do the unit economics actually work? Can you make money off of it in a way that more than outstrips the significant increase in the expense was very much an open question? And to say that we have more than 10% of our engagement on video, but more than 30% of our revenue on video, I think, just puts us in a very different place than many others in terms of having found that right balance of how to monetize short-form video and make sure that's driving both engagement and monetization. And we think there's a lot more we can do there. Because we're a lean-forward platform rather than an entertainment platform, the lean-forward nature of our platform, we think we have a lot of license from users to do much more with short-form video. So a question I've been posing to the team is in the same way that images existed on the web before Pinterest, that Pinterest brought new utilities to those images, short-form video has existed independent of Pinterest. But we believe we can bring utility to those short-form videos in ways that others may not, and others may not have user license to do because they have the user in a lean-back entertainment mode. We have the user in a lean-forward intent mode, where we think shoppable content and these kinds of things can be much more well received by our users. And so that's a big part of what comes next for us is that we're looking at how we make video shoppable. We have a really great strength in our team on computer vision. There's lots of talk about AI and how it's advancing. One of the most exciting areas of the next generation of AI is around computer vision. And that's a core competency for us. And so we're using computer vision to make video more shoppable, and some really good early results there. So our new core computer vision model that has over 1 billion-plus parameters has led to an 8% increase in visual search shopping relevance. So these are the kinds of things that we think we can do -- that we think we're already doing quite well in the balance of how to benefit from short-form video, driving gate from that but monetize it well, and we think there's a lot more to come there. I hope that helps. Hey, thanks. When you talk about sessions growing faster than users, can you provide a little bit more color on that? Is that users are spending more sessions, more time within the current categories that they're interested in? Or is there any -- is there evidence that they're starting to look across different categories? That's one question. Then the second one, just in terms of -- you talked about meaningful margin expansion in 2023. I know in the past, you talked about non-GAAP OpEx growth in fiscal 2023 would be slower than in 2022. So I'm sort of hoping you could qualitatively or quantitatively talk a little bit more about what fiscal 2023 looks like. And does meaningful margin expansion mean a couple of hundred bps of EBITDA margin expansion? Anything else there would be really helpful. Thank you. Thanks, Mark. So a couple of things. We -- when we say sessions, we're looking at what we consider to be a meaningful engagement with the platform. So you're not just coming here and bouncing, but you're on for more than a minute in general. And so those are quality engagements largely from people on mobile application – mobile app and even more impressions and revenue opportunity from those sessions than what we have seen from kind of our web-based users historically. We've seen good engagement across a number of verticals, some of our core verticals. But we've also seen, as I mentioned in my script, that there are some areas where we're seeing some cross-fertilization into some new areas. So I'm highly encouraged. In fact, one of the things I called out was men's fashion, which may come as a surprise to some on the call. We're actually seeing some of that use case diversification into things like automotive, travel, which is something we started calling out as people went out and about post-COVID. And so to answer your question, yes, we're seeing some use case diversification not only across our core verticals, but also into some emerging ones, which gives us a lot of confidence in the next journey toward use case diversification. On the non-GAAP margin, we had said a couple of quarters ago that we thought that could be around a couple of hundred basis points of margin improvement, and we're committed to delivering that. It's going to take us stepping down from where we were in the fourth quarter meaningfully in terms of year-over-year growth. I think the year-over-year OpEx growth implied by my low double-digit sequential decline is probably in the low 20s on a year-over-year basis versus 40% growth from Q4. You should expect another big step down in the second quarter, another big step down in the third quarter and another big step down in the fourth quarter. So when you do the math on what that implies for the year, it's not just a little deceleration from this year. It's a complete reset. Thank you. Two questions, if I can. First, just going back to that earlier comments around, partnerships around monetization with the likes of Retail Media Networks or other DSPs. How much do you guys see that as an opportunity around like billing in ad coverage on certain categories, helping monetize new geographies or even just on a pure pricing? Like do you think you benchmark so low that using other platforms can drive up pricing? Anything you can share there would be helpful. And then going back to the notion that you monetize, I think you said video is 30% of monetization, 10% of engagement. Appreciate some of the color you've already shared. But is that SKU brand? Or is that also kind of match your overall DR mix? Are you selling those ads or media partners, in some cases, selling ads on that content? Like -- or is it just a function of the ad creative working where you just get a higher click-through rate on those ads? Like anything you can share there to help us understand that better would be great. Thanks. All right. Thanks for the question. So on partnerships, I mean, I think each of the dimensions you mentioned are part of the opportunity. If you use the platform, you can see that there's an opportunity for us to drive increased ad relevance. I feel really great about the progress our sales team has made. But as a smaller platform, even really large, really dense auctions will augment their demand with third-party sources. And so as a smaller player, as great as our sales team has done in driving first-party ad demand, which we are absolutely committed to continuing to do, it's a real asset. We're going to continue to invest in that. If even the largest auctions benefit from augmenting demand with third-party sources, certainly, we can as well. And in doing that, that should give you greater relevance. I think I made the comment earlier around the foundation we've laid with whole page optimization. That sets us up to think about in an integrated way how we bring ads to the user in a way where those ads are relevant content, which we think is -- has a two-fold benefit. One is drive engagement when it truly is -- particularly in a commercial context where that ad could be relevant content for the user. But then secondarily, it lets us serve more ads and take our ad load up from where it's been. And our ad loads has previously been a fraction of what you would expect in other places with the kind of commercial intent that we have. So, ad coverage, increasing relevancy, ad load, these are things that will naturally improve with us over time. But as we think about the benefits potentially of augment third-party sources, retail gate networks or otherwise, we think that's an opportunity, geographies can be an opportunity. And then your final point on pricing, I think -- one of the things that I think is hard to overstate and the progress we've made here is that the whole industry is going through a rewiring on ad measurement and moving from cookies to privacy safe ad measurement solutions. So, while the whole industry is going through that rewiring, we are -- we've provided our conversion API. We've launched our cleanroom efforts. And our early indications there are really positive, but we are very early on that adoption curve. And as we think we move along that adoption curve, we think we actually are performing far better than many advertisers realize far better than what they've been able to measure. And so bringing that greater measurement is a real opportunity. Those are things that we're absolutely going to do first party, but those are also things that as we think about the potential for partnership across the industry, there's multiple different ways that, that can play out. And you've seen us talk about some of those already, like what we did in our cleanroom efforts with LiveRamp and Albertsons. And we think we'll have more of those kinds of opportunities going forward that will help with measurement, and therefore, also help with pricing as advertisers have better visibility into the value we're creating for them. And then on your other question on video, we're kind of not breaking it down quite to the level of specificity that you're asking for. But we're seeing good broad-based engagement on video. I'll give it to Todd, if there's anything more you want to share about video generally. No, I would say we -- in general that it tends to be more of an awareness opportunity. That's kind of where it started. We have built performance video and have seen decent returns there. But I think the opportunity going forward is, as Bill has talked about before, building a real full funnel video advertising experience, it takes people through conversion. I think there's a unique opportunity given the shopping mindset where more than half of the people come to Pinterest to shop. Video advertising can take you through the full funnel in a super compelling way. So, I'm excited about the opportunity there.

EarningCall_484

Greetings. Welcome to the Simon Property Group Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. Thank you, Sammy. Good evening from Atlanta. Thank you for joining us this evening. Presenting on today's call is David Simon, Chairman, Chief Executive Officer and President. Also on the call are Brian McDade, Chief Financial Officer; and Adam Reuille, Chief Accounting Officer. A quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. Our conference call this morning, this afternoon will be limited to 1 hour. For those who would like to participate in the question-and-answer session, we ask that you please respect our request to limit yourself to 1 question. Good evening from Phipps Plaza, where we recently completed our transformation, including a new office building, a new Nobu Hotel and a Life Time resort. I'm pleased to report our fourth quarter and full year results. We generated approximately $4.5 billion in FFO in 2022 or $11.95 per share. On a comparable basis, full year FFO per share was $11.87, an increase of 3.8% year-over-year. We returned approximately $2.8 billion to shareholders in dividends and shares. And total dividends today paid since our IPO now totals approximately $39 billion. We invested approximately $1 billion, including accretive development projects and expanding our other investment platform into the growing asset and investment management businesses with our Jamestown partnership. These consistent strong results are testament to the quality of our portfolio, a relentless focus on operational and cost structure, disciplined capital allocation and our team's commitment to our shoppers and communities. Fourth quarter funds from operations were $1.27 billion or $3.40 per share. Included in the fourth quarter results was a net gain of $0.25 per share, principally from the sale of our interest in the Eddie Bauer licensing JV in exchange for additional equity ownership in Authentic Brands Group, Authentic. We now own 12% of Authentic valued at approximately $1.5 billion. Let me walk through some variances for this quarter compared to Q4 of 2021. Our domestic operations had a very good quarter and contributed $0.23 of growth, driven primarily by higher rental income and with some lower operating expenses. These positive contributions were partially offset by higher interest expense of $0.03 at a $0.15 lower contribution from our other platform investments. 2021 was a great year for our retailers. However, in 2022, Forever 21 and JCPenney were affected by inflationary pressures and consumers reducing their spend. Despite not achieving the same profitability that we did in 2021, we are pleased on how we and the management teams dealt with the unanticipated external environment. Turning to domestic property NOI. We increased 5.8% year-over-year for the quarter and 4.8% for the year. Portfolio NOI, which includes our international properties at constant currency grew 6.3% for the quarter and 5.7% for the year. Occupancy for malls and outlets at the end of the fourth quarter was 94.9%, an increase of 150 basis points compared to prior year and an increase of 40 basis points sequentially. Renewals occupancy was 98.2%, and TRG was 94.5%. For the year, we signed 4,100 leases for more than 14 million square feet. Over 2 years, we've now signed 8,000 leases for more than 29 million square feet, and we have a significant number of leases in our pipeline that will open for a late 2023 and 2024 openings. Reported retailer sales momentum continued. We reached another record in the fourth quarter at $753 per square foot with the malls and outlets combined, an increase of 6% year-over-year. All platforms achieved record sales levels, including the mills, it's $679 per square foot which was a 5% increase. TRG was $1,095 per square foot, an 11% increase, and our occupancy at the end of the fourth quarter was 12%. We opened a new development in 2022, our 10th premium outlet in Japan. Construction continues, our new outlet in Normandy, France, west of Paris. This will be our second outlet in France and our 35th international outlet. Our international outlet platform is a hidden jewel for SPG. As a frame of reference, it is bigger and much more profitable with much higher sales per square foot than another public company's portfolio. We completed 14 redevelopments, and we will complete another major redevelopment project this year at some of our most productive properties. In addition, we expect to begin construction this year on 6 to 8 mixed-use projects. All of this will be funded with our internally generated cash flow. Now turning to other platform investments in the fourth quarter, it contributed $0.23 per share in FFO compared to $0.38 in the prior year period. For the year, OPI contributed $0.64 in FFO compared to $1.07 in the prior year. We are pleased with the contribution from our OPI investments, especially given our de minimis cash investment we've made in these companies. Turning to the balance sheet. We completed refinancing on 20 property mortgages for a total of $2.3 billion at an average interest rate of 5.33%. Our A-rated balance sheet is as strong as ever. Our fixed coverage ratio is 4.8x, and we ended the year with approximately $7.8 billion of liquidity. In 2022, we paid approximately $2.6 billion of common stock dividends in cash. We announced $1.80 per share this quarter, which is a 9% increase over the same period last year. The dividend is payable at the end of March -- at the end of this quarter, on March 31. We also repurchased 1.8 million shares of our common stock at an average purchase price of $98.57 in 2022. Moving on to '23. Our comparable FFO guidance is $11.70 to $11.95 per share. Our guidance reflects the following assumptions: domestic property NOI growth of at least 2%; increased interest expense compared to 2022 of approximately $0.30 to $0.35 per share, reflecting current market interest rates on both fixed and variable debt assumptions; similar OPI investment contribution, FFO contribution compared to 2022; the continuing impact of the strong U.S. dollar versus the euro and the yen; no significant acquisition or disposition activity; and a diluted share count of approximately 374 million shares. To conclude, we had another excellent year, effectively navigating external headwinds that included rising interest rates, strong U.S. dollars, inflation and a somewhat softening economy. We have consistently posted industry-leading results through our hard work, innovation, great people and great assets, and we are -- continue to be excited about our plans for 2023. If you come to Atlanta, you will see what we're doing, and it's a great example of the future growth prospects of our company. And will now allow for Q&A. Great. Just starting with the guidance of at least 2% sort of organic growth next year, obviously, occupancy is already back to 95%. Just a little bit more color on that. How much of that is occupancy gain? How much of that is rent bumps? Well, I think it's all the above. It's rent bumps, it's occupancy gains. We still -- and this is very important to underscore. We still have a lot of openings scheduled for the latter half of '23 and the early part of '24. So we're not going to see the full contribution of those tenants open until essentially really a run rate at '24, I'd say, sometime in '24. Now you ask why? Well, because we have a high-quality group of retailers opening in these, and it takes a while to build out their quality stores. But it's occupancy gains, it's rental -- it's spread increases. It's a reduction in our temporary tenant income because we're leasing space permanently. And it's basically assuming that -- a lot goes into this, but it's basically assuming relatively flat sales. Now if you remember last year, we said up to 2%. This year, we obviously blew past it. It was total for the domestic properties at clearly 5%, roughly 5%, 4.8%. So we're hopeful we'll do better. But again, we still have to make assumptions and that's why we like where we're at. I guess as you think about your other platform investments and some of the monetizations that you talked about with Authentic Brands, how do you sort of think about those on a go-forward basis against maybe making new investments in new retailers that may be struggling at this time? Well, we have a unique relations, relationship with Authentic. That's a very important partnership, so to speak, both as a big shareholder, but also we're 50% owners together, 50% for us, 50% for Authentic in SPARC. And we have a different ownership structure with JCPenney. We don't really have any plans to -- for SPARC to buy additional retailers. We're very opportunistic on that. We had a very busy year last year with Reebok, where SPARC became the operating -- domestic operating partner for Reebok. More -- a very complicated deal. As you remember, we've had -- depressed earnings. We mentioned that to you early last year, that it did depress earnings because we had -- we knew we had some losses to occur this year. So hopefully, we'll be past that this year. But we really don't have any plans to acquire anything. If we do, it will be opportunistically. And just to -- we really -- we've done our -- most of our work has been with -- on the bankruptcy front or where somebody wanted to unload a business. And -- but generally, there's not a lot of distress in retail right now. I'm not saying it won't develop in the year. But there are some brands out there that are in trouble that obviously people know about. But we don't see playing in any of those situations. Can we get a more granular update on Phipps Plaza? The repositioning has been open for, I'd say most, or at least part of 4Q. So I guess how is it tracking versus plan? What changes in traffic are you seeing? Or any notable change of in-line rents? Any dates would be appreciated. And then I guess lastly, the project seems to have increased your plan for accelerating some other mixed-use endeavors, I guess, with Jamestown, any more information would be helpful. Yes. So it really just opened. So the hotel opened at the end of October, November, but it's really new. The office -- literally, the first tenant just moved in January, mid-January. We just did a tour of that. We still have a lot of lease up. Just to give you a rough number, pre-investment, Phipps stood in the low 20s of NOI. We think it will be stabilized close to 60. And we'll have invested around $350 million in it over that period of time. So again, we don't -- we're a big company. We don't really get into like granular detail, but we basically increased the NOI by about $35 million. Remember, this was a Belk department store. So in the Belk department store, we couldn't lease up that wing. We now have a plaza that has been created external. We announced Hermès opening into the Plaza and part of the wing that really was difficult to lease with Belk as the anchor. We have an unbelievable Life Time resort. If you haven't seen what they build or their product, both with Life Time Work, the pool and the restaurants and the services and the salon and, obviously, all the fitness activities, I'd encourage you to do so. And we have a Class A plus office, the best in Buckhead that just opened. So again, low 20, 60, $350 million investment is the math. Now again, we're doing -- and you mentioned Jamestown. Jamestown investment is in the investment and asset management business. So these mixed-use developments that I mentioned in my call text, the 6 to 8, we're doing all of those with -- by ourselves or with partners that we've used before. So that really isn't with Jamestown. Again, we looked at the Jamestown relationship, future endeavors that we can do together or in partnership, but we're very active in building out our platform now. And Seattle as an example, we're about to start a residence in a hotel, which finally got approved, and that's going to start construction. We can go through the list. But all that, Simon Property Group owned just like Phipps, which we own 100% of. Nobu, we own, obviously. The Life Time it was a lease and then the office building we own, too, which is all 100% owned asset. And then the true lease up of Phipps, again, which goes back to the -- my earlier comment on the NOI. The true lease-up effects because you have -- you see Malone and some of the high-end brands building out their stores, it's not a 3-month build. It's, in many cases, 9 months to a year. The true offering that Phipps will have will really show in '24 when all of these retailers open the stores. So Christian Louboutin, Hermès and AKRIS and on and on. But most of those will either open late '23 or '24, and that's when Phipps really will be finished. These things don't just -- you don't just flip a switch and it opens. So that gives you a sense of it. So a question on the retailer brand portfolio and your equity stake in Authentic Brands. You guys have a headwind -- sorry, not a headwind. You guys have a fluctuating contribution from the retailers just based on their actual sales, right? Because it's not rents, it's based on sales. Yet I'm assuming you get some sort of recurring cash flow from the intellectual property that you own in Authentic Brands, managing the brands and all that. So I'm just trying to understand, as you guys sell more of the brand equity and exchange it for a bigger stake of Authentic Brands, how does your income mix switch from being solely sales-dependent to being more consistent, whether it's managing or other sorts of more regular fee income versus volatility from however many jeans or shorts are sold in a given quarter? All right. You're introducing -- I'll take you through a tutorial because I like you, Alex, so here we go. SPARC operates the domestic business of the brands Lucky, Aéropostale, Forever 21, [Eddie Bauer], okay, Brooks Brothers, et cetera. It license the brands from Authentic and it pays a royalty fee to Authentic, and then we, and our partner, Authentic, and it pays rent to landlords, including Simon that will pay rent to -- Forever 21 could be in a Vornado property. In fact, it is in Times Square pays rent to Steve Roth and Vornado. And that business has operating profit. And we share in that 50-50 with Authentic. So we actually, now that we converted and exchanged our license, that we own together. Now we have historically done the license business on a JV basis. We've decided over time to exchange that into stock of Authentic. And that's why we were not a shareholder in Authentic, but eventually it become a 12% shareholder in Authentic through the exchange of our interest in the JV license business, for stock into Authentic. Authentic is a big company. It does $1 billion of revenue, close thereabouts. But it owns the license of many, many brands beyond SPARC. It owns its partnership with David Beckham and its partnership with Shaquille, Elvis Presley, Juicy Couture and on down the list. You can Google it, it will give you all the names, so. But SPARC is essentially the retail operating company. So when you think of SPARC, you should think of it similar to any other retailer like American Eagle or anybody else that operates stores, operate e-commerce, et cetera, it does wholesale. The only difference it pays a royalty to Authentic. It does not pay a royalty to Simon Property Group. So the only vagaries that Simon Property Group has is, in fact, what the operating profits of SPARC are. And in the case of '21 versus '22, the big difference was essentially Forever 21 because that teenage consumer obviously cut back with the rapid increase in gas prices and inflation and the uncertain economic environment. So I know we're not allowed, but can we let Alex -- I'm asking Tom Ward, who's the police of the call, can we ask Alex if he understands this? Okay, Alex. do you understand it? Was I perfectly clear? So if I take away what you're saying, SPG lives really on the retail sales and performance, your 12% stake in AB doesn't generate any fees to you? So again, the focus is really the earnings derived purely from sales, there's not any sort of recurring. Well, I mean, it's more than -- sure, sales are important, but there's gross margin. They also sell wholesale, okay? So Brooks Brothers does have wholesale accounts. So it's more -- but it generates EBITDA basically through running the business, which includes stores, e-commerce, wholesale, and certain other ventures. Authentic, because we equity account, they're a very profitable company with high gross margins. It's an asset-light company, essentially. We take our share of earnings from them, net income because they are a taxpayer, et cetera. But together, all of those businesses, SPARC, RGG, which is our partnership with Michael Rubin, who owns Fanatics, and Authentic, all of that rolls through OPI. And OPI contributed $0.64 out of $11.87. So it's in that range, to give you a sense. So $0.64 out of $11.85. So -- but that -- hopefully, that helps explain it. Could you provide some color on leasing economics and how those are trending in the current macro environment? Just given current NOI guidance is about 2%, which is lower than average contractual bumps and there should be some occupancy upside, this just seems to imply leasing economics aren't great. But I know it's contrary to what you said on recent calls. So can you just help me better understand kind of the dynamics at play here with guidance and maybe where leasing economics are right now? Yes. Look, I would say we have positive spreads across the portfolio in renewals and in new leases versus existing leases for new fixed. And again, we also had operating spend increase because we're not immune to security cost increases, housekeeping, all of that normal operating expenses. To some extent, our fixed and bumps don't cover that. We're also projecting flat sales. And we have these cases when we're adding great retailers and great restaurants to our portfolio, we have to take out the tenant that was, in many cases, temporary, you have to take that out. And you basically have 9 months of downtime where you have no income for it. Now like we did last time, Vince, we said up to 2%. We did 4.8%. I'm hoping to do better. But those are basically the determinants. And that's why we said better than 2%. But we have some operating expense increases, real estate taxes, unbelievably continue even though we're the goose that continues to lay the golden eggs for all of the communities in which we operate, our taxes continue to go up. While we have operating expenses that go up with inflationary pressures, we had downtime. We had flat sales, and we lose temporary income while we're retending and going to physical, whether we're going to permanent income. All of that's great news, but our rent spreads are positive. Renewals are positive. And we -- and that's been the difference. And obviously, we'll throw COVID out. But even the trend prior to COVID, renewals were under customers, you know, Vince. Just one follow-up. Like is variable lease income -- do you expect that to continue to trend down just as you unwind maybe some COVID lease modifications? Or how should we think about that part of the puzzle to going forward? We have budgeted it basically down slightly because, number one is the extent that a tenant renews the lease, we're getting some of that overage into the base rent. If you remember out of bankruptcy, Forever 21 pays basically percentage rent to all of its landlords, us included. It had a tough year last year, as I mentioned earlier. And we're budgeting basically flat this year. So there's a lot that goes on that kind of -- you've got to again separate between overage and percent rent. There are always retailers that do well, some that slow down. We're pretty good at anticipating who's going to be great, who's not. But we're not the ones -- other than Forever 21, we're not the ones putting the stuff in the stores itself, okay? Forever 21, you can blame it on us, okay? So I hope that helps. David, just you had mentioned Forever 21, JCPenney's managed some inflationary headwinds in their business. I'm just kind of curious, with your purview through SPARC and other investments, just how you think the retailers, that your investors and maybe other tenants that people have concerns about or talked about in the news, are positioned heading into '23 from a gross margin management perspective and just balance sheet. And how much risk you see in this current environment versus maybe the kind of the headline fees that are in the market. Right now, we feel really good about our retailers. I think they were very focused on entering '23 with good, clean inventories. We feel like most of them have managed that. I asked my leasing folks all the time any pullback on demand. It's not really happened. So we feel good about that. Demand continues to be generally very strong. And I think they really -- because of the bounce back out of COVID really got the benefit of kind of getting their house in order. So I think on the credit side, we're feeling very comfortable, right, Brian? Yes? Yes. Watch list has been lower in years. The tenant community rebuilt its financial position during COVID and is coming out of it in a much better place. So nothing yet. Obviously, you've got a couple of big names out there, but we really have very little exposure to them. And in some cases, we'd like most of them are boxed and also in strip centers. So the ones that were -- that we have and we like the box at, we think we can do something better with them. So I'd say generally, knock on wood, I think credit side is pretty good and demand is good. On the other hand, after Christmas, most had a really good January. And again, I think the mistake we made, Simon Property Group made is that -- again, SPARC was profitable even with -- even though even it didn't meet the financial results of what -- and again, we shouldn't dwell on this too much because again, $0.64 out of $11.87, $0.64 out of $11.87. But it's important just so we'll do a little vehicle, but we made the mistake that thinking '21 -- we budgeted basically flat to '21. And '21 was for a couple of the brands there, just extraordinarily profitable. We made some tactical mistakes in Forever 21. We brought in a new CEO to rectify those mistakes. She's doing a terrific job. So we're very pleased there. We also are very pleased with JCPenney. It's unbelievably profitable EBITDA. You can see the EBITDA. There are some public filings out there. But it is -- it didn't have the '21 year of '21, but we're very pleased at where that company is positioned. And we're extremely pleased with the management team and all that they're doing to reinvigorate the brand. And we're taking a different tack than others that have managed or owned that brand. We're actually reinvesting in that company to make it very important for those communities. So very pleased with how we're positioning Penney. But it had EBITDA -- I don't know if I can disclose it, but it had a lot of EBITDA, okay? So and our partner, Brookfield, we'll let Brookfield take -- we'll let Brookfield announce it if they do their -- I'm kidding. So we're very pleased there with the brands. But we did make the mistake of thinking '21 would repeat. And then obviously, you had a lot of volatility from a macro point in '22 with huge increases in interest rates, huge increase in price, in food and energy cost that the consumer was whipsawed, and we felt the impact of it. It's stabilized now, we believe. Given the China reopening, I wonder if you could outline how these visitors would impact your coastal premium outlets and your dominant coastal malls. Well, I think we haven't seen the benefit. But just walking we -- I mean I don't want to get into the kind of the geopolitics of what's going on. But we're -- we think there's a real benefit to our landmark assets that have always been shopped by the Chinese consumer or the Asian consumer. We're starting to see that a little bit, but we're not planning for that to really accelerate in '23 but we're hopeful that it will. David, you had talked last quarter, actually, in response to a question I asked about recovering back to 2019 levels of same-property NOI, which we reckon to be about $6.2 billion. But obviously, that includes -- that does not include some of your retailer investments. But depending on how you slice it, I'm just trying to do the math here, but you're at least $200 million short, even if you include those retailer investments. If you can walk us through -- that would imply that you would get to around 3.7% NOI growth to get back to those levels. So you're clearly not guiding to that yet. You're guiding to 2%. But what are the headwinds, if you will? Floris, I think you can -- you really should just focus on domestic. To put the retailers in there, there's too much volatility. It's not something we look to -- we're focused on are domestic property NOI to get back to 2019 numbers before we were shut down by the pandemic. The short answer is we will get there on a run rate by the end of this year. That's the short answer. And you shouldn't put the retailer NOI in there. It's, again, that's -- you've got to remember, we have basically no cash investment in SPARC. So -- and I know we could talk about it all day, but it's -- when you think about Simon Property Group, we want you to think about those investments as it gets with purchase, okay? We get this great property company that owns all those real estate that's redeveloping it, great balance sheet, the ability to make smart investments with an unbelievable return on investment outside its core business. And that's what you get with a seasoned team that's experienced from recession to credit prices to a shutdown in a pandemic, okay? And we managed it through it all. So the bottom line is our domestic property NOI, because of the delay in some of these openings, we will get back on a same property basis. Because remember, the other thing for us, we have properties in and out. So you can't go back in '19, the portfolio is different. But if you do the same portfolio that we own today versus the same portfolio that we own in '19, possible we'll be there by the end of this year, okay? And that would -- and David, that includes -- the $6.2 billion was included your stake in Taubman as well. But I'm just curious because... No. We're not including Taubman in it. This is just the domestic property NOI. So we're not even including our international NOI. So what we can give you the mill, if you combine the mills, outlets and malls, domestic portfolio that we owned in '19 and that we still own in '22, we will get there on a run rate by the end of this year. As simple as that we're not that far off, but we have delayed openings. And depending on where sales come in, it's even possible we make it this year. And that's the way to look at it. And that's the only way to look at it, really. I don't disagree. If I can -- the S&L pipeline, has that changed from the last quarter as well? You mentioned some of your spaces opening later in '23 and then '24, obviously, that has the potential to impact your NOI growth going forward by 5% to 7% depending on the rent that you signed, plus your fixed rent bumps. The math that we have suggests that 2% is -- it's the extreme low side of what's probably going to happen over the next 2 to 3 years. Yes. I mean certainly, if you look at it over that period of time, call to way outperform -- and again, I just go back to last year. We try to be as thoughtful in doing this, but there are variabilities to it, overage rent being the biggest. But we also have some certain inflationary pressures that we, as landlords and property owners, have to deal with, what I mentioned earlier. And again, you have downtime. But we -- I would hope that we would beat our number just like we did last year. And just like we have historically. In the past, you've talked about 80% of the NOI being generated by the top 50% of the properties. Does this remain true? And can you talk about the demand trends and pricing power that you have in the top half of the portfolio relative to the bottom half? It's more than 50%. So I'd say demand across the board is good. Obviously, the higher end property probably has more demand. And -- but we're generally -- our leases still, to this day, occupancy cost is low and our rent spreads across the board are generally positive regardless of the sales front. Just a quick one. For your platform investment FFO forecast, are you expecting any significant nonrecurring costs like you had in the 2022 results? I was hoping maybe you could share some thoughts on deploying capital in the current macro. We noticed you didn't buy back any stock in the fourth quarter. So I guess I'm curious what your level of interest and stock buybacks is here today. And second, I know you mentioned that there's no sizable acquisitions or dispositions in the guide. But I'm curious what your view of the transaction market for malls is, at least today. Clearly, things are still a bit stalled across the board, but there have been a few trades in California the last couple of months. So curious what you think of those trades and if there are any pricing read-throughs. Well, I think we're generally pleased that we're seeing some activity in our sector. And it's great that there's others out there that are -- real estate industries that are trying to grow externally. As an example, what was today that was announced. It's good to see we're not the only ones that like to make things happen externally. So that's good. I think our strategy has been essentially confirmed by others, other players in our industry where size and economies of scale see the benefits. So it's always good to see. We saw it in the warehousing world, and we saw it in the -- now we might see in the storage world. So it's great that we see that. From a stock buyback, I think our dividend is really where we're focused growing that. One of the thing I mentioned, hopefully, in my conference text that you heard was we paid out $39 billion in dividends, staggering number when you put it in perspective. That does not include any stock buyback, that's just pure dividends. I'd say that's the, obviously, the focus. But if the stock comes under pressure, we still have the ability to deal with that. So that is in our arsenal. I'd say generally, relatively quiet on the acquisition front. We did create our partnership with Jamestown, which we're focused on this year and, obviously, the years to come to grow that relationship. But we've got a lot going on and the capital to continue to create external opportunities. And we've been -- we haven't batted 1,000, but we've certainly moved the needle profitably with our investments and creating unbelievable return on investment, both in the real estate -- still one of the best deals ever done in real estate was our deal on premium outlets, which I'm happy to walk through the math not today. But still one of the best multiple deals ever been in our industry. And at that time, we were widely criticized for it. But one of the best deals done in the public company space. Got it. Got it. And I appreciate that. But it sounds like at a high level, not putting words in your mouth, that the focus of your capital investing today is going to be more the redev, less the stock buybacks, less the acquisitions. Question, just a follow-up maybe on the FFO guide itself. I appreciate some of the headwinds, the unknowns, the OpEx, the interest expense, et cetera, but I'm trying to get a sense of what else might be limiting the FFO growth this year, which is basically flat year-over-year versus the 2%, at least. Yes, it's really simple. It's interest rate. We're losing roughly $0.30 to $0.35 per share just from either floating rate debt that's now higher or our own assumptions of what our refinancing costs are going to be. The good news is we're refinancing all of our debt. The market is there. but the cost of debt is higher. So that's really if you cut through it all, that's -- and when you look at kind of where the market was, very few analysts updated their numbers at all for higher interest rates. But they -- I don't have to tell you they ballooned over the last 12 months. No, I appreciate that. I wanted to get a bit of clarity, though, perhaps on bad debt. How are you thinking about that this year within the guide, FX headwinds, maybe at least? Yes. I think we got to open it up a little higher. We have a little higher bad debt expense budgeted this year than last year. Just hoping for a little color on expected CapEx spend just in general for maintenance and then the development spend that we should be budgeting, and what kind of returns or NOI contributions we should be thinking about on the dev readouts stopped -- that would flow through into '23 as we model. I will look at our 8-K because the development spend will add to that. But obviously, when you start a real estate project, it's over a, 2-year sometimes 3-year process. So all that's disclosed in the 8-K. And the CapEx, including TA, will probably be roughly with what it was '22, if not a little bit less, okay? Regarding the large number of stores opening in late '23 and early '24, what's that expected NOI contribution in GLA, which you attributed to these leases that are signed but not yet been paying? On NOI or -- I guess NOI. Okay. And then is there any contribution expectation from the Jamestown investment? And then if you could talk about like Klépierre that's built into guidance as well. That would be appreciated. That all in Jamestown is accretive, but it wasn't a big investment. So -- and so it's in our budget, but it's not really -- the relationship is material, but the financial impact is not material. So that's one. Klépierre, we -- it is consistent with their guidance that they'll be developing when they announced their earnings this -- in the next couple of weeks. Hope to have a quick one here. So when I look at your 2023 lease expirations, your portfolio still has about 10.5% expiring, which hasn't really budged in the past couple of quarters. I remember from the last call, you said these things can take time, especially with larger national accounts. So I was just curious if you can share an update and how we should mentally think about a realistic set of outcomes here. Well, it's -- listen, we're negotiating for the benefit of our shareholders. They're negotiating for the benefit of their shareholders. And a lot of these things we have, what I'll say, handshakes and it's the process of being [tapered]. So you should feel good that there's no smoking gun. There's nothing there that's going to lead to a fall out. It's just a process. And renewals are going We're, in fact, ahead of our '23 renewals now compared to where we were last year, some of the '22s -- and in some cases, because '22 took so long, we're doing '23s, so together and it's a process. But it's going well and relationships are progressing appropriately. Okay. And just one quick one. Where should we expect your portfolio occupancy to end up by end of this year? '23, slightly up, slightly up. I don't have the number but Brian will have it for you later. Okay, last one, I guess. We're over 6:00, but we have one more question and one to finish the Q&A. On the guidance, the range you provided based on comparable FFO per share in the coming quarters when you have a better sense of mark-to-market gains or losses, will you also show guidance for estimated diluted per share for the full year like you did in prior quarters? And we have reached the end of the question-and-answer session. I'll now turn the call back over to David Simon for closing remarks. Thank you. And again, I'm sure there are a lot more detailed questions. Please call Brian and Tom, and we'll be happy to walk you through more details. Thank you.

EarningCall_485

Good morning, everyone, and welcome to Encompass Health's fourth quarter 2022 earnings conference call. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. Thank you, operator, and good morning, everyone. Thank you for joining Encompass Health's fourth quarter 2022 earnings call. Before we begin, if you do not already have a copy, the fourth quarter earnings release, supplemental information, and related Form 8-K filed with the SEC, are available on our website at encompasshealth.com. On Page 2 of the supplemental information, you will find the Safe Harbor statements, which are also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks and uncertainties, like those relating to regulatory developments, as well as volume, bad debt, and labor cost trends that could cause actual results to differ materially from our projections, estimates, and expectations, are discussed in the company's SEC filings, including the company's earnings release and related Form 8-K, the Form 10-K for year ended December 31, 2022, when filed. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance, and other forward-looking information presented, which are based on current estimates of future events, and speak only as of today. We do not undertake a duty to update these forward-looking statements. Our supplemental information and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of the supplemental information, at the end of the earnings release, and as part of the Form 8-K filed yesterday with the SEC, all of which are available on our website. I would like to remind everyone that we will adhere to the one question and one follow-up question rule, to allow everyone to submit a question. If you have additional questions, please feel free to put yourself back in the queue. Thank you, and good morning, everyone. Fourth quarter was a very strong finish to 2022, driving our full year results to the top end of our guidance range. Patient volume remained a particular bright spot, with Q4 discharge growth of 7.3%, contributing to a full year discharge growth of 6.8%. Continued vigilance on labor management, and a solid contribution from our 2022 de novos, facilitated Q4 year-over-year adjusted EBITDA growth of 16.4%. For fiscal year 2022, we were able to overcome an increase of approximately $70 million in contract labor and sign-on and shift bonuses, $16 million in net pre-opening and new store ramp up costs at our de novos, and double-digit second half inflation in food and utility costs, to generate a year-over-year increase in adjusted EBITDA. And we did so while continuing to strengthen our competitive position. We invested nearly $600 million in CapEx in our business in 2022. This includes upgrades to many of our legacy hospitals, in many instances reducing or eliminating semi-private rooms and shared bathrooms, as well as building replacement hospitals in two key strategic markets, Huntsville, Alabama, and Tustin, California. We also continued to invest in our facility-based technology through initiatives like our Tableau onsite dialysis rollout. We now offer in-house dialysis in 41 of our hospitals, and will continue the rollout in 2023. Reducing our reliance on third party providers in obviating patient transport to receive this service, leads to fewer disruptions to therapy schedules, and improved patient outcomes and satisfaction. It also reduces our cost for these services. A central element of our strategy is investing in capacity expansions to meet the needs of a significantly underpenetrated and growing market for inpatient rehabilitative services. In 2022, we opened nine de novo hospitals, the most ever in a single year for us. These facilities exceeded our expectations by contributing $4 million in four-wall EBITDA in Q4. We also added 87 beds to existing facilities, leading to a net 4.4 increase in licensed beds in 2022. As we've mentioned previously, we are increasingly utilizing prefabrication alternatives to contain design and construction costs and increase our speed to market. Our use of prefabrication has progressed from head walls to bathrooms to exterior walls, and in 2022, Uber modules, which are two-patient rooms adjoined by a corridor. We anticipate piloting full hospital prefabrication beginning in Q3 of this year, with anticipated cost savings of almost 15%, and speed to market gains of 25%, as compared to conventional construction once the program is fully ramped. We complimented these investments in our business with the return of nearly $100 million to our shareholders through the cash dividend on our common stock. The strength and consistency of our free cashflow generation, allowed us to fund these investments and shareholder distributions, primarily with internally-generated funds. Our leverage in Q4 was 3.4 times, unchanged from Q3, and our liquidity remained strong. Evidenced by our strong consistent discharge growth, our value proposition continues to resonate across our constituencies. Within our payer mix, we further consolidated the gains made, with Medicare Advantage achieving 4.1% discharge growth in 2022. Our Q4 same-store Medicare Advantage discharges, were 41% higher than Q4 of 2019. The normalization of patient flows through healthcare, facilitated 8.6% discharge growth, and Medicare fee-for-service. We do believe that Q4 volumes benefited from early and aggressive flu season as well. None of this success has been accomplished without more than 30,000 dedicated associates. The past three years have been complicated, with a lingering pandemic, tightening labor market, burgeoning inflation, and the strategic alternatives view for our home health and hospice business. Our team has consistently arisen to meet these challenges and to seize opportunities. Our value proposition, and our operating strategy, have been further validated, and we remain highly optimistic about the long-term prospects of our business. As is our custom, today we are also providing our initial guidance for 2023. Our revenue guidance reflects our expectations of continued high single digit growth, driven this year by both volume and pricing gains. We also expect solid adjusted EBITDA growth. Given continued uncertainty around the trajectory of further labor cost improvements and the impact of inflation elsewhere in our cost structure, we believe it is prudent to exercise some caution in establishing our initial guidance range. Our 2023 guidance includes, revenue of $4.68 billion to $4.76 billion, adjusted EBITDA of $860 million to $900 million, and adjusted EPS of $2.87 to $3.16. A list of considerations underpinning these guidance ranges can be found on Page 13 of the supplemental slides. I also want to note that we are planning to host an Investor Day in New York City on September 27 of 2023. At that meeting, we'll provide more detailed insight into key elements of our strategy, including de novo hospitals, clinical technologies, and labor management. We'll also provide investors with the opportunity to hear from an array of our teammates within the senior management ranks. Please mark your calendars for September 27. Details will follow in the days ahead, and we hope to see you there. Thank you, Mark, and good morning, everyone. As Mark stated, we are very pleased with our Q4 results. Revenue for the quarter increased 9.1% over the prior year to $1.14 billion, and adjusted EBITDA increased 16.4% to $232.7 million. We continued to see strong volume growth in Q4. Discharges grew 7.3%, which combined with a 2.2% increase in revenue per discharge, to drive 9.6% inpatient revenue growth. On a same-store basis, discharges grew 4.2%. For the full year 2022, discharges increased 6.8%, and that was on top of 8.7% growth in 2021. In 2021, when the clinical labor market began tightening, and contract labor and shift bonuses started to rise, we made the strategic decision to continue to admit appropriate patients regardless of the financial burden to our company. This allowed our hospitals to provide value to our patients, referral sources, and payers. As a result, we are experiencing gains in market share. We made further progress on reducing labor costs in Q4. Our Q4 contract labor, plus sign-on and shift bonuses of $35.4 million, was comprised of $19.7 million in contract labor, and 1$5.7 million in sign-on and shift bonuses. Contract labor expense in Q4 declined approximately $5.1 million or 20.6% from Q3, $10.3 million or 34.3% from Q4 2021, and $22.2 million or 53% from the peak in Q1 2022. We experienced sequential declines in contract labor expense and FTEs for every month in Q4, and in fact, for every month since last March. Contract labor FTEs for December were 325 compared to 749 in March. Our contract labor expense is fairly concentrated, with approximately 50% of the spend occurring in 20 hospitals. Agency rates ticked up in Q4 versus Q3. This was due in part to the premium pay associated with holiday shifts. The Q4 agency rate for FTE was $211,000, compared to $205,000 in Q3. Agency rates remain market-specific and highly variable. Reducing contract labor expense remains a key focus for us, and we expect year-over-year improvement in 2023, albeit with some uncertainty around the trajectory of these costs. Our December contract Labor FTEs of 325 was in the range of 300 to 350 we had estimated in our Q3 earnings call as an exit level for 2022. The seasonality of our business and capacity growth via new hospital openings and bed expansions, may lead to some incremental needs for contract labor FTEs. Sign-on and shift bonuses decreased $8.5 million sequentially to $15.7 million in Q4, from $24.2 million in Q3. This represents a decline of $5.7 million from Q4 of ‘21. Sign-on bonuses declined by approximately $700,000 from Q3. Much of the Q4 sign-on bonus spend was tied to new hires in Q3 and prior. We saw an approximately $8 million decline in shift bonuses sequentially. You'll recall that in Q3, shift bonuses were elevated to cover periods of unexpectedly high clinical staff PTO usage during the summer. We have also made significant progress standardizing the process around shift bonus utilization and rate. We expect year-over-year improvement in sign-on and shift bonuses in 2023 as well, but there remains a tradeoff between our utilization of these bonuses and our objectives for reducing contract labor FTEs. Specifically, shift bonuses paid to existing associates, and sign-on bonuses paid to new hires, provide a positive arbitrage against current contract labor rates. As such, we expect the year-over-year improvement in sign-on and shift bonuses in 2023, to be less pronounced than the anticipated improvement in contract labor. Our efforts in hiring and retaining clinical staff remain our best option for mitigating contract labor and shift bonuses. For the full year of 2022, we had net same-store RN hires of 427. As we have discussed previously, we have made significant investments in our in-house recruiting capabilities. This includes the establishment of a centralized recruiting function and a significant expansion of dedicated resources. Our centralized talent acquisition team is now comprised of 73 associates. We have also increased our investment in marketing support for our recruiting efforts. As a result, recruiting and relocation cost in Q4 increased to $7.8 million from $3.2 million in Q4 ’21. And for the full year 2022, this investment increased to $24.5 million, as compared to $12.7 million in 2021. These expenses are included in our other operating expenses. Food cost per patient day increased 15.9% from Q4 2021, and 0.7% from Q3 2022. Utilities cost per patient day increased 16.1% from Q4 ’21, and declined 11% from Q3 of ‘22. Sequential decline in utilities cost per patient day was primarily attributable to seasonal weather patterns. We anticipate continued inflationary pressures in the first half of 2023, before lapping the larger increases in the second half of the year. Our de novo and bed addition strategy continues to generate solid growth and contribute to share gains. Our de novos performed exceptionally well in Q4, contributing $4.2 million in adjusted EBITDA. Recall that we had expected the de novos to break even in the fourth quarter after experiencing administrative delays in openings and hurricane-related disruptions in Q3. Much of the overachievement in Q4 was attributable to our Naples and Cape Coral de novos, which rebounded from Hurricane Ian much faster than anticipated. We plan to open eight new hospitals in 2023 and add approximately 80 to 100 beds to existing hospitals. Three de novos totaling 149 beds are scheduled to open in March, with an additional 50-bed hospital scheduled to open in April. As such, a significant portion of the estimated $10 million to $12 million in net pre-opening and ramp-up costs for 2023, is expected to be incurred in the first quarter. As you may have noted on Page 18 of our supplemental materials, we have changed our expectation for annual bed additions from a range of 100 to 150 to a range of 80 to 120. There are two reasons for this revision. First, we have been increasing the initial bed count in our de novos. The average number of initial beds in our de novos opened in 2018 through 2020, was 42. That average increased to 44 for the 2021 de novos, and 46 for the 2022 class. The average number of beds in the de novos we expect to open from 2023 through 2025, is 49. The larger initial footprint creates incremental leverage on the core infrastructure of the hospital, thus serving as a partial mitigant to higher construction costs, and effectively front-end loads future period bed growth. You may recall that I spoke about this in response to a question on our third quarter earnings call. The increase in the initial size of new hospitals has effectively boosted the number of beds associated with our de novo strategy by an average of approximately 56 per annum. Our market density strategy is also a factor here. In certain large and growing markets, we have chosen to open an additional hospital instead of adding beds to an existing hospital. This allows us to better serve the market by overcoming geographic barriers and traffic patterns and placing the new beds closer to incremental referral sources. We have successfully deployed this strategy in markets like Dallas and Houston, and are now doing so in certain other markets, including most recently, Tampa, and Orlando. I'll also note that our 2022 maintenance capital expenditures of 238.4 million, was higher than the estimate of $195 million to $215 million cited in our Q3 earnings report. Relief of supply chain bottlenecks and mild weather in many northern markets, allowed us to proceed with several projects that we had assumed would be delayed. As you can see on Pages 14 and 15 of the supplemental materials, we expect both maintenance and discretionary CapEx in 2023 to be consistent with 2022. Good morning. Great. Thanks. I guess the main question I had was around labor costs. I guess the actual wage inflation itself looked a little bit low. And then I guess when we - in one of your supplementals, you have the number of net same-store nurses added, like it was negative in the quarter after some pretty strong hires in the first three quarters of the year. So, would love to get a little more color about, I guess, maybe what happened in Q4. And if you're still talking about sign-on shift bonuses, why does the core wage growth kind of drop down to three? Yes. So, Kevin, I think in terms of the internal SW per FTE, that has been running right about 3%, and some of that has to do with the fact that we made a series of market adjustments really beginning in the latter part of 2020 that have now anniversaried. So, we think that that, for internal SW per FTE, is a good estimate. We do note that benefits, which typically make up about 10% of SW&B, is expected to increase by about 5% in 2023, and that's just the cost that we're seeing, the inflation that we're seeing in group medical expense. With regard to the hiring in Q4, your observation is correct. We did take a step back. The good news is, it wasn't on the hiring front. So, if you look at Q4 of 2022, our hires, gross hires for RNs was 530, and that compares to 310 in Q4 of last year, so an increase of 220. Unfortunately, it was more than offset by terminations during the quarter, which were 562 as compared to 264 of Q4 of 2021, so an increase of 298. So, that took us from a Q4 ‘21 net positive 46 to a decrease of 32 in Q4 of’ 22. Virtually all of that was attributable to increased terminations within first-year RNs. That rate rose to 45.3% this year versus 36.6% in the ‘21 quarter. We think that was a bit of an aberration because for the full year, our termination rate for first year hires actually improved year-over-year from 45% to 41%. So, a lot of detail in there, Kevin. We did take a step back. We don't think that necessarily portends that we'll have a higher termination rate moving into 2023. Frankly, some of that appeared to be tied to bonus-hopping based on increased volumes tied to flu volumes in some of the acute care hospitals. And again, we don't necessarily think that that's going to be a persistent trend. So, Kevin, clearly - we have a focus, not only on the recruitment of nurses, but also on the retention. We put in things in place this year in terms of bonus structure. Our CEOs will be having a very strong focus on making sure that we retain the nurses that we've hired in the past, especially those within that first year. We've seen kind of a spike in nurses that turn over within the first year that we hire them. So, it's an all hands on deck to make sure that we are putting forth a very solid orientation, that we bring these new nurses into our hospitals, have them orient with mentors, with folks that are seasoned in our hospitals so that they have a comfort level in caring for the rehabilitation patients that we have and so that they want to be there for a long time. So, it's both recruitment and retention. As Doug noted, I'm not taking anything away from the Q4 drop off as being alarming. I think that our strategy of having the centralized recruitment function and talent acquisition, continues to be a good move. It took a lot of the pressure off of our hospitals to keep up with this function. We aren't staffed at the hospitals to take on this task at the same degree that we have here from a centralized function in Birmingham. So, we are very focused on both the recruitment and retention of nursing staff. All right, that’s helpful. I guess second question then just being, I guess in your prepared remarks, you guys said that you thought it was prudent to have some conservatism in the guidance. Is there anything in particular in here where you say this is where we kind of decided to put our finger on the scale a little bit in the area of being prudent? Or is it just broad-based? I would probably point to a couple of things that just really reflect some of the uncertainty. We put in an assumption of a 2.5% to 3% Medicare price increase in Q4. If you look at where the input factors have been over the last couple of years, it would certainly point to and justify a higher increase. But the nice increase that we saw in the existing fiscal year notwithstanding, we really reflected back on what we had seen over the 10 years prior, and so put that assumption in. We've also put in what I think is a pretty reasonable assumption with regard to the increase that we're getting from other payers. The other factor that's in on our guidance that may not appear immediately available to you, is that we are anticipating that we will see some normalization as we move from 2022 to 2023 in both our length of stay and our EPOB. And so, just to give you some specifics there. For fiscal year ‘22, our length of stay was 12.7. It was actually 12.5 in Q4 of 2022. And the EBITDA flow-through is very sensitive to small changes in this metric. In fact, moving that metric by just 0.05 can have an impact of approximately $8 million to $10 million on EBITDA. We think that the 12.5 is not something that is necessarily sustainable, particularly given the acuity that we've been running. CMI has been hanging in there right in the kind of 1.44, 1.45 range. We're also expecting further normalization in our EPOB. Fiscal year ’22 EPOB ran at 3.35. It was 3.38 in Q4, and you've probably seen in our guidance assumptions that our expectation for 2023 is 3.4. Some of that is attributable to the cumulative effect of opening 17 hospitals over two years. This, again, is a very sensitive metric, and every 0.05 increase in EPOB translates to about $6 million to $8 million in EBITDA, depending on where you are in the guidance ranges. Hi, everybody. Thanks. Maybe first just a little bit more on the pricing assumptions and where you see things evolving at this point. I guess Medicare Advantage and Managed Care together are about 26% or at least of your fourth quarter revenue. Are you seeing - I mean, you got a step-up in the underlying rate normalizing for sequestration for Medicare fee-for-service. Are you seeing a little pickup in the rate from your managed care, either MA on straight managed care, or any move to some of this value-based type of stuff? Is that becoming more a part of what you’re contracting for? You've got to break the Medicare Advantage to that which is paid on a CMG basis, and that which is paid on a per diem basis. And as we've talked about a lot in the past, we've made great progress over the last five years plus of moving more of our contracts as a CMG basis, which are tied specifically to the Medicare rate. So, right now, about 88% of our Medicare Advantage revenues are paid on CMG basis, and those move in lockstep with Medicare. The per diem contracts there, and virtually all of the managed care, are one-off contracts that have to be negotiated, most of them on an annual basis. And that's - frankly that's just guerilla warfare around those, and it'll take getting into this year to see what kind of increases we're able to wrestle from those payers. With regard to the movement towards more value-based care and risk-sharing arrangements, we feel like we have been more ready than the payers to enter into those types of arrangements, but I would say that little traction has been made to date. Given our outcome, as well we provide in our hospitals though, A.J., I would say that if we had the opportunity to work with payers, and as Doug noted, we have certainly reached out to them in terms of including a value-based component, it's just been - it's been difficult for them to think about how to administer that. Okay. And maybe just then a follow-up on the labor. You talked a lot about the RN side of it. Anything new or different? What kind of an increase for physical therapists and therapists generally? Is it similar to last year? Is there anything changing there? And maybe just to remind us, what percent of your labor is RNs versus therapists? So, just in general, on the marketplace for therapists, we've seen some limited number of markets that have had a little bit more pressure on therapists, not just PT, but it's OTs and speech therapists as well. But that's been pretty much isolated on certain markets where there's been pressures. Nothing near what we've seen relative to nursing, but we've had to respond in those markets the same way we've responded in markets for nursing. But keep in mind, I mean, our turnover on therapy is around 8% for licensed therapists. So, it is nowhere near the degree of turnover that we have in nursing. And A.J., to your second question, in terms of our hospital staffing, and this is based on the number of FTEs, about 37% of the staff is comprised of nursing, 21% is therapy, and the balance would be administrative and support personnel. Hey, good morning, guys. Thanks for taking my questions. First one here is, how should we think about fixed cost leverage from OpEx and GA on the 8.5% revenue growth throughout the midpoint of guidance? Any color on what percent of these expenses are fixed versus variable? No, that's a good question. There's a little bit more influx right now because of the inflationary rates that we're seeing around food and utilities. And again, we've got to go through the first half of the year before we anniversary those, and just because of the volatility in contract labor sign-on and shift bonuses. The other variable that I would point to that's changing that equation a little bit, and really should be just a one-time adjustment in 2023, is that normalization in the length of stay and the EPOB that I referenced previously. If you think just about that EPOB adjustment going from where we were this year with the 3.38 to 3.40, if in fact we go all the way there, even though you're getting good leverage on total SWB, with it growing about 1.5% on a year-over-year basis, 1.5% to 2% based on the improvement in contract labor and sign-on shift bonuses, you're increasing your FTE count by about 8%. And so, that's causing some deleverage in there. So, you've got kind of both puts and takes with regard to our 2023 assumptions around the composition of fixed costs. That shouldn’t get exactly to a breakdown of the percentage, but there is a little bit more that's in flux this year. So, I get it on EPOB, but specifically if I just think about OpEx and G&A, I mean on the OpEx side, I guess besides food costs, what in there is really variable, and same with G&A? Kind of what in there is actually variable versus fixed? So, first of all, I think you're seeing really good leverage within G&A. About the only category that we don't expect to lever in 2023 is that we are going to annualize some of the second half of the year staffing additions and the recruiting function. And so, you'll see an increase that's probably a little bit on the higher side in that category, but really not enough to move the needle. And that's included in OOE within the hospitals. Corporate G&A, we should see some continuing leverage on. Within the kind of the operating segment P&L, obviously the most leverageable portion of that expense is occupancy costs. And then as you move further up the P&L, we get good leverage off of the administrative staff as well. And then you're getting into a whole lot of variable costs, remembering again that almost 55% of every revenue dollar is consumed by labor. Okay. And then, so quick follow up here on the new denials you saw in the fourth quarter. How should we think about sort of the system denials sort in ’23? You're also changing your bad debt guidance of sort of 2% to 2.2%, but just how should we be able to think about denials start accelerating in ‘23? So, activity is definitely up across the board. We had enjoyed some cessation, some relief during - really starting with March of 2020. And then even as the switch got turned back on, it was kind of slow to ramp up. But basically, all of the MACs are engaged in some form of audits before. We continue to be frustrated by misinterpretations and misunderstandings of the Medicare guidelines in the claims denial process. We have had some success, including recent success in being able to educate certain of the MACs about the requirements and about how we were meeting those requirements, and those resulted in denied claims being reversed. But with many other MACs, it is a slow process and sometimes can even take years and multiple layers of appeal to reverse. When we look at the appeals process, whether it's the ALJ or the dab, one of the frustrating parts is kind of these blanket denials of claims, which of course indicates to us that they are not making a review of each claim upon its individual merits, which is required by law. So, that's another element that we're battling. We’ve put in what we think is the most realistic estimate of how we'll see bad debt trending. I don’t know that there's anything on the horizon that would suggest that it'll spike above that, nor do we necessarily expect any kind of immediate improvement. Hi. Good morning. Wanted to follow up on guidance. By my estimate, 4Q EBITDA run rate annualizes above the high end of the guidance range, even after considering the de novo outperformance in Q4 and incremental startup losses for 2023. You called out normalization in length of stay and EPOB as potential headwinds, but it sounds like the assumptions embedded in the 2023 guidance are close to what you experienced in Q4. Length of stay finished the quarter at 12.5 days, and EPOB finished at 3.39. So, one, do I have that right with respect to assumptions for 2023? And are there any other specific headwinds that you would call out that bridge us back to the midpoint of the guide? Thanks. Yes. So, actually Q4 length of stay was 12.5. And as I mentioned earlier, each 0.05 movement in that metric can translate to $8 million to $10 million in EBITDA. Now, Q4 EPOB was 3.38, but the expectation that we've laid out there is 3.4, and every 0.05 increase in EPOB translates to about $6 million to $8 million in EBITDA. So, I think those two assumptions alone would kind of bridge you from your Q4 run rate once you've normalized for the de novo impact to something that looks like the midpoint of our guidance range. Got it. Okay, that's helpful. And then it sounds like the de novos drove $4 million of outperformance in Q4. One, can you help us understand what drove that outperformance? And is there any reason to think that that outperformance would continue into 2023? It seems like a faster de novo ramp would have a positive follow-through for 2023 as well. Thanks. I think that's a very good point, and really, we didn't factor that into 2023, simply because it's not something that we have a lot of a lot of visibility into. As I mentioned in my prepared comments, when we set the expectation for Q4 that the de novos would break even, it was because we had experience really just on the front end of our Q3 earnings call, we'd seen some administrative delays that pushed the opening dates on a number of our de novos out further, which meant that the time that they were really starting to ramp up had been delayed. And we saw some pretty significant disruptions to our Cape Coral and our Naples hospitals from Hurricane Ian, and we had expected those would linger and impact Q4 as well. Naples and Cape Coral rebounded remarkably quickly, a real credit to our teams down there in Q4 and contributed nicely. And the hospitals that we had assumed that had other delayed administrative delays that would kind of lag a little bit in in Q4, also contributed above our expectations. I think also you're seeing a bit of mentioned this market density and where we've built de novos, where we have a strong number of other hospitals, we have other resources there, staffing expertise. You're starting to see where staff can move from one hospital to the next. So, you're starting de novos up with at least a portion of the senior team at the de novo hospital is a seasoned, experienced and Compass Health staff member. So, they can work their way up their learning curve very quickly. And I think that is exactly what we saw at Naples and Cape Coral, where both of those hospitals had existing CEOs from other hospitals transfer in to do those startups. So, I do want to throw out my compliments to that group too, in terms of working through the hurricanes and working through the startup process. And some of what impacts the ramp up of a new hospital are two important factors to consider. One that Mark just touched upon, which is, if we're proximate to an existing market, because the payers are known to us, because the referral sources are known to us, because we can leverage the existing staff, the ramp up tends to be faster than when we go into a brand new market. And when we have a JV partner, the ramp-up tends to be a bit faster as well because we can leverage some of the relationships that they have also. And you've got a bit of a mixed bag on those as you look at the 2023 class. Looking specifically at the first quarter, Eau Claire, Wisconsin, is going to be a brand new market for us, as is Knoxville, Tennessee. Owasso, Oklahoma, we're going to be able to leverage. Claremont, we're going to be able to leverage. So, there's a little bit of good - a little bit of each of those included in that class. Hey, thanks guys. Good morning. Quick question on case mix. Most of my questions have been answered, but you've stressed focusing on stroke and neurological volume in the past, and having a higher than industry mix of that higher acuity volume, differentiated capabilities around stroke and neuro. Just wanted to see how that's progressing, if there's anything to call out in terms of case mix in general, and how that - how you see that evolving into 2023. Thanks. Yes, I think our - well, our case mix has been relatively flat. If you look at our program mix, with stroke, we continue to be strong, performing there with a little bit over 18%. You add another 20 some percent in neurological. So, what we've said over the last couple of years now is we've built up our expertise in just neurologically-based conditions, stroke and others, that accounts for almost - over 4% of our discharges. If you look at our ability at the time of discharge to get patients back to home, that's an area that we continue to excel. Almost 83% of our total discharges this last quarter went back to the community. So, the association with our ability to have better outcomes of the stroke population, I would say the relationship that we have with the American Heart, American Stroke Association, in terms of co-branding this, has helped to continue to put our name out in the forefront in our markets in terms of caring for stroke patients and those patients suffering from neurological conditions. Both stroke and neurological showed growth on a year-over-year basis in Q4, but as a percentage of patient mix, actually declined slightly, and that was because we had a pretty significant increase in debility, and that is directly attributable to the flu season that was very prevalent in Q4. Hey, good morning, guys. Congrats on the quarter. I guess, Doug, just as I think about modeling, anything you would call out from a seasonality perspective, or just how we should be thinking about the cadence of EBITDA over the course of the year? I would expect this to be kind of a normal year with regard to seasonal trends. The timing of the de novos has some impact, but otherwise, the normal factors with regard to seasonality that go from quarter to quarter, should be prevalent. Got it. And then I know in you're prepared to remarks, you called out the 20 markets where you're seeing some contract labor tightness - or labor tightness and high use of contract labor. Anything you can share with us on maybe which those markets are, and any improvement or anything - any color on rate trends in those specific markets that we should be thinking about? Yes. So, the northeast remains the most challenging market, both in terms of the number of contract FTEs and the rates as well. I would say that our team has been really focused, the regional team there has been really focused on that through the course of the year, and they've made great sequential progress. But there are a couple of markets in and around the Boston area is one that I would cite that have remained a bit a bit in transient with regard to progress, but the team is really focused on it. Hey, good morning. Just wanted to follow up a bit on the share taking and just get a sense for, if you kind of dial back the last 24 months, how much of a sense you have for that coming from specific payers or payer categories, perhaps from competitive IRFs relative to eligible shift patients and site of care shifts from other post-acute settings? Just anything you can help us out with for - a bit more color on share. Thank you. Yes, I think in gen, you've heard us talk about this in the past, but I absolutely think during the pandemic, our ability to take COVID patients and show that we can take a very challenging, high acute patient with medical complexities, and do a really good job in getting them back to community, has continued to pay dividends as we've moved forward into a more normalized operating environment. I think that the referral sources have recognized that not all post-acute settings are created equal, particularly between skilled nursing facilities, nursing homes, and IRFs. I think that clearly IRFs and LTACHs stood out in terms of their ability to take challenging patients. And so, I think that we've seen - certainly have taken market share in those communities, particularly where there were nursing homes that were trying to pattern themselves and claim to be rehabilitation facilities, and probably overextended a bit in terms of their ability to take rehab-oriented patients. Matt, the strength has really been very prevalent in the two major payer categories for us, which are fee-for-service and Medicare Advantage. If we look at same-store discharge growth in Q4 of this year, Medicare fee-for-service was up 5.9%, and for the full year of 2022, it was up 3.9%. We've had seven consecutive quarters now of fee-for-service discharge growth. We had mentioned relatively early in the pandemic back in 2020 when we were seeing a pretty dramatic increase in Medicare Advantage, that we felt that our ability to demonstrate our value proposition through difficult times like that, was really going to have some staying power with regard to Medicare Advantage. And in fact, that's proven to be true because our Medicare Advantage discharges increased by 34.3% in 2020. We consolidated that gain with a 5.8% increase in same-store Medicare Advantage discharges in 2021, and we added another 1.5% in 2022. So, we definitely feel like, A, the market is very substantial for the services that we provide, and the conversion rate remains low, and that we are resonating with our value proposition to payers, to referral sources, and to caregivers. Yep, understood. And then, Doug, on the thought process in existing markets about bed expansions relative to adding a new hospital, I know in the past you've talked about bed expansions being the highest ROI use of capital that you have. I imagine that your ability to use prefab and that bringing down new build costs and timeline maybe changes some of that math. But I'm curious, once the hospital's built down the road, or a few minutes away or a few miles away, can you still get any labor from - or excuse me, leverage from an admin or labor perspective where you might be able to deploy employed nurses and therapists to one or both hospitals depending on demand? Just curious, once that new build is in place, how it would compare to adding a 10 or 20 bed addition under an existing hospital? Yes, that’s absolutely the case. In markets where we have a cluster of hospitals that are reasonably proximate, we're able to leverage things like the marketing staff, the regional administration staff, and we do share resources between hospitals. But back to your earlier point, Matt, bed expansion on an existing hospital remains the highest return that we get on capital. When we look to add a new hospital, many times it's because we look at the market, we see that it's growing in a particular direction that is currently underserved. We do a bed needs analysis there and say, oh, this is not going to be solved by adding 10, 20 beds to the existing hospital. This really needs a - this is really a 50 or 60 bed need over the near-term. Let's go ahead and construct a new facility and try to take advantage of that demand in advance of other competitors that are entering that particular market. Hi, good morning. So, just being on the Washington front, is there anything that's on your radar on the regulatory or legislative outlook over the next 12 to 24 months? And then secondly, maybe on your Investor Day, I know before COVID, you had some long-term targets for EBITDA and free cash flow. Is that something we should expect to be reinstated at Investor Day? Thanks. So, I'll take the Washington question first, Anne. So, we have a number of new members of Congress that we have prioritized going out and making sure that they know about a rehabilitation hospital, having the opportunity for them to do a tour so that when we talk about our patients or the process, that they are much more familiar with it. So, that has been a big focus. We have plans for a CEO fly-in this year, where we'll take a subset of our CEOs in the hospitals and have them come to Washington, and we'll do a multi-visit members of congress from each one of our marketplaces. And that's coordinated with our team there in Washington. Relative to the regulatory front, it's been fairly quiet. RCD remains a topic out there that we have continued dialogue with our trade associations and CMS. CMS has not provided any timelines or any additional details about implementation of RCD. But that is something that we've kept in front of mind and continue to have dialogue with CMS. So. Anne, just back on the longer term outlook, our last Investor Day was March 4th of 2020. And at that Investor Day, we issued longer term targets, five-year targets for discharge growth, bed additions, and for a number of de novos to be open per hour. And then we had comparable measures for home health and hospice. We didn't issue any specific long-range targets with regard to EBITDA or cash flow or EPS at that time. Obviously, the world shut down about two weeks later, everybody lost visibility. So, we had to suspend those targets for a period of time. We introduced those for the IRF business, I think just about a year ago. I’d have to go back and check specifically, and those are the targets that you see in the - included in the supplemental materials today, albeit with the change that I've explained earlier with regard to the annual bed additions. In terms of what specific metrics we will provide a longer term outlook on in September, that is something that we're still discussing internally. I'd say everything is on the table, and it's just going to be something that we'll discuss and socialize with individuals such as yourself between now and September. All right. Thanks. I was just looking at the - I thought you had some EBITDA and targets out for each segment back then. All right, thanks. There was a time in our history we did that, but I forget when we dropped it. I feel like it was sometime around 2018 or so. And there are no further questions at this time. I'll turn the call back over to Mark Miller for closing remarks. Thank you. If anyone has any additional questions, please call me at (205) 970-5860. Thank you again for joining today's call.

EarningCall_486

Hello, and welcome to the Graphic Packaging Q4 and Full-Year 2022 Earnings Call and Webcast. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I would now like to hand over to Melanie Skijus, Vice President of Investor Relations. The floor is yours. Please go ahead. Good morning, and welcome to Graphic Packaging Holding Company's fourth quarter and full-year 2022 earnings call. Joining us on our call today are Mike Doss, the company's President and CEO; and Steve Scherger, Executive Vice President and CFO. To help you follow along with today's call, we will be referencing our fourth quarter earnings presentation, which can be accessed through the webcast and also on the Investors section of our website at www.graphicpkg.com. Before I turn the call over to Mike, let me remind you that today's press release and the presentations made by our executives include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include but are not limited to the factors identified in the release and in our filings with the Securities and Exchange Commission. Thank you, Melanie. Good morning. Thank you for joining us on the call today. 2022 was an outstanding year of Graphic Packaging. We significantly grew our business and continued executing strategic initiatives focused on extending our leadership in fiber-based consumer packaging. Our focus on consumer packaging is driving profitable growth and delivering returns for shareholders in line with our Vision 2025 goals. Turning to Slide 4, let me walk you through the year's accomplishments and a brief look into 2023 before sharing the details of the exciting new strategic capital investment we are announcing this morning. Our financial results in both quarter and the full-year were excellent, characterized by strong growth and margin expansion. Sales for the full-year increased 32% to $9.4 billion, driven by $1.1 billion positive pricing, 3% organic sales growth and acquisitions. Adjusted EBITDA of $1.6 billion grew in a faster pace sales of 52% as margins expanded by 210 basis points to 16.9%. New coated recycled paperboard or CRB K2 machine investment, the largest capital investment we have made today came to life in early 2022 as we successfully ramped production of the machine on our original timeline. The investment is evidence of our long-term commitment to high-quality, low cost production of fiber-based consumer packaging utilizing recycled content. The investment returned the first $47 million of EBITDA in 2022 and remains on track to achieve the total annual run rate of $130 million of incremental EBITDA in 2024. The success this investment has provided us with the expertise the confidence to continue to strategically invest as we will detail further in a few moments. The AR Packaging acquisition in Europe continues to meet our high expectations. Growth opportunities provided by new consumer markets, geographic expansion and proprietary solutions protected by intellectual property have further accelerated our excellent momentum. Our combined team successfully integrated the business and the initial targeted $40 million synergy goal remains on track with the first $15 million realized in 2022. As committed, our net leverage ratio declined 3.2x at year-end from pro forma 4.6x at year-end 2021. Through new product innovations and expanded geographies, we increased the addressable market for organic growth of $12.5 billion from $5 billion just a few years ago. We remain confident in our ability to achieve 100 basis points to 200 basis points annual net organic sales growth in 2023 and beyond, given strong demand from global customers for our robust pipeline of innovative fiber-based consumer packaging. Looking briefly into 2023, and as Steve will describe in his remarks, we expect sales for adjusted EBITDA and adjusted EPS to again grow year-over-year, generating strong cash flow we will invest for long-term value creation while having balance sheet prudent for today's uncertain economic environment. Before I walk through the details of the significant new investment we are announcing today, let me take a moment on Slide 5 to reflect on our performance over the past three-year period since announcing Vision 2025 in September 2019. Our global team has successfully executed a pivot to sustainability supported organic growth with net organic sales up approximately 10% since 2019. We have pursued and achieved critical milestones on our journey to Vision 2025, including growing net sales, expanding margins and building a much larger scale business focused almost entirely on a fiber-based consumer packaging. Over the past three years, sales have grown by over $3 billion to $9.4 billion, representing a 15% compound annual growth rate. Adjusted EBITDA and adjusted earnings per share have expanded at a faster pace than sales driven by margin expansion. Our financial results and achievements over the last three years have resulted in a total shareholder return of 41%, outperforming the S&P 500 return by 1,600 basis points. We are creating value through our leadership of Vision 2025. The investments we have made to advance our capabilities as a fiber-based consumer packaging company differentiate us. As you've heard me say before, we are running a different race. Let me now turn to Slide 6 to provide details regarding our announcement this morning and the role it will play in our long-term commitment to meeting consumer demand for sustainable package. Graphic Packaging is the only North American producer investing to meaningfully upgrade and expand CRB capabilities. We are confident this is the right strategy to deliver value to our customers and to our investors. We recognize the distinct opportunities that substrate can provide. The future of Consumer Packaging will include more CRB and more places, and we are taking steps to position our paperboard network to meet this growing demand. We have a strong leadership position in CRB from a cost and capability perspective, and this investment will further these advances. We will be leveraging our unique expertise in CRB production, our [muscle member] from the recent K2 investment and our leading North American mill system to build a new CRB mill in Waco, Texas. Importantly, this investment not only enhances our CRB capabilities, but supports optimization of our full paperboard network and improves our environmental footprint to further distinguish Graphic Packaging as the low-cost highest-quality paperboard producer in North America. As a result, we expect to drive significant and sustainable EBITDA improvement well into the future. Referring to Slide 7, the growing demand for packaging made with recycled materials is driven by the consumer. Today's consumer is more environmentally aware than ever. And according to a recent survey, consumers rank packaging made from the cyclical materials as the most appealing sustainability claim. Dual package made with CRB, consumers see the benefit of their recycling efforts each time they place a fiber-based packaging to a recycling bin. As you can imagine, our customers are responding to what consumers are telling them by seeking to use more recycled materials in their packaging. Not only is doing so in line with consumer trends and preferences is also a key driver for advancing their recyclability goals and support their overall publicly committed sustainability programs. This growing demand, combined with the improved quality of CRB produced by Graphic Packaging's modern mills utilizing the latest state-of-the-art technology is expanding the breadth of our opportunities for CRB-based packaging. Slide 8 demonstrates how we believe this new investment will meet the increased demand for CRB at an unmatched cost compared to our competitors. As you can see, the addition of Waco allows us to further optimize our network by closing higher-cost mills over time while still expanding capacity to meet growing global demand. We expect the new machine in Waco will mirror the capacity and cost per ton of recently completed K2 machine Kalamazoo. It's clear to see that the modern technology inherent in these new machines provides meaningful cost to produce step-change improvement compared to the decades-old machines used elsewhere. Notably, this expansive competitive cost differentiation is unique to the CRB substrate as compared to other fiber-based substrates. We are building for the future in a manner that is far more efficient than what was built in the past. Turning to Slide 9. In addition to the efficiency of the mill itself, we are very excited to have secured a location that is ideally positioned within a growing economic center. The city of Waco is situated in the Texas Triangle. Our new mill will be strategically located within 200 miles of approximately 80% of the population in Texas providing easy access to a strong existing recycled fiber basket. Waco also has existing infrastructure to support a mill as well as advantaged logistics from a rail and roadway perspective to supply our packaging facilities and our customers. We are looking forward to joining the Waco community and working with the great talent base in the area. We appreciate the strong support and engagement we have received from the city and the county as we conducted our site selection process. From a timing perspective, we expect to start construction this quarter and begin commissioning the machine by the end of 2025 with production ramping up in early 2026. Our decision to build this mill shortly after K2 allows us to leverage key learnings from that process, both internally with our external partners, which gives us added confidence in our ability to meet the projected timeline and quickly ramp-up production on the new recycled paperboard machine. Slide 10 shows an updated map for our current future mill network. With this new investment and targeted mill closures, we are looking at a simplified and optimized mill network that will lower cost and strategically increase capacity. Our virgin paperboard mills are located throughout the Southeast, which is the best virgin fiber basket in the country. Our two industry-leading CRB mills in the future will be geographically located to provide strong coverage across the United States as well as in Canada and Mexico. We estimate the optimized mill network will have 5% more capacity than we have today with the flexibility to adjust capacity in line with demand. Importantly, while the capacity expansion is driven by the addition of the new Waco mill, the benefits run across other substrates. The improved CRB quality made possible by our new machines will enable substrate optimization across our mill system as some packages that historically require virgin fiber can now be made with CRB. This will free up incremental virgin capacity in our other mills to meet our growing global demand. The combination of our global packaging growth plans and our mill network optimization plans will support integration rates in excess of 90% once the new mill is in operation. Overall, this investment will extend our position as the lowest cost, highest quality paperboard producer in North America. Beyond cost quality and capacity there are also significant sustainability advantages to this new investment as outlined on Slide 11. First, we will be increasing circularity of our system through an enhanced drum pulper investment. This investment increases our ability to clean and separate a broader range of secondary fibers. Today, a large percentage of our paperboard waste that we cannot recycle is exported. Our Waco mills designed to enable the recycling a 100% of our own internally generated paperboard side rolls and waste. We plan to capture the value of that fiber as well as reduce the environmental impact of shipping the fiber offshore for processing. We are estimating around 200,000 tons of side rolls and waste will be processed at the Waco mill versus purchasing external secondary fiber as we do today. This will also significantly enhance the security of the secondary fiber supply. This machine also increases our paper cup recycling ability. The drum pulper has the capacity to process up to 15 million paper cups per day. To take advantage of this increased recycling capacity, we have launched teams to engage with our customers and recycling partners to increase the collection rate of paper cups to further support recovery and a more circular economy. As you would expect, initial interest from customers is very high. Additionally, the CRB mill network optimization is expected to improve our environmental footprint. Our absolute greenhouse gas emissions are expected to decrease in our optimized North American CRB mill network by 12%. Investments in technologies such as the gas turbine to generate all electricity needed by the mill as well as produce steam for paperboard drying will improve overall efficiency and reliability. Lastly, let me cover the financial highlights of the project on Slide 12. This approximately $1 billion investment will be internally funded with operating cash flow over the course of three years and is consistent with our balanced approach to capital allocation. We have flexibility to invest in our business and have a strong balance sheet with manageable debt levels. As Steve will detail further, we remain focused on continuing to reduce our net leverage in 2023. We expect the state-of-the-art mill will generate $160 million of incremental annual EBITDA at its full run rate, driven by approximately $100 million of cost reduction and $60 million benefit through optimized mill capacity. We expect to realize approximately $80 million in the return on the investment in 2026, the machine's first year of operation. In summary, the strategic investment showcases how we are extending our leadership in fiber-based consumer packaging to meet growing demand for more sustainable packaging solutions. With that, I'll turn the call over to Steve to provide more detail on the quarter and full-year financials along with 2023 guidance. Steve? Thanks, Mike, and good morning. Turning to Slide 13 and the key financial highlights for the fourth quarter and full-year. Net sales increased 20% in the fourth quarter to $2.4 billion and 32% for the full-year to $9.4 billion. Fourth quarter net organic sales growth of a 1% was in line with their expectations as our customers manage year-end inventory position resulting in full-year net organic sales growth of 3%. This represents our third consecutive year of delivering organic sales growth at or above the high-end of our targeted range. Q4 adjusted EBITDA of $413 million increased to $128 million or 45% year-over-year, meeting our expectations despite the $20 million unfavorable impact from the late December winter storm, which impacted paperboard production by roughly 40,000 tons during the month. Adjusted EBITDA margin of 17.3% improved to 300 basis points from the prior year period. Full-year adjusted EBITDA of $1.6 billion increased to $544 million or 52% from 2021. Adjusted EBITDA margin of 16.9% was up 210 basis points year-over-year. Adjusted EPS excluding amortization of purchase intangibles, continue to expand, growing 78% for the full-year $2.33. On Slide 14, let me walkthrough additional details of financial performance, markets, operations and capital allocation. Our food, beverage and consumer sales grew 37% in 2022, driven by positive price, organic sales growth and acquisitions. Full-year sales were up 16% before acquisitions. Foodservice sales also achieved strong growth of 25% from 2021. Significant growth in both sales and adjusted EBITDA were driven by positive pricing, organic sales growth and acquisitions partially offset by unfavorable foreign exchange. Full-year adjusted EBITDA was also positively impacted by $47 million from the K2 CRB investment and $15 million in synergies realized from the AR Packaging acquisition. These positive benefits were partially offset by supply chain challenges and costs that our teams successfully managed throughout 2022 in order to meet customer demand. For your reference, our sales and EBITDA waterfalls are available in the appendix of today's presentation. Turning to paperboard market data. Industry operating rates reported by the FPA remained solid across substrates in the fourth quarter. SBS was 91% and CRB was 95%, our CUK operating rate remains over 95%. Company backlogs of seven to eight weeks remain healthy and are reflective of a balance supply demand environment. During the year, our strong cash flow engine really was on full split. In addition to investing strategic capital to grow our business, we return capital to shareholders while significantly delivering our balance sheet. Net debt declined by $526 million to $5.1 billion and as committed, we reduced leverage to 3.2x at year-end 2022 from pro forma of 4.6x at the end of 2021, a significant achievement. Liquidity remains very strong at over $1.5 billion. As a reminder, our Board of Directors announced a quarterly dividend increase to $0.10 per share that was affected in January, 2023 given the strength of our cash flows and the progress we have made toward achieving our Vision 2025 goals. On Slide 15, let me provide our guidance for 2023. Many of the positive drivers that fuel growth in 2022 will continue in 2023. We believe net organic sales growth driven by innovative packaging solutions, positive pricing, returns from the K2 investment, synergy capture, and core productivity will drive financial performance improvements year-over-year. 2023 sales are expected to grow over $500 million to approximately $10 billion. Adjusted EBITDA is expected to be in a range of $1.7 billion to $1.9 billion, reflecting an increase of 13% or $200 million at midpoint. Adjusted EPS excluding amortization of purchased intangible is expected to increase to a range of $2.50 to $2.90 per share. We expect to generate robust cash flow of $600 million to $800 million, which includes an initial $250 million to $300 million investment to support the new CRB mill in Waco, Texas. We are targeting further reduction in our net leverage ratio to approximately 2.5x by year-end. Slide 16 presents strong progress we have made toward achieving our Vision 2025 goal over the last three years. Our 2023 guidance reflects momentum in the business towards achieving the enhanced financial goals, we established last February. We expect to further expand our margins, grow returns on invested capital, increase our paperboard integration rate and deploy capital to support growth and reduce costs. Finally, let's move on Slide 16. We believe Graphic Packaging is well positioned to consider pursuing an investment grade credit rating, our leadership position and progress today achieving Vision 2025 growth and return milestones coupled with our confidence in the sustain future cash flows of the business, provide us with the flexibility required to continue to invest for growth while pursuing an enhanced credit rating. We will be engaging with the rating agencies in 2023 to assess options and the associated benefits of a potential upgrade. Steve, thank you. Building on Steve's comments, cash flow generation in our business is significant and provides the means and financial flexibility to make investments such as the new CRB mill in Waco, we announced today while simultaneously further reducing debt and exploring an investment grade credit rate. Let me now wrap up my prepared remarks on Slide 17. Through our established track record of delivering net organic sales growth and productivity gains, along with our long history of deploying capital strategically to strengthen and grow the business, we are creating value for all stakeholders. We are executing strategic initiatives that answer the call from consumers from more sustainable packaging options and expanding the breadth of consumer packaging solutions we offer. As a pure-play, global private base consumer packaging leader, we are running a different race. Thank you for your time this morning. I guess, first off, Mike, kind of stepping back – good morning. A lot of the CPGs that have been reporting calendar year 4Q numbers, a lot of their volumes, almost without exception are down mid-single digits. And then I look at your volumes, and they seem to have substantially decorrelated from them. So can you just give us some perspective on that? And also maybe you can parse out volumes between Europe and the U.S. as well for you? Yes. Sure. Happy to do that. First, our growth last year was broad-based really in all geographies. So I'll start with that comment. Obviously, in Q4, we saw some deceleration as we talked to you about when we got on our call at the end of Q3. And that played out through the quarter. October and November were quite strong and December was weaker as we expected it to be, quite frankly, given some of the destocking that our customers have talked to us about. But look, we were able to finish the quarter with positive growth. And really, it's all about, as I said in my prepared remarks, look, we're attacking this market differently with our new product innovation, the products that we have, focused on plastic substitution around the margin and we've been profiling a number of those different examples on our calls over the last couple of years. And I think it's really evident to see over a three-year period of time, if you look at a three-year stack, as Steve talked about in his prepared comments, over 10% volume growth. And so it's real. And even though some of those elasticities to your point, are down a bit, we like defense nature of our portfolio. If you think about what we've done over the last really five years in terms of differentiating end-use market participation, our core food and beverage, as we talked about in our February Investor Day is 56%, which is down dramatically from where it was. Five years ago, we've got a food service business that really is in the heart of this mobility movement and convenience movement. And when you see things like, last Friday's job announcement of over 500,000 jobs, I mean, people are on the go and they're busy and so they like and appreciate those kind of products. And so, yes, that to a consumer business, it's now almost 20% and diversified defensive end products like cat litters and dog food and glue and filter frames, I mean we're kind of hitting those on multiple fronts. And then the last piece, that would be our health and beauty business that we acquired with AR Packaging to kind of build off a 100% profile. I think the other part of it that I'd point to, Ghansham, and you know this is the defensive nature of that portfolio, we've got almost 20% of that is right in the heart of store brands, private label type offerings. So if the consumer trades down, we kind of catch it there, too. And so we're participating on the branded side. They see some weakness. We have it on the retail side in the private label sectors. And then ultimately, this foodservice business has been a real winner for us as customers continue to be mobile. Got you. And then for my second question, back to the announcement in Waco, just the thought process of building a brand new mill versus perhaps pursuing an expansion with an existing mill system sort of like you did with Kalamazoo. Is it just the world has changed from a geographic standpoint as it relates to your customers and the cost is overwhelming in terms of optimization by doing this? Or just give us more perspective on that? Yes, thanks for the question. It's a good one. I think, look, if you – we looked at expanding every existing CRB facility. We had to do a similar type project to what we did in Kalamazoo. But if you really take a step back from it for a minute, what you need to do if you're making high-quality, low-cost CRBs, being a fiber basket that's growing and very resilient. And so when we looked at kind of our profile, you see if they’re on the slide, the reduction down to six mills, which I'll come back to in terms of why that's important from a simplification standpoint. We really needed to be kind of in that Southwest area. It gives us great optionality to go down into our growing Mexico business. We can hit the West Coast, we can go back to the East, and you've got a basket of 20 million people in that Texas Triangle area there with very little pressure on that fiber basket. As a matter of fact, a lot of that fiber goes down into Mexico right now. So we'll grab that process and turn it back into high-quality materials. And then on top of that, as you heard in my prepared remarks, we're really excited about is we're making some other very big investments with this mill in terms of kind of owning our own energy production relative to electricity, with the gas turbine generator there, we will put into cogen-type setup. So we'll take the steam from that turned in electricity and we'll drive the paperboard. And then a lot of money going into a specialized hydro pulping system there that's going to give us maximum optionality to internalize. Side trim rolls right now are sold 4x worth in the open market and then trim things like some of our Aquacode trim that we haven't been able to process effectively at our existing CRB mills and we'll be able to take all that trim from our garden plants and bring it back to our mill in Waco and process it. So that really allows us to have the reliability we're looking for. It allows us to have the security supply. And of course, that fiber is fiber, we already own. So from a cash standpoint, it's a real winner for us. So we really like how that's kind of coming together. And then you have the tangential knock-on benefits of the muscle memory that was just built in Kalamazoo with our engineers and our contractors that have done this once, this machine will be an identical machine to the one we built in Kalamazoo, it will be a single machine operation. So we've got the costs associated with the infrastructure that we didn't have there. But geographically, locating one mill in Michigan between Chicago and Detroit and then this new mill in the Texas Triangle, you couldn't geographically position two coated recycled paperboard mills in better spots. So that really over the next three decades, drives the highest cost – or excuse me, the highest-quality and lowest cost platform that we can have. Ghansham, it's Steve. Just one thing to add that we mentioned in the prepared remarks, is also with the drum pulping the ability to also recycle up to 15 million cups a day. And so it's really an incredible investment in the circular economy, the ability to capture more fiber in better ways and we're looking forward to advancing that over the next couple of years as well. So it just kind of rounded out some of the net positive benefits of the investment. And maybe one final thing that I would share, Ghansham, since you went there. I mean if you really take a step back and think about what we're doing here over the next three years, we're really building a moat around our business. We're simplifying our mill structure, we're going to be the lowest cost by far. As you saw in our prepared comments and again, our track record would support this, we're going to be over 90% integrated. We get a lot of questions around other paperboard that's being added globally, primarily and a little bit here in North America. On the virgin grades, we're the only one investing on the recycled side, and we see the end-use consumer really appreciating that much more. They like the materials that are recycled. They get the benefit of seeing their work when they put in a recycling bin or have some other container that's going to go back. I mean recovery rates for paper and paper packaging in the U.S. last year were almost 68%, much higher than almost any other substrate, with the exception of maybe aluminum. So if you look at that, it's right at the center of it, and you're going to see CRB in more applications. We have low caliber rates that we can run now that we have the capability on these modern machines to be able to do it. We can do freeze grade boards and beverage boards. And so as both Steve and I said in our prepared comments, it allows us to really optimize our whole system. And you have to remember, we buy million tons on the external market. So now we will not be able to have to buy that many as we optimize that system because between what we've got and the new investment in Waco and our emerging mills will be able to optimize things. So our confidence in the $160 million is very high and largely within our control. Thank you. A few, I'll keep them really quick though. Run rate for price costs, the spread as we look at it today, recognizing, of course, your guidance is going to be factoring possibilities for changes in costs, et cetera. But I think like last quarter, the midpoint had been about $2.25. If we were to just look at the midpoint today, what would it be? Yes, Mark, it's Steve. Glad to take that on. The range we provided in the $100 million to $400 million, we think is a good, prudent range just given the volatility that we've seen over the last couple of years. So it feels like a very appropriate range for us. Obviously, we've got some commodities moving up and down right now of paperboard that we buy chemicals that we buy down fiber, obviously, energy and some logistics. On a mark-to-market basis, sitting here today, it would be at the low end of the range, so closer to the low end of the $100 million to $400 million but it's also in February. And so obviously, we'll continue to refine as the year plays out. There's certainly dialogue around some acceleration of costs in the second half of the year that could occur. So we're trying to keep a range that makes good sense. But the mark-to-market currently would be closer to the low end of the range, $100 million to $400 million. Okay. Appreciate that. And then just a follow-up on the organic sales growth. The 1% to 2% for 2023 understood. In curiosity, as you're looking at the first quarter, are you expecting to be in that type of range? Or are you thinking that it's perhaps a little weaker at the start of the year and you make up ground, later in the year against easier comps? Yes, Mark. I'll start it and Mike can add any color. I think, one of the positives sitting here on the call today is we've got a good view into January. We're off to the kind of start we expected to be in line with that 100 to 200 basis points. So as we talked, we saw some almost across the board, all packagers slow down in December for us, things to cycle back order patterns to where we expected them to be. So no, we would expect Q1 to be in line with those kind of expectations as we move into the year. Obviously, a lot of that is supported by the new product development activities that have been commercialized. Maybe the only [indiscernible] Mark is that that confidence in January was broad based. It was really all geographies. So we're seeing it really across our business. Hi, everyone. Good morning. Thanks for all the details. Congratulations on a good end to the year. I wanted to turn back to Waco. And you mentioned the comment, Mike, building a moat around your business. And certainly, that's been one of the things you've talked about a lot, we've talked about. Is one way to think about this as well that you obviously have had very strong results the last year? And it looks like given your guidance, you're expecting that in 2023. And so the prudent thing to do ahead of potentially additional supply and competition is build the return, build the ability to grow your earnings ahead of when that capacity hits in 2025 and 2026? You'll have potentially pulp plays out as you expect, a lot of tools at your disposal in 2025 and 2026, you use cash for buybacks, you'll have growth off this new machine in terms of EBITDA. Is that one way to look at this or would you totally disagree with that and why, why not? It's the absolute right way to look at it, George. And again, just building on some of the comments, that I made earlier to Ghansham’s question. I mean, the part of that we really liked is simplified build structure, six, well capitalized, low cost high-quality mills and the substrates that we need driving towards 90% vertical integration between our organic growth and just kind of some additional growth that we anticipate that we'll see here over that time. If you just do the math on the 100 to 200 basis points. So it positions us very well for 25, 26 regardless of kind of what those outcomes look like. And what I'd also say, George, and you've seen this, you've done this a long time, we'll have to kind of watch and see what others are doing there because our experience in this industry, and it's quite a bit for Steve and I is that over time, low-cost wins, high-cost loses. And I'd expect that to be similar to this go-around. But the great thing about how we're positioned in Graphic Packaging is not only are we low cost on the middle side, but our converting systems largely tied into that. And of course, we spent over the years to create capability there, too, which is really supporting our growth. So you're thinking about the absolute right way. All right. Thanks, Mike. I don't want to turn this into kind of an algebra class, but when I do some rough math on East Angus, Middletown and Tama and look at the slide deck and also make a conversion for metric to short ton. It seems like Waco adds about 550,000 short tons, if I did the math right. Would you agree with that? And if so, it seems like the profit per ton is a bit more $20, $30 versus K2. Could you talk to that? And if it is higher, why would that be the case? Yes, George, it's Steve. I'll start, and Mike can add on as well. But you got it correct. The Waco investment 550,000 short tons addition the assumption as you see in the slide, the cumulative capacity of the other three facilities that are the higher cost facilities are 350,000 tons across Middletown, East Angus and Tama. And so that's the net incremental 200. Obviously, that can move over the years, dependent upon the growth profile, the supply-demand environment from what they're doing, but that's the math that you're seeing there. And yes, we're seeing a slightly higher net improvement because of the singularity of this investment if you will, in terms of its ability to kind of stand on its own. And with some of the incremental investments that Mike was talking about on recovery and energy production and the like, I said again. So again, fiber costs will be a little lower in the aggregate here because of the capabilities we have George, in internalizing some of that material. We're just not getting much money for right now in the export markets. So like I said, that's a pickup for us there. From cost standpoint also from a sustainability standpoint, which we're quite excited about. And the other part of that is making our own electricity with our own steam, and that's going to lower the overall cost. So you're thinking about it the right. Hey, good morning. Thanks for taking the question. A lot of investors are concerned that pricing for your paperboard grades will begin to roll over as this happened in other markets. Looks like backlogs came down just a touch, but remain pretty healthy. I guess, what do you say when asked about this standpoint and environment, do you see any increased competition in any of your markets with any kind of discounting taking place? So Kyle, as you know overall capacity based on what's been publicly announced is going to be relatively flat over the next couple of years for sure. And then there's some ads that happen into 2025, 2026. But if you just take a step back and look at what we are talking about at Graphic Packaging, which is what I'll talk about, speak to, we expect our volumes to grow in 2023, meaning we're going to need more paperboard. And so we expect those markets to remain [indiscernible]. Our backlogs are solid as we reported here, and that's our expectation going forward. And then on the cost, you increased the range by quite a bit on the commodity cost bucket relative to the preliminary outlook last quarter. What was kind of the reasoning behind this? You talked about a little bit, but what was, where do you see the most uncertainty and costs that could see the most inflation throughout the year that caused you to increase this range? Yes, Kyle. It’s Steve. I mean, I think we're just being prudent to, if you look back over the last two years, we've seen hundreds of millions of dollars of inflation come at the business in short order at times. And you've seen very high volatility in cost categories like nat gas, like recycled fiber. And so we're just looking at this saying, listen, we don't know where it will land. We think the 100 to 400 is a good assumption. I just provided the mark-to-market a little bit earlier, which is on the lower end. But could you see some reinflation in the back half of the year? Is that plausible? And certainly we don't have a point of view on it, but we're recognizing that it is in fact plausible. And if it occurs, then we'll take appropriate price action to recover. But we're just trying to be mindful of the fact that we've been for now over two years, operating in a pretty volatile commodity input cost environment. I mean, if you think about it, Kyle, just to build on that, I mean, if someone would've told us in August we'd have $2.50 mmbtu nat gas, I don't know if you would've believed it either. So I mean, things can move around in a hurry, based on geopolitical things and other events. And a couple of the analysts on the call have actually wrote about reinflation in the second half of this year. So I think it's prudent to be a bit conservative here in terms of how we're looking at it because as Steve said, we just don’t know for sure. So I guess, hi. So I wanted to come back to the Waco investment and just, I mean, talk about a 12% kind of return on cash return and 11% ROIC. And I'm just trying to get a sense of how you've risk adjusted that versus your cost of capital for the size of the project and alternative uses of capital in terms of buying whether it's buying stock or M&A which obviously delivers earnings on a much shorter order, just would seem like the spread versus the cost of capital for sizeable project doesn’t have a big project risk premium in there. I just want to make sure [indiscernible] how you are viewing that? Yes. Thanks for the question, Adam. So first off, you know, part of how we derisk the project is the experience and the knowledge we have coming out of K2. So I'll start with that. I mean, as I mentioned in my prepared remarks, this is an identical machine, the one we just got done building. So all the engineering is done. If you think about the operating system on this machine, it'll be all debugged by the time we lift and shift it down to Waco, so all those things really give us confidence in our ability to have a vertical ramp. And I think you'd actually have to agree our ramp in Kalamazoo and then 11 month fashion getting up to full run rate. I've exceeded most people's expectations, including mine, which were high. And so I think if you think about it in those terms, that's that gives us confidence in the project. Having said that, I think the other thing you've got to factor into an investment like a mill like this is, a three decade plus, a type investment. And one other benefit about CRB versus some of the virgin stuff is the ongoing capital requirements to run a CRB mill are much lower than that of a virgin mill because you don't have all the pulping and backend things that you got to deal with. So the drop through on that 160 once, we're at full run rate is pretty large. And, our stakeholders and investors will be the beneficiaries of that kind of cash dropping through each and every year, just like they were, if you recall when we talked about, when we did K2, what we saw in K1, it had been running for three decades thrown off a $100 million of cash for $120 million investment. So that's how we think about it in a high level capital allocation. You're right, there's things like, acquisitions that you could do that could have a little bit more immediate, but they come with risk too, as we know in a situation in the macro like we're dealing with right now. But we've done all of those. I mean, if you think about the AR deal we did, it was winner for us. Synergies are on track. We're growing our topline there. We have done buybacks in the past, if you go back to 2015 almost a $1 billion of buybacks that we've done over that period of time. So we look at it as truly a balance capital allocation process. And we think this one is a real winner for our shareholders. Yes. And just add on to that. It’s Steve. I think, there's a couple things in there that Mike was articulating. One is the returns are actually in many ways mechanical. It is fixed cost reduction, variable cost reduction. We can see it, it's in our control. We know how to execute against it. And echoing the point, a 30-year return profile for besting class cost structure at 11%, 12% returns is quite value creating. But we're also, with what we're sharing today, there's a both end, and we're investing for the long-term growth, but we're going to reduce debt again in 2023, probably by another $0.5 billion, leverage is going to drop from 3.2x to 2.5x. And so we are returning very significant cash flows in a balanced way back to all stakeholders in this case by investing for the long-term to build the modes around the mode up around the business while returning value to shareholders in a significant way, driving leverage down to the low end of our targeted range. Okay. That's all very helpful. And I am going to ask a follow up. You talked about kind of reoptimizing the mill, the mill network and some of the different kind of products that that can come out of the virgin grade mills. How do you think this positions your footprint to compete against some of the FBB kind of SBS type capacity that's being put up by others and what kind of how it, how your cost position in those markets are impacted by putting Waco in directing that capacity to CRB? I think it creates very tough environment for them in many ways. And when you think about it, we're going to have an optimized six mill system coming out this lowest cost domicile here in the U.S. and the best fiber baskets both on the virgin and on the CRB side. And over time, we're going to take our tons the 5% growth that we're talking about and grow organically driving our integration rates up above 90%. So we always have said, Adam, that we want to have the ability to have leverage the full and different optionality and growing our global spend to the point now where we're buying a $1 million tons of paperboard, creates a situation where we can pull a lot of different levers that allow us to optimize our core and continue to have to buy on the outside as we grow our converting business both organically and with strategic M&A. So that's our strategy and I think it positions us well from a moat standpoint. So as those funds come online in 2025 and 2026. Two, I guess, points of clarification. Thank you. This Tama mill with, I guess a footnote one on there. It sounds like it was required at the end of January. Maybe just a little bit of color there as to what was driving that decision because it seems like it's not on the map when I look at the right side of Slide 10. And then on the cash flow discussion or guide that you're giving us, I don't know if you talked about it much, Steve, the $300 million to $400 million that's working capital interest, taxes, pension, what do you are trying to tell us there? So I'll take the first part of Gabe and then let Steve handle your second part of the question. But the first part of it is, if you take a step back and remember we had a supply agreement with Greif when we bought their converting business back in February of 2020, that was pretty large, almost a 100,000 tons [indiscernible] centrally into that. We're over half the volume of that mill, so relative to what we're doing here, we need those tons to make sure that we can run our business over the next few years and ultimately integrate that into our overall business. We're very committed to CRB as evidenced by the investments that we're making. So it made sense for us to kind of de-risk that part of our business here going forward. Yes. Just add that, a couple of context points there as terms of expectations inside of the guide were our expectation for the mill for the Tama mill this year is about $15 million of EBITDA. It'll get offset a little bit by the exit from Russia that we've articulated earlier that we're continuing to work through. Relative to the other cash items, all we're really doing there is just providing you with the range of what we expect or the really the other uses of cash for the business this year. And that's where interest taxes, working capital and pension will fall. Our interest costs are going to be in the low to mid-2s. Our cash taxes will be a 100 plus or minus, and then working capital and pension in a range, probably zero to $75 million. So all we're doing there is just putting it into the appropriate category, $300 million to $400 million, that’s really what it costs to operate the business beyond the capital that we're putting to work. And hence, it's your walk from the midpoint of our EBITDA less the CapEx, less the $300 million to $400 million get you to the cash flow of $600 million to $800 million. Take the dividend off of that any other small things that we do. And that's where the debt reduction [indiscernible] the benefits to get you down to leverage in two and half range. So we're just providing you with the walk. Understood. It was just the aggregate of those numbers and I think maybe previously you guys had kind of broken those off for us. I appreciate it. Thank you, Steve. And maybe what you're hearing, the next question is kind of two parts and I guess what you're hearing from our side of the table is maybe a little bit of surprise on behalf of investors and in terms of the magnitude and timing of this investment. So I'll start by saying, look, I think you guys have proven a lot of success with Kzoo, so, congrats there. So the two part question is, one, as you look across the existing system, one of the things from a timing perspective that, that may have accelerated this or brought it to the forefront could be, I guess some existing capital requirements of some of the existing footprint. So, can you talk about whether or not that was part of the decision making? And then the second point, Steve, from a financial standpoint, I think the Middletown mill enabled you to maybe capture some of this incremental 200,000 tons of growth. So in other words, as a part of your original Kzoo project, you guys were going to close that, you kept it open because as you've talked about, you've seen the growth. If I were to ascribe that kind of $400 million EBITDA per ton figure to that, it would say, well they were already on track to get some $70 million of incremental EBITDA that they weren't expecting before. And so looking at the project from that perspective, maybe the return potential is really $90 million from the cost saves that you'd be getting because you could have already gotten that growth with Middletown. I know it's not that simple, but just maybe flaws in that logic if you will? Yes. Let take second one first and then Mike can attack the first, no, real clarity. We got first $50 million from K2. We'll get the next $50 million this year. We'll get the final $30 million in 2024, and the 160 is incremental to that, 80 and 80. So you've got an accumulation here of 130, 160. I mean, this is a very substantial multi nearly decade level improvement of EBITDA from this investment in a very unique and world class, low cost, high quality CRB platform. So there is not, if you're asking that question, there is not a plus and minus 50, plus 50, plus 30, plus 80, plus 80. That's what's common. Yes. And so, Gabe the other part of that I think is important. You said it is, three mills that we will look to shut down once Waco is operational. I mean, these are small end of life type assets. To be fair, the folks that run those mills and work in those mills have done an excellent job with what they have for a really long time. And these kind of decisions are always hard. But our ability to attract new talent to work in places like that, it's diminishing quite frankly, we need to have modern facilities that are well capitalized, control rooms that are digital in nature, you know people will work in those kind of environments. We see it in Kalamazoo in terms of our hiring process. And then the other thing I'll point out, and this is important, our customers are under increasing pressure because of the public proclamations they're making and commitments they're making around sustainability that really we have to have the ability to service them and help them accomplish those objectives that they have over the next five to 10 years. And when you look at an investment like we did in Kalamazoo and now in Waco, Waco alone is going to reduce our absolute greenhouse gas emissions across our CRB platform by 12%. And if you're just serious about sustainability and circularity, you've got to make those kind of investments because you can't get there relancing the converting facility with led lights. So these are major moves that we're making to support our customers and position this company over a multi-decade period of time to really generate ongoing cash flows then margins, that are consistent with our Vision 2025 goals and aspirations that we've outlined. Hey, good morning. Yes, a lot of the questions have been answered, but just to touch again on kind of the capital deployment priorities, I guess as we look out towards 2025, if I just got to look at that adjusted EBITDA and sales range, it implies to may not so much on the sales front, but on the EBITDA front implies that there might be some room there at the midpoint or even towards the higher end for M&A. So, where do you think about adding capabilities in the future if there is kind of that focus on, bolt-on acquisitions or even larger M&A? Thank you. Thanks for the question, Kieran. So one of the things that Steve and I are both happy about is we head into 2023, a bit of an uncertain macro to say the least. If you have self-help things that you can work on, what a great thing for a CEO and a CFO to have and to be able to align your organization around and we've got that. We've got the continued ramp up in Kalamazoo, that's going to deliver another $50 million this year of ongoing savings as Steve has outlined. We've got synergies and growth that we can drive with our AR Packaging acquisition. And ultimately, of course, our teams will be getting busy now, down in Waco. So these are things that we control and we can execute on. And our track record around execution is really, really high as you know. And so, we like that. And so as we've said before, and we'll continue to say, I mean our bar for any M&A is, is extremely high, given some of the things that we're working on internally. Having said that, we don't always get to control when something would come to market. And so there are certain things obviously we would take a look at, but it's going to have a really, really high bar, given the other priorities that we've got in front of us and the ability to really improve our EBITDA through our own actions over the next two to three years. So that's kind of how we think about that. And as Steve has said, we're going to pay down another $500 million worth of debt roughly here this year. If you take a look at what that looks like, our debt ratio goes 2.5x. We like how we're positioning this company not just into the future, but in 2023, so the optionality we will have, we'll continue to grow and then it'll expand as we go into 2024 and 2025. But, again, we like our internal self-help story, and that's where we're going to spend our focus here unless something very compelling would come along. And as we've said, it'd have to have an incredibly high bar. Yes. And Kieran to Mike's point, big part of that high bar is integration and that's we look out over the next several years, that's where we can really drive value moving that integration up towards 90%. So that's a big part of the bar, if you will, that we set around return expectations for anything we would assess. Thanks. Mike, Steve, Melanie. Appreciate taking the questions. Nowhere approaching, we're over the hour here, but just one quick one on the Waco acquisition. If you just look at some of your initial estimates on cost and EBITDA, it seems like there's, that Waco is yielding a lower return than Kalamazoo based on those initial EBITDA generation and the cost kind of spend. Can you help us frame what's driving that lower return at the outset, and is that primarily due to the fact you're dealing with the Greenfield versus Brownfield? Well, I'll start with the absolute answer in terms of the increase some of the increased costs is a function we have to build the infrastructure. So wastewater treatment in Power Island, those kinds of things, we've got to construct. And as we said, Michael, we're actually going to have enhanced capabilities here too, both in terms of our pulping capabilities and our ability to generate our own electricity within the mill. But the overall returns is a ratio. If you think about what we spent in Kalamazoo and what the public talked about spending in Kalamazoo, it's substantially similar. Okay. And just quickly on Texarkana, can you remind us what the metrics are you're looking at to determine whether to proceed with a potential conversion of that mill, particularly given all the capacity that has been announced at the start here domestically? I remember you mentioned that you postponed the conversion because it would take about 90 days of downtime. Obviously not partly favorable in line of current tight supply demand, but just wondering if that's something that's on your radar as well, given the capacity additions that are targeted for the U.S. Yes. So as we've talked publicly about Michael, we've got, we looked at projects to do FBB, we looked at projects to expand our CUK capacity. We looked at this project to expand our CRB capacity. Obviously today in the near term we're talking about CRB, for all the reasons I've already outlined, I won't recover those points. But having said that, we've got good projects on both those different substrates over time, we see a need for those. Right now, our focus is going to be on CRB. I'll tell you that our Texarkana mill is quite busy because that machine that took downtime that you're referencing correctly. So that was during the pandemic when your food service volumes were down substantially. And of course, since, the reopening here in the U.S. and all through last year and into January here, our food service business is accelerating in terms of volumes and growth. And so we need those tons coming out of that mill now. And ultimately, that's how we're thinking about that. Hey. Good morning, everybody. Thanks for sneaking me in here past the hour. Appreciate it. My thought is follow-up something on something you said or I thought I heard you said in your prepared remarks. Like you said, I think the CRB cost advantage exceeds other substrates or the potential cost advantage in CRB. Did I hear that right? Maybe could you expand on that a little bit? Yes, Cleve. It’s Steve, I'll start. I think what we were articulating there is that there's a unique opportunity that we began with K2 and that exists with Waco for very distinctive and substantial cost to produce differences with CRB. When you compare these investments to the other capabilities in the industry, our own remaining and others. Whereas in virgin substrates, that level of difference tends to be smaller, whether you're making a current investment or maintaining your assets. So there's a unique competitive differentiation of substrates with CRB that is larger than you would see, being capable or being captured with virgin paperboard investments, I think is what we were articulating there. Right. And so if you look at that cash cost curve that's in the slide, Cleve, what Steve is referencing is that advantage is much larger on CRB that you saw the same cash cost curve for SBS, which, if you can go get the Fisher curve, the low, if you look at North America between the lowest cost and the highest cost on SBS, it's within a $50 bill. And so our advantage is going to be when this is done, $135 a ton. So that's the substantial nature of it that we're talking about. Yes. I just wanted to make sure that point was clear. And then Mike, I really liked your point earlier about the lower capital intensity of recycled grain versus virgin… Yes, no, it's a great point. And then there's one quick follow up. We're talking more about integration now and vertical integration, and I'm just wondering, if you guys could quantify a little bit for us what it means to go from 73% to 90% integration, what that does for you in other areas of your business just as a reminder. And then maybe just remind us what the restricting factor is on integration. In other markets we kind of think of the downstream as being the restriction, but I think Mike, you were talking about you'd buy, a 1 million tons of paper every year. So, and maybe it's, it's really just this upstream investment that, that enables that integration? And that's it for me. Thank you. Yes. I think, look, if you think about that, and I appreciate the question, we really take a look at that 1 million tons we buy as make versus buy and that calculus will change over time based on freight and other things that go into that around some of the places we purchase the paperboard around the globe, particularly if we want to optimize our mill network, which we'll be able to do once we're done here with this Waco investment. So I think the biggest thing for driving integration rates up is our organic growth. Every time we grow each year we grow, like we've done over the last three, we need more tons next year and we have to have low cost, high quality material paperboard to be able to convert it for our customers. Our customers really appreciate the vertical integration and they were reminded of how important that was during the pandemic and ultimately through some of the dislocations associated with these supply chain difficulties. So being an integrated supplier to these large brands and these large retailers really helps de-risk their overall supply chain profile. And so it's an important part of that calculus. Having said that, you got to invest in your converting too, and we've done a good job on that over the years. To make sure that you've got, good converting plants that are geographically located to where your customers are. We like to say that all packaging is local. And so that, that end conversion has to be done in a way that helps service our customers facilities and plants. And again, our selection of Waco is, great because we've got a 100 converting facilities here in the U.S. and it's a great location for us to be able to service them geographically, as I mentioned, down into Mexico, the West Coast, back east, and even up into the upper Midwest. So that's how we think about it, Cleve, why vertical integration is such a key part of our strategy and has been really for well over a decade now. This concludes the call today and I'll now turn the call back to Mike Doss, President and CEO for closing remarks. Thank you, Elliot. And I do want to thank everybody for joining us for our call today. We'll look forward to talking to you again towards the end of April with our updated first quarter results. Have a great day.

EarningCall_487

Okay. Good morning, everyone, and welcome to our Fourth Quarter Presentation. As usual, I will run you through and give an update on our business, and then Mikkel will take us through the financials. The evidence of global warming is clear. Despite record investments in renewable energy globally in 2022, we are far from being on a path that will meet the targets of the Paris Agreement, that is to limit global warming to 1.5 degrees. The pace of the green transition will have to accelerate and investments in renewable energy will have to increase significantly, if we're going to get close to that target, and this is especially true for emerging markets. Scatec is well positioned to contribute to the acceleration in our core markets. We have the capabilities, the track record, the pipeline and the relationships to be a key player and a key contributing factor in these markets. This was exemplified also during our COP27 participation, where we engaged in discussions with political leaders and key stakeholders in our core markets. We also signed several agreements on potential partnerships, all of these that we're now working after the conference. So in terms of 2022, it has been a year of strong operational and financial performance and also acceleration of growth for Scatec. 2022 started obviously with Russia's war of aggression on Ukraine. This contributed to a global energy crisis and also global food crisis, but obviously has also impacted us both financially and organizationally and always also on a personal level. Still, for the year as a whole, we have a solid EBITDA of NOK2.6 billion. We have moved 1.2 gigawatts of projects into construction. This represents NOK15 billion in CapEx and equity investments of about NOK2.5 billion. Then fully operational, these projects will contribute in the Power Production segment of about NOK750 million on an annual level. With these new projects, we have 4.6 gigawatts in operation and under construction. Finally, during 2022, we have updated our strategy to become even more focused, and we have adjusted the organization, as well as our management team to match this strategy. Then on ESG. Our power plants avoided 4.7 million tons of CO2 emissions during 2022 on a 100% basis. Through the year, we have maintained top ratings at the key agencies for ESG reporting, and we have been working on establishing our net zero climate targets and our plans for achieving these. In the fourth quarter also, Scatec was recognized for its leadership in corporate transparency and performance on climate change by the Carbon Disclosure Project. Scatec achieved top score, an A, as one of few companies out of nearly 15,000 companies being rated by this agency. But ESG for us is not only about reporting. We also committed to high standards of ESG throughout the value chain and through all the activities that we're doing. We continue to ensure diligent environmental and social assessment for our projects, and we work closely together with the nearby communities when we are implementing our projects, ensuring that our projects are contributing to local economic growth, improving living conditions through job creation and community initiatives. Then in terms of the quarter. Q4 was a strong quarter with good financial results, good progress on our 1.2 gigawatts of projects under construction and also significant achievements when it comes to funding to enable further growth. Total proportionate revenues came in at NOK2 billion with a strong EBITDA of NOK786 million. This is driven by strong performance in the Philippines and also progress on construction within the D&C segment In the Power Production segment, proportionate EBITDA increased by 7.6% from same quarter last year to NOK821 million. Construction of our projects in Brazil, South Africa and Pakistan progressed well in the quarter with high activities on the sites. We have also made good progress on ensuring that they are well capitalized and prepared for future growth. As previously communicated, we have several sources of funding for future growth. So this quarter, we have entered into an agreement to divest our operating plants in Upington, South Africa of 258 megawatts with gross proceeds of about NOK569 million. Further, we have also started the refinancing of our bridge to bond, which is standing at $193 million. The first $100 million has been converted into a term loan with our relationship banks. Then moving into operations. We have had stable operations with high availability of the power plants during the quarter. Power production reached 979 gigawatt hours, compared to 1,047 gigawatt hours same quarter last year. In the Philippines, the production was about 19% higher than same quarter last year, explained by strong hydrology and reallocation of some capacity from ancillary services to spot sales. Other hydro, however, was down close to 30%, compared to same quarter last year. This is mainly driven by lower inflows to our hydropower production units in Laos. Production within solar and wind is down relative to the same quarter last year. This can be explained by lower irradiation in some of our main markets. All in all, this represents a reduction of 6% last year -- this last year and are driven by weather variations that are still within what we see as normal levels. Then I'm just back from visiting Philippines, and it's always great to meet up with our team and our local partners and see the good work, which is going on locally. Production volumes were significantly above contracted sales volumes in the country, which allowed us to capture high power prices by selling excess production volumes in the spot market this quarter. Average realized spot price remained also high during the quarter, reflecting the general energy market, as well as our ability to capture higher prices based on the flexible generation base that we have in the country. The combination of high production and spot prices resulted in an EBITDA of NOK281 million, which is up 21% from same quarter last year. And for 2022 as a whole, we ended up with an EBITDA of NOK888 million, and this is also slightly up for -- relative to 2021. Then our project backlog and pipeline has increased to 16.7 gigawatts through the quarter. We continue to mature the backlog and pipeline according to our strategy, that is focusing on larger projects and also creating a more focused portfolio around our main focus markets. We now have more than 85% of the pipeline in our focus markets, and we believe that this is a reasonable level. Then in terms of the market in general, we do see that PPA prices on a general basis have come up slightly over the last six months, and we also see that component prices are coming down. All of these developments are obviously positive for us and our ability to generate value going forward. The backlog has also matured in the quarter and is now at 1 gigawatt. And here, I would like to mention that we signed the PPAs for the 273 megawatts round 5 portfolio in South Africa. This provides more visibility on financial close for these projects. In terms of the pipeline, it has increased to 15.7 gigawatts. A key achievement this quarter was the award of a 300-megawatt wind project in the safety auction in India. And here, we continue to push forward on our strategy in India with a combination of utility scale, C&I and hydropower project opportunities. And I also plan to travel to India next week to follow-up on these opportunities and spend time with our team and our partners. On the green ammonia project in Oman, reaching a fully bankable project structure is taking time. We have had further discussions with Acme on how to implement this project. Our partner is considering to move forward with a Phase 1 before financial close. We will not do that, but we will maintain an option to partner on the second phase. So let me reiterate what we also said in our Q3 presentation. The most important for us is still to maintain discipline around our investment decisions and only move forward with projects that are meeting our hurdle rates and meeting our investment criteria. I'm then happy to see that during the quarter, our construction activities continued to progress according to schedule and according to budget. Q4 D&C revenues came in at NOK627 million with a gross margin of 10%. This means that we recognized about 6% in our accounts, 6% progress. In South Africa, we are progressing well on substructures for the modules and on the grid interconnection works. And here, we start -- we are ready to start mounting of the modules. In Brazil, we are finalizing the civil works, including leveling, clearing and foundations for the substructures. We are here ready to start piling and also substructure works. And then in Pakistan, piling and substructure works have been done. And here, we are guarding to mount modules. In addition to these three main projects, we are having good progress also on BESS installation at Magat in the Philippines. This is being done by SNAP, our JV company with the Aboitiz Group. And we are also seeing good progress on insulation activities by Release. Based on all of this, we will see strong activity level in the D&C segment throughout 2023. We have signed, as I've already said, an agreement to sell our 42% equity stake in the 258-megawatt Upington solar power plant for a consideration of ZAR979 million, that is about NOK569 million. The solar plant in Upington reached COD in 2020 and was awarded in the fourth bidding round under the REAP program. The plant generates approximately one-third of the proportionate power production EBITDA in South Africa for Scatec. We entered South Africa back in 2010 and have since grown to become a leading renewable energy player in the country. And South Africa remains a focus market for us, and we will continue to build scale through new investments, including the Kenhardt project, which is currently under construction, and the growth from time project is secured in the fifth bidding round, which is currently in our backlog. We will continue to provide operations and maintenance and asset management service to the Upington plant. This will enable us to continue to realize the scale benefits of operation in South Africa. The transaction is in line with our strategy to optimize our portfolio, as presented at our Capital Markets update in September last year, and will obviously also release capital for new project investments. So then towards the end, let me recap and emphasize our updated strategy. We will continue to build -- to develop, build, own and operate renewable energy projects in emerging markets. We have built up track record and capabilities in realizing projects in these markets, and we will continue to focus here. There are three pillars to this strategy: firstly, grow traditional renewables in selected markets to take a long-term perspective and build scale and more predictability; the second pillar is to take a leadership role in green hydrogen, focusing on securing projects in the most cost-effective regions and securing offtake, and here, we will focus on the regions where we already have a presence; finally, number three, is optimizing our portfolio. So we will continue to implement this strategy during 2023. I will then hand over to Mikkel for the financial review. This will be Mikkel's last quarterly presentation as the CFO after close to 10 years, and I believe, more than 35 quarterly presentations. So on behalf of the company, I would like to thank him for his great contribution as CFO, and I look forward to work together with him in his new role. Mikkel? Thank you, Terje. So let me then go through the financials. So we continue to report solid financial results. And here, looking at the proportionate financials, fourth quarter revenues reached NOK2 billion, and that was up from NOK1.2 billion last year. Power Production continues to be the main contributor for the revenues with NOK1.3 billion, but Development & Construction is also ramping up with revenues of NOK627 million. Q4 EBITDA came in at NOK786 million, up 15% from the same quarter last year, and this is then based on improved Power Production, but also D&C contributions. For 2022, overall we generated revenues of close to NOK6 billion and EBITDA of NOK2.6 billion, a slight decrease from last year. EBIT ended at NOK469 million, up from NOK399 million last year, and we had no impairment of project development rights in the fourth quarter last year. EBIT for 2022 ended at NOK460 million and was impacted by the NOK770 million impairment of Ukraine assets that we did in the first quarter, but also impairment of product development rights of NOK132 million earlier in 2022. Now this quarter, I also will go through the consolidated financials since there are some effects that I would like to explain to you. The fourth quarter revenues from our fully consolidated power plants reached NOK773 million, which were broadly in line with the same quarter last year. But net income from the JVs reached NOK220 million, and this was down by NOK56 million from the same quarter in ’21. We equity consolidated our assets in the Philippines, in Laos, Argentina and Brazil, and about half of the reduction from last year relates to lower revenues and net results in Laos and the other half related to increased financial expenses, mainly currency effects, impacting the net profit from these four assets. The operating expense increased to NOK304 million in the quarter, reflecting increased development and construction activities. And EBITDA, as you can see, ended at NOK689 million on a consolidated basis. Now the net financial expenses increased significantly compared to last year and ended at NOK875 million. Of this, net interest expense for the quarter was NOK404 million. In addition, large currency movements led to noncash currency losses of NOK461 million. About half of this relates to our currency hedge for the RMIPPP project in South Africa, and the other half is unrealized currency losses related to balance sheet positions across our portfolio. Net loss of NOK433 million for the quarter. Then moving to the financial position. At the end of the fourth quarter, consolidated assets stood at NO37 billion, up from NOK33 billion at the end of last year. The movement here is mainly driven by the weakening of the NOK, but also construction of new power plants that we are -- have been doing in 2022. Cash at the group level stood at NOK1.7 billion and proportionate net debt ended at NOK18.4 billion. Now we continue to see solid long-term cash flows from supporting our long-term group level debt, and this is also demonstrated through the strong support that we are getting from our relationship banks. We have now refinanced $100 million of the $193 million bridge facility through a new term loan provided by the banks. The new loan comes with a margin in the low 300s. It matures almost five years from now and is amortizing with $10 million starting in 2024, $10 million per year, that is. Now moving to the cash movements. We moved NOK3.1 billion of cash to NOK1.7 billion of cash at the end of last year. We received NOK402 million of dividends from the operating power plants, but the main element of the operating cash flow is related to changes in the EPC working capital. We reported a NOK1.5 billion net positive movement in Q3, while we in Q4 reported NOK1.4 billion negative movement. This includes EPC payments for battery systems, solar panels and other components for our construction projects. The EPC-related working capital will fluctuate over time. And -- but obviously, we aim to match EPC incoming payments with outgoing payments, and we're expecting to generate a gross margin of close to NOK1 billion from the construction projects. And this margin will be earned and accumulated throughout the construction period. Now we capitalized NOK152 million of development expenses related to our backlog and pipeline, and we invested NOK158 million of equity, mostly then in Brazil and Pakistan. Total liquidity available was NOK3.6 billion at the end of Q4, including our undrawn credit facilities. Our cash position is further strengthened by the sale of the Upington assets, and we are well funded for our investment plans ahead of us. Let me also touch upon the dividends and the dividend policy. The Board is planning to propose a 2022 dividend in line with current policy to pay 25% of the free cash generated from the power producing assets. We received distributions of NOK1.2 billion in 2022, and we therefore propose a dividend of NOK1.94 per share or NOK308 million to be paid in May this year. Going forward, the Board of Directors will decrease the payment ratio to 15% of the free cash distributed from the producing power plants, and a new dividend policy provides further support to the growth ambitions, while retaining a consistent dividend policy or dividend payments. Then let me take you through the main points of the outlook. This year, we expect to produce 3.7 terawatt hours on a proportionate basis and generate power production EBITDA of about NOK2.85 billion, broadly in line with 2022. In addition, we expect contributions from the 150-megawatt solar plant under construction in Pakistan towards the end of the year. So this EBITDA is not included in the 2022 guidance. We also include an estimated NOK90 million contribution from Ukraine, which is in line with what we saw last year, and we have also adjusted the guidance for the now sale of the Upington asset. For D&C, we see remaining contract value for plants under construction of NOK7.8 billion, and we guide on a gross margin of 10% to 12% as earlier. For Services, we expect 2023 EBITDA of NOK80 million to NOK90 million, and for Corporate, a negative EBITDA of NOK140 million to NOK150 million. Now I will soon take on a new and exciting role in Scatec, and I'm really looking forward to bringing Hans Jakob Hegge onboard as the new CFO from March 1. So with this, I thank you for your attention and listening this morning. And I guess we'll open for questions, Terje. Hello? So first, congratulations on the transaction in South Africa. I want to touch a bit upon the process leading up to the transaction. So is this transaction result of collateral discussions? Or have there been like bidding rounds? And if the latter, how many bidders and binding offers? This is based on a structured process where they have been solicitated many potential bidders and many offers have been received. Initially, it was a process that was run by our partner, [Indiscernible], and neither in the process towards the end, but it has been an open bidding competition for the projects. And also, I guess, on your Capital Markets Day, get the impression that you would focus on core markets, South Africa being one of them, while you would primarily divest in noncore markets. Can you give a bit of color on why you divest in South Africa and not one of your noncore markets? Yes. I think as we said during the Capital Markets update, the process of consolidating our portfolio or selling down in assets is not -- it's not necessarily something that will happen on a very short-term basis. We continue to work also on the noncore assets and looking at those. But when it comes to South Africa, this is a transaction that makes sense for us. South Africa is still a core market. We have still a robust position there, and we still have a good growth trajectory with the projects that are currently under construction and also the ones that we have in pipeline. So from that point of view, the -- this transaction was a good transaction. It fits with our strategy, it is value-accretive and it provides significant funds for future growth. So it makes a lot of sense relative to our strategy. Okay. And then one last question. We're currently seeing a massive expansion of polysilicon production capacity, especially in China. And both [Indiscernible] and other forecasters like WoodMac, Bloomberg, et cetera, are forecasting lower polysilicon prices towards the end of the year, which could drive down module prices meaningfully. How do you view this? And sort of how do you work this into your project economics? Yes, I think we have already seen in the beginning weeks of January that there has been significant drops in polysilicon prices in the reports that have been coming out. And this will -- I'm sure that this will come through the value chain and also result in lower prices on panels modules for us. So we will watch this closely. And obviously, when we are doing economic models for future projects. We will use our best estimates and use what is available in the market in terms of coming up with predictions of that, that we use into our financial models. Good morning. Andreas Nygard, Kepler Cheuvreux. Touching upon what Roel just asked about. Could you say something about your current exposure to components price for your backlog and your projects under development? Yes, the way we structure our business is that we lock in the CapEx part of projects when we reach financial close. That's when we take the investment decision and then we have to lock in. Until that point in time, we are working, as I just said, based on estimates in terms of where the component prices and where the CapEx will be at the time of financial close. There will be -- we have actually seen some benefits of falling module prices towards the end of 2022 in the final negotiations on the module contracts. But now for the products that we currently have in construction, component prices have been locked in. And lastly, back to South Africa. I guess the sale you made, it makes sense because you got a really fair price in your view. Could you say something about what the capital cost for the seller was compared to you? No, I cannot say anything about the capital cost of the seller. I mean, the buyer institutional investor in South Africa. And I mean, clearly, they are seeing a good -- still, this is a good investment. But I cannot comment on their capital cost. Okay. Then we'll take some questions from the -- our online listeners. We have three questions from Manuel Palomo in BNP. Good morning, there is an increasing concern about the returns companies will make on assets under construction, given the inflation in costs and increase in rates. Could you please remind us as how you lock in the returns of the projects after the PPA is agreed? Yes. I have partly answered that question already. We look in the returns of the project at financial close and when we make the investment decision. That means that we are exposed to fluctuations after the PPA is signed until we reach financial close. And we also commented on this during our Q3 presentation, for instance, in Indonesia, where we had to go back and try to renegotiate PPAs, then the component prices are moving in the wrong direction or interest rates are moving in the wrong direction after the PPA has been signed. Next question from Manuel. Could you please guide to the amount of megawatts you expect to be operational and contributing to the EBITDA by full-year ‘23? Yes, our indications in terms of the projects that are currently in construction is that the Pakistan project will reach COD in the second half of the year and that the two other projects will reach COD around year-end or beginning of next year. And third and last one from Manuel on the Philippines. Prices in the Philippines are above 50% the average prices in 2021. To what extent is this commodity-related? What is the long-term average selling price you factor in your business plan? So the Philippines is impacted by the global energy market, as many other countries and have been impacted by the global energy crisis that we've seen. It's a country that is heavily dependent on coal for their power generation and coal prices have been going up, and therefore also energy prices in the Philippines have been going up. We're not going to share our internal price forecast for the Philippines, but obviously that will follow also commodity prices and the global energy market going forward. We have two questions from Nash in Barclays. Good morning. With the dividend payment ratio cut, should we assume the NOK2 billion NOK3 billion additional funding needs will be reduced accordingly? Yes, so this quarter, we have communicated two initiatives to improve our funding situation for future growth. One is the sale of the Upington assets in South Africa and the other one is the reduction of the dividend policy for the years from ‘24 and going forward. So both of those will improve our funding requirements for this period. And another one from Nash. Could you please provide a bit more guidance on how we should think about the D&C revenue, EBITDA and cash flow for the first quarter of 2023? Yes. I think Mikkel has already tried to give some indications on that. I mean, we have guided on EBITDA for power production. When it comes to the D&C segment, we have indicated the level of remaining contract value that we have in the current three projects, and then they will follow an S-curve in terms of moving through the construction phase of those projects. And obviously, we are, after we now have been talking about this for a couple of quarters, we are getting closer to the steeper part of that S-curve. One question from [Indiscernible]. Given the competitiveness in the RMIPPP tender rounds South Africa, how do you assess your chances of securing grid connection in South Africa or future projects? Are there any other ways of securing grid connections in South Africa other than partaking in that you are considering. Yes. So first of all, in terms of the last rebound in South Africa, we actually saw increasing prices relative to what we've seen historically on the PPA level, but there was a certain hiccup in terms of the grid connection queue moving into that turnaround, which resulted in only about 800 megawatts -- 800 to 900 megawatts being awarded relative to the target of 4 gigawatts. So going forward, South Africa, we'll further look at how the grid connection queue is being managed. And for us, we can secure -- we can continue to secure grid connection for our projects independent of the rebrand. And in South Africa, it is now opened up for also doing corporate PPAs and selling into the market. So you can also develop projects and realize projects on other basis than only through the REAP in South Africa going forward. Okay. Now we have two questions from Magnus Solheim Fearnley. Do you see STANLIB as a potential equity investor for the South Africa pipeline Maybe just to add Terje, STANLIB is already a co-investor with us on the other part of our South African portfolio. Yes. And another question from Magnus. Can you comment on the CPI adjustments in your contracts and how this impacts revenues in 2023? Is it a specific date, inflation adjustments kicks-in? Yes, maybe I should. There’s different dates depending on the different PPAs. So it all depends on the asset and yes, and country and the scheme that we are under. So that will vary across the portfolio. And two questions from Helene Brondbo, DNB. Do you see potential for canceling the entire dividend for increasing for increasing the liquidity available for growth? Yes. I mean this is a discussion that we're having with the Board, and we as well as the Board, we think it makes sense to continue with the underlying rationale that we have for our dividend policy, which is about showing discipline and transparency in our ability to bring dividends back from our operating assets up to the Norwegian level and linking a dividend to that. So we think that makes sense, and the Board also think that we should continue with that policy. But obviously, we have now reduced it to support funding for future growth. We have one from [Indiscernible]. Does your full year ‘23 guidance exclude the Upington sales? I guess I can answer to that. Yes. That's -- it's excluded. And one last one, one from Pascal. Why is the consolidated depreciation and amortization in full year ‘22 so much higher than in full-year ‘21? Yes. So that's mainly because we have grown the portfolio in that time frame and currency effects are also impacting that level. I think that's the main elements. We also saw some higher level of impairments on development projects in ‘22 versus ‘21. $93 million left on the bridge-to-bridge financing. How do you plan on addressing it? Will it be paid down? Or will it be refinanced? And what could we expect there? Well, we obviously have a few options there, and we -- I think it's difficult to be very precise in how we comment on it. We will address that in due time. It's still some time until it matures, the $93 million, but we will continue to evaluate our options there.

EarningCall_488

Welcome everyone to Surmodics' First Quarter of Fiscal Year 2023 Earnings Call. Please note that this call is being webcast. The webcast is accessible through the Investor Relations section of the Surmodics website at www.surmodics.com where an audio replay will be archived for future reference. An earnings press release disclosing Surmodics quarterly results was issued earlier today and is available on the company's website as well. Before we begin, I would like to remind everyone that remarks and responses to your questions today, on today's call may contain forward-looking statements. These forward-looking statements are covered under the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and include statements regarding Surmodics' future financial and operating results or other statements that are not historical facts. Please be advised that actual results could differ materially from those stated or implied by Surmodics forward-looking statements, resulting from certain risks and uncertainties, including those described in Surmodics SEC filings. Surmodics disclaims any duty to update or revise these forward-looking statements as a result of new information, future events, developments or otherwise. This call will also include references to non-GAAP measures, because Surmodics believes they provide useful information for investors. Today's earnings release contains reconciliation tables to GAAP results. I would now like to turn the call over to Mr. Gary Maharaj, Surmodics President and Chief Executive Officer. Please go ahead, sir. Thank you, operator. Hello everyone, and thank you for joining us for our first quarter of fiscal year 2023 earnings call. I'll start my remarks today with a brief review of our first quarter revenue performance. In the first quarter of fiscal 2023, we achieved total revenue of $24.9 million, representing 8% growth on a year-over-year basis. Importantly, our total revenue performance exceeded our expectations for the first quarter, which we shared on our earnings call in November. Our higher than anticipated total revenue growth was driven exclusively by our Medical Device revenue, which increased 12% year-over-year, more than offsetting a 3% decrease in our In Vitro Diagnostics or IVD revenue. Within our Medical Device business, our year-over-year sales growth was driven primarily by strong sales of our performance coating reagents and device products, including important contribution from sales of our Pounce and Sublime products. We also saw higher royalty and license fee revenue. In summary, we were largely pleased with our revenue results in the first quarter. Tim will talk through our revenue and other financial performance, including our updated fiscal 2023 guidance in further detail during his prepared remarks. But first, let me discuss some of the key operational developments during our first fiscal quarter and in recent weeks, beginning with an update on our SurVeil™ drug-coated balloon. As we shared on our November earnings call, our regulatory and clinical team finalized our complete response to the FDAs comments on our SurVeil PMA application, and we submitted our response to the agency on October 13. On January 19 we issued a press release announcing the receipt of a letter from the FDA related to our PMA application for the SurVeil. In the letter, the FDA indicated that our PMA application is not approvable in its current form. We are understandably disappointed to receive this letter, given the hard work and dedication of our team who have been focused on working collaboratively with the FDA to address their requests and provide additional clarification, data and testing as necessary, as well as our numerous interactions with the agency in recent month. It is important to understand that a ‘not approval’ letter is not a permanent denial decision. The agency provided specific guidance in terms of the information that must be added to our PMA application in order to place it in an approvable form. The information the agency requested was within two general categories, labeling and biocompatibility. With respect to labeling, the agency requested revisions to some of the language related to the devices patient labeling and instructions for use, and shared revised language incorporating these revisions. We viewed the FDAs labeling questions as generally routine and believe that it can be easily addressed. And with respect to biocompatibility, the agency raised additional questions related to our non-clinical testing and requested additional data to address these questions. First, let me say that we continue to believe that SurVeil is both safe and effective. With clinical outcomes for patients that are equivalent to the current market leading device, while using a substantially lower dose of a known cytotoxic drug. These outcomes are reflected in the 24 month data from our SurVeil TRANSCEND clinical trial, which represented at the VIVA Conference on November 1, and most recently at the ISET conference on January 18, which demonstrated the sustained durability of SurVeil safety and efficacy outcomes. Specifically, these data demonstrated comparable sustained clinical outcomes between the SurVeil DCB and the IN.PACT Admiral DCB cohorts, through 24 months in both the primary and safety and efficacy endpoints, despite the impact having 75% more paclitaxel. As it relates to the FDA letter specifically, I want to stress that the letter did not quest into human clinical data that we submitted, including the data from the TRANSCEND clinical trial. Moreover, the letter did not request any further human clinical data and there were also no concern cited with our large animal studies, our engineering. With that said, the questions and requests are received with respect to biocompatibility do require additional non-human testing analysis to address. In the days since we received the letter, our regulatory and clinical teams, in conjunction with our external advisers have been focused on evaluating its content and preparing to formally engage with the DFA. Specifically, our team has had an informal call with the Agency representatives and is now preparing a request to obtain feedback from the FDA review team through the FDAs Q-submission process. The goal of this request is to see clarification and obtain feedback under specific requirements for the additional testing and analysis to address the items outlined in the FDA letter. Assuming normal timelines, we anticipate receiving the FDAs formal feedback and our proposed approach via this process in May. In tandem, following the receipt of the FDA letter, we informed our commercial partner Abbott, and provided them with a copy of the communication. Our interactions with Abbott remain continuously productive as we proceed the next steps with the FDA that I just outlined. Our overarching goal in perusing these steps is to obtain additional clarity from the agency on what is required for this amended application to receive an approval decision. Based upon the feedback received from the agency during this process, our team and external advisors will determine the appropriate path forward, and we'll look forward to sharing additional details. While we work to obtain additional clarity and evaluate the path forwarded, we believe it is important for the investment community to appreciate some of the important considerations as we continue to navigate the regulatory process. First, while we're optimistic, we'll be able to address the FDAs questions through our engagement with the agency, we could learn that it may not be practical for us to proceed the level of evidence or request. While unlikely, if this were to occur, we would need to reevaluate our regulatory and commercial strategy for the product. The second, as we have shared in the past, if we obtain PMA approval for SurVeil before December 31 of this year, we are entitled to a final milestone payment of at least $24 million under our development and distribution agreement with our commercial partner, Abbot. After December 31, we remain entitled to this $24 million milestone payment following the receipt of the PMA approval, provided that Abbott chooses to commercialize the product and does not exercise their right to terminate the agreement. Ultimately, despite this unfortunate development in our path to commercialization of the SurVeil DCB, our team remains focused and productive. We will continue to engage with the agency and our commercial partner Abbott as we navigate the next steps in the regulatory process that I have outlined, with the goal of bringing this innovative product to physicians and patients as efficiently as possible. We'll look forward to providing the investment community with additional details on our strategy as we obtain additional information from the FDA and to determine our path forward. Now, let me provide you with an update on our progress related to our other strategic objectives for fiscal 2023. Beginning with our second strategic objective, to advance the initial commercialization of our Sublime radial and Pounce arterial thrombectomy platform. During the first quarter of 2023, our recently established direct sales force of 28 territory managers continued to focus on building our customer base and drive repeat orders across our expanded account base. Our market development team has successfully raised national product and brand awareness of our Sublime and Pounce platforms, with two dedicated supplements published in Endovascular today, which is viewed as one of the most recognized publications in Endovascular medicine. The Sublime radial access risks to foodsupplement was published in November of 2022 and outlines a compelling case for our radial revolutions spearheaded by the Sublime line of products in the peripheral space is gaining momentum. With a shift of Endovascular procedures moving from hospitals to ambulatory centers and office based labs, the benefits of radial access approach will be strategically important for owners and operators while having a positive impact on patients. In December of 2022, the Pounce thrombectomy supplement was published and reinforces the importance and success of our grab-and-go device that offers on the table results. The risk of arterial clot has increased significantly in the post-COVID era, which exemplifies the need for a simple, efficient Endovascular solution versus the more complex capital intensive devices that exist today, and a traditional surgical [inaudible] procedures. I highly recommend for you to read each of these if you want to understand more about our mission and why we remain committed to bringing these incredible technologies to market. Our team has made strong progress in engaging with potential new customers and working with them to get our products approved through their hospitals or clinics Value Analysis Committee. I am pleased to report that we ended the quarter with over 135 total customers for Pounce and Sublime, compared to over 100 at the end of fiscal 2022. And lastly, our pipeline of prospective customers has continued to expand at a healthy pace. At the end of the first quarter, the number of value analysis committees that are considering our products increased by more than 20% compared to the end of fiscal 2022. We are beginning to see the impact of our brand awareness and market education programs, which continue to drive new customer interest. Ultimately, we remain in the initial months of commercialization with a small, but growing customer base and an average sales force tenure for approximately nine months at quarter end. Looking ahead, we remain focused on building our recent progress through the next nine months of fiscal 2023 as we progress through our first full year of commercialization and continue to lead a foundation for strong future growth. I'm excited about the ongoing clinical performance of our commercial offering and will continue to find ways to accelerate growth in these areas. Lastly, an update on our Pounce venous thrombectomy device. We have recently begun to conduct limited market evaluations to venous that we experience across a wide variety of cases and clinical conditions and evaluate the feedback from numerous physicians. The real world feedback obtained through these renewed evaluations will help inform potential future design enhancements that benefit physicians and patients while optimizing its commercial viability. With respect to our third strategic objective, to drive revenue and cash flow growth from our Medical Device coatings offerings and Diagnostic businesses. Broadly speaking, we were pleased with overall performance of our core businesses during the first quarter. Revenue from our Medical Device performance coatings offerings grew 10%, while revenue from our IVD business decreased 3% year-over-year in the first quarter. Now the decrease in IVD revenue was driven primarily by the completion of a customer development program. Together, these businesses generated significant cash flow to support our growth initiatives, including the year-over-year increase in operating expenses related to the expansion of our direct sales force. So with this as an operational update as a backdrop, I'd like to turn now to discuss the spending reduction plan we have recently implemented. As we indicated in our press release on January 19, the FDAs response to our SurVeil PMA application, which means that we will not receive the related Abbott milestone payment in our second fiscal quarter as anticipated. This prompted us to evaluate options and take action in order to preserve capital as we prioritize investment in our key strategic growth initiatives. As a result, we have recently implemented a spending reduction plan, designed to reduce our planned use of cash by approximately $10 million to $11 million for the remainder of fiscal 2023, prior to the restructuring charges. Approximately 48% of the spending reduction is from SG&A, 27% from capital expenditures and 25% from R&D. Importantly, this plan is created and implemented after carefully valuation. We do not expect it to impact our ability to serve our customers, nor our ability to respond to FDA. The spending reduction plan includes two primary components; a workforce restructuring and additional cash saving measures. Let me take a minute to cover both of these components in some more detail. The workforce restructuring involves a 13% reduction in our employee headcount. These workforce reductions are intended to streamline and refocus the teams in several areas of our business, including manufacturing and operations, R&D and clinical, sales operations and our direct sales force, so that we can continue to execute our growth strategies more efficiently in fiscal ’23. On a manufacturer and operations front, we have reduced a number of positions that support the manufacturer of our SurVeil drug-coated balloon while retaining our core team that support SurVeil, including key manufacturing, technical, regulatory and clinical personnel. On the R&D and clinical front, we have aligned our headcount to support our current R&D priorities from a product development standpoint, which I'll discuss in a minute. And finally, we've reduced the size of our commercial organization, supporting our Pounce thrombectomy and Sublime radial access products to optimize our investment in sales operations. Our direct sales force consists now of 21 territory managers as of today's call, and remains focused and committed to driving growth in these product platforms. The additional cash savings measures that I mentioned, including a reduction in our planned CapEx, a reduction of our hiring plan for the remainder of fiscal 2023 and the refocusing of our investments and product development to prioritize progress, primarily on our near term commercialization opportunities. In terms of our priorities from a product development standpoint, we'll focus our product efforts on areas including Pounce arterial, Pounce venous and the Sublime radial product platforms. Several of our pipeline projects with a longer path to commercialization, including our Sundance Avess Drug Coated programs have been placed on hold. As it relates to our Sundance Avess Drug Coated balloons, we continue to be proud of a compelling first in human clinical data we have generated for these products to date, and the ongoing follow-up of our first in-human studies that is ongoing. More recently, we were pleased to see the 12 month data from our 35 patient swing trial for Sundance, presented at International Symposium on Endovascular Therapy or ISET conference on January 19. These data clearly show that the use of Sundance was associated with a primary patency maintained at 12 months and 80% of the protocol analysis population. Based on the 12 month data, our co-lead investigator for the trial, professor Ramon Varcoe, concluded that Sundance holds significant promise for treating real world patients for Peripheral Vascular artery disease. Given that Sundance and Avess DCB use the same -- similar drug delivery technology to that of SurVeil, we'll use the experience we gain from the SurVeil product PMA application process to develop the commercial and regular strategies for these drug-coated balloons. So stepping back, implementing the spending reduction plan and the related adjustment in our staffing levels was a very difficult decision for us, and in no way is it a reflection of the incredible talents and hard work of our team members during their time at Surmodics. We value every employee of Surmodics and have taken careful measures to ease the burden of those impacted, including severance and our placement services. Ultimately, this is a decision that we believe is both appropriate and necessary for the longer term success of our company and the benefit of all of its stakeholders. These steps of refocused organization to better align our spending with our near term strategic priorities and growth opportunities. As we look ahead, we remain focused on our three strategic priorities. First, we will continue to make progress with respect to our regulatory strategy for the SurVeil drug-coated balloon, as we prepare to engage with the FDA and evaluate the appropriate path forward. Second, we will continue to advance initial commercialization of our Sublime radio and Pounce arterial platforms, turning the corner for market entry eventually to rapid growth. And third, we will drive revenue and cash flow growth from our Medical Device performance coatings offerings and IVD businesses. Despite the challenges we have faced in recent weeks, we believe that pursuing these three objectives represents the best part to achieving strong sustainable growth and creating long term shareholder value. With a recently enhanced balance sheet and access to approximately $60 million and incremental debt financing, a disciplined approach spending in capital allocation, strong and stable core businesses, and a portfolio of innovative technologies, we believe we are well positioned for the future and remain committed to executing our strategic initiatives, efficient. I'll now turn the call over to Tim Arens, our Chief Financial Officer, to provide more details on our first quarter fiscal ’23 and our updated fiscal ’23 guidance. Tim? Thank you, Gary. Total revenue for the first quarter of fiscal 2023 increased $1.9 million or 8% year-over-year to $24.9 million compared to $23 million in the prior year period. Product revenue increased $1.9 million or 15% year-over-year to $14.2 million in the first quarter of fiscal 2023. The year-over-year increase in product revenue was primarily driven by medical device product revenue, which increased $1.6 million or 23% year-over-year due to strong sales of our performance coating reagent and medical devices, including contributions from sales of our Pounce arterial thrombectomy and Sublime radial platforms. We also saw contributions from growth in IVD product revenue, which increased $300,000 or 5% year-over-year, driven by growth across several IVD product lines, which more than offset some unfavorable order timing for distributed antigen products, which fluctuates quarter-to-quarter. Royalty and license fee revenue increased $670,000 or 8% year-over-year to $8.8 million. Royalty revenue from our performance coatings increased $520,000 or 8% year-over-year compared to the first quarter of fiscal 2022, royalty revenue was less impacted by pressures and procedures volumes related to hospital capacity constraints and customer supply chain disruptions. License fee revenue increased $140,000 or 12% year-over-year related to our SurVeil agreement with Abbott. R&D services revenue decreased $630,000 or 24% year-over-year to $1.9 million. The year-over-year decrease in R&D services revenue was primarily due to the completion of a customer development program in our In Vitro Diagnostics business and the timing of customer development programs in our medical device business. Product growth margin in the first quarter of fiscal 2023 was 63% compared to 63.6% in the prior year period. Product gross margin was adversely impacted relative to the prior year by certain manufacturing inefficiencies associated with ramp up of production of new products, which was partly offset by the favorable impact of product mix. R&D expense includes costs of clinical and regulatory activities, increased $1.1 million or 9% year-over-year to $12.7 million in the first quarter. The year-over-year increase in R&D expense was primarily driven by increased product development investments and our Pounce thrombectomy portfolio and costs associated with our SurVeil drug-coated balloon. SG&A expense increased $4 million or 44% year-over-year to $13.2 million in the first quarter of fiscal 2023, primary driven by a year-over-year in headcount related to the expansion of our direct sales force in fiscal 2022 and related investments to support the commercialization of our Pounce and Sublime products. Our Medical Device business reported an operating loss of $7.2 million in the first quarter of fiscal 2023 compared to a loss of $3.8 million in the prior year period. The year-over-year change was driven primarily by the investments in our direct sales force. Our IVD business reported operating income of $2.9 million in the first quarter or 50% of revenue compared to $3.2 million or 52% of revenue in the prior year period. Turning to income taxes. In the first quarter of fiscal 2022 we recorded an income tax benefit of $170,000 compared to a benefit of $710,000 in the prior year period. As we discussed in our fourth quarter earnings call, we are no longer recording tax benefits on U.S. net operating losses as a result of having established a full valuation allowance against our U.S. deferred tax asset. GAAP net loss in the first quarter of fiscal 2023 was $7.8 million or a loss of $0.56 per diluted share compared to a loss of $2.8 million or a loss of $0.20 per diluted share in the prior year period. Non-GAAP net loss in the first quarter of fiscal 2023 was $7 million or a loss of $0.50 per diluted share compared to a loss of $1.8 million or a loss of $0.13 per diluted share in the prior year period. Adjusted EBITDA loss in the first quarter of fiscal 2023 was $3.3 million compared to adjusted EBITDA of $650,000 in the prior year period. Note, our adjusted EBITDA in both periods includes an adjustment for stock-based compensation expense. For your reference, we include a detailed reconciliation in our earnings press release. Moving to the balance sheet: We began the first quarter of fiscal 2023 with $19 million in cash and $10 million in debt outstanding and a revolving credit facility with Bridgewater Bank. Cash used by operations during the first quarter was $10.8 million and capital expenditures totaled $1.0 million. It is important to note that our first quarter historically requires a higher use of cash to fund our working capital needs, such as an annual employee bonus payments and our annual prepaid insurance premium. In mid-October we entered into a new five year credit agreement with MidCap Financial, comprised of up to $100 million in term loans and a $25 million revolving credit facility. We drew on the term loan and revolving credit facility at close and received net proceeds of $19.3 million. A portion of gross proceeds were used to retire our prior revolving credit facility with Bridgewater Bank. As of December 31, 2022 we ended the quarter with $26.4 million in cash and $29.4 million in long term debt. Long term debt includes $5 million in borrowings on our $25 million revolving credit facility and $25 million in borrowings on our $100 million term loan facility. As of December 31, 2022 we have approximately $60 million in debt capital available, consisting of $50 million on our term loan availability, as well as incremental availability in our revolving credit facility, which is subject to borrowing base requirements. Turning now to fiscal 2023 guidance. We have updated our fiscal 2023 revenue guidance to reflect our performance in the first quarter, as well as our revised expectations for the remainder of fiscal 2023. We now expect fiscal 2023 total revenue to range from $102 million to $106 million, representing an increase of 2% to 6% compared to the prior year. This compares to our prior range of $103 million to $107 million or an increase of 3% to 7% compared to the prior year. Our updated total revenue guidance incorporates revised fiscal 2023 revenue expectations for our Pounce and Sublime products, including changes to reflect our updated sales headcount, which Gary mentioned. We now expect fiscal 2023 GAAP loss per share to range from a loss of $2.40 to a loss of $2 compared to our prior range of a loss of $2.80 to a loss of $2.40. Non GAAP loss per diluted share in fiscal 2023 is expected to range from a loss of $2.09 to a loss of $1.69 compared to our prior range of a loss of $2.54 to a loss of $2.14. Our updated fiscal 2023 loss per diluted share guidance reflects a revision made to our total revenue guidance that I just mentioned, as well a net favorable impact of our spending reduction measures. It is important to note that guidance does not include any incremental expense that may be incurred to potentially conduct any animal studies or other expenses that may be required to address the FDAs biocompatibility concerns related to SurVeil. In addition, our guidance excludes revenue associated with any potential future Abbott milestone payment on receipt of PMA from the FDA, which has been our practice with previous regulatory milestones. I’ll now share a few additional considerations for modeling purposes. Our fiscal 2023 total revenue guidance assumes revenue for our two businesses, medical device and IVD is expected to be approximately 73% and 27% of revenue respectively. Product revenue is expected to be approximately 58% of total revenue. Revenue associated with our legacy medical device coating offerings and IVD business is expected to grow modestly. Abbott SurVeil license fee revenue is expected to range from $4 million to $4.5 million. This compares to $5.7 million in fiscal 2022. Turning to the rest of the P&L. Our updated fiscal 2023 guidance reflects the following expectation. Product gross margins are expected to be in the mid-50s for the remainder of fiscal 2023. As a reminder, we continue to expect margins to be impacted by product mix and inflationary pressures. In addition, we expect higher absorption of fixed overhead costs in our cost of sales. As commercialized products are allocated in the increased share of our overhead expenses due to reductions in drug-coated balloon production. With regard to operating expenses, excluding onetime severance costs, we expect rest of the year quarterly expense of $12 million to $12.5 million in R&D expense and $13 million to $13.5 million in SG&A expense. Interest expense is expected to be $3.4 million for the full year. We expect a nominal amount of tax benefit for the full year. Lastly, with respect to our fiscal 2023 cash utilization, we anticipate that we will finish a year with approximately $11 million to $13 million in cash. We expect our cash use for the full year fiscal 2023 to be approximately $26 million, which consists of the total change in cash, excluding the net proceeds from long-term debt in the first quarter of $19.3 million. Further, we expect our Q3 and Q4 cash used to be approximately $3.5 million to $4 million each quarter. This reflects the following items and assumptions, our updated revenue guidance and active management of working capital; our spending reduction plan, which as Gary discussed, is expected to reduce cash use by $10 million to $11 million, excluding severance costs. We expect one-time severance costs of $1 million to $1.2 million, which we expect will be mostly incurred in the second quarter. And lastly, we expect to incur no further borrowings on a revolving credit facility in term loans. We expect to continually evaluate and asses capital allocation decisions throughout the year to ensure effective and efficient use of our cash and resources to support our business needs. Thank you. [Operator Instructions]. And our first question will come from Brooks O'Neil with Lake Street Capital Markets. Please state your question. Good afternoon everyone. I appreciate the substantial amount of detail and clearly thoughtful comments about all aspects of the business. I guess one thing I didn't hear you discuss that I think investors would like a little color on is whether you considered kind of the go-it-alone versus partner approach for Sublime and Pounce. And if you did, which I assume you did, perhaps you could just give us a little color about your thinking in that regard. Yes, I mean we evaluated this a long time ago and continuously scanned the environment on this issue. It was clear that the best way to create long term shareholder value creation was in the hands of our direct sales force. As you know, we have some experience with the partnership of whole products. Given the unique capability of these products at this point, nothing has changed there. We like what we see. You know, the cost is going to take some time to produce ongoing milk production. But the early development in the first nine months of -- I'm sorry, that's an analogy of the use of – you don't measure milk production from a calf, you measure from a cow, right, just to remind everybody. But look, with nine months of average tenure into this, its early innings and we're seeing the uptake and growth of these products as this begins to develop and it is best in our direct hands. Okay, good. Let me ask a second question, which is, I appreciate attempts, comments on the guidance and Gary your comments on the outlook forward for Sublime. I'm just curious, given that the FDA has given you some guidance about the path forward, why did you guys decide not to include the potential cost of animal testing in the forward guidance? Yes, you know here is the issue. We don't want to speculate publicly when – after we come out of the submission issue meeting, which we expect in the next couple of months, and we have alignment to the agency, only then will we have what we call much firmer data to share with our shareholders. Right now it will be subject to speculation, I'll give one caveat however. This is in the – this is not $10 million. This could be $1 million or $2 million dollars, and then again I'm speculating there, but I want to be clear, this is not in the large number of millions of dollars, which is why we said in the script, if it appears to be that, we will pause and reconsider the best options for our shareholders. But I don't want to speculate without having the agency basically get to alignment with us, and then if I speculate now, I'll be updating that and I prefer to hold that in reserve at this point. So in the letter they laid out in specific but not directly detailed terms, what type of data they like to see to cover any gaps that they believe exists, so – and much of this really deals with small animals, not for the large animal testing. Yes, thanks. I guess just to start with SurVeil. So I think you said you expect to hear back from them in May. So if you hear back from them in May and then you have to do some additional testing, maybe you can resubmit something in kind of like the fall. So I mean is it possible we could get another – an answer from the amendment in calendar ‘23. Can you give us the timing, right? Yeah, I appreciate the question, and you know the timing, I can lay out just briefly the process. So to get the feedback is like filing a brief in front of a judge. You can't secure the meeting until your brief is complete. So our team is working around the clock to complete our view and our brief and our point of view on the requirements, only then do you send that in any secure meeting, which takes in the matter of not months, but it's a matter of weeks, so it could be a month. And so, this process is really important for us to get it right with our brief, then get that meeting. So all of that as we said, under normal timelines we would expect it to happen by May. If animal, small animal testing is required, depending on the numbers, the type of species, etc. this will then be scheduled with our partners at animal labs that conduct these. These pre-clinical labs that are independent that would conduct it. So if you're asking us if we would like this done by the end of fiscal year – by the end of the calendar year, absolutely. And I appreciate the question, but until I have more appropriate information, again, I prefer to get in front of the agency and get some level of detail before speculating openly. One caveat again, clearly we are working as fast as we can, and if there's a way to get this before the end of the calendar year or earlier, we would be using every angle. Okay, I understand that you won't really know what's going to need to be done on the testing aspect, but let's just say that you're able to do that and then I guess my question would be, once you complete – let's say there's some digital testing. You complete it and submit that back to the FDA in this amendment, is there some kind of time requirement for them to – you know what's the clock there? How much time do they have to respond to that when you resubmit that amendment, once whatever testing is done? Sure, you know they are not from what we call them the [inaudible] clock right now, and 180 days is typical, but we don't expect it to take that long. This is not a whole application. It's a subset of a subset of biocompatibility, and so the early indications are they recognize that and they don't – I don't want to quote them. But until I have this in a committed, written document from the FDA, I don't want to speculate again. But 180 is typical. We don't expect it to take that long. Okay. All right, and then you know just maybe can you explain this whole process. They just seem to have some kind of hang up on whatever you're using in your coating. So what is it in the coating environment that you’re so worried about this? I mean the drug is the same right. It's a lower dose, so it's got to be some other ingredient right. Yeah, thanks. So I guess I don't know at what point I got cut off, but you know I was asking a question about just kind of what the concerns are at the FDA about biocompatibility. I mean, I guess I thought that's why you've done the kind of round of test that you did last fall to address those concerns. So, I mean what – I don't know if you can comment, but I mean what is it about the product that they are so hung up on. Is it like – I mean it's the same drug, it's a lower dose. It doesn't seem like that's the issue, but is there some other sort of ingredient that you're using that’s unique to your balloon versus some of the others. So certainly. We use some, what I call exciting technology, and you know I'll just say this. None of this going back to it relates to human clinical data, large animals or the engineering. And if you think about it, we have the only, and I mean the only pivotal will by trial of the low dose versus high dose. No, no other company has that in the industry. So approaching four year human safety data now, and so we feel that clearly our technology has a dramatic benefit, because no one else has demonstrated it in a level three evidence, randomized control trial like we have. So we were confident in doing it, because we are confident in the technology. It is highly unusual to be going back after you have hundreds of patients out to four years and with sort of a pristine safety and efficacy record. So what I'll say Mike is, I don't want to divulge some of the unique components of Surmodics technology at this point. But needless to say, these technologies that we believe mitigate the risk of using very powerful drugs by being able to use a lot less. And we believe we have actually put our money where our mouth is and conducted once again, the only pivotal trial in the industry versus the high dose device, nobody else has done it. So we'll work through this with the agency. I think it's just a matter of us getting in front of them and getting alignment, and until I get that alignment, I prefer to just stick to what we know now. We're still in fact in finding mode with them. Okay, I understand. And then I think on the prior call, maybe it was the last quarter, I don't remember, but you talked about building up some SurVeil inventory. So is that the case, and I mean maybe that's why you had to do the manufacturing reduction, I don't know. But you know what’s the shelf life? Is that stuff going to happen? Is there a risk that stuff has to be written off? If this doesn't end up being approved or takes longer than expected. Thank you, Mike. This is Tim, and I appreciate the question. There is obviously some moving parts here. You're addressing an important aspect of what's impacting the product growth margins for Q2, Q3 and Q4. This basically speaks to our expectation that we would have been in a position to have received the PMA and begin to support the Abbott commercialization engine, and you see that in our inventory build this most recent quarter versus Q4. But it also affects us, because the folks have would be working in the production line, all of that, that would have been hitting some inventory for Q2, Q3 and Q4 is now being absorbed into our product sales. So it does have an impact there. You can probably do the math, its $1.5 million to $2 million, and those costs are going to be hitting the P&L. In terms of scrap and how to think about are there things in terms of our raw materials inventory on the balance sheet, it's important to know that we really don't have final finished products on the balance sheet. It's all raw materials or components that are on the balance sheet. There are a few things that will probably have some potential for reserving against or scrapping, but again, it really is going to be dependent upon how we think about the timing of a potential FDA decision based upon the process that Gary described with the Q-submission. And we should hopefully have greater insight and perspectives on that as we kind of get into the May earnings call, but I don’t know that there would be anything other than probably something nominal for the fiscal ’23. Good afternoon. Thanks for taking the question. So you talked about the $10 million to $11 million in cash spending for the remainder of the year. How much of that carries over into fiscal 2024 assuming that you don't bring back Sundance and Avess? Thank you for the question, Jim. It's Tim. I would tell you that obviously this is a nine month view. Actually its closer to eight months given the timing of the decision and it's fair that you can run rate a good portion of that. One thing to be mindful of, the $10 million to $11 million that's reflected in the reduction, the spend reduction efforts would actually be probably greater, because there are things that are more likely to be a cash impact that would occur in our Q1, for example the annual incentive plan or payment. So it probably is not incorrect to get you a pretty good view on the dart board at least, taking the $10 million to $11 million and run rating that out. Okay, right. And then you mentioned that Abbott would have the option to not commercialize the product if you don't get approval by the end of calendar 2023. If that were to happen, would you have to refund the many of the milestone payments they've given you so far? Okay. And so if they've already invested $60 million plus into the product, it's probably unlikely that they would opt to not commercialize it if it takes a few months into 2024, that same reason? Understood. We are limited in what we can say about Abbott, but I have found them to be a highly constructive and engaged throughout this entire regulatory process. So that partnership as we continue to interact with them is strong and it continues. However, they decide months from now, I think that will be however – it’s really up to them. So I’m limited on what I can say on their behalf obviously. All right, and then just one more on Sundance and Avess. If you don't decide to go ahead with commercializing those products, are there any other options to either monetize that? Are those assets that you can sell? Go ahead. I was going to say with a PMA approval for SurVeil, the value is nonlinearly increased for those. So you know bookending them now, meaning taking them off the SurVeil and putting them in a form where we can pick it up more efficiently is the best to preserve the value there. And given our cash burn, we don't want to continue with parallelism. Even though we believe that that results in an opportunity, we simply want to get through this issue with SurVeil and we can pick it up. Those technologies would not be losing value as we book ended it. I remain quite excited about them, but let's deal with SurVeil first. That's how we feel. I guess, Gary, you described Abbott as engaged and highly constructive. I'm just curious given their wealth of experience and all the rest. Have they given you any input on anything based on their experience that's similar or any advice or any – essentially guidance as how they would sort of try to approach this? I'll say we have an excellent regulatory and technical connection with the Abbott team on this. And so they know what we're filing, they know the idiosyncrasies of the FDA interaction and I will say I've only high respect for their technical experts that they give us on loan to comment or give advice on this. So yes, that interaction clearly has been always a part of the partnership through each of these stages and I believe it will continue in that way. That said, and I believe they understand our technology as well enough. This comes down to a matter of perspective, a matter of to me at least using the totality of data versus dissecting small data sets and then using that to guide as the whole. We have a plethora of evidence from humans, to all the way down to small animals. So I think it’s really making sure that the FDA understands that perspective and narrative at a high level versus just a mere drilldown into a specific small components data set. So, I would say Abbott is being constructive and they know I don’t, I don’t expect that constructive interaction amongst the peers on Abbott team and all the technical and regulatory peers to change. I guess probably for Tim. I guess the maybe $2.5 million or so of R&D expense reduction, is most of that around Sundance and Avess or is there other things there that make up a meaningful amount? Yes. No, it's a good question there. It's obviously impacting more than just Sundance and Avess. We do have – we've made some decisions to delay some of the longer-term activities in some of the R&D programs and of course some of the personnel. So there is a number of factors, but you're picking up on a key one there, which is a drug-coated balloon aspect of this. All right. And then jumping over to Sublime and Pounce. I didn't catch it. If you said it, I missed it. Anything to say on reorder rates and any anything to share there even anecdotal? I'll say you know, when dealing with small data and small numbers of time, you can draw many conclusions. When we have looked at the reorder rates, they are exactly where we expect them to be, and that's not a negative statement. That's a positive statement. I think what's really interesting and frankly quite exciting to us, if you look at LinkedIn and you see physicians unprompted, saying things like I just did my first Pounce case, and I've got to tell the world about it. And I know I don’t want to sound like an advertisement for Vascular today, but the best way to get our – just a small tip of the iceberg stands for the power of these products is to read those supplements. They are physicians and cases that talk about the power of these products. So the reorder rates, we are happy with the reorder rates. I'll let you know that. Growth we are happy with the growth, Clearly we’ll take a bit of trim on revenue give that we have eliminated some of these territories, but we are still going to have very efficient growth. It was clearly an optimization of cash versus growth and value creation. Tim and I made the right choice of how to get that revenue growth, but also ensure cash burn within reasonable disciplined limits for the cooperation. Right. Your comments today – just jumping back real quick this last one. Your comments today that you got the notification from FDA, you sort of talked about you know possibly having to go back and do some animal testing. Is there anything in your learnings since that day that would indicate it could possibly be expanded beyond animal testing in terms of additional data that would need to be captured for some reason or are you pretty confident that that would be the extent of it, although you don't know exactly how involved the animal testing would be? You know it's a very good question. What I'll say is my risk adjustment for dealing with the agency from the lessons learned here has clearly gone up. However, the way to mitigate that risk is to get assurance from senior management of the agency of the integrity of the process, the timing and the exchange of scientific information. Life as an FDA reviewer has got to be hard. They have to go wide and also deep. However, sponsors know the technology just by nature, much deeper than an FDA reviewer can. Without the right level of interaction, if we are not able to demonstrate to these reviewers the levels of detail that are relevant to their decision, we think you'll always get a deficiency. And so part of it for me is the process doesn't lend itself to the engagement and dissemination of scientific judgment and understanding when it comes to technologies with the new and different. So, I'll leave it at that, so with that being said, I'd be quite surprised if there is something to come up about human clinical data. I can't see that happening, but allow me to risk adjust it a little bit again. I don't see it happening, while highly improbable, I'll say it could be possible, but I don't mean to scare you with that. Just giving you the risk that I see until we get full alignment of the agency. I'll say we run the best trial that's ever been conducted in the industry, and again, the only head- to-head randomized pivotal trial worldwide, and so I feel really positive about the clinical data, and I think what's stuck in my claw is that this device can be having a huge beneficial impact to me on U.S. patients. But we'll work through this with the agency.

EarningCall_489

Good morning and welcome to Premier's Fiscal 2023 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. Thank you. Welcome to Premier's fiscal 2023 second quarter conference call. Our speakers this morning are Mike Alkire, Premier's President and CEO; and Craig McKasson, our Chief Administrative and Financial Officer. Before we get started, I want to remind everyone that our earnings release and the supplemental slides accompanying this conference call are available in the Investors section of our website at investors.premierinc.com. Management's remarks today contain certain forward-looking statements, and actual results could differ materially from those discussed today. These forward-looking statements speak as of today, and we undertake no obligation to update them. Factors that might affect future results are discussed in our filings with the SEC, including our most recent Form 10-K and our Form 10-Q for the quarter, which we expect to file soon. We encourage you to review these detailed safe harbor and risk factor disclosures. Also, where appropriate, we will refer to adjusted or other non-GAAP financial measures, such as free cash flow to evaluate our business. Reconciliations of non-GAAP financial measures to GAAP financial measures are included in our earnings release, in the appendix of the supplemental slides accompanying this presentation and in our earnings Form 8-K, which we expect to furnish to the SEC soon. Thanks, Angie. Good morning, everyone, and thank you for joining us. A short time ago we reported our second quarter results, which I am pleased to share, were largely in line with our expectations. We also announced that we are implementing a targeted cost savings plan and revising our fiscal 2023 segment revenue and adjusted earnings per share guidance. First, I'm incredibly proud of our team for continuing to execute the four pillars of our growth strategy. Strong revenue growth in our Performance Services segment was driven by the execution of enterprise license agreements this quarter and growth in our consulting services and certain of our adjacent markets businesses. Importantly, we believe growth in enterprise license agreements demonstrates our strong partnerships with our members. These multiyear agreements expand the use of our technology and consulting services platform to help members deliver higher quality more cost-effective care to their patients. Even in challenging time for health systems, our members and other customers continue to see our offerings as long-term solutions for their needs. We are also making progress in strengthening our existing capabilities and expanding into adjacent markets. In the second quarter, we acquired TRPN assets for Contigo Health, our direct-to-employer business. These new assets, which we have rebranded as ConfigureNet, include our new out-of-network wrap currently offers access to more than 900,000 providers across 4.1 million US locations. We believe this offering will positively impact employer and provider-sponsored health plans bottom lines, as well as health plan members out-of-pocket costs when they access out-of-network health care services. Performance in our Supply Chain Services segment reflect quarter-over-quarter growth in net administrative fee revenue, primarily due to growth in the non-acute or, as we call it, the Continuum of Care group purchasing business. Also, as we anticipated, direct sourcing products revenue grew sequentially from the first quarter of fiscal 2023, primarily driven by expansion of our product portfolio in a more normalized demand and pricing environment. While our second quarter performance generally reflects continued execution of our multiyear growth strategy, we, as well as our members and other customers, are operating in a challenging and uncertain macro environment. Inflation, rising interest rates, labor challenges and ongoing supply chain constraints continue to affect our members and other customers. For example, within our Performance Services segment, Remitra, our e-invoicing and payables platform, is experiencing the same market dynamics impacting other financial technology companies. While these headwinds are driving slower-than-expected adoption of Remitra, we believe this environment further magnifies the need for invoice and payment automation and dependable supply chain financing for health care providers and suppliers in the long-term. We are in the process of realigning our Remitra business and cost structure for operational efficiencies in the near-term to include hosting accelerated solution design sessions with suppliers and providers to further strengthen our go-forward strategy. We remain confident regarding Remitra's potential as an important growth engine for Premier. As we announced this morning we proactively implemented targeted but meaningful cost savings measures. This includes the reduction of non-labor expense as well as elimination of certain open staffing positions and a modest reduction in our workforce. Let me be very clear, we are deeply committed to our mission to improve the health of communities. We do not take decisions that affect our employees lightly. These were difficult decisions to make, but they were also necessary to align our cost structure with the current environment, while providing flexibility to support our members and other customers in improving the delivery and cost of care. Looking ahead, we remain focused on executing our multi-lever growth strategy in reinforcing our competitive position. We will continue to appropriately and proactively invest in opportunities that optimize our business, for sustainable long-term growth, while maintaining financial discipline and flexibility. Importantly, we believe we are well positioned for longer-term success through the combination of our deep member relationships and our comprehensive and scalable technology and services platform, powered by comprehensive health care data to deliver meaningful solutions to our members in the market. I will now turn the call over to Craig McKasson, for a more detailed discussion of our second quarter operational and financial performance, our cost savings plan and revised fiscal 2023 financial guidance. Craig? Thanks Mike. For the second quarter of 2023 and as compared with the same period a year ago, our results were generally in line with our expectations with total net revenue of $359.6 million, a decrease of 5%. Supply Chain Services segment revenue of $235.5 million, a decrease of 13% and Performance Services segment revenue of $124.1 million an increase of 15%. In our Supply Chain Services segment, net administrative fees revenue increased 3% over the prior year period, primarily driven by growth in the non-acute group purchasing business. Our acute GPO business, continued to be affected by a lower level of overall utilization of our members' health care services in the quarter which in-turn impacts the supplies they purchase. Within our acute and non-acute GPO portfolio, the food category produced another quarter of strong growth due to volume growth and the impact of inflation which was partially offset by the continued normalization of demand and pricing across some categories including Pharmacy and Personal Protective Equipment or PPE relative to the prior year period. Also, demand and pricing for these categories have continued to decline from the high-levels earlier in the pandemic. As we have communicated on past earnings calls, we continue to tightly manage price increases on behalf of our health care provider members. Although, inflationary price increases have impacted certain contracts across the portfolio, particularly products reliant on petroleum and labor for their production. These increases have been mitigated by price decreases in other areas including Pharmacy and PPE. Notably, through our disciplined negotiations, we implemented new pharmacy portfolio pricing this fiscal year which is yielding lower pricing for certain products compared with the prior year period. As a result, we did not experience a material impact from inflation on our overall business in the quarter. As we expected, products revenue declined from the second quarter of last year which included higher prices and incremental purchases of PPE and other high-demand supplies related to the pandemic. The decline from the prior year was primarily due to two factors; one, the state of the pandemic compared with the previous year; and two, excess market supply and member inventory levels of certain products including PPE, which contributed to lower demand and pricing. We continue to see ongoing demand for other products and are expanding our product portfolio and driving increased member adoption to mitigate these market conditions. In our Performance Services segment, revenue increased 15% compared with last year's second quarter. This was primarily due to the timing of revenue associated with enterprise license agreements executed in the current year quarter compared with the prior year quarter as well as growth in our consulting and certain of our adjacent markets businesses including contributions from our acquisition of TRPN key assets in October 2022. As Mike indicated, Remitra, which is still in its early stages, is not ramping up at the pace we originally anticipated and we are revising our fiscal 2023 expectations for this business. We are reducing headcount and associated costs in this business to better align with our current performance expectations and are in the process of adjusting our operational plan for Remitra moving forward. We remain confident in the longer-term prospects for this business and the need that these capabilities address for our members and suppliers. With respect to our adjacent markets businesses on a combined basis, we currently expect revenue to grow 30% to 40% this fiscal year over fiscal 2022 including the benefit from the contribution of our TRPN asset acquisition. Turning to profitability, GAAP net income was $64.4 million for the quarter. Adjusted EBITDA decreased slightly compared with the prior year period to $140.5 million, primarily due to two factors; first, Supply Chain Services adjusted EBITDA decreased compared with the second quarter of fiscal 2022. Profitability of our direct sourcing business improved sequentially from the fiscal 2023 first quarter, but declined from the prior year quarter as we expected due to the decrease in products revenue driven by lower demand and pricing for PPE and higher logistics costs in the current year period. Logistics costs have begun to normalize and we expect to see that benefit margins in the second half of this fiscal year. Growth in net administrative fees revenue mitigated some of the decline in direct sourcing profitability. A quarter-over-quarter increase in Performance Services adjusted EBITDA, partially offset the decline in Supply Chain Services adjusted EBITDA. This was primarily due to an increase in Performance Services revenue, which was partially offset by higher selling, general, and administrative expenses, driven by additional headcount to support growth in certain of our adjacent markets businesses. Compared with the year ago quarter, adjusted net income decreased 5% and adjusted earnings per share decreased slightly to $0.72, primarily as a result of the same items that impacted adjusted EBITDA as well as the increase in the effective tax rate in the current year. These items were partially offset by the impact of the completion of our fiscal 2022 stock repurchase program on the current year period shares outstanding. From a liquidity and balance sheet perspective, cash flow from operations for the six months ended December 31, 2022 of $196.7 million was flat compared with the prior year. Free cash flow for the second quarter was $109.6 million compared with $107.1 million for the same period a year ago. The increase was primarily due to lower purchases of property and equipment compared with the prior year period due to the timing of purchases. For fiscal 2023, we continue to expect free cash flow of approximately 45% to 55% of adjusted EBITDA. Cash and cash equivalents totaled $94.6 million as of December 31, 2022 compared with $86.1 million as of June 30, 2022. We ended the quarter with an outstanding balance of $300 million on our five-year $1 billion revolving credit facility, which was renewed through December, 2027 during the second quarter. We subsequently repaid $30 million in January. With respect to capital deployment, we continue to take a considered and balanced approach especially, given rising interest rates. We remain committed to investing in organic growth, targeting acquisitions to strengthen or complement our existing capabilities, and differentiate our offerings in the marketplace, and returning capital to stockholders through our quarterly dividend and periodic share repurchases. We have historically executed share repurchase programs, on an annual basis. And while we do not currently have one in place, we will continue to assess whether and when that would be an appropriate use of capital. During the first six months of fiscal 2023, we paid quarterly cash dividends to stockholders totaling $50.2 million. Recently our Board of Directors declared a dividend of $0.21 per share, payable on March 15 2023 to stockholders of record as of March 1. Turning now to our cost savings plan. This initiative is designed to position the business to weather the near-term challenges, many of our providers and supplier partners are facing. Through this plan, we are lowering our expenses including non-labor costs, eliminating more than 70 open positions and reducing our workforce by approximately 100 employees or nearly 4% of our total workforce. These actions are expected to produce pre-tax cost savings of approximately $18 million to $20 million in fiscal 2023, and $35 million to $40 million on an annual run rate basis. We expect pre-tax cash restructuring charges of approximately $8 million, primarily related to our workforce reduction, which is expected to be substantially completed in February 2023 and expensed in the third quarter of fiscal 2023. Now turning to our revised fiscal 2023 outlook and guidance. Based on our performance in the first half of this fiscal year, our current visibility into the macro environment and our expectations for the remainder of the year, we are making the following updates to our fiscal 2023 guidance ranges. We are lowering Supply Chain Services net revenue, to a range of $930 million to $980 million. This is comprised of the following components: GPO net administrative fees revenue of $600 million to $620 million, as utilization has not yet universally returned to the level we originally anticipated, and members continue to destock excess inventory built up as a result of the pandemic. Direct sourcing products revenue of $285 million to $315 million, reflecting excess supply in the market and member inventory levels as I mentioned earlier, and a slower ramp in new domestic manufacturing capabilities than we initially planned due to manufacturing factory delays. As we previously communicated, we are collaborating with many of our members to stand up domestic manufacturing of certain PPE products, as part of our efforts to create a more resilient health care supply chain. We are raising Performance Services net revenue to a range of $450 million to $470 million, reflecting our performance in the second quarter and expected contributions from ConfigureNet partially offset by lower revenue contributions from Remitra, than we originally expected. Our guidance for total net revenue remains unchanged for fiscal 2023. Our guidance range for adjusted EBITDA also remains unchanged at $510 million to $530 million, and incorporates certain onetime restructuring expenses, associated with our cost savings plan. As we look to the remainder of this fiscal year, we remain optimistic and are taking proactive steps to position the business to weather current macro headwinds. But given the uncertainty in the environment, and how it might evolve, there could be some additional pressure on profitability. Lastly, we are lowering our adjusted earnings per share guidance, to a range of $2.53 to $2.65, reflecting the following items: Higher depreciation expense than we originally contemplated in our initial guidance, primarily as a result of certain fiscal 2023 planned depreciation not being calculated correctly within our forecast system. This issue has been corrected. Higher interest expense due to rising interest rates and increased utilization of the company's revolving credit facility to fund its acquisition of TRPN assets. These items are expected to be partially offset by a tax benefit as we now expect our effective tax rate to be at the low end of our 26% to 27% guidance range. From a cadence perspective, we currently expect the following for the remainder of this fiscal year. In our GPO business, we expect net administrative fees revenue to be relatively flat in the third quarter compared with the prior year quarter reflecting the current healthcare utilization environment and ongoing decrease in levels of member excess inventory. In our direct sourcing products business, in the third quarter we anticipate a sequential increase from the second quarter in revenue. However, we expect revenue to be lower in the third quarter compared with the prior year period, which benefited from the impact of increased demand and pricing due to the pandemic. In our Performance Services business, we expect third quarter revenue to decline sequentially from the second quarter due to the timing of certain enterprise license engagements, but we generally expect this segment to produce strong year-over-year growth in the third quarter. From a profitability perspective, for the third quarter of fiscal 2023, we expect adjusted EBITDA to grow in the low to mid-single-digit range over the prior year period. As I mentioned earlier, our third quarter results will reflect certain restructuring expenses related to our cost savings plan. So we expect adjusted EBITDA to increase sequentially from the third to fourth quarter of this fiscal year. In closing, while we had to implement difficult actions that impacted some of our teammates to help ensure our cost structure is more aligned with the current economic cycle, our business is resilient and we remain well positioned in the market. We generate significant stable cash flows and our financial position remains strong. As we look ahead, we are focused on executing our strategy to deliver long-term growth and value creation for our stockholders and other stakeholders. Thank you for your time today. We will now begin the question-and-answer session [Operator Instructions] The first question comes from Eric Percher with Nephron Research. Please go ahead. Thank you, Mike and Craig. Maybe to start with where you were ending and specifically the commentary around additional pressure on profitability is possible. Can you give us some view of what risks you have contemplated in second half guidance and where those additional pressures might come from? Sure, Eric. This is Craig. I'll be happy to take that. I think as we've talked about clearly utilization of the healthcare systems is a key area that we're going to have to see how that continues to recover. I will tell you – you – certainly it's regional in nature. Some health systems are seeing rebounds but a lot of health systems and other providers continue to not see utilization coming back at the pace that we would have anticipated. So to the extent that it doesn't rebound at the levels we've contemplated, that would be a headwind. If we see a more robust recovery to utilization as we head into 2023 that would be a tailwind to kind of help us perform better. The other issue is around this destocking of inventory that has been taking place. We do think that has been normalizing down and getting back to where people's purchasing patterns are going to start to be more normalized. But to the extent that that were to vary one way or the other that would be a headwind or a tailwind. Clearly, macroeconomic issues around where the overall economy goes, certainly can have implications one way or the other. We have factored in sort of where we believe best case to be on those three factors, with what we see moving forward and in the discussions with our healthcare providers. But to the extent that those move that would have an implication. And then, as we've historically talked about in Performance Services, again, very proud of the results we achieved in the second quarter with the enterprise license agreements. Those do have variability at times are difficult to predict, but we have a good pipeline and feel good about the ability to do that in the second half of the year but that could be a headwind or a tailwind depending on whether and when those agreements come through in the last six months of the year. And items like destocking. I know last quarter we talked a lot about that. Does it -- it feels like visibility into these items is just impaired in 2023, because of the comparisons, or do you feel like you have better or worse visibility now versus where you were three or six months ago? Eric, this is Mike. So, just to give you a bit of a backdrop on this. So, if you looked at pre-pandemic, many of the healthcare providers, sort of maintain this just-in-time inventory level for PPE and other supplies. And then, obviously, post the pandemic, all of our members and others build up these pretty significant strategic stockpiles 30, 60, 90 days, in some cases even 120 days. So then, if you kind of look at where we are right now and given the macro environment, many of our providers are taking a closer look at these inventory levels and trying to sort of optimize or figure out what is the right size for carrying inventory levels going forward. So, just in general to answer your question very specifically, we expect sort of the short-term trend of this balance that our health systems are trying to go -- trying to understand to occur over the next couple of quarters. And then we believe it will turn back into a much more normalized environment. Good morning, and thanks for taking the question. Maybe just first one, if I can. Relative to the change in Performance Services guidance, is there any way to bifurcate out the reduction in Remitra near-term outlook versus what was the contribution from the new TRPN assets in terms of the core versus non-core organic growth in that segment? Sure, Michael. This is Craig. Thanks for the question. We don't typically get into breaking out individual components. But as I did talk about on the call, our adjacent markets businesses, which again as a reminder, include our Contigo Health business, the Remitra business but then also our clinical decision support and Applied Sciences or Life Sciences business. With the inclusion of ConfigureNet now that, as I said in my prepared remarks, we'll grow 30% to 40% year-over-year. We had originally expected that to grow 30% to 40% prior to the acquisition of ConfigureNet. If we were to remove ConfigureNet from that, we would still be growing just a couple of points below the low end of that range. So, outside of Remitra, the other three aspects of our business both Contigo Health organically and with ConfigureNet now Applied Sciences and clinical decision support are, all growing at levels that would get us to the range that we originally discussed. It is just Remitra that which has not seen the uptake and in particular due to the rollout of Remitra's CFO, which was the supply chain financing aspect of that business that with the rising interest rates and the cost of capital, we're not seeing the uptake on. So really, we're seeing not more flat or not a lot of growth in the Remitra aspect, which is being made up by the Performance in the other parts of our adjacent markets business and then the contributions from ConfigureNet. And then Michael, I do have to add from a Remitra standpoint, while we are seeing some sort of these short-term headwinds, I will tell you, I still believe in this incredible need in the market for our health systems to automate their invoicing and payment systems. We actually conducted an accelerated solution design event, which for us is sort of this strategy creation of that with a number of really critical suppliers, very, very significant suppliers. And I'll tell you to a person all of them said that we need to have a technology like this in the industry. So we're still incredibly bullish on the program going forward. Going forward, we're also going to create an accelerated solutions design event for the members to really, really drive out what that value opportunity is for them as well. So we've defined it, what the value props are for the suppliers. And again, we're going to have an accelerated solution design event for our members over the next couple of weeks to really define that value prop for the members as well. Got it. And thinking about the net administrative fees, I don't think, it's overly shocking to see that the Continuum of Care utilization is performing better than acute care given where we've seen your customers reports other various different health care participants. As you think about the strategic evolution of that part of the business, is there any pivots you need to do or changes investments pullback you need to make within the core GPO to service what appears to be for all intents and purposes a long-term transition towards more and more care happening outside the traditional four walls of the hospital? Sure. Thanks for the question Michael. So first of all, we are actually realigning resources obviously to that non-acute area. So – but before I give you a bit more detail on that let me just say, the core capability of the GPO actually services acute and non-acute. So we have one capability that services both. And then we have additional value that, we create in the non-acute space leveraging technology and other things to get after things like purchase services and some of the smaller expense items. So very specific to your question the investments events that we're going to continue to make to get after that non-acute space primarily revolve around technology. So technology to help these non-acute facilities do ordering, technology that helps them understand what's happening with their purchase services spend, and those kinds of things. So we have been realigning given that the growth is in that non-acute and you're going to see us continue to make investments in those areas. Yeah. And Michael, this is Craig. The only quick thing, I would add to that is as part of that technology evolution that Mike is describing obviously the nature of the non-acute customer base is more disparate. And so focusing through technology on ensuring roster attachments are correct, price activations are happening on to the contract portfolio. It's – that part of the business is a little easier in a more centralized acute function. And so we do have efforts and initiatives to do that. And then I would remind you that, the non-acute GPO in and of itself has grown over the past four to five years from about 30% of our GPO portfolio up to 40%. So it is definitely a bigger area of growth and an area of focus as we continue to move forward. And one other comment, I should have made, and I should have tied it back to Remitra. This is why Remitra is so important, right? Because in these non-acute areas it's going to be really critical that we understand what's happening from an invoice all invoices. And Remitra will be that solution for that non-acute market. Hi, guys. Thank you for taking my question. There's a lot of moving pieces in the quarter. So, I was hoping we could look through the timing of license sales over the past two quarters on Performance Services business and the normalization in the Supply Chain side. And you kind of talk to some of the underlying growth in your new initiatives and what's been better or worse than expected? Sure. I'll start, and then Mike can add some color. So relative to Performance Services extremely pleased with the second quarter performance, and what we saw from enterprise license agreement execution standpoint. As you'll recall, last quarter we had indicated that we'd had a license or two that had not come in that, we'd originally anticipated. And then we had actually said that, one of those had come in sort of post-quarter close, when we announced our earnings. That – this demonstrates that that in fact did occur. And then we had strong performance through the remainder of the quarter, actually hitting highest levels of enterprise license that we've had in terms of performance for the quarter. So, very pleased with that. As we look at the other parts of our business, clinical decision support very successful in the quarter. Contigo Health continuing to do what it needs to do ahead of plan for the quarter and on a year-to-date basis the Life Sciences business growing extremely well in terms of the work that we're doing with life sciences organizations to move them forward. Again, where we didn't see performance where we expected is Remitra and so that was below the expectations and the reasons for our commentary about revising that plan. So that's sort of – and the last piece of Performance Services, we also had a very strong quarter in our advisory services business. We're continuing to see growth above and had expectations for managed services where we're actually helping health care systems provide service oversight of their IT applications and other things from an advisory standpoint, and we're also seeing good performance in our collaborative still. So that's Performance Services. On the supply chain side of the business, the normalization, as we talked about in the call, we continue to expect to see direct sourcing in particular, come down this fiscal year, but begin to grow sequentially. We saw that in this quarter. We'll continue to see that sequentially through the balance of the fiscal year, but we won't see year-over-year growth, until we get to the fourth quarter, because we did have higher demand and pricing in the prior year compared to what we're experiencing in the current year. And then relative to the GPO part of the business, it really is part and parcel tied to utilization and the excess inventory levels that we've seen. As we -- as Mike discussed, we do think that inventory is getting back down toward normalized levels, but there may be a little bit of a tail on that still that could impact sort of the level of growth that we see in the back half of the year slightly. On the Performance Services side, if it's not just beneficial timing from a pullover from last quarter, but actually better enterprise sales. How do we reconcile the weaker hospital macro versus that kind of reprioritization of these IT projects? Yes. So, I think you were asking some of the smaller health systems. It's interesting, Stephanie. I think what you're going to see going forward is the smaller health systems are going to need the same levels of technology and efficiencies as the big ones, right, if not more. So, we have been creating and designing technology, enterprise license services to really reduce the number of point solutions that all of these health systems are dealing with and pretty much have one sort of overarching enterprise analytics strategy. So, we believe, obviously, it will create the most amount of value for those health systems regardless if they're large or small. And then, of course, Stephanie, where I think we have pretty -- we believe we have pretty significant differentiation is having that wrap around services capability to really drive performance improvement. Mr. Valiquette, your line is open. Okay. We'll move along then to the next questioner. The next questioner is Jessica Tassan with Piper Sandler. Please go ahead. Hi, good morning. Thanks for taking the question. I was hoping just, when you talk about utilization related pressure on acute care purchasing, can you just help us understand maybe what categories of spend you're seeing pressure in? Is it mostly manifesting in consumables, or are you seeing capital purchasing delays as well? And then if it is, in fact, capital related, do you just have any visibility into a recovery? Thanks. Yes. So thanks, Jess. Let me take a quick stab at this. So, overall utilization, if -- and this is going back to the end of our first quarter, and we have like a 90-day lag on some of this information. But we saw a decrease in the acute spend by about 2.4%, and then we saw an increase in that quarter of 3.1%. So that... I'm sorry, acute was decreased 2.4% and then non-acute was increased, or is that -- decrease for 3.1 -- okay. So, both of those areas highlight the fact that, obviously, that are -- the core basic buying of the health systems, so think med surge and those kinds of things are still under a lot of pressure. Where we're seeing increases, obviously, is the food is coming back a lot quicker than had originally been -- the food is coming back a lot quicker. The food is coming back at a better rate post-pandemic. Yes. So the only thing I would add to that, Jessica is I think -- and again, I'm going to say what I repeat what I said earlier in terms of it does vary. So you will hear some health care organizations that are seeing strong utilization. It does depend on the markets that they're in. But broadly overall the entire footprint we're not seeing overall utilization come back at the levels that we thought. It is in some part elective procedures not being there. Some of this is actually dependent on labor. We continue to hear from our health care providers that they are challenged in terms of getting full staffing back to where they needed it to be to be able to provide everything that they need and want to provide. And relative to your question on capital, I don't know that we have a conclusive response sometimes capital because of the timing lag. But broadly I would say that we have seen some pause in capital equipment purchases, but from a GPO standpoint for us that would actually have -- if they're delaying or have already delayed the administrative fees would be in the future because we get paid at the point in time when that capital equipment is put into service in the health care institution. Yes. That makes sense. And then just my quick thoughts -- thank you. I appreciate it. And then my quick follow-up would be can you just remind us what percent of Performance Services revenue or what products we should think about as recurring or reoccurring revenue versus license? Thanks again for the question. Yeah. Thanks for the questions. Craig, I was wondering if you could just walk us through the depreciation expense and what we should be thinking about that, and what the change was? And then just on the interest expense that you called out in the higher rates. I guess, I'm a little surprised that you were surprised on that from the original guidance. So just walk us through those two points if you could? Yeah. Thank you for the question Richard. So relative to depreciation as I indicated in my comments, we unfortunately had an issue with our forecasting system that was not calculating planned depreciation on future assets at such point in time that they would be placed into service in the system. So as you know we developed -- internally developed software. We have a road map of when those will be placed in the -- into service. And so as we got into this fiscal year and particularly in the second quarter, we realized depreciation was coming in higher than we had thought and anticipated in our planning model and identified this system issue in our forecast system. And so we've rectified that. We now have reconciliation processes and things in place to make sure that does not occur anymore. But that did result in depreciation in our actuals being higher than we had initially contemplated and believed at the time that we established guidance back in August. That's really the primary issue associated with depreciation. A minor related element accelerating a little bit of depreciation is we had a couple of smaller assets that we accelerated the useful lives on to given the use of those in the marketplace, which is just giving us more depreciation than we'd originally planned as well. So those two items are really what drove the increase in depreciation expense versus what was contemplated certainly disappointed. We had a system issue didn't discover it at the time but we have rectified that and put processes in place to make sure that does not occur again in the future. Relative to the interest expense, as a reminder when we established guidance back in August, we did not have the TRPN acquisition closed. So we didn't have the level of capital on the credit facility that we do now. At the time of our first quarter call in November, we were still in the process of renewing our credit facility and didn't want to get premature in terms of updating and understanding where that was ultimately going to come out. And at that time not having identified the depreciation challenge that we're now facing, the interest expense actually would have kept us within our initially planned guidance range. But the combination of those actually did create the requirement for us to have to adjust guidance. And so that's the reason for the two line items and the adjustment -- to our adjusted earnings per share guidance. Thanks very much. I have perhaps three just clarifications housekeeping stuff. First, Craig, in your early prepared -- or discussion on the Q&A, you were talking about headwinds and tailwinds as you looked out through the year. At the end of that, you said something to the extent of we have factored in the best case. It would seem to me you would want to factor in the middle case in guidance. I apologize, Eric. If I didn't say it correctly, I meant to say, our best estimation, not best case. So yes, it -- we certainly did not factor in a best case into our expectations. We factored in our best evaluation based on the macro environment conditions and what we're hearing from our healthcare systems today. Yeah. I assumed that was the case, but I wanted to make sure it was clear. And then another clarification or just reiteration perhaps. I think you said, if you exclude the new acquisition TRPN ConfigureNet that adjacent markets growth within Performance Services would have only been a couple of points below the lower end of the original 30% to 40% growth range. Did I hear that correctly? Okay. So I know the theme of Remitra is important, but the magnitude of the impact therefore not huge in dollar terms. And then the last one the pre-tax restructuring charges coming in 3Q. Was part of your discussion of 3Q profitability the inclusion of those charges in non-GAAP numbers i.e. will -- is this going to be taken out in GAAP, or is this going to -- those charges going to -- actually the $8 million going to impact EBITDA in the third quarter on a consensus basis? Yeah. Thank you for asking. We are absorbing the $8 million restructuring charge in our adjusted EBITDA performance. We will not be adding that back. So that's why we are indicating that that's going to impact third quarter profitability. It's not an add-back to adjusted EBITDA. Hey. Thanks for taking my question. Got one on Remitra. Just so I'm clear, it seems like some of the slower pickup in that business was related to part of the value prop, related to the financing your portion of the business. As I'm just stepping back and thinking, all right you've got a product or you got a service that will help reduce costs, reduce friction in the payments, reduce some of the labor burden. It seems like it's a very great product market fit in today's macro. So I guess my question is, are there other points of friction that may be causing a slower rollout of the product, whether it's implementation time lines any kind of upfront payments, something that would cause the customer base to pause on a decision there, if they were not -- were to not go through with the financing option? Thank you. Yeah. So this is Mike. So virtually all of the concern or the lack of performance was that CFO that cash flow optimizer. And as Craig said, it's primarily -- well, it's related to a couple of things. One interest obviously in the market, but also just the market in general. But secondly, what I'll continue to say is the backside of this the invoicing part of this is something that's absolutely going to be needed in the healthcare systems. It actually helps them centralize invoicing. And as I continue to say as healthcare moves from the acute to the non-acute, it's going to be really important that they centralize all this invoicing across all these disparate areas where they're providing care. And this solution will actually do that. So it obviously will help reduce labor costs in terms of managing invoices, but just as importantly, provide them insights as to what's being invoiced in those facilities. So like I said earlier, we're incredibly still positive on this opportunity. And as I said, we had a number of our suppliers together a couple of weeks ago and there was a lot of excitement there. And I imagine when we get the providers together we'll see the same level of excitement. Got you. That's helpful. And then on the GPO I guess two questions here. One, do you think you're feeling the impact of some of the reimbursement issues that have plagued providers in the back half of the calendar year and maybe even to the first quarter just that payers delaying some payments? And if there's -- and related to that, do you feel like there's potentially even lower levels of inventory supplies particularly in the inpatient your customers just as a as CFOs they are managing cash flow. So maybe the flip side of that being is there a -- do you feel like there's a potential for a snapback break or have a faster glide path out of the sequential hold that you have in the third quarter guidance? Thank you. Yes. So as far as payers slow paying, no, that's not, typically that's not something that will have the level of impact in terms of our business. And that our -- for the most part, especially as it relates to the GPO, it's pretty much driven by utilization rates. As it relates to your other question, I think, as I said, from an inventory standpoint, they'll continue to bleed this inventory out. At some point, obviously, in the next quarter or two, you're going to start to see more of an uptick. But I think that the CFOs are really trying to find that optimized level of inventory to ensure that they have enough product, but obviously they don't have a high level of expense carrying that product. Thanks, and thanks for sneaking me in. I guess to follow-up on that if you think about the issues in the supply chain, have you delineated at all between the impact from lower utilization versus the impact from inventory reductions and/or manufacturing issues? Yes, it's -- first of all, it's tough for us to delineate in that the pressures that our health systems feel in terms of utilizing inventory is all based upon expiration, right? So they're going to try to use that product rightfully so. They're going to try to use that product, obviously, before it expires. So we know that there's a ton of that in the market as you would expect. Having said that, on utilization in general is so geographic. We have a number of our health systems that actually are starting to see volumes come back to normal, so, volumes that obviously are better important especially to create growth in the GPO had enough of these those elective procedures. And so we are starting to see growth in certain markets of where that's actually occurring, but we're not seeing it in other markets. So it's really hard for us to delineate given that there's so much difference between just utilization patterns, it's really hard for us to delineate the difference between what's happening from a utilization standpoint, and what's happening from an inventory management standpoint. Yes. And the only other point I would highlight, Kevin, the focus of today's conversation and the question has really focused on the member inventory levels. But as we also articulated there is and does continue to be excess supply in the market. There was much manufacturing done to try and anticipate and prepare for where they thought demand might be needed, because of the shortages we were seeing. An example I would give you is the State of New York had bought so much inventory that they actually continue to give away some inventory to health care providers in New York versus New York providers having to buy it. And so that excess supply issue is also sort of pushing through the channel, which needs to. And we think it's going to get there over the next quarter or so, as we've talked about, but that's another dynamic. And so when you have all three of those, it's hard to kind of prescriptively say, X is attributable to this, Y is attributable to that, and Z attributable to that. Yes. So are you seeing anything with your customers they're moving down? Are they doing more private label being more on formulary? Are they doing any narrow sourcing anything like that? Yes. As you would expect, so our committed programs have continued to grow. Our SURPASS program has -- it's, I don't know, we're seeing a probably about an 8% or 9% growth in folks that are interested in SURPASS. And then similar levels of people that have taken advantage of our AscenDrive program. So those committed programs are picking up just as you would expect given the financial pressures that these health systems are undertaking and all of them would tell you they'd much rather figure out ways to standardize product as opposed to reduce labor. You talked about pricing discipline and your openness to your suppliers to look to pass-through price. Can you talk about where you mentioned certain raw material prices and/or labor costs? Can you talk about where you're allowing higher prices into your formulary versus maybe where some of your customers might also be allowing certain products to go through with a higher price? Like what do you accept as a higher price some of your hospitals have the option to also buy? And are you seeing any differences there…. No, no, no. Good question. So just as a quick reminder as you think about anything -- any decision from a sourcing standpoint that happens here it's primarily happening in one of our sourcing committees, which is made up entirely of our healthcare system executive. So when we get a price increase or somebody that wants to do a price increase that goes by that committee. That committee makes the decision as to whether or not they're going to agree to that. And there's a number of factors that they weigh in terms of determining whether or not to allow that price increase. And obviously profitability of the supplier is important. The second is how healthy is the market, if they don't allow for a price increase and that supplier does not provide that product are we going to create a monopoly or duopoly or whatever. So they put all of those, sort of, ideas into their decision process. And then that really determines whether they take a price increase. But for the most part any increase that we take is based upon our member input. So I don't -- there's not a difference as to whether or not Premier takes one versus the members because we are very, very aligned in those areas. That's actually really helpful. If I can get one last one in. We've all seen and read how shipping costs and some of the big inflationary pressures that were hurting the supply chain in 2020 and 2021. Those have come meaningfully down. I'm just wondering as you see that are you changing or is it creating more opportunity to source for yourself more effectively? Is that something that's happening now, or is that something that might happen in the future? And how would that impact the business for you? No. So it is but we're always -- it's a great question, but we always have an eye towards another event like this. So obviously we want to take advantage of any synergies that are happening from a logistics standpoint and make sure that that value gets obviously driven into the contracts and then our health systems are paying less for products. Having said that, we want to make sure that we are building more resiliency into the supply chain so that if there is ever a huge logistical challenge in the future we have the ability to pull a lever that has more nearshore onshore capability. So we are going to continue to build out that resilient model. So even though today, we're seeing the logistical costs come down we want to make sure we have the right optionality in the event that costs significantly go up in the future. This concludes our question-and-answer session and Premier's fiscal 2023 second quarter earnings conference call. Thank you for attending today's presentation. You may now disconnect.

EarningCall_490

Ladies and gentlemen, thank you for standing by. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the Uber Fourth Quarter '22 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. Thank you, Angela. Thank you for joining us today and welcome to Uber's fourth quarter 2022 presentation. On the call today we have Uber CEO, Dara Khosrowshahi and CFO, Nelson Chai. During today's call, we will present both GAAP and non-GAAP financial measures. Additional disclosures regarding these non-GAAP measures, including the reconciliation of GAAP to non-GAAP measures are included in the press release supplemental slides and our filings with the SEC, each of which is posted to investor.uber.com. As a reminder, these numbers are unaudited and may be subject to change. Certain statements in this presentation and on this call are forward-looking statement. Such statements can be identified but such as believe, expect, intend and may, and you should not place undue reliance on forward-looking statement. Actual results may differ materially from these forward-looking statement and we do not undertake any obligation to update any forward-looking statement we make today, except as required by law. For more information about factors that may cause actual results to differ materially from forward-looking statement, please refer to the press release the issue today as well as risks and uncertainties described in our most recent annual report on Form 10-K for the year ended December 31, 2021, and in other filings made for the SEC went public. We published our quarterly earnings press release, prepared remarks and supplemental slides to our Investor Relations website earlier today. And we ask you to review those documents if you haven't already. We will open the call to questions following brief opening remarks from Dara. Thanks, Balaji. Uber delivered our strongest quarter ever in Q4, with gross bookings up 26% year-on-year on a constant currency basis. Adjusted EBITDA of $665 million exceeded the high-end of our guidance for the sixth quarter in a row and we delivered strong incremental adjusted EBITDA margin of 12%. We reached several new milestones this quarter. We crossed 2 billion quarterly trips, and our Mobility consumer base exceeded 100 million for the first time in our history. At the same time, we're laser-focused on making Uber the best platform for earners, with over 5.4 million people earning on Uber around the world, another all-time high. Put simply, the Uber platform has never been stronger and we're making great progress building on our platform advantage through advertising and membership. Despite any macroeconomic uncertainty, I'm more confident than ever in our prospects. We're entering the year with great momentum. Mobility trip growth is accelerating and Delivery remains resilient. But we are far from complacent, and we'll continue to hold ourselves to high standards of growth and profitability to deliver yet another record year in 2023. Thanks so much. Maybe two questions, if I could. Dara, as you think forward to 2023 and you sort of aligned an array of products between Delivery and Mobility, how should we be thinking about Uber One as a subscription product? And elements of either leaning in behind growth and pushing adoption of the product to create a wider moat around the collection of assets you have versus maybe just letting virality build around the subscription product. How do we think about active versus passive approach to driving the subscription element of the business? And then obviously, one of the more recurring themes during earnings season has been elements of continued efficiency and cost cutting within organizations. You guys have laid out an incremental margin strategy, but how should we be thinking about your broader views on efficiency inside the organization, especially with respect to some of the corporate costs inside the company's cost structure? Thanks so much. Yeah, absolutely, Eric. So in terms of Uber One, we think Uber One is a terrific membership program. It's the only one. If you think about the Uber One benefits, we think about that as content. So Uber One has the best content in terms of Mobility subscriptions and movement subscriptions than any other similar subscription. We got over 12 million members up, with membership having nearly doubled for 2022, which is terrific. And our efforts here are quite active. I mean, we are pushing Uber One. You'll see it on our delivery services. You'll see it on our Mobility service. And we are quite actively continuing to innovate in terms of the benefits that we offer, and the results are pretty spectacular. Members spend monthly 4.1 times the amount that nonmembers do on a monthly basis. So it creates great stickiness. And member retention is 15% greater than non-member retention. So in-period, in the initial months in which we acquire a member, that member is actually loss-making because the discounts that we offer are greater than the in-period value of that 4.1x. But over the lifetime of the member, the membership creates a significant moat and a significant growth opportunity for our business. You will see membership counts continue to increase. And you'll see the percentage of our bookings coming from membership continue to increase as well. Globally, about 25% of our gross bookings come from members. In the U.S. for example, 40% of our Delivery gross bookings come from members and it's a moat that we will continue to actively develop. Sure. So Eric, for us, as you probably recall, our call to action moment was actually in 2020. And if you recall back then, our Mobility business was over 85% of the company's gross bookings. And as we sat here in April of 2020, that business was down 80%. So as you recall, we acted pretty decisively during that time, we took over $1 billion of costs out of our infrastructure. We shuttered down a bunch of businesses. And unfortunately, we did have to let go over 20% of our headcount. So we've been really focused on efficiency since then. I think you've heard us lay out our plans, and I think Dara mentioned on CNBC, in 2021, we wanted to really push hard for EBITDA profitability, and again, we achieved that metric in 2021. Last year, we talked about being free cash flow positive at some point in the year. And again, we achieved that metric. And now, we're talking about being GAAP operating profit at some point later in the year. And we expect to continue to achieve that metric. Now we've done this -- and you mentioned incremental margins, we've done this because we focused efficiently on cost, and we've been laser-focused on it. So our headcount will largely be relatively flat this year. And even if you go back to the build that the many companies had over the past few years, we've grown our headcount about 10%, excluding the Freight business, over the period of time. And our gross bookings went from $62 billion in 2019 to $115 billion last year. So just think about that growth and efficiency. Where we've hired heads has been in some areas of tax, selectively, as well as some sales folks on the Delivery business. And you can see that it's certainly been beneficial. So our goal is really to drive the incremental margins we laid out last year at Investor Day. I think we've overachieved against all of the metrics on the profitability side. And again, as Dara mentioned, the year started off quite well, which is why you saw us raise guidance for the first quarter. And we're going to just continue to leverage our cost base, which is driving the incremental margins that you're seeing the throughput on. Thanks for taking my questions. I have two. The first one on frequency and engagement on the platform. You've made really good progress. Now you're, I think, 5.4 trips per month versus about 5 last year, but still below I think the peak levels Dara used to talk about in 2019. I guess the question on frequency is, where have you made the most progress, sort of getting that frequency per rider up? And how do you think about the key drivers throughout '23 to sort of get that back to 2019 levels and beyond? And then the second one is on the incremental margins. The Delivery incremental margins continue to deliver above your Analyst Day targets. Anything we should think about that are sort of one timish in nature or different competitive dynamics as to why the incremental margin in Delivery shouldn't stay at these elevated levels as we go throughout 2023? Thanks. So I'll handle the first one -- -- I'll handle the second part of that. So if you think about the incremental margins on the Delivery business, yeah, we've been very pleased with the throughput. It's been about over 20% if you think about last year. And it's really been driven by three areas, right, maybe four. But we really did focus on efficiency in the marketplace. And we have benefited from the fact that a lot of the players are trying to follow our path to profitability, especially the private companies as external money has been harder to come by. So that benefit has certainly been there, and we believe that will continue. Our own technology gains on really improving the efficiency of our cost per transaction. And I think you'll recall, we talked about it a fair amount in our third quarter call where we saw a little bit of a step function improvement there. And so we -- again, we expect that to do, and that's on batching and things like that, and we've seen the benefit on that. And then frankly, we've augmented the margins on new business. And so our Ads business continues to outperform the targets that we laid out. And so the combination of all three of those is really driving the incremental margins that you mentioned there. And so we don't necessarily see them changing so much. The pace of the improvement will -- certainly will slow down. And then in terms of the frequency of trips, there are really four factors that I would point to. First of all, we just talked about our membership program. As we increase the number of members in our member base and the coverage of members who tend to buy more, who tend to buy more frequently, just mathematically, you're going to drive frequency up. Second for us is the power of the platform. We are constantly cross-promoting between Mobility and Delivery, and essentially sending free or cheaper traffic from one platform to the other in a personalized targeted way as well. And so you should expect more opportunities for us to upsell and cross-sell in an intelligent way driven by AI and machine learning. The third is the breadth of the product that we offer. So for example, with Mobility, with Reserve and low cost, Reserve has been a huge shift for us. And we estimate that 50% of Reserve trips are actually incremental, they wouldn't have happened otherwise. The other 50% are upsell, so to speak. They are more profitable than on-demand trips. And then last and certainly not least is the reopening, right? The shift of spend from products to services is benefiting us. So there is a tailwind in terms of people getting out, people shopping more, people going out to dinner more, et cetera, and that is helping our business as well. So it's really membership, platform, new products, and then the macro environment that's helping frequency. And we expect to see that frequency, that 5.4%, continue to increase over a period of time. And there's no reason that I see why we shouldn't hit or exceed our all-time highs over a period of time. Hey, guys. Just a question about the upfront fare and upfront destination technology that you shipped. So you noted in the letter that you saw about a 4% increase in conversion. So I guess just some context around that. How does this innovation compared to others that you've shipped in the past in terms of like magnitude of overall impact? And as you look forward over the next couple of years, do you see other technology updates that -- in the future, that could be as impactful as what you've done with upfront? Thanks a lot. Ross, it's very difficult to predict impact. But I will tell you that the upfront destinations and upfront fares has been one of our largest releases ever. It takes a huge amount of work in the background in terms of training models, testing it out in various markets to make sure that we got it right. And it was the number one requested feature by driver partners. They want to know what the upfront fare is going to be. They want to know what the destination is going to be. It's an important part of the information that drivers process through as to whether or not they want to accept a particular trip or not. And it has just been a home run for us in terms of the number of trips that are -- that we're able to drive through the marketplace or the improved throughput in the marketplace, reduction in cancellations, because drivers now know upfront whether or not they are going to accept or not. This is a feature that we are now expanding around the world. So we've launched it in the UK now, outside of London. And for example, we see a much higher percentage of fulfillment rates than we did previously. And now we're carefully rolling out in London, and we will continue to roll it out market by market by market. So difficult to predict what our engineers are going to come up with. We're very, very happy with this feature. But I would never underestimate the power of our engineers at Uber. So hopefully, we will have another hit like upfront fares coming up. Thanks. Two questions, please. You talk about the impact of these newer Mobility products. Which of those, in particular, would you single out as having the most impact? And then just talk about the timing of rolling out upfront fairs and destinations globally. Thank you. Yeah, absolutely. So I'd say the biggest one for us has been Reserve. If you look overall at the portfolio of new products that we've introduced, those new products accounted for about $6 billion of EBITDA -- sorry, gross bookings, I wish it were EBITDA, but gross bookings for the quarter, and it's about 20% of our growth. And that portfolio is growing at about 100% year-on-year. So it will continue to be a larger and larger portion of our overall bookings. And Reserve is the biggest one. We talked about it being over $2 billion. It is a terrific product, especially as travel opens up. Typically, if you think about traveling to and from the hotel and then coming back, there are about four trips that are available to us. And we capture 1 to 1.5 of those trips. So we think there's still a significant runway for us to continue to grow Reserve. I am also very, very interested personally in our low-cost product. This is UberX Share, the opportunity for two or three passengers to get into the car. It's more efficient for the marketplace that's better for the environment. And our dream is to have all of our trips shared in an EV. That would be a beautiful thing in terms of congestion and in terms of the environment as well. And then last and certainly not least is hailables, right? They are two wheelers, three wheelers, but especially taxis. There are over 20 million vehicles that are hailable vehicles in the world, about 4.5 million taxis. It's a huge base of drivers and vehicles that we think we should power -- Uber should power, because we are the number one kind of source of on-demand movement in the world. And ultimately, we want to wire up every single vehicle, whether it's a car or a delivery vehicle or a truck or van or a bus, that's available to move people or things all around the world and taxis and hailables are a big part of it. Yeah, thanks for taking my question. Maybe one for Dara and one for Nelson. On the outlook for '24, I think there's been some headwinds from FX and some other things. Any updates on that, and maybe some of the puts and takes as you think about that, that you gave last year? And then, Nelson, a couple of the cost issues maybe in the quarter. The New York minimum driver fee changes and insurance costs, maybe you could cover those and how you're thinking about the potential impact in '23. Thanks. Well, maybe I'll try to answer both of them. So in terms of the FX, I mean, we do give you constant currency numbers. The FX has gotten better right now. We don't necessarily put that into our '24 as we're thinking about '24. We laid out guidelines last year, as you recall. We think we've overdelivered against it, particularly on the bottom line, the incremental margins and the profitability. Our focus is to make sure we continue that path. And again, we are focused on trying to deliver GAAP operating profit at some point this year. And again, we think that we will continue to do well versus the targets we laid out. In terms of some of the costs, those are things that we just have to continue to mitigate. Specifically on New York, a lot of it just has to with transparency, a lot of it just has to do with making sure that the rule set is correct. The new 6%, again, it will get absorbed into the marketplace. And then your question on insurance. Insurance, I would tell you is the one line item because we've worked -- we've scrubbed our whole company on every single line item. And that's the one line item that we frankly haven't made progress on in terms of reducing the cost per trip. A lot of it is just built on what's going on more broadly in the insurance industry as the market continues to be a hard market. A lot of it has to do with the fact that, I think, even the insurance companies are having the challenges now to do the actuarial work. Because to repair a car is much different, right, the rearview mirror that was $70 is now $700 with all the electronics. And so we, frankly, and obviously, our earners, are part of that ecosystem. As you know, we take our charges in the quarter when they come. We've done a good job managing through that. But again, I think insurance will be continue to be the one item that we haven't been able to optimize, and Dara spends a lot of time working with me and our teams on how we go do that. But if you think about every other line of our P&L, we've actually done a pretty good job in terms of driving efficiencies out, and we'll continue to focus in on that. And just I realized that I neglected to answer Mark's second question in terms of the rollout of upfront fares and destinations. It is -- this is a very complex product that we're rolling out, and we have to make sure that our models are properly trained. So we are in the middle of a rollout in the UK, and we'll continue to roll them out across major markets where appropriate. I would expect that upfront fare and destination will be rolled out in all of our markets globally by the end of the year, in markets in which we can roll it out. Depending on regulatory issues, et cetera, we may not be able to roll it out in various countries. But I would expect a full rollout by the end of this year in markets where it's appropriate. Thanks for taking the questions. I just wanted to circle back on the Delivery margins. Can you just help us, Nelson perhaps split out some of the improvement across network efficiencies, advertising and marketing incentive optimization? Thanks. No. So look at it, we're focused on delivering the incremental margins that we laid out. We certainly have delivered way above what we've been talking about long term. We expect to continue to try to deliver against the 7% total company, and we're going to continue to look for efficiencies across. And so what I try to do there is let you know that some of them were very deliberate actions that we took in terms of making sure that we are running and the marketplaces are running more efficiently regarding incentives. Some of it is just tech that we deployed. And we deployed the tech in the first half of last year, and we really saw those benefits on the cost per trip. And then again, we've talked about some new business things. And so Ads is the easiest example, where we've seen that continue to grow. So the Ads business, we continue to -- expect to continue to grow and accelerate the growth, and so we'll see the benefits in the margins. I think we'll continue to run an efficient marketplace. And so yeah, I think you should expect that we'll continue to drive margins in those businesses. But remember, we also spend time trying to invest back in. So we've invested and we've talked about it. There's some growth markets like Japan that we've invested in. And again, we now are number in Japan from a category position perspective. So we try to manage -- we're going to balance both the growth as well as the margin and the profitability. And I don't want to be too prescriptive in terms of exactly how -- what we're doing. And I think just on Ads, for folks out there, we passed $500 million in annual run rate, and that's based on increasing the number of active advertisers that we have, like 80% on a year-on-year basis. But if you look at the merchant penetration, the percentage of merchants on our Delivery side who are advertising, only 25% of our merchants are active in the auctions that we have going on. So we think there's substantial upside to our advertising business. We committed to $1 billion in revenue by 2024, and we are progressing very, very well against that target. So you should expect to see more upside, both, by the way, in our Delivery business, but also in our Mobility business, we've seen some really encouraging signal as it relates to Journey Ads on Mobility, which you see on the app, put through rates over 3%, CPMs of $45, which is pretty amazing. And then a new class of a that we're actually pretty excited about our car tops and tablets, where the goal of those advertisings is really to put more dollars in drivers' pockets. We'll run the advertising networks. We'll sell the products, et cetera. But the goal of those products essentially is to get drivers greater earnings on a monthly basis, which then will translate into more drivers on the platform and a more dependable Uber for everyone. And that works out for the marketplace and it works out for us as well. Great. Thanks for taking the question. So first, on the weekly active user penetration, it seems like in some markets like UK, you're already above kind of the pre-COVID levels, but it's still below in large markets like U.S. Is there any broad reason for this lag on the user side? And how should we kind of think about this in two. And then for Nelson, as we go into the kind of annual comp cycle, I had to be the guy that asked the SBC question, but how should we think about the target compensation levels in 2023? Any high-level color you can share on your thoughts there would be helpful. Yeah. I'll start on the user trends and then Nelson can talk SPC. The reason for the U.S. trailing is really the West Coast. So if you look at the U.S., it's really a tale of two coasts. If you look at a Miami or a New York and an Atlanta or off the coast, in Austin, Houston, et cetera, most of the U.S. is at pre-COVID levels. Canada, for example, our neighbors in the North, are above 2019 levels as well. But it really is the San Franciscos, Seattles, Portlands, Los Angeleses of our country on the West Coast that are trailing and are off the pace that we see pretty much everywhere else in the world. So I wouldn't generalize the U.S. Kind of non-West Coast looks great. The West Coast is recovering. And we talked about in January, we are having, on a daily basis in Mobility in the U.S., trips approach pre-COVID levels as well. So all the trends are moving in the right direction, but the West Coast is definitely leaving the U.S. behind the recoveries on a global basis. So regarding stock-based comp. So we are looking at all parts of our cost structure, including employee compensation. We recognize, and there is a fair amount of noise particularly on the West Coast regarding stock-based compensation. What I would say is that we expect our employment levels to be -- our headcount will be relatively stable this year. We will continue to focus on performance management across all of our businesses. And so you saw that we took some action in our Freight business in January and now specific to the Freight in the marketplace. And there'll be some other pockets of that, that will happen during the course of the year. I think you won't see any demonstrable change in stock-based comp because it takes a long time for that to build out. But we are certainly going to manage our headcount very judiciously. And then the only thing I would add is that, because we are trying to start focusing in on GAAP operating profit, it obviously is part of the calculation. And so we recognize that as well. And so as you think about the progress we've made on EBITDA and free cash flow, and now with our focus there, you can envision the amount of focus that, that line will have as we move forward. Thanks. Two, if I can. First, just on Uber One. You talked about a strong pickup in spend and clearly like a nice LTV that covers CAC pretty quickly. But once you're through that kind of start-up cost, what would contributions look like for Uber One members versus like a non-member? And how much of a trade-off is the margin for the profit dollars in that plan? And then secondly, do you think the driver supply is benefiting at all yet from slower economic growth? And to the extent we're seeing some of that or eventually see that, how do you think about pricing and take rate on the Mobility side, if you get better and better supply? Thanks. Yeah. Look, Lloyd, I don't want to get into too much of the particulars of Uber One on because as you can imagine, a bunch of information, the data there is proprietary. But if we get an Uber One member who sits around for a year, that Uber One on member generally will be unprofitable. It's really in the second year where that Uber One member will be profitable, and that's just a trade-off between frequency, order average order value and margin. And we're actively making that trade-off and driving Uber One penetration. Another side benefit of Uber One is that our merchant base, an increasing percentage of our merchant base in our Delivery business is willing to pay to have, let's say, advantage exposure to the most valuable members that we have as it relates to the Uber One audience. And as you can imagine, the Uber One audience is a high-demo audience that moves, that spends on services, that gets out of house, and it's a very, very attractive demographic, both for our merchants and for advertisers as well. In terms of driver supply, driver supply levels are very, very healthy, right? Drivers are up 35% on a year-on-year basis. New driver count is up 34% on a year-on-year basis. And we have heard from our drivers that inflation is a factor that they consider, about 70% of them that are coming on to the platform are coming on to make more money so that they can afford to live in what has been an inflationary world. So we certainly think that the economic environment could be a tailwind there. And in markets where we have seen economies get weak in the past, and Mexico has been through some recessions, Brazil has been through some recessions, we definitely see weaker economic environment helping out in terms of our driver supply that is a tailwind in terms of trip volumes. It's difficult to tell if that's what we're seeing. You'll remember that for 24 months now, we have been very, very focused on improving Uber as a platform for our earners. Come on in quickly, make a lot of money delivering quickly. Then once we have -- then we'll upsell you to driving driver earnings are $35 per utilized hour. So they're at very, very high levels. Driver earnings increased by 37% on a year-on-year basis in terms of constant currency. So I think just the earnings levels and the service that we are providing our drivers is a tailwind. In addition to the economic environment out there. And we put it all together, it results in a service where surge levels are coming down. So surge levels in January, for example, in the U.S. are under 20%. ETAs are coming down. ETAs in the U.S. are about 4.5 minutes in January as well. So the marketplace itself is getting a lot more healthy and drivers are earning well at the same time, which is exactly what we want. Great, thanks for taking the question. Dara on Delivery, we're constantly talking about or getting questions on the demand side here, just given macro challenges. And, from what we're hearing on growth in January for Delivery and accelerating expected growth, I guess in February-March. You mentioned habitual in the letter, how much do you think of this growth here in Delivery as category adoption, better convenience, et cetera, or Uber specific, as you mentioned, maybe competition isn't as great and things along those lines? Thank you. Well, I think that overall in the category, the Delivery category has been pretty resilient post-pandemic, certainly more so than a lot of other categories that that benefit from the pandemic. That said, we are growing faster than the category generally, if you look at us globally. Certainly in Europe, we are seeing many of our competitors pull back significantly from what we're unhealthy spend levels in the past, that didn't make any sense. They may sense in terms of top line, but they certainly didn't make sense in terms of bottom line. And for us in Delivery, we're benefiting from the power of the platform, very cheap audience, from our Rides business. Remember, we get more new eaters, from our rides app than we do from Google and Facebook and Instagram, combined at about a quarter of a cost. So that is a very significant structural advantage that is assisting our Delivery business. You've got our membership business, that again, is adding higher frequency higher spend more retention as well. We're the only player out there that has membership, both on Mobility with Mobility and Delivery benefits as well. And then you've seen our tech, which is optimization around cost per transaction, and then an ad business that we're building that is starting to scale. So the combination of all of those four factors, I think, is allowing us to outgrow the category, which generally has been more resilient than other categories as well. And I wouldn't expect anything to change going forward. We do think that we should continue to outgrow the category in Delivery going forward based on the environment that we're seeing. Hi, thanks for taking my questions. So Mobility continues to deliver impressive bookings growth. Maybe if you could just help give us a sense for how shared gains are playing into that versus broader recovery in category usage as you have moved further past the pandemic. And assuming you are seeing some share shifts, are you starting to see evidence that the investments you've made in driver supply technology and Uber One are allowing you to leverage your network effect and in driving sort of a permanent competitive advantage that could drive ongoing share shifts in certain markets? And then second question about freight. Bookings in EBITDA for freight were a bit behind our expectations, but you could just discuss how it compared to your own expectations in the fourth quarter, and some puts and takes of what drove could have driven that delta relative to your own expectations. Thanks. Yeah, the first thing I'd say, John is that I've never seen a permanent competitive advantage in my life, and we don't expect to. So the advantages that we have in terms of a business and Mobility, we are gaining category position, and we're getting category positions certainly in the U.S. We are in Europe and in the UK, and Australia, et cetera. We're seeing one of our competitors in France, spent a ton of money which doesn't seem to make any sense whatsoever, but they've done it before and we push them back. And we don't consider spending more money a strategy. It just like that's maybe that's a strategy when the only thing that counted was how much money you could raise. And while we see some of our competitors kind of trapped in the spend more money strategy if you want to call, it we are driving. We're using efficiency we're using technology like upfront fares and destinations, and we're using the power of our platform with membership to win category position the right way. And the right way for us is grow strong top-line faster than the category and leverage a bottom line so that you're profitable, and you continue to increase profit margins as well. So right now, we are seeing kind of the positive feedback loop of more driver supply leading to more demand, leading to more data so that we can target that demand so that we can match the right driver to the right rider, whether it's reserved or on-demand. That feedback loop is happening. But we are going to have to stay on our toes to continue to gain category position while improving margins. And we don't take a minute of that for granted. We'll continue to our best the results in the last year, year and a half have been really, really good. And the trends that we're seeing for now are really good. But the minute we take our foot off the gas, is the first minute that a competitor starts to get an advantage over us. So we don't take any of it for granted. Sure, regarding the freight. So yes, we're watching the same trends you are. Yes, we wish the freight numbers were better in the fourth quarter. But as you know, there's a little bit of a cyclical nature to what's going on more broadly in the industry. The business continues to do well, and so as we bought the Transplace business in December of 2021. We spent a fair amount of last year integrating the business and Transplace Tupelo business continues to be resilient with everything going on. And what we've seen as our Uber Freight -- historically Uber Freight business has done a very good job using the brand and our tech, our shared tech to really drive out and build out its presence, particularly with what I'd call national brands, where we need to spend some more time is really focused on some of the small and midsized shippers. And so we're doing that right now. And we've made some organizational tweaks. We do expect that you'll see us getting some traction there, but the overwhelming cycle that's going on right now more broadly on the freight industry is going to continue to impact our business. And so that business will continue to lag likely versus where we would have hoped. And certainly versus a year ago where it was a much different dynamic more broadly in freight business in this country. Hi, thanks for taking my questions. Just a couple please. Looks like the leverage on promotional spending has been quite good. I think it's the third quarter in a row of sales and marketing dollars stepping down. How much more efficient can that line get? And as a follow on to that when you think about your ambition, so on gross bookings growth? I mean, do you expect to ramp promotional spending down the road? Or do you feel comfortable about growing the business while continuing to get leverage against that that item? Thank you. So I'll start on the first one and Dara can handle the second half of it. So again, we're focused on really delivering and balancing our growth and our efficiency. So that's been our path. And I talked about when we took our big call to action in 2020. So as a company, we've been focused on growth and efficiency. We recognize that we put out targets last year. And our goal is to make sure we achieve or overachieve against them, which I believe we have, if you think about the last six quarters. And so there are times when we might take some incremental dollars and spend back in a specific marketplace. And that would there'd be strategic reasons why we would do it. There might be some situations where we pull back and so we have a capital allocation framework that we've had now for the past few years. And it's what's working well is what I would say. And so I don't want to say, could we actually get very, superefficient in the quarter? Maybe. Would we likely not? We still think there's a lot of growth. And so our goal is to really think about as our set kind of where the path's is going and making sure that we are investing behind those growth levers, so we can deliver the kind of top line growth we're doing. And delivering -- over delivering against the bottom line which we have been doing. And Nikhil, in terms of ramping S&M to drive top-line, the way I described our activities is, it's exactly like Nelson said. Generally, we want to leverage all of our cost lines the cost of sales, marketing cost. Certainly, we want to leverage operating costs and make sure that we stay lean as a company, it's just much more fun to win as a small team versus big teams. And that allows us then to lean into different segments of the business that we want to specifically grow, whether that's a specific geo, or that's a specific product. You see us with our Superbowl ad, with Uber One, that's an expensive ad that is leading into Uber One to drive growth in a very, very strategic product of ours. So strategically overall, our efficiency or drives efficiency, profit business then allows us to strategically invest in various geos or various areas. And yes, that will include investments and marketing. It'll include investments in tech as well so that we can strategically grow where we can build an advantage over our competitors. And as long as we keep on driving this efficiency every single day, every single week, every single month, every single year, that opens up avenues for us to invest and deliver the bottom line that investors are looking for long term. All right. I think that's it. Yeah, you bet. Thank you, everyone, for joining us. Huge thank you for the Uber team, delivering another great quarter and big thank you to our earners who without them, none of this would be possible. 2022 was a really, really good year for the company. And we're looking for 2023 to be an even better year. Thank you, everyone.

EarningCall_491

Welcome to the Rambus Fourth Quarter and Fiscal Year '22 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Thank you, operator, and welcome to the Rambus fourth quarter 2022 results conference call. I am Desmond Lynch, Chief Financial Officer at Rambus; and on the call with me today is Luc Seraphin, our CEO. The press release for the results that we will be discussing today have been filed with the SEC on Form 8-K. A replay of this call will be available for the next week at (866)-813-9403. In addition, we are simultaneously webcasting this call, and along with the audio, we are webcasting slides that we will reference during portions of today's call. A replay of this call can be accessed on our website beginning today at 5:00 p.m. Pacific Time. Our discussions today will contain forward-looking statements, including our expectations regarding projected financial results, financial prospects, market growth, demand for our solutions, the company's ability to effectively manage any supply chain shortages and the effects of ASC 606 on reported revenue, amongst other items. These statements are subject to risks and uncertainties that may be discussed during this call and are more fully described in the documents we file with the SEC, including our 8-Ks, 10-Qs and 10-Ks. These forward-looking statements may differ materially from our actual results, and we are under no obligation to update these statements. In an effort to provide greater clarity in the financials, we are using both GAAP and non-GAAP financial presentations in both our press release and on this call. A reconciliation of these non-GAAP financials to the most directly comparable GAAP measures has been included in our press release, in our slide presentation and on our website at rambus.com on the Investor Relations page under Financial Releases. We adopted ASC 606 in 2018 using the modified retrospective method which did not restate prior periods but rather run the cumulative effect of the adoption through retained earnings as a beginning balance sheet adjustment. Any comparison between our results under ASC 606 and prior results under ASC 605 is not an accurate way to track the company's progress. We will continue to provide operational metrics such as licensing billings to give our investors better insights into our operational performance. The order of our call today will be as follows: Luc will start with an overview of the business. I will discuss our financial results, and then we will end with Q&A. Thank you, Dave, and good afternoon, everyone. 2022 was an excellent year for the company, capped off by a solid performance in the fourth quarter, with Q4 revenue and earnings in line with guidance. Through outstanding execution, we were able to grow the business faster than the market despite a challenging macroeconomic environment. We delivered another record year of product revenue driven by memory interface chips, hit our annual revenue target for silicon IP and extended our strategic relationship with Samsung, which strengthens our long-term licensing foundation. In addition, we generated a record $230 million in cash from operations over the course of the year. As we have grown the business, we have strengthened our balance sheet and consistently returned value to stockholders through share repurchases, strategic investments and debt retirement. We continue our focused investments in the technology and talents critical to our growth initiatives. As we take a look at the details of our performance, memory interface chips led the way, delivering Q4 product revenue of $67 million, up 15% quarter-over-quarter. This brought the full year to $227 million, setting a new annual record for product revenue and significantly outpacing the market with 58% growth year-over-year. These results were driven by strong execution throughout 2022, with the team expanding our DDR4 qualification footprint and making significant market share gains. We are well positioned for the ramp of DDR5 with our industry-leading offering and continue our product leadership with last week's announcement of our Gen 3 DDR5 RCD. This latest generation chip extends the performance of our RCD family to 6,400 mega transfers per second and supports the road map of future server generations in the years to come. Turning to 2023. We remain vigilant as we navigate through the dynamics of the industry transition to a new generation of memory. While we now have improved visibility of supply, we are seeing elevated inventory levels at some end customers. This is leading to softness in the first half that is reflected in our guidance, but we expect a stronger second half of the year, with next-generation memory ramping in earnest. The industry is still early in the transition to DDR5, with a server memory crossover from DDR4 projected for the first half of 2024, which is consistent with our view from last quarter. And with that, our memory interface chip product mix will continue to be dynamic as the industry prepares for production shipments of DDR5. We are actively working with our customers to manage inventory adjustments and the transition to DDR5, and we believe we are well positioned for continued growth in 2023. As we look to the longer-term evolution of the data center, CXL brings many exciting opportunities. Multiple applications for CXL attached memory are emerging, enabling new memory tiers in the data center. CXL-enabled architectures promised to deliver higher performance and improved total cost of ownership in server generations to come. We continue to work in close collaboration with the ecosystem including cloud, OEM and DRAM makers and are well aligned with the market needs and timing. Finally, in silicon IP. The team executed very well, achieving over 30% revenue growth year-over-year. We continue to lead in our areas of focus for both interface and security IP. And while we expect challenging macro conditions, we remain confident in the long-term growth opportunities. We demonstrated strength with Tier 1 wins throughout the year and are well positioned to address the long-term need for high performance and highly secure IP in advanced SoCs. In closing, this was a tremendous year for the company. The team executed incredibly well and consistently delivered results. While we are now navigating cross currents in the first half of 2023, stemming from the overall economic environment and from a generational industry transition from DDR4 to DDR5, we continue to see solid growth opportunities in the data center. We remain committed to making focused investments in the resources essential to delivering differentiated high-quality products and innovations that address the critical performance bottlenecks between processing and memory. I'm extremely proud of the team, and I'm confident that our strategy puts us in an excellent position for long-term profitable growth. And as always, I'd like to thank our customers, partners and employees for their ongoing support. Thank you, Luc. I'd like to begin with a summary of our financial results for the fourth quarter and for the full year 2022 on Slide 5. Once again, we delivered a strong quarter with both revenue and earnings in line with our expectations. We had excellent financial results in 2022, and we ended the year very well positioned as we continue to make progress on our long-term growth strategy. The excellent financial performance was coupled with a continual improvement in our balance sheet, which supports our growth initiatives. For the year, our cash from operations was a record at $230 million, up from $209 million in 2021. Our ability to consistently generate strong cash flows has enabled us to invest in our strategic initiatives and consistently return capital to shareholders. In 2022, we executed a $100 million accelerated share repurchase program, which retired 3.2 million shares and we retired 94% of our convertible debt using our existing cash on hand. As we look to the future, we expect to continue to deliver strong cash from operations and drive shareholder value. Let me walk you through our non-GAAP income statement on Slide 6. We continue to execute and revenue for the fourth quarter was $122.4 million, in line with our expectations. Royalty revenue was $31.4 million, while licensing billings was $64.3 million. The difference between licensing billings and royalty revenue primarily relates to timing, as we do not always recognize revenue in the same quarter as we bill our customers. Product revenue was $67.2 million, consisting primarily of memory interface chips and for the full year, we delivered $227.1 million, which was a record for the company. Contract and other revenue was $23.8 million, consisting primarily of silicon IP. As a reminder, only a portion of our silicon IP revenue is reflected in contract and other revenue, and the remaining portion is reported in royalty revenue as well as in licensing billings. Total operating costs, including cost of goods sold for the quarter was towards the high end of our expectations at $85.4 million driven by higher cost of goods sold related to record memory interface chip revenue. Operating expense of $55.8 million were in line with our expectations as we continue to be vigilant in our expense management. And we ended the quarter with a total headcount of 765 employees. Under ASC 606, we recorded $1 million of interest income related to the financing component of fixed fee licensing arrangements, for which we have recognized revenue but not yet received payment. We incurred approximately $800,000 in adverse foreign currency exchanges during the period. After adjusting for noncash interest expense on the convertible notes, this resulted in non-GAAP interest and other income for the fourth quarter of $400,000. Excluding the financing interest income related to ASC 606, this would have been $700,000 of net interest expense. Using an assumed flat tax rate of 24% for non-GAAP pretax income, non-GAAP net income for the quarter was $28.3 million. Now let me turn to the balance sheet details on Slide 7. We ended the quarter with cash, cash equivalents and marketable securities totaling $313.2 million, up from the previous quarter, primarily driven by strong cash from operations of $51.3 million. At the end of Q4, we had contract assets worth $150.9 million, which reflects the net present value of unbilled accounts receivable related to licensing arrangements for which the company has no future performance obligations. We expect this number to continue to trend down as we bill and collect for these contracts. It is important to note that this metric does not represent the entire value of our existing licensing agreements, as each renewal opportunity we restructured our patent agreements in a manner that allows us to recognize revenue each quarter. Fourth quarter CapEx was $8.7 million while depreciation expense was $7.1 million. We delivered $42.6 million of free cash flow in the quarter. As a reminder, the forward-looking guidance reflects our current best estimates at this time, and we continue to actively monitor the macro environment and our actual results could differ materially from what I'm about to review. In addition to the financial outlook under ASC 606, we have also been providing information on licensing billings, which is an operational metric that reflects amounts invoiced to our licensing customers during the period adjusted for certain differences. As we have reported historically, licensing billings closely correlates with what we had historically reported as royalty revenue under ASC 605. Now let me turn to our guidance for the first quarter on Slide 8. Under ASC 606, we expect revenue in the first quarter between $107 million and $113 million. We expect royalty revenue between $25 million and $31 million and licensing billings between $61 million and $67 million. We expect Q1 non-GAAP total operating costs, which includes COGS to be between $87 million and $83 million. We expect Q1 CapEx to be approximately $9 million. Under ASC 606, non-GAAP operating results for the first quarter is expected to be between a profit of $20 million and $30 million. For non-GAAP interest and other income and expense, which excludes interest income related to ASC 606, we expect approximately $500,000 of interest expense. We expect the pro forma tax rate to remain approximately 24%. The 24% is higher than the statutory tax rate of 21%, primarily due to higher tax rates in our foreign jurisdictions. As a reminder, we pay approximately $20 million of cash taxes each year, driven primarily by licensing agreements with our partners in Korea. We expect non-GAAP taxes to be between an expense of $5 million and $7 million in Q1. We expect Q1 share count to be 110 million basic and diluted shares outstanding. Overall, we anticipate a non-GAAP earnings per share range between $0.13 and $0.20 for the quarter. Let me finish with a summary on Slide 9. I am pleased with our excellent 2022 results and the company's execution in a challenging microeconomic environment. Our top line growth was achieved by increasing our profitability and generating record cash from operations. In 2023, we are focused on execution while maintaining financial discipline. Our innovations drive a diversified and expanding portfolio, fueling product revenue growth. We continue to deliver value to our shareholders with a robust balance sheet and strong cash generation. We are well positioned to continue executing on our long-term strategic growth plans. Before I open the call up to Q&A, I would like to thank our employees for their continued teamwork and execution. With that, I'll turn the call back to our operator to begin Q&A. Could we have our first question? I appreciate you taking the question. I wanted to first ask about the different ebbs and flows in your product revenue as we transition through 2023. Luc, you communicated that you're uncertain, to paraphrase, in terms of how DDR4 and the transition to DDR5 might impact your business as well as excess inventories. Maybe if you can share with us sort of your view and how this transition may shape up because you're guiding for $60 million in product revenue in the first quarter, which doesn't sound too bad. So is the risk really more into the second quarter that you might see some air pocket of weakness in your DDR5 product revenue? And then related to DDR5, have you started to see customers pick up their order trends, perhaps after they burn through some inventory that was built last year? Thank you, Gary, for your question. First of all, we're very pleased with the year we had on the product revenue in 2022. As said in the remarks, $227 million, which was 58% growth over last year. And the last quarter was a good quarter as well, $67 million. Now let's look at what happened last year. Our customers started to build some inventory in advance for the DDR5 launch in the market. And because of some of the delays of the DDR5 platform, they had to pivot very quickly back to some DDR4 procurement in a supply-constrained environment. And that's what is reflected in our Q4 revenue, if you wish, where the weight of DDR4 is higher than what we expected out of the $67 million. Now what's happening is our customers have to digest some of these orders that they have placed on us. We are working with them in scheduling their backlog for these DDR4 orders. They are cautious as they also have to manage that transition to DDR5. And that explains the guidance we're giving for the first quarter of this year. But we're confident to continue to grow throughout the year with the launch of DDR5. We very pleased that both AMD and Intel announced the launch of their platforms to DDR5. DDR5 is going to start in earnest, mostly through the second part of the year. So as indicated last quarter, this coming quarter and the second quarter are going to be quarters we're going to adjust. We're going to adjust the backlog of our customers and the transition from DDR4 to DDR5. I would like to say that we have backlog in place for DDR4. We don't see order cancellations. We're just negotiating the schedule of shipments of these DDR4 parts, and we are comfortable with the level of inventories on DDR5. So we just have to go through the transition. We will grow this year. We will continue to gain share this year, but that will happen mostly in the second half of the year. Got it. Appreciate all the color, Luc. As my follow-up, I wanted to ask about the run rate at the silicon IP business. If I'm not mistaken, last quarter, it was $125 million annualized run rate. Is it still at that level? Or have we seen some additional growth on top of that? So we had very nice growth last year on our silicon IP business. It grew about 30% over the previous year. I think we will continue to grow that business this year, but at a lower rate given the macroeconomic environment. And we see a growth of that business in 2023 in the low to mid-single-digit number as opposed to the growth that we saw last year with the backdrop of the current economic environment. Congratulations on the good results and congratulations also for introducing the third generation DDR5. And as you're speaking with your customers, do you have an idea of what the bell curve or what the distribution will be for each one of those speed ranges, Gen 1 through Gen 3? Thank you, Kevin. The qualification cycles for the RCD chips are quite long and complex, and they're based on the performance of the chips, they are based on interoperability between the memory and the processors and signal integrity. And to give you a little bit of background, the DDR5 ramp that will happen this year -- that is happening this year on the Sapphire Rapids and general platform is based on our Gen 1 RCD, which we announced in September of '17. The second generation of RCD, we announced it in October '21, some time ago, and that will address the follow-on products, which will be introduced to the market in 2024. And the third generation, which we just announced right now on 5,400 mega transfers per second is going to address, again, the following generation that will be introduced in the market of 2025. It's always very important for us to be ahead of the market to engage with the ecosystem to go through these very complex qualification processes with our customers so that we continue to grow our share as we move. So this year, Generation 1 of our RCD is going to be the one in production, Generation 2 will start to be in production next year and Generation 3, which we just announced, will start to be in production in 2025. I see. Very clear. And maybe if you could give us the status of your -- the other chips that are going on to a DDR5, the temperature controller, the SPD hub, just an update on the status of those devices. Yes. So we announced the SPD hub and the temperature sensor in July of last year. We're well ahead with the qualification with our customers, as we speak, and we expect those products to start generating revenue towards the end of this year. That's where we are, at the same status as last quarter. One for Luc and one follow-up for Des. I just want to go back to the silicon IP and I wanted to understand how the mix would change, especially as we migrate from the first half to the second half. Would there be opportunity with the CXL 2.0, where you can actually use the existing DIMM slot to -- as a DDR4? Would that create kind of opportunity for you, especially with the CXL 2.0 and memory controller? And I have a follow-up. Thank you, Mehdi. So when it comes to CXL, we have introduced last year a series of IPs that address the CXL market. We announced our CXL 2.0 IP in January of last year. We announced CXL 3.0 towards the end of the year as well as PCIe Gen 6. So we continue to have design wins in the CXL space with SoC vendors that build SoCs for the CXL market. The CXL market will start in earnest towards the end of next year. That's where, for us, we're going to start to see product revenue. So from an IP standpoint, as we said, the view we have on our IP business this year is that it's going to grow in aggregate low to mid-single digits because a lot of the design slots has been accessed at this point in time. Given the economic environment, we do see a slight slowdown of design starts, but CXL will start. It's just that the IP business related to this, or the IP business in general, is going to grow at a lower rate this year than it was last year. This being said, we will start to see CXL product revenue towards the end of next year. And the follow-up question for Des is the buffer chip gross margin had a dip. Should I -- and I remember for calendar year 2022, you had guided to 60% to 65% gross margin, but you exited the year at 58%. How should we think about progression of buffer chip -- of our product buffer chip gross margin throughout this year? Thanks for your question. As Luc mentioned, our product revenue execution and growth has been exceptional as we continue to grow the business. I think if you look on the full year basis for 2022, our product gross margins were around 61%, which was in line with our long-term target of 60% to 65%. When we look as a company, we manage our gross margins to long term. And depending where we are in the product cycle and what products are shipping, you can see our gross margins moving around quarter-to-quarter. So that is reflected in Q4. Our product gross margins were below this range, which was entirely driven by product mix in the quarter. And we do expect to see a similar product mix in Q1. With improvements in product mix and continued manufacturing cost reductions as we go throughout the year, we do expect product gross margins for 2023 to be within the long-term range of 60% to 65%, Mehdi. Just first one is just to follow up with the gross margin question. Just want to make sure I understand the product mix that you're specifically talking about, is it the mix between DDR4 versus DDR5? Is it -- just any color around that will be helpful in terms of when -- also try to think about when these headwinds are going to start going the other way. Thanks for your question. You're exactly correct on that one. We did see in Q4 a higher mix of our DDR4 revenue from there. And that's what we expect to see going into sort of Q1. I think what we've talked about is that on the product side, we do expect to see softness in the first half of the year, which Luc mentioned in his prepared remarks with the recovery in the second half of the year, mainly driven by the DDR5 sort of revenue from there. And with that, we will see our sort of gross margins improve and come in line with the targeted range of the 60% to 65% that I've mentioned. Okay. That's clear. Maybe a follow-up question is, I think you guys -- and in reference to an earlier question, you talked about you expect your product revenue in aggregate for the full year to grow year-over-year. But did I also hear correctly that you expect Q1 to be the trough quarter as well and then start growing from there? And how should I think about the mix as you exit the year? Even a range will be helpful between DDR4, DDR5 and maybe some companion chips. Sidney, thanks for your question again. What we've said is our visibility beyond sort of Q1, it's limited on the sort product transition. Your customers are digesting the inventory in advance of the product transition from there. But I think, overall, we do expect to grow our sort of product revenue with growth in the sort of back half of the year is the way that I would describe it from there. I think overall, our execution and growth in the product side has been exceptional from there. I think we're not going to really break out the DDR4, DDR5 mix. Again, our visibility is sort of limited as the customers work through some of these transitions from here. But I think overall, for the year, we do expect to grow our product revenue. Okay. Maybe if I could sneak in one quick one. If I -- looking at your operating expenses, excluding the cost of goods sold, it's up a bit from the Q4 level in your guidance, how should we think about the rest of the year given the current macro environment? That's a great question, Sidney. Thanks. We'll continue to be disciplined and vigilant in our operating expense management given the macro challenges. For Q1, we did guide our total operating costs, which includes cost of goods sold to be relatively flat to Q4 at $85 million. If you really look specifically our operating expenses in 2022, our quarterly operating expenses were relatively stable, around the $55 million to $56 million per quarter, with R&D at $35 million to $36 million per quarter and SG&A is roughly $19 million to $20 million. In Q1, we will see some seasonal payroll increases, which will increase our sort of cost basis from there. But our expectation is that we will keep our operating expenses relatively flat from Q1 to Q2. And really looking at the sort of back half of the year, we'll continue to be prudent in our expense management and really strike the right balance to ensure that we continue to fund the right investments to ensure that we maintain our leadership positions in key programs. And I think you've seen us, the discipline throughout the year, so it was a nice operating expense leverage from there. You have shipped DDR5, again, chipsets. And so I'm curious to know the order of magnitude for the price increase for the RCD specifically in a DDR5 versus a DDR4, maybe in the initial days of DDR5 and maybe as well taking a view with more commercial volumes. And then with respect to the companion chips, the data buffer -- I'm sorry, not the data buffer, but the SPD hub and the temperature sensors. How would you calibrate your share in those particular end markets vis-a-vis your RCD share knowing that you have a broader set of customers in those companion chips? Thanks, Gary, for your question. Regarding DDR5 pricing, typically, when there's a change of generation, we do see a reset of pricing especially at the very beginning when the volumes are small. But when we go in production in earnest towards the second half of the year, we will see this price erode over time, starting from a much higher level. This is typical in that kind of generation would change. And that's why we believe, as indicated by Des earlier that our margin should improve throughout the year. And we still see us meeting our margin targets of 60% to 65% for the whole year. So that's how we do see the transition from DDR4 to DDR5. With respect to the companion chips, these companionships are in qualification now with customers. We expect them to be in production with customers towards the end of this year. The qualification cycles for these companion chips are much shorter than it is for RCDs, they are much less complex. So it's easier to gain market share earlier. It's a bit earlier to predict what our market share is, but we have good relationships, good contracts with our customers. So we expect to get some good revenue from these companion chips when we introduce them into the market. But the qualification cycles are much, much shorter than what they are for RCD chips, for example. Thank you, everyone, who has joined us today for your interest and time. We look forward to speaking with you again, too. Have a very good day. Thank you.

EarningCall_492

Hello, and welcome to the Paycor's Second Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. Good afternoon, and welcome to Paycor's earnings call for the second quarter of fiscal year 2023, which ended on December 31. On the call with me today are Raul Villar, Jr., Paycor's Chief Executive Officer; and Adam Ante, Paycor's Chief Financial Officer. Our financial results can be found in our press release issued today, which is available on the Investor Relations section of our website. Today's call is being recorded, and a replay will be available on our website following the conclusion of the call. Statements made on this call include forward-looking statements related to our financial results, products, customer demand, operations, impact of COVID-19 on our business and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We also will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors. Definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures is provided in our press release on our website. Thank you, Rachel, and thank you all for joining us to discuss Paycor's fiscal second quarter results. Paycor's modern open platform with differentiated tools for leaders in industries continues to resonate with clients and win in the market. Revenue grew 29% this quarter, driven by record bookings and ongoing PEPM expansion. Adjusted operating income margin increased by over 300 basis points year-over-year and we believe there is significant opportunity to drive further expansion as we scale. Based on these robust results and our optimistic outlook for the remainder of the year, we are once again raising our guidance, which Adam will discuss in more detail. Our go-to-market motion continues to deliver excellent results as we strategically expand sales coverage in Tier 1 markets, leverage influential broker relationships and continue to grow our average deal size. We are ahead of schedule with sales hiring and already achieved a low end of our 20-plus percent seller headcount growth target for the year. We like our sales staffing level, and we'll continue to evaluate additional hiring in the second half. We offer the only modern cloud platform, empowering frontline leaders to be more effective by providing the insights and tools required to source, attract, develop and retain their employees. This quarter, we introduced the COR Leadership Dashboard that provides actionable information to help transform managers into effective frontline leaders. The COR Leadership Dashboard surfaces real-time employee insights and evaluates leadership effectiveness by gathering feedback on how well they coach, optimize and engage their team. Given the continued tightness in the labor market, our clients' top priority remains finding and retaining talent. This quarter, we closed the Talenya acquisition and began beta testing Paycor Smart Sourcing, which leverages AI to simplify and streamline the sourcing efforts of frontline leaders to find skilled and diverse talent. Interest among our client base has been robust and early feedback is extremely positive. With the addition of Paycor Smart Sourcing, our full suite of solutions is $44 PEPM and is the most comprehensive HCM offering available in the SMB market. Our platform's modern architecture enables rapid integration of point solutions such as Talenya that provides deeper functionality than traditional suite providers. With nearly 90 different public API endpoints available to power integrations, Paycor offers the most modern interoperability solution with a broad array of partners for our clients. We are incredibly proud Paycor was distinguished as a Top Workplace U.S.A. by Energage for the third year in a row. Energage's Top Workplaces program has a 15-year history of surveying over 20 million employees to help build and brand top workplaces. Results are based on 15 cultural drivers that are proven to predict high performance against industry benchmarks. This award underscores our commitment to exemplify the cultural best practices that impact associate engagement and business performance. Let me close by reiterating how confident we are about Paycor's outlook. The labor market remains tight as nonfarm payrolls continue to increase, job openings are at elevated levels, and workforce participation remains low. Modest changes in unemployment or job openings are unlikely to materially impact our business as most of our revenue growth is derived from new business and the market is still in the early stages of adopting modern cloud-based HCM solutions. Furthermore, HCM is highly defensible as our value proposition is mission-critical to attracting, paying and retaining great talent, while also driving a compelling return on investment for our clients. Lastly, I would like to thank all Paycor associates for their efforts through this calendar year-end, especially our implementation, support and success teams who, during our busiest time of year, provided an amazing year-end experience for our clients. Thanks, Raul. I'll discuss our second quarter results, then share our outlook for the third quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. We had another strong quarter, delivering total revenues of $133 million, up 29% year-over-year and recurring revenue growth of 22%, marking the fifth consecutive quarter of 20-plus percent revenue growth. We exceeded the top end of our revenue guidance by 4% and significantly outperformed our adjusted operating income guidance as we continue to scale the business. The majority of revenue growth continues to be from new business wins. 90% of our revenue is derived from companies with between 10 to 2,500 employees, where we continue to see outsized growth. Effective PEPM increased 11% year-over-year, which includes cross-sell as well as pricing initiatives such as the conversion of our clients to our latest product bundles, and it also includes the impact of higher bundle adoption at the point of sale. In addition, we're pleased with the progress we're seeing across our partner program as we continue to expand our interoperability platform. The number of employees on our platform increased to more than 2.3 million, up 9% over the prior year. and we exceeded 30,000 customers. Our average customer size increased to 78 employees at the end of Q2 up from 74 in the prior year as we continue to focus our resources in the mid-market with clients above 100 employees. However, on a sequential basis, organic customer growth has been essentially flat, following strong growth earlier in calendar 2022. As we shift our portfolio upmarket, we continue to see moderation in employee growth in the micro segment, while the number of employees in the mid-market and enterprise segments increased 11% year-over-year, and net retention continues to trend favorably. Adjusted gross profit margin, excluding depreciation and amortization, improved to 77.9%, an increase of about 1.5 points year-over-year as we continue to scale the business. Sales and marketing expense was $42 million or 32% of revenue comparable to levels a year ago. We continue to strategically expand our sales teams and marketing programs, primarily in Tier 1 markets. We like the current level of spend and continue to evaluate investments to ensure that they will deliver an attractive return, but we have the flexibility to quickly pivot if we were to see a change in the demand environment. On a gross basis, we invested $23 million in R&D or 15% of revenue, a similar level to last year and in line with our long-term targets. We continue to focus on efficiently enhancing our modern platform to deliver on our leader strategy, whether it's through organic development, partnerships or acquisitions. G&A expense was $19 million or 14.5% of revenue, down 1.5 points from 16% in the second quarter of 2022. We intend to progressively drive G&A down as a percentage of revenue as we scale the business. While we continue to focus on building a sustainable 20-plus percent revenue engine, we are also steadily expanding margins as we scale the business. This quarter, adjusted operating income increased to $18 million or a 13% profit margin, up more than 300 basis points from the 10% last year, even while continuing to expand investments in sales and marketing and R&D. Shifting to the balance sheet and cash flow. This quarter, free cash flow was a $3 million spend compared to a negative $7 million last year. We remain on track to deliver on our plan to be free cash flow positive for the full fiscal year. We closed the quarter with $72 million in cash and no debt. Turning to client funds. This quarter, we generated just under $8 million of interest income on average client funds of about $1 billion, an effective rate of just over 300 basis points. In terms of our outlook for the second half of the fiscal year, we remain optimistic on the HCM demand environment. Our guidance assumes no material change in the broader demand environment or labor market, which has been fairly consistent and flat organic employee growth among existing customers for the balance of the year. For the third quarter, we expect total revenues of between $155 million and $157 million or 28% growth at the high end of the range and adjusted operating income of between $35 million and $36 million. For the full year, we expect revenues of $539 million to $545 million or 27% growth at the top end of the range, and we anticipate adjusted operating income of $75 million to $78 million. With respect to interest income, we expect our effective rate to increase marginally in the third quarter to about 330 basis points. At today's rate, we expect interest income will be in the range of $28 million to $30 million for the full year on average client fund balances of just over $1 billion. We still plan to reinvest a portion of interest income as we've discussed this year to accelerate our product road map and expand our marketing programs and invest in infrastructure. However, we will look to drop any incremental interest income beyond that to the bottom line, which will increase our full year outlook on margin and cash flow. Overall, we're pleased with our strong quarterly performance and ability to raise guidance again. We've driven increased profitability 3 consecutive quarters. Our differentiated platform focused on leaders continues to win in the market. As a mission-critical application, we believe in the durability of the category and our opportunity to continue capturing share with the expanding $32 billion HCM market. Raul, you mentioned all of the ways in which your business continues to perform in this environment. So I figure I'd ask the question directly. Are you seeing any negative impacts or offsets because of the macro? To date, we haven't seen any changes in our overall demand environment. Things have been fairly consistent. And they've been fairly consistent across all of our sales segments. So to this date, we've seen strong demand. Gabriela, the 1 thing I would say is that we've just seen a little bit more softness in that organic customer growth in that sort of micro segment, really small segment under 20 employees. Besides that, there's really nothing else that we're seeing. Excellent. The follow-up that I have is on how you're thinking about normalized growth. I know that very consistently now you've been doing north of 20% recurring revenue even on more difficult comps. So how do you think about potentially getting to 25%? How do you think about potentially accelerating your hiring further? Are there puts and takes that could potentially put you back down to 15% that are out of your control? So just a little bit more on how you think about normalized growth. Yes. I mean the way that we think about it is that it's about the broader demand environment, our ability to grow the sales organization at pace and do it well, so that we continue to drive the profitability and the overall return out of that investment across the sales channel. And we feel like there's sort of a natural limit in terms of that 20%, 25% headcount growth, which is what we've been targeting for the last couple of years. And so as we think about our ability to grow faster than that, we just haven't seen -- we've seen that operationally, it's just a little bit more complex, so it becomes a point of diminishing returns. And I think that there's -- so in that 20% plus range for us right now is where we feel comfortable in terms of building that sustainable sales engine to drive that growth. And then the opportunity will be to continue to expand that sales organization and the efficiency of that spend even further. So the way that we talked about it a couple of years ago and over the last 2 years now has really been about being consistent in the sales execution, developing this engine in this flywheel that can continue to grow. And so it's just about continued execution over the next couple of quarters to stay about 20%, I think. Yes. The other dynamic, Gabriela, is that we'll continue to add PEPM along the way. So we really think about it as 2 key components to drive consistent, sustainable long-term growth is our ability to continue to add sales headcount and our ability to continue to expand our PEPM and our average deal size. And so we feel confident we've made great progress moving into the 20-plus percent range. And we're going to continue to execute and focus and obviously, we want to continue to improve our performance over time. So maybe first for Adam or Raul, either one. Just the effect of PEPM growth of 11% year-over-year, really strong. I know you mentioned a few factors, Adam, such as higher bundle adoption and good cross-sell. But I'm curious if you could maybe help us think about in the quarter, which of those factors had the greatest contribution and if that's any change from what you've seen in the last few quarters? Yes. I mean, what we see is that it's really the combination of 3 key things, like we mentioned, right, the conversion in that subscription bundle, we see higher adoption at the point of sale, and we see pricing initiatives as well that go into that. And I would say it's sort of a combination of all 3. Each quarter, fluctuates a little bit depending on the initiative that's going in. But broadly, and over the last couple of quarters, it's been fairly consistent, close to 1/3 across each of those items. So there's not 1 item that necessarily sticks out, 1 of the other it's been pretty consistent, and we've seen really good execution across those 3 dynamics. Great. And maybe Raul, for you. It sounds like hiring is for sales is on track to what you're expecting. Maybe could you touch on that and just sales productivity, how is that metric trending, especially as you onboard more and more at a larger scale? Yes. So hiring has been really strong. Retention has been excellent, which has really helped us to get into a really solid perspective. And productivity, as we would expect, our new people produce at a lower rate and they slightly drag down the overall productivity based on the outsized hiring. But by and large, our tiers are operating as we would think from a 10-year perspective, our first year bucket or second-year bucket and then beyond 2 years. So we feel really good that the flywheel is working. We're onboarding people successfully. And we're focused on execution. It's Nick on for Bhavin this evening. Congrats on the strong quarter. Looking back on new sales in the quarter, was there any change in composition of those deals, say, in either size, industries or modules bought and yes, start there? Yes. Thanks, Nick. I would say, again, we had consistent results across all segments. I would say that we saw stronger results above 500 employees than traditional. So the product is really shifting, and we're seeing a lot of traction upmarket, which is newer for us than maybe others. And that's the primary dynamic that we saw this quarter. I mean, essentially, all of our segments are operating as designed and we saw a little more take in that 500 space. From a module perspective, talent continues to fly off the shelf, and we're seeing high attach rates, and we actually charge for it. So it's been a great opportunity for us, and we're really excited about it. It's differentiated, and it's winning in the market. Great. And then just with the success of some of the sports partnerships that you've had, how are you thinking about your marketing investments going forward? Yes. From a marketing perspective, obviously, the sports partnerships have provided some great air cover. We're getting significant awareness and it's really been a positive for Paycor as a whole and helping us as we expand nationwide. I would say we're continuing to focus on all facets of the marketing engine and really looking to continue to help streamline entry into all these new markets. And so we're really focused on connected TV and driving ads through that. We're focused on continuing to increase our traffic online. And so I think all of those things are helping drive top of the funnel awareness. We're seeing record impressions, record traffic to paycor.com and record leads. So we feel really good that the actions that we've taken and the marketing team has done an amazing job driving brands in these big relationships and making sure that we're maximizing our ROI on them. I guess the first question is just, Raul, I think you said in your prepared remarks that it was a record bookings. Is that for 2Q? Or is that for any quarter? Got it. Okay. And I was curious about Tier 1 markets. Any specific call-outs, whether it's kind of TFC markets, Texas, Florida or California or any other Tier 1 markets that kind of stand out in terms of kind of where you are versus what your expectation was? And I'm curious in those markets since you've had some time now. What are win rates and new seller productivity like in those Tier 1 markets versus your traditional sweet spots? Yes. So we've seen significant growth, over 100% growth in L.A., San Francisco, South Florida, and the D.C. marketplace. So those 4 are stand out for us. And as a whole, our win rates for our new sellers are on par with the win rates for our overall sales organization. So the sales operations team is doing a fantastic job of getting people up to speed on our value proposition and enabling them with the tools required to be successful out of the gate. So that's a real positive component for us. It's actually Jared on for Bryan tonight. In terms of year-to-date net revenue retention performance, how does that compare year-over-year? And in terms of your FY '23 guide, does that embedded change relative to FY '22? So the net retention has been performing well. I would say it's been fairly consistent quarter-over-quarter. It's been trending well. And yes, Q1 of last year, while any 1 quarter isn't necessarily a good metric here on that retention. Q1 of '22, actually was rather low for us as we were going in sort of coming -- growing over some of the COVID challenges. So on a year-to-date basis, it's technically up, but it's been really consistent over the last call it, 5 quarters now. So we feel good about the net retention and of course, our expectations around that are included in our guide. Okay. Great. And then in terms of the calendar 1 Q form filings, are you expecting a year-over-year tailwind related to those form filing activity and anything different there in the compare this year either quarter-on-quarter and year-on-year basis to be mindful in terms of that outlook? Yes. I mean I'd say that it's looking like it's going to be fairly consistent with where it was last year. We were wondering if we were going to see a little bit of an acceleration, but it's been really consistent with where I would sort of expect it to be from pre-COVID levels. So it looks like it's normalized well. And I think that it's driven more dynamically by overall employee retention, right, for our customers, our customers' employee retention, which has been maybe a little bit more consistent this year and back in line with pre-COVID level. So nothing -- I don't think that we would expect anything to look different as it has materially from any of the prior sort of pre-COVID years. I guess I have a couple. First of all, payroll and HCM in general, at least demand for these solutions kind of on all customer segment level seems to be holding up extremely well today and much better than the other software segments, I think that most of us on this call cover. As you look at the -- kind of what's going on under the covers, any idea why, in particular, today is great HCM environment versus others that are seeing that softness? Yes. I think a couple of things. One is it's like some of your other software, we're not a land and expand. So there's not any requirement or expectation that you're going to add more seats, so to speak. That's one. Secondly, I think the category as a whole has changed over the last decade, and it's really added some really powerful modules around recruiting, around attracting, around retaining employees. And so in this hyper tight labor market, I think that's been a big driver of accelerated demand. Secondly, cloud solutions and HCM kind of lag behind the adoption rate of some other solutions that you would cover. And so we didn't have this explosive demand out of the gate and I think COVID has really helped open up the eyes to people that buy our solutions that HCM in the cloud is something that can be helpful to their organization. So I think the combination of the cloud acceptance in our category, the additional modules that we're adding that are helping other facets of the organization outside of traditional finance or traditional HR have really made the solutions more powerful and more attractive. And again, the 3 modern players in our space combined have somewhere between 8% and 12% share. So there's a really big pie of legacy solutions still available for us to continue to convert over to a more modern solution. And I think that's why you're seeing really strong demand across the board. Got it. Helpful. And then from a follow-up perspective, you mentioned your sales hiring is on track, and you've already achieved the low end of your range. As you look at the placement of those individuals this year, I know Tier 1 cities have been the focus, but these hires, are you looking at putting them in maybe different geographic locations or customer segments than what you are 6 or 9 months ago, just seeing if there's any slight change to your strategy relative to the current demand trends you're seeing? No. I mean we're still really focused on -- the majority of the people we are hiring are focused on what we would call 50 to 1,000 segment, 50 to 2,500. And yes, we have pockets where we have reps that are focused on 250 employees and above. But ultimately, we're still in the early innings of coverage in the fact that we're still -- while we cover the entire market, we have opportunities to continue to add. We have opportunities to nearly double our current sales organization in order to secure what we would consider optimal coverage. So we have a long runway to go. If we want to add heads, we can continue to do that. And we'll look at different design, Scott, whether it's 50 to 250 or 50 to 2,500 or 250 to 2,500. There's a lot of different ways and markets to look at it. And you don't want to be robotic in your approach to the market. So we'll look at all different options. And our objective is to maximize our LTV to CAC. Just 1 for me. It's actually a bit of a follow-up to Scott's question, but there's a lot of metrics that you have given in terms of PEPM and growth in bookings and everything else. But I'd love to understand how the pipeline looks? And if you look at kind of those embedded opportunities in the pipeline, like what are you seeing in terms of the PEPM and the module adoption? I just kind of love to understand what you're seeing in terms of the opportunities that we should be expecting going forward? Brian, yes, I mean, when we look at the pipeline, I'm not sure that it looks any different than what we've seen historically. And I think the big thing, of course, is everybody buys payroll, everybody gets the sort of HCM core platform, that's Table 6 now and part of that bundle adoption at the point of sale that we've been talking about. And then we continue to expand our talent suite. Now with the addition of Paycor Smart Sourcing and the Talenya acquisition is going to continue to expand town solution. And we're already seeing interest and really strong demand around that solution, really early days. So I think that's where we're seeing a lot of growth. We're seeing a lot of growth in the portfolio come from talent. We continue to see our enterprise segment and the larger end of our customer segment looking for more talent solutions, which continue to drive that ADS up and continue to drive PEPM up where the payroll historically has been a lower part of that rate. So I think that's what we see, the same thing inside of pipeline, excuse me, is that, that continues to grow with more and more customers looking for talent solutions. This is Owen on for Pat. Congrats on the strong quarter. I was interested in the interest income line. And I guess, what was -- what the mix was of investment back into the business versus straight to the bottom line previous to all these interest rate hikes? Yes. So when we were going into the year, we were expecting something in that sort of $12 million range, $12 million growing to $24 million. And we were targeting about half, looking to spend about half of that at that $20 million to $24 million range. And I think that there comes a limit where we just simply can't consume more or we don't like what the returns look like for that incremental investment. So we've been targeting about half, meaning that we would be maybe in that $10 million to $12 million range on a full year of investment or reinvestment of those interest income funds. And I think that's probably where we're going to end. So as we look at the increase to 30% in this case, we're not necessarily looking to -- I mean, we'll look for opportunities to invest it, but I don't think that we're going to see the opportunities that we're looking for. And so that will sort of naturally fall down. I was just curious how cross-sell is doing with additional modules to existing customers, if you had seen success there? And then kind of along with that, are we're seeing any success in getting price increases through? Yes. On the cross-selling side, we continue to have strong success with our client sales team selling additional modules into the base. Obviously, they're really focused on talent as a primary driver. And so we've seen strong growth there. And we're going to continue to grow that team thoughtfully over time. And the team continues to play a big contribution to our overall growth, and we're excited about where we are with them. As far as the pricing goes, I'll let Adam walk you through that? Yes. We try to be really intentional about those price increases and make sure they follow the value that we continue to deliver for customers around either additional functionality or features and service. And so we've invested in lot incremental product. We've released a lot of product and developed a lot of great features that we've released to our customers, as well as invested pretty heavily in our service and support organizations. And so we've been able to see pretty good take on those incremental price increases that we've been able to put into the portfolio. And of course, we're really intentional with it. We don't want to be jumping out constantly with them. So it usually takes a couple of years before a client comes in before we look at price increases. And since the portfolio is growing quite nicely with a lot of new customers over the last couple of years, we've been able to revisit those prices pretty regularly. I guess I want to ask a little bit on the verticalization strategy and how that's been resonating in the quarter. Anything to call out, that's all particularly kind of from bookings instruction here? Yes. So from a bookings perspective as you think about it is slightly over 50% of our mix is coming from the 4 key industries. For a little flavor, I would say we had really strong results in professional services, and food and beverage and accommodations this quarter. And I would say healthcare kind of was a little lagging behind this quarter. They're obviously growing over tougher comps from the previous years. But that's how I would think about the industry. We're really excited about the progress we've made. We continue to invest into product differentiation and tools for implementation for our clients, so we can easily customize the tool for them for their specific industry. Okay. Got you. That's helpful. And I guess, just a housekeeping question. Just on the Talenya acquisition, I guess, what was kind of the impact in the quarter from a rev contribution? And what's kind of embedded in the outlook there going forward? Yes. It's really immaterial to the P&L. So we see -- it's like well less than 1% of our overall revenue for the year, well less than that. So it's really more about the fantastic technology and getting that into our platform and how we're going to be able to take that to market through our broader suite. But there's almost no impact to our financials. Congratulations. Pat for Pat, this time. Raul, as a follow-up, it caught my attention when you reeled off 3 metro areas that we're doing particularly well. I think L.A. was 1 of them. Like taking L.A. as an example, like what would make L.A. a place where you see particular success? What are some of the characteristics that would drive that? Yes. I mean I think it's overall business density, obviously, critical. The fact that we have continued to grow our sales team there. And this is what we're entering the third year. So we're starting to see that tenure build up in the marketplace. And when you add a really large dense marketplace that's been saturated on legacy solutions that are just looking for something modern as we've entered there, we've seen a lot of strong success. Yes. So I mean, what I'm getting at here is sort of the longevity of this growth trajectory you're on, right? So how many LA type or big metro areas are there out there where you feel like you guys are just getting started? Yes. I mean, so if you think about it, there's -- we really manage the 50 metro markets. We break them into Tier 1, Tier 2 and Tier 3. And I would say Tier 1, which is the 15th largest which includes L.A. and San Francisco and Miami, I would say we're in the early innings. We're about 1/3 of the way there. And when you think about Tier 2 markets, which are the next 15 biggest cities in America, we have, again, tons of opportunity to continue to expand. We're slightly more covered there. And so for us, it's a long runway of continuing that headcount, but also seeing that headcount mature through the tenure cohort and continuing to drive productivity. I'll add my congrats. I was wondering, first off, if you can speak to the trend you're seeing with your own real-time pay solution. I believe that 1 is a third-party solution called PayActive. Anything just in terms of what percentage of pays in your system are using it? Or how much revenue is flowing around between Paycor and the third-party provider there? Mark, while we see good adoption or sort of continuing growth in the adoption, it's still just overall -- I mean, the materiality is -- I mean, it's immaterial in terms of its impact on the revenue. So I think that we're expecting that this build is going to take years to get it to a point where the card economics are really enabling any sort of real revenue impact. When we see clients adopt it, you usually see a couple of employees in a company using the card and then it takes some time for them to really start to get into actually using it somewhere that drives card economics. What we see most of the time is that clients are or employees are downloading it to their own pay card or they're taking the cash out right away versus using it on the card. And so the economics just sort of occur a little bit differently. So with that in mind, I mean, I just think that it's going to be a long runway to revenue there. I think the benefit is in terms of it's a benefit to our customers to be able to enable for their employees. And so the customers feel good about it. There's not a huge cost to their employees. And so it's a benefit that they can provide their employees. That really just continues to give -- it becomes table stakes almost because we put it into that -- the core offering and a lot of the competitors do, too. But I don't expect it to be material to revenue for the foreseeable future. Okay. But Adam, if I understand the way you're describing that, there is some interesting percentage of pays that are kind of taking their cash out more often than the twice-a-month basis? I mean is that a fair way to think about it, right, whether they're taking cash out right away versus using it on the card? Yes. Okay. And then, Raul, regarding the focus that you've had for a long time now on the leaders within an organization, I'm interested in whether that is resonating perhaps in some new and different ways just because of this unique type of environment that we have, where unemployment, I think, is at a 50-year low, wage inflation is so high. I mean companies must have sort of a heightened interest in how they're leading, how they're managing, how they're retaining the workforce. Is that something that is kind of tangibly different for you in this environment? Clearly, talent is 1 of the biggest reasons why we win and our win rate is so strong. And we continue to invest in opportunities, whether it was goal setting or most recently with smart sourcing to help leaders find and source new employees faster. And recently, with our COR Leadership Dashboard really helps leaders understand where they are, how their employees are viewing them from a coaching perspective, from an optimization perspective, are they making them effective, are they making them better, and then are they engaged, and are they going to stay longer. And it really provides people real-time feedback from their associates in order to be a better leader. And so obviously, we believe that leaders drive associate engagement and associate engagement drives overall productivity for our clients. And if we can continue to help deliver that for our clients, they're going to be more successful. And so people are definitely resonating to the message. And so we're excited about where we are. And we're going to continue to add more differentiated tools for frontline leaders to help them be more effective. Congratulations. Wondering if you can talk a little bit more about the strong success that you're having with the employers that have more than 500 employees. Is there any difference in terms of the sales strategy in terms of how you've targeted people, what is really standing out that's helping you in the upper end of your market? Yes. I think it's a combination of things. Obviously, as we put more focus on those prospects from a sales perspective, we're going to get more of that. The product itself over the last few years has significantly added feature functionality, where we're differentiated from our peers, and we believe we have the most robust solution in HCM. And our PEPM would demonstrate that. So ultimately, I think it's the feature functionality, the ease of use of the platform and our robust talent tools that are driving success in that that 500-plus market so far. That's great. And then you did talk a little bit about your AI recruiting capabilities and Paycor Smart Sourcing. Can you talk a little bit about to what extent that's helping, particularly with a tight labor market? And what you view from a longer-term perspective, the implications of generative AI like chatGPT and the technology that is leaping forward in terms of -- both in terms of how you service your clients, but also additional features and functions that you could provide? Yes. I mean Paycor Smart Sourcing is amazing technology and an amazing addition to our portfolio. And we've already had clients in beta. And we've already sold over 100 clients on Paycor Smart Sourcing in less than 45 days. And so we're excited about the prospects. People see the value. It's a timesaver. And it essentially -- instead of asking a frontline leader to kind of view through hundreds of LinkedIn profiles or resumes stacked on their desk, we do that work for them through AI and provide them a list that they should start with first. And so it's a home run, and we're really excited about it. And we're going to continue to see more adoption. On our next call, we're going to be really excited to share the results. I'm really confident about that. I think AI, in general, there is tremendous opportunity across the entire HR platform to leverage the data that we have to provide insights to our customers. So that's on our product team is continuing to evaluate and work on. And obviously, the team that we acquired with Talenya are experts at this and will help us think through our long-term strategic planning about how to leverage AI across the other modules of our platform. Internally, obviously, there's plenty of opportunities to use that kind of functionality to improve the user experience, whether it be through -- essentially, we already have chat with a person. And now you can have chat without a person. And so it's not a be-all end-all solution by any means, but I think it's part of a future employee -- user experience that will help separate Paycor from the rest. This is Kyle on for Jackson. Just a quick one. I think, Adam, you had mentioned that there was no material change in labor or demand environment factored into your guidance. But in terms of the $30 million float for the full year, does that take into account any future rate hikes? Or is that kind of just where we are today? Yes, it's based entirely on where the rate environment is today. So yes, any increase in rates going forward would mean there's additional upside. We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. Thank you again for joining us tonight. We're encouraged by the momentum in the Paycor business and we remain laser focused on executing our strategy. We look forward to connecting with many of you over the next few weeks and we wish you all a great evening. Good night. Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.

EarningCall_493

Good afternoon and thank you for joining us as we review JFrog's fourth quarter and full year fiscal 2022 financial results, which were announced following market close today via a press release. Leading the call today will be JFrog's CEO and Co-Founder, Shlomi Ben Haim; and Jacob Shulman, JFrog's CFO. During this call, we may make statements related to our business that are forward-looking under Federal Securities laws and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements related to our future financial performance, including our outlook for Q1 and full year of 2023. The words anticipate, believe, continue, estimate, expect, intend, will and similar expressions are intended to identify forward-looking statements or similar indications of future expectations. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our views only as of today and not as of any subsequent date. Please keep in mind that we are not obligating ourselves to revise our public release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For a discussion of material risks and other important factors that could affect our actual results, please refer to our Form 10-K for the year ended December 31st, 2021, filed with the SEC on February 11th, 2022, and our most recent report on Form 10-Q, which is available on the Investor Relations section of our website and the earnings press release issued earlier today. Additional information will be made available in our Form 10-K for the year ended December 31st, 2022, and other filings and reports that we may file from time-to-time with the SEC. Additionally, non-GAAP financial measures will be discussed on this conference call. These non-GAAP financial measures, which are used as measure of JFrog's, performance, should be considered in addition to, not as a substitute for or in isolation from, GAAP measures. Please refer to the tables in our earnings release for a reconciliation of those measures to their most directly comparable GAAP financial measures. A replay of this call will be available on the JFrog Investor Relations website for a limited time. Thank you, Jeff. Good afternoon to you all and thank you for joining the call. I'm happy to report that we ended fiscal year 2022 with annual results in line with our guidance range despite the 2022 or the challenging year from a macro economic and geopolitical perspective with moderated growth in the IT market. Nevertheless, DevOps, security software, and cloud computing remained among the most resilient IT projects. I'm happy to see the JFrog not only performed well with revenue growth of 35% year-over-year in line with our guidance range, but also exceeded our commitment to breakeven wrapping up Q4 with non-GAAP EPS of $0.04, more than double the range we communicated in Q3. 2022 included hyper growth in our cloud business, significant growth in the number of customers that subscribe to our full software supply chain platform, powered by advanced DevOps and DevSecOps end-to-end solutions, and the higher landing ASP with customers who invested more in digital transformation. For the fiscal year 2022, revenue was $280 million, up 35% year-over-year. JFrog finished the year with over 7,200 customers compared to 6,650 in the prior year, choosing us as the DevOps and DevSecOps partner of choice. Allow me now to elaborate more on our fourth quarter results. Our 2022 fourth quarter revenue was $76.5 million, reflecting 29% year-over-year growth. Our cloud revenues delivered continued momentum equaling $22.6 million and increasing 53% year-over-year. Our growth in the quarter was driven by continued increases in end-to-end JFrog platform subscriptions as well as ongoing customers migration to multi-cloud and hybrid environments. Customers with ARR over $100,000 grew to 736 compared to 696 in the previous quarter, increasing 37% year-over-year. Customers with ARR over $1 million increased to 19, up from 18 in the previous quarter and up 27% year-over-year. We are pleased with this result, especially in light of the market dynamics we witnessed in the last few weeks of the quarter. On today's calls, we'll share an update on how the latest macro-economic changes are impacting our business, how we are adjusting for it, and how we continue to drive growth alongside cost efficiency to capture the massive DevOps and security market opportunities ahead. Let me start by expanding on the top three teams that drove customers acquisition and expansion throughout the year and specifically in Q4. First, overall adoption of our end-to-end software supply chain platform, showing increasing maturity and tooling consolidation by the enterprise. Second, growing demand for security solutions that are fully integrated into the DevOps workflow and available as part of a full platform. Third, cloud and multi-cloud migration and adoption. Let's begin with the end-to-end JFrog platform scope. The growing adoption of our complete platform by new and existing customers showcases the broad need for scalable end-to-end fully integrated hybrid solutions. Our holistic platform approach does continue to serve momentum in Q4. For example, one of the world's most recognizable payment processing companies completed a standardization on the JFrog platform as their system of records. They chose JFrog over the prior solution Sonatype Nexus, as they needed a highly available solution that scales efficiently and supports hybrid environments to meet the needs of thousands of developers. In another example, a leading commercial bank in EMEA chose JFrog as their enterprise DevOps system of records. Due to the high level of complexity, they presented requirements for universality, full binary lifecycle management, integrated security, large scale, and efficient replication and distribution between development sites. Already utilizing GitLab for source code management, this bank turned to JFrog to complete their software supply chain coverage within advanced solution for binary management and software supply chain security. We saw this trend throughout 2022 as customers are telling us that both from a technology and business perspective, platform consolidation and standardization will be a key theme in 2023 not only for DevOps or DevSecOps, but for complete software supply chain management. Second, to our security pillar. In mid-October, we launched an industry disruptive set of advanced tools introducing JFrog Advanced Security as the first DevOps-centric security solution. While we continue to build and expand this offering, we were excited to see initial customers who purchase JFrog Advanced Security subscriptions, quickly taking advantage of these capabilities. JFrog's meaningful investment in security over the past few years is beginning to bear fruit. We strongly believe that the holistic JFrog platform powered by JFrog Artifactory, the database of DevOps, and the de facto standard in the software package management, combined with our best-of-breed security solution into a single platform will drive adoption among our install base and attract new users. This is reflective of the sea change we saw in 2022 of security being embedded across the software supply chain, and companies discovering that if they don't control and secure the binaries in their organization, they are finding it nearly impossible to secure the software assets and remediate security issues. Modern security technology is automated, requires less human intervention, manages software package dependencies, and set policy that protect and remediate an organization's software supply chain. We build JFrog Advanced Security with this understanding, and we believe it will displace legacy security solutions, attracting new customers to JFrog as this market continues to mature. In just over a year since our acquisition of Vdoo, JFrog has really a half dozen capabilities that can consolidate security point solutions currently in the market. As some competitors cobbled together open source tooling to appeal to the market demands, JFrog delivers a comprehensive DevOps and DevSecOps solutions for enterprises who are looking to consolidate the tool stack into a single platform. Let me share with you how we differentiate insecurity. Development teams are using security point solutions that generate too many results, requiring them to inefficiently fix all vulnerabilities, not allowing them to prioritize remediation based on context. This is why our contextual analysis capability was released. Also, companies want to ensure that no software is shipped within accidentally included secrets or access keys. This is why secrets detection in our Advanced Security solution is so important, as it discovers inadvertent revealing of secrets and where they live in both code and hard coded into binaries. JFrog is helping companies and development teams focus these holistic security efforts with our solutions, alleviating teams' workloads, decreasing risk, and covering the entire software supply chain, which is impossible by scanning source code alone. We believe this approach will help drive growth in existing customers in 2023, upgrading many into higher JFrog subscription type, that incorporates security solution alongside core architect management. Security budgets remain one of the most defensible areas of technology spend, as enterprises prioritize investing in end-to-end solutions to secure their growing digital attack surface. For example, in Q4, one of the Nordic region's most prominent banks turn to JFrog to incorporate security across the software supply chain. Looking for a multi-cloud-based solution to streamline their operation, they partnered with JFrog and Google Cloud via their marketplace to enhance the bank's security posture and displaced legacy on-premise solutions. In another Q4 example, one of France's most recognizable luxury brands turned to JFrog for complete visibility and security across the software supply chain, saying they could now build once and run everywhere securely across multiple cloud providers. Looking to consolidate and standardize their DevSecOps tools long-term, this company is illustrative of what we are hearing from thousands of JFrog customers. They want to get control of their security tools fall and the associate costs. We'll keep investing in JFrog security solutions as one of our R&D cores and look forward to more advancement and innovation in software supply chain security in 2023. We believe proven powerful holistic security solution, coupled with end-to-end binary management is antidote to modern software supply chain's security threats. Now, I want to address our cloud business. Cloud, multi-cloud, and hybrid infrastructures continues to be the desired end state of many companies. Our enterprise customers tell us that cloud migrations are often a multi-year effort and that the hybrid capabilities of JFrog allow them to move over time at their own pace with limited disruption to the business. As such, we've been pleased throughout the year to see growth in the cloud business across all subscription types. In Q4, a Fortune 100 pharmacy brand chose JFrog's software supply chain platform due to the immediate need to consolidate DevOps and DevSecOps solutions. JFrog replaced multiple existing on-premise and cloud offerings, including container registry tools from AWS and Google Cloud to manage their full software supply chain on one platform. This $500,000 enterprise class bill was driven by the need for universality, scalability, consolidation of tools and JFrog's out-of-the-box integrations across the ecosystem. Recent CIO surveys validated by analysts and our customers tell us that while some short-term budgets may be tightening, annual investment in DevOps and security platforms in 2023, specifically in multi-cloud form are expected to go over 2022. Next, I want to address the ongoing macroeconomic challenges. JFrog's overall win rate and customers' preservation remains robust, consistent with the historical trends, and we have been able to close substantial amount of Enterprise Plus deals, that show us the enterprise demand for JFrog solutions. However, the macroeconomic headwinds, such as elongated sales cycles and customer pushouts increased significantly in the fourth quarter, impacting the overall growth of our business. During the month of December, we witnessed a further slowdown in deal closing and increase customers' optimization efforts in cloud usage. As we closed the quarter, we saw our customers exercise caution in this uncertain environment. This is evident in the number of deals that pushed from Q4 into 2023 and that now require C-level budget sign-offs. This impacted our growth and net retention rate in the fourth quarter. It is further evident that self-hosted customers who considering migration to the cloud are expanding their on-prem system at a slower pace, in favor of their cloud migration strategies that are pending further budget approvals. We would expect this pattern to continue in 2023 and have included them in our forward outlook. Despite these challenges, we see growing need for DevOps security and edge solutions across the software supply chain in 2023 and beyond, continuing to believe JFrog's software supply chain platform sets industry standards and delivers unmatched value to the market. As we step into 2023, we see opportunities to leverage investments we have made within our solutions in prior years, allowing us to expand our profitability while still delivering topline growth as we will share in our guidance. JFrog was founded in a recession, has built a solid business across a decade, and we believe remains well-positioned and well equipped to deliver in uncertain times. With that, I'll turn the call over to our CFO, Jacob Shulman, who will provide an in-depth recap of Q4 financial results and update you on our outlook for both Q1 and fiscal year 2023. Jacob? Thank you, Shlomi and good afternoon everyone. During the fourth quarter, total revenues were $76.5million, up 29% year-over-year. The full fiscal year 2022, revenues were $280 million, up 35% year-over-year. We ended the year with 7,200 customers, an increase of 8% over the 6,650 customers at the end of 2021. Expansion in our cloud business continued during the fourth quarter with revenues of $22.6 million, up 53% year-over-year, representing 30% of total revenues. For fiscal year 2022, our cloud revenues equaled $80million, up 60% year-over-year and equaled 28% of total revenue. We are pleased with the growth in our cloud business during the quarter and fiscal year 2022. However, we have seen an expansion of headwinds from both customer optimization and macroeconomic impact relative to our expectations, which impacted fourth quarter results. In the fourth quarter, our cloud usage was impacted by higher than expected transition of our pay-as-you-go customers to minimum annual commitments. The transition to annual commitment is beneficial to our business, it reduces volatility, and provide more visibility over the long-term. However, in the short-term, it negatively impacted our revenue growth in the quarter due to volume discounts based on commitment size. Self-managed revenues on-prem were $54 million, up 21% year-over-year during the fourth quarter. For full year 2022, self-managed revenues increased 28% compared to the prior year. Net dollar retention for the four trailing quarters was 128%, a decline of two points due to macro headwinds. Our gross retention continued to be at 97%. In Q4 of 2022, 43% of total revenue came from Enterprise Plus subscriptions, up from 35% in Q4 of 2021. Now, let me discuss the income statement in more detail. Gross profit in the quarter was $64 million, representing a gross margin of 83.7%, compared to 84.8% in the year ago period. The decrease in gross margin relative to the year ago period is related to a high portion of cloud revenues as a percentage of total. We expect gross margins will remain between 83% and 84% in the near future and then trend towards the low-80s over the long-term as cloud revenues become a greater portion of our total revenue. Operating expenses for the fourth quarter was $62.5 million or 82% of revenues, up from $50.2 million or85% of revenues in the year ago period. Our operating expenses grew sequentially by around $3 million, as we continue to build out our enterprise sales and channel relationships for the long-term. Non-GAAP operating profit in Q4 was $1.6 million or 2.1% operating margin compared to an operating profit of $50,000 or 0.1% operating margin in the year ago period. We turned back to profitability this quarter, as non-GAAP net income in the quarter was $4 million with earnings per share of $0.04 based on approximately 106 million weighted average diluted shares outstanding compared to a loss of $0.01 per share in the prior year quarter. Turning to the balance sheet and cash flow. We ended the year with $443 million in cash and short-term investments, up from $434 million as of September 30, 2022. Cash flow from operations was $7.3 million in the quarter. After taking into consideration CapEx, free cash flow was $6.4 million or 8% free cash flow margin. We remain committed to accelerating our free cash flow margin towards our long-term target of 30% over the coming years. As of December 31st, 2022, our remaining performance obligations totaled $204.7 million. I'd now like to speak about our outlook for 2023 and guidance for the first quarter and full year. Our expectations for 2023 implies strong growth in our cloud business. But due to continued headwinds related to customer optimization efforts and ongoing macroeconomic impact, we see baseline growth levels moving toward the mid-40s, down from prior levels of mid-50s. We expect the trend of slow expansion within our self-hosted business to continue through 2023, as more new customers land and expand with our cloud solutions. We continue to see an increase in usage of our solutions by self-hosted customers. And therefore, during the upcoming fiscal year, we will implement the pricing change to better align the value we deliver. This pricing increase will contribute roughly $6 million to our forecasted 2023 revenue growth. In addition, we will soon be releasing a version of JFrog Advanced Security, supporting our self-hosted customers. We are happy to see strong customer engagement since launch with our cloud-based offering, and see this introduction as an opportunity to be an additional driver of expansion within our self-hosted customers. Our outlook does not anticipate any increase in customer churn, as we have not seen a loss of business. We have seen an elongation of customers' migration process to the cloud, which will impact our net retention levels in the short-term. Our expansion in our cloud business continues to be a catalyst for longer term growth. Given the dynamics of our self-hosted and cloud businesses in 2023, we now expect our net dollar retention ratio to be in low-120s for fiscal year 2023. As committed, we returned to profitability in 2022 and now see opportunities to expand further in 2023 and beyond, as we begin to leverage investments we have made within R&D and sales and marketing over the past few years. Following prior cost optimization efforts, we referenced in the second half of 2022, we will continue with our cost management efforts, shifting resources to high-growth opportunities and being disciplined about headcount growth. For Q1, we expect revenue to be between $78 million and $79 million, with non-GAAP operating profit between $1.5 million and $2.5 million, and non-GAAP earnings per diluted share of $0.03 to $0.05, assuming a share count of approximately 107 million shares. For the full year of 2023, we anticipate a range between $340 million to $344 million. Non-GAAP operating income is expected to be between $17 million and $19 million, and non-GAAP earnings per diluted share of $0.18 to $0.20, assuming the share count of approximately 110 million shares. Thank you, Jacob. We believe we are well-positioned to face macroeconomic headwinds, as we have built a diversified customer base across multiple geographies and industry verticals. We believe our software supply chain platform is mission-critical in the digital transformation of enterprise customers and our security capabilities complement our leading position in DevOps. As we are turning the page on 2022 and leaping into 2023, I'd like to take this opportunity and thank my team. Over 1,300 frogs are working days and nights to make sure we are not only innovating, but also turning our customers into a digital transformation catalysts. We reimagine the future and navigate through the macro challenges in 2023. We are committed to working with the community, our customers, partners, and industry innovators to transform the software supply chain across our three cores DevOps, Security, and IoT. Thank you all for your attendance today and made the Frog with you. And now, we'll be happy to take your questions. Operator? Thank you. [Operator Instructions] Your first question comes from the line of Pinjalim Bora with JPMorgan. Your line is now open. Hey, thank you so much for taking the questions. Shlomi, maybe you can start with the Advanced Security side. It seems like you're seeing some initial kind of traction there. Maybe help us understand kind of the attach rates to existing customers at this point. Is it fair to assume kind of it's more of an expansion motion than a land motion? And in general, what you're seeing? Pinjalim, this is Jacob. Pinjalim, if you could improve the quality of your line, please. It was really hard to hear the question. Yes, I wanted to ask about Advanced Security and the attach rates that you're seeing with existing customers and if you're seeing any labs or maybe it is not a land motion? Yes, Pinjalim. Hi, this is Shlomi, I'll start and Jacob, feel free to chime in. So, Advanced Security, as you know was launched on October of last year, from the early beginning, we saw demand from our existing customers that require a platform solution that comes not only with Artifactory and Xray, but the full comprehensive Advanced Security capabilities. So, we added some features that are aligned with the software supply chain security and make sense to the enterprise. Some of what we have heard from our customers and as we reported some already purchased, is that they need to consolidate solutions that are now spread between different point solution. They need a solution that can run in the cloud and on-prem, and this is our plan. And they need a solution that protect the software supply chain, left to Artifactory and right to Artifactory. And this is where JFrog Advanced Security comes in. So, Pinjalim, the Advanced Security would be add-on and requires Xray capability, that's why in terms of attach rates to the customers, about half of our customers have access to Xray. So, those would be the group of customers that can today purchase Advanced Security. Again, this is just the first weeks of this product. We have -- we're happy to see first customers find it and we have great expectations from this product. But it's just first weeks of this product in the market. Yes. Understood. On the macro side, maybe help us understand the pipeline that you're entering this year with at this point in time? And what have you seen so far in January? Is that more so what you'd seen in December, or is it taking a step down? Just trying to understand the guidance and how much room is there? Is it derisked or not? Yes. So, we did see kind of macroeconomic headwinds accelerate a bit in the last few weeks of December. Specifically, we did see increased activity in cloud usage optimization. We do see that customers trying to meet their budgets. They don't have any more kind of room to exceed the initial budget allocations. We also saw some deals push out because it required additional approvals, which was not required previously. So, that -- those dynamics, we believe we will continue to see in 2023, and that's what we took into account in our guidance for the full year and the first quarter. Thank you for taking the questions. I want to follow-up a little bit more on the outlook, Jacob. In terms of the dynamics you're seeing, well understood on the elongation of sales cycles. But I was wondering, thus far into early January, have you been able to close any of those pushed out deals? And in terms of the dynamics of customers moving from pay-as-you-go, monthly to annual, you'd mentioned this dynamic before -- earlier this fiscal year. So, just the magnitude of the shift is just sort of more pronounced. And as you think about guidance for next year, where specifically are you embedding more conservatism -- just so to get a sense of how we -- how you arrive to your guidance for 2023? Yes. So, from the deals that were pushed out, some of them were closed in 2023, a lot of them haven't yet been closed, because they require additional approvals and they're going through approvals. And as we see customers looking at their budgets and kind of at the end of the year, typically, they're working on their budget plans. That was yet another reason for customers kind of waiting with their purchasing decisions before the budgets are finalized. Now, with regards to the pay-as-you-go to annual commitments transition, first of all, the portion of our pay-as-you-go customers as a percent of our overall cloud business, today represents a much smaller portion. We entered the year with about a third of the business -- cloud business being pay-as-you-go. We exited the year with pay-as-you-go to be about quarter of the cloud business. So, the transition to annual provides us better visibility, better forecasting capabilities and helps us to create better engagement with the customer, because it's typically kind of longer-term engagements with customers with their roadmap. We expect that our pay as you go to annual commitment transition will continue. We've seen that obviously as you know, optimization from customers is coming from two angles. One is storage, optimization, another one, data transfer optimization. The customers have more flexibility to do storage optimizations and data transfer optimization. And we will have many of them have already done that. But we still try to be cautious in terms of, we just the level of this optimization, therefore, increased in the last few quarter -- the last few weeks of the quarter. And we tried to be conservative in how we approach the full guidance for the year. Understood. And then, Shlomi I guess, a question for you, you have Microsoft announcing things like co-pilot for GitHub, which at least has the potential to rapidly accelerate the development and production of code. And I imagine like, the Microsoft, sort of competitors, Google, Amazon, maybe others will respond in some sort of fashion. And so when we think of this sort of AI movement on the sort of left hand side of the software release cycle, how do you think this impacts this trend were to continue and adoption of things like GitHub co-pilot, you know, accelerates meaningfully? What do you think the impact is on the software release cycle, sort of, overall, how it impacts JFrog as a DevOps platform within that software lifecycle, and maybe even order Artifactory if you can sort of peel the onion for us in terms of how the market may be evolving with respect to some of these new AI based technologies? Yes, thank you, Sanjit, for the question. Obviously, AI embedded into source code management is something that is led by GitHub and, I think that they did a good job with the copilot. However, this is for source code management, most of what you do, once you walked on your source code, you start to automate everything. And this is the power of binaries. And when you automate AI is required the automation and artificial intelligence is required in order to do a better management of binaries, a better management of binaries, distribution, and a better management of binary security. Some of these capabilities are already included in how we build our next generation distribution, next Generation security. Some of the capabilities that we released in JFrog Advanced Security are replacing point solution legacy security solution with tools that are far more automated. The power that we have with Artifactory is that it's easy to automate binaries. And it's almost -- I don't want to say impossible, but challenging to automate source code binaries are machine language. So I think that you will see more and more AI embedded into JFrog security and to your question, it will go perfectly with AI embedded into source code management. Hi. Thanks for taking the question. So I believe you're guiding fiscal 2023 revenue growing around 22% and then Q1 growing around 23% and then exiting Q4, around 128%, NRR. So just kind of curious, I know you said a little bit lower, but what are the underlying the guidance for next year? So weeks, so we ended the year with 128%. Natural retention and we expected gradually converge to 120 over the course of the year. Okay. Thank you and then just want to touch also on the pricing changes. So sounds like it could provide a $6 million tailwind, just any more color on the set of customers this would affect and then the nature of this change? So it's only impacting our self-hosted customers. As you know, our cloud monetization model is based on usage. Our self-hosted business monetization is based on number of servers. We do see that our customers utilize our solutions more and more on a self-hosted site. But it does not necessarily relate impact in the server purchases. And therefore, we decided to make this price change in order to better align the value that our customer getting with, with the price that they pay. It's a small percent, 3% to 5% increase in across all subscription types on self-hosted solutions. Hey, Jacob. Hey, Shlomi. Hey, guys. Thanks for taking the questions. I wanted to follow up on that net revenue retention color there. And I wanted to kind of find out more on the upside in perspective, what, what needs to happen, maybe from a demand environment, or you know, the customers out there, or the way that they're consuming the product that could drive net revenue retention, higher from the low 120s, maybe back up to historical levels? Yes, so, of course, as you know, our expansion of our customers in the cloud environment is higher than the corporate net dollar retention. So if we see that the trends of customer migration accelerate or the trend of customer usage optimization in cloud decelerate, that's what could create potential upside on the cloud usage, also, the adoption of our security solution for on-prem customers. Again, as we noted in the prepared remarks, we see -- we're very happy with the engagement with our customers for the -- on the cloud side with Advanced Security capabilities. We expect to launch that for on-prem. So, the adoption of these capabilities for on-prem -- by on-prem customers will also create certain upside to our expectations. We haven't launched yet Advanced Security on-prem, that's why it's too soon for us to tell. And that's why we kind of -- that potentially could create an upside. And Koji, and if I may add, I think that what we see is that the cloud growth is still performing very high you could see it in the results. What we've seen in the last few weeks of 2022 was that on-prem customers that were in the process of migrating to the cloud and improving, obviously, our net dollar retention are currently on hold pending for budget approvals. And this is part of the pipeline that was pushed. But on the same hand, they are not investing more in on-prem. So it's kind of an in-between period for on-prem customers that already express their motivation to move to the cloud, already completed a successful proof of concept of this workload migration, but still waiting to get the final approval for budget of moving to the cloud. And that's obviously on a bigger volume in our installed base, the on-prem current customers. Got it. Thank you for that. And just one follow-up here if I may a question on kind of the new business assumptions thinking about the net revenue retention and the guide. I mean, it does imply not a lot of new business, so how should we be thinking about new business as a contribution to growth in 2023? So, we are looking at the new business and we are adding capabilities not only capabilities, but also more deployment environment cloud and on-prem, obviously, the majority of new customers are coming through the cloud and we are very happy about that. That's a cloud first strategy that we set few years ago, and now bear fruit. Well, listen JFrog provide a solution to the enterprise and the small, medium companies that already have a mature development environment. If you are a startup with few developers, it's not necessarily bring the value that you need at scale. So, we are very pleased with hundreds of new customers. The new logos that we added and we are also very pleased, with those that joined us in previous years and now upgraded to the platform. So, what we see coming next is more customers, new customers joining us as they scale joining us as they move to the cloud and joining us as they need more security capabilities under one platform. Yes. Hey, guys. So the profitability for fiscal 2023 much higher than expected. So that's nice to see. But given the headwinds, that you see the macro related headwinds to topline? Are you sacrificing maybe too much on the growth side? I guess what I'm asking is what is your confidence in achieving topline growth just given the lower OpEx expand, and you're maybe something more that's occurring to the business beyond just macro? I don't know, if competition is changing, or the different approaches or maybe repository management or distribution it might be impacting the opportunity just seems like with the bullishness, you articulated around expansion of Artifactory, the security distribution that number would be going as low as you talk to? Yes. So we invested in the various areas over the course of last few years, and we have started to see first fruit from our investments in security capabilities. Artifactory is obviously the de facto standard in the industry and continue to be very strong brand. We also build significant infrastructure around our go-to-market and R&D capabilities. So, we believe that the current level of investments is sufficient for us to achieve these revenue targets that we expect and that's why we can increase our bottom-line as well, because we feel comfortable in the level of investments that we've done, Jon, and if I may add, well you know JFrog, you follow JFrog profitability was part of our plan before the recession. And we're very happy, I'm very pleased to see that we are not just committed to this KPI, but also exceeded in performing there. And we will keep on doing that. But your question is very important, because you're asking if this is for profitability, are we sacrificing something? And the answer is no. We actually invested in three main domains, A, cloud; B, platform; and Continue, security. This is what we've done for the past year. And now, I think that the company is set to kind of go after the fruits of this investments that are also very much aligned with the market demand and what we hear from the market. So we will take the profitability challenge alongside going after the fruits of our investment in 2023. Okay. That's, that's helpful. Thank you. And then the following question I have. And I would think that this would be a positive, but just the trends you might be seeing artifacts size, container usage, Infrastructure as Code, how does those trends potentially impacted trends for artifact -- Artifactory? Yes, Artifactory, as Jacob mentioned, Artifactory is the standard maker in the binary and artifact management in the world. And we are very happy to see growing and especially when new customers and large enterprise are adopting this methodology, it's kind of showing us that what we invested in is really the center of gravity for software supply chain management. When you build on top of the database of DevOps, Artifactory, and Artifactory became the single source of record for all companies, then the capabilities that you're adding as part of the platform are just completing the customers' ability to control the full software supply chain, left and right to Artifactory. So, we still think that the primary asset in software supply chain management is artifacts, and we're also seeing it from the customers demand and we're also seeing it from other companies that are trying to develop the same capabilities. Hey, guys. Yes, Mike Cikos here and thanks for taking the questions to get me on. I wanted to circle back to some of the earlier questions that are trying to get at what level of conservatism is baked into the guidance or how much has it been derisked? And really where I'm going with this is focused a lot, I think, Jacob in your prepared remarks and said that SaaS growth in calendar 2023 is expected to be mid-40s, as we look out over the course of the next year. And I'm trying to just get a better feel or a sense, but can you help us think about what went into your assumptions to arrive at that mid-40s, especially as we look at the comps that you guys are up against, given the strong growth rates, you guys delivered in calendar 2022. But anything on that sales growth in 2023 would really be beneficial from my understanding? Yes. So the following assumptions we'll look at when we came to this conclusion, A is that number of customers today and the overall business today on minimum annual commitments versus pay-as-you-go. Two, we'll look at the pipeline for migrations from on-prem to cloud. And we assumed some delays as we know that we did experience some delays in the conversions in the late part of Q4, and we assume that delays, we will continue to see some delays in 2023. So we applied some conservatism on the pipeline for conversion. And we also did not embed the significant upside usage on top of minimum commitment. So we do expect that customers will continue to optimize their cloud usage, and therefore the minimal potential upside above their annual commitments. That's great. I really do appreciate you walking me through that. And then another question for you, I guess the follow-up here. I forget if it was if it was Koji, but one of my colleagues had asked about what's expected for the calendar 2023 contribution from new customers? I think my question is a little bit different and probably more with respect to the existing customers here. But if I look at the -- that total customer count, I know that we only get that on an annual basis. But in calendar 2022, it grew 8% year-to-year versus growing 10% in calendar 2021. But calendar 2021 would have been 13%, if I strip out the customers that churn because you guys some set a couple of products. And so the question that I have is, if the customer base is growing at a slower rate, how is that impacting ability or you're forecasting here, when you're thinking about the ability to continue to grow that existing customers, if those customers aren't growing at a rapid clip as they had been in previous years? Yes, Mike, I'll take this question, and thank you. Well, first of all, in the past three years, we added 2,000, new logos to JFrog portfolio. We are also happy with the fact that our cloud first strategy, navigate more and more new customers to join JFrog in the cloud first and not migrating later. And the third thing, we are adding capabilities, and we see a growing ASP from the lending point. So our entry level prices is higher. There are more adoption of new capabilities. And still, when you add hundreds of customers a year and thousands since we start building the platform with you guys watching it, I see the growth as we expected. And please remember the answer to Koji. These are mature companies that need a serious software supply chain coverage, meaning that they are ready to scale. And they are not in the proof-of-concept of adopting a software supply chain solution. So we build for scalability. And we build a comprehensive solution that comes as one platform to enable that. This is one of the reasons that we also see a higher ASP on the lending point. Thanks, guys. A couple of things for me, Shlomi on the macro front and the elongation of the cell cycles. Couple of things on there, first of all, was January worse than December, the same if you can talk about that? And then second related to that, is there any more color you can give us on regions North America, Europe, Asia, or type of customer enterprise commercial? Yes. Thank you, Ittai. So it's too early for me to speak about January. But I can tell you that what we've seen in December and specifically, in the last week of the previous quarter, is kind of a pattern that we keep on seeing. And this is why we took it into consideration when we bought actively set it our outlook. We see that difference between geographies not just because of the geopolitical situation in Europe, but some differences between geographies in how they adapt software supply chain and how they adopt cloud. So obviously, North America is leading with cloud migration with the big legacy industry vectors start to move to the public cloud, we see EMEA following, but in a slower pace and APAC is really at the beginning of adopting platform solutions, they are still at the basics of DevOps. The second thing that we see is that security, especially in North America, and more specifically, software supply chain security, after the White House lounge should be saying that this is part of the regulation is part of every CIO agenda for 2023. And this is why we were very focused on having JFrog Advanced Security for 2023 and not later this year. So, I assume that we will keep seeing this trend, elongated process more sea level signups we will see this. But alongside that, in North America, cloud growth will still happen. And security will still be top in line of the CIO and the CISOs list. Okay. And then maybe following up on Security and Advanced Security more specifically, can you clarify the pricing changes related to advanced security? I mean, you had Xray before. So the introduction of Advanced Security did what to pricing? How did that affect your pricing scheme and how customers buy it? Yes. So Xray, as you remember, Xray is a tool that protects Artifactory. You have Artifactory is your single source of truth. And then Xray sits on top of it to make sure that your binary repository is protected. What we have done with JFrog Advanced Security is we added capability that protect you from left and right to Artifactory. Left means how you protect your static code analysis, how you protect your source code, how you protect your development environment, right mean, how you protect your runtime environment, container security, secret detection and contextual analysis. So basically, JFrog Advanced Security is, is the price on top of the current subscription that focuses on security for the pool software supply chain. Xray is part of the current subscription, which protect your Artifactory. Now speaking of left and right Artifactory, we are looking at power spend of over a billion dollar left to Artifactory developers security and around $4 billion on the right to Artifactory, which is more on time and production environments. So we are very excited about what JFrog Advanced Security can bring in addition to our business. Okay. So just to clarify that they're slowly I think you mentioned that the prepared remarks are Jacob, I don't remember that. About 40% of customers already have Advanced Security. So, we've in a quarter two, already, almost half of your customers are paying extra for this or it just seems such a rapid adoption of an incremental paid solution yet. Your numbers didn't move into material kind of a way to suggest that deed has any meaningful impact helped me reconcile the two? Yes, I think that what we said is that 40% of our customers already have Xray. This is not Advanced Security. We are just in the very early beginnings. We launched JFrog Advanced Security few weeks ago. And in the next few weeks, we are going to introduce JFrog Advanced Security for on-prem customers. So we are in the very early beginning. And we hope to see that all the extra users will also upgrade to use JFrog Advanced Security. Hey, guys. Thanks. So macro question first. So some of these trends in cloud optimization and floor migrations were already taking place last quarter, you can see that in the hyper scalar numbers and other places. But you and other people in what's called cloud native development had strong quarters in third quarter and didn't seem to be seeing that impact. So, so what's changed? It's just it's one quarter further into that optimization, or are we actually seeing more new software development projects may be cancelled, slowed down or less developers hired, is that the change from last quarter to this quarter? Yes. What we're seeing is more pronounced optimization of the cloud, cloud usage. And also somewhat delay in the cutover migration to cloud where some, some customers put on hold they migration spending, additional approvals, from sea level while they stopped already investing into expansion of their own self hosted solutions. Right. Yes. Explain that when I'm trying to get at is whether or not new development projects are slowing in a meaningful way and if that's changed from last quarter? Yes, I'll say that we Michael, if you run an on-prem environment, and you already have the strategic approval to move to the public cloud, what we see now is that you're holding and that's, that's a very big chunk of the migration process pipeline that we had. The second thing was that cloud, especially at the end of the last quarter, what we've seen is that maybe it's because of the year end, maybe because of budget reasons, reasons. But we've seen our cloud users go and optimize the cloud usage, both in storage and data transfer. And the last thing is that there are some hybrid users that are now deploying less funds in the on-prem, and not yet deploying more funds in the cloud, we had more conversation with sea levels than ever before that are waiting for final bite budget approval. So the main change that we've seen between the end of last quarter today is around that. Thanks for taking my question. This is Ethan on for Rob. I just wanted to kind of ask a little bit more on the IoT opportunity. I know there's some mention of that the prepared remarks and kind of where the market that we're at right now. Are you seeing customers coming to you actively seeking this out? Are you still kind of in an education part of the cycle right now where you're helping customers understand that you have this capability and that you're able to provide them with this type of automated release deployment with software? Thank you. Yes. Thank you, Rob, for this question. As you remember, in Q3, we reported a one big project that already adopted JFrog Connect. The IoT over-the-air update mechanism we now have in pipe, few other projects coming from very big customers that want to extend the Artifactory and security usage all the way to the connected devices. We are excited about that. That part of the solution that we wanted to see an end to end all the way to the device, and it's still happening.

EarningCall_494

Thank you, Cole, and good morning, everyone. Thank you for joining us today to review Snap-on's fourth quarter results, which are detailed in our press release issued earlier this morning. We have on the call today, Nick Pinchuk, Snap-on's Chief Executive Officer; and Aldo Pagliari, Snap-on's Chief Financial Officer. Nick will kick off our call this morning with his perspective on our performance. Aldo will then provide a more detailed review of our financial results. After Nick provides some closing thoughts, we'll take your questions. As usual, we have provided slides to supplement our discussion. These slides can be accessed under the Downloads tab in the webcast viewer as well as on our website, snapon.com, under the Investors section. These slides will be archived on our website along with the transcript of today's call. Any statements made during this call relative to management's expectations, estimates or beliefs or that otherwise discuss management's or the company's outlook, plans or projections are forward-looking statements, and actual results may differ materially from those made in such statements. Additional information and the factors that could cause our results to differ materially from those in the forward-looking statements are contained in our SEC filings. Finally, this presentation includes non-GAAP measures of financial performance, which are not meant to be considered in isolation or as a substitute for their GAAP counterparts. Additional information regarding these measures is included in our earnings release issued today, which can be found on our website. Thanks, Sara. Good morning, everybody. Wow, it's been some year and quite a quarter. China knee jerking from Zero COVID and strict lockdowns to living with COVID in unprecedented virus explosion, diminished but still continuing spikes in the supply chain, the ongoing Ukraine war, the emergence of -- the reemergence of Brexit and now the rising shadow of the recession, echoing in almost daily public pronouncements. And thru it all, Snap-on delivered another in a long line of encouraging performances. We'll go through it. Starting with the highlights of the quarter and the year, I'll give you my perspective on the results, the market environment and our progress. And after that, Aldo will move into -- as usual, Aldo will move into a more detailed review of the financials. The fourth quarter was encouraging. We believe it emphatically demonstrates the continuing resilience of our markets and the capability of our operations to achieve in the face of difficulty, wielding the power of our product our brand, our people and our strategic position. It all combines to serve as clear evidence of what we already know. Snap-on is a unique and extraordinary operation. The results for the fourth quarter serve as more testimony to that fact, and they are an unmistakable demonstration of our continuing momentum. Of course, we did with the differences from group to group and within the operations, but we believe the overall results are compelling. Fourth quarter sales of $1.159 billion as reported, up 4.3% from 2021 included a substantial impact from unfavorable foreign currency of $37.7 million a 370 basis point headwind, and an organic sales increase of 8% over last year, and that represented a 22.7% rise over 2019. This now represents the corporation's tenth consecutive quarter above prepandemic levels. It's a trend of, I think, some significance in uncertain times like these. From an earnings perspective, our opco operating income for the quarter, including the impact from unfavorable foreign currency was $248 million, up 6.8% compared to 2021 and 44.7% above the 2019 pre-pandemic level. The OI margin for the quarter, it was 21.5%, improving by 50 basis points over last year and 360 basis points over 2019. It's the same resiliency that's been demonstrated over the years as we paid dividends every quarter since 1939 without a single interruption or reduction. In fact, in November, our dividend was raised by 14.1%, marking the 13th straight year of increases. It's more a testimony of Snap-on's consistent performance through varying environments. This is just another one of them. For Financial Services, operating income of $63.9 million was down from 67 point -- $63.9 million was down from the $67.2 million in 2021. That decrease reflected the forecasted -- our forecast to return to more historical provision levels, but all the while keeping delinquencies flat to last year. And our overall quarterly EPS reached $4.42, $0.32 or 7.8% above 2021 and up 43.5% compared with 2019. Well, those are the numbers. Now to the markets. We believe that automotive repair remains very favorable. It makes sense. The average age of vehicles continue to increase. The complexity of repairs is rising steeply as new platforms enter the vehicle park, and enter they have, starting in dealerships. And we have seen a resurgence in dealership projects despite a still recovering supply chain. Changes in internal combustion, the rise of electric vehicles and the expansion of vehicle autonomy have made dealerships eager for new equipment to support complex repair test of the evolving vehicle park, and we see it. Projects and powertrains aside, dealerships continue to see healthy demand in repair and maintenance and in warranty, driving the need for shop expansion and more technicians. You can see it in the macros. Repair spending, technician numbers, technician wages, all up. Our dealership segment is expanding. And for independent repair shops, confidence remains sky high across the board. Shop owners and managers confirm that demand for repairs for technicians over complex skills are all rising, and our sales growth in that sector mirrors that enthusiasm. We believe we're moving into what we can be called the golden age of vehicle repair, and our Tools Group and RS&I group are uniquely positioned with the product, the brand and the people to take full advantage, even in the midst of turbulence. You can see it. Now for the critical industries, where our Commercial & Industrial Group, or C&I operates. We continue to see progress but the group spans wide jurisdictions. And as such, various headwinds across the geographies and the industries have attenuated some of those gains. For geographies, Europe with the war and the reemergence of Brexit and China impacted by the COVID chaos were a stark contrast to relatively strong North American markets, a lot of variation. And the range in variability among sectors also continue to be a challenge. Natural resources, heavy-duty fleets, general industries and international aviations were robust, but the military area remain challenged. Overall, however, order demand for most of the critical industries has been strong, and we believe that's a great signal for C&I's future. So C&I does have challenges across geographies and the segments, but we have made advancements, and we see opportunities for tomorrow. Going forward, we believe we'll keep moving down our runways for growth, our wide runways for growth. And as we proceed, we're also fortified, as all of you have heard before, by our Snap-on Value Creation processes, safety, quality, customer connection, innovation and rapid continuous improvement, or RCI. They're the core processes that drive our ongoing progress, especially customer connection and innovation, growing our product line. You see, our franchisees and our direct sales force puts us in a strategic advantage, standing face-to-face with professional techs, understanding their individual challenges, showcasing the solutions created by our powerful product and demonstrating their use. Our resilient markets do represent a significant opportunity, and we are there to take advantage up close and personal, like no one else, right where the jobs are done. And it's working. 2022 was a year of substantial headwinds, but our team prevailed with the year achieving new heights. Sales up $4 billion, $492.8 million, up 5.7%, reflecting an organic gain of 8.7% compared to 2021 and a 20.2% organic increase versus 2019. The opco margin for the year was 20.9%, up 90 basis points from '21 and exceeding the prepandemic margins by 170 basis points. As reported, earnings per share for the year were $16.82, up 12.7% from '21 and represented a rise of 35.5% from 2019. It's all evidence of the decisive and ongoing momentum that marked the year and the quarter. Now the operating groups. Let's start with C&I. Fourth quarter sales of million for the group were down $15.5 million versus last year, including $21.2 million in unfavorable currency and a 1.7% organic gain. Our Specialty Tools division was a clear positive with double-digit gains. Precision is becoming essential every day, and our toric products are putting us right in the middle of that rise. Our critical industries also showed strength, especially in North America, propelled by growth in natural resources, general and heavy duty, partially attenuated by lower military activity. Outside North America, it was a different story. SNA Europe was down and China was diminished. OI for C&I was $47.9 million, down $2.2 million primarily from the $2.3 million in unfavorable foreign currency. The group's operating margin was 14%. It was flat to last year, but still represented an advance of 120 basis points over the pre-pandemic level in 2019, and that was against 50 basis points of negative currency and acquisition dilution. The specialty torque business within C&I really is making significant strides. Torque is hot, and Snap-on is a widening array of new offerings to prominently participate in that trend. Products like our new series of digital torque checkers. It's from our Norbar engineering team. You might remember we acquired Norbar a few years ago. Our Norbar engineering team in England, more compact and easier to use, it helps technicians validate the accuracy of torque instruments close to the workplace, saving a lot of time. Our new checkers accommodate torque measurements from 5-inch pounds to 1,500 foot pounds and rent is from a quarter inch to 1-inch covering jobs from precision fasteners and a jet cockpit to a heavy-duty bolt on a giant oil rig, a wide range of applications. And it's compact steel how they easily mount in a variety -- this is compact steel housing easily mounts in a variety of convenient locations at the point of issuing or in the pathway of the workflow, like tool cribs, aviation hangars and manufacturing cells, making torque checking an easy exercise. With an accuracy of plus or minus 1%, our new checker increases process quality without work interruption, raises consistency in assembly activity and, with a streamlined documentation feature, greatly improves the management of fastening in any application. The initial launch was well received by any operation that relies on precision torque, and there are a lot of them. And as you can imagine, the new checker is right on track to be a Snap-on hit product with sales of $1 million in the first year. So it looks like it's a pretty strong product for us. C&I, mixed progress, challenged with headwinds, but it did have significant areas of improvement paving the way for future growth. Now on to the Tools Group. Quarterly sales of $542.7 million, up $37.9 million, including 9.5% in unfavorable currency and a 9.6% organic increase, gains in the U.S. operation and continued expansion in the international networks. And it was all led by big ticket items, tool storage and diagnostics both with double-digit gains. Operating earnings for the Tools Group were $116.1 million in the quarter, $5.6 million above 2021, and that included $4.5 million in unfavorable currency. The operating margin was 21.4%, 50 basis points below last year, but that was impacted by currency and by product mix, but it was still a result of considerable strength. Tools Group again represents the ongoing power and market leadership of our van network. It's written across the financials. And that positivity is clearly an boldly echoed in the voices of our franchisees. I can tell you, I was just at one of our annual kickoff. It's unmistakable that they're pumped enthusiastic and confidence. They know they are growing. And they firmly believe there's more to be had. And our franchisee health metrics confirm all of that to be true. The quantitative trajectory delays in that data supports every bit of the positivity -- of the positive attitude. And the franchisees expressed their excitement in more formal ways. During the quarter, we were recognized by the Franchise Business Review, which surveys franchisee satisfaction. And it's the latest ranking that publication, once again, latest annual ranking -- that publication once again listed Snap-on as a top 50 franchise, marking the 16th consecutive year we received that award. And internationally, Snap-on was ranked #1, #1 in Elite Franchisees Magazine's Top U.K. Franchises for 2023, finishing not only above the U.K.-only franchise systems, but also coming in ahead of the very popular global brand -- a number of very popular global brands. Now that type of recognition reflects, I think, fundamental strength of our brand business, and it would not have been achieved without a continuous stream of innovative new products. As part of that, Snap-on continues to lead the industry with great tool storage innovations designed to improve productivity and allow techs to personalize their workspace. We're the first to market with the LED power top, rightly lighting the greening Snap-on tools like special jewels as each store is accessed. It's quite a sight. It enables the techs to show the pride in their work. And building on that feature, in December, we started shipping the first of our new IRIS tool storage units. It's a 68-inch special edition epic roll cap, which allows the technician to adjust the draw lighting with an infinite array of color selections. It is an eye-catcher coated and great paint paired with red trim, and it also features -- besides its appearance, it also features for the first time a specially lit Snap-on logo nameplate. It's innovative, striking. And as for all epic boxes, all of them, it streams functionality. The power top and the power door provides 10 electrical outlets and 4 USB ports throughout the road that ensures that all the cordless tools, the lights, the accessories are charged and at the ready. It also features our unique speed drawer for smart customizable tool organization. It's a very popular and productive feature in the shops. Convenience, productivity and distinction, the IRIS received an overwhelming reception, helping to drive the landmark tool storage we had just in the fourth quarter -- landmark full storage quarter we had just recently. It shows that pride really is a powerful salesman. You show that every day. Well, that's our Tools Group, booming in the U.S. progressing internationally, continuing the stream of new products, building the brand, enhancing the brand channel and moving forward with momentum. Now for RS&I. In the fourth quarter, our RS&I Group results confirmed what we've been saying all along. Snap-on is well positioned for the ongoing rise in vehicle repair. RS&I sales in the quarter of $437.9 million increased 11.6%, including $9.5 million in unfavorable currency and a 14.3% organic gain, 14.3%, boom shakalaka. That rise was authored by -- it was a great performance, and that rise was authored by double-digit increase in OEM dealerships as manufacturers continue to release new models, invest in new equipment and implement essential tool programs. But our business in the independent garages also expanded nicely with double-digit growth in our undercar equipment and in our diagnostics and repair information products, twin pillars of strength. Shop owners need upgrades to follow the changing car park, and they now have confidence regarding their futures to act on that imperative and Snap-on is ready to help. RS&I operating earnings for the quarter were $110.6 million, up 13.8%. And again, and the operating margin, it was 25.3%, rising 50 basis points over 2021, exhibiting our team's ability to navigate the turbulence, welding Snap-on value creation, connecting with customers, launching innovation executing RCI and doing what they're expected to do: keep raising profitability. One example is our diagnostic business, double-digit growth, led by new products. Last quarter, we mentioned the launch of our game-changing handheld diligent diagnostic unit, the . Well, it's selling at a record pace. It's in hardware and in software subscriptions. It's a great unit that again raises the bar for an advanced repair, providing technicians with a powerful health and troubleshooting and diagnostic the most complex of vehicle repairs. Zeus Plus makes those special challenges take up so much shop time appear quick and easy, and the techs are noticing. RS&I, the repair shops are confident seeing a great future, and RS&I has the products to pave their way. Well, that's our fourth quarter. Opco organic sales rising 8%, 10 quarters of consecutive growth from pre-pandemic levels. Tools Group, demonstrating strength. Organic sales up 9.6% over last year, rising 33.2% from prepandemic levels. RS&I products to meet the needs of the vehicles of today and of tomorrow, activity up 14.3% organically, gains in both OEM dealerships and independent shops, C&I showing potential for growth despite international headwinds, strong momentum in the critical industries with much more to go. And it all drove a 21.5% operating margin for the overall enterprise, rising 50 basis points from last year and an EPS of $4.42 up over every comparison. It was another encouraging quarter. Thanks, Nick. Our consolidated operating results are summarized on Slide 6. Net sales of $1.559 billion in the quarter increased 4.3% from 2021 levels, reflecting an 8% organic sales gain, partially offset by $37.7 million of unfavorable foreign currency translation. The organic sales increase this quarter reflects double-digit gains in the Repair Systems & Information Group, high single-digit growth in the Snap-on Tools Group and low single-digit gains in the Commercial and Industrial group. From a geographic perspective, double-digit sales growth in both North and South America more than offset weaker demand in Europe. Consolidated gross margin of 48.5% improved 40 basis points from 48.1% last year. Contributions from the increased sales volumes and pricing actions, 40 basis points of favorable foreign currency effects and benefits from the company's RCI initiatives more than offset higher material and other costs. Again, this quarter, we believe the corporation through pricing and RCI actions continue to navigate effectively the cost and other supply chain dynamics of the current environment. Operating expenses as a percentage of net sales of 27% improved 10 basis points from 27.1% last year. Operating earnings before financial services of $248 million in the quarter compared to $232.2 million in 2021 as a percentage of net sales, operating margin before financial services of 21.5% improved 50 basis points from last year's fourth quarter. Financial services revenue of $88.3 million in the fourth quarter of 2022 compared to $86.9 million last year. Operating earnings of $63.9 million decreased to $3.3 million from 2021 levels and included a return to what we believe to be a more normal level of provisions for credit losses than those recorded last year. Consolidated operating earnings of $311.9 million in the quarter compared to $299.4 million last year. As a percentage of revenues, operating earnings margin of 25.1% was unchanged from last year. Our fourth quarter effective income tax rate of 22% compared to 22.3% last year. Net earnings of $238.9 million or $4.42 per diluted share increased $15.2 million or $0.32 per share from last year levels, representing a 7.8% increase in diluted earnings per share. Now let's turn to our segment results for the quarter. Starting with C&I group on Slide 7. Sales of $343.2 million decreased from $358.7 million last year, reflecting a $5.7 million or 1.7% organic sales gain, which was more than offset by $21.2 million of unfavorable foreign currency translation. The organic growth primarily reflects double-digit gains in the segment specialty torque business as well as a low single-digit increase in sales to customers in critical industries. These gains were partially offset by a mid-single-digit decline in the segment's European-based hand tools business. With respect to critical industries, gains in sales to heavy-duty fleets, mining and general industry more than offset lower activity with the military. Gross margin of 37.7% improved 120 basis points from 36.5% in the fourth quarter of 2021. This was primarily due to increased sales volumes and pricing actions, benefits from RCI initiatives and 20 basis points of favorable foreign currency effects, partially offset by higher material and other input costs. Operating expenses as a percentage of sales of 23.7% in the quarter increased 120 basis points from 22.5% in 2021, mostly due to reduced sales and lower expense businesses. Operating earnings for the C&I segment of $47.9 million compared to $50.1 million last year. The operating margin of 14% was unchanged from last year. Turning to Slide 8. Sales in the Snap-on Tools Group of $542.7 million compared to $504.8 million a year ago, reflecting a 9.6% organic sales gain, partially offset by $9.5 million of unfavorable foreign currency translation. The organic sales growth reflects a double-digit gain in our U.S. business and a low single-digit increase in our international operations. The quarter benefited from robust demand for our recently launched diagnostic platform as well as our tool storage product line. Gross margin of 43.2% in the quarter declined 70 basis points from 43.9% last year. The year-over-year decrease is primarily due to 40 basis points of unfavorable foreign currency effects, increased sales of lower gross margin products and higher material and other costs. These declines were partially offset by benefits from the higher sales volume and pricing actions. As a reminder, the Snap-on Tools Group serves as a distributor for products such as diagnostics, which is made by our RS&I Group. Operating expenses as a percentage of sales of 21.8% improved 20 basis points from 22% last year. Operating earnings for the Snap-on Tools Group of $116.1 million compared to $110.5 million last year. The operating margin of 21.4% compared to 21.9% in 2021. Turning to the RS&I Group shown on Slide 9. Sales of $437.9 million increased 11.6% from $392.5 million in 2021, reflecting a 14.3% organic sales gain, partially offset by $9.5 million of unfavorable foreign currency translation. The organic gain is comprised of double-digit increases in sales of undercar and collision repair equipment in activity with OEM dealerships and in sales of diagnostics and repair information products to independent shop owners and managers, including those diagnostic sales affected by the Snap-on Tools Group. Gross margin of 45% declined 110 basis points from 46.1% last year, primarily due to a higher material and other input costs and increased sales in lower gross margin businesses. These declines were partially offset by benefits from pricing actions and savings from RCI initiatives as well as 80 basis points of favorable foreign currency effects. Operating expenses as a percentage of sales of 19.7% improved 160 basis points from 21.3% last year, primarily due to benefits from sales volume leverage, higher activity and lower expense businesses and savings from RCI initiatives. Operating earnings for the RS&I group of $110.6 million compared to $97.2 million last year. The operating margin of 25.3% improved 50 basis points from 24.8% reported a year ago. Now turning to Slide 10. Revenue from Financial Services of $88.3 million, including a $1.2 million of unfavorable foreign currency translation compared to $86.9 million last year. Financial Services operating earnings of $63.9 million, including $900,000 of unfavorable foreign currency effects compared to $67.2 million in 2021. Financial Services expenses of $24.4 million were up $4.7 million from 2021 levels, mostly due to $4.8 million of higher provisions for credit losses. While provisions have increased versus the historically lower provision rate experienced last year, we believe that the loan portfolio trends remain stable. For reference, provisions for finance receivable losses in the current quarter were $12.8 million as compared to $8.4 million in the fourth quarter last year, yet lower than the $14.1 million and the $16 million recorded in the fourth quarters of 2019 and 2018, respectively. As a percentage of the average portfolio, Financial Services expenses were 1.1% and 0.9% in the fourth quarter of 2022 and 2021, respectively. In the fourth quarter of 2022 and 2021, the respective average yield on finance receivables were 17.6% and 17.7%. In the fourth quarter of 2022 and 2021, the average yield on contract receivables were 8.6% and 8.5%, respectively. The blended yield for the portfolio was 15.7% in the fourth quarter of 2022, which is the same as last year. Total loan originations of $299.7 million in the fourth quarter increased $43.4 million or 16.9% from 2021 levels, reflecting a 17% increase in originations of finance receivables, a 16.7% increase in originations of contract receivables. The increase in finance receivable originations reflects the continued strong sales of big-ticket items by our franchisees during the work. Moving to Slide 11. Our quarter end balance sheet includes approximately $2.3 billion of gross financing receivables, including $2 billion from our U.S. operation. The total global gross portfolio is up 3.4% year-over-year. The 60-day plus delinquency rate of 1.6% for U.S. extended credit was the same as in 2021 and compared to 1.8% in the pre-pandemic period of 2019. On a sequential basis, the rate is up 10 basis points, reflecting the seasonal trend we typically experience between the third and fourth quarters. As it relates to extended credit or finance receivables, trailing 12-month net losses of $43.8 million represented 2.4% of of outstandings at year-end. While this was up 6 basis points from a year ago, it is 47 basis points lower than year-end 2019. Now turning to Slide 12. Cash provided by operating activities of $210.6 million in the quarter compared to $222.7 million last year. The decrease from the fourth quarter of 2021 primarily reflects a 36.5% -- $36.5 million increase in working investment, partially offset by improved net earnings. Net cash used by investing activities of $67.9 million included net additions to finance receivables of $47.3 million and capital expenditures of $22.7 million. Net cash used by financing activities of $145.8 million included cash dividends of $86 million and the repurchase of 284,000 shares of common stock for $65.3 million under our existing share repurchase programs. As of year-end, we had remaining availability to repurchase up to an additional $362.4 million of common stock under existing authorizations. Turning to Slide 13. Trade and other accounts receivable increased $79.4 million from 2021 year-end. Days sales outstanding of 61 days compared to 58 days at 2021 year-end and to 67 days as of the pre-pandemic year end of 2019. Inventories increased $229.3 million from 2021 year-end. On a trailing 12-month basis, inventory turns of 2.5 compared to 2.8 at year-end 2021 and the 2.6x as of year-end 2019. The growth in inventory primarily reflects higher demand, including inventories to support new products. Additionally, given the dynamics of the current supply chain situation, our level of safety stocks and in-transit parts, components and raw materials are up, as our year-over-year costs associated with finished goods. Our year-end cash position of $757.2 million compared to $780 million at year-end 2021. Our net debt to capital ratio of 9% compared to 9.1% at year-end 2021. In addition to cash and expected cash flow from operations, we have more than $800 million available under our credit facilities. As of year-end, there were no amounts outstanding under the credit facility, and there were no commercial paper borrowings outstanding. That concludes my remarks on our fourth quarter performance. I'll now briefly review a few outlook items for 2023. We anticipate that capital expenditures will be in the range of $90 million to $100 million. In addition, we currently anticipate, absent any changes to the U.S. tax legislation, that our full year 2023 effective income tax rate will be in a range of 23% to 24%. Thanks, Aldo. Well, that's our quarter and our year. I would say we can characterize particularly the fourth quarter as a period where the hits just kept on coming: sporadic supply shortages, war, Brexit, lockdowns, virus explosion and a constant drumbeat of recession warnings that served up bad news for breakfast every day. You can also describe the recent path of the time when Snap-on clearly demonstrated the resilience of its markets and the power of its businesses. C&I. engaging the full range of challenges across sectors and geographies but overcoming, growing 1.7% organically, registering an OI margin of 14%, flat to last year, reflecting the turbulence of the moment but up 120 basis points from pre-pandemic levels. The Tools Group, big ticket items surging, organic sales growing 9.6% overall, OI margin at 21.4%, up big from pre-pandemic levels, down from last year but primarily due to 40 points of negative currency and a similar impact from less favorable product mix. Still strong. RS&I, success in both OEM dealerships and independent shops, sales of 14.3% organically and an OI margin of 25.3%, up 50 basis points from last year. We said we're well positioned for the comeback and repair shops, and RS&I is showing just that. And the credit company, OI down, but finance originations growing a strong 17%, and all of it authored strong numbers for the corporation. Organic sales up 8% versus last year, 22.7% versus pre-pandemic levels. OI margin of 21.5%, 21.5%, up 50 basis points compared with 2021 and 360 basis points over 2019. Full year organic sales were up the OI margin for the year was 20.9%, a rise of 90 basis points. And finally, EPS for the quarter of $4.42, up 7.8% versus last year and 43.5% versus prepandemic levels. The hits did just keep coming, but Snap-on overcame. We exited the year stronger than when we entered, and we left the quarter in December with greater position and strength than we had in early October. We do have momentum, and you can see it in the numbers. We believe our markets will remain resilient, offer ongoing and abundant opportunities, and with our inherent advantages, the breadth and quality of our products. the unique and aspirational nature of our brands and the considerable capabilities of our experienced team, we believe we will maintain the momentum and extend our ongoing positive trajectory throughout 2023 and well beyond. Now before I turn the call over to the operator, I want to speak directly to our franchisees and associates. I know that many of you are listening. You are the people of work, the individuals whose contributions collectively fostered these results. As I look back over the quarter, over 2022 and, in fact, over the past 3 years, it's clear your efforts, as you met the justifiable fear with extraordinary vigilance, helped keep our society and our company from disintegrating while we engaged and prevailed against the COVID. We often say that Snap-on people are unique, special and consistently make a difference. The past 3 years have clearly proved its so. For your ongoing achievement in the past quarter and many others, you have my congratulations. For your continued dedication in enabling the work of our society, you have my admiration. And for your confident commitment to Snap-on and its future, you have my thanks. I apologize if any of this has been covered in the prepared remarks, joining the call a little bit late this morning. First question... That's helpful summary. I'll dive margin-related question to start with. And what I'm wondering is, now we've got several commodities, including steel that are off of their highs that we saw in 2022, and can you just help us understand how that might start to flow into your P&L this year, especially in the Tools Group? I know that typically, there's at least a couple quarter time lag that's associated with that? Is that still a good way to think about it? And at the same time, still broader inflationary pressures out there. If you could also comment on your approach to pricing as we begin 2023. Yes, I think -- I'll answer the last question first. I think our approach to pricing as we see the situation when we meet the individual timing, like the individual quarters, I think you're going to see a mixed result. You said it correctly that things work its way and some kind of lag into your P&L as you go forward in terms of the pricing. If you look back, you do see a mixed review and, say, steel, for example. Hand tool steel is down some, it's not down to pre-pandemic levels, but tool storage steel is down closer to pre-pandemic levels. So you see some variation in that. And it doesn't look like they're going to go back up. It looks like you're going to -- I would expect to see them -- if they go to prepandemic levels, maybe that's equilibrium. But if you're above that, we kind of expect it to kind of go downwards. The thing that -- and you'll see that work its way through and give us some relief going forward. But the timing of that is a little uncertain based on what you said, associated with the lag. The big impact from the supply chain for us has been the availability of certain items. And so sometimes, even today, even as the supply chain is regularized, you can't find certain things, and you have to go out and spot market and get it. This particularly bedevils C&I., Tools Group less so, but it's impacted some of the RS&I things from time to time. So supply chain, I would say, in terms of a negative factor is abating but not disappearing as we go forward. That's what I see. So it's taken some pressure off. It's hard for me to predict, though, about certain supplies that could come up at any time. So you see that kind of situation. My follow-up question is around credit. So if you look at credit performance, I mean, it's been very good if we look at delinquency rates in the back half of the year versus normal seasonality that's in the context of what's becoming clearly more -- just more macro risk, generally speaking, originations trending higher. How do you balance credit in 2023 between managing the risk side and pushing on what does seem like it could still be an incremental growth driver for the Tools Group given where we're coming from? Well, look, I think this -- we don't change our policies in terms of risk based on the externals so much. We don't raise or drop our -- the credit standards associated with do we need sales or not. We pretty much focus on the same customer and look at it in the same way going forward. I think what you're seeing in rise of originations, it has nothing to do with the credit -- necessarily the credits to the customers. I think everybody says that professional technicians have a pretty -- had a pretty strong balance sheet for some time. I think what you've seen is a combination of compelling product and our technicians seeing the great opportunities they have, numbers of -- demand for technicians up, wages up and the repair systems up. You can see it in the macro sort of getting more confident to invest in big ticket items. I think to the extent you see originations, that's not driven by any credit policy, that's driven by the big ticket items. And whether we use credit or not will be dependent on how well the products are selling in the marketplace. Now right now, the thing about it is, is that if you have big ticket items leading the way in a robust quarter, and they were up double digits, , I think, baffle was the word I said. I think that says a lot for confidence because what my experience is, and I've been here a while, my experience is that when people -- when things start to look gloomy a little bit in professional technicians, the need doesn't go away but they tend to shift more to shorter payback items, not big ticket items. That's what happened in the great financial recession. So the fact that we had a big ticket boom, I think, gives me a lot of great confidence in our future. So the -- I mean, the automotive repair industry has arguably had some benefit from the surge in used vehicle values that caused some older vehicles to stay on the road for longer and vehicle owners to invest in maintenance. So I guess as used vehicle values are falling and potentially some more new vehicles start to get on the road and get into dealerships, I mean is Snap-on agnostic to that shift in vehicle aging? Yes, really I mean, I think as we serve the dealerships just as well. I mean, you could argue that older cars have more repairs and maybe be entitled to that. But in reality, it's a long wave of event, Liz. The fact that new cars are becoming -- the fact that used cars were being held longer, we don't really think that makes that much a difference. We followed it for years. And when you look at a year or a quarter when, let's say, scrappage is up or scrappage is down, it doesn't seem to affect the numbers at all. So for us, I think if you said, okay, the car park is going to get younger over time, then that would be some pressure on repair. But the car park has gotten older every year since 1980. So I don't think that's going to change very much. And we -- I would not put the shift to used cars as much of a factor in the strength of the automotive repair market from our perspective. So I think any change from that is not going to make a difference, really. And we do serve the dealers. We actually get -- our revenues in the Tools Group is about the dealership -- revenue from the dealerships in the Tools Group actually almost dead on reflects the amount of repair that they have as a percentage of the total repair done in the country. So we're kind of agnostic between dealerships and independent repair shops. Got it. Okay. That makes sense. And then just a question on capital allocation. And I'm curious to get your thoughts on the company's current appetite for M&A and which segments you feel are potentially more fragmented and where Snap-on could continue to roll up smaller businesses and what the pipeline might look like currently. Well, look, I think we have a pipeline. We have a number of prospects we always look at, but we have -- what we do is we look to say we have runways for growth, enhance the van channel, expand with repair shop owners and managers, extend the critical industries and build in emerging markets. And we're always looking for something that's operating in the critical task space, where the penalties for failure are high, in other words, not DIY, but professional space. That can advance our position along one of those runways. There isn't much in the Tools Group because the Tools Group is already in a strong position there and it doesn't need too much. But if you look at -- and in emerging markets -- maybe in emerging markets now that's going to start opening up with all the turbulence that's been floating around there. But our 2 sweet spots in this have been in expand repair shop owners and managers, that's a junk RS&I or extend the critical industry. And when we look there is give us a product that gives us more to sell to those customers or a new technology that's important to the customers or gives us a presence with customers. So for example, I mentioned Norbar. Norbar is an acquisition, which got us bigger in torque. It's critical. It's a technology we could use some help in at the top end. So we acquired it and it was a great success story. You can see the same kind of thing in RS&I with the acquisitions of Dealer-FX, where we wanted to beef up our software position in dealerships, one, because it's a profitable situation; but two, because it gives you a strategic advantage in terms of the visibility of new products that are going to enter the market just as you talked about, the new products, you get a better view of it. So that's the kind of thing. So things that will advance us down those runways for growth are things we have money for, and we have no shyness about acquiring things. big or small. But we're careful. We take care of our money. So we don't transform the company. We're looking for coherent acquisitions. And there are a bunch of those. But sometimes when we look at something that isn't -- it's only 30% what we do or sometimes it isn't what we thought -- where we thought it was and we decided we don't want to have it, other times we do. In case of Norbar, Dealer-FX, we thought positively. And Nick, you talked about the big ticket items really driving the show for the Tools Group, but how did the hand tools perform in the quarter? Hand tools were flat. So hands tools have been booming. They were like going wild in the last year and the first part of this year, and they are the high -- actually, believe it or not, they're the highest margin business in the hand tools. And so they're great. But when they back down a little bit, that puts a little margin pressure on them in the Tools Group. Flat is okay, though because they're really still strong. But tool storage is a great margin business, and that was up strong double-digit, fact, best tool storage ever. In fact, I had a guy telling me, I was out talking to the sales guy, he told me he could sell every tool storage unit I could build for him. Our backlog is exploding in tool storage. So we can sell a lot of them. And then -- so -- and that doesn't have much effect on margin. The real margin -- the source of the margin comment here was diagnostics. Diagnostics makes a lot of money for the corporation, but the Tools Group shares the margin with RS&I. Remember, RS&I makes it and sells it to the Tools Group. So from a pure Tools Group or when you're looking at diagnostics, that margin is a lower one for them. And so the flatness of hand tools and the rise in diagnostics created that margin pressure that moved it down somewhat in this period. But we thought this is great. It's one of the reasons why we have 21.5%, one of the reasons why RS&I was up 50 basis points, you see, because of diagnostics sells well for them. So that's sort of the way. The other thing, as I said before, I want to emphasize, boy, I think it's a good sign for the future that big ticket is strong. Now you might argue, okay, diagnostics had a special case because we launched the Zeus, and it's the best thing since [indiscernible] and everybody loves it. But the fact that tool storage is selling well really indicates an underlying confidence in the customer base, which speaks well for our situation. Yes. Look, we look at these things. They're about in the range where we like to see it, about sort of equal. So when you look back from sell-in to sell-out, we see that being about balance. Now it always goes up and down a little bit every quarter, but this is kind of in the range. I think this quarter, it's about equal. . Listen, let me ask you about your balance sheet. Your working capital investment continues to grow. I can appreciate you've got more inventory in transit and safety stock. But can you talk about your plans to harvest that cash? And is the inventory accumulation concentrated within specific lines of business or specific products? And how much of that's tool segment versus the other 2 segments? I'm -- I like our inventory because we have a lot of faith in the future, but I'll let -- Aldo has got to answer a question. I'll let him say something here. Aldo, why don't you say something? Well, David, if you're looking year-over-year, yes, the Tools Group makes a major portion of it, but it's not all of it. But actually, the Tools Group has their inventories kind of reflective of the fact that they've had very consistent organic growth. And therefore, I think it's suitable. If you look at some of the other areas where we're investing, I mentioned in my prepared remarks, it's not insignificant the amount of money that's tied up in in-transit inventory and safety stocks. Again, Snap-on has made a strategic decision to err on the side of availability. So that is priority #1. So a long answer to your question, we think the inventory is appropriate given the opportunities we see in front of us and the fact that we don't want to miss on the opportunities that present themselves as we go forward and not have disruption from the supply chain. Now again, Snap-on is blessed, for lack of a better word, with we're not a typical consumer retail-oriented company, and therefore, we're not subject to the fashion sense, I like to say, many other companies have to be concerned about. So our product doesn't really obsolesce on the shelf, so to speak. I mean, yes, you have to update the algorithms in a diagnostic unit or an alignment machine, but pretty much we feel pretty confident that making an investment in inventory is going to pay off and being able to capture sales in projects or programs that manifest themselves as we go forward. I can appreciate that you need that inventory to support the sales activity, but it continues to grow. And I guess the question is, at some point, do you have enough? And at what point if any, is there an opportunity to harvest that cash? Or is this kind of a structural step-up? There's probably opportunities to harvest that, David, you're absolutely right, but I wouldn't model it that way. In other words, I just told you what our strategic decision is. And trust me, you have even more inventory. You will never have exactly the right thing at the right time. So you have to be prepared to have a flexible factory and a flexible distribution center because of 80,000 different SKUs, impossible to forecast what the accuracy you would like. And then you multiply the statistical probability of having them when you have to put arrays of SKUs that could have 100 to 200 pieces together, and you can see what drives the need for a lot of products. And then on top of it, you have spare part requirements sometimes imposed by regulations. So if you're going to sell machines that have a life of 10-plus years such as lifts and linear machines, tire changes, wheel balances, there's obligations behind the scenes to keep ample supplies of spare parts on hand. So you put that all together, and again, we will err in favor of availability. There could be opportunities to harvest. In just saying that we don't model ourselves cash flow growth from reduction in inventories, even though that certainly is theoretically possible. Good. Let me ask you about growth, and you mentioned the improving supply channels. How much of the growth in each segment would you estimate is driven by shipping from backlog orders rather than new orders? Well, look, certainly isn't much say in the critical industries. So our backlog just keeps growing there. That's because they keep being bedeviled by the supply chain disruption. That's sort of the thing I was saying. Our backlog is really strong there. And I don't think much is in the Tools Group. Our backlog in tool storage at all-time high, and we're actually expanding 2 of the plants in the Tools Group this year to try to keep up with this whole situation. You can look at different places like you'd be entitled to the idea that, geez, I think Europe is a little bit under the weather. So you see that kind of thing there, but the U.S. seems to be booming to me. So I don't know. You can -- it seems to me as though I think you can look at it that way. U.S. is pretty strong. And we're trying to -- look, we have real confidence in the future. That's why we're expanding our capabilities here. If I could expand the more tool storage, I would tomorrow. I told you -- I think I said before, the guy said he could -- one of the guys -- one of the top sales guys said he could sell everything I could give him. So I think we're sitting on some pretty good strength in that situation. So I think you called it book-to-bill last time. I think that's pretty healthy in the U.S., a little more turbulence in Europe. Last question. Okay. Yes. Nick, last question for me. Just the 10-Q is not out yet, so, Aldo, maybe if you could just give us the finance receivable charge-offs. And then just how were overwrites this quarter? Overrides are not as dynamic as what they've been in the past. Again, that decision is made with the franchisee. They've been a little bit more conservative compared to the 2016 to 2019 window. We still think personally that it's a good bet because we have a lot of metrics behind in process that kind of gives a higher sense of collectibility on things like that as compared to other companies that might be more upstart, so to speak, when it comes to lending to the credit profile of mechanics. But to directly answer your question, our returns are not as high as what they've been in the pre-pandemic world. And the charge-offs, I think I made a remark in my prepared remarks. The charge-offs, if you look at the provisions, they're actually narrower. I think we're about 4-point, what was it, $4.4 million difference in the rate of provision. The differential between charge-offs is actually less than that. What drove the provision up a little higher is actually with the significant increase in originations. We, from experience, have to book extra reserve provisions because of that because while everything starts out well, you know there's going to be a need for some reserves. So the fact that you high originations in the quarter actually drives a higher provision as well. So probably the increase year-over-year is about $1.1 million or so of higher provisions just associated with higher originations. . Right. You provisioned pretty aggressively back in 2020, which was to your credit, but you've been working that down with charge-offs exceeding provisions for 8 of the 9 last quarters. So kind of getting back now to prepandemic level. No, no, that's what makes the comparison tougher now, David. Exactly right. Probably by the end of Q1 of 2022, the reserve was probably reduced because of the -- we finally realized we didn't need as much as what we had provided for in 2020, 2021. And that's why I like to use the expression, we're returning to a more normalized rate of provision, and that's what you kind of see now. This is Patrick Buckley on for Bret Jordan. In the C&I business, are there any other areas internationally to highlight? You've spoken about a bit here with the European hand tools. But is the weaker economic environment, the main drag there? Or is something else driving that? It's the weaker economics. The U.K. has got a whole bunch of problems, the revolving door prime ministers and so on and that kind of thing. And it tends to be more organized around the Northern parts of that business. I think driven in the fourth quarter pretty much by a lot of banks that was in Europe in the fourth quarter over the fuel situation, and that weighed heavily on the people. And I think the whole idea that the recession is coming, the recession is coming there has kind of hit them. You got China who is like -- it's chaos in China. I mean, those guys went from being 6 weeks in their apartments to all of a sudden, let everything go, come to work with COVID. And 3/4 Quite population, some people say, got COVID. So I think things kind of went stand still because of the lockdowns in various cities and standstill because everybody is getting it. So that thing has been afflicted. So I'm not sure how quickly it comes back. So you have that. The other international markets like other parts of Asia, like Southeast Asia seen pretty good in that situation. So I think it's just COVID in Asia, particularly China, and the general sort of combination of recession is coming, fuel angst in England, reemergence of now we're out of COVID, the Brexit problems reemerge and the whole idea of the war is there kind of cast a pall over Europe. Although lately, I just heard some data that said that GDP is going to grow in Europe higher than other places, I don't know. I'm from Missouri on that one. I think Europe is a little weaker than maybe has been reflected in that. . That's what -- and then one other thing you do see is that we have -- I think I said this before, we have a strong demand in the critical industries. If we could source a little better, if we didn't have the varying disruptions of what's in supply, we could -- we would have been much stronger in this quarter and in past quarters. So one of the things that drives both the maybe some of the -- cast an overhang on the sales and put some -- hang on the margins because of you have to pay for the spot buys and it will always come in. And that's really in the critical industries where if you don't realize, there is our custom kits with maybe 200 or 300 items in them, and they must be shipped complete. So if you don't have 1 or 2 of them, we can't ship. Got it. That's helpful. And then maybe could you talk a bit more on the subscription side of the RSI business? How sizable is that today? And how does the growth outlook there compared to [indiscernible]? The growth outlook is pretty good. the subscriptions are going up. I mean, they're going up through the roof. But the thing is, remember that you probably -- you may or may not realize this, but that the other -- the former version, and still we do some of this is, we would sell what we call not subscriptions, but titles. So every 6 months, we come out with a new software addition, and technicians could buy it for their diagnostic unit or not. And we're transitioning from that sort of every 6 months or every year pop to, okay, pay me every month. And so there's some balance in that. But software is growing in the situation, and we can see we can see some positivity in that regard. And so that's one of the things that is starting to help out software in the -- help out the RS&I margins. In fact, I think we want to make sure we focus more on that going forward. So I think that's one of our great opportunities. We see a lot of opportunity in things like dealership software and independent repair shop software. And the Mitchell 1 business, which we didn't mention in this, is still growing like clockwork. It's growing nicely and its profitability is strong. It's just not up in the double-digit range, but the subscription business is growing nicely. So just 2 questions. One, as far as new product development, where do you see going with -- as car onboard ADAS systems continue to grow of increasing diagnostic and calibration capabilities inside, let's say, Apollo and Zeus. And then also the CEO of General Motors has said many times she envisions $50 billion in revenue coming from software and subscriptions, especially as cars become increasingly -- have increasing software-defined functionality. And though the dealerships will have to kind of become an increasing part of that equation. So how do you see that benefiting dealer... No, that's going to -- well, I think it benefits us greatly because look, if you want to -- sort of like it isn't a $50 billion example, but we do have examples associated with just what you said, ADAS, the advanced driver assistance systems, and the calibrations associated with that. That's behind -- that's sold enabled both through our diagnostics, like you said, like Zeus and Apollo in those, and it's enabled through our undercar equipment business. And those are the 2 businesses that taste the RS&I group, they were both up nice double digits. And really the software and the physicals associated with calibration have been helping drive the situation in undercar equipment and the input around ADAS systems in Mitchell 1 and in the diagnostic systems has helped drive their attractiveness. And as more of that goes in, those products are going to get more and more essential to the technician. You see, what you're saying, I think another way to talk about this, Ivan, is this, is that right now, let's say, if you look at the total car park, like maybe 45% of the repairs require a diagnostic unit. But if you look at new units, it's like 80%. And as software starts to rise, more and more of the places where we have leadership in terms of repair information and in the software that's going to wheel that information and the calibration will be important for us. And that's all making money for us now. And the wider it gets, the more we're going to have in that situation. So we're developing products along that line. One of the things that you don't even think about is in collision. I think you know this very well. But the thing is right now, new cars are like a neural network of sensors. And if they get dinged, you get your bumper dinged. It's a major operation to recalibrate it and reset the sensors and so on. And that's making -- that's driving a lot of the underneath car -- the undercar activity in RS&I. So we're already seeing that. And so we're focusing on that stuff as well. A big portion of our business now -- or development now is associated with software. And you're going to see that we're going to focus on it more and more as we go forward. . Yes. We're going to make sure we get big focus on it. But I think we already have a pretty good position in it. We just see as it develops, these are going to create opportunities that are going to lay out there in front of you. . And this will conclude our question-and-answer session. I'd like to turn the conference back over to Sara Verbsky for any closing remarks. . Thank you all for joining us today. A replay of this call will be available shortly on snapon.com. As always, we appreciate your interest in Snap-on. Good day.

EarningCall_495

Good afternoon. Welcome to Fabrinet’s Financial Results Conference Call for the Second Quarter of Fiscal Year 2023. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions on how to participate will be provided at that time. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Garo Toomajanian, Vice President of Investor Relations. You may begin. Thank you, Operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the second quarter of fiscal year 2023, which ended December 30, 2022. With me on the call today are Seamus Grady, Chief Executive Officer and Csaba Sverha, Chief Financial Officer. This call is being webcast and a replay will be available on the Investors section of our website located at investor.fabrinet.com. During this call, we will present both GAAP and non-GAAP financial measures. Please refer to the Investors Section of our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation. In addition, today's discussion will contain forward-looking statements about the future financial performance of the company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. These statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise them in light of new information or future events, except as required by law. For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular, the section captioned Risk Factors in our Form 10-Q filed on November 8, 2022. We will begin the call with remarks from Seamus and Csaba followed by time for questions. Thank you, Garo. Good afternoon, everyone and thank you for joining us on our call today. We had a strong second quarter with revenue above our guidance range at $668.7 million. This new quarterly record was an increase of 18% from a year ago and 2% from the first quarter. After adjusting for the 14-week period in Q1, revenue would have grown 5% sequentially. Supply constraints continue to act as a revenue headwind, while we continue to see pockets of relief in some areas, we have also seen increase in supply constraints in other areas. In aggregates, the revenue impact of supply constraints during the second quarter was approximately $20 million, a little smaller than anticipated. That said, we continue to face supply issues with certain commodity components. While these supply constraints could worsen before they get better, we continue to anticipate a better supply environment later this calendar year. Our team executed very well in the second quarter, delivering non-GAAP operating margins of 10.9% setting a new quarterly performance record, including the impact of an $0.11 foreign currency loss, non-GAAP EPS of $1.90 was in the upper end of our guidance and would have been well above the range or it not for the foreign exchange impact. Looking at the quarter in more detail, both optical and non-optical communications saw quarterly and year-over-year revenue increases to new record levels. Within optical communications, telecom demand continues to be strong, but revenue decreased slightly sequentially. Primarily due to recent component charges. On the other hand, in datacom, we reached a new quarterly revenue record. And also experienced our fastest sequential growth in 10-years. Turning to non-optical communications, we had another record quarter for automotive revenue as supply improvements from the first quarter continued driving strong growth in newer automotive programs. This growth in automotive more than offset declines in industrial laser revenue in the quarter. Investing in our long-term growth remains a top priority for Fabrinet. As you know, our recently opened Building 9 provides us with significant capacity to continue to scale our business over the next several years and we continue to ramp new programs for our customers in this state-of-the-art 1 million square foot facility. Looking ahead to the third quarter, we remain optimistic that the industries we serve can remain relatively resilient, despite broader global economic trends. And this is reflected in healthy demand trends that we continue to see across our business. As I noted earlier, the supply environment is still challenging, even though we continue to successfully mitigate the impact of supply shortages, we do expect greater revenue impact for supply headwinds in the third quarter than in Q2. And this is reflective in the guidance that Csaba will detail in a moment. Our business model remains very agile, flexible and resilient. Over the years, our ability to respond quickly to changing market dynamics has helped us to optimize our business in the face of changes in supply or demand. As such, we're confident that we can continue to operate very effectively in a dynamic global environment to the benefit of all our stakeholders. In summary, we delivered strong second quarter results with revenue above guidance and record operating margins. While the supply environment remains volatile, our demonstrated ability to execute reinforces our optimism that we remain well positioned to continue producing strong financial results as we look ahead. Now, I'd like to turn the call over to Csaba for additional financial details on our second quarter and our guidance for the third quarter of fiscal 2023. Csaba? Thank you, Seamus, and good afternoon, everyone. We delivered record revenue in the second quarter that was above our guidance. Revenue was $668.7 million, which was up 18% from a year ago and up 2% from the first quarter, which you will recall was a 14-week quarter with an extra $20 million revenue contribution. Adjusting for this extra week, sequential revenue growth would have been 5%. After delivering record operating margin in Q1, we again reached a new high point to non-GAAP operating margin of 10.9% in the second quarter. Our foreign currency hedging program continues to dampen the impact of FX fluctuation on operating margins, but our bottom-line results were negatively impacted by foreign exchange [evolutional] (ph) loss of $3.9 million or $0.11 per share in the second quarter. As a result, non-GAAP earnings per share was $1.90 in the upper half of our guidance range. Without this $0.11 foreign exchange loss, non-GAAP EPS would have been well above our guidance. Looking at the revenue in more detail, optical communications revenue was $506.1 million, up most sequentially and from a year ago to a new record. Within optical telecom revenue was $392.9 million, which was up 11% from a year ago, but a decline of 3% from the first quarter, primarily due to increased supply constraints for certain commodity semiconductors used in these products. Datacom revenue on the other hand was very strong at $113.2 million. This record datacom revenue was up 15% from a year ago and 22% from Q1, due to combination of continued positive demand trends and better component availability for these products. By technology silicon photonics revenue was $123.4 million, an 11% sequential decrease, due to the same supply constraint that impacted telecom revenue. The impacted telecom products are also primarily newer, faster speed rated products and as a result revenue from products rated at 400 gig or more also declined 11% sequentially to $173.6 million. I want to emphasize that we believe demand for this product remains robust and that this decline was primarily supply related. Revenue from 100 gig products on the other hand was the highest we have seen in over two years at $153.4 million, up 10% both from a year ago and from Q1. Non-optical communications revenue was also another record at $162.6 million and represented 24% of total revenue. As in Q1, growth in non-optical communication was driven primarily by automotive revenue, which was a record $94.8 million more than double from a year ago and up 9% from Q1. In addition to a better supply environment for these products, we also benefit as from continued demand strength for newer automotive products. Industrial laser revenue was $30.9 million, down 13% sequentially. Other non-optical communications revenue increased from a year ago and from last quarter to $36.8 million. As I discuss the details of our P&L, expense and profitability metrics provided are on a non-GAAP basis, unless otherwise noted. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release and investor presentation, which you can find in the Investor Relations section of our website. Our execution was very strong in the second quarter, as reflected in our gross margins, which tied our prior record of 13%. Tailwinds from foreign exchange hedges contributed approximately 20 basis points to this performance and based on current FX levels, we anticipate that these tailwinds could turn into [Indiscernible] headwinds over the next few quarters. Operating expenses in the quarter were $13.7 million or 2.1% of revenue. This produced record operating income of $73.1 million or 10.9% of revenue. As I indicated in my introduction, a strong tieback and weaker U.S. dollar resulted in a foreign exchange loss of $3.9 million or $0.11 per share, primarily due to asset and liability revaluations at the end of the quarter. Thanks to our strong balance sheet, we continue to benefit from a higher interest rate environment. With net interest income of $2 million or approximately $0.05 per diluted share, which partially offset FX losses. Non-GAAP net income was $70 million or $1.90 per diluted share. On a GAAP basis, net income was $1.71 per diluted share. Effective tax rate was 1.7% in the second quarter and we continue to anticipate an effective tax rate in the low to mid-single-digits for the year. Turning to the balance sheet and cash flow statements. At the end of the second quarter, cash, cash equivalents, restricted cash and short-term investments were $527.6 million, up $27.7 million from the end of the first quarter. Operating cash flow was $44.5 million with CapEx of $13.4 million free cash flow was $31.1 million. We will continue to execute on our plan to return surplus cash to shareholders. Though buyback activity was low during the quarter, approximately $94.9 million remains in our share repurchase authorization. On an operational note, earlier in the third quarter, we made a decision to exit our business in the U.K. Unlike our new product introduction facilities at Fabrinet West and Fabrinet Israel, our U.K. Operation has not become a meaning program to volume manufacturing in Thailand. Since the U.K. facility also operates at a relatively small scale, serving mostly local customers, we estimate that the impact on non- GAAP financial results will be immaterial. We expect the ramp down to be substantially completed by the end of the fiscal year during, which we will help ensure a smooth transition for our customers. We expect to incur restructuring cost of approximately $3.5 million, which will be excluded from our non-GAAP results. Now I will turn to our guidance for the third quarter. We remain optimistic about the long-term demand trends across our business. And our ability to manage supply constraints as effectively as possible. At the same time, our general supply environment has improved, the availability of certain components worsened in Q2 impacting telecom revenue. From what we are currently seeing, we expect these constraints to be even tighter in Q3. Therefore, our guidance assumes a supply chain headwind of $30 million to $35 million, which is about $10 million to $15 million greater than what we saw in Q2. With this incremental supply constraints, and typical Q3 seasonality in mind, we anticipate revenue in the range of $640 million to $660 million. We anticipate non-GAAP net income to be in the range of $1.86 to $1.93 per diluted share. In summary, we had a strong second quarter performance with record revenue and margins. While the supply environment is gradually improving, a small number of components continue to constrain our ability to meet customer demand. Nevertheless, we remain confident in our ability to continue to execute value in Q3 and over the long-term. Thank you. [Operator Instructions] Our first question comes from the line of Samik Chatterjee with J.P. Morgan. Your line is open. Hi, everyone, thanks for taking the question. I have a couple maybe if we can start with the telecom and the supply constraints you're seeing there. Wondering if you can give us a bit more details about which kind of components, you're seeing sort of the more worsening constraints on because it seems like it's a bit counter to what investor expectations are at this point for a more broad or sort of easing of the supply chain. So definitely we would be curious about sort of where you're seeing these incremental constraints and is it more about not really buying from those sort of broker market or just sort of not the part not being available or the supplier not being able to ship to it? And I have a follow-up. Thank you. Yes. Hi, Samik. Yes, it's an unusual situation, I mean, overall, we're seeing the supply situation begin to improve in certain areas with certain suppliers, who have been, let's say, problematic historically for the last several quarters. But we've also seen some new suppliers pop up. And because of the majority of our business is telecom, it's about 75% telecom, 25% datacom. The shortages that we're seeing are in about the same proportion. The devices, the specific devices are components that we see in short supply. There's a support very specific products used in certain telecom transceivers where demand continues to be healthy. But we still have a couple of outlier components, so I know it's a bit of a mixed message. Overall, we see things improving and we especially see things improving as we said before in the second half of this year. But last quarter, we did have some in this quarter. Again, we continue to have some component charges that are specific to telecom. Okay. For my follow-up, maybe if you can spend a bit time on the datacom side, I understand you’re self-supply constraint there, but we've seen a lot more sort of pullback in the big customers and their CapEx, sort of, their overall spending plan. So when you think about sort of the current sort of pipeline there, are you seeing any softening on the pipeline outside of the supply constraints that you still sort of navigating when you sort of look three to six months out? Are you seeing any softening of the demand pipeline? So, I mean, there's some quick guide one quarter at a time, so we don't comment really on six month out in our guidance. But we haven't seen any particular softening, we're still primarily supply constrained on the datacom side. Obviously, we grew very nicely in the quarter and our datacom business remains quite strong. So we're primarily a supply constraint on the datacom side and our business there continues to grow nicely. We had some good strong results for 100 gig products, so 400 gig remains strong, again somewhat supply constrained, but the demand remains strong for across the product categories that we serve in the datacom side of the business. Thank you. Please standby for our next question. Our next question comes from the line of Alex Henderson with Needham & Company. Your line is open. Great, thanks. I'm definitely equally puzzled on the supply side, because we had expected it to improve, not erode here. There's clearly a semiconductor company or two from the United States that are cited frequently as the source of a lot of the consternation in the supply chain. Is it that typical source that is now improving? And we're seeing a shift to a different geography perhaps the COVID lockdowns or other issues shifting it to a different geography? Is that -- where’s the nexus of this particular supply chain located? It's really two-fold. Some of it is, again, we called out a slightly higher supply headwind number in Q3. I think we've called that $30 million, $35 million versus $20 million of about actual in Q2. Some of that is -- it's a combination of really two areas. One, is supply constraints that are COVID-related, I would say in China. So some of the suppliers who had gone through some lockdowns and whatnot in China we are seeing a slight -- not huge, but a slight headwind, due to component-related supply constraints coming out of China this quarter. And then secondly, we have a couple of -- some of the -- and again, I read, I don’t want to get into naming specific suppliers, but some of the component manufacturers who historically, certainly for the last several quarters have been problematic, have really improved and we aren't actually back to more normal lead times with many of the suppliers, who historically were problematic. But unfortunately, one or two new ones have popped up. And I think they'll go through the same cycle as the other ones, they’ll increase capacity, then improve output, and then get things improved, but we are seeing that supply headwind this quarter. So I understand Alex, it's kind of a confusing message. On the one hand, we have certain commodities where things have improved, things have stabilized and we're back to more normal lead times. But unfortunately, we have, as I say, some of these new components, suppliers who have popped up as problematic, coupled with a certain amount of supply headwind coming out of China, because of COVID. So if I'm looking at the guide for the upcoming quarter, could you give us any granularity on the assumptions between datacom and telecom sequential or year-over-year growth or sequentially any way you want to phrase it? Hi, Alex. We typically don't break this out in our guidance, but as you can see, we are calling out slight downward trends on quarter-on-quarter basis. So there has been this primarily supply related as we have discussed. So we will expect telecom to be moderating slightly and also datacom while have been very strong in the last quarter. It's going to probably moderate a slightly quarter-on-quarter basis. But both segments are continuing to be strong from demand perspective. Nevertheless, the incremental headwinds are mostly concentrated around these two segments. Overall demand side seems to be strong and robust, but our ability to feel that demand is really constrained around the material. So in both cases, I think we would expect a slight moderation or flat quarter-on-quarter in this two segments. The $30 million to $35 million is that all in the optical piece? And is it evenly split between the two categories? Yes, it's primarily around optical communication. Our automotive and laser segment have been somewhat stable in the last two quarters. There has been significant improvement on the supply side in those segments. The 30% to 35% is mostly around optical communication and split around proportion of the range, probably 75% is telecom, about 25% in the datacom-related. Thank you. Please stand by for our next question. Our next question comes from the line of Fahad Najam with Loop Capital. Your line is open. Hey, thanks for taking my question. So for the needling or specifics on the headwind component. If I look at your sub-100 gig revenue, it's growing pretty nicely in the quarter even 100 gig. So is the 75% of the $30 million headwind mostly of 400 gig and above speed? I don't know if it was my end, but I couldn't make out what you said, Csaba. Can you please repeat again? I'm sorry, so yes, the impact was in last quarter and this quarter mostly in our 400 gig and above product segments in the higher data rate segments. So both in Q2 and Q3, the expected headwinds are mostly going to be in that area, in that space. Again, these are very specific components impacting a couple of handful of products in that range. All right. My next question was, I know in the past you've said that 400 gig ZR was at the high-single-digit percent of your revenue. One, does this component headwind impact 400 ZR modules versus line card or systems? And second is, can you also update us on the 400 ZR revenue [Indiscernible] So Fahad, yes, 400 ZR, we're quite happy with the progress we've made there. We think we're a leader in our industry in supporting 400 ZR. So we're very happy with, let's say, our penetration rate in 400 ZR and our ability to grow our business with our customers in 400 ZR. Yes, the shortages we talked about, as Csaba said, they break out approximately. So first of all, let's say the automotive and the laser business, I don't want to say the shortages are behind us, because it's too early to take a victory, but certainly they've been difficult much more predictable and the improvements we made especially in automotive in the prior quarter seems to have continued in Q3. So the shortages we've called out in Q3 are primarily related to optical communications. And that breaks out 75% telecom, approximately 25% datacom. 400 ZR depending on the application and a lot of our 400 ZR business is categorized in our telecom number. So yes, 400 ZR would be impacted. But again, we wouldn't be quite -- we wouldn't be prepared to break out the split between 400 ZR and other types of products that we make. But again for the DCI, Data Center Interconnect products would be categorized in our telecom business. So they would be included in that 75% number. Got it. If I could also ask you, you had previously mentioned that you had one prominent customer for 400 gig ZR, I think you most recently said it was true. Any color on how many customers are now ramping 400 gig ZR volume? We have more than two. We have two who are, I would say, ramping nicely. We have another couple of customers, who are still in the earlier stages, new product introductions stages. But we have more than more than two customers, I would say, more than two, less than five. But it’s -- we feel we have a very good price of selection of customers there and we're very happy with the growth in that business. Thank you. Please standby for our next question. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Your line is open. Hi, good afternoon and a nice quarter. A question on your, kind of, non-speed rated portion of your business, which is at least the way I'm looking at the numbers up pretty nicely, both sequentially and year-over-year, something like 45% year-over-year. And I think historically, we might associate that with kind of optical telecom, rhodium and amplifiers. But currently, I think you've got something else to add to the mix in terms of the PON business. So that's a long way for me of looking for an update on the recent relationship with the DZS to what extent was that a major contributor to that growth in non-speed rated business or sub-100 gig however you want to call it? And what is your current assessment there in terms of getting up to, kind of, an initial full run rate? And has your perception of the opportunity at DZS changed at all over the last little while? Thanks. So Tim, I'll let Csaba go through the specifics in a moment. But overall, in relation to DZS, we're very happy with the relationship, very happy with the pace at which the business is moving and we're just looking forward to doing a very good job for these guests. They're a great company and we're very happy to be participating in their supply chain. Certainly, in terms of transfer activity, we're nicely along and we've completed the bulk of the transfers, I would say, and we're really looking to start ramping to volume now. So we're probably a little bit ahead of even though the total revenue, let's say last quarter, was not so huge from DZS, but we're happy with the progress we're making on the transfers and really looking forward to ramping that over the next few quarters. As you rightly point out, the non-speed rated business, it's an attractive mix of several type of products and maybe I'll let Csaba talk to the details of that. Hi, Tim. This is Csaba. Again, on the non-speed rated business, we don't break it out. So it is a combination of lower than 100 gig products and non-speed data rate Amplifier ROADM type of business. I mean, also have some other category there. So what we have seen, particularly on year-on-year basis, I think, is mostly a supply related situation have improved significantly, if you look at year-on-year basis. So the growth is really in the amplifier space that I would say if I look back a year ago probably that area was clearly [Technical Difficulty] year ago. And since then, I think the supply situation has significantly improved in that space. So again, the growth is indeed coming from -- on the ROADM and Amplifier space. And the other category as a below sub-100 products remains stable. That's pretty much the color I can offer in this area. Well, if I can follow-up on that briefly since you kind of pointed to the year-on-year compare as being driven by ROADM and Amplifiers. Does that imply that there's some other driver of the sequential compare? I'll leave it there. Thanks. I think it's the -- on the -- what we see is really the supply environment have been again, I think it's overall, the team has been over the last year. This business has been probably a harder hit in the early part of the last couple of quarters. So the situation has been somewhat improving. But I wouldn't want to speak on behalf of our customers how this business breaks out on a sequential basis. We do see the pipeline change improving and the demand seems to be robust again both sequentially and year-on-year basis? Thank you. Please standby for our next question. We have a follow-up from the line of Fahad Najam. Your line is open. Thanks for taking my question again. I wanted to clarify because a number of investors couldn't understand the response to my earlier question. So more explicitly the telecom component shortages that you're seeing on the 400 gig, are they more on the ZR side versus on ZR can you clarify? No, I think, Fahad, what I said was we're not going to break that out any further than we have already. We're not going to specify whether it's ZR or other products. It's in 70 -- approximately of the $30 million to $35 million we called out approximately 75% of that is telecom products. And I was just pointing out that telecom includes obviously pure telecom products, but also our DCI or data center interconnect products, which would include 400 ZR. Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Seamus for closing remarks. Thank you. Thank you for joining our call today. We delivered strong second quarter results. As we look ahead, we remain confident that we can continue to perform well based on strong broad-based demand and our demonstrated ability to execute through all kinds of market conditions. We look forward to speaking with you again soon and seeing those of you who will be attending the Overseas Conference in San Diego next month. Goodbye.

EarningCall_496

Good morning, ladies and gentlemen, and welcome to Genworth Financial's Fourth Quarter 2022 Earnings Conference Call. My name is Jim, and I will be your coordinator today. [Operator Instructions]. Thank you, operator. Good morning, and welcome to Genworth's Fourth Quarter 2022 Earnings Call. Today, you will hear from our President and Chief Executive Officer, Tom McInerney; followed by Dan Sheehan, our Chief Financial Officer and Chief Investment Officer. The slide presentation that accompanies this call is available on the Investor Relations section of the Genworth website, investor.genworth.com. Our earnings release and financial supplement can also be found there, and we encourage you to review these materials. Following our prepared remarks, we will open the call up for a question-and-answer period. In addition to our speakers, Brian Haendiges, President of our U.S. Life Insurance segment; and Jerome Upton, Deputy Chief Financial Officer and Controller, will also be available to take your questions. During the call this morning, we may make various forward-looking statements. Our actual results may differ materially from such statements. We advise you to read the cautionary notes regarding forward-looking statements in our earnings release and related presentation as well as the risk factors of our most recent annual report on Form 10-K as filed with the SEC. In our financial supplement, earnings release and investor materials, non-GAAP measures have been reconciled to GAAP where required in accordance with the SEC rules. Also, references to statutory results are estimates due to the timing of the filing of the statutory statements. Thank you very much, Sarah. Good morning, everyone, and thank you for joining our fourth quarter earnings call. Before I review our strong fourth quarter and full year 2022 results, I want to acknowledge our outstanding progress against our strategic priorities throughout the year. I'm incredibly proud of these accomplishments particularly achieving our debt target, meeting the conditions to remove the government-sponsored enterprises or GSE restrictions that were placed on an act, returning capital to shareholders for the first time in over 13 years and receiving multiple ratings upgrades. These achievements have improved Genworth's financial strength and allowed us to enter 2023 with a greater level of flexibility to invest in growth and continue returning capital to our shareholders. To speak to each of these achievements a bit further. In May of last year, the Genworth Board authorized a new share repurchase program of up to $350 million. This is an important milestone reflecting our improved financial position, the Board's confidence in our strategy and our future and our commitment to our strategic priorities. Since the authorization, we've repurchased $64 million worth of outstanding shares at an average price of less than $4 per share. We were careful to restrict the level of repurchases in 2022 until we reduce the debt to $900 million and satisfy the conditions to remove the GSE capital restrictions. Having now accomplished both objectives, we plan to pick up the pace of share repurchases subject to market conditions and general share price. Throughout 2022, the holding company received credit ratings upgrades from each of the 3 major rating agencies, reflecting a substantial improvement in our credit profile. In September, Genworth achieved a critical milestone when we paid off our remaining senior notes due in 2024, marking the achievement of our long-term holding company debt target of $1 billion or less. Genworth ended 2022 with holding company debt under $900 million, reflecting over $3 billion of debt retired since 2013. We believe this is a sustainable level of debt for the company to carry going forward with manageable interest expense obligations of approximately $60 million per year. However, we're open to further debt reduction if we have extra cash and attractive terms for further debt retirement. By reaching our holding company debt target, we were positioned from a capital perspective to meet the financial conditions for removing restrictions placed on an act by the GSEs. We believe we fully met Genworth's holding company financial conditions in both the third and fourth quarters of 2022, which should result in GSE's lifting restrictions on an act in the first quarter of this year. We are working with the GSEs and expect confirmation shortly. This is an important positive development for Enact and for Genworth as Enact will no longer be subject to more stringent capital requirements than its peers once these restrictions are removed, putting Enact on a more level playing field with competitors. The successful execution of these 4 actions is a testament to our commitment to driving value for our shareholders, and we were rewarded with strong share price performance over 2022 despite the volatile macroeconomic environment. Turning to financial results. Genworth delivered excellent results in 2022 and finished the year strong. For the full year, net income was $609 million, and adjusted operating income was $633 million or $1.24 per diluted share, well above market expectations. These outstanding results were led by Enact, which had a very strong operating performance and ended the year with record insurance in force. In the fourth quarter, amidst the ongoing challenging backdrop, Genworth generated excellent results. Net income was $175 million and adjusted operating income was $167 million or $0.33 per diluted share. Since Enact's IPO, Genworth has received approximately $370 million in capital from Enact, including $168 million in the fourth quarter. Cash flows from Enact have enabled us to achieve the key milestones, I mentioned before and will continue to benefit shareholders by fueling our share repurchase program and long-term growth strategy. While our fourth quarter statutory processes are still underway, we expect U.S. Life's statutory after-tax net income for the full year to be approximately $275 million, reflecting continued positive results for LTC, including pretax statutory income for the LTC legacy business of approximately $255 million in 2022. We expect LISC statutory capital and surplus to increase from $2.9 billion at the end of '21 to approximately $3 billion at year-end 2022. GLIC's estimated RBC ratio at year-end 2022 is currently projected to be approximately 290% in line with the prior year RBC ratio of 289%. Our final statutory results will be available with our year-end statutory filings later this month. Turning to our legacy LTC portfolio. We continued the strong momentum in our multiyear rate action plan or MYRAP, the most effective tool we have to bring our legacy LTC portfolio to economic breakeven on a go-forward basis. We achieved a total of $549 million in annual premium rate increase approvals in 2022. Of that amount, we are waiting the final disposition of a small number of the approvals as we work through implementation mechanics. With the addition of these 2022 approvals, our cumulative progress is approximately $23.5 billion in approvals on a net present value basis since 2012. We also continue to make progress against our strategy to drive future growth through our new, less capital-intensive senior care services business, which will launch under the CareScout brand. CareScout's leadership team is now fully in place and executing on a multiphased go-to-market strategy that is expected to ultimately include 4 new senior care-focused business lines. The first area of focus is the fee-based services business, which will provide care navigation support and advice to existing LTC policyholders and new customers. We expect to launch a pilot in the first half of 2023 in the Southwest with Genworth's existing LTC policyholders. The services business will include a digital platform where those in need of long-term care can search for and compare local care options bolstered by a preferred network of quality senior care providers. We are in the process of vetting and recruiting network partners in order to offer attractive pricing on high-quality care that will benefit both new and existing customers. The services business is designed to reduce claim costs on our legacy LTC book as well as drive new revenue for Genworth. Second, we are investing in CareScout's existing clinical assessments business where we see attractive opportunities for growth. CareScout has a network of clinicians nationwide. And as a leader in conducting clinical assessments, for other insurance companies, health care organizations and consumers. The third area of focus in our growth strategy is transforming the insurance and other product options available to fund long-term care. This is a key part of developing a truly comprehensive approach to addressing the complexities of the aging journey. Offering new and more innovative insurance and other funding options for long-term care is dependent on achieving an A- or better rating. We are still working on options to reduce the capital required to fund these products through innovative reinsurance arrangements. And as a result, implementation of these new LTC funding progress -- products will likely occur in 2024 or later. Finally, as we've said in the past, we see attractive longer-term growth opportunities to offer senior care services and funding solutions in international markets. After building the business successfully in the U.S., we will look to eventually capitalize on opportunities in other markets with similar aging demographic challenges. The current timing for CareScout's international expansion is planned for 2025 or later. We are investing prudently to scale the CareScout services business and leveraging our differentiated capabilities and experience, including 40-plus years of experience and expertise in the LTC insurance business, data on 330,000 LTC claims paid to date to legacy LTC policyholders, existing relationships with a network of care assessment professionals, who are mostly registered nurses and existing relationships with providers and caregivers throughout the U.S. We invested approximately $20 million in CareScout in 2022 to develop our care services business and clinical assessment capabilities, and we intend to make an additional investment of approximately $30 million in 2023. As we move forward, Genworth will maintain a disciplined capital allocation strategy, balancing investments in growth with share repurchases. Before I close, I want to acknowledge Dan Sheehan and his extraordinary contributions and accomplishments at both GE Capital and Genworth over the last 25 years. Dan has been an excellent investment leader for Genworth for decades. Under his leadership, the investment group has delivered outstanding results for many years. Over the last 2 years, as CFO, he has helped lead Genworth through a very successful transition. Above all, Dan has been a good friend in College of mine since I joined Genworth and I wish him all the best. Thank you, Tom, and good morning, everyone. Before I begin my comments on the quarter, I'd like to thank Tom and the entire Genworth team for their partnership. I've had a really good run here over my 25 years with GE and Genworth, and I'm incredibly grateful for the opportunities I've had to work with so many talented people. I'm proud of my contributions to strengthening our financial foundation, and I'm excited to see what the team builds on that foundation. Now for the quarter. Genworth delivered another strong quarter, capping off an excellent year for the company. We further strengthened our balance sheet while investing in growth and returning capital to shareholders. We ended the year with liquidity above our cash target and lower leverage, reflecting our significant debt reduction throughout the year. As a result of our successful execution, we believe we have satisfied the financial conditions for removing the PMIERs capital restrictions placed on Enact by the GSEs, which in turn should lift these restrictions on Enact in the first quarter of 2023. As Tom mentioned, this will be a very positive development for Enact and Genworth as its majority owner since Enact will no longer be subject to more stringent capital requirements than its peers. Following Tom's high-level overview of full year and fourth quarter results, I will review our segment operating performance, including the results of our annual U.S. life insurance assumption review as well as our holding company liquidity position. Turning to Slide 7. Enact's insurance in force increased 10% year-over-year to a record $248 billion, driven by new insurance written and higher persistency. Primary new insurance written was down versus the prior year, a continuation of the trend we've seen has increased interest rates have resulted in lower mortgage originations. As Enact mentioned on its earnings call this morning, while elevated mortgage rates and decreased affordability have reduced demand, total housing inventory is below long-term levels and demand remains solid. The higher interest rate environment has resulted in higher persistency and is a meaningful benefit to Enact's profitability. The overall credit risk profile of Enact's new insurance written also remains strong. Moving to Slide 8. Enact had a favorable $42 million net pretax reserve release, which drove a loss ratio of 8%. The reserve release was primarily driven by favorable cure performance on COVID-19-related delinquencies, which was partially offset by reserve strengthening on 2022 new delinquencies and a prudent response to an uncertain economic outlook. The estimated PMIER sufficiency ratio of 165% or approximately $2.1 billion above published requirements remain strong. Sufficiency decreased sequentially, driven by the operating company's dividend distribution to Enact holdings. In December, Genworth received a special dividend from Enact of $148 million, which was the major driver of Genworth's enhanced liquidity profile as we ended the year. Further, Enact's quarterly dividend payment of $0.14 per share generated proceeds of $19 million to Genworth. Going forward, returns of capital from Enact will continue to enable Genworth to generate excess cash. I will now cover our U.S. Life Insurance segment results starting on Slide 9. The segment reported adjusted operating income of $38 million, reflecting adjusted operating income of $24 million from LTC and $16 million from fixed annuities, partially offset by an adjusted operating loss of $2 million in life insurance. In our LTC insurance business, adjusted operating income was $24 million compared to $25 million in the prior quarter and $119 million in the prior year. Results reflected lower terminations versus the prior year as well as lower investment income versus the prior periods and continued growth in new claims. Earnings also benefited from higher in-force rate actions versus the prior quarter due to favorable policyholder elections related to the legal settlements on PCS I and PCS II policies. The settlement impacts were smaller, however, in the current quarter than the settlement impacts in the fourth quarter of 2021. Moving to Slide 10. The elevated claim mortality, you saw with the onset of the pandemic was lower in the current quarter versus last year, which is consistent with COVID-19 mortality trends in our life insurance business and nationwide. The remaining balance on our previously established COVID-19 mortality reserve is $90 million. As shown on the right-hand side of Slide 10, we saw a higher level of new active claims in 2022 compared to 2021, which indicates new claim incidents is trending back to pre-COVID-19 levels. New claim severity continues to increase as expected, given the aging of the block and shift in our claims mix to higher cost facility-based care. As a reminder, our large Choice I and Choice II policy blocks, which are beginning to enter their claim years, have higher daily benefit amounts and inflation coverage than the older LTC blocks. I would now like to discuss the results of our annual review of key actuarial assumptions in long-term care insurance, which is summarized on Slide 11. I will note that consistent with our practice last year, the COVID-19 pandemic impact to the businesses were generally not incorporated when reviewing our long-term assumptions since we don't think the pandemic impacts are indicative of future trends or long-term loss performance. In our assumption review of LTC claim reserves or disabled life reserves, we saw that in the aggregate, the disabled life reserve assumptions are holding up well, as they have for the last several years. Our review this year resulted in minimal change to the disabled life reserve balance. Part of the LTC active life margin testing process for policies not yet on claim, we reviewed our long-term assumptions relative to experience as is our annual practice. Our margins remain positive within the $500 million to $1 billion range consistent with last year. Therefore, there was no need to increase reserves and no P&L impact resulting from the assumption review. We made a few refinements that had relatively minor impacts, including reducing the lapse assumptions in light of favorable experience from LTC settlement elections and benefit reductions and increasing our interest rate assumptions. We also evaluated our assumptions regarding expectations of future premium rate increase approvals and benefit reductions. We have not yet changed the rate increased targets for Genworth's multiyear rate action plan from last year. However, based on favorable recent rate increase approval experience, regulatory support and settlement results, we have updated our assumption for future approvals and benefit reductions, resulting in additional future value. This assumption update demonstrates our confidence and expectation of continued success in achieving actuarially justified LTC rate increases. We now project the current targeted value of LTC premium increases and benefit reductions on a net present value basis to be approximately $30.3 billion in order to achieve economic breakeven. Since 2012, we've achieved approximately $23.5 billion in rate actions or over 75% of the rate increase and benefit reductions contemplated in our multiyear rate action plan. This is important progress toward our goal of addressing the risk in our legacy LTC business and reaching economic breakeven, and I'm incredibly proud of our team in this progress. Slides 12 through 15 further highlight the significant progress, which continued into 2022. During the full year of 2022, we received LTC in-force rate action approvals impacting $1.1 billion of annualized in-force premiums with a weighted average increase of 48%, getting us to $549 million of annual premium rate increase approvals in 2022. Our continued progress on our multiyear rate action plan and stabilization of the LTC block has also been in part through the LTC legal settlements, which have been beneficial to both our policyholders and to Genworth. For policyholders, many have elected to reduce their benefits and, in turn, reduce or eliminate their premiums. And for Genworth that allows us to release reserves and reduce our tail risk on these policies. The implementation of the second LTC legal settlement related to our PCS I and II policies began on August 1 and covers approximately 15% of our LTC policyholders. While we did see a favorable financial impact in the fourth quarter related to the settlement of $21 million before profits followed by losses, the financial impacts were not as large as they were in the prior year from the first settlement on our Choice I policies, which applied to approximately 20% of our LTC policyholders given the smaller policy block. The third LTC legal settlement related to our Choice II policies is still pending. The final court approval hearing began in November, and we're awaiting the judge's final ruling. This settlement represents 35% of our LTC block as Choice II is our largest LTC block of business. The timing for the implementation of the Choice II settlement will depend on when the court issues final approval of the settlement and whether there is any appeal of that final approval. We would expect to begin implementation within a few months of final approval, which is expected shortly for the favorable disposition of any appeal. If there is an appeal, that process is estimated to take until mid-2024 to play out to conclusion. Turning to Slide 16 and 17 in our life insurance products. We reported an adjusted operating loss of $2 million compared to operating losses of $33 million in the prior quarter and $98 million in the prior year. The key driver of the year-over-year improvement was an after-tax benefit from the Universal Life annual assumption update of $34 million relative to an unfavorable $70 million charge in the prior year. The $34 million assumption update was primarily related to interest rates, which rose throughout the year. The life insurance products also experienced favorable mortality year-over-year as pandemic impact subsided. COVID-19 claims accounted for only $3 million of the loss, which was lower than the prior year's $27 million of COVID-19 claims. In the current quarter, total term deferred acquisition cost or DAC amortization was $20 million after tax, which was higher than the prior year, primarily from 20-year term lapses. Results in the quarter also benefited from not having a DAC recoverability charge in our universal life insurance products due to the favorable assumption update. Regarding fixed annuities, adjusted operating income was $16 million compared to $19 million in the prior quarter and $20 million in the prior year, reflecting lower net spreads from bond calls, commercial mortgage loan prepayments and continued block runoff and a smaller benefit from interest rates, which did not increase as much as in the prior quarter. Our runoff segment comprised mainly of variable annuity products reported an adjusted operating income of $17 million for the current quarter compared to $9 million in the prior quarter and $16 million in the prior year. Current quarter results were impacted by positive equity market performance. As indicated on Slide 18, we're estimating the consolidated risk-based capital ratio for Genworth Life Insurance Company, or GLIC, to be 290% at the end of December, slightly up from the third quarter. Capital and surplus as of December 31 is estimated at $3 billion compared to $2.9 billion as of September 30 and December 31, 2021. We're pleased with this result given the volatility we saw in the equity markets this year, impacting our variable annuity block. Estimated combined statutory net income for life companies in 2022 was $275 million compared to $666 million in 2021. The current year estimate reflects lower earnings in LTC driven by new claims growth and lower earnings from in-force rate actions again, largely due to legal settlement impacts in the current year that are lower than last year's, partially offset by the improved mortality in the Life products as the pandemic impacts subside. Current year results also include an unfavorable impact of variable annuity products from equity market performance, offset by a net favorable impact from assumption updates and cash flow testing. Before I move on from our U.S. Life Insurance results, I wanted to provide an update on our adoption of the new GAAP accounting standard, long duration targeted improvements or LDTI, impacting our life insurance companies. As noted on Slides 19 and 20, we adopted this new standard on January 1, 2023, and we're required to represent certain financial information beginning on January 1, 2021, otherwise known as the transition date. This new standard does not impact Enact. And as Tom and I have mentioned before, it will not impact our cash flows, economic value or statutory accounting and related capital levels for our life insurance companies. In the third quarter, we disclosed a preliminary estimate for the impact to accumulated other comprehensive income or AOCI from LTC. Today, we're providing an update on the total impact to our U.S. GAAP equity position from the adoption of LDTI as of the January 1, 2021 transition date. As of that date, Genworth's U.S. GAAP equity of $15.3 billion will decrease by $13.7 billion after tax. As we've discussed in previous quarters, the most significant impact to our equity is from AOCI, which will decrease by $11.5 billion as of the transition date. The decrease is primarily due to the requirement to remeasure our insurance liabilities using a single A bond rate. The discount rate impact is mostly driven by LTC given the very long duration of the product. The single A bond rate as of the January 1, 2021 transition date was materially lower than our discount rate of over 5% under the existing guidance. It is worth pointing out that with the adoption of LDTI, our insurance liabilities, especially for LTC, will be more sensitive to movements in interest rates. For example, if the transition date adjustment use current rates and held everything else constant, the $11.5 billion reduction in AOCI would have more than reversed and the change in AOCI would have been positive. This illustrates the volatility in our U.S. GAAP reserves and AOCI that will likely occur in future periods as the discount rate fluctuates, which reinforces why we've encouraged investors to also review our statutory disclosures. The remaining decrease to stockholders' equity as of the transition date relates to a reduction to retained earnings of $2.2 billion, primarily from LTC. This impact is largely related to a more granular assessment of LTC policy cohorts defined on the basis of original contract issue date using best estimate assumptions. With this new accounting guidance, we do expect more volatility in our net income. Going forward, we'll see changes in the fair value of market risk benefits related to changes in equity market performance and interest rates impact net income for our annuity products. We could also see increased volatility from changes in our assumptions as cash flow assumptions will be unlocked and updated at least annually in the fourth quarter and from fluctuations and experience. With the adoption of LDTI, we will be representing results for full year 2021 and 2022 under the new guidance, and we expect net income to be lower in these periods, primarily related to LTC. We will provide additional details on the LDTI adoption in our 2022 Form 10-K filed later this month. Turning to the holding company on Slide 21. We ended the quarter with $307 million of cash and liquid assets above our cash target of 2x annual debt service, we received $168 million of capital from Enact plus $37 million in net intercompany tax payments in the quarter. For the full year 2022, Enact returned $206 million to Genworth and will continue to be a key source of cash flows moving forward. Given our significant debt reduction in 2022, including an additional $13 million be purchased opportunistically in the fourth quarter, our holding company strength has continued to improve over time. Annual debt service is expected to be approximately $60 million for 2023, and our debt outstanding is long dated. In 2022, net intercompany tax payments to the holding company were $223 million. The parent holding company has approximately $200 million of remaining deferred tax assets, mainly foreign tax credits that it expects to realize in the near future. The utilization of these tax assets is dependent on the taxable income generated by our subsidiaries. And once exhausted, we anticipate becoming a federal taxpayer. In the fourth quarter, we also completed $30 million of share repurchases for an average price of $4.10 per share. Through December 31, we executed a total of $64 million of our authorized $350 million share repurchase program. As we think about our capital allocation strategy going forward, our first priority is investing in growth by bringing care navigation support and other senior care services to market under the CareScout brand. There is a large addressable market for these services in the U.S., and we're excited to leverage Genworth's unique strengths to capitalize on the opportunities we see in the sector. As Tom mentioned, we'll invest approximately $30 million into launching fee-based, capital-light service offerings in 2023. Our second priority is to return capital to shareholders through opportunistic share repurchases. We expect to generate excess cash through our ownership of Enact and are well positioned to execute on these priorities given our strong liquidity position, healthy balance sheet and sustainable debt level. We had an excellent year in 2022 and are confident in Genworth's ability to continue to create value for shareholders. Now let's open the line up for questions. Looks like you talk about repurchase a modest amount of the 2034 senior unsecured notes. And I'm wondering if that was simply opportunistic given the opportunity to retire at a discount? Or whether you have intentions to chip away at that balance over time. So now that you're within that your $1 billion total debt target, just curious about your appetite for continued debt reduction and whether that's the senior, the junior or what have you. Just curious where your heads are at with -- on that subject. Yes. Thanks, Josh. Great question. So just a reminder, in terms of where our priority would be if we were to buy back debt, there are covenants that restrict us from buying the 20 -- well, the 2066s -- so our focus would be on the 2034s up and until we get that below $100 million outstanding. But in terms of how we look at debt purchases today, I think our priority now that we're sitting on a fair amount of excess cash remains focused on the share buyback. We've got the debt down below now the level that we've set out a number of years ago. And so we're quite satisfied with the fact that we've got no debt coming due for another decade. But like we were in this quarter, we will look opportunistically with so little debt trading at this -- or so little debt left at this point. There is limited trading. So what I would expect would be that there may be opportunities as we move forward, but they will be similar to the fourth quarter at this point. So as Dan noted, we didn't make any changes to the assumptions or to our expected approvals in the future with our -- MYRAP program, our future increase program. We do look at all our assumptions in aggregate, as I think I mentioned last time and they look like they're holding up in aggregate. So we didn't see a need for a change. One of the things we looked at, of course, was inflation because it made headlines. And -- we did not see an indication that our benefit utilization has changed dramatically. If it does in the future, I think there's a natural offset over the long term with interest rates and that will help us out. Yes. Can -- do you know -- can you give us any sort of metric around kind of what your claim utilization assumption is on the aggregate book, I guess, as a percentage of max daily benefit or something along those lines? Well, maybe I'll let Brian do the details if he knows. But I would say, Ryan, that -- if you go back to last year, so we did the review in the fourth quarter of 2021, we did make a number of assumption changes that increase the amount that -- of premium increases that we needed to get through the -- MYRAP, we increased the MYRAP amount by around $4 billion, and a significant percentage of that was we changed the benefit utilization assumptions last year. And some view of future costs were part of that. So we did do I think, a good job last year. And as a result of what we did, we didn't change those. But Brian, if you want to comment on Ryan's question on sort of how we look at benefit utilization from a more granular perspective on the percentage of where we are. Obviously, it varies by the different product forms. Yes. I don't have the details on that, Ryan, because it's different by nursing home, assisted living facility or home care. But what I will say is we've been tracking how we're doing against the long-term objective of reaching economic breakeven. And we've been looking for a good durable measure of that that's independent of where we are with assumptions in any given year. And if you look back to the end of 2020, we were about 64% of the way there using the assumptions we had at the time. At the end of 2021, we were about 69% of the way done. And at the end of 2022, we're about 78% of the way done. So we're kind of closing in on that end game where we're at or near economic breakeven. And so I think, yes, there are individual components, that if you look at the details and only look at that component, they may move around a little bit. But when you look at it in aggregate and how they interact with each other, we've been making constant progress over time. Yes. I would -- lastly, I would say, Ryan, as both Dan and I talked about today, we had an outstanding year of -- in LTC premium annual approvals this year, $549 million. That was a very strong year, a record year for us. We've been averaging more over time in the $300 million, $350 million range. Last year was a record at a little over $400 million. Obviously, the $549 million is a significant addition on top of that. As I mentioned, I think, Dan, we -- there are -- in counting that, there are -- we haven't finished in all of those cases. As you know, there's an electronic system that is the ultimate filing. And so we do have some mechanics that we have to do on those. But its a very strong year. And as a big part of the reason that you see the percentage accomplished against the total we need being between 75% and 80% now is because of the very strong increases we've received from regulators in the last couple of years. And I would comment, there are regulators on the call that listen to this. And as you can imagine, Ryan, it's very challenging to ask for increases and continue to as increases on some of the older product forms. You can see this on Slide 14, we're up to over 400% cumulative increases, and that's over a series of increases. So I would say we're feeling very good about beginning to get near the end of what we had needed to do to accomplish, and we're not there yet. And we'll likely make some assumption changes going forward. That seems to be inedible as more claims come in. But we just feel very good about where we are. And I think the regulators are encouraged. I would say, 10 years ago, there were some regulators who thought, well, why bother because Genworth has so many challenges. But -- and credit to all of them, and I want to thank them because I think they really have stepped up. It's hard to grant these large increases. This is probably more premium increases done in LTC than any other industry. And I think they've -- that's been very helpful for us. It's the key way we manage the legacy book. So we feel just very good about where we are. I guess I'll ask 1 more. Can I just -- I had 1 more question on long-term care. So I believe last year, you had a $28.7 billion cumulative premium rate increased assumption in LTC and now it's $30.3 billion, but the active life reserve margin remained unchanged. So it seems like there must have been some other offset. Can you help walk through that? Yes. I think what happens is, so we did make some minor refinements and assumptions. As I said, we didn't make any that were big enough to change the request going forward. But when we make those changes, sometimes they have a positive effect in terms of the value that's either already been achieved or the value that will be achieved over time. And so one of those assumptions was because we've seen improved behavior from regulators that, that's likely to continue. And so that's had a positive impact. And ladies and gentlemen, I will now turn the call back over to Mr. McInerney for his additional or closing comments. Thank you very much, Jim, and thank you to all of you that joined the call today. We really appreciate it. In closing, we're very proud of Genworth's financial performance and the accomplishment of all the strategic objectives we've reviewed today. And we're pleased to have entered 2023 with greater financial flexibility. We are well positioned to continue to return capital to shareholders while investing in growth in our CareScout set of businesses. I would like to thank Dan again for his outstanding contributions to Genworth and to also recognize our incoming CFO and CIO, Jerome Upton and Kelly Saltzgaber. They were key deputies to Dan and have been key leaders that enabled us to successfully transform Genworth and achieve our financial investment objectives. I'm highly confident that they will continue to build on the great progress Genworth has made under Dan's leadership. Thank you for your questions, your interest and your support. And with that, I'll turn things back over to Jim to close the call. Thank you, sir. Ladies and gentlemen, this does conclude Genworth Financial's fourth quarter conference call. Thank you for your participation. At this time, the call will end.

EarningCall_497

Good morning, and welcome to Skyline Champion Corporation's Third Quarter Fiscal 2023 Earnings Call. The company issued an earnings press release yesterday after close. I would like to remind everybody that yesterday's press release and statements made during this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the company's expectations and projections. Such risks and uncertainties include factors set forth in the earnings release and in the company's filings with the Securities and Exchange Commission. Additionally, during today's call, the company will discuss non-GAAP measures, which we believe can be useful in evaluating its commission -- its performance. A reconciliation of these measures can be found in the earnings release. I would now like to turn the call over to Mark Yost, Skyline Champion's President and Chief Executive Officer. Please go ahead. Thank you for joining our earnings call and good morning, everyone. I'm pleased to be joined on this call by Laurie Hough, EVP and CFO. Today, I will briefly talk about our third quarter highlights and then provide an update on activity so far in our fourth quarter and the year ahead. I'm pleased to report another solid quarter as we delivered year-over-year growth in sales and profitability despite our strong performance in the prior year period. During the third quarter, we grew net sales by 9% and EBITDA by 13%, expanding margins by 60 basis points. Margins began to normalize now that the impact of FEMA unit sales have been fully realized and our product mix began to shift to achieve a more affordable monthly payment for our customers. We remain steadfast on our key areas of focus, enhancing the customer experience, streamlining our product offerings and transforming the way homes are built and bought. Over the past few quarters, we have seen significant progress in normalizing our backlog because of stronger production capabilities, dealer destocking inventories and easing of supply chain challenges. The backlog at the end of the quarter was down $282 million to $532 million or 35% compared to the September quarter. Lead times improved during the quarter to 13 weeks compared to 19 weeks at the end of September. Normalizing backlogs to pre-pandemic levels of 4 to 12 weeks helps the homebuyer lock in both pricing and financing and also -- benefits our direct sales channels to better meet the needs of their customers. We saw strong year-over-year growth in shipments during the quarter to our community REITs and builder developer channels. Additionally, orders from communities and builders were healthy as backlogs of both of those channels grew sequentially from the second quarter levels. While retailer walk-in traffic is down year-over-year, digital leads are driving good credit quality customers with higher closing rates. As a result, we are seeing year-over-year increases in the number of home deposits at our captive retail operations and our financial partners are seeing an increase in loan applications. We have also seen increased interest in our homes from our future growth channels. We attended the International Builders' Show in Las Vegas last week, where builders and manufacturer to rent customers saw the advantages, our 2 Genesis model homes could give them. In total, we delivered 6,022 homes compared to 6,168 homes in the prior year, a decline of roughly 2.5%. Production volumes were down slightly during the quarter as retailers continue to destock their inventory levels in response to higher carrying costs and rightsizing of their floor plan credit limits. Sequentially, our decline in production reflects the completion of the FEMA units in the prior quarter and the normal holiday shutdowns at the end of the third quarter. Order cancellations have subsided and quoting activity at our manufacturing operations, are trending up in the first part of our fiscal fourth quarter. That said, we expect the retail inventory destocking to continue through the end of March. Demand varies widely by geography with lower orders and backlogs in the South Central regions of the U.S. In these areas, our plants have lowered production rates for the short-term while retaining talented team members for the spring selling season. Consistent with our last earnings call, we anticipate a sequential seasonal decline in the fourth quarter revenue, which we estimate in the high single-digits, putting our second half top line above where we expected and anticipated. In the near term, we continue to focus on streamlining our production as we have seen significant benefits from these efforts. In early January, we started production at 1 of our idled manufacturing facilities in North Carolina. Additionally, we continue to prepare and open our R&D plant in Decatur, Indiana and our Bartow, Florida plant to support the growing builder developer demand, and additional short and long-term housing needs from the impacts of Hurricane Ian. We anticipate that the ramping of these plants will impact margins over the next few quarters as we bring, very needed affordable housing to our customers. As we look forward, home buyers are facing higher interest rates and inflation. As a result, we are seeing traditional site-built homebuyers moving into our more value-oriented factory-built home solutions. Our confidence in the long-term growth potential is further strengthened by the growing upside from the build-to-rent channel, expanded penetration into the traditional REIT channel and the growing interest from midsized builder developers. While these growth drivers will take time to mature, we are excited by the progress and we continue to make and are encouraged by the longer-term impact, the results and the impact to the overall housing accessibility. In this economic environment, we need to continue to invest in innovation by introducing offerings that connect with the growing number of customers who need affordable housing. We are accelerating our investments into production automation and the customer experience. We continue to expand our digital presence by investing in technology and content that engages and educates consumers on the value of manufactured homes. This includes expanding awareness via social media where we can visually demonstrate the great design and quality of our homes as well as allow customers to design and price their homes online. These investments bring additional leads to our dealers while making it easier for our customers to find and personalize their new home. We've been recognized for our advancements in housing as we were recently named the Most Trusted Manufactured Housing brand by Lifestyle Research for the third straight year. Thanks Mark, and good morning, everyone. I'll begin by reviewing our financial results for the third quarter, followed by a discussion of our balance sheet and cash flows. I will also briefly discuss our near-term expectations. During the third quarter, net sales increased 9% to $582 million compared to the same quarter last year. We saw revenue growth of $58 million in the U.S. factory-built housing segment during the quarter, which was primarily driven by the increase in average selling price. The number of homes sold during the quarter was down roughly 1%, or 83 units, for a total of 5,749 homes compared to the same quarter last year. U.S. volume levels during the quarter were supported by increased capacity driven by the opening of our Navasota, Texas plant and the acquisitions of Manis Homes and the Factory Expo retail locations earlier this year. Volumes elsewhere in the business were down year-over-year due to reduced production schedules. Plants located in certain markets where demand softened or retailer inventory destocking occurred, realigned production schedules given lower backlogs and holiday shutdowns. The average selling price per U.S. homes sold increased by 14% to $94,200 due to product mix and year-over-year price increases on our core products to offset higher input costs. On a sequential basis, revenue in the U.S. factory-built segment decreased 28% in the third quarter of fiscal 2023 compared to the second quarter of the same year. This decrease was due to the absence of FEMA sales, which were completed in the prior quarter and the plant shutdowns around the holidays. A decline of 21% in the number of homes sold and a 9% decline in average selling price per home is primarily a result of completing the FEMA order in the prior quarter, which drove higher ASPs versus our core products. In addition, we saw a decrease in our core product ASPs sequentially due to a shift in product mix to smaller, less optioned homes and a reduction in our material surcharges on a per home basis. As mentioned earlier, some markets are experiencing softening demand because of retailer destocking, resulting in reduced production levels, which caused our capacity utilization to decrease to 66% during the quarter compared to 72% in the prior quarter. Canadian revenue decreased 15% to $31 million compared to the third quarter last year, driven by a 19% decline in the number of homes sold, partially offset by an increase in the average selling price per home. The average home selling price in Canada increased 5% to $114,800 and was driven by previously enacted price increases in response to rising material and labor costs. The decline in volume was caused by softening demand in certain markets and a shift in product mix. Consolidated gross profit increased 11% to $174 million in the third quarter, while gross margins improved 50 basis points versus the prior year quarter, primarily due to higher average selling prices. Our U.S. housing segment gross margins were 29.9% of segment net sales, up 30 basis points from the third quarter last year, primarily due to the increase in retail sales as a percentage of the total U.S. housing segment, resulting from our expansion of our captive retail operations. SG&A in the third quarter increased to $72 million from $66 million in the same period last year, primarily due to the acquisition of 12 Factory Expo retail locations earlier this year and investments made to enhance our online customer experience and supporting systems, both of which were partially offset by lower incentive compensation. Net income for the third quarter increased 22% to $83 million or $1.44 per diluted share compared to net income of $68 million or earnings of $1.18 per diluted share during the same period last year. The increase in EPS was driven by higher sales and improved gross margin, resulting in improved profitability as well as higher net interest income. The company's effective tax rate for the quarter was 23.1% versus an effective tax rate of 25.6% for the year ago quarter. The decrease in the effective tax rate was primarily due to lower state tax expense and an increase in the tax benefit for R&D tax credits. Adjusted EBITDA for the quarter was $109 million, an increase of 13% over the same period a year ago, the adjusted EBITDA margin expanded by 60 basis points to 18.7% due to gross margin improvement. The structural improvements in our business over the last few years have strengthened our operational capabilities, leading to increased profitability. These improvements also enhance our ability to navigate periods of economic uncertainty, while continuing to service our customers and protect our margin profile. As we move toward the end of our fiscal 2023, we reiterate our expectations of margins normalizing back to fiscal 2022 levels as we anticipate headwinds to our product mix with consumers moving to homes with less, options to offset inflation and interest rate increases and maintain more affordable monthly payments. In addition, we expect some margin compression from the ramp of the 3 new manufacturing facilities in North Carolina, Indiana and Florida. As of December 31, 2022, we had $712 million of cash and cash equivalents and long-term borrowings of $12 million with no maturities until 2029. We generated $85 million of operating cash flows for the quarter, an increase of $10 million compared to the prior year period. The increase in operating cash flows is primarily due to the increase in net income. During the third quarter, we repaid our outstanding floor plan borrowings of $39 million, which the company historically utilized to fund the purchase of home inventory for its captive retail operations. We remain focused on executing on our operational initiatives, and given our favorable liquidity position, plan to utilize our cash to reinvest in the business and for opportunities that support strategic long-term growth. Thanks, Laurie. While the current economic environment has raised the level of caution with consumers due to sustained inflation, higher interest rates and global uncertainty. We are confident that Skyline Champion can continue to outperform the broader housing market due to our affordable price points, strategic positioning and our core initiatives. The outlook for demand is supported by the channel opportunities with community REITs, manufactured to rent and builder developers, as well as helping our retail partners adapt to different consumer demographics. In addition, the need for affordable housing continues to grow, and we believe that the elevated cost of housing will drive more traditional site-built buyers to our homes. Before we open the lines for Q&A, I want to take a moment to thank our entire Skyline Champion team, as our consistently strong performance is a result of our focus, hard work and our ability to take care of our customers. Start with on the retail side, maybe talk a little bit more, Mark, about inventories. It sounds like destocking maybe through the end of March, which is consistent with your prior thoughts. Just how far are we along in that process? And is that more sort of a market-by-market, geography-by-geography phenomenon at this point? Dan, it's definitely a market-by-market, dealer-by-dealer inventory destocking. I would say that a majority of the destocking in certain markets has already occurred as we've seen cancellations and order quote activity pick up in certain regions, in certain markets. I would say that the Mid Central South region still has more destocking to do, that's the primary area that we're seeing it today. But I would say it's geography-based and -- most of the dealers and most of the indications we see that will be finalized by around the March time period, which is consistent with what we thought prior. Very helpful. Maybe talk a little bit more about retail traffic. I know you're kind of shifting from traditional to digital, but traditional retail traffic quoting inquiries, are you seeing a pickup at all with the recent pullback in rates over the last month or so? Yes, I would say that retail traffic, foot traffic has been up since the beginning of the calendar year generally speaking. Digital traffic is still exceeding those levels. So I would say foot traffic was down in the third quarter, about 20% to 25%. It's improved since then since January. Digital has always been strong. So we have seen our deposit activity at our captive retail increase year-over-year by 7%. So people are definitely shopping. People are definitely buying and putting deposits on homes stronger than they were last year. Got it. And I appreciate the color. So, I think if I heard correctly, revenue down high single-digits sequentially for the March quarter. Is that correct? And I'm assuming ASPs are down a little, so kind of a low double-digit decline in volumes. Is that the right way to think about it? And just any cadence as we look out maybe a little further into the June quarter? Yes, I think the March quarter is consistent with our prior earnings call guidance. So in the March quarter, we anticipated we're holding consistent with what we thought on the prior call. We just had a very good third quarter result. So on a sequential basis, it's down, but it's consistent with what we thought prior -- previously. Overall, in the June quarter, we anticipate the volumes to pick up after the destocking happens and it's our normal seasonality. The winter months are typically our lowest order rates and shipment time period in this kind of December through February, March time period. And then usually, we pick up during the spring time and people start buying again. Excellent. Last from me, and I'll jump out, but a consistent guidance from a margin perspective, getting back to sort of historical levels. I think we said Laurie previously that was in the maybe 26%, 26.5% range. Is that -- am I remembering that correctly? And is there some -- what's the sort of magnitude of the incremental pressure for the ramp-up of those 3 new facilities? Dan, yes, in the 26%, 27% range, I would say probably on the lower side of that range given the three new factories starting out. I wanted to first follow-up on the margin discussion. It's pretty impressive in light of production volumes being down as much as they were that, your ability to maintain pretty elevated margins. So I guess, as a follow-up to some of your prepared comments, anything sort of one-time in the quarter, whether that was just the benefit of lower raw material costs or something else that we should be aware of? And then more importantly, as we kind of think ahead, maybe you can just remind us about some of the structural improvements you made to the business where even if production volumes don't pick up like we expect, maybe -- you're still able to sort of maintain this much, much higher than historical level of margins? Yes, so not really anything unusual in this quarter's results, we did start to see a couple of things happening. And I think are going to continue more strongly in the fourth quarter, and that would be the elimination of or reduction of our material surcharges in the units that are finally coming through production and then also the shifting of the product mix to smaller units with less features and options in order for the consumer to hit that monthly payment that they need with the higher interest rates. So where we probably saw just a piece of that this quarter, we're going to see the vast majority of next quarter's product having those implications. And then as I mentioned, we're bringing on 3 new factories over the next probably 4 quarters. And so that's going to impact margins somewhat. So those 2 -- sorry, I forgot the second part of your question. Oh, the structural changes. The structural changes are primarily streamlining of the product offering and kind of taking a campus approach to that as well. So not only are we simplifying the floor plans and options that we're producing and making it more production-friendly, but we're also on campuses that are and production facilities that are close to one another, streamlining the production of similar products to make it easier for the direct labor workforce to build. And do you feel like there's still room for further improvements on the product simplification area. And then it sounds like maybe you're accelerating your increase in some of those investments in automation, I'm guessing that can also have some sort of benefit to margins at some point going forward, right? Yes, so we have certainly room to still go as far as just the general simplification of product offering and streamlining of that product offering. I'll let Mark speak to the automation. Yes, Greg, I think we're probably about halfway through that streamlining of product. As far as automation, I mentioned on the call that we have -- we're dedicating certain facilities towards R&D and innovation. So -- on the call, I mentioned we're opening up our Decatur, Indiana facility, which will produce customer products, but it will be kind of an -- automation hub for the company, kind of an R&D center for the company in part, along with we've got some other campuses we're looking at doing that as well. So automation is a different step level change for the company in the future. The innovation that we can see from automation is actually kind of mind-blowing to be very honest with you. It will really transform housing to a whole different level in the country and we'll make an affordable home -- a quality affordable home much more attainable for the general population in the future. So I think that will bring huge efficiencies, not only in terms of the workforce and benefiting the safety, health of the workforce to make it a better job to work at, but it will allow us to do multi-shift and other things because all of our plants today work a single-shift operation. So we can staff a different way, we can run a different way, which will bring greater efficiencies that are outside of just the products and streamlining the simplification. Yes okay great. Looking forward to getting more updates on that going forward. And then just lastly, more of a clarification, I think you mentioned that backlogs on community and builder developer were actually up on a sequential basis. In terms of that top 100 builder win that you talked about last year, were there any orders associated with that specifically or are those still yet to come? Yes, Greg, I think the community and builder channels have been very strong. Actually, our builder developer channel was up year-over-year in the quarter, 25%. Our community channel year-over-year in the quarter was up 37%. We even saw growth in our Park Model tiny home channel during the quarter. And I think very importantly, as you mentioned, the backlogs for community and builder developer actually increased during the quarter. So it was really all of a, retail issue during the quarter as far as backlogs go. The top 100 builder that we signed up has not put orders into the backlog yet. We anticipate those probably in the March, maybe rolling into April time period when they really start rolling in. So I would expect it late in the fourth quarter, if not early first fiscal quarter of next year in April. Sorry about that. Another really strong quarter, Mark, I think once we kind of flush out some of this retail destock, when we kind of look out to fiscal 2024, how are you thinking about the components from a demand standpoint after you kind of strip out FEMA? Certainly, your commentary sounds, a lot more upbeat than perhaps some of your traditional site-built builders they've talked about what was driving pretty hard at this point? Yes. I think I'm pretty optimistic on fiscal '24 going forward. I think right now today, just overall, we see kind of we're at a half-century low in terms of supply of homes for sale and rental properties -- vacant rental properties. So we're at a half-century low on the supply side for housing in general. I don't expect the Fed to make major downward moves on interest rates, employment levels are high, so people will have jobs - for the foreseeable future, they'll just be able to afford less, which puts them into our price point of homes where the traditional site-built builders can't hit those price points. So I expect us to gain share versus the traditional site-built builders after we flush through this destocking. So I think it's shaping up very well for us vis-a-vis traditional builders. And we heard that same commentary Phil, at the International Builders' Show, where we were last week. The number of builders that were very interested in our solutions and the advantages on the cost side and the time side we can provide them were very real and very material. So I think we'll start to gain share in partnership with some of those builders as well to help them solve their challenges during these difficult times for them. Got it. Mark, outside of just the HUD code dynamic going through, are there any real bottlenecks on your end from a production standpoint to meet some of that demand if you've got a pretty sizable order from the builder side of things? Phil, I think part of the reason we're opening up capacity and expanding capacity in essence, running with excess capacity a little bit is because when builders come to us and need product, it's a different type of order process. They need generally bulk orders. So they'll take either 10% or 20% or 50% of a plant's capacity with their home needs. So I think we need to run a little bit in excess to make sure we can supply that channel adequately, definitely. So I would say that's the main bottleneck is making sure we have available capacity to them that channel and to make sure that we're also taking care of our existing customers and making sure they have the product available to them as well. Supply chain is pretty much cleared today, maybe some HVAC issues still that are lingering, but that would be the main, I would say, most of the supply chain and labor issues are behind us. Super. And just 1, last 1 from me. Any color on how chattel loan rates have kind of performed and reacted to this current environment, call it the last few months? Certainly, any color on the spread side would be helpful? The chattel loans have performed surprisingly well. I think the traditional 30-year mortgage last I looked this week was 6.4% or 6.5%. We're seeing for good credit score chattel, 700-plus FICO score and 10% down. We've seen loans at about 6.7%, so about a 20 or 30 basis point spread versus traditional 30-year mortgage for good quality customers. If the customers are running closer to a 600 FICO score, only 5% down, then you're seeing spreads are probably 1.5% to even up to 3%, depending on how low the FICO score is. So they could be in that, 7.5%, 8%, 9% range, depending on their credit quality. But for good customer buyers, we're seeing a very tight spread. So Mark, you've shown the Genesis homes now at the Orlando show and then the Vegas show last week. I guess maybe any big difference that you heard from the builders on either side of the coast and where, I guess, given the affordability that Genesis brings to the table, do you think there's, more opportunities out west where you just naturally have higher prices? Would love to get your take on that. Yes I think that the Genesis product actually kind of serves builders nationwide, to be honest with you, Jay, depending on what area of the country they're in. I would say that the interest in activity at the current show in Vegas was much higher, and it was real interest. I would say, customers we had numerous amounts of customers who not only provided their information, but actively have solicited on projects that they're working on. We're very interested in quoting out specs. So it wasn't just a walk-by interest. It was -- during the show, we actually saw numerous builders actually starting to quote out our product and understand if it works for their existing pipeline of subdivision projects that they're working in. So I think given the interest rate and affordability challenges the end consumers are facing, along with the increased interest rate challenges and cost of capital challenges that builders are facing, I think it's a win-win with the speed and the availability of the product. And I think they see the same. Yes good traffic through the models was pretty amazing. I guess my second question, now with the acquisition earlier this year, some more wholly owned retail units. Could you maybe level set it for all of this and talk to how many wholly owned retail dealerships you have now? Is there a potential, because it sounds like the homes sold through the wholly owned channel had a higher gross margin. Is that something we should expect going forward? And at some point, might not bracket that out so we can see wholly owned retail versus wholesale sales? Yes, I think there are obviously the more vertical you can get with your integrated model, the more of the value chain margin capture. With the acquisition of Factory Expo, I think we've grown our retail footprint to 31 retail locations. So we have expanded, especially on the digital side of things. Factory Expo is more of a digital retailer that we acquired. As retailers, I think, phase out of the business, there's a lot of aging retailers, there's, a lot of locations and geographies that we can meet, especially more digitally. I think there's, definitely expansion opportunities into retail. Should retailers want to retire or exit the business in some way. And we want to make sure to ensure our distribution and supply for the future. That was a helpful quantification you gave on the REIT and builder channels. I guess just focusing on the REIT channel, I think in the past, you talked about some supply chain issues that were maybe preventing that channel from basically holding that channel back on the order side a little bit, maybe now that's behind you? Is the expectation that channel can continue to grow like this in the coming quarters? What are you hearing from those customers? And how should we think about that over your fiscal '24? Yes, thanks, Matt. The REIT channel and the community channel, I think, has high demand currently. It's the most affordable, high-quality housing solution, I think, out there for people and they're renting and both selling on a land lease basis. Most of the communities greenfields are starting to expand. We're starting to see transformers which, was probably the critical bottleneck, electrical transformers are starting to come in. It hasn't fully been resolved. There's, still shortages and delays. And I think that concrete is also a limiting factor for some of them, but that's easing up a little bit. But I think concrete and transformers will be the critical bottleneck, which is starting to ease, but it will kind of normalize throughout the calendar year, I believe. Their demand is very strong, and I think it will continue to grow as they have the most greenfield expansions they've planned in the past 20 to 30 years. So I think a lot of greenfield activity is happening in the communities, let alone the repair and replacement of units that are coming upon 40, 50 years old in many of these communities. And then compounding that is obviously the horrible damage that happened with Hurricane Ian in Florida and the number of homeowners who are impacted in communities down there. The REITs have done an amazing job at cleaning and getting those properties organized and getting people into temporary shelter that they can in those divisions. So I think there is substantial demand coming from communities for the foreseeable future. Got it. That's very helpful color there. Second one, just to kind of zoom into Q4. I know you gave the guide, you gave some kind of early January trends, order cancellation subsiding and quoting, getting better. Presumably, when you say order cancelations have subsided, that's related to the retail channel? But I'm just curious, when you say some trends have improved. Is that across all channels? Is it better than seasonality? Is this kind of what you normally see in January relative to the holidays, just kind of what do you think has driven that sort of uptick and any kind of detail around that? Yes, thanks, Matt. I think there's, a few things. 1, the order cancellations that we saw earlier in the year, I think even going into December, we saw cancellations improved by 60% going into December. And then here in January, it's improved another 10%. So cancellations are improved by 70% from where they were earlier in the year. That is mainly on the retail channel side. I would say a majority of that was. And that was really as retailers were trying to right-size their floor plan credit limits. They were needing to cancel orders just to get basically in compliance with our credit facilities. Some of the orders in terms of cancellations were done by some of the REITs. But those were really more cancellations in terms of I don't need it until June. So they're still out there, but they're not in our buildable backlog in terms of the foreseeable future. So, we'll reput those in when they need them in June. A few follow-ups here, when we think about Laurie, the product mix impacts, you're coming off some periods where you had a lot of price inflation, mix was a tailwind now you're calling out kind of normalizing lower or just a shift towards lower product mix. When you think about in a long-term context, when you look at what's coming through the backlog in the next couple of quarters in terms of that lower product mix, do you view that as the normalized product mix or is that a mix that would represent now kind of a below normal smaller than normal mix than what you'd expect over the medium to long-term? That's a good question, Mike. I think that it differs by geography, but it's certainly lower -- the mix is going to be lower than what we've seen over the last couple of years. I also think that as the builder developer channel grows, that will impact our ASPs, not necessarily margins, but ASPs to go up a bit because those typically can be larger homes with more features and amenities in the longer term. As we've talked about, those types of supply agreements take a bit longer to develop and materialize. Yes, okay. All right, that makes sense. And maybe also diving into the retail side again, I think if we look at historically, the difference like the retail sales price of the unit, at least grew up census numbers might be 120, 130k. Your wholesale price has been ex the FEMA, somewhere in the 80s to low 90s. But as you kind of mix into that retail vertically, integrated model a little bit more? I think last quarter you might have made a comment that you'd expect ASP to come back down into the 80s as some of the surcharges rolled off. But I'm wondering that retail dynamic, how we should think about that as an ongoing impact to ASP? And if that helps support a higher ASP than you would have previously expected? Yes, certainly, at a retail level, the ASPs are higher than wholesale. It really depends on the relative mix. So as we add manufacturing capacity, we're going to add manufacturing units, right, over the medium to long-term. And it's just -- it's a dependency on how much of the units being sold in U.S. manufacturing are manufacturing versus retail. If that percentage goes -- leans more toward retail because of acquisitions or internal organic growth, then certainly we'll see a shift in the ASP to a higher ASP relatively. Does that make sense? Okay, right. Yes and I guess maybe more specifically the fourth quarter, how should we be thinking about ASP because if you did kind of drop back into the 80s it seems like that alone would be kind of a high single-digit quarter-on-quarter decline, which then may imply that you don't expect unit down much sequentially at all so maybe a little more color on the unit versus ASP dynamic in the fourth quarter? Sequentially, I would expect ASPs to come down a bit versus the third quarter, primarily because of the things I talked about before, the elimination of more of the material surcharges as well as the shift mix more broadly across retail and manufacturing to smaller, less optioned homes. We have reached the end of our question-and-answer session. I would like to turn the conference back over to Mark for closing comments. Thank you for participating in today's call. We appreciate your time and your continued interest. We look forward to updating you on our progress on our fiscal year-end call late in May. Take care. Stay well, stay amazing. Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

EarningCall_498

Good afternoon, and welcome to the Beazer Homes Earnings Conference Call for the First Quarter Ended December 31, 2022. Today's call is being recorded, and a replay will be available on the company's website later today. In addition, PowerPoint slides intended to accompany this call are available in the Investor Relations section of the company's website at www.beazer.com. Thank you. Good afternoon, and welcome to the Beazer Homes conference call discussing our results for the first quarter of fiscal 2023. Before we begin, you should be aware that during this call we will be making forward-looking statements. Such statements involve known and unknown risks, uncertainties and other factors described in our SEC filings, which may cause actual results to differ materially from our projections. Any forward-looking statement speaks only as of the date this statement is made. We do not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. New factors emerge from time-to-time and it is simply not possible to predict all such factors. Joining me is Allan Merrill, our Chairman and Chief Executive Officer. On our call today, Allan will discuss highlights from our first quarter, the current environment for new homes and an update to our balanced growth strategy. I'll then provide details on our first quarter results and second expectations, updates on our cycle time and cost savings initiatives, a review of our land activity and future community count and end with a look at our balance sheet and book value. We will conclude with a wrap-up by Allan. After our prepared remarks, we will take questions in the time remaining. Thank you, Dave, and thank you for joining us on our call this afternoon. In our first quarter, we were pleased to generate financial results and profitability in line with the expectations we outlined in November. This translated into adjusted EBITDA of $47 million and $0.80 of earnings per share. Having said that, the new home sales and cancellation environment proved to be even more difficult than we had anticipated. As we will discuss, however, more recent traffic and sales results have been much improved. Beyond the selling environment, we are continuing to pursue and make progress with each of the operational priorities we set out for the year. This includes accelerating cycle times, reducing construction costs and re-underwriting all pending land transactions. These efforts will generate benefits in the coming quarters. In the meantime, thanks to our significant backlog and the deleveraging we accomplished in recent years, we're in a strong position from a balance sheet perspective. We have an ample supply of lots, plenty of liquidity and no near term maturities, so we expect to remain both resilient and opportunistic over the course of the year. Let's dive into the sales and cancellation environment in the first quarter with an update on more recent trends. Early in the quarter, mortgage rates continued their relentless move higher, which together with elevated home prices and other macro concerns, effectively froze the market for most discretionary homebuyers. The sales activity that was taking place was primarily for specs or quick move in homes, many of which were being offered with big incentives as most of our peers were completing their fiscal years. That presented a tough environment for us for two main reasons. First, we had just completed our fiscal year end, so our finished spec position was extremely low. We entered the quarter with fewer 100 quick move-in homes, leaving us with few opportunities for buyers with serious time constraints. Second, we experienced an increase in cancellations. As a percentage of beginning backlog, our first quarter cancellation rate was about 14%, which was in line with prior years, but a lot higher than the 5% to 10% we had experienced in the preceding quarters. And there was one other factor to play improving cycle times. On our last call, we outlined our efforts to accelerate cycle times, to extend our window for making fiscal ‘23 starts and closings. Fortunately, we saw a lot of progress during the quarter, which limited our enthusiasm to offer to be built homes at finished inventory prices. In December, as mortgage rates drifted lower, we started to see a nice uptick in online and in-person visits. This translated into a January sales pace more than double our quarter results. While we've adjusted prices, features and incentives to align with the market, overall, we have an had to make drastic changes and we are slowly capturing lower construction costs for future closings. There remains a lot of uncertainty about the trajectory of demand and pricing for new homes, largely because of affordability. But the wage growth, home price reductions and rate relief that have already occurred are gradually improving affordability. This, along with new and -- limited new and used home supply, leads us to be cautiously optimistic about the spring selling season. Looking further out, we remain confident in the strength of the new home market and our ability to create shareholder value. For quite a few years, we have described our financial strategy with a phrase balanced growth. The objectives and our results are rising from this strategy have been straightforward. Profitability growth and a less leveraged and more efficient balance sheet have led to higher returns. Our long term commitment to all three elements of balanced growth remains in place. In order to consistently deliver these balanced growth results, we know we need to successfully execute differentiated and customer oriented operational strategies. To date, our positioning has been to deliver what we call extraordinary value at an affordable price through our three pillars. But to continue to win with customers, we know we need to continue to innovate. Over a year ago, we became the first and so far the only public builder to commit that 100% of our homes would be built to the U.S. Department of Energy's Net Zero Energy Ready standard. While we set the end of fiscal ‘25 as our deadline, we're using the current slowdown to move even faster. In fact, we expect to have Net Zero Energy Ready homes under production in each of our markets by the end of this year. While there are obviously some additional costs associated with building to this higher standard, we believe further differentiating our home creates an opportunity for driving both sales paces and prices. Energy efficient homes cost less to operate are more durable over time and deliver higher customer satisfaction. And it's worth noting that the recently adopted Inflation Reduction Act provides meaningful financial incentives to attain the Net Zero Energy Ready standard. Companies have to make choices about how to pursue the creation of shareholder value. Our path is to execute against balanced growth objectives by delivering differentiated energy efficient homes with a truly unique mortgage experience. Thanks, Allan. For the first quarter of fiscal year 2023, homebuilding revenue was $444.1 million, with an average sales price of more than $533,000. Gross margin, excluding amortized interest, impairment and abandonments was 22.3%. SG&A as a percent of total revenue was 12.3%. Adjusted EBITDA was $47.1 million. Interest amortized as a percentage of homebuilding revenue was 3.1%. Net income was $24.4 million or $0.80 per share. And our GAAP tax expense was about $4 million for an effective tax rate of 14.5%, reflecting the benefit of energy efficiency tax credits from homes closed in prior years. As a reminder, broadly speaking, we don't currently pay cash taxes as we continue to utilize our deferred tax assets. Looking forward to the second quarter, we're providing the following expectations. We are anticipating a sales pace over 2.5 per community per month, which is comparable to what we did in January. While this remains somewhat lower than normal seasonal levels, it is significantly better than the first quarter pace of 1.3. Average community count is expected to be up 5% year-over-year. We expect to close around 1,000 homes reflecting the backlog conversion between 55% and 60%. While this is up around 20 points versus the same period last year, it's still quite a bit lower than our historical norms. Average sales price should be about $515,000 well above our Q1 ASP and more in line with what we expect for the rest of the year, as we continue to emphasize affordability in an elevated interest rate environment. We expect gross margin excluding interest to be in the 21% to 22% range. SG&A as a percentage of revenue should be relatively flat versus the same quarter last year. We expect this to lead to both adjusted EBITDA and earnings per share very similar to the first quarter. Interest amortize as a percentage of homebuilding revenue should be in the mid-3s and our effective tax rate should be at or below first quarter levels as we continue to reflect the benefit of our energy efficiency tax credits. While there's too much uncertainty around future sales prices to provide profitability expectations for the full year, with our large backlog and available production universe, we believe we can deliver at least 4,000 homes in fiscal 2023, which should again lead to total homebuilding revenue in excess of $2 billion (ph). In November, we highlighted a number of operational priorities for the year including accelerating cycle times, reducing construction costs and re-underwriting pending land deals. I'll review these one at a time. The supply chain challenges we faced over the last few years had extended our cycle times by nearly four months, pushing our traditional April cut off dates for starts back into January. Our efforts to recoup at least 30 days on average across our markets have been successful. So we are now looking to recoup additional time above and beyond the initial goal. On the direct cost side, the evidence of success is not apparent yet. Our first quarter closings had even higher construction costs in the prior quarter, which wasn't surprising given the cost environment that existed when these homes were started. We're working in every market with nearly every trade to recapture those dollars. We expect meaningful improvements in construction costs to materialize in the fourth quarter when the mix of closings will more heavily reflect home started with lower costs. At the same time, we continue to re-underwrite land deals using lower home prices, slower sales paces and higher mortgage rates. In many any cases, we've been able to renegotiate the costs and/or the structures (ph) of our pending deals. Even with these efforts underway, we remain confident in our expectations for community count growth moving forward through fiscal 2023 and accelerating in fiscal ‘24. As it relates to our balance sheet, we ended the quarter with about $386 million of liquidity. Our net debt to cap was 47.3% and our net debt to EBITDA was 2.4 times. We ended the first quarter at about $984 million of total debt and have no maturities until March 2025. Our focus on liquidity and a supportive maturity schedule provides flexibility for us to allocate capital in ways that best support our balanced growth objectives. We continue to grow both the quantity and quality of our book value. We ended the quarter with a book value per share above $31, up $7 from last year. Despite near term challenges, the ultimate goal of our balanced growth strategy continues to be earning returns that are above our cost of capital while growing book value per share. Thanks again, Dave. Despite a tough sales environment, we were able to deliver positive first quarter financial results. Just as importantly, our backlog of sold homes, improved sales momentum and our cycle time and cost reduction initiatives have favorably positioned us to generate full year results that grow book value and are consistent with our balanced growth objectives. Longer term fundamentals for housing remain intact and robust. And we're confident our differentiated consumer strategies, including our Net Zero Energy Ready initiative will allow us to compete for homebuyers on a basis other than just price. Finally, our team is why I remain convinced that we have the people, the strategy and the resources to create durable value over the coming years. Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Julio Romero with Sidoti & Company. You may go ahead. Hey, I wanted to maybe start on your goal of accelerating cycle times, you've been successful in recouping I guess 30 days. How much more do you think you can achieve on that front? It will depend on the city. There are different characteristics in different markets. A couple of weeks, I would say overall, some places a little more, some places a little less. But that's kind of what we try to depict on the slide is that we've moved that cut-off date out another couple of weeks. Okay. And maybe just talk about obviously on the demand side, I think January and the move-in mortgage rates have caused a little bit more optimism. Just talk about what you're seeing there and how that's maybe changed the strategic outlook for you guys? Look, in December, it's like somebody turned the lights on. Activity on the website, activity in our communities really perked up and it wasn't – like, it was great weather or anything. It was just -- it felt different and rates clearly played a role in it. I also think that some of the anxieties about the economy and about housing started to tamp down a little bit. And we can't lose sight of the fact, we got a housing shortage in this country. So people started paying attention again. And what we saw in January was absolutely, as I'm sure you've heard from others, interest and specs, but we've got more confidence around a shorter cycle time and that has made it easier to sell to be built homes well. That was pretty tough for a lot of last year where we had a hard time at the time of contract telling people that the month, little on the date that their home would be completed. We're in a very different place now. So I think there are a few things. I think they have the macro things, the interest rate things. And then I just think that with the supply chain sorting out, you've also got more visibility for customers on when to-be-built can be delivered. And I think those things collectively, I think Dave or I said it in the script, I mean January for us was, and we don't want to make too precise a thing of it because it is just one month. But what have we experienced in the month that just ended January was better than double what we did in the whole first quarter on a per month basis. That felt a lot better. Yeah. No, I appreciate the color. And I guess, If you could just touch on your other initiative of cost reductions and you talked about not there yet, but expecting meaningful improvements by the fourth quarter. How is the trajectory of like lumber prices may be impacted the way you're thinking about the flow through of cost reductions as we progress throughout the year? Yeah. I mean, with cycle time still stuck above six months, I mean, there -- as you saw prices down in the fall, you'll start to get the benefit of some of those this spring. But it's really starts that have occurred November, December and into January and February where we're seeing those lower lumber costs and that's where we get into our fourth quarter. I think that there will be improvement in our direct costs in the second and third quarter, but I think it's going to be pretty modest honestly, so weighted average thing as much as anything where the weighted average of homes with lower costs will be far better by the time get to the fourth quarter. The lumber part will play a big role in that, but it's certainly not the only category where we are seeking and achieving cost reductions. Hey, guys. Good afternoon. Thanks for all the great info as always. First question, I'd love to drill in a little bit on the January trends and how that plays into your thinking on pricing and incentives and just the overall kind of environment there? Obviously, it's very encouraging to see the improvement in sales activity. But you brought it up yourself, I mean, the 2.5, 2.6 sales pace that you saw in January and that you're expecting for the quarter. If we go back pre COVID, your fiscal 2Q absorption pace was right around 3.3 every year. There wasn't a whole lot of volatility there. So you're about 25% below what would consider to be normal right now even with the doubling. So how do you think about pricing there? Are you still discounting or increasing incentives or adjusting base prices to try to get that pace closer to the long run average or are you looking at the sequential improvement in saying, hey, this is really good off of a weaker fourth -- calendar fourth quarter. Let's kind of pause here and see if the momentum continues in February and March before we get more aggressive on the pricing front. Alan, it's an excellent question and a compound question. The smart aleck answer is, it is both. And I'll go a little further than that because it really is an individual communities, an important discussion that we're having with our division leaders, our sales leaders we do want to get sales basis back into -- certainly seasonally into the 3s. And that might happen this year, I don't know. But one good month does not an entire quarter make. We're mindful of the environment has been pretty uneven over the last six months. So we were trying to be a little careful of not just assuming that there would be this snapback and that we were somehow entitled or it was mathematically assured that this would continue into February and March. And so I think we feel pretty good about at a minimum doing 2.5 for the quarter. But we pointed it out, you've acknowledged it that's not where we're used to being, that's not what we want to get back to. I think one of the things we saw in the first quarter was that price by itself doesn't create buyer momentum. So changing incentives to convince a discretionary buyer to buy a home it's a part of the equation, but it isn't the only part of the equation. So I think we are trying to turn that dial kind of carefully. We are absolutely be competing for buyers and where market conditions at a community dictate a different base price or a different incentive or a different, included feature package, we're not afraid to compete. But we're seeing enough traffic and enough confidence and we have had the ability to remove some of the special incentives, which are tantamount to price increases that right now I think we're trying to see can we sustain the level of activity rather than trying to chase the next buyer with another incentive. So in this range depending on the community and certainly depending on the city, we're kind of on both sides of the way you frame that. But overall, I think our bias is to slowly ramp the sales pace rather than dramatically go chase the sales pace. And I know it's a long answer, but it is kind of a complicated issue. No, that's really helpful. I think it certainly walks through the way you guys are approaching the business, which is probably a little bit different than some others right now. So it's helpful to hear how you're thinking about it. Second question on the land market. So you guys were a bit later than others to kind of really ramp your lot count, I think early in the pandemic, rightfully so, you were focusing more on the balance sheet and liquidity. And if I look at your growth and loss, it really all came in '22, maybe the tail on '21. And you haven't walked away or doesn't like you walked away from any meaningful amount of lots right now, but at least what we're hearing is that while sellers are willing to adjust take down terms and things like that, we haven't really seen any capitulation either from some land owners on the options or land sellers on price. And assuming that doesn't happen, kind of puts you in a little bit of a tricky situation I guess if these deals that you tied up later in the pandemic no longer pencil or maybe they pencil at subpar margins. So how are you thinking about the land market? How are you thinking about what opportunities there might be? Do you think there will be capitulation on price or do you envision a stalemate potentially impacting your growth in ‘24 and beyond if you don't see pricing come down? There's a book in that question, Alan. Here's kind of my take. First of all, and I don’t want to be argumentative mathematically where the control lot showed up does appear to be in ‘22. But remember those deals would have been, I identified six, nine and 12 months before they were approved and contracted. So there was an awful lot of euphoria in the market on the pricing side that happened after we achieved deal terms with the underlying sellers, whether it was on a purchase or on an option contract. So the fact that something showed up in our reported control in '22 isn't necessarily indicative that that's the point at which we tracked it. I mean, we didn't change our underwriting process. We still have the same documentation required, the same turn requirements and it's burdensome and it takes a while. So there is no exaggeration that those deals on average were more than six months and oftentimes as much as 12 months earlier when they were identified. A lot of the price activity that happened after we tied them up has either been given back or might be given back. So I don't dispute that, but I'm not so worried about that generation of deals having subpar margins. Now the experience that we've had so far, we did walk away from one deal in the quarter and it was $150,000 abandon charge approximately. So we had one where we just couldn't see a path and we walked on it. But we've had pretty good success as you pointed out with takedowns. We've also had some of the land banking relationships where we've renegotiated the rate the interest rate, which affects the carrying cost, which ultimately is a part of what our finished lot cost will be. So I think we've had a measure of success on terms. And on other deals, we have been able to renegotiate prices downward by millions of dollars. Is it capitulation? No. But if you take a $6 million asset for $4 million, it's only $2 million, but it's a third off. So I would tell you, I think there is a little bit of price that is available in the market. It's not dramatic, it's not 30%, 50% and obviously it depends on cities. I think some markets that are a little more challenging right now from a sales and pricing perspective, I do expect there to be more price movement ultimately on the land side and I'd call out Phoenix. I think Phoenix is a market where there needs to be. There was a fever in Phoenix. We did not participate. Our lot position in Phoenix diminished. ‘21, ‘22. Frankly, people are trying to get $3,000 a front foot for lots. We just didn't see it. It wasn't real. A lot of people contracted at those prices. Some closed, some didn't close. I don't think that's where value is. So I think if we sort of peel the onion a little bit deeper and sort of go market by market, it's going to be different outcomes. But I'm not very concerned about having subpar margins, your phrase from the deals that we tied up in ‘21. Yeah. Thanks, gentlemen. Yeah, I wanted to, I guess, better understand the guidance of 1,000 closings for next quarter and just kind of the acceleration on the backlog conversion rate. Does that imply you guys have a lot of I guess canceled houses on the sidelines that are going to be able to get delivered that quickly? And going forward, my second question is, what was the starts in the quarter and how are you guys thinking about shifting towards specs and sets what the market seems to want right now? So Alex, let me kind of handle the first question. We've talked about a conversion ratio, a backlog conversion ratio in Q2 in the kind of 55% to 60% range. It's not, as you said, predominantly just from the specs that were canceled that are sitting there. There are some specs frankly that will close. But frankly that 55% to 60% is more in line with historical levels and still below where we have been in '18 and '19. So we're just kind of seeing some normalization in the backlog conversion ratio and frankly not back to levels where we've been at historically and a lot of that cycle time. Picking up a month makes a big difference in converting your backlog. So I think it is way more of that than any mix issue associated with formerly sold homes that became specs. Second question on the production universe, Dave, maybe has the number immediately at hand, but interesting fun fact, Alex. In the last 20 quarters, we've only had four quarters where specs represented more than half of our close over five years. The first quarter happened to be slightly one of those quarters. I don't really see us trying to do what everybody else is doing. One of the challenges in the last year with buyers has been, can you tell me when my is going to be ready. We feel a lot better about being able to answer that question in a really competitive way with yes, we can tell you and here's when it's going to be available and we have confidence in that. There are some markets and we have some buyer profiles within our footprint where specs have been and will continue to be a part of it. But I don't think you should expect us to become something that we haven't traditionally been, build huge numbers of specs and then try and engage in price discovery. We're selling a different home. We've got a different buyer experience, a different mortgage experience. And I really don't feel like playing in other people's sandbox is our best strategy. Got it. Now, I guess a month ago or two months ago, builders were talking about getting inbound calls from people looking for new starts, new work, and that seemed to present an opportunity to potentially get better costs on those new starts. But at that timeframe, it seemed like prices were still heading downward right now. It would seem from other commentary of builders that given the momentum in new sales and stuff like that that maybe prices won't be heading downward anymore. So do you think there's still going to be that opportunity to get better costs? I do. And the costs that we have gotten aren't in the P&L yet because those homes haven't reached the delivery stage. And I also think it's important to understand that just because home prices may not fall as far from here as was feared, I think we're going to get to a point where we do have year-over-year price reductions because of the action that occurred in the first quarter really started last summer. So we've got to get to the other side where we've got a one year anniversary. And I think as it becomes more evident what closing prices are, that actually is going to be valuable in those negotiations because we're a good example. We just reported a $533,000 ASP and guided down almost $20, well, guess what? That reflects changes that occurred six and nine months ago. I think some more of that data being in the market actually helped the case. With the trades for why costs have to keep coming down. Alex, I think the other part of that is not just the price side, but also the volume side. We see some pullback in volume and it clearly appears it starts volumes are down as an industry. There'll be some excess labor out there that we think we can go get some cost savings from. Okay. Now that you have the unsecured credit facility and the 27 senior maturities, 29 senior maturities are still trading below par. Why not go and take some of those out, maybe talk about, especially with -- looking like the community count is basically going to be flat for the next few quarters, why not try to reduce some of that future leverage? Well, let's talk about, Jay, first of all, the spec number was 840. So I didn't have my hand, just so you know. In terms of the 25 in capital allocation, we talked about it last quarter and the story is pretty consistent. We're building some liquidity. We're kind of looking to 25 for being fully thoughtful on the capital allocation as we're going to make it. We want to see if there's more stability in the market, if we see some improvement in demand, we're certainly committed to growing the business. So we're being pretty thoughtful with how we spend capital. And again, it's a little bit of a wait and see perspective and we have some time on the 25s. I don't know if you had another question on top of that, but… No. Just trying to understand when you have the opportunity to go out and take some of these future maturities out below par especially given how fast things went from good to bad in '22? Just trying to get a little more insight as to how you're thinking about capital allocation right now? Alternative uses of capital and rates of return on a risk adjusted basis. I mean, certainly, we're underwriting land deals even in this environment with conservative assumptions with return profiles that are vastly better than retiring debt with single digit yields. And are those assumptions valid? Are they durable? Well, that's why Dave says, we’re being a little bit cautious, but I think the opportunity for those kinds of returns, certainly for returns that greatly exceeds de-levering are good enough, the probabilities are good enough that it sort of discourages us from being in a big hurry using the liquidity for deleveraging. Okay. I think the other thing is and I want to make sure we're clear and we said in the script and I just want to make sure we have excellent visibility in the community count growth in ‘23 and ‘24 from the land position that we already have. And Allan talked about it earlier in the Q&A, clearly, we're very comfortable with the land position and the community count growth that's coming in our business. All right. I want to thank everybody for joining us for our call. And we'll see everybody in our second quarter earnings call, and we appreciate your participation. And this concludes today's call.

EarningCall_499

Good morning and welcome to the RMR First Quarter of Fiscal 2023 Financial 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. Good morning and thank you for joining RMR's first quarter of fiscal 2023 conference call. With me on today's call are President and CEO, Adam Portnoy; and Chief Financial Officer, Matt Jordan. In just a moment, they will provide details about our business and quarterly results followed by a question-and-answer session. I'd like to note that the recording and retransmission of today's conference call is prohibited without the prior written consent of the company. Today's conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and other securities laws. These forward-looking statements are based on RMR's beliefs and expectations as of today, February 3rd, 2023, and actual results may differ materially from those that we project. The company undertakes no obligation to revise or publicly release the results of any revision to the forward-looking statements made in today's conference call. Additional information concerning those factors that could cause those differences is contained in our filings with the Securities and Exchange Commission, which can be found on our website at www.rmrgroup.com. Investors are cautioned not to place undue reliance upon any forward-looking statements. In addition, we may discuss non-GAAP numbers during this call, including adjusted net income, adjusted earnings per share, adjusted EBITDA, and adjusted EBITDA margin. A reconciliation of net income determined in accordance with U.S. Generally Accepted Accounting Principles to adjusted net income, adjusted earnings per share, adjusted EBITDA, and the calculation of adjusted EBITDA margin can be found in our earnings release. Thanks Melissa and thank you for joining us this morning. Before we discuss the first quarter results, I would like to start by highlighting the enhanced earnings release format that we issued last night. This enhanced format is intended to align more closely with our alternative asset manager peers, and we expect it to be easier for investors and analysts to efficiently digest our results and make comparisons to our peer group. We have also evolved the way we define our clients, and as a result throughout our earnings release and 10-Q, you'll see them presented as either perpetual capital clients or private capital clients. As I sit here today and survey the overall economic environment, the ongoing market uncertainty driven in a large part by the Fed's rapid interest rate increases, has created significant headwinds for the commercial real estate industry. This market uncertainty has significantly slowed real estate transaction volumes with many, including our organization, taking a more wait and see approach. The impact on the publicly trade REIT industry has also been significant with the U.S. REIT index down over 24% 2022, and each respective publicly traded REIT sector generating negative returns since returns last year. In light of these challenges, RMR strong first quarter financial results are a testament to the diversity of our clients and the durability of our business model. We ended the calendar year 2022 with $37.4 billion in assets under management with $30 billion representing perpetual capital. Additionally, over the course of 2022, our fee earning AUM increased almost 10% to end the year at $26.9 billion. This quarter we reported adjusted net income of $0.51 per share, distributable earnings of $.58 per share, adjusted EBITDA of $26.4 million, and adjusted EBITDA margin of 50.8%. Finally, we again declared our dividend of $0.40 per share this quarter, which remains secure and well covered as evidenced by our 62.4% distribution payout ratio. From an operational perspective, our organization continued its focus on delivering high-quality and amenity rich buildings to our tenants. Despite a slowing and cautious commercial real estate market, from a leasing perspective, fundamentals across our managed assets remained favorable. Our portfolio of managed real estate ended the quarter and nearly 96% leased, and during the quarter, we helped arrange 2.5 million square feet of leases on behalf of our clients, which resulted in a combined 2% roll up in rents and a weighted average lease term of model of almost nine years. As a reminder, we are limited as to what we can discuss this quarter regarding our publicly traded clients as we are reporting results in advance of them. With that said, I want to highlight some items of note across our perpetual capital clients. In October, SVC amended its revolving credit facility to extend the facilities maturity date to July, 2023 and remove restrictions on paying dividends and issuing secure debt. With the amendment behind them, SVC's board increased the quarterly cash dividend from $0.01 per share to $0.20 per share, which is well covered at a conservative 37% payout ratio. SVC management is currently focused on refinancing 500 million in bonds that will mature this June, with multiple options currently available to them. Bond refinancing discussions at SVC have also been helped because all aspects of its business continue to perform well and the hotel sector fundamentals remain solid, as evidenced by higher TSA checkpoint travel volumes and increase occupancy and RevPAR levels across the industry. This positive momentum was evident this past week at the Alice Conference in Los Angeles, a major hotel industry event that included representation from both SVC and Sonesta, where the mood was the most upbeat since the beginning of the pandemic. As it relates to the retail portion of SVC's business, this same positive momentum is also evident as discretionary consumer spending continues to remain resilient across all income levels, household cash cushions remain well above pre-pandemic levels, and the majority of SVCs retail tenants remain current on their lease obligations. Turning to our real estate lending platform, Seven Hills Realty Trust, our publicly trade mortgage REIT, continues to be a growth story for the organization as its loan book approaches $1 billion. And uncertain times like these lending against commercial real estate as compared to owning the equity in the same real estate is an attractive way to generate high-risk adjusted returns. Seven Hills' default free track record, coupled with the ability to access the broader RMR real estate platform, continues to be a differentiating factor for us. In January Seven Hills Board declared a 40% increase in its quarterly dividend from $0.25 per share to $0.35 per share. This new dividend rate is a strong signal of our confidence in the company's momentum and the stability of its loan portfolio. At OPI, occupancy remains above 90% despite headwinds from high bid work arrangements and cost cutting measures across corporate America. While national indicators suggest office usage is improving, our internal data shows OPI's assets tracking ahead of national averages, which most likely reflects the diverse geographic nature of OPI's portfolio and its limited reliance on gateway markets. Given the current environment, we expect office fundamentals to remain subdued, specifically rent growth and lease rent growth and leasing velocity. As such, the organization is focused on getting ahead of OPI's upcoming 2023 and 2024 lease expirations by actively engaging tenants and thoughtfully investing in OPI's properties. At DHC, we are working with its senior living operators to improve DHC's operating performance. As a reminder, in the third quarter -- in the third calendar quarter, DHC reported its sixth consecutive quarter of occupancy growth in its senior living communities. That trend is consistent with the broader industry, though inflationary pressures and labor supply challenges remain a headwind to margin and profitability for the entire industry. These efforts are critical to DHC's long-term success and its ability to refinance upcoming debt maturities in 2024 with over $800 million in cash as of September 30th, we are confident DHC can both weather these near-term challenges and continue strategically investing in its assets. Up close with our private capital business, which ended the year at over $7 billion in managed assets, including the Mountain joint venture that was created when ILPT acquired Monmouth REIT in early 2022. The private capital portion of our business now represents 20% of our consolidated overall AUM and 15% of our fee earning AUM. Both significant milestones given this portion of our business is only about five years old. At this time, we are simultaneously pursuing organic private capital growth with our existing capital partners, developing new private capital vehicles and assessing strategic M&A opportunities as they present themselves. With over $200 million in cash and no debt, we believe we are well-positioned to take advantage of strategic opportunities that we believe will result from the ongoing market volatility. Thanks Adam. Good morning, everyone. For the first quarter of fiscal 2023, we reported adjusted net income of $8.7 million or $0.51 per share, and adjusted EBITDA of $26.4 million, with both financial measures being in line with our quarterly guidance. Total management and advisory service revenues were $49.6 million this quarter, which was almost $4 million higher on a year-over-year basis, though down approximately $2 million sequentially. The sequential quarter decrease was primarily attributable to enterprise value declines at the manage equity REITs and normal seasonal declines at TA and Sonesta, partially offset by increases in construction supervision fees. Construction supervision fees almost doubled from the same period last year as RMR continues to look for ways to maximize value at our client's assets through redevelopment and repositioning efforts. For the second fiscal quarter of 2023, we expect to generate between $48 million and $49.5 million of management and advisory service revenues based upon the current enterprise values of our managed equity REITs. As it relates to incentive fees, which as a reminder, based on a comparison of our managed equity REITs three year total shareholder return to their respective peer groups, we unfortunately did not earn any incentive fees for calendar 2022. With that said, OPI three-year total return exceeded its peer group by over 800 basis points. So, cumulative returns for OPI in the office sector were negative, given the headwinds broadly facing the office sector, which resulted in no incentive fees being due from OPI. Additionally, both OPI and SVC's total shareholder return for calendar 2022 exceeded their respective peer groups by over 500 basis points, which hopefully creates a foundation for future incentive fees. Turning to expenses. Recurring cash compensation this quarter was approximately $33.3 million, an increase of $1.7 million on a sequential quarter basis, due primarily to annual merit increases that were effective October 1. While wage inflation and labor scarcity are moderating, we remain vigilant in continually assessing staffing levels and continue to look to secondary hiring locations and select outsourcing solutions to mitigate further expense growth. Looking ahead to next quarter, we expect recurring cash compensation to increase to approximately $34.5 million due to payroll tax and 401(k) contributions resetting on January 1 and then moderating at approximately $34 million each quarter thereafter. G&A expense of $9.2 million this quarter includes approximately $400,000 or $0.01 per share of technology transformation costs, which were excluded from adjusted EPS and adjusted EBITDA. Over the next two years, we have committed up to $10 million to our technology infrastructure to ensure we harness the breadth of the data we generate internally to a strategic decision-making as well as ensure we have an operating environment that leverages technology to drive innovation and efficiencies. At this time, it's still early in our technology transformation journey, so we are unable to speak to the exact pattern of spend over the next 18 months, but it's worth noting that a portion of these technology investments will be both capitalizable and reimbursed by our clients. On a normalized basis, G&A should be approximately $9 million next quarter, excluding both technology investments and annual share grants to our Board of Directors in March. We closed the quarter with over $200 million in cash. And given the rising interest rate environment we currently operate in, we generated interest income this quarter of approximately $1.8 million and expect this number to exceed $2 million per quarter throughout the remainder of fiscal 2023. Aggregating all the prospective assumptions I previously outlined, next quarter, we expect adjusted earnings per share to range from $0.46 to $0.49 per share and adjusted EBITDA should range from $24.5 million to $26.5 million. Good morning, Adam and Matt. I appreciate those comments. Can you give us an update on what you're seeing or hearing from the sovereign wealth funds that you've dealt with and kind of private capital? And as it relates to potentially reengaging this year on either a second partner for ILPT and/or some asset sales? Sure. Good morning, Bryan. Thank you for that question. With regard specifically to the partners we're dealing with at the sovereign wealth funds, I would say they are very much open for business. I -- that happens to be a little bit unique, I think, to the relationships we have, specifically with those groups, which I can't name, but not all sovereign wealth funds are open for business, but the ones we are dealing with very much are open for business. I think, not surprisingly, they are focused on the favorite asset classes that most institutional investors are focused on, which would be industrial real estate, residential or multifamily real estate and then sort of more niche sectors like data centers and/or MOBs or life science buildings. With regards to specifically our platform and the ability to grow AUM with them this year, I think there will be opportunities to grow with them this year. And I think -- but if I had to put sort of a time line around it, I think there'll be more opportunities to do it in the second half of the year than there would be in the first half of the year. I just think given the nature of what's going on in the portfolio is that we manage, and what's going on more broadly in the market, it's probably more likely that you would see growth in those vehicles if it were to occur in 2023 in the second half of the calendar year rather than the first half. That's a little bit more driven by things going on at our firm and by their appetite because they are very much open to doing things. And so that's sort of where we're at. I think they -- in some ways, they see this as their real opportunity to aggregate assets because, to be perfectly frank, some of the non-traded REITs that have existed, who're also competing for the same assets and they have largely exited the market, and they are now largely the only buyers or the largest buyer of what I would call core plus real estate in the market today. So, I think from their perspective, if you were to ask them, they would say this is a real -- this is a real opportunity for them because they have less competition to deal with. And so, I think it will turn into opportunities for us in the future. So that segues well into my second question is, we've been getting questions from investors regarding the managed REITs, whether it's cash on hand. Obviously, I think that you have some set aside for certain things, whether it's CapEx, et cetera or refinancing, or availability to borrow to make acquisitions. What is kind of the appetite of the four managed REITs this year for acquisitions on their balance sheet? Or is it just a function of you're keeping that cash powder for refinances CapEx, et cetera? Maybe you can address that. Sure. I think across the board, there's limited acquisitions that you will see across the board at four REITs for various reasons. I think there's different reasons why that is the case at each 1 of the REITs. But broadly speaking, limited acquisition appetite. If there are some acquisitions, they could be smaller acquisitions and/or related to properties in and around existing properties, let's say an add-on from an adjacent property that adds the value to an existing property or something like that. We are very focused this -- certainly the first half of this year. And you can see it in our numbers around construction management supervision fees. There's a lot of development activity we're looking at to deploy capital this year across the REITs, especially in our senior living portfolio and our hotel portfolio, well into the hundreds of millions of dollars that we plan to be putting to work. And so, there's a lot of effort underway in that respect, which does create fees for RMR itself because we're working on the construction management side of that. That all being said, depending on timing around debt repayments, specifically at some of the REITs for 2023 maturities and as they may have more cash on hand, there could be opportunities, especially at the end of the second half of the year, to actually open up to do some acquisition opportunities at the REITs in the second half of the year. Thanks. And just last for me. I mean, I would be remiss not to mention the AlerisLife acquisition announced this morning. Any extra color you can give us on that? What the plan might be there? Is RMR going to be involved at all? And is there any impact on DHC? And that's all for me. Thanks. Sure. Thanks for that question, Bryan. We fully anticipated getting a question like that. It was really a coincidence. This was not planned to have that announcement out this morning on the same day we did our earnings release, so we anticipate the question. Unfortunately, I've been advised by counsel that this is not the proper form to go into what that announcement is. There will be, in relation to that transaction, a scheduled TO or tender offer document that will be filed with the SEC in the coming days, which will have a lot of information in it. And I encourage you to review that document when it's filed because I anticipate it will answer most, if not all, of your questions related to that transaction. The only other thing I think we can say about the transaction because it's really just directly from RMR's perspective, maybe Matt, address the fee impact. Yeah. There will be no impact to RMR's revenues as it relates to AlerisLife. And that's pretty much all we can say. Hey, good morning. Just a couple of quick ones. Can you just update us -- in the past, it sort of looked at smaller potential acquisitions of the smaller asset managers maybe, can you just update us where we are in that process, and where your head is at today? Sure. No, thanks for that question. We are -- we continue to evaluate opportunities as they present themselves. There are -- have been anecdotally a couple more opportunities that have presented themselves in the last couple of months that were opportunities that have sort of come around again where we were involved in discussions, and they've presented -- and they have reappeared. I think it's a pretty interesting environment we are entering into in 2023. There -- I anticipate that there will be some -- I don't know if it's going to be distressed sales, but there's going to be opportunities where people are going to be looking to perhaps exit or, more importantly, join a larger firm, because it's a difficult operating environment. And to give you an example, a firm that might have, let's say, a larger portion of their assets in and around office real estate, which is not a favorite asset class at the moment, might be more inclined to join a larger firm that's more diversified. And there could be opportunities, for example, around that sort of theoretical situation. So, I think there's nothing imminent that is to be announced certainly. But we have sort of ongoing regular dialogue with folks, and I anticipate that to continue. And I'm hopeful that as we get later into 2023, that some of that dialogue will turn into actionable items, and we could see some M&A activity, which would be one of the primary earmarked uses for our cash on our balance sheet. And so, we are hopeful that something like that will materialize in the coming year. Great. And then my last one would just be, if you could just comment on sort of the -- sort of on the office side. Sort of talked about the return to office, got a couple of data points about job losses and tenants potentially reducing space. Just curious where -- what you guys are hearing, what you guys are seeing on the office side? Thanks. Yeah. We spend an enormous amount of time thinking in discussing and talking about what's going on in our office portfolio. It's a very large portion of the real estate we manage across, not just OPI, but other vehicles as well. At a high level, I'm going to -- it's almost like an analogy to -- we are -- the waters are calm today, meaning occupancy is pretty high, people are paying their rents. We've been leasing space at a pretty regular clip. Things are okay. But that all being said, we are looking to 2020 later this year, 2023, 2024, and all the signs are, from a macro perspective that things are going to slow. And it's almost like you're looking into the horizon, you see storm clouds. You just don't know if we're going into a Category 1 storm or a Category 5 storm. And the market, if you look at the office sector, office REITs, I think investors are assuming going into a Category 5 storm. They're just assuming the worst. I will tell you, from a planning perspective, we are obviously planning. As we think about our office portfolio, we do the best we can to plan for it. It's going to be a very rough environment and hope that it's not as rough as we're planning for. You sort of plan for the worst and hope for the best. We know it's going to be a difficult operating environment because you have the triple threat of a slowing economy, rising interest rates and work-from-home that's just sort of not abating in a major way. And so that's having an impact across the whole industry. Even if you have a portfolio of properties that have higher occupancy or utilization than the industry as a whole, which we do, nonetheless, because the whole market sort of recedes or go backward, we get affected by that. And so that's what we're seeing. We know it's going to slowdown. We just don't know by how much and we're planning. It's going to slow down quite a bit and hope that it's not quite as bad as we planned for. In my prepared remarks, we talked about how we're very focused, at OPI, for example, our largest portfolio of office buildings, dealing with our 2023, 2024 and even 2025 lease expirations. That's a real big focus for the company. And we have varying views on where those leases are going to shake out. And it's hard to know precisely where we sit today. It's going to shake out, but at a macro level, yes, it's going to be lower occupancy, there will be rent roll downs on a general basis. But the whole industry is sort of facing that. We just don't have a good sense by how much. And that's what -- and I don't think anyone in the industry really knows precisely where it's going to be. Which, by the way, conversely presents opportunities at the same time because when the marketplace is so negative and sort of assumes the worst, as we get further along into 2023 and into 2024, especially as there's so much debt that comes due in the industry around office buildings, it does present an interesting opportunity, not just for ourselves, but others in the marketplace that might take a slightly contrarian view for certain office properties, very specifically. There may be sort of caught in the downdraft of the industry, but might be great assets you can buy at a good price. So that's the converse, the opportunity -- the other side of the corn, let's say, to the downturn in what's going on in office. This concludes our question-and-answer session. I would like to turn the conference back over to Adam Portnoy for any closing remarks.